                            131 T.C. No. 19



                     UNITED STATES TAX COURT



    MERRILL LYNCH & CO., INC. & SUBSIDIARIES, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 18170-98.                Filed December 30, 2008.



          MP decided to sell its wholly owned subsidiary,
     MLCR but wanted to retain a portion of MLCR’s assets
     within MP’s affiliated group. Before its sale, MLCR
     sold the stock in certain of its subsidiaries (issuing
     corporations) to brother-sister corporations in MP’s
     affiliated group (acquiring corporations). We held
     that these cross-chain sales, along with the subsequent
     sale of MLCR outside the affiliated group, were made
     pursuant to a firm and fixed plan to completely
     terminate MLCR’s ownership interests in the issuing
     corporations. Applying sec. 304, I.R.C., we held that
     the cross-chain sales qualified as redemptions in
     complete termination of MLCR’s interest in the issuing
     corporations under sec. 302, I.R.C., and, as such, must


     *
      This Opinion supplements our previous Opinion, Merrill
Lynch & Co. & Subs. v. Commissioner, 120 T.C. 12 (2003), affd. in
part and remanded 386 F.3d 464 (2d Cir. 2004).
                               - 2 -

     be taxed as distributions in exchange for stock instead
     of as dividends under sec. 301, I.R.C. The Court of
     Appeals for the Second Circuit affirmed our holding in
     part but remanded for us to consider P’s argument, made
     for the first time on appeal, that the sec. 302(b)(3),
     I.R.C., test for complete termination required
     consideration of MP’s ownership interest in the issuing
     corporations. MP asserts that it is entitled to
     dividend treatment because neither the cross-chain
     sales nor the later sale of MLCR reduced the 100-
     percent constructive ownership interest attributed to
     MP in the issuing corporations.
          Held: Under sec. 304, I.R.C., MLCR is the only
     shareholder whose interest in the issuing corporations
     must be tested pursuant to sec. 302, I.R.C. Because
     MLCR’s interest was completely terminated, the
     redemption was properly treated as a distribution in
     exchange for stock under sec. 302(a), I.R.C.



     Kenneth W. Gideon and Martin D. Ginsburg, for petitioner.

     Carmen M. Baerga, Jill A. Frisch, and Lyle Press, for

respondent.



                       SUPPLEMENTAL OPINION


     MARVEL, Judge:   This case is before the Court on remand from

the Court of Appeals for the Second Circuit.   Merrill Lynch & Co.

& Subs. v. Commissioner, 386 F.3d 464 (2d Cir. 2004), affg. in

part and remanding 120 T.C. 12 (2003).   In our prior Opinion, we

found that the cross-chain sales of subsidiary stock between

brother-sister corporations in an affiliated group1 were made



     1
      The affiliated group filed a consolidated Federal income
tax return for each of the years at issue.
                                - 3 -

pursuant to a firm and fixed plan to completely terminate the

cross-chain selling corporation’s actual and constructive

ownership of the subsidiaries and that the cross-chain sales must

be integrated with the later sale of the cross-chain seller

outside the affiliated group.   Applying section 304,2 we held

that the cross-chain sales qualified as redemptions in complete

termination of the selling shareholder corporation’s interest in

the subsidiaries and must be taxed as distributions in exchange

for stock under section 302(a) and (b)(3) rather than as

dividends under section 301.    The Court of Appeals affirmed our

decision in part but remanded the case for our consideration of

an argument petitioner advanced for the first time on appeal.3

                            Background

     We adopt the findings of fact in Merrill Lynch & Co. & Subs.

v. Commissioner, 120 T.C. 12 (2003) (Merrill Lynch I), as

modified by the Court of Appeals.       For convenience and clarity,

we repeat below the previously found facts necessary for the

disposition of this case.

     Merrill Lynch & Co., Inc. (Merrill Parent), is a corporation

organized under Delaware law and is the parent corporation of an

affiliated group of corporations that filed consolidated Federal


     2
      All section references are to the Internal Revenue Code.
     3
      Petitioner did not appeal our decision with respect to the
1986 cross-chain sale of Merlease Leasing Corp. and the 1987
cross-chain sale of Merrill Lynch Vessel Leasing Corp.
                                - 4 -

income tax returns for the taxable years at issue.   Merrill

Parent, through its subsidiaries and affiliates, provides

investment, financing, insurance, leasing, and related services

to clients.   Merrill Parent’s wholly owned subsidiaries included

Merrill Lynch Capital Resources, Inc. (ML Capital Resources),

Merrill Lynch Realty, Inc. (ML Realty), Merrill Lynch Asset

Management, Inc. (ML Asset Management), and Merrill, Lynch,

Pierce, Fenner & Smith, Inc. (MLPFS).

     ML Capital Resources was engaged in the business of

arranging equipment leasing transactions between third parties

and also owned various types of equipment and other tangible

personal property, which it leased to third parties.   In

addition, ML Capital Resources owned the stock of several

subsidiary corporations that were engaged in the business of

arranging equity and debt financing for small and midsize

companies.    Merrill Parent wanted to sell a portion of ML Capital

Resources’ business but did not want certain of ML Capital

Resources’ nonleasing assets to leave the affiliated group.    As a

result, Merrill Parent decided that before it sold ML Capital

Resources, ML Capital Resources would sell to other corporations

in the affiliated group the stock of its subsidiary corporations

that were engaged in lending and financing activities or that

owned other assets and businesses that were not related to its

consumer leasing operations.
                                   - 5 -

        During February and March 1987 Merrill Parent prepared a

preliminary offering memorandum regarding the sale of ML Capital

Resources, contacted various prospective buyers, and established

the procedures for bidding on ML Capital Resources.       On March 30,

1987, ML Capital Resources sold all of the stock in five of its

wholly owned subsidiaries to ML Realty for $53,972,607 and sold

all of the stock in another of its wholly owned subsidiaries to

ML Asset Management for an initial purchase price of $160

million.4      On April 3, 1987, ML Capital Resources sold all of its

stock in a seventh wholly owned subsidiary to MLPFS for

$119,819,690.5      These stock sales between the brother-sister

corporations constitute the cross-chain sales at issue in this

case.       The parties agree that these sales were section 304

transactions.

     On June 25, 1987, Merrill Parent, Merrill Lynch Consumer

Markets Holdings, Inc. (Consumer Markets), and ML Capital

Resources entered into an agreement with GATX Leasing Corp.,

acting on behalf of itself and BCE Development, Inc.

(collectively GATX/BCE), for the purchase and sale of the stock


        4
      The purchase price was to be adjusted as soon as
practicable by a subsequent agreement reflecting the actual fair
market value of the shares as of Mar. 30, 1987.
        5
      In addition, by resolution dated Apr. 8, 1987, Merrill
Parent’s board of directors approved the formation of Merrill
Lynch Consumer Markets Holdings, Inc. (Consumer Markets), and the
contribution of all of ML Capital Resources’ capital stock to
Consumer Markets.
                               - 6 -

of ML Capital Resources.   The purchase price of the ML Capital

Resources stock was $57,363,817.6

     On its consolidated Federal income tax return for the

taxable year ended December 25, 1987, petitioner claimed a long-

term capital loss of $466,985,176 from the sale of ML Capital

Resources stock.   On the basis of its interpretation of sections

302 and 304, petitioner treated the proceeds of the cross-chain

stock sales as dividend payments to ML Capital Resources, which

increased ML Capital Resources’ earnings and profits.     Petitioner

took the position that under the consolidated return regulations

then in effect, the increase in ML Capital Resources’ earnings

and profits generated a corresponding increase in the basis of

the ML Capital Resources stock held by Consumer Markets.     See

secs. 1.1502-32(a) and 1.1502-33, Income Tax Regs.   As a result

of this asserted increase, petitioner claimed that it recognized

a loss on the sale of the stock of ML Capital Resources outside

the affiliated group.

     Respondent mailed a timely notice of deficiency to

petitioner in which respondent, among other things, decreased the

long-term capital loss petitioner reported on the 1987 sale of

the stock of ML Capital Resources to GATX/BCE on the ground that


     6
      In Merrill Lynch I we did not make a finding regarding the
total purchase price of the ML Capital Resources stock. The
purchase price shown above is derived from the opinion of the
Court of Appeals. See Merrill Lynch & Co. & Subs. v.
Commissioner, 386 F.3d at 467.
                                   - 7 -

Consumer Markets’ basis in the ML Capital Resources stock was

overstated by $328,826,143, which represents the aggregate

purchase price of the eight subsidiaries sold in the 1987 cross-

chain sales.7

       The issue for decision in Merrill Lynch I was whether the

deemed section 304 redemptions in the form of the cross-chain

stock sales must be integrated with the later sale of the cross-

chain seller, ML Capital Resources, outside the affiliated group

and treated as a redemption in complete termination under section

302(a) and (b)(3) or whether the deemed section 304 redemptions

were distributions of property taxable as dividends under section

301.       We found that on the dates of the cross-chain sales,

petitioner had agreed upon and had begun to implement a firm and

fixed plan to completely terminate the ownership interest of ML

Capital Resources in the subsidiary corporations whose stock was

sold cross-chain.       Consequently, we held that the cross-chain

sales, when integrated with the sale of ML Capital Resources’

stock, resulted in a complete termination under section 302(b)(3)

of the actual and constructive ownership interest of ML Capital

Resources in the subsidiaries purchased in the cross-chain sales.

Accordingly, we concluded that the proceeds of the cross-chain




       7
      The proper tax treatment of one of the eight 1987 cross-
chain sales is not at issue in this remand because petitioner did
not appeal it.
                                  - 8 -

sales must be treated as a payment in exchange for stock under

section 302(a) rather than as a dividend under section 301.

     The Court of Appeals adopted the firm and fixed plan test as

the appropriate method for determining whether two transactions

conducted at different times may be integrated for the purposes

of section 302(b)(3) and affirmed our application of that test to

the cross-chain sales and subsequent sale of ML Capital

Resources.   However, the Court of Appeals remanded the case for

consideration of an alternative argument petitioner advanced for

the first time on appeal.      Merrill Lynch & Co. & Subs. v.

Commissioner, 386 F.3d at 475.

     On appeal petitioner argued that the proceeds of the cross-

chain sales must be treated as a dividend under section 301, even

if it is found that the actual and constructive ownership

interest of ML Capital Resources in the purchased subsidiary

corporations was completely terminated when it was sold outside

the affiliated group, because Merrill Parent retained a

constructive ownership interest in the purchased subsidiaries

after the sale of ML Capital Resources for purposes of section

302(b)(3).   Id. at 474-475.

                               Discussion

     Section 304(a)(1) recharacterizes the sale proceeds of

subsidiary stock sold by one corporation to another of its

commonly controlled corporations as a distribution in redemption
                                - 9 -

of the acquiring corporation’s stock and requires that the tax

consequences of the distribution be determined under sections 301

and 302.   Under section 302(a), a redemption of stock is treated

as a distribution in exchange for stock if it meets any of the

tests provided in section 302(b).    If none of the section 302(b)

tests is met, the redemption is treated as a dividend under

section 301.   Sec. 302(d).   The termination of interest test of

section 302(b)(3) mandates exchange treatment “if the redemption

is in complete redemption of all of the stock of the corporation

owned by the shareholder.”    In the application of this and all

other tests under section 302(b), section 304(b)(1) requires that

any determination as to whether the acquisition is to be treated

as a distribution in exchange for stock must be made by reference

to the stock of the issuing corporation.8

     The parties disagree on whether for purposes of section 304

Merrill Parent as well as ML Capital Resources is considered a

shareholder whose continuing interest in the issuing corporations

must be tested under section 302(b)(3).     On appeal petitioner

contended for the first time that because Merrill Parent’s

ownership interest in the issuing corporations was not completely

terminated within the meaning of section 302(b)(3) by the sale of



     8
      For purposes of sec. 304 in this case, the subsidiaries
whose stock was sold cross-chain are considered the issuing
corporations, and the purchasing corporations, ML Realty, ML
Asset Management, and MLPFS, are considered the acquiring
corporations.
                               - 10 -

ML Capital Resources’ stock outside the affiliated group,

petitioner has properly reported the proceeds of the sale as

dividends.   Petitioner makes the same argument on remand.

Petitioner’s argument rests on the following:    (1) Immediately

before the cross-chain sales, the acquiring corporations were

wholly owned subsidiaries of Merrill Parent; (2) under the

attribution rules of section 318, ownership of the    issuing

corporations was also attributed to Merrill Parent through its

ownership of ML Capital Resources; and (3) after the sale of ML

Capital Resources, Merrill Parent continued constructively to own

100 percent of the stock of the issuing corporations through its

ownership of the acquiring corporations.

      Petitioner relies on section 304(a)(1) to support its

position that the section 302(b)(3) termination of interest test

applies to Merrill Parent’s constructive ownership of the issuing

corporations’ stock.   According to petitioner, the specific

reference in section 304(a)(1)(B) to “person (or persons) so in

control” requires the interests of all persons in control to be

considered in applying section 302(b)(3).   Petitioner asserts

that under section 318, Merrill Parent constructively owned 100

percent of the stock of the issuing corporations both before and

after the cross-chain sales.   Sec. 304(c)(3).   Petitioner

concludes that because the sale of ML Capital Resources did not

affect Merrill Parent’s constructive ownership of the stock of
                             - 11 -

the issuing corporations, the complete termination required under

section 302(b)(3) did not occur, and the proceeds of the cross-

chain sales were properly characterized as dividends.

     Respondent contends that ML Capital Resources is the

shareholder whose interest in the issuing corporations must be

tested under section 302(b)(3) and that because Merrill Parent’s

sale of the stock of ML Capital Resources must be integrated with

the cross-chain sales of the stock of the issuing corporations,

the interest of ML Capital Resources in the issuing corporations

was completely terminated under section 302(b)(3).   To support

his position, respondent argues that section 304(a)(1) explicitly

refers to the corporation that receives property in exchange for

its stock in the issuing corporation.   Respondent also asserts

that the regulations promulgated under section 304 clearly

identify the interest of the transferor-shareholder as the

relevant interest to be examined under the section 302(b)(3)

test.

     We must decide, therefore, whether Merrill Parent’s

continuing constructive ownership interest in the issuing

corporations after the cross-chain sales must be taken into

account in analyzing the tax consequences under sections

304(a)(1) and 302(b)(3) of ML Capital Resources’ 1987 sale of

stock in the issuing corporations to the acquiring corporations.

In making this determination, we start by interpreting section
                                 - 12 -

304(a)(1).    In interpreting a statute, we begin with the language

of the statute itself.      Consumer Prod. Safety Commn. v. GTE

Sylvania, Inc., 447 U.S. 102, 108 (1980); Fed. Home Loan Mortgage

Corp. v. Commissioner, 121 T.C. 129, 134 (2003).       If the language

of the statute is plain and unambiguous, we generally apply the

statute in accordance with its terms.      Fed. Home Loan Mortgage

Corp. v. Commissioner, supra at 134; Wells Fargo & Co. v.

Commissioner, 120 T.C. 69, 89 (2003).      Whether the statute is

ambiguous is determined by reference to the language of the

statute, the specific context in which that language is used, and

the broader context of the statute as a whole.      Wells Fargo & Co.

v. Commissioner, supra at 89.      If the statute is ambiguous or

silent, we may look to the statute’s legislative history to

determine congressional intent and to resolve any ambiguity.

Fed. Home Loan Mortgage Corp. v. Commissioner, supra at 134;

Wells Fargo & Co. v. Commissioner, supra at 89.

     Section 304 provides in relevant part as follows:

     SEC. 304.     REDEMPTION THROUGH USE OF RELATED
                   CORPORATIONS.

             (a)   Treatment of Certain Stock Purchases.--

                  (1) Acquisition by related corporation
             (other than subsidiary).--For purposes of sections
             302 and 303, if--

                        (A) one or more persons are in control
                   of each of two corporations, and

                        (B) in return for property, one of the
                   corporations acquires stock in the other
                                 - 13 -

                 corporation from the person (or persons) so
                 in control,

          then (unless paragraph (2) applies) such property
          shall be treated as a distribution in redemption
          of the stock of the corporation acquiring such
          stock. To the extent that such distribution is
          treated as a distribution to which section 301
          applies, the stock so acquired shall be treated as
          having been transferred by the person from whom
          acquired and as having been received by the
          corporation acquiring it, as a contribution to the
          capital of such corporation.

                *      *     *     *      *    *   *

          (c)   Control.--

               (1) In general.--For purposes of this
          section, control means the ownership of stock
          possessing at least 50 percent of the total
          combined voting power of all classes of stock
          entitled to vote, or at least 50 percent of the
          total value of shares of all classes of stock. If
          a person (or persons) is in control (within the
          meaning of the preceding sentence) of a
          corporation which in turn owns at least 50 percent
          of the total combined voting power of all stock
          entitled to vote of another corporation, or owns
          at least 50 percent of the total value of the
          shares of all classes of stock of another
          corporation, then such person (or persons) shall
          be treated as in control of such other
          corporation.

                *      *     *     *      *    *   *

                 (3)   Constructive ownership.--

                      (A) In general.--Section 318(a)
                 (relating to constructive ownership of stock)
                 shall apply for purposes of determining
                 control under this section.

While section 304(a)(1)(A) refers to “one or more persons” and

section 304(a)(1)(B) refers to “person (or persons) so in
                              - 14 -

control”, section 304(a)(1) makes clear that the person or

persons in control must also be transferors of issuing

corporation stock who receive property in exchange for their

transferred stock.   Accordingly, under section 304, the persons

in control must actually receive property in exchange for the

transfer of their issuing corporation stock to warrant the

redemption analysis in section 302.     The references to “persons”

in section 304(a), when read in conjunction with section

304(c)(1) and (3), merely indicate that the interests of more

than one person may be combined through attribution of stock

ownership in order to meet the requisite control required for the

application of section 304(a)(1).9     The constructive ownership

rules of section 318 are thus independent of the transfer and

receipt requirements of section 304(a).

     Because sections 302 and 304 operate to determine the tax

consequences to the recipient of a corporate distribution,10 it

necessarily follows that the rules set forth in sections 302 and

304 apply only to the shareholder who, in exchange for stock,

actually receives the proceeds of a cross-chain sale.     The

position that the section 302(b) tests may be applied to a


     9
      For purposes of the Internal Revenue Code, unless otherwise
indicated, “The term ‘person’ shall be construed to mean and
include an individual, a trust, estate, partnership, association,
company or corporation.” Sec. 7701(a)(1).
     10
      Secs. 302 and 304 are in subpt. A, entitled “Effects on
Recipients”, of subch. C, pt. I.
                                 - 15 -

shareholder who indirectly or constructively holds stock but has

neither transferred any stock nor received the proceeds of the

stock sale cannot be reconciled with the language and structure

of section 304(a)(1).

     The regulations promulgated under section 304 also confirm

that the section 302(b) tests apply only to the person or persons

who actually transfer stock in the issuing corporation to the

acquiring corporation in consideration for property.11      Section

1.304-2(a), Income Tax Regs., provides as follows:

          (a) If a corporation, in return for property,
     acquires stock of another corporation from one or more
     persons, and the person or persons from whom the stock
     was acquired were in control of both such corporations
     before the acquisition, then such property shall be
     treated as received in redemption of stock of the
     acquiring corporation. * * * As to each person
     transferring stock, the amount received shall be
     treated as a distribution of property under section
     302(d), unless as to such person such amount is to be
     treated as received in exchange for the stock under the
     terms of section 302(a) or section 303. * * *
     [Emphasis added.]

Although the regulation acknowledges that more than one person

may be in control of both corporations within the meaning of

section 304, it clearly recognizes that the person or persons in

control must also have transferred stock in exchange for

property.     According to the regulation, only a person who has

transferred stock in exchange for property is subject to the

provisions of section 302.     Section 1.304-2(c), Example (4),


     11
          In this context property includes cash.   Sec. 317(a).
                              - 16 -

Income Tax Regs., illustrates this distinction as follows:

     Corporation X and corporation Y each have outstanding
     100 shares of common stock. H, an individual, W, his
     wife, S, his son, and G, his grandson, each own 25
     shares of stock of each corporation. H sells all of
     his 25 shares of stock of corporation X to corporation
     Y. Since both before and after the transaction H owned
     directly and constructively 100 percent of the stock of
     corporation X, and assuming that section 302(b)(1) is
     not applicable, the amount received by him for his
     stock of corporation X is treated as a dividend to him
     to the extent of the earnings and profits of
     corporation Y.

In the example more than one person was considered to be in

control of each corporation and their interests were aggregated

to determine control for purposes of section 304, but the section

302(b) tests were applied only to the shareholder who actually

transferred stock to the commonly controlled corporation in

exchange for property.   Nothing in the statute or the regulations

“commands” that the interests of all persons in control be tested

under sections 304(a)(1) and 302(b), as petitioner contends.

     ML Capital Resources owned 100 percent of the stock of the

issuing corporations before the cross-chain sales, thereby

satisfying the control requirement set forth in section

304(a)(1).   As a result, we need not look beyond ML Capital

Resources’ ownership of the issuing corporations to consider any

additional persons who may have an indirect interest in the

issuing corporations under the section 318 attribution rules.    ML

Capital Resources was the only “person” who transferred any stock

to the acquiring corporations in the cross-chain sales, and ML
                              - 17 -

Capital Resources was the only shareholder that received property

from the acquiring corporations in exchange for stock in the

issuing corporations.   Consequently, ML Capital Resources is the

only shareholder whose interest in the issuing corporations must

be tested under the provisions of section 302(b)(3).      Because the

interest of ML Capital Resources in the issuing corporations was

completely terminated upon its sale outside of the affiliated

group, the redemption shall be treated as a distribution in

exchange for stock.   Secs. 304(a)(1), 302(b)(3).

     Petitioner presents various hypothetical situations to

demonstrate the unintended results that the adoption of

respondent’s position might have produced under earlier versions

of section 304.   These examples, however, assume facts that are

not present in this case and rely on statutory provisions that

are no longer in effect.   Consequently, we do not address the

hypothetical situations discussed in petitioner’s brief.

Moreover, we have recognized that “a statute cannot be drafted

with sufficient particularity to fully accomplish its purposes

while avoiding every potential abuse”.     Van Raden v.

Commissioner, 71 T.C. 1083, 1116 (1979) (Wilbur J., dissenting),

affd. 650 F.2d 1046 (9th Cir. 1981).   We are required to review

and interpret sections 304 and 302 as in effect for 1987, the

year of the contested cross-chain sales.    Hypotheticals aside, we

are satisfied that the language and structure of sections 304 and

302 mandate our holding herein.
                        - 18 -

To reflect the foregoing,


                                 Decision will be entered in

                            accordance with the mandate of the

                            Court of Appeals for the Second

                            Circuit.
