## Facts

- H. J. Heinz Company operated through subsidiaries including H. J. Heinz Credit Company (HCC), a wholly owned finance subsidiary.
- Historically, when Heinz repurchased its shares, it typically bought shares directly on the public market.
- In 1994, HCC purchased 3.5 million shares of Heinz common stock on the open market.
- In January 1995, HCC transferred 3,325,000 shares to Heinz in exchange for a Heinz-issued convertible note; HCC retained 175,000 shares.
- Heinz treated the transfer as a stock redemption and characterized it as producing a taxable dividend to HCC.
- In May 1995, HCC sold the remaining 175,000 shares to an unrelated third party.
- Heinz asserted that HCC could shift the basis from the 3,325,000 transferred shares to the 175,000 retained shares, and claimed a capital loss of $124,134,189 on the 1995 sale.
- The IRS disallowed the loss and related carrybacks, applying step-transaction and related anti-avoidance doctrines on the theory that HCC’s ownership of the shares was transitory and tax-motivated.
- Heinz paid the assessed deficiency and filed a refund suit in the Court of Federal Claims seeking approximately $42.6 million.

## Issues

1. Whether HCC’s transfer of 3,325,000 shares to Heinz for a convertible note qualified as a “redemption” under I.R.C. § 317(b) permitting HCC to reallocate basis to the 175,000 shares it retained.
2. Whether substance-over-form, sham transaction, and step-transaction doctrines required collapsing the steps and treating the transaction as Heinz’s direct market repurchase, eliminating any basis inflation and capital loss.
3. Whether a deductible loss (and carrybacks) was allowable under I.R.C. § 165 given the transaction’s economic results.

## Decision

- The court entered judgment for the United States and denied Heinz’s refund claim.
- The court held there was no “true redemption” under I.R.C. § 317(b) in substance.
- The court applied sham transaction and step-transaction doctrines (including end-result and interdependence tests) to treat the arrangement as a single integrated transaction equivalent to Heinz repurchasing its shares directly from public shareholders.
- The court disallowed the claimed capital loss and the resulting loss carrybacks because the asserted loss did not reflect a genuine economic loss and depended on artificial basis manipulation.

## Legal Principles

- Tax consequences are determined by substance rather than formal labels; transactions lacking economic substance and non-tax business purpose may be disregarded.
- Under the step-transaction doctrine, formally separate steps may be collapsed where they are prearranged to reach a specific end result or lack independent economic significance.
- A redemption under I.R.C. § 317(b) requires an economically substantive shareholder relationship; transitory, tax-driven related-party interpositions may not produce a qualifying redemption.
- A loss deduction under I.R.C. § 165 requires a realized economic loss; paper losses generated solely through basis inflation are not allowable.
- In identifying ownership for tax purposes, courts examine whether the purported owner bore the burdens and benefits of ownership.

## Conclusion

The Court of Federal Claims denied Heinz’s claimed refund, holding that the intra-group stock steps were properly collapsed under anti-avoidance doctrines and did not create a qualifying redemption or a deductible capital loss because the asserted loss arose from basis manipulation rather than economic loss.


H. J. Heinz Co. & Subsidiaries v. United States, 76 Fed. Cl. 570 (Fed. Cl. 2007)