- 44 -
NSI intended to divest itself of the lease without adverse
tax consequences. To that end, in August 1996 NSI entered into a
presumably tax-free, nonrecognition transaction involving
preferred stock in a company called RD Leasing (RD).12 The RD
stock had a value of approximately $700,000. Significantly, the
prior owner of the RD stock ostensibly had a high tax basis
(approximately $87 million) in the stock.13 By acquiring the RD
stock in a presumably tax-free transaction, NSI sought to obtain
an $87 million carryover basis and a potential built-in loss of
nearly $87 million to offset $87 million of ordinary income from
the tax benefit lease. NSI’s plan was to transfer the tax
benefit lease and the RD stock to an NSI affiliate in a series of
tax-free transactions. NSI would then sell, to an unrelated
entity, all outstanding shares of stock in the NSI affiliate with
the offsetting income and loss. The unrelated entity could sell
the RD stock to trigger the $87 million built-in loss. To be
entitled to offset and to claim an ordinary loss with respect to
12The bona fides and proper attendant tax consequences of
the divestment and/or any of the divestment’s steps to NSI and/or
other participants are not in issue in this case.
13This prior owner’s earlier acquisition of the RD Leasing
(RD) preferred stock was discussed in Andantech L.L.C. v.
Commissioner, T.C. Memo. 2002-97, affd. on some issues and
remanded for further proceedings on other issues 331 F.3d 972
(D.C. Cir. 2003).
Page: Previous 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 NextLast modified: May 25, 2011