## Facts

- William C. Wilson operated a furniture business; after his death, his widow and two sons continued it as a partnership.
- In 1955 the partnership incorporated as Wilson’s Furniture, Inc.; corporate stock was issued to the two sons, and the widow received a corporate note for her former partnership interest.
- The business made extensive installment sales and held conditional sales contracts arising from those sales.
- In 1958 Wilson’s Furniture formed a new corporation, Wil-Plan, and transferred to it conditional sales contracts then on hand, plus an automobile.
- All Wil-Plan stock was distributed pro rata to the same two shareholders who owned all stock of Wilson’s Furniture.
- The shareholders reported the distribution as a tax-free corporate separation under I.R.C. § 355; the Commissioner treated the distributed Wil-Plan stock as a taxable dividend and assessed deficiencies.

## Issues

1. Whether the transfer of receivables and other property to a controlled corporation followed by a pro rata distribution of the controlled corporation’s stock qualified for nonrecognition under I.R.C. § 355.
2. Whether the distribution was “principally a device for the distribution of earnings and profits” such that § 355 nonrecognition was unavailable and dividend treatment applied.
3. Whether the Tax Court’s fact findings supporting § 355 treatment (including business purpose and absence of a device) should be disturbed on appellate review.

## Decision

- The Ninth Circuit affirmed the Tax Court’s decision setting aside the deficiencies.
- The court held the distribution qualified as a tax-free transaction under I.R.C. § 355.
- The court concluded the distribution was not taxable to the shareholders as a dividend.
- The court accepted the Tax Court’s findings that the separation served business purposes related to handling financing/contract operations and was not motivated principally by tax avoidance.
- The court deferred to the Tax Court on the fact-intensive “device” determination and found no basis to overturn its conclusions.

## Legal Principles

- A corporate separation can receive nonrecognition under I.R.C. § 355 when statutory conditions are met, including continued active conduct of a trade or business by the distributing and controlled corporations.
- Section 355 does not apply if the transaction is used principally as a device to distribute earnings and profits to shareholders.
- Whether a spin-off is a “device” is a fact-driven inquiry; appellate courts generally defer to the Tax Court’s supported findings on business purpose, continuity of operations, and the presence or absence of a tax-avoidance plan.
- Where both entities continue operating active businesses after the distribution and there is no showing of a planned cash-out, sale, or liquidation tied to the distribution, courts may uphold § 355 treatment.

## Conclusion

The Ninth Circuit upheld § 355 nonrecognition for a spin-off that separated installment-contract financing assets into a new controlled corporation and distributed its stock pro rata, finding the transaction served business purposes, both corporations continued active operations, and the distribution was not principally a device to distribute earnings and profits as a dividend.


Comm’r v. Wilson, 353 F.2d 184 (9th Cir. 1965)