## Facts

- Clark D. Pulliam was the sole shareholder and president of Pulliam Funeral Homes, P.C. (Homes), an Illinois professional service corporation operating multiple funeral homes, including an Oblong, Illinois facility.
- Homes was profitable, had significant accumulated earnings, and historically paid no dividends; Pulliam also owed Homes substantial amounts on demand loans used for personal purposes.
- Earl L. Deckard, a key employee managing the Oblong facility, sought an ownership interest; after disagreements, he acquired property to start a competing funeral home in Oblong.
- To retain Deckard and prevent competition, Homes transferred the Oblong facility’s assets to a newly formed corporation, Pulliam Deckard Funeral Chapel, P.C. (Chapel).
- On January 1, 1992, Homes distributed all 1,000 shares of Chapel stock to Pulliam.
- Under a stock-purchase agreement, Deckard was to acquire 49% of Chapel for $386,610, largely through installment payments, and he executed a covenant not to compete.
- Deckard later defaulted, his employment ended, and Pulliam reacquired nearly all of Chapel’s stock.
- The Commissioner issued a notice of deficiency for 1992 asserting, among other items, that the Chapel stock distribution was a taxable dividend to Pulliam equal to the Oblong facility’s fair market value, and imposed an accuracy-related penalty for substantial understatement.

## Issues

1. Whether the distribution of Chapel stock qualified for nonrecognition under I.R.C. § 355 or was principally a “device” to distribute Homes’ earnings and profits under § 355(a)(1)(B).
2. Whether the distribution satisfied § 355(a)(1)(D)’s “control” requirement (incorporating § 368(c)), where the Commissioner raised this theory as an alternative issue at trial and on brief.
3. What effect should be given to additional deficiency and penalty determinations that the taxpayers did not place in dispute.

## Decision

- The Tax Court held the Chapel spin-off was not used principally as a device for distributing Homes’ earnings and profits within the meaning of § 355(a)(1)(B).
- The court rejected the Commissioner’s primary characterization of the transaction as a taxable dividend to Pulliam based on the distributed stock’s value.
- The court treated the Commissioner’s late-raised “control” contention as an alternative argument and resolved the case consistently with § 355 nonrecognition treatment.
- Other adjustments and the accuracy-related penalty remained in effect to the extent they were not challenged by the taxpayers.

## Legal Principles

- A corporate division may receive nonrecognition treatment under I.R.C. § 355 only if, among other requirements, it is not used principally as a device for distributing the distributing corporation’s earnings and profits.
- The “device” inquiry turns on all the facts and circumstances, including the presence of substantial non-tax business purposes and whether the structure and subsequent events resemble a cash-out or disguised dividend.
- A history of paying no dividends despite substantial earnings can be evidence of a device, but it is not determinative when countered by credible business purposes and transaction features inconsistent with earnings extraction.
- A § 355 distribution must satisfy the statutory “control” requirement, generally requiring distribution of stock constituting control as defined by § 368(c).
- Issues not properly raised by the taxpayer in the pleadings are generally treated as conceded and are not litigated on the merits.

## Conclusion

The Tax Court upheld § 355 nonrecognition for the spin-off of the Oblong funeral-home assets into a new corporation formed to accommodate an employee-ownership arrangement and a noncompetition covenant, concluding the transaction was not principally a device to distribute earnings and profits and therefore rejecting the Commissioner’s dividend determination, while leaving unchallenged adjustments and penalties in place.


Pulliam v. Comm’r, 73 T.C.M. (CCH) 3052 (1997)