Company Argues $42 Million Refund Suit Erroneously Dismissed; Loss Transactions Weren't Shams

Counsel for the plaintiff-appellant knows of no case pending in this or any other court that will directly affect or be directly affected by this Court's decision in the pending appeal.

The jurisdiction of The United States Court of Appeals for the Federal Circuit to hear this appeal is based on 28 U.S.C. § 1295(a)(3), which provides:

Plaintiff contends that the lower court erred in failing to recognize the business purposes accomplished by the transactions in issue, in misapplying the established principles relating to both the economic sham and step transaction doctrines and in ignoring carefully crafted provisions of the Code and Regulations applicable to these transactions. Plaintiff contends that the transactions in issue should be respected for tax purposes.

1. Heinz was a public corporation with stock actively traded on the New York Stock Exchange. Jt. Stip., par. 4; App. 302.

2. Heinz was the common parent of the Heinz Group, a group of affiliated corporations filing consolidated federal income tax returns on the basis of a fiscal year ending on the Wednesday closest to April 30. Jt. Stip., pars. 1, 2 and 3; App. 301.

3. HCC was incorporated in 1983 and at all relevant times was a member of the Heinz Group. Jt. Stip., par. 7; App. 303.

4. At all times from 1983 until January, 1995, HCC engaged directly in financing Heinz subsidiaries. Jt. Stip., par. 13; App. 304.

5. HCC also directly owned foreign affiliates of the Heinz Group. Jt. Stip., par. 12; App. 303-304; Transcript; App. 428-429.

6. HCC's net after tax income for 1994 was in excess of $137 million. Jt. Stip., par. 15; App. 304.

7. HCC's net after tax income for 1995 was in excess of $277 million. Jt. Stip., par. 17; App. 304.

8. At the end of 1994, HCC's net worth was $1.8 billion. Jt. Stip., par. 14; App. 304.

9. At the end of 1995, HCC's net worth was $1.99 billion. Jt. Stip., par. 16; App. 304.

10. For many years before 1995, like many public corporations, Heinz engaged regularly in purchases of its own stock on the open market, primarily to reduce the number of its outstanding shares and thus increase its earnings per share. Heinz spent an average of more than $170 million per year on such stock. 76 Fed. Cl. at 576; App. 8; Transcript; App. 400-401, 420-421; see also section III.C.1. of Argument.

11. Heinz's purchases of its own stock had the ancillary purpose of supporting the price and liquidity of the stock. Transcript; App. 403-405, 414-415.

12. From August 11, 1994, through November 15, 1994, HCC purchased 3,500,000 shares of Heinz stock in the market, in its own name and with its own funds, at a total cost, including capitalized fees, of $130,983,103. Jt. Stip., pars. 21, 23, 24 and 25; App. 304-305.

13. HCC borrowed $40 million, exclusively on the basis of its own credit, to fund a portion of the purchase price of the 3,500,000 shares, and timely repaid this borrowing out of its own funds. 76 Fed. Cl. at 576; App. 8; Transcript; App. 451-453.

14. Because Heinz stock owned by HCC was not treated as outstanding stock for financial reporting purposes, HCC's purchase of Heinz stock satisfied the purposes of the Heinz stock purchase program just as if Heinz had purchased the stock. Transcript; App. 414-418, 631-632; see also section III.C.1. of Argument.

15. Through January 18, 1995, HCC received approximately $1.7 million in dividends on the Heinz stock it purchased. 76 Fed. Cl. at 577; App. 10.

16. On January 18, 1995, HCC transferred 3,325,000 shares of Heinz stock to Heinz in exchange for a zero coupon six percent convertible note, with a face amount of $197,402,412.78, due January 18, 2002, and convertible into 3,510,000 shares of Heinz stock, at any time beginning January 18, 1998, until January 18, 2002 ("the Note"). Jt. Stip., par. 29; App. 305; 76 Fed. Cl. at 577; App. 9-10; Jt. Ex. 1; App. 2000-2012.

17. The value of the Note was intended to be $130,506,000, equal to the value of the stock redeemed by Heinz. 76 Fed. Cl. at 578, n.11, and 578, n. 13; App. 10-11.

18. HCC's basis in the 3,325,000 shares redeemed by Heinz was $124.2 million. 76 Fed. Cl at 579; App. 13.

19. At all times during 1995, Heinz's current and accumulated earnings and profits, earned while HCC was a member of the Heinz Group, was in excess of $150 million. Jt. Stip., par. 40; App. 306.

20. Following the redemption, HCC retained 175,000 shares of Heinz stock. Jt. Stip., par. 39; App. 306.

21. On May 2, 1995, HCC sold its 175,000 shares of Heinz stock to an unrelated party for $6,966,120. Jt. Stip., par. 41; App. 306.

22. On its 1995 consolidated federal income tax return, the Heinz Group reported a $124,134,139 capital loss on HCC's sale of its 175,000 shares of Heinz stock, and carried back this loss to 1992, 1993, and 1994. 76 Fed. Cl. at 579; App.

23. Between January 18, 1995, when Heinz issued the Note to HCC, and January 18, 1998, when the right to convert the Note became exercisable, the market price of Heinz stock had more than doubled, from about $39 per share to $83 per share (computed without regard to a subsequent 3-for-2 split). 76 Fed. Cl. at 579; App. 12.

24. On April 18, 1998, HCC exercised its right to convert the Note, and received (due to the 3-for-2 split) 5,265,000 shares of Heinz stock. 76 Fed. Cl. at 579; App. 12.

As expounded by this Court in Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), the economic sham doctrine disregards transactions that lack economic substance. There was ample economic substance in the transactions here. Indeed, the lower court recognized that HCC had the benefits and burdens of ownership of the Heinz stock it purchased in the market. This fact alone means that there was no economic sham under Coltec.

The lower court held, however, that HCC's stock purchases did not meet an additional requirement, i.e., that a transaction be "purposeful." 76 Fed. Cl. at 584; App. 18-19. Such a requirement is not consistent with Coltec. More important, HCC's stock purchases were "purposeful." By purchasing stock, HCC accomplished the business purpose of reducing Heinz's outstanding stock on its reported financial statements, just as Heinz itself had done when it purchased stock. The results were to increase Heinz's earnings per share and to support the price and liquidity of Heinz's stock in the market. The lower court disregarded this business purpose and erroneously found an economic sham.

The lower court also erred in disregarding HCC's stock purchases under the step transaction doctrine. For this conclusion, the court relied almost entirely on the fact that, at the time HCC purchased its Heinz stock, a plan was underway for Heinz to redeem most of the stock and claim a loss deduction.

This case has the same elements that caused this Court not to apply the step transaction doctrine in Falconwood Corp. v. United States, 422 F.3d 1339 (Fed. Cir. 2005) -- an independent business purpose for HCC's stock purchases (described above) and a comprehensive scheme of Code provisions and regulations that determine the tax consequences of the transactions. Along with the independent business purpose for HCC's stock purchases, these provisions create a "context" that "leaves no room" (Id. at 1351-1352) for any formulation of the step transaction that relies, as the court did, merely on a plan.

From August 11, 1994, through November 15, 1995, HCC purchased 3,500,000 shares of Heinz stock in the market for $130,983,103. Because HCC was a Heinz subsidiary, these purchases were subject to section 304(a)(2). Thus, each person selling stock to HCC was required to treat the sale as though Heinz had redeemed the stock. Nevertheless, HCC's basis in its stock was its cost, $130,983,103. Rev. Rul. 80-189, 1980-2 C.B. 106.

On January 18, 1995, HCC transferred 3,325,000 shares to Heinz in exchange for the Note. The most significant feature of the Note was that it was convertible into 3,510,000 shares of Heinz stock. This conversion feature is important for two reasons. First, it was the single factor that changed what otherwise would have been a sale into a dividend. Second, it meant that, even though HCC transferred the 3,325,000 shares to Heinz, HCC retained an investment in even more Heinz stock.

Section 317(b) defines a redemption as an acquisition by a corporation of its own stock from any shareholder in exchange for property. Heinz acquired its own stock from one of its stockholders, HCC, in exchange for property, the Note. Unless disregarded, this transaction constituted a redemption.

If a redemption meets any of the tests in sections 302(b)(1)-(3), the redeemed shareholder is taxed as though the stock were sold to an unrelated party. In essence, these tests ask whether the redemption significantly reduces the redeemed shareholder's proportionate interest in the redeeming corporation. If that interest is not reduced significantly, the full amount of the sale proceeds is taxed as a dividend under section 302(d), assuming sufficient earnings and profits.

In determining whether a proportionate interest in the redeeming corporation has been reduced, the redeemed shareholder is deemed to own stock subject to an option. I.R.C. § 318(a). Thus, an owner of convertible debt is deemed to own the stock into which the debt may be converted (Rev. Rul. 68-601, 1968-2 C.B. 124) even if the option cannot be exercised immediately (Rev. Rul. 89-64, 1989-1 C.B. 91). In United States v. Davis, 397 U.S. 301 (1970), the Supreme Court held that the rules of section 302, including the constructive stock ownership rules, are to be applied strictly and mechanically without regard to whether there is a business purpose for the redemption. Accordingly, after the redemption, HCC was deemed to own the 3,510,000 shares into which the Note was convertible. Because HCC had not reduced its ownership of Heinz stock, the Note was treated as a dividend to HCC in an amount equal to its value.

After the redemption, HCC no longer owned the redeemed shares, and HCC's basis in those shares might be expected to disappear. Under Treas. Reg. § 1.302-2(c), however, HCC's basis in those shares was reallocated and added to the basis of the 175,000 shares HCC retained. Application of this rule meant that HCC's entire basis in the 3,500,000 Heinz shares it purchased resided in the 175,000 shares it retained. Consequently, when HCC sold the retained shares to an unrelated party, HCC recognized a capital loss deductible under section 165(a).

For many years prior to 1995, Heinz had a program of buying its own stock on the open market, principally to reduce the number of its outstanding shares. Heinz had generous stock option plans for its employees, and the continuing exercises of these options increased the number of outstanding shares, thereby reducing the company's reported earnings per share. Because the market price of Heinz stock was directly affected by earnings per share, management instituted a stock purchase program.

Traditionally, Heinz purchased the stock itself. During the summer of 1994, however, Heinz's tax director, John Crowe, determined that the purposes of the stock purchase program could continue to be fulfilled with a change that would produce a tax advantage. The change was that HCC instead of Heinz would purchase Heinz stock. HCC could and did make these investments using its own net worth and borrowing power, without any assistance from Heinz.

Heinz stock owned by HCC was not treated as outstanding stock on Heinz's consolidated financial statements.³ Consequently, purchases of Heinz stock by HCC fulfilled the purpose of reducing outstanding stock just as if Heinz had bought the stock in the market. For years, HCC had been in the business of lending huge sums of money to Heinz affiliates and in owning the stock of affiliates. HCC had the wherewithal to buy Heinz stock without any assistance from Heinz, and that is exactly what transpired.

Several months after purchasing 3,500,000 shares of Heinz stock, HCC transferred 3,325,000 of these shares to Heinz in exchange for the Note in what, in most cases, would be considered a sale. As explained in section II., if the form of the transactions is respected, HCC's sale of its remaining 175,000 shares to an unrelated party produced a capital loss.

The Court of Federal Claims held that this loss should be disallowed, in part based on its conclusion that the transactions constituted an economic sham. In doing so, however, the court set forth facts that demonstrated that HCC's purchase of Heinz stock had both economic substance and business purpose, and then proceeded to ignore those facts in reaching its holdings.

A. COLTEC INDUS., INC. v. UNITED STATES

For its holding on economic sham, the Court of Federal Claims relied heavily on the Federal Circuit's leading economic sham case, Coltec Indus., Inc. v. United States, 454 F. 3d 1340 (Fed. Cir. 2006). In Plaintiff's view, the lower court misconstrued Coltec. Even if the lower court's reading of Coltec were correct, however, there would be no economic sham in this case.

Coltec involved a blatant tax shelter. A Coltec subsidiary had incurred substantial potential asbestos liabilities that it purported to transfer to an affiliate. The sole effect was to create stock in the transferee corporation that could be sold at a loss, because of its high basis and little or no value. This Court determined that the transaction could not reduce the transferor's potential asbestos liability, that no party could profit from the transaction apart from the tax benefit, and that, as a result, the transfer was a sham. The critical point is that nothing of substance occurred. This Court decided Coltec solely on that basis, and explicitly declined to decide whether lack of business purpose alone is sufficient to treat a transaction as a sham:

In contrast, the lower court construed the holding in Coltec as follows:

The lower court's formulation of the economic sham test also runs counter to the principle noted in one of the leading recent sham cases, ACM Partnership v Commissioner, 157 F.3d 231 (3d Cir. 1998).

More important, even under the lower court's view of Coltec, HCC's purchase of the Heinz stock is not a sham, because it had economic substance and accomplished a business purpose. In contrast to Coltec, this case involves the use of an economically meaningful alternative to prior normal, ongoing business activities to obtain a tax benefit. HCC's purchases of the Heinz stock fulfilled an important business purpose for the Heinz Group. HCC's purchases took the shares out of circulation just as Heinz purchases would have, with the same beneficial result of increasing earnings per share and supporting the market price and liquidity of the stock.

B. ECONOMIC SUBSTANCE

The Court of Federal Claims began its sham transaction analysis by asking whether HCC's ownership interest in Heinz stock was "transitory and without real substance." 76 Fed. Cl. at 581; App. 15. The court went on to state that courts often answer this inquiry by asking whether the putative owner of property had the "burdens and benefits of ownership." 76 Fed. Cl. at 581; App. 15-16.

The court set out several factors supporting the conclusion that HCC's interest in the Heinz stock was more than notional: 1) HCC incurred indebtedness to generate a part of the funds used to purchase the Heinz stock, indebtedness that was not guaranteed by Heinz; 2) HCC received dividends on the stock; 3) HCC and not Heinz bore the risk of loss and the opportunity for gain as to the value of the Heinz stock it possessed; and 4) HCC was under no pre-existing obligation to disgorge its profits from any sale or from the receipt of dividends. 76 Fed. Cl. at 582; App. 17. For these reasons, the court concluded that, apart from substance-over-form considerations, "HCC possessed the benefits and burdens associated with the Heinz stock and, to that extent, the later redemption qualified under section 317(b)." 76 Fed. Cl. at 582-583; App. 17.

It is worth noting here that an additional factor not mentioned by the court confirms the economic reality of HCC's investment in Heinz stock. The conversion feature of the Note assured HCC of maintaining a significant interest in the value of Heinz stock notwithstanding the redemption of 3,325,000 shares to Heinz.

The court then reviewed a number of economic sham cases and summed them up by saying:

The court tackled business purpose first, using words ("as to the former") indicating that it would turn to economic substance. The balance of the sham transaction discussion, however, addresses only business purpose. In footnote 30, the court explains that it "need not specifically deal" with economic substance because of its conclusion that a lack of business purpose was sufficient to treat HCC's purchases of Heinz stock as a sham. 76 Fed. Cl. at 587, n.30; App. 23. There is not one word in the opinion suggesting that HCC's ownership of Heinz stock was anything other than real and substantive.

By holding that HCC had the burdens and benefits of ownership of the Heinz stock, the lower court effectively conceded that HCC's ownership of Heinz stock had economic substance. The court held against Plaintiff solely because of a purported lack of business purpose. The court's business purpose analysis, however, contradicts its own factual findings and ignores the unambiguous record demonstrating that HCC's acquisition and ownership of Heinz stock in fact accomplished a substantial business purpose.

C. BUSINESS PURPOSE

The Court of Federal Claims held that HCC's purchases of Heinz stock lacked business purpose. The court found that HCC's purchases did not fulfill the purposes for which Heinz had previously purchased its own stock, and that the stock purchases by HCC were not a "good investment." 76 Fed. Cl. at 585-586; App. 20-22. The court's conclusions in both instances are erroneous.

As is evident from the record, the main purpose of Heinz's stock purchase program was to increase earnings per share by taking stock off the market. The testimony of the two knowledgeable witnesses was entirely consistent with this conclusion.

At trial, John Mazur, Heinz's Assistant Treasurer in 1995, on direct examination, testified as follows:

That this testimony was considered extremely important is evident from the fact that Government counsel tried to undercut the force of Mr. Mazur's testimony on cross examination.

Government counsel was not satisfied with this answer, and proceeded to question Mr. Mazur further, hoping to obtain some concession.

This being an extremely significant issue, Plaintiff's counsel explored it further on redirect.

On re-cross, Government counsel once again tried to shake Mr. Mazur's testimony on this point but failed to do so. Transcript; App. 420-422. Referring to the testimony, quoted above, Mr. Mazur reaffirmed that the "primary business purpose behind the share repurchase program . . . is what I said. . . ."

This matter was also raised in Plaintiff's direct examination of Leonard Cullo, a vice-president and the treasurer of Heinz.

As the quoted testimony makes clear, the main purpose of the Heinz stock purchase program was as stated by the lower court in its factual finding (76 Fed. Cl. at 576; App. 8), not in the contradictory explanation in its legal analysis (76 Fed. Cl. at 586; App. 21). The main purpose was to take Heinz shares off the market and increase earnings per share reported on the Heinz financial statements. This purpose was accomplished regardless of whether those shares were purchased by Heinz or by HCC. The same conclusion applies with respect to Heinz's secondary, related business purpose, namely, as described by Mr. Mazur, "supporting the trading and liquidity of the stock." Transcript; App. 415. Again, this purpose was served regardless of whether Heinz shares were purchased by Heinz or by HCC.

This "fact" was not, however, "verified" by any witnesses at all. Indeed, as described in section III.C.1., above, the court disregarded the unrefuted testimony of the only witnesses who testified on the subject, Mr. Mazur and Mr. Cullo.

The only evidence that is even arguably consistent with the court's view of Heinz's purpose are statements made by David R. Williams, Heinz's Senior Vice President-Chief Financial Officer, at meetings of Heinz's Board of Directors in 1993 and Heinz's Executive Committee in 1995. Jt. Ex. 6; App. 2065, 2073-2074; Jt. Ex. 13; App. 2137, 2138-2140.

Government counsel read these statements into the record. Based thereon, he tried to get Mr. Mazur to agree that Heinz purchased stock with the principal purpose of adding stock to its treasury. Mr. Mazur testified consistently, however, that Heinz's business purpose for the stock purchases was to take stock off the market. Transcript; App. 416-418, 420-422. He also testified that Heinz had more stock in its treasury than it needed, and that, if necessary, Heinz could have issued additional authorized stock. Transcript; App. 417.

In fact, Mr. Williams' statements support Mr. Mazur's testimony. At the 1993 meeting, Mr. Williams stated that Heinz "held approximately 33,026,008 shares of Common Stock in the Treasury." He also noted, as Mr. Mazur did at trial --

Finally, the redemption of stock from HCC shows that adding stock to the treasury did not matter to Heinz. In the redemption, Heinz added 3,325,000 shares to its treasury, but it also issued the Note which was convertible into 3,510,000 shares. Exercise of the conversion right would and did remove 3,510,000 shares from Heinz's treasury. The stock in HCC's hands did not, however, become outstanding stock on Heinz's financial statements. Consequently, the real purpose for purchasing Heinz stock was still accomplished.

D. TAXPAYER'S RIGHT TO CHOOSE BETWEEN SUBSTANTIVE BUSINESS ALTERNATIVES

The Court of Federal Claims based its opinion in part on the fact that the business purpose accomplished by the HCC purchase of Heinz stock could have been accomplished by Heinz purchasing those shares, and that only tax planning led to HCC buying the stock. The observation is fair, but it is insufficient to justify a conclusion that what occurred was an economic sham.

In United Parcel Service of America, Inc. v. Commissioner, 254 F.3d 1014 (11^th Cir. 2001), the taxpayer moved its package insurance function from the United States to a Bermuda subsidiary and then distributed most of the stock of the subsidiary to UPS's non-public shareholders, for the sole purpose of reducing federal income tax. The Tax Court held that the arrangement was an economic sham. Reversing, the Eleventh Circuit stated:

Plaintiff's situation is exactly the same as UPS's. UPS had provided insurance to its customers domestically. Solely to reduce taxes, UPS provided this insurance through a Bermuda affiliate. Whether UPS provided insurance through a domestic or a foreign company, it had the business purpose of providing insurance to customers. Similarly, Heinz had a long-standing program of buying its own stock primarily to increase reported earnings per share. Whether Heinz or HCC purchased the stock made no more difference to the business purpose than whether UPS provided insurance to its customers through a domestic or a foreign company. Just as UPS chose a foreign company to provide this service solely to reduce taxes, after previously providing insurance through a domestic company, Heinz chose to have HCC fulfill the Heinz Group's business purpose while reducing taxes.

All that matters is that an important business purpose was fulfilled by an economically meaningful transaction, not that the Heinz Group chose a tax advantaged manner of implementing this purpose. As emphasized in UPS, that case was very different from the type of sham cases in which the Government has prevailed, which the Eleventh Circuit referred to as:

Along the same lines is Northern Indiana Public Service Co. v. Commissioner, 115 F.3d 506 (7^th Cir. 1997). The taxpayer had established a Netherlands Antilles finance subsidiary to borrow abroad and re-lend the proceeds to its United States parent and so avoid United States withholding tax on interest paid to foreign lenders. The Government argued that the finance subsidiary engaged in no meaningful economic activity and should be disregarded. If the Government's argument had been adopted, the United States parent would be regarded as borrowing abroad directly, and its interest payments would have been subject to withholding tax. The court rejected the Government's argument, relying on the principle stated in a number of cited cases that:

The same rule applies in this case. Like UPS, Northern Indiana Public Service used a subsidiary to fulfill an important business purpose solely for tax reasons when the same purpose could have been accomplished by the parent. Similarly, Heinz used HCC to accomplish an important business purpose for tax reasons. The finance subsidiary in Northern Indiana Public Service conducted business, and so did HCC. In fact, unlike the insurance subsidiary in UPS and the finance subsidiary in Northern Indiana Public Service, HCC had been in existence, conducting similar activities, for many years before the transactions at issue.

Another similar situation appears in Kraft Foods Co. v. Commissioner, 232 F.2d 118 (2d Cir. 1956). After Congress had abolished the filing of consolidated income tax returns in 1934, Kraft declared a $30 million dividend to its parent company, National Dairy, payable in debentures. The Government argued that Kraft's interest deduction on the debentures should be disallowed, because the dividend "served no business purpose other than the minimization of taxes." The Second Circuit rejected this argument.

Like the parent and subsidiary in Kraft, Heinz and HCC each had a separate and real corporate personality and engaged in objective acts with the intent of creating legal rights and duties that affected their legal relations. The fact that a bank made a loan to HCC without a Heinz guarantee confirms HCC's bona fide substantial economic existence separate from Heinz. Under such circumstances, transactions between Heinz and HCC should not be disregarded solely because they were entered into with tax advantages in mind, any more than were the transactions in UPS, Northern Indiana Public Service and Kraft.

The court in effect created its own step transaction rule: whenever a taxpayer intends to go from Step A to Step B to obtain a tax benefit, Step A is disregarded even if it has economic substance and accomplishes a business purpose. That formulation of the step transaction doctrine was firmly rejected in the leading case addressing the step transaction doctrine in this Court, a case which considered both the "interdependence" and "end result" formulations of the step transaction doctrine. Falconwood Corp. v. United States, 422 F.3d 1339 (Fed. Cir. 2005).⁴

A. FALCONWOOD CORP. v. UNITED STATES

In Falconwood, a consolidated group of corporations was restructured in two stages, carefully choreographed to accomplish several tax objectives: qualifying for conversion to subchapter S status, avoiding changes in the taxation of subchapter S corporations that were about to become effective and preserving the possibility of sheltering the group's taxable income with losses incurred during the rest of the fiscal year (the amount of which turned out to be $10.3 million).

First, the group's parent, TMCH, merged downstream into its first-tier subsidiary, Falconwood, and Falconwood became the owner of two remaining subsidiaries. Three hours later, Falconwood sold these subsidiaries to its shareholders, leaving the shareholders with three separate companies that elected subchapter S status.

Citing Treas. Reg. § 1.1502-75(d)(2)(ii), as then in effect, the taxpayer contended that the consolidated group continued in existence even though the parent, TMCH, had disappeared, because TMCH had transferred its assets to Falconwood, and for three hours Falconwood was the group's parent. The Government countered that the plan was to transform the group into three subchapter S corporations, and that, under the step transaction doctrine, the time for determining whether the group survived was when all the planned transactions had been completed, i.e., after Falconwood had sold the subsidiaries and the group no longer existed. In other words, the Government took the position that the step transaction doctrine applied to collapse Steps A and B, because the taxpayer always intended to complete Step B.

The Court of Federal Claims agreed with the Government. This Court reversed, holding that neither the "interdependence" formulation nor the "end result" formulation of the step transaction doctrine applied. The Court's reasoning was as follows: (1) there was a business purpose for the downstream merger ("avoiding the risk and delay incident to obtaining approval of a transfer of [various commodities exchange] seats from Falconwood to TMCH" in the event Falconwood had been merged into TMCH (422 F.3d at 1342)); and (2) once the downstream merger was complete, the group had no choice under the regulations but to continue filing consolidated returns. In other words, in the context of the regulation, this Court concluded that a two-step transaction that commenced with a good business purpose could not be disregarded under the step transaction doctrine, and that the tax chips had to fall where they may. The fact that the parties planned all the transactions from the start to achieve a combination of tax benefits was not enough to bring the step transaction doctrine into play.

This case has the same elements that caused the court to reject the step transaction doctrine in Falconwood -- a business purpose and a specific rule that determines the tax consequences (in this case, a comprehensive scheme of Code provisions and regulations).

HCC's purchases of Heinz stock satisfied important corporate business purposes, namely, removing the shares from circulation and increasing Heinz's reported earnings per share while providing liquidity for the market in Heinz stock. Moreover, HCC's purchases of Heinz stock with its own ample funds were economically meaningful. HCC owned the stock for two to five months, received dividends and was exposed to changes in value. Even the transfer of the stock to Heinz did not terminate HCC's interest in Heinz stock but, in fact, heightened that interest, because HCC received an option to acquire 3,510,000 Heinz shares. Accordingly, the facts do not support the lower court's conclusion that HCC's purchase of Heinz stock should be disregarded as a meaningless interim step. 76 Fed. Cl. at 590; App. 28.

As described in section IV.D.2., below, clear provisions of the Code and Regulations govern all the tax consequences of each of the transactions at issue. As in Falconwood, these provisions "leave no room for an application of the step transaction doctrine." HCC purchased the Heinz stock "for an independent business purpose and was thereafter bound to follow" the applicable provisions of the Code and Regulations. 422 F.3d at 1351.

As Plaintiff understands Falconwood, the independent business purpose for Step A (the downstream merger in Falconwood and HCC's stock purchases in this case) means that the transactions cannot be recharacterized under the step transaction doctrine, because Step A is not "fruitless." Id. at 1349. The clear rules determining the tax consequences of the transactions (the consolidated return regulations in Falconwood and the various provisions of the Code and Regulations in this case) create a "context" (Id. at 1352, 1353) that "leaves no room" (Id. at 1351) for any formulation of the step transaction that relies only on the existence of a plan.

The lower court ignored the business purpose accomplished by HCC's purchases of Heinz stock, as well as the economic reality of those purchases, and also ignored the provisions of the Code and the Regulations that govern the tax consequences of the transactions. The court concluded that, simply because the transactions in issue were planned and intended to produce a tax benefit, HCC's ownership should be disregarded. This conclusion is wholly inconsistent with Falconwood.

B. DISTINGUISHING BASIC, INC. v. UNITED STATES

When a tax benefit exists in the void apart from anything meaningful, as in Basic, Inc. v. United States, 549 F.2d 740 (Ct. Cl. 1977), that benefit may be properly denied under the step transaction doctrine. In Basic, a parent corporation caused its first tier subsidiary to distribute the stock of a second tier subsidiary to the parent to allow the parent to sell the second tier subsidiary at a reduced tax cost. The sale was a bona fide sale, but there was no reason for the distribution apart from tax savings. Thus, the distribution was ignored.

On the other hand, when a transaction having both economic substance and business purpose is the first in a series of transactions producing tax benefits, the fact that the transactions were planned to produce those benefits does not permit the first transaction to be disregarded. Basic makes this conclusion clear by distinguishing a number of cases cited by the plaintiff in that case.

Two of these cases were Sheppard v. United States, 361 F.2d 972 (Ct. Cl. 1966) and DeWitt v. United States, 204 Ct. Cl. 274 (1974):

This case is virtually identical to Sheppard and DeWitt. The first transaction had economic substance and "served a purpose unrelated to the transaction of which it became a part." Under these circumstances, it should not matter that "tax minimization was also part of the taxpayer's objective or that [the purchase of the 3,500,000 shares of Heinz stock by HCC] was only a step towards a different final end."

As a matter of corporate law, Heinz had more control over HCC than the taxpayers in Sheppard and DeWitt had over the charities. In reality, however, this distinction is meaningless. In those cases, as the court noted, the charitable gifts were made to compliant donees that the taxpayers knew would sell the property back to their respective controlled corporations. In short, "the deal" was every bit as "done" in Sheppard and DeWitt as in this case.

Falconwood, Sheppard and DeWitt all show that, when the first in a series of tax advantaged transactions has independent economic substance and accomplishes a business purpose, that transaction will not be disregarded under the step transaction doctrine just because it was also necessary to obtain a tax benefit.

C. DISTINGUISHING KING ENTERPRISES, INC. v. UNITED STATES

In King Enterprises, supra, a corporation acquired all the stock of a target corporation for 50 percent cash and 50 percent acquiring corporation stock, and the target then was merged upstream into the acquiring corporation. The Court of Claims held that, under the step transaction doctrine, the stock acquisition and the merger were parts of a single "plan of reorganization" constituting a tax-free reorganization under section 368(a)(1)(A).

Like Basic, King Enterprises is distinguishable from Falconwood, but for a different reason. The first transaction in King Enterprises (the stock purchase) did not lack business purpose or economic substance. Rather, the distinction between King Enterprises on the one hand and Falconwood and this case on the other resides in the nature of the rules that provide the "context" for the issue. Quoting King Enterprises, this Court in Falconwood stated:

The issue in King Enterprises was whether the two transactions were parts of a "plan of reorganization." This issue is necessarily based on the parties' intentions -- their "plan." The reorganization provisions contain no objective test for making this determination. Thus, the "plan of reorganization" test is a perfect example of a statutory requirement that invites and even requires facts-and-circumstances step transaction analysis. This type of statute is wholly different from the consolidated return regulation in Falconwood and the provisions of the Code and Regulations that apply in this case -- both of which state objective and unambiguous requirements without reference to plan or intent.

D. THE TRANSACTIONS ARE GOVERNED BY DETAILED, CAREFULLY CRAFTED PROVISIONS OF THE CODE AND REGULATIONS

As discussed above, the Court of Federal Claims found erroneously that purchases of Heinz stock by HCC did not accomplish any business purpose. Once this error is recognized, the only fact supporting the court's step transaction holding is that the redemption was planned at the time of HCC's stock purchases. Such a plan, however, is insufficient to recharacterize what occurred under the step transaction doctrine.

At the heart of the case is HCC's basis in its Heinz stock, specifically the reallocation of its basis in the shares Heinz redeemed to the shares HCC retained after the redemption. HCC's stock basis was determined under a comprehensive scheme of provisions in the Code and the Regulations, which include Congressionally-mandated step transaction rules. As this Court held in Falconwood, supra, the mere existence of a plan to complete the transactions is insufficient to override these rules when the transaction under scrutiny has economic substance and business purpose. The court, however, declined to take these provisions into account.

The provisions requiring stock basis reallocation were developed at a time when long-term capital gains recognized by individuals were taxed at lower rates than dividend income. Thus, individuals could obtain a tax advantage from selling stock instead of receiving dividends, and Congress took steps to counteract efforts to convert dividends into capital gains.

At the same time, due to the dividends-received deduction, dividends were taxed to corporate stockholders at low effective rates. In the 1980s, Congress took steps to counteract corporate stockholders' ability to marry tax-advantaged dividends with other tax benefits. Not surprisingly, attempts to limit tax planning by individual and corporate stockholders do not always mesh perfectly. The tension between these rules is apparent in this case.

To take a simple example, individual A purchases all the outstanding 1,000 shares of stock of a corporation in year 1 for $100,000 ($100 per share) and then sells 800 shares to the corporation in year 5 for $150,000. Assuming sufficient earnings and profits, the $150,000 is a taxable dividend to A, because A owns 100 percent of the stock both before and after the redemption.

In year 7, A sells his remaining 200 shares to an unrelated party for $50,000. Barring a different rule, A's basis in the 200 shares would be $20,000, and A would recognize a $30,000 capital gain. Then, A's basis in the 800 shares would disappear, because it did not offset the dividend in the redemption, and A no longer owns the shares to which the basis had attached.

This loss of basis was perceived to be inappropriate, and Treasury corrected the situation. Under Treas. Reg. § 1.302-2(c), A's $80,000 basis in the redeemed shares is reallocated to the 200 shares that A retains after the redemption. Upon the sale of those shares, A has a $50,000 capital loss ($100,000 paid for 1,000 shares less $50,000 received upon the sale of 200 shares), not a $30,000 capital gain ($50,000 sale price less $20,000 basis in the 200 shares).

This outcome is correct even though, by itself, A's sale of 200 shares produces a $30,000 economic gain, not an economic loss. If one analyzes all the events, A will be seen to realize $200,000 ($150,000 dividend in the redemption plus $50,000 received in the sale) on his $100,000 investment. The realized economic gain is $100,000, exactly the amount A reports for tax purposes ($150,000 dividend income in year 2; $50,000 capital loss in year 7).

In the example, matters work out as they should because the dividend is taxed to A. Given the same facts, but changing A to a corporation affiliated with the redeeming corporation, as was the case with Heinz and HCC, the dividend in the example would be tax-free due to the 100 percent dividends-received deduction. Otherwise, this case is indistinguishable from the example.

Because HCC was a Heinz subsidiary, HCC's stock purchases in the market were subject to section 304(a)(2), a special statutory provision designed to prevent shareholders from avoiding section 302. Under section 304(a)(2), each person who sold stock to HCC was required to treat the sale as though Heinz had redeemed the stock. Thus, under section 302, each seller recognized capital gain or loss if the sale reduced his or her proportionate interest in Heinz. Otherwise, the seller was taxed on dividend income. Rev. Rul. 76-385, 1976-2 C.B. 92; Rev. Rul. 81-289, 1981-2 C.B. 82. The deemed redemption treatment under section 304(a)(2), however, applied only to the sellers of the stock. This treatment did not apply to the buyer, HCC, and HCC was entitled to a cost basis in its Heinz stock. Rev. Rul. 80-189, 1980-2 C.B. 106.

Heinz's redemption of stock from HCC was subject to section 302, which mandated dividend treatment for the redemption proceeds. As interpreted by the Supreme Court, section 302 requires dividend treatment regardless of whether or not there was a non-tax business purpose for the redemption. Davis, supra. See also Boise Cascade Corp. v. United States, 329 F.3d 751 (9^th Cir. 2003).

Treatment of the redemption proceeds as a dividend invoked a comprehensive scheme of Code provisions and regulations dealing with redemptions of stock from corporate shareholders.

First, the dividend that resulted from the redemption satisfied all the requirements in sections 243(b) and 246(c) for a "qualifying dividend." Consequently, the dividend was eligible for a 100 percent dividends-received deduction under section 243(a)(3).

Second, as discussed in sections II. and IV.D.1., above, treating the redemption as a dividend invoked Treas. Reg. § 1.302-2(c), so that HCC's basis in the redeemed shares was reallocated to the shares it retained after the redemption.

Also pertaining to stock basis is section 1059. Ordinarily, under sections 1059(a) and 1059(e)(1), a dividend received in a redemption would reduce the corporate shareholder's stock basis. Under section 1059(e)(2), however, "qualifying" dividends like this one are uniquely favored, and HCC's basis in the redeemed stock was preserved and reallocated to the stock HCC retained. Section 1059(e)(2) is particularly important to this case. Its history and significance are discussed in section IV.D.3., below.

Specifically as to the step transaction doctrine, two types of statutory requirements are of particular interest.

First is the 45-day holding period requirement for the dividends-received deduction. Under section 246(c), HCC had to hold the shares for at least 45 days before the redemption. During these 45 days, HCC had to have the burdens and benefits of ownership of the shares, and the lower court found that it did. 76 Fed. Cl. at 582-583; App. 17. Section 246(c)(4) and the regulations thereunder (Treas. Reg. §§ 1.246-3 and 1.246-5) back up this holding period requirement with stringent economic substance tests: at no time during the 45-days could HCC have "diminished risk of loss" on the stock, through options or other arrangements or investments. HCC met these tests too. If HCC had not held the redeemed shares for at least 45 days, it would have been fully taxed on the dividend it received in the redemption, with no dividends-received deduction, and the benefit of its capital loss would have been eliminated.

The 45-day holding period requirement is a statutory step transaction rule, backed up by regulations that impose stringent economic substance requirements. If a shareholder held stock for 46 days, it is inconceivable that a court would disallow the dividends-received deduction merely because the shareholder planned from the beginning to sell the stock as soon as the holding period test was met.

The second type of rule that is of special interest under the step transaction doctrine relates to the earnings and profits that are distributed. Under sections 243(b)(1)(A)(i) and 1059(e)(2)(B), the earnings and profits distributed by Heinz in the redemption had to have been earned, and even accrued economically, by Heinz while Heinz and HCC were affiliated. This test ensures that the relationship between Heinz and HCC had real duration and therefore real substance. Heinz and HCC had been affiliated since HCC was formed in 1983, and these tests too were met.

The holding period and earnings and profits requirements focus, not just on the redemption itself, but on the relationship between HCC's stock purchases and the redemption and on the ongoing affiliation between Heinz and HCC. They are statutory economic substance and step transaction tests aimed at distinguishing between meaningful and non-meaningful stock ownership.

HCC's purchase and ownership of Heinz stock had economic substance and accomplished an important business purpose for the Heinz Group. In this situation, it would be inconsistent with Falconwood, and the other cases discussed above, to substitute an ad hoc step transaction rule for the specific rules Congress chose based only on the fact that Heinz planned to redeem the stock when HCC purchased it.

If corporate shareholders are taxed on dividends they receive, the same income would be taxed three or more times -- once to the corporation that earns the income, again to the distributee corporate shareholder and yet again when that shareholder distributes the income to its individual shareholders. Congress has long tried to reduce this "triple tax," generally via the dividends-received deduction (sections 243-247) and exempting dividend income within consolidated groups.

In the early 1980s, Congress became aware that corporate investors, then generally entitled to an 85% dividends-received deduction, had found ways to use this deduction in a manner Congress did not favor.

In the transaction that initially attracted Congressional attention, a corporation would purchase publicly-traded stock just before an ex-dividend date. When that stock went ex-dividend, the shareholder became assured of receiving a dividend subject to an 85% dividends-received deduction. At the same time, the market price of the stock declined by the amount of the dividend, and the shareholder could sell the stock at a capital loss. Provided the shareholder held the stock for at least 15 days (a condition to the dividends-received deduction before 1984), it could obtain an almost tax-free dividend with a capital loss, all at minimal risk.

To eliminate this opportunity, Congress enacted two provisions in the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 495 (1984-3, Vol. 1 C.B. 73), both effective for distributions after March 1, 1984. Section 53(b) increased the holding period for the dividends-received deduction to 45 days, and section 53(a) added a new Code section 1059 to eliminate the capital loss by reducing stock basis.

Initially, section 1059 was directed only at dividends equal to at least 10% (5% in the case of preferred stock) of the recipient's basis in the underlying stock. In the case of such dividends, called "extraordinary dividends," if the underlying stock was not held for at least one year, the basis of that stock was reduced by the recipient's dividends-received deduction.

The value of the dividend received by HCC, in the form of the Note, exceeded 10% of the basis of the redeemed shares, and HCC held these shares for less than one year. Thus, under section 1059 as originally enacted, HCC's basis in the redeemed shares would have been reduced by the value of the Note. As originally enacted, section 1059 eliminated the only stock basis that could be reallocated under Treas. Reg. § 1.302-2(c) and so effectively negated that basis reallocation rule for transactions like the one in issue. As a result, the loss claimed by Plaintiff would have been eliminated.

In the Tax Reform Act of 1986, Pub. L. 99-514, 99 Stat. 1874, Congress changed its original design, effective for dividends distributed after March 18, 1986. Congress extended the one-year holding period in section 1059 to two years and also required the holding period to be satisfied at the time the dividend was announced. Continuing to hold the stock after the dividend would no longer help. Congress also added section 1059(e)(1), which expanded the definition of "extraordinary dividend" to include non-pro rata distributions without regard to holding period. If these were the only changes, section 1059 still would have eliminated HCC's loss.

At the same time, however, Congress added another provision, one that completely changed the result in this case. New section 1059(e)(2) provided:

In 1988, Congress revisited section 1059 yet again, this time restricting the qualifying dividend exemption to situations where the distributed earnings and profits could be attributed economically to periods in which the distributing corporation and the recipient were affiliated. I.R.C. § 1059(e)(2)(B). Section 243(b), which defines "qualifying dividend," had already included a similar restriction, but the new provision tightened that restriction for stock basis purposes.

To recapitulate, in 1984, Congress enacted a provision to eliminate the tax benefit involved in this case. Then, in 1986, Congress instructed that this provision (modified to apply more forcefully to non-pro rata redemptions) not be applied to transactions like the one before this Court "except as provided in regulations." In 1988, Congress refined this rule even further, and Congress amended section 1059 again in 1989, 1997 and 1998.⁵ This series of events fits into the longstanding Congressional practice of fine-tuning the tax treatment of intercorporate dividends.⁶

On July 15, 1997, long after the redemption in this case, Treasury adopted a regulation of the type authorized by section 1059(e)(2):

At all times since 1986, Treasury had authority to adopt such a regulation, but it chose not to do so until July 15, 1997. Even then, Treasury made the rule retroactive only to June 17, 1996, the date the regulation was proposed. Plaintiff, of course, had no notice of any pending regulation at the time of the transactions in this case.

In the context of the transactions in issue, Congress enacted laws dealing with a complex area of the tax law, incorporating specific holding periods, exceptions and intricate definitions (e.g., sections 1059(c) and (e)(3)). Congress directed that these laws be implemented "except as provided in regulations . . ." In so doing, Congress instructed Treasury and the courts that the law was to be governed only by the Congressional directive or by a regulatory change to that directive that would apply uniformly after notice and public comment.

Plaintiff does not argue that the adoption of Treas. Reg. § 1.1059(e)-1 in 1997 precludes any form of the step transaction or other judicial doctrine prior to its effective date. Plaintiff's point is much narrower: the Code provisions and regulations should govern so long as the transaction under scrutiny -- HCC's purchases of Heinz stock -- has both economic substance and business purpose.

We are dealing with Congressional action over several years, in which Congress first eliminated the basis reallocation Plaintiff claims and then adopted the opposite result but gave Treasury the authority to re-impose the original regime or change the rule in some other way, but only by regulation. In short, Congress directed that basis re-allocation in this case was to be allowed unless Treasury adopted regulations to the contrary, which it did not do. By holding that Plaintiff is entitled to the capital loss in issue, this Court would be doing nothing more than applying the Code as Congress wrote it. This Court would not be establishing any other precedent.

One such case is Chamberlin v. Commissioner, 207 F.2d 462 (6^th Cir. 1953). In that case, a corporation distributed preferred stock to its shareholders. Days later, "as the result of prior negotiations," the shareholders sold the preferred stock to two insurance companies. 207 F.2d at 465. The stock was redeemable by the corporation at specified prices and subject to mandatory retirement. The admitted purpose was to distribute surplus without taxable cash dividends. Id. at 465-466; see id. at 469.

The Government argued that the transactions should be treated as if the corporation had issued preferred stock to the insurance companies for cash and distributed the cash as a dividend. The court stated:

Another such case is Granite Trust Co. v. United States, 238 F.2d 670 (1^st Cir. 1956), in which a parent corporation sold 20.5 percent of the stock of its wholly-owned subsidiary to friendly purchasers, solely to allow the parent to claim a loss on the liquidation of the subsidiary less than two weeks later. The First Circuit respected the stock sale, because of the specific statutory rules:

In addition to step transaction cases, the case reports are replete with instances in which taxpayers arranged tax advantaged transactions that were not to the liking of the Government but, at the time they were crafted, fell within the then applicable statutory rules that the courts refused to ignore. This case lies in this exact pattern and should be disposed of accordingly.

A number of the cases deal with the precise subject matter of this case -- the tax treatment of stock redemptions and similar corporate distributions. One such case is Chamberlin, discussed above.

Another such case, one with special relevance here, is Rodman Wanamaker Trust v. Commissioner, 11 T.C. 365 (1948), aff'd per curiam, 178 F.2d 10 (3d Cir. 1949). There, a subsidiary bought stock of its parent from a shareholder that was, for all practical purposes, the parent's sole shareholder. The Government argued, as it does here, that the purchase should be treated as if the parent had redeemed the stock, in which case the seller would have been subject to tax on a dividend. The court held that the statute applied only when the parent bought its own stock and would not be expanded to include a purchase of parent stock by a subsidiary.

The court specifically noted that, if Congress did not like the decision, it could amend the statute, which is exactly what Congress did in enacting what is now section 304(a)(2). The special relevance of Wanamaker is that HCC's purchases of Heinz stock were subject to section 304(a)(2). Plaintiff's position in this case is consistent with Wanamaker and section 304(a)(2), as interpreted by Rev. Rul. 80-189, 1980-2 C.B. 106, while the Government's position is not.

Yet another such case is Boise Cascade Corp. v. United States, 329 F.3d 751 (9^th Cir. 2003). There, a corporation redeemed stock owned by its employee stock ownership plan (ESOP) and, relying on section 404(k), claimed a deduction for the redemption proceeds as a dividend to the ESOP. Citing United States v. Davis, 397 U.S. 301 (1970), the court agreed with the taxpayer that the redemption was a dividend, even though its only purpose was to obtain the tax deduction. The district court also rejected the Government's argument that the deduction for the redemption should be disallowed, because it resulted in a double deduction for the redeeming corporation. The Government did not even raise this issue in the appeal. In response to Boise Cascade, Treasury adopted regulations, as authorized by section 404(k), to eliminate the deduction for redemption proceeds in the future. Treas. Reg. § 1.404(k)-3.

This case law is not limited to intercorporate dividend issues. The courts have reached the same conclusion in numerous cases in other areas of the tax law.

The leading authority is Gitlitz v. Commissioner, 531 U.S. 206 (2001). There, the Supreme Court held that, in another intricate area of the tax law -- insolvency of subchapter S corporations -- the unambiguous language of the Code determined the result, even though the Government argued cogently that the "right" answer was otherwise.

Examples of other such cases, even ones going so far as to state that applicable provisions of the Code and Regulations would be followed even though they create tax "windfalls," or bless "loopholes," are Pacific Gas and Electric Co. v. United States, 417 F. 3d 1375 (Fed. Cir. 2005; Brown Group, Inc. v. Commissioner, 77 F.3d 217 (8^th Cir. 1996); MCA Inc. v. United States, 685 F.2d 1099 (9^th Cir. 1982); and Woods Investment Co. v. Commissioner, 85 T.C. 274 (1985).

In Pacific Gas, this Court held that the Government could not offset its claim for interest erroneously paid to the taxpayer against a tax refund due to the taxpayer, when the interest claim was otherwise time-barred. The Court stated the principle clearly:

The long and short of it is that the transactions in this case were subject to specific mechanical rules that are controlling provided economic substance and business purpose were present, as they were.

Knetsch, however, has no application here. As in Coltec, supra, the key point in Knetsch is that nothing of substance occurred: "For it is patent that there was nothing of substance to be realized by Knetsch from this transaction beyond a tax deduction." 364 U.S. at 366. Under those circumstances, there was nothing real to which a statute might apply. In this case, however, HCC's stock purchases had economic substance and accomplished important business purposes for HCC and the Heinz Group in general.

The lower court expanded on its citation of Knetsch by adding:

As discussed in sections IV.B. and IV.C., respectively, King Enterprises and Basic both are readily distinguishable, from both this case and Falconwood.

In Schneider, employees of a corporation received bonus checks, but the checks were pre-endorsed to the employer's shareholder to buy stock from him. Like the distribution in Basic, the cash bonuses had no economic substance and were transitory, and so were properly disregarded under the step transaction doctrine.

Finally, Plaintiff does not understand how the lower court could have relied on either Dietzsch or Schroeder to support the idea that the step transaction doctrine "often" pre-empts the Code. In both cases, the taxpayer, not the Government, sought to invoke the step transaction doctrine, but the court declined to apply it.

At the same time, HCC's purchases of Heinz stock had real economic substance and accomplished important business purposes. In such a situation, Plaintiff respectfully submits that this Court should not invoke either the economic sham or the step transaction doctrines to disturb the results that are required under the Code and the Regulations.

For these reasons, Plaintiff respectfully requests this Court to reverse the judgment of the Court of Federal Claims, and hold that Plaintiff is entitled to a capital loss in the amount of $124,134,139 for 1995, resulting from the May 2, 1995, sale of Heinz stock, that Plaintiff is entitled to carry back to its fiscal years ending April 29, 1992, April 28, 1993 and April 27, 1994, to the extent allowed by law.

² Unless otherwise stated, references to Regulations are references to the Income Tax Regulations issued under the Code.

³ AICPA Committee on Accounting Procedure, Accounting Research Bulletin No. 51, Consolidated Financial Statements (1959), ch. 13, in Financial Accounting Standards Board, 3 Original Pronouncements ARB51-3 (June 1, 2007).

⁴ This Court quoted from King Enterprises, Inc. v. United States, 418 F.2d 511, 516 (Ct. Cl. 1969), describing these two formulations:

⁵ Most significantly, in May 1995, the Chairmen and Ranking Minority Members of the tax writing committees introduced bills to tax redemptions from corporate shareholders that are "not pro rata as to all shareholders" as sales, not as dividends S. 750 and H.R. 1551, 104^th Cong., 1^st Sess. (May 3, 1995). Apart from its effective date, this proposed legislation would have would have eliminated the tax benefit from the transaction in this case again, but it was not enacted. Instead, in 1997 Congress amended section 1059 in a manner that did not affect such transactions. Pub. L. 105-34, 111 Stat. 788, § 1011.

⁶ G. Mundstock, "Taxation of Intercorporate Dividends under an Unintegrated Regime," 44 Tax L. Rev. 1 (1988).