J.E. Seagram Corp. v. Commissioner

*76 OPINION

NIMS, Judge: Respondent determined a deficiency in Federal income tax with respect to petitioner's fiscal year ended July 31, 1982, in the amount of $ 160,127,325. Respondent also determined deficiencies for withholding of income tax at source in the following amounts:

*5 In addition to contesting these deficiencies, petitioner claims overpayments in Federal income tax with respect to its fiscal year ended July 31, 1982, in the amount of $ 1,954,608.

Following concessions by the parties, the only issue for decision is whether petitioner is entitled to a short-term capital loss in the amount of $ 530,410,896. All issues relating to petitioner's withholding liabilities for the calendar years 1982, 1983, and 1984, have been resolved by the parties.

Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.

The parties agree that the material facts are not in dispute. Each of the parties has filed a motion for summary judgment, along with supporting affidavits, pursuant to Rule 121. The parties have also filed three stipulations of fact. Summary adjudication is appropriate. Rule 121.

The stipulation of facts and the attached exhibits are incorporated herein by this reference.

Petitioner is a Delaware corporation with its principal place of business at 800 Third Avenue, New York, New York, *6 at the time the petition was filed in this case. Petitioner is the common parent of an affiliated group of corporations. It is an accrual basis taxpayer that keeps its books and records, and files its Federal income tax returns, on the basis of a fiscal year ending July 31.

Prior to the incorporation of petitioner on July 2, 1981, Joseph E. Seagram & Sons, Inc. (JES), an Indiana corporation, was the U.S. parent of an affiliated group of corporations. JES was an indirect wholly owned subsidiary of the Seagram Co. Ltd. (SCL), a Canada corporation. SCL was principally engaged in the production and marketing of distilled spirits and wine. On July 30, 1981, all of the stock of JES was transferred to petitioner in exchange for its stock. On August 23, 1990, petitioner's name was changed to J.E. Seagram Corp. Prior to that date, its name had been Seagold Vine-yards Holding Corp.

On May 6, 1981, Dome Petroleum Ltd. (Dome) commenced a tender offer for approximately 20 percent of the common stock of Conoco, Inc. (Conoco), a Delaware corporation engaged in the oil and gas industry as an "integrated oil company". At all relevant times, Conoco's stock was traded on*7 the New York Stock Exchange (NYSE). On May 27, 1981, Dome announced that approximately 50 percent of the common stock of Conoco had been tendered pursuant to its offer. On June 1, 1981, Conoco and Dome agreed that Conoco would trade the stock of one of its subsidiaries, Hudson's Bay Oil & Gas Co. Ltd., for Dome's Conoco stock plus $ 245 million. This trade was effected on June 10, 1981.

SCL, which is unrelated to Dome, had no prior knowledge of the Dome tender offer and played no role in the June 1981 Dome/Conoco transaction. Because of the response of Conoco's shareholders to the Dome tender offer, however, SCL believed that it might be able to negotiate to obtain a significant investment in Conoco.

Between May 29 and June 17, 1981, SCL conducted extensive negotiations with Conoco concerning proposals for it to acquire directly from Conoco, and/or through open-market purchases, between 18 percent and 35 percent of the common stock of Conoco. On May 29, 1981, Edgar M. Bronfman, chairman and chief executive officer of SCL, arranged a meeting with Conoco officials. On May 30, 1981, Bronfman proposed that SCL acquire 35 percent of the stock of Conoco*8 and enter into a "standstill" agreement with respect to this investment. On May 31, 1981, Ralph E. Bailey, chairman and chief executive officer of Conoco, stated that he preferred a 25-percent SCL investment in Conoco. Bronfman thereafter made a presentation to the Conoco board of directors.

From June 1 to June 15, 1981, representatives of SCL and Conoco, and their respective advisers, met and negotiated concerning an agreement. On June 14, 1981, SCL delivered a draft agreement whereby it or a subsidiary would acquire at least 18 percent of the Conoco shares and would agree not to acquire more than a total of 25 percent of such shares for a 15-year period, subject to certain conditions. On June 15, 1981, Bronfman offered to acquire 25 percent of Conoco's shares in direct purchases from Conoco for $ 70 per share. Alternatively, Bronfman proposed that SCL purchase a portion of its investment in Conoco through open-market purchases. On June 17, 1981, Bailey informed Bronfman that the Conoco board of directors had rejected the proposal for a significant investment in Conoco by SCL or its subsidiaries, claiming that it would not be in the long-term interests of Conoco.

The JES Tender*9 Offer

On June 18 and 19, 1981, JES purchased 143,800 shares of Conoco in open market purchases on the NYSE. On June 25, 1981, JES Holdings, Inc. (JES Tenderor), a wholly owned subsidiary of JES, initiated a tender offer for the purchase of up to 35 million shares (40.76 percent of the 85,864,538 shares outstanding on such date) of Conoco for $ 73 per share (the JES tender offer). The last date for the withdrawal of tendered shares was July 17, 1981, and the offer was set to expire on July 24, 1981.

*79 The JES tender offer was conditioned on a minimum of 28 million shares (33 percent) of Conoco common stock being tendered and not withdrawn. JES Tenderor also maintained the right to terminate the offer for Conoco if a competing tender offer was commenced or under other conditions specified in its offer. The offering prospectus stated, in part, that

The purpose of the Offer is to enable * * * [JES Tenderor] to exercise significant influence over * * * [Conoco's] operating and financial policies. If 35,000,000 Shares are purchased pursuant to the Offer, * * * [JES Tenderor] expects to be the largest single stockholder of * * * [Conoco] and may be deemed to be in control of * *10 * * [Conoco]. * * *

On June 30, 1981, the Conoco board of directors recommended that Conoco shareholders reject the JES tender offer on the ground that it was not "in the best interests of [Conoco] and its subsidiaries."

On June 24, 1981, Edward G. Jefferson, chairman and chief executive officer of E.I. DuPont de Nemours & Co. (DuPont), called Bailey to determine whether there was any constructive role DuPont might play in light of public reports. DuPont is principally engaged in manufacturing and selling diversified lines of chemicals, plastics, specialty products, and fibers. DuPont's stock is traded on the NYSE. On June 25, 1981, Bailey contacted Jefferson to determine if DuPont would be interested in the possibility of a merger with Conoco. Beginning on June 28, 1981, Conoco and DuPont representatives discussed a possible merger.

On July 6, 1981, DuPont Holdings, Inc. (DuPont Tenderor), a wholly owned subsidiary of DuPont, signed an agreement with Conoco (the DuPont/Conoco agreement or, alternatively, the agreement). The DuPont/Conoco agreement provided that DuPont Tenderor would offer (the DuPont tender offer) to exchange for each share of Conoco*11 common stock at least either (i) 1.6 shares of DuPont common stock, or (ii) $ 87.50 in cash. The agreement also provided that "As promptly as practicable following the consummation or termination of the Offer, * * * [Conoco] shall be merged into * * * [DuPont Tenderor] in accordance with the Delaware General Corporation Law" (the merger), and DuPont Tenderor would thereby acquire any Conoco shares not acquired in the tender offer.

*80 The obligation of DuPont Tenderor to accept shares for exchange was subject to the following conditions, among others: (i) At least 43,500,000 shares (51 percent of the 85,991,896 Conoco shares outstanding on such date) were tendered; (ii) no more than 34,400,000 shares (40 percent) of Conoco would be exchanged for cash; (iii) a majority of DuPont shareholders approved the acquisition of Conoco and authorized an increase in the number of DuPont shares; (iv) the transaction was approved by Federal antitrust agencies; and (v) there would be no action taken or statute, rule, regulation, or order proposed or enacted by any Federal or State governmental authority which would make the acquisition or merger illegal. The obligation of DuPont Tenderor to*12 accept shares for exchange was not conditioned upon the consummation of the merger. The consummation of the merger was subject to, among other conditions, DuPont shareholder approval, Federal antitrust review, the absence of an injunction prohibiting the merger, and the condition that a majority of Conoco common shareholders approve the merger if required under the Delaware General Corporation Law.

The DuPont/Conoco agreement also granted DuPont Tenderor an option (the option) to purchase up to 15,900,000 authorized but unissued shares of Conoco for $ 87.50 per share which could be paid in whole or in part in cash or a note of DuPont Tenderor guaranteed by DuPont. Prior to July 6, 1981, DuPont Tenderor beneficially owned fewer than 11,000 shares of Conoco (without regard to the option).

On July 6, 1981, DuPont issued a press release which stated, in part, that

The DuPont Company and Conoco, Inc. have entered into a definitive agreement for DuPont to acquire 100 percent of Conoco's stock for DuPont common stock and cash, to be followed by a merger of the two companies, * * *

On July 8, 1981, DuPont filed a premerger notification with the Federal Trade Commission and the Antitrust *13 Division of the Department of Justice.

On July 30, 1981, the Department of Justice completed its review of the proposed DuPont-Conoco merger and indicated that the Hart-Scott-Rodino waiting period would end upon the filing of a consent decree requiring DuPont Tenderor's *81 disposition of Conoco's interest, or its purchase of Monsanto's interest, in a Conoco/Monsanto joint venture.

On July 17, 1981, Mobil Corp. (Mobil) initiated a tender offer for the purchase of up to 43,500,000 shares (51 percent) of Conoco for $ 90 per share (the Mobil tender offer). Mobil stated that the offer would be followed by a merger of Conoco into a wholly owned subsidiary of Mobil. Upon the merger, Mobil would exchange securities having a value substantially equal to $ 90 per share for the Conoco common shares not tendered to Mobil. The last date for the withdrawal of tendered shares was August 6, 1981, and the offer was set to expire on August 13, 1981. Mobil's obligation to purchase was conditioned on its receiving tenders for a minimum of 43,500,000 common shares of Conoco.

On July 12, 1981, JES Tenderor increased its tender offer *14 to include the purchase of up to 44,350,000 Conoco shares (slightly over 51 percent of the outstanding Conoco shares not already owned by JES) and increased its offering price from $ 73 to $ 85 in cash per Conoco common share. JES also announced that its revised offer was no longer conditioned upon the tender of a minimum number of shares. The offering prospectus specifically discussed the DuPont/Conoco agreement and stated that

The purpose of the [JES tender] Offer is to acquire a majority of the issued and outstanding Shares and thereby control * * * [Conoco]. If 44,350,000 Shares are purchased * * * [JES Tenderor] would have the power under Delaware law to elect all of * * * [Conoco's] directors and to prevent the consummation of the proposed DuPont merger. * * * [JES Tenderor] currently intends to vote any Shares it may acquire against the proposed DuPont merger.

JES also waived its right to terminate the JES tender offer as a result of the DuPont/Conoco agreement, as publicly described as of July 10, 1981.

On July 14, 1981, DuPont Tenderor announced an increase in the cash price of its tender offer from $ 87.50 to $ 95 per Conoco common share and in the number of shares of DuPont*15 common stock offered from 1.6 to 1.7 shares per Conoco*82 share. The last date for the withdrawal of tendered shares was August 4, 1981, and the offer was to expire on August 17, 1981.

In an opinion issued by DuPont's tax counsel on July 14, 1981, it is stated that counsel were advised that

1. The Conoco liabilities to be assumed by * * * [DuPont Tenderor] have been incurred in the ordinary course of Conoco's business, or are associated with the Conoco assets to be acquired.

2. * * * [DuPont Tenderor] is acquiring Conoco for the purpose of continuing Conoco's present business.

3. * * * [DuPont Tenderor] has no plan or intention to dispose of any of Conoco's assets that it will receive pursuant to the Merger, except in the ordinary course of business.

4. DuPont has no plan or intention to transfer ownership or otherwise dispose of any shares of common stock of * * * [DuPont Tenderor], or to liquidate * * * [DuPont].

5. The managements of DuPont and Conoco are not aware of any concerted plan or intention on the part of Conoco stockholders to sell or otherwise dispose of any of the DuPont shares to be received in the Offer and Merger.

6. There exists, and prior to the Merger there*16 will be incurred, no intercorporate indebtedness between * * * [DuPont Tenderor] and Conoco, except as a result of the purchase by * * * [DuPont Tenderor] of Conoco Shares from Conoco pursuant to the Agreement.

7. No Conoco Shares are held by any Conoco subsidiary, and * * * [DuPont Tenderor] and DuPont do not, and will not, own any Conoco shares other than shares acquired pursuant to the Offer or Conoco Shares acquired from Conoco pursuant to the Agreement.

8. Conoco's redemption of its previously outstanding class of preferred stock on June 30, 1981 was unrelated to DuPont's acquisition of Conoco.

As a basis for the tax opinion counsel also assumed that

1. Not more than 51 percent of the presently outstanding Conoco Shares (not including Conoco Shares for which cash is received in lieu of fractional DuPont Shares, but including Conoco Shares held by dissenting stockholders, if any, in the Merger) will be exchanged for cash pursuant to the Offer and the Merger.

2. Less than 10 percent of the presently outstanding Conoco Shares will be held by dissenting stockholders in the Merger, if dissenters' rights are available in the Merger. Moreover, * * * [DuPont Tenderor] will acquire*17 in the Merger at least 90 percent of the fair market value of the net assets of Conoco and at least 70 percent of the fair market value of the gross assets of Conoco, after taking into account amounts paid to dissenting stockholders, if any, and expenses incurred by Conoco pursuant to the Offer and the Merger.

3. There have been and will be no redemptions of Conoco Shares in contemplation of the Merger.

*83 4. If dividends are paid by Conoco prior to the Merger, such dividends will be consistent in amount and effect with prior dividend distributions.

5. The market price of DuPont Shares will not be below $ 39 per share during the period beginning with the Offer and ending with the effective date of the Merger.

Tax counsel concluded that

It is our opinion that the Offer and the Merger should, if the Merger is consummated, be treated by the Internal Revenue Service or the courts as a single integrated transaction (with exchanges pursuant to the Offer treated as part of the Merger transaction) and that, accordingly, exchanges of Conoco Shares for DuPont Shares and cash pursuant to the Offer and the Merger should be treated for federal income tax purposes as exchanges pursuant*18 to a plan of "reorganization" within the meaning of Section 368(a)(1)(A) and (a)(2)(D) of the Code. * * *

The DuPont tender offer commenced on July 15, 1981, when DuPont's registration statement was declared effective by the Securities and Exchange Commission (SEC). Under the heading "Purpose of the Offer; the Option; Plans for Merger and Control of Conoco", the offering prospectus stated, in part, that

The purpose of the Offer and the Merger is to acquire the entire equity interest in Conoco. The Offer is being made pursuant to the Agreement which provides that following consummation of the Offer Conoco will be merged into * * * [DuPont Tenderor]. * * * The Merger requires the approval of a majority of the outstanding Conoco Shares. * * * If, as a result of the Offer and the acquisition of Conoco Shares pursuant to the Option, * * * [DuPont Tenderor] is the holder of a majority of the Conoco Shares, the Merger could be adopted regardless of the votes of any other Conoco stockholders * * *

On July 15, 1981, Conoco issued a letter to Conoco stockholders which stated, in part, that

Your Board of Directors has unanimously approved a business combination of E.I. DuPont de Nemours and*19 Company and Conoco Inc. in a two step transaction.

Conoco has entered into an Agreement with DuPont, dated as of July 5, 1981, which provides that DuPont, through a wholly owned subsidiary, will make a tender offer to acquire all outstanding shares of Conoco common stock by exchanging either cash or shares of DuPont common stock, or a combination of both * * * As soon as practicable after the completion of the tender offer, Conoco will be merged into the DuPont subsidiary. * * *

* * * *

*84 Your Board of Directors has unanimously approved the DuPont offer and recommends acceptance of the offer by all Conoco stockholders.

On July 23, 1981, JES Tenderor increased its tender offer price from $ 85 to $ 92 in cash per Conoco common share. The withdrawal date of the offer was extended to July 31, 1981, and the expiration date was extended to August 5, 1981. This offer was not conditioned upon the tender of a minimum number of shares. The offering prospectus referred to both the DuPont and Mobil tender offers and waived the right of JES Tenderor to terminate its tender offer as a result of such competing tender offers, as publicly described as of July 21, 1981.

On July 27, 1981, *20 Mobil increased its tender offer from $ 90 to $ 105 in cash per Conoco common share, and DuPont announced an increase in the cash portion of its tender offer from 40 percent of the outstanding Conoco shares to 45 percent of said shares (which was approved by the DuPont board of directors on July 29, 1981).

Also on July 27, 1981, DuPont announced that a preliminary count indicated that as of midnight July 24, 1981, approximately 35 million shares of Conoco stock had been tendered to DuPont. The announcement noted that these shares, combined with the 15,900,000 shares to be acquired upon exercise of the option, would give DuPont approximately 50 percent of the Conoco shares outstanding after the exercise of the option.

A press release issued by JES on July 27, 1981, stated that a preliminary count indicated that, as of midnight on July 26, approximately 17 million Conoco shares had been tendered to JES. This release also stated that

[JES] has waived its rights and will not terminate its offer even if: a) DuPont and/or Mobil were to increase their offering price; b) DuPont or Mobil were to waive their condition that a minimum number of shares must be tendered to them; c) DuPont were*21 to waive its condition that a shareholder vote, scheduled for August 17, is required before DuPont will purchase any shares; or d) DuPont were to exercise its rights to buy up to 50 percent of Conoco's shares for cash.

On July 28, 1981, DuPont announced that its continuing preliminary count indicated that as of the close of business on July 27, 1981, at least 38,700,000 Conoco shares had been tendered pursuant to the DuPont tender offer. On July 29, *85 1981, DuPont announced that its preliminary count indicated that as of the close of business on July 28, more than 48 million Conoco shares (56 percent of those outstanding) had been tendered pursuant to the DuPont tender offer. This announcement noted that tendered shares were subject to withdrawal until midnight August 4, 1981.

Also on July 29, JES issued a press release which stated, in part, that

[JES] charged this morning that any decision by DuPont's Board of Directors to increase the cash portion of the DuPont offer for Conoco common stock is likely to destroy any possibility of an Internal Revenue Service Ruling that the stock portion of the offer is not fully taxable.

* * * *

* * * [JES] emphasized that the risk of*22 full taxability is especially relevant in light of DuPont's announcement this morning that the cash portion of its offer is fully subscribed. Because of this oversubscription, shareholders who have not yet tendered their shares will receive only DuPont stock if they tender to DuPont, while shareholders who have already tendered may receive DuPont stock even though they elected to receive cash.

* * * [JES] further noted that shareholders who prefer to receive $ 92 in cash rather than DuPont stock with a value of $ 77.78 (based on last night's close) for their Conoco shares continue to have the opportunity to do so by tendering to [JES]. Any tenders previously made to DuPont or Mobil are not irrevocable and may still be withdrawn.

On August 1, 1981, at 1 p.m., the withdrawal rights with respect to shares tendered to JES expired. Immediately thereafter, JES Tenderor began buying tendered Conoco shares. As of midnight on August 1, 1981, JES Tenderor had received tenders of more than 15,500,000 Conoco shares.

On August 3, 1981, Mobil increased its tender offer from $ 105 to $ 115 in cash per Conoco common share. On the same day, DuPont Tenderor announced a reduction from 51 percent to*23 41 percent in the minimum percentage of outstanding shares of Conoco common stock required to be tendered by Conoco shareholders in order to be accepted for payment.

On August 4, 1981, DuPont Tenderor announced that the Justice Department had terminated the Hart-Scott-Rodino waiting period. On the same day, DuPont Tenderor increased the cash price of its tender offer from $ 95 to $ 98 per Conoco share.

*86 Mobil also announced on August 4, 1981, that it was raising its tender offer consideration to $ 120 in cash per Conoco share.

On August 5, 1981, JES Tenderor extended the expiration date of its tender offer, which was scheduled to expire on August 5, to August 7, 1981.

On June 30, 1981, Conoco commenced a lawsuit in the U.S. District Court for the Southern District of New York against SCL, JES, and JES Tenderor, to (1) enjoin them from purchasing any Conoco shares, (2) impose restrictions on any Conoco shares purchased pursuant to the JES tender offer, and (3) recover money damages. In response, JES filed a counterclaim seeking to enjoin Conoco from selling or otherwise disposing of Conoco shares or assets. JES' motion for a temporary*24 restraining order against Conoco was denied on July 3, 1981. On July 16, 1981, Conoco's request for a preliminary injunction against the continuance of the JES tender offer was denied. Conoco promptly appealed this ruling to the U.S. Court of Appeals for the Second Circuit. The District Court's denial of the preliminary injunction was affirmed on July 27, 1981.

On June 25, 1981, JES commenced a lawsuit in the U.S. District Court for the District of Delaware seeking, among other things, a declaration of the invalidity of a bylaw amendment adopted by Conoco's board of directors that purported to impose restrictions on foreign ownership of Conoco shares. On July 21, 1981, the District Court entered a decision, and issued a permanent injunction, largely in favor of JES. On July 22, 1981, Conoco appealed the District Court's decision to the U.S. Court of Appeals for the Third Circuit.

On July 30, 1981, Conoco obtained an ex parte temporary restraining order in a Florida State court against the JES tender offer. As of July 31, 1981, Conoco had also obtained a temporary restraining order from a North Carolina State court. Each of these temporary restraining orders was promptly dissolved. *25 On July 31, 1981, the U.S. District Court for the Southern District of New York enjoined Conoco from making or publicizing other applications for temporary restraining orders without reasonable notice to JES.

*87 On August 4, 1981, the U.S. District Court for the Southern District of New York denied Mobil's request for a temporary restraining order and a preliminary injunction to enjoin DuPont Tenderor from purchasing Conoco shares. Mobil moved for a stay pending appeal which stay was also denied on August 4, 1981.

Neither petitioner, JES, nor JES Tenderor sought to enjoin the granting of the option, DuPont Tenderor's exercise of the option, or DuPont Tenderor's purchase of Conoco shares.

At midnight on August 4, 1981, the withdrawal period for shares tendered to DuPont Tenderor expired. On August 5, 1981, DuPont Tenderor began purchasing Conoco common shares tendered for cash. A press release issued on that day stated that

The DuPont Company has been tendered a significant majority of the outstanding shares of Conoco Inc., and will move forward as rapidly as possible to effect a merger of the two companies.

Also on August 5, 1981, DuPont Tenderor exercised*26 the option to purchase 15,900,000 Conoco shares directly from Conoco at a price of $ 87.50 per share. DuPont Tenderor paid $ 79,500,000 in cash and a 1-year note of DuPont in the principal amount of $ 1,311,750,000 for the Conoco shares purchased pursuant to the option.

In a press release dated August 6, 1981, JES noted that its tender offer had been extended through August 7, 1981, and that as of August 5, 1981, approximately 25,300,000 Conoco shares had been tendered. The press release then stated that

* * * [JES] stated that it was accepting the tendered shares and was seeking additional shares to increase its investment in Conoco, consistent with the maximum amount of the * * * [JES] offer and the announced results of DuPont's offer for Conoco.

In light of the DuPont announcement, * * * [JES] added, each Conoco share acquired by * * * [JES] may be exchanged for or converted into 1.7 shares of DuPont common stock, either pursuant to the DuPont tender offer or upon the subsequent merger with a DuPont subsidiary which DuPont has previously announced.

On August 7, 1981, the JES tender offer expired with approximately 28 million Conoco shares (32 percent of the Conoco shares outstanding*27 at the commencement of the *88 DuPont tender offer) having been tendered to JES Tenderor for cash at $ 92 per share. JES Tenderor ultimately purchased 24,625,750 shares of Conoco for $ 92 per share and 3,113,025 shares for $ 91.35 per share, with an aggregate cost of $ 2,557,738,302.25.

Because Mobil never received tenders for 51 percent of Conoco's shares, under the terms of its tender offer, it did not purchase any of the Conoco shares tendered to it.

JES Tenderor and DuPont Tenderor were acting independently of one another and pursuant to competing tender offers.

A press release dated August 11, 1981, announced that the board of directors of SCL had authorized the exchange of the Conoco shares held by JES Tenderor pursuant to the terms of the DuPont tender offer. The release quoted JES chairman and chief executive officer Edgar Bronfman as stating:

This is an appropriate time to congratulate the management and Board of DuPont on the success of their offer for Conoco. While Seagram would have been delighted to have won 51 percent of Conoco, we are pleased at the prospect of becoming a large stockholder of the combined DuPont and Conoco. *28 We believe it will be a very strong company, with a fine future.

On August 17, 1981, JES Tenderor tendered its shares of Conoco in exchange for shares of DuPont common stock on the basis of an exchange ratio of 1.7 shares of DuPont for each Conoco share. JES Tenderor formally elected to receive DuPont stock in exchange for its Conoco stock and received 47,400,377 shares of DuPont common stock. On the exchange date, the mean high and low per share price of DuPont common stock traded on the NYSE was $ 43. The schedule-13D filed by JES with the SEC upon the exchange of the Conoco shares for DuPont shares stated, in part, that

The purpose of the exchange of the Conoco Shares for the DuPont Shares is to enable * * * [JES] to obtain a substantial equity interest in DuPont. Based upon publicly available information, * * * [JES] believes that it will be the largest DuPont shareholder. Accordingly, * * * [JES] may seek representation on DuPont's Board of Directors.

On August 17, 1981, the common shareholders of DuPont approved the planned merger and the issuance of additional DuPont common shares. The merger was voted in favor of by 75.3 percent of the outstanding*29 DuPont shares and was voted against by 5.9 percent of the outstanding DuPont shares.

On September 30, 1981, Conoco merged into DuPont Tenderor. The merger was approved by a shareholder vote in which 99,100,246 Conoco shares (97 percent) were voted in favor and 89,889 Conoco shares (less than 0.1 percent) were voted against the merger. The 5,491,896 Conoco shares (6 percent of the shares outstanding at the commencement of the DuPont tender offer) not tendered were exchanged for DuPont stock pursuant to the merger. Neither petitioner, JES, nor JES Tenderor commenced any legal action with respect to the merger.

Immediately following the merger, JES Tenderor owned 20.2 percent of the outstanding common stock of DuPont. Thereafter, petitioner purchased additional shares of DuPont common stock and increased its interest in DuPont to 24.5 percent, which interest it has maintained to date. Petitioner's total cost for this stock was approximately $ 2,892,297,000 and its total market value, as of January 31, 1992, was approximately $ 7,635,300,000.

After the June 10, 1981, redemption of the Conoco stock acquired by Dome in its tender offer, there were *30 approximately 86 million shares of Conoco stock, which shares remained outstanding until Conoco merged into DuPont Tenderor on September 30, 1981. From August 1 to August 7, 1981, JES Tenderor accepted tenders of 27,738,775 shares of Conoco stock for cash and began purchasing such shares on August 1, 1981. On August 5, 1981, DuPont Tenderor accepted approximately 39.6 million shares of Conoco stock, which were tendered to it for $ 98 cash per share, an aggregate cash amount of $ 3,880,800,000. On August 17, 1981, DuPont Tenderor accepted approximately 40.9 million shares of Conoco stock in exchange for stock in DuPont, including the 27,738,775 shares of Conoco stock which JES Tenderor had purchased for cash pursuant to its tender offer.

*90 On September 30, 1981, 5,491,896 shares of Conoco were exchanged for DuPont stock pursuant to the merger. Of the Conoco shareholders who held the 85,991,896 Conoco shares outstanding on July 5, 1981, the holders of not more than 18,653,121 of such shares acquired an ownership interest in DuPont by reason of the DuPont tender offer and merger. Of the holders of Conoco shares who either transferred their Conoco shares to DuPont Tenderor pursuant*31 to its tender offer which closed on August 17, 1981 (including JES Tenderor), or who exchanged Conoco shares in the merger, the holders of 46,391,896 of such shares acquired an ownership interest in DuPont by reason of the DuPont tender offer or the merger, although some Conoco shareholders who received DuPont stock in the tender offer may have sold their DuPont stock prior to the merger.

DuPont treated the tender offer and merger as a tax-free reorganization for Federal income tax purposes and filed its tax return for its 1981 taxable year accordingly. DuPont and Conoco advised former Conoco shareholders who had exchanged their stock for DuPont stock in either the exchange portion of the tender offer or the merger that they had no taxable gain or loss.

When the dust had settled at the completion of the Conoco-DuPont merger on September 30, 1981, approximately 78 percent of the Conoco stock had changed hands for cash pursuant to the competing JES and DuPont tender offers, yet approximately 54 percent of the Conoco equity (in addition to the optioned shares) remained in corporate solution in the form of DuPont shares received in exchange for Conoco shares.

Petitioner tendered each*32 share of Conoco stock, for which it had paid about $ 92 per share, in exchange for 1.7 shares of DuPont stock, each share of which had a mean market value on the August 17, 1981, tender date of about $ 43 or approximately $ 73.10 for each 1.7-share unit.

Petitioner did not report a loss for financial accounting purposes as a result of its exchange of Conoco stock for DuPont stock. Petitioner ascribed its carrying cost for its Conoco stock to the DuPont stock which it received in *91 exchange. Immediately following the merger, petitioner owned 20.2 percent of the outstanding common stock of DuPont. As of December 31, 1992, petitioner owned approximately 24.5 percent. Under Generally Accepted Accounting Principles, petitioner is entitled to account for its interest in DuPont under the equity method and reports a pro rata portion of DuPont's earnings as its own for financial accounting purposes under the equity method. As of the time this case was submitted, petitioner was the largest DuPont shareholder and had representation on DuPont's board of directors roughly in proportion to its interest in DuPont.

The amount of the loss petitioner *33 claims to have realized (whether or not recognizable) upon the exchange of Conoco stock for DuPont stock was $ 530,410,896.

The ultimate issue for decision is whether, for tax purposes, petitioner had a recognized loss upon the exchange of its Conoco stock for DuPont stock. Whether such a loss is to be recognized depends upon the effect to be given section 354(a)(1) under the above facts. Section 354(a)(1) provides:

SEC. 354. EXCHANGES OF STOCK AND SECURITIES IN CERTAIN REORGANIZATIONS.

(a) GENERAL RULE. --

(1) IN GENERAL. --No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.