Beauty Acquisition Corporation v. Commissioner

• Decision Date: 02 March 1995
• Docket Number: Docket No. 21750-93.
• Citation: 69 T.C.M. 1971
• Parties: Beauty Acquisition Corporation, Jack S. Levin, Receiver v. Commissioner.
• Court: U.S. Tax Court

69 T.C.M. 1971

T.C. Memo. 1995-87

Beauty Acquisition Corporation, Jack S. Levin, Receiver v. Commissioner.

Docket No. 21750-93.

United States Tax Court.

Filed March 2, 1995.

Jack S. Levin, Raymond P. Wexler, Todd F. Maynes, and Robert T. Smith, 200 E. Randolph Dr., Chicago, Ill., for the petitioner. Stephen C. Best, John Aletta, and Bradford A. Johnston, for the respondent.

Memorandum Opinion

WELLS, Judge:

The instant case¹ is before the Court on petitioner's motion for summary judgment under Rule 121. We must decide whether petitioner's distribution to its shareholders of a disputed claim for specific performance of a contract petitioner had entered into with Revlon, Inc., qualifies for nonrecognition treatment under either section 336 or 337 as in effect before the effective date of the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency in Beauty Acquisition Corp.'s (BAC's) Federal income tax for its taxable year ended October 2, 1986, in the amount of $20,700,000 and an addition to tax under section 6651(a)(1) in the amount of $5,175,000.

The majority of facts regarding the formation and dissolution of BAC are undisputed. For purposes of deciding the instant motion, we adopt respondent's statement of uncontested and material facts.

On October 1, 1985, BAC was incorporated under the laws of the State of Delaware to serve as the corporate vehicle for acquiring and operating the assets of the Beauty and Fragrance Division (the RBFD) of Revlon, Inc. (Revlon). BAC issued 100 shares of stock to Adler & Shaykin (A&S), a general partnership formed under the laws of the State of New York. The stock was issued for a total of $100 ($1 per share). A&S was BAC's only shareholder of record. BAC elected a board of directors and appointed officers, including Ms. Linda Wachner, as its chief executive officer.

On October 3, 1985, BAC entered into an asset purchase agreement (the RBFD contract) with Revlon to purchase the RBFD for $875,000,000 in cash plus the assumption of $30 million in liabilities. Section 6.2 of the RBFD contract states as follows:

In the event of a termination of this Agreement by either Buyer or Seller as provided above, this Agreement will forthwith become void and there will be no liability on the part of either Buyer or Seller, except for breaches of this Agreement prior to the time of such termination and except as otherwise provided in section 8.05 and section 8.16 which shall survive the termination.

Section 8.16 of the RBFD contract states as follows:

The parties agree that the assets of the * * * [RBFD] are unique and that Buyer is entitled to specific performance of this Agreement. In consideration of the execution of this Agreement by Buyer, Seller agrees that, if a court refuses to grant Buyer specific performance of this Agreement against Seller, Seller will promptly deliver to Buyer $20 million in immediately available funds as a break-up fee. Buyer's right to receive payments pursuant to section 8.16 is in addition to, and not in lieu or derogation of, Buyer's right to seek specific performance under this Agreement.

Upon execution of the RBFD contract, BAC began a due diligence review of the RBFD and also negotiated with Equitable Life Assurance Society of the United States (Equitable), Bankers Trust Co. (Bankers Trust), and Manufacturers Hanover Trust (Manufacturers Hanover) to secure the financial commitments that BAC needed to acquire the RBFD.

On November 5, 1985, Pantry Pride, Inc. (Pantry Pride), successfully acquired all of the stock of Revlon. Shortly thereafter, a dispute arose over the terms of the RBFD contract, and, on November 19, 1985, BAC brought suit against Revlon in a Delaware court. In its complaint, BAC sought specific performance of the RBFD contract. The complaint alleged that, after Pantry Pride acquired control of Revlon on November 5, 1985, Revlon breached the RBFD contract by taking actions which BAC believed were designed to prevent it from consummating the purchase of the RBFD. On December 6, 1985, Revlon filed an answer to the complaint alleging that the RBFD contract was not a binding agreement because it contained material ambiguities, and furthermore, that BAC lacked the financing to complete the acquisition of the RBFD, even if the contract were binding. On December 14, 1985, A&S and Equitable entered into an agreement to share the expenses of BAC's litigation against Revlon. The agreement contained a formula for determining Equitable's share of any damage award or recovery received by BAC from its suit against Revlon. BAC was unable to complete the acquisition of the RBFD on December 26, 1985. On January 15, 1986, BAC filed an amended and supplemental complaint in the Delaware court seeking specific performance of the RBFD contract and monetary damages in the alternative. On February 4, 1986, Revlon filed an amended answer to BAC's amended complaint, denying BAC's allegations regarding BAC's request for specific performance or monetary damages.

During the spring of 1986, representatives from Revlon and BAC began settlement discussions regarding the payment of money damages to BAC. Mr. Howard Gittis, vice chairman of Revlon, was the primary representative for Revlon in the settlement discussions with BAC. Mr. Frederick R. Adler, an officer and director of BAC and a general partner in A&S, was the primary representative of BAC and A&S in the settlement negotiations with Revlon. Mr. Fred N. Fishman, an attorney representing Equitable, was also prominent in the negotiations. Others who participated in the negotiations included Mr. Brian F. Wruble, president of Equitable, Mr. Robert C. O'Brian, a managing director of Bankers Trust, Mr. Stuart L. Shapiro, an attorney representing Revlon, and Mr. Stephen R. Steinberg and Mr. Jack S. Levin, attorneys representing BAC.²

Representatives of the various parties exchanged draft settlement agreements dated May 7, 1986, and May 14, 1986. The parties also exchanged a draft letter dated May 14, 1986, relating to the indemnification by A&S and BAC with respect to any claims A&S and BAC might have had against Equitable, Bankers Trust, and Manufacturers Hanover. On June 20, 1986, Mr. Fishman sent a letter to Mr. Wruble, Mr. Adler, and Mr. Leonard Shaykin (a general partner in A&S) enclosing a proposed settlement agreement dated June 19, 1986 (the proposed settlement agreement). The proposed settlement agreement stated that Equitable was to be paid $15,250,000 in exchange for settling any claims it had against Revlon relating to BAC's acquisition of the RBFD. The proposed settlement agreement, in part, provides as follows:

1. Payment to Equitable.

Simultaneously with the execution of this Agreement, Revlon Group is delivering to Equitable a check payable to its order in immediately available funds in New York, N.Y. in the amount of $15,250,000.

2. Effect of Settlement on the Litigation.

(a) The settlement provided for herein shall have no effect on the right of BAC to have commenced and to continue to prosecute the Litigation or to seek specific performance and damages exclusively for the benefit of BAC and the parties having interests therein other than Equitable and its subsidiaries, or on the right of any party other than Equitable and its subsidiaries to bring any other action with respect to the Asset Purchase Agreement or any claim relating thereto.

(b) If in the course of the Litigation BAC is judicially awarded damages (as a break-up fee or otherwise), the amount of damages to be paid pursuant to such award shall be reduced as set forth below, and any such damages shall be deemed satisfied and discharged by payment of such reduced amount:

(i) the first $20,000,000 of such award shall be reduced by an amount equal to 35% of such award and by an amount equal to 40% of the attorneys' fees and other out-of-pocket expenses of the Litigation included in such award which were * * * [incurred] by BAC, A&S and its affiliates, and Equitable and its subsidiaries to and including the date of this Agreement, and

(ii) the amount of such award over $20,000,000 shall be reduced by an amount equal to 40% of such amount over $20,000,000 and by an amount equal to 40% of the attorneys' fees and other out-of-pocket expenses of the Litigation included in such award which were * * * [incurred] by BAC, Equitable and its subsidiaries and A&S and including the date of this Agreement.

On June 23, 1986, Mr. Shapiro sent a letter to Mr. Fishman enclosing a revised draft of the June 19, 1986, proposed settlement agreement (the first revision). Section 2 of the first revision provides as follows:

2. Effect of Settlement on the Litigation.

(a) Unless BAC and A&S opt into this Agreement pursuant to Paragraph 4 below, the settlement provided for herein shall have no effect on the right of BAC to have commenced and to continue to prosecute the Litigation or to seek specific performance and damages exclusively for the benefit of BAC and the parties having interests therein other than Equitable, its affiliates and subsidiaries, or on the right of any party other than Equitable, its affiliates and subsidiaries to bring any other action with respect to the Asset Purchase Agreement or any claim relating thereto.

The language of section 2(b) of the first revision is similar to the language contained in the proposed settlement agreement. Section 4 of the first revision, in pertinent part, provides as follows:

4. BAC Option.

(a) For a period of 60 days from the date hereof, A&S and BAC shall be entitled to opt into this settlement and to receive from Revlon Group a check payable to its order in immediately available funds in New York, N.Y. in an amount equal to $19,300,000 and releases from the Revlon...