T.C. Memo. 1997-399
UNITED STATES TAX COURT
POPE & TALBOT, INC., & SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 530-93. Filed September 2, 1997.
Grady M. Bolding, James E. Burns, Jr., Russell D. Uzes,
Kevin P. Muck, and D. Cameron Baker, for petitioner.
Milton J. Carter, Jr., Terri Merriam, Henry T. Schaefer,
Christopher D. Hatfield, Randall E. Heath, and Robert F.
Geraghty, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
RUWE, Judge: The present dispute arises from the parties'
*
This opinion supplements our opinion in Pope & Talbot,
Inc., & Subs. v. Commissioner, T.C. Memo. 1997-116.
differing computations under Rule 155.1
In our first opinion in this case, Pope & Talbot, Inc., &
Subs. v. Commissioner, 104 T.C. 574 (1995) (Pope & Talbot I), on
motions for partial summary judgment, we held that under section
311(d), petitioner's gain on the distribution of appreciated
property is to be determined as if petitioner sold its interest
in the appreciated property at fair market value on the date of
distribution. In our subsequent opinion, Pope & Talbot, Inc., &
Subs. v. Commissioner, T.C. Memo. 1997-116 (Pope & Talbot II), we
determined the fair market value of the appreciated property on
the date of distribution. In addition, we held that petitioner
may offset distribution expenses against its section 311(d) gain.
In Pope & Talbot II, we made findings of fact which are
summarized as follows. During 1985, petitioner's operations
included timber, land development, and resort businesses in the
State of Washington. On December 4, 1985, petitioner's
shareholders approved a plan to transfer the assets from its
Washington businesses to a newly formed limited partnership,
which was to be owned by petitioner's shareholders (the
Partnership). Pursuant to this plan, petitioner transferred to
the Partnership approximately 78,000 acres of Washington
timberlands and its Washington land development and resort
businesses, which included an additional 4,400 acres. These
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years in issue.
timberlands and the land development and resort businesses are
collectively referred to as the “Washington properties”. In Pope
& Talbot II, we held that the fair market value of the Washington
properties was $48.5 million on the date of distribution.
In addition to the Washington properties, petitioner
transferred $1.5 million in cash to the Partnership for working
capital and sold certain installment notes receivable to the
Partnership for approximately $4.9 million in cash. The
Partnership issued partnership units to each owner of
petitioner's common stock on a pro rata basis. Petitioner
incurred $1,364,071 in legal, accounting, investment banking, and
other fees relating to the formation of the Partnership, the
transfer of the Washington properties, and the distribution of
the partnership units. In Pope & Talbot II, we held that
petitioner can offset these fees against the section 311(d) gain
it realized on the distribution of the Washington properties. We
directed that decision be entered pursuant to Rule 155.
Both parties have submitted Rule 155 computations. The
parties are in agreement regarding the computation for
petitioner's 1986 taxable year. The parties are also in
agreement regarding the computation for petitioner's 1985 taxable
year, except for the following two items: (1) Petitioner
maintains that the $1.5 million of working capital is included in
the fair market value of $48.5 million for the Washington
properties; respondent disagrees;2 and (2) respondent maintains
that a portion of the $1,364,071 in expenses should be allocated
to the transfer of $1.5 million in working capital and to the
sale of the installment notes receivable; petitioner disagrees.
Inclusion of Working Capital
In Pope & Talbot II, the primary issue for decision was the
fair market value of the Washington properties distributed by
petitioner. Our valuation was limited to the fair market value
of timber, timberland, land development and resort properties,
and related assets on the Washington properties. Neither the
value of the $1.5 million in cash transferred to the Partnership
nor the value of the installment notes receivable sold to the
Partnership was in dispute in Pope & Talbot II.
In determining the fair market value of the Washington
properties, we grouped the properties into four separate
categories and described the assets in each category. These
descriptions include, for example, the amount of merchantable
timber that could be harvested, the amount of land that could be
developed, and the various improvements on the properties. We
examined the assets in each category and, with the assistance of
expert valuation reports, determined the fair market value of
assets in each category. We concluded that the value of each
2
Petitioner's Rule 155 computation treats the working
capital as part of the Washington properties, in effect, reducing
the fair market value of the Washington properties by $1.5
million.
category of assets making up the Washington properties was as
follows:
Timber & timberland $31.0 million
Development property 10.5 million
Port Ludlow community 4.5 million
Port Gamble townsite 2.5 million
and tree nurseries
$48.5 million
The $1.5 million in cash transferred to the Partnership was
not included in the assets that we valued. Furthermore, we did
not consider, nor did we intend to include, any portion of the
working capital in determining the fair market value of the
Washington properties. Respondent's Rule 155 computation
correctly treats the $1.5 million of working capital as being
separate from the Washington properties that we valued in Pope &
Talbot II.
Allocation of Expenses
In Pope & Talbot II, we found that petitioner incurred
$1,364,071 in expenses relating to the formation of the
Partnership, the transfer of the Washington properties, and the
distribution of the partnership units. The overall purpose of
these activities was to distribute the Washington properties. We
held that petitioner may offset its expenses incurred in
connection with the distribution against its section 311(d) gain.
We did not find that these expenses related to either the
transfer of the cash or the separate sale of the installment
notes receivable. The $1,364,071 in expenses includes payments
for: (1) General accounting advice and SEC financial reporting
with regard to the distribution; (2) tax and securities advice
and general counsel work relating to the distribution; (3) a
fairness opinion; (4) fees relating to the mortgage on the
timberlands; (5) fees relating to the listing of the partnership
units; (6) transfer agent fees; (7) legal services in connection
with the distribution; (8) real estate advice; (9) printing the
proxy statement issued in connection with the distribution; and
(10) various other costs such as employee reimbursement for
distribution-related travel and lodging. The expenses in
question were not incurred for the transfer of cash to the
Partnership or the separate sale of the installment notes
receivable.
Respondent's Rule 155 computation, however, allocates a
portion of the $1,364,071 in expenses to all assets conveyed to
the Partnership, including the working capital and the
installment notes receivable sold to the Partnership, based upon
their relative values. Of the total distribution expenses,
respondent's computation allocates $124,726 to the installment
notes receivable and $37,180 to the working capital. Because
petitioner realized no section 311(d) gain on the distribution of
these two assets, the distribution expenses allocated to these
assets under respondent's computation fail to offset petitioner's
section 311(d) gain. Respondent's Rule 155 computation, which
allocates $161,906 of the expenses to the working capital and the
installment notes receivable, is incorrect. The entire
$1,364,071 in expenses should be allocated to the Washington
properties.
Based upon the foregoing, the parties will be directed to
submit a revised agreed computation and proposed decision under
Rule 155.
An appropriate order will
be issued.