## Facts

- Four individual taxpayers owned about 76% of X Corporation and 100% of Y Corporation.
- A trust for the wife of one taxpayer held 50,000 shares of X (about 13%) but owned no Y stock.
- X agreed to acquire all outstanding Y stock for 22,871 shares of X stock issued to the four individuals.
- After the exchange, the four individuals’ combined X ownership rose slightly (to about 77.3%), still below 80%.
- As part of the overall arrangement, the trust purchased 418 additional X shares for $5,000.
- The taxpayers treated the Y-for-X exchange and the trust’s stock purchase as one transaction and claimed that combining their X shares with the trust’s shares yielded more than 80% control immediately after the exchange.
- The Commissioner denied nonrecognition treatment under IRC § 351 and asserted deficiencies; the Tax Court agreed.

## Issues

1. Whether the § 351 “control” requirement (80% under § 368(c)) could be satisfied by including in the control group a trust that did not transfer the exchanged property (Y stock) but bought a small amount of transferee stock (X).
2. Whether Treas. Reg. § 1.351-1(a)(1)(ii), permitting exclusion of nominal or tax-motivated participants from the transferor group for control purposes, was valid and correctly applied.

## Decision

- The First Circuit affirmed the Tax Court.
- The trust’s purchase of 418 shares could not be aggregated with the individuals’ transfer of Y stock to meet the 80% control requirement.
- Treas. Reg. § 1.351-1(a)(1)(ii) was held valid and within Treasury’s interpretive authority.
- Because the four transferors alone did not control X immediately after the exchange, the transaction did not qualify for § 351 nonrecognition and gain had to be recognized.

## Legal Principles

- IRC § 351 is an exception to the general rule of gain recognition and is not applied beyond its intended scope.
- For § 351 control, the relevant “person or persons” are the property transferors in the exchange; mere post-exchange stockholders are not automatically counted.
- Treasury may issue regulations to address statutory margin cases, and such regulations are upheld when consistent with statutory text and purpose.
- Under Treas. Reg. § 1.351-1(a)(1)(ii), a participant with substantial preexisting stock ownership who contributes only a nominal amount of property, or participates mainly to enable others to obtain § 351 treatment, may be disregarded in testing the 80% control requirement.
- Courts evaluate the significance of each participant’s contribution and whether inclusion would allow manufactured control inconsistent with § 351’s purpose.

## Conclusion

The court held that § 351 nonrecognition was unavailable because the only relevant control group consisted of the Y-stock transferors, who lacked 80% control of X immediately after the exchange, and the trust’s nominal stock purchase was properly disregarded under a valid Treasury regulation.


Estate of Kamborian v. Commissioner, 469 F.2d 219 (1st Cir. 1972)