252801 1037 Amici Alston252801 Brief
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No. 13-1037
IN THE
Supreme Court of the United States
ON PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT
A
(800) 274-3321 • (800) 359-6859
BRIEF OF ALSTON & BIRD LLP
AS AMICUS CURIAE
IN SUPPORT OF PETITIONER
252801
WFC HOLDINGS CORPORATION,
Petitioner,
v.
UNITED STATES OF AMERICA,
Respondent.
MARY T. BENTON
Counsel of Record
GEORGE B. ABNEY
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309
(404) 881-7000
mary.benton@alston.com
Attorneys for Amicus Curiae
i
TABLE OF CONTENTS
Page
TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . i
TABLE OF CITED AUTHORITIES . . . . . . . . . . . . . . ii
INTERESTS OF THE AMICUS. . . . . . . . . . . . . . . . . . .1
SUMMARY OF THE ARGUMENT. . . . . . . . . . . . . . . .3
REASONS FOR GRANTING THE PETITION. . . . . .4
I. THE DECISION BELOW, AND OTHER
LOWER COURT DECISIONS, CREATE
AND APPLY ARBITRARY AND
CONFLICTING STANDARDS NEVER
APPROVED BY THIS COURT TO
OVERRIDE THE INTERNAL
REVENUE CODE. . . . . . . . . . . . . . . . . . . . . . . . .4
II. THE UNAUTHORIZED EXPANSION
OF THE ECONOMIC SUBSTANCE
DOCTRINE CASTS A PALL OF
SUSPICION OVER THE RIGHT OF
TAXPAYERS TO DECREASE THEIR
TAXES BY LAWFUL MEANS. . . . . . . . . . . . . .9
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ii
TABLE OF CITED AUTHORITIES
Page
CASES
ACM Partnership v. Commissioner,
157 F.3d 231 (3d Cir. 1998) . . . . . . . . . . . . . . . . . . . . . .8
ACM Partnership v. Commissioner,
T.C. Memo. 1997-115 . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Avco Mfg. Co. v. Commissioner,
25 T.C. 975 (1956) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Commissioner of Internal Revenue v.
Day & Zimmermann, Inc.,
151 F.2d 517 (3d Cir. 1945). . . . . . . . . . . . . . . . . . . . . .12
Frank Lyon Co. v. United States,
435 U.S. 561 (1978) . . . . . . . . . . . . . . . . . . . . . . . . .4, 5, 8
Friedman v. Commissioner,
869 F.2d 785 (4th Cir. 1989). . . . . . . . . . . . . . . . . . . . . .7
Gitlitz v. Commissioner,
531 U.S. 206 (2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Granite Trust Co. v. U.S.,
238 F.2d 670 (1st Cir. 1956) . . . . . . . . . . . . . . .12, 13, 14
Gregory v. Helvering,
293 U.S. 465 (1935). . . . . . . . . . . . . . . . . . . . . . . passim
Hanover Bank v. Commissioner,
369 U.S. 672 (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
iii
Cited Authorities
Page
Helvering v. F. & R. Lazarus & Co.,
308 U. S. 252 (1939) . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Higgins v. Smith,
308 U.S. 474 (1940) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
In re CM Holdings, Inc.,
301 F.3d 96 (3d Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . .7
Jacobellis v. Ohio,
378 U.S. 184 (1964) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Jacobson v. Commissioner,
915 F.2d 832 (2d Cir. 1990) . . . . . . . . . . . . . . . . . . . . . .7
Knetsch v. United States,
364 U.S. 361 (1960). . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Riggs v. Commissioner,
64 T.C. 474 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Sala v. United States,
613 F.3d 1249 (10th Cir. 2010) . . . . . . . . . . . . . . . . . . . .8
Sochin v. Commissioner,
843 F.3d 351 (9th Cir. 1988). . . . . . . . . . . . . . . . . . . . . .7
United Parcel Serv. of Am., Inc. v.
Commissioner,
254 F.3d 1014 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . .7
iv
Cited Authorities
Page
United States v. Cumberland Pub. Serv. Co.,
338 U.S. 451 (1950) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
United States v. Home Concrete & Supply, LLC,
132 S. Ct. 1836 (2012). . . . . . . . . . . . . . . . . . . . . . . . . .11
United States v. Quality Stores, Inc.,
--U.S.---- (2014). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
WFC Holdings Corp. v. U.S.,
728 F.3d 736 (8th Cir. 2013). . . . . . . . . . . . . . . . .6, 8, 10
STATUTES
Health Care and Education Reconciliation Act
of 2010, Pub. L. No. 111-152, § 1409(e)(1),
124 Stat. 1029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Internal Revenue Code (26 U.S.C.):
§ 165 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
§ 331 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
§ 332. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13, 14
§ 332(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
§ 336. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
§ 337(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
§ 351 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
§ 1504(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
§ 7701(o) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 9
§ 7701(o)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
§ 7701(o)(5)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
v
Cited Authorities
Page
ADMINISTRATIVE MATERIAL
IRS Chief Counsel Memo. AM2012-009, Nov. 15, 2012 . . .6
IRS Priv. Ltr. Rul. 87-13-041, 1986 WL 372821 . . . . . .14
IRS Priv. Ltr. Rul. 2010-14-002, 2010 WL 1411503. . . .14
IRS Priv. Ltr. Rul. 2013-30-004, 2013 WL 3856953 . . .14
IRS Priv. Ltr. Rul. 2013-34-006, 2013 WL 4496006 . . .14
IRS Rev. Proc. 2014-3, 2014-1 IRB 111, sec. § 3.01(33) . . . . . 14
OTHER MATERIALS
Yin, George K., The Problem of Corporate
Tax Shelters: Uncertain Dimensions,
Unwise Approaches, 55 Tax L. Rev. 405
(Spring 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
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1
Alston & Bird LLP, by and through the undersigned
counsel, by consent of the parties, submits this brief
amicus curiae respectfully praying that the Court grant
the Petitioner a writ of certiorari.* In support of the
petition, Alston & Bird states as follows:
INTERESTS OF THE AMICUS
Alston & Bird LLP is a general practice law fi rm
that has long represented taxpayers in federal tax
planning and controversy matters. With 80-plus attorneys
practicing in various areas affected by federal and state
taxes, its tax practice is one of the largest law-fi rm-based
tax practices in the country. Alston & Bird’s tax clients
include both long-standing fi rm clients and clients who
choose Alston & Bird solely for its tax expertise. Clients
include Fortune 100 companies, small startup businesses,
nonprofi t entities, and individuals.
A signifi cant role of Alston & Bird’s tax practice is
to provide advice on the tax aspects of the structure and
implementation of business transactions, both large and
small. Tax planning matters handled by Alston & Bird
* Pursuant to Sup. Ct. R. 37.6, Alston & Bird LLP certifi es
that no counsel for either party authored any part of this brief
and that no person, other than the amicus and its counsel, made
a monetary contribution intended to fund the preparation of the
brief. Alston & Bird LLP certifi es, consistent with Sup. Ct. R.
37.2(a), that counsel of record for both parties have been notifi ed
more than ten days before this fi ling of its intention to fi le the brief
and have given their consent. The Petitioner has fi led a blanket
waiver and the consent of the Respondent is being submitted
herewith.
2
involve virtually all forms of business transactions, from
taxable and tax-free acquisitions, dispositions, and venture
formations to fi nancings and reorganizations, involving
a variety of industries, including telecommunications,
banking, real estate, insurance, manufacturing, fi nancial
services and the service industries generally.
Alston & Bird also maintains a national tax controversy
practice defending client tax positions under challenge by
the Internal Revenue Service (“IRS”). Tax controversy
matters handled by Alston & Bird include audits,
administrative appeals, trial and appellate tax litigation
at all levels of the federal court system, and mediation of
both docketed and non-docketed tax cases.
Since the mid-1990s, Alston & Bird’s tax practitioners
have been called upon to address the burgeoning reliance
by the IRS and the lower federal courts on what is now
generally known as the economic substance doctrine.
Alston & Bird fi les this amicus brief not with reference
to the particular facts of the case of the Petitioner, but
with reference to the common plight of the Petitioner
and thousands of other taxpayers, including our clients,
who every year are faced with either assertions of this
uncertain ground for tax assessments by the IRS, or the
inability to know what the law is for purposes of planning
their fi nancial and business affairs.
3
SUMMARY OF THE ARGUMENT
This Court should grant a writ of certiorari in this case
to clarify the validity, meaning, and applicability of the
so-called economic substance doctrine, which, as applied in
the decision below, by other lower courts, and by the IRS,
has created widespread and growing uncertainty about
the tax law in the practitioner and taxpayer communities.
This uncertainty drastically hampers the ability of legal
advisors and other tax professionals to know what the
law is so that they can advise their clients regarding the
tax implications of their proposed fi nancial transactions
and business dealings. In turn, the inability of tax
professionals to provide sound legal advice to their clients
renders it all but impossible for a taxpayer to exercise
what is, undoubtedly, his “legal right . . . to decrease the
amount of what otherwise would be his taxes, or altogether
avoid them by means which the law permits.” Gregory v.
Helvering, 293 U.S. 465, 469 (1935).
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4
REASONS FOR GRANTING THE PETITION
I. THE DECISION BELOW, AND OTHER LOWER
COURT DECISIONS, CREATE AND APPLY
ARBITRARY AND CONFLICTING STANDARDS
NEVER APPROVED BY THIS COURT TO
OVERRIDE THE INTERNAL REVENUE CODE.
This Court has never explicitly authorized a broadly
applicable economic substance doctrine that generally
overrides otherwise applicable provisions of the Internal
Revenue Code (“Code”). Rather, this Court has sometimes
construed a business purpose requirement into a particular
code section, such as the corporate reorganization
nonrecognition rules. See Gregory v. Helvering, 293 U.S.
465, 469-70 (1935) (“When subdivision (B) speaks of a
transfer of assets by one corporation to another, it means
a transfer made ‘in pursuance of a plan of reorganization’
(section) 112(g) of corporate business; and not a transfer
of assets by one corporation to another in pursuance of
a plan having no relation to the business of either, as
plainly is the case here.”; “[T]he transaction upon its
face lies outside the plain intent of the statute.”). At other
times this Court has endorsed the use of traditional fact
fi nding methodologies to determine the true substance of
a transaction, as opposed to the labels affi xed to it by the
parties. See Frank Lyon Co. v. United States, 435 U.S.
561 (1978) (ruling for the taxpayer by applying common
law fact fi nding to determine who economically owned
property, which determined the taxpayer’s eligibility to
claim depreciation deductions).1
1. See also, Helvering v. F. & R. Lazarus & Co., 308 U. S.
252, 255 (1939) (fi nding a transaction which was “in written form
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5
Over the past approximately 30 years, however, lower
federal courts and the IRS have confl ated these two legal
processes of statutory interpretation and common law fact
fi nding, and have radically expanded the scope and reach
of this Court’s precedents, to create what is now commonly
referred to as the economic substance doctrine (“ESD”).
The business purpose rule of Gregory and the search
for economic substance in fact of Frank Lyon have been
melded into a two prong test (shorthanded as business
purpose and economic substance) that a taxpayer must
prove its way out of to avoid losing a claimed tax benefi t
under the ESD.
Consequently, lower courts have not limited the so-
called ESD to specifi c tax code provisions that require
a business purpose. Neither has the ESD been used
as a traditional fact-fi nding methodology to ferret out
the substance of transactions. Rather, as was true in
the decision below, the IRS and the lower courts have
applied the ESD to override the Internal Revenue Code
by disregarding transactions that satisfy the Code’s
provisions. See ACM Partnership v. Commissioner,
a transfer of ownership with a lease back, was actually a loan
secured by the property involved,” and thereby ruling for the
taxpayer); Higgins v. Smith, 308 U.S. 474, 477 (1940) (holding
that a transaction may be disregarded “upon determination that
the form employed . . . is unreal or a sham,” and ruling against a
taxpayer who attempted to realize losses upon sales of stock to his
desk drawer corporation); see Knetsch v. United States, 364 U.S.
361, 366 (1960) (ruling against the taxpayer by fi nding a purported
loan transaction was not actually a forbearance to collect money in
exchange for interest payments, because neither party intended
to loan, borrow, or pay back approximately four million dollars).
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6
T.C. Memo. 1997-115 (internal citation omitted) (“The
tax statutes apply only ‘to transactions entered upon for
commercial purposes and ‘not to . . . transactions entered
upon for no other motive but to escape taxation.’’”);
IRS Chief Counsel Memo AM2012-009, Nov. 15, 2012,
(citing ACM Partnership for the proposition that the
“common law” economic substance doctrine nullifies
otherwise applicable tax statutes when the IRS decides
the transaction was entered into for “tax avoidance”
purposes).
Neither this Court nor Congress has ever authorized
a sweeping rule that permits the IRS to override the
Code anytime it unilaterally decides a transaction lacks a
business purpose or economic substance. Section 7701(o),
enacted after the years at issue in this case, does not
authorize such a sweeping doctrine as it only clarifi es
the two factors the taxpayer is required to prove if the
judge made ESD is found relevant, relevance being a
concept wholly undefi ned in the statute. The frequent
citing of decisions of this Court as support for the judge
made ESD, including in the Eighth Circuit opinion below,2
constitute misreading and expansion of those decisions.
The ESD itself directly contracts this Court’s repeated
insistence that once the facts are found using the full
range of common law fact fi nding tools, and the statute is
properly interpreted and construed, the tax laws apply as
written. See United States v. Cumberland Pub. Serv. Co.,
2. “While the origin of the economic substance doctrine is
generally traced to the Supreme Court’s holding in Gregory v.
Helvering, …, current application of the doctrine stems primarily
from the Supreme Court’s decision in Frank Lyon Co. v. United
States ….” WFC Holdings Corp. v. U.S., 728 F.3d 736, (8th Cir.
2013).
7
338 U.S. 451, 454-455 (1950) (rejecting an application of
substance-over-form fact fi nding to deprive the taxpayer
of the normal operation of the statute to facts as found by
the court); Gitlitz v. Commissioner, 531 U.S. 206, 219-20
(2001) (refusing to apply the statute contrary to its terms,
even though the taxpayer received a “double windfall
. . . . Because the Code’s plain text permits the taxpayers
here to receive these benefi ts, we need not address this
policy concern.”); Hanover Bank v. Commissioner, 369
U.S. 672, 688 n. 23 (1962) (“Granting the government’s
proposition that these taxpayers have found a hole in the
dike, we believe it one that calls for the application of the
Congressional thumb, not the court’s.”).
The lack of authorization from this Court for a
sweeping rule that permits the IRS to override the
Code anytime it unilaterally decides a transaction is a
tax loophole is evident in the growing confl ict among the
federal circuits over the meaning and applicability of the
ESD. Many federal circuits have held that “a transaction
ceases to merit tax respect when it has no economic effects
other than the creation of a tax benefi t.” See, e.g., United
Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d
1014, 1018 (11th Cir. 2001) (internal quotations omitted);
see also, Sochin v. Commissioner, 843 F.3d 351, 354 (9th
Cir. 1988); Jacobson v. Commissioner, 915 F.2d 832, 837
(2d Cir. 1990); In re CM Holdings, Inc., 301 F.3d 96, 102
(3d Cir. 2002); Friedman v. Commissioner, 869 F.2d 785,
792 (4th Cir. 1989).
But this formulation masks fundamental ambiguities
in the ESD: what is “the transaction” and when is the
ESD relevant in the fi rst place? In the decision below, the
Eighth Circuit joined the Tenth Circuit in holding that
8
even where an overall transaction is profi table and clearly
has economic effects, it can still fall under the ESD for a
variety of reasons. See WFC Holdings v. Commissioner,
728 F.3d 736, 746 (8th Cir. 2013) (recognizing components
of the transaction were economically beneficial, but
disallowing deduction because other components were not
and could have been simplifi ed); Sala v. United States, 613
F.3d 1249, 1253-54 (10th Cir. 2010) (reversing trial court
decision upholding loss deduction where the transaction
generated a profit, but the tax benefit exceeded the
potential and actual profi t).
The radical misreading of this Court’s authorities
by the IRS and the lower courts, and the confl ict among
the federal circuits regarding the ESD’s meaning and
applicability, effectively supplant the text of the Code
with a malleable and undefi ned “I know it when I see
it” approach to resolving tax disputes. See Jacobellis v.
Ohio, 378 U.S. 184, 197 (1964) (Stewart, J., concurring);
see also, ACM Partnership v. Commissioner, 157 F.3d
231, 265 (3d Cir. 1998) (McKee, J., dissenting) (criticizing
the economic substance doctrine as akin to a “smell test”:
“If the scheme is question smells bad, the intent to avoid
taxes defi nes the result as we do not want the taxpayer
to ‘put one over.’”)
Certiorari is necessary to reaffi rm the primacy of the
Code in determining what the tax law is and in resolving
tax disputes. Ideally the Court will announce that there
is no ESD, although its “two prongs” may describe a way
to fi nd facts in certain diffi cult fact fi nding situations
(for example, cases addressing who owns property, as in
Frank Lyon). If not, certiorari is necessary to prevent
inconsistent application of the ESD, and to establish when
the doctrine is relevant.
9
II. THE UNAUTHORIZED EXPANSION OF THE
ECONOMIC SUBSTANCE DOCTRINE CASTS
A PALL OF SUSPICION OVER THE RIGHT OF
TAXPAYERS TO DECREASE THEIR TAXES BY
LAWFUL MEANS.
The Court should grant the writ of certiorari to clarify
the law so that taxpayers can exercise the right this Court
recognized in 1935 to decrease their taxes by any lawful
means. See Gregory v. Helvering, 293 U.S. 465, 469 (1935).
In 2010 Congress enacted Code § 7701(o), which
applies only to transactions occurring after March 30,
2010 and, therefore, is not applicable here. It purported
to resolve uncertainty about whether the two factual
showings a taxpayer must make to escape the ESD
(according to certain lower court decisions) are conjunctive
or disjunctive: going forward they will be conjunctive.
See § 7701(o)(1); see also Health Care and Education
Reconciliation Act of 2010, Pub. L. No. 111-152, § 1409(e)
(1), 124 Stat. 1029, 1070. The section neither creates nor
approves of an economic substance doctrine, but states
that whatever it is the courts (referring to lower federal
courts) have done under that rubric, the proof required
of the taxpayer to escape the government’s assertion of
the doctrine shall be as specifi ed in § 7701(o) in the future.
The text of the statute twice refers to the necessity of the
doctrine to be found relevant to the particular transaction,
and states that a “determination of whether the economic
substance doctrine is relevant to a transaction shall be
made in the same manner as if this subsection had never
been enacted.” See 26 U.S.C. §§ 7701(o)(1) & (5)(C).
10
But the fundamental problem for taxpayers is that
neither the IRS nor the courts have squarely addressed
the relevancy requirement of the ESD prior to or
post-codifi cation. Either they do not recognize it as an
independent issue at all, or they suggest, without directly
saying so, that because they fi nd the taxpayer’s actions
to be contrary to the purposes of Congress, the taxpayer
loses under the ESD. And to be clear, when they discern
the purposes of Congress they are not doing so to interpret
the statute to prevent the taxpayer’s claim; they do so to
justify saying the taxpayer loses under the ESD even
though the Code has admittedly been satisfi ed. The Eighth
Circuit below did not address the relevance of the doctrine.
But it is clear from its analysis that it decided to deny the
tax benefi ts sought not because it interpreted the statute
to deny the benefi t or because it found the required facts
not to have occurred, but because the taxpayer failed to
prove out of the two prong test of the ESD. WFC Holdings
Corp. v. Commissioner, 728 F.3d 736, 738 (8th Cir. 2013)
(“We hold that WFC failed to adequately show that the
transaction had either objective economic substance or a
subjective, non-tax business purpose, and we affi rm.”).
However, as this Court stated nearly 80 years ago,
“[t]he legal right of a taxpayer to decrease the amount
of what otherwise would be his taxes, or altogether
avoid them, by means which the law permits, cannot
be doubted.” Gregory v. Helvering, 293 U.S. 465, 469
(1935). A necessary corollary of the right stated by
Justice Sutherland in Gregory is the ability of taxpayers
to know what the tax law permits. Absent an objectively
understandable relevancy requirement, however, no
amount of careful and reasonable tax planning will avoid
the reach of the ESD. Neither the lower federal courts
that have applied the ESD, nor the IRS, have shown
11
any inclination to defi ne the relevance of the doctrine,
either globally or step by step. Therefore, lacking
guidance from Congress, the ESD’s relevance is wholly
undefi ned. An undefi ned doctrine granting the IRS carte
blanche authority to disregard the plain meaning of the
Code serves no valid purpose, and instead serves only
to instill fear in taxpayers seeking to lawfully reduce
their tax burdens. See Yin, George K., The Problem of
Corporate Tax Shelters: Uncertain Dimensions, Unwise
Approaches, 55 Tax L. Rev. 405, 421-22 (Spring 2002)
(noting the government often invokes the ESD for its in
terrorem effect).
On some occasions, as in IRS Chief Counsel Memo
AM2012-009, cited above, the IRS has asserted that it
will apply the economic substance doctrine when it decides
the transaction at issue does not comport with Congress’
purposes in writing the statute. Certainly, Congress’
purposes can sometimes be discerned and used to interpret
the statute. See, e.g., United States v. Home Concrete &
Supply, LLC, 132 S. Ct. 1836 (2012); United States v.
Quality Stores, Inc., ---U.S.---- (2014) (interpreting the
FICA withholding rules based on analysis of Congress’
purposes). However, when the IRS makes this assertion in
connection with the ESD it does not go on to interpret the
statute, purposively or otherwise. Rather, it asserts the
ambiguous ESD as a general anti-loophole rule, concludes
that the taxpayer cannot meet the burden of proving out
of the ESD, and then announces that the taxpayer loses.
Indeed, because most cases applying the ESD go directly
to the two prong test, that appears to have become a de
facto standard of relevancy: if the taxpayer cannot prove
out of the tests, the doctrine must be relevant, and the
taxpayer necessarily loses.
12
Faced with a fundamentally ambiguous doctrine,
unconstrained by any relevancy restriction, taxpayers
and tax practitioners are rightfully concerned about the
continued validity of traditional tax planning vehicles.
For example, Code §§ 332(a) and 337(a) allow a parent
corporation to receive property of a liquidating subsidiary
with neither the parent nor the subsidiary recognizing
gain on the transaction. The sections apply when the
parent corporation owns at least 80% of the vote and value
of the stock of the subsidiary. 26 U.S.C. § 1504(a)(2). If the
80% ownership test is not met, the subsidiary liquidation
is taxable under §§ 331 and 336, or may produce a § 165
loss. Therefore, a minor change in stock ownership – for
example, a decrease in ownership from 80% to 79% –
can convert a non-taxable reorganization into a taxable
reorganization, and vice versa.
For more than 50 years corporations have become
accustomed to fl exibility in asserting control over, or
decontrolling, subsidiaries in anticipation of a liquidation
in order to achieve the desired tax result – either
recognition (to utilize losses) or non-recognition (to avoid
gain). Changing stock ownership in order to achieve the
desired tax result was approved by the First Circuit in
Granite Trust Co. v. U.S., 238 F.2d 670 (1st Cir. 1956), in
reliance on Commissioner of Internal Revenue v. Day &
Zimmermann, Inc., 151 F.2d 517 (3d Cir. 1945) and Avco
Mfg. Co. v. Commissioner, 25 T.C. 975 (1956).
In Granite Trust, a bank (“parent”) owned 100% of
the stock of a subsidiary whose sole asset was the real
property occupied by the parent. Because the fair market
value of the property had declined and was less than the
parent’s basis in the stock of the subsidiary, the banking
13
authorities pressed the parent to make reductions in the
stock basis. To resolve the situation, the parent developed
a plan to have the parent acquire the real property at fair
market value and then liquidate the subsidiary. But for the
non-recognition rule of § 332’s predecessor, the acquisition
and liquidation would trigger a benefi cial tax loss that
could be claimed by the parent. After informally deciding
to liquidate the subsidiary, the parent sold or otherwise
disposed of enough stock to fall below the 80% ownership
threshold. The acknowledged purposes of the sale of stock
was to avoid the predecessor of Code § 332, which provided
that a loss could not be recognized on the liquidation of an
80% subsidiary. The government argued (1) that the “end
result” of the transaction was a complete liquidation and
that the intermediate steps involving the sales and gift
should be disregarded and (2) that there were no valid
sales or gift of the stock. The First Circuit rejected both
arguments. In holding for the taxpayer, the First Circuit
recognized that the facts showed that the transfers of
stock were motivated solely by tax considerations, but
also found that the transfers of the stock were “legal
transactions not fi ctitious or so lacking in substance as to
be anything different from what they purported to be.”
Granite Trust, 238 F. 2d at 678.
Subsequently the IRS acquiesced in another similar
decision holding that taxpayers may structure liquidations
in a way that makes Code § 332 either applicable or
inapplicable. See Riggs v. Commissioner, 64 T.C. 474,
489 (1975), acq. 1976-2 C.B. 2 (“[S]ection 332 is elective
in the sense that with advanced planning and properly
structured transactions, a corporation should be able to
render section 332 applicable or inapplicable.”). And as
recently as 2013, the IRS advised taxpayers, by way of
14
private letter rulings, that they may structure liquidations
to achieve desired tax benefi ts consistent with the Granite
Trust line of authorities. See IRS Priv. Ltr. Rul. 87-13-
041, 1986 WL 372821; IRS Priv. Ltr. Rul. 2010-14-002,
2010 WL 1411503; IRS Priv. Ltr. Rul. 2013-30-004, 2013
WL 3856953; IRS Priv. Ltr. Rul. 2013-34-006, 2013 WL
4496006.
The decision below, which questioned the economic
substance of a similar corporate non-recognition provision
involving a § 351 exchange, raises concerns that the IRS
and the lower courts may attempt to use the ESD to
disregard long-accepted tax planning transactions, such
as § 332 transactions upheld in Granite Trust. Those
concerns were increased on January 2, 2014, when the
IRS formally announced, for the fi rst time, that it will no
longer provide rulings on the “treatment of transactions
in which stock of a corporation is transferred with a plan
or intention that the corporation be liquidated.” IRS Rev.
Proc. 2014-3, 2014-1 IRB 111, sec. 3.01(33). Although the
procedure does not state that the reason for the change
is due to potential application of the ESD, taxpayers
and their advisors are hard pressed not to worry that,
in light of the decision below and the general expansion
of the ESD, the IRS has changed its view regarding the
application of the ESD to corporate liquidations and
reorganizations.
15
CONCLUSION
Because the economic substance doctrine is too vague
to be fairly applied to taxpayers and because it has no
proper ground in the tax jurisprudence of this Court,
this Court should grant Petitioner’s writ of certiorari to
review the Eighth Circuit’s application of this doctrine,
inform the taxpaying public and practitioners whether it
authorizes this judicial addendum to the federal tax laws,
and, if so, clarify its meaning and applicability.
Respectfully submitted,
MARY T. BENTON
Counsel of Record
GEORGE B. ABNEY
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309
(404) 881-7000
mary.benton@alston.com
Attorneys for Amicus Curiae