## Facts

- M. Edmund Coady was a shareholder of Christopher Construction Company, a corporation engaged in the construction business.
- Coady and another principal had management disputes and agreed to separate their interests by dividing the business into two construction companies.
- Christopher Construction organized a new corporation, E. P. Coady & Co., and transferred roughly half of its construction assets to the new corporation.
- E. P. Coady & Co. issued all its stock to Christopher Construction in exchange for the assets.
- Christopher Construction distributed all E. P. Coady & Co. stock to Coady in exchange for Coady’s Christopher Construction stock.
- The distributed E. P. Coady & Co. stock was valued at about $140,000; Coady’s basis in his Christopher Construction stock was about $72,500.
- After the transaction, both Christopher Construction and E. P. Coady & Co. continued operating construction businesses using the assets each held.
- Coady reported no gain, asserting nonrecognition treatment under I.R.C. § 355 (1954 Code).
- The Commissioner determined a taxable gain of about $67,500 and asserted a deficiency, concluding the transaction did not qualify under § 355.

## Issues

1. Whether I.R.C. § 355 permits nonrecognition when a single active trade or business is divided so that two corporations thereafter conduct portions of that same business.
2. Whether the § 355 “active conduct of a trade or business” and five-year requirements can be met when the pre-transaction history consists of one business conducted within a single corporation that is later split.

## Decision

- The Tax Court held that § 355 can apply to a divisive transaction that separates a single active business into two corporations, each continuing a portion of that business.
- The court rejected the Commissioner’s position that § 355 required two distinct preexisting businesses conducted separately before the distribution.
- The transaction qualified under § 355, and Coady recognized no gain on the receipt of E. P. Coady & Co. stock.
- The Commissioner’s asserted gain and deficiency were not sustained.

## Legal Principles

- For § 355, the “active conduct of a trade or business” requirement focuses on the continuation of business activity immediately after the distribution, not on whether the businesses were separately operated in distinct corporations before the separation.
- A single trade or business with the required operating history may satisfy § 355’s five-year requirement even if, after the distribution, that business is carried on in two corporations formed by dividing the prior operations and assets.
- A qualifying § 355 distribution requires satisfaction of statutory conditions, including control and non-device limitations; a shareholder-dispute-driven separation may support non-device treatment when it reflects a business-motivated corporate separation rather than a disguised distribution of earnings.

## Conclusion

The Tax Court held that a corporate division splitting one longstanding active business into two corporations can qualify for tax-free spin-off treatment under I.R.C. § 355 when both resulting corporations continue active operations and the statute’s technical requirements are met, so the shareholder receiving the controlled corporation’s stock recognizes no gain.


Coady v. Commissioner, 33 T.C. 771 (1960)