Associated Wholesale Grocers, Inc. v. U.S.
| Decision Date | 15 March 1991 |
| Docket Number | No. 89-3287,89-3287 |
| Parties | -837, 91-1 USTC P 50,165 ASSOCIATED WHOLESALE GROCERS, INC., and its subsidiary, Super Market Developers, Inc., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Joel B. Voran (H. David Barr, with him on the briefs), Gage & Tucker, Overland Park, Kan., for plaintiffs-appellants.
Kimberly S. Stanley (Benjamin L. Burgess, Jr., U.S. Atty., Topeka, Kan., Shirley D. Peterson and Gary R. Allen, with her on the briefs), Dept. of Justice, Washington, D.C., for defendant-appellee.
Before SEYMOUR, MOORE and BRORBY, Circuit Judges.
Associated Wholesale Grocers, Inc. and its wholly-owned subsidiary, Super Market Developers, Inc. (collectively, "taxpayer"), appeal the district court's order denying their motion for summary judgment and granting summary judgment in favor of the Internal Revenue Service ("IRS"). Taxpayer seeks to recognize a business loss and claim a refund of federal income taxes. See Associated Wholesale Grocers, Inc. v. United States, 720 F.Supp. 887 (D.Kan.1989).
The material facts are not in dispute. In 1976, Super Market Developers, Inc. ("Super Market Developers") made a tender offer for all of the outstanding stock of Weston Investment Co. ("Weston"), a publicly traded holding company which owned a number of corporate supermarkets. Super Market Developers acquired approximately 99.97 percent of the total outstanding shares of Weston by 1980. The management of Super Market Developer's parent corporation, Associated Wholesale Grocers, Inc. ("Associated Grocers"), subsequently decided it was not in their best interests to own and operate grocery stores through subsidiary corporations. Grocers, 720 F.Supp. at 888.
One of Weston's subsidiaries was Weston Market, Inc. ("Weston Market"), a grocery managed by Thomas Elder. In 1980, Mr. Elder expressed to taxpayer his interest in buying Weston Market. Taxpayer advised Mr. Elder that it was not interested in a transaction solely involving the stock or operating assets of Weston Market, but that it would be willing to continue discussions.
The parties eventually structured a disposition of Weston's stock which, taxpayer hoped, would enable it both to cash out Weston's minority shareholders without paying a premium and to recognize a substantial loss in the value of Weston's assets 1 when it sold Weston Market. The transaction took the form of two agreements between Super Market Developers and Elder Food Mart, Inc. ("Elder, Inc."), a corporation organized by Mr. Elder to facilitate the purchase of Weston Market. Both agreements were signed on December 11, 1980, and consummated on December 23, 1980.
Under the "Agreement and Plan of Merger," Weston was merged into Elder, Inc., with Elder, Inc. as the surviving corporation. Elder, Inc. exchanged $300,000 in cash and a non-interest bearing demand promissory note, with a face value of $9,049,703, for the Weston stock. The minority shareholders were entitled to receive $28.50 per share, or more, depending on their pro rata share of the cash and note exchanged for Weston stock.
Under the "Agreement and Plan of Reorganization," which took effect "immediately following the time of effectiveness of the merger", Super Market Developers bought back all the assets acquired by Elder, Inc. under the merger agreement except for the stock of Weston Market. In exchange for those assets, Super Market Developers paid "an amount equal to the principal amount of the promissory note ... plus an amount equal to the cash received by the [minority] shareholders."
Taxpayer treated the transaction as a taxable sale of Weston's assets and declared a tax loss under I.R.C. Sec. 1001(a) 2 Because the transaction brought Super Market Developers $2,353,258 less than its cost basis in the stock of Weston, the taxpayer reported that amount as a long-term capital loss in its 1980 consolidated federal income tax return and sought to carry back portions of the loss to each of the three prior years. The IRS denied the loss, concluding the transaction was not a sale but rather a complete liquidation of taxpayer's subsidiary, Weston. As such, the IRS concluded, recognition of the loss was barred by I.R.C. Sec. 332. 3 The IRS assessed a deficiency which the taxpayer paid.
Upon the IRS's denial of taxpayer's claim for refund, taxpayer filed suit in the United States District Court for the District of Kansas. The district court applied the step transaction doctrine in holding that Sec. 332 bars the recognition of taxpayer's loss. Grocers, 720 F.Supp. at 890. The court granted summary judgment in favor of the government. Id. This appeal followed.
Our review of the district court's grant of summary judgment is de novo. Anderson v. HHS, 907 F.2d 936, 946 (10th Cir.1990). The government and taxpayer agree the pertinent facts are undisputed. As this case involves "no genuine issue as to any material fact" (Fed.R.Civ.P. 56(c)), summary judgment is appropriate. Our task is to determine which party--the taxpayer or the government--"is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
The issue presented is whether, as a matter of law, the transaction of December 23, 1980 constitutes a taxable sale or other disposition of Weston's assets under I.R.C. Sec. 1001(a) or a non-taxable complete liquidation of Weston under I.R.C. Sec. 332.
Taxpayer argues the district court erred in accepting the government's characterization of the transaction as a non-taxable liquidation under Sec. 332, and in applying the step transaction doctrine to reach that conclusion. Taxpayer advances five reasons in support of its argument: (1) the transaction does not meet the enumerated requirements of Sec. 332; (2) case law rejects application of the step transaction doctrine in the Sec. 332 context; (3) this transaction was supported by business purposes which bar application of the step transaction doctrine; (4) even if it is applicable, the step transaction doctrine was improperly applied by the district court; and (5) application of the step transaction doctrine in this case will produce the harsh result of forever depriving taxpayer of the recognition of its tax loss. We now address those contentions.
Section 332 states an exception to the general rule of recognition which is applicable to gains or losses realized in corporate liquidations. "Generally, distributions in complete liquidation of a corporation, other than the liquidation of a subsidiary qualifying under Section 332, are taxable to the shareholder under Section 331 to the extent the fair market value of the distributions exceed[s] the basis of the shareholder's stock." 11 J. Mertens, The Law of Federal Income Taxation Sec. 42.01 at 3 (1990). "Section 332 excepts from the general rule property received, under certain specifically described circumstances, by one corporation as a distribution in complete liquidation of the stock of another corporation and provides for the nonrecognition of gain or loss in those cases which meet the statutory requirements." Treas.Reg. Sec. 1.332-1 (1955). The purpose of the exception is to facilitate simplification of corporate structures. Cherry-Burrell Corp. v. United States, 367 F.2d 669, 674 (8th Cir.1966).
The nonrecognition exception of Sec. 332 applies or, in other words, a distribution is considered to be in complete liquidation of a subsidiary, only if:
(1) the asset-receiving or "parent" corporation owns, on the date of the adoption of the plan of liquidation and continuously until the receipt of the assets upon liquidation, at least 80 percent of the total voting power and value of the subsidiary (Sec. 332(b)(1)); and
(2) the subsidiary distributes its property in complete cancellation or redemption of its stock (Sec. 332(b)(2), (3)); and
(3) the subsidiary transfers all of its property to the parent either:
(a) within the taxable year (in which case the shareholders' adoption of the resolution authorizing the distribution of assets in complete cancellation or redemption of stock is considered an adoption of a plan of liquidation) (Sec. 332(b)(2)), or
(b) in a series of distributions in accordance with a plan of liquidation under which all property is distributed within three years from the close of the year in which the first distribution is made. (Sec. 332(b)(3).)
See I.R.C. Sec. 332(b)(1)-(b)(3); 11 J. Mertens, The Law of Federal Income Taxation, Sec. 42.42 at 113-14 (1990); cf. Matter of Chrome Plate, Inc., 614 F.2d 990, 994 (5th Cir.) cert. denied, 449 U.S. 842, 101 S.Ct. 123, 66 L.Ed.2d 50 (1980).
The significance of the statute in this dispute is apparent: if Sec. 332 applies, taxpayer cannot recognize its loss. If Sec. 332 is inapplicable, however, taxpayer is entitled to a substantial tax refund.
Taxpayer argues Sec. 332 is inapplicable for three reasons: the 80 percent ownership requirement was not continuously met; all of the assets of the subsidiary were not transferred to the parent; and taxpayer did not adopt a plan of liquidation. We will consider these arguments in turn.
The stock ownership requirement is found in Sec. 332(b)(1), which specifies an 80 percent voting and value requirement. 4 That requirement is not specifically at issue here, as parties agree that taxpayer owned 99.97 percent of Weston's stock until the transactions occurred on December 23, 1980.
At issue is the continuity requirement of Sec. 332(b)(1)--whether taxpayer "has continued to be at all times until the receipt of the property" qualified under the 80 percent voting and value test. As explained by Treasury Regulation:
The recipient corporation must have been the owner of the specified amount of such stock on the date of the adoption of the plan of liquidation and have continued so to be at...
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