Dethroning King Enterprises

40 Pages Posted: 26 Nov 2004

See all articles by Jeffrey L. Kwall

Jeffrey L. Kwall

Loyola University Chicago School of Law

Kristina Maynard

Loyola University Law School


In King Enterprises, 189 Ct. Cl. 466 (1969), King Enterprises, Inc. and the other shareholders of Tenco, Inc. transferred all the stock of Tenco to Minute Maid Corporation in exchange for cash, promissory notes and Minute Maid stock. In form, a taxable stock sale had occurred. Seven months later, Tenco was merged upstream into Minute Maid. When Minute Maid acquired the Tenco stock, King Enterprises could not have known that this later merger would occur. Nevertheless, at King Enterprises' behest, the United States Court of Claims applied the step-transaction doctrine and treated King Enterprises as participating in a merger that qualified as a corporate reorganization, rather than a taxable stock sale. Thus, an action by the buyer (the merger of Tenco into Minute Maid) of which the seller (King Enterprises) was unaware when it sold its Tenco shares dramatically reduced the seller's tax liability.

The King Enterprises decision is untenable. It is patently wrong to permit a buyer's post-acquisition action to affect the seller's tax consequences when, at the time of the sale, the seller could not have known that the buyer would take the specific action that changed the seller's tax consequences. The case stands as a dangerous and unpredictable precedent for both taxpayers and the government. Until recently, King Enterprises has remained dormant, never followed and rarely cited in more than three decades. In 2001, however, the Internal Revenue Service resurrected the case in two significant public pronouncements (Rev. Ruls. 2001-26 and 2001-46). The stage is now set for the case to wreak future havoc.

It is our thesis that the tax consequences to one party to a transaction should not be changed by a subsequent unilateral act of another party when the first party neither knew, nor should have known, that the later act would occur. Part II examines the King Enterprises decision and reveals the lack of a connection between King Enterprises and the upstream merger of Tenco into Minute Maid. Part III critiques the case and demonstrates that it represents an unfortunate aberration in step-transaction doctrine jurisprudence. Part IV identifies how this dangerous precedent might victimize innocent taxpayers and whipsaw the government. Part V explores the body of law supporting the recent Internal Revenue Service rulings that potentially revitalize the case and demonstrates that King Enterprises is not a necessary foundation for these rulings. Finally, Part VI delineates the steps that should be taken to dethrone King Enterprises.

Keywords: step transaction doctrine, reorganization, whipsaw, substance over form

JEL Classification: e62, h21, h25, h26, k34

Suggested Citation

Kwall, Jeffrey L. and Maynard, Kristina, Dethroning King Enterprises. Tax Lawyer, Vol. 58, No. 1, 2004, Available at SSRN:

Jeffrey L. Kwall (Contact Author)

Loyola University Chicago School of Law ( email )

Chicago, IL 60611
United States
312-915-7152 (Phone)

Kristina Maynard

Loyola University Law School

25 E. Pearson
Chicago, IL 60611
United States

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