Joseph E. Seagram & Sons, Inc. v. Comm'r of Internal Revenue, Docket No. 5310-64.

• Decision Date: 31 August 1966
• Docket Number: Docket No. 5310-64.
• Citation: 46 T.C. 698
• Parties: JOSEPH E. SEAGRAM & SONS, INC., TRANSFEREE, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

46 T.C. 698

JOSEPH E. SEAGRAM & SONS, INC., TRANSFEREE,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5310-64.

Tax Court of the United States.

Filed August 31, 1966.

Josiah Willard and David Sachs, for petitioner.

Charles M. Greenspan and Irving Bell, for respondent.

Corporation A, in order to withdraw from business in Kentucky, contributed its Kentucky assets, including its inventories of liquor, to its Kentucky subsidiary, corporation B. Both corporations used the last-in, first-out method of inventorying goods, maintaining the inventories in layers consisting of acquisitions by month. Held, that corporation B ‘acquired’ the contributed inventories, within the meaning of section 472(b), I.R.C. 1954, at the time of contribution, rather than at the times they were acquired by corporation A, and that it is not required, as determined by the respondent, to retain in its inventory records the identity of corporation A's LIFO layers and integrate them into its own corresponding monthly LIFO layers.

ATKINS, Judge:

The respondent determined that petitioner is liable, as transferee of assets of the Calvert Distilling Co. (successor by merger to Julius Kessler Distilling Co., Inc.), for a deficiency in income tax for the taxable year ended July 31, 1959, in the amount of $360,466.80. The petitioner concedes that it is liable as transferee for any deficiency properly due, but contests the amount of the deficiency. The only issue for decision is whether liquor inventories which petitioner transferred to its subsidiary, Julius Kessler Distilling Co., Inc., in 1957 as a contribution to capital, were properly treated by the latter as acquisitions of inventory at the time of the transfer, under the last-in, first-out (LIFO) method of inventorying goods, or whether it should have treated such inventories as having been acquired at the times acquired by its parent.

FINDINGS OF FACT

Some of the facts have been stipulated and are incorporated herein by this reference.

The petitioner is an Indiana corporation engaged in the business of distilling, blending, and bottling liquors, with its principal office at New York, N.Y. It is a wholly owned subsidiary of Centenary Distillers, Ltd., a Canadian corporation, which in turn is a wholly owned subsidiary of Distillers Corporation-Seagrams, Ltd., also a Canadian corporation.

The petitioner is transferee of the assets of the Calvert Distilling Co. (hereinafter referred to as Calvert) which was the successor by merger to Julius Kessler Distilling Co., Inc. (hereinafter referred to as Kessler). The petitioner is liable as transferee for any deficiency in income tax determined to be due from Calvert.

On August 1, 1935, a corporation known as Gallagher & Burton, Inc., was formed under the laws of the State of Kentucky to engage in the business of distilling, blending, and bottling liquors. It became a subsidiary of the petitioner in 1939. On September 30, 1956, Julius Kessler Distilling Co., Inc., an Indiana corporation which was also a subsidiary of the petitioner, was merged into Gallagher & Burton, Inc., and the latter's name was changed to Julius Kessler Distilling Co., Inc., which is the Kentucky corporation referred to herein as Kessler. Kessler filed its income tax return for the taxable year ended July 31, 1959, with the district director of internal revenue for the Manhattan District of New York.

Early in January 1957, it was decided that Edgar Bronfman, then a Canadian citizen, should be elected president of the petitioner. Bronfman did not become a U.S. citizen until March 9, 1959. The laws of Kentucky prohibit an alien from being an officer or director of a liquor company doing business in that State. (Ky. Rev. Stat. sec. 243.100(4)). The petitioner was licensed to do business in Kentucky and had operating assets there. Following discussions among the petitioner's officials as to how best to permit Bronfman to become petitioner's president without violating Kentucky law, it was decided that the petitioner should cease doing business in Kentucky, and that this should be accomplished by making a capital contribution of substantially all its assets in Kentucky to Kessler, its Kentucky subsidiary. The only purpose in making the corporate contribution was to accomplish the above objective. The decision to make the contribution was not made in expectation of, or for the purpose of obtaining, any tax benefit to either the petitioner or Kessler. It was contemplated at that time that the capital contribution would be permanent or indefinite in duration, and not a temporary transfer.

On January 24, 1957, Bronfman was elected president and a director of petitioner by its board of directors. On January 31, 1957, the petitioner made a capital contribution to Kessler of substantially all of its assets located in Kentucky. Such assets had a net book value of $17,500,000, and consisted of liquor inventories with an aggregate cost basis to petitioner of $13,780,453, and the petitioner's plant and other properties located in Louisville, Ky. On January 31, 1957, prior to the contribution, petitioner's liquor inventories had an aggregate cost basis of $52,773,881 and Kessler's liquor inventories had an aggregate cost basis of $6,256,261. On the same day, the petitioner ceased to do business in Kentucky and formally withdrew as a foreign corporation doing business in Kentucky. All alcoholic beverage licenses and permits held by the petitioner in Kentucky were terminated and Kessler was substituted as the holder of such licenses.

Prior to and at the time of the capital contribution by the petitioner to Kessler of liquor inventories and other property, Kessler used the last-in, first-out (LIFO) method of inventorying liquor, pursuant to section 472, I.R.C. 1954. It maintained four LIFO inventory classification: Bulk-in-bond whisky; bulk-in-bond spirits; bulk whisky tax paid; and domestic case goods tax paid. These LIFO inventories were maintained in ‘layers' or increments, each layer consisting of a month's acquisition of each class of inventory. Its layers were priced by reference to the actual cost of the goods acquired in order of acquisition by month. The petitioner used the same LIFO inventory method as was used by Kessler, except that the petitioner maintained a fifth inventory classification: Bulk-in-bond gin. The capital contribution from petitioner to Kessler on January 31, 1957, included the inventories in all five classes. Kessler accounted for these contributed inventories in each of the five classifications as single acquisitions as of February 1, 1957, at the total cost of each class to the petitioner, without retaining the identity of the petitioner's LIFO layers or increments, and without integrating them into its own corresponding monthly LIFO layers. It included the entire amount of contributed inventory within each classification in its LIFO layer for that classification for February 1957. The cost for each gallon of each class of inventory acquired on January 31, 1957, was determined by Kessler by dividing the total cost to petitioner of all the gallons acquired within each class by the number of gallons acquired in each respective class.

After the above capital contribution, Kessler continued its previous business activities. It also continued the production which the petitioner had previously conducted in Kentucky in substantially the same manner as it had been previously conducted by the petitioner, but Kessler's name was used on barrels of bulk liquors, and the bottling of Seagram 7-Crown whisky was discontinued at the Louisville, Ky., plant. The nature of the blending operation was and is such that the distilling corporation does not necessarily use all its own distillates exclusively in its own labeled brands and, accordingly, frequently purchases distillates from and sells distillates to both affiliated and nonaffiliated companies to complete the blending process. Since the largest selling brands of the petitioner and its affiliated companies are those of ‘Seagram’ and ‘Calvert,‘ the major portion of the distillates produced at the Louisville, Ky., plant both before and after January 31, 1957, were used by or ultimately sold to the petitioner and sold to Calvert, and ultimately sold under these labels.

On November 28, 1958, the State of incorporation of Kessler was changed from Kentucky to Delaware. On November 30, 1958, Joseph E. Seagram & Sons, Inc., a Delaware corporation which was a subsidiary of the petitioner, was merged into Kessler.

On July 31, 1960, Kessler was merged into Calvert. Such merger had not been contemplated at the time of the capital contribution by petitioner of its Kentucky assets to Kessler in January 1957.¹ At the time of this merger there remained in the LIFO inventory accounts of Kessler an aggregate value of $10,771,466 of inventories which had been contributed to it by the petitioner on January 31, 1957, such amount being computed in accordance with Kessler's manner of treating the inventories so contributed by the petitioner.

On December 31, 1962, Calvert was dissolved and its assets were transferred to the petitioner. This dissolution was not contemplated at the time of the capital contribution of January 31, 1957. At the time of the dissolution of Calvert there remained in its LIFO inventory accounts an aggregate value of $10,771,466 of inventories which had been contributed by petitioner to Kessler on January 31, 1957, such amount being computed in accordance with Kessler's and Calvert's manner of treating the inventories so contributed by the petitioner.²

In the notice of deficiency the respondent determined that, pursuant to section 472(a) and (b), I.R.C. 1954, and section 1.472-3(d), Income Tax Regs., Kessler should retain in its inventory records for tax purposes (for its taxable years ended July 31, 1957, 1958, 1959, and 1960) the identity of petitioner's LIFO layers or increments within each class...