Coggin Auto. Corp. v. Comm'r of Internal Revenue
| Decision Date | 18 October 2000 |
| Docket Number | No. 1684–99.,1684–99. |
| Parties | COGGIN AUTOMOTIVE CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Corporate taxpayer, a holding company of automobile dealerships, petitioned for redetermination of deficiencies arising from built-in gain recognition for LIFO inventory recapture upon conversion of its subsidiaries from C corporations to S corporations functioning as general partners in limited partnerships that operated the dealerships. The Tax Court, Jacobs, J., held that: (1) the restructuring was genuine multiple-party transaction with economic substance compelled by business realities and tax-independent considerations, and (2) aggregate approach to partnerships applied to require taxpayer to recognize its ratable share of LIFO recapture amount.
Decision for IRS.
Judgment reversed, 292 F.3d 1326. P was a holding company that held over 80 percent of the stock of five corporations (collectively, the subsidiaries) that were engaged in the retail sales of automobiles and light trucks conducted through six dealerships. From 1972 or 1973 until and including the fiscal year ended June 26, 1993, P (as common parent) filed consolidated corporate income tax returns with its subsidiaries. The subsidiaries maintained their inventories of automobiles and light trucks under the dollar-value LIFO method of accounting. P did not directly own any inventory.From Jan. 29, 1970 (the date of incorporation), until June 27, 1993, P was a C corporation. On or about Aug. 27, 1993, P elected S corporation status, effective June 27, 1993. The election was made pursuant to a restructuring plan. The restructuring resulted in the establishment of six new S corporations formed for the purpose of becoming general partners in six limited partnerships that would operate the six dealerships. Each subsidiary contributed the assets and liabilities of its dealership to a limited partnership in exchange for a limited partnership interest. Following the transfer of assets to the limited partnerships, the subsidiaries were liquidated. As a result, P obtained the subsidiaries' limited partnership interests.R determined that pursuant to sec. 1363(d), I.R.C., P's conversion to an S corporation triggered the inclusion of the affiliated group's pre-S-election LIFO reserves ($5,077,808) into P's income. R's primary position was that the restructuring should be disregarded because it had no tax-independent purpose. R alternatively maintained that under the aggregate approach to partnerships, a pro rata share ($4,792,372) of the pre-S-election LIFO reserves was attributable to P.Held: The restructuring was a genuine multiple-party transaction with economic substance, compelled by business realities and imbued with tax-independent considerations. The restructuring was not shaped solely by tax avoidance features. Consequently, R's primary position that there was no tax-independent business purpose for the restructuring is rejected.Held, further: The aggregate approach (as opposed to the entity approach) to partnerships better serves the underlying purpose and scope of sec. 1363(d), I.R.C. Accordingly, P is deemed to own a pro rata share of the partnerships' inventories of automobiles and light trucks. Consequently, upon its election of S corporation status, P was required to include $4,792,372 in its gross income as its ratable share of the LIFO recapture amount.Sheldon M. Kay and Robert L. LoRay, for petitioner.
James P. Dawson and Julius Gonzalez, for respondent.
Respondent determined deficiencies in petitioner's Federal income taxes as follows:
+--------------------------+
¦Tax Year Ended ¦Deficiency¦
+--------------------------¦
¦ ¦
+--------------------------¦
¦June 26, 1993 ¦$432,619 ¦
+---------------+----------¦
¦Dec. 31, 1993 ¦432,619 ¦
+---------------+----------¦
¦Dec. 31, 1994 ¦432,619 ¦
+---------------+----------¦
¦Dec. 31, 1995 ¦432,619 ¦
+--------------------------+
These deficiencies stem from respondent's determination requiring petitioner to recapture its LIFO reserves upon conversion from a C corporation to an S corporation effective June 27, 1993.
The issue for decision is whether petitioner is subject to LIFO recapture pursuant to section 1363(d) as a consequence of a change in the structure of petitioner and its subsidiaries. For the reasons set forth below, we hold that it is.
All section references are to the Internal Revenue Code as in effect for 1993. All dollar amounts are rounded.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Background
At the time the petition in this case was filed, Coggin Automotive Corp., formerly known as Coggin–O'Steen Investment Corp., was a Florida corporation with its principal place of business in Jacksonville, Florida. (Herein, both Coggin Automotive Corp. and Coggin–O'Steen Investment Corp. are referred to as petitioner.)
Petitioner was a holding company. Before June 21, 1993, petitioner held over 80 percent of the stock of five C corporations, namely, Coggin Pontiac, Inc., Coggin Nissan, Inc., Coggin–O'Steen Imports, Inc., Coggin–O'Steen Motors, Inc., and Coggin Imports, Inc. (collectively, the subsidiaries), all of which were engaged in the retail sales of automobiles and light trucks. Each subsidiary was incorporated in Florida.
Six automobile dealerships were operated through the subsidiaries (five through direct ownership and one through ownership of a 50–percent general partnership interest). Four of the dealerships (Coggin Pontiac–GMC, Coggin Honda, Coggin Nissan, and Coggin Acura) were located in Jacksonville, Florida; one (Coggin Motor Mall) was located in Fort Pierce, Florida; and one (Coggin–Andrews Honda) was located in Orlando, Florida.
From 1972 or 1973 until and including the fiscal year ended June 26, 1993, petitioner (as the common parent) filed consolidated Forms 1120, U.S. Corporation Income Tax Return, with its subsidiaries (hereinafter, the affiliated group).1 The subsidiaries maintained their inventories of automobiles and light trucks under the dollar-value LIFO method of accounting. Petitioner did not directly own any inventory. As of June 26, 1993, the accumulated LIFO reserves of the affiliated group were $5,077,808 (pre-S-election LIFO reserves).
From January 29, 1970 (the date of incorporation), until June 27, 1993, petitioner was a C corporation. As of June 27, 1993, the equity and voting interests in petitioner were held as follows:
+-------------------------------------------------+
¦Shareholder ¦Ownership Interest¦Voting Interest¦
+-------------------------------------------------¦
¦ ¦
+-------------------------------------------------¦
¦Luther Coggin ¦55.0% ¦78% ¦
+--------------+------------------+---------------¦
¦Harold O'Steen¦22.5 ¦11 ¦
+--------------+------------------+---------------¦
¦Howard O'Steen¦22.5 ¦11 ¦
+-------------------------------------------------+
Luther Coggin was petitioner's president and chief executive officer; Harold and Howard O'Steen (collectively, the O'Steens) were vice presidents of petitioner. Mr. Coggin and the O'Steens were also the three directors of petitioner. The O'Steens did not assume an active managerial role in petitioner's operations.
On January 2, 1996, the O'Steens sold their stock interests in petitioner for $30,025,000 pursuant to a redemption and purchase agreement.
Coggin Pontiac–GMC
Coggin Pontiac–GMC began its operations in 1968; initially, its operations were conducted through Coggin Pontiac, Inc. Before June 21, 1993, Coggin Pontiac, Inc., owned the assets of its dealership, including the franchise rights.
Coggin Honda
Coggin Honda began its operations in 1982; initially, its operations were conducted through Coggin Pontiac, Inc. Before June 21, 1993, Coggin Pontiac, Inc., owned the assets of its dealership, including the franchise rights.
Coggin Nissan
Petitioner acquired Coggin Nissan in 1976; initially, its operations were conducted through Coggin Nissan, Inc. From its inception until July 8, 1987, Coggin Nissan, Inc., owned the assets of its dealership, including the franchise rights.
On or about July 9, 1987, Michael Andrews, the then-acting general manager of the dealership, acquired a 5–percent stock interest in Coggin Nissan, Inc., for $99,442. Between 1990 and 1997, Todd Seth was the general manager of Coggin Nissan. On or about April 1, 1992, Mr. Seth acquired a 5–percent stock interest in Coggin Nissan, Inc., for $118,581. The prices paid by Messrs. Andrews and Seth for their respective interests were determined by reference to the corporation's book value (with little or no value being assigned to the franchise rights), as reflected on the General Motors Operating Report (GMOR). 2
Coggin Acura
Coggin Acura began its operations in 1986; initially, its operations were conducted through Coggin Imports, Inc. At all relevant times, Jack Hanania was the general manager of the dealership. From its inception until April 30, 1991, Coggin Imports, Inc. (a subsidiary of petitioner), owned the assets of the dealership, including the franchise rights.
On or about May 1, 1991, Mr. Hanania acquired a 20–percent interest in Coggin Imports, Inc., for $35,000. The price paid by Mr. Hanania for his interest was determined by reference to the corporation's book value (with little or no value being assigned to the franchise rights), as reflected on the GMOR.
Coggin Motor Mall
Petitioner acquired Coggin Motor Mall in 1982; initially its operations were conducted through Coggin–O'Steen Motors, Inc. Since 1990, the general manager of the dealership has been Robert Caracello. Mr. Andrews was the director of operations for the dealership from 1993 thro...
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