33 T.C. 677 (1960), 61968, North American Service Co., Inc. v. C. I. R.
|Docket Nº:||61968, 61969.|
|Citation:||33 T.C. 677|
|Opinion Judge:||TRAIN, Judge:|
|Party Name:||NORTH AMERICAN SERVICE CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. NORTH AMERICAN SERVICE CO., INC., NORTH AMERICAN SERVICE COMPANY AND HIGHWAY ADVERTISING COMPANY OF NEW YORK, INC., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.|
|Attorney:||Ralph E. Davis, Esq., and William P. Sutter, Esq., for the petitioners. Don S. Harnack, Esq., for the respondent.|
|Judge Panel:||MURDOCK, J., dissenting: FORRESTER, J., agrees with this dissent.|
|Case Date:||January 18, 1960|
|Court:||United States Tax Court|
1. The purchase of the stock of a highway advertising company, followed by the distribution of its assets to the acquiring corporation (petitioner) which continued to operate the old business in new corporate form, held, in substance, the purchase of assets so that petitioner is entitled to the cost of acquisition as its basis.
2. Proper allocation of cost to service contracts received in liquidation determined.
3. Interest accrued in 1951 on an outstanding loan from an individual owning more than 50 per cent of petitioner's stock, but not paid within 2 1/2 months after the close of the taxable year 1951, held, not deductible in 1951 by reason of section 24(c), 1939 Code; held, further not deductible in 1952 by reason of section 23(b), 1939 Code.
Respondent determined deficiencies in income taxes of petitioner North American Service Co., Inc., for the period October 17, 1951, to December 31, 1951, in the amount of $9,044.67 and of petitioners North American Service Co., Inc., et al., for the calendar year 1952 in the amount of $37,874.62. The issues are:
(1) Whether the liquidation of North American Service Co. on October 31, 1951, was a complete liquidation within the meaning of section 112(b)(6) of the Internal Revenue Code of 1939, as contended by the respondent, so that the basis of the assets acquired
remains the same in the hands of petitioner (transferee) as in the hands of the transferor, or whether the petitioner is entitled to its cost of acquisition as the basis of the assets;
(2) If petitioner's basis is its cost of acquisition, what portion of the total cost of acquisition of the North American Service Co., Inc.‘ s assets is properly allocable to service contracts acquired in the liquidation; and
(3) Whether petitioner may deduct, in either 1951 or 1952, interest properly accruable in 1951 but paid on or after May 31, 1952, to its controlling stockholder.
FINDINGS OF FACT.
Some of the facts have been stipulated and are hereby found as stipulated.
Petitioner, North American Service Co., Inc. (hereinafter referred to as Service, Inc.), is a Delaware corporation organized on October 17, 1951, with its principal office at 341 West Superior Street, Chicago, Illinois. Petitioner, North American Service Company (hereinafter referred to as Service Co.), was an Illinois corporation organized in 1919. Its principal office was likewise at 341 West Superior Street, Chicago, Illinois. Petitioner, Highway Advertising Company of New York, Inc. (hereinafter referred to as Highway), is an Illinois corporation. Service Co. and Highway were wholly owned subsidiaries of Service, Inc., during the calendar year 1952.
Petitioner, Service, Inc., an accrual basis taxpayer, filed its income tax return for the taxable period October 17, 1951, to December 31, 1951, with the collector of internal revenue for the first Illinois district. A consolidated income tax return for the calendar year 1952 was filed by petitioners with the collector of internal revenue for the first Illinois district.
Service Co. was in the highway advertising business. It manufactured highway advertising signs of various sizes, up to and including displays measuring 11 1/2 feet by 23 feet, obtained leases for the erection of the displays and rented the displays to various customers. Service Co. employed erection and maintenance fieldmen, salesmen, factory men, general office employees, supervisory employees, and art employees. The principal salesmen were D. A. Brumbaugh, Service Co.‘ s founder and principal owner, and Robert Hubbard. Brumbaugh was one of the early members of the Roadside Business Association, and, as owner of Service Co., had earned the reputation of being a good businessman and strong competitor by 1940. The business of Service Co. was national in scope and considered an excellent operation by its competitors and customers during the period around 1940.
D. A. Brumbaugh originally had intended to build up the business
and leave it to his sons upon his death. However, the son whom he expected to take over the operation of Service Co. was killed during World War II. He had little confidence in the other sons so that after the war he began to lose the keen interest and competitive spirit that had characterized his activities in the advertising business in earlier years. However, he remained a competent salesman and Service Co. was able to continue the rate of business previously enjoyed, despite the fact that Brumbaugh did not give the same attention as previously to customer relations. He allowed the signs to become rundown and in many cases they were in need of rebuilding or repainting. At times the reflecting material known as ‘ STARLUME’ fell off the signs so that the latter could not be seen at night. Although customers complained about the condition of the displays and stated that they were not getting their money's worth out of the displays allowed to deteriorate, Brumbaugh made no real effort to satisfy them or correct the condition of the signs.
Sometime around 1951, Brumbaugh decided to sell the business. Morris F. Swaney heard from individuals in New York that Brumbaugh was going to sell the business and Swaney in turn contacted Hubert E. Howard and discussed the possibility of acquiring the business. Howard was to supply the capital.
Swaney and Howard contacted Brumbaugh in June 1951 and offered to buy the assets of Service Co. Brumbaugh, however, stated that he would not consider selling the assets because a double tax would result. Instead, he offered to sell the stock of Service Co. Again, in the early fall of 1951, a group headed by Howard entered into further negotiations for the purchase of the assets and being told that Brumbaugh would sell only the stock of the corporation because of the double tax which otherwise would result the group organized Service, Inc., to acquire Service Co.
On October 22, 1951, a special meeting of the board of directors of Service, Inc., was held at which time the acquisition of Service Co. was discussed. The minutes of the meeting and resolutions passed at that time include the following:
The chairman then stated that negotiations had been carried on for the purchase of the business assets of North American Service Co., an Illinois corporation, however, that company was not willing to sell its business assets. He pointed out that the stockholders of that company were quite willing to sell their stock. The chairman then stated that in order to acquire the business assets of North American Service Co. it would be necessary for this company to purchase all of the issued and outstanding stock of that company and to immediately, after such acquisition, partially liquidate that company in order to get the assets desired, and he stated that he deemed it advisable for this company to do so. The chairman then presented to the meeting a copy of a proposed contract between the stockholders of North American Service Co. and the company. He stated that if this company should purchase the stock of
North American Service Co., the partial liquidation of that company would be effected through the distribution to this company, the sole stockholder of North American Service Co., of all of its assets, subject to its liabilities, except for $5,000. in cash, and that the final liquidation and dissolution of that company should not be effected earlier than April 1, 1955, and not later than December 31, 1955, and that the authorized capital of North American Service Co. should be reduced to $5,000, represented by 50 shares of common stock, par value $100 each.
After a full discussion of the matter, on motion duly made, seconded and unanimously carried, the following resolutions were adopted:
WHEREAS, this company desires to obtain the business assets of North American Service Co. and negotiations have been carried on to that end; and
WHEREAS, North American Service Co. has refused to sell its assets; and
WHEREAS, the stockholders of North American Service Co. are quite willing to sell their stock in that company and it appears that in order to obtain the business assets of North American Service Co. it will be necessary to purchase the stock of that company and follow such purchase by an immediate partial liquidation of North American Service Co.; and
WHEREAS, this Board of Directors deems it advisable and necessary for this company to borrow the sum of $900,000, to obtain the funds needed in connection with the purchase of the stock of North American Service Co. and in order to meet current obligations;
NOW, THEREFORE, BE IT RESOLVED, That the Chairman of the Board of Directors and the Secretary of this company be and they are hereby authorized to enter into a contract for the purchase by this company, at a total price not exceeding $965,000, of all of the issued and outstanding shares or stock of North American Service Co., including both common and preferred stock, from the shareholders thereof, such contract to contain substantially the same terms and conditions as the aforementioned contract presented to this meeting, and that a copy of said contract be appended to these minutes.
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