Turner Construction Company v. United States

• Decision Date: 26 July 1966
• Docket Number: 285,No. 284,Dockets 29323,29324.,284
• Citation: 364 F.2d 525
• Court: U.S. Court of Appeals — Second Circuit
• Parties: TURNER CONSTRUCTION COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. Edmund A. PRENTIS, Lazarus White, Charles B. Spencer, Inc., and Spencer, White & Prentis, Inc., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

364 F.2d 525 (1966)

TURNER CONSTRUCTION COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

Edmund A. PRENTIS, Lazarus White, Charles B. Spencer, Inc., and Spencer, White & Prentis, Inc., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

Nos. 284, 285, Dockets 29323, 29324.

United States Court of Appeals Second Circuit.

Argued March 22, 1966.

Decided July 26, 1966.

Irwin B. Robins, Asst. U. S. Atty., New York City (Robert M. Morgenthau, U. S. Atty., for S. D. New York, and Grant B. Hering, Asst. U. S. Atty., New York City, on the brief), for defendant-appellee.

Richard H. Tunstead, New York City, Edmund A. Prentis, Lazarus White, Charles B. Spencer, Inc. and Spencer, White & Prentis, Inc., Austin & Diamond, New York City (Spencer & Tunstead, New York City, on the brief), for plaintiffs-appellants.

Before LUMBARD, Chief Judge, and WATERMAN and MOORE, Circuit Judges.

LUMBARD, Chief Judge:

Two taxpayers, Turner Construction Company (Turner) and Edmund A. Prentis, Lazarus White, Charles B. Spencer, Inc.,¹ appeal from two judgments of the United States District Court for the Southern District of New York. The cases were tried together because they contained a common issue of fact and law. Since that issue is contested here by both taxpayers, the appeals have also been consolidated. Each taxpayer also presses an issue applicable only to it.

The appeals present three questions. First, whether the useful life for depreciation purposes of certain Turner warehouse buildings was 25 years or 33 1/3 years. Second, whether each taxpayer may claim a loss in its 1951 tax year on the "sale" of stock in a joint venture corporation. Third, whether Spencer properly assigned a stepped-up basis to machinery and equipment received from a predecessor corporation in 1952. A fourth issue involves whether Spencer should have been permitted to amend its complaint after the trial court's opinions were announced so as to press a new theory with respect to issue III. We find against the taxpayers on issues I and II and we affirm those portions of the lower court's orders. On issue III we reverse and remand for further proceedings. For this reason, we do not decide the amendment question.

The three issues are essentially unrelated and will be treated independently. The parties stipulated many of the relevant facts. A three-day trial without a jury developed additional facts. The cases are governed by the provisions of the Internal Revenue Code of 1939 (hereinafter referred to by section numbers only).

I. Useful Life of the Hackensack Buildings

Turner contends that the district court erred in upholding the Commissioner's determination that the useful life for depreciation purposes of three warehouse buildings in Hackensack, New Jersey, was 33 1/3 years instead of 25 years, as Turner had claimed in its tax returns. Turner constructed these buildings in 1952 when it shifted its repair and storage facilities from Maspeth, Long Island, to New Jersey. The State of New Jersey's Highway Department condemned the buildings after the tax years in question.

Since the stipulation contained only a technical description of the buildings, resolution of this issue turned on the oral testimony. Francis B. Warren, Turner's executive vice president and treasurer, testified that the buildings were open air storage and repair facilities made from light, prefabricated materials, that they received rough treatment from the company's heavy construction equipment, and that 25 years was a reasonable estimate of their useful lives. The government countered with testimony by the revenue agent who had examined these buildings — a graduate engineer who had made similar estimates for the Commissioner since 1946. He described the buildings and explained his reasons for concluding that these structures had a useful life of 40 years.

After reviewing this conflicting evidence, Judge Levet concluded that the taxpayer had failed to meet its burden of proving that the Commissioner's estimate — the compromise figure of 33 1/3 years — was incorrect. Turner refers us to many cases which have set the useful lives of warehouse buildings at 25 years or less, and urges us to reverse the decision of the trial judge. But the question here is the useful life of these particular structures. The record reveals that the Hackensack buildings replaced Maspeth buildings having an admitted useful life of 50-60 years. Under these circumstances, we find no error in the lower court's conclusion that neither side had affirmatively proved its position. In such a case, the taxpayer, who has the burden of proof, cannot prevail.

II. River Construction Corporation Transaction

Both Turner and Spencer assail the district court's holding that the Commissioner properly disallowed losses claimed by the taxpayers on the "sale" of their stock in the River Construction Corporation (River) in June of 1951. Here a complex factual situation raises a fundamental tax question in a novel form.

Early in 1947, six construction companies, including Turner and Spencer, agreed to undertake a joint venture to secure a government contract for the construction of Lock No. 27, Chain of Rocks Canal, on the Mississippi River near Granite City, Illinois. The companies incorporated River as a Delaware corporation on April 29, 1947. On May 1, the six signed an agreement which fixed their respective interests in River,² and defined their rights and obligations as shareholders. Significantly, the agreement provided that none of the six would sell its River shares without unanimous approval of all; that such a sale would not relieve the seller of any obligations under the contract; and that each of the six would hold harmless, up to a designated amount, any surety which executed a bid bond on the lock project.

The six participants eventually agreed on a bid for the project which was submitted by River. On the basis of this bid, and the surety bond of the United States Fidelity and Guaranty Company, River was awarded the construction contract and, shortly after work began, was awarded a companion contract to install a 54" pipe under the Chain of Rocks Canal.

By 1950, due principally to unforeseen weather and labor conditions, it was apparent that River would incur substantial losses on the contracts. In the fall of 1950, the Winston Brothers and Al Johnson companies announced their desire to sell out so as to realize in that tax year a capital loss on the River venture. The other participants refused to permit a sale to third parties, but it was agreed that each of these two could return its shares to River in exchange for $9,000 in cash and a non-assignable, non-interest-bearing note in the amount of $171,000.³

By the middle of 1951, River's construction work on the two contracts was over 95% completed. However, the amount of the ultimate loss was still unpredictable because River had contingent claims against the government which might take years of litigation and negotiation. At this point, the four remaining shareholders decided that River should have only a single owner during this "liquidation" period.

To reduce River from four shareholders to one posed significant problems. None of the participants wanted River stock sold to outside interests. In addition, each was contractually bound to the surety company to meet its share of River's losses. Finally, though they wanted only one shareholder, they agreed to share the ultimate burden of River's losses equally.

These considerations were met in the following manner. Morrison-Knudsen Company agreed to pay $125,000 into the corporate surplus of River. Turner, Spencer and Raymond Concrete Pile Company each agreed to transfer its shares to River in exchange for $11,000 in cash and a non-assignable, non-interest-bearing note in the amount of $209,000. Each of the three notes was subordinated to claims of the surety, and each contained the following provision:

3. When and if the aforementioned contract is completed and upon closing of accounts of said contract it shall appear that such stock, exclusive of good will, tax credits and other similar intangibles, is worth less than $220,000 the total purchase price to Turner and Spencer, based on its original capitalization less losses on said lock contracts and pipe line contract, plus $125,000 the amount of Morrison-Knudsen\'s contribution, then and in that event this note shall be reduced by a sum represented by the difference between its then so determined true worth and $220,000. (Emphasis added.)

The $220,000 purchase price amounted to $44 per share. This figure allegedly was determined by rough calculations based on River's current balance sheet and its anticipated total loss. When final payment on the notes was finally made to Turner and Spencer in 1957, it was found that all payments had totaled only $118,134.27, or $23.63 per share, to each company. The taxpayers vigorously contend that $44 per share was nevertheless a fair and reasonable estimate of River's value in 1951, and that only a disappointing realization on the contingent claims against the government prevented a larger recovery. But Judge Levet pointed out in his opinion evident miscalculations which produced a liberal estimate of River's worth. Given taxpayers' disproportionately low recovery on the notes, we infer that $44 was agreed upon because it was a "safe" price. In other words, it presented a maximum amount per share which the parties anticipated in 1951 could finally be realized by River on the project.

These transactions provided a number of possible benefits to the participants. Morrison-Knudsen, by becoming sole parent of River, no doubt hoped to utilize more fully River's large net operating loss carryover. Turner and Spencer, by exchanging their River stock for cash and a note, not only profited from the $125,000 paid by Morrison-Knudsen into River but also hoped to realize some of...