                       T.C. Memo. 2001-244



                     UNITED STATES TAX COURT



 CHRYSLER CORPORATION, f.k.a. CHRYSLER HOLDING CORPORATION, AS
  SUCCESSOR BY MERGER TO CHRYSLER MOTORS CORPORATION AND ITS
            CONSOLIDATED SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22148-97.              Filed September 18, 2001.


     James P. Fuller, Ronald B. Schrotenboer, William F. Colgin,

Kenneth B. Clark, Jennifer L. Fuller, and Laura K. Zeigler, for

petitioner.

     Nancy B. Herbert and John E. Budde, for respondent.
                                - 2 -

                         MEMORANDUM OPINION


     LARO, Judge:   Respondent moves the Court for partial summary

judgment.   See Rule 121.1   Respondent determined deficiencies of

$593,967, $13,064,705, and $36,102,409 in petitioner’s 1983,

1984, and 1985 Federal income taxes, respectively.    Following our

disposition of two other issues in this case, see Chrysler Corp.

v. Commissioner, 116 T.C. 465 (2001); Chrysler Corp. v.

Commissioner, T.C. Memo. 2000-283, we must decide whether

Chrysler Corporation (Chrysler) may deduct for 1985 amounts it

paid to redeem its common stock held in the employee stock

ownership trust (ESOT) underlying the Chrysler Employee Stock

Ownership Plan (ESOP).   We hold it may not.

                             Background

     Our statement of the background of this case is derived

mainly from the pleadings, the parties’ stipulation of facts as

to the instant issue, the exhibits attached to that stipulation

of facts, the parties’ respective memoranda filed on May 3, 2000,

as to issues of fact and law in this case, and the materials

filed as to the instant motion.    We also include within our

statement, as they relate to the operation of the ESOP and ESOT,

the pertinent provisions of the Chrysler Corporation Loan



     1
       Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the relevant years.
                                - 3 -

Guarantee Act of 1979 (LGA), Pub. L. 96-185, 93 Stat. 1324 (1980)

(codified as amended at 15 U.S.C. secs. 1861-1875, 2003, 2512

(1982)).   Petitioner, like its predecessor, Chrysler, is an

accrual method taxpayer that manufactures and sells automobiles

and trucks.   Petitioner’s principal place of business was in

Auburn Hills, Michigan, when its petition was filed.

     Chrysler was faced with an economic crisis in 1979 that

resulted in Congress’ enacting the LGA on Chrysler’s behalf.

As the House Banking, Finance, and Urban Affairs Committee

recognized in its report on the LGA:    “Without Federal financial

assistance in the form of loan guarantees, the Chrysler

Corporation will soon face bankruptcy and possible liquidation,

with substantial consequences for the nation’s economy, the

federal budget, the balance of payments and; above all, several

hundred thousand individual human beings.”   H. Rept. 96-690, at 8

(1979).    By way of the LGA, Congress provided Chrysler with up to

$1.5 billion in loan guaranties in return for Chrysler’s

satisfaction of certain conditions.

     Two of these conditions required that employees of Chrysler

and its subsidiaries and affiliates make at least $587.5 million

in wage and benefit concessions and that Chrysler set up an

employee stock ownership plan meeting the requirements of both

sections 401(a) (qualified deferred compensation plans) and

4975(e)(7) (employee stock ownership plans).   Two other
                               - 4 -

conditions required that Chrysler establish the ESOT within the

rules of section 401(a) and that Chrysler contribute shares of

its common stock to the ESOT over a 4-year period from 1981

through 1984.   In each of those 4 years, Chrysler was required to

contribute to the ESOT Chrysler common stock with a value of at

least $40.625 million; during that 4-year period, Chrysler was

required to contribute to the ESOT a total of at least $162.5

million of its common stock.

     Employee stock ownership plans are tax-qualified plans which

provide significant tax benefits (as discussed infra) and are

designed to invest primarily in employer securities.   Congress

established these plans as part of the Employee Retirement Income

Security Act of 1974, Pub. L. 93-406, sec. 407, 88 Stat. 880,

current version at 29 U.S.C. sec. 1107(d)(6) (1994), envisioning

that they “would function both as ‘an employee retirement benefit

plan and a “technique of corporate finance” that would encourage

employee ownership.’”   Kuper v. Iovenko, 66 F.3d 1447, 1457 (6th

Cir. 1995) (quoting Martin v. Feilen, 965 F.2d 660, 664 (8th Cir.

1992) (quoting 129 Cong. Rec. S16629, S16636 (daily ed. Nov. 7,

1983) (statement of Sen. Long))); see also S. Rept. 97-144, at

119-123 (1981); 97 Cong. Rec. 17290-17294 (1981) (statement of

Sen. Long); S. Rept. 94-36, at 55-60 (1975).   Employees generally

are not taxed on income of an employee stock ownership plan until

it is distributed to them, and they may avail themselves of
                                - 5 -

certain rollover provisions not normally available to

non-pension-plan compensation to postpone further their taxation

on their distributions.    The principal benefit to corporate

employers is that they may deduct currently their contributions

to the plans.    The principal benefit to the plan itself is that

the underlying trust is exempt from current taxation on its

earnings.

     Pursuant to the LGA, Chrysler established the ESOP effective

July 1, 1980, and funded the ESOT by issuing to it new shares of

Chrysler common stock during each of the ESOT’s fiscal years

ended June 30, 1981 through 1984.    Pursuant to the terms of the

ESOP, employees could participate in the plan if they had:

(1) Worked for Chrysler or any of its subsidiaries or affiliates

for 9 continuous months at the beginning of the plan year and

(2) been affected by the wage and benefit concessions required by

the LGA.    Chrysler established the ESOP to:   (1) Satisfy the

LGA’s requirement for obtaining the Federal Government’s loan

guaranties, (2) compensate employees for wage and benefit

concessions, and (3) contribute to Chrysler’s financial recovery

and long-term viability by enhancing employee motivation and

increasing productivity.

     Chrysler contributed $162.5 million (15,251,891 shares) of

its common stock to the ESOT from 1981 through 1984.     Chrysler

contributed approximately one-fourth of that dollar amount in
                                - 6 -

each of the 4 years and claimed a deduction for the market value

of the contributed shares for the years in which the

contributions were made.   The contributed shares amounted to

approximately 22 percent of Chrysler’s outstanding shares at the

end of 1980, and the ESOT held the largest single block of

Chrysler common stock.

     The ESOT’s trustee was a commercial bank named

Manufacturer’s National Bank of Detroit (MNB), and MNB’s nominee

was Calhoun & Co.   Pursuant to the LGA, MNB allocated the stock

contributed by Chrysler to the individual accounts of the ESOP

participants in equal amounts, provided that the participant had

worked 650 hours or more during the plan year.     MNB also invested

any dividends received on the stock allocated to a participant's

account in additional shares of Chrysler common stock.     The LGA

authorized the participants to vote the shares in their accounts.

MNB had to vote the stock for which no directions had been

received in the same proportion as the stock as to which

directions had been received.   The ESOP authorized distributions

to employees only in the event of:      (1) Death, in which case the

proceeds were forwarded to the designated beneficiary,

(2) termination of employment, or (3) the ESOP’s termination.

Chrysler’s board of directors had the discretion to terminate the

ESOP at any time after June 30, 1984.
                                - 7 -

     In September 1983, while the ESOP was in place, Chrysler

renegotiated its collective bargaining contracts with its

employees who were members of the United Automobile, Aerospace

and Agricultural Implement Workers of America (UAW).    The

renegotiation resulted in a contract extending through October

1985.    In 1985, when the collective bargaining contracts were

again renegotiated, Chrysler agreed as part of those contracts to

terminate the ESOP and to allow the participants either to keep

the Chrysler common stock in the ESOT allocated to them or to

allow Chrysler to redeem that stock at a per-share price equal to

the applicable closing price on the New York Stock Exchange.      In

December 1985, Chrysler redeemed just over 9.58 million shares of

its common stock from the ESOT for a total cost to Chrysler of

$426,969,582.2   The ESOP participants who opted not to sell their

stock received over 3.2 million shares of Chrysler common stock

from the ESOT.

     On its 1985 Federal income tax return, Chrysler claimed a

deduction of $327,595,421 associated with its redemption of its

common stock from the ESOT.    According to Chrysler’s computation,

the deduction was less than the redemption price so as not to

duplicate the tax benefits Chrysler had previously received by



     2
       These figures include 172,135 shares redeemed by Chrysler
attributable to employees whose employment was terminated during
1985. Chrysler included the redemption price of these shares in
the amount of its claimed deduction.
                               - 8 -

way of the tax deductions claimed for the same shares when

contributed to the ESOT.   The approximate $328 million deduction

was not taken for financial accounting purposes.   For those

purposes, Chrysler reported the redemption as a purchase of

treasury stock.

                            Discussion

     We must decide whether Chrysler may deduct the costs

(redemption price and related expenses) which it incurred to

redeem its common stock upon termination of the ESOP.   Respondent

moves the Court to decide this issue by way of partial summary

judgment, arguing that a firmly established body of law holds

that a corporation may not deduct the costs which it incurs to

redeem its stock.   Petitioner objects to respondent’s motion.

Petitioner asserts that it may deduct its costs as personal

service compensation or, alternatively, as a financing expense.

Petitioner argues as to its primary assertion that material facts

are still in dispute which will establish that Chrysler redeemed

its common stock from the ESOT intending to compensate the

employees for their personal services.   Petitioner argues as to

its alternative assertion that material facts are still in

dispute which will establish that it redeemed its common stock

from the ESOT as a financing expense.

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials of phantom factual issues.
                                - 9 -

P & X Mkts., Inc. v. Commissioner, 106 T.C. 441, 443 (1996),

affd. without published opinion 139 F.3d 907 (9th Cir. 1998);

Boyd Gaming Corp. v. Commissioner, 106 T.C. 343, 347 (1996).

The concept of summary judgment is specifically recognized by

this Court and is deeply ingrained in our procedural rules.

See Rule 121(a) (“Either party may move, with or without

supporting affidavits, for a summary adjudication in the moving

party’s favor upon all or any part of the legal issues in

controversy”).    Summary judgment is appropriate where there is no

genuine issue as to any material fact and a decision may be

rendered as a matter of law.    Rule 121(b); P & X Mkts., Inc. v.

Commissioner, supra at 443; Boyd Gaming Corp. v. Commissioner,

supra at 347.    In deciding whether to grant summary judgment, we

must consider the factual materials and inferences drawn from

them in the light most favorable to the nonmoving party.     Boyd

Gaming Corp. v. Commissioner, supra at 347.    In responding to a

motion for summary judgment, the nonmoving party must do more

than merely allege or deny facts.   It must “set forth [in its

response] specific facts showing that there is a genuine issue

for trial.   If the nonmoving party does not so respond, then a

decision, if appropriate, may be entered against such party.”

Rule 121(d); accord Celotex Corp. v. Catrett, 477 U.S. 317, 324

(1986); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).    Summary judgment also
                              - 10 -

may be granted if the evidence submitted by the nonmoving party

is merely colorable or not significantly probative.     Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

     An accrual method taxpayer such as Chrysler may deduct an

expenditure under section 162(a) only if the expenditure is:

(1) An expense, (2) an ordinary expense, (3) a necessary expense,

(4) incurred during the taxable year, and (5) made to carry on a

trade or business.   Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352-353 (1971); see also Lychuk v.

Commissioner, 116 T.C. 374, 386 (2001).   A necessary expense is

an expense that is appropriate or helpful to the development of

the taxpayer’s business.   Commissioner v. Tellier, 383 U.S. 687,

689 (1966); Welch v. Helvering, 290 U.S. 111, 113-115 (1933).

An ordinary expense is an expense that is “normal, usual, or

customary” in the type of business involved.     Deputy v. du Pont,

308 U.S. 488, 495-496 (1940); see also Welch v. Helvering, supra

at 113-115.   The need for an expenditure to be ordinary serves,

in part, to “clarify the distinction, often difficult, between

those expenses that are currently deductible and those that are

in the nature of capital expenditures, which, if deductible at

all, must be amortized over the useful life of the asset.”

Commissioner v. Tellier, supra at 689-690.

     Before the passage of the Tax Reform Act of 1986, Pub. L.

99-514, 100 Stat. 2085, the cost of redeemed stock was more often
                              - 11 -

than not a capital expenditure rather than a deductible expense.3

Frederick Weisman Co. v. Commissioner, 97 T.C. 563 (1991);

Atzingen-Whitehouse Dairy, Inc. v. Commissioner, 36 T.C. 173, 183

(1961).   Whether a corporation’s redemption of its stock may

constitute an ordinary and necessary business expense under

section 162 has been considered frequently before.   The relevant

cases generally begin their analysis with the oft-quoted

principle of United States v. Gilmore, 372 U.S. 39 (1963).

There, the Supreme Court held that the expense of defending a

divorce suit was a nondeductible personal expense, even though

the outcome of the divorce would affect the taxpayer’s holdings

of income-producing property and might affect his business

reputation.   The Court explained:




     3
       In the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514,
sec. 613, 100 Stat. 2251, Congress added a new sec. 162(l) to
prohibit deductions otherwise allowable for payments paid or
incurred to redeem corporate stock. The Senate Finance Committee
explained in its report that the new provision “denies a
deduction for any amount paid or incurred by a corporation in
connection with the redemption of its stock.” S. Rept. 99-313,
at 233 (1986), 1986-3 (Vol. 3) 1, 223. Sec. 162(l) was
redesignated sec. 162(k) by the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, sec. 3011(b)(3)(A), 102
Stat. 3342, 3625. Sec. 162(k) applies only to payments made
after Feb. 28, 1986. We have observed that Congress made it
clear that in adding what is now sec. 162(k), it intended no
inference as to the deductibility of such payments under
preexisting law. Fort Howard Corp. v. Commissioner, 103 T.C.
345, 357 n. 20 (1994); Frederick Weisman Co. v. Commissioner, 97
T.C. 563, 574 (1991) (citing, inter alia, H. Conf. Rept. 99-841
(Vol. II), at II-169 (1986), 1986-3 C.B. (Vol. 4) 1, 169).
                               - 12 -

    the origin and character of the claim with respect to
    which an expense was incurred, rather than its
    potential consequences upon the fortunes of the
    taxpayer, is the controlling basic test of whether the
    expense was “business” or “personal” and hence whether
    it is deductible or not * * * [Id. at 49.]

     A few years later, a corporation’s right to deduct amounts

paid to redeem its stock reached its zenith in Five Star

Manufacturing Co. v. Commissioner, 355 F.2d 724 (5th Cir. 1966),

revg. 40 T.C. 379 (1963).    There, the Court of Appeals for the

Fifth Circuit permitted a corporation to deduct as an ordinary

and necessary expense the cost of redeeming its stock from a

50-percent shareholder, Mr. Smith.      Mr. Smith had become deeply

indebted to the corporation, and the corporation obtained a

judgment for the amount of the debt.     The corporation later

redeemed Mr. Smith’s shares at a judicial sale and credited those

proceeds against his debt.   The Court of Appeals for the Fifth

Circuit held that the corporation could deduct the amount that it

paid to redeem those shares because the redemption was essential

to its survival.   The court explained:    “It can scarcely be held

that the payment to Smith was for the acquisition of a capital

asset, but rather one which would permit Five Star again to use

assets for income production by freeing its management from

unwanted fetters.”   Id. at 727.   In reaching its holding, the

court made no reference to United States v. Gilmore, supra.
                               - 13 -

     Thereafter, the Supreme Court applied the origin of the

claim test of United States v. Gilmore, supra, to two companion

cases in which the issue was whether expenses were ordinary or

capital.    See United States v. Hilton Hotels Corp., 397 U.S. 580

(1970); Woodward v. Commissioner, 397 U.S. 572 (1970).    Both

cases involved the deductibility of a corporation’s costs

incurred incident to the appraisal and acquisition of dissenters’

stock.    The Court rejected the corporations’ claims that the

costs were deductible because their “primary purpose” did not

directly involve the acquisition of stock.    In the Woodward case,

the Court explained that “A test based upon the taxpayer’s

‘purpose’ in undertaking or defending a particular piece of

litigation would encourage resort to formalisms and artificial

distinctions.”    The Court rejected the primary purpose test as

“uncertain and difficult” and directed that the issue of whether

an expense is ordinary or capital be controlled by the “simpler

inquiry whether the origin of the claim litigated is in the

process of acquisition itself.”    Woodward v. Commissioner, supra

at 577.

     A few years after the Woodward and Hilton cases, we applied

the origin of the claim test to a corporation’s claimed deduction

of amounts it paid to redeem the shares of a minority

shareholder.    In Harder Servs., Inc. v. Commissioner, 67 T.C.

585, 596 (1976), affd. without published opinion 573 F.2d 1290
                              - 14 -

(2d Cir. 1977), the corporation redeemed an employee’s stock as

part of terminating his employment, which was done in order to

extricate the corporation from an unfavorable financial and

management situation.   We found that the “origin and nature of

the [redemption] payment was a capital transaction” and, relying

upon the cases of Gilmore, Woodward, and Hilton, rejected the

corporation’s attempt to deduct that payment.   We declined to

accept the taxpayer’s argument that the amount paid to the

disaffected employee over and above the value of the stock he

surrendered was deductible compensation.   We found that any

compensatory aspect of the transaction was inseparable from the

capital aspect–-the elimination of his equity interest.   We

explained that “there is nothing in the record to indicate that

* * * [the employee] would have been paid anything * * * had he

wished to retain his * * * shares”.    We distinguished Five Star

Manufacturing Co. v. Commissioner, supra, which had allowed a

deduction of redemption payments, on the basis of our finding

that the redemption in the Harder Servs., Inc. case was not

necessary to preserve the corporation.

     The Supreme Court provided a further development in Ark.

Best v. Commissioner, 485 U.S. 212 (1988).   There, it held that

the taxpayer could not deduct as an ordinary and necessary

business expense the loss it incurred on a disposition of a

subsidiary’s stock, although the stock had been acquired with the
                               - 15 -

purpose of preventing damage to its business reputation.      The

Court reaffirmed that the taxpayer’s motivation or business

purpose for purchasing an asset is irrelevant in determining

whether the asset is a capital asset.

     Subsequently, in Frederick Weisman Co. v. Commissioner,

97 T.C. 563 (1991), we stated that we would no longer follow the

Court of Appeals for the Fifth Circuit’s opinion in Five Star

Manufacturing Co. v. Commissioner, supra.    In the Frederick

Weisman Co. case, the taxpayer’s sole supplier suddenly required

the taxpayer to redeem the stock of all its shareholders other

than the principal owner.    The taxpayer did so and deducted the

cost, including the purchase price of the redeemed stock plus the

expenses.    The taxpayer maintained that the deduction was

justified as an ordinary and necessary business expense under

section 162 because, as was the case in Five Star Manufacturing

Co. v. Commissioner, supra, the redemption was necessary in order

to preserve the corporation’s business.    We declined to allow the

deduction.

     We discussed extensively in Frederick Weisman Co. our

disagreement with the Court of Appeals for the Fifth Circuit’s

opinion in Five Star Manufacturing Co. v. Commissioner, supra.

We stated:

     to the extent that the Fifth Circuit’s Five Star
     exception apparently transmutes the purchase price and
     expenses of a corporation acquiring its own stock into
                             - 16 -

     ordinary and necessary expenses deductible under
     section 162, we think it has been sapped of any
     remaining vitality by the Supreme Court’s Woodward,
     Hilton Hotels, and Arkansas Best line of cases. * * *
     [Frederick Weisman Co. v. Commissioner, supra at 573.]

We noted that various other courts, including the Court of

Appeals for the Fifth Circuit itself, had severely limited the

application of Five Star Manufacturing Co. v. Commissioner,

355 F.2d 724 (5th Cir. 1966), insofar as that case had allowed a

corporation to deduct an otherwise capital expenditure if the

survival of the corporate business were at stake.     See Markham &

Brown, Inc. v. United States, 648 F.2d 1043, 1045 (5th Cir.

1981); Richmond, Fredericksburg & Potomac R.R. Co. v.

Commissioner, 528 F.2d 917, 920 (4th Cir. 1975) (need to show

“dire necessity”), affg. 62 T.C. 174 (1974); Jim Walter Corp. v.

United States, 498 F.2d 631, 639 (5th Cir. 1974) (Five Star

“limited to situations where a payment to purchase a capital

asset, though capital in nature, is necessary to the taxpayer’s

survival.”); H. & G. Indus., Inc. v. Commissioner, 495 F.2d 653,

657 (3d Cir. 1974), affg. 60 T.C. 163 (1973); Stokely-Van Camp,

Inc. v. United States, 21 Cl. Ct. 731, 754 (1990).4    In Frederick

Weisman Co. v. Commissioner, supra at 572, we observed:



     4
       Even if we were to assume that Five Star Manufacturing Co.
v. Commissioner, 355 F.2d 724 (5th Cir. 1966), revg. 40 T.C. 379
(1963), is still good law, petitioner makes no argument or
showing that the stock redemption was indispensable to Chrysler’s
survival so as to invoke the exception of that case.
                               - 17 -

     The flaw in the Five Star exception is that it requires
     the trier of fact to look to the primary purpose of the
     transaction in order to determine if an otherwise
     capital expenditure can be treated as an ordinary and
     necessary business expense under section 162. While
     the Fifth Circuit purported to look to the nature of
     the transaction, its ultimate focus was on the purpose
     or business reasons for which the stock was purchased.

     Petitioner’s argument is permeated by the same flaw that, as

we observed in Frederick Weisman Co., was present in the “Five

Star exception”.    According to petitioner, the origin and nature

of Chrysler’s costs of redeeming its common stock arose in the

context of a union demand for compensation on behalf of the

employees.   Therefore, petitioner concludes, the costs patently

constitute an ordinary and necessary expenses of doing business,

deductible under section 162(a).    We disagree.   Although

petitioner’s argument purports to look to the nature of the

redemption transaction, its ultimate focus is on its purpose or

business reasons for which the Chrysler common stock was

redeemed.    As we noted in Frederick Weisman Co. v. Commissioner,

supra at 572-573:   “The Supreme Court in Woodward and Hilton

Hotels, and more recently in Arkansas Best Corp., has made it

clear that this line of inquiry is inappropriate.”     Thus, as our

opinion in Frederick Weisman Co. v. Commissioner, supra, makes

clear, redemption payments such as these simply are not ordinary

and necessary business expenses deductible under section 162(a).
                              - 18 -

     Nor are we persuaded by petitioner’s endeavor to avoid

application of the well-settled law on redemptions by

characterizing the full amount of the redemption payments solely

for purposes of this proceeding as the payment of personal

service compensation.5   The redemption payments at hand were not,

as petitioner would have it, a substitute for wages.    Those

payments were triggered by the demand of Chrysler’s

employee/shareholders that Chrysler redeem its common stock from

the ESOT at fair market value.   That demand required that

Chrysler pay to the employee/shareholders nothing more than they

would have otherwise received had they sold their Chrysler common

stock to an unrelated party on a public market.   The fact that

the redemption payments were not attributable to the personal

services of the employees is seen quickly from the fact that

Chrysler merely paid the employees for the appreciated value of

their stock.   See also Clayton v. United States, 33 Fed. Cl. 628

(1995) (decision on the taxability of distributions from the ESOT

to nonresident alien plan participants), affd. without published

opinion 91 F.3d 170 (Fed. Cir. 1996).   The employees did not


     5
       Although the manner in which a taxpayer reports an
expenditure for financial accounting purposes does not control
its proper characterization for Federal income tax purposes, Thor
Power Tool Co. v. Commissioner, 439 U.S. 522, 542-543 (1979); see
also Old Colony R.R. Co. v. Commissioner, 284 U.S. 552, 562
(1932), we give due regard to the fact that Chrysler reported the
redemption as a purchase of treasury stock for financial
accounting purposes.
                              - 19 -

receive anything of value from the redemption on account of

personal services that would entitle Chrysler to deduct a

compensation expense with respect thereto.    The employees have

simply surrendered their Chrysler stock for its value in cash.

     Nor are we persuaded by petitioner’s insistence that a

proper analysis of the origin of the claim test is that presented

in Keller St. Dev. Co. v. Commissioner, 688 F.2d 675 (9th Cir.

1982), affg. T.C. Memo. 1978-350, and that this analysis shows

that Chrysler’s costs to redeem its common stock are deductible.

In the Keller St. Dev. Co. case, the taxpayer corporation sold a

brewery.   Dissenting shareholders sued for rescission in a

derivative suit.   After 10 years, the litigation produced a

judgment, part of which awarded the corporation $2,432,175.45.

This amount represented compensation for the buyer’s use of the

brewery assets and as a substitute for the products or profits

that those assets would have generated following the sale.     In

affirming a decision of this Court, the Court of Appeals for the

Ninth Circuit rejected the taxpayer’s assertion that the

$2,432,175.45 was taxable as capital gains on the sale of assets.

The court determined that the claim which produced the

$2,432,175.45 award originated in the sale of the brewery’s

assets, a capital transaction.   The court then reasoned that “we

must next examine how the payment fits into the structure of a

capital transaction.”   Id. at 682.    It concluded that the award
                              - 20 -

was “analogous either to interest paid to a seller to compensate

for delay in payment of a purchase price, or to rent paid for the

temporary use of income producing property.”   Id.   Because the

payment of either interest or rent would have been taxable as

ordinary income, the Court of Appeals for the Ninth Circuit held

that the $2,432,175.45 award was taxable to the corporation as

ordinary income.

     The case of Keller St. Dev. Co. v. Commissioner, supra, is

of no help to petitioner.   As discussed above, the redemption

payments at hand were not a substitute for wages.    Those payments

resulted from the demand of Chrysler’s employee/shareholders that

Chrysler redeem its common stock from the ESOT at fair market

value.   That demand required that Chrysler pay to the

employee/shareholders nothing more than they would have otherwise

received had they sold their Chrysler common stock to an

unrelated party on a public market.

     We also held in Frederick Weisman Co. v. Commissioner,

97 T.C. 563 (1991), that section 311(a) precluded the deduction

of amounts paid to redeem stock.   Section 311(a) provides:

          SEC. 311(a). General Rule. -- Except as provided
     in [subsection] (b), * * * no gain or loss shall be
     recognized to a corporation on the distribution, with
     respect to its stock, of --

                (1) its stock (or rights to acquire its
           stock), or
                                - 21 -

                 (2) property.[6]

In Frederick Weisman Co. v. Commissioner, supra at 574, we

observed that “In two prior opinions we stated that such stock

redemptions for cash come squarely within the terms of section

311(a).   Harder Servs., Inc. v. Commissioner, supra [67 T.C. 585

(1976)]; Proskauer v. Commissioner, supra [T.C. Memo 1983-295].”

“Here the stock was redeemed from petitioner’s shareholders in

their capacity as shareholders, and hence section 311(a) comes

into operation.”    Id.7


     6
       The meanings of the terms “property” and “redemption” are
set forth in sec. 317, which provides:

     SEC. 317.    OTHER DEFINITIONS.

          (a) Property. -- For purposes of this part, the
     term “property” means money, securities, and any other
     property; except that such term does not include stock
     in the corporation making the distribution (or rights
     to acquire such stock).

          (b) Redemption of Stock. For purposes of this
     part, 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.
     7
       We have also held in other cases that sec. 311 bars the
deduction of amounts paid to redeem stock. E.g., Roberts &
Porter, Inc. v. Commissioner, 37 T.C. 23 (1961), revd. on other
grounds 307 F.2d 745 (7th Cir. 1962); accord Stokely-Van Camp,
Inc. v. United States, 21 Cl. Ct. 731, 754 (1990), affd. 974 F.2d
1319 (Fed. Cir. 1992). Compare H. & G. Industries, Inc. v.
Commissioner, 495 F.2d 653, 657 (3d Cir. 1974), affg. 60 T.C. 163
(1973), where the Court of Appeals for the Third Circuit found it
unnecessary to decide that issue. The applicability of sec.
311(a) was not argued in Five Star Manufacturing Co. v.
                                                   (continued...)
                                - 22 -

     Our holding in Frederick Weisman Co. v. Commissioner, supra,

is dispositive here.     Because Chrysler redeemed its common stock

from the employees (through the ESOP) in their capacity as

shareholders, section 311(a) denies Chrysler the opportunity to

recognize either gain or loss on the transaction.

     Petitioner contends that Chrysler’s redemption of its stock

falls within a specific exception to the application of section

311(a).   We disagree.   That exception, which was in effect for

the subject years, was set forth in section 1.311-1(e)(1), Income

Tax Regs., to read as follows:

          (1) Section 311 is limited to distributions which
     are made by reason of the corporation-stockholder
     relationship. Section 311 does not apply to
     transactions between a corporation and a shareholder in
     his capacity as debtor, creditor, employee, or vendee,
     where the fact that such debtor, creditor, employee, or
     vendee is a shareholder is incidental to the
     transaction. Thus, if the corporation receives its own
     stock as consideration upon the sale of property by it,
     or in satisfaction of indebtedness to it, the gain or
     loss resulting is to be computed in the same manner as
     though the payment had been made in any other
     property.[8]




     7
      (...continued)
Commissioner, 40 T.C. 379, 387 n.5 (1963), because the parties
there apparently agreed that the corporation acquired its stock
from its shareholder in his capacity as a debtor of the
corporation.
     8
       Former sec. 1.311-1, Income Tax Regs., was redesignated as
relating to prior law and was removed from the Code of Federal
Regulations pursuant to T.D. 8474, 1993-1 C.B. 242. See also
Notice 92-12, 1992-1 C.B. 500, 504.
                               - 23 -

That exception has no applicability to the instant case.   When

Chrysler redeemed its common stock from the ESOT, the selling

shareholders were not acting as debtors, creditors, employees, or

vendees.   Chrysler redeemed the stock from those shareholders in

their capacities as shareholders who wished to dispose of their

stock for its current value.   They sold their stock, most of

which had been acquired over a period of years, at prices which

had been determined by trading on the New York Stock Exchange.

This is classically a capital transaction, and it involved only

those sellers of stock who choose to engage in the redemption.

The employees who did not choose to sell their stock received no

part of the amounts Chrysler now seeks to deduct as compensation,

although they had forgone the same pay raises as those who chose

to sell their stock.   In addition, other employees, who had not

worked for Chrysler long enough when the ESOP was in effect, were

left out of the redemption altogether.

     The fact that the UAW negotiated the sale of the common

stock does not change the origin and nature of the costs Chrysler

paid for the redemption.   The provisions of the LGA placed the

UAW, perhaps anomalously, in the role of representative of the

largest single block of shareholders in Chrysler.   The fact

remains that although these sellers of Chrysler common stock were

also employees of Chrysler, they received the cash Chrysler now

seeks to deduct in their capacities as owners and sellers of
                               - 24 -

corporate stock.   Their status as shareholders was not

“incidental” to the transaction; it was essential.   Accordingly,

the exception to application of section 311(a) provided in former

section 1.311-1(e), Income Tax Regs., does not apply.9

     Finally, petitioner maintains that summary judgment is

inappropriate in this case.   According to petitioner, a

determination of the origin and nature of a claim is ordinarily

an intensively factual matter, and the parties still dispute many

relevant facts.    We disagree with petitioner’s assertion that the

subject issue is not ripe for summary judgment.   After reviewing

the materials filed by both parties, we find that there is no

genuine issue as to any of the material facts that we have set

forth supra in the background section.   “Only disputes over facts

that might affect the outcome of the suit under the governing law

will properly preclude the entry of summary judgment.     Factual

disputes that are irrelevant or unnecessary will not be counted.”

Anderson v. Liberty Lobby, Inc., 477 U.S. at 248.    Here, in

resisting summary judgment, petitioner has proffered the



     9
       We also find without merit petitioner’s similar argument
that the cost of redeeming the common stock is deductible as an
expense of securing the LGA guaranty. This contention is
misguided both as to the facts and the law. The undisputed facts
show that, although the Government required Chrysler to establish
the ESOP, it did not require the redemption which gave rise to
the claimed deduction. Moreover, even if a redemption had been
required as a condition of the loan guaranty, such a requirement
would not affect the origin and nature of the redemption as a
capital expenditure.
                              - 25 -

affidavit of an executive indicating that petitioner is ready to

present additional evidence about the creation, existence, and

termination of the ESOP.   Although this demonstration might

provide more specificity as to the details concerning the ESOP,

in our estimation these additional facts would be irrelevant to a

determination whether Chrysler could deduct amounts it paid to

redeem its stock from the ESOT.   The uncontested facts reveal to

our satisfaction that the origin and nature of the claim that

gave rise to the claimed deduction was inherently capital.

Chrysler’s employee-shareholders demanded payment, at market

prices, for their Chrysler common stock.    As we have held,

well-established case law, as well as the provisions of section

311, preclude the deduction of the amounts which Chrysler paid to

satisfy that claim.

     Each argument of the parties has been considered, and we

have rejected those arguments not discussed herein as meritless.

Accordingly,

                                           An appropriate order will

                                    be issued.
