## Facts

- Dee Shook owned an Oregon sawmill operation and agreed with Milo Wilson to form S & W Sawmill, Inc. in 1964.
- Shook transferred the sawmill site and related assets to S & W in exchange for 364 shares (100%) of S & W common stock.
- On the same day as the asset transfer, Shook and Wilson executed a stock sale/purchase agreement intended to result in Wilson owning 182 shares (50%) with corresponding voting rights.
- Shook placed certificates for 182 shares in escrow for Wilson and delivered an irrevocable proxy granting Wilson voting rights over those shares.
- Years later, Intermountain Lumber Co. acquired all S & W stock from Shook and Wilson and filed consolidated returns claiming an asset basis equal to the assets’ fair market value at incorporation, producing larger depreciation deductions.
- The Commissioner determined deficiencies for multiple fiscal years, making the assets’ basis and depreciation deductions turn on whether the 1964 transaction qualified under I.R.C. § 351.

## Issues

1. Whether Shook had “control” of S & W “immediately after the exchange” under I.R.C. §§ 351(a) and 368(c) despite a contemporaneous binding arrangement to transfer 50% of the stock and voting power to Wilson.
2. If § 351 did not apply, whether S & W’s assets took a fair market value (cost) basis rather than Shook’s carryover basis, affecting depreciation on later consolidated returns.

## Decision

- The Tax Court held for the petitioners on the § 351 question, concluding the incorporation did not qualify for nonrecognition under § 351.
- Shook lacked the required 80% control immediately after the exchange because he was bound, as part of the same plan, to divest half the shares and voting power to Wilson.
- Wilson’s ownership could not be counted toward § 351 control because he did not transfer property to S & W in exchange for stock at incorporation.
- The assets’ basis was their fair market value at the time of the 1964 transfer, rather than Shook’s historic basis; depreciation deductions were computed accordingly (with final amounts to be determined under Rule 155).

## Legal Principles

- For I.R.C. § 351, “control” (I.R.C. § 368(c)) requires at least 80% of voting power and shares held by the property transferor(s) immediately after the exchange.
- “Immediately after the exchange” is evaluated in light of binding, contemporaneous obligations and arrangements; momentary record ownership is not determinative where the transferor is committed to dispose of stock as part of an integrated plan.
- A person who does not transfer property to the corporation in exchange for stock is not a § 351 transferor whose shares may be aggregated to meet the 80% control requirement.
- An escrowed stock transfer and an irrevocable proxy may demonstrate that voting power and beneficial ownership have effectively shifted for purposes of the control test.

## Conclusion

Because Shook was obligated as part of the incorporation plan to transfer 50% of S & W stock (and voting rights) to Wilson, he did not control the corporation immediately after the exchange, so § 351 nonrecognition did not apply and the corporation’s assets took a fair market value basis for depreciation.


Intermountain Lumber Co. v. Commissioner, 65 T.C. 1025 (1976)