internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable number release date index uil no case-mis no tam-122241-13 --------------------- ----------------------------- -------------------------------- ----------------------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ---------------------------- --------------------------- ------------------------------------ ----------------- ------- --------------------------- legend ------------------------------------ parent -------------------------------------------------------------------- ---------------------------------------------------------------- sub -------------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------- sub -------------------------------------------------------------------- ----------------------------------------------------- sub -------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------------ tam-122241-13 sub -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------- us holdco ------------------------------------------------------------------ ---------------------------------------- ------------------------------------------------------------ dre ------------------------------------------------------------------ ----------------------------------------- dre ------------------------------------------------------------------ -------------------------- dre ------------------------------------------------------------------------------------- ---------------------------------------------- dre --------------------------------------------------------------------- -------------------------------------------------- dre --------------------------------------------------------------------- ---------------------------------------------------------- dre --------------------------------------------------------------------- -------------------------------------------------------------------- dre ---------------------------------------------------------------- ---------------------------------------------------------- dre ------------------------------------------------------------------ ------------------------------------------------------------------ dre ------------------------------------------------------------------ ---------------------------------------------------- foreign holdco ------------------------------------------------------------------ ------------------------------------------------------------ cfc ---------------------------------------------------------------- ------------------------------------------------------------- --------------------------------------- fc ------------------------------------------------------------------ ---------------------------------------- tam-122241-13 date date date date date date date date date date aa bb cc dd ee ff gg --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- ----------------- --------------------------- --------------------------- ---------------------- ------------------------ ------------------------------------------ ------------------------------------------ ------------------------ ------------------------ ---- ---- hh ----------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ii ----------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- jj kk ---------------------------------------------------------------- ------------------------ tam-122241-13 ll mm ------------------------ ------------------------------------------------------ nn ----------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- oo pp qq rr ss state a foreign holdco debt instruments -------------------------------------------------------------------------- ------------------------ ------------------------ ------------------------------------------ ------------------------------------------- -------------- --------------------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------- --------------------------------------------------------------------------------- -------------------------------------------------------------------------------- dre debt instruments ----- --------------------------------------------------------------------------- sub debt_instrument --------------------------------------------------------------------------------- ----------------------------------------------------- issue s whether the cross-chain sale defined below qualifies as a reorganization under sec_368 a d_reorganization assuming the cross-chain sale qualifies as a d_reorganization whether us holdco’s basis in foreign holdco should be reallocated to and included in the taxpayer’s basis in its cfc stock whether the taxpayer is barred by the duty_of_consistency from re-characterizing the cross-chain sale as a d_reorganization after having reported the transaction as a taxable sale in earlier tax returns tam-122241-13 conclusion s the cross-chain sale does not constitute a d_reorganization neither the transferor_corporation nor its shareholder was in control of the transferee corporation and the transferor_corporation neither received nor distributed stock in the transferee corporation or distributed its other properties pursuant to a plan_of_reorganization as required by sec_354 and sec_368 even if the cross-chain sale is assumed to have constituted a d_reorganization us holdco’s basis in foreign holdco cannot be reallocated to or included in the taxpayer’s basis in its cfc stock the cross-chain sale predates the effective date of the relevant regulations under sec_358 and sec_368 the taxpayer’s proposed reallocation is not permitted under those regulations or other authorities there is no unrecovered_basis to reallocate and the taxpayer’s attempt to appropriate and recover us holdco’s basis in foreign holdco is an effort to claim a double tax_benefit that is precluded by the ilfeld doctrine the taxpayer is barred from re-characterizing the cross-chain sale as a d_reorganization because it characterized the transaction differently on a prior return the irs relied on that prior characterization and the statute_of_limitations on correcting the prior return is now closed to the detriment of the irs facts during the relevant taxable years parent was the parent of an affiliated_group of domestic corporations that filed a consolidated_return for u s federal_income_tax purposes the parent group prior to date the relevant organizational structure was as follows parent indirectly owned sub in one corporate ownership chain sub owned all of the common_stock in us holdco which owned dre which owned dre which owned foreign holdco which owned aa percent less than percent of the sole outstanding class of stock in fc the remaining fc stock was publicly traded us holdco had a class of preferred_stock outstanding all of which was owned by one or more unrelated persons in a second corporate ownership chain a sub owned sub and sub b sub owned dre and sub c sub sub sub and dre collectively owned cfc and d cfc owned dre which owned dre which owned dre which owned dre which owned dre which owned dre sub sub sub and sub were subsidiaries within the meaning of sec_1_1502-1 of the parent group us holdco a domestic_corporation was not a it is possible that all of cfc 1’s stock might have been directly owned by sub at the time of the cross-chain sale rather than as stated in the facts this does not in any way alter the conclusions stated herein tam-122241-13 member of the parent group foreign holdco an entity classified as a corporation under sec_301_7701-1 et seq the entity classification regulations was a controlled_foreign_corporation within the meaning of sec_957 cfc as to which us holdco was a united_states_shareholder within the meaning of sec_951 us shareholder cfc an entity classified as a corporation under the entity classification regulations was a cfc as to which parent group members were us shareholders fc was a foreign_entity classified as a corporation under the entity classification regulations dre and dre were classified as entities disregarded as separate from their owner under the entity classification regulations disregarded entities and thus were treated as branches or divisions of us holdco dre was a disregarded_entity and thus was treated as a branch or division of sub dre dre dre dre dre and dre were disregarded entities and thus were treated as branches or divisions of cfc original acquisition of fc parent indirectly acquired shares in fc during its taxable_year ending on date in that taxable_year sub incorporated and transferred bb to us holdco in exchange for all of us holdco’s common_stock and unrelated persons transferred cc to us holdco in exchange for all of its single class of preferred_stock at that time us holdco’s preferred_stock represented dd percent and its common_stock represented ee percent less than percent of the total value of all classes of its stock us holdco’s preferred_stock represented ff percent and its common_stock represented gg percent less than percent of the total voting power of all classes of its stock us holdco was not a member of the parent group nor was it included in the parent group’s consolidated_return us holdco acting through disregarded entities formed foreign holdco and transferred hh to it in exchange for all of its stock cfc received ii from unrelated persons in exchange for the issuance of the foreign holdco debt instruments and it purchased its fc stock in exchange for jj approximately equal to the sum of hh and ii cross-chain sale of fc stock prior to date parent decided to acquire additional shares of fc stock and to hold all of its fc share ownership through dre at that time the value of the fc stock owned by foreign holdco was substantially less than what foreign holdco had paid for it us holdco dre dre and foreign holdco were all holding_companies and the fc stock was by far the most meaningful asset in that chain of entities thus there was a corresponding decline in the value of foreign holdco’s stock and in sec_2’s common_stock as of date and date the us holdco common_stock continued to represent gg percent of the total voting power of all classes of its stock however its tam-122241-13 value had declined to kk percent of the total value of all classes of its stock the us holdco preferred_stock which had retained its value had come to represent ll percent of the total value of all classes of us holdco’s stock on date us holdco adopted a plan of dissolution and liquidation consistent with the plan the following steps were implemented on date foreign holdco transferred the cross-chain sale all of its shares of fc stock to dre in exchange for mm consisting of nn in the form of the dre debt instruments issued by dre and oo in the form of the sub debt_instrument the amount_paid mm represented a premium over the trading price of the fc stock due to the effective_control provided by the aa percent block of fc stock on that same day foreign holdco distributed the sub debt_instrument to us holdco through disregarded entities in redemption of a portion of its outstanding shares on date us holdco filed its plan of dissolution with the relevant authority for state a the day following date us holdco collected pp on the sub debt_instrument made a liquidating_distribution of almost all of its cash to its preferred shareholders in cancellation of its preferred shares settled its liabilities with its creditors and distributed its remaining assets including its stock in foreign holdco through disregarded entities to sub on date the relevant authority for state a certified that the us holdco certificate of dissolution had been filed the parent group filed a consolidated u s_corporation income_tax return form_1120 for the taxable_year ending on date the year return a taxable_year that included date date date and date date sec_2 through occurred in the same calendar month on the year return us holdco’s distribution of the sub debt_instrument in partial_redemption of its stock was treated as a distribution in part payment in exchange for its stock under sec_302 the dissolution of us holdco was reported as a taxable liquidation based on sec_331 and the parent group claimed a capital_loss of qq on the liquidation of us holdco the service accepted the parent group’s year return and did not challenge the claimed capital_loss the statute_of_limitations has run on the year return as part of its year tax_return us holdco filed a form_5471 with respect to its ownership in foreign holdco the form_5471 reported that us holdco had redeemed some of its common_stock in foreign holdco and accordingly reduced the basis in foreign holdco to rr schedule c of the form_5471 also showed that foreign holdco recorded a loss of ss on its sale of fc however foreign holdco did not record any net_adjustment to earnings_and_profits on schedule h on account of the loss events subsequent to the sale of fc stock on date which was in a taxable_year subsequent to date dre transferred nn to foreign holdco in satisfaction of the dre debt instruments and foreign holdco used the proceeds to retire the foreign holdco debt instruments tam-122241-13 on date which was in a taxable_year subsequent to date sub contributed its interest in dre and indirectly dre and foreign holdco to sub and sub contributed dre thus indirectly dre and foreign holdco to cfc the parent group filed a consolidated u s_corporation income_tax return form_1120 for its taxable_year ending on date the year return in its year return the parent group filed a statement in accordance with sec_1_351-3 in which it reported the transfers as nonrecognition exchanges under sec_351 and claimed that at the time of the exchanges sub 1’s basis in foreign holdco was rr an amount equal to us holdco’s basis in foreign holdco immediately prior to foreign holdco’s sale of the fc stock to dre as adjusted to reflect how it treated foreign holdco’s transfer of the sub debt_instrument in partial_redemption of its stock during its taxable_year ending on date sub sold the stock of cfc to one or more unrelated persons the parent group filed a consolidated u s_corporation income_tax return form_1120 for the taxable_year ending on date the year return on the year return the parent group reported the sale of cfc stock for purposes of calculating its gain on the sale of cfc the parent group claimed that its basis in the cfc stock included rr based on the date transfers during the examination of the parent group’s year return the parent group admitted that the sec_1_351-3 statement reporting the date transfers was erroneous and that the date transfers had not increased the stock basis in cfc however the parent group claimed for the first time that the cross-chain sale together with the other contemporaneous steps described above had qualified as a d_reorganization and that as a result us holdco’s unrecovered_basis in the stock of foreign holdco had been reallocated to the basis in shares of cfc held by members of the parent group law and analysis a qualification of transaction as a non-divisive d reorganization2 sec_368 defines a d_reorganization as a transfer by a corporation of all or a part of its assets to another corporation if immediately_after_the_transfer the transferor or one of its shareholders or any combination thereof is in control of the corporation to which the assets are transferred but only if in pursuance of the plan stock_or_securities of the corporation to which the assets are transferred are distributed in accordance with sec_354 sec_355 or sec_356 this memorandum only discusses certain requirements applicable to a non-divisive d_reorganization other applicable_requirements are not addressed herein tam-122241-13 sec_368 provides that for purposes of determining whether a transaction qualifies as a non-divisive d_reorganization the term control has the meaning given such term in sec_304 sec_304 provides that control means the ownership of stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock sec_304 provides that the constructive_ownership rules of sec_318 with certain modifications apply for purposes of determining control under sec_304 sec_318 as modified in its application by sec_304 provides that if five percent or more in value of the stock in a corporation is owned directly or indirectly by or for any person such person shall be considered as owning the stock owned directly or indirectly by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation sec_318 as modified in its application by sec_304 provides that if five percent or more in value of the stock in a corporation is owned directly or indirectly by or for any person such corporation shall be considered as owning the stock owned directly or indirectly by or for such person sec_318 in general provides that stock constructively owned by a person by reason of the application of sec_318 or sec_318 shall for purposes of applying such provisions be considered as actually owned by such person sec_354 provides that no gain_or_loss is recognized if the stock of a corporation that is a_party_to_a_reorganization is in pursuance of a plan_of_reorganization exchanged solely for stock in another corporation that is a party to the reorganization sec_368 provides that a party to the reorganization includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or property of the other sec_354 provides that the nonrecognition rule_of sec_354 does not apply with respect to a non-divisive d_reorganization unless the corporation to which the assets are transferred acquires substantially_all of the assets of the transferor and the stock securities or other properties received by the transferor as well as the other properties of the transferor are distributed in pursuance of the plan_of_reorganization tam-122241-13 sec_356 provides that if sec_354 would apply to an exchange but for the fact that the property received in the exchange consists not only of property permitted by sec_354 but also of other_property or money then no loss from the exchange shall be recognized control requirement in a d_reorganization the asset transferor or its shareholder s or any combination thereof must own or be considered to own stock in the transferee corporation possessing at least percent of the total combined voting power or percent of the value of all shares of stock sec_368 sec_368 sec_304 neither foreign holdco the transferor_corporation nor us holdco its shareholder actually owned any stock in cfc the transferee corporation however foreign holdco and us holdco are considered to have owned some stock in cfc under the attribution_rules sub sub directly and through a disregarded_entity and sub collectively actually owned all of the outstanding_stock in cfc sub owned all of the stock of sub and by reason of sec_318 sub is considered to have owned all of the stock in cfc that sub actually owned sub directly owned all of the stock in sub and sub and by reason of sec_318 and a a sub is considered to have owned all of the stock in cfc actually or constructively owned by sub and sub ie percent of cfc as of date and date the common_stock in us holdco owned by sub represented kk percent more than five percent but less than percent of the total value of all of the outstanding us holdco stock by reason of sec_318 as modified in its application by sec_304 and sec_318 us holdco is considered to have owned kk percent of the cfc stock constructively owned by sub us holdco through disregarded entities owned all of the stock of foreign holdco thus by reason of sec_318 and a a foreign holdco is considered to have owned percent of the cfc stock constructively owned by us holdco thus us holdco and foreign holdco each are considered to have owned kk percent of cfc 1’s stock kk percent of percent of cfc 1’s stock the cfc stock constructively owned by foreign holdco and us holdco represented less than percent of the total combined voting power and less than percent of the value of all shares of stock in cfc at the time of the cross-chain sale as a result the transaction did not satisfy the control requirement of sec_368 the taxpayer proffers the following three theories by which foreign holdco and or us holdco nonetheless should be considered to have been in control of cfc tam-122241-13 a step_transaction_doctrine argument the taxpayer asserts that for purposes of applying the control requirement of sec_368 the us holdco preferred_stock should be treated as having been redeemed or otherwise should be ignored under the step_transaction_doctrine because the us holdco preferred_stock was redeemed as part of the same plan first the taxpayer makes this argument notwithstanding its reliance on the us holdco preferred_stock throughout us holdco’s entire corporate existence i to exclude us holdco from the parent group’s consolidated_return and ii to claim a stock loss under sec_331 and sec_165 on the us holdco common_stock cancelled in the us holdco dissolution the taxpayer asserts that the planned cash redemption of the us holdco preferred_stock can and should be taken into account for the limited purpose of testing control under sec_368 even though at the same time authorities such as revrul_70_106 1970_1_cb_70 prohibit disregarding the us holdco preferred_stock for purposes of sec_331 for purposes of this memorandum we will assume arguendo that the us holdco preferred_stock can be respected for certain purposes and simultaneously can be disregarded for other purposes the step_transaction_doctrine treats a series of formally separate steps as a single transaction if the steps are integrated and interdependent 88_tc_1415 the existence of an overall plan does not alone justify application of the step-transaction doctrine 90_tc_171 aff’d 886_f2d_1318 7th cir although the step_transaction_doctrine can be used to eliminate meaningless steps in a transaction that serve no purpose other than tax_avoidance it cannot be used simply to ignore economically meaningful transactions id the taxpayer largely bases its argument on two cases in 14_tc_757 one corporation ecla transferred its assets to another patents in exchange for all of patent’s stock in addition had there been no preferred_stock us holdco would not have been in any position to recognize a loss under sec_336 upon its liquidating_distribution of foreign holdco stock to sub as part of its dissolution in revrul_70_196 corporation y owned percent of corporation x and caused x to redeem the shares held by its minority shareholders and thereafter adopt a formal plan_of_liquidation the ruling held that the plan_of_liquidation had been adopted at the time the minority shareholders had agreed to be redeemed and thus the liquidation did not qualify for tax-free treatment under sec_332 the taxpayer does not cite any authority that respected outstanding non-transitory stock for purposes of sec_331 while simultaneously treating that stock as having been redeemed for purposes of sec_368 nor does the taxpayer address whether if the preferred_stock should be treated as having been redeemed for purposes of the control requirement such stock should not also be treated as having been redeemed for purposes of determining whether us holdco was affiliated with the parent group for purposes of sec_1501 et seq tam-122241-13 thereafter and as part of the same plan patents consolidated with another corporation old ericsson to form new ericsson and ecla received stock in new ericsson in exchange for its patents stock as part of the same plan ecla gave an option to the former old ericsson shareholders to purchase for cash ecla’s stock in new ericsson and the option was exercised the parties had agreed that the former old ericsson shareholders would acquire all of the new ericsson stock and that ecla was not to own any of it when the transactions were complete the court integrated the steps in determining that the transaction was a taxable sale by ecla of its assets rather than a reorganization under the statutory antecedent to sec_368 in 364_f2d_525 2d cir one corporation old spencer transferred cash furniture and fixtures and prepaid insurance to a new corporation new spencer in exchange for stock common and preferred_stock in new spencer ten days later old spencer transferred its plant and equipment to new spencer in exchange for cash and a short-term note the court applied the mutual interdependence formulation of the step_transaction_doctrine to integrate an initial contribution with a putative sale a handful of days later and stated that the integrated transactions could have constituted a reorganization within the meaning of a statutory antecedent to sec_368 moreover the court noted that on remand the trial_court was to determine whether new spencer’s subsequent issuance of additional shares to certain of its employees should be integrated with the prior steps in which case the transaction might not have constituted a reorganization for failure to satisfy the control requirementdollar_figure the taxpayer notes that in ericsson the transferor ecla and other parties had planned a disposition of the acquiring corporation’s stock whereas here us holdco and other persons planned for a secondary transfer of cash received the taxpayer asserts that the underlying legal principle is the same and that the overall plan_of_reorganization must be evaluated by taking into account such secondary transfers of consideration received when they are an essential and inseparable step toward the desired result the taxpayer contends that turner applies this same general principle the court stated that patents was organized and used solely for the convenience of the parties in these particular transaction and appears to have disregarded patents t c pincite citing 293_us_465 the court held that new ericsson’s basis in the assets formerly held by ecla for purposes of its depreciation_deductions was based on the cost to new ericsson and not on the basis of those assets in the hands of ecla like ericsson turner involved a determination of the taxpayer’s basis in depreciable assets new spencer repaid the short term note and there was evidence that on the day new spencer satisfied the note it also issued new preferred shares in the approximate amount to old spencer turner construction co f 2d pincite on remand the trial_court found that the integrated transaction had constituted a reorganization based in part on factual stipulations 273_fsupp_460 s d ny tam-122241-13 in general courts have applied step transaction in evaluating whether a transaction is a reorganization this assertion is unremarkable but the question of how the overall steps might be viewed what steps can be integrated and what constituted the plan_of_reorganization must be considered what the taxpayer overlooks is that us holdco’s dissolution was pursuant to a plan to liquidate us holdco and not pursuant to a plan to reorganize foreign holdco and that even if all of the contemporaneous steps are integrated and treated as a plan to reorganize foreign holdco and if as taxpayer contends foreign holdco is treated as having de_facto liquidated then the control requirement remains unfulfilleddollar_figure sec_368 looks to the stock ownership - actual or constructive - of the transferor_corporation foreign holdco or its shareholder us holdco in the transferee corporation cfc step_transaction_doctrine cannot give us holdco additional constructive stock ownership in cfc the transferee corporation that it never constructively owned - after all when all of the contemporaneous steps had been implemented us holdco had dissolved leaving no successor and all of its stock had been cancelled leaving it with no shareholders thus it could not have constructively owned any cfc stock at all under sec_318 step_transaction_doctrine cannot bootstrap sub into a shareholder of foreign holdco while simultaneously treating foreign holdco as having reorganized into cfc at the time the cross-chain sale was effected us holdco was foreign holdco’s sole shareholder and had been at all times from foreign holdco’s inception us holdco had adopted a plan of dissolution but it had neither filed its plan with the relevant state a authority nor had it made any liquidating distributiondollar_figure foreign holdco distributed the sub debt_instrument to us holdco through disregarded entities and us holdco made a liquidating_distribution of the proceeds thereon to unrelated persons in cancellation of the us holdco preferred_stock the consideration cfc paid to foreign holdco in the cross-chain sale was not distributed to sub had foreign holdco reorganized it should have been an empty corporate shell without assets prior to the point in time that us holdco transferred legal ownership of that entity to sub in a liquidating_distribution treating foreign holdco a sec_11 while the cross-chain sale and the us holdco dissolution were generally contemporaneous and were all referenced in the us holdco plan of dissolution and were all part of an overall plan in a generic sense the taxpayer does not assert any reason why us holdco’s dissolution should be viewed as contractually binding at the time of the cross-chain sale or as mutually interdependent with or as an end result of a plan to reorganize foreign holdco see esmark inc t c pincite 111_tc_315 11_tc_397 aff’d 177_f2d_513 3d cir cert_denied 339_us_920 without additional factual development we are unable to fully analyze whether the step_transaction_doctrine would apply as the taxpayer claims moreover us holdco’s plan of dissolution expressly provided that at any time prior to the effectiveness of a certificate of dissolution us holdco’s board_of directors could abandon the plan without any further action by the shareholders and could amend the plan in any manner not materially adverse to the holders of any class of its stock without their approval tam-122241-13 having reorganized is not consistent with treating sub as foreign holdco’s direct shareholder step transaction cannot give the transferor_corporation foreign holdco additional constructive stock ownership in cfc because foreign holdco’s shareholder us holdco dissolved cancelling the us holdco common_stock and thus the attributive link between foreign holdco and cfc that existed at the time of the cross-chain sale and as noted above sub cannot be considered to have been foreign holdco’s shareholder nor its successor the steps cannot be integrated to treat sub as having engaged in a sec_354 or sec_356 exchange with cfc or foreign holdco or otherwise to treat sub as a shareholder let alone the majority shareholder in cfc because due to sub 1’s status as a minority shareholder of us holdco the issuance of cfc stock was not a meaningless gesture the net effect of what happened from sub 1’s perspective is that its economic position in us holdco had become that of a minority shareholder a step transaction approach cannot alter this fact sub had engineered and implemented a specific structure to acquire its fc stock investment and as part of that structure it arranged for us holdco to issue voting preferred_stock instead of debt which had the effect of excluding us holdco from the parent groupdollar_figure in order to acquire full economic ownership of the fc stock sub arranged to economically purchase the interest of us holdco’s majority shareholders which at that time the preferred_stock represented and to do so in a manner that allowed it to crystallize and claim a significant stock loss on its investment through the us holdco dissolution the taxpayer now seeks to have these steps viewed differently as part of an attempt to claim a double tax_benefit for a single economic loss however viewed at the conclusion of all of the contemporaneous steps assuming that there had otherwise been a reorganization of foreign holdco the very thing that sec_368 requires - that foreign holdco the transferor or us holdco its shareholder be in control of cfc - was not present the taxpayer in effect seeks to disregard the us holdco preferred shares or the fact that those shares were held by unrelated persons and had come to represent the majority interest by value in us holdco those shares were not transitory - the shares were outstanding throughout us holdco’s entire corporate existence were issued along with the common_stock on the same day and as part of the same plan and were cancelled along with the common_stock on the same day and as part of the same plan and were held by unrelated persons through the entire time they were outstanding the us holdco preferred shares bore substantial economic rights which were respected when in its dissolution us holdco distributed pp in cash to the preferred shareholdersdollar_figure in addition the preferred shares entitled holders to ff percent of the see 417_us_134 a transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred in 252_f2d_693 2d cir the same shareholder held all of the common and preferred_stock in a subsidiary_corporation that was liquidated the court respected the preferred_stock because the terms of the preferred_stock gave the preferred shareholders the rights to all tam-122241-13 total voting power of all classes of us holdco stock the taxpayer does not contend that these economic or voting rights were illusory and in fact the taxpayer relied on these rights to exclude us holdco from the parent group and to claim a capital_loss on us holdco’s dissolution finally there is another inescapable fact - all of us holdco’s stock both common and preferred was issued at the same time and subsequently was canceled as part of the same plan_of_liquidation on the same day after us holdco’s plan_of_liquidation had been filed with the relevant state a authority the taxpayer presents no argument to justify disregarding the preferred_stock while simultaneously respecting the common_stock especially since both were outstanding at all times during us holdco’s existence both had substantial economic value and voting rights at all relevant times and the preferred_stock was held by unrelated persons the cases that the taxpayer relies upon are inapposite it was a relatively straightforward matter to determine who owned those shares in those cases and the relevant stock ownership in the transferee corporation was direct in contrast here foreign holdco’s and us holdco’s underlying stock ownership in cfc was constructive the relevant sec_318 attributive link ran through us holdco there was no plan to reorganize us holdco rather the plan was to dissolve us holdco in a liquidation that was specifically structured to ensure that sub could claim a capital_loss on its us holdco stock immediately after us holdco’s dissolution all of its stock had been cancelled no person owned any us holdco stock and the relevant sec_318 attributive linkage was severed the cases cited by the taxpayer involved the direct stock ownership context here the multiple tiers of ownership present key distinguishable facts b option to purchase sec_318 provides that for the purpose of the constructive_ownership rules any person that has the option to acquire stock should be treated as a shareholder the taxpayer contends that us holdco’s preferred_stock should be ignored in determining control because once its plan of dissolution had been adopted us holdco had a unilateral right and thus had an option to purchase its outstanding preferred_stock an option is a promise which meets the requirements for the formation of a contract and limits the promisor's power_to_revoke an offer restatement second of contracts sec_25 cited in 80_tc_955 fn aff’d 765_f2d_643 7th cir the us holdco plan of dissolution was adopted by us holdco’s board_of directors and approved by the shareholders but it of the proceeds of the corporation upon dissolution see also 87_tc_689 tam-122241-13 lacked the essential requirements of a contract by its own terms the us holdco plan of dissolution could be abandoned or modified by us holdco’s board_of directors without shareholder approval it did not create enforceable contractual rights for the shareholders and thus did not meet the definition of an option us holdco simply had board approval to redeem preferred shareholders not an actual option additionally even assuming us holdco held an option on its own preferred_stock revrul_69_562 c b would not allow such an option to be used to treat sub as the owner of those shares for purposes of sec_318 in revrul_69_562 the service stated that it would be meaningless to attribute ownership of a corporation’s stock to itself because the corporation does not acquire voting or other rights as a shareholder by acquiring its own stock through exercise of an option similarly the ruling’s logic makes it clear that such an option would not be deemed exercised and thus no longer outstanding for purposes of determining the quantum of ownership represented by us holdco’s common_stock held by sub therefore us holdco and foreign holdco’s constructive interest in cfc would not change even if us holdco were considered to have had an option on its own preferred_stock c any combination thereof argument the taxpayer claims that foreign holdco and us holdco based on their cumulative interests were in control of cfc under the constructive_ownership rules under sec_368 immediately_after_the_transfer the transferor or one or more of its shareholders or any combination thereof emphasis added must control the transferee the taxpayer looks to the interest of transferee constructively held by foreign holdco ie kk percent and the interest constructively held by us holdco ie kk percent and adds these interests together to determine the combined interest of transferor and its shareholder by combining the interests in this way the taxpayer determines that the two parties combined own more than percent of cfc which would have satisfied the control requirement this argument is unconvincing first the taxpayer is unable to cite any authority that supports multiple inclusion of the same stock ownership for purposes of attribution second the argument interprets sec_368 in a manner that would lead to nonsensical results - if the same stock could be counted twice why not more than twice third implicitly recognizing the absurdity and depending on context the potential unfairness of duplicative inclusions sec_1_318-1 states that in applying sec_318 to determine the stock ownership of any person if the amount of stock owned by any person may be included in the computation more than one time such stock shall be included only once us holdco and foreign holdco do not hold any an interpretation of a statute leading to an absurd result is to be avoided where reasonably possible 295_us_193 citing 271_us_354 and territory of 190_us_197 tam-122241-13 actual interest in cfc and only hold a constructive interest in cfc based on sec_318 each corporation’s constructive interest is based on the same actual stock held by sub sub directly and through a disregarded_entity and sub attributed to both foreign holdco and us holdco through sub 1’s ownership of us holdco’s common_stock in determining the combined interest of foreign holdco and us holdco the actual stock held by sub sub and sub can only be considered once by combining sub and cfc 1’s constructive interest the taxpayer is impermissibly including the same stock in the calculation of attribution under sec_318dollar_figure when the actual stock attributable to foreign holdco and us holdco is considered only once in determining constructive_ownership the result is that foreign holdco and us holdco’s constructive interest in cfc is only kk percent which does not constitute control d conclusion as to control neither the transferor_corporation foreign holdco nor its shareholder us holdco was in control of the transferee corporation cfc for purposes of sec_368 this is not surprising - at the time of the cross-chain sale the parent group had come to economically own only an indirect kk percent interest in the underlying fc stock the us holdco preferred shareholders - unrelated to the parent group - indirectly owned ll percent more than percent of the fc stock held by foreign holdco through what had economically become the majority interest in us holdco by means of the cross-chain sale and us holdco’s dissolution the parent group in essence purchased from the us holdco preferred shareholders their economic_interest in the fc stock structured in a way that allowed the parent group to claim a capital_loss on the us holdco stock but that did not give foreign holdco or us holdco control of cfc as a result of the absence of control the cross-chain sale did not qualify as a d_reorganization distribution requirement sec_368 states that a transaction can qualify as a d_reorganization only if in pursuance of the plan stock_or_securities of the acquiring_corporation are distributed in a transaction that qualifies under sec_354 sec_355 or sec_356 the impermissibility of attributing the same stock to two persons for the sake of determining control is further explained by analogy to sec_958 sec_958 provides the attribution_rules for determining whether a foreign_corporation is controlled by a domestic_corporation sec_958 explicitly makes sec_318 applicable inter alia for purposes of determining whether a corporation is a controlled_foreign_corporation an example in the regulations under sec_958 demonstrates that constructive interest based on the same stock can only be considered once see sec_1_958-2 ex b the example demonstrates that if a person constructively owns stock through another person combining the two persons’ interests improperly duplicates the same stock interest tam-122241-13 sec_354 provides that sec_354 does not apply to a d_reorganization unless the stock securities and other properties received by the target as well as the other properties of such target are distributed in pursuance of the plan_of_reorganization see also sec_1_368-2 applicable to transactions occurring on or after date a requirement that transferor’s stock be distributed as part of a d_reorganization the asset transferor must distribute the stock that it received from transferee however in the cross-chain sale cfc did not issue any stock foreign holdco did not receive any stock from cfc and foreign holdco did not distribute any stock cfc stock to its shareholder in addition the taxpayer asserts that cfc paid full value in the cross-chain sale thus there is no basis to treat cfc as having constructively issued shares in the transaction to account for any shortfall in the consideration paiddollar_figure in certain circumstances an actual issuance by transferee and distribution of that stock by transferor is not required where the issuance would have been a meaningless gesture in the most basic case the stock_distribution requirement is met when the stock of the transferor and transferee are directly owned by the same shareholders in the same proportions in revrul_70_240 1970_1_cb_81 shareholder b owned all of the stock of both x corporation and y corporation x sold its operating_assets for full value to y in exchange for a cash payment x paid its debts and transferred its remaining assets to b in a liquidating_distribution the service ruled that even though x had not distributed any shares of y stock to b nonetheless b would be treated as having received y stock thus satisfying the distribution requirement since b already owned all the stock of y where the same shareholders own a proportionate share of transferor and transferee the issuance and distribution of stock is a meaningless gesture because it does not change the shareholders’ proprietary interest in the assets 43_tc_295 see also 288_f2d_676 3d cir cert_denied 368_us_836 366_f2d_874 5th cir cert_denied 386_us_1022 in all of these cases the shareholders of the transferor_corporation had preserved their proprietary interest in the underlying business albeit in the form of a different corporate entity this is merely a change in form of ownership rather than a change in shareholders’ economic position with respect to the underlying business therefore there is no need to issue and distribute stock where the transferor corporation’s shareholders’ interest is preserved even absent the issuance of stock see sec_1_368-2 generally applicable to transactions occurring on or after date by reason of the second sentence an acquiring_corporation is deemed to have constructively issued its shares where the consideration it paid is less than the value of the target corporation’s assets tam-122241-13 under a similar rationale some courts have even found d reorganizations in the absence of actual stock distributions where the same shareholders held the stock of the transferor and the transferee in similar but non-identical proportions and the shareholders substituted their interest in the transferor_corporation for substantially the same interest in the transferee corporation in one case 42_tc_558 aff’d 363_f2d_262 9th cir cert_denied 386_us_1016 the three primary shareholders of a corporation wanted to add a long-time employee as a shareholder so they formed a new corporation where the employee held a percent share the old corporation sold all of its assets to the new corporation and liquidated the new corporation purchased all of the assets of the old corporation and hired all the staff of the old corporation the shareholders for the liquidating corporation claimed a capital_gain claiming that the transaction qualified as a taxable_distribution but the court found that this transaction qualified as a d_reorganization and the shareholders received boot in the d_reorganization even though the shareholders of the old corporation only held percent of the stock in the transferee corporation their interest in the underlying business was substantially preserved and they received boot with respect to their remaining interest the court looked at the entire transaction and found the transaction to be a d_reorganization because the same operations continued in the form of a new transferee corporation the underlying business existed in a different corporate entity but the shareholders’ interest in the underlying business was substantially the same the formal issuance and transfer of stock was not required to preserve the shareholders’ interest in the underlying business similarly the district_court in breech v commissioner a f t r 2d wl c d cal aff’d on other grounds 439_f2d_409 9th cir found that the los angeles transaction qualified as a d_reorganization as well as a reorganization within the meaning of sec_368 where three shareholders who owned all of the transferor corporation’s stock held percent of the transferee corporation’s stock in the transaction two shareholders of the old corporation sold their stock to a third shareholder the same shareholders formed a new corporation with two other shareholders the court found this to be a stock-for-stock_exchange because the consideration that the shareholders received for their old stock was based on their proportionate share of the underlying assets in the new corporation other cases that the taxpayer cites for the proposition that stock need not be issued and distributed in a d_reorganization involved taxable years that pre-date the enactment of the distribution requirement 23_tc_196 aff’d 231_f2d_288 7th cir 22_tc_1220 rev’d on other grounds 230_f2d_304 6th cir 2_tc_371 aff’d 147_f2d_376 9th cir cert_denied u s in each of these cases a group of shareholders had control of or at least a near-controlling interest in both the transferor and transferee corporation and the shareholders of the old corporation held substantially the same economic_interest in the new corporation tam-122241-13 in pebble springs the focus of the inquiry was to determine whether the old corporation could claim a loss on the sale of its assets the old corporation had sold all of its operating_assets to a new corporation and dissolved persons who collectively owned percent of the transferor_corporation owned percent of the transferee corporation the court held that the transaction met all the requirements of code’s predecessor to sec_368 the court found that the shareholders of the old corporation owned stock in the new corporation that constituted control as that term was defined under the law then in effect hence the literal requirements of that earlier version of the d_reorganization were met in addition the court held that the steps added together constituted a clear plan_of_reorganization in liddon the tax_court was trying to determine whether shareholders were entitled to treat proceeds from the liquidation of a corporation as capital_gain the taxpayers that owned percent of the stock in the transferor_corporation owned more than percent of the stock in the transferee corporation again the transferor_corporation sold its assets to the transferee corporation but neither received nor distributed any transferor_corporation stock to its shareholders the court reasoned that when viewing all of the transactions as a whole the shareholders had in effect exchanged their old stock for a combination of new stock and money therefore they did not receive capital_gain treatment and any proceeds that they received were taxed as a boot dividend in heller a group of three shareholders held all of the stock in the transferor and transferee corporations although in somewhat different proportions the court found that the shareholders had substituted their interest in the old corporation for substantially the same interest in the new corporation and that the net effect of all the steps taken was that the three shareholders exchanged their stock in one corporation for stock in the other pursuant to a plan_of_reorganization in each of these and other cases the courts evaluated the transactions in their entirety and concluded that the shareholders of the transferor_corporation had in substance exchanged their shares for stock in the transferee corporation as part of a plan to reorganize the transferor_corporation as stated in morgan v commissioner although there was not a direct exchange of stock in the old corporation for stock in the new plus ‘other property or money ’ that was the net effect of what was done f 2d pincite quoting liddon f 2d pincite these cases are all notable because stock was considered to have been issued and exchanged and the shareholders’ interest in the transferor corporation’s stock was preserved in transferee corporation stock the application of the meaningless gesture doctrine however has generally been limited to situations in which there is identical shareholder identity and proportionality of interest t d fed reg date or at least a substantial similarity where there are significant disparities in ownership between the transferor and transferee corporations an issuance and distribution of the transferee corporation’s stock is not a meaningless gesture because a share of the transferor_corporation imbues very different economic_interest to its shareholder with tam-122241-13 respect to the underlying assets than a share of the transferee corporation this is illustrated in 84_tc_21 where the tax_court found that the distribution requirement was not satisfied when the same shareholders that held percent of the transferee corporation held only percent of the transferor corporation’s stock the tax_court found that the transaction did not qualify as a d_reorganization when the largest shareholder of the old corporation was not a shareholder in the new corporation in warsaw photographic the tax_court stated that where stock ownership in the transferor and transferee corporations is identical an actual distribution would be a mere formality and the statute may be satisfied without it t c pincite citations and quotation marks omitted however the court held that the meaningless gesture did not apply due to the significant variation in stock ownership the court also found that the substance of the transaction at issue there pointed toward a sale at least as much as toward a reorganization t c pincite in this case us holdco wholly owned foreign holdco the transferor_corporation but constructively held kk less than percent of cfc the transferee corporation this ownership disproportionality is far closer to the warsaw photographic than moffatt or breech in this case the interest of us holdco the transferor’s shareholder in the underlying assets fundamentally changed after the cross-chain sale prior to the cross-chain sale us holdco indirectly owned percent of the fc stock held by foreign holdco after the cross-chain sale us holdco’s indirect interest in the fc stock was replaced with debt instruments although us holdco continued to own constructively but not economically a kk percent interest in cfc and thus the fc stock in short the economic position of foreign holdco’s shareholder with respect to foreign holdco’s underlying assets had substantially changed courts have overlooked the distribution requirement when shareholders’ interests in the underlying assets are preserved however when the shareholders’ interests vary so widely the statutory requirements are not waived and stock must be issued and distributed sec_1_368-2 does not apply to deem the issuance of a nominal share of cfc stock in the cross-chain sale first as discussed below the cross- chain sale predates the effective date of the regulation and the taxpayer is not allowed to retroactively apply the regulation under the circumstances second the same person or persons do not own the stock of the transferor foreign holdco and transferee cfc corporations in identical proportions as required by sec_1_368-2 rather sub constructively owned a minority by value interest in foreign holdco and percent of cfc whereas unrelated persons owned a majority by value interest in foreign holdco and no stock whatsoever in cfc the us holdco stock has significant voting rights so it is not described in sec_1504 and thus must be taken into account for purposes of the regulation see sec_1_368-2 sec_1_368-2 tempers the exact identity and proportionality requirement of sec_1_368-2 and applies the meaningless gesture doctrine if there is a de_minimis variation in shareholder identity or proportionality of ownership the tam-122241-13 variation here however is substantial far exceeding anything that might be considered de_minimis b requirement that transferee’s other properties be distributed under sec_354 the transferor must distribute not only the stock securities and other properties that it received from the transferee but also all of its other properties in pursuance of the plan of organization the taxpayer states that foreign holdco de_facto dissolved in year and thereby satisfied this requirement however based on the returns as filed foreign holdco continued to hold more other properties after the cross-chain sale in the cross-chain sale foreign holdco received the dre debt instruments which represented more than half by value of the consideration it received for its fc stock foreign holdco did not distribute the dre debt instruments rather foreign holdco retained the dre debt instruments until their retirement on date which was in a subsequent tax_year foreign holdco also continued to have going concern financial statements prepared by its public accounting firm and foreign holdco’s us shareholders continued to file returns forms for foreign holdco on a going concern basis and reporting assets and liabilities until at least date foreign holdco did not distribute all of its assets in year the year of the cross-chain sale accordingly the transaction fails to meet the distribution requirement c conclusion as to the distribution requirement foreign holdco neither distributed stock_or_securities of the transferee corporation nor its other properties pursuant to a plan_of_reorganization and the stock_distribution requirement cannot be treated as having been satisfied either under the meaningless gesture authorities or regulations as a result the cross-chain sale did not qualify as a d_reorganization tam-122241-13 b reallocation of shareholder’s basis in its stock in the transferor_corporation sec_358 provides in part that in the case of an exchange to which sec_354 or sec_356 applies an exchanging shareholder’s basis in the stock of the acquiring_corporation received in the exchange is the same as its basis in the stock of the target_corporation surrendered in the exchange a decreased by the fair_market_value of any other_property and by the amount of money received and b increased by the amount of such money or property that was treated as a dividend and the amount of gain recognized by the shareholder on the exchange sec_1_368-2 provides that in certain situations where the same persons directly or indirectly own stock in a transferor and transferee corporation in identical proportions for purposes of the distribution requirement applicable to a d_reorganization the transferee corporation is deemed to issue a nominal share of its stock which is then deemed to be distributed by the transferor_corporation to its shareholders where appropriate the nominal share is deemed to be further transferred through chains of ownership to the extent necessary to reflect the actual ownership of stock in the issuing_corporation sec_1_358-2t a iii c provides that if an actual shareholder of an issuing_corporation is deemed to receive a nominal share of stock of the issuing_corporation described in sec_1_368-2 the shareholder must after adjusting the basis in the nominal share for any transfers described in sec_1_368-2 designate the share of stock in the issuing_corporation to which the basis if any of the nominal share will attach sec_334 provides that if property is received in a distribution in complete_liquidation and if gain_or_loss is recognized on the receipt of the property then the basis of the property in the hands of the distributee shall be the property’s fair_market_value at the time of the distribution assuming arguendo that the cross-chain sale qualified as a d_reorganization the taxpayer argues that us holdco’s basis in foreign holdco must be preserved and that the taxpayer can choose the share of stock to which the basis is reallocated the taxpayer bases its argument on caselaw and on sec_1_358-2 preservation of basis the taxpayer proffers a general theory of basis preservation based on the davant case discussed above that case involved a situation where the court found that the transaction qualified as a d_reorganization notwithstanding that no transferee corporation stock had been issued to the transferor_corporation in a footnote the court noted that the shareholders’ bases in their transferor stock should be added to their bases in the transferee stock in order to account for their economic interests in the tam-122241-13 transferor f 2d pincite n the taxpayer further advocates a theory of basis preservation by analogy to the redemption regulations in example of sec_1_302-2 a husband and wife each own percent of the stock in a corporation the husband’s shares are redeemed by the corporation but the distribution is deemed equivalent to a dividend because of his wife’s continued interest in the corporation the example states that the husband’s basis is preserved in the wife’s shares as a threshold matter us holdco’s basis in foreign holdco would have been preserved in any cfc stock it might be deemed to have received or in the foreign holdco stock it owned at the time of the cross-chain sale us holdco had already adopted its plan of dissolution and its liquidating_distribution of such cfc stock or of the foreign holdco stock it actually owned would have been a recognition event to us holdco under sec_336 basis would have been preserved and recovered if at all by us holdco in its final return the cases the taxpayer cites do not support its argument in davant there was a common identity of ownership between the transferor and transferee and the ownership was direct the davant court’s articulation is instructive it follows logically from what we have said that the basis formerly belonging to petitioners' warehouse stock must now be added to the basis of their water stock had the assets of warehouse been transferred to water for water's stock as they would have been if this transaction had actually been cast as reorganization the water stock would have received the basis of petitioners' warehouse stock when warehouse was liquidated see sec_1_358-1 a different result should not be obtained just because petitioners received no new stock but merely allowed their existing stock to appreciate in value cf sec_1_302-2 f 2d pincite n emphasis added davant expressly grounded this point on ensuring that the shareholders’ results would mirror those that would have happened had there been an actual issuance of stock and where shareholder directly owns both transferor and transferee stock as in davant it is a simple matter to reallocate basis from one to the otherdollar_figure where the transaction occurs among lower-tier entities and the stock ownership is indirect such as in the case under consideration had shares actually been issued the basis results would differ due to the need to transfer such shares through the ownership chains to the actual ownerdollar_figure here sub sub directly and through a disregarded_entity and sub collectively were the sole shareholders of cfc at all relevant similarly in u s v davis 397_us_301 a shareholder directly owned a corporation’s common and preferred_stock and his preferred_stock was redeemed in a transaction held to be essentially_equivalent_to_a_dividend the court indicated that the shareholder’s basis in the redeemed preferred_stock would be applied to his basis in the common_stock he continued to own u s pincite fn the taxpayer has not cited any case involving a lower-tier transaction in which basis has been reallocated as it seeks tam-122241-13 times had cfc actually issued stock to foreign holdco in the cross-chain sale and had sub sub and sub continued to maintain their complete direct ownership of cfc then somehow that cfc stock would have had to have been distributed up the chain from foreign holdco to us holdco to sub and then contributed down the ownership chain to sub sub and sub had those steps actually occurred us holdco would have had to have distributed the stock in a liquidating_distribution because it had already adopted its plan of dissolution in that dissolution us holdco would have recognized loss and recovered its stock basis under sec_336 if at all and sub would have taken a basis in that stock equal to its fair_market_value on the date of dissolution by reason of sec_334 to paraphrase the davant rationale a different result should not be obtained just because the taxpayer received no new stock in cfc but merely allowed its existing stock to appreciate in value given that cfc paid full value for the fc stock any actual stock cfc might have issued to foreign holdco would have to have had a de_minimis value and if as taxpayer asserts cfc should be treated as having issued a nominal share such share would have a dollar_figure value and in either case the mechanical basis rules would have allowed us holdco to recover its basis and sub 1’s basis would have been set to equal the date-of- distribution value and would not have had any relation to anyone else’s basis in that stock after that point the date-of-distribution-value basis would have been transferred by sub down the ownership chain with the result that the basis in cfc would have increased at most by a de_minimis amount this is consistent with example in sec_1_358-2t c and example in sec_1_1502-13 the taxpayer also invokes example of sec_1_302-2 that example which occurs in the context of a redemption transaction and illustrates the rule in sec_1_302-2 which provides that proper adjustment of the basis of the remaining stock will be made with respect to the stock redeemed that example shows what the proper adjustment would be with respect to its facts here the facts are materially different because there is no unrecovered_basis in addition a proper adjustment would not cause the stock basis in cfc to increase as discussed below any adjustment increasing the basis in cfc stock would allow the parent group to claim a duplicative tax_benefit for a single economic loss a result which is precluded under the ilfeld doctrine the davant rationale is sound prior to the cross-chain sale us holdco had adopted a plan of dissolution and the taxpayer treated us holdco’s dissolution as a taxable liquidation under sec_331 had any actual cfc shares been issued sub 1’s basis in those shares would have been set to equal value and here there was no value the taxpayer should not get a different answer just because it chose not to cause cfc to issue its stock in the transaction duplicative tax benefits for a single economic loss tam-122241-13 in 292_us_62 the supreme court stated that absent a clear declaration of intent by congress taxpayers are not allowed to deduct the same economic loss more than once in that case the supreme court determined that the parent of a consolidated_group was not able to deduct losses on the dissolution of its subsidiaries because the losses mirrored the economic losses which the consolidated_group had taken in prior years therefore it would be inappropriate to deduct the same economic loss twice ilfeld is controlling and precludes the basis reallocation the taxpayer seeks to determine whether the same expense constitutes the same economic loss courts look to what each of the costs represent in 139_tc_198 the taxpayer claimed a capital_loss on the sale of a subsidiary that had substantial environmental liabilities in a subsequent year the taxpayer claimed a further deduction for expenditures made to clean up the property held by the subsidiary that it sold the court determined that both the capital_loss and the environmental clean up expenses represented the actual cost of cleaning up the property therefore this constituted a double deduction on the same economic loss the court disallowed the clean up expense deduction in the present case the parent group through sub contributed bb to us holdco in a sec_351 contribution to fund an indirect investment in the fc stock under sec_358 the parent group through sub took a bb basis in us holdco’s stock when us holdco liquidated in a taxable liquidation the parent group through sub realized and recognized its economic loss on its stock in us holdco and correspondingly its economic loss on its indirect investment in fc stock the basis that the taxpayer seeks to reallocated to cfc duplicates sub 1’s initial bb contribution and represents the potential for the parent group to claim a second tax_benefit with respect to the pre-cross-chain sale diminution in the value of the fc stock no statute or other applicable rule clearly or definitely requires or authorizes a double tax_benefit in this circumstance under the ilfeld doctrine the taxpayer is not allowed to include this basis in cfc stock since it would constitute an impermissible double deduction the all-cash d regulations the taxpayer argues that regulations issued in allow it to designate the share of cfc stock to which us holdco’s basis in foreign holdco would attach however the cross-chain sale occurred prior to the effective date of the regulations and in any event the regulations do not apply as the taxpayer demands in temporary regulations were issued20 under sec_368 to address the distribution requirement the regulations the regulations provided that the distribution requirement would be treated as having been satisfied t d fed reg date tam-122241-13 notwithstanding the absence of a stock issuance if the same person or persons owned directly or indirectly all of the stock of the transferor and transferee corporations in identical proportions in such a case the transferee corporation would be deemed to have issued a nominal share of its stock to the transferor_corporation in addition to the actual consideration exchanged temp sec_1_368-2t l i for this purpose de_minimis variations in stock ownership and preferred_stock described in sec_1504 were not to be taken into account temp sec_1 2t l iii in final_regulation sec_21 replaced the regulations the regulations retained the nominal share construct the regulations contained corresponding modifications to the regulations under sec_358 and sec_1502 the sec_358 provisions allowed shareholders in the nominal share context to designate the share of transferee stock to which the basis of the surrendered stock would attach in temporary regulations were issued22 under sec_358 to clarify the basis consequences resulting from the nominal share construct first these regulations do not apply to the cross-chain sale the regulations applied only to transactions occurring after date and before date temp sec_1_368-2t l i the regulations apply only to transactions occurring on or after date sec_1_368-2 the cross-chain sale predates all of these effective dates the and regulations provide that in general a taxpayer may apply the regulations to transactions occurring prior to the effective date of the regulations provided all of the transferor_corporation the transferee corporation and any shareholder of the transferor or transferee corporation apply the provisions of the regulations sec_1 l ii the taxpayer cannot satisfy this latter requirement because among other reasons foreign holdco has dissolved and its final return is time-barred in addition at this point in time the taxpayer neither directly or indirectly has any ownership_interest in either foreign holdco or cfc if those entities continue to exist they are beyond the taxpayer’s control and we have no indication that those entities or any us shareholders of those entities have agreed to apply the provisions of the regulations second the provision in the regulations that would have allowed reallocation of basis only applied where a shareholder was deemed to have received a nominal share under sec_1_368-2 sec_1_358-2 as noted above no such nominal share construct applies here because the cross- chain sale predates the relevant regulations and because the stock of foreign holdco transferor and cfc transferee was not held in identical proportions the us holdco preferred_stock possessed significant non-transitory voting rights and thus do t d fed reg date t d fed reg date tam-122241-13 not qualify for the sec_1504 exclusion these shares would count for purposes of determining proportional ownership finally assuming arguendo that the regulations somehow applied the regulations do not permit the taxpayer to reallocate us holdco’s stock basis in foreign holdco in the manner it seeks the regulations provided that the nominal share of transferee corporation stock deemed to have been issued to the transferor_corporation will then be deemed distributed by the transferor_corporation to its shareholders and where appropriate further transferred through chains of ownership to the extent necessary to reflect the actual ownership of the transferor and transferee corporations temp sec_1_368-2 this was explained in the preamble to the regulations and illustrated in ex of temp sec_1_368-2 the regulations continued the nominal share construct with language substantially_similar to that employed in the regulations sec_1 l i the preamble noted that the nominal share construct was preferable to an approach that simply deemed the distribution requirement to have been satisfied because the nominal share provided a useful mechanism with respect to stock basis consequences to the exchanging shareholder preserved remaining basis if any and facilitated future stock gain_or_loss recognition by the appropriate shareholder t d fed reg pincite5 the preamble also specifically noted that giving significance to the nominal share for purposes beyond the distribution requirement is consistent with the fundamental premise underlying the intercompany_transaction deferral system which is to preserve the location of gain and loss within a consolidated_group locational integrity was preserved through the notion that the nominal share is deemed to have been transferred through the chains of ownership prior to any reallocation the regulations also added an example to the consolidated_return_regulations which clearly illustrated the operation of this basis construct in that example which involved a transaction among lower-tier members the shareholder m of the transferor_corporation s is deemed to have received a nominal share of stock in the transferee corporation b and adjustments to m’s basis in the nominal b share resulted in an excess_loss_account thereafter m is deemed under sec_1_368-2 to have distributed that nominal share to its shareholder which resulted in an intercompany gain under sec_311 sec_1_1502-13 ex b if the taxpayer’s approach were to prevail then m would be able to reallocate the excess_loss_account to another member’s stock in b thus avoiding the sec_311 gain recognition that is not however what happens in the example the regulations also amended sec_1_358-2 to allow for reallocation of a shareholder’s basis in the nominal share the preamble stated that this approach is the most consistent with current law regarding basis determination as a similar result would occur under sec_1_358-2 if stock was actually issued in the transaction this approach of course sounds like the principle annunciated in the davant footnote as discussed above had cfc actually issued tam-122241-13 stock to foreign holdco in the transaction the basis would have been recovered if at all by us holdco upon its liquidating_distribution to sub any reallocation of that basis would have been quite inconsistent with the then-current law regarding basis determination the preamble to the regulations noted that some were contending that the regulations could be interpreted to allow an inappropriate reallocation of basis in a nominal share by persons who do not actually own stock in the issuing_corporation to shares in the issuing_corporation actually owned by another person before the nominal share is deemed to have been transferred through the relevant chains of ownership the preamble makes clear that such an approach is not supportable the irs and treasury did not intend for the regulations to allow such an inappropriate allocation_of_basis and do not believe the regulations support such an allocation t d fed reg pincite8 emphasis added the regulations added temp sec_1_358-2t a iii in place of its counterpart to clarify this point example of sec_1_358-2t c added in the regulations largely mirrors the transaction in this case and explains how the nominal share takes a fair_market_value as it is distributed through the chain of ownership to reflect actual ownership in the example corporation p wholly owns corporation x and corporation y corporation x wholly owns corporation t corporation t sells all of its assets to corporation y for cash in a transaction that qualifies as an all cash_d_reorganization under sec_1_368-2 the example notes that when the nominal share of y stock is deemed distributed to p p’s basis in the stock will equal fair_market_value under sec_301dollar_figure the taxpayer’s position relies on sec_1_358-2 as added by the regulations even though that provision was clarified removed and replaced with temp sec_1_358-2t a iii the taxpayer contends that the latter regulation was made prospectively effective sec_1_358-2t d thus indicating that it reflected a major policy shift and change in the law rather than a mere clarification therefore the taxpayer wants to rely on the regulation as issued in and argues based on its interpretation of the regulation that it can assign the basis of the nominal share to a pre-existing share of cfc the regulations clarify that if stock is issued to a lower-tier subsidiary the basis in the nominal share must be adjusted to fair_market_value upon distribution of the there is no meaningful difference in p taking a fair_market_value basis under sec_301 in the case of a non-liquidating distribution or under sec_334 in the case of a liquidating_distribution either way p’s basis is equal to the date of distribution value without any derivation from the distributor’s basis tam-122241-13 nominal share up through the chain of ownership the preamble to the regulations specifically referred to the modification as a clarification and expressly stated that the position the taxpayer asserts here was neither intended nor was allowed by the regulations t d fed reg pincite8 the regulations cannot reasonably be interpreted to give taxpayer the reallocation it seeks the preamble to the regulations stated the regulations were consistent with current law at the time of the issuance of the regulations regarding basis determination as a similar result would occur under sec_1_358-2 if stock was actually issued in the transaction t d under the general rules of sec_358 and the davant principle the basis in the nominal share would have been reset to its value upon us holdco’s post-adoption-of-plan-of-dissolution distribution to sub moreover the preamble to the regulation also discussed and included an example how the regulations applied in the consolidated context the discussion and example mirrored in sec_1_1502-13 ex demonstrate that any nominal share issued to a lower-tier subsidiary will be deemed distributed to its parent and the distribution will be treated as a sec_301 distribution in order to preserve locational integrity the clarification including example in sec_1 2t c referred to above is consistent with - not some vast departure from - the policy underlying the regulations and the pre-existing sec_358 rules c taxpayer’s duty_of_consistency the taxpayer is barred by the duty_of_consistency from characterizing the cross- chain sale of fc stock as a d_reorganization because it reported the transaction on its year return as a taxable sale followed by cascading sec_351 contributions of foreign holdco stock to cfc such a change in position after the statute_of_limitations has closed on the year return would allow the taxpayer to benefit at the expense of the service by effectively claiming twice what is a single economic loss the duty_of_consistency is a judicial doctrine holding that a taxpayer may not after taking a position on a given fact or transaction in one year take a contrary position with respect to that same fact or transaction in a subsequent year when correction of the prior year is time barred 231_f3d_541 9th cir when such a fact or transaction affects another year the doctrine holds there is a duty_of_consistency with respect to the consequences of that fact or transaction regardless of whether all the technical elements of estoppel are present id citing 131_f2d_662 5th cir the ninth circuit has identified three elements that are required for the duty_of_consistency to apply a representation by the taxpayer in a given tax_year reliance on that representation by the service and an attempt by the taxpayer to change its previous representation to the detriment of the service after the statute_of_limitations has closed on the prior tax_year 461_f3d_1080 9th cir van alen v commissioner tcmemo_2013_235 because all three of these requirements tam-122241-13 are satisfied by the facts present in this matter the duty_of_consistency binds the taxpayer to its initial characterization of the reported transaction representation by the taxpayer on its year return the parent group reported the dissolution of us holdco as a sec_331 taxable liquidation and claimed a resulting capital_loss of qq cfc 1’s form_5471 treated the cross-chain sale as a taxable purchase and reported a cost_basis rather than a large built-in_loss in the fc stock the cross-chain sale was also reported as a taxable sale on the form_5471 filed for foreign holdco for year and forms for foreign holdco were prepared and filed on a going concern basis until at least date the filing of such returns rather than the abbreviated returns properly filed by a dormant entity under revproc_92_70 effectively represented that cfc continued to exist and to own the assets and liabilities reported on the return and that cfc was not liquidated either de_facto or de jure until at least date cfc reliance by the irs the service accepted the parent group’s year return and allowed the qq capital_loss resulting from the taxable liquidation of us holdco inherent in accepting the taxpayer’s position that the liquidation of us holdco qualified as a taxable liquidation under sec_331 the service relied upon taxpayer’s representations that third parties owned us holdco voting preferred_stock at the time of us holdco’s liquidation that the preferred_stock represented more than percent of the vote and or value of us holdco stock and that us holdco was not affiliated and thus not to be consolidated with the parent group if no voting preferred shares in sub were held by third parties at the time of the liquidation as the taxpayer now contends the service might not have accepted the taxpayer’s claimed capital_loss given what would have been a latent potential for duplicative tax benefits had the cross-chain sale been reported as a d_reorganization the service might have been motivated to challenge the loss on ilfeld or other grounds moreover returns for foreign holdco continued to be filed on a going concern basis until date the taxpayer did not file abbreviated returns under revproc_92_70 that would show that foreign holdco was a dormant entity but it represented that foreign holdco was a continuing entity with some activity that that held some amount of assets and owned some amount of liabilities additionally cfc 1’s form_5471 reported a cost_basis rather than a large built-in_loss in the fc stock the service accepted these representations attempt to change position at present the taxpayer acknowledges that it erred in its prior treatment of the cross-chain sale and asserts that it should have reported the transaction as a d_reorganization on its year return in particular it asserts that its basis in the cfc stock should be increased by the basis us holdco had in foreign holdco this position tam-122241-13 is inconsistent with the way the transaction was reported on the year return as we noted above following a taxable liquidation of us holdco under a plan of dissolution adopted prior to the cross-chain sale the correct basis sub would have taken in the assets distributed to it by us holdco including any shares in foreign holdco or any deemed or a nominal share in cfc was equal to the fair_market_value on the date of distribution fair_market_value ie zero with respect to the stock in foreign holdco or any nominal or constructive share in cfc therefore if a nominal or constructive share in cfc is somehow treated as having been owned by sub or contributed by it to sub sub and sub the taxpayer’s basis in cfc would not increase additionally the taxpayer now states that foreign holdco effectively dissolved in year the year of the cross-chain sale however for a number of years after year forms were filed for foreign holdco on a going concern basis and those forms represented that foreign holdco owned some amount of assets and owed some amount of liabilities now the taxpayer argues that foreign holdco had de_facto liquidated in year for purposes of the distribution requirement in sec_354 and sec_368 the service accepted the taxpayer’s representations that foreign holdco was an ongoing business_entity with some activity that owned assets and owed liabilities in year and a number of years thereafter the service cannot now audit foreign holdco to determine if it continued as a going concern or determine the quantum or quality of assets and liabilities through these years therefore the effects of this transaction must reflect the representations that the taxpayer made about foreign holdco not being liquidated either de_facto or de jure until at least date we do not agree with the taxpayer’s contention that it engaged in a d_reorganization if the taxpayer had engaged in a d_reorganization and the service agreed that the preferred_stock should be considered to be redeemed the service should have evaluated whether to challenge the capital_loss of gg that it reported on its year return on ilfeld or other grounds in order to avoid the potential for duplicative tax benefits derived from a single economic loss however the statute_of_limitations is now closed as to the year return and the service can no longer disallow the gg capital_loss the taxpayer’s change in position would effectively allow set it up to benefit twice from the single economic loss it suffered as a result of its investment in fc first as a capital_loss resulting from the liquidation of us holdco in year and then as a loss on the sale of cfc in year the taxpayer reported on its year return that it engaged in a taxable subsidiary_liquidation the service relied on that representation in allowing the taxpayer a gg loss in year now that year is closed to adjustment the duty_of_consistency precludes the taxpayer from recharacterizing the cross-chain sale as a tax-free reorganization and effectively duplicating its loss caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent


t c memo united_states tax_court clarence mcdonald leland jr and myna green leland petitioners v commissioner of internal revenue respondent docket no filed date clarence mcdonald leland jr and myna green leland pro sese edwin b cleverdon and horace crump for respondent memorandum findings_of_fact and opinion nega judge by notice_of_deficiency dated date respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ and federal_income_tax respectively and accuracy-related_penalties of dollar_figure and dollar_figure for tax years and respectively under sec_6662 the issues for decision are whether the passive_activity_loss rules under sec_469 limit petitioners’ loss deductions for tax years and and whether petitioners are liable for accuracy-related_penalties pursuant to sec_6662 findings_of_fact some of the facts have been stipulated and are so found petitioners resided in mississippi at the time they filed their petition references to petitioner in the singular are to clarence mcdonald leland jr petitioner is an attorney practicing in the jackson mississippi metropolitan area petitioner is also trained as an electrical engineer in petitioner purchased a big_number acre farm in turkey texas in petitioner entered into a crop share arrangement with clinton pigg a farmer local to turkey in accordance with their arrangement mr pigg has complete responsibility for planting and harvesting crops and petitioner has complete responsibility for maintaining the infrastructure of the farm of the big_number acres approximately are irrigated and are used by mr pigg for planting and harvesting crops in mr pigg spent six hours planting all section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar cotton on acres before and after planting he spent a total of three hours spraying the cotton field over the course of two sprayings mr pigg checked on the farm weekly over the course of months spending approximately minutes at the farm each time it took mr pigg hours to harvest all of the cotton planted in in total mr pigg worked hours on the farm in in mr pigg sprayed and planted acres spending approximately four hours in total on both tasks the cotton did not develop in and mr pigg subsequently abandoned the crop petitioner and mr pigg talked twice monthly during and but there is no evidence in the record as to the time spent on their conversations maintaining the big_number acre farm requires petitioner to perform a lot of long hard work petitioner performs most of these tasks himself but he sometimes has assistance from his son or a friend steve coke aside from petitioner mr pigg mr coke and petitioners’ son no individuals perform any tasks on the farm petitioner visits the farm several times each year in order to perform necessary tasks commuting approximately hours each way including the time it takes to load equipment onto his trailer the farm has approximately miles of perimeter roads and miles of interior roads that must be bush hogged and disced regularly in order to remain passable a bush hog is a device that is pulled behind a tractor to cut vegetation and clear land discing involves churning and plowing soil to uproot any existing vegetation trees and brush that grow near the roads must be controlled through spraying and chopping down limbs that protrude onto the roadways because high winds can erode soil on the roads wheat must be planted each fall to prevent erosion on the roads and on acreage that is not part of the acres planted and harvested by mr pigg almost all of the roads have fences running parallel that must be maintained wild hogs are a continuing problem at the farm they dig underneath fences to get to edible crops and have dug up and broken water lines on the farm in a year before the tax years and wild hogs ate big_number pounds of peanuts that petitioner and mr pigg had grown on the farm as a result petitioner has to spend significant time controlling the wild hog population which he accomplishes through hunting and trapping petitioner usually hunts hogs for three hours each morning and afternoon while at the farm for a total of six hours per day in addition he spends time building traps and baiting them with corn millet and kool-aid to lure hogs to a specific area where he waits in a tripod stand with semiautomatic weapons in order to eradicate them petitioner also must maintain farm equipment regularly parts on tractors bush hogs and water lines must be replaced tractor tires regularly go flat and must be repaired or replaced when petitioner visits the farm he stays in a small travel trailer that also requires some maintenance each time petitioner leaves he cleans the floor of the trailer and drains the water lines and adds antifreeze to prevent them from freezing additionally petitioner keeps an old truck at the property each time he leaves he disconnects the batteries on the truck and on any tractors that remain at the farm petitioner did not keep contemporary records of time he spent at the farm in and however he reconstructed his records in preparation for trial by reference to a calendar he keeps at his law practice and credit card receipts and invoices for various purchases related to the farm activity petitioner provided logs to the court detailing time spent working at the farm petitioner also credibly testified as to his activities at the farm including the hours he spent each day on various tasks such as hunting hogs and rebuilding roads according to his records petitioner spent hours in and hours in on farm- related activities the logs petitioner provided reflect that he spent hours and hours in and respectively working on the farm we have reduced the hours because of mathematical discrepancies and to subtract time petitioner listed for attending church in turkey texas attending religious services is not part of the farming activity and therefore any hours petitioner spent either traveling to or at church cannot count toward the hours spent materially participating in the continued respondent mailed petitioners a notice_of_deficiency on date that determined deficiencies of dollar_figure and dollar_figure in petitioners’ and federal_income_tax respectively the deficiencies were attributable to respondent’s limiting loss deductions from the farming activity under sec_469 additionally the notice_of_deficiency determined accuracy-related_penalties of dollar_figure and dollar_figure for tax years and respectively under sec_6662 i burden_of_proof opinion in general the commissioner’s determination as to the taxpayer’s tax_liability is presumed correct and the taxpayer bears the burden of proving otherwise see rule a 290_us_111 this burden may shift to the commissioner if the taxpayer introduces credible_evidence with respect to any relevant factual issue and meets other conditions including maintaining required records see sec_7491 we decide this case on the preponderance_of_the_evidence and accordingly need not address whether the continued activity burden_of_proof has shifted see 124_tc_95 ii petitioner’s farming activity sec_469 limits the deductibility of losses from certain passive activities of individual taxpayers generally a passive_activity is any activity which involves the conduct of any trade_or_business and in which the taxpayer does not materially participate sec_469 a taxpayer is treated as materially participating in the activity only if the taxpayer is involved in the operations of the activity on a basis which is regular continuous and substantial sec_469 the regulations provide seven exclusive tests for material_participation in an activity sec_1_469-5t temporary income_tax regs fed reg date an individual will be treated as materially participating in an activity for purposes of sec_469 if and only if the individual participates in the activity for more than hours during such year the individual’s participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual’s participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year the activity is a significant_participation_activity for the taxable_year and the individual’s aggregate participation in all significant participation activities during such year exceeds hours the individual materially participated in the activity for any taxable years whether or not consecutive during the taxable years that immediately precede the taxable_year the activity is a personal_service_activity and the individual materially participated in the activity for any taxable years whether or not consecutive preceding the taxable_year or based on all of the facts and circumstances the individual participates in the activity on a regular continuous and substantial basis during such year id an individual may prove his or her participation in an activity by any reasonable means id para f fed reg contemporaneous daily time reports logs or other similar documents are not required if the taxpayer is able to establish the extent of his participation by other reasonable means id reasonable means may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or other narrative summaries id the phrase reasonable means is interpreted broadly and temporary guidelines may not provide precise guidance goshorn v commissioner tcmemo_1993_578 however a postevent ballpark guesstimate will not suffice see lee v commissioner tcmemo_2006_193 goshorn v commissioner tcmemo_1993_578 petitioner’s reconstructed logs his receipts and invoices related to farm expenses and his credible testimony are all reasonable means of calculating time spent on the farming activity during tax years and petitioner’s records and testimony establish that he spent hours in and hours in on farm-related activities as noted a taxpayer is treated as having materially participated in an activity if the taxpayer participates in the activity for more than hours during the taxable_year and the taxpayer’s participation in the activity for the taxable_year is not less than the participation of any other individual sec respondent’s main objection to petitioner’s reconstructed logs was that they were not prepared contemporaneously with the activity sec_1_469-5t temporary income_tax regs fed reg date does not require contemporaneous_records and we are satisfied that petitioner has established material_participation through other reasonable means respondent did not dispute petitioner’s inclusion of travel time in his reconstructed logs the facts of this case establish that petitioner’s travel time was integral to the operation of the farming activity rather than incidental see shaw v commissioner tcmemo_2002_35 we are also satisfied that petitioner’s purpose in traveling long distances to and from turkey texas was not to avoid the disallowance under sec_469 and the regulations thereunder of any loss or credit from the farming activity see sec_1_469-5t temporary income_tax regs supra 469-5t a temporary income_tax regs supra we are satisfied that petitioner’s participation was not less than the participation of any other individual including mr pigg mr coke and petitioners’ son during tax years and see id accordingly petitioner materially participated in the farming activity during tax years and and the deductions attributable to that activity are not limited by sec_469 because we rule for petitioners on the deductibility of their losses under sec_469 we also find that they are not liable for the accuracy-related_penalties pursuant to sec_6662 for tax years and in reaching our holding we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered for petitioners