Federal Taxation: Imposition of Double Standard for Section 368 Reorganization in Liquidation-reincorporation Setting

T HREE OF THE petitioners in Moffatt v. Commissioner,' owners of all the stock of Moffatt & Nichol, Inc., an engineering consulting firm, employed an independent accountant to study the tax problems presented by that firm's accumulation of substantial undistributed earnings. In accordance with the accountant's recommendation, a new firm was incorporated to handle all new business and to perform the actual work under certain nonassignable Government contracts held by the old firm. After the operating structure was established with capital and facilities provided by loans and rentals representing approximately sixty-five per cent of the assets of Moffatt 8c Nichol, Inc., the new firm acquired all of the old firm's employees. When the stock of the new firm was finally issued, the three petitioners emerged with the same relative control they had held prior to reincorporation. Formal liquidation of the old firm resulted in a distribution of more than thirty-five per cent of the assets of Moffatt & Nichol, Inc., gains on which were reported by the petitioners as capital gains. As in previous cases, 2 the Commissioner viewed the liquidation as merely one segment of a larger plan to siphon off earnings and contended that the distribution was "boot" taxable as ordinary income under section 356 of the Internal Revenue Code.8 The Commissioner, in order to sustain this contention, must initially prove that a particular transaction conforms to one of the section 369 definitions of a "reorganization."4 The category most often utilized to bring the liquidation-reincorporation within this section is the D reorganization 5 which, by the subsumption of section 354,0 requires the transfer of substantially all of one corporation's assets to