- 22 -
combine steps, but if it invents new ones, "Courts have refused
to apply the step-transaction doctrine in this manner." Esmark,
Inc. & Affiliated Cos. v. Commissioner, supra at 196. "'Useful
as the step transaction doctrine may be * * * it cannot generate
events which never took place just so an additional tax liability
might be asserted.'" Grove v. Commissioner, 490 F.2d 241, 247-
248 (2d Cir. 1973), affg. T.C. Memo. 1972-98 (quoting Sheppard v.
United States, 176 Ct. Cl. 244, 361 F.2d 972, 978 (1966)).
Respondent's proposed recharacterization does not adequately
account for, among other things, why TBS would make a capital
contribution to MGM17 and then immediately make an intercompany
loan of $107.7 million back to itself. While it is
understandable that a parent corporation would transfer excess
cash received from the sale of assets by a subsidiary to itself,
it is hard to imagine a company making a capital contribution to
a subsidiary in order to lend itself money as respondent
postulates is, in part, the substance of this transaction. The
fact that the amount of the capitalization postulated by
respondent corresponds to the value of the asset purported to be
sold is also suggestive of the fact that the asset was in fact
sold.
17In respondent's proposed recast of the substance of the
transaction, it is necessary to include a capitalization step to
account for the fact that MGM's net worth did not decrease, as
would be expected, had a redemption actually taken place.
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