## Facts

- Reef Fields Gasoline Corp. was closely held by two shareholder groups: a controlling group managing the business and a minority group targeted for buyout.
- The controlling shareholders sought to cash out the minority while continuing the same operating business under a new corporate entity.
- A new corporation (Reef Corp.) was formed as part of a multi-step plan involving (i) a temporary third-party “straw man” shareholder, (ii) an asset transfer to the new corporation, and (iii) liquidation of the old corporation.
- The straw man briefly held record ownership interests and directed steps intended to avoid the “control” element commonly associated with a § 368(a)(1)(D) reorganization.
- After the asset transfer, the old corporation liquidated, and its shareholders received consideration (including cash and notes) tied to the new corporation.
- Reef Corp. claimed the transaction was a taxable sale, seeking a cost (stepped-up) basis in the acquired assets rather than a carryover basis.
- The Tax Court treated the steps as an integrated liquidation–reincorporation reorganization, disregarded the straw man as a conduit, and denied a stepped-up basis.
- Reef Corp. appealed; the Commissioner cross-appealed, arguing the transaction could also be viewed as an § 368(a)(1)(F) reorganization.

## Issues

1. Whether the multi-step asset transfer and liquidation should be characterized, in substance, as a § 368 reorganization rather than a taxable sale of assets.
2. Whether the temporary “straw man” ownership should be respected or disregarded under substance-over-form and step-transaction principles.
3. If a reorganization occurred, whether the transaction fit within § 368(a)(1)(D), § 368(a)(1)(F), or both, and what basis rule followed.

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court held the straw man was a conduit and could be disregarded for tax characterization.
- The court treated the steps as a single integrated transaction amounting to a liquidation–reincorporation reorganization under § 368, rejecting sale treatment.
- Because the transaction was a reorganization, Reef Corp. was not entitled to a stepped-up basis in the transferred assets.

## Legal Principles

- Tax characterization turns on the transaction’s substance and overall plan, not formal step sequencing or nominal intermediaries.
- Under the step-transaction doctrine, interdependent steps undertaken to implement a single plan may be collapsed into one transaction for tax purposes.
- A conduit shareholder or entity lacking independent economic substance may be disregarded in determining whether a reorganization occurred.
- Where continuity of business operations and continuity of proprietary interest remain largely with the same controlling shareholders, a purported sale/liquidation may be recharacterized as a § 368 reorganization.
- If a transaction is treated as a § 368 reorganization, the transferee’s asset basis is generally a carryover basis under reorganization basis rules, not a cost (stepped-up) basis from purchase characterization.

## Conclusion

The Fifth Circuit treated Reef Corp.’s liquidation–reincorporation plan as a § 368 reorganization by collapsing the formally separate steps and disregarding a temporary conduit shareholder, thereby denying the taxpayer a stepped-up basis in the transferred assets.


Reef Corp. v. Commissioner, 368 F.2d 125 (5th Cir. 1966)