## Facts

- Martin Ice Cream Company (MIC), a New Jersey ice-cream distributor, operated for years under relationships developed by shareholder Arnold Strassberg, including an oral arrangement to distribute Häagen-Dazs products to supermarkets.
- MIC elected S corporation status effective November 1, 1987; Arnold and his son, Martin Strassberg, were MIC’s shareholders.
- Disagreements between Arnold and Martin led to a restructuring intended to separate Arnold from MIC while moving certain distribution operations to a new entity.
- MIC formed a wholly owned subsidiary, Strassberg Ice Cream Distributors, Inc. (SIC), and transferred to SIC certain rights and records associated with the Häagen-Dazs supermarket distribution business.
- MIC then distributed all SIC stock to Arnold as consideration in redemption of Arnold’s 51% interest in MIC.
- After the SIC stock distribution, Arnold and SIC sold assets associated with the distribution business to Häagen-Dazs/Pillsbury following Pillsbury’s efforts to consolidate distribution.
- The IRS determined MIC recognized corporate-level gain on the SIC stock distribution and asserted additions to tax for negligence and substantial understatement; the IRS later argued the subsequent sale should be attributed to MIC under the Court Holding doctrine.

## Issues

1. Whether the sale of assets to Häagen-Dazs by Arnold and SIC should be attributed to MIC under Commissioner v. Court Holding Co.
2. Whether MIC’s distribution of SIC stock to Arnold in redemption of his MIC shares qualified for nonrecognition as a § 355 split-off.
3. If MIC recognized gain on the distribution/redemption, how the corporate-level gain should be valued and measured.
4. Whether MIC was liable for additions to tax under § 6653(a)(1) (negligence) and § 6661 (substantial understatement).

## Decision

- The Tax Court rejected attribution of the Häagen-Dazs sale to MIC under Court Holding and treated Arnold and SIC as the sellers.
- The court held the SIC stock distribution did not qualify for § 355 nonrecognition.
- The court held MIC recognized corporate-level gain on the redemption/distribution, but the gain was substantially less than the amount determined by the Commissioner.
- The court rejected the § 6653(a)(1) negligence addition to tax but sustained the § 6661 substantial understatement addition.

## Legal Principles

- Personal goodwill and customer relationships tied to an individual are not corporate assets for federal tax purposes unless transferred to the corporation by contract (e.g., employment, noncompete, or similar assignment).
- Court Holding does not recharacterize a shareholder-level sale as a corporate sale where there is a genuine change in the identity of the seller and the value transferred includes personal assets not owned by the corporation.
- Section 355 nonrecognition requires strict compliance, including the distributed corporation’s engagement in an active trade or business immediately after the distribution; failure results in corporate-level gain recognition on the distribution of appreciated property.
- When a corporation recognizes gain on a distribution in a redemption, valuation must exclude amounts attributable to personal goodwill not owned by the corporation.

## Conclusion

The Tax Court held that MIC could not use § 355 to avoid corporate-level tax on the SIC stock distribution, but it limited MIC’s recognized gain because much of the business value reflected Arnold’s unassigned personal goodwill, and it refused to attribute the later Häagen-Dazs sale to MIC under Court Holding while sustaining only the substantial-understatement penalty.


Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998)