Chrysler Corporation v. Commissioner
| Citation | 82 T.C.M. 580 |
| Decision Date | 18 September 2001 |
| Docket Number | Docket No. 22148-97. |
| Parties | Chrysler Corporation, f/k/a Chrysler Holding Corporation, as Successor by Merger to Chrysler Motors Corporation and its Consolidated Subsidiaries v. Commissioner. |
| Court | United States Tax Court |
James P. Fuller, Ronald B. Schrotenboer, William F. Colgin, Kenneth B. Clark, Jennifer L. Fuller, and Laura K. Zeigler, Auburn Hills, MI, for the petitioner. Nancy B. Herbert and John E. Budde, for the respondent.
Respondent moves the Court for partial summary judgment. See Rule 121.1 Respondent determined deficiencies of $593,967, $13,064,705, and $36,102,409 in petitioner's 1983, 1984, and 1985 Federal income taxes, respectively. Following our disposition of two other issues in this case, see Chrysler Corp. v. Commissioner [Dec. 54,387], 116 T.C. 465 (2001); Chrysler Corp. v. Commissioner [Dec. 54,035(M)], T.C. Memo. 2000-283, we must decide whether Chrysler Corporation (Chrysler) may deduct for 1985 amounts it paid to redeem its common stock held in the employee stock ownership trust (ESOT) underlying the Chrysler Employee Stock Ownership Plan (ESOP). We hold it may not.
Our statement of the background of this case is derived mainly from the pleadings, the parties' stipulation of facts as to the instant issue, the exhibits attached to that stipulation of facts, the parties' respective memoranda filed on May 3, 2000, as to issues of fact and law in this case, and the materials filed as to the instant motion. We also include within our statement, as they relate to the operation of the ESOP and ESOT, the pertinent provisions of the Chrysler Corporation Loan Guarantee Act of 1979 (LGA), Pub. L. 96-185, 93 Stat. 1324 (1980) (). Petitioner, like its predecessor, Chrysler, is an accrual method taxpayer that manufactures and sells automobiles and trucks. Petitioner's principal place of business was in Auburn Hills, Michigan, when its petition was filed.
Chrysler was faced with an economic crisis in 1979 that resulted in Congress' enacting the LGA on Chrysler's behalf. As the House Banking, Finance, and Urban Affairs Committee recognized in its report on the LGA: "Without Federal financial assistance in the form of loan guarantees, the Chrysler Corporation will soon face bankruptcy and possible liquidation, with substantial consequences for the nation's economy, the federal budget, the balance of payments and; above all, several hundred thousand individual human beings." H. Rept. 96-690, at 8 (1979). By way of the LGA, Congress provided Chrysler with up to $1.5 billion in loan guaranties in return for Chrysler's satisfaction of certain conditions.
Two of these conditions required that employees of Chrysler and its subsidiaries and affiliates make at least $587.5 million in wage and benefit concessions and that Chrysler set up an employee stock ownership plan meeting the requirements of both sections 401(a) () and 4975(e)(7) (). Two other conditions required that Chrysler establish the ESOT within the rules of section 401(a) and that Chrysler contribute shares of its common stock to the ESOT over a 4-year period from 1981 through 1984. In each of those 4 years, Chrysler was required to contribute to the ESOT Chrysler common stock with a value of at least $40.625 million; during that 4-year period, Chrysler was required to contribute to the ESOT a total of at least $162.5 million of its common stock.
Employee stock ownership plans are tax-qualified plans which provide significant tax benefits (as discussed infra) and are designed to invest primarily in employer securities. Congress established these plans as part of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, Sec. 407, 88 Stat. 880, current version at 29 U.S.C. sec. 1107(d)(6) (1994), envisioning that they "would function both as `an employee retirement benefit plan and a "technique of corporate finance" that would encourage employee ownership.'" Kuper v. Iovenko, 66 F.3d 1447, 1457 (6th Cir. 1995) (); see also S. Rept. 97-144, at 119-123 (1981); 97 Cong. Rec. 17290-17294 (1981) (statement of Sen. Long); S. Rept. 94-36, at 55-60 (1975). Employees generally are not taxed on income of an employee stock ownership plan until it is distributed to them, and they may avail themselves of certain rollover provisions not normally available to non-pension-plan compensation to postpone further their taxation on their distributions. The principal benefit to corporate employers is that they may deduct currently their contributions to the plans. The principal benefit to the plan itself is that the underlying trust is exempt from current taxation on its earnings.
Pursuant to the LGA, Chrysler established the ESOP effective July 1, 1980, and funded the ESOT by issuing to it new shares of Chrysler common stock during each of the ESOT's fiscal years ended June 30, 1981 through 1984. Pursuant to the terms of the ESOP, employees could participate in the plan if they had: (1) Worked for Chrysler or any of its subsidiaries or affiliates for 9 continuous months at the beginning of the plan year and (2) been affected by the wage and benefit concessions required by the LGA. Chrysler established the ESOP to: (1) Satisfy the LGA's requirement for obtaining the Federal Government's loan guaranties, (2) compensate employees for wage and benefit concessions, and (3) contribute to Chrysler's financial recovery and long-term viability by enhancing employee motivation and increasing productivity.
Chrysler contributed $162.5 million (15,251,891 shares) of its common stock to the ESOT from 1981 through 1984. Chrysler contributed approximately one-fourth of that dollar amount in each of the 4 years and claimed a deduction for the market value of the contributed shares for the years in which the contributions were made. The contributed shares amounted to approximately 22 percent of Chrysler's outstanding shares at the end of 1980, and the ESOT held the largest single block of Chrysler common stock.
The ESOT's trustee was a commercial bank named Manufacturer's National Bank of Detroit (MNB), and MNB's nominee was Calhoun & Co. Pursuant to the LGA, MNB allocated the stock contributed by Chrysler to the individual accounts of the ESOP participants in equal amounts, provided that the participant had worked 650 hours or more during the plan year. MNB also invested any dividends received on the stock allocated to a participant's account in additional shares of Chrysler common stock. The LGA authorized the participants to vote the shares in their accounts. MNB had to vote the stock for which no directions had been received in the same proportion as the stock as to which directions had been received. The ESOP authorized distributions to employees only in the event of: (1) Death, in which case the proceeds were forwarded to the designated beneficiary, (2) termination of employment, or (3) the ESOP's termination. Chrysler's board of directors had the discretion to terminate the ESOP at any time after June 30, 1984.
In September 1983, while the ESOP was in place, Chrysler renegotiated its collective bargaining contracts with its employees who were members of the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW). The renegotiation resulted in a contract extending through October 1985. In 1985, when the collective bargaining contracts were again renegotiated, Chrysler agreed as part of those contracts to terminate the ESOP and to allow the participants either to keep the Chrysler common stock in the ESOT allocated to them or to allow Chrysler to redeem that stock at a per-share price equal to the applicable closing price on the New York Stock Exchange. In December 1985, Chrysler redeemed just over 9.58 million shares of its common stock from the ESOT for a total cost to Chrysler of $426,969,582.2 The ESOP participants who opted not to sell their stock received over 3.2 million shares of Chrysler common stock from the ESOT.
On its 1985 Federal income tax return, Chrysler claimed a deduction of $327,595,421 associated with its redemption of its common stock from the ESOT. According to Chrysler's computation, the deduction was less than the redemption price so as not to duplicate the tax benefits Chrysler had previously received by way of the tax deductions claimed for the same shares when contributed to the ESOT. The approximate $328 million deduction was not taken for financial accounting purposes. For those purposes, Chrysler reported the redemption as a purchase of treasury stock.
We must decide whether Chrysler may deduct the costs (redemption price and related expenses) which it incurred to redeem its common stock upon termination of the ESOP. Respondent moves the Court to decide this issue by way of partial summary judgment, arguing that a firmly established body of law holds that a corporation may not deduct the costs which it incurs to redeem its stock. Petitioner objects to respondent's motion. Petitioner asserts that it may deduct its costs as personal service compensation or, alternatively, as a financing expense. Petitioner argues as to its primary assertion that material facts are still in dispute which will establish that Chrysler redeemed its common stock from the ESOT intending to compensate the employees for their personal services. Petitioner argues as to its alternative assertion that material facts are still in dispute which will establish that it redeemed its common stock from the ESOT as a financing expense.
Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials of phantom factual...
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