U.S. v. Houston Pipeline Co.

• Decision Date: 07 November 1994
• Docket Number: No. 93-2737,93-2737
• Parties: -6793, 94-2 USTC P 50,578, 30 Fed.R.Serv.3d 57 UNITED STATES of America, Defendant-Appellee, v. HOUSTON PIPELINE CO., f/k/a Houston Natural Gas, Plaintiff-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 224

37 F.3d 224

74 A.F.T.R.2d 94-6793, 94-2 USTC P

50,578, 30 Fed.R.Serv.3d 57

UNITED STATES of America, Defendant-Appellee, v. HOUSTON PIPELINE CO., f/k/a Houston Natural Gas, Plaintiff-Appellant.

No. 93-2737.

United States Court of Appeals, Fifth Circuit.

Nov. 7, 1994.

Jordan Howard Mintz, J. Clifford Gunter, III, Sarah Pierce Cowen, Bracewell & Patterson, Houston, TX, for appellant.

Gilbert S. Rothenberg, Gary R. Allen, Chief, Charles Bricken, Appellant Section, Tax Div., Dept. of Justice, Washington, DC, for appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before WISDOM, DAVIS and DUHE, Circuit Judges.

WISDOM, Circuit Judge:

The plaintiff/appellant, Houston Pipe Line Company, successor in interest to Houston Natural Gas Corporation ("HNG"), appeals from the district court's grant of summary judgment denying HNG's claim for a tax refund totalling $47,879,276. Because there is no genuine issue of material fact and the defendant/appellee, United States, is entitled to judgment as a matter of law, we AFFIRM.

I

The facts are not in dispute. In January 1984, HNG became the target of a hostile takeover attempt by a wholly owned subsidiary of Coastal Corporation ("Coastal"). Coastal made a tender offer to purchase 45 percent of HNG's outstanding common stock. This 45 percent share, added to the 5.05 percent equity interest Coastal already held in HNG, would have made Coastal the majority shareholder in HNG.

The board of directors of HNG found the offer unappealing in three respects. First, HNG had doubts about Coastal's financial soundness. Second, Coastal offered to buy only enough shares to acquire control of HNG and made no provisions for the nearly 50 percent of HNG shares not included in the offer. Third, HNG was concerned about prohibitions on Coastal's ability to operate in South Central Texas, an important gas market for HNG. For these and other reasons, HNG's board of directors concluded that Coastal's offer was not in the best interests of HNG's shareholders and rejected the offer.

In February 1984, to repel the takeover, HNG devised a plan to make the corporation unattractive to Coastal by crippling itself financially. First, HNG made a counteroffer to purchase all of the outstanding shares of Coastal's common stock for a price of $875.6 million. Second, HNG made a self-tender offer to buy up to 19 million shares of its own stock for $1.3 billion. HNG obtained a bank commitment of $1.8 billion to finance the plan. Had it completed both proposed transactions, HNG would have devastated itself financially; HNG's debt would have escalated from $437 million to $3.61 billion, and its stockholders' equity would have fallen from more than $1.4 billion to less than $85 million.

Almost three weeks after its original bid, Coastal changed its mind. It proposed to withdraw its offer on the condition that HNG purchase Coastal's 5.05 percent stock interest in HNG. On February 13, 1984, HNG redeemed the 2.075 million shares held by Coastal for $124.53 million.

In its 1984 tax return, HNG did not claim a deduction for the $124.53 million it paid to redeem its stock from Coastal. It was later, after the Internal Revenue Service conducted an examination of HNG's returns for the 1984 year and the short year ending June 7, 1985, that HNG asserted it was entitled to deduct the $124.53 million it paid to redeem its stock from Coastal as an ordinary and necessary business expense under Sec. 162(a) of the Internal Revenue Code. The Service refused to allow the deduction, and on September 15, 1992, HNG filed suit in district court, seeking a refund of $47,879,276.

Stock redemptions, as a general rule, are characterized as capital transactions, ¹ and the purchase price of a stock redemption is not deductible. ² The plaintiff HNG cites Five Star Manufacturing Co. v. Commissioner of Internal Revenue ³ as an exception to this general rule. Under Five Star, the plaintiff alleges, stock redemption costs incurred in the face of an outside threat to the survival of a corporation are deductible as ordinary and necessary business expenses. The plaintiff contends that Coastal's hostile takeover attempt created "dire and threatening" circumstances that necessitated the repurchase of its own stock in order to ensure the viability of the corporation as a going concern.

The government argued that the amount the plaintiff paid to redeem its own stock from Coastal was a capital expenditure, therefore not deductible under Sec. 162(a), and moved for summary judgment.

The district court concluded that the facts of this case do not come within the holding of Five Star, because the plaintiff's stock redemption was not necessary to the survival of the company, and granted the government's motion for summary judgment. ⁴

The plaintiff appeals on two grounds: first, that the district court erred in granting summary judgment on a factual ground not raised by the government in its motion for summary judgment; and second, that the facts of this case fall within the Five Star exception that allows a taxpayer to deduct the cost of redeeming shares of its stock where the redemption is necessary to the survival of the company.

II

We review a grant of summary judgment de novo, "including the question whether the court provided the notice required by Fed.R.Civ.P 56." ⁵ We take all facts and inferences in the light most favorable to the non-moving party, ⁶ and if no rational trier of fact could possibly find for the non-moving party, summary judgment is appropriate. ⁷

A

The plaintiff's first argument on appeal challenges the district court's grant of summary judgment because the district court based its decision on facts that the government did not raise specifically in its motion for summary judgment. In its motion, the government made two arguments: first, that Five Star is no longer good law, because the case employs the old "primary purpose" rule that the Supreme Court has repudiated in cases decided after Five Star. In the alternative, the government argued that the Five Star decision is distinguishable from the undisputed facts of this case, because the parties in Five Star agreed that Sec. 311 of the Internal Revenue Code did not apply, whereas no similar agreement exists here.

Because the district court distinguished Five Star on its facts, the court found it unnecessary to address the continued viability of Five Star. The district court concluded that the facts of this case do not fall within the holding of Five Star, because the plaintiff's stock redemption was not necessary to the survival of the company. Stated simply, the government argued that Five Star was distinguishable for one reason, and the district court found Five Star distinguishable for another. The issue we must address is whether this divergence requires reversal of the district court's grant of summary judgment.

Rule 56 of the Federal Rules of Civil Procedure requires a court to consider the whole record when ruling on a motion for summary judgment. The record includes "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits...." ⁸ Although a court may not weigh the evidence to determine its truth nor draw inferences from the facts, ⁹ Rule 56 clearly permits a court to consider the whole record, and "not just the portion highlighted by the motion itself." ¹⁰ Further, "the district judge is not compelled to limit the basis for a summary judgment to those facts listed in the motion for summary judgment." ¹¹ The plaintiff, however, contends precisely the opposite.

The plaintiff contends that the district court erred in resting its decision on a factual basis not specifically argued by the government in its motion for summary judgment. The law does not support the plaintiff's contention. The rule in the Fifth Circuit is clear: "the judge is free to grant summary judgment on the basis of any facts shown by competent evidence in the record." ¹² The record is replete with evidence pertaining to the issue of whether the plaintiff's stock redemption was necessary to the survival of the company. That issue is critical to the plaintiff's case. Indeed, the great majority of the documents in the record address the issue because it is the very basis of the plaintiff's claim for relief.

The law allows a district judge to grant summary judgment on the basis of facts shown by competent evidence in the record, even if those facts are not highlighted in the motion for summary judgment. We therefore conclude that the district judge did not err in granting summary judgment on a factual basis different from the one advanced by the government in its motion.

B

The plaintiff's second argument on appeal alleges that by granting the government's motion for summary judgment on a factual basis not raised by the government in its motion, the district court deprived it of adequate notice and a meaningful opportunity to respond. Rule 56 requires a motion for summary judgment to be served at least 10 days before the time fixed for the hearing. ¹³ The purpose of the notification requirement is to allow the nonmoving party time to place all evidence supporting its position into the record and to put its best foot forward. ¹⁴ Our inquiry is whether the district court deprived the plaintiffs of adequate notice by granting the government's motion for summary judgment for a reason different from the one advanced by the government in its motion.

The plaintiffs liken their case to John Deere v. American National Bank, ¹⁵ where the district court granted summary judgment on a theory never advanced by either party. In John Deere, a primary lienholder, John Deere, brought suit against a second lienholder, American National Bank, alleging that the Bank had foreclosed on, and sold, the collateral without notice to John Deere. The Bank moved for summary judgment on the ground that it had sold the...