Litton Indus., Inc.
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
United States Tax CourtDec 3, 1987
89 T.C. 1086 (U.S.T.C. 1987)
89 T.C. 108689 T.C. No. 75

Dkt. No. 2112-79

1987-12-3

LITTON INDUSTRIES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Deane E. McCormick, Jr., Dennis P. Bedell and Melissa Thomas May, for the petitioner. Elaine T. Fuller and Marion L. Westen, for the respondent.


A dividend declared by a wholly-owned subsidiary and paid by a promissory note prior to commencement of efforts by the parent to dispose of the subsidiary is held to be a dividend a nd not part of the selling price. Deane E. McCormick, Jr., Dennis P. Bedell and Melissa Thomas May, for the petitioner. Elaine T. Fuller and Marion L. Westen, for the respondent.

FINDINGS OF FACT AND OPINION

, JUDGE:

Respondent determined a deficiency in petitioner's Federal corporate income tax for the year ended July 29, 1973 in the amount of $11,583,054. After concessions, the issue for decision is whether Litton Industries received a $30,000,000 dividend from Stouffer Corporation, its wholly owned subsidiary, or whether that sum represented proceeds from the sale of Stouffer stock to Nestle Corporation.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the attached exhibits are incorporated by this reference.

Litton Industries, Inc. (petitioner) and its subsidiaries manufactured and sold, inter alia, business systems and equipment, defense and marine systems, industrial systems and equipment, and microwave cooking equipment. It maintained its principal office in Beverly Hills, California at the time it filed its petition in this case.

On October 4, 1967, petitioner acquired all the outstanding stock of Stouffer Corporation (Stouffer), a corporation whose common stock was listed and traded on the New York stock exchange. Stouffer manufactured and sold frozen prepared food and operated hotels and food management services and restaurants. It consisted of three business segments, and the gross revenues for said segments over the five-year period 1968 to 1972 were as follows:

+-------------------------------------------------------------+ ¦ ¦Years ended--- ¦ +---------------------+---------------------------------------¦ ¦ ¦(Amounts in thousands of dollars) ¦ +---------------------+---------------------------------------¦ ¦Segment ¦7/30/72¦8/1/71 ¦8/2/70 ¦8/30/69¦7/28/68¦ +---------------------+-------+-------+-------+-------+-------¦ ¦Frozen prepared foods¦$52,825¦$42,912¦$39,892¦$34,408¦$29,423¦ +---------------------+-------+-------+-------+-------+-------¦ ¦Inns ¦17,149 ¦16,058 ¦17,178 ¦15,264 ¦11,963 ¦ +---------------------+-------+-------+-------+-------+-------¦ ¦Restaurants and food ¦ ¦ ¦ ¦ ¦ ¦ +---------------------+-------+-------+-------+-------+-------¦ ¦services ¦53,586 ¦51,051 ¦53,383 ¦54,832 ¦54,167 ¦ +---------------------+-------+-------+-------+-------+-------¦ ¦Total ¦123,560¦110,021¦110,453¦104,504¦95,553 ¦ +-------------------------------------------------------------+

Stouffer's consolidated net income (before-tax), taxes and net income (after-tax) were as follows:

+---------------------------------------+ ¦Fiscal¦Net income¦Taxes ¦Net income¦ +------+----------+----------+----------¦ ¦year ¦before tax¦on income ¦after tax ¦ +------+----------+----------+----------¦ ¦1968 ¦$4,892,000¦$2,290,000¦$2,602,000¦ +------+----------+----------+----------¦ ¦1969 ¦4,276,000 ¦2,183,000 ¦2,093,000 ¦ +------+----------+----------+----------¦ ¦1970 ¦4,851,000 ¦2,441,000 ¦2,410,000 ¦ +------+----------+----------+----------¦ ¦1971 ¦4,363,000 ¦2,128,000 ¦2,235,000 ¦ +------+----------+----------+----------¦ ¦1972 ¦5,831,000 ¦2,527,000 ¦3,304,000 ¦ +---------------------------------------+ The pre-tax income figures for 1969, 1970, and 1971 reflect a net loss from a discontinued operation in the amount of $42,000, $198,000, and $452,000, respectively. The pre-tax income figure for 1972 reflects an extraordinary gain from a sale of a leasehold interest in a restaurant in the amount of $807,000.

The following financial statements further reflect Stouffer's financial profile:

+---------------------------------------------------------------+ ¦THE STOUFFER CORPORATION ¦ +---------------------------------------------------------------¦ ¦PRO FORMA CONSOLIDATED BALANCE SHEET1 ¦ +---------------------------------------------------------------¦ ¦1969-1972 ¦ +---------------------------------------------------------------¦ ¦(000s) ¦ +---------------------------------------------------------------¦ ¦ ¦7/30/72 ¦8/1/71 ¦8/2/70 ¦8/3/69 ¦ +-----------+------------+------------+------------+------------¦ ¦ ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦ASSETS ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Current ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦assets: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Cash ¦1,294 ¦2.09 ¦2,281 ¦4.08 ¦1,854 ¦3.33 ¦1,643 ¦3.10 ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Accounts ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦receivable,¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦net ¦7,971 ¦12.89¦7,757 ¦13.86¦8,293 ¦14.88¦8,386 ¦15.81¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Notes ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦receivable ¦--- ¦--- ¦--- ¦--- ¦--- ¦--- ¦--- ¦--- ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Inventory ¦12,086¦19.54¦9,763 ¦17.45¦10,940¦19.63¦9,656 ¦18.20¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Prepaid ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦expenses ¦576 ¦0.93 ¦311 ¦0.56 ¦405 ¦0.73 ¦312 ¦0.59 ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦Total ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦current ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+------+-----+------+-----+------+-----+------+-----¦ ¦assets ¦21,927¦35.46¦20,112¦35.94¦21,492¦38.56¦19,997¦37.69¦ +---------------------------------------------------------------+

Fixed assets: Land 849 1.37 --- --- --- --- --- --- Buildings 20,062 32.44 --- --- --- --- --- --- Machinery and equipment 26,130 42.25 --- --- --- --- --- --- Total fixed assets 47,041 76.07 40,302 72.02 35,728 64.09 31,240 58.88 Less accumulated depreciation (12,039) (19.47) (8,783) (15.69) (5,637) (10.11) (2,549) (4.80) Total net fixed assets 35,002 56.60 31,519 56.32 30,091 53.98 28,691 54.08

Other assets: Excess of cost over related net assets of business pur. 3,692 5.97 3,692 6.60 3,692 6.62 3,692 6.96 Other 1,219 1.97 638 1.14 468 0.84 676 1.27 Total other assets 4,911 7.94 4,330 7.74 4,160 7.46 4,368 8.32 Total assets 61,840 100.00 55,961 100.00 55,743 100.00 53,056 100.00

+-----------------------------------------------------------------------------+ ¦ ¦7/30/72 ¦8/1/71 ¦8/2/70 ¦8/3/69 ¦ +--------------+------------+---------------+----------------+----------------¦ ¦ ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦LIABILITIES & ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦STOCKHOLDERS' ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦EQUITY ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Current ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦liabilities: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Accounts ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦payable ¦8,738 ¦14.13¦--- ¦--- ¦--- ¦--- ¦--- ¦--- ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Payroll and ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦related ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦expenses ¦3,017 ¦4.88 ¦--- ¦--- ¦--- ¦--- ¦--- ¦--- ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Other accrued ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦expenses ¦1,465 ¦2.37 ¦2 12,410¦22.18¦2 12,491¦22.41 ¦2 11,650¦21.96 ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Taxes on ¦1,115 ¦1.80 ¦164 ¦0.29 ¦(74) ¦(0.13)¦(147) ¦(0.28)¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Current mat. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦LTD ¦97 ¦--- ¦97 ¦--- ¦97 ¦--- ¦97 ¦--- ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦Total current ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------+-----+---------+-----+---------+------+---------+------¦ ¦liabilities ¦14,432¦23.34¦12,671 ¦22.64¦12,514 ¦22.45 ¦11,600 ¦21.86 ¦ +-----------------------------------------------------------------------------+

Long-term liabilities: Long-term debt 638 1.03 735 1.31 830 1.49 831 1.57 Total long-term liabilities 638 1.03 735 1.31 830 1.49 831 1.57

Other liabilities: Advances due to parent 3,906 6.32 3,055 5.46 5,534 9.93 6,683 12.60 Deferred income taxes 1,539 2.49 1,479 2.64 1,079 1.94 566 1.07 Total other liabilities 5,445 8.80 4,534 8.10 6,613 11.86 7,249 13.66 Total liabilities 20,515 33.17 17,940 32.06 19,957 35.80 19,680 37.09

Stockholders' equity: Common stock, no par value 1,859 3.01 1,859 3.32 1,859 3.33 1,859 3.50 Additional paid-in capital 18,253 29.52 18,253 32.62 18,253 32.74 18,253 34.40 Retained earnings 21,213 34.30 17,909 32.00 15,674 28.12 13,264 25.00 Total stockholders' equity 41,325 66.83 38,021 67.94 35,786 64.20 33,376 62.91 Total liabilities and stockholders' equity 61,840 100.00 55,961 100.00 55,743 100.00 53,056 100.00

Yearend shares outstanding 1,000 1,000 1,000 1,000 Equity per share $41,325.00 $38,021.00 $35,786.00 $38,376.00 SOURCE: The Stouffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9, 1972.

1 Aug. 1, 1969, through Aug. 1, 1971, are WMA calculations based on the Stouffer Corp.'s consolidated statement of changes in financial position.

2 Includes accounts payable and payroll and related expenses.

+-------------------------------------------------------------------------------------+ ¦THE STOUFFER CORPORATION ¦ +-------------------------------------------------------------------------------------¦ ¦PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS ¦ +-------------------------------------------------------------------------------------¦ ¦1968-1972 ¦ +-------------------------------------------------------------------------------------¦ ¦(000s) ¦ +-------------------------------------------------------------------------------------¦ ¦ ¦7/30/72 ¦8/1/71 ¦8/2/70 ¦8/3/69 ¦7/28/68 ¦ +-----------+--------------+--------------+--------------+--------------+-------------¦ ¦ ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Sales and ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦service ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦revenues: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Frozen ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦prepared ¦52,825 ¦42.75 ¦42,912 ¦39.00 ¦39,892 ¦36.12 ¦34,408 ¦32.93 ¦29,423¦30.79 ¦ ¦foods ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Restaurants¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦and food ¦53,586 ¦43.37 ¦51,051 ¦46.40 ¦53,383 ¦48.33 ¦54,832 ¦52.47 ¦54,167¦56.69 ¦ ¦service ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Inns ¦17,149 ¦13.88 ¦16,058 ¦14.60 ¦17,178 ¦15.55 ¦15,264 ¦14.61 ¦11,963¦12.52 ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Total ¦123,560¦100.00¦110,021¦100.00¦110,453¦100.00¦104,504¦100.00¦95,553¦100.00¦ ¦revenues ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Cost of ¦33,563 ¦27.16 ¦26,962 ¦24.51 ¦24,717 ¦22.38 ¦21,841 ¦20.90 ¦19,037¦19.92 ¦ ¦sales1 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Cost of ¦59,969 ¦48.53 ¦56,768 ¦51.60 ¦58,764 ¦53.20 ¦59,545 ¦56.98 ¦54,595¦57.14 ¦ ¦service1 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Total cost ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦of goods ¦93,532 ¦75.50 ¦83,730 ¦76.10 ¦83,481 ¦75.58 ¦81,386 ¦77.88 ¦73,632¦77.06 ¦ ¦sold ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-------+------+-------+------+-------+------+-------+------+------+------¦ ¦Gross ¦30,028 ¦24.30 ¦26,291 ¦23.90 ¦26,972 ¦24.42 ¦23,118 ¦22.12 ¦21,921¦22.94 ¦ ¦profit ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------------------------------------------------------------+

Operating, general, and administrative expenses: Marketing, general and admin.1 20,174 16.33 16,905 15.37 17,154 15.53 14,661 14.03 13,637 14.27 Depreciation/ 3,256 2.64 3,078 2.80 3,025 2.74 2,985 2.86 2,372 2.48 amortization Total operating 23,430 18.96 19,983 18.16 20,179 18.27 17,646 16.89 16,009 16.75 expense Operating 6,598 5.34 6,308 5.73 6,793 6.15 5,472 5.24 5,912 6.19 income

Other (income) and expense: Interest income --- --- --- --- --- --- --- --- --- --- Interest expense 324 0.26 342 0.31 542 0.49 84 0.08 23 0.02 Litton management 1,250 1.01 1,151 1.05 1,202 1.09 1,070 1.02 997 1.04 fee Total other (inc.) 1,574 1.27 1,493 1.36 1,744 1.58 1,154 1.10 1,020 1.07 expense Pretax income-continuing 5,024 4.07 4,815 4.38 5,049 4.57 4,318 4.13 4,892 5.12 ops. Provision for 2,285 1.85 2,128 1.93 2,441 2.21 2,183 2.09 2,290 2.40 income taxes Net income from continuing ops. 2,739 2.22 2,687 2.44 2,608 2.36 2,135 2.04 2,602 2.72 Net loss from discontinued ops. --- --- (452) (0.41) (198) (0.18) (42) (0.04) --- --- Net income before 2,739 2.22 2,235 2.03 2,410 2.18 2,093 2.00 2,602 2.72 extra. gain Extra. gain, net of income taxes of 565 0.46 --- --- --- --- --- --- --- --- $242,0002 Net income 3,304 2.67 2,235 2.03 2,410 2.18 2,093 2.00 2,602 2.72

Effective tax rate 45.5% 42.2% 48.3% 50.6% 46.8% SOURCE: The Stouffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9, 1973.

1 Exclusive of depreciation.

2 From disposition of leasehold interest in a restaurant

+----------------------------------------------------------------+ ¦THE STOUFFER CORPORATION ¦ +----------------------------------------------------------------¦ ¦CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION ¦ +----------------------------------------------------------------¦ ¦1970-1972 ¦ +----------------------------------------------------------------¦ ¦(000s) ¦ +----------------------------------------------------------------¦ ¦ ¦7/30/72 ¦8/1/71 ¦8/2/70 ¦ +--------------------------+-----------+------------+------------¦ ¦ ¦$ ¦% ¦$ ¦% ¦$ ¦% ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦SOURCES OF FUNDS ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦From operations: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦Net earnings from ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦continuing operations, ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦including gain from sale ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦of leasehold interest of ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦$565,000 in 1972 ¦3,304¦38.34¦2,687¦40.94 ¦2,608¦38.47 ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦Net loss from discontinued¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+-----+-----+-----+------+-----+------¦ ¦operations ¦--- ¦--- ¦(452)¦(6.89)¦(198)¦(2.92)¦ +----------------------------------------------------------------+

Non-cash charges to income: Depreciation and amortization 3,256 37.78 3,146 47.93 3,088 45.55 Deferred income taxes 60 0.70 400 6.09 513 7.57 Total funds provided from operations 6,620 76.82 5,781 88.07 6,011 88.66 Proceeds from loans on officers' life insurance --- --- --- --- 413 6.09 Sale or retirement of property, plant, and equipment 1,147 13.31 783 11.93 356 5.25 Advances from parent, net 851 9.87 --- --- --- --- Total sources of funds 8,618 100.00 6,564 100.00 6,780 100.00

APPLICATION OF FUNDS Additions to property, plant, and equipment 7,886 92.08 5,357 66.13 4,844 78.14 Reduction of long-term debt 97 1.13 95 1.17 414 6.68 Repayment of advances from parent, net --- --- 2,479 30.60 1,149 18.54 Increase in deferred preopening expenses 385 4.50 130 1.60 --- --- Other, net 196 2.29 40 0.49 (208) (3.36) Total application of funds 8,564 100.00 8,101 100.00 6,199 100.00 Increase (decrease) in working capital 54 --- (1,537) --- 581

Increase (decrease) in working capital components: Cash (987) 427 211 Accounts receivable 214 (536) (93) Inventories 2,323 (1,177) 1,284 Prepaid expenses 265 (94) 93 Accounts payable and accrued expenses (806) 83 (820) Taxes on income (951) (238) (73) Other, net (4) (2) (21) 54 (1,537) 581 SOURCE: The Stouffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9, 1973.

In early 1972, Charles B. Thornton (Thornton), the chairman of Litton's board of directors, Joseph Imirie, president of Stouffer, and James Biggar, an executive of Stouffer, discussed project ‘T.I.B.,‘ i.e., the sale of Stouffer. In July 1972, Litton's board of directors discussed the mechanics and problems of selling Stouffer. As of August 1, 1972 Stouffer's accumulated earnings and profits exceeded $30,000,000. On August 23, 1972, Stouffer declared a $30,000,000 dividend which it paid to Litton in the form of a $30,000,000 negotiable promissory note, and at that time, Thornton believed that Litton would have no difficulty in receiving an adequate offer for Stouffer. Two weeks later, on September 7, 1972, petitioner announced publicly its interest in disposing of Stouffer. Subsequent to said announcement, Litton received inquiries from a number of interested sources, including TWA, Green Giant, investment banking houses, and business brokers about the possible purchase of all or part of the Stouffer business.

Beginning in mid-September 1972, Litton and several underwriters discussed the feasibility of a public offering of Stouffer Stock. In early September 1972, Litton negotiated with Lehman Brothers for a public offering of Stouffer stock, but Lehman Brothers decided not to participate in the offering. During October 1972, Litton, Stouffer and Merrill Lynch, a brokerage firm that thought Stouffer had an excellent outlook, prepared a public offering of Stouffer stock. During November 1972, petitioner, Stouffer, and Hornblower and Weeks prepared a partial public offering of Stouffer stock. Merrill Lynch had a policy of not effecting partial distributions of corporate subsidiaries and thus did not participate in the negotiations with Hornblower and Weeks. In mid-December 1972, Litton decided that a complete public offering was preferable and abandoned the idea of a partial public offering. The S-1 Registration Statement, which Stouffer filed with the Securities and Exchange Commission, stated that $30,000,000 of the proceeds would be used to pay the promissory note which Litton received as a dividend.

On March 1, 1973, Nestle Alimentana S.A. Corporation (Nestle), a Swiss corporation, offered to buy all of Stouffer's stock for $105,000,000. On March 5, 1973, Nestle paid Litton $74,962,518 in cash for all the outstanding stock of Stouffer and $30,000,000 in cash for the promissory note. Because Litton sold Stouffer to Nestle, the underwriters stopped work on the scheduled public offering.

OPINION

The issue for decision is whether the $30,000,000 dividend declared by Stouffer on August 23, 1972, and paid to its parent, Litton by means of a negotiable promissory note was truly a dividend for tax purposes or whether it should be considered part of the proceeds received by Litton from the sale of all of Stouffer's stock on March 1, 1973. If, as petitioner contends, the $30,000,000 constitutes a dividend, petitioner may deduct 85 percent of that amount as a dividend received credit pursuant to section 243(a), as that section read during the year at issue. However, if the $30,000,000 represents part of the selling price of the Stouffer stock, as contended by respondent, the entire amount will be added to the proceeds of the sale and taxed to Litton as additional capital gain. Respondent's approach, of course produces the larger amount of tax dollars.

Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue.

The instant case is substantially governed by Waterman Steamship Corp. v. Commissioner, 50 T.C. 650 (1968), revd. 430 F.2d 1185 (5th Cir. 1970), cert. denied 401 U.S. 939 (1971). Respondent urges us to follow the opinion of the Fifth Circuit, which in substance adopted the position of Judge Tannenwald's dissent (concurred in by three other judges) from our Court-reviewed opinion. If we hold for respondent, we must overrule our majority opinion in Waterman Steamship. Petitioner contends that the reasoning of the Fifth Circuit in Waterman Steamship should not apply since the facts here are more favorable to petitioner. Additionally, petitioner points out that several business purposes were served by the distribution here which provide additional support for recognition of the distribution as a dividend. For the reasons set forth below, we conclude that the $30,000,000 distribution constituted a dividend which should be recognized as such for tax purposes. We believe that the facts in the instant case lead even more strongly than did the facts in Waterman Steamship to the conclusion that the $30,000,000 was a dividend. Accordingly, we hold that the Stouffer distribution to Litton was a dividend within the meaning of section 243(a).

In many respects, the facts of this case and those of Waterman Steamship are parallel. The principal difference, and the one which we find to be most significant, is the timing of the dividend action. In Waterman Steamship, the taxpayer corporation received an offer to purchase the stock of two of its wholly-owned subsidiary corporations, Pan-Atlantic and Gulf Florida, for $3,500,000 cash. The board of directors of Waterman Steamship rejected that offer but countered with an offer to sell the two subsidiaries for $700,000 after the subsidiaries declared and arranged for payments of dividends to Waterman Steamship amounting in the aggregate to $2,800,000. Negotiations between the parties ensued, and the agreements which resulted therefrom included, in specific detail, provisions for the declaration of a dividend by Pan-Atlantic to Waterman Steamship prior to the signing of the sales agreement and the closing of that transaction. Furthermore, the agreements called for the purchaser to loan or otherwise advance funds to Pan-Atlantic promptly in order to pay off the promissory note by which the dividend had been paid. Once the agreement was reached, the entire transaction was carried out by a series of meetings commencing at 12 noon on January 21, 1955, and ending at 1:30 p.m. the same day. At the first meeting the board of directors of Pan-Atlantic met and declared a dividend in the form of a promissory note in the amount of $2,799,820. The dividend was paid by execution and delivery of the promissory note. At 12:30 p.m., the board of directors of the purchaser's nominee corporation (‘Securities‘) met and authorized the purchase and financing of Pan-Atlantic and Gulf Florida. At 1 p.m., the directors of Waterman authorized the sale of all outstanding stock of Pan-Atlantic and Gulf Florida to Securities. Immediately following that meeting, the sales agreement was executed by the parties. The agreement provided that the purchaser guaranteed prompt payment of the liabilities of Pan-Atlantic and Gulf Florida including payment of any notes given by either corporation as a dividend.

Finally at 1:30 p.m., the new board of directors of Pan-Atlantic authorized the borrowing of sufficient funds from the purchaser personally and from his nominee corporation to pay off the promissory note to Waterman Steamship, which was done forthwith. As the Fifth Circuit pointed out, ‘By the end of the day and within a ninety minute period, the financial cycle had been completed. Waterman had $3,500,000, hopefully tax-free, all of which came from Securities and McLean, the buyers of the stock.‘ 430 F.2d at 1190. This Court concluded that the distribution from Pan-Atlantic to Waterman was a dividend. The Fifth Circuit reversed, concluding that the dividend and sale were one transaction. 430 F.2d at 1192.

The timing in the instant case was markedly different. The dividend was declared by Stouffer on August 23, 1972, at which time the promissory note in payment of the divided was issued to Litton. There had been some general preliminary discussions about the sale of Stouffer, and it was expected that Stouffer would be a very marketable company which would sell quickly. However, at the time the dividend was declared, no formal action had been taken to initiate the sale of Stouffer. It was not until 2 weeks later that Litton publicly announced that Stouffer was for sale. There ensued over the next 6 months many discussions with various corporations, investment banking houses, business brokers, and underwriters regarding Litton's disposition of Stouffer through sale of all or part of the business to a particular buyer, or through full or partial public offerings of the Stouffer stock. All of this culminated on March 1, 1973, over 6 months after the dividend was declared, with the purchase by Nestle of all of Stouffer's stock. Nestle also purchased the outstanding promissory note for $30,00,000 in cash.

In the instant case, the declaration of the dividend and the sale of the stock were substantially separated in time in contrast to Waterman Steamship where the different transactions occurred essentially simultaneously. In Waterman Steamship, it seems quite clear that no dividend would have been declared if all of the remaining steps in the transaction had not been lined up in order on the closing table and did not in fact take place. Here, however, Stouffer declared the dividend, issued the promissory note and definitely committed itself to the dividend before even making a public announcement that Stouffer was for sale. Respondent argues that the only way petitioner could ever receive the dividend was by raising revenue through a sale of Stouffer. Therefore, respondent asserts the two events (the declaration of the dividend and then the sale of the company) were inextricably tied together and should be treated as one transaction for tax purposes. In our view, respondent ignores the fact that Stouffer could have raised sufficient revenue for the dividend from other avenues, such as a partial public offering or borrowing. Admittedly, there had been discussions at Litton about the sale of Stouffer which was considered to be a very saleable company. However, there are many slips between the cup and the lip, and it does not take much of a stretch of the imagination to picture a variety of circumstances under which Stouffer might have been taken off the market and no sale consummated. Under these circumstances it is unlikely that respondent would have considered the dividend to be a nullity. On the contrary, it would seem quite clear that petitioner would be charged with a dividend on which it would have to pay a substantial tax. Petitioner committed itself to the dividend and, thereby, accepted the consequences regardless of the outcome of the proposed sale of Stouffer stock. See Crellin v. Commissioner, 17 T.C. 781, 785 (1951), affd. 203 F.2d 812 (9th Cir. 1953), cert. denied 346 U.S. 873 (1953).

Since the facts here are distinguishable in important respects and are so much stronger in petitioner's favor, we do not consider it necessary to consider further the opinion of the Fifth Circuit in Waterman Steamship.

The term ‘dividend‘ is defined in section 316(a) as a distribution by a corporation to its shareholders out of earnings and profits. The parties have stipulated that Stouffer had earnings and profits exceeding $30,000,000 at the time the dividend was declared. This Court has recognized that a dividend may be paid by a note. T.R. Miller Mill Co. v. Commissioner, 37 B.T.A. 43, 49 (1938), affd. 102 F.2d 599 (5th Cir. 1939). Based on these criteria, the $30,000,000 distribution by Stouffer would clearly constitute a dividend if the sale of Stouffer had not occurred. We are not persuaded that the subsequent sale of Stouffer to Nestle changes that result merely because it was more advantageous to Litton from a tax perspective.

It is well established that a taxpayer is entitled to structure his affairs and transactions in order to minimize his taxes. This proposition does not give a taxpayer carte blanche to set up a transaction in any form which will avoid tax consequences regardless of whether the transaction has substance. Gregory v. Helvering, 293 U.S. 465 (1935). A variety of factors present here preclude a finding of sham or subterfuge. Although the record in this case clearly shows that Litton intended at the time the dividend was declared to sell Stouffer, no formal action had been taken and no announcement had been made. There was no definite purchaser waiting in the wings with the terms and conditions of sale already agreed upon. At that time, Litton had not even decided upon the form of sale of Stouffer. Nothing in the record here suggests that there was any prearranged sale agreement, formal or informal, at the time the dividend was declared.

Petitioner further supports its argument that the transaction was not a sham by pointing out Litton's legitimate business purposes in declaring the dividend. Although the code and case law do not require a dividend to have a business purpose, it is a factor to be considered in determining whether the overall transaction was a sham. T.S.N. Liquidating Corp. v. United States, 624 F.2d 1328 (5th Cir. 1980). Petitioner argues that the distribution allowed Litton to maximize the gross after-tax amount it could receive from its investment in Stouffer. From the viewpoint of a private purchaser of Stouffer, it is difficult to see how the declaration of a dividend would improve the value of the stock since creating a liability in the form of a promissory note for $30,000,000 would reduce the value of Stouffer by approximately that amount. However, since Litton was considering disposing of all or part of Stouffer through a public or private offering, the payment of a dividend by a promissory note prior to any sale had two advantages. First, Litton hoped to avoid materially diminishing the market value of the Stouffer stock. At that time, one of the factors considered in valuing a stock, and in determining the market value of a stock was the ‘multiple of earnings‘ criterion. Payment of the dividend by issuance of a promissory note would not substantially alter Stouffer's earnings. Since many investors were relatively unsophisticated, Litton may have been quite right that it could increase its investment in Stouffer by at least some portion of the $30,000,000 dividend. Second, by declaring a dividend and paying it by a promissory note prior to an anticipated public offering, Litton could avoid sharing the earnings with future additional shareholders while not diminishing to the full extent of the pro rata dividend, the amount received for the stock. Whether Litton could have come out ahead after Stouffer paid the promissory note is at this point merely speculation about a public offering which never occurred. The point, however, is that Litton hoped to achieve some business purpose and not just tax benefits in structuring the transaction as it did.

Under these facts, where the dividend was declared 6 months prior to the sale of Stouffer, where the sale was not prearranged, and since Stouffer had earnings and profits exceeding $30,000,000 at the time the dividend was declared, we cannot conclude that the distribution was merely a device designed to give the appearance of a dividend to a part of the sales proceeds. In this case the form and substance of the transaction coincide; it was not a transaction entered into solely for tax reasons, and it should be recognized as structured by petitioner.

On this record, we hold that for Federal tax purposes Stouffer declared a dividend to petitioner on August 23, 1972, and, subsequently, petitioner sold all of its stock in Stouffer to Nestle for $75,000,000.

Decision will be entered under Rule 155.