Tele-Communications, Inc. v. C.I.R.

• Decision Date: 17 January 1997
• Docket Number: No. 95-9003,INC,TELE-COMMUNICATION,95-9003
• Citation: 104 F.3d 1229
• Parties: -702, 97-1 USTC P 50,155 , and Subsidiaries, and TCI Development Corp., Successor To Tele-Communications Investments, Inc. and Subsidiaries, and Athena Communications Corp. and Subsidiaries, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1229

104 F.3d 1229

79 A.F.T.R.2d 97-702, 97-1 USTC P 50,155

TELE-COMMUNICATIONS, INC., and Subsidiaries, and TCI Development Corp., Successor To Tele-Communications Investments, Inc. and Subsidiaries, and Athena Communications Corp. and Subsidiaries, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 95-9003.

United States Court of Appeals Tenth Circuit.

Jan. 17, 1997.

Roger J. Jones (William A. Schmalzl and Thomas Kittle-Kamp, with him on the brief) of Mayer, Brown & Platt, Chicago, IL, for Petitioners-Appellees.

Stephen W. Parks (Jonathan S. Cohen, with him on the brief) of Department of Justice Tax Division, Washington, DC, for Respondent-Appellant.

Before ANDERSON and McWILLIAMS, Circuit Judges, and HOLMES, District Judge. ^*

HOLMES, District Judge.

The Commissioner of Internal Revenue (the "Commissioner") appeals from the Tax Court's grant of summary judgment to Tele-Communications, Inc. ("TCI"), and its subsidiaries, and other affiliated corporations (collectively, "Taxpayers"). In the underlying lawsuit, Taxpayers brought an action in the Tax Court seeking a redetermination of deficiencies in income tax as calculated by the Commissioner for taxable years 1978, 1979, 1980 and 1981. Taxpayers filed a motion for partial summary judgment arguing that pursuant to former section 334(b)(2) of the Internal Revenue Code (the "Code") ¹ the full amount of section 1245 depreciation recapture recognized upon the liquidation of a subsidiary should be used to determine the parent corporation's basis in the assets received in the liquidation. The Tax Court held that the full amount of such depreciation recapture should be taken into account and granted Taxpayers' motion for partial summary judgment. ² We affirm.

I.

For purposes of the present appeal the facts are not in dispute. TCI is a cable television operator and the parent corporation of a consolidated group. In August 1980, one of TCI's wholly owned subsidiaries, CTCI of Ohio, Inc. ("CTCIO"), purchased 100 percent of the stock of Wheeling Antenna Co. ("Wheeling") for cash in the amount of $12,600,000. Wheeling and its two wholly owned subsidiaries, Wellsburg Cable Company, Inc. ("Wellsburg") and Brooke Cable Company, Inc. ("Brooke"), were engaged in the cable television business in several states.

CTCIO acquired the Wheeling stock with the intent to liquidate Wheeling, Wellsburg, and Brooke in accordance with the provisions of section 334(b)(2) then in effect. On November 2, 1981, Wheeling liquidated Wellsburg and Brooke, and, in turn, Wheeling was liquidated by CTCIO. As a result of Wheeling's liquidation, Wheeling was required, pursuant to section 1245 of the Code, to include an amount of depreciation recapture in its taxable income. CTCIO calculated the depreciation recapture to be $2,407,119. At the time Wheeling was liquidated, CTCIO had held the Wheeling stock for approximately 15 months.

Under section 334(b)(2), CTCIO treated its acquisition of the Wheeling stock and subsequent liquidation of Wheeling as a purchase of Wheeling's assets. Pursuant to section 334(b)(2), CTCIO's basis in the assets received from Wheeling in the liquidation was equal to the amount that CTCIO paid for the Wheeling stock, as adjusted pursuant to the applicable regulations. Treas. Reg. 1.334-1(c)(4)(v) requires an increase in stock basis equal to the amount of Wheeling's earnings and profits for the interim period between the date that CTCIO acquired the Wheeling stock and the date that Wheeling was liquidated. See Treas. Reg. § 1.334-1(c)(4)(v)(a)(2).

On their income tax return, Taxpayers computed the basis of the assets that CTCIO received upon the liquidation of Wheeling by including in Wheeling's interim earnings and profits depreciation recapture in the amount of $2,407,119. This resulted in an increase of $2,407,119 to CTCIO's basis in its Wheeling stock and a corresponding increase in the basis of the assets that CTCIO received upon the liquidation of Wheeling. The Commissioner determined that only depreciation recapture attributable to depreciation allowable after August 1980, or $286,030, was includable in Wheeling's interim earnings and profits for purposes of computing the upward adjustment in CTCIO's adjusted basis in its Wheeling stock. Thus, the Commissioner reduced CTCIO's basis in the assets it received on the liquidation of Wheeling.

Taxpayers disputed the Commissioner's determination and filed a motion for partial summary judgment in the Tax Court below. Taxpayers' motion presented the question whether, for purposes of determining CTCIO's basis in the assets distributed to it upon the liquidation of Wheeling pursuant to section 334(b)(2) and Treas. Reg. 1.334-1(c)(4)(v)(a)(2), the full amount of depreciation recapture income recognized by Wheeling, pursuant to section 1245, should be included in Wheeling's "earnings and profits" for the period during which CTCIO held the Wheeling stock.

In the Tax Court, the Commissioner asserted that Treas. Reg. § 1.334-1(c)(4)(v) requires that stock basis be increased only for earnings and profits of a subsidiary during the interim period between acquisition of the stock of the subsidiary and its liquidation. The Commissioner argued, in her brief below, that this provision of the regulations should not be interpreted to allow an increase in interim earnings and profits attributable to the recapture of depreciation that was allowable to Wheeling prior to CTCIO's acquisition of the Wheeling stock. The Commissioner further contended below that her construction of this provision "is more consistent with the purpose of the regulation than [the taxpayers']." Resp. Reply Br. at 4. This contention was supported with a two page example demonstrating how the opposing constructions worked in practice. The Commissioner also "attach[ed] considerable significance to the fact that Treas. Reg. 1.334-1(c)(4) was promulgated in its present form in 1955, some seven years prior to the enactment of Section 1245." Id. at 7.

The Tax Court rejected the Commissioner's argument, noting that it had rejected precisely the same contention in two previous cases, R.M. Smith, Inc. v. Commissioner, 69 T.C. 317, 1977 WL 3741 (1977) and First National State Bank of New Jersey v. Commissioner, 51 T.C. 419, 1968 WL 1418 (1968). The Tax Court concluded that because the full amount of depreciation recapture was includable in the subsidiary's taxable income for the interim period, the same amount was includable in its interim earnings and profits.

In the instant case, the Commissioner "do[es] not concede the correctness of the [Tax C]ourt's reasoning, [she] do[es] not contest that aspect of the Tax Court's decision on this appeal." Br. of Appellant at 18 n. 8. Rather, the sole basis of the Commissioner's current appeal can be found in the penultimate paragraph of brief she submitted to the Tax Court, ³ which paragraph states in its entirety:

In the alternative, respondent contends that earnings and profits for the interim period must be computed by using the so-called substituted basis rules found in Treas. Reg. 1.334-1(c)(4)(vi). Those regulations require that, for purposes of computing interim period earnings and profits, gain or loss from sales or exchanges of property held by the acquired corporation on the date of purchase, as well as "any other items determined by reference to basis of such property" shall be computed by substituting for such basis a new basis equal to the portion of the adjusted basis of the acquired stock allocable to such property. Treas. Reg. 1.334-1(c)(4)(vi)(a). Section 1245 recapture income constitutes an item determined by reference to the basis of property held on the date of acquisition. The substituted basis rules require that property giving rise to depreciation recapture must receive a new, substituted basis at liquidation equal to its relative fair market value at acquisition. Application of the substituted basis rules, therefore, effectively eliminates pre-acquisition depreciation and, of necessity, Section 1245 recapture income.

Id. at 8-9. In one paragraph of an eleven page order, the Tax Court summarily rejected this passing contention and held that subdivision six applies only to property held by the subsidiary on the date its stock was purchased with respect to which a gain or loss "from sales or exchanges" has been incurred, and that the provision therefore had "no application to the instant case."

II.

Summary judgment is appropriate where there is no genuine issue as to any material fact, See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); Windon Third Oil & Gas Drilling Partnership v. Federal Deposit Insurance Corp., 805 F.2d 342, 345 (10th Cir.1986), cert. denied, 480 U.S. 947, 107 S.Ct. 1605, 94 L.Ed.2d 791 (1987), and "the moving party is entitled to judgment as a matter of law," Fed.R.Civ.P. 56(c).

We review the Tax Court's summary judgment decision de novo. See Housing Auth.v. United States, 980 F.2d 624, 628 (10th Cir.1992).

III.

Generally, an appellate court will not consider an issue raised for the first time on appeal. Tele-Communications, Inc. v. Commissioner of Internal Revenue, 12 F.3d 1005, 1007 (10th Cir.1993). It is well-settled that "[t]he matter of what questions may be taken up and resolved for the first time on appeal is one left primarily to the discretion of the courts of appeals, to be exercised on the facts of individual cases." Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976). Review of issues not raised below would require us frequently to remand for additional evidence gathering and findings; would undermine the need for finality in litigation and conservation of judicial resources; would often have this court hold everything accomplished below for naught; and would often allow a party to raise a new issue on appeal when that party invited the...