Lane Bryant, Inc. v. U.S.

• Decision Date: 21 September 1994
• Docket Number: No. 92-5022,92-5022
• Citation: 35 F.3d 1570
• Parties: -6329, 94-2 USTC P 50,481 LANE BRYANT, INC. and The Limited, Inc., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1570

35 F.3d 1570

74 A.F.T.R.2d 94-6329, 94-2 USTC P 50,481

LANE BRYANT, INC. and The Limited, Inc., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 92-5022.

United States Court of Appeals Federal Circuit.

Sept. 21, 1994.

Michael F. Solomon, Ivins, Phillips & Barker, Washington, DC, argued for plaintiff-appellant. With him on the brief was David M. Weil.

Charles Bricken, Atty., Dept. of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were James A. Burton, Acting Asst. Atty. Gen., Gary R. Allen and Gilbert S. Rothenberg, Attys.

Before RICH, MICHEL, and PLAGER, Circuit Judges.

PLAGER, Circuit Judge.

This tax case arose in the wake of an unsuccessful hostile takeover attempt in the early 1980s. Plaintiff-Appellant Lane Bryant, Inc. and its parent corporation The Limited, Inc., ¹ (Lane) appeal a Court of Federal Claims judgment in favor of Defendant-Appellee the United States, No. 246-89T (Sept. 25, 1991), that Lane was not entitled to a tax refund because no portion of the premium Lane paid to recover its stock from the corporate raiders could be deducted as a business expense, I.R.C. Sec. 162(a), ² or amortized as a depreciating asset, I.R.C. Sec. 167(a). We affirm.

BACKGROUND

Two related shareholders, ³ Hatleigh Corp. (Hatleigh) and Mico Enterprises, Ltd. (Mico) On February 4, 1981, in response to this situation, Lane's Board of Directors authorized negotiations with Hatleigh and Mico. Lane wished to recover all Lane stock held by the two shareholders, end all disruptive litigation, and gain a "standstill agreement" under which no stock would be purchased for a given period in the future. ⁴ Lane reached a negotiated agreement with these shareholders on February 13, 1981; ⁵ on February 12, Lane stock had closed at $17.625 per share.

began to accumulate Lane Bryant stock in late 1979 and early 1980. By 1981, the two shareholders owned approximately 20% of Lane's common stock. Lane alleges that Hatleigh and Mico were "threatening to gain control of the company" and that they "harassed, hindered, and disrupted the management and operation" of Lane. Lane further alleges that it accrued costs for legal and proxy solicitation advice as a result of Hatleigh's and Mico's disruptive activities.

Lane's agreements with Hatleigh and Mico are substantially similar in structure. Each contains a provision which allocates certain sums to the acquisition of the stock, and each contains separate provisions relating to other aspects of the agreement. For example, section 1 of the Lane/Mico agreement states that Lane "purchased from [Mico] 206,300 shares of Common Stock of Lane Bryant ... for an aggregate purchase price of $US4,641,750." (This purchase price may be expressed as $22.50 per share, reflecting a repurchase premium of approximately $5.00 per share above the market price.) Other sections provided for cessation of present and future litigation, payment of transfer taxes, warranties of authorization and title, and waiver of dividend rights. No portion of the monetary consideration was specifically allocated to any of those provisions, which we shall refer to as "non-stock" provisions or items.

Similarly, Section 1 of the Lane/Hatleigh agreement states that "Lane purchased from [Hatleigh] ... 700,900 shares of common stock ... for an aggregate price $16,120,700, or $US23.00 per share." Thus, Lane paid Hatleigh a repurchase premium of approximately $5.50 per share above the going price for its stock. ⁶ In addition, the agreement provided a separate monetary allocation of "$US175,000 to reimburse [Hatleigh] for a portion of your costs and expenses incurred in the aforesaid litigations."

Like the Mico agreement, the Hatleigh agreement contained separate sections which provided for cessation of present and future litigation, payment of transfer taxes, warranties of authorization and title, and waiver of dividend rights. And like the Mico agreement, no portion of the monetary consideration was allocated to these non-stock provisions. The Hatleigh agreement also contained an additional non-stock item--a "standstill provision" by which Hatleigh agreed not to purchase Lane stock for the following five years. Again, the agreement did not allocate a specific portion of the monetary payment to the standstill provision.

Subsequent to the completion of the stock repurchase deals, Lane sued to recover Hatleigh's short-swing profits under section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78p(b) (1988). ⁷ (The parties specifically excepted such an action from the otherwise broad litigation waiver.) In brief, this statutory provision provides that an issuer of stock may sue to recover any profits realized from the sale of that stock within six months of its purchase, if the sale was by an individual owning more than 10% of the stock. In the course of the short- The tax consequences of these events came into focus when Lane filed its tax return for its taxable year ending January 30, 1982. Lane took a $5,299,730 deduction in that return, claiming that the $5.00 per share premium paid to Mico and the $5.50 per share paid to Hatleigh were for the non-stock items rather than for the stock itself, and hence could be deducted as "ordinary and necessary business expenses." I.R.C. Sec. 162(a). The IRS disallowed that deduction in 1986, offset the lost deduction with various other items, and arrived at a net deficiency of $2,090,605. Lane paid that deficiency in March 1987 and filed an amended return seeking a refund in 1988, arguing that the repurchase premiums were properly deducted under I.R.C. Sec. 162(a) or, in the alternative, were amortizable assets. I.R.C. Sec. 167(a). The IRS was unmoved by either theory.

                swing profit litigation, the parties stipulated that Lane had paid Hatleigh $23.00 per share (and paid Mico $22.50 per share) for the stock.   The District Court entered a $649,687.50 judgment in favor of Lane, based upon its understanding that the shares had been sold for $23.00 per share.  Lane Bryant Inc. v. Hatleigh Corp., 517 F.Supp. 1196, 1198 (S.D.N.Y.1981)
                

Lane filed suit in the Court of Federal Claims, arguing that the IRS had incorrectly denied Lane's deductions and that it therefore was entitled to a refund. On September 24, 1991, the Court of Federal Claims heard oral argument on the government's motions for summary judgment and for sanctions under Rule 11. At close of oral argument, the Court of Federal Claims denied the motion for sanctions and by written order granted the motion for summary judgment.

The Court of Federal Claims summarized the facts described above, set forth the relevant provisions of the Hatleigh and Mico agreements, and concluded:

Neither the Hatleigh agreement nor the Mico agreement made any allocation of the aggregate amount paid to Lane Bryant as to any of the non-stock items plaintiffs identify as the basis for a premium. There is no allocation for an amount paid for the "standstill" agreement.

Ct.Fed.Cl.Op. at 3. Since no consideration had been allocated to the non-stock items, there was nothing for Lane to deduct or amortize. The court acknowledged Lane's argument that the premium was intended as payment for the non-stock items, but concluded that in the "absence of a specific allocation for the non-stock items, the 'intent' of the contracting parties is irrelevant." Id. at 4-5. The court followed the so-called Danielson rule, ⁸ discussed infra, which essentially requires that the tax effects of an agreement flow strictly from the agreement as written. Id. at 5.

Lane attempted to avoid the Danielson rule by arguing that it barred repudiation of clear allocations, but was inapplicable in the case of "lump-sum" purchase agreements with no clear allocation of monetary consideration. Assessment of the tax effects of such lump-sum agreements would require an inquiry into the allocative intent of the parties. See KFOX, Inc. v. United States, 206 Ct.Cl. 143, 510 F.2d 1365, 1370 (1975). Lane argued that its agreements with Hatleigh and Mico were such lump-sum agreements, the per share price in section 1 of each agreement being only a "convenient shorthand description of the aggregate bargained-for consideration." Lane further argued that the agreements did not contain a more accurate allocation of the consideration "because time did not permit such fine detail."

The Court of Federal Claims considered and rejected Lane's argument that the agreements were lump-sum agreements for which Lane could introduce evidence of allocative intent:

The agreements, however, do specifically allocate the aggregate amounts paid to the purchasers to the shares of stock redeemed. Plaintiffs could hardly have done a better job allocating the entire purchase price to the stock in the Hatleigh and Mico agreements.... Under Danielson, plaintiffs cannot disavow the allocation of Id. at 6 (emphasis added) (alteration in original). The Court of Federal Claims concluded that summary judgment was appropriate, and entered judgment in favor of the Government. Lane appeals that judgment.

the entire purchase price [to] the stock redeemed in the agreement with Hatleigh.

DISCUSSION

Upon review of a grant of summary judgment, all evidence is to be viewed in a light most favorable to the nonmoving party, and all reasonable inferences must be drawn in favor of the nonmoving party. Summary judgment is properly granted when no material facts are in dispute and the prevailing party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c); Armco, Inc. v. Cyclops Corp., 791 F.2d 147, 149, 229 U.S.P.Q. 721, 722 (Fed.Cir.1986).

Here, the case arises from the disparity between the going market price of Lane shares and what Lane paid Mico and Hatleigh for their shares--$5.00 and $5.50 per share above market, respectively. Lane argues that "a portion of the aggregate price paid over the fair market value of the shares represented...