Briarcliff Candy Corp. v. Commissioner of Internal Revenue
United States Tax Court (1987)
54 T.C.M. (CCH) 667
In 1973, Eckmar Corporation (Eckmar) recapitalized its subsidiaries, which resulted in Briarcliff Candy Corporation (Briarcliff) (plaintiff) acquiring Health-Med Corporation (Health-Med) and Health-Med’s subsidiaries. After the closing, Eckmar owned 4,000 shares of Health-Med junior preferred stock and approximately 500 shares of Health-Med preferred stock; and Briarcliff owned 40,000 shares of Health-Med common stock. The Health-Med junior preferred stock was convertible into Health-Med common stock at such a high ratio that, once converted, Eckmar would hold as much as 95 percent of the Health-Med voting stock. After the acquisition, Briarcliff, Health-Med, and the Health-Med subsidiaries filed consolidated tax returns. The net operating losses of Briarcliff were deducted against the profits of Health-Med and its subsidiaries. The Commissioner of Internal Revenue (the commissioner) (defendant) disallowed the deductions, determining that Briarcliff and Health-Med had constructed the acquisition so that Health-Med could avoid tax liability on its profits. The commissioner issued a notice of deficiency to Briarcliff. Briarcliff filed a lawsuit in the United States Tax Court disputing the deficiency and moved for summary judgment.
Rule of Law
Holding and Reasoning (Panuthos, J.)
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