Section 269(a) applies where a “person or persons acquire, directly or indirectly, control of a corporation” and “the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy.” Section 269 allows the IRS to disallow the acquired deduction, credit, or other tax benefit and to “distribute, apportion, or allocate gross income . . . between or among the corporations, or properties, or parts thereof, involved.” Control means at least 50 percent of the total voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.

Importantly, Section 269 does not apply to any acquisition for which tax benefits were a consideration, but only those where the principal purpose was tax benefits. Treas. Reg. § 1.269-3(a) defines principal purpose as where “the purpose to evade or avoid Federal income tax exceeds in importance any other purposes.” Thus, the tax benefit purpose must be the most important purpose for the acquisition, but it need not be the only purpose.

Cases such as Briarcliff Candy Corp v. Commissioner, T.C. Memo 1987-487, have applied Section 269 where the principal purpose of the transaction was not a tax benefit intended by Congress. In Briarcliff, for example, the statute was applied where a corporation with excess net operating losses acquired other companies for the principal purpose of utilizing those losses. The court stated Section 269 was “broadly drafted to include any type of acquisition which constitutes a device by which one corporation secures a tax benefit to which it is otherwise not entitled.” However, cases have made a distinction for formations or acquisitions of a corporation that resulted in a tax benefit directly aligned with Congress’s intent in enacting the underlying provisions. In such cases Section 269 is not applicable because the taxpayer is merely taking advantage of a tax benefit created by Congress. See, e.g., Rocco, Inc. v. Commissioner, 72 T.C. 140, 152 (1979) (holding Section 269 did not apply to a change in accounting method because such change was consciously granted by Congress); see also Modern Home Fire & Casualty Insurance Co. v. Commissioner 54. T.C. 839, 853 (1970) (holding Section 269 is not applicable to an election to be taxed under Subchapter S).

John G. Hodnette is an attorney with Fox Rothschild, LLP in Charlotte.

June 12, 2025/by TAX