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Brunswick Corporation and Subsidiaries v. United States

December 22, 2008

BRUNSWICK CORPORATION AND SUBSIDIARIES, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

This tax case centers on the ability of plaintiff Brunswick Corporation and its subsidiaries to obtain a refund of Federal income taxes paid for the taxable year ending on December 31, 1986.*fn1 The parties' cross-motions for summary judgment are before the court. For the following reasons, the government's motion for summary judgment is granted, and Brunswick's motion for summary judgment is denied.

I. Background

The court adopts the parties' stipulated facts, and notes that while all of the facts are agreed, the parties dispute the relevance of certain facts as discussed more fully below.

A. The Parties

Plaintiff Brunswick Corporation has its principal place of business in Lake Forest, Illinois. Defendant is the United States of America.

B. The Brunswick Consolidated Group

Brunswick is, and during the taxable year ending December 31, 1986 (the "1986 Tax Year") was, a consolidated group of corporations, which included Brunswick Corporation as the parent and its domestic subsidiaries as members. From 1960 to the present, Brunswick, itself and through its subsidiaries, has continuously participated in the marine business, including at various times, the manufacture and sale of pleasure boats, marine engines and marine anchors.

Brunswick is, and during the 1986 Tax Year was, a calendar-year taxpayer and files its Federal income tax returns accordingly. Brunswick filed a consolidated Federal income tax return for the 1986 Tax Year, which included the income and deductions of it and its domestic subsidiaries for the period January 1, 1986 through December 31, 1986.

C. Brunswick's Acquisition of Bayliner

On December 8, 1986, Brunswick acquired all of the outstanding stock of Bayliner Marine Corporation ("Bayliner Marine"), a subchapter S corporation, and its affiliates, U.S. Marine Corporation ("U.S. Marine") and Blue Fin Industries, Inc., both subchapter C corporations. This transaction is hereinafter referred to as the "Bayliner Acquisition." Only depreciation deductions attributable to Bayliner Marine and U.S. Marine (collectively, "Bayliner") assets, and not Blue Fin Industries, Inc. assets, are at issue with respect to the Bayliner Acquisition.

Prior to and at the time of the Bayliner Acquisition, Bayliner was in the business of manufacturing pleasure boats and marine engines. As of the acquisition date, Bayliner was not part of a consolidated group nor was it related to Brunswick. Bayliner Marine and its affiliate U.S. Marine were members of the Brunswick consolidated group for the portion of the 1986 Tax Year following the Bayliner Acquisition. The Bayliner Acquisition was a qualified stock purchase within the meaning of IRC §§ 338(a) and 338(d)(3).

Pursuant to IRC § 338(g), Brunswick timely filed Forms 8023, Corporate Qualified Stock Purchase Elections with respect to its stock purchases of Bayliner Marine and U.S. Marine. As a result of Brunswick's IRC § 338(g) elections, for Federal income tax purposes, Bayliner Marine and U.S. Marine were treated as having sold all of their assets as of the acquisition date, December 8, 1986 ("Old Bayliner"). Bayliner Marine and U.S. Marine were then treated as new corporations which purchased all of the assets of Old Bayliner and placed such assets into service as of the day after the acquisition date, December 9, 1986 ("New Bayliner").

The following diagram, from a treatise excerpt provided by Brunswick (see Brunswick's response at Ex. C), helpfully illustrates this chain of events.

T = target (here, Bayliner Marine and U.S. Marine) Old T = target prior to acquisition New T = target after acquisition P = parent shs = shareholders QSP = qualified stock purchase

C.D. BLOCK, CORPORATE TAXATION: EXAMPLES AND EXPLANATIONS, 309 (3d ed. 2004).

The assets acquired by the new corporations included tangible personal property such as equipment, vehicles and molds and tooling, which qualified as recovery property under § 168(c)(1) (the "Bayliner Property"). The parties agree that the Bayliner Property is depreciable under the Accelerated Cost Recovery System ("ACRS") using the half-year convention.*fn2 This stipulation is, at first glance, surprising since the issue in this case is whether the half-year convention (Brunswick) or the short taxable year (the government) applies when calculating the depreciation for the property purchased by Brunswick. See IRC § 168(f)(5) (contains provisions regarding short taxable years -- i.e., taxable years of less than 12 months).*fn3

The answer to this seeming condundrum is that the short taxable year acts as an overlay on top of the half-year convention. Brunswick contends that the half-year convention applies across the board and that the taxable year at issue is its taxable year. On the other hand, the government asserts that New Bayliner's tax year is the relevant tax year, that New Bayliner had a short taxable year (since it came into existence in December of 1986), and that Brunswick is, therefore, entitled to 1/12 of the annual depreciation deduction for New Bayliner otherwise allowable under the half-year convention. The half-year convention thus always applies, but the applicability of the short taxable year is disputed and controls whether Brunswick is entitled to a refund or not.

D. Brunswick's Acquisition of Sea Ray

On December 30, 1986, Brunswick acquired all of the outstanding stock of Ray Industries, Inc., a subchapter C Corporation, and its subsidiaries, all subchapter C corporations (collectively, "Sea Ray"). This transaction is hereinafter referred to as the "Sea Ray Acquisition." Prior to and at the time of the Sea Ray Acquisition, Sea Ray was in the business of manufacturing pleasure boats. Sea Ray was not related to Brunswick on the acquisition date. Sea Ray Industries, Inc. and its domestic subsidiaries (collectively, "Sea Ray") were members of the Brunswick consolidated group for the portion of the 1986 Tax Year following the Sea Ray Acquisition. The Sea Ray Acquisition was a qualified stock purchase within the meaning of IRC §§ 338(a) and 338(d)(3).

Pursuant to IRC § 338(g), Brunswick timely filed Form 8023, Corporate Qualified Stock Purchase Elections with respect to its stock purchase of Sea Ray. As a result of Brunswick's IRC § 338(g) election, for Federal income tax purposes, Sea Ray was treated as having sold all of its assets as of the acquisition date, December 30, 1986 ("Old Sea Ray"). Sea Ray was then treated as a new corporation which purchased all of the assets of Old Sea Ray and placed such assets into service as of the day after the acquisition date, December 31, 1986 ("New Sea Ray").

The assets acquired by the new corporation included tangible personal property such as equipment, vehicles and molds and tooling, which qualified as recovery property under § 168(c)(1) (the "Sea Ray Property"). As with New Bayliner, the parties agree that the Sea Ray Property is depreciable under the ACRS using the half-year convention.

E. Brunswick's Claim for Refund for the 1986 Tax Year

For the 1986 Tax Year, Brunswick filed a consolidated Federal income tax return that included Bayliner Marine, U.S. Marine, and Sea Ray as members for the portions of the 1986 Tax Year beginning after the Bayliner Acquisition and the Sea Ray Acquisition, respectively. Brunswick included income and deductions of Bayliner Marine, U.S. Marine, and Sea Ray on its consolidated Federal income tax return for the 1986 Tax Year. During the Internal Revenue Service audit for the 1986 Tax Year, Brunswick and the Internal Revenue Service agreed on the proper amounts of income and deductions attributable to Bayliner Marine, U.S. Marine, and Sea Ray to be reported on ...


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