A taxpayer, like the Internal Revenue Service, may argue that the form of a transaction is different from its substance, and that the substance should govern the tax consequences of the transaction. Since the form is typically specified by documents drafted with the participation of the taxpayer, courts have developed doctrines that often dismiss substance-over-form arguments made by taxpayers. In Complex Media v. Commissioner (T.C. Memo 2021-14), however, a corporate taxpayer that acquired a business in exchange for stock and other property prevailed over the IRS, on the basis of an argument that the substance of the transaction was different from its form, and was allowed to claim amortization deductions attributable to a basis step-up arising from the substance of the transaction.

Facts

Complex Media Holdings (CMH), a partnership for tax purposes, was the holding company for two subsidiaries that published a magazine and engaged in related online activities. OnNetworks, Inc. (ONI) was identified as a potential provider of funds needed for these activities. Because of a prior unsuccessful business venture, the cash available to ONI was less than the liquidation preference of ONI’s outstanding preferred shares, and the combination of ONI with CMH was therefore negotiated between CMH and ONI’s preferred shareholders. During negotiations, friction developed between Seth Gerszberg, a member of CMH, and the preferred shareholders of ONI, and it was agreed that a portion of the ONI cash would be used to redeem Mr. Gerszberg’s interest in CMH.

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