## Facts

- Telephone Answering Service Company, Inc. (TASCO) operated a telephone answering service business and provided managerial services to two subsidiaries, “Houston” and “North American,” which also provided telephone answering services.
- In 1966, TASCO entered into an agreement to sell all of the stock of its Houston subsidiary to an unrelated third party for cash, realizing a gain of about $270,000.
- TASCO’s board approved the Houston stock sale contract and also adopted a plan of complete liquidation.
- In 1967, TASCO organized a new corporation (“New TASCO”) and transferred to it all assets used in TASCO’s telephone answering and managerial-services operations in exchange for New TASCO stock.
- TASCO retained the cash proceeds from the Houston stock sale, the stock of North American, and the stock of New TASCO it received in the asset transfer.
- TASCO distributed the retained assets (cash, North American stock, and New TASCO stock) to its shareholders and filed articles of dissolution.
- Around the same time, a 15.7% shareholder’s interest in New TASCO was redeemed through a distribution of assets of North American.
- After these steps, New TASCO changed its name to TASCO and continued the same telephone answering and management business with the same customers, employees, and offices.
- TASCO claimed the Houston stock sale occurred “in complete liquidation” and therefore qualified for nonrecognition of gain at the corporate level under I.R.C. § 337.
- The Commissioner issued a notice of deficiency treating the gain on the Houston stock sale as taxable to TASCO, and TASCO petitioned the Tax Court for redetermination.

## Issues

1. Whether TASCO’s 1966 sale of the Houston subsidiary’s stock qualified for nonrecognition under I.R.C. § 337 as a sale made in pursuance of a plan of complete liquidation.
2. Whether the overall series of transactions—liquidation steps coupled with transfer of the operating business to New TASCO and continuation of operations—meant TASCO did not undergo a “complete liquidation” for § 337 purposes.

## Decision

- The Tax Court held for the Commissioner.
- The court concluded TASCO was not entitled to § 337 nonrecognition for the gain on the Houston stock sale.
- The gain from the Houston stock sale was taxable to TASCO, and the deficiency determination was sustained.

## Legal Principles

- A corporation seeking nonrecognition under I.R.C. § 337 must show that the sale or exchange was made in pursuance of a plan of complete liquidation meeting the statute’s requirements.
- Tax characterization depends on the substance of what occurred, not only formal labels such as “plan of liquidation,” dissolution filings, or the order of steps.
- When a purported liquidation is paired with a transfer of the operating business to a newly formed corporation that continues the same business with substantially the same customers, employees, and facilities, the transaction may be treated as a liquidation followed by reincorporation rather than a true termination.
- Related steps may be evaluated together when they are parts of a single overall program, and continuity of the enterprise can show the “liquidation” did not end the corporate business in the manner § 337 contemplates.
- The taxpayer bears the burden to prove entitlement to nonrecognition treatment and to show the transaction fits within the statutory conditions.

## Conclusion

Telephone Answering Service Co. v. Commissioner of Internal Revenue holds that § 337 nonrecognition does not apply when a corporation sells appreciated property in the context of a formal liquidation that, in substance, leaves the same business operating in a new corporate shell owned by the same ownership group; because TASCO’s answering-service and management operations continued seamlessly in New TASCO (later renamed TASCO), the court treated the events as inconsistent with a “complete liquidation” and taxed the gain on the Houston stock sale.


Telephone Answering Service Co. v. Commissioner of Internal Revenue, 63 T.C. 423 (1974)