Free Joint Status Report - District Court of Federal Claims - federal

Case 1:01-cv-00256-CFL

Document 79

Filed 10/16/2006

Page 1 of 4

IN THE UNITED STATES COURT OF FEDERAL CLAIMS
____________________________________________ ) MARRIOTT INTERNATIONAL ) RESORTS, L.P., MARRIOTT ) INTERNATIONAL JBS CORPORATION, ) Tax Matters Partner, ) ) Plaintiff, ) ) v. ) ) THE UNITED STATES, ) ) Defendant. ) ____________________________________________)

Nos. 01-256T & 01-257T (Judge Charles F. Lettow)

JOINT SUBMISSION PURSUANT TO THE COURT'S REQUEST AT AUGUST 18, 2006 HEARING Pursuant to the Court's request at the hearing held on August 18, 2006, the parties, through their respective counsel, respectfully submit the charts appended as Exhibit A hereto summarizing the transaction at issue in the above-captioned actions; the Federal income tax consequences according to Plaintiff, Marriott International Resorts, L.P., Marriott International JBS Corporation ("Marriott"); and the adjustments made to Marriott's tax treatment by the Internal Revenue Service ("IRS"). In support of this joint submission, the parties respectfully state: 1. At the hearing held on August 18, 2006, the Court requested the

parties to submit "a chart that indicates the flows of assets and liabilities to various entities in this case and then also indicates at various points who's taking what deductions or what the tax consequences are, just from the standpoint of the

Case 1:01-cv-00256-CFL

Document 79

Filed 10/16/2006

Page 2 of 4

returns and how they've been adjusted . . . ." (Aug. 18, 2006 Hearing Tr. 22.) The charts appended as Exhibit A hereto are submitted pursuant to this request. 2. The charts appended as Exhibit A are intended solely to assist the

Court in understanding the evidence to be presented at trial and do not reflect any stipulations or admissions by the parties as to any facts for purposes of this action or preclude the parties from introducing evidence at trial that may be inconsistent with their contents. 3. Marriott's position regarding the Federal income tax consequences of

the transaction at issue, as shown in the charts appended as Exhibit A, is the position alleged in the Complaints, which correct certain errors in the original return. 4. The charts in Exhibit A use the following abbreviations: a. "MII" refers to Marriott International, Inc., which during the 1994 taxable year at issue was a corporation organized and existing under the laws of the State of Delaware and the common parent of an affiliated group of corporations (including but not limited to MORI, MICC, and JBS) filing a consolidated Federal income tax return. b. "MORI" refers to Marriott Ownership Resorts, Inc., which during taxable year 1994 was a preexisting wholly-owned subsidiary of MII.

2

Case 1:01-cv-00256-CFL

Document 79

Filed 10/16/2006

Page 3 of 4

c.

"MICC" refers to Marriott International Capital Corporation, which during taxable year 1994 was a preexisting wholly-owned subsidiary of MII.

d. e. 5.

"JBS" refers to Marriott International JBS Corporation. "MIR" refers to Marriott International Resorts, L.P.

For presentation purposes, the charts in Exhibit A reflect the following

simplifying assumptions: a. b. All dollar amounts are approximate. MORI's $65 million short sale in April 1994 and $10 million short sale in August 1994 are shown as a single $75 million short sale. c. MORI's contribution of Repos to MIR ($63.7 million in May 1994 and $9.5 million in August 1994) is shown as a single contribution of $73 million in Repos. d. MORI's contribution of mortgages to MIR ($65.2 million in May 1994, $11.9 million in August 1994 and $6.2 million in October 1994) is shown as a single contribution of $83 million in mortgages. e. In a few charts, JBS's 1% interest in MIR is ignored as immaterial and all results are tracked through MICC.

3

Case 1:01-cv-00256-CFL

Document 79

Filed 10/16/2006

Page 4 of 4

f.

Results from operations of the Marriott subsidiaries involved and of MIR that are not relevant to this presentation are ignored.

g.

Complexities from the repayment of principal of mortgages while owned by MIR are ignored.

Respectfully submitted,

s/Robert L. Willmore Harold J. Heltzer, Esq. (Attorney of Record) Robert L. Willmore, Esq. Alex E. Sadler, Esq. Crowell & Moring LLP 1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (202) 624-2915 (202) 628-5116 (fax) Attorneys for Plaintiff October 16, 2006

s/G. Robson Stewart* G. Robson Stewart, Esq. U.S. Department of Justice ­ Tax Division Court of Federal Claims Post Office Box 26 Ben Franklin Station Washington, D.C. 20044 (202) 307-6493 (202) 514-9440 (fax)

Attorney for Defendant October 16, 2006 *Signed with permission by Robert L. Willmore

2849717

4

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 1 of 9

Pre-September 30, 1994
MORI, in the regular course of its business, obtains $83 million of fixed-rate, mostly 10-year term mortgages from timeshare purchasers.

MII
100% 100%

MORI

MICC

$83 MM mortgages

Tax Consequences:
Ø MORI has a tax basis in the timeshare mortgages of $83 million. (MORI has income on the sale of the timeshares financed with the mortgages, but this is ignored for purposes of this analysis.)

1

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 2 of 9

April & August 1994
MORI short-sells $75 million of 5-year Treasury notes in two short sales ($65 million in April and $10 million in August 1994), receiving cash proceeds of $73 million in total. MORI invests the $73 million proceeds in 30-day repurchase agreements ("repos"), which are periodically rolled over. MORI has a short-sale obligation ("SSO") to return the borrowed Treasury notes.

MII
100% 100%

MORI

MICC

Ø $83 MM mortgages Ø $73 MM repos Ø SSO

2

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 3 of 9

May 1994
MII organizes JBS with a contribution of $1 million.

MII
100% 100% 100%

JBS

MORI

MICC

Ø $1 MM cash

Ø $83 MM mortgages Ø $73 MM repos Ø SSO

Tax Consequences:
Ø MII has a basis of $1 million for its JBS stock.

3

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 4 of 9

May - October 1994
MORI and JBS organize MIR. MORI contributes the $83 million of mortgages (in May, August and October 1994) and $73 million of repos (in May and August 1994) to MIR, which also assumes MORI's SSO. MORI has a 99% interest in MIR. JBS contributes $1 million of cash to MIR. JBS has a 1% interest in MIR.

MII
100% 100% 100%

JBS
1%

MORI
99%

MICC

MIR

Ø $83 MM mortgages Ø $73 MM repos Ø $1 MM cash Ø SSO

Tax Consequences Per Marriott:
Ø Ø MORI's and JBS's respective contributions to MIR are tax-free under I.R.C. § 721. MIR has a carryover basis for the mortgages of $83 million and for the repos of $73 million under I.R.C. § 723. MORI's basis for its MIR interest is $156 ($83 + $73) million under I.R.C. § 722. MIR's assumption of the SSO has no tax effect, because the SSO is not a "liability" under I.R.C. § 752.

Ø

4

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 5 of 9

September - October 1994
MIR sells $73 million of repos for $73 million. MIR acquires Treasury notes with a face value of $75 million for $72 million. The Treasury notes are used to close the SSO. MIR has $1 million remaining from the repo proceeds.

MII
100% 100% 100%

JBS
1%

MORI
99%

MICC

Ø $83 MM mortgages

MIR

Ø $3 MM receivable Ø $1 MM cash

Tax Consequences Per Marriot:
Ø MIR has no gain or loss from disposition of the repos. MIR recognizes $1 million of taxable gain on the short sale (i.e., $73 million of cash proceeds ­ $72 million cost to close SSO). MORI's basis for its MIR interest is increased to $157 ($156 + $1) million under I.R.C. § 705(a)(1)(A). MII's basis for its stock in MORI is increased by $1 million under Treas. Reg. § 1.1502-32(b)(2)(i).

Ø

Tax Consequences Per IRS:
Ø The Notice of Final Partnership Administrative Adjustment (FPAA) issued with respect to MIR's Partnership Return (Form 1065) for the tax year ended October 28, 1994, reduced the partners' (JBS and MORI) bases in the partnership by $75 million because the U.S. Treasury notes short sale obligation constitutes a liability under I.R.C. § 752. Thus, MORI's basis for its MIR interest of $157 million was reduced to $82 million. 5

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 6 of 9

October 1994
MORI transfers its 99% interest in MIR to MICC.

(Page 1 of 2)

MII
100% 100% 100%

JBS
1%

MORI
99%

MICC

New MIR

Ø $83 MM mortgages Ø $3 MM receivable Ø $1 MM cash

6

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 7 of 9

(Page 2 of 2) Tax Consequences Per Marriott:
Ø Distribution and Contribution: § § § § § Ø Under Rev. Rul. 78-83, the transfer is treated as a distribution of the MIR interest by MORI to MII, followed by a contribution of the MIR interest by MII to MICC. MII has a carryover basis of $157 million for its interest in MIR under former Treas. Reg. § 1.1502-14(a)(4). MII's basis for its MORI stock is reduced by $157 million under Treas. Reg. § 1.1502-32(b)(2)(iv). MII's contribution to MICC is an I.R.C. § 351 transaction in which MICC takes a carryover basis ($157 million) for its MIR interest under I.R.C. § 362. MII's basis in the stock of MICC increases by $157 million under I.R.C. § 358(a)(1). The distribution from MORI to MII terminates MIR under I.R.C. §§ 708 and 761(e)(1). The termination is treated as the distribution of MIR's assets to MICC and JBS and the immediate recontribution of those assets by MICC and JBS to a new MIR partnership under former Treas. Reg. § 1.708-1(b)(1)(iv). The MIR assets distributed to MICC take a basis equal to MICC's basis for its MIR interest, $157 million, of which $154 million is allocated to the mortgages, under I.R.C. § 732(b). The MIR assets that MICC contributes to the new MIR have a carryover basis of $157 million under I.R.C. § 723. The MIR assets distributed to JBS take a basis equal to JBS's basis for its MIR interest, $1 million, which is allocated to the mortgages JBS contributed to the new MIR, under I.R.C. § 732(b). The new MIR's basis for the mortgages is $155 ($154 + $1) million under I.R.C. § 723.

Termination and Recontribution: §

§ § § §

7

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 8 of 9

November 1994

(Page 1 of 2)

The new MIR sells a partial interest in the timeshare mortgages to TIAA for $82 million, which is distributed by the new MIR to MICC and by MICC to MII. $151 million of the mortgages' basis is allocated to the interest sold to TIAA.

MII
100% 100% 100%

JBS
1%

MORI
99%

MICC

New MIR

Ø $82 MM interest in mortgages Ø $3 MM receivable Ø $1 MM cash Ø $1 MM interest in mortgages

TIAA

8

Case 1:01-cv-00256-CFL

Document 79-2

Filed 10/16/2006

Page 9 of 9

(Page 2 of 2) Tax Consequences Per Marriott:
Ø The amount realized by the new MIR from the sale is $82 million. The basis of the sold interest is $151 million. The new MIR recognizes a loss of $69 ($82 ­ $151) million, which is included in the MII consolidated return. The loss reduces MICC's basis in the new MIR by $69 million under I.R.C. § 705(a)(2)(A), and the distribution reduces MICC's basis in the new MIR by $82 million under I.R.C. § 733(1), a total of $151 million. The loss and distribution also reduce MII's basis for its stock in MICC by $69 million and $82 million, respectively, a total of $151 million.

Ø

Ø

Tax Consequences Per IRS:
Ø The FPAA issued with respect to the new MIR's Partnership Return (Form 1065) for the tax year ended December 30, 1994, adjusted the amount reported on the sale of the timeshare mortgages. The new MIR claimed a loss of $69 million on the sale. Based on the basis reduction of $75 million applied to the old MIR's October 28, 1994, return, the IRS determined that there was actually a gain of $2 million on the sale of the mortgages by the new MIR and accordingly increased its gross income by $72 million.

9