## Facts

- Kimbell-Diamond Milling Company, a Texas grain-milling business, operated a milling plant in Wolfe City, Texas.
- In August 1942, the Wolfe City plant was destroyed by fire; the destroyed assets had an aggregate adjusted basis of $18,921.90.
- In November 1942, Kimbell-Diamond received $124,551.10 from insurance (primarily reimbursement for the fire loss).
- Seeking replacement facilities, on December 26, 1942, Kimbell-Diamond used the insurance proceeds and additional funds to acquire 100% of the stock of Whaley Mill & Elevator Co., located in Gainesville, Texas.
- Corporate minutes reflected that the stock purchase was authorized to replace the burned mill and continue business operations.
- Kimbell-Diamond’s plan in buying Whaley’s stock was to obtain Whaley’s operating assets and liquidate Whaley as soon as practicable.
- On December 31, 1942, Whaley was dissolved and its assets were distributed to Kimbell-Diamond in complete liquidation.
- For later tax years, the Commissioner determined deficiencies after reducing Kimbell-Diamond’s basis in the assets received on liquidation, which reduced depreciation and excess profits tax credits.
- Kimbell-Diamond argued it received the assets in a tax-free liquidation with carryover basis; the Commissioner treated the stock purchase and liquidation as a single asset acquisition with cost basis.

## Issues

1. Whether a prior Tax Court decision involving the same fire loss precluded the Commissioner from disputing the basis of the replacement property (collateral estoppel/res judicata).
2. Whether Kimbell-Diamond’s acquisition of Whaley should be treated as a tax-free liquidation under § 112(b)(6) of the 1939 Code with carryover basis, or as an asset purchase producing a cost basis to Kimbell-Diamond (as affected by involuntary-conversion rules).

## Decision

- The Tax Court held that the earlier litigation did not collaterally estop the Commissioner from contesting basis because the earlier case addressed nonrecognition of gain on the involuntary conversion, not the basis of the acquired assets.
- The court treated the stock acquisition and prompt liquidation as integrated steps undertaken to acquire assets, not as a qualifying § 112(b)(6) liquidation producing carryover basis.
- Kimbell-Diamond’s basis in the Whaley assets was the cost incurred to acquire them (measured by the stock purchase price and related amounts), rather than Whaley’s historic basis.
- Decision entered for the Commissioner.

## Legal Principles

- Collateral estoppel applies only to issues actually litigated and decided; a prior determination of nonrecognition on an involuntary conversion does not, by itself, fix the basis of later-acquired replacement assets.
- When a taxpayer purchases a corporation’s stock pursuant to a plan to obtain its assets and promptly liquidates the corporation, the steps may be treated as a single transaction—an acquisition of assets—rather than as a separate stock investment followed by a tax-free liquidation.
- In such a transaction, the acquirer generally takes a cost basis in the acquired assets, not a carryover basis under liquidation provisions, and basis consequences must be consistent with the transaction’s substantive character.

## Conclusion

The Tax Court sustained deficiencies by characterizing Kimbell-Diamond’s stock purchase and near-immediate liquidation of Whaley as a single asset acquisition, giving Kimbell-Diamond a cost basis (not Whaley’s carryover basis) and rejecting preclusion based on the earlier involuntary-conversion decision.


Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74 (1950)