Cross-appeals from decision of Tax Court, Scott, Judge, holding that taxpayer was entitled to a stepped-up basis for assets acquired through merger-liquidation of controlled corporation, but that taxpayer was limited in step-up to percentage of corporation controlled at time of liquidation.
Smith and Timbers, Circuit Judges, and Tyler,*fn* District Judge.
These are cross-appeals from a decision by the Tax Court, 58 T.C. 619 (1972), Irene F. Scott, Judge, holding (1) that the taxpayer, Madison Square Garden Corporation (MSG), was entitled under 26 U.S.C. § 334(b) (2) to a stepped-up basis for assets acquired through a merger-liquidation of a controlled corporation, but (2) that it was limited in this step-up to 80.22% of the assets received since it controlled only that percentage of the acquired corporation's stock at the time of the liquidation. We affirm on the Commissioner's appeal of the first holding, but reverse and remand on the taxpayer's appeal of the second.
The facts have been stipulated. In the year prior to the merger-liquidation, MSG acquired approximately 52% of the stock of the old Madison Square Garden Corporation (Old Garden). However due to the fact that during this acquisition period Old Garden redeemed 36% of its own stock, MSG's interest rose from the 52% to just over the 80% required for a stepped-up basis under § 334(b) (2). Pursuant to the merger-liquidation agreement, MSG with its 80.22% interest, received 100% of Old Garden's assets, while the minority shareholders -- who held the remaining 19.78% interest -- received therefor an appropriate amount of preferred stock in MSG.
The Commissioner contends that this merger-liquidation failed the 80% control rule of § 332 and the corresponding basis provisions of § 334(b) (2) in that MSG did not "purchase" the required 80% interest in Old Garden, but rather sat by and watched as the 52% it had acquired blossomed into 80% due to the redemption of the Old Garden shares. The Commissioner advances this rather mechanical interpretation of § 334(b) (2) without benefit of any direct authority save the word "purchase" in the Code itself.*fn1
But as § 334(b) (3) makes clear, that term is not to be so narrowly construed:
Purchase defined. -- For purposes of [334(b) (2)], the term "purchase" means any acquisition of stock . . . .
To be sure, here there was technically no "acquisition" of 80% of the shares outstanding at the start of the acquisition period. But neither was the redemption a fortuitous accident. Rather the reduction in the number of outstanding shares was obviously part of a general plan by which MSG would acquire the assets of a somewhat smaller Old Garden. And as the parties agree, Congress' explicit intent in enacting § 334 was to codify the rule of Kimbell-Diamond, 14 T.C. 74 (1950), aff'd 187 F.2d 718 (5th Cir.), cert. denied, 342 U.S. 827, 72 S. Ct. 50, 96 L. Ed. 626 (1951), that such an integrated transaction should be treated as the purchase of assets that in substance it is. See, S. Rep. No. 1622, 83rd Cong., 2d Sess., 3 U.S. Code Cong. & Admin. News 4621, 4679, 4894-95 (1954); Cabax Mills v. Commissioner of Internal Revenue, 59 T.C. 401, 408-09 (1972).
Given this clear intent, we believe the Tax Court was quite correct in holding that § 334 is not limited to the case where a corporation acquires the requisite 80% control solely through purchases, rather than through purchase and redemption. Clearly the underlying goal of purchasing assets and the degree of control immediately prior to the liquidation are the same in either case. To accept the Commissioner's contrary contention that the measurement of control must be made according to the number of shares outstanding at the start of the acquisition period would be to raise an irrational bar in any case where the statutory purpose was in all other respects met, but the acquired corporation, for whatever reason, found it necessary or desirable to retire a portion of its stock.
In short, we believe the Tax Court was correct in holding that the measurement of control is to be made on the date the liquidation plan is adopted and the assets distributed. Here the requisite control was present.
Turning then to the question of the proper basis for the assets acquired, we find that the issue was largely overlooked in the stipulation of facts: Thus while the parties have provided us with such helpful information as the useful lives of the athletes owned by the Garden,*fn2 neither side has introduced the actual liquidation agreement. We must, therefore, infer from other facts the precise nature of the liability MSG assumed vis-a-vis the minority shareholders. That difficulty noted, it seems clear -- and neither the ...