## Facts

- Max Cohen was the sole stockholder and president of West Coast Marketing Corporation (West Coast).
- Cohen purchased about 12,000 acres of Florida land, commonly described as three tracts (north, middle, and south).
- Cohen assigned his interest in the middle tract to West Coast, which took title to that tract.
- Cohen and West Coast sold one-half of their interests to George Coury, who—encouraged by Cohen—looked for a buyer for the land.
- Coury negotiated with Louis Wolfson, associated with Universal Marion Corp. (Universal), for Universal to acquire all three tracts.
- Universal made a formal offer to purchase the tracts for $360 per acre, payable in Universal preferred stock, and Cohen, Coury, and West Coast orally agreed.
- Before completing the sale to Universal, Cohen formed Manatee Land Co. (Manatee) to act as an intermediate title-holding entity.
- Cohen and West Coast transferred their interests in the tracts to Manatee in exchange for Manatee stock (Cohen received 769 shares; West Coast received 645 shares).
- When the transaction closed, Manatee conveyed title to the tracts to Universal, and Cohen and West Coast transferred their Manatee stock to Universal in exchange for 10,800 shares of Universal voting stock.
- Universal then liquidated Manatee.
- West Coast reported no taxable income from these steps.
- The Commissioner determined a deficiency for West Coast’s fiscal year ended June 30, 1960 (reported as $50,911.97) on the ground that West Coast realized taxable long-term capital gain from the exchange tied to the disposition of the land interest.
- West Coast petitioned the United States Tax Court, asserting the transaction qualified for nonrecognition (including reliance on I.R.C. § 354(a)(1)) because it was structured as a stock-for-stock exchange through Manatee.

## Issues

1. Whether, in substance, West Coast engaged in a taxable sale or exchange of its land interest to Universal, rather than a tax-free exchange under I.R.C. § 354(a)(1) accomplished through the use of Manatee as an intermediate corporation.
2. Whether the intermediate steps—transfer of land to Manatee, exchange of Manatee stock for Universal stock, and liquidation of Manatee—should be treated as an integrated transaction for federal income tax purposes.

## Decision

- The Tax Court held that the transaction, viewed as a whole, was in substance a taxable disposition of West Coast’s interest in the land to Universal.
- The court rejected West Coast’s attempt to obtain nonrecognition under I.R.C. § 354(a)(1) through the intermediate use of Manatee.
- The court treated Manatee as a conduit formed and used to pass title and facilitate the prearranged transfer to Universal, rather than as an entity that changed the tax result.
- The court sustained the Commissioner’s deficiency determination; decision was entered for the respondent.

## Legal Principles

- Federal income tax treatment depends on the substance of what occurred, not solely on the formal steps or labels used by the parties.
- Under the step-transaction doctrine, formally separate steps may be combined and treated as one transaction when the steps are prearranged parts of a single plan aimed at a specific end result.
- An intermediate corporation formed to carry out a preplanned transfer, with no meaningful role beyond temporarily holding title or stock and then being promptly eliminated, may be treated as a conduit when applying nonrecognition provisions.
- Nonrecognition rules for reorganizations and related exchanges (including I.R.C. § 354) do not protect gains where the overall arrangement is effectively a sale dressed in reorganization form.

## Conclusion

West Coast Marketing attempted to avoid gain recognition by inserting Manatee as an intermediate corporation between its land interests and Universal, then exchanging Manatee stock for Universal stock and liquidating Manatee. The Tax Court collapsed the steps and treated Manatee as a conduit used to carry out an already negotiated transfer of the land to Universal, concluding that the overall substance was a taxable disposition rather than a qualifying nonrecognition exchange under I.R.C. § 354(a)(1). Decision was entered for the Commissioner.


West Coast Marketing Corp. v. Commissioner, 46 T.C. 32 (1966)