H.J. Heinz Co. & Subsidiaries v. United States

OPINION

“A given result at the end of a straight path is not made a different result because reached by following a devious path.”1

All tax students are familiar with the concept of “basis,” which, in the income tax law, is the touchstone for measuring income and loss. Generally speaking, it is basis that prevents the double taxation of income reflected in a property’s cost, by allowing that cost to be recovered, tax-free, upon the' asset’s disposition. And it is basis, again, that measures the loss realized if the seller recovers less than its investment in property. Sometimes, the process for determining basis is straight-forward, with the amount readily traceable, for example, to specific costs incurred by the taxpayer with respect to the asset being sold. Other times, however, the origins of basis are more obscure, particularly, when the tax law attributes costs previously incurred by a taxpayer to the sold asset. Those attribution rules are fairly complicated, providing opportunities both for bona fide tax planning and undue manipulation of the tax system. Sometimes it falls to a court to discern which of these has occurred.

This tax refund ease is before the court following a three-day trial in Washington, D.C. Plaintiffs seek a refund of $42,586,967. At issue is whether H.J. Heinz Credit Company (HCC), a subsidiary of the H.J. Heinz Company (Heinz), may deduct a capital loss of $124,134,189 on a sale of 175,000 shares of Heinz stock in May 1995. In 1994, HCC purchased 3,500,000 shares of Heinz stock, 3,325,000 shares of which were transferred to Heinz in January of 1995 in exchange for a convertible note issued by Heinz. Heinz asserts that this was a redemption which should be taxed as a dividend, and that HCC’s basis in the redeemed stock should be added to its basis in the 175,000 shares it retained. HCC sold the latter stock in May of 1995 and, in plaintiffs view, recognized a capital loss arising from the increase in basis that occurred upon the earlier redemption. That loss, plaintiffs argue, should then be carried back to reduce their taxes in their 1994,1993 and 1992 taxable years.

Not so, defendant argues, asserting that Heinz did not, in fact, effectuate a redemption of stock from HCC. In this regard, it asseverates that a redemption did not occur because HCC’s ownership of the 3,325,000 shares of Heinz stock was transitory and should be disregarded. It further claims that no redemption occurred because Heinz had no business purpose for interposing a subsidiary between itself and the shareholders from whom HCC purchased stock, save to engineer an artificial tax loss. And, finally, it contends that while Heinz structured the second purchase as an exchange for property under section 317(b) of the Internal Revenue Code of 1986,2 the steps of the transaction should be collapsed under the so-called “step transaction doctrine,” with Heinz again viewed as having repurchased its stock directly from the outside investors. As such, defendant contends, the basis in the 3,325,000 shares allegedly “redeemed” by Heinz should not be added to the 175,000 shares that HCC retained, with the effect that no capital loss was produced upon the sale of the latter shares.

*573I. FINDINGS OF FACT

Based on the record, including the parties’ joint stipulations, the court finds as follows:

A.

Heinz, a Pennsylvania corporation, is the common parent of the affiliated group of corporations known as the Heinz Consolidated Group (Heinz Consolidated Group), which corporations filed consolidated income tax returns for the years in question. The successor to a food business founded in 1869 by Henry J. Heinz, Heinz manufactures and markets processed food products worldwide, directly and through subsidiaries.

Until the early 1980s, Heinz maintained a corporate policy of directly financing its domestic subsidiaries’ working capital needs because it could borrow at more favorable interest rates than its subsidiaries. This policy, however, had what Heinz perceived as negative state tax implications in certain states—although the subsidiaries could deduct interest payments made to Heinz, the latter was required to treat those payments as taxable income.3 In 1983, Heinz began studying a proposal to establish a Delaware-based financing company that would assume Heinz’s financing activities. Under this plan, all of Heinz’s subsidiaries would obtain financing from, and make all payments (including interest) to, this Delaware-based financing company, with interest income from the financing company being “repatriated” to Heinz by means of intercorporate dividends. Under this scenario, the Delaware subsidiary’s income would be exempt from Delaware tax, see Del.Code Ann. tit. 30, § 1902(b)(8); in most states, the subsidiaries would continue to take deductions for interest payments made to the new financing company; and Heinz would not experience a corresponding increase in its taxable income because many states—including Heinz’s home state of Pennsylvania—did not tax in-tercorporate dividends.

Ultimately deciding to effectuate this plan, on September 15,1983, Heinz established the H.J. Heinz Credit Company (HCC), a wholly-owned Delaware corporation with 1,000 shares of stock. That same year HCC began lending money to the members of the Heinz Consolidated Group, as well as several Heinz foreign subsidiaries. HCC, however, had no office or employees of its own, with Heinz essentially making decisions for its subsidiary at its corporate offices in Pittsburgh. By the mid-1980s, several state taxing authorities, including Pennsylvania, began questioning the use of Delaware investment companies as a tax planning strategy. Concerned with this trend, in a memorandum dated November 29, 1984, Catherine A. Ca-poni, Heinz’s Manager for State Taxes, warned:

While [the establishment of an independent financing company] is an excellent tax planning strategy, in order to insure its viability, the Delaware sub must have sufficient substance and nexus in Delaware. If there is little or no substance and all activities are actually directed from and take place in Pennsylvania, the Delaware entity may not sustain itself under scrutiny by the Commonwealth of Pennsylvania. The two companies could be collapsed and treated as one company for Pennsylvania tax purposes.

(Emphasis in original). Athough Ms. Capo-ni was optimistic that HCC had established a sufficient nexus with Delaware to create a “ ‘taxable’ situation in the state,” she indicated that Heinz had some exposure on this issue because “the majority, if not all, of [HCC’s] corporate activity/aecounting takes place at [Heinz] World Headquarters in Pennsylvania” and “HCC pays no management fee to World Headquarters for the services provided.” She noted that Heinz’s Pennsylvania tax counsel had suggested that it draft a service agreement “detailing the services to be performed by World Headquarters personnel for HCC,” and stipulate *574an “arm’s length fee” which HCC would pay in return for these services. But, for reasons unexplained, company officials did not heed her advice. Heinz’s legal and tax counsel remained concerned and periodically repeated their warnings regarding HCC’s status.

B.

In late 1985, John C. Crowe, Vice President for Tax of Heinz, considered transferring to HCC twelve “safe harbor” leases4 Heinz had entered into in 1982 and 1983, in order to shield future income generated by these leases from taxation in Pennsylvania. Mr. Crowe asked Ms. Caponi to investigate the state tax implications of this proposal. In April of 1986, she estimated that the transfer of the leases to HCC would reduce Heinz’s state taxes by approximately $9.7 million over the fiscal years ending 1987-1991, with HCC paying no state tax on the leases in all states but Delaware and Ohio (where the leased property existed).

In a memorandum dated May 12, 1986, Mr. Crowe described how the transfer of the leases should occur. He noted that while Heinz had a tax basis in the leased property <pf zero, the property was subject to nonre-course debt of approximately $150 million. This was a bad combination, he indicated, for if Heinz were to transfer the property to HCC,- it would experience a gain of $150 million.5 Although this gain would be deferred under the federal income tax laws, it would be immediately taxable in Pennsylvania. Instead, Mr. Crowe recommended that Heinz simultaneously transfer an asset to HCC in which Heinz had a tax basis of more than $150 million, thereby preventing any gain from being realized upon the transfer of the leases. First considering whether Heinz should transfer to HCC its holdings in a subsidiary, he quickly concluded that this would not work because it would create future tax problems.6 Instead, he advised that “an asset other than stock of an operating company must be used,” ultimately concluding that the stock of HCC itself was a “perfect candidate.”7 He observed that, as of March 31, 1986, Heinz had a tax basis of roughly $385 million in HCC. He suggested that Heinz form a new subsidiary in Delaware and “as soon as possible” transfer its interests in the 1982 safe harbor leases and *575“a portion of [Heinz’s] ownership in HCC” to the new company, in return for stock of the new company and, most importantly, the assumption of the safe harbor lease liabilities. Mr. Crowe further concluded that in May 1987, the 1983 safe harbor leases should be transferred to the new subsidiary, along with the balance of HCC stock in return for the assumption of liabilities on the 1983 leases.

On July 10, 1986, Heinz formed Heinz Leasing Company (Heinz Leasing), a Delaware corporation, as a wholly-owned, first-tier subsidiary. On July 14, 1986, Heinz transferred to Heinz Leasing ten of the aforementioned “safe harbor” leases, as well as 50 percent of the issued and outstanding stock of HCC. On October 7, 1987, Heinz transferred to Heinz Leasing the two remaining safe harbor leases and the remaining 50 percent of the issued an outstanding stock of HCC. On January 21, 1988, Heinz Leasing sold one share of HCC back to Heinz for par value.

HCC continued to lend money to members of the Heinz Consolidated Group and associated foreign subsidiaries. After the transfer of the leases and stock to Heinz Leasing, counsel at Heinz remained concerned that HCC would be viewed by state taxing authorities as lacking substance. In late 1986, Ms. Caponi sent yet another memorandum to Mr. Crowe warning that HCC still had not put in place the recommended management contract, thereby, in her view, exposing Heinz to potential tax liability in Pennsylvania. In early 1987, Paul F. Renne, Vice President and Treasurer of Heinz,8 made similar warnings to Mr. Crowe. He too recommended that Heinz Leasing pay a management fee to Heinz.

In October 1988, Mr. Crowe distributed a draft set of operating procedures to be used with respect to HCC and Heinz Leasing, similar to those suggested by Ms. Caponi in 1984. The draft operating procedures required HCC to pay an annual “service fee” of $30,000 to Heinz for certain services rendered by Heinz World Headquarters. Another notable provision in this draft addressed the issue of corporate dividends, stating—“If the company [HCC or Heinz Leasing] has excess cash which is not expected to be redeployed as a loan in the near future, a dividend should be declared.” In March of 1989, Mr. Crowe distributed a finalized copy of the “operating procedures,” which included the service fee, but deleted the “excess cash” provision above. Nonetheless, it appears that both HCC and Leasing always declared a dividend when they had cash not needed in their businesses.

On March 2, 1989, Ms. Caponi reported that the Pennsylvania Department of Revenue was about to audit Heinz’s tax returns for its fiscal year 1987. She expressed concern that considerable taxes would be asserted if the state auditors either treated Heinz, Heinz Leasing and HCC as a single entity, or treated Heinz Leasing and HCC as doing all their business in Pennsylvania (rather than Delaware). In April 1990, Mr. Crowe sent a memorandum to Mr. Renne reiterating the need for Heinz to “convert HCC/[Heinz Leasing] into companies of real substance.” He recounted the advice received by Heinz dating back to 1981, and cautioned that “the Company has never responded to the concerns expressed by every tax advisor who has looked at the situation.” “To be respected as a separate company which is not doing business in Pennsylvania,” he asserted, “it is absolutely essential that HCC (and [Heinz Leasing]) employ at least one person who is qualified to and actually does originate transactions and the accounting therefore,” rather than “a qualified person who merely parrots instructions from Pittsburgh and copies accounting reports prepared here.” Relying on information provided by Ms. Caponi, he estimated that Heinz had a potential tax exposure of $20 million.9

*576These concerns proved valid. At various points between 1992 and 1994, Connecticut, Massachusetts, New York and North Carolina all took steps challenging whether Heinz Leasing and HCC were separate taxable entities from Heinz. For example, a May 17, 1993, Heinz memorandum indicates that a Connecticut auditor had combined Heinz Leasing and HCC with Heinz, stating that “[d]ue to the fact that these companies had no payroll or operating expenses, the auditor’s position is that the effective control of these assets rests with the parent corporation.”

C.

Meanwhile, like many public companies, Heinz engaged regularly in the purchase of its own stock, spending an average of more than $170 million per year on such stock primarily to manage its earnings per share. In October of 1991, the Heinz board of directors announced a program (the 1991 repurchase program), under which the company would repurchase 10,000,000 shares of its common stock on the open market. This stock was to be deposited into Heinz’s treasury to support employee retirement and savings plans, certain cumulative preferred stock holders, and for other corporate purposes. This program proved highly successful—at a Heinz board meeting held on June 9,1993, David R. Williams, Senior Vice President^Chief Financial Officer, announced that 9,736,200 shares had been repurchased under the 1991 repurchase program and that the program likely would be completed prior to the September 1993 board meeting. Mr. Williams further reported that, based on this success, the Heinz executive committee had recommended that the company repurchase an additional 10,000,000 shares of common stock to be used for various corporate purposes. The Heinz board of directors ratified this proposal, and the new repurchase program went into effect (the 1993 repurchase program). At a subsequent meeting of the Heinz board of directors on July 13, 1994, Mr. Williams advised that the executive committee had recommended that HCC participate in the 1993 repurchase program by repurchasing Heinz stock, an arrangement that, according to the minutes, Mr. Williams asserted “would result in a more efficient use of certain intercompany cash flows.” The Heinz board of directors ratified this proposal and authorized HCC to borrow up to $40 million to finance the purchases.

The HCC board of directors met on August 2, 1994. According to the minutes, Mr. Renne, acting in his role as one of the three HCC directors, advised the board that “[HCC had] been considering purchasing shares of the Common Stock of [Heinz] for investment purposes.” After a brief discussion, the three directors authorized HCC to purchase up to 1,100,000 shares of Heinz common stock for a maximum price of $37 per share. To help finance this purchase, on August 9, 1994, HCC, without assistance or backing from Heinz, entered into a credit agreement with the Morgan Guaranty Trust Company of New York (Morgan Guaranty) for an unsecured loan of $40,000,000. In response to a reported “recent increase in the [Heinz] stock price,” the HCC board of directors voted on August 11, 1994, to increase their maximum purchase price to $40 per share, and HCC began purchasing Heinz common stock in the public market (through the same Heinz employee who made such repurchases for Heinz).

The Heinz executive committee met on September 12, 1994, at which meeting Mr. Williams reported that the 1993 repurchase program had been completed. Mr. Williams recommended that Heinz again renew the repurchase program, with the stock to be purchased either by Heinz or HCC. The executive committee agreed and the next day, September 13, 1994, the Heinz board of directors ratified the proposal, creating a third repurchase program (the 1994 repurchase program). Shortly thereafter, on September 20, 1994, the HCC board of directors held a meeting, at which they discussed HCC’s role in the new program. According to the minutes, at that meeting, Mr. Renne stated that “in light of [Heinz’s] recent adop*577tion of a new 10,000,000 share repurchase program, [HCC’s board] is considering increasing the number of shares of [Heinz] to be purchased by the Company from 1,100,000 shares as authorized by the Board on August 2, 1994 to 3,500,000 shares.” HCC’s board approved this proposal, and authorized HCC to borrow up to $70 million, as necessary, to acquire the Heinz shares.

D.

Between August 11, 1994, and November 15, 1994, HCC purchased 3,500,000 shares of Heinz common stock in the public market for $129,175,400, including commissions, and paid an additional $1,807,703 in investment banking and legal fees in connection with the stock purchase. Throughout the repurchase process, HCC kept Heinz appraised of its stock purchases and the status of its Morgan Guaranty loans. At the January 10, 1995, Heinz executive committee meeting, Mr. Williams informed the committee that HCC had purchased 3,500,000 shares of Heinz common stock pursuant to the 1994 repurchase program, and recommended that Heinz offer to purchase 3,325,000 of those shares from HCC. According to the minutes (as well as presentation slides used at the meeting), the purpose of this transaction ostensibly was to “move the shares into the Company’s treasury where they would be available for stock option exercises and other transactions requiring shares and would-also enable the Company to discontinue paying dividends on the shares that it purchases from HCC.” Mr. Williams set forth a detailed statement of the proposed transaction, recommending that the shares be transferred on January 17,1995, at a price equal to the January 13,1995, closing price of Heinz common stock on the New York Stock Exchange, and that the purchase be funded by Heinz issuing to HCC a “zero coupon convertible debt instrument.” In his presentation to the board, Mr. Williams also indicated that “due to the method of accounting presently applied to [HCC’s] shares, the purchase from [HCC] would have no impact on reported results and would require no public disclosures.” The Heinz executive committee approved this recommendation.

That same day, January 10,1995, the HCC board of directors met. Mr. Renne stated that the company had received an offer from Heinz to purchase 3,325,000 shares of Heinz common stock in return for a zero coupon note issued by Heinz. On a separate matter, Mr. Renne also stated that “due to changing views among the states regarding the treatment of Delaware holding companies, the directors of the Company have decided to demand repayment of all affiliate loans, and discontinue all Delaware holding company lending activities as soon as reasonably possible.” The board agreed to both proposals.10 HCC accepted Heinz’s offer, and transferred 3,325,000 shares of Heinz common stock to Heinz on January 18,1995. From the time it acquired the Heinz stock through January 18, 1995, HCC received approximately $1.7 million in dividends on the Heinz stock.

In consideration for the transfer, Heinz issued to HCC a subordinated convertible note, zero percent coupon, due January 18, 2002, paying $197,402,412.78 at maturity (the Note).11 At the option of the holder, the Note could be converted into 3,510,000 shares of Heinz common stock at any time from January 18, 1998 (three years after issuance) until maturity.12 Heinz was the *578sole obligor and guarantor on the Note. The Note gave the holder no right to registration of the Heinz stock into which the Note was convertible. Neither the Note itself, nor the stock issued upon its conversion, was registered under Federal or state securities laws; from the time it issued, the Note was considered a “restricted security” within the meaning of 17 C.F.R. § 230.144(a)(3) (1995), as its holder could have sold it only in a private placement or in a transaction that otherwise qualified as exempt from the registration requirements of Federal and state securities laws. In an opinion secured by HCC on January 16, 1995, Goldman Sachs confirmed that the Note was “reasonably valued” at $130.5 million, which was the value of the stock to be redeemed. According to Goldman Sachs, approximately, 84 percent of the value was in the debt portion of the Note, with the remaining value .in the conversion feature. The Note ultimately was issued by Mr. Renne, acting for Heinz, to HCC.13

Following the redemption, HCC retained 175,000 shares of Heinz stock. At a meeting of the Heinz board of directors held on April 12,1995, Mr. Williams advised that the Heinz executive committee was recommending approval of a proposed sale by HCC of the 175,000 shares to an unrelated third party. The minutes indicate that Mr. Williams reported that “the shares would be sold at current market price less a discount to be negotiated because the shares would not initially be registered under the Securities Act of 1933.” At the end of its taxable year ended April 27, 1995, HCC’s net worth (the excess of asset book value over liabilities) was nearly $2 billion, with net income of approximately $277 million. In a sale that closed on May 2,1995, HCC sold the remaining 175,000 shares to AT & T Investment Management Corp. (AT & T), an unrelated third party, in a private placement for a discounted rate of $39.8064 per share, or $6,966,120, in cash.14 Heinz incurred $117,156 in costs as a result of this transaction; HCC also received and paid a variety of legal and management fees to Heinz in connection with the transfer. By the end of its fiscal year on August 2, 1995, HCC’s balance sheet reflected no loans receivable, with the Note being listed as the only notes receivable.15 On November 29, 1995, Heinz Leas*579ing was merged into HCC, leaving Heinz the sole owner of the issued and outstanding stock of HCC. On April 18,1998, after receiving advice from Goldman Sachs, HCC exercised its right to convert the Note and received 5,265,000 shares of Heinz stock.16 From the time of the redemption in January -1995 until the conversion right on the Note first became exercisable three years later, the price of Heinz stock more than doubled, from about $39 to $83 per share.

E.

The Heinz Consolidated Group filed a consolidated federal income tax return for its 1995 taxable year, on which it reported a capital loss of $165,531,902. The Heinz Consolidated Group then carried back $129,050,505 of the capital loss to its 1992 taxable year, $873,329 to its 1993 taxable year, and $37,780,068 to its 1994 taxable year. The capital losses carried back to 1992 and 1993 equaled the Heinz group’s capital gain in each of those years, and the capital loss carried back to 1994 was the residual amount of the 1995 net capital loss. On October 31, 1997, the Heinz Consolidated Group filed refund claims for the 1992, 1993, and 1994 taxable years of $43,979,379, $300,491, and $12,490,598, respectively, plus statutory interest, based on the carryback of the capital loss incurred in 1995. On October 18, 2002, it filed an amended return for 1995 increasing its net capital loss by $2,172,000, which, in turn, increased the Heinz group’s net capital loss carryback from 1995 to $167,703,902. It carried this amended net capital loss back to the 1992, 1993, and 1994 taxable years, and increased the refunds claimed to $29,063,452, $300,491, and $13,223,024, respectively.

The parties apparently no longer dispute $43,569,763 of Heinz’s amended 1995 net capital loss, which was carried back to the 1992 taxable year. The IRS, however, has disallowed the remaining $124,134,139 of the 1995 net capital loss, arguing, inter alia, that the transaction at issue lacked economic substance and a business purpose. It allowed only a capital loss carryback of $43,569,763 to 1992, and nothing to 1993 or 1994. On December 23, 2003, plaintiff filed the instant action. The case was originally assigned to Judge Sypolt, but on December 15, 2004, it was reassigned to the undersigned. Trial was held on January 4 and 5, 2006, and post-trial briefing and closing arguments followed.

II. DISCUSSION

If plaintiff is correct, transactions that, for financial accounting purposes, produced more than a $6 million profit, yielded, for tax purposes, a loss of over $124 million. Understanding how this might be the case requires a review of how the Code treats some inter-corporate transactions.

Heinz’s capital loss is deductible, if at all, under section 165 of the Code, which provides in pertinent part:

SEC. 165. LOSSES.

(a) General Rule.—There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

(b) Amount of Deduction.—For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

Under sections 1011 and 1012 of the Code, a taxpayer’s basis in an item is generally its cost. See United States v. Chicago, B. & Q.R. Co., 412 U.S. 401, 406 n. 7, 93 S.Ct. 2169, 37 L.Ed.2d 30 (1973). The parties agree that the 3,325,000 shares that Heinz obtained from HCC had a basis in HCC’s hands of $124.2 million. Heinz asserts that it “redeemed” these shares with the Note with*580in the meaning of section 317(b) of the Code, which provides that “stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.” Defendant admits that if a true redemption occurred, it would be treated as a dividend under section 302(d) of the Code.17 It further admits that if a true redemption occurred, and a dividend arose under section 302(d), the transfer of stock from HCC to Heinz did not reduce the former’s equity position in the latter, so that the basis HCC had in the 3,325,000 shares would shift to HCC’s remaining 175,000 shares.18 And defendant acknowledges that if this shifting in basis occurred, HCC was entitled to deduct a huge capital loss upon the subsequent sale of those 175,000 shares to AT & T.

In the tax law, “if’ is a colossal word. Should the transaction in which Heinz acquired the 3,325,000 shares actually be considered a redemption within the meaning of section 317(b)? If it is not, plaintiffs essentially concede that HCC’s basis in the 3,325,-000 shares did not shift to its remaining stock and that the subsequent sale of the latter stock did not produce a loss. In arguing for this result, defendant makes several points. First, it contends that no redemption occurred under section 317(b) because Heinz did not exchange property for the stock within the meaning of that section. Second, defendant asseverates that even if the transaction technically qualified as a “redemption” within the meaning of section 317(b), the transaction should not be treated as such because it lacked economic substance and had no bona fide business purpose other than to produce tax benefits; it was, in a word, a sham. Finally, it asserts that under the so-called “step transaction doctrine,” the purchase of the stock by HCC and the exchange of the stock for the Note should be merged together and viewed as a direct purchase of the stock by Heinz.

As will be seen, in some ways it is difficult to differentiate these claims, all of which are different manifestations of the more general “substance over form” concept, see Marvin A. Chirelstein, “Learned Hand’s Contribution to the Law of Tax Avoidance,” 77 Yale L.J. 440, 472 (1968); Lewis R. Steinberg, “Form, Substance and Directionality in Subchapter C,” 52 Tax Law. 457, 458 n. 8, 499 (1999); see generally, Ernest J. Brown, “The Growing ‘Common Law1 of Taxation,” 34 S. Cal. L.Rev. 235 (1961). Yet, while these various doctrines overlap, they also have different criteria that bring into relief the nuances of various transactions, as well as the importance of particular features therein.19 Be*581cause of this, the court will consider defendant’s theories and plaintiffs’ responses thereto seriatim.

A. Did HCC possess the benefits and burdens of the ownership of the Heinz stock?

Stock is redeemed under section 317(b) if the corporation acquires it in exchange for property. See Frontier Chevrolet Co. v. Comm’r of Internal Revenue, 116 T.C. 289, 294 & 294 n. 9, 2001 WL 505196 (2001), aff'd, 329 F.3d 1131 (9th Cir.2003); Boyle v. Comm’r of Internal Revenue, 14 T.C. 1382, 1390 n. 7,1950 WL 231 (1950), aff'd, 187 F.2d 557 (3d Cm.), cert. denied, 342 U.S. 817, 72 S.Ct. 31, 96 L.Ed. 618 (1951). As noted, some redemptions are treated as sales under section 302, while others are treated as a payment of dividends. Distributions characterized in the latter fashion are commonly called “section 301 distributions,” taking their name from the controlling Code provision. See Hurst v. Comm’r of Internal Revenue, 124 T.C. 16, 21, 2005 WL 249648 (2005).

Section 317(b) presupposes that the individual or corporation receiving property from the redeeming corporation, in fact, possesses the stock being redeemed. In arguing that this requirement was not met here, defendant asserts that HCC had a transitory interest in the Heinz shares that should not be respected for tax purposes because it did not have the benefits and burdens of that ownership. In analogous situations, courts have held that requirements of the reorganization provisions of the Code that require the continued possession of stock were not met where ownership of stock by a party “was transitory and without real substance.” Helvering v. Bashford, 302 U.S. 454, 458, 58 S.Ct. 307, 82 L.Ed. 367 (1938); see also Idol v. Comm’r of Internal Revenue, 38 T.C. 444, 1962 WL 1395, (1962), aff'd, 319 F.2d 647 (8th Cir.1963).20 In making the latter determination, courts often have focused on whether the entity claiming ownership of stock or another item possessed the “burdens and benefits of ownership.” See Grodt & McKay Realty, Inc. v. Comm’r of Internal Revenue, 77 T.C. 1221, 1236-37, 1981 WL 11305 (1981); see also Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916 (1930); H.R.Rep. No. 98-432, pt. 2, at 1132, U.S.Code Cong. & Admin.News 1984, pp. 697, 806 (1984) (“for Federal income tax purposes, the owner of *582property must possess meaningful burdens and benefits of ownership”). Among the factors relevant to this determination are: (i) whether the purchaser bears the risk of loss and opportunity for gain; (ii) which party receives the right to any current income from the property; (iii) whether legal title has passed; and (iv) whether an equity interest was acquired in the property.21 The mere record of stock ownership is but the starting point in this analysis—one consideration among many in determining whether one is the owner of property.22 Indeed, none of these factors is necessarily controlling; the incidence of ownership, rather, depends upon all the facts and circumstances. Int'l Paper Co. v. United States, 33 Fed.Cl. 384, 393-94 (1995); Baird v. Comm’r of Internal Revenue, 68 T.C. 115, 124, 1977 WL 3656 (1977). While these factors typically are applied in discerning when a sale occurs, particularly in contradistinguishing leases or loans, they have also been employed more generally in determining to whom ownership, in a given transaction, was transferred, including the stock supposedly redeemed in a section 317(b) exchange. See, e.g., Schmidt v. Comm’r of Internal Revenue, 55 T.C. 335, 339-40, 1970 WL 2355 (1970); see also Lisle v. Comm’r of Internal Revenue, 35 T.C.M. (CCH) 627, 634-40, 1976 WL 3334 (1976).

In the case sub judice, several factors suggest that HCC’s ownership of the Heinz stock was more than notional. HCC incurred significant indebtedness to generate the funds that were used to purchase the Heinz stock on the market, indebtedness that was not guaranteed by its parent. Further, unlike in other cases, HCC received dividends on the stock during the period of its possession. See generally, Provost v. United States, 269 U.S. 443, 447, 46 S.Ct. 152, 70 L.Ed. 352 (1926) (discussing the impact of who receives dividends in differentiating between stock loan and custodial arrangement); Lynch v. Hornby, 247 U.S. 339, 346, 38 S.Ct. 543, 62 L.Ed. 1149 (1918). And HCC, and not Heinz, bore the risk of loss and the opportunity for gain as to the value of the Heinz stock it possessed—indeed, from the time that it obtained the Heinz stock between August and November of 1994, to the time it sold it in January of 1995, the stock appreciated, a fact that was reflected in the purchase price in the parties’ agreement. Moreover, while the evidence on this point is a bit mixed, on balance, it appears that HCC was under no preexisting obligation to distribute or disgorge any profits it received— either in the form of dividends received, gain realized on the sale, or otherwise—to its parent. Finally, although defendant implies otherwise, it is well-established that, absent a sham, the fact that the transactions sub judice involved a parent corporation and a wholly-owned subsidiary, while suggesting a need for close scrutiny, does not alone provide a basis for ignoring the other indicia of ownership here. See Comm’r of Internal Revenue v. Bollinger, 485 U.S. 340, 345, 108 S.Ct. 1173, 99 L.Ed.2d 357 (1988); Nat'l Carbide Corp. v. Comm’r of Internal Revenue, 336 U.S. 422, 433-34, 69 S.Ct. 726, 93 L.Ed. 779 (1949); Moline Properties, Inc. v. Comm’r of Internal Revenue, 319 U.S. 436, 438-39, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943); Ocean Drilling & Exploration Co. v. United States, 988 F.2d 1135, 1144 (Fed.Cir.1993).

Accordingly, and setting aside, briefly, other substance-over-form considerations, it appears preliminarily that HCC possessed the burdens and benefits associated with the *583Heinz stock and, to that extent, the later redemption qualified under section 317(b).23

B. Was the transaction that gave rise to the capital loss here a sham?

The right of a taxpayer to arrange its affairs to minimize taxes is well-established. The Supreme Court observed long ago that “[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his [or her] taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596 (1935). But to state this principle is not to decide the case. In Gregory, for example, the Court proceeded to disregard the taxpayer’s carefully arranged corporate reorganization. In so doing, it asked: “[p]utting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find?” Gregory, 293 U.S. at 469, 55 S.Ct. 266; see also Principal Life Ins. Co. v. United States, 70 Fed.Cl. 144, 145 (2006). Invoking another permutation of this substance-over-form concept, defendant asserts that the transaction in question was an economic sham and thus did not qualify as a redemption under section 317(b).24

As recently noted by this court, there are two predominant “tests” for identifying economic shams. See Keener v. United States, 76 Fed.Cl. 455, 467, 2007 WL 1180476 at *10 (Fed.Cl. Apr.18, 2007). The Fourth Circuit has adopted a two-prong standard for disregarding a transaction under the so-called “sham transaction doctrine,” stating that “[t]o treat a transaction as a sham, the court must find that the taxpayer was motivated by no business purposes other than obtaining tax benefits ... and that the transaction has no economic substance because no reasonable possibility of a profit exists.” Rice’s Toyota World Inc. v. Comm’r of Internal Revenue, 752 F.2d 89, 91 (4th Cir.1985) (emphasis added); see also Black & Decker Corp. v. United States, 436 F.3d 431, 441 (4th Cir.2006). As indicated in Keener, however, “[a] better approach to this sham analysis, which is more flexible and enjoys the support of a majority of the circuits, holds that ‘the consideration of business purpose and economic substance are simply more precise factors to consider in the [determination of] whether the transaction had any practical economic effects other than the creation of income tax losses.’ ” Keener, 76 Fed.Cl. at 467, 2007 WL 1180476, a