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in exchange for CKH preferred stock. Petitioner contended that
the value of the CKH preferred stock would not have exceeded
$207,000 at the time of the exchange.
1. The $2 Million Consulting Fee
Before the creation of CKH in October 1996, petitioner was
negotiating with National Service Industries, Inc. (NSI), to
provide certain services. The services involved assisting NSI to
dispose of a safe harbor lease under former section 168(f)(8)
without adverse tax consequences. The safe harbor lease was on
the verge of producing approximately $87 million of ordinary
income (the tax benefit lease). Although NSI, if it remained the
holder of the tax benefit lease, would not receive or be enriched
by $87 million from an economic standpoint, NSI, for tax
purposes, would be obligated to report $87 million of ordinary
income with respect to the tax benefit lease. A consulting
agreement was executed between NSI Enterprises (an NSI
subsidiary) and petitioner on December 1, 1996, 1 day before Cap
Corp.’s, CKH’s, and petitioner’s execution of the stock purchase
and debt conversion agreements, discussed in II. C. above, under
which among other things, CKH acquired a 100-percent stock
ownership in CKS.
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