## Facts

- Stevens Pass Co. operated a ski resort; its voting stock was owned 50/50 by Donald Adams and Bruce Kehr, and its nonvoting stock was owned by John Caley.
- Serious shareholder disputes threatened continued operations and prompted a restructuring to change ownership and raise capital.
- A new corporation, Stevens Pass, Inc., was formed to acquire the business and obtain new investment.
- Stevens Pass, Inc. raised funds by issuing its own stock to outside investors; Kehr and Caley invested, while Adams did not.
- Stevens Pass, Inc. purchased all outstanding stock of Stevens Pass Co. for about $650,000.
- After acquiring the stock, Stevens Pass Co. was liquidated and its assets and liabilities were distributed to Stevens Pass, Inc.
- Stevens Pass, Inc. claimed a stepped-up basis in the acquired assets equal to the purchase price for the stock plus liabilities assumed, and took depreciation and related deductions on that basis.
- The IRS determined deficiencies for fiscal years ending September 30, 1961, 1962, and 1963, treating the overall transaction as a nontaxable capital contribution (including under I.R.C. § 351 concepts) requiring carryover basis.

## Issues

1. Whether the acquisition should be respected as a taxable stock purchase followed by liquidation, giving Stevens Pass, Inc. a cost (stepped-up) basis in the assets, or recharacterized as a nontaxable capital contribution exchange limiting basis to carryover.
2. Whether the participation of outside investors and the financing structure supported collapsing the steps under substance-over-form or step-transaction principles.
3. Whether bona fide business purposes supported the form selected despite favorable tax consequences.

## Decision

- The Tax Court held for Stevens Pass, Inc.
- The court characterized the transaction as an actual purchase of the old corporation’s stock followed by a genuine liquidation.
- The court rejected the IRS “conduit” theory and declined to treat the arrangement as a § 351-type contribution of assets.
- Stevens Pass, Inc. was entitled to compute depreciation using a stepped-up cost basis reflecting the stock purchase price plus assumed liabilities.
- Deficiencies based on the carryover-basis theory were disallowed.

## Legal Principles

- A stock acquisition followed by liquidation will be respected in accordance with its form when the steps are actually carried out, have independent economic significance, and reflect real changes in ownership and financing.
- Substance-over-form and step-transaction doctrines do not permit disregarding a taxpayer’s chosen form solely because tax considerations influenced the structure; the form must lack business reality or be a sham to be ignored.
- Where an acquiring corporation purchases target stock for consideration and then liquidates the target, the acquiring corporation’s basis in assets received generally reflects its cost investment (including liabilities assumed), absent a controlling nonrecognition rule requiring carryover basis.
- The presence of genuine outside equity investment and non-circular economic effects weighs against recasting an acquisition as a shareholder asset contribution to a new corporation.

## Conclusion

The Tax Court upheld Stevens Pass, Inc.’s stepped-up basis and related depreciation deductions because the transaction was a real stock purchase followed by liquidation supported by business objectives and economically meaningful participation by new investors, not a disguised § 351 capital contribution.


Stevens Pass, Inc. v. Commissioner, 48 T.C. 532 (1967)