Cox Enters. & Subsidiaries v. Comm'r

T.C. Memo. 2009-134

UNITED STATES TAX COURT

COX ENTERPRISES, INC. & SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18312-06. Filed June 9, 2009.

C and A were either the sole or controlling
trustees of three trusts (the shareholder trusts) whose
corpora, together, consisted exclusively of 98 percent
of P’s stock. C and A were the income beneficiaries of
each trust for life, the remainder (corpus) to be
divided among their lineal descendants upon the death
of the survivor.

In 1992, P tried to sell two TV stations but was
able to sell only one. For valid business reasons, P
decided to operate the retained station, KTVU (TV), in
partnership with two family partnerships whose members
were C, A, their children, and entities they
controlled. In 1993, to that end, KTVU, Inc., a wholly
owned second-tier subsidiary of P that owned and
operated KTVU (TV), contributed the KTVU (TV) station
assets (station assets) to the newly formed KTVU
Partnership in exchange for a majority partnership
interest. The two family partnerships contributed cash
in exchange for their minority interests. In 1996, the
family partnerships made additional cash contributions
to correct an inadvertent shortfall identified by an
independent consulting firm.
 - 2 -

R alleges that, because KTVU, Inc.’s partnership
interest in KTVU Partnership was worth $60.5 million
less than the station assets it contributed to KTVU
Partnership, KTVU, Inc., gratuitously transferred
valuable partnership interests to the family
partnerships. R argues that, because of (1) the
identity of interests between the beneficiaries of the
shareholder trusts and the members of the family
partnerships and (2) the effective control by C and A
over the corporate actions of P and its subsidiary,
KTVU, Inc., that transfer was made for the benefit of
the shareholder trusts, resulting in a constructive
dividend distribution of appreciated property by P to
the shareholder trusts taxable to P under sec. 311(b),
I.R.C.

P moves for summary judgment. P admits, for
purposes of the motion, a $60.5 million disparity
between the value of the station assets KTVU, Inc.,
contributed to KTVU Partnership and the value of the
partnership interest it received in return.

Held: Because the undisputed facts establish that
it was not the primary purpose of the assumed
gratuitous transfer of partnership interests to the
family partnerships to provide an economic benefit to
them and, derivatively, to the shareholder trusts, that
assumed transfer (which, under the agreed facts, we
find to have been unintentional and not beneficial to
the shareholder trusts) did not constitute a
constructive dividend from P to the shareholder trusts
resulting in taxable gain to P under sec. 311(b),
I.R.C. See Stinnett’s Pontiac Serv., Inc. v.
Commissioner, 730 F.2d 634, 640-641 (11th Cir. 1984),
affg. T.C. Memo. 1982-314; Sammons v. Commissioner, 472
F.2d 449, 451-454 (5th Cir. 1972), affg. in part, revg.
in part, and remanding T.C. Memo. 1971-145.

Judith A. Mather, Bernard J. Long, Jr., and Alejandro L.
Bertoldo, for petitioner.

Bonnie L. Cameron, for respondent.
 - 3 -

MEMORANDUM OPINION

HALPERN, Judge: Petitioner is the common parent of an

affiliated group of corporations making a consolidated return of

income. By notice of deficiency (the notice), respondent

determined deficiencies in the group’s Federal income tax for its

1992, 1993, 1994, and 1996 taxable (calendar) years. Petitioner

timely filed a petition disputing a portion of the proposed

$24,839,810 deficiency for 1993. Petitioner has moved for

summary judgment (the motion).1 Respondent objects. The issue

for decision is whether a member of the group (petitioner’s

wholly owned second-tier subsidiary) must recognize gain under

section 311(b)2 in connection with its transfer of assets to a

newly formed partnership in exchange for an interest in that

partnership. The motion asks that we enter judgment in

petitioner’s favor “finding as a matter of law that, contrary to

* * * [the notice], petitioner need not recognize gain under

section 311(b) * * * in the amount of $56,182,115, or in any

other amount, upon the formation * * * [of the partnership].”

1
Petitioner assigned no error to respondent’s determination
of deficiencies for 1992, 1994, and 1996, and it disputes only a
portion of the deficiency respondent determined for 1993. Our
resolution of the motion in petitioner’s favor disposes of that
dispute but leaves an undetermined deficiency for 1993. We shall
order the parties to submit their separate computations or a
joint computation of the remaining deficiency for that year.
2
Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for 1993 and all Rule references
are to the Tax Court Rules of Practice and Procedure. The notice
refers to gain under sec. 311(d), but the parties agree (and we
accept) that the intended reference is to sec. 311(b).
 - 4 -

Background

Summary Judgment

A summary judgment is appropriate “if the pleadings, answers

to interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law.” Rule 121(b). In

response to a motion for summary judgment, “an adverse party may

not rest upon the mere allegations or denials of such party’s

pleading, but such party’s response, by affidavits or as

otherwise provided in this Rule, must set forth specific facts

showing that there is a genuine issue for trial.” Rule 121(d).

Facts on Which We Rely

Petitioner is a Delaware corporation with its principal

offices in Atlanta, Georgia. Petitioner is primarily engaged,

through subsidiaries, in newspaper publishing and the ownership

and operation of cable television systems, radio and television

broadcasting stations, and wholesale and retail automobile

auctions and related businesses. At all times relevant to the

motion, Cox Communications, Inc. (CCI), a wholly owned subsidiary

of petitioner, owned KTVU, Inc., which, until September 1, 1993,

owned and operated station KTVU (TV), serving the San

Francisco/Oakland, California, market.

At all times relevant to the motion, petitioner’s principal

shareholders were three trusts (together, the shareholder trusts)

formed by the former governor of Ohio, James M. Cox (Mr. Cox),
 - 5 -

which collectively owned approximately 98 percent of petitioner’s

issued and outstanding stock. Two of those trusts (the Atlanta

trusts) were established in 1941, one (Atlanta Trust I) for the

benefit of Mr. Cox’s daughter, Anne Cox Chambers (Mrs. Chambers),

as income beneficiary for life, and her lineal descendants, as

holders of the remainder interest, and the other (Atlanta Trust

II) for the benefit of Mr. Cox’s daughter, Barbara Cox Anthony

(Mrs. Anthony), as income beneficiary for life, and her lineal

descendants, as holders of the remainder interest. The third

trust (the Dayton trust), established in 1943 and modified in

1984, benefited both daughters, as income beneficiaries for life,

and their lineal descendants, as successor income beneficiaries

and holders of remainder interest. At all times relevant to the

motion, Mrs. Anthony was the trustee of Atlanta Trust I, Mrs.

Chambers was the trustee of Atlanta Trust II, and each was one of

three cotrustees of the Dayton trust.3 At all times relevant to

the motion, each Atlanta trust owned approximately 29 percent,

and the Dayton trust owned approximately 40 percent, of

petitioner’s stock. The balance of petitioner’s stock was held

by other parties, principally petitioner’s employees, none of

whom were members of the Cox family.

3
Although the three trust instruments are not part of the
record in this case, they are before the Court in a related case
arising out of the same transaction, Chambers v. Commissioner,
docket Nos. 16698-06 and 16699-06, and, in various parts, have
been described by both parties in their filings with respect to
the motion. There appears to be no dispute as to the terms of
the instruments, and, therefore, we shall take notice of those
terms. See Fed. R. Evid. 201.
 - 6 -

At all times relevant to the motion, Mrs. Chambers and Mrs.

Anthony were members of petitioner’s eight-member board of

directors (the board) and Mrs. Anthony’s son, James Cox Kennedy,

was chairman of the board and petitioner’s chief executive

officer (CEO) and president.

By agreement dated August 1, 1993, Mrs. Chambers’s three

children and an entity Mrs. Chambers wholly owned formed ACC

Family Partnership (ACC Partnership). The three children were

limited partners, and each owned a 31.66-percent interest in ACC

Partnership.

By agreements dated August 1, 1993, Mrs. Anthony, her two

children and/or entities (corporations and trusts) they owned or

controlled formed two partnerships. By September 1, 1993, the

two partnerships merged and became the Anthony Family Partnership

(BCA Partnership). BCA Partnership was a general partnership of

which KTVU-BCA, Inc., an entity wholly owned by Mrs. Anthony,

owned approximately 4 percent and entities (corporations and

trusts, including trusts for Mrs. Anthony’s grandchildren) owned

or controlled by Mrs. Anthony’s children owned approximately 96

percent.

One of the stated purposes for the formation of ACC

Partnership and the two partnerships that became BCA Partnership

was to “invest in interests in the KTVU Partnership”.
 - 7 -

On August 1, 1993, KTVU, Inc., ACC Partnership, and the two

family partnerships that, by September 1, 1993, had merged to

become BCA Partnership formed KTVU Partnership. KTVU Partnership

was formed to acquire and operate television station KTVU (TV).

During 1993, petitioner’s shareholders did not include ACC

Partnership, BCA Partnership (together, the family partnerships)

or any of their respective partners. A diagram showing the

relationships of the various trusts, corporations, and

partnerships that we have described (and certain information yet

to be described) is attached to this report as an appendix.

Pursuant to the terms of the KTVU Partnership agreement,

KTVU, Inc., became the managing general partner and received a

majority partnership interest, which entitled it to 55 percent of

partnership distributable profits and liquidation proceeds up to

specified base amounts and 75 percent of distributable profits

and liquidation proceeds in excess of those base amounts. ACC

Partnership and BCA Partnership each received a 22.5-percent

interest in distributable profits and liquidation proceeds up to

the same specified base amounts and a 12.5-percent interest in

distributable profits and liquidation proceeds in excess of those

base amounts.4 The KTVU Partnership agreement also contains the

following subparagraph relating to “Tax Allocations”:

4
The profit interest BCA Partnership received from KTVU
Partnership represents the sum of the profit interests received
by the two partnerships that merged to create BCA Partnership.
 - 8 -

4.6 Tax Allocations: Code Section 704(c).

(a) In accordance with Code section 704(c) and
the Treasury Regulations thereunder, income, gain,
loss, and deduction with respect to any property
contributed to the capital of the Partnership shall,
solely for tax purposes, be allocated among the
Partners so as to take account of any variation between
the adjusted basis of such property to the Partnership
for federal income tax purposes and its initial Gross
Asset Value.

The “initial Gross Asset Value of any asset contributed by a

Partner to the Partnership” is defined as “the gross fair market

value of such asset, as determined by the contributing Partner

and the Partnership”.

On August 6, 1993, the executive committee of petitioner’s

board, which was composed of James Cox Kennedy (petitioner’s CEO

and president) and two nonfamily, outside directors (the

executive committee), adopted a resolution on behalf of

petitioner, which provided, in pertinent part, as follows:

RESOLVED, That the Company hereby ratifies and
approves the formation by KTVU, Inc., a wholly owned
subsidiary of the Company, and certain general and
limited partnerships to be formed by Anne Cox Chambers,
Barbara Cox Anthony and James C. Kennedy, and the
children of such individuals (the “Family
Partnerships”), of a new general partnership to be
known as “KTVU Partnership,” to operate Television
Station KTVU, San Francisco, California, and to conduct
the business presently conducted by KTVU, Inc., and
that in consideration of the partnership interests to
be acquired by KTVU, Inc. and the Family Partnerships,
KTVU, Inc. shall contribute substantially all of its
assets used in the conduct of Television Station KTVU
and the Family Partnerships shall contribute cash in an
amount corresponding to the fair market value of the
partnership interests acquired by such Family
Partnerships; and
 - 9 -

RESOLVED, That the proper officers of the Company
shall determine the final valuation of the KTVU
Partnership and the percentage interest therein to be
held by each of the Partners therein based on the
contributions being made by each of them to insure that
the formation of the KTVU Partnership and the
acquisition of the interests therein by the Family
Partnerships shall be on terms and conditions no less
favorable to the Company or KTVU, Inc. than the terms
and conditions that would apply in a similar
transaction with persons who are not affiliated with
the Company * * *

On September 1, 1993, KTVU, Inc., contributed to KTVU

Partnership the assets of KTVU (TV), excluding approximately $25

million of KTVU, Inc.’s working capital, its interest in Sutro

Tower, Inc. (the corporation owning the transmission tower the

television station used), its interest in the San Francisco

Giants Baseball Club, and its studio building (the contributed

assets are hereafter referred to as the station assets). On the

same day, ACC Partnership and BCA Partnership each contributed

$27 million to KTVU Partnership.5 That amount was based, in part,

on an analysis by Arthur Andersen L.L.P. (Arthur Andersen) of

“the appropriate marketability and minority interest discounts

applicable to a minority interest in the KTVU Partnership as of

August 1, 1993.” The family partnerships’ contributions to KTVU

Partnership were financed by loans to the family partnerships by

Texas Commerce Bank, N.A., and secured, in part, by each

partnership’s interest in KTVU Partnership. Mrs. Chambers and

her three children guaranteed the loan to ACC Partnership, and

5
BCA Partnership’s contribution to KTVU Partnership
represents the sum of the contributions made by the two
partnerships that merged to create BCA Partnership.
 - 10 -

Mrs. Anthony and her two children guaranteed the loan to BCA

Partnership.

In 1996, petitioner’s management discovered that errors had

been made in computing the fair market value of each family

partnership’s interest in KTVU Partnership. The computations

failed to take into account (1) the family partnerships’ cash

contributions totaling $54 million and (2) the reduced allocation

to the family partnerships (and increased allocation to KTVU,

Inc.) of income distributions and sale proceeds in excess of the

base amounts specified in the KTVU Partnership agreement.

Thereafter, petitioner (with the concurrence of the family

partnerships) engaged the investment banking firm of Furman Selz,

L.L.C. (Furman Selz), to determine, in the light of those

computational errors, whether there should be an adjustment to

the amounts the family partnerships contributed in exchange for

their interests in KTVU Partnership. On June 30, 1996, Furman

Selz, in its formal analysis, opined that, as of August 1, 1993,

each family partnership’s interest in KTVU Partnership had a fair

market value of approximately $31 million. On September 12,

1996, in response to that analysis, each family partnership

contributed an additional $4 million to KTVU Partnership.6

Petitioner’s decision to continue operating KTVU (TV)

through KTVU Partnership resulted from its inability to implement

its decision to have KTVU, Inc., sell the station. Early in

6
We have not been provided with the computations that led
Furman Selz to conclude that the family partnerships had
initially undercontributed to the partnerships.
 - 11 -

1992, petitioner engaged McKinsey & Co. (McKinsey) to evaluate

the prospects of several of its operating divisions, including

its television broadcast business. McKinsey recommended that

petitioner retain its stations affiliated with the then major

television networks, but that it dispose of its two Fox

affiliates, KTVU (TV) and WKBD (TV), the latter serving the

Detroit, Michigan, area. Later in 1992, petitioner engaged

Morgan Stanley & Co. (Morgan Stanley) to assist in the sale of

both stations. Morgan Stanley’s efforts resulted in limited

expressions of interest in acquiring the two stations; and,

although petitioner was eventually able to sell WKBD (TV), a

rapidly declining market during the fourth quarter of 1992 caused

petitioner to terminate efforts to solicit offers for KTVU (TV).

Operating that station through KTVU Partnership provided a viable

business alternative to a sale of the station in that it (1)

responded, in part, to McKinsey’s recommendation that petitioner

reduce its investment in the television broadcast business,7 (2)

made KTVU, Inc.’s working capital available for use in

nonbroadcast areas of petitioner’s business, and (3) helped to

allay concerns among petitioner’s television broadcast executives

that petitioner was forsaking the television business by

7
We assume that the accomplishment of this objective was
made possible, at least in part, by the family partnerships’
initial $54 million investment in KTVU Partnership.
 - 12 -

demonstrating the Cox family’s continuing commitment to that

business.8

Respondent’s Notice of Deficiency

In 1999, in connection with his examination of petitioner’s

1993 return, respondent engaged Business Valuation Services, Inc.

(BVS), to opine as to the fair market value of (1) the station

assets (2) KTVU, Inc.’s partnership interest in KTVU Partnership,

and (3) the family partnerships’ interests in that partnership.

BVS arrived at a $300 million fair market value for the station

assets, a $233.5 million fair market value for KTVU, Inc.’s

partnership interest in KTVU Partnership, and a $34,342,500 fair

market value for each family partnership’s interest in KTVU

Partnership, all as of August 1, 1993. Respondent subsequently

increased the latter two values to $239.5 million and $34,912,500

to take into account the family partnerships’ additional 1996

cash contributions. The foregoing adjusted values give rise to

(1) a $60.5 million difference between the determined fair market

value of the contributed station assets and the determined fair

market value of KTVU, Inc.’s partnership interest in KTVU

Partnership and (2) a $7,825,000 difference between the

8
In his objection to the motion, respondent does not
dispute petitioner’s representations regarding the foregoing
nontax motives for the formation of KTVU Partnership. Therefore,
we treat those representations as true. See Rule 121(d); Jarvis
v. Commissioner, 78 T.C. 646, 658-659 (1982) (granting summary
judgment to the Commissioner where the taxpayer “failed to submit
any information which contradicts * * * [the Commissioner’s]
factual determinations”); see also Beauregard v. Olson, 84 F.3d
1402, 1403 n.1 (11th Cir. 1996) (accepting as true undisputed
facts submitted in connection with a motion for summary
judgment).
 - 13 -

determined value of the two family partnership interests in KTVU

Partnership and the $62 million those partnerships contributed.

On the basis of the first of those two differences,

respondent included in the notice the following adjustment to

petitioner’s 1993 income under section 311(b):9

Other Income-Gain under IRC § 311(d) [sic]:

It is determined that you have a recognizable gain
under Section 311(d) [sic] of the Internal Revenue Code
related to property you distributed to your
shareholders during the taxable year 1993. Your
taxable gain is $56,182,115 figured as follows:

Fair market value of KTVU, Inc.
station assets $300,000,000
Less fair market value of KTVU, Inc.
55% interest received 239,500,000
Fair market value in excess of
interest received (gain) $ 60,500,000
Less KTVU, Inc. basis in excess of
fair market value (1) 4,317,885
Section 311(d) [sic] gain $ 56,182,115

(1) $60,500,000/$300,000,000) x $21,411,000
= $4,317,885

9
Sec. 311(b) provides, in pertinent part, as follows:

SEC. 311 (b). Distributions of Appreciated
Property.--

(1) In general.--If--

(A) a corporation distributes
property (other than an obligation of
such corporation) to a shareholder in a
distribution to which subpart A [secs.
301-307] applies, and

(B) the fair market value of such
property exceeds its adjusted basis (in the
hands of the distributing corporation),

then gain shall be recognized to the distributing
corporation as if such property were sold to the
distributee at its fair market value.
 - 14 -

Therefore, your taxable income is increased $56,182,115
for the taxable year 1993.

Petitioner is willing to assume for purposes of the motion

that the value of the partnership interest KTVU, Inc., received

upon formation of KTVU Partnership was $239.5 million and that

that value was $60.5 million less than the value of KTVU, Inc.’s

contribution to that partnership ($300 million).

Discussion

I. Arguments of the Parties

A. Respondent

In his “Notice of Objection to * * * [the motion]”,

respondent summarizes his position as follows:

Petitioner, while under the direction and control
of the trustees of Atlanta Trust I, the Atlanta Trust
II, and the Dayton Trust (“Shareholder Trusts”),
entered into a transaction with its subsidiary, KTVU,
Inc., to distribute partnership interests to the
partners of KTVU Partnership. To the extent KTVU, Inc.
contributed excess value, it is deemed to have received
a partnership interest in the section 721 contribution.
Subsequently, KTVU, Inc. made a constructive
distribution of a portion of the KTVU Partnership
interest for the benefit of the Shareholder Trusts,
which triggered section 311(b) gain.

In his accompanying memorandum of law, respondent restates

his position:

Simply stated, in the simultaneous transfers made by
KTVU, Inc. (“Petitioner’s Subsidiary”) and by two
partnerships to the newly formed KTVU Partnership, the
two transferors received partnership interests in
excess of the value of the assets they transferred, and
the Petitioner’s Subsidiary received a partnership
interest of value less than the value of the property
it transferred. The partners which received greater
interests were related to the shareholders of
Petitioner’s Subsidiary, so that their receipt of value
greater than the amount they transferred to the
 - 15 -

partnership was a constructive distribution to the
shareholders of Petitioner’s Subsidiary. There was no
negotiation of a business benefit to the Petitioner’s
Subsidiary for the excess value which it transferred to
the partnership. The facts demonstrate that the
economic reality of what has occurred is a distribution
of appreciated property in the form of partnership
interests to the shareholders of Petitioner’s
Subsidiary. Accordingly, Respondent asserted a
deficiency based on the application of section 311(b).

The point appears to be that there was an identity of

interests between the shareholder trusts and the family

partnerships, i.e., the beneficiaries of the former and the

partners in the latter were, as a practical matter, identical

(Mrs. Chambers, Mrs. Anthony, and the lineal descendants of

each), with the result that the family partnerships’ gratuitous

receipt from KTVU, Inc., of enhanced or additional partnership

interests in KTVU Partnership constituted, in substance, a

distribution from petitioner to or for the benefit of the

shareholder trusts, taxable to petitioner under section 311(b).

In respondent’s view, the benefit to the shareholder trusts

arose because, after the formation of KTVU Partnership, the

beneficiaries of those trusts “now held an interest, as either a

partner in a Family Partnership or a sole shareholder in a

corporation which was a partner in a Family Partnership, in

assets that were previously held by KTVU, Inc.”10 In other

10
We interpret respondent’s reference to “an interest * * *
in assets that were previously held by KTVU, Inc.” as relating to
the family partnerships’ interests in station assets worth $60.5
million that respondent alleges were given to them, not to their
interest in the balance of the station assets that they are
deemed to have purchased with their cash contributions to KTVU
Partnership.
 - 16 -

words, through the family partnerships, the shareholder trust

beneficiaries had eliminated the shareholder trusts and the three

corporate layers that separated them from ownership of the

station assets. Significantly, they had defeated the temporal

division into life estates and remainders the terms of the

shareholder trusts imposed so that, for instance, all the

partners (direct and indirect) of the family partnerships, and

not just Mrs. Chambers and Mrs. Anthony, shared in current income

generated by the station assets.11

In further support of his position that the primary purpose

for the formation of KTVU Partnership was to benefit the

shareholder trusts, respondent argues that that transaction was

orchestrated by the controlling trustees of those trusts, Mrs.

Chambers and Mrs. Anthony, in their capacities as members of

petitioner’s board and by Mrs. Anthony’s son, James Cox Kennedy,

a remainder beneficiary of those trusts, in his multiple

capacities as petitioner’s CEO and president, chairman of

11
We note that, in one of his filings with this Court in
Chambers v. Commissioner, docket Nos. 16698-06 and 16699-06, but
not in this case, respondent argues that the formation of KTVU
Partnership also provided a tax avoidance benefit to Mrs.
Chambers and Mrs. Anthony individually:

What occurred here was a shifting of the life
beneficiaries’ income interests to the remainder
beneficiaries prior to the deaths of * * * [the
former], resulting in * * * [the latter’s] receiving an
accelerated gift of the trust income * * *. This
occurrence also caused the income attributable to the
life beneficiaries to escape taxation.

In other words, the formation of KTVU Partnership effected an
assignment of income without payment of gift or income taxes by
the assignors, Mrs. Chambers and Mrs. Anthony.
 - 17 -

petitioner’s board, and member of the board’s executive

committee, which actually ratified and approved the formation of

KTVU Partnership.

Respondent bases his argument that there was a section

311(b) distribution by petitioner on caselaw holding that a

corporation’s transfer of money or property to a third party

primarily for the direct or tangible benefit of a shareholder

gives rise to a constructive dividend or distribution to that

shareholder,12 and caselaw finding the requisite benefit to the

shareholder when the primary purpose of the distribution is to

benefit a member of the shareholder’s family.13

Although respondent argues that petitioner’s transfer,

through KTVU, Inc., of “additional value in the form of increased

partnership interests” to the family partnerships was made “for

the benefit of [the] Shareholder Trusts, rather than directly to

them,” respondent also characterizes the constructive

distribution as a distribution to the shareholder trusts through

the affiliated group; i.e., “a distribution of partnership

12
See, e.g., Stinnett’s Pontiac Serv., Inc. v.
Commissioner, 730 F.2d 634, 640-641 (11th Cir. 1984), affg. T.C.
Memo. 1982-314; Sammons v. Commissioner, 472 F.2d 449, 451-454
(5th Cir. 1972), affg. in part, revg. in part and remanding T.C.
Memo. 1971-145; Commissioner v. Makransky, 321 F.2d 598, 601-602
(3d Cir. 1963), affg. 36 T.C. 446 (1961); Gilbert v.
Commissioner, 74 T.C. 60, 64 (1980).
13
See, e.g., Hagaman v. Commissioner, 958 F.2d 684, 690-691
(6th Cir. 1992), affg. and remanding on other issues T.C. Memo.
1987-549; Green v. United States, 460 F.2d 412, 419 (5th Cir.
1972); Byers v. Commissioner, 199 F.2d 273, 275-276 (8th Cir.
1952), affg. a Memorandum Opinion of this Court; Epstein v.
Commissioner, 53 T.C. 459, 471-475 (1969).
 - 18 -

interests by KTVU, Inc. to CCI, followed by subsequent

distributions of the partnership interests from CCI to * * *

[petitioner] and * * * [petitioner] to the Shareholder Trusts.”14

Finally, in his memorandum of law under the heading

“CONCLUSION”, respondent states as follows:

Petitioner’s Motion for Summary Judgment must
fail. This case presents factual issues relating to
valuation, and intertwined factual and legal issues
regarding whether a distribution was made, and the
determination of whether the distribution was made with
respect to stock. Petitioner, in its abbreviated
statement of facts to the Court, conveniently omitted
facts which are crucial to understanding the issues.
As such, summary judgment is not appropriate.

B. Petitioner
Petitioner first argues that section 311(b) simply does not

apply to the formation of KTVU Partnership because there was no

distribution of appreciated property by petitioner to its

shareholders, “but rather, a contribution of property by KTVU,

Inc. to KTVU partnership in exchange for a partnership interest

14
Because the first two of those alleged deemed
distributions occur between members of an affiliated group within
the meaning of sec. 1504, respondent notes that, under the
consolidated return regulations in effect during 1993, sec.
311(b) gain is taken into account by the distributing corporation
(KTVU, Inc.) upon the final alleged deemed distribution from
petitioner to the shareholder trusts. See sec. 1.1502-14T(a),
Temporary Income Tax Regs., 53 Fed. Reg. 12679 (Apr. 18, 1988),
amended by 55 Fed. Reg. 9424 (Mar. 14, 1990) and 58 Fed. Reg.
13412 (Mar. 11, 1993). Respondent further notes that, in his
view, KTVU, Inc.’s distribution of additional value to the family
partnerships simultaneously triggered all three deemed
distributions, and thus its recognition of the alleged sec.
311(b) gain is immediate.
 - 19 -

* * * governed by * * * sections 721(a) and 704(c)(1)(A).”15

Consistent with that view, petitioner argues that (1) any

disproportionally large partnership interests received by the

family partnerships were not received by “shareholders” of

petitioner, (2) the “built-in gain inherent in the * * * [station

assets]”, rather than being taxable to petitioner under section

311(b), “is recognized by KTVU, Inc. in accordance with the

section 704(c) requirements”, and (3) pursuant to those

requirements, as set forth in regulations under section 704(c),

a disproportionately higher amount of income and gain
[is allocated] to KTVU, Inc. over the tax life of the
contributed assets, so that over that period KTVU, Inc.
will be allocated the entire amount of the [built-in]

15
Sec. 721(a) provides as follows:

SEC. 721. NONRECOGNITION OF GAIN OR LOSS ON CONTRIBUTION.

(a) General Rule.--No gain or loss shall be recognized
to a partnership or to any of its partners in the case of a
contribution of property to the partnership in exchange for
an interest in the partnership.

Sec. 704(c)(1)(A) provides as follows:

SEC. 704. PARTNER’S DISTRIBUTIVE SHARE.

(c) Contributed Property.--

(1) In general.--Under regulations
prescribed by the Secretary–-

(A) income, gain, loss, and deduction
with respect to property contributed to
the partnership by a partner shall be shared
among the partners so as to take account of
the variation between the basis of the
property to the partnership and its fair
market value at the time of contribution * *
*
 - 20 -

gain inherent in the KTVU Station Assets at the time of
contribution.

See sec. 1.704-1(b)(1)(vi), (5), Example (13)(i) (built-in gain

on partnership’s sale of property taxed to contributing partner),

Income Tax Regs.; see also 1 McKee et al., Federal Taxation of

Partnerships and Partners, par. 10.04[1], at 10-109 through 10-

110 (2d ed. 1990). Petitioner concludes: “Thus, except for

timing differences, section 704(c) puts KTVU, Inc. in the same

position as if KTVU Inc.’s contribution of the KTVU Station

Assets to KTVU Partnership had been immediately taxable as a sale

for fair market value.”16

16
In support of its position that sec. 704(c), rather than
sec. 311(b), is the appropriate vehicle for taxing KTVU, Inc., on
any and all built-in gain attributable to the station assets
KTVU, Inc., contributed to KTVU Partnership, petitioner relies on
the decision of the Court of Appeals for the Sixth Circuit in
Shunk v. Commissioner, 173 F.2d 747, 750-752 (6th Cir. 1949),
revg. 10 T.C. 293 (1948). In Shunk, the Court of Appeals
rejected the finding of this Court that an apparent bargain sale
by Shunk Manufacturing Co. (Shunk) to a newly formed partnership
in which its shareholders held a five-sixths interest constituted
a constructive dividend from Shunk to its shareholders. See
Shunk v. Commissioner, 10 T.C. at 303-307. The Court of Appeals
concluded:

The property sold by * * * [Shunk] was sold to the
partnership; it was not a transfer (or distribution) to
its * * * shareholders * * *. To hold otherwise would
completely ignore the legal concept of a partnership.
* * * [Shunk v. Commissioner, 173 F.2d at 751.]

Petitioner also relies on certain legislative history
attendant to the repeal of the General Utilities doctrine
(derived from the Supreme Court’s opinion in Gen. Utils. &
Operating Co. v. Helvering, 296 U.S. 200 (1935), and stating that
a corporation generally did not recognize gain or loss on a
distribution of appreciated or depreciated property to its
shareholders with respect to its stock). S. Rept. 100-445 (1988)
is the report of the Committee on Finance accompanying S. 2238,
100th Cong., 2d Sess. (1988), which formed the basis for part of
(continued...)
 - 21 -

Even assuming arguendo that sections 721 and 704(c) are not

the exclusive governing provisions, petitioner argues that

section 311(b) would still not apply because petitioner made no

distribution to any of its shareholders. Petitioner purports to

distinguish the caselaw respondent cites in support of his

argument that KTVU, Inc.’s gratuitous transfer of partnership

interests to the family partnerships was for the benefit of the

shareholder trusts and, therefore, constituted a constructive

dividend to those trusts. Petitioner argues that the

16
(...continued)
the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-
647, sec. 1006(e)(5)(A), 102 Stat. 3400, which amended sec.
337(d). In pertinent part, the report states:

Section 704(c) of the Code generally requires that
gain attributable to appreciated property contributed
to a partnership by a partner be allocated to that
partner; it is expected that this rule would generally
prevent the use of a partnership to avoid the purposes
of the amendments made by subtitle D of Title VI of the
Act (for example, by attempting to shift the tax on C
corporation appreciation to another party or to a non-C
corporation regime). * * * [S. Rept. 100-445, supra at
67.]

Petitioner cites the foregoing statement as confirmation of its
view that the Code provisions effecting the repeal of the General
Utilities doctrine, including sec. 311(b), “are not intended to
apply where section 704(c) already applies to tax the gain to the
corporate transferor.”

Finally, petitioner adds that the reference in sec. 704(c)
to fair market value is a reference to true fair market value so
that, if, in fact, the station assets have been undervalued as
respondent claims, respondent “can challenge that valuation * * *
[and] require that the section 704(c) allocations be based upon
accurate fair market value.” In other words, the appropriate
adjustment would be to increase KTVU, Inc.’s built-in gain
taxable to KTVU, Inc., under sec. 704(c), not to find a deemed
distribution by petitioner taxable to petitioner under sec.
311(b).
 - 22 -

constructive distributees in the cited cases had the authority to

effect the transfers in question whereas Mrs. Chambers and Mrs.

Anthony, in their capacity as trustees of the shareholders

trusts, were without authority, under the trust instruments, to

transfer KTVU Partnership interests (which would represent

additions to trust principal) to anyone until termination of the

trusts. Petitioner also notes that (1) “Mrs. Anthony and Mrs.

Chambers, as two of the eight directors [of petitioner],

controlled neither the board nor any decisions regarding business

ventures, including the KTVU Partnership”, and (2) “it cannot * *

* be assumed that the independent directors [on the executive

committee] * * * acted to favor non-shareholders of * * *

[petitioner] by directing KTVU. [sic] Inc. to distribute ‘extra’

partnership interests to * * * [the family partnerships] contrary

to their duties as directors and members of the executive

committee.” Thus, even if Mrs. Chambers and Mrs. Anthony had had

the authority to effect the transfer of “extra” partnership

interests in KTVU Partnership to the family partnerships, they

lacked the power to do so, and the outside (nonfamily) directors’

power to effect that transfer was circumscribed by their

fiduciary responsibilities to petitioner.

Finally, petitioner argues that even if one assumed a

distribution of partnership interests to the family partnerships,

the “[t]he Family Trusts * * * received absolutely no benefit,

direct, tangible or otherwise, as a result of the assumed

distribution”. Indeed, petitioner argues that the shareholder
 - 23 -

trusts would have been harmed by such distributions because

premature distributions of trust principal would have

contradicted the terms of the respective trust instruments

(violating the trustees’ duties of impartiality) and diminished

the trustees economic ability to carry out Mr. Cox’s wishes.17

II. Analysis

A. Existence of a Genuine Issue of Material Fact

Because, for purposes of the motion, petitioner concedes a

$300 million value for the station assets contributed by KTVU,

Inc., to KTVU Partnership and a $239.5 million value for the

partnership interest it received in exchange therefor, valuation

is not an issue herein. Moreover, respondent does not identify

the “intertwined factual and legal issues regarding whether a

distribution was made” or whether it “was made with respect to

stock”,18 nor does he identify the “conveniently omitted facts

which are crucial to understanding the issues.” Therefore,

because respondent has failed to satisfy the requirement of Rule

121(d) to “set forth specific facts showing that there is a

17
In other words, the family trusts would have been harmed
because such distributions were not permitted by the trust
instruments and would, to the extent made, deprive the trustees
of the wherewithal to carry out the settlor’s wishes.
18
We find that the question of whether KTVU, Inc.’s
exchange of the station assets for a majority partnership
interest in KTVU Partnership involved a distribution by
petitioner with respect to its stock, for purposes of secs.
301(a) and 311(b), raises an issue of law to be decided by
applying the applicable caselaw, discussed infra, to the
undisputed facts.
 - 24 -

genuine issue for trial”, we will not deny the motion for that

reason.

B. Existence of a Dividend Subject to Section 311(b)

1. Respondent’s Alternative Positions

Respondent argues that, in substance, KTVU, Inc.’s assumed

gratuitous transfer of partnership interests in KTVU Partnership

to the family partnerships constituted a constructive dividend

from petitioner to the shareholder trusts causing petitioner to

recognize $60.5 million of unrealized gain pursuant to section

311(b).19 Respondent appears to have charted two alternative

19
Petitioner’s concession regarding the $60.5 million
disparity between the value of the station assets KTVU, Inc.,
contributed to KTVU Partnership and the value of the partnership
interest it received is not a concession that the family
partnerships’ partnership interests were enhanced by that amount.
Indeed, in response to an informal discovery request from
petitioner, respondent states his positions that (1) the property
he asserts KTVU, Inc., distributed was a partnership interest in
KTVU Partnership while (2) the property to be valued to determine
gain under sec. 311(b) is the KTVU, Inc., assets contributed to
that partnership. He continues: “The fair market value
component of property distributed by KTVU, Inc. under I.R.C. §
311(b) would be the same whether the constructively distributed
property is KTVU television assets or an interest in the
partnership.” Respondent relies on Pope & Talbot, Inc. v.
Commissioner, 162 F.3d 1236 (9th Cir. 1999), affg. 104 T.C. 574
(1995), in support of that position. In Pope & Talbot, Inc. v.
Commissioner, supra at 1239, the Court of Appeals held that, for
purposes of determining Pope & Talbot, Inc.’s hypothetical gain
under what is now sec. 311(b)(1), the hypothetical sale was of
the property the corporation owned at the time of the
distribution (improved and unimproved real property) and not the
aggregate value of the individual limited partnership units the
corporation distributed. There appears here to be a discrepancy
between the $60.5 million difference in value that respondent
would cause petitioner to treat as resulting in recognized gain
under sec. 311(b) and the $7,825,000 difference between the
determined value of the two family partnership interests in KTVU
Family Partnership and the $62 million those partnerships
contributed. We need not resolve that discrepancy. The sole
(continued...)
 - 25 -

paths to arrive at that result. Under one approach, he argues

that the transfer was, in fact, to the family partnerships, but

that it was for the benefit of the shareholder trusts and,

therefore, constituted a constructive dividend to those trusts.

Under the other, he posits a constructive dividend from KTVU,

Inc., to its parent, CCI, and from CCI to its parent, petitioner,

followed by petitioner’s constructive distribution to the

shareholder trusts. Respondent appears to favor the first path,

stating that “[f]or purposes of this case, it is only necessary

to establish that appreciated assets left the corporate solution

of KTVU, Inc., for the benefit of its Shareholder Trusts”.20

Assuming that the transfer to the family partnerships was for the

benefit of the shareholder trusts, respondent’s apparently

favored approach is clearly sustainable under the applicable

caselaw (discussed infra). Therefore, since respondent does not

19
(...continued)
issue involved in the motion is the existence (or nonexistence)
of a sec. 311(b) distribution of property, not the identity or
value of the transferred property. Petitioner argues that, “even
assuming” the family partnerships received partnership interests
worth more than their cash contributions, to trigger the
application of sec. 311(b) that assumed transfer from KTVU, Inc.,
to the family partnerships must constitute a distribution from
petitioner to the shareholder trusts, which, in petitioner’s
view, it does not.
20
We find additional support for our view that respondent
favors the first path in his statements that “the
characterization and taxation of the transfer, if any, of the
partnership interests from the Shareholder Trusts to the Family
Partnerships is not here at issue” (emphasis added), and “the
relationships between the Shareholder Trusts, their
beneficiaries, and the Family Partnerships illustrate that the
transfer to the Family Partnerships was directed by and for the
benefit of [i.e., not to] the Shareholder Trusts” (emphasis
added).
 - 26 -

claim that it makes any difference, and since he appears to favor

the first path, the issue we address is whether KTVU, Inc.’s

assumed gratuitous transfer to the family partnerships

constituted, in substance, a constructive dividend by petitioner

to the shareholder trusts subject to section 311(b).

2. Discussion
a. Introduction

Petitioner’s principal argument is a legal argument that the

Internal Revenue Code provisions pertaining to partners and

partnerships (subtitle A, chapter 1, subchapter K), preempt

application of the provisions pertaining to corporate

distributions and adjustments (subtitle A, chapter 1, subchapter

C) when considering the tax effects of a partner’s capital

contribution to a partnership. More precisely, petitioner argues

that section 704(c), which, like section 311(b), effectively

taxes KTVU, Inc., on the built-in gain associated with the

station assets, preempts the application of section 311(b) to any

portion of that gain.21

21
Although sec. 704(c)(1)(A) taxes the contributing partner
on any built-in gain associated with property that partner
contributed, on Sept. 1, 1993, the date of KTVU, Inc.’s
contribution of the station assets to KTVU Partnership,
contributors of property to a partnership were still permitted to
rely on regulations issued under prior law, which made the
contributor’s recognition of the entire built-in gain elective.
See sec. 1.704-1(c)(2), Income Tax Regs., which was replaced by
regulations effective for contributions made on or after Dec. 21,
1993. TD 8500, 1994-1 C.B. 183; see also 1 McKee et al., Federal
Taxation of Partnerships and Partners, par. 10.04[3], at 10-113
(2d ed. 1990). According to article 4.6(a) of the KTVU
Partnership agreement, the partners made that election, and for
that reason KTVU, Inc., was, in fact, taxable on the built-in
(continued...)
 - 27 -

Because we decide the motion on grounds that effectively

render moot the legal issues petitioner raises, we need not

address either the preemption issue or petitioner’s argument that

Mrs. Chambers and Mrs. Anthony, in their dual capacities as

controlling trustees of the shareholder trusts and members of

petitioner’s board, had neither the authority nor the power to

effect a contribution of the station assets by KTVU, Inc., to

KTVU Partnership for the benefit of anyone until termination of

the shareholder trusts.22 We shall grant petitioner’s motion on

the ground to which petitioner also alludes, that the undisputed

facts fail to demonstrate that KTVU, Inc.’s assumed gratuitous

transfer of partnership interests to the family partnerships was

made primarily to benefit the shareholder trusts, or,

alternatively, that it actually provided a benefit to the

shareholder trusts.

21
(...continued)
gain associated with the station assets as petitioner alleges.
22
The issue of whether Mrs. Chambers and Mrs. Anthony (who,
as controlling trustees of the shareholder trusts, were,
arguably, in a position to select all the members of petitioner’s
board) had the power to control petitioner’s board and its
decisions would appear to present a question of material fact
sufficient to result in a denial of the motion were deciding that
issue necessary. See Green v. United States, 460 F.2d at 420
(“[T]he appropriate test for determining control over corporate
action * * * is whether the taxpayer has exercised substantial
influence over the corporate action * * * . The inquiry is
factual”.). Because we find resolving the “power” issue
unnecessary, we need not deny the motion on that ground.
 - 28 -

b. The Caselaw

In Sammons v. Commissioner, 472 F.2d 449, 451-452 (5th Cir.

1972), affg. in part, revg. in part and remanding T.C. Memo.

1971-145, the Court of Appeals for the Fifth Circuit set forth

standards for determining whether a corporation’s transfer of

property to a third party constitutes a dividend to the

transferor corporation’s shareholder(s).23 The taxpayer in

Sammons guaranteed and then assumed a debt obligation of a

second-tier subsidiary of a corporation 99 percent owned by the

taxpayer. The issue was whether the taxpayer’s purchase of

preferred stock from its insolvent or near insolvent second-tier

subsidiary was primarily intended to provide that subsidiary with

funds sufficient to reimburse the taxpayer for his payment of the

subsidiary’s debt obligation with the result that that

transaction gave rise to a constructive dividend to the taxpayer.

After acknowledging the “well-established principle that a

transfer of property from one corporation to another corporation

may constitute a dividend to * * * [a common shareholder of] both

corporations”, id. at 451, the Court of Appeals set forth what it

described as a subjective and an objective test for determining

23
Barring a stipulation to the contrary, this case is
appealable to the Court of Appeals for the Eleventh Circuit. See
sec. 7482(b)(1)(B). The Court of Appeals for the Eleventh
Circuit has held that any case the Court of Appeals for the Fifth
Circuit decided before Oct. 1, 1981, is binding precedent upon
it. See Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th
Cir. 1981). Sammons v. Commissioner, 472 F.2d 449 (5th Cir.
1972), which we have followed in determining whether an
intercorporate transfer constitutes a constructive dividend to a
common shareholder, e.g., Chan v. Commissioner, T.C. Memo. 1997-
154, is such a case.
 - 29 -

whether such a transfer does, in fact, constitute a dividend from

the transferor corporation to the shareholder. The subjective or

primary purpose test requires that the distribution or transfer

be made primarily for the benefit of the shareholder rather than

for a valid business purpose. Id. The objective or distribution

test requires that the distribution or transfer caused “funds or

other property to leave the control of the transferor corporation

and * * * [allowed] the stockholder to exercise control over such

funds or property either directly or indirectly through some

instrumentality other than the transferor corporation.” Id.

Both tests must be satisfied to find a constructive dividend to

the shareholder of the transferor corporation. Id.

In Stinnett’s Pontiac Serv., Inc. v. Commissioner, 730 F.2d

634, 641 (11th Cir. 1984), affg. T.C. Memo. 1982-314, the Court

of Appeals for the Eleventh Circuit cites with approval the

observation of the Court of Appeals for the Fifth Circuit in

Kuper v. Commissioner, 533 F.2d 152, 160 (5th Cir. 1976), affg.

in part and revg. in part 61 T.C. 624 (1974), that, in applying

the Sammons primary purpose test, “the search for this underlying

purpose usually involves the objective criterion of actual
primary economic benefit to the shareholders as well”; i.e.,

there is an “objective facet” of that test that “inevitably

overlaps with the Sammons’ objective distribution test”. The

Court of Appeals for the Eleventh Circuit states the point as

follows:
 - 30 -

In determining whether the primary purpose test
has been met, we must determine not only whether a
subjective intent to primarily benefit the shareholders
exists, but also whether an actual primary economic
benefit exists for the shareholders. * * * [Stinnett’s
Pontiac Serv., Inc. v. Commissioner, supra at 641.]

Accord Gilbert v. Commissioner, 74 T.C. 60, 64 (1980)

(“[T]ransfers between related corporations can result in

constructive dividends to their common shareholder if they were

made primarily for his benefit and if he received a direct or

tangible benefit”.).

If the benefit to the shareholder is “indirect or derivative

in nature, there is no constructive dividend.” Id.; see also

Rushing v. Commissioner, 52 T.C. 888, 894 (1969) (“[W]hatever

personal benefit, if any, Rushing [the sole shareholder of the

transferor and transferee corporations] received was derivative

in nature. Since no direct benefit was received, we cannot

properly hold he received a constructive dividend.”), affd. on

another issue 441 F.2d 593 (5th Cir. 1971).

Finally, as respondent points out in his memorandum of law

in support of his notice of objection, courts have found the

requisite benefit to the shareholder when the primary purpose of

the corporation’s distribution or transfer of money or property

is to or for the benefit of a member of the shareholder’s family.

See, e.g., Hagaman v. Commissioner, 958 F.2d 684, 690-691 (6th
Cir. 1992), affg. and remanding on other issues T.C. Memo. 1987-

549; Green v. United States, 460 F.2d 412, 419 (5th Cir. 1972);

Byers v. Commissioner, 199 F.2d 273, 275 (8th Cir. 1952), affg. a
 - 31 -

Memorandum Opinion of this Court; Epstein v. Commissioner, 53

T.C. 459, 471-475 (1969).

In both Green and Epstein, the courts’ approach was to

decide whether there had been a bargain sale by a corporation the

taxpayer controlled to trusts for the benefit of his minor

children (and, therefore, a constructive dividend to the

taxpayer) on the basis of the parties’ competing valuations of

the property sold. We conclude, however, that neither case

stands for the proposition that the mere finding of a bargain

sale based on competing property valuations requires a finding

that the transfer constitutes a constructive dividend to the

shareholder, regardless of intent.

In Green v. United States, supra at 420, the Court of

Appeals focused on two issues: valuation of the property alleged

to have been sold for a bargain price (which issue it remanded)

and the shareholder’s control over the corporation’s actions;

i.e., his “ability to divert a dividend or a bargain sale to * *

* [his] chosen recipient”. In addressing the latter issue, the

Court of Appeals stated as follows:

We emphasize that the finder of fact must also be
allowed to consider, for what he thinks it is worth,
that the corporation did in fact consummate a
transaction with favorable consequences for the
taxpayer personally or for his immediate family; this
circumstance is surely one tending to prove that the
taxpayer exercised substantial influence [the court’s
test for control] over corporate action. [Id. at 420-
421.]
 - 32 -

We consider that language to be fully consistent with the Court

of Appeals’ own primary purpose test set forth in Sammons v.

Commissioner, supra, and, in particular, with the notion that the

taxpayer necessarily would have exercised his “substantial

influence over corporate action” for the sole purpose of

benefiting his minor children. Indeed, the Court of Appeals

itself noted: “The approach suggested is entirely consistent

with * * * Sammons”. Green v. United States, supra at 421.

In Epstein, a case decided before Sammons, we found a

constructive dividend to the taxpayer shareholder because we

found a bargain sale by the corporation to trusts for the benefit

of the taxpayer’s children. The latter finding was based on our

determination of the property’s value after reviewing the

parties’ after-the-fact expert witness valuations and the

evidence underlying them. Although there is no discussion of any

need for evidence of corporate or shareholder intent to make a

bargain sale, we clearly expressed our belief that that intent

was present in the case. For example, in justifying constructive

dividend treatment, we observed:

The device of having a corporation make a transfer
of property, for no or insufficient consideration, to a
person other than a stockholder has not been too
successful in avoiding dividend treatment to the
stockholder whose own purposes have been satisfied by
such transfer. * * *

“The petitioner controlled the Willoughby Co. It
acted solely to accommodate him in making the transfer.
He enjoyed the use of the property by having it
transferred for his own purposes. * * *” [Epstein v.
Commissioner, supra at 474-475 (quoting Clark v.
Commissioner, 31 B.T.A. 1082, 1084 (1935), affd. 84
F.2d 725 (3d Cir. 1936)).]
 - 33 -

The foregoing language leaves no doubt that our finding of a

constructive dividend to the taxpayer shareholder was based

principally on a finding that there was no business purpose for

the bargain sale, and that it was solely motivated by the

taxpayer’s desire to confer an economic benefit on his children.

c. Application of the Primary Purpose Test

(1) Petitioner’s Intent in Forming KTVU
Partnership

(a) Introduction

Respondent argues that “it is only necessary to establish

that appreciated assets left the corporate solution of KTVU,

Inc., for the benefit of its Shareholder Trusts, to establish

that there has been a distribution with respect to [the]

Shareholder Trusts’ stock to which section 311 applies.” He then

argues that “the relationships between the Shareholder Trusts,

their beneficiaries, and the Family Partnerships illustrate that

the transfer to the Family Partnerships was directed by and for

the benefit of the Shareholder Trusts.” Lastly, as “[f]urther

proof of benefit to the Shareholder Trusts,” he argues: “As

trustees of the Shareholder Trusts, Mrs. Chambers and Mrs.

Anthony approved KTVU, Inc.’s receipt of less than fair market

value for the appreciated assets transferred.”

Assuming arguendo that Mrs. Chambers and Mrs. Anthony,

acting in concert, were responsible for both petitioner’s

decision to form KTVU Partnership and the manner in which it was

formed, the undisputed facts do not support respondent’s

characterization of that transaction. That is, the facts do not
 - 34 -

support respondent’s conclusion that Mrs. Chambers and Mrs.

Anthony purposely approved KTVU, Inc.’s contribution of the

station assets to KTVU Partnership in exchange for a less than

fair market value partnership interest (i.e., that they caused

KTVU, Inc., to deal with the family partnerships at less than

arm’s length) to provide an economic benefit to the family

partnerships and, derivatively, to the shareholder trusts. Even

assuming an identity of interests among the entities involved in

the transaction (petitioner, KTVU, Inc., the shareholder trusts,

and the family partnerships), that is not, in and of itself,

evidence that the related individuals common to those entities

(and, in particular, Mrs. Chambers and Mrs. Anthony) acted in

concert purposely to violate the arm’s-length standard in forming

KTVU Partnership. See, e.g., Rushing v. Commissioner, 52 T.C. at

894 (“The fact that Rushing was the sole shareholder of both

L.C.B. and Briercroft is not a sufficient basis for concluding

that Rushing constructively received the advances of L.C.B. [to

Briercroft.]”). Moreover, the undisputed facts strongly indicate

that the parties to the formation of KTVU Partnership intended an

arm’s-length transaction.

(b) Factors Relating to Petitioner’s Intent
(i) Business Reasons for the Formation of
KTVU Partnership

As discussed supra, petitioner continued to operate KTVU

(TV) through KTVU Partnership only because petitioner could not

sell it. By operating the station in that manner petitioner was

able to reduce its investment in the television broadcast
 - 35 -

business, use KTVU, Inc.’s working capital in other business

areas, and allay concerns among petitioner’s television broadcast

executives that petitioner was abandoning the television

broadcast business by demonstrating the Cox family’s ongoing

commitment to it.

(ii) The Executive Committee Resolution

The August 6, 1993, resolution of the executive committee of

petitioner’s board specifically required that the family

partnerships’ cash contributions to KTVU partnership be “in an

amount corresponding to the fair market value of the partnership

interests acquired by such Family Partnerships”, and that the

family partnerships’ acquisition of partnership interests in KTVU

Partnership “be on terms and conditions no less favorable to * *

* [petitioner] or KTVU, Inc. than the terms and conditions that

would apply in a similar transaction with persons who are not

affiliated with * * * [petitioner]”.

(iii) The Outside Appraisals and Additional Cash
Contributions by the Family Partnerships

Before forming KTVU Partnership, petitioner retained an

outside accounting firm, Arthur Andersen, “to render an opinion

of the appropriate marketability and minority interest discounts

applicable to a minority interest in the KTVU Partnership as of

August 1, 1993”, the date of its formation. Then, in 1996,

because petitioner’s management discovered that errors had been

made in computing each family partnership’s interest in KTVU

Partnership, Furman Selz was retained to revalue those interests.

Furman Selz determined that the correct fair market of each of
 - 36 -

those interests as of August 1, 1993, was $31 million. On

September 12, 1996, in response to that determination, each

family partnership contributed an additional $4 million to KTVU

Partnership to bring the total contribution of each to $31

million.

(iv) Fiduciary Responsibilities of Petitioner’s
Board of Directors and Majority Shareholders

Respondent asserts (and petitioner here concedes) that KTVU,

Inc., gratuitously transferred KTVU Partnership interests to the

family partnerships and that Mrs. Chambers and Mrs. Anthony stood

on both sides of the transaction. The parties, however, dispute

whether those facts require us to find that Mrs. Chambers and

Mrs. Anthony intended that gratuitous transfer. We agree with

petitioner: In light of United States v. Byrum, 408 U.S. 125

(1972), we need not find intent on those facts alone.

Even assuming Mrs. Chambers and Mrs. Anthony controlled

petitioner’s board and could direct petitioner’s actions, because

the applicable State law imposes fiduciary duties on corporate

directors and majority shareholders (e.g., Mrs. Chambers and Mrs.

Anthony), we may not necessarily conclude (as respondent does)

that Mrs. Chambers and Mrs. Anthony intended to make a gratuitous

transfer to the family partnerships.

In United States v. Byrum, supra at 137-138, the Supreme
Court observed that in almost every if not every State “[a]

majority shareholder has a fiduciary duty not to misuse his power

by promoting his personal interests at the expense of corporate

interests” and that “the directors also have a fiduciary duty to
 - 37 -

promote the interests of the corporation.” Whether petitioner’s

majority shareholders and directors were subject to the laws of

Delaware (the State of petitioner’s incorporation) or Georgia

(the State in which petitioner has its principal offices), they

had fiduciary responsibilities of the type referred to in Byrum.

See Ga. Code Ann. sec. 14-2-830(a) (2003) (enacted in 1981)24 (“A

director shall discharge his duties as a director, including his

duties as a member of a committee: (1) In a manner he believes

in good faith to be in the best interests of the corporation”.);

In re Reading Co., 711 F.2d 509, 517 (3d Cir. 1983) (“Under

Delaware law, corporate directors stand in a fiduciary

relationship to their corporation and its stockholders”, and “a

majority shareholder * * * has a fiduciary duty to the

corporation and to its minority shareholders if the majority

shareholder dominates the board of directors and controls the

corporation.”); GLW Intl. Corp. v. Yao, 532 S.E.2d 151, 155 (Ga.

Ct. App. 2000) (“It is well settled that corporate officers and

directors have a fiduciary relationship to the corporation and

its shareholders and must act in good faith.”); Marshall v. W.E.
Marshall Co., 376 S.E.2d 393, 396 (Ga. Ct. App. 1988)

(“[M]ajority shareholder who really controls the corporation” has

a “fiduciary relationship * * * to protect minority shareholders”

and “majority shareholders must act in good faith when managing

corporate affairs”.).

24
See 1988 Ga. Laws p. 1070, sec. 1.
 - 38 -

KTVU, Inc.’s assumed gratuitous transfer of a substantial

partnership interest in KTVU Partnership necessarily would have

reduced its distributive share of income and liquidation (or

sale) proceeds from KTVU (TV) by the amounts that would have been

attributable to that interest. Thus, the assumed transfer

necessarily would have resulted in financial detriment to (and,

therefore, would not have been in the best interests of) KTVU,

Inc., and the minority shareholders of its ultimate parent,

petitioner. We agree with petitioner that such a transfer would

represent a breach of the majority shareholder’s and directors’

fiduciary duties to petitioner and to the minority shareholders

who, unlike the beneficiaries of the (majority) shareholder

trusts, did not own interests in the family partnerships and,

therefore, would not be made financially whole for the likely

shortfall in income and liquidation (or sale) proceeds.

In United States v. Byrum, supra, the decedent owned a

majority of the stock in three corporations and transferred

shares in those corporations to an irrevocable trust for his

children. He retained the right to vote the transferred shares,

veto any investments and reinvestments by the trustee, and

replace the trustee. The Commissioner determined that those

retained rights caused the values of the shares to be includable

in his gross estate under either section 2036(a)(1) (retention of

the enjoyment of or right to income from the property) or section

2036(a)(2) (the right to designate who shall enjoy the property

or the income therefrom). As we observed in Chambers v.
 - 39 -

Commissioner, 87 T.C. 225, 232 (1986), the Supreme Court in

Byrum, in rejecting the Commissioner’s contentions, “repeatedly

emphasized the fiduciary duties of a majority shareholder and of

the directors of a corporation.” The Supreme Court outlined the

constraints on majority shareholders and directors of a

corporation as follows:

Whatever power Byrum may have possessed with respect to
the flow of income into the trust was derived not from
an enforceable legal right specified in the trust
instrument, but from the fact that he could elect a
majority of the directors of the three corporations.
The power to elect the directors conferred no legal
right to command them to pay or not to pay dividends.
A majority shareholder has a fiduciary duty not to
misuse his power by promoting his personal interests at
the expense of corporate interests. Moreover, the
directors also have a fiduciary duty to promote the
interests of the corporation. However great Byrum’s
influence may have been with the corporate directors,
their responsibilities were to all stockholders and
were enforceable according to legal standards entirely
unrelated to the needs of the trust or to Byrum’s
desires with respect thereto. [United States v. Byrum,
supra at 137-138; fn. refs. omitted.]

In the light of the Supreme Court’s reasoning in Byrum, we

agree with petitioner that, on the evidence before us, it would

be improper to find that Mrs. Chambers and Mrs. Anthony, as both

directors of petitioner and trustees of the shareholder trusts,

purposely acted for the benefit of the trust beneficiaries (and

to petitioner’s detriment) by directing KTVU, Inc., to distribute

“extra” partnership interests to the other KTVU Partnership

partners contrary to their fiduciary duty to petitioner and its

minority shareholders.
 - 40 -

(c) Conclusion

The foregoing factors (the nontax business reasons for the

formation of KTVU Partnership, the executive committee

resolution, the use of outside appraisals to determine and,

later, increase the family partnerships’ capital contributions to

KTVU Partnership, and the fiduciary responsibility constraints

against self-serving actions by the majority shareholders and

directors of petitioner) demonstrate that there is no reason to

conclude that either Mrs. Chambers or Mrs. Anthony or any of

petitioner’s other directors intended a gratuitous transfer by

KTVU, Inc., to KTVU Partnership of station assets worth $60.5

million. Rather, assuming that that transfer did, in fact,

occur, the undisputed facts strongly indicate that it was

unintentional. Therefore, we conclude that KTVU, Inc.’s transfer

of the station assets to KTVU Partnership was not intended to

provide a gratuitous economic benefit to the other partners and,

derivatively, to the shareholder trusts.

(2) Existence of a Benefit to the
Shareholder Trusts
(a) Analysis

The terms of the three shareholder trusts make clear that

Mr. Cox intended to have all the net income therefrom paid to (1)

Mrs. Chambers and Mrs. Anthony (under the Dayton trust (at all

times here relevant)), (2) Mrs. Chambers (under Atlanta Trust I),

and (3) Mrs. Anthony (under Atlanta Trust II). The trust terms

also make clear his intent that only upon the death of those
 - 41 -

income beneficiaries were the trust corpora to be distributed to

his children’s lineal descendants.

In general, the terms of the trust determine the nature and

extent of the duties and powers of a trustee. 3 Restatement,

Trusts 3d, sec. 70 (2007). It is also generally accepted that a

trustee’s first or primary duty is to (1) act wholly for the

benefit of the trust, (2) preserve the trust assets, and (3)

carry out the settlor’s intent. See 76 Am. Jur. 2d, Trusts, sec.

331 (2005); see also 90A C.J.S., Trusts, sec. 321 (2002) (“By

accepting the trust, a trustee becomes bound to administer it, or

to execute it, in accordance with the provisions of the trust

instrument and the intent of the settlor” (fn. refs. omitted));

id. sec. 322 (“It is the trustee’s paramount duty to preserve and

protect the trust estate in compliance with the terms of the

trust.”).25

25
As evidenced by their filings in Chambers v.
Commissioner, docket Nos. 16698-06 and 16699-06, the parties
agree that the Atlanta trusts, created in Georgia, are governed
by Georgia law and the Dayton trust, created in Ohio, is governed
by Ohio law. The laws of those two States generally incorporate
and are consistent with the foregoing principles of trust law.
See, e.g., Ga. Code Ann. sec. 53-12-190 (1997) (Trustee duties)
(generally applying “the common law duties of the trustee”); id.
sec. 53-12-211 (Duty of trustee as to receipts and expenditure)
(generally requiring compliance with “the terms of the trust”);
Ohio Rev. Code Ann. sec. 5808.01 (2006) (Duty to administer
trust) (“[T]rustee shall administer the trust in good faith, in
accordance with its terms and purposes and the interests of the
beneficiaries”.); id. sec. 5808.04 (Prudent administration) (“A
trustee shall administer the trust as a prudent person would and
shall consider the purposes, terms, distributional requirements,
and other circumstances of the trust.”).
 - 42 -

If, as respondent argues, Mrs. Chambers and Mrs. Anthony,

through their control over the corporate actions of petitioner,

caused petitioner to have KTVU, Inc., make a gratuitous transfer

of partnership interests representing as much as $60.5 million in

station assets to the family partnerships, they necessarily would

have violated their duties as trustees of the shareholder trusts.

By stripping the trust corpora of valuable assets for inadequate

consideration, Mrs. Chambers and Mrs. Anthony would have failed

to preserve the trust assets; by granting their lineal

descendants (holders of the remainder interests) immediate access

to both income and principal attributable to the gratuitously

transferred assets (through membership in the family

partnerships), they would have failed to carry out the settlor’s

(Mr. Cox’s) intent as expressed in the trust instruments. As

respondent suggests, the shifting of assets from petitioner (the

stock of which constituted the entire corpus of each shareholder

trust) to KTVU Partnership may have benefited the remainder

beneficiaries by accelerating their enjoyment of income and

principal and satisfied the desire of Mrs. Chambers and Mrs.

Anthony to shift trust income from themselves as life

beneficiaries to the remainder beneficiaries. Nevertheless, the

beneficiaries are not the trusts, and Mrs. Chambers’s and Mrs.

Anthony’s fiduciary obligation under the trusts was to administer

the trusts in accordance with the terms thereof, not in
 - 43 -

accordance with the conflicting desires of the beneficiaries.26

Indeed, one can imagine the trustees’ actions being carried to

their logical extreme whereby the trustees would have petitioner

transfer all its assets to KTVU Partnership thereby leaving the

trusts holding stock in an empty shell and, in effect,

terminating the shareholder trusts. Under those circumstances,

one would be hard pressed to conclude that the trustees had acted

for the benefit of the shareholder trusts.27

26
In this discussion, we treat the shareholder trusts as
entities separate and apart from the trustees and beneficiaries.
That treatment appears to be in accord with the definition of a
trust set forth in 1 Restatement, Trusts 3d, sec. 2 (2007). That
section defines a trust as, in essence, “a fiduciary relationship
with respect to property”. In “Comment a. Terminology”, the
authors of the restatement add the following clarification:

Increasingly, modern common-law and statutory
concepts and terminology tacitly recognize the trust as
a legal “entity,” consisting of the trust estate and
the associated fiduciary relation between the trustee
and the beneficiaries. This is increasingly and
appropriately reflected both in language (referring,
for example, to the duties or liability of a trustee to
“the trust”) and in doctrine, especially in
distinguishing between the trustee personally or as an
individual and the trustee in a fiduciary or
representative capacity.
27
This analysis is consistent with our recent decision in
Santa Fe Pac. Gold Co. v. Commissioner, 132 T.C. (2009), in
which we held that the taxpayer’s payment of a $65 million
“termination fee” to a putative white knight in connection with a
hostile takeover of the taxpayer by another corporation
constituted a currently deductible expenditure. In reaching that
result, we noted that the taxpayer’s board of directors approved
the hostile takeover and rejected the “white knight” because
“Delaware fiduciary duties laws required Santa Fe’s board to
obtain the highest value for the company’s shareholders.” Id. at
(slip op. at 30). After the hostile takeover that triggered
the termination fee, the acquiring company fired the taxpayer’s
employees, released most of its management, shut down its
headquarters, discarded its business plans, and, therefore,
(continued...)
 - 44 -

In determining that actions by a trustee that violate the

terms of a trust, but are favored by the trust beneficiaries, may

be detrimental to the trust, we are mindful of the general rule

that a settlor or grantor who is not also a trust beneficiary

(e.g., Mr. Cox were he still alive) may not maintain a suit to

enforce the terms of the trust. See, e.g., 3 Scott, Trusts 211

(4th ed. 1988) (interpreting 1 Restatement, Trusts 2d, sec. 200

(1950)) (“Where a trust is created inter vivos and the

[nonbeneficiary] settlor is still alive, it would seem that he

cannot maintain a suit to enforce the trust.”); 76 Am. Jur. 2d,

Trusts, sec. 615 (2005) (“An action * * * to enforce the trust

must ordinarily be brought by beneficiaries, trustees, or someone

representing them, and not the settlor of the trust or a

representative of the settlor.” (Citation omitted.)). The reason

for the nonbeneficiary settlor’s inability to sue the trustee to

enforce the terms of the trust is the absence of a contractual

relationship between the settlor and the trustee. See 3 Scott,

supra at 191-193; Gaubatz, “Grantor Enforcement of Trusts:

Standing in One Private Law Setting”, 62 N.C. L. Rev. 905, 909-

912 (1984). Rather, the trustee’s fiduciary obligations are

27
(...continued)
harmed rather than benefited the taxpayer. For that reason, we
held the termination fee to be currently deductible. In so
doing, we distinguished INDOPCO, Inc. v. Commissioner, 503 U.S.
79 (1992), which requires the capitalization of fees that provide
a benefit to the taxpayer extending beyond the taxable year in
issue. Id. at (slip op. at 51). In effect, our finding of
no benefit to the taxpayer treated as irrelevant the obvious
financial benefit to the taxpayer’s shareholders who stood, in
relation to the taxpayer, as the beneficiaries of the shareholder
trusts stand in relation to those trusts.
 - 45 -

generally considered to run to the beneficiaries, providing the

beneficiaries with exclusive rights of enforcement against the

trustee. See 1 Restatement, Trusts 2d, secs. 197-200 (1959); 3

Scott, supra at 209, 211-212. Both Georgia and Ohio law appear

to be consistent with that precept. See Ga. Code Ann. sec. 53-

12-193 (2003); Ohio Rev. Code Ann. secs. 5810.01 and 5810.02

(2006).28

Assuming that Mr. Cox or his representative would have been

without standing to sue to enforce the terms of the shareholder

trusts and that the trust beneficiaries would benefit from and be

28
There are indications that the judicial bias against
enforcement of the settlor’s intent may be softening. See 3
Scott, Trusts 218 (4th ed. 1988) (“The tendency of American
courts has been to lay an increasing emphasis on the function of
the court in carrying out the wishes of the settlor.”). For
commentary questioning universal application of the rule against
settlor enforcement of trust terms, see Gaubatz, “Grantor
Enforcement of Trusts: Standing in One Private Law Setting”, 62
N.C. L. Rev. 905, 906 (1984):

A grantor who creates a spendthrift or material purpose
trust relies on the trustee to resist the importunings
of the beneficiary to deviate from the trust to his
immediate advantage. If the beneficiary seeks such
deviation, his desires are contrary to those of the
grantor, even if not contrary to the grantor’s economic
interests. The attempt thus raises the question of the
grantor’s right to prevent the trustee from acceding to
the beneficiary’s demands. [Fn. ref. omitted.]

See also Note, “Right of Settlor To Enforce a Private Trust”, 62
Harv. L. Rev. 1370, 1376 (1949):

But there are some indications, at least in the case of
spendthrift trusts, of a policy to give the settlor’s
intention affirmative effect against an unwilling
trustee. Where this * * * policy is present, the
settlor should be allowed to enjoin unauthorized
payments of income or principal, and, wherever
feasible, to follow the property into the hands of the
payees and reestablish the trust. [Fn. refs. omitted.]
 - 46 -

in favor of any gratuitous transfer of trust assets to the family

partnerships, that gratuitous transfer nonetheless would be

harmful to the shareholder trusts. As noted supra, it would

necessarily diminish trust principal and income and, therefore,

it would necessarily diminish the economic well-being of the

shareholder trusts, irrespective of Mr. Cox’s right (were he

alive) to enforce the terms of those trusts. In short, the

enhanced benefits to the trust beneficiaries arise at the expense

of the shareholder trusts.

(b) Conclusion

KTVU, Inc.’s assumed gratuitous transfer of an interest in

KTVU Partnership to the family partnerships did not benefit the

shareholder trusts.

(3) Conclusion Concerning Application of
the Primary Purpose Test

KTVU, Inc.’s assumed gratuitous transfer of an interest in

KTVU Partnership to the family partnerships does not satisfy the

primary purpose test as set forth in Sammons v. Commissioner, 472

F.2d 449 (5th Cir. 1972), and Stinnett’s Pontiac Serv., Inc. v.
Commissioner, 730 F.2d 634 (11th Cir. 1984).

3. Conclusion

KTVU, Inc.’s assumed gratuitous transfer of an interest in

KTVU Partnership to the family partnerships did not constitute a
 - 47 -

distribution to the shareholder trusts subject to section

311(b).29

An order granting petitioner’s

motion for summary judgment will

be issued.

29
We note in closing that, were respondent able to
establish that (1) petitioner, KTVU, Inc., KTVU Partnership, and
the family partnerships were all under common control, and (2)
the allocation of income and liquidation (or sales) proceeds
among KTVU, Inc., and the family partnerships was unreasonable
(i.e., it did not reflect their true taxable incomes according to
their relative contributions to KTVU Partnership), circumstances
that, in fact, he alleges, the Secretary has authority under sec.
482 to allocate income and deductions among related partners to
clearly reflect income. See, e.g., sec. 1.704-1(b)(1)(iii),
Income Tax Regs. (“[A]n allocation that is respected under
section 704(b) and this paragraph nevertheless may be reallocated
under * * * section 482”.). We are not called upon to review the
Secretary’s exercise of his authority under sec. 482 in the case
before us. It may be that respondent’s decision to proceed
against petitioner under sec. 311(b), rather than against the
partners in KTVU Partnership under sec. 482, is attributable, at
least in part, to the fact that the latter approach would not
have resulted in an immediate tax on the entire $56,182,115
deemed gain attributable to the assumed transfer of partnership
interests in KTVU Partnership by KTVU, Inc., to the family
partnerships. Instead, because KTVU, Inc., and the family
partnerships were all domestic taxpayers, a reallocation of KTVU
Partnership’s income among them most likely would have resulted
in little, if any, additional tax in 1993 and the following
years.
 - 48 -

APPENDIX

Shareholder Trusts
Atlanta Trusts Atlanta Trust II
BCA has life estate,
remainder to her lineal
Atlanta Trust I descendants Dayton Trust
ACC has life estate, ACC & BCA have life
remainder to her estates, remainder to
lineal descendants their lineal descendants
29%

29% 40%

Cox Enterprises, Inc.

100%

CCI

100%

KTVU, Inc.

55/75% of profit distributions certain KTVU TV station assets
(9/1/93)

KTVU Partnership

$31M 22.5/12.5% 22.5/12.5% $31M
(9/1/93: $27M) of profit of profit (9/1/93: $27M)
(9/12/96: $4M) distributions distributions (9/12/96: $4M)

ACC Partnership BCA Partnership
(ACC-owned entity & ACC’s (Entities controlled by BCA
children) & her children)

Family Partnerships