Merrill Lynch & Co. v. Comm'r of Internal Revenue
| Decision Date | 15 January 2003 |
| Docket Number | No. 18170–98.,18170–98. |
| Parties | MERRILL LYNCH & CO., INC. & Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Corporate taxpayer, parent of consolidated group, petitioned for redetermination of deficiencies arising from disallowed basis increases of subsidiaries based on redemptions by related subsidiaries treated as dividends, when subsidiaries were subsequently disposed of in complete redemption. The Tax Court, Marvel, J., held that transactions constituted a firm and fixed plan to completely terminate ownership in subsidiaries whose stock was sold, in part, to members of consolidated group, and thus were taxed as distributions in exchange for stock, rather than as dividends between related parties.
Decision for IRS. David J. Curtin, Sheri Dillon, Peter J. Genz, William F. Nelson, Kimberly S. Piar and Cornelia J. Schnyder, for petitioner.
Carmen M. Baerga, Jill A. Frisch, Lyle B. Press, and Jody S. Rubinstein, for respondent.
MP is the parent of an affiliated group (P) that filed consolidated income tax returns for the taxable years at issue.
1986 Transactions: In 1986, P decided to sell the principal investments business of MLL, a second tier subsidiary. Because P wanted to retain certain assets of MLL, consisting of its lease advisory business and certain other assets (the 1986 retained assets) within the consolidated group while minimizing or eliminating gain on the sale of MLL outside the consolidated group, P adopted and implemented a plan consisting of the following steps: (1) MLL distributed the 1986 retained assets to its subsidiary, Merlease; (2) MLL then sold Merlease cross-chain to a sister corporation (MLAM) in a transaction that qualified as a sec. 304, I.R.C., deemed redemption; (3) MLL then distributed a dividend of the gross sale proceeds to its parent, MLCR, a wholly owned subsidiary of MP; (4) P then completed the sale of MLL to a third party. Under the consolidated return regulations then in effect, the cross-chain sale and the related dividend generated an increase in MLCR's basis in MLL's stock, enabling P to sell MLL outside the consolidated group at a loss.
On the date of the 1986 cross-chain sale, P had identified the prospective purchaser of MLL, had negotiated a tentative purchase price for MLL, and clearly intended to sell MLL outside the consolidated group, thereby terminating MLL's constructive ownership under sec. 318, I.R.C., of Merlease, the issuing corporation.
On its consolidated tax return for TYE Dec. 26, 1986, P claimed a loss from the sale of MLL after treating the gross sale proceeds as a dividend and increasing its basis in MLL's stock by that amount.
1987 Transactions: P decided to sell the leased properties business of MLCR, its wholly owned subsidiary. Because P wanted to retain MLCR's nonleasing assets (the 1987 retained assets) while minimizing or eliminating gain on the sale of MLCR outside the consolidated group, P adopted and implemented a plan consisting of the following steps: (1) MLCR identified the subsidiaries holding the 1987 retained assets (MLBFS, MLPC, MLVC, MLEI, MLRDM, MLI, MLLE); (2) MLCR then sold the seven subsidiaries to three sister corporations (MLRI, MLPFS, MLAM) within the consolidated group in transactions that qualified as sec. 304, I.R.C., deemed redemptions; (3) MLCR then distributed dividends of the gross sales proceeds to its parent, MLCMH, a wholly owned subsidiary of MP; (4) P then completed the sale of MLCR to a third party. Under the consolidated return regulations then in effect, the cross-chain sales and related dividends generated increases in MLCMH's basis in MLCR's stock, enabling P to sell MLCR outside the consolidated group at a loss.
On the dates of the first seven of the 1987 cross-chain sales, P had identified the purchaser of MLCR, had prepared a draft acquisition agreement, and clearly intended to sell MLCR outside the consolidated group, thereby terminating MLCR's constructive ownership under sec. 318, I.R.C., of the subsidiaries sold cross-chain (the issuing corporations).
After the first seven of the 1987 cross-chain sales had closed and shortly before the sale of MLCR was scheduled to close, the purchaser of MLCR notified P that it could not own VL, one of MLCR's subsidiaries because of Federal law restrictions. Approximately 2 weeks before the sale of MLCR closed, MLCR sold the stock of VL to MLAM, a sister corporation, in a transaction that qualified as a deemed sec. 304, I.R.C., redemption.
On its consolidated income tax return for TYE Dec. 26, 1987, P claimed a loss of $466,985,176 from the sale of MLCR after treating the gross sales proceeds from the 1987 cross-chain sales as a dividend and increasing its basis in MLCR's stock by that amount.
Respondent determined that the nine cross-chain sales of Merlease, MLBFS, MLPC, MLVC, MLEI, MLRDM, MLI, MLLE, and VL (the subsidiaries) and the sales of MLL and MLCR outside the consolidated group were parts of a firm, fixed, and clearly integrated plan to completely terminate MLL's and MLCR's actual and constructive ownership of the subsidiaries. Petitioner contends that each cross-chain sale resulted in the receipt of a dividend by the selling corporation under secs. 302(d) and 301, I.R.C., equal to the gross sale proceeds and that it was entitled, under the consolidated return regulations, to increase its basis in MLL's and MLCR's stock as a result of the cross-chain sales.
Held: The cross-chain sales qualified as redemptions in complete termination of MLL's and MLCR's interest in the subsidiaries sold cross-chain under sec. 302(b)(3), I.R.C., and must be taxed as distributions in exchange for stock under sec. 302(a), I .R.C., rather than as dividends under sec. 301, I.R.C.
Respondent determined the following deficiencies in the Federal income tax of Merrill Lynch & Co., Inc. (Merrill Parent) and subsidiaries (collectively, the consolidated group or petitioner):
+-------------------------+
¦TYE ¦Deficiency¦
+--------------+----------¦
¦ ¦ ¦
+--------------+----------¦
¦Dec. 26, 1986 ¦$7,704,908¦
+--------------+----------¦
¦Dec. 25, 1987 ¦12,141,242¦
+--------------+----------¦
¦Dec. 30, 1988 ¦12,928,981¦
+-------------------------+
The ultimate issue in this case involves the proper computation of petitioner's basis in the stock of two consolidated group members (the target corporations) that it sold in 1986 and 1987. In order to resolve that issue, we must decide the tax effect of nine cross-chain sales 1 of stock of certain subsidiaries (the issuing corporations) owned by the target corporations. These sales were structured by petitioner to transfer certain assets from the target corporations to other members of the consolidated group (the acquiring corporations) before the target corporations were sold outside the consolidated group. The parties agree that the cross-chain sales qualified as section 304 2 redemptions that must be tested for dividend equivalency under section 302(b). The parties disagree, however, regarding the result of that testing.
Respondent contends that each cross-chain sale by a target corporation and the later sale of that target corporation outside the consolidated group were parts of a firm, fixed, and clearly integrated plan to completely terminate the target corporation's actual and constructive ownership of the issuing corporations. Respondent argues, therefore, that the cross-chain sales qualified as redemptions in complete termination of the target corporations' interest in the issuing corporations under section 302(b)(3), and must be taxed as a distribution in exchange for stock under section 302(a). Petitioner contends that each cross-chain sale resulted in the receipt of a dividend by the selling corporation under sections 302(d) and 301 equal to the gross sale proceeds and that it was entitled, under the consolidated return regulations, to increase its basis in the target corporations' stock by the amount of the dividend.3 Petitioner's claim to increased bases in the stock of the target corporations when the target corporations are sold to unrelated third-party purchasers in 1986 and 1987 depends for its success upon dividend treatment for the gross proceeds of the nine cross-chain sales. See secs. 1.1502–32(a) and 1.1502–33, Income Tax Regs.
Following concessions,4 therefore, we must decide:
(1) Whether a deemed section 304 redemption in the form of a 1986 cross-chain stock sale between brother-sister corporations in a consolidated group must be integrated with the later sale of the cross-chain seller outside the consolidated group and treated as a redemption in complete termination under section 302(a) and (b)(3) as respondent contends, or whether the deemed section 304 redemption qualified as a distribution of property taxable as a dividend under section 301 as petitioner contends; and
(2) whether deemed section 304 redemptions in the form of eight 1987 cross-chain stock sales between brother-sister corporations in a consolidated group must be integrated with the later sale of the cross-chain seller outside the consolidated group and treated as a redemption in complete termination under section 302(a) and (b)(3) as respondent contends, or whether the deemed section 304 redemptions were distributions of property taxable as dividends under section 301 as petitioner contends.
Some of the facts have been stipulated. We incorporate the stipulated facts into our findings by this reference.
Merrill Parent is a corporation organized under Delaware law and is the parent corporation of an affiliated group of corporations that filed consolidated Federal income tax returns during the years at issue. Merrill Parent, through its subsidiaries and affiliates, provides investment, financing, insurance, leasing, and related services to clients.
Before it was sold outside...
To continue reading
Request your trial
-
Merrill Lynch & Co., Inc. v. C.I.R., Docket No. 03-40676-AG.
...a "firm and fixed plan" to perform the second transaction at the time the first transaction was executed. Merrill Lynch & Co. v. Comm'r, 120 T.C. 12, 51-52, 2003 WL 124159 (2003). The tax court went on to conclude that the Cross-Chain Sales and the later sale of Resources were part and parc......
-
Reddam v. Comm'r of Internal Revenue
...stock was part of an orchestrated plan to create a large capital loss for petitioner. See Merrill Lynch & Co. v. Commissioner, 120 T.C. 12, 51-52 (2003) (finding that this Court will integrate a redemption with one or more other transactions to decide whether the requirements of sec. 302(b)......
-
Merrill Lynch & Co. v. Comm'r of Internal Revenue
...for the Second Circuit. Merrill Lynch & Co. & Subs. v. Commissioner, 386 F.3d 464 (2d Cir.2004), affg. in part and remanding 120 T.C. 12, 2003 WL 124159 (2003). In our prior Opinion, we found that the cross-chain sales of subsidiary stock between brother-sister corporations in an affiliated......
-
A walk through the step-transaction doctrine.
...418 F.2d 511, 516 (Ct. Ct. 1969). (12.) Long Term Capital Holdings, 330 F. Supp. 2d 122, 191 (D. Conn. 2004). (13.) Merrill Lynch S Co., 120 T.C. 12, 53(2003), aft'd in part, remanded in part, 386 F.3d 464 (2d Or. (14.) True, 190 F.3d 1165. 1175 (10th Cir. 1999). (15.) Weikel, T.C. Memo. 19......