LITTON INDUSTRIES v. COMMISSIONER OF INTERNAL REVENUE

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Docket Number

No. 2112-79.

Attorney(S)

Deane E. McCormick, Jr., Dennis P. Bedell, and Melissa Thomas May, for the petitioner. Elaine T. Fuller and Marion L. Westen, for the respondent.

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Smart Summary

Factual and Procedural Background

Litton Industries, Inc. (petitioner) acquired all outstanding stock of Stouffer Corp. (Stouffer), a publicly traded corporation engaged in frozen prepared foods, inns, and food services, in 1967. In early 1972, discussions began among Litton's and Stouffer's management regarding the potential sale of Stouffer. On August 23, 1972, Stouffer declared a $30 million dividend paid to Litton by a negotiable promissory note. At that time, no formal sale efforts had commenced, and Litton publicly announced its intent to sell Stouffer only two weeks later. Over the following months, Litton engaged with various parties and underwriters about selling Stouffer either via public offerings or direct sale. Ultimately, on March 1, 1973, Nestle Alimentana S.A. Corp. offered to purchase all of Stouffer's stock for $105 million, and on March 5, 1973, Nestle paid Litton approximately $75 million in cash for the stock and $30 million in cash for the promissory note. The dispute centers on whether the $30 million distribution constituted a dividend or part of the sale proceeds.

Legal Issues Presented

Whether the $30 million distribution declared by Stouffer and paid by promissory note to Litton prior to any formal sale efforts constitutes a dividend for Federal tax purposes.
If not a dividend, whether the $30 million should be treated as part of the proceeds from the sale of Stouffer stock and thus taxed as capital gain.

Arguments of the Parties

Petitioner's Arguments

The $30 million distribution was a bona fide dividend declared and paid prior to any formal sale action or announcement.
Several legitimate business purposes were served by the dividend, including maximizing after-tax returns and avoiding dilution of earnings prior to a public or private offering.
The timing and facts here distinguish this case from Waterman Steamship Corp. v. Commissioner, and thus the Fifth Circuit's contrary holding should not apply.
Litton committed to the dividend regardless of the eventual sale outcome and accepted the tax consequences.

Respondent's Arguments

The $30 million distribution was effectively part of the sale proceeds, as the dividend could only be paid if the sale of Stouffer stock occurred.
The dividend and sale were inextricably linked and should be treated as one integrated transaction for tax purposes, following the Fifth Circuit’s opinion in Waterman Steamship.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Waterman Steamship Corp. v. Commissioner, 50 T.C. 650 (1968), revd. 430 F.2d 1185 (5th Cir. 1970), cert. denied 401 U.S. 939 (1971)	Whether a dividend declared and paid shortly before a simultaneous sale of subsidiary stock should be treated as a dividend or part of sale proceeds.	The Court distinguished the instant case from Waterman based primarily on timing, finding the dividend here was declared well before any sale efforts and thus constituted a true dividend.
Crellin v. Commissioner, 17 T.C. 781 (1951), aff'd 203 F.2d 812 (9th Cir. 1953), cert. denied 346 U.S. 873 (1953)	Recognition that a dividend declared and paid by a corporation imposes tax consequences on the recipient even if subsequent events alter the transaction.	The Court cited this case to support that petitioner would be charged with tax on the dividend regardless of whether the sale occurred later.
T.R. Miller Mill Co. v. Commissioner, 37 B.T.A. 43 (1938), aff'd 102 F.2d 599 (5th Cir. 1939)	A dividend may be paid by issuance of a promissory note.	The Court relied on this precedent to confirm that the form of payment by promissory note does not preclude treatment as a dividend.
Gregory v. Helvering, 293 U.S. 465 (1935)	Taxpayers may organize transactions to minimize taxes but not to create sham transactions lacking substance.	The Court found no sham or subterfuge in the dividend declaration, emphasizing the substance of the transaction coincided with its form.
T.S.N. Liquidating Corp. v. United States, 624 F.2d 1328 (5th Cir. 1980)	Business purpose is a factor in determining whether a transaction is a sham.	The Court considered petitioner’s legitimate business purposes in declaring the dividend as supporting its validity.

Court's Reasoning and Analysis

The Court analyzed the timing and circumstances surrounding the $30 million distribution by Stouffer to Litton. Unlike the Waterman Steamship case, where the dividend and sale were essentially simultaneous and prearranged, here the dividend was declared and paid by promissory note six months prior to any formal sale efforts or public announcement. The Court emphasized that at the time of the dividend declaration, no binding sale agreement or purchaser was in place, and the sale of Stouffer was only one of several possible avenues to raise funds for the dividend payment.

The Court rejected the respondent’s argument that the dividend and sale were inseparable, noting that Stouffer could have raised funds by other means such as a public offering or borrowing. The Court found that Litton committed to the dividend and accepted its tax consequences regardless of the sale outcome, supported by precedent recognizing dividends paid by promissory notes.

Further, the Court found no evidence of sham or subterfuge; the transaction had legitimate business purposes including maximizing after-tax returns and preserving stock value prior to sale. The Court concluded that the form and substance of the transaction coincided, and the distribution was a genuine dividend under section 316(a) and section 243(a).

Holding and Implications

Holding: The Court held that the $30 million distribution declared by Stouffer on August 23, 1972, and paid by promissory note to Litton, was a dividend for Federal tax purposes, not part of the proceeds from the sale of Stouffer stock.

Implications: As a result, Litton is entitled to treat the $30 million as a dividend received, allowing it to claim the dividend-received deduction under section 243(a). The decision clarifies that timing and substance control the characterization of such distributions, distinguishing this case from prior precedent where dividends and sale were simultaneous. No new precedent was established; rather, the Court applied existing principles to the facts, affirming that a dividend declared well before any sale efforts is recognized as such even if a sale later occurs.

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LITTON INDUSTRIES, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FINDINGS OF FACT AND OPINION

CLAPP, Judge:

Respondent determined a deficiency in petitioner's Federal corporate income tax for the year ended July 29, 1973, in the amount of $11,583,054. After concessions, the issue for decision is whether Litton Industries received a $30 million dividend from Stouffer Corp., its wholly owned subsidiary, or whether that sum represented proceeds from the sale of Stouffer stock to Nestle Corp.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the attached exhibits are incorporated by this reference.

Litton Industries, Inc. (petitioner), and its subsidiaries manufactured and sold, inter alia, business systems and equipment, defense and marine systems, industrial systems and equipment, and microwave cooking equipment. It maintained its principal office in Beverly Hills, California, at the time it filed its petition in this case.

On October 4, 1967, petitioner acquired all the outstanding stock of Stouffer Corp. (Stouffer), a corporation whose common stock was listed and traded on the New York stock exchange. Stouffer manufactured and sold frozen prepared food, and operated hotels and food management services and restaurants. It consisted of three business segments, and the gross revenues for said segments over the 5-year period 1968 to 1972 were as follows: Years ended — (Amounts in thousands of dollars) --------------------------------------------- Segment 7/30/72 8/1/71 8/2/70 8/30/69 7/28/68 Frozen prepared $52,825 $42,912 $39,892 $34,408 $29,423 foods Inns 17,149 16,058 17,178 15,264 11,963 Restaurants and food services 53,586 51,051 53,383 54,832 54,167 ------- ------- ------- ------- ------- Total 123,560 110,021 110,453 104,504 95,553 Stouffer's consolidated net income (before-tax), taxes, and net income (after-tax) were as follows: Fiscal Net income Taxes Net income year before tax on income after tax 1968 $4,892,000 $2,290,000 $2,602,000 1969 4,276,000 2,183,000 2,093,000 1970 $4,851,000 $2,441,000 $2,410,000 1971 4,363,000 2,128,000 2,235,000 1972 5,831,000 2,527,000 3,304,000 The pre-tax income figures for 1969, 1970, and 1971 reflect a net loss from a discontinued operation in the amount of $42,000, $198,000, and $452,000, respectively. The pre-tax income figure for 1972 reflects an extraordinary gain from a sale of a leasehold interest in a restaurant in the amount of $807,000.

The financial statements on pages 1090-1095 further reflect Stouffer's financial profile.

In early 1972, Charles B. Thornton (Thornton), the chairman of Litton's board of directors; Joseph Imirie, president of Stouffer; and James Biggar, an executive of Stouffer, discussed project "T.I.B.," i.e., the sale of Stouffer. In July 1972, Litton's board of directors discussed the mechanics and problems of selling Stouffer. As of August 1, 1972, Stouffer's accumulated earnings and profits exceeded $30 million. On August 23, 1972, Stouffer declared a $30 million dividend which it paid to Litton in the form of a $30 million negotiable promissory note, and at that time, Thornton believed that Litton would have no difficulty in receiving an adequate offer for Stouffer. Two weeks later, on September 7, 1972, petitioner announced publicly its interest in disposing of Stouffer. Subsequent to said announcement, Litton received inquiries from a number of interested sources, including TWA, Green Giant, investment banking houses, and business brokers about the possible purchase of all or part of the Stouffer business.

Beginning in mid-September 1972, Litton and several underwriters discussed the feasibility of a public offering of Stouffer Stock. In early September 1972, Litton negotiated with Lehman Bros. for a public offering of Stouffer stock, but Lehman Bros. decided not to participate in the offering. During October 1972, Litton, Stouffer, and Merrill Lynch, a brokerage firm that thought Stouffer had an excellent outlook, prepared a public offering of Stouffer stock. During November 1972, petitioner, Stouffer, and Hornblower and Weeks prepared a partial public offering of Stouffer stock. Merrill Lynch had a policy of not effecting partial distributions of corporate subsidiaries and thus did not participate in the negotiations with Hornblower and Weeks. In mid-December 1972, Litton decided that a complete public offering was preferable and abandoned the idea of a partial public offering. The S-1 Registration Statement, which Stouffer filed with the Securities and Exchange Commission, stated that $30 million of the proceeds would be used to pay the promissory note which Litton received as a dividend.

On March 1, 1973, Nestle Alimentana S.A. Corp. (Nestle), a Swiss corporation, offered to buy all of Stouffer's stock for $105 million. On March 5, 1973, Nestle paid Litton $74,962,518 in cash for all the outstanding stock of Stouffer and $30 million in cash for the promissory note. Because Litton sold Stouffer to Nestle, the underwriters stopped work on the scheduled offering.

OPINION

The issue for decision is whether the $30 million dividend declared by Stouffer on August 23, 1972, and paid to its parent, Litton, by means of a negotiable promissory note was truly a dividend for tax purposes or whether it should be considered part of the proceeds received by Litton from the sale of all of Stouffer's stock on March 1, 1973. If, as petitioner contends, the $30 million constitutes a dividend, petitioner may deduct 85 percent of that amount as a dividend-received credit pursuant to section 243 (a), as that section read during the year at issue. However, if the $30 million represents part of the selling price of the Stouffer stock, as contended by respondent, the entire amount will be added to the proceeds of the sale and taxed to Litton as additional capital gain. Respondent's approach, of course produces the larger amount of tax dollars.

Aug. 1, 1969, through Aug. 1, 1971, are WMA calculations based on the Stouffer Corp.'s consolidated statement of changes in financial position.

The instant case is substantially governed by Waterman Steamship Corp. v. Commissioner, 50 T.C. 650 (1968), revd. 430 F.2d 1185 (5th Cir. 1970), cert. denied 401 U.S. 939 (1971). Respondent urges us to follow the opinion of the Fifth Circuit, which in substance adopted the position of Judge Tannenwald's dissent (concurred in by three other THE STOUFFER CORPORATION PRO FORMA CONSOLIDATED BALANCE SHEET^fn1 1969-1972 (000s) ========================================================================== 7/30/72 8/1/71 $ % $ % -------------------------------------------------------------------------- ASSETS Current assets: Cash 1,294 2.09 2,281 4.08 Accounts receivable, net 7,971 12.89 7,757 13.86 Notes receivable — — — — — — — — — — — — Inventory 12,086 19.54 9,763 17.45 Prepaid expenses 576 0.93 311 0.56 ------- ----- ------ ----- Total current assets 21,927 35.46 20,112 35.94 ------- ----- ------ ----- Fixed assets: Land 849 1.37 — — — — — — Buildings 20,062 32.44 — — — — — — Machinery and equipment 26,130 42.25 — — — — — — ------- ----- ------ ----- Total fixed assets 47,041 76.07 40,302 72.02 Less accumulated depreciation (12,039) (19.47) (8,783) (15.69) -------- ------- ------- ------- Total net fixed assets 35,002 56.60 31,519 56.32 -------- ------- ------- ------- Other assets: Excess of cost over related net assets of business pur. 3,692 5.97 3,692 6.60 Other 1,219 1.97 638 1.14 ------ ------ ----- ------ Total other assets 4,911 7.94 4,330 7.74 ------ ------ ----- ------ Total assets 61,840 100.00 55,961 100.00 ====== ====== ====== ====== LIABILITIES STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 8,738 14.13 — — — — — — Payroll and related expenses 3,017 4.88 — — — — — — Other accrued expenses 1,465 2.37 12,410 22.18 Taxes on income 1,115 1.80 164 0.29 Current mat. LTD 97 — — — 97 — — — ------ ------ ------ ------ Total current liabilities 14,432 23.34 12,671 22.64 ------ ------ ------ ------ Long-term liabilities: Long-term debt 638 1.03 735 1.31 ------ ------ ------ ------ Total long-term liabilities 638 1.03 735 1.31 ------ ------ ------ ------ Other liabilities: Advances due to parent 3,906 6.32 3,055 5.46 Deferred income taxes 1,539 2.49 1,479 2.64 ------ ------ ------ ------ Total other liabilities 5,445 8.80 4,534 8.10 ------ ------ ------ ------ Total liabilities 20,515 33.17 17,940 32.06 ------ ------ ------ ------ Stockholders' equity: Common stock, no par value 1,859 3.01 1,859 3.32 Additional paid-in capital 18,253 29.52 18,253 32.62 Retained earnings 21,213 34.30 17,909 32.00 ------ ------ ------ ------ Total stockholders' equity 41,325 66.83 38,021 67.94 ------ ------ ------ ------ Total liabilities and stockholders' equity 61,840 100.00 55,961 100.00 ====== ====== ====== ====== Yearend shares outstanding 1,000 1,000 Equity per share $41,325.00 $38,021.00 ========================================================================== 8/2/70 8/3/69 $ % $ % -------------------------------------------------------------------------- ASSETS Current assets: Cash 1,854 3.33 1,643 3.10 Accounts receivable, net 8,293 14.88 8,386 15.81 Notes receivable — — — — — — — — — — — — Inventory 10,940 19.63 9,656 18.20 Prepaid expenses 405 0.73 312 0.59 ------ ----- ------ ------ Total current assets 21,492 38.56 19,997 37.69 ------ ----- ------ ------ Fixed assets: Land 849 1.37 — — — — — — — — — — — — Buildings 20,062 32.44 — — — — — — — — — — — — Machinery and equipment — — — — — — — — — — — — ------ ----- ------ ------ Total fixed assets 35,728 64.09 31,240 58.88 Less accumulated depreciation (5,637) (10.11) (2,549) (4.80) ------ ----- ------ ------ Total net fixed assets 30,091 53.98 28,691 54.08 Other assets: Excess of cost over related net assets of business pur. 3,692 6.62 3,692 6.96 Other 468 0.84 676 1.27 ------ ----- ------ ------ Total other assets 4,160 7.46 4,368 8.32 ------ ----- ------ ------ Total assets 55,743 100.00 53,056 100.00 ====== ====== ====== ====== LIABILITIES STOCKHOLDERS' EQUITY Current liabilities: Accounts payable — — — — — — — — — — — — Payroll and related expenses — — — — — — — — — — — — Other accrued expenses ^fn212,491 22.41 ^fn211,650 21.96 Taxes on income (74) (0.13) (147) (0.28) Current mat. LTD 97 — — — 97 — — — ------ ----- ------ ------ Total current liabilities 12,514 22.45 11,600 21.86 ------ ----- ------ ------ Long-term liabilities: Long-term debt 830 1.49 831 1.57 ------ ----- ------ ------ Total long-term liabilities 830 1.49 831 1.57 Other liabilities: Advances due to parent 5,534 9.93 6,683 12.60 Deferred income taxes 1,079 1.94 566 1.07 ------ ----- ------ ------ Total other liabilities 6,613 11.86 7,249 13.66 ------ ----- ------ ------ Total liabilities 19,957 35.80 19,680 37.09 Stockholders' equity: Common stock, no par value 1,859 3.33 1,859 3.50 Additional paid-in capital 18,253 32.74 18,253 34.40 Retained earnings 15,674 28.12 13,264 25.00 ------ ----- ------ ------ Total stockholders' equity 35,766 64.20 33,376 62.91 ------ ----- ------ ------ Total liabilities and stockholders' equity 55,743 100.00 53,056 100.00 ====== ====== ====== ====== Yearend shares outstanding 1,000 1,000 Equity per share $35,786.00 $38,376.00 THE STOUFFER CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS 1968-1972 (000s) ========================================================================== 7/30/72 8/1/71 8/2/70 $ % $ % $ % -------------------------------------------------------------------------- Sales and service revenues: Frozen prepared foods 52,825 42.75 42,912 39.00 39,892 36.12 Restaurants and food service 53,586 43.37 51,051 46.40 53,383 46.33 Inns 17,149 13.88 16,056 14.60 17,178 15.55 -------- ------ ------ ------ ------- ------ Total revenues 123,560 100.00 110,021 100.00 110,453 100.00 Cost of sales^fn1 33,563 27.16 26,962 24.51 24,717 22.38 Cost of service^fn1 59,969 48.53 56,768 51.60 58,764 53.20 -------- ------ ------ ------ ------- ------ Total cost of goods sold 93,532 75.70 83,730 76.10 83,481 75.58 -------- ------ ------ ------ ------- ------ Gross profit 30,028 24.30 26,291 23.90 26,972 24.42 Operating, general, and administrative expenses: Marketing. general and admin.^fn1 20,174 16.33 16,905 15.37 17,154 15.53 Depreciation/ amortization 3,256 2.64 3,078 2.80 3,025 2.74 -------- ------ ------ ------ ------- ------ Total operating expense 23,430 18.96 19,983 18.16 20,179 18.27 -------- ------ ------ ------ ------- ------ Operating income 6,598 5.34 6,308 6.73 6,793 6.15 -------- ------ ------ ------ ------- ------ Other (income) and expense: Interest income — — — — — — — — — — — — — — — — — — Interest expense 324 0.26 342 0.31 542 0.49 Litton management fee 1,250 1.01 1,151 1.05 1,202 1.09 -------- ------ ------ ------ ------- ------ Total other (inc.) expense 1,574 1.27 1,493 1.36 1,744 1.58 -------- ------ ------ ------ ------- ------ Pretax income-continuing ops. 5,024 4.07 4,815 4.38 5,049 4.57 Provision for income taxes 2,285 1.85 2,128 1.93 2,441 2.21 -------- ------ ------ ------ ------- ------ Net income from continuing ops. 2,739 2.22 2,687 2.44 2,608 2.36 Net loss from discontinued ops. — — — — — — (452) (0.41) (198) (0.18) -------- ------ ------ ------ ------- ------ Net income before extra, gain 2,739 2.22 2,235 2.03 2,410 2.18 Extra gain, net of income taxes of $242,000^fn2 565 0.46 — — — — — — — — — — — — -------- ------ ------ ------ ------- ------ Net income 3,304 2.67 2,235 2.03 2,410 2.18 ======== ====== ====== ====== ======= ====== Effective tax rate 45.5% 42.2% 48.3% -------------------------------------------------------------------------- ========================================================================== 8/3/69 7/28/68 $ % $ % -------------------------------------------------------------------------- Sales and service revenues: Frozen prepared foods 34,468 32.93 29,423 30.79 Restaurants and food service 54,832 52.47 54,167 56.69 Inns 15,264 14.61 11,963 12.52 ------- ------ ------- ------- Total revenues 104,504 100.00 95,553 100.00 Cost of sales 21,841 20.90 19,037 19.92 Cost of service 59,545 56.98 54,595 57.14 ------- ------ ------- ------- Total cost of goods sold 81,386 77.88 73,632 77.06 ------- ------ ------- ------- Gross profit 23,116 22.12 21,921 22.94 Operating, general, and administrative expenses: Marketing. general and admin. 14,661 14.03 13,637 14.27 Depreciation/amortization 2,985 2.86 2,372 2.48 ------- ------ ------- ------- Total operating expense 17,646 16.89 16,009 16.75 ------- ------ ------- ------- Operating income 5,472 5.24 5,912 6.19 ------- ------ ------- ------- Other (income) and expense: Interest income — — — — — — — — — — — — Interest expense 84 0.08 23 0.02 Litton management fee 1,070 1.02 997 1.04 ------- ------ ------- ------- Total other (inc.) expense 1,154 1.10 1,020 1.07 ------- ------ ------- ------- Pretax income-continuing ops. 4,318 4.13 4,892 5.12 Provision for income taxes 2,183 2.09 2,290 2.40 ------- ------ ------- ------- Net income from continuing ops. 2,135 2.04 2,602 2.72 Net loss from discontinued ops. (42) (0.04) — — — — — — Net income before extra, gain 2,093 2.00 2,602 2.72 Extra gain, net of income taxes of $242,000 — — — — — — — — — — — — ------- ------ ------- ------- Net income 2,093 2.00 2,602 2.72 ======= ====== ======= ======= Effective tax rate 50.6% 48.8% -------------------------------------------------------------------------- THE STOUFFER CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION 1970-1972 (000s) ========================================================================== 7/30/72 8/1/71 8/2/70 $ % $ % $ % -------------------------------------------------------------------------- SOURCES OF FUNDS From operations: Net earnings from continuing operations, including gain from sale of leasehold interest of $565,000 in 1972 3,304 38.34 2,687 40.94 2,608 38.47 Net loss from discontinued operations — — — — — — (452) (6.89) (198) (2.92) Non-cash charges to income: Depreciation and amortization 3,256 37.78 3,146 47.93 3,088 45.55 Deferred income taxes 60 0.70 400 6.09 513 7.57 ------ ------ ------ ------ ------ ------ Total funds provided from operations 6,620 76.82 5,781 88.07 6,011 88.66 Proceeds from loans on officers' life insurance — — — — — — — — — — — — 413 6.09 Sale or retirement of property, plant, and equipment 1,147 13.31 783 11.93 356 5.25 Advances from parent, net 851 9.87 — — — — — — — — — — — — ------ ------ ------ ------ ------ ------ Total sources of funds 8,618 100.00 6,564 100.00 6,780 100.00 ------ ------ ------ ------ ------ ------ -------------------------------------------------------------------------- APPLICATION OF FUNDS Additions to property, plant, and equipment 7,886 92.08 5,357 66.13 4,844 78.14 Reduction of long-term debt 97 1.13 95 1.17 414 6.68 Repayment of advances from parent, net — — — — — — 2,479 30.60 1,149 18.54 Increase in deferred preopening expenses 385 4.50 130 1.60 — — — — — — Other, net 196 2.29 40 0.49 (208) (3.36) ------ ------ ------ ------ ------ ------ Total application of funds 8,564 100.00 8,101 100.00 6,199 100.00 ------ ------ ------ ------ ------ ------ Increase (decrease) in working capital 54 — — — (1,537) — — — 581 — — — ====== ====== ======= ====== ====== ====== Increase (decrease) in working capital components: Cash (987) 427 211 Accounts receivable 214 (536) (93) Inventories 2,323 (1,177) 1,284 Prepaid expenses 265 (94) 93 Accounts payable and accrued expenses (806) 83 (820) Taxes on income (951) (238) (73) Other, net (4) (2) (21) ------- ------- ------- 54 (1,537) 581 ======= ======= ======= SOURCE: The Stouffer Corp.'s SEC Form S-1 Registration Statement dated Feb. 9, 1973. judges) from our Court-reviewed opinion. If we hold for respondent, we must overrule our majority opinion in Waterman Steamship. Petitioner contends that the reasoning of the Fifth Circuit in Waterman Steamship should not apply since the facts here are more favorable to petitioner. Additionally, petitioner points out that several business purposes were served by the distribution here which provide additional support for recognition of the distribution as a dividend. For the reasons set forth below, we conclude that the $30 million distribution constituted a dividend which should be recognized as such for tax purposes. We believe that the facts in the instant case lead even more strongly than did the facts in Waterman Steamship to the conclusion that the $30 million was a dividend. Accordingly, we hold that the Stouffer distribution to Litton was a dividend within the meaning of section 243 (a).

In many respects, the facts of this case and those of Waterman Steamship are parallel. The principal difference, and the one which we find to be most significant, is the timing of the dividend action. In Waterman Steamship, the taxpayer corporation received an offer to purchase the stock of two of its wholly owned subsidiary corporations, Pan-Atlantic and Gulf Florida, for $3,500,000 cash. The board of directors of Waterman Steamship rejected that offer but countered with an offer to sell the two subsidiaries for $700,000 after the subsidiaries declared and arranged for payments of dividends to Waterman Steamship amounting in the aggregate to $2,800,000. Negotiations between the parties ensued, and the agreements which resulted therefrom included, in specific detail, provisions for the declaration of a dividend by Pan-Atlantic to Waterman Steamship prior to the signing of the sales agreement and the closing of that transaction. Furthermore, the agreements called for the purchaser to loan or otherwise advance funds to Pan-Atlantic promptly in order to pay off the promissory note by which the dividend had been paid. Once the agreement was reached, the entire transaction was carried out by a series of meetings commencing at 12 noon on January 21, 1955, and ending at 1:30 p.m. the same day. At the first meeting, the board of directors of Pan-Atlantic met and declared a dividend in the form of a promissory note in the amount of $2,799,820. The dividend was paid by execution and delivery of the promissory note. At 12:30 p.m., the board of directors of the purchaser's nominee corporation (Securities) met and authorized the purchase and financing of Pan-Atlantic and Gulf Florida. At 1 p.m., the directors of Waterman authorized the sale of all outstanding stock of Pan-Atlantic and Gulf Florida to Securities. Immediately following that meeting, the sales agreement was executed by the parties. The agreement provided that the purchaser guaranteed prompt payment of the liabilities of Pan-Atlantic and Gulf Florida including payment of any notes given by either corporation as a dividend.

Finally, at 1:30 p.m., the new board of directors of Pan-Atlantic authorized the borrowing of sufficient funds from the purchaser personally and from his nominee corporation to pay off the promissory note to Waterman Steamship, which was done forthwith. As the Fifth Circuit pointed out, "By the end of the day and within a ninety minute period, the financial cycle had been completed. Waterman had $3,500,000, hopefully tax-free, all of which came from Securities and McLean, the buyers of the stock." 430 F.2d at 1190. This Court concluded that the distribution from Pan-Atlantic to Waterman was a dividend. The Fifth Circuit reversed, concluding that the dividend and sale were one transaction. 430 F.2d at 1192.

The timing in the instant case was markedly different. The dividend was declared by Stouffer on August 23, 1972, at which time the promissory note in payment of the dividend was issued to Litton. There had been some general preliminary discussions about the sale of Stouffer, and it was expected that Stouffer would be a very marketable company which would sell quickly. However, at the time the dividend was declared, no formal action had been taken to initiate the sale of Stouffer. It was not until 2 weeks later that Litton publicly announced that Stouffer was for sale. There ensued over the next 6 months many discussions with various corporations, investment banking houses, business brokers, and underwriters regarding Litton's disposition of Stouffer through sale of all or part of the business to a particular buyer, or through full or partial public offerings of the Stouffer stock. All of this culminated on March 1, 1973, over 6 months after the dividend was declared, with the purchase by Nestle of all of Stouffer's stock. Nestle also purchased the outstanding promissory note for $30 million in cash.

In the instant case, the declaration of the dividend and the sale of the stock were substantially separated in time in contrast to Waterman Steamship where the different transactions occurred essentially simultaneously. In Waterman Steamship, it seems quite clear that no dividend would have been declared if all of the remaining steps in the transaction had not been lined up in order on the closing table and did not in fact take place. Here, however, Stouffer declared the dividend, issued the promissory note, and definitely committed itself to the dividend before even making a public announcement that Stouffer was for sale. Respondent argues that the only way petitioner could ever receive the dividend was by raising revenue through a sale of Stouffer. Therefore, respondent asserts the two events (the declaration of the dividend and then the sale of the company) were inextricably tied together and should be treated as one transaction for tax purposes. In our view, respondent ignores the fact that Stouffer could have raised sufficient revenue for the dividend from other avenues, such as a partial public offering or borrowing. Admittedly, there had been discussions at Litton about the sale of Stouffer which was considered to be a very salable company. However, there are many slips between the cup and the lip, and it does not take much of a stretch of the imagination to picture a variety of circumstances under which Stouffer might have been taken off the market and no sale consummated. Under these circumstances, it is unlikely that respondent would have considered the dividend to be a nullity. On the contrary, it would seem quite clear that petitioner would be charged with a dividend on which it would have to pay a substantial tax. Petitioner committed itself to the dividend and, thereby, accepted the consequences regardless of the outcome of the proposed sale of Stouffer stock. See Crellin v. Commissioner, 17 T.C. 781, 785 (1951), affd. 203 F.2d 812 (9th Cir. 1953), cert. denied 346 U.S. 873 (1953).

Since the facts here are distinguishable in important respects and are so much stronger in petitioner's favor, we do not consider it necessary to consider further the opinion of the Fifth Circuit in Waterman Steamship.

The term "dividend" is defined in section 316 (a) as a distribution by a corporation to its shareholders out of earnings and profits. The parties have stipulated that Stouffer had earnings and profits exceeding $30 million at the time the dividend was declared. This Court has recognized that a dividend may be paid by a note. T.R. Miller Mill Co. v. Commissioner, 37 B.T.A. 43, 49 (1938), affd. 102 F.2d 599 (5th Cir. 1939). Based on these criteria, the $30 million distribution by Stouffer would clearly constitute a dividend if the sale of Stouffer had not occurred. We are not persuaded that the subsequent sale of Stouffer to Nestle changes that result merely because it was more advantageous to Litton from a tax perspective.

It is well established that a taxpayer is entitled to structure his affairs and transactions in order to minimize his taxes. This proposition does not give a taxpayer carte blanche to set up a transaction in any form which will avoid tax consequences, regardless of whether the transaction has substance. Gregory v. Helvering, 293 U.S. 465 (1935). A variety of factors present here preclude a finding of sham or subterfuge. Although the record in this case clearly shows that Litton intended at the time the dividend was declared to sell Stouffer, no formal action had been taken and no announcement had been made. There was no definite purchaser waiting in the wings with the terms and conditions of sale already agreed upon. At that time, Litton had not even decided upon the form of sale of Stouffer. Nothing in the record here suggests that there was any prearranged sale agreement, formal or informal, at the time the dividend was declared.

Petitioner further supports its argument that the transaction was not a sham by pointing out Litton's legitimate business purposes in declaring the dividend. Although the code and case law do not require a dividend to have a business purpose, it is a factor to be considered in determining whether the overall transaction was a sham. T.S.N. Liquidating Corp. v. United States, 624 F.2d 1328 (5th Cir. 1980). Petitioner argues that the distribution allowed Litton to maximize the gross after-tax amount it could receive from its investment in Stouffer. From the viewpoint of a private purchaser of Stouffer, it is difficult to see how the declaration of a dividend would improve the value of the stock since creating a liability in the form of a promissory note for $30 million would reduce the value of Stouffer by approximately that amount. However, since Litton was considering disposing of all or part of Stouffer through a public or private offering, the payment of a dividend by a promissory note prior to any sale had two advantages. First, Litton hoped to avoid materially diminishing the market value of the Stouffer stock. At that time, one of the factors considered in valuing a stock, and in determining the market value of a stock was the "multiple of earnings" criterion. Payment of the dividend by issuance of a promissory note would not substantially alter Stouffer's earnings. Since many investors were relatively unsophisticated, Litton may have been quite right that it could increase its investment in Stouffer by at least some portion of the $30 million dividend. Second, by declaring a dividend and paying it by a promissory note prior to an anticipated public offering, Litton could avoid sharing the earnings with future additional shareholders while not diminishing to the full extent of the pro rata dividend, the amount received for the stock. Whether Litton could have come out ahead after Stouffer paid the promissory note is at this point merely speculation about a public offering which never occurred. The point, however, is that Litton hoped to achieve some business purpose, and not just tax benefits, in structuring the transaction as it did.

Under these facts, where the dividend was declared 6 months prior to the sale of Stouffer, where the sale was not prearranged, and since Stouffer had earnings and profits exceeding $30 million at the time the dividend was declared, we cannot conclude that the distribution was merely a device designed to give the appearance of a dividend to a part of the sales proceeds. In this case, the form and substance of the transaction coincide; it was not a transaction entered into solely for tax reasons, and it should be recognized as structured by petitioner.

On this record, we hold that for Federal tax purposes Stouffer declared a dividend to petitioner on August 23, 1972, and, subsequently, petitioner sold all of its stock in Stouffer to Nestle for $75 million.

Decision will be entered under Rule 155.