## Facts

- Litton Industries, Inc. owned 100% of Stouffer Corporation, which operated profitable food and hospitality businesses.
- In early 1972, Litton considered possible dispositions of Stouffer but had not begun formal sale efforts or reached any agreement with a buyer.
- On August 23, 1972, Stouffer declared a $30 million dividend to Litton, paid by a negotiable promissory note; the note was later satisfied in cash.
- After exploring alternative transactions, Nestlé offered to buy all Stouffer stock for $105 million.
- On March 5, 1973, Nestlé paid Litton about $75 million for the Stouffer stock and paid $30 million to retire the promissory note representing the earlier dividend.
- Litton reported the $30 million as a dividend (eligible for the intercorporate dividends-received deduction).
- The Commissioner asserted an $11,583,054 corporate income tax deficiency for Litton’s tax year ended July 29, 1973, recharacterizing the $30 million as part of the stock-sale proceeds.

## Issues

1. Whether Stouffer’s $30 million pre-sale distribution to its parent, paid by promissory note, was a dividend for federal income tax purposes.
2. Whether the $30 million should instead be treated as additional consideration from Litton’s later sale of all Stouffer stock to Nestlé.

## Decision

- The Tax Court held the $30 million payment was a dividend, not part of the selling price for the Stouffer stock.
- The court found the dividend was declared before the commencement of disposition efforts and was not contingent on the later sale.
- The fact that Nestlé ultimately supplied cash to extinguish the note did not change the dividend’s character.
- The deficiency was to be recomputed under Tax Court Rule 155.

## Legal Principles

- A distribution by a wholly owned subsidiary can be respected as a dividend when it is declared before any binding sale arrangement and has independent corporate and economic substance.
- Substance-over-form analysis focuses on whether a pre-sale distribution was contingent on, or integrated with, a later stock sale, including timing and transactional interdependence.
- A negotiable promissory note issued as a dividend may constitute a real corporate obligation supporting dividend treatment when backed by earnings and profits.
- Tax motivation alone does not warrant recharacterization where the transaction is consistent with corporate formalities, economic reality, and credible business purposes.

## Conclusion

The Tax Court treated Stouffer’s $30 million note dividend to Litton as a bona fide dividend rather than disguised stock-sale proceeds because it preceded formal disposition efforts, was not conditioned on a sale, and reflected a substantive corporate obligation supported by Stouffer’s earnings and profits.


Litton Indus., Inc. v. Comm'r, 89 T.C. 1086 (1987)