United States Court of Appeals,
Fifth Circuit.
No. 93-2737.
UNITED STATES of America, Defendant-Appellee,
v.
HOUSTON PIPELINE CO., f/k/a Houston Natural Gas, Plaintiff-
Appellant.
Nov. 7, 1994.
Appeal from the United States District Court for the Southern
District of Texas.
Before WISDOM, DAVIS and DUHÉ, Circuit Judges.
WISDOM, Circuit Judge:
The plaintiff/appellant, Houston Pipe Line Company, successor
in interest to Houston Natural Gas Corporation ("HNG"), appeals
from the district court's grant of summary judgment denying HNG's
claim for a tax refund totalling $47,879,276. Because there is no
genuine issue of material fact and the defendant/appellee, United
States, is entitled to judgment as a matter of law, we AFFIRM.
I
The facts are not in dispute. In January 1984, HNG became
the target of a hostile takeover attempt by a wholly owned
subsidiary of Coastal Corporation ("Coastal"). Coastal made a
tender offer to purchase 45 percent of HNG's outstanding common
stock. This 45 percent share, added to the 5.05 percent equity
interest Coastal already held in HNG, would have made Coastal the
majority shareholder in HNG.
The board of directors of HNG found the offer unappealing in
1
three respects. First, HNG had doubts about Coastal's financial
soundness. Second, Coastal offered to buy only enough shares to
acquire control of HNG and made no provisions for the nearly 50
percent of HNG shares not included in the offer. Third, HNG was
concerned about prohibitions on Coastal's ability to operate in
South Central Texas, an important gas market for HNG. For these
and other reasons, HNG's board of directors concluded that
Coastal's offer was not in the best interests of HNG's shareholders
and rejected the offer.
In February 1984, to repel the takeover, HNG devised a plan to
make the corporation unattractive to Coastal by crippling itself
financially. First, HNG made a counteroffer to purchase all of the
outstanding shares of Coastal's common stock for a price of $875.6
million. Second, HNG made a self-tender offer to buy up to 19
million shares of its own stock for $1.3 billion. HNG obtained a
bank commitment of $1.8 billion to finance the plan. Had it
completed both proposed transactions, HNG would have devastated
itself financially; HNG's debt would have escalated from $437
million to $3.61 billion, and its stockholders' equity would have
fallen from more than $1.4 billion to less than $85 million.
Almost three weeks after its original bid, Coastal changed its
mind. It proposed to withdraw its offer on the condition that HNG
purchase Coastal's 5.05 percent stock interest in HNG. On February
13, 1984, HNG redeemed the 2.075 million shares held by Coastal for
$124.53 million.
In its 1984 tax return, HNG did not claim a deduction for the
2
$124.53 million it paid to redeem its stock from Coastal. It was
later, after the Internal Revenue Service conducted an examination
of HNG's returns for the 1984 year and the short year ending June
7, 1985, that HNG asserted it was entitled to deduct the $124.53
million it paid to redeem its stock from Coastal as an ordinary and
necessary business expense under § 162(a) of the Internal Revenue
Code. The Service refused to allow the deduction, and on September
15, 1992, HNG filed suit in district court, seeking a refund of
$47,879,276.
Stock redemptions, as a general rule, are characterized as
capital transactions,1 and the purchase price of a stock redemption
is not deductible.2 The plaintiff HNG cites Five Star
Manufacturing Co. v. Commissioner of Internal Revenue3 as an
exception to this general rule. Under Five Star, the plaintiff
alleges, stock redemption costs incurred in the face of an outside
threat to the survival of a corporation are deductible as ordinary
and necessary business expenses. The plaintiff contends that
Coastal's hostile takeover attempt created "dire and threatening"
circumstances that necessitated the repurchase of its own stock in
order to ensure the viability of the corporation as a going
concern.
The government argued that the amount the plaintiff paid to
1
Woodward v. Commissioner of Internal Revenue, 397 U.S. 572,
575, 90 S.Ct. 1302, 1305, 25 L.Ed.2d 577 (1970).
2
Markham & Brown, Inc. v. United States, 648 F.2d 1043, 1045
(5th Cir.1981).
3
355 F.2d 724 (5th Cir.1966).
3
redeem its own stock from Coastal was a capital expenditure,
therefore not deductible under § 162(a), and moved for summary
judgment.
The district court concluded that the facts of this case do
not come within the holding of Five Star, because the plaintiff's
stock redemption was not necessary to the survival of the company,
and granted the government's motion for summary judgment.4
The plaintiff appeals on two grounds: first, that the
district court erred in granting summary judgment on a factual
ground not raised by the government in its motion for summary
judgment; and second, that the facts of this case fall within the
Five Star exception that allows a taxpayer to deduct the cost of
redeeming shares of its stock where the redemption is necessary to
the survival of the company.
II
We review a grant of summary judgment de novo, "including the
question whether the court provided the notice required by
Fed.R.Civ.P. 56."5 We take all facts and inferences in the light
most favorable to the non-moving party,6 and if no rational trier
of fact could possibly find for the non-moving party, summary
4
Houston Pipe Line Co. v. United States, 838 F.Supp. 1160,
1163 (S.D.Tex.1993).
5
Resolution Trust Corp. v. Sharif-Munir-Davidson Dev. Corp.,
992 F.2d 1398, 1401 (5th Cir.1993).
6
Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct.
2505, 2510, 91 L.Ed.2d 202 (1986).
4
judgment is appropriate.7
A.
The plaintiff's first argument on appeal challenges the
district court's grant of summary judgment because the district
court based its decision on facts that the government did not raise
specifically in its motion for summary judgment. In its motion,
the government made two arguments: first, that Five Star is no
longer good law, because the case employs the old "primary purpose"
rule that the Supreme Court has repudiated in cases decided after
Five Star. In the alternative, the government argued that the Five
Star decision is distinguishable from the undisputed facts of this
case, because the parties in Five Star agreed that § 311 of the
Internal Revenue Code did not apply, whereas no similar agreement
exists here.
Because the district court distinguished Five Star on its
facts, the court found it unnecessary to address the continued
viability of Five Star. The district court concluded that the
facts of this case do not fall within the holding of Five Star,
because the plaintiff's stock redemption was not necessary to the
survival of the company. Stated simply, the government argued that
Five Star was distinguishable for one reason, and the district
court found Five Star distinguishable for another. The issue we
must address is whether this divergence requires reversal of the
district court's grant of summary judgment.
Rule 56 of the Federal Rules of Civil Procedure requires a
7
Resolution Trust, 992 F.2d at 1401.
5
court to consider the whole record when ruling on a motion for
summary judgment. The record includes "the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits...."8 Although a court may not weigh the evidence
to determine its truth nor draw inferences from the facts,9 Rule 56
clearly permits a court to consider the whole record, and "not just
the portion highlighted by the motion itself."10 Further, "the
district judge is not compelled to limit the basis for a summary
judgment to those facts listed in the motion for summary
judgment."11 The plaintiff, however, contends precisely the
opposite.
The plaintiff contends that the district court erred in
resting its decision on a factual basis not specifically argued by
the government in its motion for summary judgment. The law does
not support the plaintiff's contention. The rule in the Fifth
Circuit is clear: "the judge is free to grant summary judgment on
the basis of any facts shown by competent evidence in the record."12
The record is replete with evidence pertaining to the issue of
whether the plaintiff's stock redemption was necessary to the
8
Fed.R.Civ.P. 56(c).
9
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106
S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986).
10
Ramirez v. Burr, 607 F.Supp. 170, 173 (S.D.Tex.1984),
citing Keiser v. Coliseum Properties, Inc., 614 F.2d 406, 410
(5th Cir.1984).
11
Daniels v. Morris, 746 F.2d 271, 276 (5th Cir.1984).
12
Id.
6
survival of the company. That issue is critical to the plaintiff's
case. Indeed, the great majority of the documents in the record
address the issue because it is the very basis of the plaintiff's
claim for relief.
The law allows a district judge to grant summary judgment on
the basis of facts shown by competent evidence in the record, even
if those facts are not highlighted in the motion for summary
judgment. We therefore conclude that the district judge did not
err in granting summary judgment on a factual basis different from
the one advanced by the government in its motion.
B.
The plaintiff's second argument on appeal alleges that by
granting the government's motion for summary judgment on a factual
basis not raised by the government in its motion, the district
court deprived it of adequate notice and a meaningful opportunity
to respond. Rule 56 requires a motion for summary judgment to be
served at least 10 days before the time fixed for the hearing.13
The purpose of the notification requirement is to allow the
nonmoving party time to place all evidence supporting its position
into the record and to put its best foot forward.14 Our inquiry is
whether the district court deprived the plaintiffs of adequate
notice by granting the government's motion for summary judgment for
a reason different from the one advanced by the government in its
13
Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S.
317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).
14
NL Industries, Inc. v. GHR Energy Corp., 940 F.2d 957, 965
(5th Cir.1991).
7
motion.
The plaintiffs liken their case to John Deere v. American
National Bank,15 where the district court granted summary judgment
on a theory never advanced by either party. In John Deere, a
primary lienholder, John Deere, brought suit against a second
lienholder, American National Bank, alleging that the Bank had
foreclosed on, and sold, the collateral without notice to John
Deere. The Bank moved for summary judgment on the ground that it
had sold the collateral in accordance with a Texas state court
judicial sale and that the state-court judgment operated as res
judicata against John Deere. The district court granted the Bank's
motion, not on a res judicata theory, but instead on the theory
that John Deere had not presented any evidence that it had suffered
damages arising from the Bank's actions. We reversed, because the
theory of failure to show damages "certainly was not raised by the
Bank in a manner that would be sufficient to put John Deere on
notice that failure to present evidence of damages could be grounds
for summary judgment."16
We fail to see the parallel between the plaintiff's case and
John Deere. In John Deere, the district court granted summary
judgment on the basis of a tangential theory that neither party
asserted. The movant's brief in support of its motion for summary
judgment "relie[d] solely on a res judicata argument."17 The
15
809 F.2d 1190 (5th Cir.1987).
16
Id. at 1191.
17
Id. at 1192.
8
nonmoving party in John Deere had no notice of the need to
introduce evidence of damages in order to withstand a motion for
summary judgment, and summary judgment was therefore inappropriate.
The plaintiff in this case alleges to have had no notice that
the theory of their case could arise in the district court's
consideration of the government's motion for summary judgment. The
plaintiff's argument is unpersuasive. The government's motion for
summary judgment states, "the Five Star decision is distinguishable
from the undisputed facts of this case and provides no exception
available to HNG."18 The plaintiff's refund claim was premised on
the applicability of Five Star and the plaintiff knew that it
needed to introduce sufficient evidence to bring it within the
holding of the case. The procedural inequity involved in John
Deere is not present here. The record before us demonstrates that
the plaintiff had adequate notice and every opportunity to present
its case. We therefore conclude that the district court did not
err in granting summary judgment based on facts not specifically
alleged in the government's motion for summary judgment.
III
We turn now to the merits of the plaintiff's case. The issue
is whether the plaintiff may reduce its tax liability for the 1984
year by taking a current deduction for the $124.53 million it paid
to redeem its stock from one of its shareholders.
The general rule is undisputed: when a corporation redeems
its own stock, it is a capital transaction, and the corporation may
18
Record at 104.
9
not deduct the amount spent for the redemption as a business
expense under § 162(a) of the Internal Revenue Code.19
The plaintiff argues that it falls within the exception the
general rule recognized by the Fifth Circuit in Five Star
Manufacturing Co. v. Commissioner of Internal Revenue.20 In the
particular circumstances presented by the facts in Five Star, we
allowed a taxpayer to deduct the cost of redeeming shares of its
stock because the redemption was vital to the survival of the
company. The plaintiff argues that it falls within the Five Star
exception and may take a current deduction for the purchase price
of the stock it redeemed from Coastal.
The government contends that the amount paid by the plaintiff
to redeem its stock was a capital expenditure and therefore not
deductible. The government makes two arguments in its motion for
summary judgment. First, the government asks us to overrule Five
Star, because, the government alleges, Five Star was decided under
the "primary purpose" test, a test the Supreme Court has repudiated
in cases decided after Five Star. In the alternative, the
government contends that the facts of this case do not fit the
exception recognized in Five Star.
The district court found that Five Star was distinguishable
on its facts and granted the government's motion for summary
judgment. Because Five Star was inapplicable, the district court
19
Woodward v. Commissioner of Internal Revenue, 397 U.S.
572, 575, 90 S.Ct. 1302, 1305, 25 L.Ed.2d 577 (1970); Jim Walter
Corp. v. United States, 498 F.2d 631, 638 (5th Cir.1974).
20
355 F.2d 724 (5th Cir.1966).
10
found it unnecessary to address the viability of Five Star. We
agree with the district court and affirm the grant of summary
judgment in favor of the government.
The record before us demonstrates that the plaintiff's case
does not fit within the Five Star exception. In Five Star, a
patent holder, by license agreement, gave to Kincade and Smith the
exclusive right to manufacture, use, and sell a certain car heater.
Kincade and Smith owned 50 percent each of Five Star Manufacturing
Company, and they transferred the license to Five Star. The
company began to draw profit selling the heaters, but Smith was
delinquent in his management of Five Star. He drew heavily from
the company's treasury and Five Star paid no royalties to the
patent holder. The patent holder cancelled the license, attached
two-thirds of the company's inventory of finished goods, and
obtained a judgment for unpaid royalties. The company had no
working capital and no credit. The patent holder agreed to renew
the license and release his hold on the corporate assets only if
Five Star redeemed Smith's 50 percent share of the corporate stock
and eliminated Smith from the enterprise.
Five Star had no choice but to redeem Smith's stock;
liquidation was the alternative. This Court allowed Five Star to
deduct its redemption payment to Smith, because the payment was
unquestionably a "necessary expense."21 In those circumstances, we
stated, it could "scarcely be held that the payment to Smith was
for the acquisition of a capital asset, but rather one which would
21
Five Star, 355 F.2d at 727.
11
permit Five Star again to use assets for income production by
freeing its management from unwarranted fetters."22
Later cases stressed the extraordinary factual circumstances
that warranted the Five Star holding. In Jim Walter Corp. v.
United States,23 this Court found the Five Star exception
inapplicable to the facts of the case, and stated that Five Star is
limited to situations where the redemption expenditure is
"necessary to the taxpayer's survival." In Markham & Brown, Inc.
v. United States,24 we again found Five Star inapplicable to the
facts of the case, and restated the Jim Walter holding that the
Five Star rule applies only to situations where the expenditure is
"made to save the corporation from dire and threatening
circumstances."25
The plaintiff in this case contends that Coastal's takeover
attempt created "dire and threatening circumstances" that allow it
to deduct the cost of the stock redemption as an ordinary and
necessary business expense. The district court could discern no
such threat, and neither can we.
Unlike HNG, the Five Star company faced extinction if it did
not redeem the shares. The license was Five Star's only
income-producing asset. The company had no working capital and no
credit. Without the license, the company, without question, would
22
Id.
23
498 F.2d 631, 639 (5th Cir.1974).
24
648 F.2d 1043, 1046 (5th Cir.1981).
25
Id. at 1045.
12
have gone out of business. In contrast, the plaintiff corporation
was a profitable corporation; it was able to procure a $1.8
billion bank commitment to finance its proposed plan to fend off
the Coastal takeover. Five Star does not apply to profitable,
solvent corporations such as the plaintiff HNG.
The district court found that "HNG's survival as a going
concern was not threatened in any way."26 The plaintiff maintains
that it would have faced financial ruin if Coastal had effectuated
the takeover, and argues that a takeover by Coastal would have
created the "dire and threatening circumstances" that warrant
application of the Five Star exception. We, like the district
court, are unconvinced. First, the plaintiff can speculate only as
to what would have come of a takeover by Coastal. Presupposing
"dire and threatening circumstances" to come is very different from
actually enduring dire and threatening circumstances. Further, we
agree with the district court's finding that although a corporation
may change after it is taken over, it "continues to survive at the
will of the shareholders and management, unlike Five Star which
could not have continued to manufacture the very product it was in
the business of manufacturing without a renewed licensing
agreement."27
Finally, in Five Star it was a third party, the patent holder,
who gave the company an ultimatum: redeem the shares or liquidate
26
Houston Pipe Line Co. v. United States, 838 F.Supp. 1160,
1162 (S.D.Tex.1993).
27
Id. at 1162-63.
13
the company. From these facts comes the Five Star exception:
where the redemption is absolutely necessary to the survival of the
company, a deduction may be allowed.28 In this case, the plaintiff
had the option to redeem the shares or allow Coastal to take over
the corporation. It was the plaintiff's choice to pay $124.53
million to redeem the shares owned by Coastal. The redemption was
not necessary to the corporation's survival as a going concern, and
Five Star does not provide the plaintiff with a legal basis for its
claimed deduction.
Because Five Star is inapplicable to this case, it is
unnecessary to consider the viability of Five Star. The district
court's grant of summary judgment is AFFIRMED.
28
Markham & Brown, 648 F.2d at 1045; Jim Walter, 498 F.2d
at 639; Five Star, 355 F.2d at 727.
14