Ball v. Comm’r of Internal Revenue Serv.

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In 1997, the trusts acquired all shares of AIS with an aggregate basis of $5,612,555. In 1999, the trusts formed Wind River Corporation and contributed their AIS shares in exchange for all Wind River shares. Wind River designated itself a subchapter S Corporation. In 2003, Wind River elected to treat AIS as a qualified subchapter S subsidiary. Before that election, the trusts’ aggregate adjusted basis in Wind River was $15,246,099. After the Qsub election, the trusts increased their bases in that stock to $242,481,544. The trusts sold their Wind River interests to Fox. After transaction costs, the sale yielded $230,111,857 in cash and securities in exchange for the Wind River stock. The trusts claimed a loss of $12,247,229: the difference between the amount actually received for the sale and the new basis in the Wind River stock. The trusts shareholders’ 2003 tax returns showed that capital loss. The IRS determined that a capital gain of approximately $214 million had been realized from the sale to Fox, for a cumulative tax deficiency of $33,747,858. Deficiency notices stated “the Qsub election and the resulting deemed I.R.C. 332 liquidation did not give rise to an item of income under I.R.C. 1366(a)(1)(A); therefore, [the Trusts] could not increase the basis of their [Wind River] stock under I.R.C. 1367(a)(1)(A).” The Tax Court found the increase in basis and declared loss to be improper. The Third Circuit affirmed. View "Ball v. Comm'r of Internal Revenue Serv." on Justia Law