Pope & Talbot, Inc. v. C.I.R., 97-71359

• Decision Date: 06 January 1999
• Docket Number: No. 97-71359,97-71359
• Citation: 162 F.3d 1236
• Parties: -364, 99-1 USTC P 50,158, 99 Cal. Daily Op. Serv. 168, 99 Daily Journal D.A.R. 214 POPE & TALBOT, INC., and Subsidiaries, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1236

162 F.3d 1236

83 A.F.T.R.2d 99-364, 99-1 USTC P 50,158,

99 Cal. Daily Op. Serv. 168,

99 Daily Journal D.A.R. 214

POPE & TALBOT, INC., and Subsidiaries, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 97-71359.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 4, 1998.

Decided Jan. 6, 1999.

James E. Burns, Jr., Brobeck, Phleger & Harrison, San Francisco, CA, for petitioner-appellant.

Thomas J. Clark, Tax Division, United States Department of Justice, Washington, DC, for respondent-appellee.

Appeal from a Decision of the United States Tax Court; Robert P. Ruwe, Tax Court Judge, Presiding. Tax Ct. No. 530-93.

Before: NOONAN, THOMPSON and TROTT, Circuit Judges.

Opinion by Judge THOMPSON; Dissent by Judge NOONAN.

DAVID R. THOMPSON, Circuit Judge:

The taxpayer Pope & Talbot, Inc. ("Pope & Talbot") appeals the tax court's decision under 26 U.S.C. § 311(d)(1) determining the gain Pope & Talbot was required to recognize when it distributed appreciated property to a limited partnership, which in turn distributed limited partnership interests to the Pope & Talbot shareholders. The tax court calculated the fair market value of the distributed property by determining what a willing buyer would have paid a willing seller in a hypothetical sale of the property on the date of distribution.

Pope & Talbot contends the tax court should have determined the fair market value of the distributed property by aggregating the market value of the limited partnership interests the shareholders received. We have jurisdiction under 26 U.S.C. § 7482, and we affirm.

I BACKGROUND

Pope & Talbot is a publicly held Delaware corporation. Its shares are traded on the New York Stock Exchange. During 1985, Pope & Talbot's Board of Directors and shareholders approved a "Plan of Distribution" ("the Plan") to transfer 71,363 acres of its timberlands, timber, land development, and resort businesses in the State of Washington (together, "the Washington Properties") to Pope Resources, a newly formed Delaware limited partnership ("the Partnership"). Although Pope & Talbot was not to become a partner in the Partnership, the Plan included the formation of two new Delaware corporations-Pope MGP, Inc. and Pope EGP, Inc.-to serve, respectively, as the managing general partner and the standby general partner. Both of these new corporations were owned initially by two principal shareholders of Pope & Talbot, who were to have exclusive authority for managing the Partnership. The Plan required that when Pope & Talbot transferred the Washington Properties to the Partnership, the Partnership would issue limited partnership interests to Pope MGP, Inc., which in turn would distribute the limited partnership units pro rata to the Pope & Talbot shareholders. The holders of the limited partnership units were to have no management power and only limited voting rights.

The effective date of the distribution was December 20, 1985. On that date Pope & Talbot borrowed $22.5 million from Travelers Insurance Company, secured by the Washington Properties, and then transferred the Washington Properties to the Partnership subject to this liability. Pope & Talbot retained the $22.5 million in loan proceeds. Pope & Talbot also transferred $1.5 million in cash and certain installment notes receivable to the Partnership. The Partnership paid Pope & Talbot $5 million for the installment notes receivable, making this payment with funds it borrowed from an unrelated lender.

The Partnership paid no consideration for the Washington Properties. The limited partnership units in the Partnership were distributed to the approximately 6,000 shareholders of Pope & Talbot, each shareholder receiving one limited partnership unit for every five shares of Pope & Talbot's common stock.

Two weeks before the effective date of the distribution, approximately 1.2 million limited partnership units of the Partnership began trading on the Pacific Stock Exchange on a "when issued" basis. A "when issued" transaction is a conditional transaction in which the buyer indicates a desire to buy the security when it is authorized for sale. The weighted average trading price of the partnership units between December 6, 1985, and When Pope & Talbot filed its tax returns, it computed the fair market value of the distributed property by using the aggregate value of all the limited partnership units, which individually were valued at $11.50 per unit. The Commissioner disputed this valuation and determined that additional tax was due. Pope & Talbot eventually filed suit in the tax court challenging the Commissioner's deficiency determination.

January 7, 1996, was approximately $11.50 per unit.

The tax court granted the Commissioner's motion for partial summary judgment, holding that, under 26 U.S.C. § 311(d)(1), ¹ the appropriate methodology to compute Pope & Talbot's gain on the distribution of the appreciated Washington Properties was to treat the properties as if they had been sold by Pope & Talbot for their fair market value on the day of distribution and "not by reference to the property interest received by each shareholder."

A trial then ensued to determine the fair market value of the Washington Properties, using the methodology determined by the tax court in its partial summary judgment. The tax court reviewed extensive expert witness reports and testimony about the fair market value of each of the Washington Properties. Based on this review, the court determined that the valuation range for the combined Properties was between $46.7 million and $59.7 million. The court then considered the aggregate value of the trading price of the limited partnership units, but only as evidence of the fair market value of the Properties. Concluding that the aggregate value of the units warranted valuation toward the low end of the valuation range, the court found the fair market value of the Washington Properties to be $48.5 million.

In this appeal, Pope & Talbot challenges the methodology by which the tax court valued the distribution of the Washington Properties, as well as the value placed on those properties.

II ANALYSIS

To determine the correct methodology to be used in calculating the fair market value of appreciated property a corporation distributes to its shareholders, we must interpret 26 U.S.C. § 311(d)(1).

The version of 26 U.S.C. § 311(d)(1) ("section 311(d)(1)") in effect when this distribution occurred provides:

I. Distributions of Appreciated Property.--

(1) In General.--If--

(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and

(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),

then a gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property distributed had been sold at the time of distribution.

26 U.S.C. § 311(d)(1) (1984).

Our analysis begins with the language of the statute. When "the statute's language is plain, 'the sole function of the courts is to enforce it according to its terms.' " Giovanini v. United States, 9 F.3d 783, 785 (9th Cir.1993) (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)).

The statute's focus is on gain to the corporation. The final clause of the statute provides that a distributing corporation is required to recognize such gain "in an amount equal to [the excess of fair market value over adjusted basis] as if the property distributed had been sold at the time of distribution." 26 U.S.C. § 311(d)(1)(1984). This clause unambiguously requires that the distributed property be valued as if the corporation had sold it. The plain reference is to the corporation's property. This is made even plainer by subsection 311(d)(1)(A), which specifically We conclude that the plain meaning of section 311(d)(1) requires that the gain recognized by Pope & Talbot be valued as if the corporation had sold the Washington Properties at the time of distribution, not by aggregating the value of the individual limited partnership units.

refers to property distributed by the corporation, and subparagraph (B), which refers to "the fair market value of such property. " Finally, the parenthetical clause of subparagraph (B) refers to the property and its adjusted basis "(in the hands of the distributing corporation )."

The legislative history supports this conclusion. Since 1969 Congress has passed several income tax measures that have progressively repealed the controversial holding of the Supreme Court in General Utilities & Operating Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154 (1935). The General Utilities case gave corporations a loophole through which they could avoid the traditional two-tier taxation of corporate income. See generally Boris I. Bittker & James S. Eustice, Federal Income Tax of Corporations and Shareholders p 8.20 (6th Ed.1998). In General Utilities, the Supreme Court held that a corporation was not required to recognize gain when it distributed appreciated property to its shareholders. General Utilities, 296 U.S. at 206, 56 S.Ct. 185.

Congress began its repeal of the General Utilities holding with the Tax Reform Act of 1969, Pub.L. No. 91-172, § 905(a), 83 Stat. 487 (1969). That Act provided that a corporation distributing property to a shareholder in a redemption must recognize gain to the extent the fair market value of the property distributed exceeds the corporation's adjusted basis in the property. 26 U.S.C. § 311(d)(1) (1969). The legislative history of the Act includes the following:

General reasons for change.--Recently, large corporations have redeemed very substantial amounts of their own stock with appreciated property and in this manner have disposed of appreciated property for a corporate purpose...