How WaMu Beat the IRS in Intangibles Case

The bank gets credit for rights that one of its acquisitions had picked up in the wake of the savings-and-loan crisis.

Generally, a taxpayer’s basis in an asset is equal to the cost to the taxpayer of acquiring the asset. The term cost generally includes any assumption of the seller’s liabilities. The Appeals Court found that the merger and the AA were integral parts of one all-encompassing transaction in which Home Savings acquired Southern Federal’s excess liability in exchange for a complex consideration package that included structuring the merger as a tax-free “G” reorganization. (A “G” reorganization is a court-approved transfer by a corporation of assets to another corporation in a bankruptcy, receivership, or foreclosure, provided that the owners of the transferor get stock or securities of the transferee corporation as part of the deal.)

The United States had argued that recognizing a Home Savings cost basis in the rights based on its assumption of FSLIC’s liabilities required characterizing some of the acquired thrifts’ liabilities as FSLIC’s liabilities. That’s because Home Savings did not pay the FSLIC separate consideration for the rights, the United States argued. In the IRS’s view, that would be inconsistent with the supervisory merger’s treatment as a tax-free “G” reorganization, which requires, among other conditions, that Home Savings assume “substantially all” of Southern’s liabilities as a result of the merger.

In its conclusion, the Appeals Court quoted a 1971 decision, Lewis & Taylor, Inc. v. Comm’r: Where “a transaction has economic substance and is economically realistic, it should be recognized for tax purposes, and the fact that a transaction is so arranged that the tax consequences are highly favorable to one of the parties affords the Commissioner no license to recast it into one of less advantage.”

Home Savings had agreed to acquire the three failing thrifts, “whose liabilities far exceeded their assets, in exchange for a complex consideration package including, among other items, cash, indemnities, the branching and the RAP rights, and the structuring of the merger as a tax-free ‘G’ reorganization,” the Appeals Court noted. “This leads us to hold that Home Savings had a cost basis in the Rights equal to some part of the acquired thrifts’ excess of liabilities over the value of their assets.”

Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for


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