AEROQUIP-VICKERS, INC. AND SUBSIDIARIES, f/k/a Trinova Corp. and Subsidiaries v. Commissioner of Internal Revenue

*The Honorable Patrick J. Duggan, United States District Judge for
the Eastern District of Michigan, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0370P (6th Cir.)
File Name: 03a0370p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
AEROQUIP-VICKERS, INC. AND
SUBSIDIARIES, f/k/a Trinova
Corp. and Subsidiaries,
Petitioner-Appellee,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellant.
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No. 01-2741
On Appeal from a Decision of the United States Tax Court.
No. 02931-94—Mary Ann Cohen, Chief Tax Court Judge.
Argued: April 30, 2003
Decided and Filed: October 20, 2003
Before: CLAY and GIBBONS, Circuit Judges;
DUGGAN, District Judge.*
2 Aeroquip-Vickers v. Commissioner No. 01-2741
_________________
COUNSEL
ARGUED: Frank P. Cihlar, UNITED STATES
DEPARTMENT OF JUSTICE, APPELLATE SECTION,
TAX DIVISION, Washington, D.C., for Appellant. Thomas
V.M. Linguanti, BAKER & McKENZIE, Chicago, Illinois,
for Appellee. ON BRIEF: Frank P. Cihlar, Joel L.
McElvain, UNITED STATES DEPARTMENT OF
JUSTICE, APPELLATE SECTION, TAX DIVISION,
Washington, D.C., for Appellant. Thomas V.M. Linguanti,
Frederick E. Henry III, Robert S. Walton, BAKER &
McKENZIE, Chicago, Illinois, for Appellee.
GIBBONS, J., delivered the opinion of the court, in which
DUGGAN, D. J., joined. CLAY, J. (pp. 19-41), delivered a
separate dissenting opinion.
_________________
OPINION
_________________
JULIA SMITH GIBBONS, Circuit Judge. In 1986,
petitioner-appellee Aeroquip-Vickers, Inc. (formerly known
as Trinova Corporation, and operating as the Libbey-Owens-
Ford Company (LOF) at the time), transferred all of its assets
relating to a glass manufacturing business, including property
for which it had previously claimed investment tax credits
(ITCs) under former 26 U.S.C. § 38 (Section 38 property),
into a wholly-owned subsidiary, LOF Glass, Inc. (LOF
Glass). LOF then transferred LOF Glass to one of its
shareholders, Pilkington Holdings, in return for Pilkington
Holdings’ shares in LOF. LOF treated this transaction as a
corporate reorganization under 26 U.S.C. § 368(a)(1)(D) and
accordingly did not recognize any gain or loss from the
exchange on the consolidated federal income tax return for
1986 that it filed together with LOF Glass. LOF also did not

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No. 01-2741 Aeroquip-Vickers v. Commissioner 3
report any recaptured ITCs from the transaction, as would be
required by former 26 U.S.C. § 47(a)(1) upon the disposition
of Section 38 property before the end of the property’s
estimated useful life.
In 1993, the Commissioner of Internal Revenue (CIR)
asserted a deficiency against LOF for LOF’s failure to include
ITC recapture in income under former 26 U.S.C. § 47(a)(1)
on its 1986 consolidated tax return. Trinova petitioned the
United States Tax Court for a redetermination of the
deficiency. The Tax Court held that neither the transfer of the
property from LOF to LOF Glass nor the change in ownership
of LOF Glass was a disposition of Section 38 property under
26 U.S.C. § 47, and that Trinova thus had no recapture
obligations. CIR appealed. For the reasons set forth below,
we reverse the decision of the Tax Court.
I.
The facts are not disputed. Pursuant to Tax Court Rule
91(a), the parties submitted a Stipulation of Facts, which the
Tax Court summarized as follows:
Petitioner, an accrual basis taxpayer . . . changed its
name to Trinova from the Libbey-Owens-Ford Company
(LOF) on July 31, 1986. Petitioner timely filed a
consolidated Federal income tax return with certain of its
subsidiaries for the years at issue with the Internal
Revenue Service Center, Cincinnati, Ohio, or the Internal
Revenue Service office in Toledo, Ohio. Petitioner was
engaged in the fluid power and plastics businesses and
the manufacture of glass. The glass business was
referred to as “LOF Glass Division.”
One of LOF’s largest shareholders was Pilkington
Brothers (Pilkington), an English company, which owned
29 percent of petitioner’s common stock through its
wholly owned U.S. subsidiary, Pilkington Holdings, Inc.
(Pilkington Holdings). Two of petitioner’s fourteen
4 Aeroquip-Vickers v. Commissioner No. 01-2741
directors were associated with Pilkington. In late 1985,
Pilkington approached LOF and began negotiations
concerning the possibility of acquiring the glass business.
Earlier that year, on July 25, 1985, the board of
directors of LOF approved the transfer of the glass
business to a wholly owned subsidiary for valid business
reasons. On February 19, 1986, LOF Glass, Inc. was
incorporated as a wholly-owned subsidiary of LOF. On
March 6, 1986, a “Transfer and Assumption Agreement,”
amended on April 25, 1986, transferred to LOF Glass,
Inc., all assets associated with the LOF Glass Division,
including inventories and receivables, effective
retroactively to February 19, 1986. These assets also
included section 38 assets upon which LOF had
previously claimed ITCs. Petitioner took no formal
action contemplating the liquidation of LOF Glass, Inc.,
in the event that the acquisition by Pilkington did not
take place.
On March 7, 1986, LOF, Pilkington, and Pilkington
Holdings entered into an agreement, amended on
April 28, 1996, whereby LOF would transfer all of its
shares of LOF Glass, Inc., to Pilkington Holdings in
exchange for all of the shares of petitioner held by
Pilkington Holdings. On April 28, 1996, Pilkington
Holdings exchanged 4,064,550 shares of LOF for the
shares of LOF Glass, Inc. LOF Glass, Inc., continued to
operate the glass business as a subsidiary of Pilkington
Holdings and used the section 38 assets in its trade or
business.
The parties have stipulated that petitioner recognized
no gain or loss upon the transaction whereby its glass
business was transferred to LOF Glass, Inc., pursuant to
the provisions of section 351 or sections 354, 355, and
368(a)(1)(D) (except as required by such sections or
section 357(c)), and that pursuant to section 355 neither
petitioner nor Pilkington Holdings recognized any gain

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No. 01-2741 Aeroquip-Vickers v. Commissioner 5
or loss upon the exchange of LOF Glass, Inc., shares for
the LOF shares.
Before February 19, 1986, income, deductions, and
credits with respect to the LOF Glass Division were
included in petitioner’s return. From February 19, 1986,
through April 28, 1986, deductions and credits with
respect to LOF Glass, Inc. (the subsidiary), were
included as part of petitioner’s consolidated return. After
April 28, 1986, LOF Glass, Inc., was no longer part of
petitioner, petitioner’s affiliated group, or petitioner’s
consolidated Federal income tax return.
On its 1986 consolidated return, petitioner did not
include any amount of ITC recapture with respect to the
LOF Glass, Inc., section 38 assets. Respondent
determined that a $5,718,749 ITC recapture arose from
the April 1986 transaction. Petitioner does not dispute
the amount of the ITC recapture. . . .
On November 26, 1993, CIR issued a notice of deficiency
to Trinova, stating that Trinova had understated its tax
liabilities on the consolidated income tax returns that it had
filed with its subsidiaries between 1985 and 1988. On
February 18, 1994, Trinova filed a petition with the Tax Court
contesting the deficiencies, including CIR’s recapture of ITCs
under 26 U.S.C. § 46. On February 27, 1997, the Tax Court
found in favor of Trinova on the issue of the recapture of the
ITCs. On October 1, 2001, the Tax Court entered a decision
disposing of all claims of all parties. CIR timely filed a notice
of appeal.
II.
The Tax Court’s application of law to the fully stipulated
record is reviewed de novo. See Friedman v. Comm’r, 216
F.3d 537, 541 (6th Cir. 2000).
6 Aeroquip-Vickers v. Commissioner No. 01-2741
Under former 26 U.S.C. §§ 38 and 46, a taxpayer who
acquired certain machinery and equipment for use in its trade
or business (Section 38 property) was allowed a credit against
its income tax liability in an amount equal to a percentage of
his investment (the ITC). However, under former 26 U.S.C.
§ 47, the ITC was limited to property that the taxpayer used
in its trade or business for most of the property’s useful life.
If the taxpayer disposed of Section 38 property before the end
of the useful life, then the taxpayer was required to recapture
the ITC and increase its tax liability. See 26 U.S.C.
§ 47(a)(1). The stated purpose of this provision was “[t]o
guard against a quick turnover of assets by those seeking
multiple credit.” S. Rep. No. 1881, 87th Cong., 2d Sess. 11
(1962).
Determining that Trinova was not liable for ITC recapture,
the Tax Court emphasized that “the transactions herein took
place in the consolidated return context.” Section 1.1502-
3(f)(2)(i) of the Consolidated Return Regulations (CRR)
states that “a transfer of section 38 property from one member
of the group to another member of such group during a
consolidated return year shall not be treated as a disposition
or cessation within the meaning of section 47(a)(1).”
Defending the Tax Court’s application of this provision to the
facts in this case, Aeroquip-Vickers observes that “[a]fter
[LOF] transferred the LOF Glass Division business . . . to
LOF Glass including some section 38 property, LOF Glass
continued to use the section 38 property while a member of
the [LOF] affiliated group,” and thus asserts that the “transfer
of the section 38 property to LOF Glass . . . was a non-event
under section 47; there was no ‘disposition’ of section 38
property.” In addition, Aeroquip-Vickers argues that “this
non-event for section 37 purposes did not metamorphose into
an ITC recapture event merely because LOF glass ultimately
left the [LOF] affiliated group” since “LOF Glass continued
to use the section 38 property up to and following the time
that LOF Glass left the [LOF] affiliated group.” Aeroquip-
Vickers thus claims that “there would be no recapture event

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No. 01-2741 Aeroquip-Vickers v. Commissioner 7
unless or until LOF Glass disposed of the section 38
property.” (emphasis in brief).
In support of its decision, the Tax Court relied upon CRR
§ 1.1502-3(f)(3), which provides the following examples:
Example (1). P, S, and T file a consolidated return for
calender year 1967. In such year S places in service
section 38 property having an estimated useful life of
more than 8 years. In 1968, P, S, and T file a
consolidated return and in such year S sells such property
to T. Such sale will not cause section 47(a)(1) to apply.
* * *
Example (3). Assume the same facts as in example (1),
except that P, S, and T continue to file consolidated
returns through 1971 and in such year T disposes of the
property to individual A. Section 47(a)(1) will apply to
the group . . .
* * *
Example (5). Assume the same facts as in example (1),
except that in 1969, P sells all the stock of T to a third
party. Such sale will not cause section 47(a)(1) to apply.
The Tax Court first noted that “the mere transfer of section 38
assets within a consolidated group does not trigger recapture”
and then added that Example 5 illustrated that “the transfer of
the stock of [LOF Glass] to Pilkington Holdings would not
trigger the recapture of such credit.” Trinova Corp. v.
Commissioner, 108 T.C. 68, 73 (1997) (emphasis added).
CIR argues that the Tax Court erred by failing to give
appropriate deference to Revenue Ruling 82-20. Revenue
rulings are official interpretations by the IRS which have been
published in the Internal Revenue Bulletin. 26 CFR
§ 601.201(a)(6). Under the facts assumed by Revenue Ruling
82-20, parent corporation P owns 100 percent of subsidiary
8 Aeroquip-Vickers v. Commissioner No. 01-2741
corporation S. P and S file a consolidated federal income tax
return. A and B, equal owners of P, decide to split the
business into two independent corporations, one owned by A
and the other owned by B. To achieve this, “P transferred all
the assets of one of the businesses necessary to conduct the
trade or business, including section 38 property, to S solely in
exchange for additional shares in S and immediately
thereafter distributed all the stock of S to A. . . . A
surrendered all its stock in P as part of the transaction.” Id.
Revenue Ruling 82-20 states that:
When there is no intention at the time of transfer to keep
the property within the consolidated group, the
transaction should be viewed as a whole and not as
separate individual transactions. . . . Because the transfer
of the section 38 property from P to S is a step in the
planned transfer of the property outside the group, the
exception in section 1.1502-3(f)(2)(i) of the regulations
does not apply to this transaction. Therefore, the transfer
from P to S is a disposition under section 47(a)(1) of the
Code.
Id.
Rejecting CIR’s position, the Tax Court concluded that
“Example 5 and not Rev. Rul. 82-20 . . . provides the key to
decision herein.” Trinova Corp. v. Comm’r, 108 T.C. 68, 77
(1997). The Tax Court acknowledged that both the Second
Circuit in Salomon Inc. v. United States, 976 F.2d 837 (2d
Cir. 1992) and the Ninth Circuit in Walt Disney Inc. v.
Comm’r, 4 F.3d 735 (9th Cir. 1993), cases involving “factual
situation[s] substantially similar to that involved herein,” had
reached the opposite conclusion. However, the Tax Court
explained that
[w]ith all due respect, we disagree with both the result
and the reasoning of the Courts of Appeals. . . . We think
that the fact that the transfer of the assets and the transfer
of the stock occurred in the same, rather than different,

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No. 01-2741 Aeroquip-Vickers v. Commissioner 9
taxable years does not provide a meaningful basis for
distinguishing Rev. Rul. 82-20 . . . from Example 5 of
the regulations. . . . We think the Courts of Appeals for
the Second and Ninth Circuits accorded the ruling undue
weight and that revenue rulings play a lesser role than the
language of the opinions of those Courts of Appeals
seems to indicate.
Trinova Corp., 108 T.C. at 76-77. The Tax Court also added
that in this case CIR “has stipulated that there was a business
purpose, i.e. substance, to the transfer by petitioner to [LOF
Glass].” Id. at 78.
In Salomon, Engelhard Minerals and Chemicals
Corporation (EMC) (later known as Salomon) developed a
plan to separate its marketing arm and its industrial divisions
into two independent companies. 976 F.2d at 838. EMC
transferred the assets and liabilities of its industrial divisions
to Porocel, an existing wholly owned subsidiary (later
renamed Engelhard Corporation (EC)). Id. In return, EMC
received EC stock. Id. Four days later, EMC “[spun] off” EC
“by distributing all of its EC shares pro-rata to its
stockholders.” Id. The IRS determined that EMC would not
recognize gain as a result of the transaction. Id. at 839.
However, the IRS also noted that “[c]ertain of the machinery,
equipment and other assets that EMC planned to transfer to
EC qualified as section 38 property,” and concluded that the
“transfer of this property to EC followed by a spin-off to
EMC shareholders [was] a ‘disposition’ which triggered
§ 47(a) recapture.” Id. at 840. Salomon brought suit to
recover the recapture taxes paid. Id.
The Second Circuit concluded that Revenue Ruling 82-20
was not “unreasonable, nor inconsistent with prevailing law,”
and thus was “entitled to great deference.” Id. at 841. The
Second Circuit explained that since a direct transfer of
Section 38 property was a disposition under 26 U.S.C.
§ 47(a)(1), “the more circuitous transfer by way of another
consolidated group member should be as well.” Id. at 842.
10 Aeroquip-Vickers v. Commissioner No. 01-2741
In substance, if not in form, the direct and the circuitous
transaction are the same. Each achieves a rapid transfer
of section 38 property outside the group. To distinguish
between them would deny economic reality. Moreover,
such a holding would allow the common parent of a
consolidated group, such as EMC, to move section 38
property outside the group without paying recapture
taxes simply by first transferring the property to a
member subsidiary and then distributing the subsidiary’s
stock to the third-party. Revenue Ruling 82-20’s
requirement of recapture under these circumstances is not
unreasonable.
* * *
The rapidity with which these components follow one
another suggest that they are, in substance, parts of one
overall transaction intended to dispose of the section 38
assets outside of the consolidated group. Revenue
Ruling 82-20 further solidifies this inference by positing
that there is “no intention at the time of transfer to keep
the property within the consolidated group.” These
factual circumstances, timing and intent, differ from
those presented in CRR Example 5. They lead to the
conclusion that the two components are steps in a larger
transaction which, when viewed as a whole, constitutes
a § 47(a)(1) “disposition.”
Id. at 842 (citations omitted).
The reasoning and conclusion of the Second Circuit was
subsequently adopted by the Ninth Circuit in Walt Disney. In
that case, Retlaw, a predecessor of Walt Disney Inc. (Disney),
developed a plan to separate its “Disney assets” (including the
commercial rights to the name “Walt Disney” and two
attractions at Disneyland) from its “non-Disney assets” (two
television stations, a cattle ranch, and several agricultural
properties), and then allow Walt Disney Productions
(Productions) to acquire Retlaw (which would only retain its

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No. 01-2741 Aeroquip-Vickers v. Commissioner 11
Disney assets). Walt Disney, 4 F.3d at 737. In order to
accomplish this, Retlaw transferred its non-Disney assets,
which included Section 38 property, to a newly-formed,
wholly owned subsidiary called Flower Street. Id. In
exchange, Retlaw received Flower Street common stock. Id.
That same day, the Retlaw board of directors authorized the
distribution of the Flower Street stock pro rata to the Retlaw
shareholders, but specified that the distribution could only be
made concurrently with the closing of Productions’ proposed
acquisition of Retlaw. Id. The actual distribution occurred
fifty-nine days later, immediately following the approval of
the Retlaw acquisition by Productions’ shareholders and just
prior to Productions’ acquisition of the stock of Retlaw. Id.
at 738.
Retlaw and Flower Street then filed a consolidated federal
income tax return. Id. In the consolidated return, however,
Retlaw did not recapture the ITCs it previously had taken on
Section 38 property included among the non-Disney assets
transferred to Flower Street. Id. As a result, the IRS assessed
a deficiency, which Disney contested. Id. Reversing the
decision of the Tax Court, the Ninth Circuit applied Revenue
Ruling 82-20 and determined that Disney was required to
recapture the ITC it had previously taken with respect to
Section 38 property transferred by Retlaw to Flower Street.
Id. at 739. The Ninth Circuit explained that
Revenue Ruling 82-20 is not unreasonable because “[i]n
substance, if not in form, the direct and the circuitous
transaction are the same” and “to distinguish between
them would deny economic reality” and would allow the
common parent of a consolidated group to circumvent
easily the recapture requirement. Moreover, Revenue
Ruling 82-20 and Example 5 of the Consolidated Return
Regulations are not inconsistent because they address
different situations: the latter covers situations where,
due to a “meaningful time delay” between the asset
transfer and the spin-off, there is “little reason to believe
that the transferor corporation intends to use the
12 Aeroquip-Vickers v. Commissioner No. 01-2741
1“When Congress has ‘explicitly left a gap for an agency to fill, there
is an express delegation of authority to the agency to elucidate a specific
provision of the statute b y regulation,’ Chevron, 467 U.S. at 843-844 , and
any ensuing regulation is binding in the courts unless procedurally
defective, arbitrary or capricious in substance, or manifestly contrary to
the statute.” United States v. Mead Corp., 533 U.S. 218, 227 (2001)
(explaining the application of the Chevron test).
transaction as a means of moving section 38 property out
of the group while avoiding recapture taxes”; the former
involves facts under which the transferor’s initial intent
to move section 38 property out of the consolidated
group is undisputed.
Id. (quoting Salomon, 976 F.2d at 842) (internal citations
omitted).
As the Tax Court observed, both the Second Circuit and the
Ninth Circuit afforded “great deference” to Revenue Ruling
82-20. This court previously has held that “[a]lthough a
revenue ruling ‘is not entitled to the deference accorded a
statute or a Treasury Regulation,’ a revenue ruling is entitled
to some deference unless ‘it conflicts with the statute it
supposedly interprets or with that statute’s legislative history
or if it is otherwise unreasonable.’” CenTra, Inc. v. United
States, 953 F.2d 1051, 1056 (6th Cir. 1992) (quoting
Threlkeld v. Comm’r, 848 F.2d 81, 84 (6th Cir. 1988)); see
also Johnson City Med. Ctr. v. United States, 999 F.2d 973,
977 (6th Cir. 1993) (“[T]his Court accords deference to
Revenue Ruling 85-74 under the standard set forth in
Chevron [U.S.A., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837, 842- 43 (1984)].”1); Wuebker v. Comm’r,
205 F.3d 897, 903 (6th Cir. 2000).
However, recent Supreme Court decisions limiting the
Chevron doctrine have called our earlier cases into question.
In Christensen v. Harris County, 529 U.S. 576, 587 (2000),
the Supreme Court held that “[i]nterpretations such as those
in opinion letters – like interpretations contained in policy

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No. 01-2741 Aeroquip-Vickers v. Commissioner 13
statements, agency manuals, and enforcement guidelines, all
of which lack the force of law – do not warrant Chevron-style
deference.” The Court explained that such agency
interpretations are entitled to respect, “but only to the extent
that those interpretations have the ‘power to persuade.’” Id.
(quoting Skidmore v. Swift & Co., 323 US. 134, 140 (1944)).
In United States v. Mead Corp., 533 U.S. 218, 226-27 (2001),
the Supreme Court emphasized that Chevron deference is
appropriate only “when it appears that Congress delegated
authority to the agency generally to make rules carrying the
force of law, and that the agency interpretation claiming
deference was promulgated in the exercise of that authority”
through “notice-and-comment rulemaking, or by some other
indication of a comparable congressional intent.” The Court
added that “an agency’s interpretation may merit some
deference whatever its form, given the ‘specialized experience
and broader investigations and information’ available to the
agency, and given the value of uniformity in its administrative
and judicial understandings of what a national law requires.”
Id. at 234 (quoting Skidmore, 323 U.S. at 139-40). In United
States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220
(2001), the Supreme Court declined to consider “whether the
Revenue Rulings themselves are entitled to deference.”
However, the Court noted that the revenue rulings at issue
“reflect the agency’s longstanding interpretation of its own
regulations,” and concluded that “[b]ecause that interpretation
is reasonable, it attracts substantial judicial deference.” Id.
When promulgating revenue rulings, the IRS does not
invoke its authority to make rules with the force of law.
Specifically, the IRS does not claim for revenue rulings “the
force and effect of Treasury Department regulations.” Rev.
Proc. 89-14, 1989-1 C.B. 814. In light of the Supreme
Court’s decisions in Christensen and Mead, we conclude that
Revenue Ruling 82-20 should not be accorded Chevron
deference. Revenue rulings do, however, constitute
“precedents to be used in the disposition of other cases.” Rev.
Proc. 89-14, 1989-1 C.B. 815. Revenue rulings also serve as
“official interpretation[s]” by the IRS of the tax laws. Treas.
14 Aeroquip-Vickers v. Commissioner No. 01-2741
2A recent Tax Court M emorandum decision also grants a revenue
ruling Skidmore deference. See Tedoken v. Comm ’r, 84 T.C.M. (CCH)
657 (20 02).
3As Judge Swift of the Tax Court noted below in dissent, “[t]he
weight to be given a revenue ruling is not the issue in this case. Rather,
the issue is the validity of the underlying rationale of Rev. R ul. 82-2 0.”
(JA 198 .) Put differently, the amou nt of deference to be accorded to
Revenue Ruling 82-20 ultimately turns upon the validity of its reasoning.
Reg. § 601.201(a)(6). By noting only that revenue rulings
“are not entitled to the deference accorded a statute or a
Treasury Regulation,” without explicitly acknowledging that
some deference to revenue rulings is proper, the Tax Court
mischaracterized the degree of deference accorded to revenue
rulings. See, e.g., Omohundro v. United States, 300 F.3d
1065, 1069 (9th Cir. 2002) (granting Skidmore deference to
a revenue ruling); Del Commercial Props., Inc. v. Comm’r,
251 F.3d 210, 214 (D.C. Cir. 2001) (same); U.S. Freightways
Corp. v. Comm’r, 270 F.3d 1137, 1142 (7th Cir. 2001)
(same); American Express Co. v. United States, 262 F.3d
1376, 1383 (Fed. Cir. 2001) (reasoning that “[i]n the context
of tax cases, the IRS’s reasonable interpretations of its own
regulations and procedures are entitled to particular
deference.” (citing Cleveland Indians, 532 U.S. at 220)).2
Consequently, the level of deference to be accorded to
Revenue Ruling 82-20 depends upon “the thoroughness
evident in its consideration, the validity of its reasoning, its
consistency with earlier and later pronouncements, and all
those factors which give it power to persuade, if lacking
power to control.” Mead, 533 U.S. at 228 (quoting Skidmore,
323 U.S. at 140). Consideration of all of these factors leads
us to conclude that some deference to Revenue Rule 82-20 is
proper.3
Aeroquip-Vickers argues that “neither the ITC regime nor
the consolidated return regulations contain any ambiguity
justifying Rev. Rul. 82-20.” Aeroquip-Vickers further
contends that Revenue Ruling 82-20 is inconsistent with

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No. 01-2741 Aeroquip-Vickers v. Commissioner 15
§ 1.1502-3(f) because the express terms of § 1.1502-3(f) do
not explicitly refer to “intent”or “timing” requirements. As
previously discussed, substantially similar challenges to
Revenue Ruling 82-20 were considered and rejected by both
the Second and Ninth Circuits in Salomon and Walt Disney.
“Uniformity among the circuits is especially important in tax
cases to ensure equal and certain administration of the tax
system. We would therefore hesitate to reject the view of
another circuit.” Nickell v. Comm’r, 831 F.2d 1265, 1270
(6th Cir. 1987).
Moreover, the approach favored by CIR and adopted by the
Second and Ninth Circuits is entirely reasonable. Example 5
of CRR § 1.1502-3(f) involves a situation where the asset
transfer occurs in one year and the spin-off takes place in the
following year, while Revenue Ruling 82-20 applies to
situations where (as in the instant case) the asset transfer is
“immediately” followed by the spin-off. Whether the use of
different years “merely illustrate[s] the sequence of events,”
as Aeroquip-Vickers argues, or rather signifies a “meaningful
time delay” between the two steps, Salomon, 976 F.2d at 842,
is an extremely close question. However, the more persuasive
interpretation is that the decision to assign different events to
different calender years in Example 5 of CRR § 1.1502-3(f),
rather than merely listing the order of events, has greater
significance. See 2A Singer, Norman J., Sutherland Statutes
and Statutory Construction, § 46.06 at 192 (2000 ed.) (“every
word of a statute must be presumed to have been used for a
purpose”). Consequently, we conclude that the underlying
rationale of Revenue Ruling 82-20 is valid, “reflect[s] the
agency’s longstanding interpretation of its own regulations,”
and thus deserves “substantial judicial deference.” Cleveland
Indians Baseball Co., 532 US. at 220.
Aeroquip-Vickers also argues that the “step transaction
doctrine” is inapplicable in this case, since CIR has stipulated
that valid business reasons existed for the intermediate steps
taken by LOF. The step-transaction doctrine was not directly
addressed in either Salomon or Disney. However, as Judge
16 Aeroquip-Vickers v. Commissioner No. 01-2741
Swift of the Tax Court observed in his dissenting opinion,
both of those decisions “rel[ied] heavily on ‘economic reality’
and the ‘substance-over-form’ doctrines, which are simply
broader labels for, and which encompass, the step transaction
doctrine.” Trinova Corp. v. Commissioner, 108 T.C. 68, 79
(1997) (Swift, J., dissenting). When analyzing the question
of whether the separate steps of a complex transaction should
be treated as having independent significance or as related
steps in a unified transaction, “courts have enunciated a
variety of doctrines, such as step transaction, business
purpose, and substance over form. Although the various
doctrines overlap and it is not always clear in a particular case
which one is most appropriate, their common premise is that
the substantive realities of a transaction determine its tax
consequences.” King Ent. Inc. v. United States 418 F.2d 511,
516 n. 6 (Ct. Cl. 1969); see also Comm’r v. Court Holding
Co., 324 U.S. 331, 334 (1945) (“The incidence of taxation
depends upon the substance of a transaction.”); Brown v.
United States, 782 F.2d 559, 563 (6th Cir. 1986) (“The step
transaction doctrine is a judicial device expressing the
familiar principle that in applying the income tax laws, the
substance rather than the form of the transaction is
controlling.”) (quotation omitted).
This court has applied the “end result” test in order to
determine whether the steps of a transaction should be treated
separately or as a single unit. Brown, 782 F.2d at 563-564.
“Under that test, purportedly separate transactions will be
amalgamated into a single transaction when it appears that
they were really component parts of a single transaction
intended from the outset to be taken for the purpose of
reaching the ultimate result.” Id. at 564 (quotations omitted)
(emphasis added).
A recitation of the stipulated facts supports the conclusion
that LOF entered the transaction with the intent to move
Section 38 property out of the consolidated group. In late
1985 representatives of Pilkington approached LOF
concerning the possibility of acquiring its glass business.

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No. 01-2741 Aeroquip-Vickers v. Commissioner 17
Negotiations concerning this transaction took place between
November 1985 and March 1986. LOF’s transfer of its glass
business and its Section 38 property to LOF Glass occurred
on March 6, 1986. One day later, LOF, Pilkington, and
Pilkington Holdings entered into an agreement providing that
LOF would transfer all of its interest in LOF Glass to
Pilkington Holdings in exchange for Pilkington Holdings’
entire interest in LOF. On April 28, 1986, Pilkington
exchanged shares of LOF for the shares of LOF Glass. After
that date, LOF Glass was no longer part of LOF’s affiliated
group, nor was it part of LOF’s consolidated federal income
tax return. From the beginning, an intent on the part of LOF
to move Section 38 property out of the consolidated group
without paying recapture taxes by first transferring the
property to LOF Glass and then distributing LOF Glass’s
stock to Pilkington is evident.
Aeroquip-Vickers argues that, unlike in Disney and
Salomon, in this case CIR “stipulated to the propriety not only
of each step but also of the entire reorganization and split-
off.” Aeroquip-Vickers contends that since “the whole
transaction and each step along the way had economic
substance,” no “tax avoidance motive” can be attributed to
LOF.
Admittedly, this case does not involve a situation where
“[t]he whole undertaking . . . was in fact an elaborate and
devious form of conveyance masquerading as a corporate
reorganization, and nothing else.” Gregory v. Helvering, 293
U.S. 465, 470 (1935) (emphasis added). Aeroquip-Vickers
correctly notes that CIR has stipulated that the requirements
of 26 U.S.C. § 368(a)(1)(D) were met in this case. The
individual steps of the transaction had a valid business
purpose. However, “[t]he law is unclear as to the relationship
between the step transaction doctrine and the business
purpose requirement. Our survey of the relevant cases
suggests that no firm line delineates the boundary between the
two.” Associated Wholesale Grocers, Inc. v. United States,
927 F.2d 1517, 1526 (10th Cir. 1991). In Associated
18 Aeroquip-Vickers v. Commissioner No. 01-2741
Wholesale Grocers, the Tenth Circuit held that the existence
of a valid business purpose does not preclude application of
the step transaction doctrine, explaining that “‘[a] legitimate
business goal does not grant [a] taxpayer carte blanche to
subvert Congressionally mandated tax patterns.’” Id. at 1527
(quoting Kuper v. Comm’r, 533 F.2d 152, 158 (5th Cir.
1976)). The substance over form inquiry thus is not as
narrow as Aeroquip-Vickers suggests.
Here, although the individual steps of the transaction had a
legitimate business reason, the transaction must be treated as
a single unit and judged by its end result. “To ratify a step
transaction that exalts form over substance merely because
the taxpayer can either (1) articulate some business purpose
allegedly motivating the indirect nature of the transaction or
(2) point to an economic effect resulting from the series of
steps, would frequently defeat the purpose of the substance
over form principle.” True v. United States, 190 F.3d 1165,
1177 (10th Cir. 1999). Aeroquip-Vickers has shown only the
existence of a non-tax business purpose for engaging in a
series of transactional steps “to accomplish a result [it] could
have achieved by more direct means.” Id. (quoting
Associated Wholesale Grocers, 927 F.2d at 1527).
Notwithstanding this business purpose, CIR correctly
concluded that the intended end result of the transaction was
to allow LOF to avoid liability for ITC recapture.
III.
For the foregoing reasons, we reverse the decision of the
Tax Court.

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No. 01-2741 Aeroquip-Vickers v. Commissioner 19
______________
DISSENT
______________
CLAY, Circuit Judge, dissenting. The majority overstates
the level of deference revenue rulings receive. The Supreme
Court’s decision in United States v. Mead, 533 U.S. 218
(2001), compels me to respectfully dissent. New circuit
precedents, in Omohundro v. United States, 300 F.3d 1065
(9th Cir. 2003) (per curiam), U.S. Freightways Corp. v.
Commissioner, 270 F.3d 1137 (7th Cir. 2001), and American
Express Co. v. United States, 262 F.3d 1376 (Fed. Cir. 2001),
are cited by the majority to temper the impact of Mead. But
as discussed below, these cases do not diminish Mead nearly
to the extent that would be necessary to reach the result
arrived at by the majority. I also wish to emphasize that
assuming, arguendo, we wanted to defer to expertise, we
would affirm the Tax Court.
This opinion is noteworthy because it involves a three-
judge panel of the Court of Appeals reversing (by a two-to-
one vote) a “fully reviewed” (effectively “en banc”) eleven-
to-six decision by the United States Tax Court, which handles
only complex tax disputes and consists of seventeen eminent
jurists who specialize exclusively in tax law. An
overwhelming majority of the Tax Court found
Commissioner’s Revenue Ruling unpersuasive, although two
of three judges of this Court find the Revenue Ruling
compelling—in part because Commissioner drafted the
regulation. Commissioner is also a party to this dispute; in
fact, the IRS seeks to collect millions of dollars. The Tax
Court’s experts have no stake in the outcome.
To simplify this controversy: two different kinds of tax
guidelines conflict. On its face, a treasury regulation,
§ 1.1502-3(f), seems to support Taxpayer. An interpretation
of that regulation, Rev. Rul. 82-20, seems to support
20 Aeroquip-Vickers v. Commissioner No. 01-2741
1The Supreme Court foreshadowed Mea d in Christensen v. H arris
County, 529 U.S. 576 (2000). Christensen declined to grant Chevron
deference to an opinion letter signed by the acting administrator of the
W age and Hour Division of the Department of Labor, holding that
“[i]nterpretations such as those in opinion letters—like interpretations
contained in policy statements, agency manuals, and enforcement
guidelines—do not warrant Chevron-style deference.” Id. at 587.
Christensen held that documents issued without the force of law do not
receive Chevron deference, see id., but the opinion provid ed little
guidance as to when and to what types of agency statements this
exception would apply.
Commissioner. The question is whether the regulation itself
or the Revenue Ruling governs the disputed transaction.
I.
In footnote three, the majority explains that “the amount of
deference to be accorded to Rev. Rul. 82-20 ultimately turns
upon the validity of its reasoning.” I completely agree.
Mysteriously, however, the majority also states that the Tax
Court erred “[b]y noting only that revenue rulings ‘are not
entitled to the deference accorded a statute or a Treasury
regulation,’ without explicitly acknowledging that some
deference to revenue rulings is proper.” To the extent the
majority implies that a revenue ruling could ever receive more
deference than its persuasive value warrants, the majority is
incorrect.
As the majority properly notes, the Supreme Court’s
decision in United States v. Mead, 533 U.S. 218 (2001),
restricted the scope of Chevron deference.1 Mead involved a
tariff ruling by the Customs Service that classified Mead’s
“day planners” as diaries for assessment purposes under the
Harmonized Tariff Schedule of the United States, 19 U.S.C.
§ 1202. 533 U.S. at 224. After reviewing Chevron, the Court
stressed that “[t]he fair measure of deference to an agency
administering its own statute has been understood to vary
with circumstances, and courts have looked to the degree of
the agency's care, its consistency, formality, and relative

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No. 01-2741 Aeroquip-Vickers v. Commissioner 21
2It is hard to understate Mead’s importance. Justice Scalia described
the decision as “one of the most significant opinions ever rendered by the
Court dealing with the judicial review of administrative action.” 533 U.S.
at 261 (Scalia, J., dissenting). Mead effectively limits Chevron to
situations in which the agency can show “affirmative legislative intent”
that it has lawmaking power. Id. at 239 (Scalia, J., dissenting). When
Congress intends for the Treasury Departm ent to issue policy statements
expertness, and to the persuasiveness of the agency's
position.” Id. at 228 (citation omitted). Chevron applies only
if “Congress would expect the agency to be able to speak with
the force of law when it addresses ambiguity in the statute or
fills a space in the enacted law.” Id. at 229. Furthermore,
even if the agency has the legislative authority to act with the
force of law, “the agency interpretation claiming deference
[must be] promulgated in the exercise of that authority.” Id.
at 227. The Mead Court ultimately found against the
Customs Service because “the terms of the congressional
delegation give no indication that Congress meant to delegate
authority to Customs to issue classification rulings with the
force of law.” Id. at 232-33.
Mead explained that “a very good indicator of delegation
meriting Chevron treatment is express congressional
authorizations to engage in the process of rulemaking or
adjudication that produces regulations or rulings for which
deference is claimed.” 533 U.S. at 229. According to Mead,
when Congress wants an agency to act with legal force, it
wants the agency to guarantee “fairness and deliberation,”
which the use of a “relatively formal administrative procedure
tends to foster.” Id. at 230. Mead also states that notice-and-
comment procedures are not the only indicator that Congress
intended an agency to act with the force of law, because
“other statutory circumstances” may sometimes signal the
same legislative objective. Id. 229. The Court, however,
cited only one case, NationsBank v. Variable Annuity Life
Insurance Co., 513 U.S. 251 (1995), in which an agency
ruling received Chevron deference without notice-and-
comment procedures.2
22 Aeroquip-Vickers v. Commissioner No. 01-2741
that have the legal force, C ongress clearly so indicates. See, e.g., I.R.C.
§ 40(f)(3) (authorizing the Secretary to prescribe by regulation the manner
in which taxpayers ma y elect no t to have alcohol fuel credits ap ply); id.
at § 414(o) (authorizing the Secretary to prescribe regulations necessary
to achieve the purposes of the low income housing credit); id. at § 42(o)
(authorizing the Secretary to prescribe regulations to preven t avoidance
of employee b enefit provisions). A Treasury Regulation expressly states
that revenue rulings “do n ot have the force and effect of Treasury
Department regulations” (which do have legal force). Rev. Proc. 89-14,
1989-1 C.B. 814.
3However, the majority tries to minimize this. After writing that,
“[i]n light of the Supreme Court’s decisions in Christensen and Mead, we
conclude that Revenue Ruling 82-20 should not be accorded Chevron
deference,” the majority notes that “revenue rulings do, however,
constitute ‘precedent[s] [to b e used ] in the disposition of o ther cases.’
Rev. Proc. 89-14, 1989-1 C.B. 815. Revenue rulings also serve as
‘official interpretation[s]’ by the IRS of the tax laws. Treas. Reg.
§ 601.201(a)(6).” (alterations in majority op.). Yet neither the fact that
revenue rulings are “official” or serve as precedent for the IRS to use in
other cases gives revenue rulings legal force. See Rev. Proc. 89-14,
198 9-1 C.B. 814. U nder Mead, the absence of legal force is the primary
indicia of a regulation w arranting only Skidm ore deference, see Mead,
533 U.S. at 232-33, and neither the “officiality” of revenue rulings nor the
Treasury Department’s intent that the IRS use revenue rulings to guide
subsequent decisions makes the revenue ruling itself likely to better
withstand Skidm ore scrutiny because neither factor makes the revenue
ruling necessarily more thoroughly considered, consistent, valid, or
otherwise persuasively reasoned. See Skidmore v. Swift & Co., 323 U.S.
134, 140 (1940).
The majority agrees that Chevron does not apply to revenue
rulings because such rulings are issued without the force of
law.3 See also Omohundro v. United States, 300 F.3d at
1068 (“Mead involved a Customs Service tariff ruling, which
is closely akin to an IRS revenue ruling. Given that the two
types of agency rulings are analogous, we are required to
apply Mead’s standard of review to an IRS revenue ruling.”);
U.S. Freightways Corp., 270 F.3d at 1141 (declining to give
Chevron deference to IRS policy statements made without
notice-and-comment formalities); Am. Express Co. v. United
States, 262 F.3d at 1382-83 (stating that IRS decisions not

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No. 01-2741 Aeroquip-Vickers v. Commissioner 23
adopted in regulations after notice and comment are probably
not entitled to Chevron deference). The Mead Court noted
that agency statements ineligible for Chevron deference may
still receive Skidmore deference. Mead, 533 U.S. at 234-35
(“Chevron left Skidmore intact and applicable where statutory
circumstances indicate no intent to delegate general authority
to make rules with force of law, or where such authority was
not invoked.”)
In Skidmore v. Swift & Co., 323 U.S. 134 (1944), the Court
gave an agency pronouncement only the weight it deserved in
light of “the thoroughness evident in its consideration, the
validity of its reasoning, its consistency with earlier and later
pronouncements, and all those factors which give it power to
persuade.” Id. at 140.
When the majority claims the Tax Court erred by failing to
acknowledge that “some deference to revenue rulings is
proper” (emphasis added), the majority overstates Skidmore
“deference.” Skidmore “deference” does not always involve
“deferring” because the level of respect afforded the agency
pronouncement depends on its “power to persuade.”
Skidmore, 323 U.S. at 140. An agency pronouncement with
no persuasive power receives no deference. Therefore,
because the Tax Court majority found the Treasury
Department’s justification for its revenue ruling unpersuasive,
the Tax Court did not err by failing to acknowledge that
“some deference to revenue rulings is proper.” Likewise, to
the extent this Court finds the Treasury Department’s
rationale unpersuasive, we have no obligation to defer.
Exactly as the majority explains, “the amount of deference to
be accorded to Revenue Ruling 82-20 ultimately turns upon
the validity of its reasoning.”
The majority cites a string of four cases in support of its
statement that even after Mead “some deference to revenue
rulings is proper.” Yet none of these cases push Skidmore
“deference” to the level that the majority would have in the
present case. The first case cited, Omohundro, 300 F.3d
24 Aeroquip-Vickers v. Commissioner No. 01-2741
1065, grants Skidmore “deference.” But as explained,
Skidmore “deference” relies on the “power to persuade.”
Omohundro granted “deference” only after ruling, “First, the
IRS's reasoning is valid.” Id. at 1068. The “deference”
accorded was to persuasive reasoning, not merely to IRS
interpretive authority. The majority in the present dispute
accords deference based upon the Revenue Ruling itself, apart
from its persuasive power.
The second case cited, Del Commercial Props., Inc. v.
Comm’r, 251 F.3d 210, 214 (D.C. Cir. 2001), was released
ten days before Mead. Given that the majority acknowledges
the relevance of Mead, it is not clear why this case is cited.
The third case cited by the majority, U.S. Freightways
Corp. v. Comm’r, 270 F.3d at 1139, states:
Although we acknowledge that even after United States
v. Mead Corp., 533 U.S. 218, 150 L. Ed. 2d 292, 121 S.
Ct. 2164 (2001), we owe some deference to the
Commissioner's interpretation of his own regulations, we
conclude here that the lack of any sound basis behind the
Commissioner's interpretation, coupled with a lack of
consistency on the Commissioner's own part, compels us
to rule in favor of Freightways.
This statement highlights again the importance of Mead.
While U.S. Freightways professes to accord some
“deference,” it is not at all clear that the term is being used to
signify anything substantially beyond than the “power to
persuade,” under Skidmore. After all, as stated in the quoted
passage above, U.S. Freightways rejected the Commissioner’s
ruling, which severely calls into question the amount of true
deference that was actually given by the Seventh Circuit.
The last case cited by the majority is Am. Express Co., 262
F.3d 1376. This case, unlike U.S. Freightways, held in favor
of the Commissioner. However, American Express is readily
distinguishable from the present case. In American Express,

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No. 01-2741 Aeroquip-Vickers v. Commissioner 25
4The majority properly emphasizes that “‘[u]niformity among the
circuits is especially important in tax cases to ensure equal and certain
administration of the tax system.’” (quoting Nickell v. Comm’r, 831 F.2d
1265, 127 0 (6th Cir. 1987)). This principle does not limit our obligation
to react to new Suprem e Court decisions. As discussed further below, the
majo rity wrongly relies on Chevron-era tax precedents. We canno t ignore
Mead in the nam e of co nsistency.
the court ruled that the interpretation was not at all in conflict
with the applicable regulation, since on its face the regulation
simply did not address the issue at hand. Id. at 1381 (“There
is nothing on the face of IRS Rev. Proc. 71-21 that defines the
term ‘services,’ . . . .”). By contrast, in the present case, the
regulation on its face addressed the issue with sufficient
clarity to warrant a ruling from the Tax Court, in favor of
Taxpayer. Thus, even though American Express professed to
accord “deference” to the IRS interpretation, the context in
that case was such that the amount of actual deference
accorded was not nearly as great as that accorded by the
majority in the present case.
While the language contained in Omohundro, U.S.
Freightways, and American Express does indicate that even
after Mead some “deference” is due to revenue rulings, it is
not at all clear that this deference is anything more than
Skidmore “deference,” which simply mandates that the
reviewing court must consider agency interpretations,
examining them for their “power to persuade.”
The following sections explain why the government’s
reasoning is invalid.
II.
Unlike the majority, I see no reason to rely on two equally
antiquated decisions from other circuits that deal with
ostensibly similar tax controversies.4 Both Walt Disney, Inc.
v. Comm’r, 4 F.3d 735 (9th Cir. 1993), and Salomon, Inc. v.
Comm’r, 976 F.2d 837 (2d Cir. 1992), accepted Petititoner’s
26 Aeroquip-Vickers v. Commissioner No. 01-2741
5As the majority notes, the Salomon court depended heavily on its
conclusion that
[i]n substance, if not in form, the direct and the circuitous
transaction are the same. Each achieves a rapid transfer of
section 38 p roperty outside the group. To distinguish between
them would deny economic reality. Mo reover, such a holding
would allow the common parent of a co nsolidated group . . . to
move section 38 property outside the group without paying
recapture taxes simply by first transferring the property to a
member subsidiary and then distributing the subsidiary’s stock
to the third -party.
976 F.2d at 842. Disney then quotes this text. See 4 F.3d at 73 9. W e
cannot conclude that Respondent intended “to mo ve section 38 property
interpretation in Rev. Rul. 82-20. These cases are
distinguishable and outdated.
In both Disney and Salmon, the taxpayers sought rulings
from the IRS as to whether they would qualify for tax-free
“D” reorganizations. Disney, 4 F.3d at 737; Salomon, 976
F.2d at 839. Also in both cases, the taxpayers represented to
the IRS that they would recapture ITCs associated with
property transferred to newly formed subsidiaries. The IRS
then issued private letter rulings stating that the transactions
would qualify as tax-free “D” reorganizations. See Priv. Ltr.
Rul. 8215003 (Oct. 22, 1981) (Disney ruling); Priv. Ltr. Rul.
8132115 (May 18, 1981) (Salomon ruling). Each taxpayer
then reorganized its business, but did not recapture the ITCs.
Disney, 4 F.3d at 736; Salomon, 976 F.2d at 838. In the
ensuing litigation, Commissioner did not challenge the
effectiveness of the reorganizations, see Disney, 4 F.3d at
738; Salomon, 976 F.2d at 839, but Commissioner never
expressly stipulated that the transactions met the requirements
of §§ 355 and 368(a)(1)(D). In contrast, Commissioner made
that stipulation in this case, which means Commissioner
concedes that the split-off was “not used principally as a
device for the distribution of the earnings and profits” of LOF
or LOF Glass. See I.R.C. § 355(a)(1)(B).5

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No. 01-2741 Aeroquip-Vickers v. Commissioner 27
outside the group witho ut paying recapture taxes,” see Salomon, 976 F.2d
at 842, when Co mmissioner concedes that the split-off was “not used
principally as a de vice for the distribution of the earnings and profits.”
See I.R.C. § 355(a)(1)(B).
Even without this distinction, neither Disney nor Salomon
should influence this Court. Both Disney and Salomon
explicitly stated that IRS revenue rulings deserve “great
deference.” Disney, 4 F.3d at 740-41; Salomon, 976 F.2d at
841. We cannot know what conclusion the Salomon or
Disney courts would have reached had they not afforded the
Commissioner “great deference” revenue rulings
unquestionably no longer receive. See Omohundro v. United
States, 300 F.3d at 1068; U.S. Freightways Corp., 270 F.3d
at 1141; Am. Express Co., 262 F.3d at 1382-83. This
tremendous difference makes Disney and Salomon
inapplicable in contemporary tax litigation.
III.
The next step is to consider whether the Commissioner has
offered a persuasive position.
A.
The consolidated return provisions in the tax code allow
multiple corporations (including a parent and subsidiaries) to
file a single consolidated tax return. I.R.C. §§ 1501,
1504(a)(1). The majority notes this, but fails to recognize
how the single taxpayer theory implicates the present
controversy.
To file a consolidated return, each subsidiary must be
linked, directly or indirectly, to the common parent by an
ownership chain of both 80% of the voting power of the
subsidiary and 80% of the value of the subsidiary’s stock.
I.R.C. § 1504(a)(2). Once a group of corporations elects to
file a consolidated return, the corporations must remain in the
group unless they cease to qualify as group members or the
28 Aeroquip-Vickers v. Commissioner No. 01-2741
Secretary consents to deconsolidation. I.R.C. §§ 1501, 1504;
Treas. Reg. 1.1502-75. Congress and the Treasury
Department realized that “[i]n substance, there was little
distinction between a corporation that chose to conduct its
business by means of divisions and another corporation that
preferred to operate its various businesses through
subsidiaries.” CRESTOL, ET AL., THE CONSOLIDATED TAX
RETURN ¶ 1.01 at 1-2 (5th ed. 2000). Therefore, consolidated
returns allow parents and subsidiaries to be treated as though
they were a “single taxpayer.” Commissioner concedes that
the economic approach underlying the consolidated return
regime is the “single taxpayer theory.” (Comm’r Br. at 14-
16.) As noted, the majority offers no response to this
argument.
B.
Congress delegated authority to the Treasury Department
to promulgate regulations governing the distribution of tax
credits among the members of a consolidated group.
Accordingly, the Secretary of the Treasury instituted
§ 1.1502-3, which covers the handling of “consolidated tax
credits,” including the disposition of Section 38 property. See
Treas. Reg. § 1.1502-3(f). Under section 1.1502-3(f)(2)(i):
a transfer of Section 38 property from one member of the
group to another member of such group during a
consolidated return year shall not be treated as a
disposition or cessation within the meaning of section
47(a)(1). If such Section 38 property is disposed of, or
otherwise ceases to be Section 38 property or becomes
public utility property with respect to the transferee,
before the close of the estimated useful life which was
taken into account in computing qualified investment,
then section 47(a)(1) or (2) shall apply to the transferee
with respect to such property (determined by taking into
account the period of use, qualified investment, other
dispositions, etc., of the transferor). Any increase in tax
due to the application of section 47(a)(1) or (2) shall be

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No. 01-2741 Aeroquip-Vickers v. Commissioner 29
6This is different from the ITC provisions in the I.R.C. § 47(a)(1) and
(2). In § 47, while a transfer between non-consolidated group members
may constitute a “mere change in form that does not trigger recapture,”
it is the transferor that the IRS holds liable for the recapture if the
transferee disposes of the property or the transferor disposes of its interest
in the transferee. T he transferee has no liability at all. I.R.C . § 47 (b).
added to the tax liability of such transferee (or the tax
liability of a group, if the transferee joins in the filing of
a consolidated return).
(emphasis added). Thus, the regulation tests the transferee to
determine whether it must recapture ITCs and whether the
transferee may report the recapture on its separate return (if it
has left the consolidated group) or the consolidated group
return (if the transferee remains a member of the group).6 No
other consolidated return regulation addresses ITC recapture
and no other regulation explicitly requires ITC recapture
when a transferee of Section 38 property is split-off from the
affiliated group in a valid “D” reorganization. The majority
offers no response to this argument.
C.
Once § 1.1502-3(f)(2)(i) imposes transferee liability for
ITC recapture on consolidated group members, § 1.1502-
3(f)(3) provides five illustrations of how § 1.1502-3(f)(2)(i)
will apply:
Example (1). P, S, and T file a consolidated return for
calendar year 1967. In such year S places in service
Section 38 property having an estimated useful life of
more than 8 years. In 1968, P, S, and T file a
consolidated return and in such year S sells such property
to T. Such sale will not cause section 47(a)(1) to apply.
Example (2). Assume the same facts as in example (1),
except that P, S, and T filed separate returns for 1967.
30 Aeroquip-Vickers v. Commissioner No. 01-2741
The sale from S to T will not cause section 47(a)(1) to
apply.
Example (3). Assume the same facts as in example (1),
except that P, S, and T continue to file consolidated
returns through 1971 and in such year T disposes of the
property to individual A. Section 47(a)(1) will apply to
the group and any increase in tax shall be added to the
tax liability of the group. For the purposes of
determining the actual period of use by T, such period
shall include S's period of use.
Example (4). Assume the same facts as in example (3),
except that T files a separate return in 1971. Again, the
actual periods of use by S and T will be combined in
applying section 47. If the disposition results in an
increase in tax under section 47(a)(1), such additional tax
shall be added to the separate tax liability of T.
Example (5). Assume the same facts as in example (1),
except that in 1969, P sells all the stock of T to a third
party. Such sale will not cause section 47(a)(1) to apply.
When closely scrutinized, these examples vindicate
Taxpayer’s position.
In example one, P, S, and T are members of a consolidated
group at all times. There is no § 47 disposition of the Section
38 property when S obtains it and sells it to T, because T has
simply assumed S’s role.
In example two, S acquires the property from P before the
corporations become members of a consolidated group.
S then transfers the property to T after the corporations form
a consolidated group. P still did not engage in a § 47 transfer
because the entire transaction occurred within a consolidated
group.

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No. 01-2741 Aeroquip-Vickers v. Commissioner 31
7Commissioner argues that this result occurs because the regulations
(and exam ples) assume that the co nsolidated group mem bers initially
intended for the property to remain within the group. This speculation
ignores § 1.1502-3(f)(2), which imposes liability based on whether or not
an intra-group transfer took place, not whether or not the parties intended
the Section 38 assets to rem ain in the group after the transfer. N otably,
the regulations contemplate that T may leave the group and file its own
return or a return with a new consolidated group . See Treas. Reg.
§ 1.1 502 -3(f)(2)(i).
In example three, the corporations acquire and transfer the
Section 38 property while belonging to a consolidated group,
but T then transfers the Section 38 property to some unrelated
party. This triggers a § 47 ITC recapture for which the
consolidated group is responsible.7
In example four, when T transfers the Section 38 property
to an unrelated third party, P, S, and T are no longer members
of a consolidated group. Thus, T files a separate return. T’s
transfer outside the group triggers the ITC recapture and that
“additional tax shall be added to the separate tax liability of
T.” Treas. Reg. § 1.15.02-3(Ex. 4). The liability is not
imposed on S, the transferor of the Section 38 property, or P,
the other group member. Transferee liability is imposed on
T. This reflects the policy embedded in § 47 and the ITC
provisions that the responsible entity (now T) must continue
to use Section 38 property its trade or business for the
appropriate period.
In example five (like example one), the Section 38 property
was acquired by S and transferred to T while all parties
remained members of a consolidated group. When P sells T’s
stock to a third party, no recapture occurs. The rule of
transferee liability dictates that there is no ITC recapture
because T remains liable for ITC obligations as the transferree
of Section 38 property. If T disposes of the property, ceases
using it in its trade or business, or joins a new consolidated
32 Aeroquip-Vickers v. Commissioner No. 01-2741
8If T joins a new consolidated group, then T and the other members
of the new consolidated gro up wo uld then be liable. See Tre as. Reg.
§ 1.1502 -3(f)(2).
9As described above, this transfer occurred in exchange for the third
party’s (Pilkington’s) stock in the parent (LOF).
group, T will be liable.8 The original transferor has no post-
transfer recapture liability.
Example five reflects precisely what happened in this case.
A parent (LOF) transferred Section 38 assets to a subsidiary
(LOF Glass) that was a member of the parent’s consolidated
group. The parent then transferred its stock in the subsidiary
to a third party outside the consolidated group (Pilkington).9
According to example five, any liability for recapture lies
with the transferee, not with the original parent/transferor.
D.
In Rev. Rul. 82-20, 1982-1 C.B. 6, the IRS considered the
application of the ITC recapture provisions of the IRC and the
consolidated return regulations. Specifically, the IRS applied
§ 1.1502-3(f) to a corporate reorganization which, as in this
case, qualified under §§ 355(a)(1) and 368(a)(1)(D) for
nonrecognition treatment. The ruling involved a transfer of
assets, including Section 38 property, by a parent corporation
to its wholly-owned subsidiary, followed by a distribution of
the subsidiary’s stock to one of the parent corporation’s
shareholders. Since the parent and the subsidiary filed a
consolidated tax return, the situation addressed in the
Revenue Ruling is very similar to that presently before this
Court.
The ruling initially noted that under Treas. Reg. § 1.47-
3(f)(5)(ii) a recapture determination is required when the
transferor of the Section 38 property does not retain a
substantial interest in the subsidiary. This is in tension with
§ 1.1502-3(f)(2)(i), which does not treat the transfer from one

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No. 01-2741 Aeroquip-Vickers v. Commissioner 33
member of a consolidated group to another as a § 47
disposition. To reconcile these provisions, the Commissioner
assumed that the consolidated return regulation, § 1.1502-
3(f)(2)(i), was “premised on the assumption that the property
[would] remain[] within the consolidated group. When there
is no intention at the time of the transfer to keep the property
within the consolidated group, the transaction should be
viewed as whole and not as separate transactions.” Rev. Rul.
82-20.
The rationale, according to the Commissioner, is that a
parent corporation’s transfer of Section 38 property to its
wholly-owned subsidiary is not treated as a disposition so
long as the parent corporation substantially owns the
subsidiary. I.R.C. § 47(b). When such a transfer is followed
by a split-off of the subsidiary’s stock, however, recapture is
imposed immediately because the transferor no longer retains
a “substantial interest” in the transferee. If the government
has correctly interpreted § 1.1502(f)(2)(i), then Taxpayer
must recapture the ITCs. The majority offers no response to
this argument.
E.
Rev. Rul. 82-20 is inconsistent with § 1.1502(f)(2)(i)
because the treasury regulation focuses on making the
transferee responsible for the Section 38 property, whereas
the Revenue Ruling looks to the “intent” of the parties in the
consolidated group. Depending on whether the parties in the
consolidated group intended to transfer the Section 38
property to a third party ultimately, either the transferor or the
transferee may have to recapture the ITCs.
First, if intent were the decisive factor under the regulation,
the regulation would make that clear. Commissioner argues
that the regulation does make that clear, because in crucial
example five, the parent, subsidiary, and transferee file
consolidated returns in 1967 and 1968, and the subsidiary
transfers its Section 38 property in 1968, but the parent does
34 Aeroquip-Vickers v. Commissioner No. 01-2741
10This example stand in contrast to this case, in which the parent
waited only a weekend to make the transfer.
11Treas. Reg. § 1.1502-3(f)(2)(i) states:
a transfer o f Section 38 property from one member of the group
to another member of such group during a consolidated return
year shall not be treated as a disposition or cessation within the
meaning of section 47(a)(1). If such Section 38 property is
disposed of, or otherwise ceases to be Section 38 property or
becomes public utility property with respect to the transferee,
before the close of the estimated useful life which was taken into
not sell the transferee’s stock until 1969. § 1.1502-3(f)(3)
(Ex. 5). Commissioner concludes that the parent does not
recapture the ITCs in this example only because the parent
waited a year before selling the transferee’s stock.10 Since
the hypothetical parent waited a year, the consolidated group
must not have “intended” to move the assets outside of the
group when it transferred them within-group to its subsidiary.
This extraordinarily strained hypothesis is hard to accept
primarily because the relevant regulations never mention
intent. One cannot reasonably believe that the Treasury
Department meant an intent test but, rather than saying so
expressly, it said so through the circuitous route
Commissioner defends. A parent company could certainly
wait a year before transferring assets outside the consolidated
group, yet have intended to make the transfer from the outset.
Most likely, example five has the relevant events occurring in
different years simply to make the hypothetical as simple and
clear as possible with respect to the order in which the
transactions take place. That certainly seems a more plausible
explanation than to assume the reference to a different year
somehow implies an intent standard. It also seems reasonable
that the Treasury Department merely wanted example five to
illustrate the clear language in § 1.1502-3(f)(2), which places
obligations on the transferee without discussing the
transferor’s intent.11

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No. 01-2741 Aeroquip-Vickers v. Commissioner 35
account in computing qualified investment, then section 47(a)(1)
or (2) shall apply to the transferee with respect to such property
(determined by taking into account the period of use, qualified
investment, other dispositions, etc., of the transferor). Any
increase in tax due to the application o f section 47(a)(1) or (2)
shall be ad ded to the tax liability of such transferee (or the tax
liability of a group, if the transferee joins in the filing of a
consolidated return).
(emp hasis added ).
The majority claims that:
the more persuasive interpretation is that the decision to assign
different events to different calendar years in Example 5 of CRR
§ 1.1502-3(f), rather than merely listing the order of events, has
greater significance. See 2A S inger, N orman J., Sutherland
Statutes and Statutory Construction, § 46 .06 at 192 (2000 ed.)
(“every word of a statute must be presumed to have been used
for a purpo se”).
The majo rity wants to infer an intent test because example five lists
separate calend er years, instead of simply the ord er of events. This
argument is silly. Had the Commissioner listed the order of events, rather
than calendar years, it would not make an intent test a less plausible
inference—a taxpayer intending to transfer § 47 assets out of the
consolidated group would could still undertake the same series of
transactions in the sam e allegedly nefarious sequence. T he reference to
“calendar years” as opposed to “the order of events” indicates nothing
abo ut whether the C omm issioner meant to inco rporate an intent test.
The Commissioner’s choice of language, however, tells us much
more. If the Commissioner wanted an intent test, he could have used the
word “intent” in his exam ple. Sutherland also sup ports my interpretation.
See, e.g., 2A NO R M A N J. SINGER , SU T H ER LA N D ST A TU T ES A N D
STATUTORY CO N S TR U C TIO N § 46.06 at 135 (2000 ed.) (“W hat a
legislature says in the text of a statute is considered the best evidence of
the legislative intent or will.”); SINGER , supra, § 47:23 at 304-06
(explaining that the doctrine of expressio unius est exclusio alterius
indicates “an inference that all omissions should be understood as
exclusions”).
Second, the interpretation in Rev. Rul. 82-20 fails to respect
the single-taxpayer theory that underlies the consolidated
36 Aeroquip-Vickers v. Commissioner No. 01-2741
12Commissioner’s position is also inconsistent with the notion that
the entity with the ability to keep the Section 38 property in the
app ropriate trade or business use should be the same entity that faces
recapture if it fails to do so . It may be more efficient to have the
taxpaying party be the one that holds the assets rather than force the
transferor to attempt to guarantee their future use ex an te by contract,
since the property-holder (transferee) can more easily adap t to changes in
its economic circumstances over the relevant life of the Section 38
material. Notably, this case is not about whether a tax gets paid, but who
will pay it—the transferee or the transferor. Thus, siding with Taxpayer
will not necessarily encourage tax avoidance.
return regulations. As already noted, according to I.R.C.
§ 47(a) (1) and (2), if a transfer between non-consolidated
group members triggers recapture, the transferor is liable for
the recapture while the transferee has no liability. I.R.C.
§ 47(b); Treas. Reg. § 1.47-3(f)(5). The single taxpayer
theory, however, involves ignoring transactions between
members of a consolidated group. By attempting to impose
recapture liability on the transferor, Commissioner would
create situations—like this one—where liability would remain
with the group even after the subsidiary holding the assets has
left. This conflicts with the single-entity approach by treating
a now-separate corporation as though it still belonged to the
consolidated group.12 It is significant, therefore, that the
Supreme Court attempts to interpret the consolidated return
regulations in a manner consistent with the single-entity
theory. See United Dominion Industrs. v. United States, 532
U.S. 822 (2001) (holding that the single-entity approach is the
proper method for calculating product liability losses among
a consolidated group).
Due to the single-taxpayer theory embodied in the
consolidated return regulations and the resulting transferee
liability imposed on LOF Glass for the ITC recapture, LOF’s
transfer of the Section 38 property to LOF Glass did not
trigger § 47; there was no disposition of Section 38 property,
and thus no ITC recapture. See Treas. Reg. § 1.1502-
3(f)(2)(i). Commissioner argues that even if this is the correct

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No. 01-2741 Aeroquip-Vickers v. Commissioner 37
13And it is not necessarily an intentional shift, since Commissioner
stipulated that the reorganization was “not used principally as a device for
the distribution of the earnings and profits of LOF or LOF Glass.” (See
J.A. at 57.) The Co mmissioner’s stipulation is discussed m ore tho roughly
in conjunctio n with the step-transaction issue be low.
interpretation of § 1.1502-3(f)(2)(i), the initial transaction
became relevant for § 47 purposes when LOF Glass left the
LOF-affiliated group because the parent (LOF) no longer
retained interest in the Section 38 property.
In April of 1986, LOF Glass split-off from the LOF
affiliated group in the “D” reorganization with the exchange
of LOF Glass shares for Pilkington’s interest in LOF. This
occurred immediately after LOF made LOF Glass an
independent subsidiary, but the parties stipulated that LOF
Glass continued to use the Section 38 property in the glass
business both before and after LOF Glass left the consolidated
group. When LOF Glass left the group, it did so subject to
the transferee obligation for the ITC recapture that arose when
it received the Section 38 property along with the LOF Glass
Division business initially. See Treas. Reg. § 1.1502-
3(f)(2)(i).
Although Commissioner argues, in accordance with Rev.
Rul. 82-20, that these intra-group transfers and the “D”
reorganization evince an intent to avoid ITC recapture by
disposing of the property outside of the group, the worst the
transactions show is nothing more than a shift in ITC
recapture liability.13 By transferring the LOF Glass Division
and the Section 38 property within the consolidated group, the
parties imposed liability for the ITC recapture on LOF Glass.
When Pilkington acquired LOF Glass—albeit one day
later—LOF Glass brought with it the same ITC recapture
obligation. If LOF Glass became a member of a Pilkington
consolidated group, then that consolidated group would be
subject to ITC recapture as well. See Treas. Reg. § 1.1502-
3(f)(2)(i). Under the consolidated return regulations, the ITC
38 Aeroquip-Vickers v. Commissioner No. 01-2741
recapture obligations remained, although now assigned to a
different party.
IV.
Commissioner also argues that the interpretation of
§ 1.1502-3(f)(2)(i) contained in Rev. Rul. 82-20 is consistent
with the “step-transaction doctrine.” Commissioner notes that
the “incidence of taxation depends upon the substance of a
transaction,” rather than its form. Comm’r v. Court Holding
Co., 324 U.S. 331, 334 (1945); see also Kluener v. Comm’r,
154 F.3d 630, 634 (6th Cir. 1998). “The step transaction
doctrine is a judicial device expressing the familiar principle
that in applying the income tax laws, the substance rather than
the form of the transaction is controlling.” Brown v. United
States, 782 F.2d 559, 563 (6th Cir. 1986) (internal quotations
omitted). Under this doctrine, “interrelated yet formally
distinct steps in an integrated transaction may not be
considered independently of the overall transaction.”
Comm’r v. Clark, 489 U.S. 726, 738 (1989). Although
various courts have applied different tests to determine
whether the step-transaction doctrine applies in a particular
case, this Court uses the “end result” test. Brown, 782 F.2d
at 564. Pursuant to the “end result” test, “purportedly
separate transactions will be amalgamated into a single
transaction when it appears that they were really component
parts of a single transaction intended from the outset to be
taken for the purpose of reaching the ultimate result.” Id.
(internal quotation marks omitted).
The appeal of step-transaction analysis rapidly dissipates
when one remembers that Commissioner stipulated that the
transaction appropriately received “D” reorganization
treatment, which means Commissioner stipulated, inter alia,
that the split-off transaction was “not used principally as a
device for the distribution of the earnings and profits” of LOF
or LOF Glass. See I.R.C. § 355(a)(1)(B). The Commissioner
thus conceded that LOF and LOF Glass were engaged in the
“active conduct of a trade or business” for at least five years

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No. 01-2741 Aeroquip-Vickers v. Commissioner 39
14One sentenc e drafted by the majority deserves particular attention.
The majority claims, without citation, that “[h]ere, although the individual
steps of the transaction had a legitimate business reason, the transaction
must be treated as a single unit and judged by its end result.” I have no
idea how a party could possibly intend several steps to achieve various
legitimate business purposes but simultaneously intend the series of steps
to accomplish an illegitimate tax-avoidance objective. As a matter of
logic, if an agent undertakes a series of related acts, and if each step is
viewed as part of a process intended to achieve an legitimate goal, it is
impo ssible to view all steps as intending to serve illegitimate ends.
Somewhere along the line, the agent must have intended at least one of the
steps to acco mplish something improper (in this case, without a legitimate
business purpose). Commissioner concedes Respondent acted with a
business purpose at every stage.
prior to the transaction and for five years after Pilkington
became the owner of LOF Glass. See I.R.C. § 355(a) and (b).
If the transfers from LOF Glass Division to LOF Glass and
ultimately to Pilkington had economic viability (and thus
were not merely tax avoidance transactions), then the step-
transaction doctrine cannot apply. See Rev. Rul. 79-250,
1979-2 C.B. 156, 157 (explaining that where each step in a
corporate reorganization has an independent legal and
economic significance, the step-transaction doctrine does not
apply).
The majority cites no authority for the proposition that the
IRS can accept an entire transaction as justified by a
legitimate business purpose to determine whether “D”
reorganization treatment will apply, but not accept a part of
that same transaction as motivated by a legitimate business
purpose exclusively to determine ITC recapture—particularly
given that the “substance over form” principle requires courts
to view transactions “as a whole, and each step, from the
commencement of negotiations to the consummation of the
sale, is relevant.”14 Court Holding, 324 U.S. at 334.
The majority further concedes, as it must, that this case
does not involve a situation where “‘[t]he whole undertaking
. . . was in fact an elaborate and devious form of conveyance
40 Aeroquip-Vickers v. Commissioner No. 01-2741
15In fact, the Associa ted Gro cers court “share[d] the government’s
skepticism as to the alleged significance of taxpayer’s claimed business
purp ose.” 927 F.3d at 1527. Associa ted Gro cers also involved a
com pletely different statutory provision—a liquidation under I.R.C . § 332
rather than a § 368 restructuring. Id. at 1519.
masquerading as a corporate reorganization, and nothing
else.’ Gregory v. Helvering, 293 U.S. 465, 470 (1935)
(emphasis added).” By emphasizing “and nothing else,” the
majority implies that, despite the government’s stipulation,
both a legitimate business purpose and an improper tax
avoidance objective motivated the disputed transaction. The
majority then cites a Tenth Circuit case, Associated
Wholesale Grocers, Inc. v. United States, 927 F.2d 1517,
1526 (10th Cir. 1991), for the general proposition that a
taxpayer may not dodge provisions of the tax code merely
because the taxpayer can articulate some business purpose for
its activity. In the present dispute, however, Taxpayer offers
this Court much more than a general assurance that it had a
business purpose for its transaction.15
Again, the Commissioner stipulated that the transaction
properly received “D” reorganization treatment, which means
Commissioner stipulated, inter alia, that the split-off
transaction was “not used principally as a device for the
distribution of the earnings and profits” of LOF or LOF
Glass. See I.R.C. § 355(a)(1)(B) (emphasis added). The
phrase “a device for the distribution of . . . earnings and
profits” means simply “a device for the distribution of . . .
earnings and profits [so as to avoid taxes].” Id. Put
differently, the Commissioner conceded that the split-off was
not principally a tax avoidance mechanism. The majority’s
Tenth Circuit step-transaction case does not involve any
stipulation by Commissioner—let alone a concession that the
taxpayer’s transaction did not principally serve a tax-
avoidance purpose.
Moreover, in Rev. Rul. 79-250, 1979-2 C.B. 156, the
Commissioner conceded that in § 368 situations like this one,

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No. 01-2741 Aeroquip-Vickers v. Commissioner 41
the step-transaction doctrine would not apply. According to
the Commissioner, “the substance of each of a series of steps
will be recognized and the step transaction doctrine will not
apply, if each such step demonstrates independent economic
significance, is not subject to attack as a sham, and was
undertaken for valid business purposes and not mere
avoidance of taxes.” (emphasis added). This seems to
resolve the matter, and the majority has no rational reason to
defer to Rev. Rul. 82-20 at the expense of Rev. Rul. 79-250.
V.
More than two decades ago, this Court correctly observed
that the Treasury Department’s consolidated return
regulations should receive greater deference than
interpretations of those regulations. See Wolter Constr. v.
Comm’r, 634 F.2d 1029, 1034-35 (6th Cir. 1980). This
principle unquestionably applies here. It seems either very
difficult or impossible for an interpretive statement to survive
Skidmore review when that statement conflicts with the text
it purports to interpret. Commissioner’s Revenue Ruling is
not persuasive because it contradicts the text and examples in
§ 1.1502-3(f).
For all the aforementioned reasons, I respectfully dissent.

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