## Facts

- Hershey Foods Corporation operated a Canadian branch that manufactured and sold candy in Canada.
- The Canadian branch had a history of losses and required substantial investment in fixed assets to operate.
- Hershey and another U.S. confectionery company planned to combine their Canadian operations by forming a new Canadian corporation.
- Hershey proposed transferring the Canadian branch’s assets to the new Canadian corporation in exchange for its stock, intending nonrecognition treatment as a § 351 exchange.
- Because the transferee was a foreign corporation, the transaction required a favorable ruling under the then-applicable § 367 regime to obtain nonrecognition treatment.
- The Commissioner conditioned a favorable § 367 ruling on Hershey’s agreement to include specified amounts in income (effectively requiring gain recognition on the outbound transfer).
- After exhausting administrative remedies, Hershey filed a declaratory judgment action under § 7477 challenging the Commissioner’s adverse determination as unreasonable.

## Issues

1. Whether the Commissioner acted reasonably under § 7477 in refusing to issue a favorable § 367 ruling unless Hershey recognized gain on the outbound transfer of its Canadian branch assets.
2. Whether the proposed transfer had sufficient tax-avoidance potential to justify the Commissioner’s condition requiring current income inclusion.

## Decision

- The Tax Court entered declaratory judgment for Hershey.
- The court held the Commissioner’s adverse § 367 ruling (and its condition of gain recognition) was unreasonable.
- The court concluded the proposed transfer lacked meaningful tax-avoidance potential and fit within administrative standards for incorporating an active foreign business requiring substantial fixed-asset investment.

## Legal Principles

- Under the pre-1984 § 367 regime, nonrecognition for transfers to foreign corporations depended on whether the transaction had the effect of tax avoidance or evasion as evaluated through the ruling process.
- In a § 7477 declaratory judgment proceeding, the Tax Court reviews whether the Commissioner’s § 367 determination was reasonable in light of the administrative record and applicable legal standards; it does not decide the issue purely de novo.
- The Commissioner’s discretion in § 367 rulings must be tied to the statute’s anti-avoidance purpose and applied consistently with published or articulated administrative guidelines.
- An outbound incorporation of an active foreign branch composed largely of operating, fixed assets and lacking substantial built-in appreciation may present low tax-avoidance risk, making denial of nonrecognition treatment unreasonable absent concrete avoidance features.

## Conclusion

The Tax Court held that conditioning a favorable § 367 ruling on gain recognition was unreasonable where the outbound transfer incorporated an unprofitable, active Canadian branch with substantial fixed-asset needs and no identified avoidance features, entitling Hershey to favorable § 367 treatment for the intended § 351 exchange.


Hershey Foods Corp. v. Comm’r, 76 T.C. 312 (1981)