Bilar Tool & Die Corp. v. C. I. R.
| Decision Date | 19 March 1976 |
| Docket Number | Nos. 75--1224,75--1225,s. 75--1224 |
| Citation | 530 F.2d 708 |
| Parties | 76-1 USTC P 9243 BILAR TOOL & DIE CORPORATION, formerly Forway Tool & Die Company, Inc., a Michigan Corporation, Petitioner-Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant-Cross-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Elmer J. Kelsey, Robert A. Bernstein, Tax Div., Dept. of Justice, Meade Whitaker, Chief Counsel, I.R.S., Washington, D.C., for C.I.R.
William L. Powers, Butzel, Long, Gust, Klein & Van Zile, Richard U. Mosher, Detroit, Mich., for Bilar Tool & Die Corp.
Before EDWARDS and PECK, Circuit Judges, and McALLISTER, Senior Circuit Judge.
This is a government appeal from a decision by a sharply divided Tax Court which allowed deduction of $4,000 in attorney fees as ordinary and necessary expenses. These fees resulted from legal work on a corporate division which split the Forway Tool & Die Company, Inc., into two equal parts. The taxpayer in this case, Bilar Tool & Die Corporation, as a result of a simple change of name, is the direct successor to the previous corporation. A new corporation was organized under the name of Four-Way Tool & Die, Inc.
The parties stipulated that the corporate division described above resulted from a dispute between two shareholders, Markoff an Sakuta, who had previously had equal ownership of the original corporation. They also stipulated that the agreed-on plan called for equal division of the financial and physical assets of the old corporation, as well as equal division of the liabilities. As a result, Markoff would own 100% of the stock of Bilar, and Sakuta 100% of the stock of the newly organized company, Four-Way. The plan contemplated what actually occurred, namely, that two corporations would continue in the same business in which the old corporation was engaged--but after the split, as competitors. The stipulation stated 'the series of events evidenced by the above stipulated facts and joint exhibits constitute a single unified plan.'
The stipulation also indicated that Bilar Tool & Die incurred legal and accounting fees in the sum of $11,500 'in connection with the plan.' Taxpayer, however, did not see fit to introduce any specific evidence concerning those services, except as to the $4,000 of attorney fees. As to this an attorney testified that the $4,000 was a fee paid for devising and carrying out the unified plan referred to above. He also testified that $400 of the $4,000 was directly attributable to expenses involved in the incorporation of the new corporation.
The majority of the Tax Court found that the $4,000 was an ordinary and necessary business expense under IRC § 162(a), 26 U.S.C. § 162(a) (1970). The Tax Court declined to allow deductibility as to the remaining $7,500 because of failure to prove that the expenses were ordinary and necessary. As to this issue, the taxpayer appeals.
The majority of the Tax Court found that the dominant aspect of the overall plan was a division of the business through a partial liquidation. It allowed deduction of the $4,000 of attorney fees as ordinary and necessary expenses under § 162(a) of the Code. In so doing it cited and relied on United States v. General Bancshares Corp., 388 F.2d 184 (8th Cir. 1968), and Transamerica Corp. v. United States, 254 F.Supp. 504 (N.D.Cal.1966), aff'd, 392 F.2d 522 (9th Cir. 1968). The appellee adopts the Tax Court's view and urges us to do likewise.
On the other hand, the government contends that there was no liquidation at all, that this was simply a corporate reorganization where all the assets of the corporation were continued in business, albeit in divided form. Under this theory the expenses of reorganization are capital expenditures and nondeductible under IRC § 263(a)(1), 26 U.S.C. § 263(a)(1) (1970).
The government also contends that the tax problem should be looked at from the point of view of the transaction taken as a whole and should not be viewed, as the majority of the Tax Court did, from the point of view solely of the Bilar half of the former corporation, which is the taxpayer here. In the government's view Bancshares and Transamerica were wrongly decided.
The majority opinion of the Tax Court found as a matter of fact that '(p) etitioner acquired nothing (through the total plan) that would be of any benefit to it in its future operations.' The Tax Court also found '(s)o far as the corporate petitioner is concerned, there was no improvement or betterment of any capital asset it owned.' We believe these findings are 'clearly erroneous.' (See Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960)) and that the decision of the Tax Court must be reversed.
The reasons for 'the Plan of Reorganization' are set forth in the minutes of the meeting which adopted it:
4. On September 21, 1967, a special meeting of the Board of Directors of the Corporation was held and the following resolutions were made:
(a) That a disagreement had arisen in 1967 between the two shareholders of the Corporation which made it impossible for the Corporation to continue operations in its present corporate form,
(b) That the shareholders of the Corporation had agreed upon a division of the business whereby the assets of the Corporation would be divided and whereby approximately one-half (1/2) of the Corporation's total assets would be owned in a separate corporate form by Mr. Sakuta and the remaining assets would continue to be held by the Corporation which would be wholly owned by Mr. Markoff, and
(c) That a plan of corporate separation should be adopted.
The testimony of the president of the present taxpayer corporation vividly demonstrates just how important to the owners' investment in the old corporation the corporate reorganization plan for its division into two corporations actually was. At the Tax Court hearing Mr. Markoff testified:
MR. MOSHER: . . . Mr. Markoff, I direct your attention to Joint Exhibit 2--B, page 2, the third paragraph of that page. The third paragraph of that page indicates that there was a disagreement between you and Mr. Sakuta. Can you tell me what the nature of that disagreement was?
A Yes, it was a disagreement about the working situation there at that time. The president of the corporation at that time, Joseph Sakuta and the foreman, had a big argument and it was either Joe Sakuta leaving the corporation or the foreman, Larry Caloia.
Q Was Mr. Sakuta's son employed by the corporation at that time?
A Yes, he was working for the corporation at that time.
Q Was he an officer of the corporation?
A No.
Q Was there some dispute as to the amount of responsibility which Mr. Sakuta's son should have?
A This was one of the big arguments of the corporation. It wasn't Joe Sakuta personally, but his wife and it got back to the corporation and it was always a turmoil there that the son should have more authority in the business, more responsibility and I would rather have, like I say, the fellow that I could depend on, Larry Caloia working in that category than his son Joey.
Q Are you saying that you could not depend on Mr. Sakuta's son?
A I would say he was inexperienced, right.
Q I would also direct your attention to the second half of the third paragraph on page 2 of the agreement. It says that the disagreement made it impossible--excuse me, the disagreement made impossible the continued operation of the tool and die business in its present corporate form. Can you tell me what is meant by impossible in that context?
A Well, as I mentioned before, Larry Caloia was our foreman at that time and he ran the business when I was out getting new business. When I left the plant, Joe Sakuta and his son would get together in the office and just spend most of their time in the office instead of watching how the corporation was running--how the business was running. When it got to a point where it was either Joe Sakuta or Larry Caloia, I had to have somebody there that I could depend on, that when I left the plant, that the plant would be running right.
Q Can you tell me what, in your mind, would have happened to the corporation if some agreement or some separation did not occur?
A We would have had a real rough road to go and I think eventually would have went down the drain, as the way it was going there.
When a plan of reorganization of a corporation which is going 'down the drain' produces two viable corporations by the equal division of the assets of the doomed (or threatened) corporation, we believe value has clearly been added to the capital structure of both the original corporation and the successor corporations. Such was the dominant purpose and result of the reorganization plan as this record clearly establishes. Under these facts the expenses of carrying out such a reorganization plan are nondeductible capital outlays. As stated in Mills Estate v. Commissioner, 206 F.2d 244, 246 (2d Cir. 1953):
The part played in respect to the operation of the business is what counts in determining whether the necessary expense of obtaining it was an ordinary business expense which is deductible under section 23(a)(1)(A) of the Code. As was said in Case v. Commissioner, 9 Cir., 103 F.2d 283, 286,
This taxpayer, having...
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