                       T.C. Memo. 2011-25



                     UNITED STATES TAX COURT



 RALPHS GROCERY CO. & SUBSIDIARIES f.k.a. RALPHS SUPERMARKETS,
              INC., & SUBSIDIARIES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


FRED MEYER, INC., & SUBSIDIARIES, Petitioners v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket Nos. 20364-06, 25969-06.   Filed January 27, 2011.



     Roger J. Jones, Andrew R. Roberson, and Sarah S. Sandusky,

for petitioners.

     Alan M. Jacobson, John E. Budde, and Laurie A. Nasky, for

respondent.
                                 - 2 -

                          MEMORANDUM OPINION


     CHIECHI, Judge:     These cases are before us on the motion for

partial summary judgment of petitioners (petitioners’ motion) and

the motion for partial summary judgment of respondent (respon-

dent’s motion).     We shall grant petitioners’ motion, and we shall

deny respondent’s motion.

                              Background

     The parties are in agreement regarding or do not dispute the

following facts.1

     At the time petitioner Ralphs Grocery Co. (RGC) and its

subsidiaries filed the petition in the case at docket No. 20364-

06, all of RGC’s stores and its main warehouse were located, and

all goods and services were provided, exclusively in California.

     At the time petitioner Fred Meyer, Inc. (Fred Meyer), and

its subsidiaries filed the petition in the case at docket No.




     1
      The parties filed with the Court a stipulation of facts
together with stipulated exhibits attached and an agreed state-
ment of material facts that are to control for purposes of their
respective motions for partial summary judgment. (We shall refer
to that stipulation together with those exhibits and that agreed
statement as the parties’ agreed facts.) The parties’ agreed
facts pertain to, inter alia, the requirements and effects of the
U.S. Bankruptcy Code (Bankruptcy Code), 11 U.S.C. (2006).
Respondent objected to several stipulated exhibits. We shall not
rule on respondent’s evidentiary objections. That is because we
need not rely on the exhibits to which respondent objects in
order to resolve the questions presented in the parties’ respec-
tive motions for partial summary judgment.
                               - 3 -

25969-06, Fred Meyer had its headquarters in Oregon and provided

goods and services primarily in Oregon and Washington.

     At the time petitioners filed their respective petitions,

RGC and Fred Meyer were subsidiaries of the Kroger Co. (Kroger)

and were members of Kroger’s consolidated group for Federal

income tax (tax) purposes.   At that time, Kroger had its head-

quarters in Ohio.

     In 1873, George A. Ralphs founded a grocery store business

in Los Angeles, California (Ralphs grocery store business).    That

business remained privately owned for over 90 years.    In 1968,

Federated Department Stores, Inc. (Federated), purchased the

Ralphs grocery store business from its then owners.    Federated

operated that business as an unincorporated division of Federated

until 1988.

     In 1986, Campeau Corp. (Campeau), a corporation organized

under the laws of Canada, acquired Allied Stores Corp. (Allied)

for approximately $3.6 billion.   At that time, Allied operated

certain retail department stores through certain of its subsid-

iaries.

     In 1988, Campeau acquired Federated for approximately $6.7

billion.   At that time, in addition to operating the Ralphs

grocery store business, Federated operated certain retail depart-

ment stores through certain of its subsidiaries.   Campeau’s

acquisition of Federated constituted a qualified stock purchase
                               - 4 -

under section 338(d)(3).2   In connection with its acquisition of

Federated, pursuant to section 1.338-4T(f)(6), Temporary Income

Tax Regs., 50 Fed. Reg. 16413 (Apr. 25, 1985), Campeau made a

protective carryover basis election and an offset prohibition

election.

     In order to finance Campeau’s acquisitions of Allied and

Federated,3 certain subsidiaries of Campeau borrowed funds from

Citibank, Bank of Montreal, Banque Paribas (Paribas), the Edward

J. DeBartolo Corp. (EJDC), and Olympia & York CC Limited (O&Y).

     On June 6, 1988, Ralphs Acquisition Co. was incorporated

under the laws of Delaware.   Around that date, Federated trans-

ferred all of the assets and the liabilities of the Ralphs

grocery store business to a transitory subsidiary (Newco) in

exchange for all of the common stock of Newco.   Thereafter, Newco

merged with and into Ralphs Acquisition Co., which changed its

name to Ralphs Grocery Co. (Ralphs).4   As part of that merger,



     2
      All section references are to the Internal Revenue Code
(Code) in effect at all relevant times.
     3
      The parties agree that certain subsidiaries of Campeau
borrowed funds in order to finance Campeau’s acquisitions of
Allied and Federated. However, the parties’ agreed facts do not
refer to any amounts that Campeau or any of its subsidiaries
borrowed with respect to the acquisition of Allied.
     4
      Ralphs Grocery Co. that we shall refer to as Ralphs is not
the same entity as petitioner Ralphs Grocery Co. As discussed
below, in June 1995 Ralphs was merged into Ralphs Supermarkets,
Inc. (RSI). Thereafter, RSI, the surviving company, assumed the
name Ralphs Grocery Co.
                               - 5 -

Federated transferred to Ralphs all of the common stock of Newco

in exchange for a promissory note of Ralphs in the amount of $900

million.   (We shall refer to the series of transactions by which

Federated transferred the Ralphs grocery store business to Newco

and Ralphs in exchange for a $900 million promissory note as the

Ralphs incorporation transaction.)     For tax purposes, the Ralphs

incorporation transaction was treated in part as an intercompany

asset sale and in part as a dividend distribution of the Ralphs

grocery store business.   The Ralphs incorporation transaction

resulted in a deferred intercompany gain (Ralphs deferred inter-

company gain) in excess of $500 million.    At an undisclosed date

after the Ralphs incorporation transaction, all of the outstand-

ing common stock of Ralphs5 was transferred to Allied and Hold-

ings III, Inc. (Holdings III), an indirect subsidiary of Campeau

that had been incorporated in 1988.

     Campeau organized its operations in the United States

through Federated Stores, Inc. (FSI), a holding company formerly


     5
      In August 1988, Ralphs issued to certain executives and
certain key employees of Ralphs 170,000 shares of nonvoting
series A preferred stock (series A nonvoting preferred stock) and
130,000 shares of nonvoting series B preferred stock (series B
nonvoting preferred stock) for an aggregate price of $3 million.
A portion of the series A nonvoting preferred stock was required
to be redeemed each year beginning in 1992 and continuing through
1998. A portion of the series B nonvoting preferred stock was
required to be redeemed each year beginning in 1992 and continu-
ing through 1996. In addition, Ralphs was permitted to redeem at
any time the series A nonvoting preferred stock and the series B
nonvoting preferred stock provided that it gave the owners of
that respective stock five days notice of any such redemption.
                              - 6 -

known as Campeau Corp. (U.S.), Inc.   FSI was the parent corpora-

tion of a consolidated group (FSI consolidated group) for tax

purposes that consisted of approximately 60 other U.S. corpora-

tions, including Allied, Federated, and Ralphs, that filed a

single consolidated tax return for each of the taxable years

ended January 31, 1989 through 1993, and that had an ownership

structure as of October 28, 1991, as described below.6   Certain

members of the FSI consolidated group were engaged in the real

estate business, certain other members were engaged in the retail

department store business, and Ralphs was engaged in the grocery

store business.

     As of October 28, 1991, FSI owned:   (1) 100 percent of the

outstanding common stock of Holdings III, (2) 100 percent of the

outstanding common stock of Campeau Properties, Inc. (CPI), and

(3) 100 percent of the outstanding common stock of each of

certain corporations (FSI shopping center corporations) that each

owned certain shopping centers.7

     As of October 28, 1991, CPI, which had been incorporated in

1988 and was serving as a holding company for FSI’s ownership



     6
      Attached as an appendix is a chart showing the ownership
structure as of Oct. 28, 1991, of the members of the FSI consoli-
dated group.
     7
      Each of the FSI shopping center corporations held a 50-
percent interest in certain partnerships. EJDC owned directly or
indirectly the remaining 50-percent interest in each of those
partnerships.
                                - 7 -

interests in certain shopping mall developments that FSI, EJDC,

and their respective affiliates were to develop jointly, owned

7.5 percent of the outstanding common stock of Federated Hold-

ings, Inc. (Holdings).

     As of October 28, 1991, Holdings III owned:   (1) 100 percent

of the outstanding common stock of Federated Holdings II, Inc.

(Holdings II), (2) approximately 83.75 percent8 of the outstand-

ing common stock of Ralphs, (3) a promissory note due from

Federated (Federated note) in the principal amount of $75 mil-

lion, and (4) a promissory note due from Allied (Allied note) in

the principal amount of $100 million.

     As of October 28, 1991, Holdings II, which had been incorpo-

rated in 1990, owned:    (1) 100 percent of the outstanding common

stock of Allied,9 (2) 28.04 percent of the outstanding common

stock of Holdings, and (3) a residual interest in certain collat-

eral relating to a certain monetization agreement.

     As of October 28, 1991, Allied owned:   (1) 50 percent of the

outstanding common stock of Holdings, (2) approximately 16.25




     8
      In the parties’ agreed facts, the parties agreed to the
approximate percentage of the outstanding common stock of Ralphs
that Holdings III owned. For convenience, we shall not refer
hereinafter to that ownership percentage as approximate.
     9
      As of Oct. 28, 1991, Allied also had outstanding certain
preferred stock that was publicly traded.
                               - 8 -

percent10 of the outstanding common stock of Ralphs, and (3) 100

percent of the stock of each of certain operating subsidiaries

that were engaged in the retail department store business.

      As of October 28, 1991, certain investors unrelated to the

members of the FSI consolidated group owned 6.96 percent of the

outstanding common stock of Holdings.   As of that date, EJDC

owned 7.5 percent of the outstanding common stock of Holdings.

On December 12, 1991, EJDC sold that stock of Holdings to FSI for

$1.   After that sale, EJDC was not a stockholder of any member of

the FSI consolidated group.

      As of October 28, 1991, Holdings, which had been incorpo-

rated in 1988, owned:   (1) 100 percent of the outstanding common

stock of Federated and (2) the residual interest in a $1 million

escrow fund.

      As of October 28, 1991, Federated owned 100 percent of the

stock of each of certain operating subsidiaries that were engaged

in the retail department store business.

      Certain members of the FSI consolidated group borrowed funds

from certain financial institutions in order to finance Campeau’s

acquisition of Federated (discussed above).   In May 1988, Bank of

Montreal and Paribas lent $500 million to FSI in order to finance



      10
      In the parties’ agreed facts, the parties agreed to the
approximate percentage of the outstanding common stock of Ralphs
that Allied owned. For convenience, we shall not refer hereinaf-
ter to that ownership percentage as approximate.
                               - 9 -

Campeau’s acquisition of Federated.    In April 1989, FSI prepaid

that loan in full.   FSI made that payment by using a $500 million

dividend that Holdings III had paid to FSI around that time.

Around April 1989, before paying that dividend, Holdings III

received a $500 million dividend from Holdings II.   Around the

same time, Holdings II had raised the $500 million that it used

to pay that dividend by selling to Allied for $500 million

(1) approximately 36.2 percent of the outstanding common stock of

Holdings and (2) an option to purchase an additional 1 percent of

the outstanding common stock of Holdings.

     In May 1988, EJDC lent $480 million to FSI (EJDC equity

loan) to finance Campeau’s acquisition of Federated.   That loan

was evidenced by a promissory note in the amount of $480 million

(FSI $480 million note) that FSI issued to EJDC.11   In connection

with the EJDC equity loan, EJDC, Campeau, FSI, and CPI executed a

document entitled “MASTER PLEDGE AGREEMENT” (EJDC master pledge

agreement).

     In April 1989, FSI and EJDC refinanced the EJDC equity loan

and renegotiated its terms.   Pursuant to that refinancing, EJDC

returned to FSI the FSI $480 million note in exchange for a new

promissory note from FSI in the amount of $480 million (FSI new


     11
      EJDC also received in consideration for the EJDC equity
loan (1) 7.5 percent of the outstanding common stock of Holdings,
which it owned as of Oct. 28, 1991, and (2) a pledge of the
outstanding common stock of Holdings that CPI owned (i.e., 7.5
percent of the outstanding common stock of Holdings).
                               - 10 -

$480 million note).12   Campeau guaranteed FSI’s payment of all

sums due under the FSI new $480 million note.

     In connection with the refinancing of the EJDC equity loan,

EJDC, Campeau, FSI, Holdings III, CPI, and the FSI shopping

center corporations executed a document entitled “MASTER PLEDGE

AGREEMENT” (EJDC revised master pledge agreement) that superseded

the EJDC master pledge agreement.   Under that revised pledge

agreement, certain members of the FSI consolidated group pledged

to EJDC the following properties as security for FSI’s perfor-

mance under the FSI new $480 million note:   (1) 100 percent of

the outstanding common stock of CPI that FSI owned, (2) certain

partnership interests and certain stock that CPI owned, including

the common stock of Holdings that CPI owned, (3) the stock that

FSI owned in each of the FSI shopping center corporations and the

respective partnership interests that each of those corporations

owned, (4) 100 percent of the outstanding common stock of

Allied,13 and (5) the 83.75 percent of the outstanding common

stock of Ralphs that Holdings III owned.   The EJDC revised master



     12
      EJDC retained the pledge consisting of the 7.5 percent of
the outstanding common stock of Holdings that CPI owned and that
EJDC had received as consideration for the EJDC equity loan. See
supra note 11.
     13
      In April 1989, FSI owned directly 100 percent   of the
outstanding common stock of Allied. As of Oct. 28,    1991, Hold-
ings II owned 100 percent of the outstanding common   stock of
Allied. The parties’ agreed facts do not establish    how or when
Holdings II acquired that stock.
                                - 11 -

pledge agreement provided that EJDC was to release on May 1,

1991, the pledge by Holdings III of the 83.75 percent of the

outstanding stock of Ralphs that Holdings III owned.    EJDC did

not release that pledge on May 1, 1991.

     Each of the pledges under the EJDC revised master pledge

agreement was subordinate to (1) FSI’s payment of all sums due

under the FSI new $480 million note and (2) Campeau’s guaranty of

FSI’s payment of those sums.    The EJDC revised master pledge

agreement did not state that any pledge of property under that

agreement had priority over any other pledge of property under

that agreement.

     On April 7, 1989, Citibank, Bank of Montreal, and Paribas

provided to Allied certain revolving working capital in the

amount of $280 million.   On the same date, Bank of Montreal and

Paribas provided to Allied a certain revolving inventory facility

in the amount of $70 million.

     On September 12, 1989, O&Y agreed to lend up to $250 million

to Campeau.   Thereafter, Campeau borrowed $175 million of that

$250 million from O&Y (Campeau $175 million loan).    Campeau then

lent $175 million to FSI that was evidenced by a note from FSI in

the amount of $175 million (FSI $175 million note).    Thereafter,

FSI lent $175 million to Holdings III that was evidenced by a

note from Holdings III in the amount of $175 million (Holdings

III note).    The Holdings III note was payable no later than
                              - 12 -

September 12, 1991, and provided for an interest rate of 9.875

percent per year.

     Holdings III used the $175 million that it borrowed from FSI

to lend $100 million to Allied and $75 million to Federated that

were evidenced by the Allied note and the Federated note, respec-

tively.

     On September 18, 1989, Holdings III guaranteed the Campeau

$175 million loan that Campeau received from O&Y around September

12, 1989.   On September 18, 1989, Holdings III also pledged to

O&Y as security for that guaranty the outstanding common stock of

Ralphs that Holdings III owned (i.e., 83.75 percent).   That

pledge was subject to the security interest of EJDC in that stock

under the EJDC revised master pledge agreement.

     In late 1989, certain members of the FSI consolidated group

became aware that they would be unable to make payments timely

with respect to the debt that each had incurred.   As a result,

between January 14 and March 30, 1990, FSI and certain of its

subsidiaries, including Holdings, Holdings II, and Holdings III,

filed in the U.S. Bankruptcy Court for the Northern District of

California (California U.S. Bankruptcy Court) respective volun-

tary petitions for relief (chapter 11 petitions) under chapter

11, entitled “Reorganization”, of the Bankruptcy Code, 11 U.S.C.

secs. 1101-1174. (We shall refer collectively to FSI and certain

of its subsidiaries that filed chapter 11 petitions in the
                              - 13 -

California U.S. Bankruptcy Court as the FSI debtors.)    At the

time Holdings III filed its chapter 11 petition in the California

U.S. Bankruptcy Court, the Holdings III note was the only evi-

dence of indebtedness of Holdings III for money that it had

borrowed.

     In the chapter 11 petition that it filed with the California

U.S. Bankruptcy Court, Holdings III reported total assets of

$1,004,285,000 and total liabilities of $657,778,000.    In the

consolidated balance sheets for each of the taxable years ended

January 31, 1991 through 1993, the FSI consolidated group re-

ported, based on book value, the following total assets and total

liabilities (not including stockholders equity) of Holdings III

as of the beginning of each of those taxable years:

           Date            Total Assets      Total Liabilities
       Feb. 1, 1990        $179,754,880         $179,754,879
       Feb. 1, 1991         180,457,073          179,754,880
       Feb. 1, 1992         180,293,905          179,775,064

     On January 15, 1990, Allied and certain of its

subsidiaries (collectively, Allied debtors) and Federated and

certain of its subsidiaries (collectively, Federated debtors)

filed in the U.S. Bankruptcy Court for the Southern District of

Ohio (Ohio U.S. Bankruptcy Court) chapter 11 petitions under

chapter 11 of the Bankruptcy Code.     (We shall refer collectively

to the Allied debtors and the Federated debtors as the Allied/

Federated debtors.)   On January 15, 1990, the Ohio U.S. Bank-
                                - 14 -

ruptcy Court consolidated the respective chapter 11 cases of the

Allied debtors and the Federated debtors for joint administration

under a single docket number.    (We shall refer to the proceedings

commenced in the Ohio U.S. Bankruptcy Court that that court

consolidated on January 15, 1990, as the Allied chapter 11

proceedings.)

     In the chapter 11 petition that it filed with the Ohio U.S.

Bankruptcy Court, Allied reported, based on book value, total

assets of approximately $2,934,000,000 and total liabilities of

approximately $2,406,000,000 as of October 28, 1989.   In the

chapter 11 petition that it filed with the Ohio U.S. Bankruptcy

Court, Federated reported, based on book value, total assets of

approximately $6,202,000,000 and total liabilities of approxi-

mately $5,339,000,000 as of October 28, 1989.

     On July 2, 1990, the California U.S. Bankruptcy Court

transferred venue in the respective chapter 11 cases of the FSI

debtors to the Ohio U.S. Bankruptcy Court.   On July 13, 1990, the

Ohio U.S. Bankruptcy Court consolidated those proceedings for

joint administration under a single docket number.   (We shall

refer to the proceedings commenced in the California U.S. Bank-

ruptcy Court that the Ohio U.S. Bankruptcy Court consolidated on

July 13, 1990, as the FSI chapter 11 proceedings.)   Thereafter,

the Ohio U.S. Bankruptcy Court considered and treated the Allied
                              - 15 -

chapter 11 proceedings and the FSI chapter 11 proceedings as

interrelated and closely coordinated those proceedings.

     Around early 1990, Ralphs was solvent.   At no time did

Ralphs file a petition under the Bankruptcy Code.   Nor was Ralphs

a debtor in either the FSI chapter 11 proceedings or the Allied

chapter 11 proceedings.   As a result, no creditor claims were

filed against Ralphs in the FSI chapter 11 proceedings or in the

Allied chapter 11 proceedings.

     The FSI consolidated group filed Form 1120, U.S. Corporation

Income Tax Return (Form 1120), for its taxable year ended January

31, 1991 (FSI consolidated group 1/31/91 consolidated return).

The FSI consolidated group attached to that return a consolidated

balance sheet in which it reported, based on book value, the

following total assets and total liabilities (not including

stockholders equity) as of the beginning of that taxable year

(i.e., February 1, 1990) of that group and of certain of its

members:
                             - 16 -

         Company/Group          Total Assets1    Total Liabilities
   FSI consolidated group      $12,022,633,639    $13,975,652,352
   FSI                             836,271,594      1,008,207,723
   Holdings III                    179,754,880        179,754,879
   Holdings II                     476,483,273        477,014,279
   Holdings                           -0-                  30,540
   Federated                     6,572,255,075      6,879,178,500
   Allied                        3,020,041,662      3,846,033,370
   Ralphs                        1,404,826,686      1,369,630,102
     1
       The term “Total Assets” does not include any amount repre-
senting the value of intangible assets. In the consolidated
balance sheet that the FSI consolidated group attached to the FSI
consolidated group 1/31/91 consolidated return, line 13A, “INTAN-
GIBLE ASSETS”, was left blank for each member of that consoli-
dated group.

     For the FSI consolidated group’s taxable year ended January

31, 1990, Holdings claimed a worthless stock deduction with

respect to the common stock of Federated that it owned.   For that

taxable year, Allied, Holdings II, and CPI each claimed a worth-

less stock deduction with respect to the common stock of Holdings

that each owned.

     At all times during the FSI chapter 11 proceedings, the FSI

debtors, including FSI and Holdings III, operated as debtors in

possession under the Bankruptcy Code and conducted their respec-

tive ongoing businesses substantially as they had conducted those

businesses before the FSI chapter 11 proceedings had commenced.

During the pendency of the FSI chapter 11 proceedings through

early February 1992, FSI and the other FSI debtors continued to

be managed by the officers that had managed the respective FSI
                              - 17 -

debtors before the FSI chapter 11 proceedings had commenced.14

At no time during the FSI chapter 11 proceedings did the Ohio

U.S. Bankruptcy Court appoint any trustee to take control of the

assets and the business of any of the FSI debtors.   Nor did that

court appoint any examiner for any of those debtors.   At no time

during the FSI chapter 11 proceedings did any creditor of FSI

object to FSI’s acting as a debtor in possession.    Nor did any of

those creditors ask the Ohio U.S. Bankruptcy Court to appoint any

trustee.

     At all times during the Allied chapter 11 proceedings, the

Allied/Federated debtors also operated as debtors in possession

and conducted their respective ongoing businesses substantially

as they had conducted those businesses before the Allied chapter

11 proceedings had commenced.15


     14
      From January 1990 to February 1992, G. William Miller
served as the chairman and the chief executive officer of FSI.
     15
      The parties’ agreed facts do not indicate whether during
the pendency of the Allied chapter 11 proceedings through early
February 1992 the Allied/Federated debtors continued to be
managed by the officers that had managed the respective Allied/
Federated debtors before the Allied chapter 11 proceedings had
commenced. Nor do those agreed facts indicate whether certain
facts (discussed below) that the parties agree apply to the FSI
debtors and/or the FSI chapter 11 proceedings also apply to the
Allied/Federated debtors and/or the Allied chapter 11 proceed-
ings. However, neither party argues that any such fact does not
apply to the Allied/Federated debtors and/or the Allied chapter
11 proceedings. We assume that is because in making their
respective arguments with respect to their respective motions for
partial summary judgment the parties focus their arguments on the
receipt of certain RHC stock by certain creditors of FSI and do
                                                   (continued...)
                              - 18 -

     The U.S. Trustee Program (U.S. trustee program), a component

of the U.S. Department of Justice that is responsible for promot-

ing the efficiency and protecting the integrity of the Federal

bankruptcy system, oversaw the FSI chapter 11 proceedings and the

Allied chapter 11 proceedings.   Pursuant to that program, six

official creditor committees were appointed in the Allied chapter

11 proceedings.   Pursuant to the U.S. trustee program, an offi-

cial committee of unsecured creditors of FSI was appointed in

the FSI chapter 11 proceedings.16   None of EJDC, Bank of Mon-

treal, Paribas, O&Y, or Campeau was a member of the committee of

unsecured creditors of FSI appointed pursuant to the U.S. trustee

program in the FSI chapter 11 proceedings.

     Several claims were filed in the FSI chapter 11 proceedings

against the various FSI debtors, including the following claims.

EJDC filed numerous claims in the FSI chapter 11 proceedings,

including:   (1) Certain secured claims against FSI, identified as

class 1, under the EJDC revised master pledge agreement and the

FSI new $480 million note; (2) certain secured claims against

Holdings II, identified as class 2, under a certain agreement;


     15
      (...continued)
not focus on the receipt of certain RHC stock by certain credi-
tors of Allied. See infra note 49.
     16
      Each of the respective official committees appointed
pursuant to the U.S. trustee program in the Allied chapter 11
proceedings and the official committee of unsecured creditors
appointed pursuant to that program in the FSI chapter 11 proceed-
ings possessed certain rights under the Bankruptcy Code.
                             - 19 -

(3) certain secured claims against Holdings III, identified as

class 3, under the EJDC revised master pledge agreement and any

pledge agreement regarding the Allied note or the Federated note;

(4) certain secured claims against CPI, identified as class 4;

(5) certain respective unsecured claims against FSI, Holdings

III, and CPI, identified as class 14, including any unsecured

deficiency claims17 against those debtors; and (6) certain unse-

cured claims against any of the FSI debtors, identified as class

15, to the extent such claims were not included in class 14.18

EJDC’s claims against the FSI debtors, except Holdings, totaled

approximately $480 million, not including interest due on those

claims.

     In the FSI chapter 11 proceedings, EJDC asserted a lien on

the following property of certain of the FSI debtors:   (1) The

common stock of CPI that FSI owned; (2) the common stock of each

of the FSI shopping center corporations that FSI owned; (3) FSI’s

interest in the Holdings III note; (4) the common stock of Ralphs

that Holdings III owned; (5) the common stock of Holdings that



     17
      An “unsecured deficiency claim” was any portion of a claim
to the extent that the value of the claimholder’s interest in the
applicable FSI debtor’s interest in any property securing the
claim was less than the amount of the claim or to the extent that
the amount of any claim subject to setoff was less than the
amount of such claim, as determined under sec. 506(a) of the
Bankruptcy Code.
     18
      Each of the debts on which the creditor claims of EJDC
against the FSI debtors was based had been guaranteed by Campeau.
                              - 20 -

CPI owned; (6) a certain general partnership interest that CPI

owned in a certain partnership; (7) the 50-percent partnership

interest of each of the FSI shopping center corporations in the

partnerships that operated certain shopping malls jointly with

EJDC; and (8) the common stock of Allied that Holdings II owned.

     There were several potential grounds on which the FSI

debtors might have been able to invalidate the security interest

that EJDC claimed in the common stock of Ralphs that Holdings III

owned.   The FSI debtors claimed in certain documents filed with

the Ohio U.S. Bankruptcy Court that if they were not able to

invalidate the security interests in the property of certain of

the FSI debtors that EJDC asserted, EJDC would be entitled to

(1) all of the value attributable to the common stock of Ralphs

that Holdings III owned, which the FSI debtors estimated to equal

approximately $485.8 million, and (2) all of the value attribut-

able to the common stock of each of the FSI shopping center

corporations that FSI owned, which FSI estimated to be not more

than $80 million, to the extent necessary to satisfy EJDC’s

oversecured claims totaling approximately $543 million.

     Bank of Montreal and Paribas filed certain unsecured claims

against the FSI debtors, identified as class 20, relating to the

$500 million that they had lent to FSI in May 1988.   Bank of

Montreal and Paribas filed those claims as a protective measure

in the event FSI recovered as a “voidable preference” under the
                             - 21 -

Bankruptcy Code a portion of the $500 million that it had repaid

to Bank of Montreal and Paribas in April 1989.

     O&Y filed a secured claim against Holdings III, identified

as class 8, under the terms of the Allied note and the Federated

note and under Holdings III’s guaranty of the loan that O&Y had

agreed on September 12, 1989, to make available to Campeau.      O&Y

filed an unsecured deficiency claim against Holdings III and all

other FSI debtors, identified as class 21.    O&Y also asserted as

security for its claims against Holdings III a lien on the common

stock of Ralphs that Holdings III owned.

     FSI filed a secured claim against Holdings III, identified

as class 10, under the Holdings III note.    FSI also filed an

unsecured claim against Holdings III, identified as class 24,

that included any unsecured deficiency claim.

     Campeau filed a secured claim against FSI, identified as

class 9, under the FSI $175 million note.    Campeau filed an

unsecured claim against the FSI debtors, identified as class 22,

that included any unsecured deficiency claims and any claims

Campeau may have assigned to O&Y as security.    Campeau also

asserted a lien on the claims that FSI filed and that were

identified as class 10 and class 24.

     Ralphs filed an unsecured claim against the FSI debtors,

identified as class 26, under certain tax-sharing agreements that

certain members of the FSI consolidated group, including Ralphs,
                              - 22 -

had entered into before the FSI chapter 11 proceedings had been

commenced.

     Holdings III held the interest, identified as class 39, in

the outstanding common stock of Holdings II.   FSI held the

interest, identified as class 40, in the outstanding common stock

of Holdings III.

     In addition to the claims discussed above, Allied had

potential claims against the FSI debtors for fraudulent convey-

ance, breach of fiduciary duties, indemnity, and civil

conspiracy.   Those claims were asserted on behalf of Allied

against the FSI debtors with respect to the funds that FSI used

in April 1989 to repay to Bank of Montreal and Paribas the $500

million that those companies lent to FSI in May 1988.    FSI had

potential claims for preference against Bank of Montreal and

Paribas with respect to the claims asserted on Allied’s behalf

against the FSI debtors.   Bank of Montreal and Paribas had

contingent claims to recover from FSI any amount which Bank of

Montreal or Paribas would be required to pay Allied or by which

their other claims against Allied might be reduced as a result of

Allied’s claims against the FSI debtors with respect to the $500

million that Bank of Montreal and Paribas had lent to FSI.     Bank

of Montreal and Paribas asserted that their respective claims

would be senior to those claims of EJDC that were secured by the

common stock of Ralphs that Holdings III owned.
                                - 23 -

     Several claims were filed in the Allied chapter 11 proceed-

ings against the various Allied/Federated debtors, including the

following claims.   Bank of Montreal and Paribas filed secured and

unsecured claims against Allied, identified as class A-6, class

AR-6, and class AO-6, with respect to the respective revolving

working capital and revolving inventory facilities that they had

extended to Allied on April 7, 1989.

     Holdings III filed an unsecured claim against Allied,

identified as class A-17, under the Allied note.    Holdings III

also filed an unsecured claim against Federated, identified as

class F-10, under the Federated note.

     EJDC and its affiliates filed more than 200 claims against

the Allied/Federated debtors.    EJDC asserted that its claims

against Federated were secured by a pledge of the Federated note

and the Allied note.

     Holdings held the interest, identified as class F-15, in the

outstanding common stock of Federated.    Holdings II held the

interest, identified as class F-19, in the outstanding common

stock of Allied.

     The FSI debtors and the Allied/Federated debtors had obliga-

tions under the Bankruptcy Code to file with the Ohio U.S.

Bankruptcy Court in the FSI chapter 11 proceedings and the Allied

chapter 11 proceedings respective proposed plans of reorganiza-
                              - 24 -

tion19 and respective disclosure statements with respect to those

proposed plans of reorganization.   Under the Bankruptcy Code, the

FSI debtors and the Allied/Federated debtors had an exclusive

right during the 120 days following the date on which those

debtors filed their respective chapter 11 petitions (plan exclu-

sivity period) to file respective proposed plans of reorganiza-

tion with the Ohio U.S. Bankruptcy Court.   On several occasions,

the FSI debtors and the Allied/Federated debtors requested

extensions of their respective plan exclusivity periods.   The

Ohio U.S. Bankruptcy Court granted each of those requests.

     At no time did EJDC, Bank of Montreal, Paribas, O&Y, or

Campeau seek to reduce the time during which FSI had the exclu-

sive right to file a proposed plan of reorganization with the

Ohio U.S. Bankruptcy Court.   Nor did those creditors object to

the requests of FSI to extend the time during which it had the

exclusive right to file a proposed plan of reorganization with

that court.20


     19
       The term “plan of reorganization” is used herein to refer
to a plan described in ch. 11 of the Bankruptcy Code, 11 U.S.C.
secs. 1101-1174. Our use of that term is not intended to refer
to a plan of reorganization for tax purposes or to imply that any
proposed plan of reorganization filed with the Ohio U.S. Bank-
ruptcy Court constituted a plan of reorganization for tax pur-
poses.
     20
      The docket sheet of the Ohio U.S. Bankruptcy Court in the
FSI chapter 11 proceedings did not reflect (1) that EJDC, Bank of
Montreal, Paribas, O&Y, or Campeau requested that that court
shorten the FSI debtors’ plan exclusivity period in the FSI
                                                   (continued...)
                              - 25 -

     During the FSI chapter 11 proceedings and the Allied chapter

11 proceedings, the FSI debtors, the Allied debtors, the Feder-

ated debtors, Ralphs, the various creditors committees, and other

respective creditors of the FSI debtors and the Allied/Federated

debtors engaged in extensive discussions and negotiations regard-

ing the resolution of the FSI chapter 11 proceedings and the

Allied chapter 11 proceedings.   Each of the participants in those

discussions and negotiations was represented by separate profes-

sional advisors.

     The FSI debtors and the Allied/Federated debtors filed with

the Ohio U.S. Bankruptcy Court respective joint proposed plans of

reorganization in the FSI chapter 11 proceedings and the Allied

chapter 11 proceedings.   Thereafter, those debtors amended on

several occasions the respective joint proposed plans and filed

with the Ohio U.S. Bankruptcy Court those respective amended

joint proposed plans.   None of EJDC, Bank of Montreal, Paribas,

O&Y, or Campeau objected to the confirmation of any of the

respective proposed plans of reorganization that the FSI debtors

and the Allied/Federated debtors filed with the Ohio U.S. Bank-




     20
      (...continued)
chapter 11 proceedings or (2) that any of those creditors ob-
jected to the several requests that the FSI debtors made to the
Ohio U.S. Bankruptcy Court for extensions of that plan exclusiv-
ity period.
                                - 26 -

ruptcy Court.21   No party except the FSI debtors and the Al-

lied/Federated debtors filed with that court a proposed plan of

reorganization in the FSI chapter 11 proceedings or the Allied

chapter 11 proceedings.

     On October 28, 1991, the FSI debtors filed with the Ohio

U.S. Bankruptcy Court in the FSI chapter 11 proceedings (1) a

document entitled “Third Amended Joint Plan of Reorganization for

Federated Stores, Inc.; Federated Holdings, Inc.; Federated

Holdings II, Inc.; Federated Holdings III, Inc. and Campeau

Properties, Inc.” (October 1991 proposed FSI chapter 11 plan) and

(2) a document entitled “Second Amended Disclosure Statement

Pursuant to Section 1125 of the Bankruptcy Code for Federated

Stores, Inc.; Federated Holdings, Inc.; Federated Holdings II,

Inc.; Federated Holdings III, Inc. and Campeau Properties, Inc.”

(FSI disclosure statement).22

     On October 28, 1991, the Allied/Federated debtors filed with

the Ohio U.S. Bankruptcy Court in the Allied chapter 11 proceed-

ings (1) a document entitled “Third Amended Joint Plan of Reorga-


     21
      The docket sheet of the Ohio U.S. Bankruptcy Court in the
FSI chapter 11 proceedings did not reflect that EJDC, Bank of
Montreal, Paribas, O&Y, or Campeau filed any document with that
Court objecting to the confirmation of any of the respective
proposed joint plans of reorganization that the FSI debtors filed
with that Court in those proceedings.
     22
      The docket sheet of the Ohio   U.S. Bankruptcy Court in the
FSI chapter 11 proceedings did not   reflect that EJDC, Bank of
Montreal, Paribas, O&Y, or Campeau   filed any document with that
Court objecting to the adequacy of   the FSI disclosure statement.
                             - 27 -

nization of Federated Department Stores, Inc., Allied Stores

Corporation and Certain of Their Subsidiaries” (October 1991

proposed Allied chapter 11 plan) and (2) a document entitled

“Disclosure Statement Pursuant to Section 1125 of the Bankruptcy

Code for the Third Amended Joint Plan of Reorganization for

Federated Department Stores, Inc., Allied Stores Corporation, and

Certain of Their Subsidiaries” (Allied disclosure statement).

     The October 1991 proposed FSI chapter 11 plan and the

October 1991 proposed Allied chapter 11 plan (collectively, the

October 1991 proposed chapter 11 plans) were interdependent.    The

effectiveness of the October 1991 proposed FSI chapter 11 plan

was conditioned on the satisfaction of or, if waivable, waiver of

all of the conditions to the effectiveness of the October 1991

proposed Allied chapter 11 plan.

     According to the FSI debtors and the Allied/Federated

debtors, the primary reason for filing separate proposed plans of

reorganization in their respective chapter 11 proceedings was the

existence of separate debt structures for the respective opera-

tions of the FSI debtors and the Allied/Federated debtors.    Other

reasons of the FSI debtors and the Allied/Federated debtors for

filing separate proposed plans of reorganization were:

(1) Allied, Federated, and Ralphs were separate reporting compa-

nies under certain Federal securities laws; (2) the agreement of

the respective parties to the FSI chapter 11 proceedings and the
                              - 28 -

Allied chapter 11 proceedings that the creditors of the retail

department store businesses should become equity participants in

those businesses after the chapter 11 reorganization; and (3) the

retail department store businesses and the Ralphs grocery store

business had little in common, having been operated separately

under separate management and from separate geographic locations.

     According to the FSI disclosure statement, the overall

purposes of the October 1991 proposed FSI chapter 11 plan were:

(1) To distribute the assets of the FSI debtors among the credi-

tors of those debtors; (2) to maximize the amount that the

creditors of the FSI debtors could recover on their respective

claims against those debtors and to allocate that amount in a

manner that the FSI debtors viewed as fair and reasonable; and

(3) to settle and compromise certain significant disputes that

the FSI debtors believed would result in significant expense if

litigated and that had the potential to impact adversely the FSI

debtors if determined adversely to them.

     According to the Allied disclosure statement, the overall

purposes of the October 1991 proposed Allied chapter 11 plan

were:   (1) To alter the respective debt and the respective

capital structures of the Allied/Federated debtors so that at the

conclusion of the Allied chapter 11 proceedings those debtors

would possess viable respective capital structures; (2) to

maximize the amount that the creditors of the Allied/Federated
                              - 29 -

debtors could recover on their respective claims against those

debtors and to allocate that amount in a manner that the Allied/

Federated debtors viewed as fair and reasonable; and (3) to

settle, compromise, or otherwise dispose of certain claims of and

against the Allied/Federated debtors on terms that those debtors

believed to be reasonable.   In addition, Allied/Federated debtors

intended for the October 1991 proposed Allied chapter 11 plan to

preserve certain economies of scale and other benefits of the

joint operation of the Allied/Federated debtors.

     As a specific condition to any confirmation by the Ohio U.S.

Bankruptcy Court of the October 1991 proposed chapter 11 plans,

the FSI debtors, the Allied/Federated debtors, and the respective

creditors of those debtors entered into an agreement (comprehen-

sive settlement agreement) that was to resolve certain actual and

potential claims that those parties had against each other under

terms that those parties determined were reasonable.   That

agreement provided, inter alia, that the parties to that agree-

ment generally agreed to use their best efforts to have the Ohio

U.S. Bankruptcy Court confirm the October 1991 proposed chapter

11 plans.

     Under the comprehensive settlement agreement, the FSI

debtors, the Allied/Federated debtors, Ralphs, and some of the

respective creditors of those debtors were to execute releases

regarding potential and actual claims among and between the
                                - 30 -

parties to that agreement.     Those claims included the various

respective claims of EJDC, Bank of Montreal, Paribas, O&Y, and

Campeau.   Many of the issues raised by the claims that the

parties to the comprehensive settlement agreement were to release

were novel or unresolved issues of law that could have required

time-consuming litigation to resolve.

     Under the comprehensive settlement agreement, certain tax-

sharing agreements between and among members of the FSI

consolidated group that had been entered into before the com-

mencement of the FSI chapter 11 proceedings and the Allied

chapter 11 proceedings were to be canceled as a condition to the

execution of the comprehensive settlement agreement and of the

Ohio U.S. Bankruptcy Court’s confirmation of the October 1991

proposed chapter 11 plans.23

     Under the comprehensive settlement agreement, the claim of

Holdings III with respect to the Federated note was to be reduced

from $77.1 million to $40.7 million in order to account for

certain claims that the Federated debtors had against FSI with




     23
      One of the tax-sharing agreements was between Ralphs and
FSI. Under that agreement, for each taxable year of the FSI
consolidated group Ralphs was obligated to pay to FSI an amount
equal to the amount of tax that Ralphs would have paid if Ralphs
had filed a separate tax return for that taxable year. In
return, each member of the FSI consolidated group agreed to
indemnify jointly and severally and hold harmless Ralphs against
any claim of liability for tax of the FSI consolidated group.
                               - 31 -

respect to certain tax-sharing agreements among those debtors and

FSI.

       The comprehensive settlement agreement stated that that

agreement was an essential element of and means of implementation

of the October 1991 proposed chapter 11 plans.    That agreement

also stated that each of the October 1991 proposed chapter 11

plans was an essential element of and means of execution of the

comprehensive settlement agreement.

       The October 1991 proposed chapter 11 plans proposed to

separate the ownership and the operation of the Ralphs grocery

store business from the respective ownership and the respective

operations of the real estate businesses and the retail depart-

ment store businesses.    In order to achieve that separation, the

October 1991 proposed chapter 11 plans proposed, inter alia, that

Allied and Federated merge into a single surviving entity, known

as New Federated, thereby consolidating the real estate busi-

nesses and the retail department store businesses, and that a

majority of the outstanding common stock of Ralphs be distributed

to EJDC, Bank of Montreal, and Paribas, all of which were unre-

lated to the FSI consolidated group.

       In negotiating the terms of the October 1991 proposed FSI

chapter 11 plan, FSI proposed to value all of the outstanding

common stock of Ralphs at $580 million solely for the purpose of

allocating the outstanding common stock of Ralphs which Holdings
                                   - 32 -

III owned and which the FSI debtors proposed in that plan that

Holdings III transfer to EJDC, Bank of Montreal, Paribas, and

Campeau.24       Although FSI had proposed a value higher than $580

million for the outstanding common stock of Ralphs, FSI was

willing to, and did, propose a value of $580 million for that

stock in order to achieve a consensus among the parties that

negotiated the terms of the October 1991 proposed FSI chapter 11

plan.        Based on a value of $580 million for all of the outstand-

ing common stock of Ralphs, the Allied/Federated debtors assumed

that the value of the outstanding common stock of Ralphs that

Allied owned (i.e., 16.25 percent) was approximately $94 million.

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that EJDC receive the following with respect to

its creditor claims identified as classes 1, 2, 3, 4, 14, and 15:

(1) 20 million shares of the outstanding common stock of Ralphs,

representing approximately 60.34 percent of the total outstanding

common stock of Ralphs, to be distributed from the shares of

Ralphs common stock that Holdings III owned; (2) a release under

the comprehensive settlement agreement of any claims against

EJDC; and (3) certain respective real estate partnership inter-




        24
      The net value of all of the outstanding common stock of
Ralphs was at least $475 million.
                              - 33 -

ests that the FSI shopping center corporations owned or certain

stock of those corporations that FSI owned.25

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that Bank of Montreal and Paribas, in consider-

ation for (1) their respective creditor claims identified as

class 20, (2) their respective agreements under the comprehensive

settlement agreement to release any claims against EJDC, and

(3) their respective consents to the October 1991 proposed Allied

chapter 11 plan as holders of the claims identified as class A-6,

receive the following:   (1) 3,514,286 shares of the outstanding

common stock of Ralphs, representing approximately 10.6 percent

of the total outstanding common stock of Ralphs, to be distrib-

uted equally between Bank of Montreal and Paribas and to be

distributed from the shares of Ralphs common stock that Holdings

III owned and (2) releases under the comprehensive settlement

agreement of any potential claims against Bank of Montreal or

Paribas.

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that Campeau receive the following with respect



     25
      Under the October 1991 proposed FSI chapter 11 plan, it
was proposed that EJDC receive the respective real estate part-
nership interests that each of the FSI shopping center corpora-
tions owned, unless FSI determined that any such distribution to
EJDC would have adverse tax consequences to FSI. In that event,
under the October 1991 proposed FSI chapter 11 plan, it was
proposed that EJDC receive certain respective stock of the FSI
shopping center corporations that FSI owned.
                                - 34 -

to its creditor claims against FSI identified as classes 9 and

22:   (1) 4,244,241 shares of the outstanding common stock of

Ralphs, representing approximately 12.8 percent of the total

outstanding common stock of Ralphs, to be distributed from the

shares of Ralphs common stock that Holdings III owned, (2) cash,

and (3) a release under the comprehensive settlement agreement of

any potential claims against it.    Under the October 1991 proposed

FSI chapter 11 plan, the FSI debtors proposed that a portion

(i.e., 0.8 percent) of the outstanding common stock of Ralphs

that those debtors proposed be distributed to Campeau be distrib-

uted to FSI and be sold by FSI as needed in order to satisfy

certain obligations and expenses arising under the October 1991

proposed FSI chapter 11 plan.    To the extent that FSI did not

sell any portion of the Ralphs stock that it received, the FSI

debtors proposed in the October 1991 proposed FSI chapter 11 plan

that FSI distribute that portion to Campeau.

      The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that O&Y receive the following with respect to

its creditor claims identified as classes 8 and 21:    (1) A

distribution from Campeau with respect to Holdings III’s guaranty

of the loan that O&Y agreed on September 12, 1989, to make

available to Campeau and (2) a release under the comprehensive

settlement agreement of any potential claims against it.
                               - 35 -

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that FSI receive with respect to its creditor

claims identified as classes 10 and 24 the property of the estate

of Holdings III, if any, after the distribution pursuant to that

proposed plan of the common stock of Ralphs that Holdings III

owned.    In the October 1991 proposed FSI chapter 11 plan the FSI

debtors proposed that FSI distribute pursuant to that plan any

such property that it received.

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that the respective creditor claims of EJDC, Bank

of Montreal, Paribas, O&Y, and Campeau all be impaired.   In that

proposed plan the FSI debtors proposed that all secured claims

except the secured claims identified as class 1126 be impaired.

In the October 1991 proposed FSI chapter 11 plan the FSI debtors

proposed that several creditors that had filed respective unse-

cured claims against the FSI debtors receive certain distribu-

tions with respect to their claims.

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that Holdings, Holdings II, Holdings III, and CPI

be dissolved and that their respective assets vest in and be held

by FSI as disbursing agent for distribution under the October



     26
      The claims identified as class 11 consisted of claims
against Holdings II under a certain loan agreement dated Apr. 29,
1988, pursuant to which Holdings II borrowed certain funds from
Citicorp Investment Bank Ltd.
                                - 36 -

1991 proposed FSI chapter 11 plan.       In that proposed plan the FSI

debtors proposed that FSI continue in existence until the October

1991 proposed FSI chapter 11 plan had been fully consummated and

the Ohio U.S. Bankruptcy Court closed the FSI chapter 11 proceed-

ings.     At that time FSI would dissolve.

     The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that all of the outstanding common stock of

Holdings III be canceled upon the dissolution of that company and

that no property be distributed to FSI with respect to its

interest, identified as class 40, as the sole stockholder of

Holdings III.

     In summary, the FSI debtors proposed in the October 1991

proposed FSI chapter 11 plan that Holdings III transfer to the

following creditors of FSI the following approximate percentages

of the outstanding common stock of Ralphs:

                                Percentage of Outstanding
               FSI Creditor       Common Stock of Ralphs
             EJDC                          60.4
             Campeau                       12.8
             Bank of Montreal               5.3
             Paribas                        5.3

        The Allied/Federated debtors proposed in the October 1991

proposed Allied chapter 11 plan that on or after the effective

date of that proposed plan Allied and Federated merge and that

all of their respective assets vest in a single surviving com-

pany, to be known as New Federated.      The Allied/Federated debtors
                              - 37 -

proposed in that proposed plan that all of the outstanding common

stock of New Federated be distributed to the respective creditors

of the Allied debtors and the Federated debtors.

     The Allied/Federated debtors proposed in the October 1991

proposed Allied chapter 11 plan that Holdings III receive with

respect to its claim against Federated under the Federated note

816,000 shares of the common stock of New Federated.   The Al-

lied/Federated debtors proposed in that proposed plan that

588,000 of those 816,000 shares be distributed pursuant to the

October 1991 proposed FSI chapter 11 plan to the respective

general, unsecured creditors of FSI and Holdings III in satisfac-

tion of those unsecured creditors’ respective claims against FSI

and Holdings III.   The Allied/Federated debtors proposed in the

October 1991 proposed Allied chapter 11 plan that the remaining

228,000 shares of the common stock of New Federated that that

plan proposed Holdings III receive be sold under the October 1991

proposed FSI chapter 11 plan to provide cash to FSI.   In the

October 1991 proposed Allied chapter 11 plan the Allied/Federated

debtors proposed that Holdings III contribute to the capital of

Allied its claim against Allied under the Allied note and that no

property be distributed to Holdings III with respect to that

claim.

     The Allied/Federated debtors proposed in the October 1991

proposed Allied chapter 11 plan that Bank of Montreal and Paribas
                              - 38 -

each receive with respect to their respective claims identified

as classes A-6, AR-6, and AO-6 approximately 4.83 percent of the

total outstanding common stock of Ralphs, to be distributed from

the shares of Ralphs common stock that Allied owned and that New

Federated27 was to own pursuant to the October 1991 proposed

Allied chapter 11 plan.

     The Allied/Federated debtors proposed in the October 1991

proposed Allied chapter 11 plan that Allied retain in its capac-

ity as a stockholder of Ralphs the shares of the Ralphs common

stock that it owned and that were not to be distributed to Bank

of Montreal and Paribas (i.e., 6.6 percent of the outstanding

common stock of Ralphs).   New Federated, as the successor to

Allied, was to retain and continue to own such stock.

     In summary, the Allied/Federated debtors proposed in the

October 1991 proposed Allied chapter 11 plan that the following

companies own the following approximate percentages of the

outstanding common stock of Ralphs after any distributions of

that stock proposed in that proposed plan:




     27
      As discussed above, the Allied/Federated debtors proposed
in the October 1991 proposed Allied chapter 11 plan that Allied
and Federated merge into a single surviving entity known as New
Federated.
                                - 39 -

                                Percentage of Outstanding
                 Entity           Common Stock of Ralphs
             Bank of Montreal               4.8
             Paribas                        4.8
             New Federated                  6.6

     As of February 3, 1991, an appraisal estimated that, exclud-

ing the then-outstanding debt of Ralphs of approximately $985

million and the cash and cash equivalents of $34.7 million that

Ralph owned, the value of Ralphs was between approximately $1.45

billion and $1.55 billion.

     The FSI debtors, the Allied/Federated debtors, Ralphs, the

creditors that filed claims in the FSI chapter 11 proceedings

and/or the Allied chapter 11 proceedings, and their respective

representatives negotiated the terms of an indemnification

agreement.    They believed that such an indemnification agreement

would be necessary in order to allocate among the members of the

FSI consolidated group responsibility for certain liabilities,

including certain tax liabilities.       That was because of, inter

alia, the pendency of the FSI chapter 11 proceedings and the

Allied chapter 11 proceedings, the proposed cancellation of

certain tax-sharing agreements among the members of the FSI

consolidated group, the separation proposed in the October 1991

proposed chapter 11 plans of the retail department store busi-

nesses and the Ralphs grocery store business into entities with
                              - 40 -

separate ownership, and the fact that the FSI consolidated group

was at all relevant times filing a single consolidated tax

return.

     In October 1991, the FSI debtors, the Allied/Federated

debtors, Ralphs, and the creditors that filed claims in the FSI

chapter 11 proceedings and/or the Allied chapter 11 proceedings

filed with the Ohio U.S. Bankruptcy Court an unexecuted proposed

indemnification agreement (October 1991 proposed indemnification

agreement) that they had negotiated and that they proposed be

effective as of the effective date of the October 1991 proposed

FSI chapter 11 plan.   The Ohio U.S. Bankruptcy Court did not

approve the October 1991 proposed indemnification agreement.

     It was proposed in the October 1991 proposed indemnification

agreement, inter alia, that responsibility for certain nontax

liabilities arising from the conduct of the respective businesses

of the parties to that agreement be allocated among those parties

and that certain tax liabilities be allocated among certain of

those parties.   Certain proposals were made in the October 1991

proposed indemnification agreement to address certain other

matters regarding the relationship of the parties to that agree-

ment after certain of those parties ceased to be members of the

FSI consolidated group.

     It was also proposed in the October 1991 proposed indemnifi-

cation agreement that New Federated, FSI, and Ralphs indemnify
                             - 41 -

one another and certain other members of the FSI consolidated

group for certain losses relating to, resulting from, or arising

out of the conduct of their respective businesses before, on, or

after the effective date of the October 1991 proposed FSI chapter

11 plan.

     It was further proposed in the October 1991 proposed indem-

nification agreement that New Federated indemnify and hold

harmless Ralphs, Holdings III, FSI, and certain subsidiaries of

FSI from and against certain tax liabilities that became known

after the respective effective dates of the October 1991 proposed

FSI chapter 11 plan and the October 1991 proposed Allied chapter

11 plan but that were attributable to taxable years that ended on

or before those effective dates.   In exchange for that proposed

indemnification, it was proposed in the October 1991 proposed

indemnification agreement that Ralphs pay to New Federated

(1) $10 million over a period of five years beginning on the

effective date of the October 1991 proposed FSI chapter 11 plan

and (2) an amount equal to 21 percent of any taxes for which New

Federated indemnified Ralphs but not to exceed $15 million,

adjusted by a certain $5 million credit potentially available to

Ralphs.

     After the FSI debtors and the Allied/Federated debtors filed

the October 1991 proposed FSI chapter 11 plan and the October

1991 proposed Allied chapter 11 plan, respectively, the FSI
                              - 42 -

debtors, the Allied/Federated debtors, Ralphs, and the respective

creditors that had filed claims in the FSI chapter 11 proceedings

and/or the Allied chapter 11 proceedings discussed and negotiated

certain modifications of the terms of those proposed chapter 11

plans.   Under the respective modified proposed FSI chapter 11

plan and the modified proposed Allied chapter 11 plan, the FSI

debtors and the Allied/Federated debtors proposed (1) the incor-

poration of a new company, Ralphs Holding Co., Inc. (RHC),

(2) the transfer to it by Holdings III and Allied of their

respective common stock ownership in Ralphs (i.e., 83.75 percent

and 16.25 percent, respectively), (3) the transfer to Holdings

III and Allied by RHC of 83.75 percent and 16.25 percent, respec-

tively, of RHC’s outstanding common stock, (4) the respective

distributions by Holdings III to certain of FSI’s creditors and

by Allied to certain of its creditors of their respective shares

of outstanding common stock of RHC in the same amounts and in the

same manner as the parties to the October 1991 proposed chapter

11 plans had proposed in those proposed plans Holdings III and

Allied distribute the common stock of Ralphs.   (We shall refer to

the series of transactions that the FSI debtors and the Allied/

Federated debtors proposed in the modifications to the October

1991 proposed chapter 11 plans (namely, that RHC be incorporated,

Holdings III and Allied transfer their respective common stock of

Ralphs to RHC, RHC transfer all of its common stock to Holdings
                              - 43 -

III and Allied, and Holdings III and Allied distribute their

respective common stock of RHC) as the Ralphs transaction.)

     The proposed Ralphs transaction required the parties that

negotiated the terms of the October 1991 proposed indemnification

agreement to revise the terms of that agreement to take into

account that proposed transaction.     Around late 1991, Federated

and certain of its subsidiaries, Allied and certain of its

subsidiaries, New Federated (as the proposed successor to Allied

and Federated), FSI and certain of its subsidiaries, Holdings

III, Ralphs, and RHC executed a document entitled “INDEMNIFICA-

TION AGREEMENT” (proposed final indemnification agreement).28    It

was proposed in the proposed final indemnification agreement that

that agreement be effective as of the effective date of the

proposed FSI chapter 11 plan that the Ohio U.S. Bankruptcy Court

confirmed.   The execution of the proposed final indemnification

agreement was necessary in order to induce the parties to that

proposed agreement to approve any proposed chapter 11 plans in

the respective chapter 11 proceedings.    However, any such indem-

nification agreement would have been necessary to induce such

approvals regardless of whether the Ralphs transaction had been




     28
      No stipulated exhibit referred to the proposed final
indemnification agreement as being part of the consideration for
any transaction that occurred with respect to the FSI chapter 11
proceedings or the Allied chapter 11 proceedings.
                              - 44 -

proposed as a modification to the respective October 1991 pro-

posed chapter 11 plans.

     It was also proposed in the proposed final indemnification

agreement that Holdings III be indemnified against any deficiency

in tax attributable to the Ralphs transaction, including any tax

attributable to an election under section 338(h)(10).

     It was further proposed in the proposed final indemnifica-

tion agreement that RHC become a joint and several co-obligor

with respect to payments that the proposed initial indemnifica-

tion agreement proposed be made by Ralphs.   As a result, in the

proposed final indemnification agreement it was proposed that

Ralphs and RHC be jointly and severally liable for payments to

New Federated of not less than $10 million and not more than $20

million.

     On January 8, 1992, the FSI debtors filed with the Ohio U.S.

Bankruptcy Court in the FSI chapter 11 proceedings a document

entitled “Additional Modification (Effective Upon Filing Pursuant

to Bankruptcy Code Section 1127) of Third Amended Plan of Reorga-

nization for Federated Stores, Inc.; Federated Holdings, Inc.;

Federated Holdings II, Inc.; Federated Holdings III, Inc.; and

Campeau Properties, Inc.” (January 1992 proposed FSI chapter 11

plan).   Around that date, the Allied/Federated debtors filed with

the Ohio U.S. Bankruptcy Court in the Allied chapter 11 proceed-

ings a modification of the October 1991 proposed Allied chapter
                              - 45 -

11 plan (January 1992 proposed Allied chapter 11 plan).   Certain

revisions and modifications of certain provisions of the October

1991 proposed FSI chapter 11 plan were proposed in the January

1992 proposed FSI chapter 11 plan in order to include the Ralphs

transaction, which included the contemplated creation of RHC.

The January 1992 proposed FSI chapter 11 plan proposed to include

the following paragraph with respect to the contemplated creation

of RHC:

     5.   Creation of Ralphs Holding Company

          Prior to the Effective Date, Holdings III and
     Allied may, at their election (with the concurrence of
     each party who will receive Ralphs Common Stock under
     the [October 1991 proposed FSI bankruptcy] Plan),
     contribute all of the common stock of Ralphs owned by
     those entities to a newly incorporated Delaware corpo-
     ration which may be formed for the purpose of holding
     all of the issued and outstanding capital stock of
     Ralphs (the “Ralphs Holding Company”). In exchange for
     contributing their respective holdings of common stock
     of Ralphs to Ralphs Holding Company, Holdings III will
     receive that number of shares of capital stock in
     Ralphs Holding Company so that it owns the same per-
     centage of the issued and outstanding capital stock of
     Ralphs Holding Company as of the Effective Date as it
     now owns of the common stock of Ralphs, and Allied will
     receive that number of shares of capital stock in
     Ralphs Holding Company so that it owns the same per-
     centage of the issued and outstanding capital stock of
     Ralphs Holding Company as of the Effective Date as it
     now owns of the common stock of Ralphs.

     Certain provisions were proposed in the January 1992 pro-

posed FSI chapter 11 plan that differed from the provisions

proposed in the October 1991 proposed FSI chapter 11 plan,

including the following.   The FSI debtors proposed in the January
                                - 46 -

1992 proposed FSI chapter 11 plan that EJDC receive the following

with respect to its creditor claims identified as classes 1, 2,

3, 4, 14, and 15:     (1) 20 million shares of the common stock of

RHC, representing approximately 60.34 percent of the total

outstanding common stock of RHC, to be distributed from the

shares of the outstanding common stock of RHC that Holdings III

was to own; (2) a release under the comprehensive settlement

agreement of any claims against EJDC; and (3) certain respective

real estate partnership interests that the FSI shopping center

corporations owned or certain stock of those corporations that

FSI owned.29

     The FSI debtors proposed in the January 1992 proposed FSI

chapter 11 plan that Bank of Montreal and Paribas, in consider-

ation for (1) their respective creditor claims identified as

class 20, (2) their respective agreements under the comprehensive

settlement agreement to release any claims against EJDC, and

(3) their respective consents to the January 1992 proposed Allied

chapter 11 plan as holders of the claims identified as class A-6,

receive the following:     (1) 3,514,286 shares of the outstanding

common stock of RHC, representing approximately 10.6 percent of

the total outstanding common stock of RHC, to be distributed

equally between Bank of Montreal and Paribas and to be distrib-

uted from the shares of RHC common stock that Holdings III was to


     29
          See supra note 25.
                               - 47 -

own and (2) releases under the comprehensive settlement agreement

of any potential claims against Bank of Montreal or Paribas.

      The FSI debtors proposed in the January 1992 proposed FSI

chapter 11 plan that Campeau receive the following with respect

to its creditor claims against FSI identified as classes 9 and

22:   (1) 4,244,241 shares of the outstanding common stock of RHC,

representing approximately 12.8 percent of the total outstanding

common stock of RHC, to be distributed from the shares of RHC

common stock that Holdings III was to own, (2) cash, and (3) a

release under the comprehensive settlement agreement of any

potential claims against it.   Under the January 1992 proposed FSI

chapter 11 plan the FSI debtors proposed that a portion (i.e.,

0.8 percent) of the outstanding common stock of RHC that those

debtors proposed be distributed to Campeau be distributed to FSI

and be sold by FSI as needed in order to satisfy certain obliga-

tions and expenses arising under the January 1992 proposed FSI

chapter 11 plan.   To the extent that FSI did not sell any portion

of the RHC stock that it received, the FSI debtors proposed in

the January 1992 proposed FSI chapter 11 plan that FSI distribute

that portion to Campeau.

      The FSI debtors proposed in the January 1992 proposed FSI

chapter 11 plan that FSI receive with respect to its creditor

claims identified as classes 10 and 24 any property of the estate

of Holdings III after the distribution pursuant to that proposed
                               - 48 -

plan of the common stock of RHC that Holdings III was to own.     In

the January 1992 proposed FSI chapter 11 plan the FSI debtors

proposed that FSI distribute pursuant to that plan any such

property it received.

     The FSI debtors proposed in the January 1992 proposed FSI

chapter 11 plan that the respective creditor claims of EJDC, Bank

of Montreal, Paribas, O&Y, and Campeau all be impaired.   In that

proposed plan, the FSI debtors proposed that all secured claims

except the secured claims identified as class 1130 be impaired.

In the January 1992 proposed FSI chapter 11 plan the FSI debtors

proposed that several creditors that had filed respective unse-

cured claims against the FSI debtors receive certain distribu-

tions with respect to their claims.

     The FSI debtors proposed in the January 1992 proposed FSI

chapter 11 plan that all of the outstanding common stock of

Holdings III be canceled upon the dissolution of that company and

that no property be distributed to FSI with respect to its

interest, identified as class 40, as the sole stockholder of

Holdings III.

     In summary, the FSI debtors proposed in the January 1992

proposed FSI chapter 11 plan that Holdings III transfer to the

following creditors of FSI the following approximate percentages

of the outstanding common stock of RHC:


     30
          See supra note 26.
                               - 49 -

                               Percentage of Outstanding
            FSI Creditor          Common Stock of RHC
          EJDC                            60.4
          Campeau                         12.8
          Bank of Montreal                 5.3
          Paribas                          5.3

     The FSI debtors proposed, inter alia, in the January 1992

proposed FSI chapter 11 plan the following provision:

     H.   Nondischarge And Injunction.

          1.    Nondischarge Of Debtors.

          Pursuant to section 1141(d)(3) of the Bankruptcy
     Code, the Confirmation Order shall not discharge claims
     against any of the [FSI] Debtors. However, no creditor
     of any of said Debtors may receive any payment from, or
     seek recourse against, any assets which are to be
     distributed under Sections IV, V, and VI of this Plan,
     except for those distributions expressly provided for
     in said Sections IV, V, and VI. As of the Confirmation
     Date, all entities are precluded from asserting,
     against any property which is to be distributed under
     Section IV, V or VI of this Plan, any claims, obliga-
     tions, rights, causes of action, liabilities or equity
     interests based upon any act or omission, transaction
     or other activity of any kind or nature that occurred
     prior to the Confirmation Date, other than as expressly
     provided in this Plan or the Confirmation Order,
     whether or not (a) a proof of claim or proof of inter-
     est based on such debt or interest is Filed or deemed
     Filed pursuant to section 501 of the Bankruptcy Code,
     (b) a claim or interest based on such debt or interest
     is allowed pursuant to section 502 of the Bankruptcy
     Code or (c) the holder of a claim or interest based on
     such debt or interest has accepted the Plan.

           2.   Injunction.

          Except as otherwise provided in the Plan or the
     Confirmation Order, on and after the Confirmation Date:

                (1) All entities which have held, currently
           hold or may hold a debt, claim, other liability or
           interest against any Debtor that would be dis-
                             - 50 -

          charged upon Confirmation of this Plan and the
          Effective Date but for the provisions of section
          1141(d)(3) of the Bankruptcy Code and Section
          VI.G.1. hereof are permanently enjoined from tak-
          ing any of the following actions on account of
          such debt, claim, liability, interest or right:
          (a) commencing or continuing in any manner any
          action or other proceeding on account of such
          claim against property which is to be distributed
          under Section IV, V, or VI of this Plan, other
          than to enforce any right to distribution with
          respect to such property under the Plan;
          (b) enforcing, attaching, collecting or recovering
          in any manner any judgment, award, decree, or
          order against any property to be distributed to
          creditors under Section IV, V, or VI of this Plan,
          other than as permitted under subparagraph (a)
          above; and (c) creating, perfecting or enforcing
          any lien or encumbrance against any property to be
          distributed under Section IV, V, or VI, other than
          as permitted by this Plan.

               (2) All non-Debtor persons and entities are
          permanently enjoined from commencing or continuing
          in any manner any action or other proceeding
          whether directly, derivatively or otherwise, on
          account of or respecting any claim, debt, right,
          cause of action, or liability released or to be
          released pursuant to the Comprehensive Settlement
          Agreement.

     The Allied/Federated debtors proposed in the January 1992

proposed Allied chapter 11 plan that Bank of Montreal and Paribas

each receive with respect to their respective claims identified

as classes A-6, AR-6, and AO-6 approximately 4.83 percent of the

total outstanding common stock of RHC, to be distributed from the

shares of RHC common stock that Allied was to own and that New
                              - 51 -

Federated31 was to own after the effective date of the January

1992 proposed Allied chapter 11 plan.

     The Allied/Federated debtors proposed in the January 1992

proposed Allied chapter 11 plan that Allied retain in its capac-

ity as a stockholder of RHC the shares of the RHC common stock

that it was to own and that were not to be distributed to Bank of

Montreal and Paribas (i.e., 6.6 percent of the outstanding common

stock of RHC).   New Federated, as the successor to Allied, was to

retain and continue to own such stock.

     In summary, the Allied/Federated debtors proposed in the

January 1992 proposed Allied chapter 11 plan that the following

companies own the following approximate percentages of the

outstanding common stock of RHC after any distributions of that

stock proposed in that proposed plan:

                              Percentage of Outstanding
              Entity             Common Stock of RHC
          Bank of Montreal               4.8
          Paribas                        4.8
          New Federated                  6.6

     In connection with the inclusion of the Ralphs transaction

in the January 1992 proposed FSI chapter 11 plan and the January

1992 proposed Allied chapter 11 plan (collectively, the January

1992 proposed chapter 11 plans), EJDC, Federated, FSI, and RHC


     31
      The January 1992 proposed Allied chapter 11 plan, like the
October 1991 proposed Allied chapter 11 plan, provided that
Allied and Federated were to merge into a single surviving entity
to be known as New Federated.
                               - 52 -

entered into a certain agreement (proposed tax election agree-

ment), which was to be effective as of the effective date of the

January 1992 proposed FSI chapter 11 plan.   Those parties pro-

posed in the proposed tax election agreement that FSI and New

Federated (as successor to Federated) agree to prosecute dili-

gently and in good faith a request to be submitted to the Inter-

nal Revenue Service (IRS) for certain rulings (section 382/384

rulings) regarding the application of sections 382 and 384 to the

January 1992 proposed chapter 11 plans.

     It was stated in the proposed tax election agreement that

FSI, New Federated (as successor to Federated), and RHC agreed to

prosecute diligently and in good faith a request to be submitted

to the IRS for rulings (section 338(h)(10) rulings) that:

(1) The Ralphs transaction constituted a qualified stock purchase

under section 338(d)(3); (2) RHC would be entitled to make an

election under section 338(a) and (h)(10) with respect to its

acquisition of Ralphs; (3) FSI would be entitled to make an

election under section 338(h)(10) with respect to the Ralphs

transaction; and (4) any such elections would not adversely

affect certain rulings that the IRS was expected to issue with

respect to whether the merger of Allied and Federated32 consti-

tuted a reorganization under section 368(a)(1)(G).




     32
          See supra note 27.
                               - 53 -

     The proposed tax election agreement stated that FSI agreed

to make an election under section 338(h)(10) if (1) the section

338(h)(10) rulings that the IRS issued were “favorable” and

(2) RHC determined to make an election under section 338(a) and

(h)(10).   FSI agreed to make that election whether or not the

section 382/384 rulings that FSI and New Federated (as successor

to Federated) requested from the IRS were “favorable”.

     The January 1992 proposed FSI chapter 11 plan was accepted

in writing by each of the creditors and equity security holders

whose acceptance was required under the Bankruptcy Code.   On

January 10, 1992, the Ohio U.S. Bankruptcy Court confirmed the

January 1992 proposed FSI chapter 11 plan.   (We shall refer to

the January 1992 proposed FSI chapter 11 plan as confirmed by the

Ohio U.S. Bankruptcy Court as the confirmed FSI chapter 11 plan.)

The effective date of the confirmed FSI chapter 11 plan was

February 2, 1992.33   On January 10, 1992, the Ohio U.S. Bank-

     33
      On Feb. 2, 1992, the proposed final indemnification agree-
ment became effective. Ralphs and RHC, or their successors, made
all payments totaling $10 million required by that agreement.
Ralphs, RHC, or their successors claimed deductions for their
respective payments in their respective tax returns for the
taxable years in which they made any such payments. In the
notice of deficiency for its taxable years ended Jan. 31, 1993,
Jan. 30, 1994, Jan. 28, 1995, and June 14, 1995, that respondent
issued to petitioner RGC on July 11, 2006, respondent determined
that if a valid election under sec. 338(h)(10) had been made with
respect to the Ralphs transaction, the payments made under the
final indemnification agreement would have been assumed or
contingent liabilities and therefore would not have been deduct-
ible for the year of payment. Petitioner RGC did not contest
                                                   (continued...)
                                - 54 -

ruptcy Court also confirmed the January 1992 proposed Allied

chapter 11 plan.     (We shall refer to the January 1992 proposed

Allied chapter 11 plan as confirmed by the Ohio U.S. Bankruptcy

Court as the confirmed Allied chapter 11 plan.)     The effective

date of the confirmed Allied chapter 11 plan was February 4,

1992.

     The Ohio U.S. Bankruptcy Court stated in pertinent part in

its order confirming the January 1992 proposed FSI chapter 11

plan (Ohio U.S. Bankruptcy Court’s order) the following with

respect to its confirmation of that proposed plan:

          C. The provisions of the Plan shall bind the
     [FSI] Debtors, the Reorganized Debtors and all credi-
     tors and equity security holders of any of the [FSI]
     Debtors, whether or not the respective claims or inter-
     ests of such creditors or equity security holders are
     impaired under the Plan, whether or not such creditors
     and equity security holders have accepted the Plan, and
     whether or not such creditors and equity security
     holders have filed proofs of claim of interest or are
     deemed to have filed proofs of claim of interest.

          D. Except as otherwise provided in the Plan or
     this Order, on and after the Confirmation date:

                  (1) All entities which have held, currently
             hold or may hold a debt, claim, other liability or
             interest against any [FSI] Debtor that would be
             discharged, upon Confirmation of the Plan and the
             Effective Date but for the provisions of section
             1141(d)(3) of the Bankruptcy Code and Section
             VI.G.1 of the Plan are permanently enjoined from
             taking any of the following actions on account of
             such debt, claim, liability, interest or right:
             (a) commencing or continuing in any manner any

        33
      (...continued)
that determination in the petition that it filed with the Court.
                        - 55 -

     action or other proceeding on account of such
     claim against property which is to be distributed
     under Section IV, V, or VI of the Plan, other than
     to enforce any right to distribution with respect
     to such property under the Plan; (b) enforcing,
     attaching, collecting or recovering in any manner
     any judgment, award, decree, or order against any
     property to be distributed to creditors under
     Section IV, V, or VI of the Plan, other than as
     permitted under subparagraph (a) above; and
     (c) creating, perfecting or enforcing any lien or
     encumbrance against any property to be distributed
     under section IV, V, or VI of the Plan, other than
     as permitted by the Plan.

          (2) All non-Debtor entities and individuals
     are permanently enjoined from commencing or con-
     tinuing in any manner, or otherwise prosecuting,
     any action or proceeding, whether directly, deri-
     vatively or otherwise, on account of or respecting
     any claim, debt, right, cause of action, or lia-
     bility that is released or to be released pursuant
     to the Comprehensive Settlement Agreement; pro-
     vided, however, that this injunction will not
     prevent any creditor (other than a Consenting
     Additional Party) of any [FSI] Debtor whose claim
     against a [FSI] Debtor is guaranteed by a third-
     party non-Debtor from prosecuting any direct claim
     against such third-party non-Debtor under any such
     guaranty.

The foregoing injunction shall apply to the holder of a
debt, claim or interest, whether or not a proof of
claim was Filed or deemed Filed, whether such claim was
allowed, whether or not the holder of such claim ac-
cepted the Plan, and whether or not the right to pay-
ment was reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undis-
puted, legal, equitable, secured, or unsecured. Any
person injured by any willful violation of this injunc-
tion shall recover actual damages, including costs and
attorneys’ fees, and, in appropriate circumstances, may
recover punitive damages from the willful violator.
                             - 56 -

     In the Ohio U.S. Bankruptcy Court’s order, that court

determined that the equity value of Ralphs was between $550

million and $637 million.

     As set forth in the January 1992 proposed FSI chapter 11

plan and in the Ohio U.S. Bankruptcy Court’s order, after the

confirmation of that proposed plan EJDC, Bank of Montreal,

Paribas, and Campeau, as the parties that filed creditor claims

against the FSI debtors, were enjoined from further asserting any

of the respective claims that they had asserted in the FSI

chapter 11 proceedings.

     After the Ohio U.S. Bankruptcy Court confirmed the January

1992 proposed chapter 11 plans, the FSI debtors and the Al-

lied/Federated debtors took steps to comply with the requirements

of the confirmed FSI chapter 11 plan and the confirmed Allied

chapter 11 plan, respectively.

     Immediately before the Ralphs transaction was effected, the

primary assets of Holdings III consisted of:   (1) All of the

outstanding common stock of Holdings II, the assets of which

included directly or indirectly the common stock and assets of

Allied, Holdings, Federated, and their respective subsidiaries,

(2) 83.75 percent of the outstanding common stock of Ralphs,

(3) the Allied note, and (4) the Federated note.

     The FSI consolidated group filed Form 1120 for its taxable

year ended January 31, 1993 (FSI consolidated group 1/31/93
                              - 57 -

consolidated return).   The FSI consolidated group attached to

that return a consolidated balance sheet in which it reported,

based on book value, the following total assets and total liabil-

ities as of the beginning of that taxable year (i.e., February 1,

1992) of that group and of certain of its members:


         Company/Group          Total Assets1    Total Liabilities
   FSI consolidated group      $11,471,163,367    $14,460,193,630
   FSI                             227,757,850      1,513,035,371
   Holdings III                    180,293,905        179,775,064
   Holdings II                     470,188,023        471,458,182
   Holdings                            957,957            872,978
   Federated                     5,979,262,404      6,873,748,518
   Allied                        3,060,396,285      3,719,114,874
   Ralphs                        1,357,571,286      1,414,776,300
     1
       The term “Total Assets” does not include any amount repre-
senting the value of intangible assets. In the consolidated
balance sheet that the FSI consolidated group attached to the FSI
consolidated group 1/31/93 consolidated return, line 13A, “INTAN-
GIBLE ASSETS”, was left blank for each member of that consoli-
dated group.

     On January 29, 1992, Jan Charles Gray (Mr. Gray), an officer

of Ralphs, incorporated RHC under the laws of Delaware.   On

February 2, 1992, Mr. Gray approved a resolution that provided:

     RESOLVED FURTHER, that the fair consideration for such
     issuance of the common stock of the Corporation [RHC]
     is the contribution by Allied Stores Corporation and
     Federated Holdings III, Inc. of all of the issued and
     outstanding common stock of Ralphs Grocery Company;

     On February 3, 1992, Allied, Holdings III, and RHC entered

into an agreement entitled “CONTRIBUTION AND SUBSCRIPTION AGREE-

MENT”.   That agreement provided in pertinent part:

          D. Allied, Holdings III, and Ralphs Holdings
     desire that the Holdings III Contributed Shares and the
                              - 58 -

     Allied Contributed Shares be contributed to Ralphs
     Holdings, in each case in exchange for the issuance to
     Holdings III and Allied of the Ralphs Holding Common
     Stock, such that immediately after giving effect
     thereto Ralphs Holding will own all of the issued and
     outstanding shares of Ralphs Common Stock and Allied
     and Holdings III together will own all of the issued
     and outstanding shares of Ralphs Holding Common Stock
     in the same respective proportion as they together
     owned all of the issued and outstanding shares of
     Ralphs Common Stock immediately prior to giving effect
     thereto.

          NOW, THEREFORE, the parties hereto hereby agree as
     follows:

          1. Holdings III hereby contributes the Holdings
     III Contributed Shares to Ralphs Holding in exchange
     for the issuance to Holdings III of 27,758,527 shares
     of Ralphs Holding Common Stock (“Holdings III Ralphs
     Holding Shares”), and Ralphs Holding hereby accepts the
     transfer of the Holdings III Contributed Shares in full
     payment of the Holdings III Ralphs Holding Shares.

          2. Allied hereby contributes the Allied Contrib-
     uted Shares to Ralphs Holding in exchange for the
     issuance to Allied of 5,384,330 shares of Ralphs Hold-
     ing Common Stock (the “Allied Ralphs Holding Shares”),
     and Ralphs Holding hereby accepts the transfer of the
     Allied Contributed Shares in full payment of Allied
     Holding Shares.

     On February 3, 1992, pursuant to the confirmed FSI chapter

11 plan and the confirmed Allied chapter 11 plan, respectively,

Holdings III and Allied transferred to RHC the respective out-

standing common stock of Ralphs that they owned (i.e., 83.75

percent and 16.25 percent, respectively).   Pursuant to those

confirmed plans, RHC transferred to Holdings III and Allied 83.75

percent and 16.25 percent, respectively, of its outstanding

common stock.   As a result of those transfers, RHC acquired 100
                              - 59 -

percent of the outstanding common stock of Ralphs, which was the

only class of voting stock of Ralphs and which accounted for over

80 percent of the total value of all of the stock of Ralphs that

was outstanding on February 3, 1992.   After the Ralphs transac-

tion, RHC’s only asset was the common stock of Ralphs that it

owned.34

     On February 3, 1992, as required by the confirmed FSI

chapter 11 plan, Holdings III transferred the stock of RHC that

it had received so that the following creditors of FSI owned the

following approximate percentages of the outstanding common stock

of RHC:

                              Percentage of Outstanding
             FSI Creditor         Common Stock of RHC
           EJDC                          60.4
           Campeau                       12.8
           Bank of Montreal               5.3
           Paribas                        5.3

     Holdings III did not transfer to FSI any stock or assets of

Ralphs, RHC, Holdings, Holdings II, Allied, Federated, or any of

their subsidiaries.   FSI did not receive the Allied note or the

Federated note from Holdings III.

     Except for the common stock of Ralphs that it received from

Allied as part of the Ralphs transaction, RHC did not receive any


     34
      On Feb. 3, 1992, RHC and Ralphs entered into an agreement
under which RHC agreed to perform accounting, advisory, capital
raising, and other services for Ralphs in exchange for a fee
equal to the direct and indirect costs to RHC of performing those
services.
                              - 60 -

stock or assets of Holdings, Holdings II, Allied, Federated, or

any of their subsidiaries.   Nor did RHC receive from Holdings III

the Allied note or the Federated note.

     Neither FSI nor RHC received any of the outstanding pre-

ferred stock of Ralphs as part of the Ralphs transaction.

     On February 3, 1992, as required by the confirmed Allied

chapter 11 plan and pursuant to a certain written, binding

agreement, Allied transferred the common stock of RHC that it had

received so that the following entities owned the following

approximate percentages of the outstanding common stock of RHC:

                              Percentage of Outstanding
                Entity           Common Stock of RHC
           Bank of Montreal              4.8
           Paribas                       4.8
                  1
           Allied                        6.6
     1
       As discussed below, on Feb. 4, 1992, pursuant to the
confirmed Allied chapter 11 plan, Allied and Federated merged
into a single entity known as New Federated.

     The distribution of the RHC stock to EJDC, Bank of Montreal,

Paribas, and Campeau as required by the confirmed FSI chapter 11

plan and the confirmed Allied chapter 11 plan was not pro rata

with respect to the respective amounts of the respective claims

asserted by creditors and was not pro rata with respect to the

status of those creditors as secured or unsecured creditors.

     Pursuant to the confirmed FSI chapter 11 plan, Holdings III

received with respect to its interest as the sole stockholder of

Holdings II any cash remaining after Holdings II paid certain
                               - 61 -

administrative claims and priority claims against it and made all

payments required to be made under that plan to certain of its

unsecured creditors.    Holdings III distributed that cash to FSI

for distribution pursuant to the confirmed FSI chapter 11 plan.

     Under the confirmed FSI chapter 11 plan, no property was

distributed to the following companies with respect to their

respective interests:   (1) FSI did not receive any property with

respect to its interest as the sole stockholder of Holdings III;

(2) Holdings did not receive any property with respect to its

interest as the sole stockholder of Federated; and (3) Holdings

II did not receive any property with respect to its interest as

the sole stockholder of Allied or with respect to its interest as

a stockholder of Holdings.

     On February 4, 1992, pursuant to the confirmed Allied

chapter 11 plan, Allied and Federated merged into a single entity

known as New Federated.   As part of that merger, the operating

assets of Allied’s subsidiaries were transferred to New Feder-

ated.   After the merger of Allied and Federated, all of their

respective stock was canceled, and the stock of New Federated was

issued to the respective creditors of the Allied/Federated

debtors.   For purposes of the distribution of the stock of New

Federated pursuant to the confirmed Allied chapter 11 plan, the

value of New Federated was estimated to be approximately

$2,014,700,000 and the value of the New Federated common stock
                              - 62 -

that was distributed to creditors of the Allied/Federated debtors

was estimated to be $25 per share.     The distribution of the stock

of New Federated was not pro rata with respect to the respective

amounts of the respective claims asserted by creditors and was

not pro rata with respect to the status of those creditors as

secured or unsecured creditors.

     Pursuant to the confirmed Allied chapter 11 plan, Holdings

III received 816,000 shares of common stock of New Federated with

respect to its claim against Federated under the Federated Note.

As required by the confirmed FSI chapter 11 plan, Holdings III

(1) distributed 588,000 of those shares in satisfaction of

general, unsecured creditor claims against FSI and Holdings III

and (2) sold the remaining 228,000 shares to provide cash to FSI.

No other property was distributed to or retained by Holdings III

with respect to its claim against Federated under the Federated

note.   Pursuant to the confirmed Allied chapter 11 plan, Holdings

III contributed to Allied its claim against Allied under the

Allied note.   No property was distributed to or retained by

Holdings III on account of that claim against Allied.

     On January 29, 1992, the same date on which Mr. Gray incor-

porated RHC, Ralphs issued an information statement (Ralphs

information statement) to the persons who owned preferred stock

of Ralphs and the persons who held certain rights under a certain

equity appreciation rights plan (EAR plan) that Ralphs had
                               - 63 -

instituted in 1988.35   Ralphs attached the Ralphs information

statement to a memorandum from Byron Allumbaugh, the chairman and

the chief executive officer of Ralphs, that was addressed to all

the officers of Ralphs.   That memorandum stated:

          Enclosed for your review is an Information State-
     ment relating to the treatment of the outstanding
     Series A and Series B Preferred Stock (“Preferred
     Stock”) of Ralphs Grocery Company and the Equity Rights
     outstanding under the Ralphs Grocery Company 1988
     Equity Appreciation Rights Plan in connection with the
     consummation of the plan of reorganization of Federated
     Stores, Inc., which is expected to occur February 3,
     1992. The Information Statement describes the planned
     redemption of your Preferred Stock, as well as certain
     proposed amendments to the Equity Appreciation Rights
     Plan and your individual Equity Rights Agreements
     negotiated by Ralphs.

           Please review the Information Statement carefully.
     It describes the salient differences between the cur-
     rent provisions of the Equity Appreciation Rights Plan
     and Equity Rights Agreements and the proposed amend-
     ments to be adopted with your consent. The Information
     Statement also summarizes the terms of a Nonqualified
     Stock Option Plan to be adopted by Ralphs’ new parent
     company. As you know, it is proposed that each of you,
     as well as certain other key employees of Ralphs, will
     be granted options to purchase common stock of the
     parent company as described in the Information State-
     ment.

          Patrick Collins [one of the directors of Ralphs],
     Jan Charles Gray [Ralphs’ senior vice president and
     general counsel], Alan Reed [Ralphs’ chief financial
     officer] and I have spent many months considering and
     consulting with counsel and others concerning the
     proposed amendments to the Equity Appreciation Rights
     Plan, as well as possible alternatives. We believe the


     35
      The EAR plan was one of several separate executive compen-
sation arrangements that Ralphs had instituted. The participants
in the EAR plan had the right to a percentage of the increase in
the appraised value of Ralphs over time.
                             - 64 -

     amendments resolve fairly several issues under the Plan
     and, when combined with the grant of stock options,
     represents a very attractive ongoing incentive package.
     On this basis, Pat, Jan, Alan and I intend to approve
     the proposal and we urge each of you to do the same.

     The Ralphs information statement described the material

changes to the EAR plan that would be effected by the proposed

amendments to that plan, as described in that statement.   The

proposed amendments to the EAR plan did not require the redemp-

tion of any outstanding preferred stock of Ralphs.

     The Ralphs information statement described the approval

necessary to make the proposed amendments to the EAR plan as

follows:

                        APPROVAL REQUIRED

          The Amended Plan will become effective as of
     January 31, 1992 only if it is unanimously approved in
     writing by the holders of the Equity Rights. Attached
     as Annex C to this Information Statement is a form of
     Consent of Equity Rights Holder by which the holders
     are requested to evidence their approval of the Amended
     Plan and of the related First Amendment (attached
     hereto as Annex B) to the Agreement.

          To be effective, all such consents must be com-
     pleted, signed and returned to Jan Charles Gray, Esq.,
     General Counsel of Ralphs, on or before the close of
     business on January 31, 1992. In addition, each Equity
     Rights holder also must complete, sign and return the
     extra counterpart of the First Amendment to the Agree-
     ment enclosed herewith. (Equity Rights holders may wish
     to keep a copy of their consent and the First Amendment
     as returned to Ralphs.)

          The holders of Equity Rights are not required to
     consent to the adoption of the Amended Plan; however,
     the consequences of failing to do so are uncertain.
                               - 65 -

     The Ralphs information statement also discussed the proposed

redemption of the outstanding preferred stock of Ralphs.        As of

January 29, 1992, all of that preferred stock was owned by

management and key employees of Ralphs.       The Ralphs information

statement stated in pertinent part as follows with respect to

that proposed redemption:

          As the FSI plan for reorganization was being
     finalized, Ralphs’ senior management engaged in discus-
     sions and negotiations with respect to the treatment of
     the outstanding Preferred Stock and the outstanding
     Equity Rights in connection with the reorganization.
     Under the provisions of the Plan, the consummation of
     the FSI plan of reorganization and the resulting change
     in ownership of Ralphs’ outstanding common stock could
     possibly be deemed to constitute a “change in control”
     of Ralphs within the meaning of the Plan. As such, and
     as discussed below in more detail, the plan of reorga-
     nization had the potential to trigger an immediate cash
     payout obligation to the Equity Rights holders upon
     consummation of the plan of reorganization. To avoid
     this result, and to eliminate future charges to Ralphs’
     earnings for financial accounting purposes associated
     with the Plan, EJDC proposed certain modifications to
     the Plan designed to facilitate the FSI plan of reorga-
     nization while maintaining, to the extent practicable,
     the current benefits to the Equity Rights holders under
     the Plan. The proposed amendments to the Plan and the
     Agreements discussed below are the end result of these
     negotiations.

        *       *        *       *        *         *       *

                    REDEMPTION OF PREFERRED STOCK

          The Certificates of Designations (the “Certifi-
     cates”) setting forth the respective rights, prefer-
     ences and privileges of Ralphs’ outstanding Series A
     Preferred Stock and Series B Preferred Stock each
     provide for the mandatory redemption (i.e., repurchase)
     of the Preferred Stock in the event of a “change in
     control” as defined therein. The Certificates also
     permit Ralphs’ to redeem the Preferred Stock at any
                              - 66 -

     time upon five days prior notice to the Preferred Stock
     holders. It is unclear whether the change in ownership
     of Ralphs’ outstanding common stock that will result
     upon consummation of the FSI plan of reorganization
     would trigger a mandatory redemption of the Preferred
     Stock pursuant to the Certificates; in any event,
     however, Ralphs has agreed to redeem the Preferred
     Stock, subject to the consummation of the plan of
     reorganization of FSI, for the original price paid for
     the Preferred Stock of $10 per share in cash, or a
     total of $3 million.

          This Information statement will serve as the
     requisite notice of redemption under the Certificates.
     Please be advised, therefore, that all of the outstand-
     ing shares of Preferred Stock will be redeemed by
     Ralphs on or about February 5, 1992 (the “Redemption
     Date”), subject to the prior consummation of the plan
     of reorganization of FSI.

          All shares of Preferred Stock will be redeemed, if
     any are redeemed. Upon redemption, each holder of
     Preferred Stock will receive from Ralphs the Redemption
     Price of $10 per share. On or after the Redemption
     Date, a holder of Preferred Stock will not have any
     rights as such holder other than the right to receive
     the redemption price upon surrender of the certificates
     evidencing his or her Preferred Stock.

     The Ralphs information statement did not indicate that

the redemption of the preferred stock of Ralphs was required or

prohibited by the confirmed FSI chapter 11 plan or that any such

redemption was part of or provided for in that plan.   The con-

firmed FSI chapter 11 plan contemplated that the preferred stock

of Ralphs would be redeemed over the period 1992 to 1998, as

specified in the terms of that preferred stock at the time that

stock was issued.   The confirmed FSI chapter 11 plan stated in

pertinent part as follows with respect to any redemption of the

preferred stock:
                                  - 67 -

          Ralphs may redeem at its option the shares of
     Ralphs Preferred Stock held by any holder, at any time
     in whole or in part, at the Initial Purchase Price.

          *         *       *       *       *       *       *

          The Ralphs Preferred Stock has no voting rights
     and may not be pledged or transferred except by the
     laws of descent and distribution. In the event Ralphs
     is subjected to a “change in control” (as defined in
     Ralphs’ certificate of incorporation, as amended), all
     outstanding shares of Ralphs Preferred Stock will be
     redeemed at the Initial Purchase Price. The change in
     ownership of Ralphs Common Stock that will occur pursu-
     ant to the Plan may trigger the change in control
     provision with respect to the Ralphs Preferred Stock,
     thereby requiring redemption of the outstanding shares.

     On February 2, 1992, an attorney with Morrison & Foerster,

attorneys for FSI, sent a letter to the board of directors of

Ralphs.       In that letter, the attorney stated his opinion that

“under subsection 4.20 of the indenture dated as of August 26,

1988 between Ralphs and the United States Trust Company of New

York as trustee with respect to Ralphs 14 percent Senior Subordi-

nated Debentures due 2000 (the “Indenture”)” the Ralphs transac-

tion would not result in a “change of control”.

     Each of the holders of rights under the EAR plan acknowl-

edged having read and received the Ralphs information statement

and consented to the amendments to the EAR Plan that were de-

scribed in that information statement.
                              - 68 -

     On February 3, 1992, EJDC, Bank of Montreal, Paribas, Camdev

Properties, Inc.,36 Allied, and FSI,37 as the stockholders of

RHC, elected directors of RHC (RHC board of directors).   On that

date, the RHC board of directors met via telephonic conference.

At that meeting, the RHC board of directors, acting on behalf of

RHC as the sole common stockholder of Ralphs, elected new direc-

tors of Ralphs (Ralphs board of directors).

     On February 3, 1992, the Ralphs board of directors met via

telephonic conference.   At that meeting, the Ralphs board of

directors approved resolutions (1) ratifying and approving all of

the actions of and resolutions approved by the prior board of

directors of Ralphs with respect to the confirmed FSI chapter 11

plan, including the issuance of the Ralphs information statement,

and authorizing the officers and directors of Ralphs to take all

necessary actions to effect the transactions required by the

confirmed FSI chapter 11 plan and (2) calling for the redemption




     36
      Camdev Properties, Inc., which was an assignee of Campeau,
received approximately 12 percent of the total outstanding common
stock of RHC pursuant to the confirmed FSI chapter 11 plan.
     37
      As discussed above, under the confirmed FSI chapter 11
plan, Holdings III distributed to FSI a portion (i.e., 0.8
percent) of the outstanding common stock of RHC that was to be
distributed to Campeau for subsequent sale for the purpose of
satisfying certain obligations and expenses arising under that
plan. To the extent FSI did not sell any portion of that stock,
the confirmed FSI chapter 11 plan required that FSI distribute
that portion to Campeau.
                             - 69 -

on February 3, 1992, of all of the preferred stock of Ralphs.    On

February 3, 1992, the RHC board of directors passed a resolution

approving the decision of the Ralphs board of directors to redeem

all of the outstanding preferred stock of Ralphs.

     Neither the Ralphs information statement nor the minutes of

the respective board meetings of the Ralphs board of directors

and the RHC board of directors indicated whether or not the $3

million required to redeem all of the outstanding preferred stock

was to be deposited into an escrow account.

     No mention was made in the confirmed FSI chapter 11 plan,

the confirmed Allied chapter 11 plan, the FSI disclosure state-

ment, or the Allied disclosure statement of any negotiations

among the FSI debtors, the Allied/Federated debtors, Ralphs, RHC,

EJDC, Bank of Montreal, Paribas, or Campeau with respect to a

redemption of the outstanding preferred stock of Ralphs.   Nor did

any of those documents discuss a planned redemption of that

stock.

     No discussion appeared in the comprehensive settlement

agreement, the proposed initial indemnification agreement, the

proposed final indemnification agreement, or the proposed tax

election agreement regarding a planned redemption of the out-

standing preferred stock of Ralphs.

     Form 10-K, ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934, that Ralphs filed in May 1992
                              - 70 -

with the U.S. Securities and Exchange Commission (SEC) for its

fiscal year ended February 2, 1992 (1992 Form 10-K) stated that

all of the preferred stock of Ralphs remained outstanding as of

February 2, 1992, the last day of Ralphs’ fiscal year, and that

that stock was subsequently redeemed for $3 million.    In a

section titled “Ownership of the Company”, the 1992 Form 10-K

stated that “Since February 3, 1992 (the “Transfer Date”), all of

the outstanding capital stock of the Company, consisting of 100

shares of common stock, par value $1.00 per share (the “Common

Stock”), has been held by Ralphs Supermarkets, Inc. (the “Holding

Company”), a Delaware Corporation.”

     Ralphs attached a balance sheet to the 1992 Form 10-K.

Ralphs reported in that balance sheet the outstanding preferred

stock as a $3 million liability, and not as stockholders equity,

as of the end of each of its fiscal years ended February 2, 1991,

and February 3, 1992.   The respective amounts of total assets and

total liabilities as of February 2, 1992, that Ralphs reported in

the balance sheet that it attached to the 1992 Form 10-K were

equal to the respective amounts of total assets and total liabil-

ities that the FSI consolidated group reported in the balance

sheets that the FSI consolidated group attached to the

FSI consolidated group 1/31/93 consolidated return.38


     38
      In the respective consolidated balance sheets that the FSI
consolidated group attached to the FSI consolidated group 1/31/91
                                                   (continued...)
                             - 71 -

     On July 13, 1992, the Ralphs board of directors held a

meeting via telephonic conference.    At that meeting, the Ralphs

board of directors adopted a resolution declaring that no pre-

ferred stock of Ralphs remained outstanding, prohibiting the

issuance of any preferred stock in the future, and eliminating

all references to preferred stock in Ralphs’ certificate of

incorporation.

     Pursuant to the confirmed FSI chapter 11 plan, on February

3, 1992, RHC, Ralphs, Allied, Bank of Montreal, Paribas, EJDC,

Camdev Properties, Inc., and FSI entered into a certain registra-

tion rights agreement as part of the Ralphs transaction.   RHC

granted to its stockholders under that agreement certain regis-

tration rights that permitted those stockholders to participate

in certain registration offerings that RHC might make of its

stock and allowed them to demand that RHC register the stock that

those stockholders received pursuant to the confirmed FSI chapter

11 plan and the confirmed Allied chapter 11 plan.




     38
      (...continued)
consolidated return and the FSI consolidated group 1/31/93
consolidated return, line 22A, “CAPITAL STOCK - PREFERRED”, was
blank with respect to Ralphs. That is because, unlike the
financial statement balance sheets that Ralphs attached to the
1992 Form 10-K, there was no line item for “Redeemable preferred
stock” in those consolidated balance sheets.
                              - 72 -

     Within three months after the Ralphs transaction was ef-

fected, RSI (i.e., Ralphs and Ralphs Supermarkets, Inc.)39 devel-

oped a recapitalization plan for those two companies.   As a

result, RSI filed a registration statement with the SEC with

respect to a proposed public offering of the shares of common

stock of RSI.   Ralphs filed a registration statement with the SEC

with respect to a proposed offering of $300 million of Ralphs’

senior subordinated notes.

     On January 21, 1993, Holdings III dissolved pursuant to the

laws of Delaware.   The certificate of dissolution was signed by

FSI as the sole stockholder of Holdings III.   On the same date,

Holdings, Holdings II, and CPI also dissolved.    On July 19, 1993,

FSI dissolved pursuant to the laws of Delaware.   The respective

common stock of Holdings III and FSI was canceled upon the

dissolution of each of those companies.   At no time did Holdings

III receive any of its own stock from FSI.

     In an order dated June 30, 1993, the Ohio U.S. Bankruptcy

Court found that the estate of each of the FSI debtors had been

fully administered, granted in its entirety FSI’s motion for a

final decree, and entered a final decree closing the FSI chapter

11 proceedings.




     39
      In April 1992, RHC changed its name to Ralphs Supermar-
kets, Inc.
                              - 73 -

     In an order dated June 25, 2001, the Ohio U.S. Bankruptcy

Court found that the respective estates of the Allied debtors and

the Federated debtors had been fully administered and entered a

final decree closing the Allied chapter 11 proceedings.

     Around October 12, 1993, FSI filed the FSI consolidated

group 1/31/93 consolidated return.     Ralphs was a member of the

FSI consolidated group during the period February 1 to 3, 1992.

     The FSI consolidated group attached Form 8023, Corporate

Qualified Stock Purchase Elections (Form 8023), to the FSI

consolidated group 1/31/93 consolidated return.     In that form,

FSI (1) identified (a) itself as the common parent of the selling

group, (b) “Ralphs Supermarkets, Inc.” as the purchasing corpora-

tion, and (c) “Ralphs Grocery Company” as the target corporation

and (2) checked the box “Joint election under section

338(h)(10)”.   The FSI consolidated group also attached to the FSI

consolidated group 1/31/93 consolidated return a “Schedule

Required Under Regs. 1.338-1T(e)(1) as to Includable Affected

Targets”.   In that schedule, FSI identified “Ralphs Grocery

Company” as the includible target and reported that the percent-

age of Ralphs stock owned was 100 percent.     FSI did not attach to

the FSI consolidated group 1/31/93 consolidated return a copy of

the confirmed FSI chapter 11 plan.     FSI also did not attach to

that return a statement executed under penalties of perjury that
                               - 74 -

showed the purposes of or that detailed all the transactions

incident or pursuant to the confirmed FSI chapter 11 plan.

     FSI reported in the FSI consolidated group 1/31/93 consoli-

dated return that $475 million of consideration was paid in the

Ralphs transaction, that Ralphs had total liabilities of

$1,164,390,700, and that Ralphs was subject to an election under

section 338(h)(10).    FSI identified all of the $475 million of

consideration that it reported as paid in the Ralphs transaction

as “Debt of Federated Stores, Inc., and Subsidiaries held by

creditors”.    FSI did not report in the FSI consolidated group

1/31/93 consolidated return any amount of “cash” or “purchase

money debt” as part of the consideration paid in the Ralphs

transaction.

     The FSI consolidated group attached Schedule D, Capital

Gains and Losses (1/31/93 Schedule D), to the FSI consolidated

group 1/31/93 consolidated return.      In that schedule, FSI re-

ported with respect to the transaction in which Federated incor-

porated Ralphs long-term capital gain of $492,618,173 (i.e., the

Ralphs deferred intercompany gain) and ordinary income of

$81,723,870.    In addition, FSI reported in that schedule with

respect to the Ralphs transaction a gross sale price of

$1,639,390,700, a cost or other basis, plus expense of sale, of

$1,303,501,700, and a long-term capital gain of $335,889,000 that
                               - 75 -

resulted from the election under section 338(h)(10) that FSI made

with respect to the Ralphs transaction.40

     The FSI consolidated group owed no Federal tax for the

taxable year ended January 31, 1993, except for the alternative

minimum tax, certain recapture taxes, and certain environmental

taxes.    Taking into account the gain reported on the 1/31/93

Schedule D, FSI showed gain in excess of $900 million resulting

from the Ralphs deferred intercompany gain and the election under

section 338(h)(10) that it made with respect to the Ralphs

transaction.    That gain was offset by a net operating loss

deduction available to the FSI consolidated group for the taxable

year ended January 31, 1993.

     RSI filed Form 1120 for its consolidated group, which

included Ralphs, for each of the taxable years ended January 31,

1993 (RSI consolidated group 1/31/93 consolidated return),

January 30, 1994, January 28, 1995, and June 14, 1995.    RSI filed

an amended consolidated group return for the taxable year ended

January 31, 1993 (RSI consolidated group 1/31/93 amended consoli-

dated return), which the IRS received around November 18, 1993,

and treated as filed on that date.


     40
      FSI also attached to the FSI consolidated group 1/31/93
consolidated return Form 8594, Asset Acquisition Statement. In
that form, FSI reported a total sale price and assets transferred
of $1,639,390,700 with respect to the Ralphs transaction.
                              - 76 -

     In the respective RSI consolidated returns filed for the

taxable years ended January 31, 1993, January 30, 1994, January

28, 1995, and June 14, 1995, the Ralphs transaction was treated

as a purchase under section 338(h)(3) because a timely election

under section 338(h)(10) had been made.

     RSI attached Form 8023 to both the RSI consolidated group

1/31/93 consolidated return and the RSI consolidated group

1/31/93 amended consolidated return.   In that form, RSI

(1) identified itself as the purchasing corporation and “Ralphs

Grocery Company” as the target corporation and (2) checked the

box “Joint election under section 338(h)(10)”.   RSI also attached

to the RSI consolidated group 1/31/93 consolidated return a

“Schedule Required Under Regs. 1.338-1T(e)(1) as to Includable

Affected Targets”.   In that schedule, RSI identified “Ralphs

Grocery Company” as the includible target and reported that the

percentage of Ralphs stock owned was 100 percent.   RSI did not

attach to the RSI consolidated group 1/31/93 consolidated return

or the RSI consolidated group 1/31/93 amended consolidated return

a copy of the confirmed FSI chapter 11 plan.   RSI also did not

attach to either of those returns a statement executed under

penalties of perjury that showed the purposes of or that detailed

all the transactions incident or pursuant to the confirmed FSI

chapter 11 plan.
                               - 77 -

     RSI reported in the RSI consolidated group 1/31/93 consoli-

dated return that $475 million of consideration was paid in the

Ralphs transaction, that Ralphs had total liabilities of

$1,164,390,700, and that Ralphs was subject to an election under

section 338(h)(10).   RSI identified all of the $475 million of

consideration that it reported as paid in the Ralphs transaction

as “Debt of Federated Stores, Inc., and Subsidiaries held by

creditors”.   RSI did not report in the RSI consolidated group

1/31/93 consolidated return any amount of “cash” or “purchase

money debt” as part of the consideration paid.

     RSI attached Form 8594 to the RSI consolidated group 1/31/93

consolidated return and the RSI consolidated group 1/31/93

amended consolidated return.     In that form, RSI reported a total

sale price and assets transferred of $1,639,390,700.    In Form

8594, RSI allocated that sale price to certain classes of assets

as follows:

                   Asset Class          Amount
                    Class I           $36,800,000
                    Class II              -0-
                    Class III       1,006,964,727
                    Class IV          595,625,973

     In the RSI consolidated group 1/31/93 consolidated return

and the RSI consolidated group 1/31/93 amended consolidated

return, pursuant to section 13261(g)(2) and (3) of the Omnibus

Budget Reconciliation Act of 1993, Pub. L. 103-66, sec. 13261(g),
                                - 78 -

107 Stat. 540, RSI elected retroactive application of section

197, entitled “Amortization of Goodwill and Certain Other

Intangibles”.

     On June 14, 1995, Food 4 Less Holdings, Inc. (Food 4 Less),

acquired all of the outstanding common stock of RSI.    On the same

date, Food 4 Less merged Ralphs with and into RSI, with RSI as

the surviving corporation.    RSI changed its name after that

merger to Ralphs Grocery Company (RGC).41

     On March 10, 1998, Fred Meyer acquired all of the common

stock of Food 4 Less in a merger.    As a result of that merger,

Food 4 Less became a wholly owned subsidiary of Fred Meyer.

                              Discussion

     In their respective motions for partial summary judgment,

the parties ask us to decide whether RHC and FSI made a valid

joint election under section 338(h)(10) with respect to RHC’s

acquisition of all of the outstanding common stock of Ralphs from

Holdings III and Allied that took place as part of the Ralphs

transaction.    Before we address that issue, we shall briefly

summarize the Ralphs transaction that took place pursuant to the

confirmed FSI chapter 11 plan and the confirmed Allied chapter 11

plan.     In that transaction, RHC, a newly formed company, acquired

all of the outstanding common stock of Ralphs from Holdings III


     41
      RHC, RSI, and RGC are all the same entity, which is not
the same entity as Ralphs.
                                  - 79 -

and Allied, the respective owners of 83.75 percent and 16.25

percent of that outstanding stock.         In exchange for the respec-

tive Ralphs stock that RHC acquired from Holdings III and Allied,

RHC issued to those companies 83.75 percent and 16.25 percent,

respectively, of its outstanding common stock.        Thereafter,

(1) Holdings III distributed all of the outstanding RHC common

stock that it held to EJDC, Bank of Montreal, Paribas, and

Campeau,42 which were certain of FSI’s creditors, and (2) Allied

(a) distributed a portion (i.e., 9.65 percent) of the outstanding

RHC common stock that it held to Bank of Montreal and Paribas,

which were certain of Allied’s creditors, and (b) retained the

balance (i.e., 6.6 percent).43     After those distributions to the

respective creditors of FSI and Allied, those creditors owned the

following approximate percentages of the outstanding common stock

of RHC:

                                 Percentage of Outstanding
                     Owner          Common Stock of RHC
                 EJDC                       60.4
                 Campeau                    12.8
                 Bank Montreal              10.1
                 Paribas                    10.1



     42
          Campeau owned 100 percent of the outstanding stock of FSI.
     43
      As part of the confirmed Allied chapter 11 plan, Allied
merged with and into Federated, and the resulting company was
known as New Federated. As a result of that merger, New Feder-
ated held the assets of Allied, which included 6.6 percent of the
outstanding RHC common stock that Allied had retained under the
confirmed Allied chapter 11 plan.
                                - 80 -

     The parties agree that there are no genuine issues of

material fact44 and that summary adjudication is appropriate with

respect to the issue under section 338(h)(10) that the parties

ask us to decide in their respective motions for partial summary

judgment.     The parties also agree that (1) our resolution of the

issue under section 338(h)(10) depends on whether RHC’s acquisi-

tion of all of the outstanding common stock of Ralphs from

Holdings III and Allied constitutes a qualified stock purchase

under section 338(d)(3); (2) our resolution of that question

under section 338(d)(3) depends on whether that acquisition

constitutes a purchase under section 338(h)(3);45 and (3) our


     44
          See supra note 1.
     45
      Sec. 338(h)(3) defines the term “purchase” in pertinent
part as follows:

          SEC. 338(h). Definitions and Special Rules.--For
     purposes of this section [338]--

          *       *       *         *    *       *       *

                  (3) Purchase.--

                       (A) In general.--The term “purchase”
                  means any acquisition of stock, but only if--

                            (i) the basis of the stock in the
                       hands of the purchasing corporation is
                       not determined (I) in whole or in part
                       by reference to the adjusted basis of
                       such stock in the hands of the person
                       from whom acquired, * * * [and]

                            (ii) the stock is not acquired in
                       an exchange to which section 351, 354,
                                                      (continued...)
                                 - 81 -

resolution of that question under section 338(h)(3), and there-

fore our resolution of the question under section 338(d)(3),

depends on whether, as respondent maintains and petitioners

dispute, the Ralphs transaction constitutes a reorganization

under section 368(a)(1)(B), (C), or (G).     We thus address whether

the Ralphs transaction constitutes a reorganization under section

368(a)(1)(B), (C), or (G).46

     It is the position of respondent that RHC’s acquisition of

the outstanding common stock of Ralphs from Holdings III and



     45
          (...continued)
                        355, or 356 applies and is not acquired
                        in any other transaction described in
                        regulations in which the transferor does
                        not recognize the entire amount of the
                        gain or loss realized on the transaction
                        * * *

     Respondent argues, inter alia, that as part of the Ralphs
transaction stock was acquired in an exchange to which sec. 354
applies and that therefore RHC’s acquisition of the outstanding
common stock of Ralphs does not constitute a purchase because of
sec. 338(h)(3)(A)(ii). Sec. 354 applies only to a transaction
that qualifies as a reorganization under sec. 368(a)(1). Turnbow
v. Commissioner, 368 U.S. 337, 343 (1961). If we were to find
that the Ralphs transaction does not qualify as a reorganization
under sec. 368(a)(1)(B), (C), or (G), sec. 354 would not apply.
     46
      Our discussion is limited to the three types of reorgani-
zations on which respondent relies (i.e., the reorganizations
described in sec. 368(a)(1)(B), (C), and (G)) in support of
respondent’s position in respondent’s motion. The parties agree
that if the Ralphs transaction were to be treated as a reorgani-
zation qualifying under sec. 368(a)(1)(B), the target corporation
would be Ralphs. The parties also agree that if the Ralphs
transaction were to be treated as a reorganization qualifying
under sec. 368(a)(1)(C) or (G), the target corporation would be
Holdings III.
                                 - 82 -

Allied does not constitute a purchase under section 338(h)(3) and

therefore does not constitute a qualified stock purchase under

section 338(d)(3).     That is because, according to respondent, the

Ralphs transaction qualifies as a reorganization under section

368(a)(1)(B), (C), and (G), and consequently RHC has a carryover

basis under section 362 in the respective Ralphs common stock

that it received from Holdings III and Allied.       See sec.

338(h)(3)(A)(i)(I).47     Respondent does not dispute that if we

were to find that the Ralphs transaction does not qualify as a

reorganization under section 368(a)(1)(B), (C), or (G), RHC’s

acquisition of all of the outstanding common stock of Ralphs from

Holdings III and Allied would, as petitioners maintain, consti-

tute a purchase under section 338(h)(3) and a qualified stock

purchase under section 338(d)(3), and consequently RHC and FSI

would have made a valid joint election under section 338(h)(10)

with respect to that purchase.

     Section 368 sets forth certain statutory requirements in

order for a transaction to qualify as a reorganization under

section 368(a)(1)(B), (C), or (G).        See, e.g., sec. 368(a)(1)(B),

(C), (G), (2), (b).     In addition to those statutory requirements,

the courts have established certain nonstatutory requirements in

order for a transaction to qualify as a reorganization under any

of those provisions of that section.       One of those nonstatutory


     47
          See supra note 45.
                               - 83 -

requirements known as the continuity-of-interest requirement

mandates that “the taxpayer’s ownership interest in the prior

organization must continue in a meaningful fashion in the reorga-

nized enterprise.”    Paulsen v. Commissioner, 469 U.S. 131, 136

(1985); see LeTulle v. Scofield, 308 U.S. 415 (1940); Pinellas

Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462 (1933).

According to the Supreme Court of the United States (Supreme

Court), “this interest must be definite and material; [and] it

must represent a substantial part of the value of the thing

transferred.”    Helvering v. Minn. Tea Co., 296 U.S. 378, 385

(1935); see Paulsen v. Commissioner, supra; secs. 1.368-1(b),

1.368-2(b)(2), Income Tax Regs.   We limit ourselves to consider-

ation of the continuity-of-interest requirement.   That is because

our resolution of whether the Ralphs transaction satisfies that

requirement resolves the question of whether that transaction

constitutes a reorganization under section 368(a)(1)(B), (C), or

(G).

       For 1992, the year in which the Ralphs transaction occurred,

transitory ownership of stock in the acquiring corporation by the

transferor’s stockholders is to be disregarded in determining

whether the continuity-of-interest requirement is satisfied.48


       48
      Under regulations applicable to transactions occurring
after Jan. 28, 1998, the continuity-of-interest requirement is
satisfied regardless of whether the stockholders of the trans-
feror dispose of their stock in the acquiring company after those
                                                   (continued...)
                               - 84 -

See, e.g., Penrod v. Commissioner, 88 T.C. 1415, 1427 (1987);

Heintz v. Commissioner, 25 T.C. 132, 142-143 (1955).

     Respondent maintains that the continuity-of-interest re-

quirement would be satisfied with respect to the Ralphs transac-

tion if certain creditors of FSI49 were treated as equity owners

of FSI for purposes of the reorganization provisions on which

respondent relies.   In support of respondent’s argument that

those creditors should be treated as equity owners for those

purposes, respondent relies on Helvering v. Ala. Asphaltic

Limestone Co., 315 U.S. 179 (1942) (Alabama Asphaltic), which

respondent maintains “is squarely applicable in this case

[sic]”.50   According to respondent:


     48
      (...continued)
stockholders receive that stock.   See T.D. 8760, 1998-1 C.B. 803,
804.
     49
      Pursuant to the confirmed FSI chapter 11 plan, certain
creditors of FSI received 83.75 percent of all of the outstanding
common stock of RHC. See infra note 54. Thus, the parties focus
their arguments with respect to whether the Ralphs transaction
satisfies the continuity-of-interest requirement on the receipt
of certain RHC stock by certain creditors of FSI and do not focus
on the receipt of certain RHC stock by certain creditors of
Allied. We shall do the same.
     50
      It is respondent’s position that Congress’ enactment into
the Code of sec. 368(a)(1)(G) did not “change or eliminate the
fundamental stepping into the shoes principle of Alabama Asphal-
tic.” According to respondent:

     The law that was adopted as the “G” reorganization in
     1980 [Bankruptcy Tax Act of 1980, Pub. L. 96-589, sec.
     4, 94 Stat. 3401] specifically approved the application
     of Alabama Asphaltic and extended its principle to
                                                   (continued...)
                              - 85 -

     The [Supreme] Court’s rule stated in Alabama Asphaltic
     is simple and direct. A valid reorganization in which
     the stock of the newly-created entity is transferred to
     the creditors of a corporation rather than the stock-
     holders requires that: 1) the debtor corporation must
     be insolvent; and 2) the insolvent debtor corporation’s
     creditors must receive the stock in the entity pursuant
     to a reorganization plan. Alabama Asphaltic, 315 U.S.
     183-84. * * *

     Relying on what respondent calls the “simple and direct”

rule of Alabama Asphaltic, respondent concludes that

     the bankruptcy of FSI qualifies its creditors as equity
     holders for continuity of interest purposes. * * *
     Therefore, the distribution by Holdings III of 83.75
     percent of the stock of RHC to FSI’s creditors main-
     tains the qualification under the continuity of inter-
     est doctrine.

     Respondent acknowledges that under Alabama Asphaltic “the

creditors must take effective command over the insolvent * * *

corporation’s assets”.   According to respondent, such “effective

command”

     is vital to finding continuity of interest, and * * *
     is present in this case [sic]. * * * The creditors of
     FSI took overt steps to exert their control over its
     assets. FSI’s assets included the Ralphs stock. While


     50
      (...continued)
     creditors who had less than senior rights but who
     became post-bankruptcy shareholders. * * *

     Petitioners do not disagree with respondent’s statements
with respect to the effect of the enactment of sec. 368(a)(1)(G)
on the principles of Alabama Asphaltic. We thus address the only
issue with respect to the continuity-of-interest requirement that
respondent argues. As discussed below, that issue is whether
under Alabama Asphaltic we should treat certain creditors of FSI
as equity owners of FSI for purposes of determining whether the
continuity-of-interest requirement is satisfied in the Ralphs
transaction.
                              - 86 -

     Ralphs was not the bankrupt corporation, Ralphs stock
     was undeniably an asset of FSI, and was ultimately
     taken possession of by FSI’s creditors in the bank-
     ruptcy plan. [Citation omitted.]

     In support of respondent’s contention that “the creditors of

FSI took overt steps to exert their control over its [FSI’s]

assets”, respondent asserts that

     on the date that EJDC and the other creditors insti-
     tuted bankruptcy proceedings, they stepped into the
     shoes of Campeau and became the equity owners of FSI
     and of all that FSI owned. They thereby gained effec-
     tive command over the assets of FSI.

     Petitioners counter that the instant cases are materially

distinguishable from Alabama Asphaltic.51

     In Alabama Asphaltic,

     The old corporation [Alabama Rock Asphalt, Inc.] was a
     subsidiary of a corporation which was in receivership
     in 1929. Stockholders of the parent had financed the
     old corporation taking unsecured notes for their ad-
     vances. Maturity of the notes was approaching and not
     all of the noteholders would agree to take stock for
     their claims. Accordingly, a creditors’ committee was
     formed, late in 1929, and a plan of reorganization was
     proposed to which all the noteholders, except two,
     assented. The plan provided that a new corporation
     would be formed which would acquire all the assets of
     the old corporation. The stock of the new corporation,
     preferred and common, would be issued to the creditors
     in satisfaction of their claims. Pursuant to the plan,


     51
      Petitioners also maintain that the instant cases are
materially distinguishable from the cases decided after Helvering
v. Ala. Asphaltic Limestone Co., 315 U.S. 179 (1942), that have
found that case to be controlling in holding that certain credi-
tors involved in those cases should be treated as equity owners
for purposes of the continuity-of-interest requirement. (We
shall refer to those cases decided after Alabama Asphaltic that
have so held and that the parties cite as the Alabama Asphaltic
progeny.)
                             - 87 -

     involuntary bankruptcy proceedings were instituted in
     1930. * * * The bankruptcy trustee offered the [insol-
     vent corporation’s] assets for sale at public auction.
     They were bid in by the creditors’ committee for
     $150,000. * * * Thereafter, respondent [Alabama Asphal-
     tic Limestone Co.] was formed and acquired all the
     assets of the bankrupt corporation. It does not appear
     whether the acquisition was directly from the old
     corporation on assignment of the bid or from the com-
     mittee. Pursuant to the plan, respondent issued its
     stock to the creditors of the old corporation--over 95%
     to the noteholders and the balance to small creditors.
     * * *

Helvering v. Ala. Asphaltic Limestone Co., supra at 181-182.

     On the basis of the above-quoted facts, the Supreme Court

concluded in Alabama Asphaltic that the continuity-of-interest

requirement enunciated in cases like Pinellas Ice & Cold Storage

Co. v. Commissioner, 287 U.S. 462 (1933), and LeTulle v.

Scofield, 308 U.S. 415 (1940), was not satisfied

     since the old stockholders were eliminated by the plan,
     no portion whatever of their proprietary interest being
     preserved for them in the new corporation. And it is
     clear that the fact that the creditors were for the
     most part stockholders of the parent company does not
     bridge the gap. The equity interest in the parent is
     one step removed from the equity interest in the sub-
     sidiary. In any event, the stockholders of the parent
     were not granted participation in the plan qua stock-
     holders.

Helvering v. Ala. Asphaltic Limestone Co., supra at 183.

     Nonetheless, the Supreme Court concluded in Alabama Asphal-

tic on the facts there involved

     that it is immaterial that the transfer shifted the
     ownership of the equity in the property from the stock-
     holders to the creditors of the old corporation.
     Plainly, the old continuity of interest was broken.
     Technically, that did not occur in this proceeding
                             - 88 -

    until the judicial sale took place. For practical
    purposes, however, it took place not later than the
    time when the creditors took steps to enforce their
    demands against their insolvent debtor. In this case,
    that was the date of the institution of bankruptcy
    proceedings. From that time on, they had effective
    command over the disposition of the property. The full
    priority rule of Northern Pacific Ry. Co. v. Boyd, 228
    U.S. 482, applies to proceedings in bankruptcy as well
    as to equity receiverships.[52] It gives creditors,
    whether secured or unsecured, the right to exclude
    stockholders entirely from the reorganization plan when
    the debtor is insolvent. When the equity owners are
    excluded and the old creditors become the stockholders
    of the new corporation, it conforms to realities to
    date their equity ownership from the time when they
    invoked the processes of the law to enforce their
    rights of full priority. At that time they stepped
    into the shoes of the old stockholders. The sale “did
    nothing but recognize officially what had before been
    true in fact.” Helvering v. New Haven & S.L.R. Co.,
    121 F.2d 985, 987 [2d Cir. 1941].

          That conclusion involves no conflict with the
     principle of the Le Tulle case.[53] A bondholder inter

     52
      In N. Pac. Ry. Co. v. Boyd, 228 U.S. 482 (1913), the
Supreme Court held that a court-approved plan of reorganization
under which an insolvent corporation sold its assets to a new
corporation that the stockholders and certain bondholders of the
insolvent corporation owned did not serve to eliminate or defeat
the claim of an unsecured creditor of the insolvent corporation
who sought to enforce against the new corporation a judgment
against the insolvent corporation. The Supreme Court held that
the unsecured creditor’s interest was superior to the interest of
the stockholders of the insolvent corporation and that those
stockholders took their interest in the new corporation subject
to the claim of the unsecured creditor.
     53
      The “Le Tulle case” to which the Supreme Court referred is
LeTulle v. Scofield, 308 U.S. 415 (1940). In that case, the
Supreme Court held that there was no tax-free reorganization
where the transferor company transferred its assets in exchange
for cash and short-term notes of the transferee company. In so
holding, the Supreme Court concluded that, where the consider-
ation for the transfer consisted solely of the transferee’s
bonds, the transferor did not retain any proprietary interest in
                                                   (continued...)
                              - 89 -

     est in a solvent company plainly is not the equivalent
     of a proprietary interest, even though upon default the
     bondholders could retake the property transferred. The
     mere possibility of a proprietary interest is, of
     course, not its equivalent. But the determinative and
     controlling factors of the debtor’s insolvency and an
     effective command by the creditors over the property
     were absent in the Le Tulle case. [Citations omitted.]

Helvering v. Ala. Asphaltic Limestone Co., 315 U.S. at 183-184.

     The parties in the instant cases agree, and we conclude,

that it was material to the Supreme Court’s holding in Alabama

Asphaltic that the continuity-of-interest requirement was satis-

fied that the creditors “had effective command over the disposi-

tion of the property”, id. at 183, of the insolvent debtor

corporation.   A principal disagreement between the parties here

centers on the identity under Alabama Asphaltic of the insolvent

debtor corporation over whose property its creditors must have

such “effective command”.

     Petitioners argue that under Alabama Asphaltic (1) the

insolvent corporation over whose property its creditors must have

“effective command” must be the target corporation in the pur-

ported reorganization, and (2) the direct creditors of that

target corporation must receive the stock of the company that

acquired the stock of the insolvent target corporation or its

property.   According to petitioners, under Alabama Asphaltic the

continuity-of-interest requirement is not satisfied in the


     53
      (...continued)
the new company.
                               - 90 -

instant cases because (1) Ralphs, which the parties agree would

be the target in the case of a reorganization qualifying under

section 368(a)(1)(B), and Holdings III, which the parties agree

would be the target in the case of a reorganization qualifying

under section 368(a)(1)(C) or (G), were solvent at all times

during the chapter 11 proceedings, and (2) neither Ralphs nor

Holdings III had any creditors who received RHC stock in the

Ralphs transaction.54

     Respondent does not dispute (1) that Ralphs and Holdings III

were solvent at all times during the chapter 11 proceedings and

(2) that neither Ralphs nor Holdings III had any creditors who

received RHC stock in the Ralphs transaction.55   Respondent

argues instead that under Alabama Asphaltic (1) the insolvent

corporation over whose property its creditors must obtain “effec-

tive command” need not be the target corporation in the purported




     54
      Pursuant to the confirmed FSI chapter 11 plan, Campeau was
to receive 12.8 percent of the outstanding common stock of RHC.
However, 0.8 percent of the outstanding common stock of RHC that
Campeau was to receive was to be distributed to FSI pursuant to
that plan. FSI was required to sell that stock for the purpose
of satisfying certain obligations and expenses arising under the
confirmed FSI chapter 11 plan. To the extent FSI did not sell
any portion of the 0.8 percent of the outstanding common stock of
RHC that it received, FSI was required under that plan to dis-
tribute that portion to Campeau.
     55
          See supra note 54.
                              - 91 -

reorganization,56 and (2) the direct creditors of that target

corporation need not receive the stock of the company that

acquired the stock of the insolvent target corporation or its

property.   According to respondent, in determining whether the

continuity-of-interest requirement is satisfied in the Ralphs

transaction, it is appropriate and necessary under Alabama

Asphaltic to inquire (1) whether the creditors of the insolvent

FSI, which the parties agree would not be a target corporation in

the case of a reorganization qualifying under section

368(a)(1)(B), (C), or (G), “had effective command over the

disposition of the property [of FSI]”, Helvering v. Ala. Asphal-

tic Limestone Co., supra at 183, and (2) whether the creditors of

the insolvent FSI received the stock of RHC.   Respondent main-

tains that the parties’ agreed facts require affirmative answers

to the foregoing inquiries.

     We need not resolve the parties’ disputes over (1) whether

or not under Alabama Asphaltic the insolvent corporation over

whose property its creditors must have “effective command” must

be the target corporation in the purported reorganization and




     56
      Respondent cites no case, and we have found none, in which
a court has held Alabama Asphaltic to be controlling on the
question of whether creditors of an insolvent corporation are to
be treated as equity owners of that corporation for purposes of
the continuity-of-interest requirement where the insolvent
corporation (in the instant cases FSI) is not the target corpora-
tion in a purported reorganization.
                              - 92 -

(2) whether or not under that case the direct creditors of that

insolvent target corporation must receive the stock of the

company that acquired the stock of that target corporation or its

property.   That is because, assuming arguendo that respondent

were correct in respondent’s view as to the appropriate and

necessary two inquiries under Alabama Asphaltic that should be

made in the instant cases, we find on the basis of the parties’

agreed facts that the answer to the first of those inquiries is

that the creditors of FSI did not obtain “effective command” over

FSI’s property.

     In Alabama Asphaltic, “effective command” over the insolvent

corporation’s property arose because its creditors took steps by

instituting involuntary bankruptcy proceedings against it to

enforce their rights under the so-called full priority rule of N.

Pac. Ry. Co. v. Boyd, 228 U.S. 482 (1913), “to exclude stockhold-

ers [of the insolvent corporation] entirely from the reorganiza-

tion plan when the debtor is insolvent.”     Helvering v. Ala.

Asphaltic Limestone Co., supra at 183-184.

     Unlike the facts in Alabama Asphaltic, in the instant cases

EJDC, Bank of Montreal, Paribas, and Campeau,57 the creditors of

FSI that pursuant to the confirmed FSI chapter 11 plan received




     57
      We shall sometimes refer collectively to EJDC, Bank of
Montreal, Paribas, and Campeau as the FSI creditors.
                                   - 93 -

83.75 percent58 of the outstanding common stock of RHC from

Holdings III, did not take steps against FSI to enforce their

rights under the so-called full priority rule “to exclude stock-

holders [of FSI] entirely from the reorganization plan”.        Id.   In

fact, unlike the facts in Alabama Asphaltic, in the instant cases

the FSI creditors did not, as respondent asserts, commence

involuntary bankruptcy proceedings against FSI.       Instead, FSI

filed in the California U.S. Bankruptcy Court59 a voluntary

petition under chapter 11, entitled “Reorganization”, of the

Bankruptcy Code, 11 U.S.C. secs. 1101-1174.       Unlike the facts in

Alabama Asphaltic, in the instant cases FSI operated as a debtor

in possession60 at all times during the FSI chapter 11 proceed-

ings.        The FSI creditors did not object during those proceedings

to FSI’s acting as a debtor in possession.       Nor did any of those

creditors ask the Ohio U.S. Bankruptcy Court to appoint a




        58
             See supra note 54.
     59
      Hereinafter, all references to the FSI chapter 11 proceed-
ings are to those proceedings after venue in those proceedings
was transferred to the Ohio U.S. Bankruptcy Court. For conve-
nience, we shall refer to any filing in the FSI chapter 11
proceedings with the Ohio U.S. Bankruptcy Court as FSI’s filing
with that court.
     60
      As a debtor in possession, FSI continued to control its
assets and operate its business in the same manner as it had done
before the commencement of the chapter 11 proceedings. In
addition, during the pendency of the FSI chapter 11 proceedings
FSI continued to be managed by the officers that had managed FSI
before the FSI chapter 11 proceedings had commenced.
                               - 94 -

trustee.61   The FSI creditors did not file with the Ohio U.S.

Bankruptcy Court any proposed plan of reorganization62 in the FSI

chapter 11 proceedings.   Instead, on January 8, 1992,63 FSI filed

with the Ohio U.S. Bankruptcy Court the January 1992 proposed FSI

chapter 11 plan.64   Although under the January 1992 proposed FSI


     61
      The U.S. trustee program, a component of the U.S.
Department of Justice that is responsible for promoting the
efficiency and protecting the integrity of the Federal bankruptcy
system, oversaw the FSI chapter 11 proceedings. That program
appointed an official committee of unsecured creditors in the FSI
chapter 11 proceedings but did not take possession of the assets
of FSI and did not have the authority to direct the disposition
of that company’s assets or to manage that company’s business
during the pendency of the FSI chapter 11 proceedings.
     62
      The term “plan of reorganization” is used to refer to a
plan described in chapter 11 of the Bankruptcy Code and is not
intended to refer to a plan of reorganization for tax purposes.
See supra note 19.
     63
      FSI filed several proposed plans of reorganization with
the Ohio U.S. Bankruptcy Court before filing on Jan. 8, 1992,
another proposed FSI chapter 11 plan. At no time did the FSI
creditors seek to reduce the time during which FSI had the
exclusive right to file a proposed plan of reorganization with
the Ohio U.S. Bankruptcy Court. Nor did those creditors object
to the requests of FSI to extend the time during which it had the
exclusive right to file a proposed plan of reorganization with
that court.
     64
      On Oct. 28, 1991, FSI filed with the Ohio U.S. Bankruptcy
Court the October 1991 proposed FSI chapter 11 plan. That plan
proposed, inter alia, that the FSI creditors receive from
Holdings III certain stock of Ralphs in satisfaction of their
creditor claims against FSI. Respondent focuses on that proposed
plan in further support of respondent’s assertion that the
“creditors of FSI took overt steps to exert their control over
its assets.” Respondent contends:

          The [Ralphs] transaction here was undertaken at
     the very end of the bankruptcy proceedings when the
                                                   (continued...)
                               - 95 -

chapter 11 plan the claims of secured creditors of FSI except

class 1165 were impaired and certain unsecured creditors of FSI

were to receive property with respect to their claims, none of

the FSI creditors objected to or rejected that proposed plan.     In

fact, those creditors accepted in writing the January 1992

proposed FSI chapter 11 plan, and the Ohio U.S. Bankruptcy Court

confirmed it on January 10, 1992.

     On the parties’ agreed facts, we find that under Alabama

Asphaltic the FSI creditors did not take “effective command” over




     64
      (...continued)
     creditors’ inchoate rights had matured into effective
     control of the property. The initial plan had been for
     the * * * [Ralphs] stock to go directly to the
     creditors. However, after the creditors were already
     entitled to receive the * * * [Ralphs] stock, the
     creditors directed that the * * * [Ralphs] stock,
     rather than going to the creditors themselves, should
     go to the acquiring corporation (the creditor’s wholly-
     owned holding company) [RHC]. In directing the * * *
     [Ralphs] stock to the acquiring corporation, the
     creditors controlled where the Ralphs stock went.

     The above-quoted contentions of respondent are refuted by
the facts to which the parties agreed for purposes of their
respective motions for partial summary judgment. The FSI
creditors were not entitled to any property of FSI or Holdings
III before the Ohio U.S. Bankruptcy Court confirmed the January
1992 proposed FSI chapter 11 plan. That confirmed plan required,
inter alia, that EJDC, Bank of Montreal, Paribas, and Campeau
receive certain stock of RHC, and not stock of Ralphs, in
satisfaction of their respective creditor claims against FSI.
The October 1991 proposed FSI chapter 11 plan on which respondent
focuses was never confirmed by the Ohio U.S. Bankruptcy Court and
did not entitle the FSI creditors to any stock of Ralphs.
     65
          See supra note 26.
                               - 96 -

the assets of FSI.66   We conclude that Alabama Asphaltic is

materially distinguishable from the instant cases, that

respondent’s reliance on that case is misplaced, and that that

case is not controlling in the instant cases.

     We also find the Alabama Asphaltic progeny to be materially

distinguishable from the instant cases.    In the Alabama Asphaltic

progeny, the courts concluded, as did the Supreme Court in

Alabama Asphaltic, that the determinative fact was whether the

creditors of the insolvent corporation took proactive steps and

thereby obtained effective command over the insolvent

corporation’s property.    See, e.g., Palm Springs Holding Corp. v.

Commissioner, 315 U.S. 185, 188-189 (1942); Wells Fargo Bank &

Union Trust Co. v. United States, 225 F.2d 298, 300-301 (9th Cir.

1955).    Unlike the creditors involved in the instant cases, the

creditors involved in the Alabama Asphaltic progeny took

proactive steps to enforce or protect their rights in the

insolvent corporations’ properties, such as filing a foreclosure

action under mortgages securing the insolvent corporation’s




     66
      Assuming arguendo that Holdings III, which the parties
agree would be the target corporation in a reorganization
qualifying under sec. 368(a)(1)(C) or (G), were insolvent and
that it were correct under Alabama Asphaltic to determine whether
the FSI creditors had “effective command” over the property of
Holdings III, we would find for the reasons discussed above as to
why the FSI creditors did not have “effective command” over FSI’s
property that the FSI creditors did not have such “effective
command” over the property of Holdings III.
                                - 97 -

debt,67 selling the insolvent corporation’s assets under an

indenture,68 filing a receivership action against the insolvent

corporation,69 or entering into possession and operating the

property of the insolvent corporation.70    In the instant cases,

none of the FSI creditors took any proactive steps to enforce or

protect their respective rights to payment by FSI of their

respective debts.

     Based upon the parties’ agreed facts, we reject respondent’s

argument that, in determining whether the continuity-of-interest

requirement is satisfied in the Ralphs transaction, Alabama

Asphaltic requires us to treat as equity owners of FSI the FSI

creditors who received 83.75 percent71 of the outstanding common

stock of RHC.     Respondent does not cite, and we have not found,

any case in which a court has held Alabama Asphaltic to be

controlling under facts materially indistinguishable from the



     67
      See, e.g., Wells Fargo Bank & Union Trust Co. v. United
States, 225 F.2d 298, 300 (9th Cir. 1955); Peabody Hotel Co. v.
Commissioner, 7 T.C. 600, 602-603 (1946); Pearson Hotel, Inc. v.
Commissioner, 199 F. Supp. 33, 35 (N.D. Ill. 1959).
     68
      See, e.g., Palm Springs Holding Corp. v. Commissioner, 315
U.S. 185, 186 (1942).
     69
      See, e.g., Atlas Oil & Ref. Corp. v. Commissioner, 36 T.C.
675, 676 (1961); Ky. Natural Gas Corp. v. Commissioner, 47 B.T.A.
330, 333 (1942).
     70
      See, e.g., Roosevelt Hotel Co. v. Commissioner, 13 T.C.
399, 401 (1949).
     71
          See supra note 54.
                             - 98 -

parties’ agreed facts in the instant cases.    Nor has respondent

offered any persuasive reason why we should extend the holding of

Alabama Asphaltic to the parties’ agreed facts.

     We hold that the continuity-of-interest requirement is not

satisfied in the Ralphs transaction and that that transaction is

not a reorganization under section 368(a)(1)(B), (C), or (G).72

Respondent does not dispute that if we were to hold, which we

have, that the Ralphs transaction is not a reorganization under

any of those provisions of section 368, (1) RHC’s acquisition of

the outstanding common stock of Ralphs from Holdings III and

Allied would constitute a purchase under section 338(h)(3) and a

qualified stock purchase under section 338(d)(3), and (2) RHC and

FSI would have made a valid joint election under section

338(h)(10) with respect to that acquisition.

     We have considered all of the contentions and arguments of

the parties that are not discussed herein with respect to the

matters that we address herein, and we find them to be without

merit, irrelevant, and/or moot.




     72
      In the light of our holdings that the Ralph’s transaction
does not satisfy the continuity-of-interest requirement and is
not a reorganization under sec. 368(a)(1)(B), (C), or (G), we
need not and shall not address whether the Ralphs transaction
satisfies, as respondent maintains and petitioners dispute, the
other requirements applicable to each of the three types of
reorganizations on which respondent relies.
                        - 99 -

To reflect the foregoing,


                                 An order granting

                            petitioners’ motion and denying

                            respondent’s motion will be

                            issued.
- 100 -

APPENDIX
