Complex Media, Inc. v. Comm'r
| Decision Date | 10 February 2021 |
| Docket Number | T.C. Memo. 2021-14,Docket No. 13368-15,Docket No. 19898-17. |
| Parties | COMPLEX MEDIA, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
P, a corporation, acquired the assets of a business previously conducted by partnership PS. In exchange for the transferred assets, P issued 4,999,000 shares of its common stock. Immediately thereafter, in accordance with a prior obligation, P redeemed 1,875,000 of the common shares held by PS in exchange for $2.7 million in cash and P's obligation to make an additional payment of $300,000 a little over a year later. PS paid the cash and assigned its right to the additional payment to SG, one of its partners, in redemption of SG's interest in PS. P claimed an increased basis of $3 million in intangible assets it acquired from PS and amortized that additional basis under I.R.C. sec. 197(a). R disallowed P's claimed amortization deductions.
Held: A taxpayer's ability to identify an alternative path to a given end result that provides more favorable tax consequences than the path actually taken is not enough to entitle the taxpayer to the desired tax treatment. Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974).
Held, further, because any tax planning involved in structuring the transactions in issue was focused on insulating PS' continuing partners from the consequences of the redemption of SG's interest and not on the achievement of a tax benefit inconsistent with allowing P increased bases in the assets it acquired from PS, P is not precluded from seeking to disavow the form of its transactions.
Held, further, P's issuance and immediate redemption of 1,875,000 common shares had no economic substance and thus are disregarded under the step transaction doctrine, with the cash and deferred payment right treated as additional consideration for the assets P acquired from PS.
Held, further, accepting the parties' agreement that I.R.C. sec. 351 applied to PS' transfer of assets to P, PS recognized gain in the transaction, as recharacterized, to the extent of the $2.7 million cash it received and the fair market value of its right to the additional $300,000 payment. See I.R.C. sec. 351(b). PS' recognized gain increases P's bases in the transferred assets. See I.R.C. sec. 362(a).
Held, further, when assets transferred in an I.R.C. sec. 351 exchange with taxable "boot" constitute a trade or business, the residual method of allocation prescribed by I.R.C. sec. 1060 can appropriately be used to allocate the boot among the transferred assets. Consequently, PS' gain in amortizable section 197 intangibles, and the corresponding increase in asset bases allowed to P, is determined by subtracting from the agreed total asset value the estimated values of those assets other than amortizable section 197 intangibles. Richard J. Sapinski and Robert A. Stern, for petitioner.
Lisa M. Rodriguez, Shawna A. Early, and Lyle B. Press, for respondent.
HALPERN, Judge: In a notice issued in February 2015, respondent advised Complex Media, Inc. (petitioner or CMI), that he had determined deficiencies in its Federal income tax for calendar years 2010, 2011, and 2012. The deficiency for each of 2010 and 2012 was $69,635; the deficiency for 2011 was $1 less. By a separate notice, issued in June 2017, respondent advised petitioner that he had determined a deficiency of $77,730 in its Federal income tax for calendar year 2013. The deficiencies arose from respondent's disallowance of petitioner's deduction, for each of the years in issue, of $204,808 of amortization in respect of intangible assets it acquired from a partnership, Complex Media Holdings, LLC (CMH). Respondent now concedes that $4,808 of the deduction claimed for each year is allowable, leaving $200,000 of amortization in issue for each year. In determining whether petitioner is entitled to deduct more than the $4,808 of amortization that respondent would allow for each year in respect of the assets petitioner acquired from CMH, we must decide: (1) whether the tax consequences to petitioner of its acquisition of the assets of CMH's magazine and internet media business (transferred business) must be determined in accordance with the form of that transaction, as delineated in a Contribution, Merger, and Joint Venture Agreement (CM & JV Agreement) that required petitioner to issue 4,999,000 shares of its common stock in exchange for those assets; (2) if not, whether, by application of the step transaction doctrine, the transaction should be recharacterized to include in the consideration that petitioner paid for the assets the $2.7 million in cash and the right to an additional future payment of $300,000 that petitioner distributed to CMH in immediate redemption of 1,875,000 of those 4,999,000 shares; and (3) if the transaction should be so recharacterized, the portion of the resulting gain recognized by CMH in the exchange that is allocable to amortizable section 197 intangibles, entitling petitioner to increase its tax bases in those assets and allowing it annual amortization deductions beyond those attributable to the bases of those assets in CMH's hands.
All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. We round all dollar amounts to the nearest dollar.
Petitioner was organized or incorporated in May 2009 to participate in the transactions described below. When petitioner filed its petitions in the present cases, it maintained its principal place of business in New York, New York.
The periodical that served as the foundation of the transferred business began publication, in print form, in May 2002. Richard Antoniello was hired to run the magazine and later acquired an equity interest in the business. At the end of 2006, Mr. Antoniello began developing the online portion of the business. CMH was organized in January 2008 to serve as a holding company for two limited liability companies that, between them, had previously conducted the transferred business.
The transactions at issue resulted from a search for financing to fund further development of the business. Eventually, CMH identified OnNetworks, Inc. (OnNetworks or ONI), as a potential investor. OnNetworks had raised about $19 million through the issuance of common and preferred stock but had lost most of its initial funding in pursuit of an unsuccessful business venture. By early 2009, OnNetworks had about $6.3 million in cash left--less than the amount its preferred shareholders were entitled to receive upon a liquidation of the corporation (liquidation preference).
During negotiations over a business combination involving CMH and OnNetworks, friction developed between OnNetworks preferred shareholders and Seth Gerszberg, one of CMH's partners. The other partners urged Mr. Gerszberg to withdraw from the business to allow the intended transaction to go forward, but they lacked the funds to buy out his interest. Negotiations ultimately coalesced around a plan under which a portion of OnNetworks' remaining cash would be used to redeem Mr. Gerszberg's interest in CMH and the remainder used as operating capital for the transferred business.
The transactions in issue were implemented by several agreements, all dated on or as of November 25, 2009, including the CM & JV Agreement among petitioner, CMH, OnNetworks, and an acquisition subsidiary of petitioner; an Asset Purchase Agreement between CMH and its two subsidiaries; a Stock Repurchase Agreement between petitioner and CMH; and a Unit Purchase Agreement between CMH and Mr. Gerszberg.
The agreement provides a nonexclusive list of assets and properties included in Acquired Assets, including all "Intellectual Property" (broadly defined) "used in or useful to the Business".3 The list of Acquired Assets also includes "any and allpermits, certificates, licenses, franchises and authorizations obtained from any federal, state, municipal or local government", "any and all books, records and other information, data and documentation of the Business or otherwise if directly related to any of the Acquired Assets", and "all equipment, furnishings, inventories of goods and office supplies, paper, pre-paid postage and materials related to the Complex magazine including, without limitation, those items set forth on Schedule 1.1(b) attached hereto". Schedule 1.1(b) to the Asset Purchase Agreement includes an eight-page list of what appears to be computer equipment.
It also lists several items of office furniture (chairs, file and storage cabinets, tables, a bookshelf and couch, trash cans) and equipment (mail sorter, "refridgerator [sic]", and microwave oven).
The CM & JV Agreement provided for the simultaneous occurrence of two events: (1) the merger of petitioner's acquisition subsidiary into OnNetworks, and (2) CMH's contribution to petitioner of the assets of the transferred business. The CM & JV Agreement defines the assets to be contributed as those acquired by CMH pursuant to the Asset Purchase Agreement....
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