ACF-Brill Motors Co. v. Comm'r of Internal Revenue, Docket No. 14256.

• Decision Date: 24 February 1950
• Docket Number: Docket No. 14256.
• Citation: 14 T.C. 263
• Parties: ACF-BRILL MOTORS COMPANY (SUCCESSOR BY MERGER TO AMERICAN CAR AND FOUNDRY MOTORS COMPANY), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

14 T.C. 263

ACF-BRILL MOTORS COMPANY (SUCCESSOR BY MERGER TO AMERICAN CAR AND FOUNDRY MOTORS COMPANY), PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 14256.

Tax Court of the United States.

Promulgated February 24, 1950.

1. The transaction involving the exchanges of the shares of stock upon the organization of petitioner's predecessor was tax-free within the meaning of section 203(b)(4) of the Revenue Act of 1926, and the petitioner's predecessor in 1943 held the stock of corporation X and Y on an other than cost basis as prescribed by Regulations 110, sec. 33.31(c)(2)(iv)(F).

2. Upon the facts, held, petitioner's predecessor was entitled to accrue and deduct on its 1943 consolidated return the amount of $17,986.84 for Pennsylvania income and franchise taxes of one of its subsidiaries.

3. Upon the facts, held, petitioner is entitled to deduct in 1943 the amount of $34,169.55 for California franchise tax based on the 1942 income of one of its subsidiaries.

4. Held, petitioner is not entitled to deduct an amount paid for California franchise tax for the taxable year 1943, which tax was based on the 1943 income of that subsidiary. John E. Hughes, Esq., John W. Hughes, Esq., and Glen W. Watkins, Esq., for the petitioner.

Karl W. Windhorst, Esq., for the respondent.

The respondent determined a deficiency in petitioner's excess profits tax for the year 1943 in the amount of $346,223.18. Certain adjustments made by him are not contested. Respondent has conceded that petitioner was correct in respect of one of the assignments of error. The questions for determination are:

(1) Did petitioner's predecessor, for the purpose of computing the amount of consolidate invested capital, hold the stock of Hall-Scott Motor Car Co. and Fageol Motors Co. with an ‘other than cost basis‘ as prescribed by section 33.31(c)(2)(iv)(F) of Regulations 110?

(2) Is the petitioner entitled to accrue and deduct on its 1943 consolidated tax return the item of $17,896.84 representing Pennsylvania income and franchise taxes of ACF Motors Co. for the years 1938 to 1943, inclusive?

(3) Is petitioner entitled to an additional deduction for 1943 of $34,169.55 for California franchise tax based on the 1942 income of its subsidiary, Hall-Scott Motor Car Co.?

(4) Should petitioner be permitted to deduct for the taxable year 1943 an amount paid by Hall-Scott Motor Car Co. for California franchise tax, which tax was based on 1943 income of that subsidiary?

FINDINGS OF FACT.

Part of the facts were stipulated and they are so found.

Petitioner was incorporated under the laws of the State of Delaware on August 1, 1944, with its principal office at Philadelphia, Pennsylvania. It is the successor by merger of American Car & Foundry Motor Co. (hereinafter sometimes referred to as petitioner's predecessor), a Delaware corporation, with the Brill Corporation, also of Delaware. Petitioner's tax returns for the year involved were filed by its predecessor with the collector of internal revenue for the first district of Pennsylvania. It filed consolidated corporation income and excess profits tax returns under the provisions of section 141 of the Internal Revenue Code for the calendar year 1943 on behalf of itself and its wholly owned subsidiaries, Hall-Scott Motor Car Co., a California corporation (sometimes hereinafter referred to as Hall-Scott); the Fageol Motors Co., an Ohio corporation (hereinafter referred to as Fageol Ohio); the Fageol Co., an Ohio corporation; and the ACF Motors Co. of Delaware.

The American Car & Foundry Motors Co. and all its subsidiary companies used the accrual method of accounting and filed their tax returns on that basis.

Issue 1.— In the year 1925 it became apparent to the officers of American Car & Foundry Co. of New York, a manufacturer of railroad cars and equipment, and the J. G. Brill Co. (sometimes hereinafter referred to as Brill), of Philadelphia, Pennsylvania, a manufacturer of interurban and street railway cars, that the street railway business was on the downgrade and that the manufacture and sale of buses was becoming increasingly important. Hence, W. H. Woodin, president of American Car & Foundry Co., and S. M. Curwen, president of J. G. Brill Co., became interested in the manufacture of buses. They commenced activities to procure that type of business almost immediately.

In June 1925 Woodin and Curwen commenced negotiations to acquire the assets or the controlling interest of stock of the Hall-Scott Motor Car Co. of California, a manufacturer of a well known engine for buses; the Fageol Motor Co. of California (hereinafter referred to as Fageol California); and the Fageol Motor Co. of Ohio, manufacturers of bus bodies.

Prior to these negotiations, however, Hall-Scott and Fageol California had been contacted relative to the acquisition of their assets or a controlling interest in their stock by a bankers' syndicate. Those companies granted the bankers' syndicate an option to purchase. On July 3, 1925, W. H. Woodin telegraphed E. J. Hall, one of the stockholders of Hall-Scott, asking that consideration be given to a new proposition not less favorable than the bankers' syndicate referred to hereinabove. On July 9, 1925, Curwen telegraphed F. R. Fageol, an officer and stockholder of Fageol California and Fageol Ohio, stating that he was very much interested in the proposition of securing with American Car & Foundry Co. a large investment in Fageol California and Hall-Scott, with a view to greatly strengthening all Fageol companies.

On August 8, 1925, the option granted by Fageol California and Hall-Scott to the bankers' syndicate expired unexercised.

On August 28, 1925, officers of American Car & Foundry Co. and J. G. Brill Co. submitted to the directors of Fageol California a proposition for the consolidation of Fageol California and Hall-Scott through the formation of a new corporation. The proposition was accepted by the directors of Fageol California, subject to the approval of two-thirds of the stockholders of that company. Those stockholders never approved this proposition.

On August 29, 1925, American Car & Foundry Co. and J. G. Brill Co. entered into an agreement with E. J. Hall, B. C. Scott, and L. S. Scott for the purchase of 667 shares of stock of Hall-Scott out of a total 1,000 shares outstanding, at the rate of $4,500 per share, as follows:

+---------------------------------------------------------+
                ¦                                                ¦Shares  ¦
                +------------------------------------------------+--------¦
                ¦E. J. Hall to sell to American Car & Foundry Co ¦181     ¦
                +------------------------------------------------+--------¦
                ¦E. J. Hall to sell to J. G. Brill Co            ¦37      ¦
                +------------------------------------------------+--------¦
                ¦B. C. Scott to sell to American Car & Foundry Co¦306     ¦
                +------------------------------------------------+--------¦
                ¦B. C. Scott to sell to J. G. Brill Co           ¦63      ¦
                +------------------------------------------------+--------¦
                ¦L. S. Scott to sell to American Car & Foundry Co¦69      ¦
                +------------------------------------------------+--------¦
                ¦L. S. Scott to sell to J. G. Brill Co           ¦11      ¦
                +---------------------------------------------------------+
                

In September, 1925, Curwen of Brill received a written opinion from an attorney in San Francisco, California, respecting the statutory prohibition against the doing of business in the State of California by foreign corporations having a preferred par value stock with no voting rights and no par value common stock having exclusive voting rights. The attorney stated in part as follows:

There is no way in which the difficulty can be avoided and the general features of your proposed capitalization setup still followed. That way is by having the foreign corporation act merely as a holding corporation owning the stock of the already existing California corporations. The mere holding of stock in a California corporation will not be a doing of business in this state on the part of the foreign corporation, but the foreign corporation must be very careful to confine its activities, so far as this state is concerned, solely to the ownership of the stock. If the course is pursued of having an eastern holding company, it is of course quite advisable that as large a proportion as possible of the common stock at least of the local Fageol Company be acquired, but the acquisition of all of it is not essential.

On September 9, 1925, the directors of Brill held a meeting at which the president explained that it might be desirable for the Brill Co. to subscribe an additional amount of stock in a holding company about to be formed for the purpose of acquiring and holding stock of Hall-Scott and the Fageol companies. The following resolution was passed at that meeting:

RESOLVED FURTHER, that the President is hereby authorized on behalf of the Company to subscribe for such additional stock as may be agreed upon between him and the American Car & Foundry Company in a holding company to be formed to acquire control, through common stock ownership, of the Hall-Scott Motor Car Company, the Fageol Motors Company of Ohio and, if acquired, the Fageol Motor Car Company of California, not to exceed the total amount of the said stock or an aggregate sum of $1,500,000 including the $500,000 subscription to the stock of the Hall-Scott Motor Car Company.

Attached to the minutes of the meeting held September 9 is a draft of a plan for the acquisition of controlling interest in a bus-manufacturing business. It states as follows:

The American Car & Foundry Company and The J. G. Brill Company have been working for some time to arrange a consolidation between the Hall-Scott Motor Car Company, Incorporated, of Berkeley, California, builders of the well-known Hall-Scott engine and the Fageol Companies (Fageol Motor Company of California, Oakland, California, and Fageol Motors Company of...