## Facts

- Cumberland Public Service Co., a closely held Kentucky corporation, operated a diesel electric power system that became uncompetitive after cheaper TVA power entered the area.
- A rural electric cooperative offered to buy the corporation’s transmission and distribution equipment, but the corporation refused a direct asset sale due to expected corporate capital gains tax.
- The shareholders arranged to acquire the equipment from the corporation through a distribution in kind and then sell the equipment to the cooperative, which the cooperative accepted.
- The transaction proceeded in two steps: (1) the corporation transferred the relevant assets to shareholders in partial liquidation, sold remaining assets, and dissolved; (2) shareholders sold the distributed assets to the cooperative.
- The Commissioner assessed and collected about $17,000 in corporate tax on the theory that the shareholders acted as a conduit for what was substantively a corporate sale.

## Issues

1. Whether the transaction had to be treated as a taxable corporate sale of assets, rather than a shareholder sale following a genuine liquidation and dissolution.
2. Whether a tax-reduction motive and coordinated steps required disregarding the liquidation form under a substance-over-form approach.

## Decision

- The Supreme Court affirmed the judgment for the taxpayer.
- The Court held the record did not require overturning the Court of Claims’ factual finding that the liquidation and dissolution were genuine and that the sale was made by the shareholders, not the corporation.
- The Court distinguished Commissioner v. Court Holding Co. on the ground that, on these facts, the trial court reasonably found a bona fide liquidation rather than a disguised corporate sale.

## Legal Principles

- A corporation generally recognizes taxable gain when it sells its assets, but a genuine liquidation with an in-kind distribution to shareholders does not itself trigger corporate-level gains tax on the distribution.
- A corporation may liquidate and dissolve without incurring corporate gains tax even if a principal motive is to avoid corporate taxation, so long as the liquidation is real.
- Whether a transaction is properly characterized as a corporate sale or a shareholder sale after liquidation depends on the “entire transaction” and is primarily a question of fact for the trial court; an appellate court should not recharacterize absent a record that compels a contrary finding.
- Substance-over-form principles apply when shareholders are used as a mere conduit for a corporate sale, but the presence of tax motivation alone does not establish conduit status.

## Conclusion

The Court upheld a trial court’s finding that a corporation’s liquidation and dissolution were genuine and that shareholders, after receiving assets in kind, made the sale, so the corporation was not subject to capital gains tax on the disposition despite an admitted tax-avoidance motive.


United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950)