T .C . Memo . 2009- 34

T .C . Memo . 2009- 34

UNITED STATES TAX COUR T

COX ENTERPRISES, INC . & SUBSIDI IES, Petitioner v_ .

COMMISSIONER OF INTERNAL REV NUE, Respondent :

Docket No .

18312-06 .

Filed June 9, 2004 .

j

C and A were either the sole or controlling j

trustees of three trusts (the shareholder trusts) whose

corpora, together, . consisted exclusively of 98 percen t

of P .'s stock . C and A were the i come beneficiaries of

each trust for life, the remainder (corpus) to be

divided among their lineal descen nts upon the deat h

of the survivor .

In 1992, P tried to'sell two TV stations but wasjl

able to sell only one . For valid b usiness reasons, Pf

decided to . operate the retained station, KTVU (TV), in

partnership with two family partnerships whose members' ;

were C, A, their children, and entities they ►

'

; +i

controlled . . In 1993, to that end, KTVU, Inc ., a wholl y

owned second-tier subsidiary of P that owned and

operated KTVU (TV), contributed the KTVU (TV) station 11 1

assets (station assets) to the-newly formed KTV U

Partnership in exchange for a majority partnershi p

interest . The two family partnerships contributed cash

in exchange for their .minority interests . In 1996, the

family partnerships made addition 1 cash contributions

to correct an inadvertent shortfall identified by an

independent consulting firm .

- 2 R alleges that, because KTVU, Inc .'s partnership

interest in KTVU Partnership was worth $60 .5 million

less than the station assets it contributed to KTVU

Partnership, KTVU, Inc ., gratuitously transferred

valuable partnership interests to the family

partnerships . R argues that, because of (1) the

identity of interests between .the beneficiaries of the

shareholder trusts and the members of the family

partnerships and,(2) the effective control by C and A

over the corporate actions of .P and its subsidiary,

KTVU, Inc ., that transfer was made for the benefit of

the shareholder trusts, resulting in a constructive

dividend distribution of appreciated property by P to

the shareholder tfrusts .taxabe to P under sec . 311(b),

I .R .C .

P moves for summary judgment . P admits, for

purposes of the motion, a $60 .5 million disparity

between the value of the station assets KTVU, Inc .,

contributed to KTVU Partnership and the value of the

partnership interest it received in return .

Held : Because the undisputed facts establish that

it was not the primary purpose of the assumed

gratuitous transfer of partnership interests to the

family partnerships to provide an economic benefit 'to

them and, derivatively, to the shareholder trusts, that

assumed transfer (which, under the agreed facts, we .

find to-have been unintentional and not beneficial to

the shareholder trusts) did not constitute a

constructive dividend from Pto the shareholder trusts

resulting in taxable gain to ;~P under sec . 311(b),

I .R .C . See Stinnett's Pontiac Serv ., Inc . V .

Commissioner , 730' F .2d 634, 640-641 (11th Cir . 1984),

affg . T .C . Memo . ;1982-314 ; Sammons v . Commissioner , 472

F .2d 449, 451-454! (5th Cir . 1972), affg .. in part, revg .

in part, and remanding T .C . Memo . 1971-145 .

Judith A . Mather ,

Bernard J . Long ,

Bertoldo , for petitioner .

Bonnie L . Cameron , for respondent. .

Jr . , and Alejandro L .

f

- 3 MEMORANDUM OPINION

HALPERN,

Judge : Petitioner is th common parent of a n

affiliated group of corporations makin a consolidated

income . By notice of deficiency (the notice),

return o f

responden t

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

1992, 1993 ,

1994, and 1996 taxable

(calendar) years . Petitione r

timely filed a petition disputing a po tion of the proposed`

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

summary judgment (the motion) .', Respondent objects . The issu e

for decision is whether a member of th group (petitioner's, `

f

wholly owned second-tier subsidiary) must recognize gain under

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

a

newly formed partnership in exchange for an interest in tha t

partnership . The motion asks that we enter judgment i

n petitioner's favor "finding as a mat e of law that, contrary t o

[the notice], petitioner need n o

recognize gain under

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

other amount, upon the formation * *

*

1 Petitioner assigned no error to

[of the partnership] .

espondent's determination

of deficiencies for 1992, 1994, and 199 6, and it disputes only a

portion of the deficiency respondent de termined for 1993 . Our

resolution of the motion in petitioner' s favor disposes of it rhat

dispute but leaves an undetermined def' ciency for 1993 . We shall

order the-parties to submit their sepa ate computations or'a

joint computation of the remaining def ' ciency for that year .

2 Unless otherwise noted, all sect on references are tolith e

Internal Revenue Code . in effect for 199 3 and all Rule references

are•to .the Tax Court Rules of Practice and Procedure . The notice

he parties agree (and!we

refers to gain under sec . 311(d), but

accept) that the intended reference is to sec . 311(b) .

-

4

Background

Summary Judgment

A summary judgment is appropriate "if the pleadings, answer s

interrogatories, depositions,, admissions, and any othe r

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

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

a

decision may be rendered

as a I~

matter of law ." Rule 121(b) . In

4

response to a motion for summary judgment, "an adverse party ma y

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

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

otherwise provide d in this Rule, must set forth specific facts

showing that ther e is'a genuine issue for trial ." Rule 121(d )

Fact s on Which We Rely

Petitioner is a Delaware corporation with its principa l

offices in Atlanta, Georgia . Petitioner is primarily engaged,

through subsidiaries, in newspaper publishing and the ownershi p

and operation of cable television systems, radio and televisio n

broadcasting stations, and wholesale and retail automobile

auctions and related businesses . At all times relevant'to th e

motion, Cox Communications, Inc . 1(CCI), a wholly owned subsidiary

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

owned and operated station KTVU (TV), serving the Sa n

Francisco/Oakland, California, market .

a

jI

At all times relevant to the motion, petitioner's principa l

shareholders were three trusts (together, the shareholder trusts)

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

5

which collectively owned approximately 98 percent of petitioner's

issued and outstanding stock . Two of hose trusts (the Atlant a

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

th e

benefit of Mr . Cox's daughter, Anne Co Chambers (Mrs . Chambers) ;

as income. beneficiary for life, and hei lineal descendants! , as

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

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

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

descendants, as holders of the remainder interest . The third

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

19.84, benefited both daughters, as inc me beneficiaries for ife,

and their lineal descendants, as succe sor .income beneficiarie s

and holders of remainder interest . At all times relevant tdithe

motion, 'Mrs . Anthony was the trustee o

Atlanta Trust I, Mrs .

Chambers was the trustee of Atlanta Tr st II, and each was' opp I a of

three cotrustees of .the Dayton trust . .3

At all times relevant t o

the motion, each Atlanta trust owned a, proximately 29 percent,

and the Dayton trust owned approximate y 40 percent, of

petitioner's stock . The balance of pe itioner's stock was', Yield

by other parties, principally petition r 's employees ,

none'o f,

~

whom were members of

the Cox family .

N~ .

3 Although the three trust instrum ants are not part of the

record in this case, they are before ti e Court in a related case

arising out of the same transaction, CY ambers v . Commissioner ,

docket Nos . 16698-06 and 16699-06, and, in various parts, hate

been described by both parties in their filings with respect to

the .motion . There appears to be no di : pute as to the terms :of

the instruments, and, therefore, we shE 11 take notice of thos e

. ,I

terms . See Fed . R % Evid . 201 .

At all times relevant to'the motion,

Mrs . Chambers and Mrs .

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

directors (the board) and Mrs .- Anthony's son, James CoxiKennedy,

was chairman of the board and petitioner's chief executiv e

i

officer (CEO) and president .

By agreement dated August 1, :1993, Mrs . Chambers's„thre e

children and an entity Mrs . .Chamber s wholly owned formed AC C

Family . Partnershi p

limited partners,

(AC C Partnership) .

The three children wer e

and ;; each owned a 31 .66-percent interest in AC C

Partnership .

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

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

.

controlled formed two partnerships . By September 1, 1993, th e

two partnerships merged and became the Anthony Family Partnership

(BCA•P.artnership) . BCA Partnership was a general partnership of

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

owned approximately 4 percent andfentities (corporations an d

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

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

percent .

One of the stated purposes for the formation of ACC

Partnership and the two partnerships that became BCA Partnership

was to "invest in interests in the KTVU Partnership

- 7 On August 1, 1993, KTVU,, Inc ., ACC Partnership, and the!tw o

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

become BCA Partnership formed KTVU Partnership . KTVU ..Partne ship

was formed to acquire and operate tele ision station KTVU ;(TV) .

During 1993, petitioner's shareholders did not include ACC ,

Partnership, BCA Partnership (together,) the family partnershlips )

or any of .their respective partners . diagram showing th'e'

relationships of the various trusts, c rporations, and

partnerships that we have described

( arid certain information yet

_

I

to be described) is attached

to this report as an

appendix; . 6

Pursuant to the terms of the KTVU Partnership agreemen

KTVU, Inc ., became the managing general partner and receive0 a

majority partnership interest, which entitled it to 55 percent of

partnership distributable profits and liquidation proceeds up to

specified base amounts and 75_percent• f distributable profits

and liquidation proceeds in excess of hose, base amounts .-i CC

Partnership and BCA Partnership each received a 22 .5-percentinterest in distributable profits and iquidation proceeds p to

the same specified base amounts and a 2 .5-percent interesIIt i n

distributable profits and liquidation ~roceeds in excess of thos e

base amounts .4 The KTVU Partnership agreement also contains th e

following subparagraph relating

to "Tax Allocations" :

The profit interest BCA Partners ip received from KTVU

Partnership represents the sum of the profit interests received

by the two partnerships that merged to create BCA Partnership .

- 8 4 .6

Tax Allocations : Code Section 704(c) .

(a) In accordance with)Code :section 704(c) and

the Treasury Regulations thereunder, . income, gain,

loss, and .deduction with respect to any property

contributed to the capital of the Partnership shall,

solely for tax purposes, be allocated among the

Partners so as to take account of any variation between

the adjusted basis of such property to the Partnership

for federal income tax purposes and its initial Gross

Asset Value .

The "initial Gross Asset Value of . any asset contributed by a

Partner .to the Partnership" is defined as "the gross fair market . .

value . .of such asset ,

as determined by the contributing Partne r

and the Partnership" .

On, August 6,

1993,

the executive committee of petitioner's

boardi,,,which was composed of James Cox Kennedy (petitioner's CEO

and president) and two nonfamily,)~outside directors (th e

executive committee), adopted a resolution on behalf of

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

RESOLVED, . That the Company hereby ratifies an d

approves the formation by KTVU, Inc ., a wholly owned

subsidiary of the Company, and certain general and!,,

limited partnerships to be formed by Anne . Cox Chambers,

Barbara Cox Anthony and James C . Kennedy, and the

'children of such individuals (the "Family

-Partnerships"), of a new general partnership to bel

known as "KTVU :Partnership," to operate Television

Station KTVU, San Francisco, :California, and to conduct

the business presently conducted by KTVU, Inc ., and

that in consideration of the-partnership interests to

be acquired by KTVU, Inc . and the Family Partnerships,

KTVU, Inc . . shall, :contribute substantially all of its

assets used in the conduct of Television Station KTVU

and the Family Partnerships shall contribute cash in an

amount corresponding to the fair market value of the

partnership interests acquired by such Family

Partnerships ; and

i

- 9 .RESOLVED , . That the proper of icers of the Company

shall determine the final valuati n of the KTVU

Partnership and the percentage in erest therein tobe!`

held by each of the Partners then in based on the i .

contributions being made by each

f them to insure thaat

the formation of the KTVU Partner hip and th e

acquisition of the interests then in .by the Family

Partnerships shall be on terms an

conditions no less '

favorable to the Company or-KTVU , Inc . than the terms) q

and conditions that would apply i a similar

transaction with persons who are of affiliated with'

the Company * * * .

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

Partnership the assets of KTVU

( TV),

excluding approximately $25

'million of KTVU, Inc .'s working . capita , its interest in Sutro

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

television station used ),

its interest in the San Francisco,J~

Giants Baseball Club, and its studio b ilding

( the contribute d

assets are hereafter - referred to as the station assets)- . Oni the

same day, ACC Partnership and BCA Partnership each contributed

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

in part,

on an analysis by Arthur Andersen L .L .P . (Arthur Andersen) o f

11

"the appropriate marketability and minority interest discounts

applicable to a minority interest in the KTVU Partnership asl'of

August 1, 1993 .11 The family partnerships'

contributions to KTVU

Partnership were financed by loans to the family partners h ips by,

Texas Commerce Bank, N .A ., and secured ,lin part, by eac h

partnership' s interest in KTVU Partnership .

Mrs . Chambers, and

C

her three children guaranteed the loan to ACC Partnership, an d

s BCA Partnership ' s contribution t

KTVU Partnership

represents the sum of the contributions made by the two

partnerships that merged to create BCA

artnership .

- 10 -

Mrs . Anthony and her two children guaranteed the loan to BC A

Partnership .

In 1996, petitioner's management discovered that errors ha d

been made in computing the fair market value of each family

partnership's interestE in KTVU Partnership . The computations

failed to take into account (1) the family partnerships'~l cas h

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

to the family partnerships (and increased allocation to KTVU ,

Inc .), . .of income distributions and sale proceeds in excess of th e

base amounts specified in the KTVU Partnership agreement .

Thereafter, petitioner (with the concurrence of the family

partnerships) engaged the investment banking firm of Furman Selz,

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

computational errors, whether there should be an adjustment t o

thesamounts the family partnerships contributed in exchange for

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

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

'f

II

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

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

1996, in response to that analysis, each family partnership

d

dl

contributed an additional $4 million to KTVU Partnership .6

II

il

Petitioner's decision to continue operating KTVU (TV )

through KTVU Partnership resulted from its inability to,implement

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

6 We have not been provided with the computations that led

Furman Selz to conclude that thei~family partnerships had

initially undercontributed .to the partnerships .

11

1992, petitioner engaged McKinsey

& Co . .(McKinsey )

to evaluate•

the prospects of several of its operating divisions ,

its television broadcast business .

including

Mc insey recommended that

petitioner retain its stations affiliated with the then major

television networks ,

affiliates ,.

KTVU

but .that it dispose of its two Fox,

( TV) and WKBD

Detroit, Michigan , 'area .

(TV),

Later in 1992 ,

Morgan Stanley & Co . (Morgan Stanley )

both stations .

the latter serving the

petitioner engaged

to assist in the sale 'Of

Morgan Stanley ' s efforts resulted in limited

expressions of interest . in acquiring the two stations ; and,

although petitioner was eventually able to sell WKBD

(TV), a

rapidly declining market during the fourth quarter of 1992 ': caused

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

Operating that station through KTVU Partnership provided aiv iable

business alternative to a sale of the s ation in'that it (i) I

responded ,

in part, to McKinsey ' s recom endation that petitioner

I

reduce its investment in the television broadcast business ;' 1(2 )

made KTVU ,

Inc .'s working capital avail ble for use in

nonbroadcast areas of petitioner's busi ess ,

and (3 )

helped to

allay concerns among petitioner's televsion broadcast executives

that petitioner was forsaking the telev i sion business by

We assume that the

•I

accomplishment of this objective 'wa's

made possible , at least in part, by the family partnerships '

initial $54 million investment in KTVU artnership .

- 12

demonstrating the Cox family's continuing commitment to„that

business . e

Respondent's Notice -of Def iciency ~

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

1993 return, respondent engaged Business Valuation Services, Inc .

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

assets

(2) KTVU, Inc .'rs partnership interest in KTVU Partnership ,

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

• BVS arrived at a $300, ; million fair market value for the'station

assets, a $233 .5 . million fair market value for KTVU, Inc .' s

partnership interest in_KTVU Partnership, and a $34, .342,,500-fair

market value for each family partnership's interest in KTVU

Partnership, all as of August 1, 1!1 993 . Respondent subsequently

increased the latter two values to $239 .5 million and $34,912,50 0

take ;into account the family partnerships' additional 199 6

cash contributions . . The foregoing adjusted values give rise to

(1) a $60 .5 million difference between the determined fair market

value of the contributed station assets and the determined fairmarket value of KTVU,,Inc .'s partnership interest in KTVU

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

In his objection to the motion,,, respondent does not

dispute petitioner's representations regarding the foregoing

rnontax motives for the formation of KTVU Partnership . Therefore,

we treat those representations as true . See Rule 121(d) ; Jarvis

v

78 T . C . 646, 658-659 (1982) (granting summar y

l udgment to the Commissioner where the taxpayer "failed,to submit

any information which contradicts * *,'* [the Commissioner's]

factual determinations") ; see also Beauregard v . Olson, '184 F .3d

1402, 1403 n .1 (11th Cir . 1996) (accepting as true undisputed

!'facts submitted in connection with a motion for summar y

]judgment) .

j~

a~

13 -

determined value of the two family par nership interests

in KTVU

Partnership and the $62 million those artnerships contributed .

On the basis of the first of thos two differ ences ,

respondent included in the notice . the ollowing .adjustmenti~to

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

Other .Income-Gain under IRC 311 d [sic] :

{

It is determined that you have s

under Section 311(d) [sic] of the

related to property you distribut

shareholders during the taxable y

taxable gain is $56,182,115 figur

Fair market value of KTVU, Inc .

station asset s

.Less fair market value of KTVU,

55o interest receive d

Fair market value in excess of

interest received (gain)

Less KTVU, Inc . basis in excess of

fair market value (1 )

-Section 311(d) [sic] gain

F

i

$300,000,000 .

239, .500,00 0

$ 60,500,000

4,317,885

$56,182,11 5

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

SEC . 311 (b) . Distributions Of Appreciated

Property .--

(1) In general .--If-(A) a corporation d istributes

property (other than an bligation of

such corporation) to a s areholder in a

distribution to which su part A [secs .

301-307] applies, and

(B) the fair market value of such I'

property exceeds its .adj sted basis (in the .

hands of the distributi n corporation) ,

then gain shall be recognized to the distributingicorporation as if such proper y were sold to the"

value .

distributee at its fair marke

i

- 14 -

Therefore, your taxable income is increased $56,182,115

for the taxable year 1993 .

Petitioner is willing to--assume for purposes'of the' motio n

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

upon formation of KTVU Partnership was $239 .5 million and tha t

that value was $60 .5 million less than--the value .of KTVU, Inc .'s

icontribution,to

that partnership 1,($30 .0 million) .

f

lif

Discussion

I.

Arguments of the Partie s

A.

Respondent

E

.In -..his "Notice of Objection to * * * [the motion) ",

if

respondent summarizes his position as follows :

Petitioner, "while under the direction and control

of the trustees of Atlanta Trust I, the Atlanta Trust

;II, and the Dayton Trust ("Shareholder Trusts"),, dG

entered into a transaction with its subsidiary, KTVU,

:Inc ., to distribute partnership interests to the

;partners of KTVU''Partnership . To the extent KTVU, Inc .

-contributed excess value, it is deemed to have receive d

a partnership interest in the section 721 . contribution .

Subsequently, KTVU, Inc . made a constructive

distribution of a portion of the KTVU Partnership

interest for the'!benefit ofjthe Shareholder Trusts,

which triggered section 311(b) gain .

In his accompanying memorandum of law, respondent restates

his position :

,i

IP

Simply stated, in the simultaneous transfers made by

KTVU, Inc . ("Petitioner's Subsidiary") and by two

partnerships to the newly formed .KTVU Partnership, the

two transferors received partnership interests in

excess of the value of the assets they transferred, and

the Petitioner's . Subsidiary received a partnership

interest of value less than :the value of the property

it transferred . The partners which received greater

interests were related to the shareholders of

.Petitioner's Subsidiary, solithat their receipt of value

greater than the,, amount they transferred to the

- 15 -

partnership was a constructive di tribution to th e

shareholders of Petitioner's Subsidiary . There was no I

negotiation of a business benefit to the Petitioner's

Subsidiary for the excess value w ich it transferred to

the partnership . The facts demon trate that the

economic reality of what has occu red is a .distribution

of appreciated property in the fo m of-partnership

interests to the shareholders of Petitioner' s

Subsidiary . Accordingly, Respondent asserted a

deficiency based on the application of section 311(b)' . .

The point appears to be that there was an identity of

interests between the shareholder trusts and the famil y

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

partners in the latter were, as a practical matter, identica l

( Mrs . Chambers , Mrs . Anthony, and the pineal descendants o f

each), with the result that the family partnerships' gratuitou s

receipt from KTVU, Inc .,

.of enhanced or additional partnershi p

interests in KTVU Partnership constitut d, in substance, a,

distribution from petitioner to or for he benefit of th e

shareholder trusts, taxable

to petitioner under section 311(1') .

In . respondent's view, the benefit :o the shareholder trust s

.arose because, after the formation of K VU Partnership, the

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

partner in a Family Partnership or a so e shareholder in a

corporation which was a partner in a Fa ily Partnership, in

!

assets that were previously held by K , Inc .1110 In other'

1

10 We interpret respondent' s refere ce to "an interest} * .1

in assets that were previously held by TVU, Inc ." as relatirng to

the family partnerships' interests in s ation assets worth'$60 .5

million that respondent alleges were g i en to them, not to their

interest in the balance of the station

ssets that they are! il l

deemed to have purchased with their cas

contributions to KTVU

1

Partnership .

16 words, through the family partnerships, the shareholder trus t

beneficiaries had eliminated the shareholder trusts and the three

corporate layers that separated them from ownership of th e

station assets . Significantly, they had defeated .the temporal

division into life estates and remainders the terms of the

shareholder trusts imposed so that, for instance, all th e

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

not just Mrs . Chambers and Mrs . Anthony, shared in current incom e

I

generated by the station assets .1'

In further support of his position that the primary purpose

for the-formation of KTVU Partnership was to benefit the

shareholder trusts, respondent argues that that transaction was

orchestrated by the controlling trustees of those trusts, Mrs .

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

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

a remainder beneficiary of those trusts, in his multiple

capacities as petitioner's CEO and president, chairman o f

11 We note that, in one of his filings with this Court in

Chambers v . Commissioner , docket` Nos . 16698-06 and 16699-06, but

not in this case, respondent argues that the formation of KTVU

!Partnership also provided a tax avoidance benefit to Mrs .

Chambers and Mrs . Anthony individually :

What occurred here was a shifting of the life

beneficiaries' income interests to the remainder

beneficiaries prior to the deaths of * * * [the

former], resulting in * * * [the,latter's] receiving a n

accelerated gift,of the trust income * * * . This

occurrence also caused the income . attributable to the

life beneficiaries to escape taxation .

In other words, the formation oflIKTVU Partnership effected an

iassignment of income without payment of gift or income taxes by

the assignors, Mrs . Chambers'and'Mrs . Anthony .

iB

- 17

i

petitioner's board, and member of the bard's - executiv e

committee, which actually ratified and approved the formation o f

i

KTVU Partnership .

Respondent bases his argument that there was a section

j

311(b) distribution by petitioner .on.c selaw holding that a

corporation's transfer of money or property to a third party :

primarily for the direct or tangible beiefit of a sharehol d er

gives rise to .a constructive dividend o: distribution to that

th e

shareholder,12 and caselaw finding th e

shareholder when the primary purpose of

benefit ;a member of the shareholder's

f

Although respondent argues that pe

through . .KTVU, Inc ., of "additional valu

in the form of increased

partnership interests" to the family pa

tnerships was made L "fo r

the benefit of [the] Shareholder Trusts

1 11

rather than directly, t o

them," respondent also characterizes th

distribution as a distribution to the s

the affiliated group ; i .e ., ."a distribu

12 See, e .g ., Stinnett's Pontiac Se v . Inc . v .

Commissioner , 730 F .2d 634, 640-641 (11 h Cir . 1984), affg .i3T .C .

472 F .2d 449, 45l-4'5i4

Memo . 1982-314 ; Sammons v . Commissioner

(5th Cir . 1972), affg . in part, revg . i part and remanding T .C .

Memo . 1971-145 ; Commissioner v . Makrans , 321 F .2d 598, 601-602

(3d Cir . 1963), affg . 36 T .C . 446 (1961 ; Gilbert v .

Commissioner , 74 T .C . 60, 64 (1980) .

13 See, e .g ., Hagaman v . Commission ( r, 958 'F .2d 684, 690°--169 1

.(6th Cir . 1992), affg . and remanding on other issues T .C . Memo .

1987-549 ; Green v . United States , 460 F 2d 412, 419 (5th Ciir

1972) ; Byers v . Commissioner , 199 F .2d

73, 275-276 (8th CJJr }II

1952), affg . a Memorandum Opinion of th s Court ; Epstein v .

Commissioner , 53 T .C . 459, 471-475 (196

- 18 interests by KTVU, Inc` . to CCI, followed by subsequen t

distributions of the partnership interests from CCI to * * "*

[petitioner] and * * * (petitioner]-to the Shareholder Trusts . "1 4

Finally, in his memorandum of law under the heading

"CONCLUSION", respondent states as follows :

Petitioner's Motion for,,Summary Judgment must :

fail . This case presents factual issues relating to

valuation, and intertwined factual and legal issues

regarding whether a distribution ''was made, and the

determination of ;~.whether the, distribution was made with

respect to stock . Petitioner, in its abbreviated

statement of facts to the Court,~conveniently omitted

facts which are-crucial to understanding the issues .

As such, . summary' judgment is not appropriate .

B.

Petitione r

Petitioner first',,Iargues thae section 311(b) simply does not

applyto the formation of KTVU Partnership because there was no

distribution of appreciated property by petitioner . to it s

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

Inc . to-'KTVU partnership in exchange for a partnership interes t

I!

14 Because the first two of those-alleged deemed

distributions occur between members of an affiliated group within

the meaning of sec . 1504, respondent notes that, under the

consolidated return regulations in effect during 1993, sec .

311(b) gain is taken into account by the distributing corporation

(KTVU, Inc .) upon the, ; final alleged deemed distribution . from

petitioner to the shareholder trusts . See sec . 1 .1502-14T(a),

(Temporary Income Tax Regs ., .53 Fed . Reg . 12679 (Apr . 18, 1988),

amended by 55 Fed . Reg . 9424 (Mar . 14•; 1990) and 58 Fed! . Reg .

134121(Mar . 11, 1993) . Respondent further notes that, in hi s

it view, KTVU, Inc . ' s distribution of additional value to the family

partnerships simultaneously triggered all three deemed .;

.distributions, and thus its recognition of the alleged [sec .

311(b) gain is immediate .

19

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

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

disproportionally large partnership in erests received by {th e

ea

family partnerships were not received y "shareholders" ofi

,

petitioner, (2) the "built-in gain inherent in the * * * [statio n

assets]", rather than being taxable to petitioner under sect i on

! , gl

311(b), " is recognized by KTVU, Inc .

irk accordance with the '

section 704(c) requirements", and (3) pursuant to thos e

requirements, as set forth in regulatio s under section 704(

a disproportionately higher amount of income and gain .

[is allocated] to KTVU, Inc . over he tax life of the`

contributed assets, so that over t at period KTVU, Inc .

will be allocated the entire amoun of the [built-in] f

is Sec . 721(a) provides as follows :

SEC . 721 . NONRECOGNITION OF GAI N

~ 11

R LOSS ON CONTRIBUTION .

(a) 'General Rule .--No gain o

loss shall be recognized

to>,a partnership or to any of its

artners in the case of a

contribution of property to the pa tnership in exchanget,lfor

an interest in the partnership .

Sec . 704(c)(1)(A) provides as fo lows :

SEC,. 704 . PARTNER'S DISTRIBUTIVE HARE .

(c) Contributed Property .-(1) In general .--Under tegulation s

prescribed . by the Secretary-oss, and deductio n

(A) income, gain,

ontributed t o

with respect to propert y

the partnership by a part er shall be shared ;

o take account of i

among the partners sous

basis

of the

the variation between the

property to the partnersh .p and its fai r

market value at the time

f contribution

*

- 20, gain inherent in the KTVU Station , Assets at the time of

contribution .

See sec . 1 .704 -1 (b) (1) (vi) , ( 5) ,

Example

(13) (i) (built- in gai n

on partnership's sale of propertylltaxed to contributing partner),

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

Partnerships and Partners, par . 10 .04[1], at 10-109 through 10110 (2d ed . 1990) . Petitioner concludes : "Thus, except fo r

timing differences ,

section 704 (c) puts KTVU,

Inc . in the same

position as if KTVU Inc .'s contribution of the KTVU Statio n

Assets to KTVU Partnership had been immediately taxable as a sale

for fair market value ..

16

In support of its position that sec . 704(c), rather than

sec . 311(b), is the appropriate vehicle for taxing KTVU, Inc ., on

any and all built-in gain attributable to the station asset s

KTVU,, Inc :, contributed to KTVU Partnership, petitioner ;;relies on

the decision of the Court of Appeals for the Sixth Circuit in

Shunk v . Commissioner ;`,173 F .2d 1,47, 750-752 (6th Cir . 1949),

revg . .10 T .C . 293 (1948) . In Shunk , the Court of Appeals

rejected the finding of this Court that an apparent bargain sale

by Shunk-Manufacturing Co . (Shunk). to a newly formed partnership

in which its shareholders held a` ;five sixths interest constituted

a constructive dividend from Shunk to .:its shareholders .,E See

i'~ Shunk v . Commissioner , 10 T .C . at 303-307 . The Court of Appeals

concluded :

The property sold by * * * [Shunk] was sold to the

partnership ; it was not a transfer (or distribution) to

its * * * shareholders * *.* . To hold otherwise would

completely ignore the legal concept of a partnership .

* * * [ Shunk v . Commissioner , 173 F .2d at 751 : 1

Petitioner also relies on certain legislative history

j~attendant to the repeal of the General Utilities doctrine

(derived from the Supreme Court's opinion in Gen . Utils . &

Operating

Co . v . Helvering , 296 U .S . 200 (1935), and stating that

,

i ~a corporation generally did not recognize gain or loss-on a

distribution of appreciated or depreciated property to its

shareholders with respect to its'stock) . S . Rept . 100-445 (1988)

is the report of the,fCommittee on Finance accompanying S . 2238,

100th .Cong ., 2d Sess . (1988), which formed the basis for part o f

(continued . . . )

1

- 21 Even assuming arguenao tnat sects ns 721 aria 704(c) ar e

not

the exclusive governing provisions, pe itioner argues that ,

section 311(b) would still not apply because petitioner madejn o

Ii

I

distribution to any of its shareholdersl . Petitioner purport s to

distinguish . the caselaw respondent cites in support of his` J l

argument that KTVU,

Inc .'s gratuitous transfer of partnership

interests to the family partnerships was for the benefit of .th e

shareholder trusts and ,

dividend to those trusts .

16(

I

therefore , constituted a constructiv e

Petitioner argues that th e

. .continued )

the Technical and Miscellaneous Revenue

647, sec . 1006(e)(5)(A), 102 Stat . 3400

337(d) . In pertinent part, the repor t

Section 704 ( c) of the Code ge

gain attributable to appreciated p

to a partnership by a partner be a

partner ; it is expected that this

prevent the use of a partnership t

of the amendments made by subtitle

Act (for example, by attempting to

corporation appreciation to anothe

corporation regime ) . * * * [ S . Rep

67 . 1

100-

erally requires that :

operty contributed-''

located to tha t

ule would generally'

avoid the purpose s

D of Title VI of the'"

shift the tax on C

party or to a non!, c

100-445, supra at-

Petitioner cites the foregoing stateme n as confirmation of its

view that the code provisions effecting the repeal of the Genera l

Utilities doctrine, including sec . 311( ) . "are not intended'°,t o

apply where section 704(c) already app l es to tax the gain to the

corporate transferor . "

Finally, petitioner adds that the .

to fair market value is a reference to

that, if, in fact, the station assets h

respondent claims, . respondent " can chal

[and] require that the section 704(c) a

accurate fair market Value ." In other

adjustment would be to increase KTVU, I

taxable to KTVU, Inc ., under sec . 704(c

distribution by petitioner taxable to p

311(b) .

.

eference in sec ; 7 0 4 (1 c )

rue fair market value s o

ve been undervalued''ls

enge that valuation

locations be based upon

ords, the appropriates

c . s built-in gain 1,

, .not to find a deemed

titioner under sec .' t

- 22 -

constructive distributees in the cited cases had the authority to

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

Anthony, in their capacity as trustees of the shareholders

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

transfer KTVU`Partnership interests (which would represen t

additions to trust principal) to anyone until termination of th e

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

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

controlled neither the board nor any decisions regarding busines s

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

be assumed that the''independent directors [on the executive

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

jr[petitioner] by directing .KTVU . [sic] Inc . to distribute `extra '

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

~to•their duties as directors .andmembers of . the executive

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

`the authority to effect the transfer of "extra" partnership

interests in KTVU Partnership to the family partnerships, they

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

power to effect that transfer was circumscribed by their

fiduciary. responsibilities to petitioner .

Finally, petitioner argues that even if one assumed a

distribution of partnership interests to the family partnerships,

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

direct, tangible or otherwise, as a result of the assume d

ildistribution" . Indeed, petitioner argues that the shareholder

23 -

trusts would have been harmed by such distributions becausei i

premature distributions of trust princ'pal would .have

contradicted the terms of the respectiie trust instrument s

.(violating the trustees '

duties of imp rtiality)

and diminished

the trustees economic ability to carry out Mr . Cox's wishes .i'

II .

Analysi s

11

A . Existence of a Genuine Issue f Material Fact

Because, for purposes of the motion, petitioner concedes a

.$300 .million value for the station assets contributed by K T1VU, .

Inc ., to KTVU Partnership and a $239 .5 iillion value for the e

partnership interest it received in exc ange therefor, valuation

is not an issue herein . Moreover, resp ndent does not identif y

4j

the "intertwined factual and legal issu s regarding whether a

distribution was made" or whether it " w s made with respect t o

stock

1,8 nor does -he identify the "con

which' are crucial to understanding th e

because respondent has failed to satisf

121(d)

17

to "set forth specific facts sh o

would have been harmed

itted by the trust,- i

instruments and would, to the extent ma e, deprive the trustees'

of the wherewithal to carry out the se t lor's wishes .

. In other words, the family trus t

because such distributions were not p e

18 We find that the question of wh e her KTVU, Inc .' s

exchange of the station assets for a ma ority partnership

interest in KTVU Partnership involved a distribution by

petitioner with respect to its stock, f r purposes of secs .

301(a) and . .311(b), raises an issue of 1 w to be decided by'

applying the applicable caselaw, discus ed infra, to the

undisputed facts .

I

- 24' -

genuine issue for trial "

we will not deny the motion for tha t

reason .

Existence of 'a Dividend Subject to Section 311 (Ib)

1.

Respondent's Alternative Position s

Respondent argues. that, in substance, KTVU, Inc .'siassumed

gratuitous transfer of partnership interests in KTVU Partnershi p

.to the family partnerships constituted a constructive dividend

from petitioner to the shareholder trusts causing petitioner t o

.recognize $60 .5 million of unrealized-gain pursuant to section

311(b) . .19 'Respondent appears to .have charted two alternativ e

if 19 Petitioner's concession regarding the $60 .5 million

disparity between the,, value of the station assets KTVU, Inc

contributed to KTVU Partnership and the value of the partnershi p

interest it received is not a'concession that the family

partnerships' partnership interes'!ts were enhanced by that amount .

Indeed, in response to an informal discovery-request from

petitioner, respondent states his positions that (1) the property

he asserts KTVU, Inc . ; distributed was a partnership interest in

KTVU Partnership while .(2) the property to .be valued to determine

gain under sec . 311(b) is the KTVU, Inc, ., assets contributed to

'that partnership . He continues : "The fair market value

component of property!, distributed by KTVU, Inc . under I .R .C . §

311(b) would be the same whether the constructively distributed

property is KTVU television assets or ;an interest in the

partnership ." Respondent relies on Pope & Talbot, Inc . v .

Commissioner , 162 F .3d 1236 (9th ;~Cir . 1999), affg . 104 T .C . 574

4 (1995), in support of that position . In Pope & Talbot, Inc . v .

. Commissioner , supra at 1239, the Court of Appeals held that, fo r

purposes of determining Pope & Talbot, Inc .'s hypothetical gain

if under what is now sec?. 311(b)(1) ,' the .hypothetical sale was of

ithe property the corporation owned at the time of the

distribution (improved and unimproved,,, real property) and not the

,aggregate .value of the individual limited partnership units the

11corporation distributed . There appears here to be a discrepancy

between the $60 .5 million . difference in value that respondent

would .. cause petitioner to treat . as resulting in recognized gain

sunder sec . 311(b) and : the $7,825 ;000 difference between the

'!determined value of the two family partnership interests in KTVU

1j Family Partnership and the $62 million those partnership s

contributed . We need not resolve that discrepancy . The sol e

(continued . .. .)

- 25 paths to arrive at that result . . Under one approach ,

that the transfer was, in fact, to the

he argue s

family partnership s

that'it was for the benefit of the sha eholder trusts and ,

therefore ,

constituted a constructive ividend to those trusts .

i

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

Inc ., to its parent ,

CCI, and from CCI

to its parent , petitioner,

1. 1 1

followed by petitioner ' s constructive distribution to th e

shareholder trusts . Respondent appears to favor the .first'°p'ath ,

stating that "[f]or purposes of this-ca se, i t is only necessary

to establish that appreciated assets le f t the corporate! solutio n

of KTVU ,, Inc .,

for the-benefit of its Shareholder Trusts" . 2 0

Assuming that the transfer . to the famil partnerships was for the

benefit . of the shareholder trusts, resp ndent's apparentl y

favored approach is clearly sustainable under the applicabl e

caselaw '( discussed infra ) .

19( . .

.

Therefore,

since respondent does no t

continued )

issue involved in .the motion is the exitence ( or nonexistence)

of a sec . 311 ( b) distribution of proper y, not the identity or

Petitioner argues that even

value of the transferred property .

assuming " the family partnerships recei ed partnership interest s

worth more than their cash contribution to trigger the

N

application of sec . 311 (b) that assumed transfer from KTVU ,I ' Inc .,

to the family partnerships must constit y to a distribution from

petitioner to the shareholder trusts, w ich, in petitioner's !

view, it does not .

1 f

20 We find additional support for o r view that responde n t

favors the first path in his statements that "the

characterization and taxation of the tr nsfer , if any , of the

partnership interests from the Sharehol er Trusts to the FamiJl y

Partnerships is not here at issue" (emp asis added ), and "th e

relationships between the Shareholder T usts, thei r

beneficiaries , and the Family Partnersh ps illustrate that,the

transfer to the Family . Partnerships was directed by and for he

benefit of [ i .e ., not to] the Sharehold r Trusts ( emphasis

added)

q

- 26 claim,-that it makes any difference, and since he appears ; to favo r

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

assumed gratuitous transfer to the family partnerships

1,

constituted, in substance, a constructive dividend by petitioner

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

2 .

Discussio n

a.

Introductio n

Petitioner's principal argument is a legal argument that . .the

Internal, Revenue Codej1provisions :pertaining to partners and

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

application of the provisions pertaining to corporat e

distributions and adjustments (subtitle A, chapter 1, subchapter

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

contribution to a partnership . More precisely, petitioner argues

that 'section 704 (c .) , which, like ,section 311(b),

effectively

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

station assets ,

preempts the application of section 311(b) to an y

portion of that gain ."

e

; .21 Although sec . 704(c)(1)(A).

taxes the contributing partner

ion, any built-in gain associated with property that partner

contributed, on Sept . 1, 1993, the date of KTVU, Inc .'s

contribution of the station assets to KTVU Partnership,,

?contributors of property to a partnership were still permitted to

rely!on regulations issued under prior law, which made the

contributor's'recognition of the entire built-in gain elective .

,See sec . 1 .704-1(c)(2), Income Tax Regs ., which was replaced by

regulations effective'for contributions made on or after Dec . 21,

1993 1 ;,, TD 8500, 1994-1 C .B . 183 ;,see also 1 McKee et ali, ., Federal

Taxation of Partnerships and Partners, par . 10 .04[3], at 10-113

1(2d ed .-1990) . According to article 4 .6(a) of the KTVU

"Partnership agreement, the partners made that election,, and fo r

that'll reason KTVU, Inc ., was, in fact,Etaxable on the built-i n

.

(continued . . .)

1~

~

- 27 Because we decide the motion on - g ounds that effectively

render . moot the legal issues petitione raises, we

need note

address either - the preemption issue or petitioner ' s argument tha t

Mrs . Chambers and Mrs . Anthony ,

in the i r dual capacitie's a's,

i

controlling trustees of the shareholde trusts and members ..o

petitioner ' s board, had neither the au horny nor .the power~ o

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

KTVU Partnership for the benefit of an one until • termination j of .

the shareholder trusts .22 We shall gra t petitioner ' s motion on

the ground to which petitioner also alludes,

that the undisputed

facts fail to demonstrate that KTVU,' I c .'s assumed gratuitou s

transfer of partnership interests to the family partnership s was

made primarily to benefit the

alternatively ,

shareholder trusts, or,

that it actually provide

, a benefit to the

shareholder trusts .

21 (

. . . continued )

gain associated with the station assets as petitioner alleges .

A

22 The issue of whether Mrs . Chambers and Mrs . Anthony (w ho ,

as controlling . trustees of the shareholder trusts, were ;

arguably , in a position to select all the members of petitioner's

board ) had the power to control petitioner's board and its

decisions would appear to present a question of material fact

sufficient to result in a denial of the motion were deciding,?that

issue necessary .

See Green v . United S ates, 460 F . 2d at 420

("[T]he appropriate test for determining control over-corporate

action * * * is whether the taxpayer has exercised substantial

influence over the corporate action * * * .

The inquiry is

factual" . ) .

Because we find resolving he "power" issue

unnecessary , we need not deny the motio on that ground .

11

j.

II

-

28

-

b . The Caselaw

Sammons v . Commissioner , . 472 F ..2d 449, 451-452 (15th Cir .

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

1971-14 5 , the Court of Appeals for the Fifth Circuit set . forth

standards for determining whether .a corporation's transfer of

property to a . third party constitutes a dividend to the

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

Sammons guaranteed and then assumed a ,,debt obligation of a

second-tier subsidiary of a corporation 99 percent owned by th e

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

preferred stock from its insolvent or near insolvent second-tier

subsidiary was primarily intended to provide that subsidiary with

funds sufficient to reimburse the taxpayer for his payment of the

I

if

I!

subsidiary's debt obligation with ; the result that that

transaction gave rise to a constructive dividend to the-j~taxpayer .

After acknowledging the "well-established principle that a

transfer of property from one corporation to another corporation

may constitute a dividend to * * * [a common shareholder of] bot h

corporations",

id .

at 451, the .Court of Appeals set forth what i t

described as a subjective and an objective test for determinin g

23 Barring a stipulation to the contrary, this caseis

appealable to the Court of Appeals for the Eleventh Circuit . See

sec . 7482 (b)(1)(B) . The Court of. Appeals .for the Eleventh

t Circuit has, held that any case t1- e Court of Appeals for the .Fift h

i,Circui

decided before Oct . 1, 19'81, is binding precedent upon

`it . See Bonner v . City of Prichajrd , 661 F .2d .1206, 1207 (11th

Cir X11981) .

Sammons v . . Commissio,ner ,,:472 F .2d 449 (5thi'Cir .

1972),- which we have followed in determining whether an' .

intercorporate transfer constitutes a constructive dividend to a

common shareholder, e .g ., Chan v .'i Commissioner , T .C . Memo . 1997154, is such a case .

- 29 -

whether such a transfer does, in fact,

constitute a dividendifrom

the transferor corporation to the shareholder . The subjective o r

primary purpose test requires that the distribution or .tran s if e r

be made primarily for the benefit of the shareholder rather han

for a valid business purpose .

Id .

The objective or distributio n

test requires that the distribution or

transfer caused "funds or

other property to leave the control of

the transferor corporation

ii

and * * * [allowed] the "stockholder to

exercise control overf suc h

q .

funds or property either directly or indirectly through some,

9i

instrumentality other than the transfe or corporation ."

Id .

Both tests must be satisfied to find alconstructive dividendit o

the shareholder of the transferor corporation .

Commissioner , 73 0 F . 2 d

In .Stinnett'sPon tiac Serv ., Inc .

634, 64 1 (11th Cir .

1984 ),

Id .

affg . T .C . Demo

1982-314, the Cour t

of Appeals for the Eleventh Circuit ci

es with approval th e

observation of the Court of Appeals fo

the Fifth Circuit in}

Kuper v . Commissioner , 533 F .2d 152, 1

0 •(5th Cir . 1976), affg .

in part and revg . in part 61 T .C . 624

1974), that, in applying

the Sammons primary purpose test, "the

search for this underlying

purpose usually involves the objective criterion of actua l

.primary economic benefit to the share h lders as well " ;

there is an "objective facet" of tha t

i .e .,

est that "inevitably

overlaps with the Sammons ' objective d stribution test" .

The

Court of Appeals for the Eleventh Circ it states the point .as

follows :

30 In determining whether the primary purpose test

has been met , we must determine not only whether a

subjective intent to primarily benefit the shareholders

exists, but also 'whether an actual primary economic

benefit exists for the shareholders . * * * [ Stinnett's

Pontiac Serv ., Inc . v . Commissioner , supra at 641 . ]

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

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

constructive dividends to their common shareholder if they were

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

tangible benefit" .) .

If the benefit to the shareholder is "indirect or derivative

in nature ,

there is no constructive dividend ."

Id . ; see also

Rushing V . Commissioner ,

52 T .C . 888, 894

personal benefit, if any,

Rushing [the sole shareholder of th e

transferor and transferee corporations ]

in nature .

( 1969 ) ("[ W]hatever

received was derivative

Since no direct benefit was received ,

we cannot

properly hold he received a constructive dividend ."),

affd . o n

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

Finally, as respondent points out in his memorandum of law

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

requisite benefit to the shareholder when the primary purpose of

the corporation's distribution or transfer of money or property

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

See, e .g .,

Cir . 1992 ),

549 ;

Hagaman v . Commissioner,

affg .

958 F .2d 684 ,

690-691 (6th

and remanding on other issues T .C . Memo . 1987-

Green v . United States ,~ 460 F .2d 412 ,

419 (5th Cir .

1972) ;

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

- 31 Memorandum Opinion of this Court ; E st in v . Commissioner, 513

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

In both Green and Epstein , the courts' approach was t o

decide whether there had . been a bargain sale by a corporation th e

taxpayer controlled to trusts for the benefit of his minor,",

children (and, therefore, a constructs-\

;e dividend to the 3i

taxpayer) on the basis of the parties' competing valuations°o f

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

stands for the proposition that the me e finding of a bargain

sale based on competing property valuations requires a findin g

that the transfer constitutes a constructive dividend to th e

shareholder,

regardless of intent . .

In Green v . United States ,

supra at 420, the Court of

Appeals : . focused on two . issues : valuati n of the property alleged

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

and theshareholder's control over the corporation's actions ;

i .e ., his "ability to divert a dividen or a bargain sale t o

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

Court of Appeals stated as follows :

We emphasize that the finder of fact must also be

allowed to consider, for what he thinks it is worth,

that the corporation did in fact consummate a

transaction with favorable conse ences for the

taxpayer personally or for his immediate family ; this .'^^

circumstance is surely one tendin to prove that the

taxpayer exercised substantial in luence [the court's

test for control] over corporate action . [ Id . at 420'

421 .]

11

- 32 We consider that language to be fully consistent with the .Court

of Appeals '

own primary purpose test set forth in Sammons V .

Commissioner ,

supra , and ,

in particular ,

with the notion that the

taxpayer necessarily would have exercised his "substantial

influence over corpora,te .action "

for the sole purpose of

benefiting his minor children . ,

Indeed, the Court of Appeals

itself noted : " The approach suggested is entirely consisten t

I

with * * * Sammons " .

Green v . United States , supra at 421 .

In Epstein ,

a case decided before Sammons ,

we found a

constructive dividend to the taxpayer shareholder because we

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

of the taxpayer ' s children .

The latter finding was based on our

determination of the property ' s value :after reviewing the

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

evidence underlying them . Although there is no discussion of any

need for , evidence of corporate or-shareholder intent to

:make a

bargain sale, we clearly expressed our belief that that intent

was present in the case .

dividend treatment ,

For example ,

in justifying constructive

we observed :

The device of having a corporation make a transfer

of property , for no or insufficient consideration, to a

person other than a stockholder has not been to o

successful in avoiding dividend treatment to the

stockholder whose own purposes have been satisfied by

such transfer .

"The petitio er controlled the Willoughby Co . It

acted solely to accommodate him in making the transfer .

He enjoyed the use of the property by having it .

transferred for his own purposes . * * *" [ Epstein v .

Commissioner , supra at 474 - 4 .75 (quoting Clark v .

Commissioner , . 31 B .T .A . 1082 , 1084 ( 1935 ), affd . 84

F . 2d 725 ( 3d Cir . 1936)) .]

- 33 The foregoing language leaves no doubt

constructive dividend to the taxpayer

principally on a finding that there wa

the bargain sale, and that it was sole

taxpayer's desire to confer an econom i

(1)

Petitioner's Intents in Forming KTV U

Partnershi p

(a)

Introduction

Respondent argues that "it is on l

necessary to establish

that appreciated assets left the corpo ate solution of KTVU,, l

Inc ., for the benefit of its Shareholde r Trusts, to establis h

that there has been a distribution wit

Shareholder Trusts' stock to which sec

ion 311 applies ." HeIthen

argues that "the relationships betwee n the Shareholder Trusts,

their beneficiaries, and the Family P a tnerships illustrate-tha t

the transfer to the Family Partnership

was directed by andffo r

the benefit . of . the Shareholder Trusts ."

Lastly, as "[f]urthe r

t

l4

;I

proof of benefit to the Shareholder Tr sts," he argues :

I

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

Anthony approved KTVU, Inc .'s receipt f .less than fair marke t

value for the appreciated assets transferred . "

Assuming arguendo that Mrs . Chambers and Mrs . Anthony,

acting in concert, were responsible foi both petitioner's

decision to form KTVU Partnership and the manner in which it wa s

formed, the undisputed facts do not support respondent' s

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

-

34

-

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

Anthony purposely approved KTVU, Inc .'is contribution of ;the

station assets to KTVU Partnership in exchange for a less tha n

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

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

arm's length) to provide an economic benefit to the famil y

partnerships and, derivatively, to the shareholder trusts . Even

assuming an identity of interests among the entities involved in

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

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

evidence that the related individuals common to those entities

in particular, Mrs . Chamber and Mrs . Anthony) acted i n

concert purposely to violate the arm's-length standard in formin g

KTVU Partnership . See, e .g .,

Rushing v . Commissioner , 52 T .C . at

894 (-The fact that Rushing was the sole shareholder of bot h

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

that Rushing constructively receii, ed the advances of L . C . B . [to

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

that the parties to the formation of KTVU Partnership intended an

arm's-length transaction .

(b)- Factors Relating .to Petitioner's Intent

(i)

Business Reasons for the Formation of

KTVU Partnershi p

As discussed sura, petitioner continued to operate KTVU

'(TV) through KTVU Partnership only because petitioner could not

sell it .

.By operating the station in,that manner petitioner was

able~to reduce its investment in the television broadcast

- 35 business, use KTVU, Inc .'s working cap :tal'in other busines s

areas, and allay concerns among petitioner's television broadcas t

executives that petitioner was abandoni ng the televisio n

broadcast business by demonstrating th~ Cox family' s ongoin g

commitment to it .

(ii)

The .Executive Committee Resolutio n

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

petitioner's board specifically required that the family

partnerships'- cash contributions to KT partnership be "in an

amount corresponding to the fair market, value of the partner1ship

interests acquired by-such Family Parterships", and that th e

family partnerships' acquisition of partnership interest s in ; KTVU

Partnership "be on terms and condition no .less favorable

to

*

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

would apply in a similar transaction with persons who ar e not

Gi

affiliated with * * * [petitioner]" .

I, ( f

(iii) The Outside Appraisals and Additional .Cash

Contributions by-the Family Parthershib s

Before forming KTVU Partnership, petitioner retained an

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

of . the appropriate marketability and minority interest'discolnts

applicable to a minority interest in t e KTVU Partnership as o f

August 1, 19 .93", the date of its formation . Then, in 1996,

because petitioner's management discovered that errors had ; been

made in computing each family partnerslip's interest in KTVU'

Partnership, Furman Selz was retained to revalue those interests .

Furman Selz determined that the correc fair market of each-of

I

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

On

September 12, 1996, in response to that determination, eac h

family partnership contributed an additional $4 million to KTV U

ij

Partnership to bring the total contribution of each to $3 1

million .

(iv)

Fiduciary Responsibilities of Petitioner's

Board of Directors and Majority Shareholder s

Respondent asserts (and petitioner here concedes) that KTVU ,

Inc ., gratuitously transferred KTVU Partnership interests to th e

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

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

whether those facts require us-to find that Mrs . Chambers an d

Mrs . Anthony intended that gratuitous transfer . We agree with .

petitioner : In light of United States v . Byrum , 408 U .S . 12 5

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

Even assuming Mrs . Chambers and Mrs . Anthony controlled

petitioner' s board and could direct petitioner ' s actions ,

because

the applicable State law imposes fiduciary duties on corporate

directors and majority shareholders

Anthony),

( e .g ., Mrs . Chambers and Mrs .

we may not necessarily conclude

( as respondent does)

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

transfer to the family partnerships .

In United States v . Byrum ,

supra-at 137-138, the Suprem e

Court observed that in almost every if not every State "[a]

majority shareholder has a fiduciary duty not to misuse his power

by promoting his personal interests at the expense of corporate

interests and that "the directors also have a fiduciary duty to-

- 37 promote the interests of the corporation ."

majority shareholders and directors

Delaware

Whether petition'er's

were subject to the laws of

( the State of petitioner ' s incorporation)

or Georgia

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

had fiduciary responsibilities of the type referred to'in Byrum .

See Ga . Code Ann . sec .

14-2-830(a) (20(3) ( enacted in 1981) .21, ("A

director shall discharge his duties as a director ,

includi:nglhi s

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

in good faith to be in the best interests of the corporatilo ,

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

k

Delaware law, corporate directors stan in a fiduciar y

relationship to their corporation and 'ts stockholders ", and " a

majority shareholder * * * has a fiduciary duty to the .

61

corporation and to its minority shareholders if the majority ;

shareholder dominates the board of .dir ctors and controls to

corporation .") ;.

GLW Intl . Corp . v .• Yao , 532 S .E .2d 151, 15511(Ga .

Ct . App . 2000) ("It is well settled th .t corporate officers an d

directors have a fiduciary relationship to the corporation' and

its-shareholders and must act in good aith .") ; Marshall v' W .E .

Marshall Co . , 376 S .E .2d 393, 396 (Ga . Ct . App . 1988)

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

a "fiduciary relationship * * * to protect minority shareholders"

and "majority shareholders must act in .good faith when~manag!ing

corporate affairs" .) .

it

24 See 1988 Ga . Laws p . 1070, sec .

- 38 KTVU, Inc .'s assumed gratuitous transfer of a substantial

partnership interest in KTVU Part lership necessarily would hav e

.

I

I

reduced its distributive share of r income and liquidation (o r

sale ). proceeds from KT-VU-(TV)

by the amounts that would have bee n

attributable to that interest .

Thus, the assumed transfer

necessarily would have ; resulted in financial detriment to (and ,

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

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

petitioner .

We agree with petitioner that such a transfer would .

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

fiduciary duties to petitioner and to the minority shareholders

who, unlike the beneficiaries of the

trusts, did not own interests

therefore ,

( majority )

shareholde r

in the family, partnerships and,

would not be made financially whole for the likely

shortfall in income and liquidation

In,.'United States v . Byrum ,

( or sale)

supra,

proceeds . ,1

the decedent owned a

majority of the stock in three corporations and transferred

shares in those corporations to an irrevocable trust for his

children .

He retained the right to vote the transferred shares ,

veto any investments and reinvestments by the trustee, and

replace the trustee . The Commissioner determined that thos e

retained rights caused the values of the shares to be includable

in his i : gross estate under either section 2036 ( a)(1)

(retentionof

the enjoyment of or right to income from the property )

or section

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

or the income therefrom ) .

li

As we observed in Chambers v .

- 39 Commissioner ,

87 T .C . 225, 232

( 1986),

Byrum , in rejecting the Commissioner's

emphasized the fiduciary duties of a m

the directors of a corporation ." The

constraints on majority shareholders a

corporation as follows :

Whatever power Byrum may have possessed with respect toj

the flow of income into the trust was derived not from

an enforceable legal right specified in the trust`

instrument , but from the fact that he could elect a

majority of the directors of the three corporations .

The power to elect the directors conferred no legal

right to command them to pay or not to pay dividends .,

A majority shareholder has a fiduciary duty not to

misuse his power by promoting his personal interests at,

the expense of corporate interest Moreover, the

.1 1

directors also have a fiduciary d ty to promote the

interests of the corporation . However great Byrum's

influence may have been with the corporate directors ,

their responsibilities were to al stockholders and

were enforceable according to leg 1 standards entirelyl

unrelated to the needs of the trust or to Byrum's

desires with respect thereto . [ U ited States v . Byrum',

supra at 137 - 138 ; fn . refs . . omitt d . ]

In the light of the Supreme Court's reasoning in Byrum,

we

agree with petitioner that, on the evi ence before us, it woul d

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

as,both

directors of petitioner and trustees o the shareholder trusts ,

purposely acted for the benefit of the trust beneficiaries

( and

to petitioner ' s detriment ) by directin q . KTVU, Inc .., to distribute

"extra" partnership interests to the,other .KTVU Partnership

partners contrary to their fiduciary duty to petitioner ,andlit s

minority shareholders .'

4 0

(c)

Conclusio n

The foregoing factors

( the nontax business reasons for the

formation of KTVU Partnership, the executive committee o

resolution , the use of : outside appraisals to determine and,

later, increase the family partnerships '

KTVU Partnership ,

capital contributions to

and the fiduciary responsibility constraints

against self - serving actions by the majority shareholders and

directors of petitioner) demonstrate that there is no reason to '

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

petitioner ' s other directors intended a gratuitous transfer by

KTVU,

Inc .,

to KTVU Partnership of station assets worth $60 . 5

14

million . Rather ,

assuming that that transfer did, in fact,

occur, . the undisputed facts strongly indicate that it was

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

of the station assets to KTVU Partnership was not intended t o

provide ,~ .a gratuitous economic benefit to the other partners and ,

derivatively,

to .the shareholder trusts .

(2)

Existence of a Benefit to the

Shareholder Trust s

(a)

Analysi s

The terms of the three shareholder trusts make clear tha t

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

Mrs . Chambers and Mrs . Anthony

(under-the Dayton trust (at all

times !i, here relevant)), I, (2) Mrs . Chambers

and (3) Mrs . .Anthony

( under Atlanta ..Trust I),

( under Atlanta Trust II ) .

The trust terms

also make clear his intent that only upon the death of thos e

{

i~

i

- 41

-

income beneficiaries were the trust co pora to be distributed to

II

his children's lineal descendants .

In general, the terms of the trust . determine the nature an d

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

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

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

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

carry out the settlor's intent . See 7 Am . Jur . 2d, Trusts,r sec .

331 (2005) ;

see also 90A C .J ..S ., Trusts, sec . 321 (2002) ("By

accepting the trust, a trustee becomes bound to administerlit, o r

.to execute it, in accordance with the Jrovisions of the tru s

instrument and the intent of the settl r" (fn . refs . omitted)) ;

id .

sec . 322 ("It is the trustee's paramount duty to preserve and

protect . .the trust estate in compliance with the terms of th e

! ,I

25

trust ."')

Zs As evidenced by their filings i

Chambers v .

Commissioner , docket Nos .- 16698-06 and 16699-06, the parties

agree that the Atlanta trusts, created in Georgia, are governed

by Georgia law and the Dayton trust, created in Ohio, is governed

by Ohio law . The laws of those two States generally incorporate

and are consistent with the foregoing principles of trust law .

.See, e .g ., Ga . Code Ann . sec . 53-12-19 (1997) (Trustee duties )

(generally applying "the common law duties of the trustee") ;j id .

sec . 53-12-211 (Duty of trustee as to receipts and expenditure)

(generally requiring compliance with "the terms of the trusty) ;

Ohio Rev . Code Ann . sec . 5808 .01 (2006) (Duty to administer

trust) ("[T]rustee shall administer the trust in good faith,l'in

accordance with its terms and purposes and the interests of the

beneficiaries" .) ; id . sec . 5808 .04 (Prudent administration) 1("A

trustee shall administer the trust as prudent person would and

shall consider the purposes, terms, di tributional requirements,

and other circumstances of the trust .") .

I

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

through their control over the corporate actions of petitioner,

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

of partnership interests representing as much as $60 .5 million in

station assets to the .family partnerships, they necessarily would

have violated their duties as trustees of the shareholder trusts .

By stripping the trust corpora of valuable .. assets for inadequate

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

to preserve the trust assets ; by granting their linea l

descendants (holders of the remainder interests) immediate access

to both income and principal attributable to the gratuitously

transferred assets (through membership in the family

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

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

-respondent suggests, the shifting of assets from petitioner (the

stockAof~which constituted the entire corpus of each shareholder

(trust) to KTVU Partnership may have benefited the remainder

beneficiaries by accelerating their enjoyment of income an d

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

Anthony . to shift trust income from themselves as life

11

beneficiaries to the remainder beneficiaries . Nevertheless, the

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

Anthony's fiduciary obligation under the trusts was to administer

the trusts in accordance with the ; terms thereof, not in

i

43 accordance with the conflicting desire

of the beneficiarie

{.2 6

Indeed, one . can imagine the trustees' ctions being carries . o

their logical extreme whereby the trustees would have petitione r

t

transfer all its assets to KTVU Partne ship thereby leaving the

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

terminating the shareholder trusts . tinier those circumstances ,

one would be hard pressed to conclude that the trustees had acte d

11

for the benefit of the shareholder tru s

S .2

7

26 In this discussion, we treat th e shareholder trusts a s

entities separate and apart from the tr stees and beneficiaries . .

That treatment appears to be in accord

ith the definition of a

trust set-forth in 1 Restatement, Trust

3d, sec . 2 (2007) . That

section defines,a trust as, in essence, "a fiduciary relationshi p

with respect to property" . In "Comment a . Terminolocry " , the!!

authors of the restatement add the .fol l El wing clarification :

Increasingly, modern common-1 H w and statutory

concepts and terminology tacitly r cognize the trust as l

a legal "entity," consisting of th EP trust estate and

the . associated fiduciary relatio n

etween the trustee

and the beneficiaries . This is in reasingly an d

,appropriately reflected both in l a guage (referring ,

toil

for example, to the duties or liab lity of a trustee

"the trust") and in doctrine, espe 0 ially i n

distinguishing between the trustee personally or as an

individual and the trustee in a fi uciary or ! ° :

representative capacity .

27 This analysis is consistent with our recent decision in

Santa Fe Pac . .Gold .Co . v . Commissioner , 132 T .C . (2009) in .

which we held that the taxpayer's payme t of a $65 millio n

"termination fee" to a putative white k ight in connection with a

hostile takeover of the taxpayer by ano her corporation

constituted a currently deductible expe diture . In reaching tha t

result, we noted that the taxpayer's bo rd of directors approired

hite knight " because .

the hostile takeover and rejected the

Santa Fe's board to ,

"Delaware fiduciary duties laws require

Id . at

obtain the highest value for the compa n 's shareholders . ."

(slip op . at 30) . After the hostile takeover that triggere d

y fired the taxpayer' s

the termination fee, the acquiring comp

employees, released most of its manageme t, shut down its

headquarters, discarded its business pla s, and, therefore ,

(continued! . .)

i!

In determining that actions by a,trustee that violate the

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

be detrimental to the !trust, we are mindful of the general rul e

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

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

ip

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

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

(1950) .) ("Where a trust is created inter vivos and th e

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

1E

'4.

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

,Trusts, ,; sec . 615 (2005 ) ("An action * * * to enforce the trus t

must ordinarily be brought by beneficiaries, trustees, or someone

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

representative of t.he,,settlor ." (Citation omitted .)) . The reason

'~for theinonbenef iciary settlor's~i .nability to sue the trustee to .

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

relationship between the settlorand the trustee . See 3 Scott,

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

Standing in One Private Law Setting", 62 N .C . L . Rev . 905, 9091912 (1984) . Rather, the trustee's fiduciary obligations ar e

z?

. .continued

) harmed rather than benefited the taxpayer . For that reason, w e

ipheld .the termination fee to be currently deductible . In so,

doing, we distinguished INDOPCO, .Inc . v . Commissioner „503 U .S .

79 (1992), which requires the capitalization of fees that provide

Ila benefit to the taxpayer extending beyond the taxable year in

issue .

Id . at (slip op . at '51) . In effect, .our finding of

no benefit to the taxpayer treated as irrelevant the obvious

financial benefit to the taxpayer's shareholders who stood, in

relation to the taxpayer, as the beneficiaries of the shareholder

trusts stand-in relation to those trusts .

45 generally considered to'run to the ben ficiaries, providing the

beneficiaries with exclusive rights of enforcement against th e

trustee . See 1 Restatement, Trusts 2d,1 secs .

197-200

(1959)

9

Scott, .supra at 209, . 211-212 . Both Georgia and Ohio=law appea r

to be consistent with that precept .

12-193 (2003) ; Ohio Rev . Code Ann .'sec

(2006) .2 8

Assuming that Mr . .Cox or his repr

without standing to sue to enforce the

terms of the shareholde r

trusts and that the trust beneficiari e

would benefit from ! and be

28 There are indications that the

udicial bias agains t

enforcement of the settlor's intent ma

be softening . See ;'3

Scott, Trusts 218 (4thed . 1988) . ("Th e tendency of American

courts has been to lay an increasing enjphasis on the functio n

the court in carrying out the wishes of the settlor .") . Fori,

commentary questioning universal applic ation of the rule agains t

settlor enforcement of trust terms, see Gaubatz, "Grantor

Enforcement of Trusts : Standing in One Private Law Setting "

N .C . L .,Rev . 905 , 906 (1984) :

A-grantor who creates a spendthrif t or material purpose!

trust relies on the trustee to res ist the importuning s

of the beneficiary to deviate .from the trust to his

immediate advantage . If the benef iciary seeks suc h

deviation, his desires are contrar

to . those of the '

grantor, even if not contrary to t e grantor's economic

the question of the !

interests . The attempt thins raise

grantor's right to prevent the tru tee from acceding to'!

the beneficiary's demands . [Fn . r f . omitted .. ]

See also Note , " Right of Settlor To Enf rce a Private Trus t

Harv . L . Rev . 1370, 1376 (1949) :

But there are some indications, at least in the case ofi,

spendthrift trusts, of a policy to give the settlor's

intention affirmative effect against an unwilling

trustee . Where this * * * policy is present, the .

settlor should be allowed to enjoin unauthorized

payments of income or principal, a id, whereve r

feasible, to-follow the property i to the hands of the

payees'and reestablish the trust . [Fn . refs . omitted .]

- 46, -

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

partnerships, that gratuitous . .transferinonetheless would be

harmful to the shareholder trustsl! As noted supra ,'it would

necessarily diminish trust principal and income and, therefore ,

it would necessarily diminish the, ;economic well-being of the

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

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

lenhanced benefits to the trust beneficiaries arise at the expens e

;

of the' shareholder trusts .

(b)

Conclusion

;j

KTVU, .Inc .'s assumed gratuitous transfer of an interest i n

KTVU Partnership to the family partnerships did not benefit the

d6

i~

shareholder trusts .

(3)

Conclusion Concerning Application of

the Primary Purpose Test -

tKTVU, Inc .'s assumed gratuitous transfer of an interest in

KTVU Partnership to the family partnerships does not satisfy th e

primary purpose test as set fort1- in Sammons v . Commissioner , 47 2

F .2d,449 (5th Cir . 1972), and Stinnett' .s Pontiac Serv . .i,lInc v .

Commissioner , 730 F .2d .634 (11th,iCir . 1984) .

3 .

Conclusion

;

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

KTVU Partnership to the family partnerships did not constitute a

I!

47 distribution to the shareholder trusts

subject to sectio n

311(b) . 29

An order

rantin etit!io her, s

motion f r summary

be issue

. -

ud ment wiil l

j

29 We note in closing that, were respondent able to

establish .that (1) petitioner, KTVU, Inc ., KTVU Partnershipqland

the family partnerships were all under common control, and (2)

the allocation of income and liquidation (or sales) proceeds'j

among .KTVU, Inc ., and .the family partnerships was unreasonable

(i .e ., it did not reflect their true taxable incomes according to

their relative contributions to KTVU Partnership), circumstances

that, in fact, he . alleges, the Secretary has authority under;Hsec .

482 to allocate income and deductions among related partners1to

clearly reflect income . See, e .g ., sec . 1 .704-1(b)(1),(111 ),

Tax Regs .

(" .[A]n allocation that is respected under

section 704(b) and this paragraph nevertheless may be reallocated

r

under * * * section 482" .) . We are not called upon to review the

Secretary's exercise of his authority under sec . 482 in the icase

before us . It may be that respondent's decision to proceedi

against petitioner under sec . 311(b), rather than against the

partners in KTVU Partnership under sec ._482, is attributable") at

least in part ; to the fact that the latter approach would not

have resulted in an immediate tax on the entire $56,182,115

deemed gain attributable to the assumed transfer of partnership

interests in KTVU Partnership by KTVU, Inc ., to the family'

partnerships . Instead, because KTVU, I c ., and the family .

partnerships were all domestic taxpayer 3, a reallocation of KTVU

Partnership's income among them most lively would have resulted

in little, if any, additional tax in 19 3 and the followin g

years .

48, APPENDIX

Ii

'4f ,

Shareholder Trust s

1 Atla nta

Trust s

Atlanta Trust II

BCA has life estate ,

remainder to her lineal

descendant s

Atlanta . Trust I

ACC !ha's,life estate ,

remainder to her

lineal descendant s

Dayton Trust

ACC & BCA .have lif e

estates, remainder to

their lineal descendant s

29 0

290

40 0

Cox Enterprises, Inc .

CC I

'10

KTVU, , Inc .

55/75% of profit distributions

certain KTVU TV station assets

(9/1/93) . -

Y

.KTVU Partnership .

$31M

22 .5/12 .5%

(9/1/93 : $27M) of,,profit

(9/12/96 : .$4M) distribution s

22 .5/12 .5°%

$31M

of profit (9/1/93 : $27M)

distributions (9/12/96 : $4M )

I

ACC Partnership

(ACC-owned entity & ACC' s

BCA Partnership

(Entities controlled by BCA

children)

& her children )

"Family Partnership s

II