Walt Disney Inc. v. C.I.R.
| Decision Date | 31 August 1993 |
| Docket Number | No. 92-70082,92-70082 |
| Citation | 4 F.3d 735 |
| Parties | -5812, 93-2 USTC P 50,484 WALT DISNEY INCORPORATED, Petitioner-Appellee, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Respondent-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Frank P. Cihlar, U.S. Dept. of Justice, Tax Div., Washington, DC, for respondent-appellant.
James G. Phillipp, Gibson, Dunn & Crutcher, Los Angeles, CA, for petitioner-appellee.
Appeal from a Decision of the United States Tax Court.
Before: WOOD, Jr. * , REINHARDT, and RYMER, Circuit Judges.
Walt Disney Incorporated ("Disney") brought this action for redetermination of the Commissioner of Internal Revenue's assessment of a $453,197 federal income tax deficiency for Disney's tax year ended January 28, 1982. Pursuant to Rule 91 of the Rules of Practice and Procedure of the United States Tax Court, the facts were stipulated by the parties, and the case was submitted to the Tax Court for decision. Concluding that under the terms of Treas.Reg. Secs. 1.1502-3(f)(2) & (3) there was no "disposition" within the meaning of 26 U.S.C. Sec. 47(a)(1) (1976), and thus Disney was not required to "recapture" investment tax credit taken on any of the assets involved in the transaction at issue, the Tax Court held that there was no federal income tax deficiency. Walt Disney v. Commissioner, 97 T.C. 221, 1991 WL 145046 (1991). The Commissioner appeals. We have jurisdiction under 26 U.S.C. Sec. 7482, and we reverse.
Retlaw, a California corporation and a predecessor of appellee Walt Disney Incorporated, was formed by Walter E. Disney before his death. 1 At all relevant times prior to December 1, 1981, Retlaw's main businesses and assets (exclusive of cash, cash equivalents, and receivables) were the following:
(a) the commercial rights to the name "Walt Disney," licensed by Retlaw to Walt Disney Productions ("Productions") for the latter's use in connection with various business ventures;
(b) two attractions at Disneyland--the miniature railroad and the monorail system;
(c) two television broadcasting stations;
(d) a 14,000 acre cattle ranch; and
(e) several agricultural properties.
Sometime prior to April 9, 1980, in response to inquiries by Productions, Retlaw and Productions opened negotiations for Productions to acquire from Retlaw the "Walt Disney" name and the miniature railroad and monorail (items (a) and (b), or the "Disney assets"). After more than a year of negotiation, Productions and Retlaw entered into a written contract ("Retlaw Acquisition Agreement") dated July 8, 1981, under which Productions, following the divestiture by Retlaw of all of its properties other than the Disney assets (i.e., items (c)-(e), or the "non-Disney assets"), would acquire all the common stock of Retlaw in exchange for $46.2 million worth of Productions common stock.
The agreed upon exchange of stock was subject to certain conditions precedent specified in the Retlaw Acquisition Agreement, among them:
(1) prior to closing, Retlaw would transfer to a newly-formed, wholly-owned subsidiary ("Flower Street") all of the non-Disney assets. Retlaw then would distribute the stock of Flower Street pro rata to Retlaw's shareholders;
(2) the Retlaw Acquisition Agreement had to be approved by a vote of Productions' shareholders owning a majority of Productions' common shares voting on the matter (exclusive of the shareholders of Productions who were also shareholders of Retlaw, and certain related persons); and
(3) there could be no litigation pending or threatened on the closing date against Retlaw or affecting Retlaw's business or assets, nor could there be in effect any court order restraining or enjoining the acquisition. Productions was given the authority to waive each of the conditions contained in the Retlaw Acquisition Agreement.
Anticipating the closing of the Retlaw Acquisition Agreement, Retlaw and Productions had requested on July 1, 1981 an IRS ruling on the income tax consequences of the proposed transactions. In its October 22, 1981 ruling, the IRS determined that (1) the exchange of Retlaw's assets for all the stock of Flower Street, followed by the distribution of the Flower Street stock to the Retlaw shareholders (the corporate division) would qualify as a tax-free reorganization within the meaning of section 368(a)(1)(D) of the Internal Revenue Code ("D" reorganization) 2; and (2) the subsequent exchange of all the Retlaw stock for Productions stock (the corporate acquisition) would be a reorganization within the meaning of section 368(a)(1)(B) ("B" reorganization). 26 U.S.C. Sec. 368(a)(1)(B) & (D) (1976).
On December 1, 1981, Retlaw transferred all of its non-Disney assets to Flower Street in exchange for 4,500 shares of authorized but unissued Flower Street common stock. The non-Disney assets transferred to Flower Street included "section 38 assets"--i.e., tangible personal property upon which Retlaw had previously taken an investment tax credit in accordance with sections 38 and 46 of the Internal Revenue Code. 26 U.S.C. Secs. 38, 46 (1976 & Supp. IV 1980). On the same day, the Retlaw board of directors also authorized the distribution of the Flower Street stock pro rata to the Retlaw shareholders, but specified that the distribution could only be made concurrently with the closing of Productions' proposed acquisition of Retlaw. Retlaw took no formal action, as evidenced by shareholder or Board resolution, contemplating the liquidation of Flower Street in the event the acquisition of Retlaw by Productions failed to occur.
On December 18, 1981, Productions commenced the solicitation of proxies in connection with its January 28, 1982 shareholders' meeting. At the scheduled meeting, Productions' shareholders approved the Retlaw Acquisition Agreement by an affirmative vote of 93 percent of the common shares voted. Immediately following the meeting, also on January 28, 1982 and just prior to Productions' acquisition of the stock of Retlaw under the terms set forth in the Retlaw Acquisition Agreement, Retlaw distributed to its own shareholders pro rata all of the outstanding stock of Flower Street, until then owned by Retlaw.
As a result of its acquisition by Productions, Retlaw's taxable year, which had begun on March 29, 1981, ended on January 28, 1982. 3 For that abbreviated taxable year, Retlaw and Flower Street, a member of the "affiliated group" of which Retlaw was the parent corporation, elected to file a consolidated federal income tax return. See 26 U.S.C. Sec. 1504(a). 4 The consolidated return included the income and deductions of Retlaw for the period March 29, 1981 through January 28, 1982, and the income and deductions of Flower Street for the period December 1, 1981, through January 28, 1982. In the consolidated return, however, Retlaw failed to recapture the investment tax credits it previously had taken on the section 38 property included among the non-Disney assets transferred to Flower Street. Based on this failure, the IRS determined the deficiency that was the subject of Disney's petition for redetermination and of the Commissioner's present appeal.
The Tax Court's decision of a legal question is reviewed de novo. Paccar, Inc. v. CIR, 849 F.2d 393, 396 (9th Cir.1988).
The primary tax question in this case is whether Disney was required to recapture a portion of the investment tax credit it had previously taken with respect to certain of the non-Disney assets transferred by Retlaw to Flower Street on December 1, 1981 during the course of Retlaw's "D" reorganization. 5 The Commissioner argues that the Tax Court's determination that no recapture of investment tax credit was mandated following Retlaw's transfer of section 38 property to Flower Street and the ensuing distribution of Flower Street stock to Retlaw's shareholders is contrary to Revenue Ruling 82-20, which held that recapture was necessary in a hypothetical situation involving a similar "D" reorganization. 6
Disney counters that Revenue Ruling 82-20 does not apply on the facts of this case and that, in any event, the Commissioner may not use a revenue ruling to limit or otherwise qualify the explicit and unambiguous language of the Commissioner's own regulations. Noting that Sec. 1.1502-3(f)(2)(i) of the Consolidated Return Regulations provides that "a transfer of section 38 property from one member of the [consolidated return] 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)," Disney asserts that the first component of Retlaw's "D" reorganization--the transfer of the non-Disney assets to Flower Street--was not a disposition pursuant to 47(a)(1) because both corporate entities were members of a single consolidated group. Further, Disney argues that, viewed in isolation, the spin-off of Flower Street to Retlaw's shareholders did not trigger the recapture obligation because the section 38 property remained in the same corporation. Thus, since neither part of Retlaw's "D" reorganization required recapture, Disney maintains that recapture of investment tax credit was not required for the transaction as a whole.
Disney's argument fails; the Commissioner's position is directly supported by the Second Circuit's opinion in Salomon, Inc. v. United States, 976 F.2d 837 (2nd Cir.1992) and Revenue Ruling 82-20.
Under the facts assumed by Revenue Ruling 82-20, P corporation owns 100 percent of subsidiary corporation S. Rev.Rul. 82-20, (available on WESTLAW, FTX-ALL Database), 1982 IRB LEXIS 318, * 1. P and S file a consolidated federal income tax return on a calendar year basis. Id. A and B, equal owners of P, decide to split the business into two independent corporations, one owned by A and the other by B. Id. at * 1-* 2. To achieve this end, ...
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