Seaboard Commercial Corp. v. Comm'r of Internal Revenue

Decision Date26 August 1957
Docket NumberDocket Nos. 32857,32858,32859.
Citation28 T.C. 1034
PartiesSEABOARD COMMERCIAL CORPORATION AND SUBSIDIARY COMPANIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.COASTAL MACHINE WORKS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

28 T.C. 1034

SEABOARD COMMERCIAL CORPORATION AND SUBSIDIARY COMPANIES, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.COASTAL MACHINE WORKS, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 32857

32858

32859.

Tax Court of the United States.

Filed August 26, 1957.


[28 T.C. 1035]

John R. Brook, Esq., for the petitioners.

Joseph Landis, Esq., for the respondent.

1. Judgment in a prior proceeding which established the value of the closing inventory of a predecessor taxpayer, held, to estop the parties from litigating issues involving items of the same inventory for the opening of the following year.

2. Net operating losses incurred by a subsidiary corporation during previous affiliation with another corporate group, and properly included in prior consolidated returns filed by earlier affiliated corporations, held, not available as a carryover in consolidated returns filed for the current parent and its affiliated group.

3. Respondent's disallowances under section 45, I.R.C. 1939, of deductions for interest and service charges, held, not authorized, the amounts paid being reasonable and the purpose justified.

4. Stock of a debtor subsidiary corporation donated by parent to the creditor subsidiary, which took over the debtor's assets and liabilities, held, not to give rise to deduction for worthless debt of the debtor subsidiary absent proof that the debt was not worthless in a prior year nor to deduction for worthless stock of the debtor subsidiary absent proof that it was not already worthless.

5. On other issues, held, on the facts, respondent's determinations not shown to be improper.

In these consolidated proceedings respondent determined deficiencies as follows:

+-----------------------------------------------------------------------------+
                ¦Petitioner ¦Year ¦Tax ¦Deficiency¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦ ¦ ¦ ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦Seaboard Commercial Corporation ¦( ¦Income ¦$33,733.84¦
                ¦and ¦1943 ¦ ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦Subsidiary Companies. ¦( ¦Excess profits ¦310,332.11¦
                ¦ ¦1943 ¦ ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦Coastal Machine Works, Inc ¦1943 ¦Declared value ¦5,655.23 ¦
                ¦ ¦ ¦excess-profits ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦Coastal Machine Works, Inc ¦( ¦Income ¦3,403.39 ¦
                ¦ ¦1944 ¦ ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦ ¦( ¦Income ¦3,076.82 ¦
                ¦ ¦1945 ¦ ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦ ¦( ¦Excess profits ¦297,948.50¦
                ¦ ¦1945 ¦ ¦ ¦
                +--------------------------------+-----+---------------------------+----------¦
                ¦ ¦ ¦ ¦ ¦
                +-----------------------------------------------------------------------------+
                

Respondent also determined that an addition to tax of $1,413.81 is due from Coastal Machine Works, Inc., hereafter referred to as Coastal, for failure to file a timely declared value excess-profits tax return for 1943.

Bolton Manufacturing Corporation, a Delaware corporation, hereafter referred to as Bolton Delaware, was a subsidiary of petitioner Seaboard Commercial Corporation, hereafter referred to as Seaboard. The following issues involve Bolton Delaware:

(1) Does the decision in Docket No. 25481, National Fireworks, Inc. and Affiliated Corporations, T.C. Memo. 1956-1, affd. (C.A. 1) 243 F.2d 295, act as an estoppel by judgment concerning issues, 2, 3, 4, and 5, infra?

(2) If not estopped by judgment, did Bolton Delaware sustain a loss on sale of surface grinders in 1943?

(3) If not estopped by judgment, did Bolton Delaware sustain a loss on sale of Frankel lathes in 1943?

(4) If not estopped by judgment, did Bolton Delaware incur costs of $84,909 in connection with U-6 Hob Thread milling machines deductible in 1943?

(5) If not estopped by judgment, did Bolton Delaware properly deduct in 1943 deferred labor costs incurred in 1942?

Other issues still in contention are:

[28 T.C. 1036]

(6) Whether either Seaboard or any subsidiary is entitled to carry over to 1943 net operating losses of Automatic Machinery Manufacturing Corporation, hereafter referred to as Automatic,1 for fiscal periods ending before January 1, 1943.

(7) Whether respondent properly disallowed excess profits tax deductions for amounts paid by Bolton Delaware and Coastal to Seaboard in 1943 purportedly as interest on indebtedness.

(8) Whether respondent properly disallowed deductions in 1944 and 1945 for amounts paid to Seaboard by Coastal purportedly as interest on indebtedness.

(9) Whether Coastal can deduct amounts it paid in 1945 to Seaboard purportedly as service charges.

(10) Whether respondent erroneously failed to allow Seaboard to carry over an unused excess profits credit from each of 1941 and 1942.

(11) Whether Coastal incurred contract termination expenses deductible either in 1945 or 1946, so as to increase the 1946 net operating loss.

(12) Whether Coastal sustained an ordinary loss in 1947 due to worthlessness of stock of another Seaboard subsidiary corporation, later known as Coastline Manufacturing Corporation, hereafter referred to as Coastline, which Seaboard transferred to Coastal in 1947.

(13) Whether in 1947 Coastal is entitled to a bad debt deduction on Coastline indebtedness.

(14) Whether respondent erred in determining the addition to tax for 1943 against Coastal for failure to file a timely declared value excess-profits tax return.

Each party has conceded certain issues and settlement of others has been stipulated. The issues that have conceded or settled will be given effect in the Rule 50 computation.

FINDINGS OF FACT.

The stipulated facts are found accordingly.

Seaboard is a corporation organized under the laws of Delaware. For 1943, as common parent of the following subsidiaries, it joined them in making consolidated income and excess profits tax returns filed on June 15, 1944, with the collector of internal revenue for the third district of New York.

Lincoln Exchange, Inc.,
New York, New York
Seaboard Consultants, Inc.,
New York, New York
Coastal,
Bridgeport, Connecticut

[28 T.C. 1037]

Bolton Delaware,
West Haven, Connecticut
Peerless Tools, Inc. (inactive),
West Haven, Connecticut, hereafter
referred to as Peerless
Pacific Iron Works, Inc. (inactive),
West Haven, Connecticut, hereafter
referred to as Pacific.

Bolton Delaware, which changed its name to Coastal in 1947,2 filed its separate returns for 1944 and 1945 with the collector of internal revenue for the district of Connecticut.

On July 31, 1942, National Fireworks, Inc., hereafter referred to as Fireworks, acquired all of the stock of Automatic which owned all the stock of Peerless and Pacific. On December 22, 1942, Fireworks sold, for $10,000, all of the Automatic stock to Bolton Manufacturing Company, a Connecticut corporation, hereafter referred to as Bolton Connecticut, a wholly owned subsidiary of Seaboard. Prior to December 31, 1942, Automatic liquidated Peerless and Pacific and had all of their assets distributed to it. After December 22, 1942, a new corporation, Bolton Delaware, organized on December 16, 1942, acquired all assets of Bolton Connecticut, including the Automatic stock, and assumed all liabilities in exchange for Bolton Delaware's voting stock. Seaboard liquidated and dissolved Bolton Connecticut about December 31, 1942, and had distributed to it all the stock of Bolton Delaware. On December 31, 1942, Automatic merged into Bolton Delaware pursuant to Delaware corporation law.

Seaboard incorporated Coastal in July or August 1943, becoming its 100 per cent stockholder. Seaboard invested $300,000 in cash for the Coastal stock, and agreed to advance any additional funds needed. In August 1943, Seaboard advanced to Coastal $800,000 to enable it to purchase the plant and machinery of Bolton Delaware. Coastal purchased all the physical inventory from Bolton Delaware for cash.

Coastal, from August 1943, successfully operated throughout the war on contracts for the Air Force and Navy on aircraft components. Coastal completed production of Collier Multipurpose machines as a subcontractor because the machines were located on its property. Later, Coastal became a subcontractor to Eastman Kodak Company in the manufacture of Navy proximity fuses, and operated on that item until 1946.

Throughout 1944, 1945, 1946, and 1947, Bolton Delaware was Seaboard's wholly owned subsidiary. From its organization in 1943 through November 1947, Coastal was Seaboard's wholly owned subsidiary.

[28 T.C. 1038]

For 1944 and 1945, when it did not file consolidated returns, Seaboard had unused excess profits credits of $203.064.24 and $153,558.57, respectively.

Issue 1. Estoppel by Judgment.

On July 27, 1949, respondent sent a statutory notice of deficiency to Fireworks regarding its taxable year ended August 31, 1943. The notice did not adjust Automatic's ending inventory for the period September 1 through December 31, 1942. Fireworks timely petitioned the Tax Court to redetermine the deficiencies, Docket No. 25481, but raised no issue respecting the December 31, 1942, valuation of Automatic's inventory. Fireworks filed amended petitions, first contending that it has overstated Automatic's closing inventory as of December 31, 1942, with respect to U-6 Hob Thread millers, Frankel multiple purpose lathes, SG-2B surface grinders, and Collier Multipurpose machines by approximately $460,000, and finally alleging that it had overstated that inventory by approximately $740,000. The Tax Court decided on the merits that Automatic had not overstated its closing inventory (Memorandum Findings of Fact and Opinion filed January 10, 1956, T.C. Memo. 1956-1). The Court of Appeals for the First Circuit affirmed the Tax Court decision, 243 F.2d 295.

Issues 2, 3, and 4. Inventory Loss.

The 1943...

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