The opinion
Beghe, J., dissenting: Having joined Judge Swift’s dissent, I add a few words in an effort to provide some further support and explanation. The case at hand is an appropriate occasion to apply the intent, end result, integrated transaction version of the step-transaction doctrine to support a finding of early disposition that results in ITC recapture.
Petitioner’s initial drop-down to LOF Glass of the glass business and its section 38 assets, which occurred on March 6, 1986, was followed 1 day later by the single-spaced, 45-page, March 7, 1986, agreement for the splitoff exchange of shares of petitioner for shares of lof Glass by Pilkington Holdings. The splitoff occurred on April 28, 1986, pursuant to that agreement, as amended in immaterial respects. Although the parties stipulated that the drop-down occurred for valid business reasons, reasons that were presumably independent of the impending divestiture, there were no substantial conditions in the March 7, 1986, agreement to consummation of the splitoff. 1
The majority, uncritically following our opinion in Walt Disney Inc. v. Commissioner, 97 T.C. 221 (1991), revd. 4 F.3d 735 (9th Cir. 1993), assumes an unwarranted equivalence between the two events described in the section 1502 regulation examples and the LOF Glass divestiture transaction. 2 Contrary to the majority’s assumption, the unadorned descriptions of the events in the regulation’s two examples indicate the lack of connection between the intragroup sale of section 38 assets in year 1 and the sale of the stock of the purchaser to a third party outside the group in year 2. The majority goes on to disregard the obvious connection — supplied by the intent, manifested contemporaneously with the drop-down to LOF Glass, to accomplish the end result of the splitoff — that binds the steps in the case at hand in an integrated transaction. 3
The transactions in the case at hand are not just two unconnected sales. They evidence a flow of events that comprise a two-step divestiture, the second step of which is an exchange of shares under section 368(a)(1)(D) that qualifies for nonrecognition under section 355. The initial drop-down of assets into a subsidiary in exchange for its shares is essential to enable the intended divestiture to be accomplished by a share-for-share exchange that entitles the second step to nonrecognition of gain to both parties. The connection that binds the two steps, as in J.E. Seagram Corp. v. Commissioner, 104 T.C. 75, 91-99 (1995), is manifested in the plan of reorganization, which embodies the intent to achieve the end result. 4 Although the first step in the case at hand has an independent business purpose in the sense that it would not have been fruitless in all events to take that step — after all, a corporation engaged in more than one business almost invariably has a business purpose for dropping a business into a subsidiary, if only to protect the assets of its other businesses from the liabilities and risks that are encapsulated by the drop-down — the independent business purpose of the first step in the case at hand is trumped by the more important business purpose of completing the divestiture by means of a tax-free exchange, which relegates the first step to a subordinate implementing role.
The integrated transaction approach is a legitimate “weak” version of the step-transaction doctrine, as contrasted with the “strong” requirements 5 that must be satisfied, under its binding commitment and interdependence versions, in order to disregard unnecessary intermediate steps. 6 The creation of and drop-down to lof Glass were necessary to accomplish the divestiture (separating LOF Glass, the new holder of the glass business and its section 38 assets, from the affiliated group), which was the intended end result that followed the initial step. The intention to effect that end result suffices to justify application of the integrated transaction approach to conclude that the section 38 assets left the economic family of petitioner’s affiliated group in a way that requires ITC recapture.
Jacobs, J., agrees with this dissent. Expiration of all Hart-Scott-Rodino waiting periods, receipt of tax opinions that the splitoff would be a tax-free exchange under sec. 355, and satisfaction of all other stated conditions must have occurred or have been waived between Mar. 6 and Apr. 28, 1986.
There are at least three significant differences between the facts of the examples in the sec. 1502 regulation and the facts of our case. In the examples, the sale of the sec. 38 assets and the sale of the purchaser’s stock occur in different tax years, whereas in our case they occur in the same year; the first sale in the examples appears to be made to a preexisting member of the group, whereas in our case the transfer is made to a newly created subsidiary organized to do the deal, including the second step; and the examples concern two unrelated sales, whereas the first transaction in our case is a drop-down of assets that is an integral and necessary step of the plan to accomplish the agreed-upon tax-free split-off exchange of shares that is intended to follow.
Events should be deemed to have a connection for tax purposes when dictated by the logic of events that has to do with cause and effect relationships and necessary connections or outcomes. Under that formulation, there is no connection between the sales in the examples in the sec. 1502 regulation, and there is a connection between the drop-down and the split-off in the case at hand.
Contrary to the views of those who would read the intent, end result, integrated transaction version of the step-transaction doctrine out of the judicial arsenal, see, e.g., Ginsburg & Levin, Mergers, Acquisitions and Buyouts, secs. 208.4.5, 608.1, 608.3.1, 610.9, 1002.1.4 (July 1996); Bowen, “The End Result Test”, 49 Taxes 722 (1994), there is an appropriate role for this “weak” version of the step-transaction doctrine in situations such as the case at hand.
The terms “weak” and “strong” are used here in the mathematical sense of “subject to less/ more exacting or numerous conditions”. See Oxford English Dictionary, Entries under “weak”, 19.f(b) and “strong”, 19.c (2d ed. 1995). Analogous usages occur in logic, physics, and cosmology. On “weakened” and “strengthened” moods of the syllogism, see Cohen & Nagel, An Introduction to Logic and Scientific Method 84, 86 (1934). On the “strong” force in elementary particle physics, which holds the nucleus together, and the “weak” force, which causes the decay of many of the elementary particles, see, e.g., 28 Encyclopedia Britannica, Subatomic Particles 239-240 (15th ed. 1993). On the “weak” and “strong” anthropic principles regarding the state of the universe, see Hawking, A Brief History of Time 124-126 (1988). See also Penrose, The Emperor’s New Mind 17-23 (1989), on “strong” artificial intelligence.
As in West Coast Mktg. Corp. v. Commissioner, 46 T.C. 32 (1966).