## Facts

- McDermott, Inc. was a Delaware parent corporation; McDermott International, Inc. (International) was its wholly owned subsidiary and a controlled foreign corporation.
- In 1982, McDermott and International adopted a reorganization plan under which International would make an exchange offer for McDermott common stock.
- International offered McDermott shareholders cash and newly issued International common stock in exchange for McDermott common stock.
- International acquired about 30 million McDermott shares, paying roughly $10.5 million in cash and issuing about 30 million International shares.
- Rohinton K. Bhada and Patricia A. Bhada tendered 26 shares of McDermott common stock to International.
- The Bhadas received 26 shares of International common stock plus $9.10 in cash.
- The IRS determined that I.R.C. § 304 applied and treated the consideration as a taxable distribution in redemption of stock under §§ 302 and 301, rather than as a nonrecognition exchange.

## Issues

1. Whether International’s acquisition of McDermott stock from McDermott shareholders in exchange for newly issued International stock (plus cash) was an acquisition “for property” that triggered redemption treatment under I.R.C. § 304(a).
2. Whether newly issued stock of the acquiring corporation constitutes “property” for purposes of § 304(a)(2)(A), such that the transaction is recharacterized as a dividend/redemption distribution under §§ 302 and 301.

## Decision

- The Tax Court held that the International shares received by the Bhadas were not “property” within the meaning of § 304(a)(2)(A).
- Because the stock component was not “property,” § 304 did not apply to recharacterize the exchange as a redemption distribution under §§ 302 and 301.
- The stock-for-stock portion of the exchange received nonrecognition treatment under otherwise applicable corporate exchange/reorganization rules.
- The $9.10 cash received was treated as boot, with gain recognized only to the extent required under the applicable nonrecognition/boot provisions.

## Legal Principles

- For § 304(a)(2)(A), “property” does not include newly issued stock of the acquiring corporation when used as consideration in a qualifying internal control rearrangement transaction.
- Section 304 targets transactions that use related corporations to replicate dividend or redemption results; it is not applied where the transaction primarily reorganizes ownership without extracting earnings in a dividend-like manner.
- Statutory interpretation of § 304 must be coordinated with corporate nonrecognition provisions to avoid converting common reorganization exchanges into taxable redemption distributions.

## Conclusion

The Tax Court ruled that International’s newly issued stock was not “property” for purposes of § 304(a)(2)(A), so the Bhadas’ exchange of McDermott stock for International stock (plus minor cash boot) was not treated as a § 304 redemption and was taxed under the applicable nonrecognition and boot rules instead.


Bhada v. Commissioner, 89 T.C. 959 (1987)