Tseytin v. Commissioner of Internal Revenue, 122815 FEDTAX, 354-12

Docket Nº:354-12
Opinion Judge:SWIFT, JUDGE.
Party Name:MICHAEL TSEYTIN AND ELLA TSEYTIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Frank Agostino, Brian D. Burton, and Lawrence A. Sannicandro, for petitioners. Marco Franco, for respondent.
Case Date:December 28, 2015
Court:United States Tax Court
 
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T.C. Memo. 2015-247

MICHAEL TSEYTIN AND ELLA TSEYTIN, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 354-12

United States Tax Court

December 28, 2015

Frank Agostino, Brian D. Burton, and Lawrence A. Sannicandro, for petitioners.

Marco Franco, for respondent.

MEMORANDUM OPINION

SWIFT, JUDGE.

Respondent determined a $30, 478 deficiency in petitioners' 2007 Federal income tax and a $6, 096 penalty under section 6662(a).

For purposes of calculating the amount or portion of the total $23, 099, 420 that Michael Tseytin (petitioner) received in cash in a corporate merger that is taxable to him under section 356(a)(1)(B), the two issues for decision are: (1) whether petitioner is to be treated as the owner of the two blocks of stock involved in the merger or whether he is to be treated with respect to one of the blocks of stock merely as an agent or nominee and (2) if he is to be treated as the owner of both blocks of stock, whether petitioner may subtract the $527, 298 loss he realized on one of the blocks of stock from the $17, 324, 565 gain to be recognized on the other block of stock. We must also decide whether petitioner is liable for a penalty under section 6662(a).

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2007, and all Rule references are to the Tax Court Rules of Practice and Procedure. Respondent has conceded that under section 6015(f) petitioner Ella Tseytin has been relieved from joint and several liability for the tax deficiency and penalty at issue.

Background

This case was submitted under Rule 122. The stipulated facts are so found. At the time of filing the petition, petitioner resided in New Jersey.

In early 2007 and a number of prior years petitioner owned stock in U.S. Strategies, Inc. (USSI), a New Jersey corporation, which owned a majority (91%) interest in two limited liability companies organized under the laws of the Russian Federation, which in turn owned and operated Pizza Hut and Kentucky Fried Chicken franchises throughout the Russian Federation.

Archer Consulting Corp. (Archer), apparently an unrelated legal entity organized under the laws of the British Virgin Islands, owned 250 shares (or 25%) of the issued and outstanding shares of stock in USSI (Archer shares).

Petitioner owned the other 750 shares (or 75%) of the issued and outstanding shares of stock in USSI (non-Archer shares) and had a zero tax basis in the non-Archer shares.

Unidentified key employees of USSI's two limited liability companies owned a minority 9% stock interest in each of the two limited liability companies.

AmRest Holdings, NV (AmRest), a corporation unrelated to USSI and organized under the laws of the Netherlands and the shares of which were publicly traded on the Warsaw Stock Exchange, owned and operated Pizza Hut, Kentucky Fried Chicken, Burger King, and Starbucks franchises throughout Central and Eastern Europe.

In May 2007 USSI, AmRest, and petitioner agreed to the merger of USSI into AmRest. The merger was to qualify as a tax-free reorganization under sections 356 and 368(a), subject to the requirement of section 356(a)(1)(B) regarding cash received in the merger.

For the sole purpose of facilitating the transfer and merger of USSI into AmRest, AmRest formed AmRest Acquisition Subsidiary, Inc. (AA Subsidiary), as a wholly owned subsidiary of AmRest.1

In order to effect the transfer and merger, petitioner agreed to purchase the Archer shares for $14 million and then to transfer to AmRest 100% of the shares of stock in USSI for a total consideration that turned out to be worth approximately $54 million.

Below we summarize further details regarding the USSI-AmRest merger, the Archer shares, and the transfer of the USSI stock to AmRest.

Merger Agreement

On May 20, 2007, USSI, AmRest, and petitioner entered into the Agreement and Plan of Merger (AmRest agreement). The AmRest agreement provided that "USSI shall be merged into * * * [AmRest] and the separate existence of USSI shall thereupon cease."

In article 5.4(d) of the AmRest agreement petitioner warranted that before the merger he would hold of record and own beneficially all 1, 000 shares of USSI stock free and clear of any restrictions on transfer, contracts, commitments, equities, claims, or demands.

Under additional terms of the AmRest agreement, in exchange for transferring all of the USSI stock to AmRest, petitioner was to receive as consideration approximately $26.4 million in cash and AmRest stock equal to approximately $21.6 million.2

Archer was not a party to the AmRest agreement.

The Archer Shares

As stated, under the May 20, 2007, AmRest agreement petitioner was to acquire the 250 Archer shares he did not then own, and he was to be the owner of 100% of the USSI stock before closing of the USSI-AmRest merger.

On May 25, 2007, petitioner entered into a securities purchase agreement with Archer (Archer agreement), under which he agreed to purchase the Archer shares for $14 million.

Under the Archer agreement, petitioner was to receive "all right, title and interest in and to the Archer shares, free and clear of all liens, claims and other encumbrances" and he agreed to purchase the Archer shares for his "own account."

AmRest was not a party to the Archer agreement.

Petitioner's purchase of the Archer shares closed on June 14, 2007.

Further Events and Amended Merger Agreement

In further preparation for the USSI-AmRest merger, petitioner took a number of actions as sole shareholder of USSI, including amending its bylaws, appointing himself its sole director, and giving shareholder approval for the merger.

On July 2, 2007, USSI, AmRest, and petitioner executed an amendment to the AmRest agreement (AmRest amendment) under which the amount of cash petitioner was to receive on the merger was decreased to $23, 099, 420.

Archer was not a party to the AmRest amendment.

On July 2, 2007, the merger between USSI and AmRest closed. By transfer into his bank account petitioner received the $23, 099, 420 cash, and he received the AmRest stock which then had a market value of approximately $30, 791, 390.

On July 5, 2007, from the $23, 099, 420 cash petitioner received, petitioner paid Archer the $14 million owed to Archer for the Archer shares.

Both the AmRest agreement and the AmRest amendment specify that each share of USSI stock was being exchanged for an equal portion of the total merger consideration (namely, $53, 890, 810).3

As reflected in the summary below (and treating the Archer and the non-Archer blocks of USSI stock as separate blocks of stock and ignoring petitioner's argument that he never owned the 250 Archer shares), on the basis of a pro rata allocation of the $53, 890, 810 total merger consideration to all 1, 000 shares of USSI stock, petitioner realized on the merger: (1) a $527, 298 short-term capital loss on the transfer to AmRest of the 250 Archer shares and (2) a $40, 418, 107 long-term capital gain on the transfer to AmRest of the 750 Non-Archer shares:

Item

Archer Shares

Non-Archer Shares

250 Archer shares transferred 25% of total consideration received

$13, 472, 702

Less cost basis

14, 000, 000

Short-term capital loss realized

(527,...

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