TAX COURT OPINION

Case: Bank of America Corporation & Subsidiaries as Successors to Merrill Lynch & Co., Inc. & Subsidiaries
Docket Number: 18170-98
Judge: Marvel
Opinion Type: reported
Filed: 01/15/2003
Pages: 81

120 T.C. No. 3 - UNITED STATES TAX COURT MERRILL LYNCH & CO., INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket. No . 18170 -98 . , Filed January . 15, 2 0 03 . . MP is the parent of an affiliated groi2p, (P) thát filed consolidated income tax returns for the taxable ' years, at issue.. . 1986 Transactions : 2 In 1986, P decided ,to sell the its lease advisory bus'iness and Because P wanted to retain certain assets investments business of MLL, a second tier principal subsidiary. of MLL, consisting of certain other assets (the 1986 retained ås'sets) within the consolidated group while minim1z1ng .or eliminating gain on the sale of MLL outside the consolidated group, P adopted and implemented a plan consisting of following, steps: assets to its subsidiary, Merlease; Merlease cross-chain to a sister corporation (MLAM) a transaction that qûalif ied as a, sec . 304, I . R . C. , deemed redemption; of wholly owned subsidiary of MP; sale of MLL to a third party. Under the consolidated the gross sale proceeds to its parent, MLCR, a (1). MLL distributed the 1986 retained (3) MLL then distributed a' dividend the. (2) MLL then sold in~ .(4) .P then~ completed the SERVED JAN 1 5 2001 - 2 - return regulations then in effect, aÊd the related dividend generated an increase in MLCR's basis in MLL's stock, enabling P to sell MLL outside the consolidated group at a loss. the cross-chain sale On the date of the 1986 cross-chain sale, P had identified the prospective purchaser of MLL, had negotiated a tentative purchase price for MLL, and clearly intended to sell MLL outside the consolidated group, under sec. 318, corporation. thereby terminating MLL's constructive ownership I.R.C., of Merlease, the issuing On its consolidated tax return for TYE Dec. 26, 1986, P claimed a loss from the sale of MLL after treating the gross sale proceeds as a dividend and increasing its basis in MLL's stock by that amount. 1987 Transactions: P decided to sell the leased its wholly owned Because P wanted to retain MLCR's (2) MLCR then sold the seven subsidiaries to properties business of MLCR, subsidiary. nonleasing assets (the 1987 retained assets) while minimizing or eliminating gain on the sale of MLCR outside the consolidated group, P adopted and implemented a plan consisting of the following steps: (1) MLCR identified the subsidiaries holding the 1987 retained assets (MLBFS, MLPC, MLVC, MLEI, MLRDM, MLI, MLLE); three sister corporations (MLRI, MLPFS, MLAM) within the consolidated group in transactions that qualified as sec. 304, distributed dividends of its parent, MLCMH, a wholly owned subsidiary of MP; P then completed the sale of MLCR to a third party. Under the consolidated return regulations then in effect, generated increases in MLCMH's basis in MLCR's stock, enabling P to sell MLCR outside the consolidated group at a loss. the cross-chain sales and related dividends the gross sales proceeds to I.R.C., deemed redemptions; (3) MLCR then (4) On the dates of the first seven of the 1987 cross- chain sales, P had identified the purchaser of MLCR, had prepared a draft acquisition agreement, and clearly intended to sell MLCR outside the consolidated group, thereby terminating MLCR's constructive ownership under sec. 318, (the issuing corporations). I.R.C., of the subsidiaries sold cross-chain - 3 - After the.first seven of the 198,7-cross-chain sales had closed and shortly before the sale of MLCR was scheduled to close, _the. purchaser of MLCR notified P that it could not own VL, one of MLCR's .subsidiaries because of Federal weeks before the sale of MLCR closed, MLCR sold the stock of VL to MLAM, a sister corporation, in a transaction that qualifiëd as a deëmed sec. 304, I.R.C., law restrictions. Approximately 2 redemption. . On its consolidated income tax return for TYE Dec. 26, 1987, P claimed-a loss of $466'!9853176 from , the sale of MLCR after treating the gross sales proceeds from thet 1987 cross-chain sales as a dividend and increasing its basis in MLCR's stock by that amouilt . Respondent determined that the nine cross-chain fixed, and clearly integrated plan ,to completely sales of Merlease, MLBFS, MLPC, MLVC, MLEI, MLRDM, MLI, MLLE, and VL (the subsidiaries)- and the sales of MLL and MLCR outside the consolidated group were parts of a firm, terminate MLL's and MLCR's actual and constructive ownership of the subsidiaries . Petitioner contends that each cross-chain sale resulted in the receipt of a dividend by the selling corporation under.secs.·302(d) and 301, to the gross sale proceeds and that it was entitled, under the consolidated -return regulations, stock as a~ result of to increase its basis in MLL's and MLCR's the cross-chain sales.: I.R.C., equal Held: The cross-chain"·sales qualifi.ed as in the subsidiaries sold cross-chain· under redemptions in complete termination of MLL's and MLCR's interest sec. 302(b) (3), distributions in-exchange for st-ock under sec. 302.(a), I.R.C., rather than as dividends under sec. 301, I.R.C., and must be taxed as I.R.C. - 4 - David J. Curtin, Sheri Dillon, Peter J. Genz, William F. Nelson, Kimberly S. Piar and Cornelia J. Schnyder, for petitioner. Carmen M. Baerga, Jill A. Frisch, Lyle B. Press, and Jody S. Rubinstein, for respondent. MARVEL, Judge: Respondent determined the following deficiencies in the Federal income tax of Merrill Lynch & Co., Inc. (Merrill Parent) and subsidiaries (collectively, the consolidated group or petitioner): TYE Dec. 26, 1986 Dec. 25, 1987 Dec. 30, 1988 Deficiency $7,704,908 12,141,242 12,928,981 The ultimate issue in this case involves the proper computation of petitioner's basis in.the stock of two consolidated group members (the target corporations) that it sold in 1986 and 1987. In order to resolve that.issue, we must decide the tax effect of nine cross-chain sales1 of stock of certain subsidiaries (the issuing corporations) owned by the target corporations. These sales were structured by petitioner to transfer certain assets from the target corporations to other members of the consolidated group (the acquiring corporations) 1For purposes of this opinion, a cross-chain sale means a sale by one brother-sister corporation to another brother-sister corporation in the same ownership chain. before the target corporations were i sold'outside the consolidated group. The parties agree that1the .cross-chain sales qualified as section 3042 redemptions that must be tested for dividend equivalency under åectiòñ 302 (b) > ' The*parties .disagree; however, regarding the result of that' testirig. RespondeÑt contends that 'eåch croès-chain sale by as target corporation and the later sale of that target corporation outside the consolidated group were parts of .a firm, fixed, and clearly integrated plan to c mpletely terminate Áhe target corporation's ' actual and constructive ownership of .the issuing. corporations. Respondent argues, therefore, that the cross-chain sales qualified as redemptions in complete terminatiön of the target corporations' ^interest ,in the issuing corporations under section 302 (b) (3) , and must be taxed as a distribution in. exchanÛe for stock under section 302 (a) . Petitioner coritends that each cross- chain ,sale resulted. in the receipt of a dividend by the . selling corporation under sections 302;(d) and 301 equal tò the gross sale proceeds and that it ewas entitled, under the . consolidated return - regulations, to increase its basis in the target corporations' stock by the amount of the dividend.3 Petitiorier's claim to 2All section references^aré to'the Iriternal Revenue Code in effect for the years in issue, and·all Rule references are to the Tax Court Rules of Practice and Procedure. 'Monetary'amounts arei rounded to the nearest dollar. 3Under" the consolidated return investment adjustment - (cont inued . . . ) increased bases in the stock of the target corporations when the target corporations are sold to unrelated third-party purchasers in 1986 and 1987 depends for its success upon dividend treatment for the gross proceeds of the nine cross-chain sales. See secs. 1.1502-32(a) and 1.1502-33, Income Tax Regs. Following concessions,' therefore, we must decide: 3(...continued) regulations, see secs. 1.1502-32(a) and 1.1502-33, Regs. as in effect for the years at member's basis in a subsidiary was increased or decreased, dollar for dollar, by changes in the earnings and profits of subsidiary. consolidated return investment adjustment regulations generally for determinations and tax years beginning on or after Jan. 1, 1995. The Commissioner subsequently amended the issue, a consolidated group T.D. 8560, 1994-2 C.B. 200. Income Tax the . (4) (3) respondent tax (2) respondent failed tax credit and instead included in petitioner's general business credits for the 1986 respondent failed to include petitioner's the recalculated amount of environmental 4In its petition, petitioner asserted (1) that respondent failed to use the Becker "separate return limitation year" net operating loss of $85,164,319 in computing petitioner's group taxable income for the 1987 taxable year; to take into account deductions for the 1987 and 1988 taxable years; failed to allow a separate fuel such credit taxable year; available general business tax credits in determining petitioner's alternative minimum tax for the 1988 taxable year; and (5) income tax withheld by Newmont Mining on dividends paid to a consolidated Canadian subsidiary of petitioner during the 1987 taxable year. respondent agreed with petitioner's position regarding adjustments (1)-(4). conceded adjustments (1), that the disagreements regarding adjustments (1)-(4) would be resolved in computing any final deficiencies in this case. With respect respondent denied the adjustment the answer but did not raise the issue on brief or at trial. Adjustment 151(e) (4) and (5); Petzoldt v. Commissioner, 92 T.C. 661, 683 In its petition, petitioner also stated that respondent failed to take into account $98,505 of Federal In the answer to the petition, respondent (2), and (4). Respondent also conceded is, therefore, deemed conceded. to adjustment (5), (5) in See Rule (continued...) ... 7 - (1) Whether a deemed,section 304 redemption in:the form of a 1986 cross-chain stock sale ibetween brother-sister corporations in a consolidated: gröup must- be integrated with the .later, sale of the cross-chain seller outside the consolidated groupqand treated as a'redemption in complete termination funders.section 302 (a) and (b) (3) as' respondent contends /L ·or whether thet deemed section 304. redemption qualified as a distribution óf property ,taxable as a dividend -under section 301' asopetitioner contendst -and . (2) whether' deemed sect·ion 304 redemptions , in .the .·form of eight 1987 cross-chain stock.sales between-brother-sister corporations in a consol·idated group must be, integrated with the later salë of thè cross-chain. sellér outside the.consolidated - group and treated as a5redemption in complete ,termination under section 302 (a) and - (b) (3) as respondent contends,: .or . whether the deemed section 304 redernptions; were distributions of rproperty- . taxable as dividends under section 301 as petit.ioner contends. FINDINGSi OF. FACT ·. Some of the facts have been estipulated.: We incorporate the stipulhted Pfacts into oür findings by th:is reference. Merrill Parent is a corporation organized runder. Delaware law and'is- the parent-corporation of an affiliated group, of corporations that filed consolidated Federal income tax returns . 4 ( . . . continued) (1989); Money v. Commissioner, 89 T.C. 46, 48 (1987). - 8 - during the years at issue. Merrill Parent, through its subsidiaries and affiliates, provides investment, financing, insurance, leasing, and related services to clients. I. 1986 Sale of ML Leasing Before it was sold outside the consolidated group, Merrill Lynch Leasing, Inc. (ML Leasing or MLL), was a wholly owned subsidiary of Merrill Lynch Capital Resources, Inc. (ML Capital Resources or MLCR), which in turn was wholly owned by Merrill Parent. ML Leasing was engaged in the business of arranging leasing transactions between third parties (lease advisory business). ML Leasing also was engaged in the business of leasing its own real and tangible personal property to third parties in the capacity of lessor (principal investments business). Immediately before the years at issue, the principal investments business leases were generating substantial positive cashflow but had "turned around" for income tax purposes, meaning that if ML Leasing continued to hold the leases the principal investments business would generate taxable income in excess of pretax cashflow. ML Leasing also owned, directly or through single-purpose subsidiary corporations, general and limited partnership interests in limited partnerships that held property subject to operating and leveraged leases. A. Preliminary Discussions As early as August 22, 1985, Douglas E. Kroeger, a member of thes corporate tax. department. at Merrill*Parent, sent an interoffice 'memorandum to ·David K. - Downes,c corporate · controller at Merrill Parent , . recommending thè sale of _ ML Leasing' s st ock, after "stripping out" certain assets Merrill Parent .did not wish to sell, 'as part of a tax strategy; that cou-ld result in an- . increase in after-tax earnings of more than $60 million.5 <On . Sept'ember 16, 1985, Mr. Downes presented-this tax strategy to Jerome- P. Ke.nny, president·and chief executive officer of Merrill Lynch Capital 'Marke t s (ML · Capital- Marke t s or: MLCM) 6, ; and. Stephen L. Hammerman, Merrill Parent's general counsel and,arranged· a meeting to explain more fully the :proposedi tax strategy. 4he proposed tak strategy at .that time consisted- oft at least two, steps--the distribution- of cert-ain: assets .of<ML Leasing that Merrill ·Parent wanted to retain within the consolidated group and the· sale of ML Leasinc) to a third party following. the distribution . sThe tax strategy contemplated by Mr. Kroéger was intended to increase after-tax earnings by taking .advantage of a,provision in the consolidated retu'rn regulations requiring the add back of accelerated depreciation,oyer, straight-line de];>reciation when calculating earnings and profits. Commissioner, 85 T,. C. 2'74 issue in this case. (1985.) .. This tax strategy is not at See Woods"Inv. Co'. v. Although it is unclear 'from the Yecordl it uppears that Merrill Parent. rptained Merrill Lynch Capital Markets (ML Capital Markets) Resources in 1987. the stock of ML Leasing in 1986 arid ML Capital to sell - 10 - At some point thereafter, Merrill Parent decided it wanted to sell only the principal investments business of ML Leasing as part of its tax strategy. Merrill Parent did not want ML Leasing's lease advisory business and certain other assets that were not part of the principal investments business (collectively referred to as the 1986 retained assets) to leave the consolidated group. Merrill Parent decided to transfer the 1986 retained assets to other corporations within the consolidated group in preparation for the sale of ML Leasing, leaving only the principal investments business remaining in ML Leasing, including the operating and leveraged lease assets. On March 26, 1986, participants at an internal meeting of petitioner discussed the possible sale of ML Leasing's stock. At the meeting, the participants discussed the estimated tax basis of ML Leasing as of the end of 1985, the approximate value of ML Leasing, whether the sale would be prohibited because= of various restrictions in the lease documents, the intangible effects of the sale of ML Leasing, the possibility of tax reform being passed prior to late August 1986, the estimated after-tax economic benefit of the sale of ML Leasing, and the estimated after-tax book gain that would result from the sale of ML Leasing. At the meeting, Jeffrey Martin, a member of petitioner's Mergers & Acquisitions Group, was asked "to feel out the market on a no-name basis inquiring if there are any - 11T- interested^parties for such attransaction."- 'Upon conclusion o.f the meetihg, it was decided that petitioner "would.await Mr. Martin's findings before any ádditional workttakes.place" , regarding1the sale of ML Leasing.. In approximately April 1986, petitioner decided to pursue a sale of ML Leasing and appointed Theodóre D Sands; managing.director of the Investment Banking Division'at Merrill Parent,2to serve.as,the chief negotiator with re-spect to thë~ sále.7 Mr. Sands suggested that petitioner "clean up"' ML Leasing: by removingí any.assets the mcompany did not want to sell (i.e., the 1986 retåinéd assets).' Mr.~Sands, however, did not suggest the manner ini:whichsthe 1986 retained assetss should be transferred"from Mu-Leasing, and he did not suggest implementing the 1986 bross chain·sale at 1ssue an this case. B. Pe't"ition~er Seeks a Purchaser . Mr. Sarids was 'asked to dévelopr a profile of -a likely pros ective *purchaser for ML.Leasing and a list of prospectives purchasers. Mr. Sands establ'ished three criteria for,a-potential purchaser of ML'Leasing: (1) A purchaser should .be ~financiallyc 70n July .28, 1986, petitioner officially appointed a five- person project team to conduct which i'ncluded Mr. Sands as chief negotiator. the divéstiture of ML Leasing, 8The.1986 retained assets consisted of assets leased under finance, and leveraged leases, operating, liabilities associated with such.assets, and 'the shares of 34 corporate subsidiaries that owned leased equipment and leased real property. which would be retained was Made by the head of'investment banking at Merrill Parent. .The·decision as do which assets would be sold and 'subject to thé' - 12 - sophisticated to handle the lease portfolio; (2) a purchaser should be able to finance the transaction; and (3) a purchaser should have a net operating loss (NOL) carryforward and, therefore, should be indifferent to the fact that the lease portfolio was about to turn for tax purposes. In or around April 1986, Mr. Sands contacted Inspiration Resources Corp. (Inspiration). Inspiration was a diversified natural resources company whose stock was publicly traded on the New York and Toronto stock exchanges. Inspiration was controlled by Minerals & Resources Corp., Ltd. (MINORCO), a Bermuda corporation headquartered in London, England. Mr. Sands had worked with Inspiration on other matters before 1986 and was aware that Inspiration had a' significant NOL. Petitioner provided to Inspiration a document entitled "MERRILL LYNCH LEASING INC. Proposed Sale of Equity Investment Assets" dated April 1986 (ML Leasing offering memorandum). The ML Leasing offering memorandum described the assets that would be owned by ML Leasing at the time of the sale and the pretax cashflows expected to be derived from the portfolio of leases. The ML Leasing offering memorandum described the proposed transaction as follows: Prior to the sale of Leasing's stock, any of Leasing's assets which are not to be sold will be dividended to MLCR. Assets rema1n1ng ln Leasing will be the equity investments in real estate and equipment net major corporations, 1981 Tax Act, unused ITC carryover, and any state net tax benefits purchased under the leased to --13 - operatins losses '("NOL's") not. used inuthè:various ML&Co. 1986 unitary returns. in Leasing would consist solely of deferred- taxes. The remaining liabilities -MLCR ki·ll then sell the stock of Leasing. .* * * The 1986 retained assets er~e ñot included in-the description of ML Leasing's portfolio. On Juáe 19, 1986, Mr. Sands prepared a memorandum entitled "Status of ML Leasing Sales'Effort"'. The memorandum -reported on a telephone call Mr. Sanda receited from Mr. Smith, the Vice President-Finance for Inspiration. As summarized in..the memorandum, Mi . Smith~ "expressed strong interest". in. purchasing ML Leasing and repo'rted that he hadtprepèred a detailed.analysis for consideration by In'spiration's ~execut^ive.committee.: Although Mr. Smith had expressed reservations ábout the status of Inspiràtion's NOLs'ând ábout>the lack^ of certainty regarding the lease résidual value's, Mr. (cid:0)540anåsreportèd that Mr. Smith's dohbérn regardiný Inspiratioù's NOLs was not a serious problem and that Mr: Smith's concern regarding'the residual values would be addressed in a meeting on Junè 23 ùhen"Mr., Smith and- his staff would meet with a representative of ML Leasing to review the residuals on a lease-by-lease basis. Mr. Sands reported.that, if Mr. Smith were satisfied after the June 23 meeting, Inspiration "will make a go , no go decision on. buying Leasing. at the $80 million asking price based on.the assumption. that the residual values can,be.confirmed.by an oµtside appraiser." - 14 - On July 3, 1986, a written "Presentation to Inspiration Resources Corporation" prepared by ML Capital Markets was submitted to Inspiration. The presentation again described the assets proposed to be owned by ML Leasing at the time of sale of the ML Leasing stock to Inspiration and the pretax net cashflows expected to be derived from the portfolio of leases. The 1986 retained assets were not included in those assets. The presentation proposed a purchase price of $98 million and a closing date at the end of 1986. C. The Tax Plan and the Section 304 Cross-Chain Sale Sometime between 1985 when the possible sale of ML Leasing was first discussed and July 21, 1986, when ML Leasing contributed the 1986 retained assets to Merlease Leasing Corp. (Merlease), petitioner finalized a plan' to strip ML Leasing of the 1986 retained assets and to sell ML Leasing outside the consolidated group using planning techniques designed to increase petitioner's tax basis in ML Leasing and thereby eliminate gain on the sale of ML Leasing. The plan consisted of the following steps: 9It appears from the ML Leasing offering memorandum that petitioner originally intended to have MLL distribute the 1986 retained assets to MLCR as a dividend. We infer from this fact that petitioner finalized its plan to engage in sec. 304 crosschain sales after the ML Leasing offering memorandum had been prepared. - 15 - 1.' ML Leasing.-would contribute the 1986 retained asset.s to Merlease, a direct wholly owned ·subsidi'ary of ML Leasing, in anticipation of ML Leasing's sale'outside the consolidated group. 2. ML Leasing would -then sell Merlease cross,chain to a sister corpóration within the consolidated group. -3. ML:Leasing would declare a dividend to ML Capital Resources öf designated:assets and the gross.sales proceeds from the cross-chain sale of Merlease to the acquiring corporation. 4. After each of the steps outlined above had occurred, petitioner wóuld then sell MLiLeasing to a third-party purchaser. In acóórdance with the plan,and -pursuant·to a resolution dated July 21, 1986,- ML Leasiñg contributed the 1986- retained assets'to the capital of'Merlease. In·accordance with the plan and pursuant to resolutions adopted on July 22, *1986, the respective boards of directors of ML Leasing and Merrill Lynch Asset Management, Inc. (ML Asset Management.ör MLAM), ardirect wholly owned subsidiary of Merrill Parent, approved the sale of -the stock of^Merlease to ML Asset Management for a purchase price equal to the .fair 'market.value of such.stóck as of July 22, 19861. Two days later,. ML Leasing and ML Asset Management entered into a stock purchase agreement dated "Some of the same assets identified in the July 21, 1986, to corporate action as having been contributed to consent Merlease's capital~were included.as part of a.dividend declared and paid to ML Cåpital Resources, ML Leasing's sole shareholder as of July 18, 1986. - 16 - . July 24, 1986, pursuant to which ML Asset Management agreed to purchase all of ML Leasing's Merlease stock for a purchase price of $73,320,471. The sale closed on July 24, 1986. Immediately before ML Asset Management purchased the stock of Merlease, ML Asset Management's accumulated earnings and profits exceeded the price it paid for the Merlease stock. The parties agree that the sale of Merlease to ML Asset Management was a section 304 transaction. D. Presentation to Merrill Parent's Board of Directors On July 28, 1986, only 4 days after the cross-chain sale of Merlease, a formal presentation was made to Merrill Parent's board of directors regarding the sale of ML Leasing." The presentation included the distribution of a written summary and slides illustrating the details of the plan.for the sale of ML Leasing, including key calculations. The written summary began as follows: We have identified a significant economic benefit, based on an opportunity in the tax law, in selling Merrill Lynch's proprietary lease business. This economic benefit can be achieved by structuring a transaction to sell subsidiary, Merrill Lynch Leasing. such a sale could realistically result in an after-tax financial statement gain of approximately $104 million. the stock of our primary leasing We believe that The presentation laid out the various steps of the plan to "Petitioner was unable to locate the minutes of the meeting the board of directors on July 28, 1986, of presentation was made. the date the - 17. - dispose of -Me'rri'll Lynch's propriet'ary lease business, culminating. in the (cid:0)541aleof ML Leasing's stock.: . The stated purpose of the presentation was 'to ,secure 3the board's 'approval "to enter into a letter of intent with the purcha(cid:0)541er*'andto secure the board's authorization for:. - intent, subject the Executive Committee to approve the final details sof the proposed transaction in accordance with the letter of contingencies arising from negotiating a final agreement of $20 million. in early October, up to a máximum reduction to closing adjustments and unforseen The written summary informed the board of directors that "due to the exhaustion of tax benefits, many of * * * [ML Leasing's] leases begin to produce taxable income in 1987, with the remainder 'turning around in 1988. Accordingly, it is an opportune time to sell our Principal Investments line of business to an appropriate purchaser." The summary also informed the board of directors that because it was not Merrill Parent's intent to withdrew from all aspects of the leasing business, Merrill Parent was removing the 1986 retained assets from ML Leasing before ML Leasing's stock was sold in two-steps: -(1) The 1986 retained assets had been. sold to ML Asset Mánagement for approximat ly $57 million.; and (2) ML Lea ing w 11 decläre' a $115 The presentation represented to the board of directors the "Once both partie's have signed the letter of that sales price will be firmly established subject -only. to changes in the residual value by~ the appraisers . Moreover, even the impact òf residual value appraisals will be limited to $14 million." intent, - 18 - million dividend to ML Capital Resources consisting of cash received from ML Asset Management, plus other cash, receivables, and certain liabilities. After removal of the 1986 retained assets, the summary represented that Merrill Parent would then be in a position to sell the principal investments business portion of ML Leasing. The summary unequivocally identified Inspiration as the purchaser of ML Leasing's stock, described Inspiration, and stated that "In return for the stock of ML Leasing, we will receive $126 million in cash (subject to adjustments for residual value appraisals) from the purchaser, Inspiration Resources Corporation." The summary also explained how the sale price was determined," quantified the after-tax income and the tax benefit that would result from the sale, explained the tax risks of the transaction, and recommended the creation of a $37 million tax "The sale price was determined by calculating the present the cashflow to Inspiration ($143 million), calculating value of the cashflow stream generated by ML Leasing's assets ($42 million), discounting the pretax cashflow to reflect the value of the value of Inspiration's NOLs present value of (representing a split of NOLs). increased by the amount of cash to be left in ML Leasing (estimated to be $31 million) to arrive at a total sale price of $126 million (subject appraisals). The resulting base sale price ($95 million) was then to adjustment for residual value ($101 million), and adding to the the cashflow stream a premium of $53 million the benefits arising from Inspiration's. - 19 - reserve for the transaction." In calculating the recommended reserve, the summary stated the following: The IRS could maintain the form of this transaction should be disregarded The first item of tax reserve concerns the sale to Merrill Lynch Asset Management of subsidiaries we wish to retain. that and in substance, a distribution with a reduction in tax basis should be deemed to have occurred. million reserve amount previously multiplied by the 28% capital gains tax rate. the leasing is the $57 million I noted The $16 Following the presentation, Merrill Parent's board of directors approved the plan, including the sale of Merrill Leasing to Inspiration. E. Nonbinding Letter of Intent On July 29, 1986, 1 day after the presentation to its board of directors, Merrill Parent entered into a nonbinding letter of intent with Inspiration for the sale of the stock of ML Leasing to Inspiration. The letter of interit provided a "period of exclusivity" during which Merr'iZ1 ParerÀt would negotiate exclusively with Inspiration to reach an agreement for the sale of ML Leasing. Upon executinò the letter of intent, the parties agreed that "if' subh sale a'greement is not executed on or prior to August 31, 1986, neither of us intends to proceed with the transactions-contemplated herein." The letter of·intent provided "The $37 million tax 'reserve consisted of a $16 million reserve for the possible disallowance of the deemed dividend resulting from the cross-chain sale and a $21 niillion reserve for lost tax benefits if certain income projections were not realized. - 20 - that "If the conditions to reaching an agreement are satisfied, the aggregate purchase price will be $95,000,000", subject to adjustment for cash left in ML Leasing, for the value of residuals as determined by independent appraisers, and for other specified adjustments. The letter of intent also stated: It is understood that this letter of intent merely intentions with constitutes a statement of our mutual respect to the proposed acquisition and does not contain all matters upon which agreement must be reached in order for the proposed acquisition to be consummated. proposed acquisition will result only from execution of definitive agreements, subject expressed therein. A binding commitment with respect to the conditions to the Following execution of the nonbinding letter of intent, both Inspiration and Merrill Parent hired outside appraisers to value the lease portfolio." On July 29, 1986, Merrill Parent issued a news release to its employees announcing that it had entered into a letter of , intent for the sale of a portion of its leasing operations to Inspiration. Merrill Parent announced that the sale, if consummated, would result in a realization of after-tax gain of at least $70 million and was scheduled to close at the end of During July and Aug. 1986, petitioner also executed various transfers within the consolidated group to remove assets from ML Leasing before its sale to Inspiration. By resolutions dated July 31 and Aug. 1, 1986, ML Leasing's board of directors authorized payment of a dividend to ML Capital Resources consisting of all Leasing, distributions are not at intercompany receivables, cash, and other assets. the capital stock of five subsidiaries of ML issue in this case. These - 21 1986,, "subject to negotiation of definitive documentation and normal' conditions to closing." . . On August 5', 1986,."Inspiration''s boardrof directors ratified and retroactively approved the nonbinding letter of, intent between Insþiration- and Merri-ll Parent'. 'I'he board of directors authorized the executive committee'of the board of directors to "take any'and all necessary or:desirable actions in connection with the proposed·acquisition of" ML Leasing. . .. F. FurtherJNégotiations Between. Petitioner and- Inspiration . On August· 19, t 1986, (Inspirations wrote a letter to .Mr. Sands explaininéf that "Several problems'have arisen over:the- past few weeks" regarding tlíe. purchase' of ML Leasing. In the letter, Inspiration, advised that it »was: unable. "to. f inance this transacti-on on a secured basisj within the timeframe and terms of our agreement: " Inspiration stated. that it had started to review alternative means of financing, including. both unsecured financing and the sale of specific leases from the ML Leasing portfolio as .a means of financing the transaction and suggested that the increased cost oft the .unsecured financing "may justify a downward adjustment'-in the purchase: price." In -the= letter, - Inspiration requested that the terms ofi.the draft stock purchase agreement be altered to accommodate alternative-means-of financíng; i.e. by eliminati g a provision in the dra'ft stock agreement that prohibited Inspiration from sellirig signifiàant - 22 - assets from ML Leasing for a period of 5 years. In addition, Inspiration suggested that "Merrill Lynch may have to arrange with the lessee and the secured noteholders to waive certain restrictions on transfer of ownership" in order to accommodate its request. Inspiration also pointed out that the existing draft purchase agreement did not contain a representation from petitioner that the cashflows as presented to Inspiration were correct. Inspiration advised that in order for a lender or a purchaser to make financing decisions based on "these cash flows, a legal due diligence review will be insufficient and it will be essential for Merrill Lynch to represent that the cash flows [of the leases] are accurate." Inspiration concluded its letter by expressing its continued interest in completing the transaction. In order to give the parties to the letter of intent additional time to finalize their deal, the parties on August 29, 1986, agreed to extend the term of the nonbinding letter of intent to September 19, 1986, and negotiations and discussions continued with Inspiration after August 29, 1986." Shortly after August 29, 1986, petitioner's appraiser and Inspiration's appraiser completed their analysis of residual values. Both appraisers valued the residual values of the leases "A Sept. 8, 1986, interoffice memorandum from Mr. Sands stated that although Inspiration still had not secured financing to purchase ML Leasing, Inspiration was optimistic that it would do so. Mr. Sands also indicated that Inspiration's financing efforts were going very well. - 23 - in ML Leasing's portfolio higÑer th'an petitioner and Inspiration had expected. As a rÁsult , the chie f f inanc ial of f icer f oh Merrill'Parent i'nstructed Mr. Sands tÒ'negotiaÊe an lncrease in the purchase price from $126.6 million tò Ô131.4 million. In accordance with thbse instructions, Mr. Sands attempted^to negotiate an adjustment to the purchase þrice. Älûhou'gh his efforts appaèently were not* init-ially sell réceived," thè^ partie^s ultimately agréed tò increase the purchase-pricè by $3 million. In approximately Áugust or Àarly Sèptethber 1986 petitioner proviÈled Inspiration wiÊh"a draft stock purchase agreemént dated September 11, 1986." On SeÙt mber 1(cid:16)254Ï,1986, t!he executivë committee of Inspiration's.board·of directors met to--discuss the acquisition òf MÈ Leasing4 AfteÈ discus ion, Ehe- eNecutïve committee approved the Septembër 11~, 1986, stock"purchase agreement 'substanti'ally in the form presented. The executive commithee also authorized Ins ïration's management td 'finalizé the necessary bank financing. Mr. Sands was asked by Inspiration's representatives to leave the meeting, and, Inspiration refused to return phone calls from either Mr. Sands or petitioner's attorneys. least -at day. after the meeting for at "The Aug. 19, 1986, létter from Inspiration t$o Mr. Sands the Sept . 11, 1986, indicaties there was .a. previous version of draft stock purchase agreement. as to when the .first 'stock purchase agreement was^ drafted and circulated. , The record is unclear, however, G. ML Leasing Stock Purchase Agreement - 24 - Effective September 19, 1986, Merrill Parent, ML Capital Resources, ML Leasing, and Inspiration executed an agreement for the purchase and sale of the stock of ML Leasing (ML Leasing stock purchase agreement). The ML Leasing stock purchase agreement was amended as of October 31, 1986, to reflect further negotiations on certain matters. The purchase price was $129,445,843, payable in cash at closing, subject to certain postclosing adjustments. Pursuant to the ML Leasing stock purchase agreement, the purchase price subsequently was adjusted based on residual value appraisals for certain leases. The sale of ML Leasing closed on October 31, 1986. II. 1987 Sale of ML Capital Resources At the beginning of petitioner's TYE 1987, ML Capital Resources was a wholly owned subsidiary of Merrill Parent.19 ML Capital Resources was engaged in the business of arranging equipment leasing transactions between third parties and also I owned various types of equipment and other tangible personal property, which it leased to third parties. ML Capital Resources' business focused on small business leases. It was also a partner in certain limited partnerships that held "By resolution dated Apr. 8, 1987, _the board of directors of Merrill Parent approved the formation of a newly organized corporation, Merrill Lynch Consumer Markets Holdings, (Consumer Markets or MLCMH), and the contribution of all capital stock of ML Capital Resources to Consumer Markets. Inc. the - 25 - computers leased to IBM . and had -been- active .in other types of financing for medium;(cid:0)541izedbusinesses. · ML Capital ·Resources also owned the stock of . a number of esubsidiary corporations that ,were engaged in the business of· arranging .equity and debt financing, for middle- and small-sized companies. ., Merrill - Parent decided to sell .that portion of ML Capital Resources' búsiness consisting of t the-ownershipt of, leased property . In the aggregate, the . leases , were generat- ing . . substantial positive cashflow but had "turned,around" for income tax purÓosestso that if MLiCapital Resources continued to hold .. them, the' leases would~generate taxable income .in excess of pretax cashflow. Because Merrill Parent did not .want ML; Capital Resources' nonleasing'Êssetis:to leave the; consolidated: grqup, it decided tihat ML Cap'ilal Resources would'sell to other affi-liated , corf>orations the stock of T certain subsidiary corporations that were ehgagéd in lending and financing activities>or that owned other as'áets'fand büsinesses that were not related to its.·core . consumer leasing operations (collectively referred to as- the 1987 retained assets) .20 A. * Petitioner Seeks a Purchasert e ' r Mèi-rill Parent decided to conduct the sale of ML Capital Resources' utiilizing a bidding: process . By February 17, 1987, a 20Senior .management decided which assets to' sell and which assets to retain within the consolidated group. - 26 - draft preliminary offering memorandum regarding the sale of the stock of ML Capital Resources (preliminary offering memorandum) had been prepared, as well as a list of prospective buyers and a projection of an estimated sale price for ML Capital Resources of between $70 and $80 million, on which was calculated a potential after-tax gain of between $43.5 and $88 million. At some point between February 17, 1987, and March 1987, the preliminary offering memorandum was finalized. If a potential purchaser was interested after reviewing the preliminary offering memorandum, Merrill Parent required that the potential purchaser sign a confidentiality letter, at which point the potential purchaser could request a confidential 3-volume detailed offering memorandum dated March 1987 regarding the specific leases in ML Capital Resources' portfolio (3-volume offering memorandum). Under the bidding procedure established by Merrill Parent and set forth in the 3-volume offering memorandum, interested purchasers were required to submit "preliminary 4 indications of interest", including a proposed cash purchase price, by March 27, 1987. Immediately thereafter, ML Capital Markets and ML Capital Resources would select a limited number of potential purchasers that would be given the opportunity to perform detailed due diligence. At that.time, prospective purchasers would be given proposed forms for a stock purchase agreement. Prospective purchasers were required to submit bids - 27 - as to price·and terms by April 10f 1987.5 The..3fvolume'offering memorandum -indicated that ML Capital Resources -"does not intend to engage .in substantial negotiations with: respect to. the terms of the Stock Purchase Agreement". and proposed an April 30, :198.7, (cid:16)042 closing date. (cid:16)042 On March 13, 1987, :the· chairman of the board of ML Capital Resources authobized a five-person team to pursue the divestiture of ML Capital Resources, .'four of whoin had been .involved in the sale of ML Leasing. Mr. Sands again was appointed as; chief ne^gotiator. . . In and around March 1987, Merrill Parent contacted various potential' purchasers regarding the sale of. ML Capital Resources. The ultimate purchaser, GATX Leasing_ Corp. (GATX) , -on behalf of. itself" and ·BCE 'Development,, .Inc. (BCE) , a majority-owned subsidiary of Bel.1 Canada'Ente prises (collectivelý referred. to as GATX'/BCE unl'ess otherwise indicated) , e preliminary offering memorandum sometime during March 1987 :apparently.rreceived the · e because ML Capital Markets sent GATX/BCE a confidentiality agreement dated March 23, 1987. B. Section 304 Cross-Chain Sales 1. Five Subsidiaries Effective March 28 and March 30, 1987, respectively, the boards of directors of ML Capital Resoûrces and Merrill Lynch Realty, Inc. '(ML Realty o MLRl), a wholly owned subsidiary of - 28 - Merrill Parent, approved the sale of all the stock of five subsidiaries wholly owned by ML Capital Resources to ML Realty: Merrill Lynch Business Financial Services, Inc. (Financial Services or MLBFS);" Merrill Lynch Private Capital, Inc. (Private Capital or MLPC);" Merrill Lynch Venture Capital, Inc. (Venture Capital or MLVC); Merrill Lynch Energy Investments, Inc. (Energy Investments or MLEI); and Merrill Lynch R&D Management, Inc. (MLRDM) (collectively referred to as the five subsidiaries). ML Capital Resources and ML Realty entered into a stock purchase agreement dated March 30, 1987, for the sale of stock of the five subsidiaries to ML Realty. The purchase price of the stock of the five subsidiaries was $53,972,607 (which was allocated to each subsidiary based on their respective book values). The sale closed on March 30, 1987. Immediately before its purchase of the five subsidiaries, ML Realty had accumulated earnings and profits that exceeded the purchase price. The sales of the five subsidiaries were five of the eight cross-chain sales Before the sale of Financial Services, effective Mar. 30, 1987, ML Capital Resources contributed certain loan receivables and other assets and liabilities with a net book value of $10 million to Financial Services. part of included in the assets of ML Capital Resources at sale of These assets and liabilities were intended to be the its stock. the 1987 retained assets and thus were not the time of "Private Capital had a substantial negative book net worth as of Mar. 29, 1987. Before the sale of Private Capital, effective Mar. 30, 1987, ML Capital Resources contributed $32 million in cash to the capital of Private Capital and thereby created a positive book net worth in Private Capital. - 29 - at issue for the taxable year ended December«25,- .1987: t The parties agree that these sales were section 304- transactions. 2. ML Interfunding Merrill Lynch r Iríterfunding,' Inc . .. (ML Interfunding or. MLI) -, was a wholly owned subsidiary of ML Capital Resources . i By . resolutions dated March 27, 28, and 30, .1987., the boards of directors of- ML Capital. Resources and ML ' Asset Management approved the' sale4 of all the stock. of ML Interfunding to ML Asset Management ." ML, Capital Resources and ML Asset .Management entered into a· stiock purchase agreément dated March 30, 1987, which profided for an initial purchase price of-. $160 million to - be paid at closing with the purchase price to bei adjusted as soon as practicable. by subsequent âgreement of ML Asset Management and ML Capitali Resources'so as to equal the fair market value of the shares as of March 30, 1987. The ÷sale closed on March 30, 1987.M Immediately >before its!*purchase of. ML Interfunding, ML By resolution dated Mar. 27, 1987, the board of directors of ML Interfunding declared and paid a dividend having a total value of $100 million to 'ML Capital Resources of certain · preferred stock that it owned in .Gelco Corporation (Gelco) plus the shares of certainrunaffiliated corporations (portfolio stock) , which it had acquired as a dividend from - its wholly owned subsidiary, ML Portfolio Management, by resolution dated Mar. 26, 1987. contributed the portfolio stock and the Gelco .shares to Merrill Lynch Property Holdings, of ML Capital Resources. By fesolution dated Mar. 28,' 1987, ML·Capital Resources Inc., a direct wholly owned subsidiary . In a valuation report dated Apr.. 18, 1988,. Deloitte Haskins-Sells determined that the fair-market value of the stock . (continued. . ) - 30 - Asset Management had accumulated earnings and profits that exceeded the purchase price. This is the sixth cross-chain sale at issue for the taxable year ended December 25, 1987. The parties agree that this cross-chain sale was a section 304 transaction. 3. Leasing Equipment By resolutions dated April 3, 1987, the respective boards of ML Capital Resources and Merrill Lynch, Pierce, Fenner & Smith, Inc. (MLPFS), a first-tier wholly owned subsidiary of Merrill Parent, approved the sale of all the stock of ML Leasing Equipment Corp. (Leasing Equipment or MLLE), a wholly owned subsidiary of ML Capital Resources, to MLPFS." ML Capital Resources and MLPFS entered into a stock purchase agreement dated April 3, 1987. The purchase price for Leasing Equipment's stock was $119,819,690. The sale closed on April 3, 1987. Immediately before its purchase of Leasing Equipment, MLPFS had accumulated "(...continued) Based of ML Interfunding as of Mar. 30, 1987, was $181,080,000. on such appraisal, ML Asset Management and Consumer Markets, as assignee of ML Capital Resources' rights under the ML Interfunding stock purchase agreement, agreed that ML Asset Management would pay Consumer Markets $26,413,365 as the final payment of which was the difference between $181,080,000 and the net consideration paid at closing of $154,666,635. the purchase price for the ML Interfunding stock, "On Apr. 2, 1987, ML Capital Resources contributed the stock of MLL Corporate Partners, Resources engaged in nonleasing activities, Inc., a subsidiary of ML Capital to Leasing Equipment. 31s - earnings and pròf itis that exceeded . the purchase price . This is the seventh cross-chain sale at issue for the taxable year ended Deöember 25, 1987. The parties agree that this cross'chain sale was a se'ction 304 transaction-. C. The a Sale' óf ML- Capital Resources . Pursuant to the bidding p ocedure govern1ng the- sale of ML Capital Resources; petitioner received five or six bids, includ'ing one from GATX/BCE. The bid from GATX/BCE, dated April 21, 1987, contained the principal terms upon iwhich GATX/BCE was prepared to Òurchase all the òütstanding shares of ML Capital Resources (Apri'l 21, 1987, bid proposal) . GATX/BCE proposed a base purchase price of $63 million, .plus 70 percent of certain . residual payments in excess ofn$27 million. GATX/BCE's April 21, 1987, bid proposal specifically provided, among .other _things, the following coñditions precedent: (1) GATX/BCE would enter into a purchase agreement ohly upon the×receipt of all requisite corporate approvals, including approvals .by the -boards of GATX and BCE, and (2) satisfactory completion of further: due diligence . The further 'due diligence included, but -.was not limited t'à*, review of the. basid and related documentation, review of audited firiancials of -the IBM partnerships,and iML .Capital Although(cid:16)042thebidding proced re required each pròspective purchaser to submit by Mar. interest outlining a proposed purchase price, no information regarding what, .27, 1987, preliminary indications of if anything, GATX/BCE submitted. the record contains - 32 - Resources, and review of a report prepared by IBM Credit Corporation for the partners of the IBM partnerships. On April 23, 1987, a formal presentation regarding the sale of ML Capital Resources was made to Merrill Parent's board of directors at its regular meeting. The presentation was made by Courtney F. Jones. The substance of the presentation was summarized in a written summary and slides illustrating the details of the plan for the sale of ML Capital Resources. The written summary began as follows: We have identified a significant economic benefit, based on an opportunity in the tax law, in selling Merrill Lynch's proprietary middle market business. structuring a transaction to sell our leasing subsidiaries, Merrill Lynch Capital Resources. realistically result statement gain of approximately $73 million. We believe that such a sale could This economic benefit can be achieved by in an after-tax financial lease the stock of one of In conjunction with Merrill Lynch Capital Markets we have identified a purchaser. presentation is to secure your approval Executive Committee to approve the final details of transaction and sign the definitive agreement. The purpose of this for the the The written summary laid out the various steps of the plan to dispose of Merrill Lynch's proprietary middle-market lease business culminating in the sale of ML Capital Resources' stock. The written summary informed the board of.directors that-- due to the exhaustion of tax benefits, many of * [ML Capital Resources'] taxable income in 1987. the leases will service the debt and the tax liability generated by the * leases have begun to produce in most years not be sufficient to The projected cash flow from * - 33 - .leases., Accordingly,÷ it is an opportune time to sell this business to an appropriate purchaser. The written summary also informed the board of directors that because Merrill Parent did not intend to withdraw from the "Lending Activities" aspect of the business, Merrill Parent "will first remove the assets and operations related to the businesses we wish to retain" and will "transfer all of the subsidiaries of ML Capital Resources elsewhere within our Corporate structure" in three steps before ML Capital Resources' stock was sold: (1) ML Capital Resources had already sold ML Interfunding's stock to ML Asset Management7for its net bòok value of approximately $160 million; (2) ML Capital Resources had already. sold, the stock of certain of its subsidiaries to ML Realty Inc. for approximately $50 million; and (3) ML Capital Resources will declare a $459 million* dividend to its parent company,. Merrill -Lynch Consumer Markets Holdings, Inc. (Consumer Markets), consist ing of cash received from ML Asset Management and ML Realty, -existing cash balances, the stock of the remaining .subsidiaries, receivables, and liabilities. . The board was informed that after these transfers we~re completed, ML Capital Resources "will have equity of approximately· $40 million" and "we will be in a position to sell" ML Capital Resources' stock. The presentation identified "a joint venture between BCE Development, Inc., a wholly owned U.S. subsidiary of Bell- Canada and GATX I)easing Corporation," a wholly owned subsidiarý of GATX -·34 - Corporation" as the likely purchaser and estimated a sales price of $70 million, consisting of $62 million in cash plus the assumption of $8 million in liabilities. The presentation also explained how the sale price was determined, quantified the after-tax income and the tax benefit that would result from.the sale, explained the tax risks of the transaction, and recommended the creation of a $35 million tax reserve for the transaction." In calculating the recommended reserve, the presentation stated the following: it is the tax aspects that make As you can imagine, this sale especially attractive. in conceiving this transaction, has creatively applied two different tax concepts to maximize the calculation of Merrill Lynch's tax basis in ML Capital Resources. The Tax Department, * * * * * The second tax concept deals with the creation of approximately $210 million in tax basis. This basis is created by selling the stock of certain ML Capital Resources subsidiaries to MLAM and ML Realty Inc. $210 million, rather than distributing this value to ML Consumer Markets Holdings Inc. Under the tax rules the sale is recharacterized as two separate transactions; a dividend by MLAM and MLRI to MLCR of $210 million and a contribution to the capital of MLAM and MLRI by MLCR of approximately the same amount. by MLCR increases Merrill Lynch's tax basis in MLCR by $210 million. MLCR's contribution to the capital of MLAM and MLRI has no effect on tax basis. The dividend received for "The $35 million tax reserve consisted of a $14 million reserve for the possible disallowance of the deemed dividend resulting from the cross-chain sale and a $21 million reserve for lost tax benefits if certain income projections were not realized. - 35 - The final step is for MLCR to declare a dividend of cash, certain subsidiaries, and receivables to ML Consumer Markéts Holdings Inc. This _intercompany dividend triggers a taxable gain that also increases our tax basis in MLCR at the time of sale, $340 million. -What remains is our.. tax basis .- As our basis in the stock is greater than the sales price', the sale results in..a $278 million long term capital term capital gains, million. resulting· in a.-tax benefit of $94 loss. This capital loss will offset other long The intercompany dividend to ML Consunier Markets Holdings"-triggers a_ tax liability of $8 million, which reduces the maximum potential million tax benefit to .$86 2 -- a. The 'summary represented .that Merrill Parent's .corporate law department and outside counsel had already prepared a proposed definitive sales agreement and that the purchaser.had submitted its desired contract changes, which were being negotiated. Although the summary requested the ·board of, directors to authórize the executive committee to .approve the final details of the transaction and to sign the definitive.agreement for a :;. minimum sales price of $70 million, the board authorized the proper officers to finalize .the -sale of all the capital stock of ML Capital Resources for not less than $60 million,. subject to adjustments based on the valuation.of. certain assets. - D. GATX/BCE Modifies Its Initial Bid In a letter addressed to Mr. Sands dated April 27, 1987, GATX modified its April 21, 1987, bid proposal (April 2'7, ..1987, - 36 - bid proposal)." GATX reconfigured its April 21, 1987, bid proposal from $63 million, plus 70 percent of the discounted value of the residual.payments in excess of $27 million, to $66 million, plus 40 percent of the discounted value of residual payments in excess of $29.5 million. The April 27, 1987, bid proposal stated that, except for the replacement of the original paragraphs in the April 21, 1987, bid proposal concerning the purchase price, "all other terms and conditions remain unchanged." As of April 27, 1987, GATX/BCE had not evaluated the lease portfolio of ML Capital Resources, and the proposed purchase price was based on the representations made in the offering memorandum. E. Nonbinding Letter of Intent On May 22, 1987, Merrill Parent entered into a nonbinding letter of intent with GATX/BCE for the sale of the stock of ML Capital Resources (nonbinding letter of intent). The nonbinding letter of intent confirmed that Merrill Parent had provided 4 GATX/BCE with a draft sale agreement containing a description of the assets in which ML Capital Resources had an equity interest as of the proposed closing date. The nonbinding letter of intent set forth pricing terms identical to those set forth in GATX's April 27, 1987, bid proposal; i.e, $66 million'plus 40 percent of "The record is unclear as to whether a second round of bids was conducted or whether petitioner merely asked GATX/BCE to modify its original bid. - 37 - th'e -discountied value of . residual payments i in :excess : of , . $29, 500 , 000 . The- nonbinding letter of intent specif ica'lly stated that the parties were bound by the; terms of their March 23, 1987, confidentiality agreement... The nonbinding letter of intent also stated: [GATX/BCE] and * * * [petitioner] , (ii) no The consummation of the- acquisition contemplated herein is subject to·(i) negotiation and execution of definkitive agreements acceptable in form and. substance to * * * change having occurred in the federal or the regulations of thereunder that would materially adversely alter the economic effect of the transactions contemplated herein,. (i'ii) approval of herein by'* * by the. appropriate corporate· authorities for- * * -* [GATX/BCE] , financing by * and appropriate closing conditions. (iv) consummation of satisfactory secured * -[GATX/BCE] and (v) other customary [petitioner's] Executive Committee and the U. S. Treasury promulgated * * income tax laws the·transactions contemplated F. GATX Finance Committee Approval On or about May 29, 1987, the GATX Finance Committee met to consider thé proposed acquisition of ML Capital Resources. A written proposal presented at that meeting stated that GATX was "awarded the transaction" based on its initial and modified bid proposals and was "invited to perform a due diligence investigation." The written proposal also stated that, upon completion of the due diligence process, GATX/B.CE reserved the right to adjust the purchase price based on its due diligence findings in the event that any information in the 3-volume offering memorandum was incorrect. The written proposal also recommended that the base purchase price be reduced to $63.3. - 38 - million as a result of an increase in the reserve for losses and a net reduction in expected future residual values. On June 1, 1987, the GATX Finance Committee approved the proposal to acquire the capital stock of ML Capital Resources for a purchase price of $63.3 million, subject to certain specified conditions. The GATX Finance Committee recommended that the proposed transaction be forwarded to the GATX board of directors. G. Continued Negotiations After executing the nonbinding letter of intent, petitioner and GATX/BCE continued their negotiations. In conjunction with GATX/BCE's due diligence review of the lease portfolio, petitioner and GATX/BCE agreed that it was impractical to examine each lease separately because the lease portfolio consisted of such a large number of relatively small leases. Therefore, they agreed to use a "statistical sampling technique", whereby the parties would jointly pick a certain number of leases at random to examine in significant detail and compare them to the representations made by Merrill Parent in the 3-volume offering memorandum. The results of the "statistical sample" were not satisfactory to GATX/BCE; i.e., a larger than expected portion of the leases did not coincide with Merrill Parent's representations in the 3-volume offering memorandum. From May 22 through June 25, 1987, negotiations continued in order to accommodate the adjustments revealed by the due - 39 - diligence review. Among other concessions; petitioner represented to GATX that to the best of petitioner's knowledge, as of the date of the closing, the schedules'in . the contract were the actual status of the individual leases and) to the extent they were not, there would be a postclosing adjustment to accurately reflect the discrepancies. . ' . During the negotiations, GATX requested £hat ML Vessel (cid:16)042 Leasing Corporation (Vessel Leasing), a wholly owned subsidiary of ML Capital Resources, not be included in the ML Capital Resources portfol'ió because GATX/BCE could not own the <assets in Vessel Leasing due to restrictions under Federal: laws.29 By resolution dated June 10, 1987, the respective boards of ML Capital Resources and ML Asset Management aßproved the sale of all the stock of Vessel 'Leasing to ML Asset Management . On that same date, ML Capital Resources and ML Ásset Management entered into a stock purchase agreemènt with respect to Vessel Leasing's stock.' The purchase pkice'for the stock was $367,481. The sale closed on June 10, 1987. Immediately before its: purchase of Vessel Leasing, ML Ässet Management hàd accumulated earnings and-. profits that! exceeded the purchase price. This is the eighth cross-chain sale at issue for the taxable' year ended December 25, 29BCE was a Canadian corpóration and could ~n t ec ally o*wn a vessel that had been financed by the U.S. Government. - 40 - 1987. The parties agree that this cross-chain sale was a section 304 transaction. H. Sale of ML Capital Resources is Finalized By resolution dated June 18, 1987, ML Capital Resources' board of direc.tors authorized the sale of its stock to GATX/BCE. As of June 25, 1987, Merrill Parent, Consumer Markets, ML Capital Resources, and GATX/BCE entered into an agreement for the purchase and sale of stock of ML Capital Resources for a fixed cash consideration of $50,447,996, payable at closing (subject to adjustments for working capital and certain residual proceeds), and a contingent cash payment based on the realization of certain residual values due on or before January 1, 1995, but not to exceed $15 million. The sale closed on June 26, 1987. Merrill Parent represented.to GATX/BCE that, to the best of its records and knowledge, as of the date of the closing the schedules attached to the contract would contain accurate information about each of the individual leases. To the extent that the schedules did not contain accurate information, there would be postclosing adjustments. With one exception, Merrill Parent did not guarantee the obligations of the lessees. Merrill Parent also did not guarantee the residual values of any leases. On its consolidated Federal income·tax return for the taxable year ended December 25, 1987, petitioner claimed a long- term capital loss in the amount of $466,985,176 from the sale of ML Capital'Resources' stock,' computed as follows: - 41 - Sale price Less.: - Capital loss basis in ML Capital Resources $ 49, 581, 304 516,566,480 (466, 985, 176) III. Notice of Deficiency Respöndent tùailed a timely notiice of dèf cien y to petitibner on Áugust 20, 1998, whïch set forth ä number of adjustments to pétibioner' s t'axable incomê för t'h'e (cid:0)570earsat issue.: The only adjustmerits in dispiite ase rSsnondent's determinations (i) decreasing thé long-tierm capital loss reported bý ML Capital ResourcÀs ón Êhe 19È6 sa'le of th stock of ML Leasing to Inspiration on the ground t·hah ML Capital Resources basis in the stfock was 'overstátied by $73',320,4 1, 'and to~ (ii) décreasirig thÄ ldng-term capital loss feboft!ed bý Consúmer Markets on thä 1987 sale of thé stock of ML 'Capital Resources to GATX/BCE on 'thë ground that Cörfsumer Markets baá s in the stock was overstated by $328',826,143 3° OPINION I. Applicable Statutes The'parties agree that sectïon 304 applies to the nine cross-bhairi sales a'nd that 'section 304 t-reats the c1oss-chain 3°The $328, 826, 143 adjustment' to the . basis; of the stock of (i) Capital Resources in respondent's notice equals the sum of the $53, 972, 607 aggregate purchase price for the .five subsidiaries, Interfunding, (iii) the $119,819,690 final purchase price for Leasing Equipment, and (iv) Leasing. (ii) the $154,666,365 initial purchase price for ML the $367,481 purchase price of Vessel - 42 - sales as redemptions. The parties disagree, however, as to whether the redemptions must be taxed as distributions in exchange for stock under section 302(a) or as distributions of property under section 301. Before section 304 was enacted, a parent corporation could extract earnings from its related corporations while avoiding ordinary dividend treatment by selling the stock of one of its controlled corporations to another of its controlled corporations. See, e.g., Wanamaker Trust v. Commissioner, 11 T.C. 365 (1948), affd. per curiam 178 F.2d 10 (3d Cir. 1949). In 1950, section 304 was enacted to prevent the bailout of corporate earnings and profits through sales involving subsidiary corporations. See Revenue Act of 1950, ch. 994, 64 Stat.906; see also H. Rept. 2319, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 380, 420; S. Rept. 2375, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 483, 514. In 1954, section 304 was amended to prevent the bailout of corporate earnings and profits using brother-sister corporations. See H. Rept. 1337, 83d Cong., 2d Sess. A79 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 239 (1954). This antibailout provision provides the analytical framework for both parties' arguments in this case. The pertinent part of section 304 (a) (1) provides that, for purposes of section 302, if one or more persons are in control of each of two corporations, and in return for property, one of the - 43 - corporations acquires«stock insthe other corporation from the person so in control,- then such property shall be: treated as a distribution !in redemption of the stock of the corporation acquiring súch stock. See also Rev. Rul.3.70-496, .1970-2 ,C.B. .74.. If a stock acquisition is governed,by section 30,4 (a) , any . determination as to whether the stock acquisition is to be , treated as a:distribution :in part or. full payment in exchange for the êt'ock must be made. by reference to the .stock of the. issuing corporatión."· Sec . 304 (b) .(1) . . Section 318;,- as. modif ied by section 304 (b) (1)., applies in determining whether the requisite control under section 30'4-(a),exists. . . Section'304 (a-) (1) recharacterizes what -appears to ,be a sale as a rëdemption· by treatirig the sale proceeds as a distributiön i@redemption of the acquiring corporation's stock. and requiring that the tax consequences of the distribution be determined under sections 301 and' 302 . Section 302 (a) provides. that if. a corporation redeems its stock, the redemption- shall .be .treated as a distribution in part or full payment in exchange for the' stock if the redemption qualifies as one of four types of redemptions listed in section 302 (b) --a redemption that is not esseÀtidliy equivalent to a dividend (section 302 (b) (1) ) , a substantially disproportionate redemption of stock (section 302 (b) (2)), a ' "In· this case, J the^issuing corporations are Merlease, the five subsidiaries,iML Interfunding, Leasing Equipment,.and Vessel Leasing. See sec. 304 (b) (1) . - 44 - redemption in complete termination of a shareholder's interest- (section 302 (b) (3)), or a redemption from a noncorporate shareholder in partial liquidation (section 302 (b) (4)). If the deemed redemption does not qualify under section 302 (b), then the distribution is governed by section 301." In this case, respondent relies only upon section 302 (b) (3), claiming that the deemed section 304 redemptions, when integrated with the sales of the target corporations, completely terminated the target corporations' ownership of the issuing corporations. Section 302(b) (3) provides that "Subsection(a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder." See Bleily & Collishaw, Inc. v. Commissioner, 72 T.C. 751, 756 (1979), affd. without published opinion 647 F.2d 169 (9th Cir. 1981). The attribution rules under section 318(a) apply in determining ownership of stock for purposes of section 302. See sec. 302(c) (1). II. The Parties' Arguments Regarding the Applicable Legal Standard 4 Ordinarily, whether a redemption results in the complete termination of a shareholder's interest in a corporation under section 302 is determined immediately after the redemption. Sec. »Sec. 301(a) provides: "Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect its stock shall be treated in the manner provided in subsection (c)." to - 45 ^- - 302 (b) (3)1 and (c) (2) (A) . In some circumstances, however, both taxpayers Land thé commissioner have argued that- a redemption i shouldknot be tested unders section -302 (b) immediately after the redemption but only after 'another related transaction has · ' occurred. See, e.g., Bleily &,Collishaw, Inc; v."Commissioner, supra; bNiedermeyer V . Commissionér, 62 T . C 280 (1974 ) , af f d . (cid:16)042535 F.2d 500 (9th Cir. 1976) . c . ·. ,.,. . In this^case, petlitioner, contends that the deemed 'section 304 re'dêmpt iòns, i . e . , .the' nine cros s -chain sales , should be tested under- sëction ·302 (b) (3) d without integrating7them with the later sales òf-the target corporations. > Petitioner asserts that the deemed seátion' 304 redemptions, standing alone, did not . completely terminate thé÷target corporations'z actual and construòtive ownership interes!t ·in the > issuing corporations s . because, under i the i attribution rules of. section 18; the target . corporatiòns continued tö hold an ownership. interest in. those . corporations following the redemptions. Respondent: contends, however, thät the' section 304 redemptions a at issue in this case i.e., the-nibe cross-chain salesymust be integrated with the lateri sales of the target. corþorations in 'order. to decide under section-302 (b) (3) whether the target corporations' constructive ownership of the transfer'red stock under section 318 ,was completely terminated. The parties rely onudifferent legal standar'ds .in support -of the^ir respéctive positions. - 46 - Petitioner relies on a test articulated by this Court in Niedermeyer v. Commissioner, supra at 291. Petitioner claims that this Court has consistently used the Niedermeyer test to decide whether a redemption should be integrated with other allegedly related transactions in order to ascertain the tax consequences of the redemption. In Niedermeyer, we held that, if a redemption, standing alone, fails to qualify under section 302 (b) (3), the redemption will nevertheless be subject to sale or exchange treatment "Where there is a plan which is comprised of several steps, one involving the redemption of stock that results in a complete termination of the taxpayer's interest in a corporation". Id. at 291. However, we required that "the redemption must occur as part of a plan which is firm and fixed and in which the steps are clearly integrated." Id. Petitioner describes the Niedermeyer.test as a "variation of the step transaction doctrine" and asserts that "While the test permits amalgamation of steps that are not subject to an 'absolutely' a binding contract, it leaves little room for contingency". Petitioner relies on this Court's opinions in Monson v. Commissioner, 79 T.C. 827, 837 (1982), Roebling v. Commissioner, 77 T.C. 30 (1981), and Bleily & Collishaw, Inc. v. Commissioner, supra at 756, to support his position. According to petitioner, each of the three above-cited cases had the following facts in common: (1) Each case involved a partial redemption that was - 47 - held tó be part oft a firm and 3fixed plan; (2) in-each case, the complete termination of the shareholder's interest vrequired .a party not controlled by the taxpayer to acquire :thetremaining shares*; and (3) at 3the~time of the redemptión, the third-party purchaser had-already negotiated-for'and made a firm commitment to acquire the remaining xshares . Petitioner :extracts from the cases the conclusions that, where an alleged plan to_completely terminate a shareholder's ownership requires tthe participation of a third party, the third party must häve committed to the plan at least in súbstance on ör before the redemption date in order for Niedermeyer's "firm and fixed plan" requirement to be satisfied and that a taxpayer's unilateral plan can never be a firm and fixed .plan. 'Petitioner s analysis and arguments, therefore, focus primarily on whether the!re was an agreement in substance with the third-party·purchasers of the target«corporations' stock on the dates of the deemed section 304:redemptions; i.e-., the nine cross-chain sãles. Respondent rejects petitioner's attempt:to focus the Court's eye primarily on the third-party purcha.sers who acquired. the. . targeh cÄrpofatioås stock and ärgue[Â fÒr the applicatiòn of an intent-based test drawn from the decision of the U.S. Court'of Appeals for the Sixth Circùit in Zenz v. .Quinlivan, 213 F.2d 914 (6th Cir.. 1954) and pertinent opinions of thi's Court, including but n t limit!ed to, Niedermeyer v. Commissioner, supra. Citing - 48 - Zenz, respondent argues that a partial redemption, which is one of a series of transactions intended to terminate completely a shareholder's ownership interest in a corporation, must be integrated with the related transactions for purposes of section 302(b) (3) and treated as a sale or exchange. Under respondent's articulation of the relevant legal standard: As a result of the decision in Zenz, other in testing in a corporation. Niedermeyer the sequence of planned transactions is (articulating a Zenz-like standard). the Zenz doctrine make transactions must be taken into account whether a redemption is a distribution under § 301 or a sale or exchange under § 302(a) where the redemption is part of a firm and fixed plan to terminate a shareholder's interest v. Commissioner, 62 T.C. 280 (1974), aff'd 535 F.2d 500 (9th Cir. 1976) As subsequent applications of clear, irrelevant where the overall result termination of a shareholder's interest. United States v. Carey, 289 F.2d 531 (8th Cir. 1961) (holding that Zenz applies when the redemption precedes the stock to a plan); see also B. Bittker and J. sale pursuant Eustice, Federal Income Taxation of Corporations and Shareholders, 19.06[3] at 9-42 (6th ed. 1994) ("[I]f the form of the distribution is cast as a redemption, treatment as a sale under Zenz is highly likely unless the preliminary redemption transaction can be separated from the later sale.") [Fn. ref. omitted.] is the complete its In its reply brief," petitioner dismisses respondent's reliance "In their reply briefs, both parties argue alternatively the applicable standard is derived from the step transaction three tests for deciding whether the that doctrine and that one of step transaction doctrine should be applied, but not all tests, must be used in this case to analyze the sec. 304 redemptions and the later sales. Petitïoner contends that only the binding commitment test should be used, and respondent contends that only the end result test should be used. detailed description of Commissioner, T.C. Memo. 2002-97. the three tests, see Andantech L.L.C. v. three For a We decline to apply any of the (continued...) on Zenz, claiming that "its relevance to -this case is at best . tangential." Petitioner notes that Zenz involved both a tax year prior to the enactment of section 302 and .a different factual situation. In Zenz, -the -sole shareholder of .a corporation sold some of .her stock first, and a short time, later, 3the. issuing , , . , corporation redeemed the remainder of her- stock. Petitioner distinguishes 2ènz from the instant case because n"The order- of , sale and subsequent redemption was chosen to -reduce taxes--that is, to avoid dividend treatment from the;redemption leg", the redemption completely terminated the _taxpayer's interest in the (cid:16)042 corporatión, and the Commissioner was attempting to,reorder the transactions in order to obtain dividend, treatment for the . redemption proceeds. Petitioner urges .this Cou'rt _to.limit the application of the Zenz intent-based test to cases where the form of the transactions and the intent of the taxpayer coincide as it did' in Zenz and tc7 decline to äpply the test in· cases such as this where the issue to be decided is "whether a r'edemption that does not. terminate the shareholder's 'ìnterest and a later- sale that does terminate that interest are sufficiently related to justif y trea.ting a non-terminatinc redempt^ion as part of the later sale transactioh. - ( c. : continued) . three tests because the applicable legal standard is that identified elsewhere in this opinion. - 50 - III. Analysis of the Nine Cross-Chain Sales A. In General Each party claims that the applicable legal standard is clear and that the legal standard, when applied to the facts, supports a decision in that party's favor. The parties rely on many of the same cases to support their respective positions. The parties' arguments, however, are so diametrically opposite regarding their interpretation of the cases that we must turn to an examination of the principal-cases on which both parties rely." A careful examination of the pertinent facts and holdings of these cases is necessary to respond adequately to the parties' detailed and often tortured parsing of these cases in support of their respective arguments. "Petitioner also relies on several anticipatory dividend Inc. v. Commissioner, 89 T.C. In each of the anticipatory cases to bolster its arguments regarding the cross-chain sales. See TSN Liquidating Corp., Inc. v. United States, 624 F.2d 1328 (5th Cir. 1980); Litton Indus., 1086 (1987); Gilmore v. Commissioner, 25 T.C. 1321 (1956); CoffeV v. Commissioner, 14 T.C. 1410 (1950); Rosenbloom Fin. Corp. v. Commissioner, 24 B.T.A. 763 (1931). dividend cases decided by this Court, we held that a corporation's distribution of a dividend to a shareholder before the shareholder sold his stock was taxable as a dividend and not as part of not with respondent distinguishable from this case, and we do not consider them further. Income Taxation of Corporations and Shareholders, par. 8.07[2][a], at 8-66 (7th ed. 2002) it is important its target stock to the corporation because use of format will ("In order to obtain the hoped-for dividend result, that the selling shareholder not surrender any of that the anticipatory dividend cases are involve the exchange of stock for consideration. We agree the later stock sale. The dividend transactions did likely trigger sale treatment.") the redemption See Bittker & Eustice, Federal 1. 'Zenz v. Quinlivan .» . . . 51 - In Zenz v. Quinlivan,'.213 F.=2d 9143.(6th Cir. -1954), the sole shareholder of a corporation decided tos sell the corporation to a compet:itor. =Because the. competitor did not want to assume.the tax liabilities associated with the corporation's accumulated earnings fandLprofits, the»competitor purchased only part of_ the shareholder's stock. Three weeks later, after a corporate reorganization and corporate'action, the corporation.redeemed -the balance of the shareholder's stock. On her tax.return, the redeemed shareholder reported the transaction as,a..rèdemption of all of her stock under section,115(c1) of theaInternal Revenue Code of 1939 and claimed.that thè transaction must..be treated as a sále or exchange of :stock.' The Commissioner determined.that the redemptïon was essentially= equivalent to.the distribution of a taxable dividend and recharacterized the redemption'proceeds as diví dend incbme . - The CoÙrt·of Appeals for the Sixth Circuit reversed the decisión of the lower 'court, which had upheld.the Commissioner's determinatïon.' The Court of* Appeals acknowledged the "general. princißle" that "a t'axpáyer hast the legal right -to decrease the amount of what otherwise^would be his -taxes or'altogether.avoid them by mean.s which the law permits." Zenz v. Quinlivan,»supra at 916. The dourt of Appeals refused to decide -the issue presented based on'the taxpayer's motivation to.avoid taxes. - 52 - Instead, it examined the nature of the transaction in order to decide if it was, in substance, a dividend distribution or a sale. The Court of Appeals held that the redemption was not essentially equivalent to the distribution of a dividend because the taxpayer intended "to bring about a complete liquidation of her holdings and to become separated from all interest in the corporation", and the redemption completely terminated her interest in the corporation. Id. at 917. 2. Niedermeyer v. Commissioner Twenty years after Zenz v. Quinlivan, supra, was decided, this Court decided the tax effect of a sale in ·the context of section 304. In Niedermeyer v. Commissioner, 62 T.C. 280 (1974), the relevant issues were whether the taxpayers' sale of all of their common stock in American Timber & Trading Co., Inc. (AT&T) to Lents Industries, Inc. (Lents) was a redemption involving a related corporation under section 304 (a) (1) of the Internal Revenue Code of 1954 and, if so, whether the redemption should be treated as a distribution in exchange for the redeemed stock under section 302(a) or as a distribution to which section 301 applies. The taxpayers in Niedermeyer sold all of their common stock but not their preferred stock in AT&T to Lents on September 8, 1966. On the date of the sale, the majority of Lents' stock was owned by the taxpayers' sons. On December 28, 1966, the taxpayers contributed their AT&T preferred stock to the - 53 - Niedermeyer Foundatioh, a tax-.exempt organization. The« taxpayers alleged that the distribution- by Lents toe them was in exchange for their AT&T stock. The Commissioner alleged that the sal-e was a section 304 transaction between related corporations and that the distribution was a taxable dividend under sections 301 and 302. This Court.first considered whether the sale was a deemed redemption.uhder section 304'(a) (1). .After applying. the constructive ownership, rules of section 318(a) as required-by section 304 (c), this Court concluded that'the taxpayers were in control of both AT&T and Lents immediately prior to the sale and that the transaction in which Lents- acquired,.the·taxpayers' AT&T dommon stóck must be- treated as airedemption under section 304 (a) (1). - This Cóurt then addressed the taxpayers:' contention that, even if the sale were.treated; as a.deemed redemption under - section 304 (a) (-1), the taxpayers nevertheless were entitled to treat the distribution'from Lents as full:payment in exchange for their AT&T stock under section 302(a) by meeting one of the conditions of section 302 (b).. .After rejectingsthe >taxpayers' argument under sectioh 302(b) (1), the Courtrturned to their. argusents under. section 302 (b)..(3). Among other things, the taxpayers argued that:the~distributionewas in complete terminatioh of their ownership interest .in AT&T, contending that - 54 - the distribution and their subsequent gift of their AT&T preferred stock were parts of a single plan to completely terminate their actual and constructive ownership of AT&T before the end of 1966. In Niedermeyer, this Court acknowledged that, where there is a plan consisting of a redemption and one or more other steps that results in a complete termination of the taxpayer's interest in a corporation, section 302(b) (3) may apply. Niedermeyer v. Commissioner, supra at 291 (citing in support Leleux v. Commissioner, 54 T.C. 408 (1970), Estate of Mathis v. Commissioner, 47 T.C. 248 (1966)). The Court emphasized, however, that the redemption "must occur as part of a plan which is firm and fixed and in which the steps are clearly integrated." Id. After searching the record for evidence in support of the taxpayers' alleged plan, the Court concluded that the evidence presented was "too insubstantial to prove the existence of such a plan." Id. Among the facts on which the Court relied were the following: (1) The alleged plan was not in writing, and there was no indication that the taxpayers communicated their donative intention to the charity or to anyone. (2) The taxpayers' son who testified at trial about the Lents stock acquisition did not mention any desire on the - 55 - taxpayers' part to completely terminate their ownership interest in ·AT&T . - (3)-The taxpayers could easily haveichanged their minds regärding their áVowed intention to donate their preferred stock. (4) The3taxpayers failed to show that their alleged ,decision to donäte the preferred stock was in any way fixed or binding. - This Court'·emphasized that a plan·sufficient to.pass muster.under section 302 (b) (3)'did'not need to be "in writing, absolutely bindiNg, br 'communicated to" others"·but; that "the above-mentioned factors, 'all of which are lacking here, .tend to show a plan.which is fixed and firm." Id. at 291-292. (cid:16)042 Although the^ Court in Niedermeyer- did not expressly state that the plan td which it was.referring was a plan of.the-. - , taxpayers, suöh a conclusion is wärranted.· The Court rejected the taxpayers' self-serving testimony regarding their intention to donate and searched instead for.objective.evidence that the deemed:section 304 rëdemption and the later gift were.integrated parts of a firm and fixed .plan on, the part of the, taxpayers to completëly"terminate their ownership interest; i.e. , a plan consisting of clearly integrated steps to which the taxpayers. were firmly committed. . . e 3. Beniamin v. Commissioner S . . In Beniamin v. Commissioner; 66 T.C. 1084 (1976), affd. 592- F.2d 1259 (5th Cif. 1979),'the'issue presented was.whether the · 8 - 56 - redemption of the taxpayer's class A preferred voting stock by a family-held corporation was essentially equivalent to a dividend under section 302 (b) (1) of the Internal Revenue Code of 1954. In deciding the tax effect of the redemption, this Court addressed the taxpayer's argument that the redemption was pursuant to a plan of redemption that, when fully implemented, would completely terminate the taxpayer's ownership interest. The evidence at trial failed to disclose any common understanding among the shareholders or the redeeming corporation as to the timing of, or procedure for, the alleged redemption plan, nor was there any evidence of a concrete plan involving the shareholders or the corporation. After examining the record, this Court concluded there was no credible evidence of any firm plan to redeem, noting that "vague anticipation" was not enough to constitute a plan. Id. at 1114. 4. Paparo v. Commissioner In Paparo v. Commissioner, 71 T.C. 692 (1979), the taxpayers were shareholders of Nashville Textile Corp. (Nashville) and Jasper Textile Corp. (Jasper), two women's apparel manufacturers, and House of Ronnie, Inc. (Ronnie), the corporation that designed and marketed the clothing made by Nashville and Jasper. In order to improve their sales development effort, the taxpayers approached I. Amsterdam, a succe sful sales organization. The shareholders of I. Amsterdam als owned Denise Lingerie Co., a women'è apparel manufacturer. 'The taxpayers concluded that -if Ronnie could acquire Denise in exchange for Ronnie's stock, Ronnie would?acquire notionly Denise's'manufacturing.facilities but aläò theráales relationship with*I.-Amsterdam. -In the early part :of 1969, negotiations began., Denise's shareholders were interested in the taxpayer.'s ÷acquisition proposal,but·would not coñsider accepting-stock in a privately 'held corporation., . In conjunction with the proposed-acquisition of Deni.se,.the taxpayers began to explore' taking Ronnie.public.. The underwriter they had selected recommended ithat paahville andt Jaspersbe combined with Ronnie before the public offering. In, January 1970; the 'taxpayers' and another shareholder-of Nashville ·and Jasper agreed to sell all of their.stock to :Ronnie for $800,000.. The taxpayers contèmplated that the purchase price would be;paid from the proceeds of one or more public.offerings of Ronnie's ,. stock. . On March 30, 1970, the first public offering of Ronnie's stock was made. A portion of the sales proceeds was used to make the downpayment to·the Nashville and Jasper shareholders. On October 30, ~1970, sRonnie'entered into-an. agreement with Deniså's shareholders to acquire all of Denise's outstanding.. stock in exchange for.Ronnie's stock. . On April 20, 1972, a second public offering of Ronnie's stock was ,made. A portion. of the proceeds were used to pay the - 58 - balance of the purchase price owed to the Nashville and Jasper shareholders. The sole issue for decision was whether the amounts received. by the taxpayers in 1970 and 1971 from Ronnie in exchange for their stock in Nashville and Jasper were taxable as capital gains under section 302", or as dividends under section 301. The parties agreed that section 304 applied to the stock acquisitions in question and that, therefore, the transfer of Nashville and Jasper stock to Ronnie must be characterized as a redemption through the use of related corporations. The parties disagreed only with respect to the application of section 302. The taxpayers contended that the redemptions qualified as sales under section 302(a) because they met the requirements of either section 302 (b) (1) or (2). The taxpayers argued that the 1970 redemption was but one step in an overall plan to redeem their interest in Nashville and Jasper that ended in 1972 with the second public offering, and it was not the essential equivalent of a dividend. This Court rejected the taxpayers' argument, concluding that the record did not contain any compelling evidence of an overall financial plan covering both the first and the second public offerings. No formal written plan for the funding of the Relevant code provisions were from the Internal Revenue Code of 1954. - 59 - redemption through*subsequent public offerings: of Ronnie's =stock existed, and no corporate minutes were of fered into evidence to substantiate5such a plan. In"àdditioh, funding the redemption through·subsequent publiä offerings of Ronnie's stock wa(cid:0)541beyond the control öf the- taxpayers .· Although this Court acknowledged the taxpayers' apparent intent that. subsequent public offerings be made, the taxpayers had inade no promise to the underwriter, nor was theke any evidence of an agreement*to make another public offering. ST Bleily & Collishaw Inc. v.. Commissioner . In'Bleily & Collishaw Inc. v. Commissioner, 72 T.C. 751 (1979); the taxpayer owned 30 peröent of a corporation. The majority shärehòlder wanted sole control over the corporation, and the taxpayer' was'willing to sell. all of its shares to the majority shareholder. However, because 'the majority shareholder did not have sùfficient- funds to-purchase all of the taxpayer's shares at' that: t'ime, the majority shareholder .purchased only a portion of^ the taxpayer's 'stocki i Thereafter, over a period of~ appr'öximatèly 23' weeks, the corporation redeemed the balance· of the taxpayek' s stock in increments tied to the availability of . money to fund the redemptions. Although the ·taxpayer was under no contractùal or other legal obligation to' sell the rest of. its shares or have them redeemed if and when money became available - to fund additional acquisitions, this Court found that the - 60 - taxpayer intended to sell its shares whenever the money needed to fund the acquisitions became available. In Bleily & Collishaw, Inc., the issue before the Court was whether the redemptions met the requirements of section 302(b) (3) of the Internal Revenue Code of 1954.. We described the applicable legal standard as follows: Where several redemptions have been executed pursuant to a plan to terminate a shareholder's interest, .individual redemptions constitute, in substance, component parts of a single sale or exchange of entire stock interest. treat a series of redemptions as a single plan unless the redemptions are pursuant to a firm and fixed plan to eliminate the stockholder from the corporation. We have refused, however, the the the to Generally, a gentleman's agreement lacking written embodiment, communication, and contractual obligations will not suffice to show a fixed and firm plan. other hand, a plan need not be in writing, absolutely binding, or communicated to others to be fixed and firm although these factors all is the case. [Id. at 756; citations omitted.] tend to indicate that such On the Noting that whether a firm and fixed plan existed in a given case is necessarily a fact issue, we held that the requirements of section 302(b) (3) were met because the redemptions were part of a firm and fixed plan to eliminate the stockholder from the corporation. The record established that the corporation planned to eliminate the taxpayer as a shareholder and that the taxpayer had agreed to the sale of all its shares and to the purchase price, even though there was no binding.obligation on either party to consummate additional stock sales. - 61 - 6. Roebling v. Commissioner In Roeblfing v Commissioner, 77 T.C. 30 .(1981)., a taxpayer ownéd approximately 90 percent of the class B.preferred stock and approx:imately 45 percent of the ·common stock of Trenton Trust Co. (Trenton Trust)~. In 1958, Trentòn Trust adopted a plan of recapitalization to simplify and strengthen- its capital structur.e which, among*óther things, called'for,the redemption.of a specified amount- of the class B- preferredustock each year and required-Trenton Trust- to establish. a sinking fund for:that purpose. DuFing each of the·years 1965-69, part-of:the taxpayer's-class B preferred stock was redeemed, and in 1965 and 1966, "the 'taxpayër sold some shares. Among the issues presented to~thìs Court was whether the redemption.of the taxpayer's class B preferred shares was not essentially equivalent to a dividend within the meaning of section 302(b) (1) of the Internal Revenue Code bf 1-954 . . . Each year, Trenton Trust set.aside funds and decided how much of those funds.it would use to retire the class B preferred . . shares. Each retirement of shares required -action of Trenton Trust's board of directors and*the consent and.appro.val.-of the FDIC and the Department'of Banking and..Insurance of the State-of New Jersey.s^ Each year,- Trentoni Trust's; board of directors adopted a resolution to'applf for the necessary regulatory appróvals, and Trenton Trust then filed its applications. For - 62 - most of the relevant years, the applications were granted at least in part, but on one occasion the application was denied. Although the taxpayer in Roebling relied only upon section 302 (b) (1) to support her contention that each of the redemptions qualified as a sale or exchange under section 302(a), she argued that the redemptions were integrated steps in a firm and fixed plan to redeem all of the preferred stock and that the redemptions in the aggregate resulted in a meaningful reduction of the taxpayer's interest in Trenton Trust. Applying the same analysis used in cases involving section 302 (b) (3), this Court held that the redemptions were integrated steps in a firm and fixed plan even though there was no binding commitment on the· part of Trenton Trust to acquire the taxpayer's shares or on the taxpayer's part to tender her shares. The Court acknowledged that each redemption was subject to the financial condition of the bank and required regulatory approval, but emphasized that "this was about as firm and fixed a plan as a bank could have under the circumstances." Roebling v. Commissioner, supra at 55. 7. Monson v. Commissioner In Monson v. Commissioner, 79 T.C. 827 (1982), a closely held corporation owned by the taxpayer and his children redeemed all of the children's stock and a portion of the taxpayer's stock on July 30, 1976. Immediately following the redemption, the taxpayer was the corporation's sole shareholder. On August 2, - 63 - 1976, the taxpayer sold" all of his shares to a third party for cash ahd a promi-ssory note. e Minutes of a board of directors meeting held on-July 30; 1976, described the; redemption and -the subsequent sale of taxpayer's remainincJ stock to a third party as steps in the, sale The taxpayer reported the redemption proceeds as income from.the sale or-exchange of stock under -section - , 302 (a) . . Citing Zenz v. Quinlivan, 213 F.2d 914 (6th Cir. 1954), this Court examined the record to determine whether the .intent of the . taxpayer was to bring about a; complete .liquidations of his . . ownership iriterest in his corporation. Monson: v. Commissioner, súpra at 835-836. Because the record c-learly established that the· redemption of .the-taxpayer's stock wass part< of anc overall plan to terminate his entire interest: in his. closely held corporation,_ this Court. held that the redemption was either a complete termination. of the taxpayer/_s ,interest under section 302 (b~) (3) or wascnot' essentially equival.ent to a dividend,under section 302 (b) (1) . Id. at 837. In either event, section 302 (a) required the redemption to be. treated. as a- sale. Id.3 8. Applicable Lega;l Principles , The above-cited cases decided by this Court confirm that this Court has not integrated a redemption with one or more other transactions to decide whejther the requirements of section 302 (b) are met unless the redemption wås part 6f a firm'änd fixed plan to satisfy one of the conditions of section 302 (b) (such as, in the case of section 302 (b) (3), the complete termination of the taxpayer's ownership in the issuing corporation), and the steps of the plan were clearly integrated. Bleily & Collishaw, Inc. v. Commissioner, 72 T.C. at 756; Niedermeyer v. Commissioner, 62 T.C. at 291. Whether or not a plan existed is an issue of fact that must be resolved on the basis of all of the relevant facts and circumstances of a particular case. Bleily & Collishaw, Inc. v. Commissioner, supra at 756. The taxpayer has the burden of proving that the Commissioner's position regarding the existence or nonexistence of a plan is erroneous. Rule 142(a)." An analysis of whether or not a firm and fixed plan existed necessarily entails an examination of the taxpayer's intent. See Monson v. Commissioner, supra at 835-836 (citing Zenz v. Quinlivan, supra, with approval); Niedermeyer v. Commissioner, supra at 291 ("there was no evidence of communication of petitioners' asserted donative intention to the charity or to anyone"). It is the taxpayer's intention, as manifested by the taxpayer's participation in and agreement to the plan, that the search for a plan is designed to reveal. However, a taxpayer's self-serving statement regarding its intent or regarding the MPetitioner has not argued that the burden of proof should be placed on respondent, and we infer from the record that sec. 7491 does not apply because the examination in this case began before its effective date. existéñce ofla plan is given véry little;weight.in÷the* absence of supporting evidence tending to show vthat the Commissioner's position is erroneoust." Niedermeyer v. Commissioner, supra ;at 291. Instead, this Court has relied primarily;on objective evidence, such as a written plan, corporate minutes confirming the esisteñce 'of* a'plan, _or a writing^ or other communication from an involved.third party,_or the lack thereof, as the most compelling evidence of the existence of a firm and fixed plan evidencing a taxpayer's intention regarding the.redemption,of its stock. Id.; see also Mönson v..Commissionermsupra; Roebling v. Commissioner, 77 T .'C..- 30 (1981) ; Bléily & Collishaw, Inc . v. Commiësioner, supra. By focusing'on the ,intent·tof the redeeming corgoration and the redeemed shareholder..on.$he·.date of the redemption*,4both thisnCourt and the,Court.of Appeals for..the Sixth Circúìt in Zenz have ·attemp;ted to cull after the-fact attempts on the part of taxpa'yers to rlink unrelated transactions. in order'to achieve. favorable tax treatment-, see Niedermeyer v. Commissioner, supra, from'those situations where the taxpayer , intentionálly structures two.or more. transactions as part of a plan to terminate the taxpayer's ownership interest in a corpóration, see Zenz v. Quinlivan, supra. a . An analysis of whether or not a £irm añd fixed plan existed also entails an ëxamination of añy uncertainty«in consummating the alleged plan. ·Although a binding commitment to the plan is not required, whether or not the redeeming corporation and the redeemed shareholder have demonstrated their intention to consummate the alleged plan in some meaningful way is an important factor. Bleily & Collishaw, Inc. v. Commissioner, supra at 757 ("Collishaw had agreed to the sale of all its shares and to the purchase price. As noted before, the fact that the agreement was not binding is not dispositive."); Niedermeyer v. Commissioner, supra at 291 ("Petitioners could easily have changed their minds with regard to any intent to donate the preferred stock. Clearly petitioners' decision to donate the preferred stock has not been shown to be in any way fixed or binding."). If the taxpayer is the sole shareholder of a closely held corporation and could easily change his mind regarding the implementation of the alleged plan, this Court has demanded compelling evidence of the taxpayer's commitment to the plan before it will find that a firm and fixed plan existed. Niedermeyer v. Commissioner, supra at 291. If, however, the taxpayer is a shareholder of a more broadly held close corporation or a publicly held corporation, this Court's.analysis has focused primarily on the redeeming corporation's commitment to the plan. For example, in Roebling v. Commissioner, supra at 55, a case involving the periodic redemption of a banking institution's preferred shareholders, we stated that-- While we realize that this redemption plan was subject to the financial condition of the bank and the - 67 - See Bleily & Collishaw, approval each t ime of the banking,authorit ie s ,. :we . think this was about as firm and fixed a plan as a bank could hävé under the circumstances . Inc. v. Commissioner, supra. requirement of a firm and.fixediplan for,redemptionu. need be as rigid under the circumstances here involved as would be required in a,closely held familys m . i , corporation situation where the plan could be changed àt any time by the actions of áne or two ,shareholders. Compare Niedermeyer v. Commissioner, supra, and McDonald v. Commissioner, 52 T.C. 82- (1969) . We do not believe the ,.. . . As thi:s Court's opinion in Roebling confirms, the existence of conditions; contingencies, or other uncertainties will not F - necessarily preclude a findincj that a firm,and fixed plan exists but is one factor thate the Court must consider in,reaching its . decision. - . Bi The Section 304 Redemptions - , . t ,.., , The fórègöing cases and the .principles we have extracted from thëm require that we examine_the.facts in.örder_to decide whethet petitioher- engaged-in the'cross-chain sales .and the later salest of the target corporations as part of,a firm and fixed plan to completely terminate the target corporati:ons' actual and constructivè bwnership of the issuing corporations . - 3 -1. ' The 1986 ' Cross -Chain Sale. of :Merlease Petitiòner' s evidence at trial foc'used almost exclusively on the lack ·oftany binding commitment or.even an agreement in principle betiwëen pet~itioner and Inspiration, the ultimate purchaser -of ML Leasing, ont the date of ,ML Leasing's cross-chain sale 'of its' Merlease stock' to MLi Asset Management . . .On the . date . of the cross-chain sale, Inspiration had not yet completed its due diligence, contractually committed itself to buy the stock of ML Leasing, or finalized its financing arrangements. Moreover, on the date of the cross-chain sale, the board of directors of Merrill Parent had not yet authorized the sale of ML Leasing's stock, and Inspiration had not yet approved the purchase. The existence of these uncertainties according to petitioner precludes any finding that the cross-chain sale was part of a firm and fixed plan to terminate ML Leasing's actual and constructive ownership of Merlease. We disagree. Whether a redemption and later sale are integrated steps in a firm and fixed plan is a factual determination that necessarily focuses on the actions of the redeemed shareholder and the redeeming corporation. See Roebling v. Commissioner, supra; Niedermeyer v. Commissioner, 62 T.C. 280 (1974). If the actions of the redeemed shareholder and the redeeming corporation evidence a firm and fixed plan to participate in two or more related transactions that, individually or collectively, qualify as a redemption under section 302(b), then the redemption executed pursuant to the plan will qualify as a sale or exchange under section 302(a). Niedermeyer v. Commissioner, supra. After examining the actions of the redeemed shareholder (ML Leasing), the redeeming corporation (ML Asset Management), and Merrill Parent, we are convinced that the deemed redemption under section 304, 'i.e , the cross-chain sale, and the-later sale of ML Leasing outside the consolidated group were two steps-in a firm and fixed plán to terminate ML Leasing's actual'and.constructive ownership'of Merlease, the issuing corporation.. . ·. .,. The princiþal, and mösticompelling, evidence on,which we rely is the formal presentation of the planoto,Merrill Parent s board of¯directors,=which:tookbplace on July 28,:1986,·only 4 - days after the cross-chain sale of Merlease: 2 The formal p'resentation 'inclúded the distribution of:a written summary and slides illùstrating.the details of- the plan to dispose of· petitioner's proprietary lease business culminating in the sale of ML Leasing.- The written summary laid;out each'step of the plan. ' Among the steps identified·were (1) ethe crossychain sale of Merlease', which the summary ·àcknowledged had.already occurred, (2) the distribution of a'diùidend by ML Leasing to ML Capital - Resources- consisting of the cash beceived (cid:16)042inthe.cross-chain sale by ML Leasing"from ML Asset'Management and. Other assets, and (3) the imminent sale of ML Leasing to Inspiration. The, written summary described the tax benefits of the. plan, which were predicated on"an increase in Merri'll Parent'·s basis in ML Leasing un'der the consolidated'return'regulations for the proceeds.of.the cross-chain? sale.' The written summary confirmed.that the plan inclùded the sale of ML Leasing.and unequivocally·identified Inspiration as the"purchaser. - 70 - The written summary also confirmed that, although the sale of ML Leasing had not yet been finalized, the sale was sufficiently mature that the establishment of a tax reserve for the transaction was warranted. In fact, the written summary included a recommendation to the board of directors that a tax reserve specifically geared, in part, to the extraordinary basis adjustment resulting from the section 304 redemption be approved. Petitioner seeks to minimize the impact of the written summary by pointing out that the summary was prepared for a board of directors meeting that occurred 4 days after the cross-chain sale. Although petitioner is correct regarding the chronology, petitioner offered us no proof that the plan suddenly sprang to life after the cross-chain sale had occurred, or that the cross- chain sale and the later sale of ML Leasing were unrelated. In fact, petitioner introduced very little evidence regarding the development, review, and approval of the plan reflected in the written summary, even though the plan was the product of petitioner's own internal planning. The July 28, 1986, board of directors meeting was a regular board of directors meeting. Ordinarily, a corporation is required by its bylaws and/or by State law to provide reasonable advance notice to its directors of a regular board meeting. We believe that it is reasonable to infer from this record that the plan outlined in the written summary and presented to Merrill - 71 '- Parent's'bòard of diréctórs:on.July 28, 1986, had:been carefully constructed, +etted, finalized[ and approved by the appropriate corporate officërs by at least Julý 24, 1986? the»date of the 1986 cross-chain (cid:0)541ale, 'and in sufficientTtime before the.July 28, 1986, board of directorstmeeting to enableethe notice of meeting to be giveh-ahd the meeting-materials to betcollated and e distributed tor the ¢ difectors Wé also^nöte that, on the date of.the.cross-chain sale, petitioner had identified Inspiration as the purchaser of ML Leasin'g and had álready engaged in substantial negotiations-with Inspir'étion. In'fact-,Cpetitioner and Inspiration had agreed in e principle- to a purchase price that was used to calculate the estimáted tax' bènefits, in the'written'summaky, presented;to the board of directors. An inferénce can also be. drawn from the record that7 after a meeting on June ·23, 1986,iInspiration confi med 'informally that it was prepared to purchase ML . Leasing's stóck, (cid:0)541ubject to ;veri-fiöation: of ithe residual lease values by an outside appraisek. .- It was only after. such . confirmation'was presumablÿ received that petitioner proceeded, with the brósh-chaiih sale. A fir'mland fixèd plän does.hot exist for purposes of·section 302 when there is only "vague anticipation" that a particular - step in an alleged plan will occur. Beniamin v. Commissioner, 66 T.C. at 1114. The facts in this case, however, establish much - 72 - more than vague anticipation that the sale of ML Leasing's stock would occur. The facts establish the existence of a firm and fixed plan on the part of Merrill Parent, ML Leasing, ML Asset Management, and Merlease to engage in a multistep transaction specifically designed to dispose of petitioner's proprietary leasing business outside of the consolidated group while eliminating gain on the transaction through basis adjustments resulting from the interplay of section 304 with the consolidated return regulations. We find that a firm and fixed plan to dispose of ML Leasing outside the consolidated group existed on the date of the 1986 cross-chain sale, and that the 1986 cross-chain sale, the distribution of a dividend of the gross sale proceeds, and the sale of ML Leasing were integrated steps in that plan. Because the 1986 cross-chain sale (the deemed section 304 redemption), when integrated with the sale of ML Leasing's stock, resulted in the complete termination of ML Leasing's actual and constructive ownership interest in Merlease (the issuing corporation), see section 304 (b), we hold that the redemption qualified under section 302 (b) (3), and that, therefore, the redemption shall be treated as a payment in exchange for stock under section 302(a) and not as a dividend under section 301. 2:: The..1987 Cross-Chain -Sales of the·Five, Subsidiaries, ML Interfundinq, and Leasing Equipment - Petitioner makes similar.factual and,legal arguments with respect to'the 1987'cross-chain sales. Because,the factua-1,and legal argumehts are virtually identical for all of the 1987 cross-chain sales except the one involving. Vessel Leasing, we shall consider them together,- ëxcluding only Vessel Leasing. . L:ike petitioner'saevidence.regarding the 1986 crossichain sale, petitionér's evidence regarding the'19A7e cross-chain sales focused almost exclusively on the lack.of- any binding commitment or even anà agreement in-principle betweenvpetitioner and GATX/BCE, the ultimate purchaser of ML Capital. Resources, on the dates of the 1987 cross'-chain sales.. Seven of the eight 1987 cross chain sales occurred on March 30, 1987 (the.five subsidiaries and ML Interfunding)',.and April 3., 1987 (Leasing Equipment). On those dates,'GATX/BCE had not had any meaningful opportunity to review the 3-volume offering memorandum og ,to conduct its due.diligence investigation,.and had not contra'ctually committed itself to buy ML Capital Resources' stock. Neither the board of directors of Merrill.Parent nor the board of directors of GATX/BCE had approved the transaction. Petitioner argued that the existence of these uncertainties precludes.any finding that the cross-chain sale was part of a firm andcfixed plan to terminate ML Capital Resources'.actual and - 74 - constructive ownership of the issuing corporations. Again, we disagree. After examining petitioner's actions including those of the redeemed shareholder (ML Capital Resources), the redeeming corporations (ML Realty, ML Asset Management, and MLPFS), and Merrill Parent, we are convinced that the section 304 deemed redemptions, i.e., the 1987 cross-chain sales, and the later sale of ML Capital Resources to GATX/BCE were steps in a firm and fixed plan to terminate ML Capital Resources' actual and constructive ownership of the issuing corporations. As with the 1986 cross-chain sale, the most compelling evidence of a firm and fixed plan with respect to the 1987 cross- chain sales is the formal presentation of the plan to Merrill Parent's board of directors, which took place on April 23, 1987, 2 days after receipt of GATX/BCE's bid and approximately 3 weeks after seven of the eight 1987 cross-chain sales closed. The formal presentation included the distribution of a written summary and slides illustrating the details of the plan to dispose of ML Capital Resources using much of the same language, format, and reasoning as that used in the 1986 written summary. The written summary laid out each step of the plan. Among the steps identified were (1) the cross-chain sales of the seven subsidiaries, which the summary acknowledged had already occurred, (2) the distribution of a dividend by ML Capital - 75s - Resources to its sóle shaféholder,'ML Consùmer, Markets Holdings, Inc., of the 'considerätion received in the cross-chain sales, and (3) - thê* imininent s ale óf ML Capit al - Re source s t o5 GATX/BCE . The wkitten summary described the tax benefits of the plan, which were predicated'on än increase in þètitioner's basis in ML Capital Re.sources under'thekconsòlidated return regulations for the proceedsiof the- cross-áhain salesP The wrítten summary confirmed that thè plàn 'included the sale of ML Capital Resources and des'cribed GATX/BCE as the klikely^ purchaseÊ"~.·^ The written summary åonfirmed that; 'althbùghnthe sale* of ML Caßital Resoùrces had not yet been finalized*and the sale: - negotiatiöns were nöt~as für along as those Fin! 1986, the negotiatiöns were sufficientlý matüre and the salensufficiently likely to"occurithat the establishment of a tax reserve för the e transact'iòn"was warrànted. The written summary included a recommendation to the board of directors that à tax deserve specifically geared, in part', to the basis adjustment'resulting from the section 304 redemptions =be apþroved. In response to the presentation regarding th'e p~län, Merrill iPar:ent'.s .board of dire'ctors approved thë""plan, ratified the cross-chain sales, and authorized the appropriate officers tó finalize 'the sale of ML Capital Resources. Petitioner attempts to minimize 'the impact of the written summary by þointing out that the summary was prepared for a board - 76 - of directors meeting that occurred approximately 3 weeks after the 1987 cross-chain sales. Although petitioner is correct regarding the chronology, petitioner offered us no proof that the plan suddenly sprang to life after the 1987 cross-chain sales had closed or that the 1987 cross-chain sales and the later sale of ML Capital Resources were unrelated. In fact, petitioner introduced very little evidence regarding the development, review, and approval of the plan reflected in the 1987 written summary, even though the plan was the product of petitioner's own internal planning and closely resembled the 1986 plan. Petitioner correctly points out that, as of the dates of the 1987 cross-chain sales, there was no contractual obligation between petitioner and GATX/BCE to consummate the sale of ML Capital Resources. We note, however, that petitioner had structured the "playing field" in order to expedite and simplify , the sale of ML Capital Resources by (1) structuring the proposed sale as an auction designed to encourage the submission of bids acceptable to petitioner, (2) preparing and distributing a proposed Stock Purchase Agreement in conjunction with the 3- volume offering memorandum and advising prospective purchasers that petitioner "does not intend to engage in substantial negotiations" with respect to its terms, (3) securing at least one appraisal of residual value in anticipation of the sale, and (4) offering the prospective purchaser administrative resources to facilitate the uninterrupted management of ML Capital' Resources' lease portfolio after the sale closed. In additi.on, on the :date of the earliest±1987 cross-chainssale, petitiòner had already had substantial contacts with prospective purchasers including GATX/BCE.· GATX/BCE had apparently already submitted a preliminary indicationiof interest (includingra·cash.purchase price), and GATX/BCE had been selected by petitioner to perform detailed due diligence regarding the proposed.sale. Two days before Merrill·Parent's board of directors eapproved the sale. of ML Capital Resources and authorized appropriate.officers to finalize the' deal, GATX/BCE had submitted.its formal bid to purchäse ML Capital Resources'; stock. " Merrill Parent·,had received and.reviewed the bid priòr to'the' board meeting and, in the written summary distributed at the..meeting, described GATX/BCE to the board of directors·as the~"likely purchaser..-" We reject petitioner's.argument.that-any uncertainty regarding·the- terms'of the proposed'sale of ML Capital.Resources at th'e time-of the cross-chain sales prevents'integration.of the transactions for pùrposes of ,section" 3024b) .·:: A binding com'miitment or' even an 'agreement in- princiþle that'each step of.a plan iwill occur·is notia prerequisite for·fin.ding·that sa firm and fixed pl*an- existed,u although uncertainty regarding one or, more steps' öf the plan is a factor we3 must^ consider. . Roebling v. s - Commissioner, 77 T.C. at 55; 'Niedermeyer v.·Commissioner, 62 T.C. - 78 - at 292. While there was some uncertainty regarding the details of the sale of ML Capital Resources on the dates of the cross- chain sales, there was no uncertainty that petitioner intended to sell ML Capital Resources as part of the plan. The totality of the facts and circumstances convinces us that petitioner had a firm and fixed plan to dispose of ML Capital Resources in a carefully orchestrated sequence of steps designed to avoid corporate-level tax on the transaction. The facts also convince us that petitioner was prepared to do everything reasonably possible to facilitate the implementation of that plan. We find that a firm and fixed plan to dispose of ML Capital Resources outside the consolidated group existed on the dates of the cross-chain sales, and that the cross-chain sales, the distribution of a dividend of the gross sale proceeds, and the sale of ML Capital Resources were integrated steps in that plan. 3. The 1987 Cross-Chain Sale of Vessel Leasing Because much of what was said regarding the other 1987 cross-chain sales applies with respect to the cross-chain sale of Vessel Leasing, we incorporate the foregoing analysis here. What differentiates the Vessel Leasing sale from the other 1987 cross- chain sales, however, is a chronology that makes it even easier to conclude that the Vessel Leasing sale must be integrated with the sale of ML Caoital Resources outside the consolidated group. - 79 - The Vessel' Leasing cross'chain sale closed on June 1Ó, 1987. On that date, GATX/BCE had already submitted sits initial and . modified'bids (Äpri'l 21,"-19875 and April 277 1987, respectively) . and had been- -"awarded the trañsaction", Merri'll. Parent's.'board of directors had met and authorized the consummation of .the sale of ML Capital Resòurces' stock to GATX/BCE (April 24,' 1987) , GATX/BCE had entered into a nonbinding. letter ·of intent (May. 22, 1987),f GATX's Finance Commi-ttee had- approved>the proposal to acquire ML 'CÁpital Resources' stock (June 1,. 1987) , and GATX/BCE had completed 'its due di(cid:16)042l'igencereviewe During final ·'1.. . negotiations, GATX had requested that ML 'Capi'tal:.Resources s dispose of its Vessél Leasing* stock priort to closing because GATX/BCE ^ could not own Ves'sel :Leasing duento Federal law restrictions. Immediately thereafter the respective boards: of ML Capital Resources and ML Asset Management approved the sale of Vessel Leasing's stock to ML Asset Management, and the final 1987 crossLchain sale closed. n It is appareht 'that* the cross-chain sale of Vessel Leasing's stock to ML Asset IVlanagement was tarranged in anticipation of the immïrient Esale of ML Capital Resourcesl to GATX/BCEtand was part of a seamless nét öf tra'nsactions culminating in the complete term*ihation of ML ,Capitàl Resources' owners!hip interest in the issu[ing.·corporations\(whose stock was sold cross-chain .in tYansact'ions that qualified as sectión 304 rede'mptions:. >We find - 80 - therefore, that a firm and fixed plan to dispose of ML Capital Resources outside the consolidated group existed on the date of the Vessel Leasing cross-chain sale and that the Vessel Leasing cross-chain sale, like the other 1987. cross-chain sales, was an integrated step in that plan. Because the eight 1987 cross-chain sales (the deemed section 304 redemptions), when integrated with the sale of ML.Capital Resources' stock, resulted in the complete termination of ML Capital Resources' actual and constructive ownership interest in the issuing corporations, see section 304 (b), we hold that the redemptions qualified under section 302 (b) (3) and that, therefore, the redemptions shall be treated as a payment in exchange for the stock under section 302(a) and not as a dividend under section 301. IV. Conclusion . The record establishes that on the dates of the cross-chain sales, petitioner had agreed upon, and had begun to implement, a firm and fixed plan to completely terminate the target corporations' ownership interests in the issuing corporations (the subsidiaries whose stock was sold cross-chain). The plan was carefully structured to achieve very favorable tax basis adjustments resulting from the interplay of section 304 and the consolidated return regulations, and the steps of the plan were described in detail in written summaries prepared for meetings of - 81 - Merrill Parent's board of directors. As described in those written summaries, the cross-chain sales of the issuing corporations' stock and the sales of the target corporations were part of the same seamless web of corporate activity intended by petitioner to culminate in the sale of the target corporations outside the .consolidated group. Under the test prescribed by this Court in Niedermeyer v. Commissioner, 62 T.C. 280 (1974), and other cases discussed herein, respondent properly integrated the cross-chain sales with the related sales of the target corporations to ascertairí the tax consequences of the transactions, and we sustain respondent's determination. We have considered the other arguments of the parties, and, to the extent not discussed herein, we conclude that the arguments are irrelevant, moot, or without merit. To reflect the foregoing, Decision will be entered under Ru'le 155.