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DOJ Argues Parent Corp Must Take Share of LIFO Recapture Amount Into Income

APR. 30, 2001

Coggin Automotive Corp. v. Commissioner

DATED APR. 30, 2001
DOCUMENT ATTRIBUTES
  • Case Name
    COGGIN AUTOMOTIVE CORP., Petitioner-Appellant v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
  • Court
    United States Court of Appeals for the Eleventh Circuit
  • Docket
    No. 01-10478-B
  • Institutional Authors
    Justice Department
  • Cross-Reference
    Coggin Automotive Corp. v. Commissioner, 115 T.C. No. 28. No. 1684-99

    (Oct. 18, 2000) (For a summary, see Tax Notes, Oct. 23, 2000, p. 492;

    for the full text, see Doc 2000-26953 (28 original pages) or 2000 TNT

    203-7 Database 'Tax Notes Today 2000', View '(Number'.)

    For Coggin's opening appellate brief, see Doc 2001-9425 (59 original

    pages) [PDF] or 2001 TNT 78-88 Database 'Tax Notes Today 2001', View '(Number'.

    For Coggin's reply brief, see Doc 2001-15762 (24 original pages) [PDF] or

    2001 TNT 118-26 Database 'Tax Notes Today 2001', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    S corporations, elections, effect
    S corporations, capital gains
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-21653 (67 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 165-29

Coggin Automotive Corp. v. Commissioner

 

=============== SUMMARY ===============

 

In a brief for the Eleventh Circuit, the Justice Department has argued that the Tax Court correctly held that a consolidated group of corporations that restructured itself and made an S corporation election must take a pro rata share of the partnerships' inventories in gross income as its ratable share of the LIFO recapture amount.

Coggin Automotive Corp., formerly Coggin-O'Steen Investment Corp., was a holding company and a C corporation. Before June 21, 1993, the company held 80 percent of the stock of five C corporations. Coggin Pontiac, Inc., Coggin Nissan, Inc., Coggin- O'Steen Imports, Inc., Coggin-O'Steen Motors, Inc., and Coggin Imports Inc. (the subsidiaries) sold cars and light trucks. From 1972-1973 until June 26, 1993, Coggin, as the common parent, filed consolidated returns with the subsidiaries. The subsidiaries maintained their inventories under the dollar-value LIFO method of accounting, without Coggin directly owning any inventory, and their accumulated reserves were $5,077,808.

In 1993, Coggin determined that because (1) the general managers wanted to participate in the profits of a stand-alone partnership dealership and (2) the owner wanted, for estate tax purposes, an effective way for the general managers to buy him out, they should change the structure of Coggin from a C corporation to an S corporation and operate the dealerships through partnerships. The board adopted a plan to change the structure, and established six corporations. The new corporations were incorporated to be general partners in limited partnerships that would operate the dealerships. At the same time, the subsidiaries, the S corporations, and several of the dealership's general managers entered into limited partnership arrangements. Each general partner had a 1 percent interest in the limited partnership, and the limited partner had a 99 percent interest. Next, the stock of the subsidiaries owned by four individuals was redeemed for promissory notes. Next, each of the newly formed S corporations contributed cash to the limited partnership in which it was to hold an interest. At the same time, the four individuals also contributed the notes to the S corporations for limited partnership interests.

After transfer of the assets to the partnerships, the subsidiaries were liquidated, and Coggin obtained the subsidiaries' limited partnership interests. The company elected S corporation status on August 27, 1993, effective June 27, 1993. Between 1993 and 1998, various general managers purchased larger interests in the dealerships. In 1997, Coggin agreed to sell the stock of CF Motor Corp. and the assets of the dealerships to Asbury Automotive and agreed to sell Asbury its 50 percent interest in a Coggin-Andrews partnership. Andrews objected to selling the dealership and sought to block the sale. Andrews eventually agreed to sell his interest in the partnership to Coggin and Asbury for $7.3 million.

The IRS issued Coggin two deficiency notices, one for the year ending June 26, 1993 and the other for the tax years ending December 31, 1993, 1994, and 1995, determining that under section 1363(d), Coggins' conversion to an S corporation triggered the inclusion of the affiliated group's pre-S election LIFO reserves ($5,077,808) into Coggin's gross income. The IRS's primary argument was that the restructuring was a sham with no tax-independent purposes. Alternatively, the IRS maintained that under the aggregate approach of partnerships a pro rata share ($4,792,372) of the pre-S election LIFO reserves was attributable to Coggins.

The Tax Court first held that the restructuring was a "genuine multiple-party transaction with economic substance" and not a sham, rejecting the IRS's position that there was no tax-independent business purpose for the restructuring. The court, however, agreed with the IRS that the aggregate approach to partnerships better serves the underlying purpose and scope of section 1363(d) and that Coggin was therefore deemed to own a pro rata share of the partnerships' inventories and was required to include $4,792,372 in its gross income for 1993 as its ratable share of the LIFO recapture amount. (For a summary of this opinion, see Tax Notes, Oct 23, 2000, p. 492; for the full text, see Doc 2000-26953 (28 original pages) or 2000 TNT 203-7 Database 'Tax Notes Today 2000', View '(Number'.)

The DOJ argues that the Tax Court correctly applied the aggregate concept of partnerships in holding that section 1363(d) required Coggin to recapture the LIFO inventory reserves. The Justice Department emphasizes that the purpose of section 1363 was to insure that LIFO method taxpayers, which enjoyed the deferral benefits of the LIFO method during their status as a C corporation, would not be treated more favorably than their FIFO counterparts upon electing to become an S corporation. To accomplish this end, the DOJ maintains that section 1363(d) requires a LIFO taxpayer electing S status to recapture the benefits of using the LIFO. The Justice Department further contends that treating the limited partnerships as aggregates and, therefore, treating Coggin as owning its share of the partnerships' inventories is appropriate for purposes of section 1363(d) in this case. Otherwise, Coggin, who enjoyed the deferral benefits of LIFO accounting as the results of having filed consolidated returns with its subsidiaries, would escape a corporate level tax on the LIFO reserves built in to the inventories formerly held by its subsidiaries upon its election of S status.

 

=============== FULL TEXT ===============

 

IN THE UNITED STATES COURT OF APPEALS

 

FOR THE ELEVENTH CIRCUIT

 

 

ON APPEAL FROM THE DECISION OF

 

THE UNITED STATES TAX COURT

 

 

BRIEF FOR THE APPELLEE

 

 

CLAIRE FALLON

 

Acting Assistant Attorney

 

General

 

 

DAVID ENGLISH CARMACK

 

(202) 514-2933

 

CHARLES BRICKEN (202) 514-3006

 

Attorneys

 

Tax Division

 

Department of Justice

 

Post Office Box 502

 

Washington, D. C. 20044

 

 

CERTIFICATE OF INTERESTED PERSONS AND

 

CORPORATE DISCLOSURE STATEMENT

 

 

[1] Pursuant to Federal Rule of Appellate Procedure 26.1 and Eleventh Circuit Rule 26.1-1, counsel for the appellee hereby certify that, to the best of their knowledge, information, and belief, the following is a complete list of all trial judges, attorneys, persons, associations of persons, firms, partnerships, or corporations that have an interest in the outcome of this case, including subsidiaries, conglomerates, affiliates and parent corporations, including any publicly held company that owns 10 percent or more of the party's stock, and other identifiable legal entities related to a party:

AF Motors, L.L.C.

 

ALM Motors, L.L.C.

 

ANL, L.P.

 

Asbury Atlanta AC L.L.C.

 

Asbury Atlanta Chevrolet L.L.C.

 

Asbury Atlanta Hon L.L.C.

 

Asbury Atlanta Jaguar L.L.C.

 

Asbury Atlanta Lex L.L.C.

 

Asbury Automotive Arkansas Dealership Holdings L.L.C.

 

Asbury Automotive Arkansas L.L.C.

 

Asbury Automotive Atlanta L.L.C.

 

Asbury Automotive Brandon, L.P.

 

Asbury Automotive Central Florida, L.L.C.

 

Asbury Automotive Deland, L.L.C.

 

Asbury Automotive Group L.L.C.

 

Asbury Automotive Jacksonville GP L.L.C.

 

Asbury Automotive Jacksonville, L.P.

 

Asbury Automotive Management L.L.C.

 

Asbury Automotive North Carolina Dealership Holdings L.L.C.

 

Asbury Automotive North Carolina L.L.C.

 

Asbury Automotive North Carolina Management L.L.C.

 

Asbury Automotive North Carolina Real Estate Holdings L.L.C.

 

Asbury Automotive Oregon L.L.C.

 

Asbury Automotive Oregon Management L.L.C.

 

Asbury Automotive St. Louis, L.L.C.

 

Asbury Automotive Tampa GP L.L.C.

 

Asbury Automotive Tampa, L.P.

 

Asbury Automotive Texas Holdings L.L.C.

 

Asbury Automotive Texas L.L.C.

 

Asbury Deland Imports 2, L.L.C.

 

Asbury Jax Holdings, L.P.

 

Asbury Jax Management L.L.C.

 

Asbury St. Louis Cadillac L.L.C.

 

Asbury St. Louis Gen L.L.C.

 

Asbury St. Louis Lex L.L.C.

 

Asbury St. Louis LR L.L.C.

 

Asbury Tampa Management L.L.C.

 

Asbury Texas Management L.L.C.

 

Asbury-Deland Imports, L.L.C.

 

Asbury-Everest Holdings L.L.C.

 

Atlanta Real Estate Holdings L.L.C.

 

Avenues Motors, LTD.

 

Baer, Charles

 

Bayway Financial Services, L.P.

 

Bricken, Charles

 

Brown, Stuart L.

 

C&O Properties, Ltd.

 

Camco Finance II L.L.C.

 

Camco Finance L.L.C.

 

Carmack, David English

 

CFP Motors, LTD.

 

CH Motors, LTD.

 

CHO Partnership, LTD.

 

CN Motors, LTD.

 

Coggin Automotive Corp.

 

Coggin Cars L.L.C.

 

Coggin Chevrolet L.L.C.

 

Coggin, Luther

 

Coggin Management, L.P.

 

Coggin-Starling Chevrolet, L.L.C.

 

Coggin-Starling Pontiac-GMC-Buick, L.L.C.

 

Cohen, N. Jerold

 

CP-GMC Motors, LTD.

 

Crown Acura/Nissan, LLC

 

Crown Battleground, LLC

 

Crown CHH L.L.C.

 

Crown CHV L.L.C.

 

Crown Dodge, LLC

 

Crown FFO Holdings L.L.C.

 

Crown FFO L.L.C.

 

Crown Fordham L.L.C.

 

Crown GAC L.L.C.

 

Crown GAU L.L.C.

 

Crown GBM L.L.C.

 

Crown GDO L.L.C.

 

Crown GHO L.L.C.

 

Crown GKI L.L.C.

 

Crown GMI L.L.C.

 

Crown GNI L.L.C.

 

Crown GPG L.L.C.

 

Crown GVO L.L.C.

 

Crown Honda, LLC

 

Crown Honda-Volvo, LLC

 

Crown Mitsubishi, LLC

 

Crown Raleigh L.L.C.

 

Crown RIA L.L.C.

 

Crown RIB L.L.C.

 

Crown RIM L.L.C.

 

Crown RIS L.L.C.

 

Crown Royal Pontiac, LLC

 

Crown RPG L.L.C.

 

Crown Used Car Mall L.L.C.

 

Crown Wendover L.L.C.

 

CSA Imports L.L.C.

 

Damerow Ford Co.

 

Dawson, James P.

 

de Luna, Benjamin A.

 

Escude-D L.L.C.

 

Escude-M L.L.C.

 

Escude-MO L.L.C.

 

Escude-NN L.L.C.

 

Escude-NS L.L.C.

 

Escude-T L.L.C.

 

Fallon, Claire

 

Friberg, Ellen T.

 

Gonzalez, Julius

 

Goss, William A.

 

Gries, Matthew J.

 

Hope CPD L.L.C.

 

Hope FLM L.L.C.

 

Jacobs, Julian I.

 

Kay, Sheldon M.

 

KPMG, LLP.

 

LoRay, Robert L.

 

McDavid Auction, L.P.

 

McDavid Austin-Acra, L.P.

 

McDavid Communications, L.P.

 

McDavid Grande, L.P.

 

McDavid Houston-Hon, L.P.

 

McDavid Houston-Kia, L.P.

 

McDavid Houston-Niss, L.P.

 

McDavid Houston-Olds, L.P.

 

McDavid Irving-Hon, L.P.

 

McDavid Irving-PB&G, L.P.

 

McDavid Irving-Zuk, L.P.

 

McDavid Outfitters, L.P.

 

McDavid Plano-Acra, L.P.

 

McKeithen, Daniel IL

 

Nashville Motors L.L.C.

 

NP FLM L.L.C.

 

NP MZD L.L.C.

 

NP VKW L.L.C.

 

Plano Lincoln,Mercury, Inc.

 

Precision Computer Services, Inc.

 

Precision Enterprises Tampa, Inc.

 

Precision Infiniti, Inc.

 

Precision Motorcars, Inc.

 

Precision Nissan, Inc.

 

Premier LM L.L.C.

 

Premier NSN L.L.C.

 

Premier Pon L.L.C.

 

Prestige Bay L.L.C.

 

Prestige Toy L.L.C.

 

RER Properties, LLC

 

Roseborough, Teresa Wynn

 

RWlJ Properties, LLC

 

Smith, David R.

 

Spectrum Insurance Services L.L.C.

 

Sutherland Asbill & Brennan LLP

 

Tampa Hund, L.P.

 

Tampa Kia, L.P.

 

Tampa LM, L.P.

 

Tampa Mit, L.P.

 

Tampa Suzu, L.P.

 

Thomason Auto Credit Northwest, Inc.

 

Thomason Dam L.L.C.

 

Thomason FRD L.L.C.

 

Thomason Hon L.L.C.

 

Thomason Hund L.L.C.

 

Thomason Maz L.L.C.

 

Thomason Niss L.L.C.

 

Thomason on Canyon, L.L.C.

 

Thomason Sub L.L.C.

 

Thomason Suzu L.L.C.

 

Thomason TY L.L.C.

 

Thomason Zuk L.L.C.

 

TXK CPD, L.P.

 

TXK FRD, L.P.

 

TXK L.L.C.

 

WMZ Brandon Motors, L.P.

 

WMZ Motors, L.P.

 

WTY Motors, L.P.

 

 

STATEMENT REGARDING ORAL ARGUMENT

[2] Pursuant to Eleventh Circuit Rule 28-2(c), counsel for the appellee state that, because of the complex, technical nature of the question presented, they believe that oral argument would be helpful to the Court.

TABLE OF CONTENTS

 

 

Certificate of interested persons and corporate disclosure statement

 

Statement regarding oral argument

 

Statement of jurisdiction

 

Statement of the issue

 

Statement of the case

 

(1) Course of proceedings and disposition in the court below

 

(2) Statement of the facts

 

(3) Standard of review

 

Summary of argument

 

Argument:

 

The Tax Court correctly applied the aggregate concept of

 

partnerships in holding that I.R.C. section 1363(d) required

 

taxpayer to recapture the LIFO inventory reserves attributable

 

to its share of the LIFO inventories held by partnerships in

 

which it was a partner as of the time it elected to become an S

 

corporation

 

 

A. Introduction

 

B. Treating the partnerships in which taxpayer was a partner as

 

aggregates of their partners is appropriate in applying

 

I.R.C. section 1363(d) in the circumstances of this case

 

C. Taxpayer's arguments for a contrary result fail to establish

 

that, in the circumstances of this case, the Tax Court erred

 

in applying the aggregate concept of partnerships for

 

purposes of I.R.C. section 1363(d)

 

Conclusion

 

Certificate of compliance

 

Certificate of service

 

Addendum

 

 

CITATIONS

 

 

CASES:

 

 

Amity Leather Products Co. v. Commissioner, 82 T.C. 726 (1984)

 

Brown Group, Inc. v. Commissioner, 77 F.3d 217 (8th Cir. 1996)

 

*Casel v. Commissioner, 79 T.C. 424 (1982)

 

General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935)

 

Hamilton Industries v. Commissioner, 97 T.C. 120 (1991)

 

*Holiday Village Shopping Center v. United States, 773 F.2d 276

 

(Fed. Cir. 1985)

 

Kohler Co. and Subsidiaries v. United States, 124 F.3d 1451 (Fed.

 

Cir. 1997)

 

P.D.B. Sports, Ltd. v. Commissioner, 109 T.C. 423 (1997)

 

Petroleum Corp. of Texas, Inc. v. United States, 939 F.2d 1165 (5th

 

Cir. 1991)

 

Unger v. Commissioner, 936 F.2d 1316 (D.C. Cir. 1991)

 

 

STATUTES:

 

 

Internal Revenue Code of 1986 (26 U.S.C.):

 

Section 11

 

Section 301

 

Section 316

 

Section 336

 

Section 386

 

Section 472

 

Section 1056

 

Section 1245

 

Section 1250

 

Section 1254

 

*Section 1363

 

Section 1366

 

Section 1368

 

Section 1374

 

Section 6213

 

Section 7442

 

Section 7459

 

Section 7482

 

Section 7483

 

Subchapter C, sections 301 et seq.

 

Subchapter K, sections 701 et seq.

 

Subchapter S, sections 1361 et seq.

 

 

Tax Reform Act of 1986, Pub. L. No. 99-514,100 Stat. 2085:

 

 

Section 632, 100 Stat. 2275

 

Sections 631-633, 100 Stat. 2269-2282

 

 

Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-

 

647, section 1006(e), 102 Stat. 3342, 3401

 

 

MISCELLANEOUS:

 

 

Eleventh Circuit Rule 28-2

 

H.R. Conf. Rep. No. 100-495 at 974 (1987), reprinted in 1987-3 C.B.

 

193, 254

 

*H.R. Conf. Rep. No. 83-2543, at 59 (1954), reprinted in 1954

 

U.S.C.C.A.N. 5280, 5319-5320

 

H.R. Conf. Rep. No. 98-861, at 864-865 (1984), reprinted in, 1984-3

 

C.B. (vol. 2) 1, 118-119.

 

H.R. Conf. Rep. No. 99-841, vol. II, at 198-199, 203 (1986),

 

reprinted in 1986-3 C.B. (vol. 4), v, 198-199, 203

 

*H.R. Rep. No. 100-391, pt. 2, at 1098 (1987), reprinted in 1987

 

U.S.C.C.A.N. 2313-378, 2313-713

 

H.R. Rep. No. 100-795, at 58 & n.27 (1988)

 

S. Rep. No. 100-445, at 60 & n.30, reprinted in 1988 U.S.C.C.A.N.

 

4515, 4583

 

Staff of Joint Committee on Taxation, Description of Possible

 

Options to Increase Revenues, at 189 (Comm. Print 1987)

 

Staff of the Joint Comm. on Taxation, 98th Cong., General

 

Explanation of the Revenue Provisions of the Deficit Reduction

 

Act of 1984 238 (Comm. Print 1984)

 

Treas. Reg. section 1.701-2

 

 

Note: Authorities marked with an asterisk in the margin are those

 

upon which the United States primarily relies.

 

 

STATEMENT OF JURISDICTION

[3] On November 24, 1998, the Commissioner mailed to Coggin Automotive Corp. ("taxpayer"), a statutory notice of deficiency determining a deficiency in federal income tax of $432,619 for the taxable year ended June 26, 1993, and a statutory notice of deficiency determining deficiencies in federal income taxes of $432,619 for each of the taxable years ended December 31, 1993, 1994, and 1995. (Doc. 11 at 2 & Exs. 1-J, 2-J.) 1 On January 27, 1999, within the 90-day period specified in Section 6213(a) of the Internal Revenue Code of 1986 (26 U.S.C.) ("I.R.C."), 2 taxpayer filed a petition in the United States Tax Court seeking a redetermination of its income tax liability. (Doc. 1.) The Tax Court accordingly had jurisdiction over the case under I.R.C. sections 6213 and 7442.

[4] The Tax Court entered its decision pursuant to I.R.C. section 7459 on October 19, 2000. (Doc. 20). The decision was final and disposed of all claims with respect to all parties. Taxpayer filed its notice of appeal on January 16, 2001 (Doc. 21), within 90 days after entry of the decision. This appeal, therefore, is timely under I.R.C. section 7483. This Court has jurisdiction over this appeal pursuant to I.R.C. section 7482.

* * * * *

STATEMENT OF THE ISSUE

[5] Whether the Tax Court correctly held that a partnership should be treated as an aggregate of its partners for purposes of applying I.R.C. section 1363(d) as to one of its partners, and that, therefore, taxpayer was required to recapture the last-in, first-out (LIFO) inventory reserves attributable to its share of the LIFO inventories held by partnerships in which it was a partner as of the time it elected to become an S corporation.

STATEMENT OF THE CASE

(1) COURSE OF PROCEEDINGS AND DISPOSITION IN THE COURT BELOW

[6] Taxpayer appeals from a decision of the United States Tax Court (Julian I. Jacobs, Judge) determining income tax deficiencies of $408,300 for each of the taxable years ended June 26, 1993, and December 31, 1993, 1994, and 1995. (Doc. 20.)

(2) STATEMENT OF THE FACTS

[7] The operative facts may be summarized as follows:

[8] Taxpayer, a corporation formerly known as Coggin O'Steen Investment Corporation, has its principal place of business in Jacksonville, Florida. (Doc. 1 at 1; Doc. 11 at 2.) As of early 1993, taxpayer was a holding company that owned various percentages of the stock of five C corporations with which it filed consolidated federal income tax returns. Taxpayer did not directly own or operate any business or directly own any inventory. Rather, taxpayer's subsidiary corporations were operating companies that operated automobile dealerships. Of these subsidiaries, Coggin Pontiac, Inc., operated two dealerships, and Coggin Nissan, Inc., Coggin-O'Steen Motors, Inc., and Coggin Imports, Inc., each operated one dealership. The fifth subsidiary, Coggin-O'Steen Imports, Inc., owned a 50-percent interest in a limited partnership (Coggin-Andrews Partnership) which also operated an automobile dealership. (Doc. 11 at 2-3.) The general managers of certain of the dealerships owned small amounts of the stock in three of taxpayer's subsidiaries (Doc. 11 at 10, 11, 15, 23), and the other 50-percent interest in the Coggin-Andrews Partnership was owned by a corporation controlled by the dealership's general manager (Doc. 11 at 27-28).

[9] Sometime before May 1993, taxpayer decided that it would be advantageous to change its structure from a C corporation to an S corporation and to operate the dealerships through partnerships similar to the Coggin-Andrews Partnership. The restructuring required several steps. On May 27, 1993, taxpayer formed six new corporations, each of which elected S corporation status, to serve as general partners of the limited partnerships that would operate the dealerships. (Doc. 11 at 6, 8-9, 12-13, 17-18, 25, 29-30.) These S corporations then entered into limited partnerships with taxpayer's C corporation subsidiaries (and those general managers who held stock in taxpayer's subsidiaries). Each general partner received a one- percent interest in a limited partnership in exchange for a contribution of cash (Doc. 11 at 5-6, 8, 12, 17, 24, 29), and the limited partners received a 99-percent interest in a partnership in exchange for the contribution of the assets (including inventory) and liabilities of a dealership (Doc. 11 at 6, 9, 13, 19, 26) (or, in the case of Coggin-O'Steen Imports, Inc., the contribution of its 50- percent interest in the Coggin-Andrews Partnership (Doc. 11 at 30)). The general managers who had owned shares in three of taxpayer's subsidiaries were paid for those shares with promissory notes; they contributed the notes to the limited partnerships in exchange for partnership interests and thus became limited partners. (Doc. 11 at 13-15, 18-19, 20, 25-26.)

[10] Finally, taxpayer's subsidiaries were liquidated. Taxpayer thus acquired its subsidiaries' limited partnership interests and itself became a limited partner in the limited partnerships. (Doc. 11 at 6, 13, 19, 26-27, 31.) Thereafter, on June 27, 1993, taxpayer elected S corporation status effective June 27, 1993. (Doc. 11 at 3.)

[11] As more fully explained in the argument, infra, I.R.C. section 1363(d) requires a corporation to recapture its LIFO reserve upon converting from a C corporation to an S corporation if the corporation accounted for its inventory using the LIFO method in its last taxable year as a C corporation. The LIFO reserve is the excess of the inventory value using the first-in, first-out cost-flow assumption over the inventory amount calculated under the LIFO method. Taxpayer's subsidiaries had started using the LIFO method of inventory accounting as early as 1976. (Doc. 11 at 45.) Taxpayer started filing consolidated federal income tax returns with its subsidiaries as early as 1972 or 1973. (Doc. 11 at 2.)

[12] The Commissioner issued two notices of deficiency to taxpayer, one covering the short taxable year ended June 26, 1993, and the other covering the taxable years ended December 31, 1993, 1994, and 1995. (Doc. 11 at 2.) The Commissioner determined that taxpayer's conversion to an S corporation triggered the recapture of the consolidated group's pre-conversion LIFO reserves pursuant to I.R.C. section 1363(d) under two theories. The Commissioner's primary position was that taxpayer's restructuring had no non-tax purpose and, therefore, should be disregarded, with the result that the entire LIFO reserves ($5,077,808) should be recognized. In the alternative, the Commissioner determined that, under the aggregate concept of partnerships, taxpayer should be treated as owning directly its pro-rata share of partnership inventories, and thus had to recapture its pro-rata share of the LIFO reserves ($4,792,372). Because any increase in tax resulting from LIFO recapture is to be paid in four equal installments under I.R.C. section 1363(d)(2), the Commissioner determined deficiencies in each of the four taxable years in issue of $432,619 under his primary position and of $408,300 under his alternative position. (Doc. 11 at Exs. 1-J, 2-J.)

[13] Taxpayer petitioned the Tax Court for a redetermination of its liability for the years in issue. (Doc. 1.) Following a trial, the Tax Court rejected the Commissioner's primary position, finding that taxpayer's restructuring was a genuine transaction having economic substance and imbued with considerations independent of its tax consequences. (Doc. 19 at 20.) After considering the legislative history of I.R.C. section 1363(d), the Tax Court concluded that "the application of the aggregate approach (as opposed to the entity approach) of partnerships in this case better serves Congress' intent." (Doc. 19 at 24.) The court thus held that taxpayer is deemed to own a pro-rata share of the dealerships' inventories, and that, upon its election of S corporation status, it was required to include in its gross income its ratable share of the LIFO recapture amount. (Doc. 19 at 27.) The Tax Court, accordingly, entered its decision determining that taxpayer owed deficiencies in income tax of $408,300 for each of the four years in suit. (Doc. 20.)

[14] Taxpayer appealed following entry of the Tax Court's adverse decision. (Doc. 22.)

(3) STANDARD OF REVIEW

[15] The Commissioner agrees with taxpayer (Br. 5) that the question presented is one of law and, therefore, is reviewable de novo.

SUMMARY OF ARGUMENT

[16] Taxpayer, a C corporation, filed consolidated returns with its subsidiaries, which operated automobile dealerships and accounted for their inventories using the last-in, first-out (LIFO) method. The subsidiaries contributed their assets and liabilities, including their inventories, to limited partnerships in exchange for limited partnership interests, then liquidated, distributing their partnership interests to taxpayer. After thus becoming a limited partner in each of the limited partnerships, taxpayer elected to become an S corporation. Although taxpayer never directly owned any inventories, the Tax Court held that taxpayer should be treated as directly owning its pro rata share of the limited partnerships' inventories for purposes of determining whether taxpayer was required to take the partnerships' LIFO reserves into income under I.R.C. section 1363(d). This conclusion followed from the Tax Court's determining that the purposes of that statute would best be served by treating the limited partnerships as aggregates of their partners rather than as separate entities. Taxpayer contends that the Tax Court erred in so holding. The Tax Court, however, was correct.

[17] 1. Under I.R.C. section 1363(d), if a C corporation that has inventories for which it accounts using the LIFO method elects to become an S corporation, it must take into its income the amount of its LIFO reserve (i.e., the amount by which the value of the inventory in question calculated using the FIFO flow assumption exceeds its value using the LIFO flow assumption) in its last year as a C corporation. The purpose of I.R.C. section 1363 was to insure that LIFO method taxpayers, which enjoyed the deferral benefits of the LIFO method during their status as a C corporation, would not be treated more favorably than their FIFO (first-in, first-out) counterparts upon electing to become an S corporation. To accomplish this end, I.R.C. section 1363(d) requires a LIFO taxpayer electing S status to recapture the benefits of using the LIFO.

[18] 2. Taxpayer never directly owned any inventories. At the time it elected to become an S corporation, taxpayer was a limited partner in limited partnerships that held the inventories that previously had belonged to taxpayer's subsidiaries. Where it is appropriate to do so, however, a partnership may be treated as an aggregate of its partners, with each partner deemed to own directly an undivided pro rata interest in partnership property. Treating the limited partnerships as aggregates, and therefore treating taxpayer as owning its share of the partnerships' inventories, is appropriate to the purposes of I.R.C. section 1363(d) in this case, because otherwise taxpayer, who enjoyed the deferral benefits of LIFO accounting as the result of having filed consolidated returns with its subsidiaries, would escape a corporate level tax on the LIFO reserves built in to the inventories formerly held by its subsidiaries upon its election of S status. If the partnerships were, instead, treated as separate entities, as taxpayer contends they should be, then there would be no LIFO recapture under I.R.C. section 1363(d), and the manifest intent of Congress to subject LIFO reserves to a corporate level tax upon the election of S status would be thwarted.

[19] 3. Taxpayer advances several arguments purporting to demonstrate that the Tax Court's decision in this case was wrong. Taxpayer's arguments, however, lack merit.

[20] The Tax Court's decision is correct and should be affirmed.

ARGUMENT

THE TAX COURT CORRECTLY APPLIED THE AGGREGATE CONCEPT OF

 

PARTNERSHIPS IN HOLDING THAT I.R.C. section 1363(d) REQUIRED

 

TAXPAYER TO RECAPTURE THE LIFO INVENTORY RESERVES ATTRIBUTABLE

 

TO ITS SHARE OF THE LIFO INVENTORIES HELD BY PARTNERSHIPS IN

 

WHICH IT WAS A PARTNER AS OF THE TIME IT ELECTED TO BECOME AN S

 

CORPORATION

 

 

A. INTRODUCTION

 

 

[21] Before May 1993, taxpayer, a C corporation, was a holding company that had five C corporation subsidiaries with which it filed consolidated returns. The subsidiaries operated automobile dealerships and accounted for their inventories using the last-in, first-out (LIFO) flow assumption authorized by I.R.C. section 472. The subsidiaries contributed their assets and liabilities, including their inventories, to limited partnerships in exchange for limited partnership interests. The subsidiaries then liquidated, with the result that taxpayer became the owner of the subsidiaries' limited partnership interests and, thus, became a limited partner in the limited partnerships that operated the dealerships. Thereafter, taxpayer elected to become an S corporation.

[22] An understanding of the difference between C corporations and S corporations would be helpful to resolution of this case. At the risk of oversimplifying, it is sufficient to recognize that, in general a C corporation (so-called because corporate distributions and adjustments are governed by Subchapter C of the Code, I.R.C. sections 301 et seq.) is separately taxed on its income. I.R.C. section 11. To the extent that a C corporation distributes money or property to its shareholders out of its earnings and profits, the amount of the distribution is includible in the gross income of the shareholders (and, hence, is subject to a second level of taxation in the hands of the shareholders). I.R.C. sections 301(c), 316(a). A different tax regime is established for S corporations, i.e., corporations that elect to be taxed under Subchapter S of the Code, sections 1361 et seq. In general, an S corporation is not subject to tax on its income. I.R.C. section 1363(a), Appendix, infra. Rather, each shareholder must take his pro rata share of the corporation's income or loss into account in computing his own gross income whether or not any distribution to shareholders is made, I.R.C. section 1366, and distributions to shareholders generally result in adjustments to the shareholders' basis in S corporation shares, rather than in dividends, I.R.C. section 1368. Thus, election of S status has the effect of eliminating the taxation of income at the corporate level.

[23] Also helpful to decision of this case is an understanding of the difference between the "first-in, first-out," or "FIFO," and "last-in, first-out," or "LIFO," methods of accounting for inventories. The Internal Revenue Code specifically permits taxpayers to use the LIFO method of inventory accounting "in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income." I.R.C. section 472(a). The Federal Circuit has explained FIFO and LIFO accounting as follows (Kohler Co. and Subsidiaries v. United States, 124 F.3d 1451, 1457 (Fed. Cir. 1997)):

Two common methods of inventory accounting are the LIFO and

 

FIFO (first-in, first-out) methods. The difference between these

 

methods relates to whether, when a taxable entity sells a

 

fungible product pulled from inventory, it is deemed to have

 

sold the last product placed in inventory, or the product that

 

has been in inventory for the longest period of time. Using the

 

LIFO system, the taxpayer's closing inventory is deemed to

 

consist of the earliest acquired goods. Under FIFO, the closing

 

inventory is deemed to consist of the most recently manufactured

 

goods. The LIFO method results in less income than FIFO during

 

times of rising prices because income is computed as the

 

difference between the selling price and the price of the most

 

recently produced, higher priced goods. The IRS permits the use

 

of LIFO because the LIFO accounting system affords relief

 

against profits that merely reflect the bloating of inventory

 

values due to inflation.

 

 

[24] A taxpayer's use of the LIFO method in times of rising prices has the effect of deferring the recognition of income. That is, as the Federal Circuit indicated, in periods of rising prices, using the LIFO method results in lower income than would have been the case under FIFO, because the value of the taxpayer's closing inventory is reduced as newer, more expensive goods are taken out of inventory (i.e., are deemed sold first, leaving more of the older, less expensive goods), and hence the cost of goods sold is increased. See Amity Leather Products Co. v. Commissioner, 82 T.C. 726, 731-732 (1984); Hamilton Industries v. Commissioner, 97 T.C. 120, 129 (1991). LIFO accounting is intended to remove inflation as a factor in determining income. The rationale underlying the LIFO method of inventory accounting is "that income may be more accurately determined by matching current costs against current revenues, thereby eliminating from earnings any artificial profits resulting from inflationary increases in inventory costs." Amity Leather, 82 T.C. at 732; see also Hamilton Industries, 97 T.C. at 130, 132.

[25] We turn now to the provision at issue in this case. Under I.R.C. section 1363(d), if a C corporation that has inventories for which it accounts using the LIFO flow assumption elects to become an S corporation, it must take into its income the amount of its LIFO reserve in its last taxable year as a C corporation. The LIFO reserve (i.e., the amount to be recaptured) is the amount by which the value of the inventory in question calculated using the FIFO flow assumption exceeds its value using the LIFO flow assumption. In this regard, I.R.C. section 1363(d) provides in part as follows:

(1) IN GENERAL. -- If --

 

 

(A) an S corporation was a C corporation for the last

 

taxable year before the first taxable year for which the

 

election under section 1362(a) was effective, and

 

 

(B) the corporation inventoried goods under the LIFO

 

method for such last taxable year,

 

 

the LIFO recapture amount shall be included in the gross income

 

of the corporation for such last taxable year (and appropriate

 

adjustments to the basis of inventory shall be made to take into

 

account the amount included in gross income under this

 

paragraph).

 

 

. . . .

 

 

(3) LIFO RECAPTURE AMOUNT. -- For purposes of this

 

subsection, the term "LIFO recapture amount" means the amount

 

(if any) by which --

 

 

(A) the inventory amount of the inventory asset under

 

the first-in, first-out method authorized by section 471,

 

exceeds

 

 

(B) the inventory amount of such assets under the LIFO

 

method.

 

 

For purposes of the preceding sentence, inventory amounts shall

 

be determined as of the close of the last taxable year referred

 

to in paragraph (1).

 

 

[26] The question in this case is whether taxpayer's election of S corporation status triggered recapture, under I.R.C. section 1363(d), of the LIFO reserves attributable to its share of the LIFO inventories held by the limited partnerships in which it became a limited partner after the liquidation of its subsidiaries, notwithstanding that taxpayer never directly owned any of those inventories while it was a C corporation. We shall demonstrate below that the Tax Court was correct in holding that taxpayer was required to recapture the LIFO reserves. Thereafter, we shall explain why taxpayer's arguments that the Tax Court was wrong lack merit.

B. TREATING THE PARTNERSHIPS IN WHICH TAXPAYER WAS A PARTNER AS

 

AGGREGATES OF THEIR PARTNERS IS APPROPRIATE IN APPLYING

 

I.R.C. SECTION 1363(d) IN THE CIRCUMSTANCES OF THIS CASE

 

 

[27] 1. As noted, I.R.C. section 1363(d) applies where a C corporation owned LIFO inventories at the time of its election to become an S corporation. Taxpayer here, however, never directly owned any inventories. Rather, at the time that taxpayer elected S corporation status, it owned limited partnership interests in limited partnerships that owned inventory. The Tax Court nevertheless treated taxpayer as directly owning its pro rata shares of the partnerships' inventories for purposes of applying I.R.C. section 1363(d). The critical step in the Tax Court's reasoning was its conclusion that the limited partnerships should be treated, in the circumstances of this case, as aggregations of their respective partners rather than as separate entities, with the result that taxpayer was deemed to own directly its share of the partnerships' inventories. In so holding, the Tax Court correctly applied established principles of the tax law.

[28] The taxation of partnerships is governed by Subchapter K of the Internal Revenue Code, sections 701 et seq. Subchapter K treats partnerships as entities for some purposes and as aggregations of individuals, or conduits, for other purposes. Under the entity concept, a partner does not have any direct interest in partnership assets or operations, but has only an interest in the partnership entity that is separate from the partnership's assets and operations. Under the aggregate or conduit concept, each partner is treated as the direct owner of an undivided interest in the partnerships asset's and operations. See, e.g., Unger v. Commissioner, 936 F.2d 1316, 1318 (D.C. Cir. 1991). As the court of appeals explained (Unger, 936 F.2d at 1318):

The Internal Revenue Code also treats partnerships as

 

aggregates for some purposes and as separate entities for

 

others. A partnership must calculate income as a discrete

 

entity. See 26 U.S.C. section 703 (1988). The obligation to pay

 

taxes, however, passes through the partnership to the individual

 

partners. Id. sections 701, 702; United States v. Basye, 410

 

U.S. 441, 448, 93 S.Ct. 1080, 1085, 35 L.Ed.2d 412 (1973)

 

(characterizing partnership as a "conduit" through which

 

taxpaying obligation passes). The conflict between the aggregate

 

and the entity views, then, carries over to the realm of federal

 

taxation. See Pusey, The Partnership as an "Entity":

 

Implications of Basye, 54 Taxes 143, 158 (1976) ("The entity-

 

aggregate conflict has been, and will continue to be, one of the

 

most controversial areas of partnership taxation.).

 

 

[29] A partnership may also be treated as either an entity or an aggregate for purposes of other provisions of the internal revenue laws, that is, provisions outside of Subchapter K that are not specifically concerned with partnership taxation. An illustrative case is Holiday Village Shopping Center v. United States, 773 F.2d 276 (Fed. Cir. 1985). The taxpayer in that case was a corporation that owned a 99-percent interest in a limited partnership that, in turn, held a shopping center on which it took accelerated depreciation. The corporation was liquidated and distributed all its assets to its shareholders, including the limited partnership interest. The corporation contended that it need not recognize any gain or loss on the liquidation under I.R.C. section 336. The IRS, however, took the view that the corporation had to recapture its accelerated depreciation on the shopping center under I.R.C. section 1250, which requires the accelerated portion of the depreciation on real property (i.e., depreciation in excess of the straight-line amount) to be taken into income upon the disposition of depreciable real property notwithstanding any other provision of the Code. The corporation, in an argument analogous to the argument that taxpayer makes here, claimed that, under its plain language, I.R.C. section 1250 was inapplicable because the corporation did not dispose of any real property but, rather, only its interest in a limited partnership that held real property. 773 F.2d at 279. In other words, the taxpayer corporation relied on the entity theory of partnership. The Federal Circuit, however, after examining the legislative history of the provisions relating to partnerships and to depreciation recapture, held that, in the circumstances of that case, "the partnership should not be viewed as an independent taxable entity wholly separate from and independent of its two partners" because "[t]he purpose of the recapture provisions . . . supports treating the partnership for tax purposes as the aggregate of the two partners rather than as a separate entity." 773 F.2d at 280. The Federal Circuit explained (Holiday Village Shopping Center, 773 F.2d at 279):

The legislative history of the 1954 Code, which added

 

subchapter K to the Code, shows that Congress did not intend a

 

partnership to be treated in all situations as an entity for tax

 

purposes. The House Conference Committee Report, H.R.Conf.Rep.

 

No. 2543, 83d Cong., 2d Sess. 59, reprinted in 1954 U.S.Code

 

Cong. & Ad.News 5280, 5319-20, states:

 

 

Both the House provisions and the Senate amendment

 

provide for the use of the "entity" approach in the

 

treatment of the transactions between a partner and a

 

partnership which are described above. No inference is

 

intended, however, that a partnership is to be considered

 

as a separate entity for the purpose of applying other

 

provisions of the internal revenue laws if the concept of

 

the partnership as a collection of individuals is more

 

appropriate for such provisions.

 

 

The proper inquiry, therefore, is whether in determining

 

the applicability of the recapture provision in section 1250 to

 

the present situation, it "is more appropriate" to treat the

 

partnership as an aggregate or "collection of individuals" than

 

as "a separate entity."

 

 

See also Casel v. Commissioner, 79 T.C. 424, 433 (1982) (Conference Committee report respecting Internal Revenue Code of 1954 "clearly stated that whether an entity or aggregate theory of partnerships should be applied to a particular Code section depends upon which theory is more appropriate to such section").

[30] Accordingly, the Tax Court did not err in holding that "[o]utside of subchapter K, whether the aggregate or the entity approach is to be applied depends on which approach more appropriately serves the Code provision at issue." (Doc. 19 at 21.) And, as we shall demonstrate below, the Tax Court correctly concluded that the congressional intent underlying I.R.C. section 1363(d) is best served in the circumstances of this case by applying the aggregate concept of partnerships.

[31] 2. In General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935), the Supreme Court held that corporations do not realize gain on the distribution of assets whose fair market values exceed their tax bases, and that rule was subsequently embodied in the relevant Code provisions. The General Utilities doctrine held sway until 1986 when, by enacting the Tax Reform Act of 1986, Pub. L. No. 99-514, sections 631-633, 100 Stat. 2085, 2269-2282, Congress did away with the General Utilities doctrine. As part of that reform, Congress, in section 632 of the 1986 Act, 100 Stat. 2275, amended I.R.C. section 1374 to require an S corporation to pay a separate corporate-level tax on any net recognized built-in gains recognized through a sale or distribution of assets within 10 years following the effective date of the corporation's election of S status. The purpose of the provision was to prevent the permanent avoidance of the corporate level tax on the distribution of appreciated assets by an S corporation that had held the assets at the time when, as a C corporation, it elected S status. See H.R. Conf. Rep. No. 99-841, vol. II, at 198-199, 203 (1986), reprinted in 1986-3 C.B. (vol. 4), v, 198-199, 203.

[32] The LIFO recapture rule of I.R.C. section 1363(d) fills a gap in the reach of I.R.C. section 1374 with respect to inventories with built-in gains held by a C corporation at the time of its conversion to an S corporation. A C corporation that accounts for its inventories using the FIFO flow assumption clearly would fall within the reach of I.R.C. section 1374, that is, it would recognize any built-in gains on its sales of inventory after electing S status because, under the FIFO flow assumption, the inventory sold would be considered to have been the earliest acquired, with the result that inventory held prior to the conversion would be deemed the first sold thereafter. In contrast, because the LIFO flow assumption treats any sale of inventory as the sale of the most recently acquired inventory, an S corporation's post-election sales of LIFO inventory generally would consist of property acquired after its S election, with the result that I.R.C. section 1374 would not apply unless the absolute amount of inventory on hand were reduced below the inventory level at the time of the S election. As the Conference Committee explained (H.R. Conf. Rep. No. 100-495 at 974 (1987), reprinted in 1987-3 C.B. 193, 254):

Thus, a C corporation using the last-in, first-out (LIFO) method

 

of accounting for its inventory which converts to S corporation

 

status is not taxed [under I.R.C. section 1374] on the built-in

 

gain attributable to LIFO inventory to the extent it does not

 

invade LIFO layers during the ten-year period following the

 

conversion.

 

 

[33] Furthermore, a taxpayer who was facing rising acquisition costs or whose business was growing might never experience an inventory decrement that would cause it to recognize built-gain under I.R.C. section 1374 with respect to LIFO inventories on hand at the time of its S election. See Staff of Joint Committee on Taxation, Description of Possible Options to Increase Revenues, at 189 (Comm. Print 1987) ("[I.R.C. section 1374] may be ineffective in the case of a LIFO inventory, since a taxpayer experiencing constant growth may never be required to invade LIFO inventory layers"). As the Tax Court noted below, Congress "recognized that the deferred built-in gain resulting from using the LIFO method might escape taxation at the corporate level." (Doc. 19 at 24.) Congress addressed this problem by imposing a separate corporate level tax on the LIFO reserves of C corporations at the time of their election of S corporation status through the enactment of I.R.C. section 1363(d).

[34] Thus, Congress's purpose in enacting I.R.C. section 1363(d) manifestly was to ensure that built-in gains on assets (such as LIFO reserves) that fell outside the ambit of I.R.C. section 1374 nevertheless would be taxed at the corporate level upon a corporation's election of S status. This purpose plainly would be advanced by applying the aggregate theory of partnerships in this case and, accordingly, by treating taxpayer as the direct owner of the LIFO inventories at issue for purposes of recapturing LIFO reserves under I.R.C. section 1363(d). Equally plainly, the statutory purpose would be thwarted if the entity theory of partnerships were to be applied in the circumstances of this case, thus permitting taxpayer to avoid the corporate level tax on its LIFO reserves. As the Tax Court explained (Doc. 19 at 24):

By enacting sections 1374 and 1363(d), Congress evinced an

 

intent to prevent corporations from avoiding a second level of

 

taxation on built-in gain assets by converting to S

 

corporations. Application of the aggregate approach to section

 

1363(d) is consistent with Congress' rationale for enacting this

 

section and operates to prevent a corporate taxpayer from using

 

the LIFO method of accounting to permanently avoid gain

 

recognition on appreciated assets. In contrast, applying the

 

entity approach to section 1363(d) would potentially allow a

 

corporate partner to permanently avoid paying a second level of

 

tax on appreciated property by encouraging transfers of

 

inventory between related entities.

 

 

[35] The history of former I.R.C. section 386 confirms the correctness of the analytical approach followed in Holiday Village Shopping Center and by the Tax Court in this case. Concerned that taxpayer corporations would seek to avoid recapture provisions like I.R.C. section 1250, as did the taxpayer in Holiday Village Shopping Center, by transferring recapture assets to partnerships and then distributing to shareholders interests in the partnerships, Congress in 1984 enacted former I.R.C. section 386. Under I.R.C. section 386, any sale or distribution of an interest in a partnership holding recognition property (generally, inventory and depreciable items) was treated as an event triggering recognition income in the same amount as the corporation would have recognized if it had sold or distributed the property directly. Congress thus endorsed the approach taken by the court in Holiday Village Shopping Center of treating a partnership as an aggregation of individuals where necessary to effect the statutory purpose. As the staff of the Joint Committee explained, "Congress believed that in this case, as elsewhere, the use of a partnership form should not result in greater tax benefits than would be available in the case of direct ownership." Staff of the Joint Comm. on Taxation, 98th Cong., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 238 (Comm. Print 1984). Further, Congress took pains to "stress that no inference is intended [from enactment of I.R.C. section 386] as to whether or not the results obtained by the provisions of this section differ from those under current law." H.R. Conf. Rep. No. 98- 861, at 864-865 (1984), reprinted in, 1984-3 C.B. (vol. 2) 1, 118- 119.

[36] Congress repealed I.R.C. section 386 in 1988. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, section 1006(e), 102 Stat. 3342, 3401. Congress did not suggest, however, that the repeal represented a reversal of its endorsement of treating partnerships as aggregations of individuals where appropriate. Rather, Congress stated that it considered I.R.C. section 386 to be deadwood in light of the changes in the law it made in 1986 in overturning the General Utilities doctrine. Further, Congress specifically authorized the retention of certain rules contained in I.R.C. section 386, and to use the step-transaction or other doctrines where appropriate to prevent certain of the abuses to which I.R.C. section 386 had been directed. H.R. Rep. No. 100-795, at 58 & n.27 (1988); S. Rep. No. 100-445, at 60 & n.30, reprinted in 1988 U.S.C.C.A.N. 4515, 4583.

[37] In short, the analytical approach taken by the Federal Circuit in Holiday Village Shopping Center in applying the aggregate concept of partnerships and endorsed by Congress in former I.R.C. section 386 remains alive and well. The Tax Court correctly followed that approach in determining that the aggregate concept should be used in applying I.R.C. section 1363(d) in the circumstances of this case.

C. TAXPAYER'S ARGUMENTS FOR A CONTRARY RESULT FAIL TO ESTABLISH

 

THAT, IN THE CIRCUMSTANCES OF THIS CASE, THE TAX COURT ERRED

 

IN APPLYING THE AGGREGATE CONCEPT OF PARTNERSHIPS FOR

 

PURPOSES OF I.R.C. SECTION 1363(d)

 

 

[38] Taxpayer presents numerous arguments in support of its contention that the Tax Court erred in treating the partnerships as aggregates for the purpose of applying I.R.C. section 1363(d). But, although taxpayer's arguments appear attractive at first blush, they are either beside the point or lacking in merit.

[39] 1. Taxpayer's principal argument is that treating it, for purposes of I.R.C. section 1363(d) as directly owning (under the aggregate theory of partnerships) its pro rata share of the inventories of the limited partnerships is contrary to the plain language of the statute. (Br. 10-12.) Specifically, taxpayer points out that I.R.C. section 1363(d), by its terms, applies in the case of a corporation electing S status that inventoried goods under the LIFO method in its last taxable year as a C corporation, whereas taxpayer itself never directly owned any inventories at all, much less accounted for them under the LIFO method. (Br. 11.) Taxpayer evidently reasons that, therefore, the Tax Court's decision is wrong.

[40] Taxpayer is, of course, correct in its assertion that the language of I.R.C. section 1363(d) does not literally apply to the facts of this case. It does not follow, however, that I.R.C. section 1363(d) is inapplicable. As the Federal Circuit said in response to a substantially identical plain language argument made by the taxpayer in Holiday Village Shopping Center, 773 F.2d at 279, "[a]lthough the argument is superficially appealing, the issue is not as simple or as simplistic as [the taxpayer] suggests." Rather, as we have already explained, the Federal Circuit went on to hold that, in applying Code provisions outside of the partnership provisions of Subchapter K, whether the aggregate or the entity concept of partnerships is to be applied depends on which approach best advances the purpose underlying the Code provision in question. And, as we also demonstrated, the congressional intent underlying I.R.C. section 1363(d) is best served in the circumstances of this case by applying the aggregate concept of partnerships.

[41] As taxpayer points out (Br. 31-33), the Fifth Circuit, in Petroleum Corp. of Texas, Inc. v. United States, 939 F.2d 1165 (5th Cir. 1991), declined to follow the Federal Circuit's approach in Holiday Village Shopping Center. Instead, the Fifth Circuit held that the plain language of the recapture provisions, I.R.C. sections 1245, 1250, and 1254, precluded their application in a case where, before the enactment of former I.R.C. section 386, a corporation transferred recapture property to limited partnerships and then, in a liquidating distribution, distributed partnership interests, rather than the underlying property itself, to its shareholders. The court of appeals purported to distinguish Holiday Village Shopping Center on the ground that, in Petroleum Corp. of Texas, the transfers of property to the partnerships were conceded to have been supported by valid business purposes other than tax avoidance, which had not been the case in Holiday Village Shopping Center. Petroleum Corp. of Texas, 939 F.2d at 1167 n.1.

[42] Circuit Judge Brown concurred, but stated that he had misgivings in so doing. Petroleum Corp. of Texas, 939 F.2d at 1169 (Brown, J., concurring). Judge Brown noted, first, that Holiday Village Shopping Center could not be distinguished on the ground stated by the majority, and that the court of appeals should admit that the decision in Petroleum Corp. of Texas created an inter- circuit conflict for possible resolution by the Supreme Court. Petroleum Corp. of Texas, 939 F.2d at 110 (Brown, J., concurring). Judge Brown had a more serious concern (ibid.):

Additionally, I cannot escape the feeling that the result

 

of the court's decisions comes close to an instance of "now you

 

see it, now you don't" that: [property] meeting all of the

 

section 1254 requirements, somehow, someway, by our

 

declarations, undergoes juridical transmutation into a

 

partnership interest immune to recapture.

 

 

[43] We think that Petroleum Corp. of Texas was incorrectly decided, and that Judge Brown was correct in his concern that the holding in that case would have the effect of letting taxpayers avoid recapture income by means of legal legerdemain. Judge Brown's concern is relevant here: a holding in this case that the entity theory of partnerships pertains, and that I.R.C. section 1363(d) is therefore inapplicable, would be nothing short of a road map instructing C corporations on how to circumvent the recapture of their LIFO reserves upon electing S status. Preserving the integrity of the taxing scheme contemplated by Congress warrants applying the aggregate concept of partnerships here.

[44] Finally, it is worth reiterating here that the events of this case occurred after Congress, by enacting I.R.C. section 386, confirmed its endorsement of the analytical approach taken by the Federal Circuit in Holiday Village Shopping Center, and congressional approval of that reasoning has not been withdrawn. Accordingly, the Tax Court was correct in following the analytical approach taken in Holiday Village Shopping Center-i.e., considering whether the entity or the aggregate concept of partnerships should pertain in applying I.R.C. section 1363(d).

[45] In light of the foregoing, it is clear that taxpayer's argument that the language of I.R.C. section 1363(d), taken literally, does not apply here merely begs the relevant question. It also follows from the foregoing that taxpayer's argument that the Tax Court lacked authority to "exceed" the plain language of I.R.C. section 1363(d) (Br. 19-20) lacks merit.

[46] 2. Taxpayer contends that the legislative history of I.R.C. section 1363(d) does not support the Tax Court's holding that the partnerships of which taxpayer was a partner as aggregates for purposes of applying the LIFO recapture rule of I.R.C. section 1363(d). (Br. 21-24.) In this regard, taxpayer argues that Congress intended to craft a "targeted measure" rather than the "broadbrush revision fashioned by the Tax Court." (Br. 21.) Taxpayer also attempts to refute the Tax Court's analysis by means of reductio ad absurdum. It contends that the Tax Court held that the aggregate concept of partnerships must apply, and the C corporation thus must recapture a pro rata portion of a partnership's LIFO reserves, in all cases in which a C corporation converts to S status. (Br. 21.) It then goes on to posit a situation in which it would make no sense to require such recapture (as where a C corporation invests cash in an existing partnership that had LIFO inventories and later elects S status), and a situation in which aggregate treatment would not effect recapture (as where the C corporation contributes its LIFO inventories to a large partnership receives in exchange only a small percentage interest in the partnership). (Br. 21-23.) Taxpayer reasons, therefore, that aggregate treatment of the partnerships is "an ineffective and inappropriate solution to the problem perceived by the Tax Court." (Br. 24.)

[47] Taxpayer interprets the legislative purpose of I.R.C. section 1363(d) far too narrowly. It asserts that, in enacting that statute, Congress intended only to cure a potential weakness in I.R.C. section 1374, and that the remedy "requires only that C corporations using the LIFO method recapture the benefits of using that method in the year of conversion to S status." (Br. 22.) The legislative history of I.R.C. section 1363(d) does not support taxpayer's narrow interpretation. Congress stated its purpose in enacting I.R.C. section 1363(d) as follows (H.R. Rep. No. 100-391, pt. 2, at 1098 (1987), reprinted in 1987 U.S.C.C.A.N. 2313-378, 2313- 713):

The committee is concerned that taxpayers using the LIFO

 

method may avoid the built-in gain rules of section 1374. It

 

believes that LIFO method taxpayers, which have enjoyed the

 

deferral benefits of the LIFO method during their status as a C

 

corporation, should not be treated more favorably than their

 

FIFO (first-in, first-out) counterparts. To eliminate this

 

potential disparity in treatment, the committee believes it is

 

appropriate to require a LIFO taxpayer to recapture the benefits

 

of using the LIFO method in the year of conversion to S status.

 

 

This statement of purpose plainly shows that congressional intent would be advanced by having I.R.C. section 1363(d) apply in the circumstances of this case, and that acceptance of taxpayer's position would thwart the will of Congress. Having filed consolidated returns with its subsidiaries, which used LIFO inventories, and as the successor to those subsidiaries by reason of their liquidation, taxpayer "enjoyed the deferral benefits of the LIFO method during [its] status as a C corporation." Furthermore, if taxpayer's ploy of having its subsidiaries transfer the LIFO inventories to partnerships in contemplation of taxpayer's election of S status should enable taxpayer to avoid LIFO recapture, then taxpayer ultimately will have been "treated more favorably than [its] FIFO (first-in, first-out) counterparts," and I.R.C. section 1363(d) will not have accomplished its purpose "[t]o eliminate this potential disparity in treatment." Thus, as already mentioned, a holding that taxpayer has been immunized from the application of I.R.C. section 1363(d) by reason of the contribution of its subsidiaries' LIFO inventories to partnerships would be no more than an instruction on how to make an end run around the requirement of LIFO recapture.

[48] Taxpayer's characterization of the Tax Court's holding also is unfounded, and its attempts to make that holding, as so mischaracterized, appear ridiculous and ineffectual lack merit. Contrary to taxpayer's assertion, the Tax Court did not hold that the aggregate concept of partnerships must be applied in all instances in which a corporate partner converts from C to S status. Rather, the Tax Court said, "we hold that the aggregate approach (as opposed to the entity approach) better serves the underlying purpose and scope of section 1363(d) in the circumstances of this case." (Doc. 19 at 27; emphasis added.) And, although it may be true that treating a partnership as an aggregate will not result in achieving the purposes of I.R.C. section 1363(d) in all instances, it does not follow that a partnership should not be treated as an aggregate of its partners where -- as in this case -- aggregate treatment will accomplish the statutory purpose.

[49] 3. Taxpayer points out that it never held inventories and, accordingly, never elected to use the LIFO method. It argues that, therefore, the Tax Court's decisions improperly attributes to it a method of accounting (the LIFO method) that it never elected to use. (Br. 24.) It also argues that, if taxpayer had also had its own inventories and accounted for them using the FIFO method, then the Tax Court's opinion would have the impermissible effect of having taxpayer account for similar inventories using both the FIFO and LIFO methods. (Br. 24-25.)

[50] Taxpayer's arguments are specious and, in any event, beside the point. As already noted, the legislative purpose underlying I.R.C. section 1363(d) was to require taxpayers who had enjoyed the income deferral benefits of using the LIFO method during their status as C corporations to recapture the benefits of LIFO deferral upon electing S status in order to eliminate the potential disparity in treatment between such corporations and those who had accounted for their inventories using the FIFO method before converting to S status. H.R. Rep. No. 100-391, pt. 2, at 1098 (1987), reprinted in 1987 U.S.C.C.A.N. 2313-378, 2313-713. And, as also noted, because taxpayer filed consolidated returns with, and was the successor by liquidation to, its subsidiaries, which used LIFO inventories, it "enjoyed the deferral benefits of the LIFO method during [its] status as a C corporation."

[51] Accordingly, treating the partnerships here involved as aggregates, with the result that taxpayer is deemed to have directly owned its pro rata share of their inventories for purposes of applying I.R.C. section 1363(d), does not improperly attribute a LIFO election, or the actual use of LIFO accounting, to taxpayer, as taxpayer incorrectly contends. Rather, it has the effect only of requiring taxpayer to recapture the benefit of income deferral that it unquestionably received by reason of its subsidiaries' (and the partnerships') use of the LIFO method prior to taxpayer's S election. And, of course, that is precisely what Congress intended.

[52] 4. Taxpayer argues that use of the aggregate approach to treat taxpayer as owning a portion of the partnerships' inventories for purposes of I.R.C. section 1361(d) is inconsistent with Subchapter K of the Code and creates unintended difficulties. (Br. 25-35.) Specifically, taxpayer complains first that the Tax Court's decision is contrary to the requirement that partnership income be determined at the partnership level in that "[i]t has required income with respect to a partnership's inventory that has not yet been recognized by the partnership to be determined at the partner level." (Br. 27.) This is a specious argument.

[53] It is in the nature of the recapture of LIFO reserves under I.R.C. section 1363 to require the recognition of income that has not, in fact, been realized by anyone. Indeed, as we have already explained, I.R.C. section 1363 was enacted to reach gains built into LIFO inventories that likely would not be realized within the 10 years following an S election (and, hence, would not be taxed under I.R.C. section 1374) or, indeed, might never be realized at all. See H.R. Conf. Rep. No. 100-495 at 974 (1987), reprinted in 1987-3 C.B. 193, 254; Staff of Joint Committee on Taxation, Description of Possible Options to Increase Revenues, at 189 (Comm. Print 1987). That the income taxable under I.R.C. section 1363(d) has not been realized by the partnership thus is no surprise, and it hardly constitutes an impediment to applying the statute here. And, on the facts of this case, it is taxpayer-a partner-who has benefitted from the income deferral that resulted from use of the LIFO method with respect to the inventories held by partnerships as of the date of its S election, so it only makes sense to require taxpayer to recapture LIFO reserves pursuant to I.R.C. section 1363(d).

[54] Under I.R.C. section 1363(d)(1), an appropriate adjustment to the basis of inventory is to be made to take into account the amount of taxpayer's LIFO recapture. It is our understanding that, in the circumstances here, the partnerships may take appropriate adjustments to the bases of their inventories to reflect the amounts included in taxpayer's income as LIFO reserve recapture with respect to those inventories.

[55] Taxpayer argues at some length that there is nothing in Subchapter K of the Code that would allow for such an adjustment to the bases of the partnerships' inventories, and that how such an adjustment should be made is unclear. (Br. 28-31.) Citing P.D.B. Sports, Ltd. v. Commissioner, 109 T.C. 423 (1997), taxpayer argues that, therefore, I.R.C. section 1363(d) should not apply. The short answer to taxpayer's argument is that the only issue in this case is whether taxpayer must take LIFO reserves into income under I.R.C. section 1363(d); the proper manner of making the correlative adjustments to inventory is not before this Court.

[56] Moreover, the decision in P.D.B. Sports, upon which taxpayer relies, is readily distinguishable from the instant case and does not support taxpayer's position here. In P.D.B. Sports, the petitioner was the partnership itself. In that case, an individual bought more than a 50-percent interest in a partnership that owned a professional sports franchise. Under Subchapter K, the sale of a greater than 50-percent interest in a partnership results in termination of the partnership, the deemed distribution of the partnership's assets to the partners, and the deemed recontribution of the assets to a new partnership, in connection with which the partnership's basis in the assets may be adjusted to reflect their value. See P.D.B. Sports, 109 T.C. at 430-431. The partnership contended that, accordingly, it was entitled to amortization deductions based on the fair market value of its player contracts. The Commissioner contended, however, that, under I.R.C. section 1056 (limiting adjustments to the basis of player contracts in the event of the sale or exchange of a sports enterprise), the amount by which the bases of player contracts could be adjusted was limited, as was, consequently, the amount of the partnership's amortization deductions. The Tax Court, after analyzing I.R.C. section 1056 and its legislative history, concluded that I.R.C. section 1056 was not intended to apply where a buyer acquires an interest in a partnership holding player contracts. A significant factor in its decision was that there was no indication as to how the basis provisions of I.R.C. section 1056 could be reconciled with conflicting provisions in Subchapter K.

[57] In contrast to the circumstance in P.D.B. Sports, in this case there is no direct conflict between I.R.C. section 1363(d) and the provisions of Subchapter K. We are confident that, if this Court should affirm the decision below and appropriate inventory adjustment should thus be required, the parties will work out a manner of implementing adjustments that accurately take taxpayer's income inclusion into account and yet consist with the relevant provisions of the Code.

[58] 5. Taxpayer argues, based on a lengthy discussion of regulations under I.R.C. sections 1363 and 1374 that taxpayer describes as controversial, that there is no support in the regulations for the Commissioner's position in this case. (Br. 12- 18.) Taxpayer says that it is not questioning the validity of the regulations, but merely pointing out that, when the Commissioner desired to "expand" I.R.C. section 1363(d), it did so only prospectively, and that even that regulations' alleged expansion of the statute did not reach the fact pattern of this case. (Br. 14-15.) Taxpayer contends that, therefore, the Tax Court expanded the reach of I.R.C. section 1363(d) by, in effect, "writ[ing] a statute or regulation that neither Congress nor the Service chose to write." (Br. 15.)

[59] It is unclear to us why taxpayer has chosen to make this argument on appeal. It did not do so in the Tax Court, presumably because, as taxpayer points out (Br. 13, 14), the regulations became effective after the date of taxpayer's S election and do not address the fact pattern presented here. The regulations are inapplicable to this case, and the Commissioner therefore does not rely on them here. Quite plainly, no inference can properly be drawn about the correctness of the Commissioner's position as to the applicable law in this case from the fact that the Treasury did not, after the transactions at issue, promulgate a regulation that addresses the application of I.R.C. section 1363(d) where, as here, a C corporation transfers LIFO inventories to a partnership and thereafter elects S status. Moreover, as taxpayer has indicated in its brief (Br. 21-23), circumstances may arise in which the purposes of I.R.C. section 1363(d) might not be served by treating a partnership as an aggregate (although no such circumstances are present in this case). Accordingly, it is understandable that the Commissioner did not adopt a regulation providing a blanket rule as to whether partnerships are to be treated as aggregates in applying I.R.C. section 1363(d), and, for this reason, too, no negative inference may properly be drawn from the absence of a regulation on point as to the correctness of the Commissioner's position here.

[60] In short, taxpayer's argument based on regulations under I.R.C. sections 1363 and 1374 that admittedly do not apply here is simply irrelevant and beside the point. Moreover, if a subsequently effective regulation that applied to the present facts and supported the Commissioner's position in this case had been adopted, taxpayer would emphasize that the regulation was not in effect at the time of its transactions, and it would argue stridently that the regulation therefore should be disregarded.

[61] 6. Taxpayer contends that, by treating the partnerships to which taxpayer's subsidiaries transferred their inventories as aggregates of their individual partners, rather than as separate entities, the Commissioner has contravened Treas. Reg. section 1.701- 2(e), which provides in part as follows (Treas. Reg. section 1.701- 2(e)(1)):

The Commissioner can treat a partnership as an aggregate of

 

its partners in whole or in part as appropriate to carry out the

 

purpose of any provision of the Internal Revenue Code or the

 

regulations promulgated thereunder.

 

 

In this regard, taxpayer notes that Treas. Reg. section 1.701-2(e) was adopted after the transaction at issue in this case and, further, was made prospectively effective. Thus, according to taxpayer, the Commissioner's retroactive application of the aggregate approach to the transaction in this case contravened the regulation. (Br. 18.) Taxpayer also points out that the Eighth Circuit, in Brown Group, Inc. v. Commissioner, 77 F.3d 217, 222 (8th Cir. 1996), stated (in obiter dictum) that, "as we read the regulations [i.e., Treas. Reg. section 1.701-2(e)], the IRS does not have the power to recast partnership transactions or apply the aggregate approach for transactions occurring prior to these effective dates." (Br. 19.)

[62] Taxpayer is wrong. In the first place, the Commissioner does not rely on the anti-abuse provisions of Treas. Reg. section 1.701-2 as the source of his authority to apply the aggregate concept of partnerships to the transactions at issue in this case. Rather, that authority existed before the promulgation of the regulation. As already mentioned, Congress in 1954 indicated that the aggregate, rather than the entity, theory of partnerships should be applied where appropriate in applying provisions of the Internal Revenue Code outside of Subchapter K, H.R. Conf. Rep. No. 83-2543, at 59 (1954), reprinted in 1954 U.S.C.C.A.N. 5280, 5319-5320, and the Federal Circuit followed that approach in Holiday Village Shopping Center, 773 F.2d at 279-580.

[63] By the same token, Treas. Reg. section 1.701-2(e) did not purport to confer on the Commissioner for the first time the authority to treat a partnership as an aggregate of its partners where appropriate. Rather, the regulation explicitly confirmed the prior existence of that authority, as the preamble to the regulation stated (T.D. 8588, 1995-1 C.B. 109, 111):

Paragraph (e) [of Treas. Reg. section 1.701-2] confirms the

 

Commissioner's authority to treat a partnership as an aggregate

 

of its partners in whole or in part as appropriate to carry out

 

the purpose of any provision of the Code or the regulations

 

thereunder. As stated in some comments, as well as under current

 

law, the Commissioner's authority to treat a partnership as an

 

aggregate of its partners is not dependent on the taxpayer's

 

intent in structuring the transaction.

 

 

It also follows that the Eighth Circuit's dictum in Brown Group, Inc., to the effect that the Commissioner lacked authority to treat a partnership as an aggregate before the effective date of Treas. Reg. section 1.701-2(e) simply was wrong, and that taxpayer's reliance thereon was misplaced.

[64] 7. Taxpayer's final argument is that, since the transactions here were not found to have been abusive (i.e., the asset transfers to the partnerships were found to have a non-tax purpose), to the extent that the transactions exploit a loophole in I.R.C. section 1363(d), it is for Congress, not the courts , to remedy. (Br. 34-36.) This argument, too, lacks merit.

[65] As we have already demonstrated, a partnership may properly be treated as the aggregate of its partners, rather than as a separate entity, where appropriate in applying provisions of the Internal Revenue Code outside of Subchapter K, Holiday Village Shopping Center, 773 F.2d at 279-580; H.R. Conf. Rep. No. 83-2543, at 59 (1954), reprinted in 1954 U.S.C.C.A.N. 5280, 5319-5320. Whether a taxpayer's conduct is abusive is not necessarily a factor in determining whether treating a partnership as an aggregate of its partners is appropriate for purposes of a given Code section-that is, it may be appropriate to treat a partnership as an aggregate in situations where the conduct in question is not abusive. Indeed, in this case, the Commissioner asserted that the partnerships in this case should be treated as aggregates as an alternative to his primary position (rejected by the Tax Court), which was that taxpayer's 1993 restructuring should be disregarded because it lacked any economic purpose independent of taxes.

[66] We have also shown that, in the circumstances of this case, treating the partnerships as aggregates so that I.R.C. section 1363(d) will apply would advance the purpose of Congress to prevent C corporations from avoiding taxation of built-in gain assets at the corporate level upon the conversion of the C corporations to S corporations and, therefore, is appropriate. H.R. Rep. No. 100-391, pt. 2, at 1098 (1987), reprinted in 1987 U.S.C.C.A.N. 2313-378, 2313- 713. Quite clearly, a C corporation might avoid taxation of LIFO reserves at the corporate level by making an S election in the circumstances of this case without regard to whether there is any tax abuse connected with the S election and related transactions. Realizing the purpose underlying I.R.C. section 1363(d) by treating the partnerships as aggregates so as to tax LIFO reserves upon a corporation's electing S status thus does not require an abusive transaction as a predicate. Treating the partnerships in this case as aggregates, therefore, is not rendered inappropriate by the fact that the 1993 restructuring at issue here was not found to be abusive. Accordingly, taxpayer's assertion that a desire to prevent abusive transactions does not warrant the Tax Court's decision in this case is misconceived and wholly beside the point.

CONCLUSION

[67] For the foregoing reasons, the decision of the Tax Court is correct and should be affirmed.

Respectfully submitted,

 

 

CLAIRE FALLON

 

Acting Assistant Attorney

 

General

 

 

DAVID ENGLISH CARMACK

 

(202) 514-2933

 

CHARLES BRICKEN (202) 514-3006

 

Attorneys

 

Tax Division

 

Department of Justice

 

Post Office Box 502

 

Washington, D. C. 20044

 

 

APRIL 2001

 

 

CERTIFICATE OF COMPLIANCE

[68] I certify that this brief complies with the type volume limitation set forth in Rule 32(a)(7)(C) of the Federal Rules of Appellate Procedure. This brief (not including those items excluded from type-volume limitations by Eleventh Circuit Rule 32-4) contains 9,399 words.

CHARLES BRICKEN

 

Attorney

 

 

CERTIFICATE OF SERVICE

[69] It is hereby certified that service of this brief has been made on counsel for the appellant on this 30th day of April, 2001, by mailing two copies thereof in an envelope properly addressed to them as follows:

N. Jerold Cohen, Esquire

 

Matthew J. Gries, Esquire

 

Teresa Wynn Roseborough, Esquire

 

Daniel R. McKeithen, Esquire

 

Sutherland Asbill & Brennan LLP

 

999 Peachtree Street, N.E.

 

Atlanta, Georgia 30309-3996

 

 

CHARLES BRICKEN

 

Attorney

 

 

ADDENDUM

 

 

Internal Revenue Code of 1986 (26 U.S.C.):

 

 

SEC.1363. EFFECT OF ELECTION ON CORPORATION.

 

 

(a) General Rule. -- Except as otherwise provided in this

 

subchapter, an S corporation shall not be subject to the taxes

 

imposed by this chapter.

 

 

. . . .

 

 

(d) Recapture of LIFO Benefits. --

 

 

(1) In general. --If --

 

 

(A) an S corporation was a C corporation for the

 

last taxable year before the first taxable year for

 

which the election under section 1362(a) was

 

effective, and

 

 

(B) the corporation inventoried goods under the

 

LIFO method for such last taxable year,

 

 

the LIFO recapture amount shall be included in the gross

 

income of the corporation for such last taxable year (and

 

appropriate adjustments to the basis of inventory shall be

 

made to take into account the amount included in gross

 

income under this paragraph).

 

 

(2) Additional tax payable in installments. --

 

 

(A) In general. -- Any increase in the tax

 

imposed by this chapter by reason of this subsection

 

shall be payable in 4 equal installments.

 

 

(B) Date for payment of installments. -- The

 

first installment under subparagraph (A) shall be paid

 

on or before the due date (determined without regard

 

to extensions) for the return of the tax imposed by

 

this chapter for the last taxable year for which the

 

corporation was a C corporation and the 3 succeeding

 

installments shall be paid on or before the due date

 

(as so determined) for the corporation's return for

 

the 3 succeeding taxable years.

 

 

(C) No interest for period of extension. --

 

Notwith-standing section 6601(b), for purposes of

 

section 6601, the date prescribed for the payment of

 

each installment under this paragraph shall be

 

determined under this paragraph.

 

 

(3) LIFO recapture amount. -- For purposes of this

 

subsection, the term "LIFO recapture amount" means the

 

amount (if any) by which --

 

 

(A) the inventory amount of the inventory asset

 

under the first-in, first-out method authorized by

 

section 471, exceeds

 

 

(B) the inventory amount of such assets under the

 

LIFO method.

 

 

For purposes of the preceding sentence, inventory amounts

 

shall be determined as of the close of the last taxable

 

year referred to in paragraph (1).

 

 

(4) Other definitions. -- For purposes of this

 

subsection --

 

 

(A) LIFO method. -- The term "LIFO method" means

 

the method authorized by section 472.

 

 

(B) Inventory assets. -- The term "inventory

 

assets" means stock in trade of the corporation, or

 

other property of a kind which would properly be

 

included in the inventory of the corporation if on

 

hand at the close of the taxable year.

 

 

(C) Method of determining inventory amount. --

 

The inventory amount of assets under a method

 

authorized by section 471 shall be determined --

 

 

(i) if the corporation uses the retail

 

method of valuing inventories under section 472,

 

by using such method, or

 

 

(ii) if clause (i) does not apply, by using

 

cost or market, whichever is lower.

 

 

(D) Not treated as member of affiliated group. --

 

Except as provided in regulations, the corporation

 

referred to in paragraph (1) shall not be treated as a

 

member of an affiliated group with respect to the

 

amount included in gross income under paragraph (1).

 

FOOTNOTES

 

 

1 "Doc." references are to pages of the documents contained in the record on appeal, as numbered by the clerk of the Tax Court.

2 Except as noted, all statutory references are to the Internal Revenue Code of 1986 (26 U.S.C.), as amended and in effect during the years in issue ("I.R.C.").

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    COGGIN AUTOMOTIVE CORP., Petitioner-Appellant v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
  • Court
    United States Court of Appeals for the Eleventh Circuit
  • Docket
    No. 01-10478-B
  • Institutional Authors
    Justice Department
  • Cross-Reference
    Coggin Automotive Corp. v. Commissioner, 115 T.C. No. 28. No. 1684-99

    (Oct. 18, 2000) (For a summary, see Tax Notes, Oct. 23, 2000, p. 492;

    for the full text, see Doc 2000-26953 (28 original pages) or 2000 TNT

    203-7 Database 'Tax Notes Today 2000', View '(Number'.)

    For Coggin's opening appellate brief, see Doc 2001-9425 (59 original

    pages) [PDF] or 2001 TNT 78-88 Database 'Tax Notes Today 2001', View '(Number'.

    For Coggin's reply brief, see Doc 2001-15762 (24 original pages) [PDF] or

    2001 TNT 118-26 Database 'Tax Notes Today 2001', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    S corporations, elections, effect
    S corporations, capital gains
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-21653 (67 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 165-29
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