## Facts

- A parent corporation and its wholly owned subsidiary acquired nearly all shares (about 99.97%) of a publicly traded holding company that owned supermarket-related subsidiaries.
- The parent later decided it no longer wished to own and operate grocery stores through subsidiary corporations.
- A manager of one operating supermarket subsidiary expressed interest in purchasing that business.
- The taxpayer faced a gap between its high cost basis in the holding company’s stock and the lower carryover basis in the holding company’s underlying assets, creating a potential stock loss the taxpayer wanted to recognize.
- To accomplish a cash-out of minority shareholders and attempt to recognize a loss, the taxpayer and the buyer’s newly formed corporation executed two coordinated agreements:
  - The holding company merged into the buyer’s corporation, with the buyer’s corporation surviving.
  - Immediately after the merger, the taxpayer repurchased from the buyer’s corporation all former holding-company assets except those tied to the operating supermarket business, which the buyer retained.
- The taxpayer reported the overall transaction as a sale of stock generating a capital loss and sought a tax refund.
- The IRS disallowed the loss, treated the arrangement as a complete liquidation of a controlled subsidiary under I.R.C. § 332, assessed a deficiency, and the taxpayer paid and sued for a refund.

## Issues

1. Whether the integrated transaction should be characterized as a taxable stock sale generating a recognizable capital loss or as a nonrecognition complete liquidation under I.R.C. § 332.
2. Whether substance-over-form and step-transaction analysis required collapsing the merger and asset repurchase into a single plan for federal income tax purposes.
3. Whether the brief interposition of the buyer’s corporation as the surviving entity prevented application of § 332’s control and complete liquidation requirements.

## Decision

- The Tenth Circuit affirmed summary judgment for the United States.
- The court held the transaction, viewed as a whole, was a complete liquidation of a controlled subsidiary within the meaning of I.R.C. § 332, not a loss-recognizing stock sale.
- Because § 332 applied, the taxpayer could not recognize the claimed capital loss, and the IRS’s deficiency determination was upheld.
- Summary judgment was proper because the material facts concerning the structure and timing of the steps were undisputed and the dispute was legal characterization.

## Legal Principles

- Federal income tax consequences depend on the substance of a transaction rather than the formal labels used by the parties.
- Under the step-transaction doctrine, formally separate steps that are prearranged components of a single plan may be treated as one integrated transaction.
- A parent receiving property in a complete liquidation of an at-least-80%-owned subsidiary generally takes under I.R.C. § 332, resulting in nonrecognition of gain or loss to the parent on receipt of the property.
- In a § 332 liquidation, basis rules (including carryover basis principles reflected in I.R.C. § 334) can prevent recognition of a built-in loss in the parent’s subsidiary stock through a restructuring designed to resemble a sale.
- Temporary, intermediary ownership inserted as part of a prearranged plan does not necessarily defeat § 332 treatment when the overall transaction functions as a parent-subsidiary liquidation.

## Conclusion

The court treated the merger and immediate asset repurchase as a single, preplanned liquidation of a controlled subsidiary under I.R.C. § 332, barring the parent from recognizing a capital loss that it sought to generate through the transaction’s formal structure.


Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517 (10th Cir. 1991)