## Facts

- Pope & Talbot, Inc. was a publicly held Delaware corporation whose shares traded on the New York Stock Exchange.
- In 1985, Pope & Talbot’s board and shareholders approved a plan to separate certain Washington State operations: timberlands, timber, land-development, and resort businesses (the “Washington Properties”).
- The plan called for transferring the Washington Properties to a newly formed Delaware limited partnership, Pope Resources (the “Partnership”).
- Pope & Talbot itself was not to become a partner in the Partnership.
- The plan included creating two new Delaware corporations—Pope MGP, Inc. (managing general partner) and Pope EGP, Inc. (standby general partner)—with management authority concentrated in the general partner structure.
- Under the plan, when Pope & Talbot transferred the Washington Properties to the Partnership, the Partnership would issue limited partnership interests to Pope MGP, Inc., and those limited partnership units would then be distributed pro rata to Pope & Talbot’s shareholders.
- The limited partnership unit holders had no management power and only limited voting rights.
- The distribution’s effective date was December 20, 1985; on that date, Pope & Talbot borrowed $22.5 million from Travelers Insurance Company, secured by the Washington Properties, and transferred the Washington Properties to the Partnership subject to that liability.
- The Commissioner determined Pope & Talbot had to recognize gain under 26 U.S.C. § 311(d)(1) and valued the distributed Washington Properties by determining what a willing buyer would pay a willing seller for the properties on the distribution date.
- Pope & Talbot disputed the Tax Court’s valuation approach, arguing that fair market value should instead be measured by aggregating the market value of the limited partnership units ultimately received by its shareholders.

## Issues

1. Under 26 U.S.C. § 311(d)(1), must the fair market value used to compute corporate gain from a distribution of appreciated property be determined by valuing the distributed property itself on the distribution date using the willing-buyer/willing-seller standard?
2. May the fair market value of the distributed property instead be determined by aggregating the market value of the limited partnership interests distributed to the corporation’s shareholders?

## Decision

- The Ninth Circuit affirmed the Tax Court’s decision.
- The court held that § 311(d)(1) calls for determining the fair market value of the distributed property itself as of the distribution date, using a hypothetical willing-buyer/willing-seller valuation of that property.
- The court rejected Pope & Talbot’s attempt to substitute the aggregate market value of the limited partnership units later distributed to shareholders for the fair market value of the Washington Properties distributed by the corporation.
- The court treated valuation as a question of fact and reviewed the Tax Court’s fair market value finding for clear error; it found no clear error.
- Judge Noonan dissented.

## Legal Principles

- Under 26 U.S.C. § 311(d)(1), when a corporation distributes appreciated property, it must recognize gain as if it sold the property for its fair market value on the date of distribution.
- “Fair market value” generally means the price at which property would change hands between a willing buyer and a willing seller, with neither being compelled to act and both having reasonable knowledge of relevant facts.
- For § 311(d)(1), the valuation focus is the property the corporation distributes, not the value of ownership interests (such as limited partnership units) created or transferred in later steps.
- Market prices of partnership interests may reflect features of the interests themselves—such as limits on control, governance arrangements, liquidity, and leverage—and therefore are not automatically a proxy for the value of the underlying assets.
- A Tax Court’s valuation determination is a factual finding reviewed on appeal for clear error.

## Conclusion

The Ninth Circuit held that Pope & Talbot’s gain under § 311(d)(1) had to be computed using the fair market value of the Washington Properties themselves on the December 20, 1985 distribution date, determined by the willing-buyer/willing-seller standard, and not by aggregating the market value of the limited partnership units distributed to shareholders.


Pope & Talbot, Inc. v. Commissioner of Internal Revenue, 162 F.3d 1236 (1999)