IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 94-50291

IN THE MATTER OF: INSILCO CORPORATION,

Debtor.

INSILCO CORPORATION,

Appellant,

versus

UNITED STATES OF AMERICA and

AMPHENOL CORPORATION,

Appellees.

Appeal from the United States District Court

for the Western District of Texas

(May 15, 1995)

Before HIGGINBOTHAM, SMITH, and STEWART, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

During the pendency of its voluntary bankruptcy proceedings,

Insilco Corporation filed an amended return with the Internal

Revenue Service, claiming a $14.4 million refund. The bankruptcy

court adjudicated Insilco's claim and granted summary judgment in

favor of the government. Insilco appealed, and the district court

aff irmed. We hold that Insilco is not entitled to a refund and,

accordingly, affirm.1 LPL is the predecessor corporation to the current

intervenor-appellee, Amphenol Corporation.

2 I.

In 1985, Insilco Corporat ion owned sixty-six percent of the

shares of Times Fiber Communication, Inc. and the public owned the

remainder. LPL Investment Group, Inc., 1 a newly formed corporation

with no significant assets, sought to acquire Times Fiber. LPL

initially proposed to pay Insilco cash and LPL stock in exchange

for Insilco's Times Fiber stock. Later, the parties structured the

deal as the following individual transactions rather than a single

exchange:

1. Public Offer : Times Fiber made a self-tender to purchase

the Times Fiber shares held by the public for $15.25 per

share.

2. Times Fiber Sale : Insilco sold all of its Times Fiber

shares to LPL in exchange for $15 .25 per share, or

approximately $96 million in cash.

3. LPL Preferred Stock Purchase : Insilco paid $20 million

to LPL to purchase 200,000 shares of LPL preferred stock.

4. LPL Common Stock Purchase : Insilco and five other

investors paid $8 million to acquire LPL common stock.

Insilco paid $897,068 for 953,135 shares of class A stock.

5. Merger : LPL acquired the remaining shares of Times Fiber

stock held by the public for $15.25 per share by means of a

merger.

A separate document was prepared for each of these transactions:

for the public offer, an Offer to Purchase for Cash by Times Fiber

Communications, Inc. Any and All Outstanding Shares of its Common

Stock, dated December 4, 1985; for Insilco's sale of Times Fiber

Stock to LPL, a Stock Purchase Agreement, dated November 17, 1985

and amended December 2, 1985; for Insilco's purchase of LPL2 All citations to the Internal Revenue Code are as of

1985, when the events relevant to the issues in this case took

place.

3 preferred stock, a Preferred Stock Subscription Agreement , dated

December 31, 1985; for purchase of LPL common stock by Insilco and

other investor s, six Common Stock Subscription Agreements, each

dated December 31, 1985; and for the merger of the remaining Times

Fiber shares of stock held by the public, an Agreement and Plan of

Merger, dated November 22, 1985. The public offer expired on

December 26, 1985 , and the other transactions closed on December

31, 1985. In 1989, LPL redeemed all of Insilco's LPL stock, both

common and preferred.

On its original 1985 tax return, Insilco reported that it sold

the Times Fiber stock for $96 million, recognizing a gain of

approximately $75 million from a basis of $21 million. It also

treated the LPL preferred and common stock as purchased for $20

million and $897,068, respectively. LPL reported the Times Fiber

stock as a purchase for cash and elected to have I.R.C. § 338 2

apply to the transaction.

Availability of the § 338 election was critical to the success

o f the negotiations between LPL and Insilco. Under § 338, a

corporation that purchases eighty percent of the stock of another

corporation within a twelve-month period and satisfie s certain

other cond itions may elect to have the transaction treated as

though it were a purchase of the assets (rather than the stock) of

the acquired corporation, thus allowing the basis of those assets

to be stepped up to the amount paid for the stock. This, in turn,4

has the effect of increasing the amount of the depreciation or

amortization deductions available to the acquired corporation, and,

accordingly, its post-tax c ash flow. Lawrence DeGeorge, chief

executive officer of LPL, stated in his affidavit that he would not

have pursued the transaction had he believed that an election under

§ 338 would not be available. Insilco was aware that LPL intended

to make and did actually make the § 338 election.

In 1991, during the pendency of its voluntary bankruptcy

proceedings, Insilco amended its 1985 federal income tax return and

claimed a refund of approximately $14.4 million. In the amended

return, Insilco took the position that under substance-over-form

principles, the transaction shou ld be treated as an exchange of

Tim es Fiber stock for cash and LPL stock. In effect, Insilco

sought to collapse the separate purchase and sale transactions into

the following single transaction: Insilco sold all of its stock in

Times Fiber and in exchange received LPL common and preferred stock

and approximately $75 million in cash ($96 million for the sale of

Times Fiber stock <less> $20 million for the purchase of the

preferred shares <less> $897,068 for th e purchase of the common

shares). By characterizing the transaction in this manner, Insilco

would be entitled to a refund under §§ 304 and 351 and LPL would

not be entitled to the § 338 election.

A few days after filing its amended return, Insil co sought

adjudication of its refund claim in the bankruptcy court. Insilco

and the government each filed a motion for summary judgment. The

bankruptcy co urt denied Insilco's motion and granted summary5

judgment in favor of the government. The district court affirmed.

Insilco filed an appeal in this court, which was dismissed when the

court determined that the order from which the appeal was taken was

not an appealable final order. The case was remanded to the

bankruptc y court, which disposed of the remaining issues between

the parties. The district court essentially re-entered its

judgment affirming the summary judgment decision, and Insilco filed

this appeal.

II.

A.

The bankruptcy court correctly held that the rule of

Commissioner v. Danielson

, 378 F.2d 771 (3d Cir.) (en banc), cert.

denied

, 389 U .S. 858 (1967) (adopted by this court in S pector v.

Commissioner

, 641 F.2d 376 (5th Cir. Unit A), cert. denied

, 454

U.S. 868 (1981)), applies to preclude Insilco from recharacterizing

its transaction and reaping favorable tax benefits. In D anielson

,

shareholders of the Butler County Loan Company sold their interest

i n the company to the Thrift Investment Corporation. Each

shareholder received $374 per share, which was allocated $222 to

the share and $152 to a covenant not to compete. Under applicable

tax laws, such allocation would mean that the $222 would be

entitled to favorable capital gains treatment while the $152 had to

be treated as ordinary income. When the shareholders claimed the

full amount as capital gain, the IRS filed suit for the deficiency.6

The court found in favor of the IRS and adopted the following

rule: "[A] party can challenge the tax consequences of his

agreement as construed by the Commissioner only by adducing proof

which in an action between the partie s to the agreement would be

admissible to alter that construction or to s how its

unenforceability because of mistake, undue influence, fraud,

duress, etc." 378 F.2d at 775. The court distinguished the case

in which the taxpayer seeks to raise a substance-over-form argument

from cases in which the I RS resorts to such argument. The court

found that "to allow the Commissi oner alone to pierce formal

arrangements does not involve any disparity of treatment because

taxpayers have it within their own control to choose in the first

place whatever arrangements they care to make." I d. ; accord

Spector

, 641 F.2d at 381 ("Just as the Commissioner in determining

income tax liabilities may look through the form of a transaction

to its substance, so, as a general rule, may he bind a taxpayer to

the form in which the taxpayer has cast a transaction.") (citations

omitted). The court also addressed the issue of taxpayers who,

claiming to be unaware of the tax consequences of their agreement,

argue that they could not have consciously entered into the

agreement. The court held that even when "'[i]t is reasonably

clear that the sellers failed to give consideration to the tax

consequences of t he provision, . . . where parties enter into an

agreement with a clear understanding of its substance and content,

they cannot be heard to say later that they overlooked possible tax7

consequences.'" D anielson

, 378 F.2d at 778 (quoting Hamlin's Trust

v. Commissioner , 209 F.2d 761, 765 (10th Cir. 1954)).

Finally, the court raised sound policy reasons to hold parties

to their agreements. First, it noted that the tax consequences of

a transaction are often taken into account in determining the

purchase price. D anielson

, 378 F.2d at 775. To allow one party to

recharacterize a transaction at a later date to achieve favorable

tax advantage s would be tantamount to granting that party "a

unilate ral reformation of the contract with a resulting unjust

enrichment." I d. S e cond, the court concluded that sanctioning

such recharacterization would "nullify the reasonably predictable

tax c onsequences of the agreement." I d. Third, the court found

that to permit this type of attack "would cause the Commissioner

considerable problems in the collection of taxes[, because] [t]he

Commissioner would not be able to accept taxpayers' agreements at

face value." Id.

This court faced a similar recharacterization issue in

Spector . There the court had to determine "whether a transaction

in which taxpayer surrendered his partnership interest in an

accounting firm in exchange for a specified sum constitutes a

'sale' of his partnership interest, thus creating long term capital

gain under [I.R.C. §] 741 . . ., or whether the transaction was a

'liquidation' of taxpayer's interest under section 707(c), thus

producing ordinary income gain under section 736(a)(2)." 641 F.2d

at 377-78. The parties to the transaction had structured it as a

liquidation, and the e vidence revealed that the amount of the8

withdrawing partner's settlement was calculated with the

expectation that the parties would elect to treat the transaction

as a liquidation. Reviewing the taxpayer's decision to treat the

transaction as a sale producing a capital gain, the Tax Court

conclud ed that the taxpayer could disavow the form of the

transaction on a showing that, as structured, it did not comport

with economic reality. This court, however, adopted the D anielson

rule and reversed and remanded. Id. at 386.

Utley v. Commissioner

, 906 F.2d 1033 (5th Cir. 1990) (per

curiam), reached the same result. In that case, the taxpayers sold

property to a corporation in which they were the sole shareholders.

As an installment sale, t he taxpayers were required to report

capital gains. However, had the parties characterized the

transaction as a contribution to capital, the transfer would have

been a non-recognition event under I.R.C. § 351. This court

rejected the taxpayers' attempt to claim that the transfer was not

really a sale but a contribution and concluded that despite the

lack of evidence indicating that the transaction was in reality an

installment sale, the taxpayers were held to the form of

transaction originally chosen. Id. at 1038-39.

Danielson

, Spector , and Utley stand for the proposition that

a taxpayer cannot recast its transaction and reap the resulting

benefits. This principle and the policies that underlie it apply

in this case. Insilco could have structured the transaction as a

sale of stock in exchange for cash and stock; indeed, that is how

the parties originally structured the transaction. Nonetheless,9

the parties ultimately chose to s tructure the transaction as

separate purchases and sales. Some six years later, now that it

has no remaining financial interest in LPL, Insilco cannot change

its mind. LPL anticipated that § 338 would apply to step up the

basis in Times Fiber's assets. To allow recharacterization would

effectively permit Insilco to unilaterally reform the contract,

contrary to the teachings of Danielson

.

B.

Insilco argues that the Danielson rule does not apply in this

case because §§ 304 and 351 are mandatory. In other words, Insilco

claims that it made a mistake of law that it is now seeking to

correct and that it is not seeking to recast the facts of its

transaction. This argument is without merit.

1.

Section 304 provides that when a person who is in control of

two corporations sells the stock of one corporation to the other

corporation, the proceeds of the sale shall be considered a

distribution and the acquired stock shall be considered a

contribution to capital. In order for § 304 to apply, the

transferor (Insilco) must be in control of both corporations (Times

Fiber and LPL) before the stock transfer. S ee Treas. Reg. § 1.304-

2(a). Insilco was in control of Times Fiber before the transfer.

See I.R.C. § 304(c)(1). It argues that it also had actual control

of LPL before the transfer pursuant to § 304(c)(2)(A) , which

provides that

[w]here 1 or more persons in control of the issuing

corporation [Times Fiber] transfer stock of such corporation10

in exchange for stock of the acquiring corporation [LPL], the

stock of the acquirin g corporation received shall be taken

into account in determining whether such person or persons are in control of the acquiring corporation.

As LPL and Insilco structured the transaction, Insilco received $96

million when it transfe rred the Times Fiber stock to LPL; it did

not receive any LPL stock. Nor did Insilco acquire LPL shares of

stock by transferring its shares of Times Fiber. In short, the

transaction was structured as purchases and sales of stock for

cash, not as an exchange of stock for stock. To achieve a result

that fits within § 304 requires t hat we recharacterize the

transaction, which is precluded by Danielson

.

Insilco attempts to avoid recharacterization arguments by

claiming that it had constructive ownership of LPL before the

transactions. A person constructively owns stock if that person

has an option to acquire the stock. I.R.C. § 318(a)(4). "[T]o

qualify as an option, the holder must have the right to obtain the

stock at his election. . . . [with] no contingencies with respect

to such election." Rev. Rul. 68-601, 1968-2 C.B. 124 (defining

when a warrant is an option). Insilco claims that it had an option

to purchase a controlling portion of LPL stock because on December

31, 1985, it had the unconditional right to acquire one hundred

percent of the LPL preferred stock, the aggregate value of which

represented over fifty percent of the total value of all classes of

LPL stock.

Insilco did not make this argumen t to the bankruptcy court,

and we need not consider it. Insilco claims its failure to make

the specific construc tive ownership argument to the bankruptcy11

cou rt should not preclude this court from considering the issue

because it has always maintai ned that § 304 applied and § 304(c)

r efers to § 318, the constructive ownership provision. However,

Insilco had to advance its option arg ument before the bankruptcy

court. Instead, the first time Insilco raised this argument was in

its reply brief to the district court on appeal from the bankruptcy

court's order. The district court did not mention the issue in its

affirmance, and we need not consider issues raised for the first

t ime on appeal. S ee First Colonial Corp. of Am. v. A merican

Benefit Life Ins. Co. (In re First Colonial Corp. of Am.)

, 693 F.2d

447, 449-50 n.5 (5th Cir. 1982), cert. denied

, 461 U.S. 915 (1983);

see also Texas v. United States

, 730 F.2d 339, 358 n.35 (5th Cir.)

(stating that the determination of whether to consider an issue not

raised below is within the discretion of the court and should be

decided on a case-by-case basis), cert. denied

, 469 U .S. 892

(1984). In any event, the contract to purchase the preferred

shares cannot be considered an unconditional optio n because

Insilco's agreement to purchase $20 million worth of LPL preferred

shares was conditioned on other transactions, most notably

Insilco's agreement to sell its Times Fiber shares to LPL and the

merger of Times Fiber into LPL.

2.

I nsilco also argues that § 351 is mandatory and, therefore,

applicable to the LPL transaction. Section 351(a) provides that

"[n]o gain or loss shall be recognized if property is transferred

to a corporation by one or more p ersons solely i n exchange for12

stock or securities in such corporation and immediately after the

exchange such person or persons are in control

. . . of the

corporation." As with § 304, Insilco's argument hinges on its

characterization of the transaction as an exchange of Times Fiber

stock for LPL stock and cash. While surely related, the distinct

transactions involving Insilco, LPL, Times Fiber's shareholders,

and other investors were simply not structured as an exchange.

Insilco's attempt to s ay otherwise is not permitted. S ee

Danielson , 378 F.2d at 775.

III.

For the foregoing reasons, the judgment of the district court

is AFFIRMED.