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McDonald's Restaurants of Illinois v. Commissioner

688 F.2d 520 (1982)

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McDonald’s Restaurants of Illinois v. Commissioner

United States Court of Appeals for the Seventh Circuit

688 F.2d 520 (1982)

Facts

The McDonald’s Corporation (McDonald’s) entered into negotiations with three men (the sellers) to purchase restaurants from them. For accounting purposes, McDonald’s needed to pay the sellers in McDonald’s stock. However, the sellers would agree to the deal only if they could be assured that they would be able ultimately to end up with cash. The parties agreed to a deal whereby McDonald’s would acquire the companies holding the sellers’ restaurants through a merger and then contribute the restaurants to 27 wholly owned McDonald’s subsidiaries (plaintiffs). In exchange, the sellers would receive McDonald’s common stock and a right to force McDonald’s to register the stock within two years so that the sellers could sell the stock on the open market for cash. The parties consummated the transaction. Shortly thereafter, McDonald’s registered the stock, and the sellers sold it for cash on the open market. The parties treated the transaction as a taxable sale. Accordingly, McDonald’s reported an adjusted basis in the acquired assets equal to the value of the common stock it exchanged for them. The 27 subsidiaries then took depreciation deductions based on those adjusted bases. The Internal Revenue Service (IRS) (defendant) treated the transaction as a tax-free reorganization, recalculated the amount of allowable depreciation deductions, and assessed deficiencies. The United States Tax Court upheld the deficiencies, and the 27 subsidiaries appealed.

Rule of Law

Issue

Holding and Reasoning (Cummings, C.J.)

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