Trinova Corp. & Aubsidiaries v. Comm'r of Internal Revenue
| Decision Date | 27 February 1997 |
| Docket Number | No. 2931-94.,2931-94. |
| Citation | 108 T.C. No. 6,108 T.C. 68 |
| Parties | TRINOVA CORPORATION AND SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frederick E. Henry, Chicago, IL, Jeffrey M. O'Donnell, Washington, DC, and Julie C. H. Walsh, Chicago, IL, for petitioners.
Nancy B. Herbert and Reid M. Huey, for respondent.
P, a corporation, filed a consolidated tax return with its affiliated companies. P operated a division with assets that included certain section 38 assets upon which investment tax credits (ITC) had been claimed. P transferred the division assets to a wholly owned subsidiary, G. P agreed to transfer its shares in G to another shareholder, H, in return for H's shares in P. The two transactions qualified for nonrecognition status under secs. 351, 355, and 368(a)(1)(D), I.R.C. R determined a deficiency for P's failure to include ITC recapture in income under sec. 47(a), I.R.C., on its 1986 consolidated tax return, relying on Rev. Rul. 82-20, 1982-1 C.B. 6. Sec. 1.1502-3(f)(2) and (3), Income Tax Regs., particularly Example (5) thereof, provides for no recapture. Held: Rev. Rul. 82-20, 1982-1 C.B. 6, is an unwarranted attempt to limit the scope of the regulations; no ITC recapture is includable in P's income.
Respondent determined the following deficiencies in petitioner's Federal income taxes and additions to tax:
+-----------------------------------+
¦¦ ¦¦ ¦¦Addition to Tax ¦
++----++----------++----------------¦
¦¦Year¦¦Deficiency¦¦Sec. 6661(a) ¦
++----++----------++----------------¦
¦¦1985¦¦$ 117,988 ¦¦— ¦
++----++----------++----------------¦
¦¦1986¦¦11,630,928¦¦$1,429,687 ¦
++----++----------++----------------¦
¦¦1987¦¦4,924,255 ¦¦— ¦
++----++----------++----------------¦
¦¦1988¦¦834,875 ¦¦— ¦
+-----------------------------------+
After concessions, the issue for decision is whether petitioner is liable for recapture in 1986 of investment tax credits (ITC) claimed on certain section 38 1 assets that were transferred to a wholly owned subsidiary, the stock of which was then transferred out of the consolidated group in a tax-free transaction. If this issue is resolved in favor of respondent, then the issue of the addition to tax under section 6661(a), which relates only to the recapture issue, will have to be decided.2Background
This case was submitted fully stipulated under Rule 122. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference and found accordingly.
Petitioner, an accrual basis taxpayer, had its principal offices in Maumee, Ohio, at the time it filed its petition herein. Petitioner changed its name to Trinova from the Libbey-Owens-Ford Company (LOF) on July 31, 1986. Petitioner timely filed a consolidated Federal income tax return with certain of its subsidiaries for the years at issue with the Internal Revenue Service Center, Cincinnati, Ohio, or the Internal Revenue Service office in Toledo, Ohio. Petitioner was engaged in the fluid power and plastics businesses, and in the manufacture of glass. The glass business was referred to as the “LOF Glass Division”.
One of LOF's largest shareholders was Pilkington Brothers (Pilkington), an English company, which owned 29 percent of petitioner's common stock through its wholly owned U.S. subsidiary, Pilkington Holdings, Inc. (Pilkington Holdings). Two of petitioner's fourteen directors were associated with Pilkington. In late 1985, Pilkington approached LOF and began negotiations concerning the possibility of acquiring the glass business.
Earlier that year, on July 25, 1985, the board of directors of LOF approved the transfer of the glass business to a wholly owned subsidiary for valid business reasons. On February 19, 1986, LOF Glass, Inc. was incorporated as a wholly owned subsidiary of LOF. On March 6, 1986, a “Transfer and Assumption Agreement”, amended on April 25, 1986, transferred to LOF Glass, Inc., all assets associated with the LOF Glass Division, including inventories and receivables, effective retroactively to February 19, 1986. These assets also included section 38 assets upon which LOF had previously claimed ITCs. Petitioner took no formal action contemplating the liquidation of LOF Glass, Inc., in the event that the acquisition by Pilkington did not take place.
On March 7, 1986, LOF, Pilkington, and Pilkington Holdings entered into an agreement, amended on April 28, 1986, whereby LOF would transfer all of its shares of LOF Glass, Inc., to Pilkington Holdings in exchange for all of the shares of petitioner held by Pilkington Holdings. On April 28, 1986, Pilkington Holdings exchanged 4,064,550 shares of LOF for the shares of LOF Glass, Inc. LOF Glass, Inc., continued to operate the glass business as a subsidiary of Pilkington Holdings and used the section 38 assets in its trade or business.
The parties have stipulated that petitioner recognized no gain or loss upon the transaction whereby its glass business was transferred to LOF Glass, Inc., pursuant to the provisions of section 351 or sections 354, 355, and 368(a)(1)(D) (), and that pursuant to section 355 neither petitioner nor Pilkington Holdings recognized any gain or loss upon the exchange of LOF Glass, Inc., shares for the LOF shares.
Before February 19, 1986, income, deductions, and credits with respect to the LOF Glass Division were included in petitioner's return. From February 19, 1986, through April 28, 1986, deductions and credits with respect to LOF Glass, Inc. (the subsidiary), were included as part of petitioner's consolidated return. After April 28, 1986, LOF Glass, Inc., was no longer part of petitioner, petitioner's affiliated group, or petitioner's consolidated Federal income tax return.
On its 1986 consolidated return, petitioner did not include any amount of ITC recapture with respect to the LOF Glass, Inc., section 38 assets. Respondent determined that a $5,718,749 ITC recapture arose from the April 1986 transaction. Petitioner does not dispute the amount of the ITC recapture, should the Court hold petitioner liable for it.
The investment tax credit provisions, now repealed but in effect in respect of the taxable year 1986, provided for a tax credit to taxpayers purchasing certain types of property for use in their businesses. Whether petitioner is required to recapture its investment tax credit turns upon the impact of a revenue ruling on what other otherwise appears to be unqualified language of a consolidated return regulation. The issue is not new to this Court whose position has been rejected by two Courts of Appeals. By way of background to our resolution of this judicial conflict, we first turn to a description of the provisions in respect of the investment tax credit pertinent to our analysis.
Section 47(a)(1) provided for recapture of the investment tax credit:
If during any taxable year any property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life which was taken into account in computing the credit under section 38 * * * 3
Section 47(b) further provided:
For purposes of subsection (a), property shall not be treated as ceasing to be section 38 property with respect to the taxpayer by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business.
Section 47 sets out two prongs for the “mere change in the form” test-- first, a continuing trade or business, and second, a retained substantial interest. The transactions herein clearly satisfy the continuing trade or business requirement. However, after the transaction in question, petitioner no longer had any interest in its former glass business; LOF Glass operated as a subsidiary of Pilkington Holdings. Thus, if section 47 were the only provision involved in this case, this lack of retained interest would be fatal to petitioner's position herein. Blevins v. Commissioner, 61 T.C. 547 (1974); Aboussie v. Commissioner, 60 T.C. 549 (1973), affd. without published opinion 504 F.2d 758 (5th Cir. 1974); Soares v. Commissioner, 50 T.C. 909 (1968); Purvis v. United States, 73-1 USTC par. 9157 (N.D. Ga. 1972).
However, the transactions herein took place in the consolidated return context, which provides a different frame of reference. Paragraph (f) of section 1.1502-3, Income Tax Regs., deals with early dispositions of section 38 assets of a member of a consolidated group; subparagraph (2) of paragraph (f) provides:
(2) * * * a transfer of section 38 property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of section 47(a)(1). If such section 38 property is disposed of, or otherwise ceases to be section 38 property * * * before the close of the estimated useful life * * *, then section 47(a)(1) or (2) shall apply * * *
Subparagraph (3) of paragraph (f) provides:
(3) Examples. The provisions of this paragraph may be illustrated by the following examples:
Example (1). P, S, and T file a consolidated return for calendar year 1967. In such year S places in service section 38 property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated return, and in such year S sells such property to T. Such sale will not cause section 47(a)(1) to apply.
* * *
Example (3). Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section 47(a)(1) will apply to the group * * *
* * *
Example (5). Assume the same facts as in example (1), except that in 1969, P sells all...
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