Litton Indus. v. Commissioner

Litton Industries, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent

Litton Indus. v. Commissioner

Docket No. 2112-79

United States Tax Court

89 T.C. 1086; 1987 U.S. Tax Ct. LEXIS 166; 89 T.C. No. 75;

December 3, 1987. December 3, 1987, Filed

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Decision will be entered under Rule 155.

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 and 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.

Clapp, Judge.

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CLAPP

FINDINGS OF FACT AND OPINION

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 million dividend from Stouffer Corp., its wholly owned subsidiary, or whether that sum represented proceeds from the sale of Stouffer stock to Nestle Corp.

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 Corp. (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 5-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 financial statements on pages 1090-1095 further reflect Stouffer's financial profile.

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 million. On August 23, 1972, Stouffer declared a $ 30 million dividend which it paid to Litton in the form of a $ 30 million 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 Bros. for a public offering of Stouffer stock, but Lehman Bros. 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 million 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. Corp. (Nestle), a Swiss corporation, offered to buy all of Stouffer's stock for $ 105 million. On March 5, 1973, Nestle paid Litton $ 74,962,518 in cash for all the outstanding stock of Stouffer and $ 30 million 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 million 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 million constitutes a dividend, petitioner may deduct 85 percent of that amount as a dividend-received credit pursuant to section 243(a), ¹ as that section read during the year at issue. However, if the $ 30 million 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.

The instant case is substantially governed by Waterman Steamship Corp. v. Commissioner, 50 T.C. 650">50 T.C. 650 (1968), revd. 430 F.2d 1185">430 F.2d 1185 (5th Cir. 1970), cert. denied 401 U.S. 939">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

The Stouffer Corporation
Pro Forma Consolidated Balance Sheet 1
1969-1972
(000s)
	7/30/72	8/1/71
	$	%	$	%
Assets
Current assets:
Cash	1,294	2.09	2,281	4.08
Accounts receivable, net	7,971	12.89	7,757	13.86
Notes receivable
Inventory	12,086	19.54	9,763	17.45
Prepaid expenses	576	0.93	311	0.56
Total current assets	21,927	35.46	20,112	35.94
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
Less accumulated depreciation	(12,039)	(19.47)	(8,783)	(15.69)
Total net fixed assets	35,002	56.60	31,519	56.32
Other assets:
Excess of cost over related
net assets of business pur.	3,692	5.97	3,692	6.60
Other	1,219	1.97	638	1.14
Total other assets	4,911	7.94	4,330	7.74
Total assets	61,840	100.00	55,961	100.00
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
Taxes on income	1,115	1.80	164	0.29
Current mat. LTD	97		97
Total current liabilities	14,432	23.34	12,671	22.64
Long-term liabilities:
Long-term debt	638	1.03	735	1.31
Total long-term liabilities	638	1.03	735	1.31
Other liabilities:
Advances due to parent	3,906	6.32	3,055	5.46
Deferred income taxes	1,539	2.49	1,479	2.64
Total other liabilities	5,445	8.80	4,534	8.10
Total liabilities	20,515	33.17	17,940	32.06
Stockholders' equity:
Common stock, no par value	1,859	3.01	1,859	3.32
Additional paid-in capital	18,253	29.52	18,253	32.62
Retained earnings	21,213	34.30	17,909	32.00
Total stockholders' equity	41,325	66.83	38,021	67.94
Total liabilities and
stockholders' equity	61,840	100.00	55,961	100.00
Yearend shares outstanding	1,000	1,000
Equity per share	$ 41,325.00	$ 38,021.00

The Stouffer Corporation
Pro Forma Consolidated Balance Sheet 1
1969-1972
(000s)
	8/2/70	8/3/69
	$	%	$	%
Assets
Current assets:
Cash	1,854	3.33	1,643	3.10
Accounts receivable, net	8,293	14.88	8,386	15.81
Notes receivable
Inventory	10,940	19.63	9,656	18.20
Prepaid expenses	405	0.73	312	0.59
Total current assets	21,492	38.56	19,997	37.69
Fixed assets:
Land
Buildings
Machinery and equipment
Total fixed assets	35,728	64.09	31,240	58.88
Less accumulated depreciation	(5,637)	(10.11)	(2,549)	(4.80)
Total net fixed assets	30,091	53.98	28,691	54.08
Other assets:
Excess of cost over related
net assets of business pur.	3,692	6.62	3,692	6.96
Other	468	0.84	676	1.27
Total other assets	4,160	7.46	4,368	8.32
Total assets	55,743	100.00	53,056	100.00
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable
Payroll and related expenses
Other accrued expenses	n2 12,491	22.41	2 11,650	21.96
Taxes on income	(74)	(0.13)	(147)	(0.28)
Current mat. LTD	97		97
Total current liabilities	12,514	22.45	11,600	21.86
Long-term liabilities:
Long-term debt	830	1.49	831	1.57
Total long-term liabilities	830	1.49	831	1.57
Other liabilities:
Advances due to parent	5,534	9.93	6,683	12.60
Deferred income taxes	1,079	1.94	566	1.07
Total other liabilities	6,613	11.86	7,249	13.66
Total liabilities	19,957	35.80	19,680	37.09
Stockholders' equity:
Common stock, no par value	1,859	3.33	1,859	3.50
Additional paid-in capital	18,253	32.74	18,253	34.40
Retained earnings	15,674	28.12	13,264	25.00
Total stockholders' equity	35,786	64.20	33,376	62.91
Total liabilities and
stockholders' equity	55,743	100.00	53,056	100.00
Yearend shares outstanding	1,000	1,000
Equity per share	$ 35,786.00	$ 38,376.00

The Stouffer Corporation
Pro Forma Consolidated Statement of Earnings
1968-1972
(000s)
	7/30/72	8/1/71
	$	%	$	%
Sales and service revenues:
Frozen prepared foods	52,825	42.75	42,912	39.00
Restaurants and food service	53,586	43.37	51,051	46.40
Inns	17,149	13.88	16,058	14.60
Total revenues	123,560	100.00	110,021	100.00
Cost of sales 1	33,563	27.16	26,962	24.51
Cost of service 1	59,969	48.53	56,768	51.60
Total cost of goods sold	93,532	75.70	83,730	76.10
Gross profit	30,028	24.30	26,291	23.90
Operating, general, and
administrative expenses:
Marketing, general and admin. 1	20,174	16.33	16,905	15.37
Depreciation/amortization	3,256	2.64	3,078	2.80
Total operating expense	23,430	18.96	19,983	18.16
Operating income	6,598	5.34	6,308	5.73
Other (income) and expense:
Interest income
Interest expense	324	0.26	342	0.31
Litton management fee	1,250	1.01	1,151	1.05
Total other (inc.) expense	1,574	1.27	1,493	1.36
Pretax income-continuing ops.	5,024	4.07	4,815	4.38
Provision for income taxes	2,285	1.85	2,128	1.93
Net income from continuing ops.	2,739	2.22	2,687	2.44
Net loss from discontinued ops.			(452)	(0.41)
Net income before extra. gain	2,739	2.22	2,235	2.03
Extra. gain, net of income
taxes of $ 242,000 2	565	0.46
Net income	3,304	2.67	2,235	2.03
Effective tax rate	45.5%	42.2%

The Stouffer Corporation
Pro Forma Consolidated Statement of Earnings
1968-1972
(000s)
	8/2/70	8/3/69
	$	%	$	%
Sales and service revenues:
Frozen prepared foods	39,892	36.12	34,408	32.93
Restaurants and food service	53,383	48.33	54,832	52.47
Inns	17,178	15.55	15,264	14.61
Total revenues	110,453	100.00	104,504	100.00
Cost of sales 1	24,717	22.38	21,841	20.90
Cost of service 1	58,764	53.20	59,545	56.98
Total cost of goods sold	83,481	75.58	81,386	77.88
Gross profit	26,972	24.42	23,118	22.12
Operating, general, and
administrative expenses:
Marketing, general and admin. 1	17,154	15.53	14,661	14.03
Depreciation/amortization	3,025	2.74	2,985	2.86
Total operating expense	20,179	18.27	17,646	16.89
Operating income	6,793	6.15	5,472	5.24
Other (income) and expense:
Interest income
Interest expese	542	0.49	84	0.08
Litton management fee	1,202	1.09	1,070	1.02
Total other (inc.) expense	1,744	1.58	1,154	1.10
Pretax income-continuing ops.	5,049	4.57	4,318	4.13
Provision for income taxes	2,441	2.21	2,183	2.09
Net income from continuing ops.	2,608	2.36	2,135	2.04
Net loss from discontinued ops.	(198)	(0.18)	(42)	(0.04)
Net income before extra. gain	2,410	2.18	2,093	2.00
Extra. gain, net of income
taxes of $ 242,000 2
Net income	2,410	2.18	2,093	2.00
Effective tax rate	48.3%	50.6%

The Stouffer Corporation
Pro Forma Consolidated Statement of Earnings
1968-1972
(000s)
	7/28/68
	$	%
Sales and service revenues:
Frozen prepared foods	29,423	30.79
Restaurants and food service	54,167	56.69
Inns	11,963	12.52
Total revenues	95,553	100.00
Cost of sales 1	19,037	19.92
Cost of service	54,595	57.14
Total cost of goods sold	73,632	77.06
Gross profit	21,921	22.94
Operating, general, and
administrative expenses:
Marketing, general and admin. 1	13,637	14.27
Depreciation/amortization	2,372	2.48
Total operating expense	16,009	16.75
Operating income	5,912	6.19
Other (income) and expense:
Interest income
Interest expense	23	0.02
Litton management fee	997	1.04
Total other (inc.) expense	1,020	1.07
Pretax income-continuing ops.	4,892	5.12
Provision for income taxes	2,290	2.40
Net income from continuing ops.	2,602	2.72
Net loss from discontinued ops.
Net income before extra. gain	2,602	2.72
Extra. gain, net of income
taxes of $ 242,000 2
Net income	2,602	2.72
Efective tax rate	46.8%

The Stouffer Corporation
Consolidated Statement of Changes in Financial Position
1970-1972
(000s)
	7/30/72
	$	%
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
Net loss from discontinued operations
Non-cash charges to income:
Depreciation and amortization	3,256	37.78
Deferred income taxes	60	0.70
Total funds provided from operations	6,620	76.82
Proceeds from loans on officers'
life insurance
Sale or retirement of property, plant,
and equipment	1,147	13.31
Advances from parent, net	851	9.87
Total sources of funds	8,618	100.00
Application of Funds
Additions to property, plant, and equipment	7,886	92.08
Reduction of long-term debt	97	1.13
Repayment of advances from parent, net
Increase in deferred preopening expenses	385	4.50
Other, net	196	2.29
Total application of funds	8,564	100.00
Increase (decrease) in working capital	54
Increase (decrease) in working capital components:
Cash	(987)
Accounts receivable	214
Inventories	2,323
Prepaid expenses	265
Accounts payable and accrued expenses	(806)
Taxes on income	(951)
Other, net	(4)
	54

The Stouffer Corporation
Consolidated Statement of Changes in Financial Position
1970-1972
(000s)
	8/1/71
	$	%
Sources of Funds
From operations:
Net earnings from continuing operations,
including gain from sale of leasehold interest of
$ 565,000 in 1972	2,687	40.94
Net loss from discontinued operations	(452)	(6.89)
Non-cash charges to income:
Depreciation and amortization	3,146	47.93
Deferred income taxes	400	6.09
Total funds provided from operations	5,781	88.07
Proceeds from loans on officers'
life insurance
Sale or retirement of property, plant,
and equipment	783	11.93
Advances from parent, net
Total sources of funds	6,564	100.00
Application of Funds
Additions to property, plant, and equipment	5,357	66.13
Reduction of long-term debt	95	1.17
Repayment of advances from parent, net	2,479	30.60
Increase in deferred preopening expenses	130	1.60
Other, net	40	0.49
Total application of funds	8,101	100.00
Increase (decrease) in working capital	(1,537)
Increase (decrease) in working capital components:
Cash	427
Accounts receivable	(536)
Inventories	(1,177)
Prepaid expenses	(94)
Accounts payable and accrued expenses	83
Taxes on income	(238)
Other, net	(2)
	(1,537)

The Stouffer Corporation
Consolidated Statement of Changes in Financial Position
1970-1972
(000s)
	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	2,608	38.47
Net loss from discontinued operations	(198)	(2.92)
Non-cash charges to income:
Depreciation and amortization	3,088	45.55
Deferred income taxes	513	7.57
Total funds provided from operations	6,011	88.66
Proceeds from loans on officers'
life insurance	413	6.09
Sale or retirement of property, plant,
and equipment	356	5.25
Advances from parent, net
Total sources of funds	6,780	100.00
Application of Funds
Additions to property, plant, and equipment	4,844	78.14
Reduction of long-term debt	414	6.68
Repayment of advances from parent, net	1,149	18.54
Increase in deferred preopening expenses
Other, net	(208)	(3.36)
Total application of funds	6,199	100.00
Increase (decrease) in working capital	581
Increase (decrease) in working capital components:
Cash	211
Accounts receivable	(93)
Inventories	1,284
Prepaid expenses	93
Accounts payable and accrued expenses	(820)
Taxes on income	(73)
Other, net	(21)
	581

SOURCE: The Stouffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9,1973.

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 million 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 million 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 dividend 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 million 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 salable 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">17 T.C. 781, 785 (1951), affd. 203 F.2d 812">203 F.2d 812 (9th Cir. 1953), cert. denied 346 U.S. 873">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 million 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">37 B.T.A. 43, 49 (1938), affd. 102 F.2d 599">102 F.2d 599 (5th Cir. 1939). Based on these criteria, the $ 30 million 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">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 million 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 million 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 million 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 million.

Decision will be entered under Rule 155.

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Footnotes

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

• 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.

  SOURCE: The Stouffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9, 1972.↩

• 1. Exclusive of depreciation.↩

• 2. From disposition of leasehold interest in a restaurant.

  SOURCE: The Souffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9, 1973.↩