Forming a Joint Venture Is Not a Sale

The structure of the NBC Universal deal between GE and Comcast probably was influenced by a 1978 court decision.

An issue settled more than 30 years ago undoubtedly informed the manner in which Comcast and General Electric structured their joint venture arrangement regarding the “sale” of NBC Universal.

NBC Universal is valued at about $30 billion, and the agreement between the two companies, announced in December of 2009, aims to create a joint venture in which Comcast owns 51% of the television network, while its former owner, GE, owns the remaining 49%.

The deal harks back to a 1978 tax case involving Penn-Dixie Steel Corp. that, among other things, addressed the general benefits and burdens of ownership, as well as the concept that a collar on shares may act to transfer ownership of those shares. At issue, according to the Internal Revenue Service, is that the taxpayer sought to treat a collar transaction as a sale, in part because the possibility that a put and call would not be exercised was so remote that it should be ignored.

The original transaction began in the following manner: C Corp. and U Corp. entered into a joint venture agreement on July 1, 1968, which closed on July 31, 1968. U transferred so-called old Phoenix (the “wanted” business) to newly created Phoenix Corp. in exchange for 50% of Phoenix stock and a debenture issued by Phoenix. In addition, C made a (cash) capital contribution to Phoenix and received in exchange the remaining 50% of Phoenix’s stock.

WillensFinal“The taxpayer, the court observed, seeks to have us hold that the ‘benefits and burdens of ownership’ passed to C in 1968. The facts, however, belied this contention.” — Robert Willens

During the period from August 1, 1970, to July 31, 1971, U could “put” to C its Phoenix stock for $8.5 million, plus 125% of half of the “undistributed profits” of Phoenix. C, in turn, could “call” U’s stock in Phoenix on the same terms during the following year, beginning August 1, 1971, and ending July 31, 1972.

Sometime after July 31, 1968, Penn-Dixie acquired control of C Because U was concerned that Penn-Dixie was in “poor financial condition,” its treasurer forced Phoenix to invest (the funds that C had contributed to Phoenix) in a debenture issued by U.

U exercised its put option effective July 31, 1971, and C purchased the stock by the following series of transactions: it executed an interest-free promissory note payable to Phoenix, and Phoenix agreed to accept the promissory note in full satisfaction of the U debenture in which it had invested.

The issue was whether the 1968 transaction between U and C constituted a sale to C of U’s entire interest in old Phoenix. Consider that the payment of half the purchase price was deferred for two or three years. So, if the transaction constituted a sale, C would be entitled to an “imputed interest” deduction under Section 483 of the Internal Revenue Code. The court, however, ruled that the 1968 transaction did not constitute such a sale. (See Penn-Dixie Steel Corporation v. Commissioner, 69 T.C. 837 (1978).)

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