AVCO Mfg. Corp. v. Comm'r of Internal Revenue
| Decision Date | 31 January 1956 |
| Docket Number | Docket No. 45633. |
| Citation | 25 T.C. 975 |
| Parties | AVCO MANUFACTURING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Held, the liquidation of Crosley Corporation in the fiscal year ended November 30, 1946, was not a tax-free transaction under section 112(b)(6), I.R.C. 1939, and the loss sustained by petitioner thereon is recognizable.
2. Held, the transaction by which the assets of Lycoming Manufacturing Corporation were acquired by petitioner and subsequently transferred to Aviation Manufacturing Corporation was not one in which no gain or loss was recognizable under either section 112(g)(1)(C) or section 112(b)(10) of the 1939 Code.
3. Held, Respondent erred in reducing the amount of loss sustained by petitioner on liquidation of American Propeller Corporation in the fiscal year 1947. Held, further: Petitioner is entitled to an additional loss deduction in the amount of $40,000. Rule of Cohan v. Commissioner, 39 F.2d 540, applied.
4. Held, petitioner entitled to amortization deductions for emergency plant facilities under section 124, I.R.C. 1939, only to the extent it included payments in reimbursement thereof in income. United States v. Milnor Corporation, 85 F.Supp. 931, followed.
5. Held, petitioner's distribution to its shareholders in 1935 of American Airlines and Canadian Colonial Airways stocks did not constitute a partial liquidation within the meaning of section 115(i) of the Revenue Act of 1934. Such distribution and a cash distribution in 1938, held, further, to be out of earnings and profits for invested capital purposes. 6. Held, petitioner's obligation under it Extra Compensation Plan was incurred, was properly accruable, and deductible in the fiscal year ended November 30, 1947.
7. Held, tooling expenses incurred by petitioner under its contract with Convair properly accruable and deductible in the fiscal year ended November 30, 1947. John E. Hughes, Esq., John W. Hughes, Esq., and Harold R. Burnstein, Esq., for the petitioner.
William A. Schmitt, Esq., for the respondent.
Respondent determined deficiencies in income and excess profits taxes of petitioner for years and in amounts, as follows:
+-------------------------------------------------+
¦Fiscal year ended ¦Income tax ¦Excess profits ¦
+-------------------+------------+----------------¦
¦November 30 ¦ ¦tax ¦
+-------------------+------------+----------------¦
¦1944 ¦ ¦$682,786.41 ¦
+-------------------+------------+----------------¦
¦1945 ¦$122,343.70 ¦ ¦
+-------------------+------------+----------------¦
¦1946 ¦1,707,031.91¦ ¦
+-------------------+------------+----------------¦
¦1947 ¦860,800.89 ¦ ¦
+-------------------------------------------------+
At the trial of this proceeding, a stipulation of concessions by both parties was filed wherein 12 issues have been resolved. Such concessions will be given effect in the Rule 50 recomputation consequent hereon. The remaining issues in controversy are:
(1) Whether petitioner sustained a loss in the fiscal year ended November 30, 1946, on the liquidation of the Crosley Corporation;
(2) Whether the transfer of substantially all the assets of Lycoming Manufacturing Company to petitioner in exchange solely for voting stock of petitioner constituted a nontaxable reorganization under section 112 of the Internal Revenue Code of 1939;
(3) Whether respondent erred in reducing the loss petitioner sustained on the liquidation of American Propeller Corporation in the fiscal year ended November 30, 1947, and whether petitioner is entitled to a further loss in addition to that taken on its tax return;
(4) Whether petitioner is entitled to accelerated amortization on emergency plant facilities for the fiscal years ended November 30, 1944 and 1945;
(5) Whether the distribution by petitioner to its stockholders of American Airlines and Canadian Colonial Airways stocks during 1935 was out of earnings or profits as an ordinary dividend for invested capital purposes or constituted a partial liquidation; (6) Whether a deduction for accrued compensation of petitioner's employees under its Extra Compensation Plan is properly allowable in the fiscal year ended November 30, 1947, rather than in that ended November 30, 1948;
(7) Whether petitioner is entitled to an expense deduction for excess tooling expense in the fiscal year ended November 30, 1947, rather than in that ended November 30, 1948.
The stipulation of facts filed by the parties, with exhibits attached, is adopted and incorporated herein by this reference.
The petitioner, Avco Manufacturing Corporation, formerly named the Aviation Corporation, is a corporation organized and existing under the laws of the State of Delaware with its principal office at New York, New York. The tax returns for the years here involved were filed with the collector of internal revenue for the third district of New York. Petitioner kept its books and rendered its tax returns during such years on the accrual basis of accounting.
As of October 25, 1946, petitioner was directly engaged in the business of design, development, manufacture, and sale of aircraft engines, engine parts, and accessories, and, in addition, produced heating equipment for industrial and home use and operated a general foundry business and manufactured automatic garage door openers. It had its plants at Williamsport, Pennsylvania (Lycoming Division and Spencer Heater Division), Detroit, Michigan (Republic Aircraft Products Division), and Circleville, Ohio (Horton Manufacturing Division). Its wholly owned subsidiary, American Propeller Corporation (hereinafter sometimes referred to as Propeller) had its plant at Toledo, Ohio. At the above date, Propeller manufactured machine tools and dies instead of aircraft propellers.
In addition to other subsidiaries, petitioner owned 59.3 per cent of the voting stock of New York Shipbuilding Corporation and 26.1 per cent of the outstanding stock of Consolidated Vultee Aircraft Corporation. The latter corporation at its Nashville plant manufactured stoves, buses, bus parts, and frozen food storage cabinets.
The Crosley Corporation (hereinafter called Crosley) manufactured radio receiving sets and household refrigerators in Cincinnati, Ohio, and Richmond, Indiana, respectively. It also owned radio station WINS in New York and its wholly owned subsidiary, Crosley Broadcasting Corporation, and owns and operates radio station WLW in Cincinnati, Ohio.
Petitioner is a widely held corporation and its stock is listed on the New York Stock Exchange. During the years involved, its capitalization consisted of the following shares of stock issued and outstanding:
+--------------------------------------+
¦ ¦Number of shares ¦
+----------------+---------------------¦
¦At November 30 ¦Common ¦Preferred ¦
+----------------+---------+-----------¦
¦1944 ¦5,793,513¦ ¦
+----------------+---------+-----------¦
¦1945 ¦5,794,346¦300,000 ¦
+----------------+---------+-----------¦
¦1946 ¦6,613,424¦267,287 ¦
+----------------+---------+-----------¦
¦1947 ¦6,614,674¦257,587 ¦
+--------------------------------------+
On March 4 and November 18, 1946, petitioner owned 496,030 shares, or 90.88 per cent of the 545,800 shares of the outstanding stock of Crosley. These 496,030 shares had previously been acquired by cash. On November 30, 1945, petitioner owned 483, 409 of such shares, or 88.6 per cent, which it had previously purchased for $19,242,695.80 cash, and before March 4, 1946, it purchased an additional 12,621 shares of Crosley for $490,040.62 cash.
The petitioner, through its board of directors, at meetings held October 4 and 17, 1946, authorized the formation and execution of an ‘agreement and plan’ for the transfer and acquisition of certain of its common stock for the net assets of Crosley and the liquidation of that corporation. The agreement and plan dated October 24, 1946, entered into between petitioner and Crosley, was adopted by the stockholders of Crosley at a special meeting held November 18, 1946. In accordance with the provisions of paragraph Second (a) of the agreement and plan dated October 24, 1946, petitioner waived its rights as a stockholder of Crosley to receive such shares of petitioner's stock, which, except for such waiver, would be distributable to petitioner in the liquidation of Crosley. Petitioner elected this course because its authorized stock was not sufficient to issue shares in exchange for all the outstanding stock of Crosley. Pursuant to the plan Crosley transferred all its assets to petitioner by bill of sale and the petitioner transferred 173,688 shares of its common stock to Crosley. Thereupon Crosley liquidated and distributed 173,688 shares of the common stock of petitioner to its stockholders other than petitioner in exchange for 43,422 shares of Crosley stock held by such stockholders. The holders of 6,545 shares dissented and received cash. Crosley ceased doing business as of November 18, 1946, pursuant to notice of liquidation.
On November 18, 1946, at 1:22 p.m., after the adoption of the agreement and plan dated October 24, 1946, and before the transfer of the net assets of Crosley to petitioner, and before the liquidation of Crosley and distribution thereunder of the assets thereof as set forth in the agreement and plan, petitioner, pursuant to authorization of the executive committee of the board of directors, sold on the New York Stock Exchange 200 shares of the common stock of Crosley to Smith Barney & Company, for cash, thus becoming and remaining during the interim period the owner of 495,830 shares of the 545,800 shares of Crosley stock outstanding;...
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