Opinion ID: 592081
Heading Depth: 2
Heading Rank: 1

Heading: Was it Proper for the District Court to Rely on Revenue Ruling 82-20?

Text: 26 Salomon first contends that the district court erred by relying on Revenue Ruling 82-20 which, it maintains, is not good law. We disagree. 27 Revenue rulings represent the official IRS position on application of tax law to specific facts. See Rev.Rul. 92-1, § 2.05, 1992-1 I.R.B. 7, 12; Becker v. Commissioner of Internal Revenue, 751 F.2d 146, 149 (3rd Cir.1985). They relate to matters as to which the IRS is the primary authority. Bob Jones Univ. v. United States, 461 U.S. 574, 596, 103 S.Ct. 2017, 2030, 76 L.Ed.2d 157 (1983). Revenue rulings are accordingly entitled to precedential weight. Carle Foundation v. United States, 611 F.2d 1192, 1195 (7th Cir.1979) cert. denied 449 U.S. 824, 101 S.Ct. 85, 66 L.Ed.2d 27 (1980). Indeed, we have stated that Revenue rulings issued by the I.R.S. are entitled to great deference, and have been said to 'have the force of legal precedent unless unreasonable or inconsistent with the provisions of the Internal Revenue Code.'  Amato v. Western Union Int'l, Inc., 773 F.2d 1402, 1411 (2d Cir.1985) (quoting Fred H. McGrath & Son, Inc. v. United States, 549 F.Supp. 491, 493 (S.D.N.Y.1982) (citation omitted)), cert. dismissed, Western Union Int'l, Inc. v. Amato, 474 U.S. 1113, 106 S.Ct. 1167, 89 L.Ed.2d 288 (1986); see also The Progressive Corp. v. United States, 970 F.2d 188 (6th Cir.1992). We believe that Revenue Ruling 82-20 is neither unreasonable, nor inconsistent with prevailing law. 28
29 Revenue Ruling 82-20 addresses itself to those consolidated group asset transfers that are immediately followed by a pre-conceived spin-off of the transferee corporation to a third-party outside the group. It holds, in essence, that such transactions should be treated the same as a direct transfer of the section 38 assets to a third-party. Since the direct transfer constitutes a disposition under § 47(a)(1), see Treas.Reg. § 1.1502-3(f)(3) ex. 3, it reasons that the more circuitous transfer by way of another consolidated group member should be as well. 30 We do not find this conclusion unreasonable. In substance, if not in form, the direct and the circuitous transaction are the same. See Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945). Each achieves a rapid transfer of section 38 property outside the group. To distinguish between them would deny economic reality. See Gregory v. Helvering, 293 U.S. 465, 470, 55 S.Ct. 266, 268, 79 L.Ed. 596 (1935) (refusing to exalt artifice above reality in determining tax liability). Moreover, such a holding would allow the common parent of a consolidated group, such as EMC, to move section 38 property outside the group without paying recapture taxes simply by first transferring the property to a member subsidiary and then distributing the subsidiary's stock to the third-party. Revenue Ruling 82-20's requirement of recapture under these circumstances is not unreasonable. 31
32 Salomon next argues that Revenue Ruling 82-20 is inconsistent with prevailing law. Salomon's first assertion, that the rule is squarely at odds with CRR Example 5, is flawed because there is no inconsistency between Revenue Ruling 82-20 and CRR Example. The two rulings address different factual situations. CRR Example 5 assumes that the asset transfer occurs in one year (1968) and the spin-off in the next (1969). Placing these two steps in different calendar years is not accidental, and signifies a meaningful time delay between them. But see Walt Disney v. Commissioner, 97 T.C. 221, 228 (1991). Where such a delay exists, Salomon's argument that the two steps of the transaction should be treated separately for tax purposes makes a good deal of sense. In such circumstances, there is little reason to believe that the transferor corporation intends to use the transaction as a means of moving section 38 property out of the group while avoiding recapture taxes. See Tandy Corp. v. Commissioner, 92 T.C. 1165, 1173 (1989) (decision to view separately the two steps of a divisive D transaction premised on the [d]elay of the stock distribution until the year following the asset transfer). 33 Revenue Ruling 82-20, however, assumes that the spin-off follows immediately after the asset transfer. Rev.Rul. 82-20, 1982-1 C.B. 6, 7. The rapidity with which these components follow one another suggest that they are, in substance, parts of one overall transaction intended to dispose of the section 38 assets outside of the consolidated group. Revenue Ruling 82-20 further solidifies this inference by positing that there is no intention at the time of transfer to keep the property within the consolidated group. Id. These factual circumstances, timing and intent, differ from those presented in CRR Example 5. They lead to the conclusion that the two components are steps in a larger transaction which, when viewed as a whole, constitutes a § 47(a)(1) disposition. Cf. Tandy at 1170 (recapture argument better supported where asset transfer and spin-off occur in same calendar year). The Revenue Ruling thus complements CRR Example 5 by dealing with transactions that occur rapidly and are intended at their onset to transfer section 38 property outside the consolidated group. The consolidated return regulations state that [t]he Internal Revenue Code, or other law, shall be applicable to the group to the extent the regulations do not exclude its application. Treas.Reg. § 1.1502-80 (emphasis added). Revenue Ruling 82-20 is within the ambit of such other law. We accordingly believe that the two rulings are not in conflict, and may consistently be read together. Judge Freeh did not err when he viewed the two rulings as alternatives and then chose Revenue Ruling 82-20 based on EMC's intention immediately to spin-off EC following the asset transfer. 34 Revenue Ruling 82-20, in addition to not conflicting with CRR Example 5, is fully consistent with the purpose and express terms of the Code's recapture provisions, 26 U.S.C. § 47 et seq. (1976 & Supp.1980). Congress instituted recapture in order [t]o guard against a quick turnover of assets by those seeking multiple credit. S.Rep. No. 1881, 87th Cong., 2d Sess. 18 (1962), reprinted in 1962 U.S.C.C.A.N. 3304, 3320. Asset transfers with the intent of immediately spinning-off the transferee corporation exemplify this concern. As explained above, § 47(a)(1) provides for recapture upon the disposition of section 38 property. Section 47(b), however, makes an exception to this rule where the transfer occurs by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business. 26 U.S.C. § 47(b) (Supp. IV 1980) (emphasis added). Where the transferor corporation does not retain the necessary substantial interest in the transferee, § 47(b) does not apply and recapture is required. See Treas.Reg. § 1.47-1(f)(ii)(b). In divisive D reorganizations of the type engaged in by EMC, the transferor parent distributes all the shares of the transferee to its shareholders. It does not retain a substantial interest in the transferee subsidiary. Salomon maintains Revenue Ruling 82-20's intent test violates the single entity concept by failing to preserve the integrity of the initial asset transfer from one consolidated group member to another. It argues that Revenue Ruling 82-20 is inconsistent with the Code's consolidated return provisions. 35 The Code treats consolidated return filers as a single entity principally because it assumes that, contrary to the technicalities of corporate form, they actually function as one unit. Thus, CRR § 1.1502-3(f)(2) holds that there is no § 47(a)(1) disposition because it supposes that the transferor corporation is so intertwined with the transferee that it might as well have been moving assets from one branch of its own operation to another. 36 A pre-existing intent to spin-off the transferee corporation outside of the group, however, changes the picture entirely. Under these circumstances, the transaction is, in substance, a means of moving the assets outside the group. There is much less reason to preserve the fiction that the corporations involved are a single entity. To the contrary, if the asset transfer and spin-off are not treated the same as any other third-party disposition, consolidated groups will have an incentive to use these transactions as a means of avoiding recapture taxes. We therefore give little weight to the single entity principle in this context and hold that it does not render invalid the IRS' conclusion, voiced in Revenue Ruling 82-20, that [w]hen there is no intention at the time of transfer to keep the property within the consolidated group, the transaction should be viewed as a whole and not as separate individual transactions and recapture should be the order of the day. Rev.Rul. 82-20 1982-1 C.B. 6. 37 In sum, we find Revenue Ruling 82-20 consistent with the Code, and hold that the district court properly relied upon it. 38