Turner Broadcasting System, Inc. and Subsidiaries v. Commissioner

111 T.C. No. 18

UNITED STATES TAX COURT

TURNER BROADCASTING SYSTEM, INC. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

TRACINDA CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 13977-96, 14786-96. Filed December 23, 1998.

Ps (TBS and Tracinda) and others engaged in a
series of complex commercial transactions that closed
simultaneously. TBS acquired a publicly held and
traded company (MGM) by way of a reverse triangular
subsidiary merger. At the same time as the acquisition
by merger, MGM transferred all the shares in its wholly
owned subsidiary (UA) to one of its former
shareholders, Tracinda. Tracinda then sold some of the
UA shares to former shareholders of MGM pursuant to a
prospectus and subscription agreement, which was
contemplated in the initial agreement. The
consideration received by MGM for the UA shares was
less than MGM's basis in those shares (UA Loss). Both
Ps claim a tax consequence from the sale of the UA
shares. TBS claims the loss was recognized by MGM and
is available to the TBS Group. Immediately prior to
 - 2 -

the transactions, Tracinda and MGM were part of a
"Controlled Group" for the purposes of sec. 267,
I.R.C., Tracinda claims the UA Loss is deferred and
transferred to its basis in the UA shares, by virtue of
the operation of sec. 267(f), I.R.C., and sec.
1.267(f)-1T(c), Temporary Income Tax Regs., 49 Fed.
Reg. 46997 (Nov. 30, 1984). (Sec. 267 issue.)
Tracinda subsequently sold the UA shares to third
parties.

R claims the benefit of the UA Loss should be
denied to both parties because the form adopted by Ps
does not reflect the substance of the transaction. R
seeks to have the UA transaction recharacterized into a
part sale, part redemption transaction. If
recharacterized as a redemption, R contends that sec.
311(a), I.R.C., operates to deny the benefit of the UA
Loss to both parties. (Sec. 311 issue.)

R has denied Ps any tax benefit from the UA Loss.
R has filed a motion for summary judgment on the sec.
311 issue. Both Ps have filed cross-motions for
partial summary judgments on the secs. 311 and 267
issues. These cases have been consolidated to clarify
the tax consequences of the transactions common to all
the parties.

Held: The form chosen by Ps was not a fiction
that failed to reflect the substance of the
transaction. Esmark, Inc. v. Commissioner, 90 T.C. 171
(1988), affd. 886 F.2d 1318 (7th Cir. 1989), followed.
Consequently, sec. 311, I.R.C., has no application to
this transaction.

Held, further: Where a corporation that is a
member of a controlled group is acquired by an
unrelated third party, thereby terminating the
controlled group relationship, and that corporation
simultaneously sells an asset at a loss to a member of
the former controlled group, sec. 267(f), I.R.C., and
sec. 1.267(f)-1T, Temporary Income Tax Regs., 49 Fed.
Reg. 46997 (Nov. 30, 1984), do not defer or deny the
loss of the selling member, or increase the purchasing
member's basis in the asset by the amount of the loss.

William F. Nelson and Suzanne Celeste Feese, for petitioner

in docket No. 13977-96.
 - 3 -

Richard E. Timbie and Trevor Washington Swett III, for

petitioner in docket No. 14786-96.

Robert J. Shilliday, Jr., for respondent.

OPINION

RUWE, Judge: Respondent determined a deficiency in Tracinda

Corp.'s (Tracinda) Federal income tax for the taxable year ending

January 31, 1991, in the amount of $54,763,119 and an accuracy-

related penalty under section 6662(d)1 in the amount of

$10,952,616. Respondent determined deficiencies in Turner

Broadcasting System, Inc.'s (TBS) Federal income tax for the

taxable year ending December 31, 1991, in the amount of

$21,538,821 and for the taxable year ending December 31, 1992, in

the amount of $49,050,854. Tracinda's deficiency results from

disallowance of a basis adjustment arising out of its acquisition

of United Artists Corp. (UA) from MGM/UA Entertainment Co. (MGM)

in 1986. TBS acquired MGM simultaneously with the sale of UA to

Tracinda. The TBS deficiencies result, in part, from

disallowance of net capital loss carryforward deductions

originating from the 1986 sale of UA and carried forward into

subsequent years. MGM's basis in UA was greater than the

consideration received for all the UA shares sold. The

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 4 -

difference between MGM's basis in UA and the amount received from

Tracinda for all the UA stock is hereafter called the UA Loss.

TBS and respondent jointly moved to sever from the rest of

the TBS case what will hereafter be described as the section 311

and section 267 issues. The parties also filed a joint motion

for consolidation of docket No. 14786-96 (Tracinda) and docket

No. 13977-96 (TBS). On March 11, 1997, the parties' joint

motions for issue severance and consolidation were granted.

This matter is before the Court on petitioner TBS' and

petitioner Tracinda's Motions for Partial Summary Judgment and

respondent's Motion for Summary Judgment, under Rule 121. The

first and second stipulations of fact and attached exhibits are

incorporated herein.

The parties have asked this Court to decide the following

issues as a matter of law: (1) Whether the transaction by which

MGM sold stock of UA to Tracinda (the UA Sale) is properly

characterized for tax purposes in accordance with its form as a

sale, rather than as a constructive redemption of MGM stock

subject to section 311 (the section 311 issue); and (2) if the

transaction is properly characterized as a sale, whether section

267 and section 1.267(f)-1T(c)(6) and (7), Temporary Income Tax

Regs., 49 Fed. Reg. 46998 (Nov. 30, 1984), apply to (a) disallow

the UA Loss claimed by MGM on the UA Sale, and (b) increase

Tracinda's basis in the UA stock by the amount of the UA Loss

(the section 267(f) issue).
 - 5 -

Background

When the respective petitions were filed, TBS was a Georgia

corporation having its principal place of business in Atlanta,

Georgia, and Tracinda was a Nevada corporation having offices in

Las Vegas, Nevada.

In July and early August 1985, TBS and Tracinda and their

respective owners entered into negotiations, and subsequently

contracts, that changed the ownership of MGM and UA.

At the time of the initial negotiations, Tracinda was an

investment and holding company wholly owned by Kirk Kerkorian

(Kerkorian). Kerkorian directly owned .075 percent of MGM and

indirectly owned 50.066 percent of MGM through Tracinda.

MGM was a publicly held corporation that traded on both the

New York and Pacific stock exchanges. UA was a wholly owned

subsidiary of MGM. TBS, at all material times, was more than 80

percent beneficially owned by R.E. "Ted" Turner.

As a result of the negotiations, the following documents

were executed on August 6, 1985: Agreement and Plan of Merger

between TBS, Merger Sub,2 MGM and UA dated August 6, 1985 (Merger

Agreement); Purchase and Sale Agreement between Tracinda and MGM

(Purchase and Sale Agreement); Company Option Agreement between

TBS and MGM (C-Option); and Option Agreement between Kerkorian,

2
Merger Sub was a company incorporated as a transitory
merger subsidiary (TBS Acquisition Corp.) that merged into MGM.
MGM was the corporation that survived the merger.
 - 6 -

Tracinda, and TBS (Option) (collectively, the transaction

documents). The transaction documents provided for:

(1) TBS' acquisition of MGM (MGM Purchase);3

(2) MGM's sale of all the shares in UA to Tracinda; and

(3) Tracinda's sale of shares in UA to some of MGM's former

public shareholders (Subscribing Public) and to certain UA

executives.4 The agreed price for UA was equal to $9 cash per

share,5 and the agreed price of MGM was $29 cash per share.

The consideration for the MGM shares was altered in October

1985 and again in January 1986. At the conclusion of the

transaction, on March 25, 1986, the consideration for the MGM

shares was $20 cash and one share of TBS Series A preferred stock

(TBS Preferred Stock) for each MGM share.

Prior to the negotiations, MGM had approximately $400

million of public debt outstanding in the form of 10-percent

senior subordinated notes due April 15, 1993 (MGM Notes). The

conditions of issue of the MGM Notes are contained in an

indenture dated April 15, 1983 (the MGM Indenture). On August

3
The mechanism that accomplished the reverse triangular
subsidiary merger is not in issue in this case.
4
Pursuant to a prospectus and subscription agreement, 14.3
percent of the UA shares acquired by Tracinda were sold to the
Subscribing Public for $9.18 per share. A total of 6.43 percent
of the said UA shares was sold to UA executives.
5
Under the transaction documents, the capital of UA was to
be recapitalized so that it mirrored the number of shares issued
by MGM.
 - 7 -

31, 1985, MGM's bank debt stood at $98 million, consisting of $89

million in borrowings under a $175 million revolving credit

facility, and $9 million under an agreement providing for bank

borrowings of up to $10 million to cover daily operating

requirements.

In anticipation of the merger, TBS offered to exchange

$1,100 of its subordinated notes for each $1,000 principal amount

of the MGM Notes, provided the exchanging MGM Note Holder

consented to certain modifications of the MGM Indenture. The

Merger Agreement did not require TBS to make the exchange offer

for the MGM Notes, and TBS' obligation to close its acquisition

of MGM was not contingent upon the successful consummation of the

exchange offer. However, the exchange offer was conditioned upon

consummation of the merger. The exchange offer remained open

through March 31, 1986.

The original Merger Agreement and other transaction

documents were first executed on August 6, 1985. At that time,

MGM believed that its tax basis in UA was not materially

different from the $9 per share value of UA set forth in the

Merger Agreement. Accordingly, MGM believed and informed TBS

that a sale of UA would not produce any material gain or loss.

This information was incorrect. MGM's tax basis in the UA shares

exceeded the consideration received by MGM. The parties disagree

as to the extent of the excess; however, none of the parties have

contended that MGM's basis did not exceed the consideration
 - 8 -

received. Tracinda argues that the excess is $271,727,849. In

the revenue agent's report issued to TBS, respondent stated that

the UA Loss was $262,696,140. A loss on the disposition of UA in

the amount of $217,612,767 was claimed on TBS' 1986 consolidated

return. TBS now claims the UA Loss is in excess of $262 million.

The excess of basis is hereinafter referred to as the UA Loss.6

After ascertaining that MGM's basis in the UA stock

substantially exceeded the agreed sale price to Tracinda, the

parties entered into an Amended and Restated Agreement and Plan

of Merger dated January 15, 1986, between MGM, UA, TBS and

others, which provided for the possibility of the UA Loss in

clause 6.3(c):

If, however the sale of New UA [UA] results in a
Federal and/or State tax loss, the Company [MGM] shall
benefit therefrom; provided, however, that to the
extent the Purchaser [TBS] receives an actual tax
benefit on any of its post merger consolidated tax
returns as a result of such loss, the Company [MGM]
shall pay to New UA [UA] the first $12.5 million of
Federal and/or State tax benefits from the realization
of such loss.

The UA Loss was reported on the TBS Group's7 1986

consolidated tax return. In March 1989, Tracinda filed an

amended income tax return for the taxable year ending January 31,

6
For purposes of these proceedings, respondent does not
agree to any specific amount.
7
Unless otherwise specified, a reference to TBS Group is to
TBS and its consolidated subsidiaries.
 - 9 -

1987, on which it claimed $61,137,114 additional basis in the UA

shares sold during that year. This addition to basis is not in

issue in these proceedings.8 On November 1, 1990, Tracinda sold

its remaining 35,046,037 shares of UA stock to an unrelated

purchaser for $753,313,496. Its cost basis in that stock was

$315,414,333 ($9 per share). Tracinda claimed an increase in

basis of $178,561,218 when reporting its taxable gain from the

sale on its income tax return for the taxable year ending January

31, 1991. That amount reflected a pro rata allocation to

Tracinda's basis in its UA shares of a $271,727,849 loss incurred

by MGM on its March 25, 1986, sale of UA. Only Tracinda's tax

year ending January 31, 1991, is at issue in this case. TBS and

the successor corporation to MGM have filed a civil action

against Tracinda. That action seeks, inter alia, damages and a

declaratory judgment that Tracinda pay any and all benefits

attributable to the UA Loss to TBS.9

The status of the various parties on March 25, 1986, prior

to the closing of TBS' acquisition of MGM and MGM's transfer of

UA, was as follows:

8
It appears that respondent is barred from denying the
benefit of the basis adjustment in previous years because the
time allowed by the statutory period of limitations for the
assessment of tax on such adjustments has expired.
9
In that suit TBS alleges and Tracinda denies that as part
of a post Merger settlement agreement, UA waived its right to
receive any part of the tax benefit resulting from the capital
loss realized on the sale of UA pursuant to clause 6.3(c) of the
Merger Agreement.
 - 10 -

a. MGM owed the banks $294,809,215 and owed the holders of

the MGM Notes approximately $400 million.

b. Public shareholders (i.e., shareholders other than

Kerkorian and Tracinda) owned 24,839,712 shares (49.9 percent) of

the 49,745,137 outstanding shares of stock of MGM.

c. Tracinda owned 22,973,585 shares (46.2 percent) of the

stock of MGM.

d. Kerkorian owned 1,931,840 shares (3.9 percent) of the

stock of MGM.

e. MGM owned all the UA stock, which had been recapitalized

to have the same number of outstanding shares as MGM.

f. TBS had raised $1,203,257,700 cash and had arranged to

issue 49,745,137 shares of TBS Preferred Stock.

g. Tracinda had received in escrow $64,533,655 from the

Subscribing Public on or prior to November 26, 1985, as the

subscription price for 7,029,810 shares of UA stock they had

subscribed to purchase from Tracinda for $9.18 per share.10

h. The UA Executive Stock Purchase Agreements, pertaining

to the sale of 3,200,000 shares of UA stock to UA executives, had

been executed.

10
Tracinda bore the expenses of its offering of UA shares to
the subscribing public shareholders that were estimated to be
$1,265,365 ($.18 per share) in the UA Prospectus.
 - 11 -

i. TBS had incorporated the 20 Mirror Subsidiaries, which

together with TBS would become the shareholders of MGM as the

result of the merger of Merger Sub into MGM on March 25, 1986.

j. A Disbursing Agent had been appointed for the merger

consideration.

A closing occurred on March 25, 1986, pursuant to the final

transaction documents and was memorialized by a Closing

Memorandum and a Funds Transfer Memorandum. The parties have

stipulated that each of the events memorialized occurred. Those

events were deemed to be simultaneous and included:

a. TBS and TBS' Merger Sub transferred $994,902,740 and

49,745,137 shares of TBS Preferred Stock to the MGM Shareholders

Account established at the Disbursing Agent.

b. Tracinda delivered its 22,973,585 MGM shares to the

Disbursing Agent.

c. Tracinda acknowledged receipt of $459,471,700 cash and

22,973,585 shares of TBS Preferred Stock from the Disbursing

Agent.

d. At the direction of Tracinda, the Disbursing Agent

transferred $447,706,233 from the MGM Shareholders Account to MGM

in payment of the purchase price for the UA stock. This payment

was funded from the cash portion of the consideration received by

Tracinda for its MGM shares (i.e., Tracinda paid for the UA stock

using cash it received from TBS in the MGM Purchase).
 - 12 -

e. MGM delivered to the Disbursing Agent, as transfer agent

for UA, share certificates representing 49,745,137 UA shares,

which constituted all the issued and outstanding shares of UA.

MGM also instructed the Disbursing Agent, as transfer agent for

UA shares, to cancel the UA stock certificates held in the name

of MGM, duly endorsed for transfer to Tracinda, and to issue to

Tracinda UA stock certificates for an aggregate 49,745,137 UA

shares. The Disbursing Agent delivered to Tracinda five

certificates of UA common stock representing in aggregate

49,745,137 shares.

f. MGM transferred $294,809,214.66 to its banks in

satisfaction of its bank borrowings.

g. MGM transferred to UA $17,275,000, which represented the

amount payable by MGM to UA under clause 6.2 of the Merger

Agreement.11

After the transfers described above, the balance of MGM's

account at the Disbursing Agent was approximately

$140,399,278.34, with MGM having the right to instruct the

Disbursing Agent with respect to the investment or transfer of

such funds.

11
Clause 6.2 provided for the transfer of assets between MGM
and UA to give effect to the terms of the Merger Agreement and in
particular to reflect the agreement that there would be
adjustments made to reflect the position of UA as if UA had
operated as an independent company since May 31, 1985, until the
transaction closed on Mar. 25, 1986.
 - 13 -

Immediately following the closing, pursuant to MGM's prior

irrevocable instructions, the Disbursing Agent transferred

$22,725,000 from MGM's account to UA's account in partial payment

of amounts due from MGM to UA under clause 6.4 of the Merger

Agreement.12 On or shortly after March 25, 1986, MGM made a net

intercompany loan of approximately $107.7 million cash to TBS, in

accordance with TBS' customary cash management procedures. This

intercompany loan was reflected on MGM's books as an intercompany

receivable (i.e., as an asset of MGM).

The status of the parties on March 25, 1986, after the

completion of the transactions contemplated in the transaction

documents, was as follows:

a. TBS, directly and through wholly owned subsidiaries,

owned 100 percent of MGM.

b. TBS had disbursed $994,902,740 cash and 49,745,137

shares of TBS Preferred Stock and received $107.7 million cash in

an intercompany loan from MGM.

c. MGM had disposed of UA.

d. MGM had received $447,706,233 cash, which it had used in

part to prepay its $294,809,215 debt to the banks and to satisfy

a $40 million obligation to UA.

12
Clause 6.4 of the Merger Agreement provided for "Post
Closing Adjustment[s]". These adjustments related to the
allocation of the economic, financial and legal consequences of
transactions occurring during the period from May 31, 1985, to
March 25, 1986, as reflected in the intercompany accounts between
MGM and UA.
 - 14 -

e. Tracinda owned 39,515,327 shares of UA (79.44 percent),

22,973,585 shares of TBS Preferred Stock (46.18 percent), and

$76,299,122 cash, which includes $64,533,655 ($9.18 per share)

cash paid in escrow by the Subscribing Public pursuant to

Tracinda's offering of UA shares.

f. Kerkorian owned 1,931,840 shares (3.88 percent) of TBS

Preferred Stock and $38,636,800 cash.

g. The MGM public shareholders owned 24,839,712 shares

(49.93 percent) of TBS Preferred Stock and $496,794,240 cash.

h. The Subscribing Public owned 7,029,810 shares (14.13

percent) of UA, for which they had paid $64,533,655 ($9.18 per

share).

i. UA executives owned 3,200,000 shares of UA (6.43

percent), for which they subsequently paid $28,800,000 to

Tracinda.

Discussion

A. Whether Summary Judgment Is Appropriate

Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials. Northern Ind. Pub. Serv.

Co. & Subs. v. Commissioner, 101 T.C. 294, 295 (1993); Florida

Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988); Shiosaki v.

Commissioner, 61 T.C. 861, 862 (1974).
 - 15 -

Summary judgment is appropriate where there is no genuine

issue as to any material fact and a decision may be rendered as a

matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98

T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994); Jacklin

v. Commissioner, 79 T.C. 340, 344 (1982). In deciding whether to

grant summary judgment, the Court must consider the factual

materials and inferences drawn from them in the light most

favorable to the nonmoving party. Bond v. Commissioner, 100 T.C.

32, 36 (1993); Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

If the conditions of summary judgment are otherwise satisfied

with respect to a single issue or less than all the issues in a

case, then partial summary judgment may be granted, even though

all the issues in the case are not disposed of. Rule 121(b);

Naftel v. Commissioner, supra.

The parties agree that no issues of material fact are in

dispute in relation to the section 311 issue or the section 267

issue and that we may render judgment regarding those issues

under Rule 121(b).

B. Section 311 Issue

The form adopted by the parties to the transaction consists

of mutually dependent simultaneous sales of all the issued shares

in MGM to TBS and MGM's sale of all the issued shares in UA to

Tracinda. Respondent views this series of transactions as
 - 16 -

integrated, mutually dependent steps in an overall plan. We

agree. Indeed, petitioners do not characterize it differently.

Respondent, however, seeks to have the transactions

recharacterized for tax purposes using either the step

transaction or the substance-over-form doctrine. Respondent

urges us to reject the form adopted by the parties. That form

reflects events that actually happened, in favor of what

respondent characterizes as the substance of the transaction.

Respondent summarizes his position as follows:

The substance of this transaction should be determined
by applying the terms of the [f]inal Merger Agreement
and the Purchase and Sale Agreement in tandem, since
the agreements were completely interdependent, and the
steps of the transaction occurred simultaneously.
Viewing this transaction as a whole, TBS should be
treated as making a capital contribution to MGM
equivalent to the value of UA. * * * Further, in a
transaction which is in substance a bootstrap
acquisition, the portion of Tracinda's MGM stock equal
in value to the UA stock was redeemed by MGM in
exchange for the UA stock. * * *

In respondent's recharacterization of the "substance of the

transaction", MGM is deemed to have distributed its UA stock to

Tracinda and the Subscribing Public in exchange for a portion of

the shareholders' MGM stock. If we were to agree with

respondent's recharacterization as a redemption, section 311(a)

would provide that no loss would be recognized on MGM's

distribution of UA shares in redemption of its own shares.
 - 17 -

Respondent justifies the proposed recharacterization on the

ground that the form adopted by the parties "does not comport

with economic reality". Respondent's argument in its purest

terms is that sale of all the issued shares in MGM to the TBS

Group and MGM's sale of all the issued shares in UA to Tracinda

cannot be viewed as occurring simultaneously for tax purposes.

Respondent contends the transactions must be assigned a

sequential order for tax purposes. Respondent further argues

that since simultaneous sale transactions cannot be recognized

for tax purposes, it is necessary to recharacterize the

transaction to reflect its true substance.

We find respondent's argument that the sales could not occur

simultaneously for tax purposes to be no more than superficially

appealing, unsupported by authority, and without merit in view of

the stipulated facts. On brief, respondent cites no authority

for the proposition that "some kind of [sequential] ordering of

the steps of the transaction is necessary for tax purposes to

determine the tax consequences." Transactions that occur

simultaneously or are deemed by law to have occurred concurrently

or simultaneously are commonplace.13 In G.M. Trading Corp. v.

13
The regulations speak of simultaneous events in at least
22 places. For instance, sec. 1.351-1(a)(1), Income Tax Regs.,
provides:

"immediately after the exchange" does not necessarily
require simultaneous exchanges by two or more persons,
(continued...)
 - 18 -

Commissioner, 106 T.C. 257, 267 (1996), revd. on other grounds

121 F.3d 977 (5th Cir. 1997), we examined some of the tax

consequences of a simultaneous transaction, stating: "the

simultaneous nature of a number of steps does not require all but

the first and the last (or "the start and finish") to be ignored

for Federal income tax purposes."

The regulations under section 267(f), discussed infra p. 23,

would also seem to impliedly acknowledge simultaneous

transactions. See sec. 1.267(f)-1T(c)(1), Temporary Income Tax

Regs., 49 Fed. Reg. 46997 (Nov. 30, 1984), sec. 1.1502-

13(a)(1)(i), Income Tax Regs., discussed infra pp. 31-34. These

regulations dealing with "intercompany transactions" address a

situation involving the purchase and sale of an asset between

corporations that are members of the same group after the sale

transaction but are not necessarily members of the same group

before the transaction. This seems, by logical implication, to

contemplate a sale of an asset and the simultaneous association

or disassociation of group members. We are dealing exactly with

13
(...continued)
but comprehends a situation where the rights of the
parties have been previously defined and the execution
of the agreement proceeds with an expedition consistent
with orderly procedure. * * * [Emphasis added.]

In the regulations, we have not been able to locate reference to
sequential ordering for tax purposes being required when
simultaneous transactions are mentioned. See also sec. 1.707-
3(f), Example (1). (Treatment of simultaneous transfers as a
sale.), Income Tax Regs.
 - 19 -

this type of situation; i.e., the sale of an asset between

members of a controlled group and the simultaneous disassociation

of the buyer and the seller.

Petitioners seek to have the above-described transactions

taxed in accordance with the form adopted by them. Petitioners

argue that both substance and form are aligned and that the form

adopted should determine the tax consequences. Petitioners cite

this Court's reasoning in Esmark, Inc. & Affiliated Cos. v.

Commissioner, 90 T.C. 171 (1988), affd. without published opinion

886 F.2d 1318 (7th Cir. 1989), as authority for that proposition.

In Higgins v. Smith, 308 U.S. 473, 477 (1940), the Supreme

Court stated:

the Government may not be required to acquiesce in the
taxpayer's election of that form for doing business
which is most advantageous to him. The Government may
look at actualities and upon determination that the
form employed for doing business or carrying out the
challenged tax event is unreal or a sham may sustain or
disregard the effect of the fiction as best serves the
purposes of the tax statute. * * *

However, in order to apply either the substance-over-form

doctrine or the step-transaction doctrine, we must determine that

the substance of the transaction differs from its form. If

substance follows form then this Court will respect the form

chosen by the taxpayer. Esmark, Inc. & Affiliated Cos. v.

Commissioner, supra.
 - 20 -

Even if alternative explanations are available to account

for the results of a transaction, this Court will not disregard

the form of the transaction if it accounts for the transaction at

least as well as alternative recharacterizations.14 This is

particularly true in cases that deal with public companies. As

we stated in Esmark, Inc. & Affiliated Cos. v. Commissioner,

supra at 183: "Congress enacted a statute under which tax

consequences are dictated by form; to avoid those consequences,

respondent must demonstrate that the form chosen by petitioner

was a fiction that failed to reflect the substance of the

transaction." (Emphasis added.)

In all the cases cited to us where this Court adopted a

substance-over-form argument, a desire to gain a tax benefit,

through the use of meaningless steps or some other tax fiction,15

was present. Respondent can point to no such tax fiction or

14
See Grove v. Commissioner, 490 F.2d 241 (2d Cir. 1973),
affg. T.C. Memo. 1972-98; Carrington v. Commissioner, 476 F.2d
704, 709 (5th Cir. 1973), affg. T.C. Memo. 1971-222.
15
For an example of a transaction that was considered to be
a tax fiction by the Supreme Court, see Knetsch v. United States
364 U.S. 361 (1960). That case is authority for the proposition
that

the Commissioner * * * [may] disregard transactions
which are designed to manipulate the Tax Code so as to
create artificial tax deductions [benefits]. They do
not allow the Commissioner to disregard economic
transactions, * * * which result in actual, non tax-
related changes in economic position. [Northern Ind.
Pub. Serv. Co. & Subs. v. Commissioner, 115 F.3d 506,
512 (7th Cir. 1997), affg. 105 T.C. 341 (1995).]
 - 21 -

meaningless step.16 As we stated in Esmark, Inc. & Affiliated

Cos. v. Commissioner, 90 T.C. at 195:

The existence of an overall plan does not alone,
however, justify application of the step-transaction
doctrine. Whether invoked as a result of the "binding
commitment," "interdependence," or "end result" tests,
the doctrine combines a series of individually
meaningless steps into a single transaction. * * *

At the time the original transaction documents, which establish

the form of the transactions, were executed the parties were

unaware of the tax benefit in issue. The absence of a tax motive

lends credence to petitioners' position that the transaction is

what it purports to be; i.e., that the structure of the

transaction was dictated by a business purpose and that substance

and form are aligned.

In order to recharacterize the transaction, respondent must

have a logically plausible alternative explanation that accounts

for all the results of the transaction. The explanation may

16
Respondent cites Estate of Schneider v. Commissioner, 88
T.C. 906 (1987), affd. 855 F.2d 435 (7th Cir. 1988), for the
proposition that the step-transaction doctrine need not solely be
employed to eliminate meaningless steps. We do not read that
case to stand for that proposition. That case explicitly adopts
the elimination of meaningless steps analysis contained in
Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613-614 (1938).
Additionally, the case itself cites the existence of meaningless
steps (issue of preendorsed checks to employees for purported
stock purchase) as the reason for the application of the step-
transaction doctrine. The Court of Appeals for the Seventh
Circuit affirmed this Court's recharacterization; however, it
chose to arrive at the same conclusion using a substance-over-
form analysis (parties' rights different from form used).
 - 22 -

combine steps, but if it invents new ones, "Courts have refused

to apply the step-transaction doctrine in this manner." Esmark,

Inc. & Affiliated Cos. v. Commissioner, supra at 196. "'Useful

as the step transaction doctrine may be * * * it cannot generate

events which never took place just so an additional tax liability

might be asserted.'" Grove v. Commissioner, 490 F.2d 241, 247-

248 (2d Cir. 1973), affg. T.C. Memo. 1972-98 (quoting Sheppard v.

United States, 176 Ct. Cl. 244, 361 F.2d 972, 978 (1966)).

Respondent's proposed recharacterization does not adequately

account for, among other things, why TBS would make a capital

contribution to MGM17 and then immediately make an intercompany

loan of $107.7 million back to itself. While it is

understandable that a parent corporation would transfer excess

cash received from the sale of assets by a subsidiary to itself,

it is hard to imagine a company making a capital contribution to

a subsidiary in order to lend itself money as respondent

postulates is, in part, the substance of this transaction. The

fact that the amount of the capitalization postulated by

respondent corresponds to the value of the asset purported to be

sold is also suggestive of the fact that the asset was in fact

sold.

17
In respondent's proposed recast of the substance of the
transaction, it is necessary to include a capitalization step to
account for the fact that MGM's net worth did not decrease, as
would be expected, had a redemption actually taken place.
 - 23 -

The hypothetical or constructive redemptions of shares by

MGM in exchange for UA shares proposed by respondent would differ

in price and form of consideration from shareholder to

shareholder. In the instant case, the Subscribing Public paid

Tracinda $9.18 per UA share in November 1985. Those shareholders

received the full merger consideration when they tendered their

shares in MGM in March 1986.18 Tracinda and certain UA

executives paid $9 per UA share. Such a non pro rata redemption

would appear at a variance with the normal rules for the

governance of public companies.19 Additionally, it leaves

unexplained the $64,533,655 payment made to Tracinda by the

Subscribing Public.20

Finally, respondent's argument adds a step that did not

occur. The addition of the "capitalization" step proposed by

respondent is the type of tax fiction that the step-transaction

doctrine applies to. It is an impermissible attempt to turn

18
The Subscribing Public's payment of the additional $9.18
per share in November 1985 is described by respondent as
"Reimbursing Tracinda" (a fellow shareholder) for its costs in
arranging the subscription offering (respondent's deemed
redemption of MGM shares for UA shares).
19
Respondent takes the position that such corporate
formalities are "irrelevant" to the tax substance of the
transaction.
20
Respondent takes the position: "In substance, this
payment was a nullity. * * * [It] was part of a circular cash
flow that should be disregarded. * * * [Each] subscribing public
shareholder was reimbursed in merger consideration".
 - 24 -

simultaneous sale transactions into a transaction dressed as a

redemption, in order to deny a legitimate tax consequence.

In summary, respondent fails to demonstrate a tax fiction, a

misalignment of the parties' rights and the form adopted by them,

a meaningless step, or a nonbusiness purpose to support

invocation of the step transaction or other substance-over-form

doctrine. We hold that the transactions in issue should be taxed

in accordance with the form actually adopted and carried out by

petitioners. Consequently, there was no deemed redemption of MGM

shares, and section 311(a) has no application to this

transaction.

C. Section 267 Issue

Having determined that the proper characterization of the

transaction is the form adopted by petitioners, it is necessary

to determine the applicability of section 267(f) and section

1.267(f)-1T, Temporary Income Tax Regs., 49 Fed. Reg. 46997 (Nov.

30, 1984) (the 1984 temporary regulation). The 1984 temporary

regulation was in force until superseded by the final regulation,

section 1.267(f)-1, Income Tax Regs., July 18, 1995. This final

regulation is prospective only and applies with respect to

transactions occurring in years beginning on or after July 12,

1995. T.D. 8597, 1995-2 C.B. 147, 160.

Respondent now argues and Tracinda agrees, that the

transaction by which MGM sold stock in UA to Tracinda (the UA
 - 25 -

Sale) should be treated as a related party sale covered by

section 267(f). Respondent and Tracinda argue that Tracinda and

Kerkorian had control of MGM when the UA Sale occurred.

Respondent concedes MGM was not part of the Tracinda and

Kerkorian controlled group immediately after the sale.

Respondent considers control prior to the sale as sufficient to

establish that the UA Sale was a sale "between members of the

same controlled group."21 Respondent and Tracinda further argue

that this interpretation is consistent with the 1984 temporary

regulation. As a consequence of this view, respondent's present

position is that the UA Loss should be denied in part to MGM22

and should be instead transferred to the basis of Tracinda's UA

stock.23 Respondent's proposed reallocation of the loss is made

pursuant to respondent's interpretation of paragraph (c)(6) and

(7) of the 1984 temporary regulation.

21
Respondent's argument is based on the application of the
"binding commitment test" enunciated in a line of cases discussed
infra pp. 36-37.
22
Respondent would disallow that part of the UA Loss that is
proportionate to the number of shares purchased by Tracinda, on
its own behalf and on behalf of the UA executives, to the total
number of UA shares purchased. Respondent believes that Tracinda
should be viewed as an agent for the Subscribing Public and that
the basis shift rules should not apply to the 14 percent of UA
stock acquired by the Subscribing Public.
23
Respondent's notice of deficiency to Tracinda dated Apr.
24, 1996, however, states that "sections 267(a) and 267(f) do not
apply to allow a basis adjustment in the subsequent sale of
MGM/UA Communications Co. [UA] common stock."
 - 26 -

TBS argues that section 267(f) has no application to the UA

Sale. Alternatively, even if section 267(f) does apply, TBS

takes the position that paragraph (c)(6) and (7) of the 1984

temporary regulation do not prevent MGM's deduction of the UA

Loss because MGM and Tracinda were not members of the same

controlled group immediately after the UA Sale. TBS takes the

position that the requirement for there to be a controlled group

relationship immediately after the sale is a consequence of the

1984 temporary regulation's adoption of substantial portions of

the consolidated return regulations.24

In order properly to understand the parties' arguments, it

is useful to give an overview of the operation of section 267.

Section 267(a)(1) provides in part:

No deduction shall be allowed in respect of any loss
from the sale or exchange of property, directly or
indirectly, between persons specified in any of the
paragraphs of subsection (b). * * *

24
TBS additionally argues that if the 1984 temporary
regulation produces the result respondent advocates, it is
invalid. TBS argues that par. (c)(6) and (7) of the 1984
temporary regulation, if applicable in this case, are invalid
because they disallow, rather than defer, a sec. 267(f) loss to
the seller (MGM), reincarnate the disallowed loss into its
prerecognition state as basis, and relocate that basis to
somebody else (Tracinda), thereby permanently denying the
taxpayer (MGM) the benefit of the UA Loss. In view of our
interpretation of the scope of the 1984 temporary regulation, it
is not necessary for us to consider the invalidity argument. We
note that TBS' invalidity argument was made moot for taxable
years beginning after July 12, 1995, by the removal of the loss
relocation provisions in the Commissioner's final regulations.
See infra note 29.
 - 27 -

Section 267(b) enumerates certain relationships. Most of

the relationships enumerated are intrafamily or equivalent

relationships where there is a unity of economic interest. The

section also provides that members of a controlled group as

defined in subsection (f) are among the enumerated relationships.

Section 267(d) provides, in general terms, that if a loss has

been disallowed under section 267(a)(1) only so much of the gain

on the subsequent resale of the property as exceeds the loss is

recognized by the related party purchaser. However, section

267(f)(2) requires different treatment for sales between members

of a controlled group. Section 267(f) provides in relevant part:

(f) Controlled Group Defined; Special Rules Applicable to
Controlled Groups.--

(1) Controlled group defined.--For purposes of this
section, the term "controlled group" has the meaning given
to such term by section 1563(a), except that--

(A) "more than 50 percent" shall be substituted
for "at least 80 percent" each place it appears in
section 1563(a), and

(B) the determination shall be made without regard
to subsections (a)(4) and (e)(3)(C) of section 1563.

(2) Deferral (rather than denial) of loss from sale or
exchange between members.--In the case of any loss from the
sale or exchange of property which is between members of the
same controlled group and to which subsection (a)(1) applies
(determined without regard to this paragraph but with regard
to paragraph (3))--

(A) subsections (a)(1) and (d) shall not
apply to such loss, but

(B) such loss shall be deferred until the property
is transferred outside such controlled group and there
 - 28 -

would be recognition of loss under consolidated return
principles or until such other time as may be
prescribed in regulations. [Emphasis added.]

The parties have stipulated that prior to the UA Sale,

Tracinda, MGM, and UA were members of a section 267(f) controlled

group (the Tracinda Group). After the completion of the UA Sale

on March 25, 1986, MGM was no longer part of the Tracinda Group.

Section 267(f) is silent on what constitutes a sale between

members of the same controlled group or whether deferral ends

when the selling member leaves the controlled group. This raises

the question of whether deferral under section 267(f) requires

that the relevant parties be members of the same controlled group

before and after the sale. Because there is an ambiguity in the

statute in this regard, we look to the legislative history to see

whether Congress manifested an intent that would resolve the

issue. The relevant part of the Senate report states:

The bill extends the loss disallowance and accrual
provisions of section 267 (as well as other provisions
of the Code applicable to related parties defined under
section 267) to transactions between certain controlled
corporations. For purposes of these loss disallowance
and accrual provisions, corporations will be treated as
related persons under the controlled corporation rules
of section 1563(a), except that a 50-percent control
test will be substituted for the 80-percent test.
These rules are not intended to overrule the
consolidated return regulation rules where the
controlled corporations file a consolidated return. In
the case of controlled corporations, losses will be
deferred until the property is disposed of (or
collection of a receivable is made) by the affiliate to
an unrelated third party in a transaction which results
in a recognition of gain or loss to the transferee, or
 - 29 -

the parties are no longer related. In a transaction
where no gain or loss is recognized by the transferee,
the loss is deferred until the substitute basis
property is disposed of. [S. Prt. 98-169 (Vol. 1), at
496 (1984); fn. ref. omitted; emphasis added.]

The conference committee report provides:

The provision generally follows the Senate
amendment with the following modifications:

* * * * * * *

(3) The operation of the loss deferral rule is
clarified to provide that any loss sustained shall be
deferred until the property is transferred outside the
group, or until such other time as is provided by
regulations. These rules will apply to taxpayers who
have elected not to apply the deferral intercompany
transactions rules, except to the extent regulations
provide otherwise. [H. Conf. Rept. 98-861, at 1033
(1984), 1984-3 C.B. (Vol. 2) 287; emphasis added.]

The legislative history regarding section 267(f) indicates

that it was intended to "extend" the related party provisions of

section 267 even though subsection (f)(2)(A) makes subsections

(a)(1) and (d) inapplicable.25 Nevertheless, there is a general

theme that runs through the gain recognition limitation in

section 267(d) and the loss deferral provisions of subsection (f)

in that they both prevent an immediate loss deduction to the

seller and accrue the loss either in terms of a limited gain

recognition to the purchaser pursuant to section 267(d) or as a

deferral of the tax benefit of the loss pursuant to section

25
Sec. 267(f)(2)(A) provides: "subsections (a)(1) and (d)
shall not apply to such loss".
 - 30 -

267(f). We think what Congress intended to "extend" was the

class of transaction in which there would be a delay, of some

kind, in the recognition of a loss until there was an

economically genuine realization of the loss. See McWilliams v.

Commissioner, 331 U.S. 694 (1947); Hassen v. Commissioner, 599

F.2d 305, 309 (9th Cir. 1979), affg. 63 T.C. 175 (1974).

It is clear from the legislative history that the

consolidated return rules were to be applied where controlled

corporations filed consolidated returns. The Tracinda Group did

not file consolidated returns that included MGM during the

relevant periods. The statute itself provides that a deferred

loss of a member of a controlled group would be "deferred until

the property is transferred outside such controlled group and

there would be recognition of loss under consolidated return

principles or until such other time as may be prescribed in

regulations." Sec. 267(f)(2)(B). The property (UA stock) was

not transferred out of the Tracinda Group as a result of the

March 25, 1986, transactions. Rather, MGM, the selling member,

left the controlled group on that date. We therefore turn to the

1984 temporary regulation, in effect for the years in issue,

which was applicable to controlled groups' not filing a

consolidated return.26

26
A separate temporary regulation was promulgated for
companies in a controlled group that filed consolidated returns.
See sec. 1.267(f)-2T, Temporary Income Tax Regs., 49 Fed. Reg.
(continued...)
 - 31 -

The 1984 temporary regulation provides in relevant part:

(c) Deferral and restoration of loss under
consolidated returns principles--(1) General rule. Except
as otherwise provided in this section, the rules for
deferred intercompany transactions in § 1.1502-13 of the
consolidated return regulations apply under section
267(f)(2) to the deferral and restoration of loss on the
sale of property directly or indirectly between M1 and M2 as
if--

(i) the taxable year in which the sale
occurred were a consolidated return year (as
defined in § 1.1502-1(d)) and

(ii) all references to a "group" or an
"affiliated group" were to a controlled
group.

* * * * * * *

(6) Exception to restoration rule for selling member
that ceases to be a member. If a selling member of property
[sic] for which loss has been deferred ceases to be a member
when the property is still owned by another member, then,
for purposes of this section, § 1.1502-13(f)(1)(iii)[27]

26
(...continued)
46997 (Nov. 30, 1984).
27
Sec. 1.1502-13(f)(1)(iii), Income Tax Regs., 38 Fed. Reg.
758 (June 4, 1973), at the relevant time provided:

(f) Restoration of deferred gain or loss on
dispositions, etc.--(1) General rule. The remaining
balance (after taking into account any prior reductions
under paragraphs (d)(3) and (e)(3) of this section) of
the deferred gain or loss attributable to property,
services, or other expenditure shall be taken into
account by the selling member as of the earliest of
the following dates:

* * * * * * *

(iii) Immediately preceding the time
(continued...)
 - 32 -

shall not apply to restore that deferred loss and that loss
shall never be restored to the selling member.

(7) Basis adjustment and holding period. If paragraph
(c)(6) of this section precludes a restoration for property,
then the following rules apply:

(i) On the date the selling member
ceases to be a member, the owning member's
basis in the property shall be increased by
the amount of the selling member's unrestored
deferred loss at the time it ceased to be a
member ("increase amount"). [Emphasis
added.]

The 1984 temporary regulation does not explicitly contain a

definition of what constitutes a sale between members of a

controlled group. However, it does generally incorporate section

1.1502-13, Income Tax Regs., of the consolidated return

regulations that deal with "deferred intercompany transactions".

These regulations are said to apply, except as otherwise provided

in the 1984 temporary regulation. No express provision can be

found in the 1984 temporary regulation that defines the scope of

transactions covered other than the reference to deferred

"intercompany transactions". The term "intercompany

transactions" is not itself defined in the 1984 temporary

regulation. However, section 1.1502-13, Income Tax Regs., which

is referred to and made applicable by the 1984 temporary

27
(...continued)
when either the selling member or the member
which owns the property ceases to be a member
of the group;
 - 33 -

regulation, defines "intercompany transactions" and "deferred

intercompany transaction" as follows:

(a) Definitions.--For purposes of §§ 1.1502-1 through
1.1502-80:

(1) "Intercompany transaction." (i) Except as
provided in subdivision (ii) of this subparagraph, the
term "intercompany transaction" means a transaction
during a consolidated return year [taxable year in
which the sale occurred] between corporations which are
members of the same [controlled] group immediately
after such transaction.* * *

* * * * * *
*

(2) "Deferred intercompany transaction".
The term "deferred intercompany transaction"
means--
(i) The sale or exchange of property,

* * * * * * *

in an intercompany transaction.

The 1984 temporary regulation provides that, except as

otherwise provided, "the rules for deferred intercompany

transactions in § 1.1502-13 of the consolidated return

regulations apply under section 267(f)(2)". 49 Fed. Reg. 46997

(Nov. 30, 1984). These words are intended to govern the

application of section 267(f). By this temporary regulation,

respondent has clarified and limited the operation of section

267(f)(2) to what are defined to be "intercompany transactions".

When the 1984 temporary regulation is read in light of the

definition of intercompany transactions in the consolidated
 - 34 -

return regulations, the UA Sale would not be covered because

immediately after the completion of the sale the parties were not

members of the same controlled group.

Respondent argues that paragraph (c)(6) and (7) of the 1984

temporary regulation constitutes exceptions to the application of

section 1.1502-13, Income Tax Regs., of the consolidated return

regulations. This is partly true; however, the exception is to

the "restoration" of loss rule in section 1.1502-13(f)(1)(iii),

Income Tax Regs. Section 1.1502-13(f)(1)(iii), Income Tax Regs.,

deals with the situation of a selling member that leaves the

controlled group after having engaged in a deferred intercompany

transaction. But when there has been no deferred intercompany

transaction, as defined in section 1.1502-13(a), Income Tax

Regs., paragraph (f)(1)(iii) has no application, and it follows

that the exception to paragraph (f)(1)(iii) contained in

paragraph (c)(6) and (7) of the 1984 temporary regulation also

has no application.

After considering the overall regulatory context and the

specific language used in paragraph (c)(6) and (7) of the 1984

temporary regulation, we conclude that paragraph (c)(6) and (7)

does not apply to the UA Sale, which was part of the overall

transaction that simultaneously ended the controlled group

relationship and transferred the UA shares to Tracinda. The fact

pattern that is dealt with in paragraph (c)(6) and (7) of the

1984 temporary regulation assumes that an intercompany
 - 35 -

transaction has occurred before the selling member leaves the

controlled group. The paragraph talks of a loss that "has been

deferred". It also refers to property "still owned" when the

selling member departs the group and of an "unrestored deferred

loss". We give effect to the use of the past tense in the 1984

temporary regulation. In other words, before paragraph (c)(6)

and (7) of the 1984 temporary regulation become operative, the

loss must have been deferred as an "intercompany transaction"

prior to the dissociation of the seller from the controlled

group.28 The preamble to the 1984 temporary regulation adds

additional weight to this interpretation. It states in relevant

part:

Accordingly, the temporary regulations provide that if
a member (M1) sells property to another member (M2),
and thereafter, while M2 still holds the property, M1
ceases to be a member of the group, then M1's
unrestored deferred loss for property at the time M1
ceases to be a member will never be restored to M1.
* * * [T.D. 7991, 1985-1 C.B. 71, 73; emphasis added.]

The MGM Purchase and UA Sale occurred simultaneously.

Immediately after the transaction, MGM was not a member of the

controlled group that included Tracinda. As a consequence, there

28
We note this is the same view as is expressed by the
authors of 1 Dubroff et al., Federal Income Taxation of
Corporations Filing Consolidated Returns, sec. 31.11[6], at 31-
246 (2d ed. 1998), stating: "The fact pattern addressed by the
prior regulations [the 1984 temporary regulation] involved an
intercompany sale at a loss followed by * * * [Seller] leaving
the group." (Emphasis added.)
 - 36 -

was no "deferred intercompany transaction", "loss that has been

deferred", or "unrestored deferred loss at the time it [MGM]

ceased to be a member" of the controlled group.29

None of the parties have directed us to any case law

interpreting the scope of section 267(f).30 We have, however,

been directed to a series of cases which interpret what is now

section 267(a)(1) and (b)(2). Federal Cement Tile Co. v.

Commissioner, 40 T.C. 1028 (1963), affd. 338 F.2d 691 (7th Cir.

29
We note that the exception to restoration rule contained
in paragraph (c)(6) and (7) of the 1984 temporary regulation was
eliminated by a final regulation published in 1995. When the
Commissioner proposed this regulation in 1994, the preamble to
the proposed sec. 1.267(f)-1, Income Tax Regs., 1994-1 C.B. 724,
732, stated:

The current regulations applicable to controlled
groups [sec. 1.267(f)-1T] generally conform to the
basic intercompany transaction rules applicable to
consolidated groups. * * *

The current regulations also provide that if S sells
property to B at a loss, and the property is still
owned by B when S ceases to be a member of the same
controlled group, S never takes the loss into account.
Instead, B's basis in the property is increased by an
amount equal to S's unrestored loss.

The proposed regulations eliminate the rule that
transforms S's loss into additional basis in the
transferred property when S ceases to be a member of
the controlled group. Instead, the proposed
regulations generally allow S's loss immediately before
it ceases to be a member [of the controlled
group]. * * *
30
Sec. 267(f) operates on transactions between parties
defined in subsec. (b)(3), which provides: "Two corporations
which are members of the same controlled group (as defined in
subsection (f))".
 - 37 -

1964); Moore v. Commissioner, 17 T.C. 1030 (1951), affd. 202 F.2d

45 (5th Cir. 1953); W. A. Drake, Inc. v. Commissioner, 3 T.C. 33

(1944), affd. 145 F.2d 365 (10th Cir. 1944). These cases are

cited for the proposition that the proper time to test for

control is when there is a binding commitment to sell. However,

these cases do not deal with section 267(f) and the

aforementioned regulations. Additionally, the treatment afforded

a loss from a transaction between members of a controlled group

is not the same as the treatment afforded to a loss between

parties otherwise specified in section 267(b). We do not think

it likely that Congress would specify a different treatment if

there were no relevant distinction to be drawn.31 We must be

cautious in applying judicial glosses developed by the courts to

prevent technical avoidance of the purpose of a statute (loss

disallowance on intrafamily transactions) to a new situation (the

controlled group provisions). This caution is intensified when

to do so would conflict with our reading of the regulations.

31
The controlled group provisions of sec. 267(f) do not
share a common ancestry with the other relationships dealt with
in sec. 267. The current subsecs. (b)(3) and (f) of sec. 267
were first inserted into the Code in 1984 by the Deficit
Reduction Act of 1984, Pub. L. 98-369, sec. 174(b)(2) to (3), 98
Stat. 705. They had no counterpart in the 1939 or the 1954
Codes. In contrast, the provisions now embodied in sec.
267(b)(1) and (2) can be traced back to sec. 24(b)(1)(A) and (B)
of the 1939 Code. Federal Cement Tile Co. v. Commissioner, 40
T.C. 1028 (1963), affd. 338 F.2d 691 (7th Cir. 1964); Moore v.
Commissioner, 17 T.C. 1030 (1951), affd. 202 F.2d 45 (5th Cir.
1953); W. A. Drake, Inc. v. Commissioner, 3 T.C. 33 (1944), affd.
145 F.2d 365 (10th Cir. 1944) (all interpret sec. 24(b)(1)(B) of
the 1939 Code).
 - 38 -

The words of the 1984 temporary regulation which make the

rules for "deferred intercompany transaction" of section 1.1502-

13, Income Tax Regs., applicable to deferral under section 267(f)

militate against use of the "binding commitment test" in the

controlled group situation. Pursuant to that regulation, the

controlled group relationship is tested immediately after the

transaction, not when the binding commitment is entered into.

Application of the "binding commitment test" depends on the

controlled group relationship before the transaction and

therefore would conflict with the 1984 temporary regulation.

Finally, incorporation of the "binding commitment test" into

section 267(f) jurisprudence would also be contrary to the

current regulations. The final regulations, section 1.267(f)-1,

Income Tax Regs., adopt the "immediately after" test of the

consolidated return regulations that respondent contends were not

part of the 1984 temporary regulation at issue in this case.

Sections 1.267(f)-1(b)(1) and 1.1502-13(b)(1)(i), Income Tax

Regs., provide:

§ 1.267(f)-1. Controlled groups.--* * *

* * * * * * *

(b) Definitions and operating rules. The definitions
in § 1.1502-13(b) and the operating rules of § 1.1502-13(j)
apply under this section with appropriate adjustments,
including the following:

(1) Intercompany sale. An intercompany sale is a
sale, exchange, or other transfer of property between
members of a controlled group, if it would be an
 - 39 -

intercompany transaction under the principles of §
1.1502-13, determined by treating the references to a
consolidated group as references to a controlled group
and by disregarding whether any of the members join in
filing consolidated returns. [Emphasis added.]

§ 1.1502-13. Intercompany transactions.--

* * * * * * *

(b) Definitions. For purposes of this section--

(1) Intercompany transactions--(i) In general.
An intercompany transaction is a transaction between
corporations that are members of the same consolidated
group immediately after the transaction. S is the
member transferring property or providing services, and
B is the member receiving the property or services.
Intercompany transactions include--

(A) S's sale of property (or other
transfer, such as an exchange or
contribution) to B, whether or not gain or
loss is recognized; [Emphasis added.]

Our reading of the 1984 temporary regulation and the

nonapplicability of the binding commitment cases is consistent

with the position finally taken by respondent in section

1.267(f)-1, Income Tax Regs.32

For the foregoing reasons, we hold that MGM is not

prohibited from deducting the loss realized on its March 25,

1986, sale of UA stock to Tracinda by virtue of the application

32
Respondent argues that sec. 1.267(f)-1(h), Income Tax
Regs., would apply if this case were governed by the final
regulations. That section is an anti-avoidance rule intended to
apply only to transactions structured with a principal purpose of
avoiding the purpose of sec. 267. However, respondent has
stipulated that petitioners were unaware of the loss when they
decided on the form of the transaction.
 - 40 -

of section 267(f). It follows, for the same reasons, that

Tracinda is not entitled to increase its basis in the UA shares

by the amount of the UA Loss.33

An appropriate order will be

issued (1) granting TBS' motion for

partial summary judgment, (2)

granting Tracinda's motion

for partial summary judgment as to

the section 311 issue and denying

it as to the section 267 issue, and

(3) denying respondent's motion

for summary judgment.

33
In regard to TBS, respondent's notice of deficiency
provides further grounds for the disallowance of the UA Loss.
Respondent contends that the capital loss carryover, which in
part is made up of the UA Loss, is not permitted under secs. 269,
382, and 383. Neither the parties' motions nor this opinion
addresses these issues.