Martin Ice Cream Co. v. Comm'r

*191 BEGHE, JUDGE: Respondent determined the following deficiency and additions to tax:

In so doing, respondent determined that Martin Ice Cream Co. (MIC *20 or petitioner) recognized taxable gain of $ 1,430,340 on the distribution of stock of its newly created subsidiary, Strassberg Ice Cream Distributors, Inc. (SIC), to one of petitioner's two shareholders, Arnold Strassberg (Arnold), in redemption of his 51-percent stock interest in petitioner. Shortly before trial, we granted respondent's motion for leave to amend answer to allege that a subsequent sale of assets to the Haagen-Dazs Co., Inc. (Haagen-Dazs), by Arnold and SIC should be attributed to petitioner under Commissioner v. Court Holding Co.., 324 U.S. 331, 89 L. Ed. 981, 65 S. Ct. 707 (1945).

We reject respondent's attempt to apply Court Holding, although we uphold respondent's original determination that petitioner recognized gain on the redemption of Arnold's stock in petitioner. We find that petitioner's gain is substantially less than the gain determined by respondent. We reject respondent's imposition of an addition to tax under section 6653(a)(1) but uphold the addition to tax for substantial understatement under section 6661. ^1*21

FINDINGS OF FACT

Some of the facts are stipulated and are so found. MIC is a New Jersey corporation whose principal place of business was Bloomfield, New Jersey, when it filed its petition.

MIC was incorporated in 1971 as a wholesale ice cream distributor, with Martin Strassberg (Martin) as its sole shareholder. MIC was a C corporation from 1971 through 1986. On December 30, 1986, MIC filed with the Internal Revenue Service a Form 2553, Election by a Small Business Corporation, which took effect on November 1, 1987. As a *192 result of the election, the accounting period of MIC was changed, commencing January 1, 1988, from an October 31 fiscal year to the calendar year.

Soon after World War II, Arnold, Martin's father, a high school mathematics teacher, began a part-time business after school hours, selling ice cream products wholesale to stores in Newark, New Jersey. During summer vacations, Arnold expanded his coverage to small stores and ice cream parlors on the Jersey Shore. By 1960, Arnold had incorporated his own company, Arnold's Ice Cream, and was engaging full time in the wholesale distribution of ice cream. In the 1960's, Arnold began to *22 develop relationships with the owners and managers of several supermarket chains when he conceived an innovative packaging and sales campaign that used bright colors and catchy slogans to market ice cream products to supermarkets for resale to consumers. Ice cream had hitherto been sold by supermarkets to consumers as an undifferentiated product in large containers and multiserving packages with plain brown wrappers. Arnold subsequently developed other packaging ideas for ice cream products that helped supermarkets sell ice cream products under their private labels. Even with different kinds of packaging, supermarkets marketed ice cream to consumers mainly on the basis of price. In the late 1960's, Arnold had a falling-out with his major supplier, Eastern Ice Cream, which forced Arnold's Ice Cream into bankruptcy.

In 1971, Martin and Arnold organized MIC as a part-time business, with one delivery truck, distributing ice cream to small grocery stores and food service accounts (restaurants, hotels, and clubs) in northern New Jersey. Martin joined the business after having completed virtually all requirements for a Ph.D. in statistics and after spending several years doing operations research *23 and statistical analysis as an employee of large corporations. In 1975, Martin began working in the ice cream distribution business full time. During most of the 1970's, Arnold owned no stock in MIC because he wished to avoid the claims of creditors of Arnold's Ice Cream. In 1979, Arnold became a 51-percent shareholder in MIC, and Martin's interest was reduced to 49 percent. At no time did Arnold or Martin have an employment agreement with MIC.

In 1974, Ruben Mattus (Mr. Mattus), the founder of Haagen- Dazs, asked Arnold to use his ice cream marketing *193 expertise and relationships with supermarket owners and managers to introduce Haagen-Dazs ice cream products into supermarkets. Haagen-Dazs manufactured an entirely new range of "super-premium" ice cream products that were differentiated from the competition by both higher quality and higher price. Haagen-Dazs had initially marketed its products to small stores and restaurants for single-serving on- premises consumption. Haagen-Dazs had made only minimal inroads into the supermarkets, and now Mr. Mattus wanted to intensify his marketing efforts in that sector. Mr. Mattus asked for Arnold's help because he had been unable to convince *24 the supermarkets to carry his products; they saw super-premium ice cream as too expensive for a retail setting designed for off-premises consumption.

Arnold, as the first distributor of Haagen-Dazs ice cream to supermarkets, sparked a revolution in the retail sale of ice cream. Arnold and Haagen-Dazs tapped a hitherto hidden demand for a super-premium ice cream in supermarkets by consumers who were willing to pay higher prices for higher quality. By the late 1970's, MIC was distributing ice cream products, including Haagen-Dazs ice cream, to four major supermarket chains, Pathmark, Shop Rite, Foodtown, and Acme in New York, New Jersey, Connecticut, and Pennsylvania (the supermarkets) and to smaller grocery stores. However, neither Arnold nor MIC ever entered into a written distribution agreement with Haagen-Dazs or Mr. Mattus.

Arnold was so successful that in the late 1970's or early 1980's Mr. Mattus invited Arnold to become his partner in a planned expansion of Haagen-Dazs' supermarket sales to the West Coast. Arnold declined the offer and continued to use MIC as his corporate vehicle to distribute Haagen-Dazs products in New Jersey and adjacent areas.

Martin did not support or participate *25 in Arnold's efforts to expand ice cream distribution to the supermarkets. Martin disliked the social activities necessary to developing and sustaining personal relationships with supermarket owners and managers -- activities that Arnold thrived on. Martin preferred to manage day-to-day operations at the MIC warehouse, arriving at work as early as 3 to 4 a.m. to supervise the loading of MIC's delivery trucks for delivery to the supermarkets *194 and the small stores. ² Martin employed route salesmen to expand and maintain wholesale distribution of ice cream, primarily Haagen-Dazs, to small independent grocery stores and food service accounts in New Jersey and New York. Martin did little or no solicitation himself. Arnold did not participate in Martin's development of the business of wholesale ice cream distribution to small grocery stores and food service accounts, focusing instead on the supermarkets.

In 1985, the Borden Co. (Borden) retained Arnold to use his contacts with the supermarkets to put *26 Borden's ice cream products into supermarket freezers. Arnold worked as a broker for Borden, personally earning commissions on Borden's sales of ice cream products to supermarkets, rather than as a distributor buying from the manufacturer and reselling to retailers. MIC did not participate in Arnold's work for Borden. Arnold had the ability to -- and did -- put Borden's ice cream products into supermarket freezers at a time when many of his original contacts from the 1960's and earlier had passed from the scene. By 1988, Arnold no longer had a business relationship with Borden.

At some time in the early to mid-1980's, Ben and Jerry's, a competitor of Haagen-Dazs in the manufacture and marketing of super-premium ice cream, asked Arnold to help obtain supermarket freezer space for its products. Haagen-Dazs had not objected to Arnold's work for Borden but told him that he could not continue to distribute Haagen-Dazs ice cream products if he were to distribute Ben and Jerry's ice cream products. Arnold thereupon terminated further contact with Ben and Jerry's.

In 1983, the Pillsbury Co. (Pillsbury) purchased Haagen- Dazs from Mr. Mattus. Pillsbury promptly initiated a business plan to consolidate *27 the distribution of Haagen-Dazs ice cream products into its own distribution centers, with the goal of delivering directly to retail stores, especially large supermarket chains. Pillsbury believed it could deliver a uniformly higher quality product to supermarkets at lower cost than independent distributors whose refrigeration equipment was not as reliable. Pillsbury believed that ensuring high quality was vital to its basic corporate strategy of continuing *195 to differentiate Haagen-Dazs products from those of its competitors.

Another important component of the Haagen-Dazs corporate strategy was to enter into written distribution contracts, explicitly terminable at will by Haagen-Dazs on short notice, with distributors that it was not ready to buy out. Since 1974, MIC, like other regional distributors, had distributed Haagen-Dazs products on the basis of Arnold's original oral agreement with Mr. Mattus. After its acquisition by Pillsbury, Haagen-Dazs always maintained that distributors such as MIC did not have enforceable rights to continue to distribute Haagen-Dazs ice cream. In June 1988, the U.S. District Court, Northern District of California, MDL docket No. 682, ordered summary *28 judgment in distributed ice cream products for a direct competitor. ³ The grounds were that the termination did not violate antitrust laws and that the oral agreement with the distributor did not prevent termination at will. ⁴

In late 1985 or early 1986, representatives of Haagen-Dazs first approached the Strassbergs about acquiring direct access to Arnold's relationships with the supermarkets and removing him as a middleman in the chain of distribution. Haagen-Dazs also wanted to forestall competitors, *29 such as Ben and Jerry's, from using Arnold's contacts and knowledge to gain access to the supermarkets. Haagen- Dazs also did not want to leave distributors like Arnold, who had been with Haagen-Dazs since the early days of Mr. Mattus, without adequate reward for the role they had played in bringing Haagen-Dazs to prominence. Also, because Arnold was a high-profile, well- respected ice cream distributor, Haagen-Dazs did not wish to alienate Arnold and risk having him stir up the other independent distributors before Haagen-Dazs was ready to take similar steps against them. Haagen-Dazs believed that these various relationships, personal to *196 Arnold, had value for which it was willing to pay. At the same time, Haagen-Dazs wished to terminate any residual rights to distribute Haagen-Dazs ice cream that its distributors might have acquired over the years, even as it maintained that neither Arnold nor MIC, or later, SIC, had any enforceable "distribution rights" as such. Haagen-Dazs was not interested in acquiring MIC as an ongoing distributor to either the supermarkets or the small grocery stores and food service accounts or in acquiring its physical assets.

During the early to mid-1980's, *30 Arnold and Martin had increasingly vocal disagreements over the future direction of MIC. Arnold wished to expand the supermarket business, and Martin wished to expand the small store business. They were unable to agree on which course to take or otherwise to agree on coordinating their different business objectives.

Martin was concerned about MIC's overdependence on a small number of large supermarket accounts. He felt that a diversified customer base of small independent stores with higher gross profits carried less risk. Martin was concerned about the smaller profit margins of the supermarket business and also felt that the small stores had a better record of paying MIC's invoices in full and on time.

Arnold attributed Martin's disparagement of the supermarket business to his dislike of the process of developing and maintaining the personal relationships with the managers and owners of the supermarkets that was needed to maintain access to supermarket freezer space. Arnold believed that the small volume of sales generated by each of the independent stores did not justify the effort to acquire and service their accounts.

Arnold and Martin each blamed the other's approach to management *31 of his own line of the business for MIC's not being more profitable during the mid-1980's.

From 1985 through 1988, Arnold's and Martin's disagreements intensified, especially in the aftermath of Arnold's promotion of MIC's failed investment in a warehouse facility in central Newark that would have substantially expanded MIC's capability to distribute ice cream to the supermarkets, just as Haagen-Dazs was building its own large distribution facility in the Bronx. MIC's share of the total cost of the Newark facility would have been about $ 2.5 million. In 1987 or *197 early 1988, Arnold and Martin ultimately abandoned the project after MIC had invested approximately $ 100,000.

By 1988, Martin no longer wanted to work with Arnold, and Arnold felt that Martin was pushing him to retire. They were looking for a way to end their constant strife over the future direction of petitioner. Their disagreement had made them both receptive to the first overture from Haagen-Dazs in May 1986. At that time, Arnold and Martin began consulting with their attorney, Russell L. Hewit (Mr. Hewit), concerning the negotiations with Haagen-Dazs. ⁵ Arnold was the primary negotiator in the talks with Haagen-Dazs. To *32 that end, Arnold executed a series of confidentiality agreements. In March 1987, the initial talks broke down because the parties could not agree on the price for the business with the supermarkets.

To memorialize the termination of discussions, Mr. Hewit sent Haagen-Dazs a letter dated April 7, 1987, stating that he understood Haagen-Dazs to have made an initial offer of $ 3 million for "the Haagen-Dazs portion of the business". In a letter dated April 16, 1987, Haagen-Dazs replied that it had not offered $ 3 million, and that the distribution rights under discussion were worth approximately $ 1 million. Despite the breakdown in formal negotiations, the parties remained in contact. On January 8, 1988, Arnold signed a new confidentiality agreement.

On May 4, 1988, the MIC board of directors, consisting of Martin, Arnold, and Mr. Hewit, and Arnold and Martin as MIC's shareholders, adopted and approved resolutions to form a subsidiary *33 of MIC, to be called SIC. Later that month, negotiations resumed between Haagen-Dazs and Arnold and Martin regarding the possible sale of Arnold's supermarket distribution rights.

As with the earlier negotiations, Arnold took the lead in the negotiations with Haagen-Dazs. Between May 13 and May 23, 1988, Arnold and Martin met at least three times with Haagen-Dazs representatives. On May 16, 1988, Hewit wrote a letter to Charles McGill, vice president -- acquisitions, for Pillsbury, stating that, on May 13, proposals for Haagen-Dazs to buy MIC's "supermarket and food service business *198 only" for up to $ 2.5 million had been rejected and that one of the obstacles was the possible sale of the remaining business to another distributor acceptable to Haagen-Dazs. However, neither Martin nor MIC thereafter pursued the possibility of such a sale, and the subject was never raised in subsequent negotiations with Haagen-Dazs.

On May 19, 1988, the parties discussed the outlines of an agreement to sell the supermarket and food service distribution business to Haagen-Dazs. On May 23, 1988, Mr. Hewit wrote another letter to Mr. McGill detailing the terms discussed in the meetings, including an overall *34 price of $ 1.5 million for that business, $ 350,000 in additional contingent payments payable over 3 years, and annual payments of $ 150,000 to Arnold for 3 years, and of $ 50,000 to Martin for 5 years in return for consulting services and covenants not to compete in the retail super-premium ice cream distribution business, except as MIC and Martin would continue to distribute ice cream to stores other than the supermarket chains. Mr. Hewit's letter did not refer to any allocation of the total price between distribution rights as such and the business records related to those rights, or even refer to any such records. Haagen-Dazs had derived the total price it was willing to pay from a formula based upon MIC's annual sales of Haagen-Dazs products to the supermarkets.

On May 31, 1988, SIC's certificate of incorporation was filed with the New Jersey secretary of state, and SIC was organized as a wholly owned subsidiary of MIC. On June 2, 1988, Stan Oleson of Pillsbury sent Mr. Hewit a draft "Agreement for Purchase and Sale of Assets" and other associated draft documents. The Agreement documents listed Arnold, Martin, MIC, and SIC collectively as "Sellers" and provided for the purchase *35 of any and all of Sellers' distribution rights, "including but not limited to supermarket and food service distribution rights, if any" and their cancellation by the "Buyer". On June 6, 1988, Mr. Hewit replied to Mr. Oleson with a letter containing a number of modifications to the proposed agreements, chief among which was elimination of all references to Martin and MIC as parties to the proposed sale so as not "to increase the risk that the 355 Exchange will be collapsed". During the negotiations that culminated in the signing on July 8 of a sale agreement between Arnold and SIC as sellers and Haagen-Dazs as buyer, Mr. Hewit did not draft *199 his own version of the sale agreement; he made mark-ups of his suggested changes and sent copies of the marked-up drafts back to Haagen-Dazs.

On June 14, 1988, Beth L. Bronner, vice president for strategic and business development for Haagen-Dazs, replied to Mr. Hewit's letter of June 6, stating that Haagen-Dazs had "incorporated, where possible, the suggested changes in your redraft and letter of June 6. However, many of the points in your letter reflected a transaction materially different from the one we believed we had negotiated with your clients". *36 Ms. Bronner's letter stated that Haagen-Dazs had incorporated "your proposed exclusion of Martin Strassberg and * * * MIC from the Purchase Agreement," although it created "an important issue with which we must deal" in light of Haagen-Dazs' main objective of obtaining "ANY AND ALL distribution rights" of both Arnold and Martin and their respective companies. Ms. Bronner proposed to resolve this issue through a separate "side agreement" in which Martin and MIC "would clearly acknowledge" that all rights to distribute "Haagen-Dazs products have been transferred to * * * SIC and that he * * * Martin claims no rights to distribute Haagen-Dazs." ^6*37

Mr. Hewit sought advice from two tax attorneys, Charles E. Falk, an attorney C.P.A. with an LL.M. in taxation from New York University School of Law, and Martin's brother-in-law, Jan Neiman, an attorney practicing tax law in Miami Beach, Florida, on the tax structuring of the transactions creating SIC and distributing its stock to Arnold. ^7*38 Mr. Hewit sought their advice to ensure that he properly drafted all documents necessary to effect the separation of Martin and MIC from Arnold and SIC. There is no evidence in the record that Mr. Hewit considered trying to obtain a private letter ruling from the Internal Revenue Service, or that he rendered *200 a written opinion to petitioner or Martin or Arnold regarding the tax consequences of the transactions at issue, or that Mr. Hewit or any of the parties in interest received a written tax opinion from Mr. Neiman or Mr. Falk.

On June 15, 1988, Arnold, Martin, and Mr. Hewit executed documents providing for the transfer of MIC's interests in the supermarket business and associated customer and pricing lists from MIC to SIC and the exchange of Arnold's stock in MIC for the stock of SIC (the split-off). The first of these documents, entitled "Agreement", provided for the transfer of

All of the Corporation's MIC's rights to distribute Haagen- Dazs Ice Cream products to supermarket chains (Pathmark, Shop Rite, Foodtown and Acme) and food service accounts (restaurants, hotels and clubs), and the business records of said distributorship, including but not limited to customer lists and pricing lists, to the Subsidiary * * * for the purpose of transferring to Arnold all of the outstanding shares of the Subsidiary in exchange for the surrender by Arnold of all of his shares of the Corporation, in a transaction intended to qualify as a tax-free split-off under Internal Revenue Code Section 355, as amended * * *

A second document, dated June 15, 1988, also entitled *39 "Agreement", stated that Martin and Arnold were operating separate businesses that were formerly jointly operated by MIC, and that both Arnold and Martin "wish to assure a smooth transition so that neither party loses customers or employees as a result of * * * misunderstanding". The document further stated that

Following the Exchange, * * * MIC shall cooperate with * * * SIC and provide such assistance that is reasonably necessary for * * * SIC to conduct its business, provided that the rendering of such services does not unduly interfere with the conduct of * * * MIC's business.

* * * * * * *

SIC shall pay to and reimburse * * * MIC for all costs incurred by * * * MIC in providing such services.

This agreement provided, among other things, that MIC would continue to deliver ice cream from its warehouse to SIC's supermarket accounts after the June 15 transactions separating MIC and SIC. MIC did continue to do so until the closing of Arnold's and SIC's sale of assets to Haagen-Dazs on July 22.

On June 15, 1988, the MIC board of directors, consisting of Arnold, Martin, and Mr. Hewit, adopted a resolution, which *201 was approved by Arnold and Martin as shareholders, declaring that MIC was *40 in two separate businesses of equal fair market value, one distributing ice cream to supermarket chains and food service accounts and another distributing ice cream to small independent grocery stores. The resolutions stated that MIC undertook the transaction to split into two corporations in order to resolve the dispute between Arnold and Martin over the future direction of MIC and whether it would focus on distribution to supermarkets or to food service accounts and small stores and that Martin wished to operate the business of distribution of Haagen-Dazs ice cream products to nonsupermarket stores. Martin and Arnold each submitted his written resignation as a director, officer, and employee of the other company, Martin from SIC, and Arnold from MIC. Each of these documents bore the typed date "June 3, 1988", which was crossed out and amended by hand to read "June 15, 1988". None of the resolutions, agreements, or resignations contain any guaranty or indemnification from SIC or Arnold that would protect MIC or Martin from any tax liabilities arising from the split-off or the contemplated sale to Haagen-Dazs.

On June 20, 1988, Arnold and Mr. Hewit signed a directors' resolution of *41 SIC, submitting to Arnold, as sole shareholder of SIC, an offer by Haagen-Dazs to "purchase all of the rights of the Corporation SIC to distribute Haagen-Dazs ice cream products". Arnold then signed a shareholder's resolution to authorize SIC to enter into negotiations with Haagen-Dazs. In an undated memorandum, Arnold disclosed his customer list to Haagen-Dazs, most likely in response to a June 30 letter from Ms. Bronner.

In a letter to Mr. Hewit, dated July 1, 1988, Richard Wegener, a Pillsbury attorney, summarized changes made "to the various distributor agreements" pursuant to negotiations that had taken place the previous week. Mr. Wegener stated that, in the wake of those negotiations, Haagen-Dazs "clearly * * * had its work cut out concerning the financial issues raised by Section 4.5 of the proposed agreement." Mr. Wegener exhorted Arnold "to get out * * * on the table" all relevant information required to complete that section, which was a warranty and representation by Arnold and SIC concerning sales of Haagen-Dazs ice cream products to supermarkets by MIC and SIC for the period of June 1, 1987, to *202 May 31, 1988. On July 5, 1988, Mr. Hewit sent Ms. Bronner documentation of *42 the sales to supermarkets for the 12-month period ending May 31, 1988. On July 7, 1988, Mr. Oleson wrote Mr. Hewit a letter asking whether Haagen-Dazs' refusal to agree to deposit money in escrow on signing the purchase agreement would be a "deal breaker" that would require cancellation of this planned July 8 meeting to sign the agreement. He also expressed optimism that the deal would be signed.

On July 8, 1988, Arnold, individually, and as president of SIC, and Ms. Bronner, on behalf of Haagen-Dazs, signed an "Agreement For Purchase and Sale of Assets" by Arnold and SIC, as "Sellers", in which the parties agreed to the terms of the sale and related documents. Notwithstanding that the documents effectuating the split- off provided only for the transfer of supermarket and food service distribution rights and records to SIC, the Arnold-SIC-Haagen-Dazs agreement recited that SIC "owns all of the rights to distribute Haagen-Dazs product which were or may have been owned by Martin Strassberg and MIC," and purported to provide, consistent with the Haagen-Dazs first draft, for the purchase of all distribution rights including but not limited to supermarket rights. ⁸ This agreement specifically *43 stated that "Buyer is not purchasing assets relating to the 'non-banner' business of * * * MIC, the former parent of SIC," ^9*44 and allocated the stated $ 1.5 million price to be paid at the closing, $ 300,000 to "Records" and $ 1,200,000 to "Sellers' Rights". There is no evidence in the record of any negotiation over this allocation or of any of the considerations that led Haagen-Dazs to allocate the purchase price in this fashion.

Unlike prior drafts of the purchase agreement in the record, the agreement as executed on July 8, 1988, between Haagen- Dazs and SIC and Arnold contains an Article 2.4 that *203 makes the closing contingent on an audit by a "'Big-8' auditing firm" of the documentation of the sales to supermarket chains, independent supermarkets, and food service accounts for the 12-month period ending May 31, 1988. The audit was required to ascertain the actual sales figures in order to set the purchase price under Article 2.4 in accordance with a purchase price reduction clause that applied to both the payment to be made at the closing and the contingent annual payments to be made over the following 3 years. ^10*45 Article 2.4 also provided that Haagen-Dazs would have no obligation to close if the audited sales were less than $ 4 million for the period under audit.

On July 20, 1988, Touche Ross & Co. submitted an audit report to Haagen-Dazs, stating that the audited sales were less than represented by Arnold and SIC. As late as July 21, Mr. Hewit was still negotiating with Haagen-Dazs on behalf of petitioner concerning the list of accounts that MIC would continue to service after the sale.

On July 22, 1988, Arnold and representatives of Haagen- Dazs closed the sale to Haagen-Dazs. The employees of MIC who had reported to Arnold before June 15 continued to do so until that date. Arnold thereupon notified MIC in writing that SIC no longer required the services of MIC in delivering ice cream products to the supermarkets or in otherwise servicing their accounts. ^11*46 SIC then paid MIC for services rendered. MIC's customers had not been notified of any changes in its business until they were notified of the sale of the supermarket distribution business to Haagen-Dazs.

The closing documents contained an amendment to the purchase agreement -- signed July 22 after receipt of the Touche Ross & Co. audit of the supermarket sales figures -- stating that during the 12-month period ending May 31, 1988, the sales of Haagen-Dazs products to the four supermarket chains, food service accounts, and independent supermarkets *204 had totaled $ 4,528,000. Pursuant to the purchase price reduction clause of the Agreement, that sales figure resulted in a downward price adjustment of $ 86,000, of which $ 69,660 reduced the purchase price paid by Haagen-Dazs at the closing, and $ 16,340 of which reduced the amount of contingent additional payments payable to Arnold over 3 years. Consequently, the first closing document, entitled "Closing Statement", reduced the agreed sale price of $ 1.5 million to $ 1,430,340, and reduced the maximum amount of contingent annual payments of $ 350,000 to $ 333,660.

The bill of sale, signed by Arnold individually and as president of SIC, listed the items acquired from SIC as all existing customer lists, price lists, historical sales records, promotional allowance and rebate records, "and other *47 business records as requested by Buyer, and the goodwill associated therewith".

Arnold also signed an "Assignment of Rights", which referenced -- and transferred to Haagen-Dazs -- the rights described supra, in two capacities: first, as president of SIC, and second, as an individual; there was no allocation of the consideration paid for the rights as between Arnold and SIC. ^12*48 Ms. Bronner also signed the Assignment of Rights on behalf of Haagen-Dazs. Arnold signed a "Consulting and Non-Competition Agreement" with Haagen-Dazs, for which he was to be paid $ 150,000 annually for a period of 3 years. Martin also signed a "Consulting and Non-Competition Agreement" with Haagen-Dazs, for which he was to be paid $ 50,000 annually for a period of 5 years. Finally, Haagen-Dazs entered into three nonexclusive distribution agreements with petitioner for its continued distribution of Haagen-Dazs ice cream products to specified small independent stores and food service accounts in a limited geographical area.

On March 3, 1989, petitioner filed a Form 1120S for 1988, reporting gross sales of $ 6,021,394 and an ordinary loss of $ 278. Rudolph Bergwerk signed the return as preparer. MIC's *205 1988 Form 1120S contained no reference to the creation of SIC, the transfer to it of assets, or their basis, or the distribution of SIC stock to Arnold in redemption of his stock in MIC. Nor did the return refer to SIC's and Arnold's subsequent sale of assets to Haagen-Dazs, contain any of the other information required by the regulations under sections 351, 355, or 368, or allocate earnings and profits between petitioner and SIC as required by section 312(h) and associated regulations with respect to a transaction governed by sections 355*49 and 368(a)(1)(D).

On April 10, 1989, SIC filed Form 1120S for its tax year 1988, which included a statement disclosing the sale of assets by SIC, including records and goodwill for $ 286,068 and the "right to distribute the product of buyer for $ 1,144,272". ¹³ The statement also disclosed that Arnold, as sole stockholder distributee, would report the gain on his personal income tax return for taxable year 1988. On July 14, 1989, Arnold caused SIC to be dissolved under New Jersey law.

For each tax year thereafter through 1995, MIC reported the following *50 losses and gross sales as compared with 1988 and earlier years:

*206 ULTIMATE FINDINGS OF FACT

1. The intangible assets embodied in Arnold's oral agreement with Mr. Mattus and personal relationships with the supermarket owners and managers were never corporate assets of petitioner. Until the sale to Haagen