In Uncategorized on 03/31/2021 at 17:43

Doubtless y’all will recall we left Complex Media last month with a Rule 155 beancount, after the Complexes were let off the hook on their Section 351 tax-free incorporation, to reckon up the effects of their sale, specifically some Section 197 IP intangibles.

Refresh your recollection with my blogpost “A Challenge,” 2/10/21. And get those crutches and that large whiskey I spoke of then ready. Judge James S. (“Big Jim”) Halpern has 103 (count ’em, 103) pages of REVISION of the Complexes’ saga in Complex Media, Inc., 2021 T. C. Memo. 14 (REVISED), filed 3/31/21.

The Section 197s need to be created post-8/10/93 (check), need to be used in a trade or business (here magazine-publishing; check), and mustn’t be self-created (here created by seller; check).

But if you’re the lucky recipient of these in a Section 351, you get the transferor’s basis (here seller-created, wherefore basis is bupkis, if you’ll pardon an arcane technical term).

Judge Big Jim, no mean unscrambler of multilevel, multiparty corporate fritattas, called for help. “Identifying the issues that remain for decision has proved to be a challenge, leading to our request that the parties address in supplemental briefs a series of questions posed in an order dated April 24, 2020. Our efforts were not entirely successful.” 2021 T. C. Memo. 14 REVISED, at p. 21.

The parties seem to agree that the deal was a Section 351 tax-free incorporation. If it were a sale, the Complexes’ basis in the Section 197s would have been north of $7 million, with taxes to the seller to match.

But the deal goes out of control because of the buyout of the dissentient partner. The $3 million cash supposedly paid to acquire these Section 197s was in fact paid to the departing partner. He turned in the shares he got in the tax-free incorporation immediately and got said cash. That breaks the 80% control group required to comply with Section 351. In short, a give-and-go torpedoes the tax-free exchange.

Trying to rope in the preferred shareholders of the acquirer doesn’t help, as they didn’t get back the same stock they gave up. Anyway, they didn’t control the acquirer, as they needed one of the common shareholders to go along.

And the duty of consistency requires the Complexes to stick to their story.

But the story doesn’t end there.

“In sum, petitioner’s ineligibility to invoke grounds that would render its contracts unenforceable or call into question respondent’s interpretation of those contracts does not prevent it from disavowing the form of the transactions implemented under them.” 2021 T. C. Memo. 14 REVISED, at p. 55.

But what must the disavower prove in order to escape from the deal it created?

“…we now conclude that the additional burden the taxpayer has to meet in disavowing transactional form relates not to the quantum of evidence but instead to its content–not how much evidence but what that evidence must show by the usual preponderance. The Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits… that are inconsistent with those the taxpayer seeks through disregarding that form.” 2021 T. C. Memo. 14 REVISED, at p. 64. (Emphasis by the Court).

After a lengthy probe of tax consequences, Judge Big Jim finds that the Complexes aren’t trying for tax consequences other than they had sought. “Substance over form” applies to taxpayers as well as to IRS.

But there’s still the problem of valuing what the Complexes got. They got cash and a note, and tangibles as well. But the note, calling for future payment, wasn’t worth face value. And the value of the rest isn’t clear either. So our old friend Cohan is reprised, and the Section 1060 and Rev Rul. 68-55 play their parts.

And when the dust settles, we get a Rule 155 beancount again. Mark Twain got it right: “Well you’ve got to admire men that deal in ideas of that size and can tote them around without crutches.”


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