Turner Broad. Sys., Inc. & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 23 December 1998 |
| Docket Number | 14786–96.,Nos. 13977–96,s. 13977–96 |
| Citation | 111 T.C. 315,76 T.C.M. (CCH) 982,111 T.C. No. 18 |
| Parties | TURNER BROADCASTING SYSTEM, INC. AND SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.TRACINDA CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
William F. Nelson and Suzanne Celeste Feese, for petitioner in docket No. 13977–96.
Richard E. Timbie and Trevor Washington Swett III, for petitioner in docket No. 14786–96.
Robert J. Shilliday, Jr., for respondent.
Respondent determined a deficiency in Tracinda Corp.'s (Tracinda) Federal income tax for the taxable year ending January 31, 1991, in the amount of $54,763,119 and an accuracy-related penalty under section 6662(d) 1 in the amount of $10,952,616. Respondent determined deficiencies in Turner Broadcasting System, Inc.'s (TBS) Federal income tax for the taxable year ending December 31, 1991, in the amount of $21,538,821 and for the taxable year ending December 31, 1992, in the amount of $49,050,854. Tracinda's deficiency results from disallowance of a basis adjustment arising out of its acquisition of United Artists Corp. (UA) from MGM/UA Entertainment Co. (MGM) in 1986. TBS acquired MGM simultaneously with the sale of UA to Tracinda. The TBS deficiencies result, in part, from disallowance of net capital loss carryforward deductions originating from the 1986 sale of UA and carried forward into subsequent years. MGM's basis in UA was greater than the consideration received for all the UA shares sold. The difference between MGM's basis in UA and the amount received from Tracinda for all the UA stock is hereafter called the UA Loss.
TBS and respondent jointly moved to sever from the rest of the TES case what will hereafter be described as the section 311 and section 267 issues. The parties also filed a joint motion for consolidation of docket No. 14786–96 (Tracinda) and docket No. 13977–96(TBS). On March 11, 1997, the parties' joint motions for issue severance and consolidation were granted.
This matter is before the Court on petitioner TBS' and petitioner Tracinda's Motions for Partial Summary Judgment and respondent's Motion for Summary Judgment, under Rule 121. The first and second stipulations of fact and attached exhibits are incorporated herein.
The parties have asked this Court to decide the following issues as a matter of law: (1) Whether the transaction by which MGM sold stock of UA to Tracinda (the UA Sale) is properly characterized for tax purposes in accordance with its form as a sale, rather than as a constructive redemption of MGM stock subject to section 311 (the section 311 issue); and (2) if the transaction is properly characterized as a sale, whether section 267 and section 1.267(f)–1T(c)(6) and (7), Temporary Income Tax Regs., 49 Fed.Reg. 46998 (Nov. 30, 1984), apply to (a) disallow the UA Loss claimed by MGM on the UA Sale, and (b) increase Tracinda's basis in the UA stock by the amount of the UA Loss (the section 267(f) issue)
When the respective petitions were filed, TBS was a Georgia corporation having its principal place of business in Atlanta, Georgia, and Tracinda was a Nevada corporation having offices in Las Vegas, Nevada.
In July and early August 1985, TBS and Tracinda and their respective owners entered into negotiations, and subsequently contracts, that changed the ownership of MGM and UA.
At the time of the initial negotiations, Tracinda was an investment and holding company wholly owned by Kirk Kerkorian (Kerkorian). Kerkorian directly owned .075 percent of MGM and indirectly owned 50.066 percent of MGM through Tracinda.
MGM was a publicly held corporation that traded on both the New York and Pacific stock exchanges. UA was a wholly owned subsidiary of MGM. TBS, at all material times, was more than 80 percent beneficially owned by R.E. “Ted” Turner.
As a result of the negotiations, the following documents were executed on August 6, 1985: Agreement and Plan of Merger between TBS, Merger Sub 2, MGM and UA dated August 6, 1985 (Merger Agreement); Purchase and Sale Agreement between Tracinda and MGM (Purchase and Sale Agreement); Company Option Agreement between TBS and MGM (C–Option); and Option Agreement between Kerkorian, Tracinda, and TBS (Option) (collectively, the transaction documents). The transaction documents provided for:
(1) TBS' acquisition of MGM (MGM Purchase) 3
(2) MGM's sale of all the shares in UA to Tracinda; and
(3) Tracinda's sale of shares in UA to some of MGM's former public shareholders (Subscribing Public) and to certain UA executives.4 The agreed price for UA was equal to $9 cash per share,5 and the agreed price of MGM was $29 cash per share.
The consideration for the MGM shares was altered in October 1985 and again in January 1986. At the conclusion of the transaction, on March 25, 1986, the consideration for the MGM shares was $20 cash and one share of TBS Series A preferred stock (TBS Preferred Stock) for each MGM share.
Prior to the negotiations, MGM had approximately $400 million of public debt outstanding in the form of 10–percent senior subordinated notes due April 15, 1993 (MGM Notes) The conditions of issue of the MGM Notes are contained in an indenture dated April 15, 1983 (the MGM Indenture). On August 31, 1985, MGM's bank debt stood at $98 million, consisting of $89 million in borrowings under a $175 million revolving credit facility, and $9 million under an agreement providing for bank borrowings of up to $10 million to cover daily operating requirements.
In anticipation of the merger, TBS offered to exchange $1,100 of its subordinated notes for each $1,000 principal amount of the MGM Notes, provided the exchanging MGM Note Holder consented to certain modifications of the MGM Indenture. The Merger Agreement did not require TBS to make the exchange offer for the MGM Notes, and TBS' obligation to close its acquisition of MGM was not contingent upon the successful consummation of the exchange offer. However, the exchange offer was conditioned upon consummation of the merger. The exchange offer remained open through March 31, 1986.
The original Merger Agreement and other transaction documents were first executed on August 6, 1985. At that time, MGM believed that its tax basis in UA was not materially different from the $9 per share value of UA set forth in the Merger Agreement. Accordingly, MGM believed and informed TBS that a sale of UA would not produce any material gain or loss. This information was incorrect. MGM's tax basis in the UA shares exceeded the consideration received by MGM. The parties disagree as to the extent of the excess; however, none of the parties have contended that MGM's basis did not exceed the consideration received. Tracinda argues that the excess is $271,727,849. In the revenue agent's report issued to TBS, respondent stated that the UA Loss was $262,696,140. A loss on the disposition of UA in the amount of $217,612,767 was claimed on TBS' 1986 consolidated return. TBS now claims the UA Loss is in excess of $262 million. The excess of basis is hereinafter referred to as the UA Loss.6
After ascertaining that MGM's basis in the UA stock substantially exceeded the agreed sale price to Tracinda, the parties entered into an Amended and Restated Agreement and Plan of Merger dated January 15, 1986, between MGM, UA, TBS and others, which provided for the possibility of the UA Loss in clause 6.3(c):
If, however the sale of New UA [UA] results in a Federal and/or State tax loss, the Company [MGM] shall benefit therefrom; provided, however, that to the extent the Purchaser [TBS] receives an actual tax benefit on any of its post merger consolidated tax returns as a result of such loss, the Company [MGM] shall pay to New UA [UA] the first $12.5 million of Federal and/or State tax benefits from the realization of such loss.
The UA Loss was reported on the TBS Group's 7 1986 consolidated tax return. In March 1989, Tracinda filed an amended income tax return for the taxable year ending January 31, 1987, on which it claimed $61,137,114 additional basis in the UA shares sold during that year. This addition to basis is not in issue in these proceedings.8 On November 1, 1990, Tracinda sold its remaining 35,046,037 shares of UA stock to an unrelated purchaser for $753,313,496. Its cost basis in that stock was $315,414,333 ($9 per share). Tracinda claimed an increase in basis of $178,561,218 when reporting its taxable gain from the sale on its income tax return for the taxable year ending January 31, 1991. That amount reflected a pro rata allocation to Tracinda's basis in its UA shares of a $271,727,849 loss incurred by MGM on its March 25, 1986, sale of UA. Only Tracinda's tax year ending January 31, 1991, is at issue in this case. TBS and the successor corporation to MGM have filed a civil action against Tracinda. That action seeks, inter alia, damages and a declaratory judgment that Tracinda pay any and all benefits attributable to the UA Loss to TBS.9
The status of the various parties on March 25, 1986, prior to the closing of TBS' acquisition of MGM and MGM's transfer of UA, was as follows:
a. MGM owed the banks $294,809,215 and owed the holders of the MGM Notes approximately $400 million.
b. Public shareholders (i.e., shareholders other than Kerkorian and Tracinda) owned 24,839,712 shares (49.9 percent) of the 49,745,137 outstanding shares of stock of MGM.
c. Tracinda owned 22,973,585 shares (46.2 percent) of the stock of MGM.
d. Kerkorian owned 1,931,840 shares (3.9 percent) of the stock of MGM. e. MGM owned all the UA stock, which had been recapitalized to have the same number of outstanding shares as MGM.
f. TBS had raised $1,203,257,700 cash and had arranged to issue 49,745,137 shares of TBS Preferred Stock.
g. Tracinda had received in escrow $64,533,655 from the Subscribing Public on or prior to November 26, 1985, as the subscription price for 7,029,810 shares of UA stock they...
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