## Facts

- American Potash & Chemical Corporation sought to acquire Western Electro-Chemical Company (Wecco) to obtain and integrate Wecco’s business and assets.
- Potash acquired 100% of Wecco’s stock in two separate stock-for-stock offers:
  - From Sept. 28 to Nov. 3, 1954, Potash acquired 48% of Wecco stock for 33,367 shares of Potash voting stock plus $466.12 cash for fractional shares; the offer expired Nov. 18, 1954.
  - On Nov. 30, 1955, Potash acquired the remaining 52% for 33,295 shares of Potash voting stock under different exchange terms.
- Potash operated Wecco from Dec. 1955 through June 30, 1956, then completely liquidated Wecco and took all assets and liabilities.
- For fiscal years 1957–1960, Potash claimed depreciation on the former Wecco assets using an adjusted cost basis exceeding $7 million; Wecco’s historic basis in the depreciable assets was about $3.7 million.
- After audit, the Commissioner reduced Potash’s depreciation deductions, asserting Potash was limited to Wecco’s carryover basis, assessed deficiencies, and denied refund claims.
- Potash filed a refund suit; the government moved for summary judgment, arguing the transaction was a tax-free reorganization (primarily a § 368(a)(1)(C) reorganization) or a qualifying subsidiary liquidation producing carryover basis.

## Issues

1. Whether Potash’s two-step acquisition of all Wecco stock followed by liquidation was, as a matter of law, a tax-free reorganization—particularly a § 368(a)(1)(C) reorganization—requiring a carryover basis in the acquired assets.
2. If no reorganization occurred, whether Potash could claim a cost basis under the Kimbell-Diamond doctrine, or whether I.R.C. § 334(b)(2) displaced that doctrine so that cost basis was available only when § 334(b)(2)’s conditions were satisfied.
3. Whether the government was entitled to summary judgment fixing a carryover basis for depreciation.

## Decision

- The Court of Claims denied the government’s motion for summary judgment.
- The court held the record did not establish, with the needed specificity, that the transaction qualified as a § 368 reorganization (including a “C” reorganization).
- The court held the Kimbell-Diamond doctrine was not preempted by the enactment of § 334(b)(2).
- The case required further proceedings to develop facts relevant to applying Kimbell-Diamond and computing any resulting basis.

## Legal Principles

- The party asserting tax-free reorganization treatment bears the burden to establish the statutory and regulatory elements with specificity; that showing may fail where acquisition steps are temporally separated and occur on materially different terms.
- Step-transaction principles do not automatically permit collapsing discrete acquisitions into a single qualifying “C” reorganization, especially where timing and continuity requirements for reorganization treatment are not adequately shown on the record.
- Enactment of § 334(b)(2) did not, by itself, eliminate nonstatutory cost-basis treatment under Kimbell-Diamond where the transaction is not governed by reorganization provisions.
- In a stock acquisition followed by liquidation undertaken principally to obtain the target’s assets, Kimbell-Diamond may support cost-basis depreciation even if the transaction does not meet § 334(b)(2)’s technical requirements, subject to proof on a developed factual record.

## Conclusion

The court refused to treat Potash’s staged stock acquisitions and later liquidation as a tax-free reorganization on summary judgment and rejected the government’s claim that § 334(b)(2) made Kimbell-Diamond unavailable; further factfinding was required to determine whether the transaction should be treated in substance as an asset purchase producing cost basis for depreciation.


Am. Potash & Chem. Corp. v. United States, 399 F.2d 194 (Ct. Cl. 1968)