J.E. Seagram Corp., F.K.A. v. Comm'r of Internal Revenue
| Decision Date | 24 January 1995 |
| Docket Number | No. 6112–92.,6112–92. |
| Citation | 104 T.C. No. 4,104 T.C. 75 |
| Parties | J.E. SEAGRAM CORP., F.K.A., Seagold Vineyards Holding Corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Harold R. Handler and David W. Ichel, for petitioner.
Anne Hintermeister and William H. Stoddard, for respondent.
P commenced a cash tender offer for a large part of the publicly traded stock of Conoco. Conoco thereafter entered into an agreement with DuPont Holdings, Inc. (DT), a subsidiary of DuPont, pursuant to which DT commenced a competing tender offer for all of the stock of Conoco. DT offered cash and publicly-traded DuPont stock for Conoco stock. The agreement between Conoco and DT called for Conoco to be merged into DT if DT acquired more than 50 percent of Conoco's stock. As of the expiration of withdrawal rights under its tender offer, DT had been tendered in excess of 50 percent of Conoco's stock while P under its tender offer had acquired approximately 32 percent of Conoco's stock. Because DT had successfully acquired control of Conoco, P tendered its Conoco stock in exchange for DuPont stock. Thereafter, Conoco merged into DT. P claims a loss on the exchange.
1. Held: DuPont's two-step acquisition of Conoco by means of a tender offer of cash and DuPont stock in exchange for Conoco stock, followed by a statutory merger of Conoco into DT, embodied a “plan of reorganization” within secs. 368(a)(1)(A) and 354(a), I.R.C.
2. Held, further, there was continuity of interest where approximately 54 percent of the outstanding Conoco stock was acquired by DT in exchange for DuPont stock, and the balance for cash, notwithstanding the fact that the Conoco stock acquired in exchange for DuPont stock included petitioner's tendered DuPont stock which petitioner had acquired for cash prior to the tender.
3. Held, further, the merger of Conoco into DT qualified as a reorganization within sec. 368(a)(1)(A) and (2)(D), I.R.C.
Respondent determined a deficiency in Federal income tax with respect to petitioner's fiscal year ended July 31, 1982, in the amount of $160,127,325. Respondent also determined deficiencies for withholding of income tax at source in the following amounts:
+-----------------------------------------+
¦¦Calendar Year ¦Withholding Deficiency ¦
++---------------+------------------------¦
¦¦1982 ¦$175,696 ¦
++---------------+------------------------¦
¦¦1983 ¦72,914 ¦
++---------------+------------------------¦
¦¦1984 ¦64,886 ¦
+-----------------------------------------+
In addition to contesting these deficiencies, petitioner claims overpayments in Federal income tax with respect to its fiscal year ended July 31, 1982, in the amount of $1,954,608.
Following concessions by the parties, the only issue for decision is whether petitioner is entitled to a short-term capital loss in the amount of $530,410,896. All issues relating to petitioner's withholding liabilities for the calendar years 1982, 1983, and 1984, have been resolved by the parties.
Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
The parties agree that the material facts are not in dispute. Each of the parties has filed a motion for summary judgment, along with supporting affidavits, pursuant to Rule 121. The parties have also filed three stipulations of fact. Summary adjudication is appropriate. Rule 121.
The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Petitioner is a Delaware corporation with its principal place of business at 800 Third Avenue, New York, New York, at the time the petition was filed in this case. Petitioner is the common parent of an affiliated group of corporations. It is an accrual basis taxpayer that keeps its books and records, and files its Federal income tax returns, on the basis of fiscal year ending July 31.
Prior to the incorporation of petitioner on July 2, 1981, Joseph E. Seagram & Sons, Inc. (JES), an Indiana corporation, was the U.S. parent of an affiliated group of corporations. JES was an indirect wholly owned subsidiary of The Seagram Company Ltd. (SCL), a Canada corporation. SCL was principally engaged in the production and marketing of distilled spirits and wine. On July 30, 1981, all of the stock of JES was transferred to petitioner in exchange for its stock. On August 23, 1990, petitioner's name was changed to J.E. Seagram Corp. Prior to that date, its name had been Seagold Vineyards Holding Corporation.
On May 6, 1981, Dome Petroleum Ltd. (Dome) commenced a tender offer for approximately 20 percent of the common stock of Conoco, Inc. (Conoco), a Delaware corporation engaged in the oil and gas industry as an “integrated oil company.” At all relevant times, Conoco's stock was traded on the New York Stock Exchange (NYSE). On May 27, 1981, Dome announced that approximately 50 percent of the common stock of Conoco had been tendered pursuant to its offer. On June 1, 1981, Conoco and Dome agreed that Conoco would trade the stock of one of its subsidiaries, Hudson's Bay Oil & Gas Company Ltd., for Dome's Conoco stock plus $245 million. This trade was effected on June 10, 1981.
SCL, which is unrelated to Dome, had no prior knowledge of the Dome tender offer and played no role in the June, 1981 Dome/Conoco transaction. Because of the response of Conoco's shareholders to the Dome tender offer, however, SCL believed that it might be able to negotiate to obtain a significant investment in Conoco.
Between May 29 and June 17, 1981, SCL conducted extensive negotiations with Conoco concerning proposals for it to acquire directly from Conoco, and/or through open-market purchases, between 18 percent and 35 percent of the common stock of Conoco. On May 29, 1981, Edgar M. Bronfman, chairman and chief executive officer of SCL, arranged a meeting with Conoco officials. On May 30, 1981, Bronfman proposed that SCL acquire 35 percent of the stock of Conoco and enter into a “standstill” agreement with respect to this investment. On May 31, 1981, Ralph E. Bailey, chairman and chief executive officer of Conoco, stated that he preferred a 25 percent SCL investment in Conoco. Bronfman thereafter made a presentation to the Conoco board of directors.
From June 1 to June 15, 1981, representatives of SCL and Conoco, and their respective advisers, met and negotiated concerning an agreement. On June 14, 1981, SCL delivered a draft agreement whereby it or a subsidiary would acquire at least 18 percent of the Conoco shares and would agree not to acquire more than a total of 25 percent of such shares for a 15–year period, subject to certain conditions. On June 15, 1981, Bronfman offered to acquire 25 percent of Conoco's shares in direct purchases from Conoco for $70 per share. Alternatively, Bronfman proposed that SCL purchase a portion of its investment in Conoco through open-market purchases. On June 17, 1981, Bailey informed Bronfman that the Conoco board of directors had rejected the proposal for a significant investment in Conoco by SCL or its subsidiaries, claiming that it would not be in the long-term interests of Conoco.
On June 18 and 19, 1981, JES purchased 143,800 shares of Conoco in open market purchases on the NYSE. On June 25, 1981, JES Holdings, Inc. (JES Tenderor), a wholly owned subsidiary of JES, initiated a tender offer for the purchase of up to 35 million shares (40.76 percent of the 85,864,538 shares outstanding on such date) of Conoco for $73 per share (the JES Tender Offer). The last date for the withdrawal of tendered shares was July 17, 1981, and the offer was set to expire on July 24, 1981.
The JES Tender Offer was conditioned on a minimum of 28 million shares (33 percent) of Conoco common stock being tendered and not withdrawn. JES Tenderor also maintained the right to terminate the offer for Conoco if a competing tender offer was commenced or under other conditions specified in its offer. The offering prospectus stated, in part, that
The purpose of the Offer is to enable * * * [JES Tenderor] to exercise significant influence over * * * [Conoco's] operating and financial policies. If 35,000,000 Shares are purchased pursuant to the Offer, * * * [JES Tenderor] expects to be the largest single stockholder of * * * [Conoco] and may be deemed to be in control of * * * [Conoco]. * * *
On June 30, 1981, the Conoco board of directors recommended that Conoco shareholders reject the JES Tender Offer on the ground that it was not “in the best interests of [Conoco] and its subsidiaries.”
On June 24, 1981, Edward G. Jefferson, chairman and chief executive officer of E.I. DuPont de Nemours and Co. (DuPont), called Bailey to determine whether there was any constructive role DuPont might play in light of public reports. DuPont is principally engaged in manufacturing and selling diversified lines of chemicals, plastics, specialty products, and fibers. DuPont's stock is traded on the NYSE. On June 25, 1981, Bailey contacted Jefferson to determine if DuPont would be interested in the possibility of a merger with Conoco. Beginning on June 28, 1981, Conoco and DuPont representatives discussed a possible merger.
On July 6, 1981, DuPont Holdings, Inc. (DuPont Tenderor), a wholly owned subsidiary of DuPont, signed an agreement with Conoco (the DuPont/Conoco Agreement or, alternatively, the Agreement). The DuPont/Conoco Agreement provided that DuPont Tenderor would offer (the DuPont Tender Offer) to exchange for each share of Conoco common stock at least either (i) 1.6 shares of DuPont common stock, or (ii) $87.50 in cash. The Agreement also provided that “As promptly as practicable following the consummation or...
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