Wrangler Apparel Corp. v. US
| Decision Date | 22 July 1996 |
| Docket Number | No. 2:94cv481.,2:94cv481. |
| Citation | 931 F. Supp. 420 |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | WRANGLER APPAREL CORP., Plaintiff, v. The UNITED STATES of America, Defendant. |
Norwood Robinson, Winston-Salem, NC, Herbert O'Dell, Washington, DC, for plaintiff.
Donald Gavin, Washington, DC, Department of Justice, for defendant.
This matter is before the Court on Plaintiff and Defendant's Motions for Summary Judgment.
This is an action for a tax refund of $17,730,600 based upon an alleged "greenmail" payment made in connection with the purchase of common stock. Plaintiff, Wrangler Apparel Corp., merged with Blue Bell, Inc. ("Blue Bell") and has assumed Blue Bell's tax refund claim, though the events which give rise to this refund claim occurred while Blue Bell was an independent entity.
From 1981 to November 1983 various entities controlled by the Bass family of Fort Worth, Texas ("Bass Group") began purchasing Blue Bell stock. By November 1983 the Bass Group had acquired 2,981,600 shares equaling a 23.4 percent interest in Blue Bell's total shares outstanding. Blue Bell's management viewed the Bass Group as a corporate raider intent upon taking over the company. In order to end the Bass Group's disruptive presence, Blue Bell's management decided to eliminate the group's ownership interest in the company.
Blue Bell offered to purchase the shares held by the Bass Group, and the parties executed a Stock Purchase Option Agreement ("SPOA") on November 17, 1983. The SPOA provided that the Bass Group would sell all of its Blue Bell shares in a two-step process and would not purchase any additional shares for a period of ten years. Under the first paragraph of the SPOA, Blue Bell agreed to purchase 1,898,100 of its shares held by the Bass Group "at a purchase price equal to $50.00" per share. These shares were identified as the "Initial Shares" in the agreement.
The SPOA also granted Blue Bell an option to purchase the remaining 1,083,500 shares held by the Bass Group during the option period of March 23-31, 1984 "at a purchase price equal to $50.00" per share. These shares were identified as the "Option Shares" in the agreement. The SPOA further provided that if Blue Bell did not exercise its option, then the Bass Group would have the right to repurchase the Initial Shares previously redeemed by Blue Bell.
The SPOA contained a standstill provision which stated that if Blue Bell exercised its option and purchased the Option Shares, the Bass Group would be prohibited from purchasing Blue Bell stock for a period of ten years. After the parties executed the SPOA, Blue Bell purchased the Initial Shares from the Bass Group for $90,130,867.05 which was paid in cash and with a promissory note. At the price of $50 per share the 1,898,100 Blue Bell shares held by the Bass Group were worth $94,905,000. The Bass Group returned $4,774,132.95 to Blue Bell which reflected the amount by which the $50 per share price exceeded the Bass Group's acquisition costs for the shares within the last six months. This payment by the Bass Group was made pursuant to Section 16(b) of the Securities and Exchange Act of 1934 which requires that a shareholder with a 10 percent interest in a company return any profits to the company that were earned during a six month period on the purchase or sale of the company's stock. This profit is referred to as a "short swing" profit. See Blau v. Lehman, 368 U.S. 403, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962); 15 U.S.C. § 78p (1981).
At the time of Blue Bell's purchase, the mean trading price of Blue Bell's stock was $35.9375 per share. At this price the 1,898,100 Initial Shares had a value of $68,212,968.75, thus Blue Bell paid the Bass Group an excess of $21,917,898.30 for the Initial Shares over the trading value of the stock.
Subsequently, on March 30, 1984 Blue Bell exercised its option under the SPOA and purchased the remaining 1,083,500 shares held by the Bass Group for $54,175,000 in cash. At the time of this purchase, the mean trading price of Blue Bell's stock was $36.375 per share. Blue Bell thus paid the Bass Group an excess of $14,762,687.50 for the Option Shares over the trading value of the stock. After the two transactions had been completed, Blue Bell had paid a total of $36,680,585.80 over the trading price of its shares to the Bass Group.
Plaintiff contends that this $36,680,585.80 payment is "greenmail" which it defines in its complaint as "an amount paid to a corporate raider not to acquire stock held by the raider, but to eliminate the raider's threat to the company's business." Plaintiff's Complaint, ¶ 6. Plaintiff asserts that Blue Bell paid this greenmail in order to eliminate any further threats to the company by the Bass Group and to obtain the standstill provision in the SPOA. Plaintiff contends that the greenmail payment should be tax deductible or amortizable over time. After the Internal Revenue Service denied Plaintiff any tax deduction or loss for the greenmail payment, Plaintiff brought this action for a tax refund.
The Government has moved for partial summary judgment and argues that as a matter of law Plaintiff is not entitled to any of its claimed tax deductions or losses in connection with the alleged greenmail payment. Plaintiff has filed a protective motion for partial summary judgment which provides that if the Government's motion is granted, then Plaintiff is entitled to a tax deduction for unstated interest. This interest relates to the promissory note Blue Bell gave the Bass Group in connection with its purchase of the Initial Shares. Plaintiff states that if the Government's motion for summary judgment is denied, then its motion for unstated interest is moot.
Summary judgment is appropriate if "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In making this determination the court views the evidence in the light most favorable to the non-moving party, granting that party the benefit of all reasonable inferences. Bailey v. Blue Cross & Blue Shield of Virginia, 67 F.3d 53, 56 (4th Cir.1995), cert. denied, ___ U.S. ___, 116 S.Ct. 1043, 134 L.Ed.2d 190 (1996). A motion for summary judgment should not be granted "`unless the entire record shows a right to judgment with such clarity as to leave no room for controversy and establishes affirmatively that the adverse party cannot prevail under any circumstances.'" Campbell v. Hewitt, Coleman & Assoc., Inc., 21 F.3d 52, 55 (4th Cir.1994) (quoting Phoenix Sav. & Loan, Inc. v. Aetna Casualty & Sur. Co., 381 F.2d 245, 249 (4th Cir.1967)).
The Government's Motion for Partial Summary Judgment presents the question of whether the Bass Group and Blue Bell intended to allocate any of the purchase price for Blue Bell's stock to the standstill provision in the SPOA. Plaintiff argues that Blue Bell made a greenmail payment in exchange for the Bass Group's agreement in the standstill provision not to acquire Blue Bell stock or otherwise attempt to gain control of Blue Bell for a period of ten years. The Government contends, however, that Plaintiff is not entitled to a tax refund because the parties did not allocate any portion of the purchase price in the SPOA to the standstill provision. The Government argues that since none of the money Blue Bell paid for its stock was allocated to the standstill provision, the transaction is simply a redemption of Blue Bell's stock which is a non-deductible capital expenditure under Internal Revenue Code ("I.R.C.") § 263 and cannot be amortized under I.R.C. § 167.
In its complaint, Plaintiff presents two primary reasons why it is entitled to a tax refund for the alleged greenmail payment. First, Plaintiff contends that the alleged greenmail payment is a tax deductible business expense under I.R.C. § 162. Alternatively, Plaintiff asserts that it is entitled to amortize any portion of the alleged greenmail payment that is allocable to the standstill provision over the provision's useful life under I.R.C. § 167. The Government asserts in its Motion for Partial Summary Judgment that Plaintiff cannot deduct what it contends is a greenmail payment under I.R.C. § 162 nor amortize it over time under I.R.C. § 167. The Court will now address the Government's arguments in turn.
Section 162 provides for the deduction of all ordinary and necessary business expenses. The Government argues that the alleged greenmail payment cannot be deducted under § 162 as an ordinary and necessary business expense because the payment instead was made in conjunction with the acquisition of a capital asset, i.e. Blue Bell stock. In Woodward v. Commissioner, 397 U.S. 572, 90 S.Ct. 1302, 25 L.Ed.2d 577 (1970) the Supreme Court adopted the "origin of the claim" test for determining whether an expenditure is ordinary in nature and entitled to a deduction or whether it is a capital expenditure which is not entitled to a deduction. Under the "origin of the claim" test, costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures. Woodward, 397 U.S. at 575, 90 S.Ct. at 1305. The motivation of the taxpayer in the acquisition or disposition of a capital asset is irrelevant. Arkansas Best Corp. v. Commissioner, 485 U.S. 212, 223, 108 S.Ct. 971, 978, 99 L.Ed.2d 183 (1988).
The Government cites Stokely-Van Camp Inc. v. United States, 974 F.2d 1319 (Fed.Cir. 1992) which is factually similar to the present case. In Stokely the taxpayer corporation paid a premium to three shareholders to redeem its stock. Id. at 1323. As part of the transaction the shareholders agreed to a standstill provision whereby they would not acquire any stock or other security in the corporation for five years. Id. The...
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