Black & Decker Corp. v. United States - 436 F.3d 431 (4th Cir. 2006)

Rule:

Under 26 U.S.C.S. § 358(a)(1), a § 351 transferrer's basis in the stock received from a transferee is the same as the basis of the property the transferrer surrenders, reduced by the amount of any money received. 26 U.S.C.S. § 358(d)(1) further provides that, in a 26 U.S.C.S. § 358 analysis, an assumption of liability by a transferee shall be treated as money received by the transferrer. A transferrer reduces its basis in the stock received from the transferee by the amount of any liability the transferee assumed in exchange. But the statute also provides that 26 U.S.C.S. § 358(d)(1) does not apply if the liability assumed is one that would be excluded under 26 U.S.C.S. § 357(c)(3). 26 U.S.C.S. § 358(d)(2). 26 U.S.C.S. § 357(c)(3)(A), in turn, excludes liability the payment of which would give rise to a deduction. 

Facts:

A corporate taxpayer paid $ 561 million to a controlled subsidiary in exchange for 10,000 shares of the subsidiary's stock and the subsidiary's assumption of a $ 560 million contingent liability of the taxpayer. The taxpayer then sold the shares for $ 1 million, claimed a $ 560 million capital loss on its federal income tax return, and sought a refund based on that loss. The Internal Revenue Service (IRS) declined to pay because it concluded that the capital loss stemmed from an illegal tax shelter. After the taxpayer sued, the district court denied the IRS's summary judgment motion and granted the taxpayer's summary judgment motion. The IRS appealed.

Issue:

Did IRC §§ 357 and 358  require the taxpayer to reduce its basis in the subsidiary's stock by the amount of the liabilities transferred to the subsidiary?

Answer:

No.

Conclusion:

The court found that neither the IRS nor the taxpayer was entitled to summary judgment. The contingent liability that the taxpayer transferred to the subsidiary fell within the 26 U.S.C.S. § 357(c)(3) exception for liability the payment of which gave rise to a deduction. Therefore, under 26 U.S.C.S. § 358(d)(2)'s exception to the general rule of 26 U.S.C.S. § 358(d)(1), the liability need not have been treated as money received by the taxpayer for basis reduction purposes. Accordingly, the district court's denial of the IRS's summary judgment motion was correct. Under the sham transaction doctrine, however, the validity of the claimed loss turned on unresolved issues of material fact.