(dissenting):
I dissent. Admittedly, Judge Ward’s attempt to conceptualize Green’s purchase of Olen and McCrory’s purchase of National as two-step transactions, involving initial exchanges of Green and McCrory stock for cash and subsequent acquisitions of Olen’s and National’s assets in return for that cash, has superficial appeal. If we follow this approach, as the majority suggests, the costs associated with the purchases of stock are allocable to the intangible “altered corporate structure,” Mills Estate, Inc. v. Commissioner, 206 F.2d 244, 246 (2d Cir. 1953), and are therefore deductible only upon the surviving corporation’s dissolution or liquidation. Vulcan Materials Co. v. United States, 446 F.2d 690, 693 (5th Cir.), cert. denied, 404 U.S. 942, 92 S.Ct. 279, 30 L.Ed.2d 255 (1971). In contrast, the costs incident to the cash purchases of assets are deductible when the purchasers dispose of them. E. g., Parmelee Transportation Co. v. United States, 351 F.2d 619 (Ct.Cl.1965) (dictum); Massey-Ferguson, Inc. v. Commissioner, 59 T.C. 220 (1972). An evidentiary hearing is necessary, the majority contends, to enable the district court appropriately to allocate McCrory’s acquisition expenses between the two aspects of these transactions.
I am unable to concur in this approach, however, because the taxable events which attach to this hypothetical sequence of transactions distinguish the majority’s model from the actual tax-free exchanges that Green and McCrory adopted.
The initial issuance of stock for cash is not a taxable event for the issuing corporation, I.R.C. § 1032(a), or for the purchaser of that stock. But when the issuer then uses that cash to purchase assets in the second step of the hypothetical transaction, the sale is a realization event for the sellers, subjecting them to a capital gains tax. I.R.C. § 1222. Thus, one of the parties to this two-step procedure incurs tax liability.
In contrast, no taxable incidents were realized by either Green or McCrory, the purchasing corporations, or by Olen and National, the sellers of the assets, in the acquisitions involved in this case. The parties chose to characterize these transactions as tax-free reorganizations, pursuant to I.R.C. § 368(a)(1)(A). As a result, Olen’s and National’s shareholders avoided capital gains liabilities when they disposed of their assets. Moreover, by offering Olen and National this tax-free vehicle, Green and McCrory added an incentive to the deal, and presumably obtained the sellers’ assets for a lower price, because the proceeds the sellers received were not taxed. Thus, I cannot agree that the benefits to Green and McCrory were merely “incidental” in nature. See note 7 ante.
The parties in this case determined at the outset not to incur any initial tax liabilities by characterizing the acquisition as statutory mergers. Having chosen that route, McCrory should be required to treat its acquisition expenses in a manner analogous to the treatment of similar non-deductible costs associated with other forms of tax-free mergers and reorganizations. To recast the underlying acquisitions at this point as a two-step issuance of stock and a realizable purchase and sale of assets for cash would allow the taxpayer to redefine the terms of the transaction for its own tax advantage. I would be inclined to compel McCrory to accept the consequences of its initial choice. Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149, 94 S.Ct. 2129, 2137, 40 L.Ed.2d 717 (1974).
Accordingly, I see no reason for a remand since there are no facts McCrory could produce which would characterize the acquisition transactions as anything but tax-free statutory mergers. I would affirm Judge Knapp’s decision for the Government.