# UNITED STATES TAX COURT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ad266e8151c8f7932 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text T.C. Memo. 2011-25 UNITED STATES TAX COURT li RALPHS GROCERY CO. &i SUBSIDIANIES f.lé.a. NALPHS SUPERMARKETS, INC. , & SUBSIDIARIES, Petitio 1ers E. - COMMISSIONER OF INTERNAL REVENIJE, Respondent FRED MEYER, INC., & SUBSIDIARIES, Petitione s . COMMISSIONER OF INTERNAL REVENUE, Reap nd nt Docket'Nos. 2Ó364-06, 25959-06. F le JÄnuary 27, 2011. Roqer J. Jones, Andrew R. Roberson, and Sarah S. Sandusky, for petitioners. 1 Alan M. Jacobson, John E. Budde, and Laurie A. Nasky, -for respondent . EERVED JAN 2 7 2011 2 MEMORANDUM OPINION CF ECHI, Judge: partia These ases are before us on the motion for summary judgment of petitioners (petitioners' motion) and the mot on for partial summa y judgment of respondent (respondent's otion) . We shall grant petitioners' motion, and we shall deny re pondent's motion. B ckground T parties are in agreement regarding or do not dispute the following facts. At the time petitioner 1 alphs Grocery Co. (RGC)..and its subsidi ries filed the petit on in the~ case at docket No. 20364 06, all of RGC' s stores and its main warehouse were located, and all goo s and services were rovided, exclusively in California. At the time petitioner Fred Meyer, Inc . (Fred Meyer) , and its subäidiaries filed .the pétition in the case at docket No. Tl e parties filed with he Court a stipulation of facts together with stipulated exhïbits attached and an agreed statement of material facts that ares to control for purposes of their respective motions for partian summary judgment. (We shall refer to that stipulation together ith those exhibits and that agreed stateme t as the parties' agreed facts.) The parties' agreed facts pertain to, inter alia, the requirements and effects of the U.S. Ba kruptcy Code (Bankruptcy Code) , 11 U.S.C. (2006) . Respond nt objected to several stipulated exhibits. We shall not rule on respondent's evidentiary objections. That is because we need no rely on the exhibits to which respondent objects in order to resolve the questions presented in the parties' respective mot ions for partial summary judgment . - 3 25969-06, Fred Meyer had its headquarters :In Oregon and provided goods and services primarily in Oregon and Washington. At the time petitioners filed their respective petitions, RGC and Fred Meyer were subsidiaries of the Kroger Co. (Kroger) and were members of Kroger' s consolidated group for Federal income tax (tax) purposes. At t-hat time, Krocjer had its head- quarters in Ohio. In 1873, George A. Ralphs founded a grocery store business in Los Angeles, California (Ralphs-grocery store business) . business remained privately owned for over 90 years. Federated Department Stores-, Inc . That In 1968, (Federated) , purchased the Ralphs grocery store business from its then owners . Federated operated that business as an unincorporated division of Federated until 1988. In 1986, Campeau Corps (Campeau) , ,a co pc ration organized under the laws of Canada, acquired Allied Stores Corp. for approximately $3.6 billion. (Allied) At that tiine, Allied operated certain retail.department stores,through certain of its,subsidiaries. In 1988, Campeau acquired Federated. for apyroximately $6.7 bill'ion. At that time, in addition to operating the Ralphs grocery store business, Fed rated operated ceÉtain retail depart- ment stores through certain of its subsidi'aries. Campeau's acquisition of Federated constituted a qualified stock purchase 4 - under ection 338 (d) (3) .2 Federa d, ,pursuant to secti n 1.5338-4T(f) (6), Temporary Income Tax Reg ., Ir connection with its acquisition of 50 Fed. Reg. -16413 (Apr. 25," 1985), Campeau made a protect ve, carryover basis e ection and an offset prohibition eledti . i In order to- finance Cam eau's acquisitions of Allied and Federat d,3 certain subsidiaries of Campeau borrowed funds from Citibank, sBank of Montreal, J. DeBartolo Corp. (EJDC) , anque Paribas (Paribas)", the Edward a id Olympia & York CC Limited (O&Y) . On June 6, 1988, Ralphs Acquisition Co. was incorporated under the laws of Delaware. Around that date, Federated trans'- ferred all of the assets and the liabilities of the Ralphs grocery store business to a t ransitory subsidiary (Newco) in exchang for all of the common stock of Newco. merged ith and into Ralphs name to Ralphs Grocery Co. Thereafter, Newco cquisition Co., which changed -its (Ralphs) .4 As part of that merger 2A]l section references are to the Internal Reeenue Ce>de (Code) n effect at all rele ant times. 3T1 e parties agree that ertain subsidiaries of Campeau borrowe funds in order to finance Campeau's acquisitio~ns of Allied nd, Federated . Howeve , the parties' agreed . f ac ts do not refer to any amounts that Canpeau or any of its subsidiaries borroweå with respect to the cquisition of Allied. 4Ralphs Grocery Co. that we shall refer to as Ralphs is not the same entity as petitioner Ralphs Grocery Co. As discussed below, in June 1995 Ralphs wa merged into Ralphs Supermarkets, Inc. (R I) . Thereafter, RSI, the surviving company, assumed the name Ralphs Grocery Co. - 5 - Federated transferred to Ralphs all of the common stock of Newco in exchange for a promissory note of Ralph million. i the amount of $900 (We shall refer to the series of atransactions by which Federated transferred the Ralphs grocery -store business to Newco and Ralphs in exchange ,for a $900 mill'ion promissory note as the Ralphs incorporation transaction.) For ta purposes, othe Ralphs incorporation transaction was treated-in part as an intercompany asset sale and in part as a.dividend distri ution of the Ralphs grocery store business.- The Ralphs tincorporation transaction resulted in a deferred intercompany gain ( lyhs deferred inter- company gain) in excess of $500 million. Et an undisclosed date after the Ralphs incorporation transaction all of the outstand- ing common stock of Ralphs" was transferNed to Allied and Holdt ings III, Inc. (Holdings III), an indirect subsidi'ary of Campeau that had been incorporated in 1988. Campeau organized its operations in'the-United States through Federated Stores, Inc. (FSI), a holding company formerly sIn August 1988, Ralphs issued to certAin executives and certain key employees of'Ralphs 170,0Ò0 shaked of nonvoting series A preferred stock (series A nonvoting preferred stock) and 130,000 shares of nonvoting series B preferred stock (series B nonvoting preferred stock) for an aggregate p ice of $3 million. A portion of the series A nonvotingspreferreddstock was required to be redeemed each year beginning;in 1992 and continuing through 1998. A portion of the series B nonvoting þreferred stock was required to be redeemed each year beginninga in 1992 and continuing through 1996. In addition, Ralphs was permitted to redeem at any time the series A nonvoting preferred stock and the series B nonvoting preferred stock provided that -it gave the owners of that respective stock five days notice of any esuch redemption. - 6 known s Campeau Corp . (U . S . Inc . FSI was the parent corpora tion of a consolidated group (FSI consolidated group) for tax purpose that consisted of-a proximately 60 other U.S. corpora- tions, ncluding Allied, Federated, and Ralphs, that filed a single onsolidated tax retu n for each of the taxable years ended nuary 31, 1989 throuch 1993, and that had an ownership structuce as of October 28, 1991, as described below.' Certain members of the - FSI consolidat ed group were engaged in the real estate usiness, certain other members were engaged' in the retail departm nt store business, a d Ralphs was engaged in the grocery store b siness. As of ,October 28, 1991, FSI owned: outstanding common stock of I oldings III, (1) 2100 percent of the (2), 100,percent of the outstan ing common stock of Campeau Properties, Inc. (CPI) , and (3) 100 percent of the outst nding common stock of each of certain corporations -(FSI shåpping center corporations) that each owned c rtain shopping cente s . As of October 28, 1991, CPI, which had been incorporated in 1988 Ån was serving as a ho]ding company for FSI's ownership 6At tached as an appendix is a chart showing the ownership structu e as of -Oct. 28, 199], of the members of the FSI consolidated g oup. 'E ch of the FSI shopping - center corporations held a 50 percent interest in certain partnerships. EJDC owned directly or indirec ly the remaining 50-percent interest in each of those partnerships . 7 - interests in certain shopping -mall developments that FSI, EJDC, and their.respective affiliates were to develop jointly, owned 7.5 percent of the outstanding common stock of Federated Holdings , Inc . (Holdings ) . As of October 28, 1991, Holdings III owned (1) 100 percent il of the outstanding common stockiof Federated HoldingsJII, Inc. (Holdings II) , (2) approximately 783 ..75 percent" of the outstand- ing common stock of Ralphs; -(3) a promissory note due from | Federated (Federated hote) in the principal aniount of $75 mil- . lion, and (4) a promissory note due from Allied (Allied note)r in the principal amount of $100 milTion. As of October 28, 1991, Holdi~ngs II, which had been incorpo- -rated in 1990, owned: (1) 100 percent of the joutstanding common stock of Allied,' (2) 28.04 percent of the òutstanding:common stock of «Holdings, and (3) a residual interest in certain collateral relating to a certain monetization fagreement . As of October 28, 1991, Allied owned: outstandirig .common stock of Holdings, (1) 50 percent of the (2) aþproximately 16.25 "In the parties' agreed facts, the parties agreed to the approximate percentage of the outstanding common stock.of Ralphs that Holdings III owned. For convenience, we shall not refer hereinafter to that ownership percentage asl approximate. "As of Oct. 28," 1991, Allied also had dutstanding certain preferred stock that was publicly. traded. - 8 percen °. of the outstanding oommon stock of Ralphs, and (3) 10Ó percen of the stock of each of certain operating subsidiaries that w e engaged in the retÄil department store business . As of October 28, 1991, certain investors unrelated to the members of the FSI consolidat ed group owned 6 . 96 percent of the outsta Sing common stock of Holdings. owned As of that date, EJDC 5 percent of the out tanding common stock of Holdings . On Dece ber 12, 1991, EJDC s ld that stock of Holdings to FSI for $1.- Af car that sale, EJDC w s not a stockholder of any member of the FSI consolidated group. As of October 28, 1991, Holdings, which had been incorpo- rated i 1988, owned: (1) 1 0 percent of the outstanding common stock o Federated and (2) tl e residual interest iri a $1 million escrow und. As of October 28, 1991, Federated owned 100 percent of the stock o each of certain ope ating subsidiaries that werer engaged in the åetail department sto e business . Ce tain members of the SI consolidated group borrowed -funds from ce tain financial institutions in order to finance Campeau's acquisi ion of Federated (discussed above) . Montrea In May 1988, Bank of and Paribas lent $500 million to FSI in order to finance °I the parties'. agreed facts, the parties agreed to the approxi ate percentage of the outstanding common stock of Ralphs that Al ied owned. For conv nience, we shall not refer hereinaf ter to t hat ownership percent age as approximate. - 9 Campeau's acquisition of Federated. that loan in full. In April '1989, FSI prepaid FSI made that payment by using"a $50Ò million dividend that Holdings III had paid to FSI around that time. II Around April 1989, before paying that dividend, Holdirigs III received a $500 million dividend from Holdings3 II: same time, Holdings II had raised the $500 Aróund the illion that it used to pay that dividend by selling to Allied f r $500 million (1) approximately 36.2 percent of the outst nding common stock of Holdings and (2) an option to purchase an a ditional 1 percent^ of the- outstanding common stock of Holdings , In «May 1988, ~EJDC lent $480 million to FSI loan) (EJDC equity to finance Campeau' s acquisition of Federated. That loan was evidenced by a promissorg note in the . a nount of $480 million (FSI $480 million. note) that FSI issued to EJDC.A In-connection with the ; EJDC equity loan, EJDC, Campeau, FSI, ând CPI executed a document entitled "MASTER PLEDGE AGREEMÉNT" (EJDC master pledge agreement) . In April 1989, FSI and EJDC refinanced the EJDC equity loan and renegotiated its terms. Pursuant to that refinancing, EJDC returned to FSI the FSI $480 million note in exchange for a new promissory note from FSI in the amount of $480 million (FSI new "EJDC also received -in consideration for the EJDC equity loan (1) 7.5 percent of the outstanding comihon stock of Holdings, which it owned as of Oct. 28, 1991, and (2) a pledge of the outstanding common stock of Holdings that CPI owned (i l e . , 7 . 5 percent of the outstanding common stock of Holdinga) . 10 - $480 m' .lion note) ." Campean guaranteed FSI's payment of all sums d a under the FSI new $480 million note. In connection- with the efinancing of the EJDC equity loan EJDC, C mpeau, FSI, Holdings III/ CPI, -and the FSI shopping center orporations executed a document entitled ""MASTEP -PLEDGE AGREEMEÑT" the EJD (EJDC. revised -mast er pledge agreement)" that superseded master, pledge agreet ent .- agreement, certain members o Under that revised pledge the FSI consolidated ,group .pledged to EJDC the following propert ies as security for FSI' s perfor- mance u der the FSI new $480 million note: (1) 100 percent- of the outstanding common stock of CPI that FSI owned, (2) certain partnership interests and ce tain stock that CPI owned; including the common stock of Holdings that CPI owned, (3) the stock- that FSI own d in each of the FSI shopping center corporations and the respective partnership interests that each of those corporations owned, Allied, 4) 100 percent of the outstanding common stock of and (5) the 83.75 percent of the outstanding common - stock of7Ralphs that Holding III owned. The. EJDC revisedsmaste "E3DC re'tained the pledce consisting of the 7.5 perce'nt of the outÊtanding common stock þf Holdings that CPI owned and that EJDC ha received as conside ation' foi the EJDC equity loan. See supra note 11. FI April 1989, FSI owned directly 100 percent of the outstancing common -stock of Allied. As of Oct. 28, 1991, Holdings II owned 100 percent of the outstanding-common stock of Allied. The parties' agreed facts do not establish-how or when Holding II acquired that sto :k. - 11 - * pledge agreement provided that EJDC was to release on May 1, 1991, the pledge by Holdings III of the 83. 75 percent of the outstanding stock of Ralphs that Holdings III owned. EJDC did not release that pledge on May 1, 1991 Each of the, pledges under the EJDC ,revå.sed master pledge it agreement was subordinate to (1) FSI' s payment of all sums due under the FSI new $480 million note and (2) Campeau' s guaranty of FSI' s payment of those sums . * The .EJDC trevised master pledge agreement did not state that any pledge of property -under that agreement had priority over any otheropledg of property under that agreement . On April 7, " 1989, Citibank, Bank of' Mohtreal, and Pari:bas provided to Allied: certain revolving working capital in the amount of $280 million. On the same date, Bank of Montreal and Paribas provided to Allied a certain revolv ng inventory facility in the amount of $70 million. On- September 12, 1989, O&Y agreed to lendeup to $250 million to Campeau. - Thereafter, Cainpeau borrowed $ 75 million of that $250 million from O&Y (Campeau $1'75 milliòn laan) Campeau then lent $175 million to FSI that was evidenced by a note from FSI 'in the amount of $175 million i(FSI $175-mililio1 note) . Thereafter, FSI lent $175 million to Holdings III that Was evidenced by a note from Holdings III in the amount of $175 million (Holdings III note) . The Holdings III note was payabie no later than - 12 Septem er 12, 1991, and prov ded for an interest rate of 9.875 percen per year-. H ldings III used the $ 75 million that it borrowed from FSI to len $100 million to Alli d and $75 million to Federated that were e denced by the Allied note and the Federated note, respec- tively. On September 18, 1989, $175 m oldings III guaranteed the Campeau lion loan that Campe u received from O&Y around September 12, 19 9. On September 18, 1989, Holdings III also pledged to - O&Y as security for that guaiAanty the outstanding common stock of Ralphs hat Holdings III owned (i . e . , 8 3 . 75 percent ) . pledge as subject to the se urity interest of EJDC in ,that stock under t e EJDC revised maste Thàt pledge. agreement. In late 1989, certain mèmbers of the FSI consolidated group became ware that they would be unable to make payments' timely with re pect to the debt tha each had incurred. As a result, between January 14 and March 30, 1990, FSI and certain of its subsidiaries, including Hold ngs, Holdings II, and Holdings III, filed i the U.S. Bankruptcy Court for the Northern District of California (California U.S.- Bankruptcy Court) respective volun- tary pe itions for relief (cl apter 11 petitions) under chapter 11, ent tled "Reorganization", of the Bankruptcy, Code,- 11 U.S.C. secs. 1 01-1174. Of its (We shall refer collectively to FSI and certain ubSidiaries that fil d chapter 11 petitions in the --13 California U.S. Bankruptcy Court as the FSI debtors.) At the time Holdings IIII filed its chapter 1-1 peti ion in the California U.S: Bankruptcy Court, the Holdings III note was the only evi- dence of indebtedness of Holdings III for money that it had borrowed. In the chapter 11 petition that it filed with the California U.S. Bankruptcy Court, Holdings III reported total assets of $1,2004,285,.000 and total liabilities of $65)',778,OOO. In the- consolidated balance sheets for each of the taxable years ended January 31, 1991 through 1993, the FSI -consolidated group re- ported, based on book value, the followins total'assets and total liabilities (not including stockholders equ ty) 'of Holdings III as of the beginning of each of- those taxable fears: Date Feb. Feb. - Feb. 1, 1, 1, 1990 1991 1992 Total Assets otal Liabilities $179,754,880 180,457,073 180,293,905 $179,754,879 179,754,880 179,775,064 On January 15, 1990,- Allied and certai subsidiaries of¡its (collectively, Allied debtors) and Federated and certain of its subsidiaries (collectively, Federated debtors) filed in the U.S. Bankruptcy Court -for the Southern District of Ohio (Ohio U.S. Bankruptcy Court) chapter 11 petitions under , chapter 11 of the Bankruptcy; Code .: (We shall refer collectively to the Allied debtors and the Federated debtors as the Allied/ Federated debtors.) On January 15, 1990, the Ohio U.S. Bank- 14 - ruptcy ourt consolidated th Allied ebtors and the Feder ted debtors for joint administration under a single docket number commen respective chapter 11 cases of the (We shall refer to the proceedings d in the Ohio U.S. B nkruptcy Court that that court - consoli ated on January 15, i990, as the Allied chapter 11 procee ngs . ) ; In the.chapter 11 petit on that it filed with the Ohio U.S. Bankru cy Court, Allied repcrted, based -on book value, atotal assets f approximately $2, 934, 000, 000 and total liabilities of approximately $2,406,000,000 as of October 28, 1989. In the chapter 11 petit-ion that it filed -with the Ohio U-.S. Bankruptcy Court, ederated reported,- based on book value, total assets of approxihately $6,202,000,000 and total. liabilities of approximately 5, 339, 000, 000 as of Octobers 28, 1989. On July 2, 1990, the California U.S. Bankruptcy Court transferred venue in the res ective chapter 11 cases of the FSI debtors to the Ohio U.S. Ban ruptcy Court. On July 13, 1990, the Ohio;U. Bankruptcy Court å nsolidated those proceedings for joint a inistration under a single docket number. (We shall refer to the proceedings comrenced in the California U.S. Bank- ruptcy tourt that the Ohio U.S. Bankruptcy Court consolidated-on July 13 1990, as the FSI chàpter 11 proceedings.) Thereafter, the Ohio U.S. Bankruptcy Court considered and treated the Allied - 15 - chapter 11 proceedings and the FSI chapter 11 proceedings as interrelated and closely coordinated those proceedings. Around early 1990, Ralphs was' solvent. At no time did Ràlphs file a petition under the Bankruptcy Códe. Nor was Ralphs a debtor in either the FSI chapter 11 proceedings or the Allied chapter 11 proceedings. 'As a result, no creditor claims were filed against Ralphs in ther FSI chapter 11 proceedingd or in the Allied chapter 11 proceedings . The FSI consolidated group filed Form 1120, U.S. Corporation Income Tax Return (Form 1120) , for its -taxable year ended January 31, 1991 (FSI consolidated, group 1/31/91 consolidated return) . The FSI consolidated group attached to that return a consolidated balance sheet in which it reported, based on book value", the following total assets and total liabilities (not including stockholders equity) as of the beginning of tliat taxable year (i . e . , February» 1, 19 90 ) of that group and Jof certairi of its member s : il - 16 -- Company/Group Total Assetsi ' Total Liabilities FSI onsolidated group FSI Hol ings III Hold .ngs II Holdings $12, 022, 633, 639 836, 271, 594 179, 754,.880 476, 483, 273 -0 - $13, 975, 652, 352 1, 008, 207, 723 179,'754, 879 477, 014, 279 30 , 540 6, 572, 255, 075 3, 020, 041, 662 1,404,826,686 6, 879, 178 , 50 0 3, 846, 033, 370 1,369,630,102 Fede ated Alli d Ralp s T e term "Total Assets" does not include any amount representin the value of intangiŠle assets. In the consolidated balanc sheet that the FSI c0nsolidated group attached to the FSI consol ated group 1/31/91 c$nsolidated return, line 13A, "INTANGIBLE SETS", was left blan for each member of that consolidated group. For the FSI consolidatec group' s taxable year ended January 31, 199 , Holdings claimed a worthless stock deduction with respect to the common stock Šf Federated that it owned. For that taxable|year,- Allied; Holdin s II, and CPI each claimed a worthless stock deduction with respect to the common stock of Holdings that ea h owned. At all, times during the FSI chapter 11 proceedings, the FSI debtors including FSI and Holdings III, operated as debtors in possess on under the Bankrupt cy Code. and conducted their respective on oing businesses subst antially as they had conducted thos busines es before the FSI chåpter 11 proceedings had commenced. During he pendency of the FSI chapter 11 proceedings through early F bruary 1992, FSI and the other FSI debtors continued to be mana ed by the officers that had managed the respective FSI 1 - 17 debtors before the FSI chapter 11 proceedings had commenced. " At no time during the FSI chapter 11 proceedings did the Ohio U.S. Bankruptcy Court appoint any 'trustee to take control of the assets and the business of any of the FSI debtors . Nor did that court appoint any examiner - for any of thosej debtors . At no time during the FSI chapter 11 proceedings did any creditor of FSI object to FSI' s acting as a debtor in possession. 'Nor did any of those creditors-ask the Ohio U.S. Bankruptcy Court to appoint any trustee. At all. times . during s the Allied chapter 11 proceedings , the Allied/Federated debtors .also operated as dybtors in possession and conducted their respective ongoing busihesses substantially as they had conducted those businesses before the Allied chapter 11 proceedings had commenced. From January 1990. to February 1992, G. William Miller serired as the chairman and the chief executive officer of FSI. 1sThe parties' agreed facts do not indicate whethe~r during the pendency of the Allied chapter 11 proceedings through early February 1992 the Allied/Federated debtors continued to be managed by the officers that had managed the respective Allied/ Federated debtors before the- Allied chapter 11 proceedings had commenced. Nor do those agreed facts indicate whether certain facts (discussed below) that the parties agree apply to the FSI debtors and/or the FSI chapter 11 proceedings also apply to the Allied/Federated debtors and/oi- the Allied chapter 11 proceedings . However, neither party argues that 'any such fact does not apply to the Allied/Federated debtors and/or the Allied chapter 11 proceedings.. We assume that is-because ïn making their respective arguments with respect t·o their respective motions for partial summary judgment the parties focus their arguments on the receipt of certain RHC stock by certain creditors of FSI' and do (continued . . . ) 18 - T e U.S. Trustee Progra (U.S. trustee program), a component of the .S. -Department of Ju tice that is responsible for pi-omot- ing th efficiency and prote ting the integrity of the Federal bankru cy system,. oversaw t e FSI chapter 11 proceedings and the Allied hapter 11 proceeding . officia creditor committees were appointed in the Allied chapter - 11 proc edings . Pursuant to that program, six Pursuant to the U . S . trus tee program, an of f i - cial committee of unsecured reditors of FSI -was, appointed in the FSI chapter 11 proceedin s . " None of EJDC, Bank of Mon- treal, Paribas, O&Y, or Campëau was a member of the committee of unsecur d creditors of FSI appointed pursuant to thë U.S. trustee program in the FSI chapter 11 proceedings . Se eral claims were filèd in the FSI chapter 11 proceedings against the various FSI debtcrs, including -the following 'claims. EJDC filed numerous claims i including: class 1 (1) Certain secu ed claims against FSI, identified as under the EJDC revised master pledge agreement and the FSI new $480 million note; Holding as ( the FSI chapter 11 proceedings, (Ž) certain secured claims,against II, identified as class 2, under a' certain agreement; . . continued) not focus on the, receipt of certain RHC stock by acertain creditors of Allied. See infra note 49. "E ch of the respective official committees appointed pursuan to the U.S. trustee program in the Allied chapter 11 proceedings and the official committee of unsecured creditors appoint{d pursuant to that p ogram in the FSI chapter 11 procee ings possessed certain rights under the Bankruptcy Code. - 19 - (3) certain secured claims against Holdings III, identified as class 3, under the EJDC revised master pledge agreement and any pledge agreement regarding the Allied note orathe Federated note; (4) certain secured claims against CPI, identified as class 4; (5) certain respective unsecured claims against FSI,' Holdings III, and CPI, identified as class 14, includirig any unsecured deficiency claimsi? against those debtors; and (6) certain unse-cured claims Jagainst any of the FSI debtors-, identified as class 15, to the extent 'such claims were not inclúded in cla s 14. EJDC's claims against the 'FSI debtors, except Holdings totaled approximately $480 million, not including -ihterest due on those c laims . 10 In -the FSI chapter 11 proceedings, EJD asserted a lien on the following property of certain of the FSI debtors: common stock of CPI that FSI owned; (2) the common stock of e~ach of the FSI shopping center corporations that FSI owned; interest in the CHoldings III note; that Holdings III owned; (1) The (3) FSI' s (4) the dommon stock: of Ralphs (5) the common stoek of Holdings that 7An "unsecured deficiency claim" was any portion of a claim to the extent that. the value of the claimholder' s interest in the applicable FSI debtor' s interest in any proþerty securing the claim was less than the amount of the claimi or to the extent that the amount of any claim subject to setoff was less than the amount of such claim, as determined under sec., 506 (a) of the Bankruptcy Code. "Each of the debts on which he creditbr claims of EJDC against the FSI debtors was based had been guaranteed by Campeau. s - 20 CPI ow d; (6) a certain genéral partnership interest that "CPI owned ik a certain partnersh p; (7) the 50-percent partnership interest of each of the FSI shopping center corporations in the partne ships that operated c rtain shopping malls jointly with EJDC; d (8) -the common sto k of Allied that Holdings II ownede T1 re were several pote tial grounds on which the FSI debtors might have been able to invalidate the security interest that E0 C claimed in the com on stock of Ralphs that Holdings III owned. The -FSI debtors claimed in certain documents filede wit'h the Oh U.S. Bankruptcy Cou t that if they were not able to invali te the security inte ests in the property of certain of the FSI debtors that EJDC as erted, EJDC would be entitled to a (1) all of the value attribut able tos the common stock of Ralphs that Holl.dings III owned, which the FSI debtors .estimated to equal approximately $485.8 millionA and -(2) all of the value. attribute able to the common stock of each of the FSI shopping center corpora ions that FSI owned, which FSI estimated to- be not more than $8 m llion, to the ext nt necessary to satisfy EJDC' s oversec red claims totaling pproximately $543 million. Ba k of Montreal and Pa ibas filed certain unsecured claims against the FSI debtors, ider tified as class 20, relating to the $500 mi lion that they had nt- to FSI in May 1988 . Bank of Montrea and Paribas filed t ose claims as a~ protective measure in the vent FSI recovered ag a "voidable preference" under the - 21 - Bankruptcy Code a portion of the $500 million that -it had repaid to Bank of Montreal and Paribas in April 1989. O&Y filed a sedured claim -against Holdings III, identified as class 8, under the terms of the Allied nöte and the Federated note and under Hol:dings III's guaranty of th'e loan that O&Y had agreed on September 12, 1989, to make available to Campeau. O&Y filed an unsecured deficiency claim against Hold'ings IfI ahd all other FSI' debtors, identified as class 21. O&Y also asserted as security for its claims against Holdings II a lien on" the common stock of Ralþhs that Holdings III owned. FSI filed a secured claim against Holdinge III, identified as class 10, under the Holdings III note. FSI also filed an unsecured claim against Holdings III, identïfied'as clàss 24, that included any unsecured deficiency claim. Campeau filed a secured claim against FSI class 9, under the FSI $175 million note. identified as Campeau-filed an unsecured älaim against the FSI debtors, identified as class 22, that included any -unsecdred deficiency'claims and any claims Campeau may have assigned to O&Y as securit . Campeau also asserted a lienoon the claims that FSI-filed and that were identified as class 10 and class 24. Ralphs filed an unseau ed claim against the FSI debtors, identified as class 26, under certain tax-sharing agreements that certain members of the FSI consolidated groåp, including Ralphs, - 22 had ent red into before the SI chapter ll'proceedings had been commenced. H Ldings III held the i terest, identified as class 39, in the out tanding common stock of Holdings II. interes , identified as clas FSI held the 40, in the outstanding common stock of Hol ings III. I - addition to the clains discussed above, Allied had potenti l claims against the FSI debtors for fraudulent conveyance, b each of fiduciary du ies, indemnity, and civil conspir cy. Those claims wene asserted on behalf of Allied e against the FSI. debtors with respect to the funds thats FSI used in Apri 1989 to repay to Bank of Montreal and Paribas the $500 million that those companies lent to FSI in May 19884. FSI had potenti l claims for preferer ce against Bank of Montreal and Paribas with respect to the dlaims asserted on. Allied' s behalf against th,e FSI debtors; , Bar k of Montreal and Paribas had conting nt claims to recover from FSI any amount which .Bank of Montrea or. Paribas would be required to pay Allied or by which their o her claims against A] lied might be. reduced as a result of Allied' claims against the FSI debtors with.respect to the $500 million that Bank of Montreal and Paribas had lent to FSI. Bank of Mont eal and Paribas- asserted that their respective claims would be senior to those claims of EJDC that were secured by the common tock of Ralphs that Holdings III owned. - 23 - Several claims were filed in the Allied chapter 1L proceedings againsts the various Allied/Federated-debtors, following claims. including the Bank of Montreal. and Paribas filed.secured and unsecured claims against Allied, identified as classrA-6, class AR-6, and class AO-6, with respect- to the respective revolving working capital and.revolving inventory facilities that they had extended to Allied on Aprile 7, 1989. Holdings III filed an unsecured claim against Allied, identified as class A-17, lunder the Allsied note. Holdings III, also filed an unsecured claim against Federated, identified as class F-10) under the Federated.notes EJDC and its affiliates filed more than 200 claims against the Allied/Federated debtors . EJDC asserted that its claims againstsFederated were secured by a pledge of the Federated note and the Allied note. Holdings held the interest, identifiedtas class F-15, in the outstanding common stock of Federated. Holdings II held the interest, identified as class F-19, in the outstanding common stock of Allied. The FSI debtors and the Allied/Federated debtors had obliga- tions'under the Bankruptcy Code to file with the Ohio U.S. Bankruptcy Court in the FSI chapter 11 proceedings and the Allied chaptek 11 proceedings respective p oposed plgns of reorganiza- - 24 - tionU nd respective disclos re statements with respect to those propos plans of reorganiza ion. Under the Bankruptcy Code FSI de ors and the Allied/F derated debtors had an exclusive right ring the 120 days following the date on which those debtors filed their respecti e chapter 11 petitions sivity the (plan exclu- eriod) to file respe tive proposed plans of reorganiza- tion wi h the Ohio U.S. Bank uptcy Court. On several occasions the FSI debtors -and the Allied/Federated debtors requested extensi ns of their respecti4e plan exclüsivity periods. Ohio U. The . Bankruptcy Couet gnanted each of those requests.? At no time did EJDC, Ba k of Montreal, Paribas, O&Y, or Campeau seek to reduce the time during which FSI had the exclu- sive ri ht to file a propose plan of reorganization with the Ohio U.S. Bankruptcy Court. Nor did those creditors object'to the req ests of FSI to extend the time during which it had the exclusive right to file à pr posed* plan of reorganization with that coürt.20 "T e term "plan of reorcjanization" is used herein to refer to a plan described in ch. 11 of the Bankruptcy Co'de, 11 U.S.C. secs. 1 01-1174. Our use of that- term is not intended to refer to a pl n of reorganization or tax purposes or to imply that any propose .plan of reorganizat. on filed with the Ohio U.S., Bankruptcy €ourt constituted a plan of reorganization for tax purposes. 20T e docket sheet of thé Ohio U.S. Bankruptcy Court in the FSI cha ter li proceedings did not' reflect (1) that EJDC, Bank of Montrea , Paribas, O&Y, or C$mpeau requested that that court shorten the FSI debtors' plan exclusivity period in the FSI (cont inued . . . ) - 25 - During the FSI chapter 11 proceedings and the Allied chapter 11 proceedings, the FSI debtors, the Allied debtors, the Federated debtors, Ralphs, the various creditors committees, and other respective creditors of the FSI debtors and the Allied/Federated debtors engaged in extensive -discussions .and riegotiations regarding the resolution of .the FSI chapter 11 proceedings and the Allied chapter 11 proceedings . Each of the; pdrticipants in those discussions and negotiations was representeds by cseparate professional advisors. . 1 - The FSI debtors and the Allied/Federated debtors filed with the Ohio U.S. Bankruptcy Court, respective joint proposed plans of reorganization in sthe FSI chapter 11 proceedings and the Allied chapter - 11 proceedings . Thereafter , those debtors amended on - several occasions the respective joint proposed plans and filed with the Ohio U.S. Bankruptcy Court those ,respective amended joint proposed plans. None of: EJDC, Bank of lvíontreal, Paribas, O&Y, or Campeau objected to the confirmation of any of the respective proposed- plans of reorganization' that the FSI debtors and the Allied/Federated debtors filed with the Ohio U.S. Bank- ( . . . continued) chapter 11 proceedings or (2) that any of those creditors objected to the several reqtiests that the -FSI debtors made to the Ohio U.S. Bankruptcy Court for .extensions of tihat plan exclusivity period. - -26 ruptcy ourt." - No party exc pt the FSI debtors and the Al- lied/Fe erated debtors filed with that court a proposed plan of reorgan zation in the FSI ch pter 11 proceedings or the Allied chapter 11 proceedings . On October 28, 1991, th -FSI debtors filed with the Ohio U.S. Ba kruptcy Court in the FSI chapter 11 proceedings (1) a documen entitled "Third Ame ded Joint Plan of Reorganization for Federat d Stores, -Inc.; Federated Holdings, Inc.; Federated Holdings II, Inc . ; Federated Holdings III, Inc . and Campeau Properties, Inc." (October 1 91 proposed FSI chapter 11 plan) and (2) a document entitled "Sec nd Amended Disclosure Statement Pursuan to Section 1125 of the Bankruptcy Code for Federated Stores, Inc.; Federated Hold ngs, Inc:; Federated Holdings; II, Inc . ; F derated Holdings III Inc . and Campeau Properties , . Inc . " (FSI disclosure"statement) . On October 28, 1991, th Allied/Federated debtors filed with the Ohio U.S. Bankruptcy Cou t in the Allied chapter 11 proceedeings (1 a document entitled "Third Amended Joint Plan of Reorga- "The docket sheet of the Ohio U.S. Bankruptcy Court in the FSI cha] ter 11 proceedings didd not reflect that EJDC, Bank of Montreai, Paribas, O&Y, or CZmpeau filed any document with that Court o jecting to the confiŠmation of any of the respective proposed joint plans of reorganization that the FSI debtors filed with thÂt Court in those prodeedings . "T e docket sheet of the Ohio U.S. Bankruptcy. Court in the FSI cha ter 11- proceedings did not reflect that EJDC,, Bank of Montreal, Paribas, O&Y, or Campeau filed any document with that Court o jecting to the adequacy of the FSI disclosure statement. - 27 - nization of Federated Department Stores, Inc., Allied Stores Corporation and Certain of Their Subsidiaries" (October 1991 proposed Allied chapter 11 plan) and (2) a -document entitled "Disclosure Statement Pursuant to Section 1125 of the'Bankruptcy Code.for the Third Amended Joint Plan of Reorganization-for Federated Department Stores, Inc., Allied Stores Corporation, and Certain of Their Subsidiaries" (Allied disclosure statement). The October 1991 proposed FSI chapter il plan and the October 1991 proposed Allied chapter 11 plan (collectively, the October 1991 proposed chapter 11 plans) were interdependent. 2The effectiveness of the October 199T proposed FSI chapter-11 plan was conditioned on the satisfaction of or, lif'waivable, waiver of all of the conditions to the effectiveness of the October 1991 proposed Allied chapter 11 plan. According to the FSI debtors'and the Allied/Federated debtors, the primary reason for filing separate proposed plans of reorganization in their respective chapter 11 proceedings was the existence of separate debt structures for the respective operations of the FSI debtors and the All'ied/Federated debtors. Other reasons of the FSI debtors and the Allied/Federated 'debtors for filing separate sproposed plans of reorganization were: (1) Allied, Federated, and Ralphs were separate reporting compa- nies under certain Federal securities laws; -(2)- the agreement of the respective- parties to the FSI chapter 11 proceedings and the - 28 Allied chapter 11 proceeding that the creditors of the retail departn ent store businesses hould become equity participants in those sinesses after the c apter 11 reorganization; and (3) the retail epartment store busi esses and the Ralphs grocery-store busirie s had little in commo , having been operated separately under parate management anÅ from separate geographic locatioris Ac ording to the FSI disclosure statement, the overall purpos s of the October 1991 proposed FSI chapter 11 plan were: (1) To distribute the assets of the FSI debtors among the credi tors o those debtors;, (2) to maximize the amount that the- credit cs of the FSI debtors could recover on their respective claims gainst those debtors and to allocate that- amount in a manner hat the FSI debtors (3) to ettle and compromise certain significant disputes that iewed as fair and reasonable; and the FSI debtore -believed .wou d result in significant expense if litigat d and that had the p tential to impact adversely, the FSI debtors if determined advers ly to them. Ac ording to the Allied disclosure statement, the-overall apurpose of the October 1991 proposed Allied chapter 11 plan were: 1) To alter the respective debt and the respective capital structures of the Al ied/Federated debtors sso that at the conclus on of the Allied cha ter 11 proceedings those debtors would p ssess. viable respective capital structures; (2) to maximizh the amount that .the creditors of the Allied/Federated - 29 - debtors could recover on their respective claims - against those debtors and to allocate that amount in á manner that the Allied/ Federated debtors viewed as fair and reasonable; and (3) tò i settle,. compromise, or otherwise dispose of certain claims of and against the Allied/Federated debtors on terms *that those debtors believed to be reasonable. In addition, A]jlied/Federated debtors intended for the October 1991 "proposed Allied chapter 11 plan to preserve certain economies of scale and other benefits of the joint operation of the Allied/Federated debtors. As a specific, condition to any confirmation by the Ohio U S. Bankruptcy Court of the October 1991-proposed chapter 11 plans, the FSI debtors, the Allied/Federated debtors, and the respective creditors of those debtors 'entered into an agreement (comprehen- sive settlement agreement) that was to resolve" certain áctual and potential claims that those parties had against each other under terms that those parties determined were reasonable. That agreement provided, inter.alia, that the parties to that agreement generally agreed to use their best efforts to have the Ohio U.S. Bankruptcy Court confirm the October 1991 proposed chapter 11 plans; Under the comprehensive settlement agreement, the FSI debtors, the Allied/Federated debtors, Ralphs, and some of the respective creditors of those debtors were to execute releases regarding potential and actual claims among| arid between the - 30 - parties to that agreement e 'hose claims included the various respective claims of EJDC, B nk of Montreal, Paribas¡ O&Y, and' Campeau. Many of the issues raised by the, claims that the parties to the comprehensive settlement agreement were to release were n vel or unresolved iss es of law that could have required time-c nsuming litigation to resolve. Under the comprehensive settlement agreement, certain tax- sharin agreements between and among members of- the FSI consol ated group that had een entered into before the com- mencem nt of the FSI chapter 11 proceedings and the Allied chapter 11 proceedings were o be canceled as - a condition to the execut n of the comprehensiÝe settlement agreement and of the Ohio U. . -Bankruptcy Court' s confirmatiion of the October 1991 propos chapter 11 plans . U er the comprehensive settlement agreement, the claim of Holdin III with respect to the Federated note was to be reduced from $7 1 million to $40.7 tâillion in order .to account for certain claims that the FedeÙatede debtors had against FSI with "O e of the tax-sharing agre'ements was between Ralphs and FSI. U ider that agreement, for each taxable year of the FSI consoli lated group Ralphs waj obligated to pay to FSI an amount equal t > the amount of tax tlíat Ralphs would have paid if Ralphs had fil d a separate tax ret(rn for that taxable year. In return, each member of the FSI consolidated group agreed to indemni y jointly and severalily and hold harmless Ralphs against any claim of liability for t x of the FSI consolidated group. ! - 31 respect to certain tax-sharing agreements among those debtors and FSI. The comprehensive settlement agreement st-ated that that agreement was an essential 'element of and means of implementation of the October 1991 proposed chapter 11 plaps That agreement also stated that each of the October 1991 proposed chapter 11 plans was an essential el.ement of and means of execution of the comprehens ive se t t lement agreement . The October 1991 proposed chapter 11 plans proposed to separate the ownership and the operation of; the Ralphs grocery store business from the respective ,ownership and the respective operations of the real estate businesses- and the retai'l department store businesses . In order -to 'achieve" that separation, the October 1991 proposed chapter 11 plans ~proposeld, ~inter alia, that Allied and Federated ,merge into a single surviving eritity, known as New Federated, - thereby consolidating the real estate businesses and the retail department store businesses, and that a ' majority of the outstanding common stock of Ralphs be distributed to EJDC, Bank of Montreal, and Paribas, all of which were unrelated to the FSI consolidated group. In negotiating the terms of the October 1991 proposed FSI chapter 11 plan, FSI proposed to value all of the outstanding common stock of Ralphs at $580 million solely for the purpose of allocating the. outstanding common stock of Ralphs which Holdings 32 - III ow ed and which the FSI debtors proposed in that plan that Holdin III transfer to EJDC, Bank of Montreal, Paribas, and Campea .24 Although FSI had roposed a value higher than $580 millio for the outstanding ommon stock of Ralphs, FSI was willin to, and did, propose a value of $580 million for that stock order to achieve a onsensus among the parties that negotia ed the terms of the dctober 1991 proposed FSI chapter 11 plan. Based on a value of $$80 million for all of the outstand2 ing co on stock of Ralphs, t he Allied/Federated .debtors assumeà that t a value of the outstai ding common stock of Ralphs that Allied wned ( i . e . , 16-. 25 peÈcent ) was approximately, $94 million Th chapte FSI debtors propose sin the October 1991 proposed, FSI 11 plan that EJDC redeive the following with respect to its cre itor claims identified as classes 1, 2, 3 4, 14, and 15: (1) - 20 hiillion shares of thegoutstanding common stock of Ralphs, representing approximately 60 . 34 percent of the total, outstanding common tock of Ralphs, to be distributed from the shares of • Ralphs ommon stock that Hol ings III owned; (2) a release under the comprehensive settlement agreement of any claims against EJDC; and (3) certain respect ive real estate" partnership inter 24The net value of all of the outstanding common stock of Ralphs as at least $475 milÈion. I -- 33 - ests that the FSI .shopping center corporations owned or certain stock of those corporations that FSI owned.23 - The FSI debtors proposed in the October 1991 proposed FSI chapter 11- -plan that Bank of Montreal and Paribas, in -consider- ation for (1) their respective creditor claims identified -as class 20, (2) their respective agreements undër the comprehensive settlement agreement to release any claims against EJDC, and (3) their respective consents "to the October 1991 proposed Allied chapter 11 plan as holders of the claims identified as class A-6, receive the -following: (1) e3,*514;286 shares of the outstanding common stock of Ralphs, representing approximately 10.6 percent- of the total outstanding common stock of Ralphs, to be distributed equally between Bank of Montreal and Paribas and to be distributed from the shares of Ralphs common stock that Holdings III owned and (2) releases under the comprehensive settlement agreement of any potential claimst against/Bank of Montreal or Paribas. The FSI debtors pro'posed in the October 1991 proposed FSI chapter 11 plan that Campeau receive the folldwing with respect 2sUnder the October 1991 proposèd FSI chapter ,11 plan, it was proposed that EJDC receive the respective real estate partnership interests that each of the FSI shopping center corporations owned, unless FSI determined that any such distribution to EJDC would have adverse tax consequences to FSI. In that event, under the October 1991 proposed FSI chapter 11 plan, it was proposed that EJDC receive certain respective stock of the FSI shopping center corporations that FSI owned. - 34 to its areditor. claims against- FSI identified as classes -9 and 22: (]) 4,244,241 shares of the outstanding common stock of Ralphs representing approxí atelys 12.8 percent of the total outstan ing common stock of alphs, to be distributed from the shares that Holdings III owned, f Ralphs common stoc (2) cash, and (3) a release under the comprehensive settlement agreement of any pot antial claims against it . Under the October 1991 proposed FSI cha2ter -11 plan, the FSI debtors proposed that a portion I! (i.e., .8 percent) of the o tstanding common stock of Ralphs that th se debtors- proposed e .distributed - to Campeau be distrib- uted to FSI and be sold by FSI as needed in order to satisfy certain obligations and expe ses arising under the October 1991 proposed FSI chapter 11 plan sell an To the extent. that. FSI did not . portion of the Ralp s stock that it received, the FSI debtors proposed in the Octo er 1991 proposed FSI chapter 11 plan that FS distribute that port ion to Campeau. Th FSI debtors proposed in the October 1991 proposed FSI chapter 11 plan that O&Y rec ive the following with respect to its creditor claims identified as classes 8 and: 21: (1-) A distrib tion from Campeau with respect to Holdings III's guaranty of the oan that O&Y agreed n September 12, 1989, - to make availab e to Campeau and (2) a release under the comprehensive settlem nt agreement of any potential claims against it . !i - 35 - The FSI debtors proposed in the October 1991 proposed FSI chapter- 11 plan that FSI receive with respect to its creditor * claims identified-as classes 10-and 24 the property of the estate of Holdings III, if any,.after the distribution pursuant to that proposed plan of the common stock of Ralphs that Holdings III owned. In the October 1991 proposed FSI chapter 11 pl'an the FSI debtors proposed that FSI adistribute pursuant to that plan any such property that .it received. The FSI debtors proposed in the October 1991 proposed FSI chapter 11 plan that the respective creditor claims of EJDC, Bank of Montreal, Paribas, O&Y, and Campeau all be impaired. In that proposed plan the FSIs debtors proposed that all secured claims except the secured claims identified as class 11" bè ilmpaired. In the October 1991 aproposed FSI chaptef 11?plan the FSI debtors proposed that several creditors that had filed respeative unse- cured claims against the FSI debtors receive certain distributions with respect to their claims. The FSI debtors proposed in the October 1991 proposed FSI chapter 11 plan that Holdings, Holdings II, Holdings III, and CPI be dissolved and that their respective assets vest in and be held by FSI as disbursing agent 'for -distribution under the October "The claims identified as class 11 cor sisted of claims against Holdings II under a certain loan agreement dated Apr. .29, 1988, pursuant to which Holdings II borrowed certain funds from Citicorp Investment Bank Ltd. - 36 - 1991 p oposed FSI chapter 11 plan. debtor In that proposed plan-the FSI proposed that FSI co tinue in existence until the - October 1991 pr posed FSI chapter 11 plan had been fully consummated and the Ohi U.S. .Bankruptcy Cou t closed the FSI-chapter 11 proceed- ings. t that time FSI woul dissolve. FSI debtors propose in the October 1991 proposed" FSI T chapte 11 plan that all. of t he outstanding common stock of Holding III be canceled upo that n property be distribut ed to FSI with respect to its interes , identified as clas Holding the dissolution of· that company and 40, as the sole stockholder of III. In summary, the FSI debt ors proposed in the October 1991 propose FSI chapter 11 plan that Holdings III transfer to the followihg "creditors of FSI tl e following approximate percentages I of the utstanding common st ck of Ralphs: FSI Creditor Percentage of Outstanding Common Stock of Ralphs EJDC Campe au 60 . 4 12 . 8 Bank of Montreal 5.3 Paribas 5.3 Th Allied/Federated de tors proposed in the October 1991 propose Allied chapter 11 plan that on or after the effective date of that proposed plan Allied and Federated merge and that all of heir respective assets vest in a single surviving comI pany, t be known as New Federated. | 3 The Allied/Éederated debtors ,37 - proposed in that proposed plan that.all of the outstanding common stock of New Federated 4xa distributed to the respective creditors of the Allied debtors and the Federated debtors. The Allied/Federated debtors-proposed in the October 1991 proposed Allied chapter 11- plan that'Holdings III receive with respect to its claim against Federated under the Federated note 816 000 shares of the common stock of New Federated. The Al- lied/Federated debtors proposed in that proposed planothat 588,000 of those 816,000 shares be distributed pursuant= to the October 1991 proposed,FSI chapter 11: plan to the respective general, unsecured creditors of FSI and Holdings III in satisfaction of those unsecured creditors' respective claims against FSI and Holdings III. The Allied/Federated debtors proposed in the October 1991 proposed Allied chapter 11 plan that the remaining 228,000 shares of the common stock of New Federated that that, plan proposed Holdings III receivesbe sold under the October 1991 proposed. FSI chapter 11 plan to' provide cash to FSI. In the October 1991 proposed Allied, chapter 11 plan the Allied/Federated debtors proposed that Holdings III contribute to the capital of Allied its claim against Allied under the Allied note and that no property be distributed to Holdings III with respect to that claim. The Allied/Federated debtors p oposed in,the October 1991 proposed Allied chapter 11 plan that Bank of Montreal and Paribas - 38 - each r ceive, with respect to their respective claims identified as cla ses A-6, AR-6, and AO 6 approximately- 4.83 ~percent of the total tstanding common sto k of Ralphs, to be distributed from the sh es of Ralphs common tock that Allied owned and that New Federat d" was to own pursua t to the October 1991 proposed Allied chapter 11 plan. Th Allied/Federated de tors proposed -in the October 1991 propos Allied chapte$ 11 p an that Allied retain in its capac- ity as stockholder of Ralp s the shares of the Ralphs common stock t at . it owned and that were not to be distributed to Bank of Mont eal and Paribas (i.e , 6.6 percent -of the outstanding common tock of Ralphs) . Ne Federated, . as the successor - to Allied, was to,retain and co tinue to own such stock. I summary, the Allied/Federated debtors proposed in the October 1991 proposed Allied chapter 11 plan that the following compani s own the following pproximate percentages of the outstar0ling common stock of alphs after any distributions of that stock proposed in that proposed plan: A discussed above, th Allied/Federated debtors proposed in the October 1991 proposed Allied chapter 11 plan that Allied and Fed rated merge into a s ngle surviving entity known as New Federat d. 39 - Entity Bank of Montreal Paribas New Federated Percentage of Outstanding Common Stock of Ralphs 4.8 4.8 6.6 As of February 3, 1991, an appraisal estimated that, excluding the then-outstanding debt of Ralphs of approximately $985 million and the cash and cash equivalents of $34 . 7 million that Ralph owned, the value of Ralphs was between approximately $1.45 billion and $1.55 billion. The FSI debtors, the Allied/Federated debtors, Ralphs, the creditors that filed.claims in the FSI chapter 11 proceedings and/or the Allied chapter 11 proceedings, and their respective representatives negotiated the terms of an indemnification agreement. They believed that such an indemnification agreement would be necessary in order to allocate among the members of the FSI consolidated group responsibility for certain liàbilities, including certain tax liabilities. That was because of, inter alia, the pendency of the FSI chapter 11 proceedings and the Allied chapter 11 proceedings, the proposed cancellation of certain tax-sharing agreements among the members of the FSI consolidated group, the separation proposed in the October 1991 proposed chapter 11 plans of the retail department store businesses and the Ralphs grocery store business into entities with - 40 separa e ownership, and the act that the FSI consolidated group was at all relevant times filing a single. consolidated tax return. I October 1991, the FS debtors, the Allied/Federated debtor , Ralphs, and the creditors that filed claims in the FSI chapter 11 proceedings and/or the Allied chapter 11 proceedings filed th the Ohio U.S. Ban ruptcy Court an unexecuted pr posed indemni ication agreement (O tober 1991 proposed indemnificatioh agreement) that they had negötiated and that they proposed be effect i as of the effecti FSI chapter 11 plan. date of the October 1991 proposed The Ohio U.S. Bankruptcy Court did not approve the October 1991 pro osed indemnification agreement. It was proposed in the October 1991 proposed indemnificatio agreeme t, inter alia, that esponsibility for certain nontax liabili ies arising from the conduct of the respective businesses of the arties to that agreen ent be allocated among those parties and tha certain tax liabilities be allocated among certain of those parties . Certain prop sals were made in the October 1991 proposed indemnification agrèement to address certain other matters regarding the relati nship of the parties to that agreement after certain of those parties ceased to be members of the FSI consolidated group. It I was also proposed in the October 1991 proposed indemnification agreement that New Federated, FSI, and Ralphs indemnify - 41 one another and certain other members of the FSI consolidated group for certain losses relating to resulting from, or arising out of the conduct of their respective businesses before, on, or after the effective date of the October 199-1 proposed 'FSI chapter 11 plan. ..- - It was further proposed in the October 1991 proposed indemnification agreement that New Federated indemnify and hold harmless Ralphs, Holdings III, FSI, and certain subsidiaries of FSI from and -against certain tax liabilities - that became known after the respective -effective dates of the October 1991 proposed FSI chapter 11 plan and the October 1991 proposed- Allied chapter 11 plan but that were attributable to taxable years that ended on or before those effective dates. indemnification In exchange for thatt proposed it was proposed in the Octiober 1991 proposed indemnification agreement that Ralphs pay to New Federated (1) $10 million over a period of five years beginning on the effective date of the October 1991 proposed FSI chapter 11 plan and (2) an amount. equal to 21 percent of any taxes for which New Federated.indemnified Ralphs but not to exceed $15 million, adjusted by a certain $5 million credit potentially available to Ralphs . After the FSI debtors and; the-Allied/Federated debtors filed the October 1991 proposed FSI chapter 11 plan and the October 1991 proposed Allied chapter 11 plan, respectively, the FSI - 42 - debtor , the Allied/Federate debtors, Ralphs / and the respective credit rs that had filed cla ms in the FSI chapter 11 proceedings and/or the Allied ,chapter 11 proceedings discussed and riegotiated certain modifications of the terms of those proposed- chapter 11 plans. Under the respective modified proposed FSI chapter 11 plan a the modified propos d Allied chapter 11 plan, the FSI debtor and the Allied/Federated debtors proposed (13) the incor- porat i of - a new company, R lphs Holding Co . , Inc . (2) , th transfer to it by Ho dings III and Allied of their (RHC) , respective common stock owne†ship in Ralphs (i.e., 83.75 þercent and 16 . 25 percent , respectiv ly) , III an (3 ) the trans f er to Holdings Allied by RHC of 83. 5 percent and 16.25 percent, respec- tively, of RHC' s outstanding common stock, (4) "the respective distrib tions by Holdings II] to certain of FSI' s creditors and by Alli d to certain of its reditors of their respective shares of outs anding common stock öf. RHC in the same amounts and in the same ma ner as the parties t the October 1991 proposed chapter 11 plan had proposed in tho e proposed plans Holdings III and Allied istribute the common stock of Ralphs (We shall refer to the ser LeS Of transactions that the FSI debtors and the Allied/ Federat d debtors proposed ir the modifications to the October 1991 pr posed chapter- 11 plar s (namely, that RHC be incorporated Holdings III and Allied tran(fer their respective common stock of Ralphs to RHC, RHC transfer all of=its common stock to Holdings . - 43 III and Allied, and Holdings III and Allied distribute their respective common stock of RHC) as the Ralphs stransaction.) The proposed Ralphs transaction required;the parties that negotiated the terms of thesOdtober 1991 proposed indemnification agreement to revise the terms of that agreement to take into account that proposed transactionue Around late 1991, Federated and certain of its subsidiaries, Allied and certain of its subsidiaries,.New Federated (asethe proposed successor to Allied and Federated), FSI and certain of its subsidi'aries, Holdings III, Ralphs, and RHC executed a document entitled "INDEMNIFICA- TION AGREEMENT" (proposed final indemnificati~on agreement)." It was proposed in.the proposed final indemnification -agreement that that agreement be effective as of the effective "date of the proposed FSI chapter 11 plan that the Ohio U.S. Bankruptcy Court confirmede. The execution of the proposed final indemnification agreement was necessary in'order to induce the parties, to that proposed agreement to approve any proposed chapter 11 plans inithe respective chapter 11 proceedings. Howe'ver, any such indeš- nification agreement would have been necessary to'induce such approvals regardless of- whether the Ralphs transaction had been "No stipuladed exhibit referred to the proposed final indemnification agreement as being part of the consideration for any transaction that ocòurred widh respect to the FSI chapter 11 proceedings or the Allied chapter 11 proceedings. ! - 44 - proposed as a modification t posed the respective October 1991 pro- hapter 11 plans. I was also proposed in the proposed final indemnification agreem at that Holdings III e indemni-fied against« any deficiency in tax attributable to the PÁlphs transaction, including any tax attributable to an election under section 338 (h) (10) . I was further proposed in the proposed final indemnifica- tion agceement that RHC beco e a joint and several co-obligor with re pect to payments that the proposed initial indemnifica- tion ag ceement proposed be mŠde by Ralphs.1 As a result, in the propose 1 .final indemnificati n agreement it was proposed that Ralphs nd RHC be jointly anc severally liable for þayments to a New Fe rated of not less th n $10 million and not more than $20 millio O January 8,. 1992, the FSI debtors filed with the Ohio U.S. Bankrup cy Court in the FSI chapter 11 proceedings a documententitle1 ."Additional Modific tion (Effective Upon Filing Pursuant to Bank uptcy Code Section 1 27/) of Third Amended Plan of Reorganizatio for Federated Store , . Inc ; ; Federated Holdings , Inc .'; * Federat d Holdings II, Inc . ; Federated Holding£ III, Inc . ; and Campeau Properties, Inc." (January 1992 proposed FSI chapter 11 plan) . Around that date, the Allied/Federated debtors filed with the Ohi U.S. Bankruptcy Cou t in the Allied -chapter 11 proceed- ings a odification of the O tober 1991 proposed Allied chapter - 45 - 11 plan (January 1992 proposed Allied chapter 11 plan) Certain revisions and modifications of certain provisions of the October 1991 proposed FSI chapter 11 plan údre proposed in the January 1992 proposed FSI chapter 11 plan in order to include the Ralphs transaction, which inclùded the contemplated creation of RHC. The January 1992 propòšed FSI-chapter 11 -plan proposêd to include the following paragraph with respect to the contemplated creation of RHC: 5t. Creation of Ralphs Hol'ding Company Prior to the Effective Date, Holdings "III and Allied may, at their election (with the concurrence of each party who will receive Ralphs Common Stock under the [October 1991 proposed FSI bankruptcy] Plan) , contribute all of thè common stock of Ralphs owned by those entities to a newly incorporated Delaware corporation which may be formed "for the purpose of holding all of the issued and outstanding capital stock of Ralphs (the "Ralphs Holding Company") . In exchange for contributing their respective holdings of common stock of Ralphs to Ralphs Holding Company; Holdings III will receive that number of shares of capital stock in Ralphs Holding Company so that it owns the same percentage of the issued and outstanding capital stock of Ralphs Holding Company as of th'e Effective Date as it now owns of the common stock of Ralphs, and Allied will receive that number of shares of capital stock in Ralphs Holding Company so that it owns the same percentage of the issued and outstanding capital stock of Ralphs Holding Company as of the Ef fective Date as it now owns of the common stock of Ralphs . Certain provisións were proposed in the January 1992 proposed FSI chapter 11 plan that diffefed from the p/ovisions proposed in the October 1991 proposed FSI chapter 11 plan, including the following. The FSI debtors proposed in the January - 46 - 1992 p oposed FSI chapter 11 plan that EJDC receive the following with respect to its creditor claims identified as classes 1, 2, 3, 4, 4, and 215: (1) 20 million shares of the common stock of RHC, r presenting approximat ly 60 . 34 percent of .the total outsta ing common stock of HC, to be distributed from the shares Nf the outstanding co mon stock of RHC that Holdings III was to wn; (2) a .release under the comprehensive settlement agreem at of any claims agai Ist EJDC; and (3) certain respective real e ate partnership inte ests that the FSI shopping center corpora ions owned or certain stock of those corporations that FSI ow ad. Th FSI debtors proposec in the January 19923 proposed FSI chapter 11 plan that Bank of Montreals and Paribas, in consideration f r (1) their respecti e creditor claims identified as class 2 J, (2) their respecti e agreements under the comprehensivé settlem nt agreement to rele se any claims against EJDC, and (3) the r respective consenté to the January 1992 proposed Allied chapter 11 plan as holders of the claims identified as class A-6, receive the following: common (1) ,5.14,286 shares of the outstanding tock of RHC, represe ting approximately 10.6 percent of the tot 1 outstanding common stock of RHC, to be distributed equally between Bank of Mont eal and Paribas and to be distrib uted fr m the shares of RHC c ommon stock that Holdings III was to "S e supra note 25. - 47 own and (2).releases under the comprehensive settlement agreement of any potential"claims against Bank of Montreal or Paribas. The FSI debtors proposed in the January 1992 proposed-FSI chapter 11 plan that Campeau receive the following with respect to.its creditor claims against FSI identified-as classes 9 and 22: (1) 4,244,241 shares of the outstanding common stock of RHC, representing approximately 12.8 percent of the total outstanding common stock of 3RHC, to be distributed from* the shares of RHC common stock that Holdings III was to own, (2);-cash, and (3) a release-under the comprehensive settlement agreement of any. potential claims against :it. Under the January 1992 proposed FSI chapter 11 plan.the FSI debtors proposed that a portion (i.e., 0.8 percent) of the outstanding common stock of RHC that, those debtors proposed be distributed to Campeau be distributed to FSI and be, sold by FSI as needed in order to satisfy certain obliga- tions and expenses arising under the January 1992 proposed FSI chapter 11 plan. To the extent that FSI did not sell any portion of the RHC stock that -its received, the -FSI debtors proposed in the January 1992 proposed FSI chapter 11 plan that FSI distribute that portion to Campeau. The FSI,debtors proposed in the January 1992 proposed FSI chapter 11 plan that FSI receive with respect,to its creditor claims identified as classes 10 and 24 any property of the estate of Holdings III after the distribution pursuant to that proposed - 48 - plan of the common stock of HC that Holdings III was to own'. In the Jar ary 1992 proposed FSÌ chapter 11 plan the FSI debtors propos that FSI distribute pursuant to that plan any such propert it - received. Tl chapte FSI'debtors propose T in thê January 1992 proposed SI 11' plan that the -respective creditor claims of EJDC, Bank of «Mont eal, Paribas, O&Ý, a d Campeau all be impaired. In tliat propose plan, the' FSI debto s proposed that all secured claims except he secured claims id ntified as class¢ 113° be impaired. In the anuary 1992 proposed FSI chapter 11 plan the FSI debtors propos that several credit rs that had filed respective "unse cured claims against the FSI debtors receiŸe certaine distributions wn.th respect to their Th laims . FSI debtors proposed in the January 1992 p oposed' FSI chapter 11' plan that all of he outstanding common stock of Holdings III be canceled upon the dissolution of that company and that no property be distributed to' FSI with respect to its interes ,'identified as clas 40, as the'sole stockholder of Holding , III . In summary, the FSI debt ors proposed in the January 1992 propose - FSI chapter 11 plan that Holdings III ti-ansfer to the following creditors of FSI tl e following approximate percentages of the utstanding common at ck of RHC: SOS e supra note 26. - 49 - FSI Creditor Percentage of Outstanding Common Stock öf RHC BJDC Campeau 60 . A 12.8 Bank of Montreal 5.3 Paribas 5.3 The FSI debtors proposed, inter alia, in the January 1992 proposed FSI chapter 11 plan the following provision: H. Nondischarge And -Injúnction. 1. Nondischarge Of Debtors . Pursuant toasec'tion 1141-(d) (3) of the Bankruptcy Code,' the Confirmation Order shall not di-scharge claims against any of the [FSI] Debtors . However, no creditor of any of said Debtors may receive any payment from, or seek recourse against, any assets which are to be distributed under Sections IV, V, and VI of this Plan, ekcept for thóse distributions expressly provided for in said Sections IV, V, and VI. As of the Confirmation Date, all entities are precluded from asserting, against -any property which is to be distributed under Section IV, V or VI of- this Plan, any claims, obligations, rights, causes of adtion, liabilities or equity interests based upon any act or ornission, tran'saction or other activity of any kind or nature that occurred prior to the Confirmation Date, other than as expressly provided in"this Plans or, the Confirmation Order, whether or not (a) a proof of claim or proof of interest based on such debt or interest is Filed or deemed Filed pursuant to section 501 of the Bankruptcy Code, (b) à claim or interëst based on s ch debt or interest is allowed pursuant to section 502 of the Bankrupt-cy Code or (c) the holder of a claim or interest based on such debt or interest has accepted the Plan. 2. Injunction. Except as otherwise provided in the Plan or the Confirmation Order, on and after the Confirmation Date: (1) All entities which have held, currently hold or may hold a debt, claim, other liability or interest against any Debtor that would be dis- - 50 - charged upon Confirmation of this Plan and the Effective Date but for the provisions of section 1141(d) (3) of the Bankruptcy Code and Section VI.G.1. hereof are(permanently enjoined from taking any of the following actions on account! of such debt, claim, liability, interest or right: (a) commencing or Éontinuing in any manner any action or other präceeding on account of such claim against prop rty which is to -be distributed under Section IV, V, or VI of this Plan, other than to enforce any right to distribution with respect to such property under the Plan; (b) enforcing, attÀching, collecting or recovering in any manner any judgment, award, decree, or order against any ÿroperty to be distributed to creditors under Seätion IV, V, or VI of this Plan, other than as perm tted under subparagraph (a) above; and (c) cre ting, perfecting or enforcing any lien or encumbrance against any property to be distributed under ection IV, V, or VI, other than as permitted by this Plan. (2) All non-DÈbtor peïsons and entities are permanently enjoinåd from commencing or continuing in any manner any action or other proceeding whether directly, derivatively or otherwise, on account of or respècting any claim, debt, right,. cause of action, oÊ liability released or to be released pursuant $$ the Comprehensive Settlement Agreement . Th Allied/Federated de tors proposed in the January 1992 propose i Allied chapter 11 p an that Bank of Montreal and Paribas each re eive with respect to tiheir respective claims identified as clasjes A-6, AR-6, and AO 6 approximately 4.83 percent of the total o tstanding common sto k of RHC, to be distributed from the shares f RHC common stock tl at Allied was to own and that New - 51 - Federated" was to own after the .effective date of the January 1992 proposed Allied chapter 11 plan. The Allied/Fêderated .debtors proposed"in the January 1992 proposed Allied chapter 11 plan that Allied i-etain in its Oapacity as a stockholder of 'RHC' the shares "of the'RHC oommori stock that it was to own and that were nót to be distributed tio Bank of Montreal and Paribas ( i . e . stock of RHC) 6 . 6 apercènt of . the' outstanding common New Federated,- as the successor to Allied, was to retain and continue to own such stock. In summary, . the Allied/Federated debtors proposed in. the January 1992 proposed Allied chapter 11 plan that the following companies own the followirig appròximate percerftages of the outstanding common stock o'f RHC aftež any distributions of that stock proposed in that proposed plan: Entity Bank of Montreal Percentage of Outstanding Common Stock of RHC 4.8 Paribas 4.8 New Federated 6.6 In connection with the inclusion of the Ralphs transaction in the January 1992 proposed FSI chapter 11 plan and the January 1992 proposed Allied chapter 11 plan (collectively, the January 1992 proposed.chapter 11 plans), EJDC, Federated, FSI, and RHC "The January 1992 proposed Allied chapter 11 plan, like the October 1991 proposed Allied chapter 11 plan, -provided that Allied and Federated were to merge into a single surviving entity to be known as New Federated. 52 - entere int-o a certain agree ent (proposed tax election agree- ment) , hich was to be effective as of the effective date of the Januar 1992 proposed- FSI ch posed i the proposed tax el ction agreement that FSI and New ter 11 plan. «Those parties pro- Federa ed (as successor to, Federated) -agree to prosecute diligently nd in good faith a ráquest to, be submitted to. the Inter- nal Re nue Service (IRS) fo certain rulings (section 382/384 rulings) regarding the applieation of sections 382 and 384 to the January 1992 proposed chapter 11 plans . It was stated in the proposed tax election agreement that FSI, Ne Federated (as succe sor to Federated) , and RHC agreed to prosecu e diligently and in ood faith a.request to be submitted to the [RS for rulings (sect on 338,(h) (10) rulings) that: (1) The Ralphs transaction constituted a qualified stock purchase under s ction 338 (d) (3) ; electio (2) RHC would be entitled to make an under section 338 (a) and (h) (10) with respect to its acquisi ion of Ralphs; (3) F I would be entitled to make an election under section 338 (h) (10) with respect to the Ralphs transac ion; and (4) any such elections would not adversely affect ertain rulings that the IRS was expected to issue with respect to whether the merge of Allied and Federated" consti- tuted a reorganization under section 368 (a) (1) (G) . US e supra note 27. - 53 - The proposed tax election agreement stated that FSI agreed to make an election under section 338(h) (10) if (1) the section 338 (h):(10) rulings that the IRS issued weres "favorable" and (2) RHC determined- to.make an election under section 338(a) and (h) (10). FSI agreed to make that election whether or'not the section 382/384 rulings that FSI and New Federated (as successor to Federated) requested from the IRS were "favorable". The January 1992 proposed FSI chapter 11 plan was accepted in writ-ing by each of the creditors andeequity security holders whose acceptance was -required under the Bankruptcy Code. On January 10, 1992, the Ohio UrS. Bankruptcy Court confirmed the January 1992 proposed 2FSI chapter-11 plan. (We shall refer to the Januaryr1992 proposed FSI chapter 11 plan.as confirmed by the Ohio U.S. Bankruptcy Court as the confirmed FSI chapter 11 plan.) The effective date of the confirmed FSI chapter 11 plan was February 2, 1992." On January 10, 1992, the Ohio U.S. Bank- "On Feb. 2, 1992, the proposed final indemnification agreement became effective. Ralphs and RHC, ,or their successors, made all payments totaling $10 million required by that agreement. Ralphs, RHC, or their successors claimed deductions for their respective payments in their respective tax returns for the taxable yeärs in which they made any such payments. In the notice, of deficiency for its taxable years ended Jan. 31, 1993, Jan. 30, 1994, Jan. 28, 1995, and June 14, 1995, that respondent issued to petitioner RGC on July 11, 2006,. respondent determined that if a valid election under sec. 338 (h) (10) had been made with respect to the Ralphs transaction, the payments made under the final indemnification agreement would have been assumed or contingent liabilities and therefore would not. have been deduct- ible for the year of payment. Petitioner RGC did not contest (continued...) - 54 - ruptcy Court also confirmed the January 1992 proposed Allied chapte 11 plan. (We shall efer to the January 1992 próposed Allied chapter 211 plan -as confirmed by the Ohio U.S. Bankruptcy Court s the . conf irmed Allie chapter 11 plan. ) The ef fective date o the confirmed Allied chapter 11 plan was February 4, 1992. T its or Ohio U.S. Bankruptcy Court stated in pertinent past in r confirming the Jan ary 1992 proposed FSI chaptee 11 plan (Chio U.S. Bankruptcy C urt'á order) the fol'lowing with respect to its confirmation - f -that proposed plan. C. The provisions of the Plan shall bind the [F9I) Debtors, the Reor Janized Debtors and all credit cs and equity securitý holders of 'any of the [FSI] De tors, whether or not (the respective claims or interes s of such creditors or equity security holders are s im aired under the Plan, whether or not such creditors an1 equity security holc}ers have accepted the Plan, and wh ther or not such creditors and equity security ho lders have filed proo(s of claim of interest or are de med to have filed proofs of claim of interest. ' D. Except as othe wise provided in the Plan or thLs Order, on and afte the Confirmation -date: (1) All entit es which have held, curi-ently . hold or may hold a debt, claim, other liability or interest against any [FSI] Debtor that would be discharged, upon Ccnfirmation of the Plan and the Effective Date but for the provisions of section 1141(d) (3) of the sankruptcy Code and Section VI.G.1 of the Plan re permanently enjoined from taking any of the following actions on account of such debt, claim, Êiability, interest or right: (a) commencing or continuing in any manner any , ( . . continued) that de ermination in the petition that it filed with the Court - 55 - action or other proceeding on account of such claim against property which is to be distributed under Section IV, V, or VI of the Plan, other than to enforce any right to distribut~ion with respect to such property under the Plan; (b) enforcing, attaching, collecting or recovering in any manner , any judgment, award, decree; or order -agàinst any property to be distributed to creditors under Section IV, V, or VI of the Plan,- other "than as permitted under subparagraph (a) above; and (c) creating, perfecting or enforcing any lien or encumbrance against any property to be distributed under section IV, V,r or,VI of the Plan, other than as permitted by the Plan. (2) All non-Debtor entities and individuals are permanently enjoined from commencing or continuing in any manner, or otherwise prosecuting, any action or proceeding, whether directly, derivatively or otherwise, on account of or respecting any claim,«debt, right, cause of,action, or liability that is released or to be released pursuant to the Comprehensive Settlement Agreement;- provided, however, that this injunction will not prevent--any creditor (other than a Consénting Additional Party) of any [FSI] Debtor whose claim ,against a [FSI] Debtor is guaranteed by a thirdparty non-Debtor from prosecuting any direct claim against such third-party n'on-Debtor under any such guaranty. The foregoing injunction shall apply to the holder of a debt, claim or interest, whether or not a proof of claim was Filed or deemed Filed, whether such claim was allowed, whether or not the holder of such claim accepted the Plan, and whether or not the right to payment was reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. Any person injured by any willful violation of this injunction shallarecover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages from the willfula violator. - 56 - Ir the Ohio U.S. Bankru tcy Court's order, that court determi ed that the equity v lue of Ralphs was between $550 millior and $637 million. As set forth in the Jan ary 1992 proposed FSI chapter 11 plan ar in the Ohio U;S. Ba kruptcy Court's order, after the confirmation of that proposed plan EJDC, Bank of -Montreal, Paribas and Campeau, as the parties that filed creditor claims against the FSI debtors, wer enjoined from further asserting any of the they had asserted in the FSI espective claims tha chapter 11 proceedings. Af er the Ohio U.S. Ban ruptcy Court confirmed the January 1992 pr posed chapter 11 plans, the FSI debtors and the Al- lied/Fe erated debtors took åteps to comply with the requirements of the confirmed FSI chapter 11 plan and the confirmed Allied chapter 11 plan, respectively. Iminediately before the Ralphs transaction was ef fected, the primary assets. of Holdings IIrI consisted, of : (1) All of the outstanding common stock of Holdings II, the assets of which included directly or indirect ly the common stock and assets of Allied, Holdings, Federated, and their respective subsidiaries, (2) 83. /5 percent of the out tanding common stock of Ralphs, (3) the Allied note, and (4) the Federated note. Thé FSI consolidated group filed Form 1120 for its taxable year en ed January 31, 1993 (FSI consolidated group 1/31/93 - 57 - consolidated return). The FSI consolidated group attached to that return a consolidated balance sheet in which it reported, based on book value, the following total assets and total liabil- ities as of the beginning of that taxable year- (i.e., February 1, 1992) of that group and of certain of its members: Company/Group FSI consolidated group FSI Holdings III Holdings II Holdings Federated Allied Ralphs Total Assetä $11,471,163,367 227,757-,850. 180,293,905 470,188,023 957,957 5,979,262,404 3,060,396,285 1,357,571,286 Total Liabilities $14,460,193,630 1,513,035,371 179,775,064 471,458,182 872,978 6,873,748,518 3,-719,114,874 3 1,414,776,300 The term "Total Assets" does not include any amount representing the value of intangible assets. In the consolidated balance sheet that the FSI consolidated group attached to the FSI consolidáted group 1/31/93 consolidated return, line 13A, "INTANGIBLE ASSETS", was left blank for dach member of that consolidated group. On January 29, 1992.,- Jan Charles Gray (Mr. Gray) , an officer of Ralphs, incorporated RHC under the laws of Delaware. On February 2,'1992, Mr. Gray approved a resolution that provided: RESOLVED FURTHER, that the fair considenation- for such issuance of the common stock of the Corporation [RHC] is the contribution by Allied Stores Corporation and Federated Holdings III, Inc. of all of the issued and outstanding common stock of Ralphs Grocery Company; On February 3, 1992, Allied, Holdings III, and RHC entered into an agreement entitled '"CONTRIBUTION AND SUBSCRIPTION AGREE- MENT". That agreement -provided in pertinent-part: D. Allied, Holdings III, and Ralþhs Holdings desire that the Holdings III Contributed Shares and the A lied- Contributed Shares -be contributed to Ralphs H ldings, in each case I.n exchange for the issuance to H ldings III and Allied of the Ralphs Holding Common St ock, such that immediately after giving effect tl ereto Ralphs Holding Ñill own all of , the issued and outstanding shares of RÀlphs Common Stock and Allied a d Holdings III togethÈr will own- all of the'issued ar d outstanding shares f Ralphs Holding Common Stock ir the same respective proportion as they together ogned all of the issued and outstanding shares of Ra'lphs Common Stock imm diately prior to giving ef fect tllereto. NOW, THEREFORE, the parties hereto hereby agree as lows: f 1. Holdings III hereby contributes the Holdings II Contributed Shares o Ralphs Holding in exchange f the issuance to Holdings III of 27, 758, 527 shares of Ralphs Holding CommoÃ'Stock ("Holdings III Ralphs H ding Shares") , and R lphs Holding hereby accepts the transfer of the Holding III Contributed Shares in full pa ment of the Holdings III Ralphs -Holding Shares. 2. Allied hereby áontributes the Allied Contribut d Shares to Ralphs Hålding in exchange for the is uance to Allied of 5, 384, 330 shares of Ralphs Holdin Common Stock (the "Allied Ralphs Holding Shares") , an Ralphs Holding hereby accepts the transfer of the' Al Lied Contributed Sharås in full payment of Allied Ho L ding Shares . On February,3, 1992, pugsuant to "the confirmed FSI chapter 11 plan and the confirmed Al]ied chapter 11 plan, respectively Holding III and Allied tran ferred to RHC the respective out- s tandin common s tock of Ral hs that they owned (i . e . , 8 3 . 75 percent and 16.25 percent, r spectively) . Pursuant to those confirm d plans, RHC transfe red to Holdings .III and Allied 83.75 percent and 16.25 percent, r spectively, of its outstanding common tock. 1 As a result o those transfers, RHC acquired 100 - 59 - percent of the outstanding common stock of Ralphs, which was the only class of voting stock of Ralphs and, which accounted for over 80 percent of the total value of all of the stock. of Ralphs that was outstanding on February 3, 1992. After the Ralphs transac- tion, RHC' s only asset was the common stock of Ralphs -that it owned. On Februarya 3, 1992, as required by the confirmed FSI chapter 11 plan, Holdings III transferred the stock of RHC thata it had received so that the following .creditors of FSI owned the following approximate percentages of the outstanding common stock of RHC: FSI Creditor Percentage of Outstanding Common Stock of RHC EJDC 60.4 Campeau Bank of Montreal Paribas , 12.8 ,5.3 5.3 Holdings III did not transfer to FSI any stock or assets of Ralphs, RHC, Holdings, Holdings II, Kllied, Federated, or any of their subsidiaries. FSI did not receive the Allied note or the Federated note from -Holdings III. Except for the common stock of Ralphs that it received from Allied as part of the Ralphs transaction, RHC did-not receive any "On Feb. 3, .1992, RHC .and Ralphs entered into an agreement under which RHC agreed to perform accounting, advisory, capital raising, and other services for Ralphs in exchange . fort a fee equal to the direct and indirect costs to RHC of performing those serv-1.ces. - 60 - stock assets of Holdings, Holdings II, Allied, Federated, oi any of heir -subsidiaries. the Allied note or - the Feder N ferred O or did RHC receive from Holdings III ed note . ther FSI nor RHC received any of the outstanding pretock of Ralphs as pa t of the Ralphs transactions February 3, 1992, as required by the confirmed Allied chapter 11 plan and pursuant to a certain written, binding agreem at, Allied transferred the common stock of RHC that' it had receiv so that the following entities owned the following approxi ate percentages of t e outstanding common stock o'f RHC: Percentage of Outstanding Entity Common Stock of RHC Bank of Montreal 4.8 Paribas ¯ 4.8 Allied 6.6 discussed below, on Feb. 4, 1992, pursuant^ to the confirm d Allied chapter 11 lan, Allied and Federatèd ,merged into a ingle entity known a New Federated. Th distribution of the RHC stock to EJDC, Bank of Montreal Paribas and Campeau as required by the confirmed FSI chapter 11 plan an the confirmed Allied chapter 11 plan was not pro rata with re pect to the respective amounts of the respective claims asserte by. creditors and wa not pro rata with respect to the status f those creditors as secured or unsecured creditors . Pu suant to the confirm d FSI chapter 11 plan, Holdings III receive with respect to its interest as the solei stockholder of Holding II any cash remaining after Holdings II paid certain - 61 administrative claims and priority claims against it and made all payments required to be made under that plan to certain of its unsecured creditors. Holdings III distributed that cash to FSI for distribution pursuant.to the confirmed FSI chapter 11 plan. Under the confirmed FSI chapter 11 plan, no property was distributed to the following companies with respect to their respective interests: (1) FSI didinot receive any property with respect to its interest:as the sole stockholder of Holdings III; (2) Holdings did not receive any property with respect to its interest as the sole stockholder of Federated; and (3) Holdings II did not, receive any property with respect to its interest as, the sole stockholder of Allied or with respect to its interest as a stockholder of Holdings. On February 4, 1992, pursuant to the confirmed Allied chapter 11 plan, Allied and Federated merged into a single entity known as New Federated. As patt of that merger, the operating assets of Allied's subsidiaries were -transferred to New Federated. After the merger of Allied and -Federated, all of their respective- stock was canceled, -and the -stock of New Federated was issued to the respec'tive creditors of the Allied/Federated debtors. For purposes of the:distribution of the stock of New Federated pursuant to the confirmed Allied,chapter 11 plan, the value of New Federated was estimated to be approximately $2,014,700,000 and the value of therNew Federated common stock - 62 - that wai distributed tò creditors of the Allied/Federated debtors was est mated to be $25 per åhare. The distribution of the stock of New Jederated was not pro rata with respect to the respective amounts of the respective claims asserted by creditors and was not pro rata with respect to the status of those creditors as secured or . unsecured credito s . Pu suant to the confirm d Allied chapter 11 plan, Holdings III received 816, 000 shares df. common stock of New Federated with respect to its claim against Federated under the Federated Note. Ass requ .red by the. confirmed FSI- chapter 11 plan, Holdings III (1) dis ributed'588,000 of tlose sharessin satisfaction of general unsecured creditor-claims against FSI and Holdings III. and (2) sold the remaining 2 8, 000 shares sto provide cash ,to FSI. No othe property was distril uted to or retained by Holdings III with re pect to its claim against Federated under the Federated note. ursuant to the confi med Allied chapter 11 plan, Holdings III con ributed to Allied it claim against 'Allied under the Allied note. distributed to or retained by Holding No property wa III on account of tl t claim against Allied. On January 29, 1992, the same date on which Mr. Gray incorporated RHC, Ralphse issued a information statement (Ralphs informa ion statement) to the persons who owned preferred stock of Ralpl s and, the persons whd held certain rights under a certain equity ppreciation rights pl n (EAR plan) that Ralphs had | á - 63 - instituted in 1988.35 Ralphs attached the Ralphs information statement to a .memorandum from Byron Allumbäugh, .the chairman and the chief executive officer of Ralphs, that- was addressed to all the officers of Ralphs. That memorandum stated: Enclosed for your- review is an Information Statement relating to the treatment of the outstanding Series A and Series- B Preferred Stock ,("Preferred Stock") of Ralphs Grocery Company and the Equity Rights outstanding under the Ralphs Grocery Company -1988. Equity Appreciation Rights Plan in connection with the consummation of the plan of reorganization of Federated Stores, Inc., which is expected to occur February 3, 1992. The Information Statement describes the planned redemption of your Preferred Stock, as well as certain proposed amendments to the Equity Appreciation Rights Plan and your individual Equity Rights Agreements negotiated by Ralphs. Please review the Information Statement carefully. It describes the salient differences between the current provisions of the Equity Appreciation Rights Plan and Equity Rights Agreements and theiproposed amendments to be adopted with your consent . The Information Statement,also summarizes the terms of a Nonqualified Stock Option Plan to be adopted by Ralphs' new parent. company. As you know, it is proposed that each of you, as well as certain other key employees of Ralphs, will be granted options to purchase common stock of the parent company as described in the Information Statement . Patrick Collins [one of the directors of Ralphs], Jan Charles Gray. [Ralphs' senior vice president- and . general counsel] , Alan Reed [Ralphs' chief financial officer] and I have spent many months considering and consulting with counsel and others concerning the proposed amendments .to the EquityaAppreciation Rights Plan, as well as possible alternatives. We -believe the asThe EAR plan was''one of several separú.te executive compensation arrangements that Ralphs had instituted. The participants in the EAR plan had the right to a percentage -of the increase in the appraised value of Ralphs over time. - 64 . aÅndments resolve fairiy several issues under the Plan an , when combined with the grant of stock options, re9resents a very attractive ongoing incentive package. Od this basis, Pat, Jan Alan and I intend to approve th proposal and we urg each of you to do the same. T Ralphs information etatement described the material changes to the EAR plan,that would be effected by the proposed amendme ts to 4that plan, as described in that statement. i propose The amendments to the E R plan did not require the redemp- tion cof any outstanding pref rred stock -of Ralphs . Th Ralphs information tatement described the approval necessa y- to make the proposed, amendments to the EAR plan as follows APPROVAL REQUIRED The Amended Plan w 11 become effective as of Ja uary 31, 1992 only ife it is unanimously approved in wr ting by the holders df the Equity. Rights . Attached as Annex C to this Info mation Statement is a form of Co sent of Equity Right Holder - by which the holders are requested to evidende their approval of the,Amended Pl n and of : the related First Amendment (attached he eto as .Annex B) to. tlie Agreement . To be effective, aßl such consents must be compl ted, sigríed and retu$ned to Jan Charles Gray, Esq., Ge eral Counsel of RalpÑs, on or before the close of bu iness on January 31, $1992. In- additioñ, each Equity Ri íhts holder also must complete, sign and return the ex ra counterpart of th First Amendment to ther Agreeme t enclosed herewith. (Equity Rights holders may wish to keep a copy of their onsent and the First Amendment as returned to Ralphs . ) Ì The, holders of Equ ty Rights are not required to copsent to the adoption of the Amended Plan; . however, th0 consequences of' failing to do so are uncertain. - 65 The Ralphs information statement also discussed the proposed redemption of the outstanding preferred stock of Ralphs . As of January 29,- 1992, - all of that preferred stock was owned by management and key employees of Ralphs. The Ralphs information statement stated in pertinent part as follows with respect to that proposed redemption: As the FSI plan for reorganization was being finalized, Ralphs's senior management engaged in discussions and negotiations with respect to, the treatment of the outstanding Preferred Stock and the outstanding Equity Rights in connection with the reorganization. Under the provisions of the Plan, the consummation of ' the FSI plan of reorganization and the resulting change in ownership of Ralphs' outstanding common stock could possibly be deemed to constitute a "change in control" of Ralphs within the meaning of the Plan. As such, and as discussed below in more detail, the plan of reorganization had the potential to trigger an immediate cash payout obligation to the Equity Rights holders upon a consummation of the plan of reorganization. To avoid this result, - and to eliminate future, charges to Ralphs' earnings for financial accounting purposes associated with the Plan, EJDC proposed certain modifications to the Plan designed to- facilitate the FSI plan of reorganization while maintaining, to the extent practicable, the current benefits to the Equity Rights holders,under the Plan. The proposed amendments to the Plan and the Agreements discussed belowrare the end result of these negotiat ions . * * * * * REDEMPTION OF PREFERRED STOCK The.Certificates of Designations (the "Certificates") setting forth the respective rights, preferences and privileges of Ralphs' outstanding Series A Preferred Stock and Series B Preferred Stock -each provide for the mandatory redemption (i.e., repurchase) of the Preferred Stock in the event of a -"change in control" as defined therein. The Certificates also permit Ralphs' to redeem the Preferred Stock at any. - 66 - ti e upon five days pri r notice to the Preferred Stock ho l ders . It is unclear whether the change in ownership of Ralphs' outstanding dommon stock that will result up n consummation of the FSI plan of reorganization wo ld trigger a mandato y redemption of the Preferred St ck pursuant to the Certificates; in any event, ho ever, Ralphs has agr ed to redeem the Preferred St ck, subject to the c nsummation of the plan of re rganization of FSI, f or the original price paid for the Preferred Stock of $10 per share in cash, or a total of $3 million. This Information s atement will sežve as the re uisite notice of redŠmption under the Certificates. Pl ase be advised, therdfore that all of the outstandin shares of Preferred Stock will be redeemed by Ra phs on or about February 5, 1992 (the "Redemption Date") , subject to the grior consummation of the plan of reorganization of. FS]i. All shares of Pref red Stock will be redeemed, if a are redeemed. Upon redemption, each holder of Pr ferred Stock will receive from Ralphs the Redemption Pr ce of $10 per share. On or after the Redemption Da e, a holder of Prefe red Stock will not have any rights as such holder ot her than -the right to receive thå redemption price updn surrender of the certificates ev dencing his or her P eferred Stock. Th Ralphs information tatemènt did not- indicate that the redemption of the prefer ed stock of Ralphs was required or prohibited by the conf irmed SI- chapter 11 plan or , that any such redempt on was part of or pròvided for in that plan. firmed The con- SI chapter 11 plan c ntemplated that the preferred stock of Ralp s would be redeemed ver the period 1992 to 1998, as specified in the terms of that preferred stock at the time that stock was issued. The confirned FSI chapter 11 plan stated in pertinemt part as follows with respect to "any, redemption of the preferred stock: - 67 - Ralphs may redeem at its option the shares of Ralphs Preferred Stock held by any holder, at any time in whole or in part, at .the Initial Purchase Price. * * * -* - * * * The Ra-lphs Preferred Stock has no voting rights and may not be pledged or transferred except by the laws of descent and distribution. In the event. Ralphs is subjected to a "change in control" (as defined in Ral-phs' certificate of incorporation, as amended) , all outstanding shares of Ralphs Preferred Stock will be redeemed at the Initial Purchase Price. The change in ownership of Ralphs Common Stock that will occur pursuant to the Plan may trigger the change in control provision with respect to the Ralphs Preferred Stock, thereby requiring redemption of the outstanding shares . On: February 2, 1992, an attorney with iMorrison & Foerster, attorneys for FSI, sent a letter to the board of directors of Ralphs . ; In- that letter, the attorney stated his opinion that "under subsection 4.20 of the indenture dated as of August 26, 1988 between Ralphs and the United States Trust Company of New York as trustee . with respect to Ralphs 14 percent Senior Subordinated Debentures due 2000 (the "Indenture")" the Ralphs transac- tion would not result in a "change of control" . Each of the holders of rights under the EAR plan acknowledged having read and received the Ralphs information statement and consented*to the amendments to the EAR Plan that were de- scribed in that information statement. 68 - Or February 3, 1992, EJDC, Bank of Montreal, Paribas, Camdev Propert i.es , Inc . , * Allied, aÈid FSI, 37 as the stockholders of RHC, el cted directors of RH (RHC board of directors) : On that date, t ie RHC board of direc rs met via telephonic conference. At that meeting, the RHC board of directors, acting on behalf of RHC as he sole -common stock older of Ralphs, elected new direc- tors of Ralphs (Ralphs board of directors) . On February 3, 1992, th telephonic conference. Ralphs board of directors met via At t at meeting, the Ralphs board of directo s approved resolutior s (1) ratifying and approving all of the- actGons of and resolutíor s approved by the prior board of directo: s of Ralphs with res ect to the confirmed FSI chapter 11 plan, i icluding the issuance of the Ralphs information statement, and aut orizing the officers and directors.of Ralphs to take all necessa y actions to effect the transactions required by the confirm d FSI chapter 11 plar and (2) calling for the redemptión C milev Propertfies, Inc., which was an assignee'of Campeau, receive approximately 12 pedcent of the total outstanding common stock o RHC pursuant to the confirmed FSI chapter 11 plan: 37A discussed above, unc er the confirmed FSI chapter 11 plan, H ldings III distributeÊ to FSI a portion (i.e., 0.8 percent) of the outstanding chmmon stock of RHC that was to be distrib ted to Campeau for subsequent sale for the purpose of satisfy ng certain obligationî and expenses arising under that plan. o the extent FSI did ot sell any portion of that stock, the conf irmed FSI chapter 11 þlan required that FSI distribute that po tion to Campeau. - 69 - on February 3, 1992, of allsof the preferred stock of Ralphs. On February 3, 1992, the RHC board of directors passed a resolution approving the decision of thé Ralphs board of directors to redeem all of the outstanding preferred stock of Ralphs. Neither the Ralphs.information statement nor the minutes of the respective board meetings of the Ralphs board of directors and the RHC board of directors indicated whether or not the $3 million required to redeem all of the outstanding preferred stock was to be deposited into an escrow account. No mention was made in the confirmed FSI chapter 11 plan, the confirmed Allied chapter 11 plan, the FSI d.isclosure state- ment, or the Allied disclosure statement of any negotiations among the FSI debtors, the Allied/Federated debtors, Ralphs, RHC, EJDC,, Bank of Montreal, Paribas, or Campeau with respeòt to aredemption of the outstanding preferred stock of Ralphs.' Nor did any of those documents discuss a planned redemption of that stock. No discussion appeared in the compreheñsive settlement agreement, the proposed initial' indemnification agreement, the proposed final indemnification agreement, or the proposed tax election agreement regarding a planned redemption of the outstanding preferred stock of Ralphs. Form 10-K, ANNUAL REPORT UNDER SECTION 13'OR 15(d)- OF THE SECURITIES EXCHANGE ACT OF 1934, lhat Ralphs filed in May 1992 - 70 - with th U S. Securities and Exchange Commission (SEC) for its fiscal ear ended February 2 all of he preferred stock of Ralphs remained outstanding as of Februa 2, 1992, the last day of «Ralphs' fiscal year, and that 1992 (1992 Form 10-K) that st ck was subsequently iedeemed for $3 million. stated that In as sectio titled "Ownership of the Company", the 1992 Form 10-K stated hat "Since February , 1992 (the "Transfer Date") , all of the out tanding capital stoc of the Company, consisting of 100 shares f common stock, par alue $1. 00 per share , (the "Common Stock") has been held by Ra phs Supermarkets, Inc. (the "Holding Company ) , a Delaware Corporation. " Ralphs attached a balance sheet to the 1992 Form 10-K. Ralphs eported in that balar ce sheet the outstanding preferred stock a a $3 million liabil ty, and not as stockholders equity, as of the end of each of its fiscal years endeda February 2, 1991, and February 3, 1992. The réspective amounts of total assets and I total liabilities as of Febr ary 2, 1992, that Ralphs reported in the bal nce sheet that it att ached to the -1992 Form 10-K were equal to the respective amour ts of - total assets and total liabilities that the FSI consolidat ed group reported in the balance sheets ehat the FSI consolidated group attached to the- 4 FSI consolidated group 1/31/93 consolidated return. "I the respective cons lidated balance sheets that the FSI consoli at-ed group'attachéd t o the FSI consolidated group 1/31/91 (continued . . . ) * - 71 - On July 13, 1992, the Ralphs board of directors held a meeting via telephonic conference. At that meeting, the Ralphs board of directors adopted a resolution declaring that no preferred stock of Ralphs remained outstanding, prohibiting the issuance of any preferred stock in the future, and eliminating all references to preferred stock in'Ralphs' certificate of incorporation. Pursuant to the confirmed FSI chapter: 11 plan, on February 3, 1992, . RHC, Ralphs, Allied, Bank of Montreal, Paribas, EJDC, Camdev. Properties, Inc.," and FSI entered into a certain registration rights agreement as part of the Ralphs transaction. RHC granted to its stockholders under that agreement certain registration rights- that permitted those stockholders to participate in certain registration offerings that RHC might inake of- its stock and allowed them to demand -that RHC register~ the stock that those stockholders received pursuant to the confirmed FSI chapter 11 plan and the confirmed All'ied chapter 11 plan. " ( . . . continued) consolidated return and the FSI consolidated group 1/31/93 consolidated return, line 22A, "CAPITAL STOCK - PREFERRED", was blank with respect to Ralphs. That is because, unlike the financial statement balance sheets that Ralphs attached to the 1992 Form 10-K, there was no line item fòi- "Redeemableipreferred stock" in those consolidated balance sheets. - 72 W:ithin three months aft r the Ralphs transaction was eff ec ted, RSI (i.. e . , Ralphs and Ralphs Supermarkets , , Inc . ) " adevel oped a cecapitalization plan for those two companies. As- a result, RSI filed a registra ion statement with the SEC with respec to a proposed public offering of the shares of common stock E RSI. Ralphs filed à registration statement with the SEC with re pect to a proposed offering of $300 million of Ralphs' senior subordinated notes . On January 21', 1993, Ho dings III dissolved pursuant to the laws of Delaware. FSI as The certificate of dissolution was signed' by he sole stockholder f Holdings III. On the same date, Holding , Holdings II, and C I also dissolved. On July 19, 1993 FSI dis olved pursuant to th The respective laws of Delaware. common stock of Holdings III and FSI was canceled upon the dissolu ion of each of those companies . At no time did Holdings III rec ive any of its own s ock from -FSI. In an order dated June 30, 1993, the Ohio U.S. Bankruptcy Court f hund that the estate f each of the FSI debtors had been fully administered, granted in its entirety FSI's motion for a final d cree, and entered a final decree closing the FSI chapter 11 proc edings. I kets, April 1992, RHC cha ged- its name to Ralphs Supermar- I c. - 73 - In . an order dated June 25 , 20 01, the Ohio U. S . Bankruptcy Court found that the respective estates of the Al-lied debtors and the Federated debtors had -been fully administered and entered a final decree closing the Allied chapter 11 proceedings. Around .October 12, -1993, FSI filed the FSI consol-idated group 1/31/93 consòlidated return. Ralphs was a member of the FSI consolidated group during the period -February 1 to 3, 1992. The FSI consolidated group attabhed Form 8023, Corporate Qualified Stock Purchase Elections (Form 8023) to the FSI consolidated group 1/31/93 cons'olidated return. In that form, FSI (1) identified (a) itself as the common parent of Ithe selling group, (b) "Ralphs Supermarkets, Inc."- as the purchasing-corpora- tion, and (c) "Ralphs Grocery Company" as the target corporation and (2) checked the box "Joint election under section • 338 (h) (10) " . The FSI consolidated group also attached to ther FSI consolidated group 1/31/93 consolidated return a "Schedule Required Under Regs. 1.338-1T(e) (1) as to Includable Affected Targets" . In that schedule, FSI identified "Ralphs Grocery Company" as the includible target and reported that the percentage of- Ralphs stock owned was 100 percent. FSI did not- attach to the FSI consolidated group' 1/31'/93 consolidated return a copy of the confirmed FSI chapter 11 plan. FSI also did not attach to that - return a statement executed under penalties of perjury that - 74 showed che purposes of or th t detailed all the transactions incider - or- pursuant to the onfirmed FSI chapter 11. plan. FS t reported in the FSI consolidated group 1/31/93 consolidated turn that $475 milli n of consideration was paid in the Ralphs ransaction, that Ral hs had total .liabilities of $1,164, 90, 700, and -that Ral hs was subject to an election under sectio 338 (h) (10) . FSI identified all of the $475 million of conside ation that it reported as paid in the Ralphs transaction as "De of Federated Stores credito s" . Inc . , and Subsidiaries held by FSI did not rep rt in the FSI consolidated group . 1/31/93 consolidated return any amount of "cash" or "purchase money d bt" as part of the c nsideration paid in the Ralphs transac ion. Thã FSI consolidated grdup attached Schedule D, Capital Gains añd Losses (1/31/93 ScÈedule D) , to the FSI consolidated ' group 1 31/93 consolidated return. ported In that schedule, FSI re- ith respect to the t ansaction in whi-cheFederated incor- porated Ralphs long-term cap tal gain of $492,618,173 (i e. Ralphs the 1eferred intercompany gain) and ordinary income of $81, 723 870 . In addition, F I reported in that schedule with respect to the Ralphs transac ion a gross sale price, of , $1,639,990,700, a cost. or other basis, plus expense of sale, of $1, 303, 901, 70.0 , and a long-tdrm capital gain of $335, 889, 000 that - 75 - resulted from the election under section 338(h) (10) that FSI made with respect to the Ralphs transaction. The FSI consolidated group owed no Federal tax for the taxable year sended January 31, 1993, except for the alternative minimum tax, certain recapture taxes, and certain environmental taxes. Taking into account the-gain report-ed on the 1/31/93 Schedule D, FSI showed gain in excess. of $900 million resulting from the Ralphs deferred intercompany gain,and the election under section 338 (h) (10) that it made with respect to the Ralphs transaction. That gain was offset by a net operating,loss deduction available to the FSI consolidated group for the taxable year ended January 31, 1993 . RSI filed Form 1120 for its consolidated group, which included Ralphs, for each of the taxable years ended January 31, 1993 .(RSI consolidated group 1/31/93 consolidated return), January 30, 1994 January -28, 1995,:and June 14, 1995. RSI filed an amended consolidated group return for the taxable year ended January- 31, 1993 (RSI,consolidated group 1/31/93 amended consolidated return), which the IRS received around November 18, 1993, and treated as filed on that date. "FSI also attached to the FSI consolidated group 1/31/93 consolidated return Form 8594, Asset Acquisition Statement. In that form, FSI reported a total sale price and assets transferred of $1,639,390,700 with respect to the Ralphs transaction. - 76 - I the respective RSI consolidated returns filed for the taxabl years ended January 31, 1993, January 30, 1994, January 28, 19 5, and June 14, 1995, the Ralphs transaction was treated as.a p rchase under section 38(h)-(3) because a timely election under s'ection 338 (h) (10 ) had been made a R I attached Form 8023 to both the RSI consolidated group 1/31/9 consolidated return And the RSI consolidated group 1/31/93 amended consolidated return. In that form, RSI (1) id atified itself as -the purchasing corporation and "Ralphs Grocery Company" as the targ t corporation and " (2) checked the box "J nt election under seetion 338(h) (10)". RSI also attached to the RSI consolidated grou]S 1/31/93 consolidated return a "Sched e Required Under Regå; 1.338-1T(e) (1) as to Includable Affecte Targets". Grocer Company" as the incl dible target and reported that the In that chedule, RSI identified "Ralphs percent ge of Ralphs stock o ned was 100 percent. RSI did not attach o the RSI consolidat d group 1/31/93 consolidated return or the SI consolidated group 1/31/93 amended- consolidated return a copy f the ,confirmed FSI hapter 11 plan. RSI also did not di attach Þo either of those ret urns, a statement executed under penalti s of perjury that sh wed the purposes of or that detailed all the transactions inciden chapter 11 plan. or pursuant to the confirmed FSI - 77 - RSI reported in the RSI consolidated group 1/31/93 consolidated return that $475 ,million of consideration was paid in the Ralphs transaction, that Ralphs had total liabilities of $1,164,390,700, and that' Ralphs was subject to an election under section 338 (h) (10) . RSI identified all of the $475 million of consideration that it reported as paid in the Ralphs transaction as "Debt of Federated Stores,- Inc , ands Subsidiaries held by creditors" . RSI did not report in the RSI consolidated group 1/31/93 consolidated return any amount of "cash" or "purchase money debt" as part of the consideration paid. RSI attached Form 8594 to the RSI consolidated- group 1/31/93 consolidated return and the RSI consolidated group 1/31/93 amended consolidated return. In that form, RSI reported a total sale price and assets transferred of $1, 639, 390 , 700 . t In Form 8594, RSI allocated that sale" price to certain classes of assets as follows: Asset Class Class Class Class Class I II III IV Amount . $ 6,800,000 -01, O06, 964 , 727 595, 625, 973 In the RSI consolidated group 1/31/93 consolidated return and the RSI consolidated group 1/31/93 amended consolidated return, pursuant to section 13261(g) (2) and (3) of the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66,- sec. 13261(g) , 78 - 107 St t. 540, RSI elected r troactive application of section 197, entitled. "Amortization of Goodwill and Certain Other Intang bles" O ! June 14, 1995, Food 4 Less Holdings, Inc. (Food 4 Less) acquir d all of the outstand ng common stock of R.SI. On the same date, Food 4 Less merged Ral hs with and into RSI, with RSI as the surviving corporation. RSI changed its name'after that merger t·o Ralphs Grocery Com any (RGC) . Or March 10, 1998, Fred Meyer acquired all of the common stock Food 4 Less in a me ger. As a result of that merger, Food 4 Less became a wholly Ewned subsidiary of Fred -Meyer. Discussion I their respective motions for partial summary judgment, the pa ies ask us to decide whether RHC and FSI made a valid ' joint election under section 338(h) (10) with respect to RHC's acquisi ion of all of the out standing common stock of Ralphs from Holding III and Allied that took place as part of the Ralphs transac ion. Before we addr ss that issue, we shall briefly summarize the Ralphs tiransact ion that took place pursuant to theconfirm d FSI chapter 11 pla and the confirmed Allied chapter 11 plan. En that transaction, RHC, a newly formed company, acquired all of he outstanding commor stock of Ralphs from Holdings III R C, RSI, and RGC are the same entity as Ralphs . 11 the same entity, which is not - 79 - and Allied, the respective owners of 83 75 percent and 16.25 percent, of that outstanding stock. In exchange for:the respec- tive Ralphs stock that RHC acquiredefrom GHoldings III and Allied, RHC issued to those companies 83.75 percent and 16.25 percent, respectively, of its outstanding common stock. Thereafter, (1) Holdings III distributed all of the outstanding RHC common stock that.it held to EJDC, Bank of Montreal, Paribas, and Campeau," which were certain of FSI's creditofs, and (2) Allied (a) distributed a.portion (i.e., 9.65 percent) of the outstanding RHC common stock -that it held to Bank of Montréal and Paribas, which were certain of Allied's creditors, and (b) retained the balance (i.e., 6.6 percent)." After those distributions to the respective creditors of FSI and Allied [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ad266e8151c8f7932. Public record. Not legal advice.