Yoc Heating Corp. v. Comm'r of Internal Revenue
| Decision Date | 07 November 1973 |
| Docket Number | 5680–71.,Docket Nos. 625–69 |
| Citation | 61 T.C. 168 |
| Parties | YOC HEATING CORP. (FORMERLY KNOWN AS NASSAU UTILITIES FUEL CORP.), PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
R corporation sought to purchase the assets of O corporation and transfer them to a newly organized subsidiary of R. O refused to sell its assets. R thereafter purchased more than 85 percent of O's stock and organized a new corporation, N. O then transferred to N all its assets subject to its liabilities, which N assumed. In consideration for the transfer, N issued 1 share of its stock to R in exchange for every 3 shares of O stock held by R. N also made cash payments to most of the minority shareholders of O. Held, N is entitled to a stepped-up basis in the assets it acquired from O. Held, further, N is not required to carry back a net operating loss it incurred after it acquired O's assets to prior taxable years of O before it may carry over such loss to its own subsequent taxable years. Allan Bakst and Henry L. Glenn, for the petitioner.
Michael A. Menillo and Alfred C. Bishop, Jr., for the respondent.
Respondent determined the following deficiencies in petitioner's income tax:
+--------------------------+
¦Docket No.¦Year¦Deficiency¦
+----------+----+----------¦
¦ ¦1963¦$34,432.35¦
+----------+----+----------¦
¦625–69 ¦1964¦27,767.95 ¦
+----------+----+----------¦
¦ ¦1965¦51,224.41 ¦
+----------+----+----------¦
¦5680–71 ¦1966¦75,530.40 ¦
+----------+----+----------¦
¦ ¦1967¦33,333.28 ¦
+--------------------------+
Because of concessions made by the parties, the issues that remain to be decided are:
(1) Whether the basis of the assets that petitioner acquired from another corporation in 1962 is their cost to petitioner, or whether it is the same basis as those assets had in the hands of the other corporation; 1
(2) Whether a net operating loss incurred by petitioner after it acquired those assets must first be carried back to prior taxable years of that other corporation before it may be carried over to petitioner's subsequent taxable years.
The resolution of these issues will depend upon the characterization of the transaction whereby petitioner acquired all of the assets of that other corporation.
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioner is a corporation whose principal office was in Massapequa, N.Y., at the time it filed its petitions in this case. It filed its Federal income tax returns for 1963 through 1967 with the district director of internal revenue, Brooklyn, New York. When the events involved in this case took place, petitioner's name was Nassau Utilities Fuel Corp.2 Petitioner will hereafter sometimes be referred to as New Nassau, to distinguish it from the corporation mentioned in the next paragraph.
Nassau Utilities Fuel Corp., which will be referred to as Old Nassau, was a corporation organized in 1929 under the laws of the State of New York and had its principal place of business in Roslyn, N.Y. Old Nassau was engaged in the business of selling fuel oil at both wholesale and retail. It conducted this business using water terminal facilities and storage tanks on property it owned and leased on the north shore of Long Island, New York (hereinafter referred to as the Roslyn terminal).
Reliance Fuel Oil Corp. (Reliance) is a corporation organized under the laws of the State of New York with its principal place of business in Massapequa, N.Y. It was engaged in the business of selling fuel oil at retail from an inland terminal. Because it lacked a water terminal and adequate storage tanks, it was compelled to buy oil from a wholesaler at prices higher than it would have had to pay if it had had a water terminal with storage facilities which would have enabled it to buy greater amounts of oil direct from the major oil companies. Reliance's lack of water terminal and storage facilities also resulted in its being unable to exchange oil with other retailers on Long Island in the course of making deliveries to customers located in different parts of the Island and to accomplish deliveries only at an increased cost through the use of trucks.
As its sales increased, it became increasingly apparent to Reliance that it would have to acquire a water terminal somewhere on Long Island in order to maintain or improve the profitability of its business. Reliance had been seeking to purchase such a water terminal for a number of years.
In 1961, Reliance contacted Old Nassau to ascertain whether the Roslyn terminal might be purchased. Reliance was not interested in acquiring the business of Old Nassau, which it did not consider sufficiently profitable, but only the assets of Old Nassau, particularly the Roslyn terminal. By August of that year, Reliance and Old Nassau had formulated the draft of an agreement for the sale to Reliance for cash and notes of all of Old Nassau's assets, which were to be transferred to a new corporation organized and owned by Reliance.
Before this proposed agreement for the sale of assets could be executed, however, Old Nassau informed Reliance that it would be unable to sell its assets because of opposition expected from its minority shareholders. Instead, a group of Old Nassau's controlling shareholders (hereinafter referred to collectively as the sellers), who together owned 84.8 percent of the corporation's common stock, offered to sell their stock to Reliance.3
Reliance consulted its attorney and accountant regarding this offer. Reliance was willing to purchase the stock only if the assets of Old Nassau could be transferred thereafter to a new corporation and take a stepped-up basis equal to the cost of the stock purchased. Reliance did not want to integrate the less profitable business of Old Nassau with its own business. Reliance's attorney and accountant advised that these objectives could be achieved through the proposed purchase of the stock of Old Nassau rather than the direct purchase of Old Nassau's assets, as originally intended.
On September 14, 1961, Reliance purchased for cash and its notes 7,825 shares, or 84.8 percent, of the common stock of Old Nassau. The notes were due in 28 quarterly installments and were secured by a pledge of the purchased stock to the sellers. The agreement between Reliance and the sellers allowed Reliance to vote the pledged stock so long as the notes were not in default. The agreement further provided that—
Reliance may vote to liquidate and dissolve [Old] Nassau only on condition that:
(a) All of the assets, except such sums of money required to purchase the interest of the minority stockholders in and to the stock held by them in [Old] Nassau, shall forthwith be transferred to a newly formed corporation (hereinafter called “CORPORATION”), all of whose issued and authorized shares of capital stock shall be issued and registered in Reliance.
(b) All of such shares of stock in the Corporation shall forthwith be pledged with [the sellers] in lieu and in place of the stock of [Old] Nassau pledged hereunder as though the stock of the Corporation was originally pledged and the said shares of stock in the Corporation shall be subject to each and every provision of this agreement.
Reliance then proceeded to follow the steps advised by its attorney and accountant to buy out the minority shareholders of Old Nassau and obtain a stepped-up basis for Old Nassau's assets in the hands of a new corporation. First, Reliance attempted to contact all the other shareholders of Old Nassau and purchase their stock for cash. By May of 1962, however, Reliance had succeeded by this effort in purchasing only a small number of additional shares of Old Nassau's stock.
On May 31, 1962, Reliance addressed to all the shareholders of Old Nassau an offer to purchase all of Old Nassau's assets. The terms of the offer were as follows:
(1) Old Nassau would change its name so as to make it available to a new corporation.
(2) Reliance would then organize a new corporation under the laws of the State of New York bearing the name Nassau Utilities Fuel Corp. (New Nassau).
(3) Old Nassau would then sell, assign, and transfer all its assets to New Nassau subject to all the liabilities of Old Nassau, which New Nassau would assume. In consideration therefor, New Nassau would, at the option of each shareholder of Old Nassau, either pay $40 for each share of Old Nassau common stock or exchange 1 share of New Nassau common for every 3 shares of Old Nassau common.
On June 1, 1962, a special meeting of the board of directors of Old Nassau was held to consider the above offer. The board resolved that the offer be accepted, that the corporation adopt a new name in place of the name Nassau Utilities Fuel Corp., that the assets subject to the liabilities of the corporation be sold and transferred to Reliance,4 and that Old Nassau be dissolved.
On June 22, 1962, a special meeting of the shareholders of Old Nassau was held. The holders of 7,884 shares of common stock voted to approve the board's resolutions. The holders of 424 shares voted against the resolutions and thereafter commenced an action against Old Nassau in the appropriate State court for the appraisal and payment of the fair market value of their shares.
On July 3, 1962, Old Nassau adopted a new name in place of the name Nassau Utilities Fuel Corp., a new corporation (New Nassau) bearing the name Nassau Utilities Fuel Corp. was organized under the laws of the State of New York, and Old Nassau sold and transferred all its assets subject to its liabilities to New Nassau. On July 23, 1962, Old Nassau notified the Internal Revenue Service of its plan of dissolution. Old Nassau was dissolved on November 8, 1962.
In consideration for the assets of Old Nassau, and pursuant to the agreement of sale, New Nassau exchanged 1 share of its common...
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