Byerlite Corporation v. Williams, 13877.

• Decision Date: 15 December 1960
• Docket Number: No. 13877.,13877.
• Citation: 286 F.2d 285
• Parties: BYERLITE CORPORATION, Plaintiff-Appellant, v. Parker C. WILLIAMS, District Director of Internal Revenue, Eighteenth District of Ohio, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

286 F.2d 285 (1960)

BYERLITE CORPORATION, Plaintiff-Appellant, v. Parker C. WILLIAMS, District Director of Internal Revenue, Eighteenth District of Ohio, Defendant-Appellee.

No. 13877.

United States Court of Appeals Sixth Circuit.

December 15, 1960.

David R. Hertz, Hertz & Kates, and Samuel K. Walzer, Cleveland, Ohio, for appellant.

I. Henry Kutz, Atty., Dept. of Justice, Washington, D. C. (Howard A. Heffron, Acting Asst. Atty. Gen., Lee A. Jackson, Melvin L. Lebow, Attys., Dept. of Justice, Washington, D. C., and Russell E. Ake, U. S. Atty., Cleveland, Ohio, on the brief), for appellee.

Before McALLISTER, Chief Judge, POPE, Circuit Judge, and THORNTON, District Judge.

McALLISTER, Chief Judge.

Plaintiff paid income and excess profits taxes for 1949 and 1950 under protest, and brought this action to recover them. It contended that certain advances which it made to an affiliated corporation were loans; that these loans were not repaid; that they, therefore, constituted a bad debt; and that, accordingly, they were deductible, as a bad debt, from plaintiff's ordinary income, under Section 23 (k) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(k).

The District Court held that the advances in question from plaintiff to its affiliated corporation were not loans but, rather, were an investment in the stock of the affiliated corporation, and, therefore, a capital investment therein; that, by virtue of various sections of the Internal Revenue Code, the particular loss, in this case, resulting from such investment and capital asset, was not deductible from plaintiff's ordinary income; and the District Court, accordingly, dismissed the complaint.

The background of the case is as follows: Commencing in 1931, plaintiff Byerlite Corporation engaged in the manufacture and sale of asphalt and allied products. The shares of stock in Byerlite were, and are, held by members of the Myers family, who also manage and direct its business. D. N. Myers is President; Inez Myers, his wife, is Vice President; and Milton Myers, his brother, is Secretary and Treasurer.

In February, 1947, plaintiff Byerlite Corporation learned of the availability of asphaltic materials on the island of Aruba, in the Netherlands West Indies. These asphaltic materials had accumulated from the dumping of oil refinery residue on the property of the Lago Oil and Transport Company, a Canadian corporation. This latter company was an affiliate of the Standard Oil Company of New Jersey. Byerlite, after making an examination of these asphaltic materials, commenced negotiations to purchase them from the Lago company.

On May 7, 1947, a contract of sale of the asphaltic materials was executed between the Byerlite company and the Lago company. According to the contract, Byerlite agreed to purchase and remove a minimum of 600,000 tons of asphaltic pitch, of which 200,000 tons were to be purchased and removed within three and a half years of the date of the contract, and the balance was to be purchased and removed at the rate of not less than 70,000 tons per year. It was understood that all of the asphaltic materials would be removed within a few years, and, in no event, later than ten years after the contract date.

Shortly after the execution of the contract, Byerlite commenced preparations for the removal of the asphaltic materials. Equipment, machinery, and other properties were purchased and shipped to the island of Aruba. About that time, it occurred to the Byerlite company that it would be advisable to organize a subsidiary corporation, the only function of which would be to carry on the operations necessary to prepare the asphaltic materials for shipment. Byerlite's reason for considering that a subsidiary corporation should be organized arose out of the state of political uncertainty in the world, at that time, affecting colonial governments, and, especially, in this case, the Dutch colonial government. Colonial governments were then toppling and disappearing in all parts of the world, and the Dutch were experiencing much of the brunt of this great political change in their colonies. Because of these circumstances, Byerlite desired to avoid risking all of its corporate resources to the liabilities resulting from an operation in a foreign country under Dutch colonial government.

On September 16, 1947, therefore, a subsidiary corporation was organized by Byerlite, and incorporated under the laws of the Dominion of Canada, under the name of the Byerlite Export Company, Ltd., which will hereafter be referred to as "Export." The authorized capital of Export was 10,000 shares, having a par value of $5.00 per share. However, only 6 shares of Export were ever issued, and they were issued to Byerlite for the sum of $30.00; but no certificates of stock were ever issued by Export, nor did it possess a stock certificate book.

In formulating the idea of a subsidiary corporation, and in conducting the business at Aruba through such an organization there, the Byerlite company did not contemplate tax evasion, or tax avoidance, or tax savings; it gained no operating advantage by conducting part of its business through the subsidiary; and it, further, gained no operative advantage by the use of a foreign, rather than a domestic, subsidiary. Its sole purpose, according to the evidence, was to avoid risking all of its assets and resources, used elsewhere, to perilous losses that might result from this relatively minor operation. In brief, then, in organizing Export, the purpose which Byerlite company had in mind was to avoid losing all it possessed, as a result of doing business under a colonial government, at a time when such governments were disappearing, or being overturned by revolution in many parts of the world.

The object and effect of the Byerlite company's organization of its affiliate, Export, was to separate the operation of securing the asphaltic materials from the Lago company into two parts: (1) Export was to carry out the minor operation of removing the asphaltic materials from the premises of the Lago company, and providing island transport of the materials to a port in Aruba from which they could be shipped. (2) Byerlite was to finance the whole project and provide for the trans-shipment and sale to third parties. Thus, Byerlite was to purchase the asphaltic materials and pay the Lago company for them. It was to pay to Export, all the expenses in removing the materials, preparing them for shipment, and transporting them to a seaport. It was further to bear the cost of shipment of the materials from the island of Aruba to the place of destination, and to sell and collect from the eventual buyers.

The President of the Byerlite company considered that it would require an expenditure, on Byerlite's part, of approximately $125,000 to commence operations in the island of Aruba, including the cost of the purchase of equipment, machinery, and other items for the removal of the asphaltic materials. Prior to the incorporation of Export, the Byerlite company had paid out of its own funds $88,000 for these purposes. The amount of these expenses was thereafter entered on the books of the Byerlite company as an advance, and was recorded on the books of Export as an account payable to the Byerlite company.

At the time Export was organized, it was estimated that additional expenditures in large amounts for machinery, equipment, and other items would be required to be advanced by the Byerlite company to Export for the purpose of removing the asphaltic materials and preparing them for shipment from a port in Aruba. Such expenditures were thereafter advanced by the Byerlite company, and charged to Export as loans.

The Byerlite company, at the time it entered into the contract with Lago company for the purchase of the asphaltic materials, considered that the contract with the Lago company was a valuable asset. This assumption was based upon the belief that there were markets in Spain, Sweden, France, and Italy for the asphaltic materials, which, in those countries, are used for the manufacture of fuel in the form of coal briquettes. It was further assumed that the selling price of the asphaltic materials in those foreign countries would be approximately $24.00 per ton; that the cost of removing, preparing, selling, and shipping the materials would be $20.00 per ton; and it was expected, accordingly, that, on the total of 600,000 tons, there would be a yield of profit on the entire transaction of $2,400,000. The Byerlite company expected to ship about 200,000 tons of the material the first year.

The original plan called for the payment by the Byerlite company to Export of a service fee of $1.50 per ton over and above the expected cost of operation for removing and preparing the material for shipment. It was from these service fees, payable to Export, that the Byerlite company expected to receive back the money which it advanced to Export to carry out the operations assigned to it.

The Byerlite company had, and retained as its own, its contract with the Lago company, the vendor of the materials, and was to receive all profits over and above the sum of $1.50 per ton. As stated above, this amount was to be retained by Export as a service fee. But from the aggregate of these service fees of Export, the Byerlite company was to be repaid for its large advances to Export, which the latter company had received for the purpose of the removal and preparation of the materials for shipment. The foregoing was the original plan of the Byerlite company and the Export company. It was subsequently somewhat modified, as hereafter appears, but with no effect upon this case.

Byerlite's contract with the Lago company, shortly after its execution, appeared extremely valuable — and later dropped to utter worthlessness, resulting in an enormous loss to Byerlite. The drama of this remarkable rise and fall of a promising business venture does not directly bear upon the issues in ...