Canaveral Int'l Corp. v. Comm'r of Internal Revenue

• Citation: 61 T.C. 520
• Decision Date: 29 January 1974
• Docket Number: Docket No. 2576-69.
• Parties: CANAVERAL INTERNATIONAL CORPORATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

61 T.C. 520

CANAVERAL INTERNATIONAL CORPORATION, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2576-69.

United States Tax Court

Filed January 29, 1974.

Carl F. Bauersfeld, Robert J. Tyrrell, and Robert Ash, for the petitioner.

Marlene Gross, for the respondent.

1. P, the parent of an affiliated group of corporations, initially negotiated to exchange some of its stock for a yacht which was convertible to business use. On discovering that the yacht was owned by corporation N and that the yacht and its furnishings had an undepreciated basis of $769,632.75, P instead acquired all of N's stock, in August 1962, in exchange for some of P's nonvoting preferred stock. As an affiliate of P, N improved the yacht and unsuccessfully attempted to charter it for commercial purposes until December 1963, when N sold the yacht for $250,000. The consolidated return claimed depreciation and a sec. 1231, I.R.C. 1954, ordinary loss on the sale computed with reference to N's undepreciated basis. Held, the value of P's stock exchanged for N's stock was $177,500; P's principal purpose in acquiring N's stock was tax avoidance within the mending of sec. 269(a), I.R.C. 1954; the depreciation deductions and the loss on the sale of the yacht must be computed in the consolidated return by using $177,500 as the cost basis of the yacht.

2. Two of petitioner's domestic subsidiaries made loans to one of petitioner's foreign subsidiaries and in fiscal year 1966 petitioner claimed bad debt deductions in its consolidated return. Held, petitioner has not shown that the debts from the foreign subsidiary became worthless in 1966 or that petitioner did not strip the foreign subsidiary, without full consideration, of assets which could have been applied on such debts.

3. One of petitioner's foreign subsidiaries, operating an ocean liner, furnished tickets for passengers and space on the liner for the benefit of a domestic subsidiary joining in the consolidated return for fiscal years 1963 and 1964. Held, the amounts of the deductions for such services are determined.

FEATHERSTON, Judge:

Respondent determined a deficiency in petitioner's Federal income tax and that of its affiliated companies for the taxable year ended September 30, 1966, in the amount of $159,431.48. By stipulation the parties have settled most of the issues outlined in the notice of deficiency, leaving for decision the following questions:

(1) Whether the principal purpose motivating petitioner's acquisition of the stock of Norango, Inc., was the evasion or avoidance of Federal income tax within the meaning of section 269;¹

(2) What is the adjusted basis under section 1011 for computing the allowance for depreciation and gain or loss with respect to a yacht owned and later sold by Sea Research, Inc., one of the affiliated corporations joining in petitioner's consolidated return for its fiscal year ended September 30, 1964?

(3) Whether the intercompany accounts payable owned by Bimini Run, Ltd., to Canaveral Groves, Inc., and Abe Engineering Co., Inc., became worthless within the meaning of section 166(a) in the taxable year ended September 30, 1966; and

(4) Whether and to what extent Canaveral Groves, Inc., incurred business expenses deductible under section 162(a) in taxable years ended September 30 of 1963 and 1964, for space and transportation supplied by Bimini Run, Ltd.

FINDINGS OF FACT

General

Canaveral International Corp. (hereinafter petitioner) was incorporated in 1960 under the laws of Delaware. Its principal office at the time of filing the petition in this proceeding was in Miami, Fla. For the taxable years ended September 30 of 1960 through 1967, petitioner and its domestic subsidiary corporations filed consolidated income tax returns on the accrual basis with the district director of internal revenue, Jacksonville, Fla.

Petitioner is a public corporation whose shares are traded on the American Stock Exchange. Petitioner holds the stock of numerous subsidiaries which are engaged primarily in land development and shipping businesses. At all times pertinent to this proceeding, Henry Dubbin was chairman of the board and vice president of petitioner, and Daniel S. Dubbin, Henry's brother, was president. The Dubbins were the original promoters of petitioner and, with their wives, were the largest single shareholders of the company. Since the company's inception, both men have devoted their full time and efforts to the management of petitioner and its subsidiaries.

1. Acquisition of Norango, Inc.

Norango, Inc. (hereinafter Norango), was a Maine corporation whose principal tangible asset on July 16, 1962, was a yacht, the M/Y Norango (hereinafter sometimes ‘the yacht’ or ‘the vessel’). The M/Y Norango was constructed in 1959 with a North Sea trawler hull according to the specifications of Norman B. Woolworth (Woolworth), to be used for Woolworth's personal pleasure. Ownership of the yacht was placed in Norango in October 1959 to protect Woolworth from liability connected with the use of the vessel. All the funds necessary to purchase and maintain the yacht were contributed or advanced by Woolworth, and he was the beneficial owner of all of Norango's stock.

Shortly after Norango acquired the yacht, Woolworth became terminally ill. Since Woolworth's wife disliked the yacht and it was expensive to maintain, the M/Y Norango was decommissioned. While owned by Norango, the vessel was used only two or three times by the Woolworth family, and it was never used for business purposes.

During the period of his illness, Woolworth had advertised the yacht for sale through his attorney, Talbot M. Malcolm (Malcolm). Except for the negotiations described below, Malcolm received no offers to purchase the vessel.

In March or April 1962, Alex M. Balfe (Balfe), a shipbroker in Miami, Fla., learned that the M/Y Norango was for sale and so advised Henry Dubbin. Henry Dubbin had told Balfe petitioner was interested in buying a vessel suitable for oceanographic and geodetic work because one of its subsidiaries previously had owned a ship chartered for oceanographic work and such charter had been very remunerative to petitioner. Due to her trawler hull, spacious decks, seaworthiness, and more-than-adequate accommodations, the M/Y Norango was suitable for petitioner's purposes.

Balfe and Henry Dubbin telephoned Woolworth, who was then in the hospital, and discussed the possibilities of acquiring the vessel. Henry Dubbin suggested that the vessel be acquired in exchange for petitioner's stock. After discussion, Woolworth requested financial statements and other details concerning petitioner which were forwarded to him.

Woolworth died on June 19, 1962, before the transaction for acquisition of the vessel was completed. After his death, Henry Dubbin received a call from Malcolm, as attorney for the executors of Woolworth's estate (the estate), who expressed a desire to continue the negotiations for the sale of the yacht. Henry Dubbin then traveled to New York in order to meet with Malcolm and consummate the transaction.

Sometime prior to reaching an agreement as to the terms of the sale of the M/Y Norango, petitioner's attorneys discovered that the vessel was owned directly by Norango rather than by Woolworth. When petitioner's accountants reviewed Norango's books and records, they noted that the books showed $961,484.89 in notes payable to Woolworth. Norango's balance sheet also showed that the vessel's basis, inclusive of furnishings, was $769,632.75. Petitioner's representatives then asked Malcolm to sell the stock of Norango rather than the vessel itself. In order to liquidate the debt, petitioner negotiated to purchase the notes along with Norango's stock. Later, petitioner contributed the notes to Norango's capital surplus.

Petitioner ordinarily receives tax and legal advice from Miami-based accountants and attorneys. However, in negotiating for the purchase of Norango, petitioner retained Ernest Field as counsel in New York. Field, who is both an attorney and an accountant, discussed the tax implications of the Norango acquisition with petitioner's comptroller and auditing division.

On July 16, 1962, the executors of Woolworth's estate signed a written agreement to sell all the issued and outstanding stock of Norango (1,500 shares), plus the aforementioned notes in the amount of $961,484.89, to petitioner in exchange for 949 shares of petitioner's preferred non-dividend-bearing, nonvoting, convertible stock. Under the terms of the agreement, (1) the preferred stock had to be converted into 20,878 shares of common stock on or after February 1, 1966, and before February 1, 1967,² or (2) in the event petitioner proposed to redeem the preferred stock, the estate could convert it as in (1). Petitioner had the option to redeem all or a part of the common stock at agreed-upon redemption prices, the lowest price being $12.65 per share if the common stock were redeemed prior to July 16, 1963, and the highest price being $15.52 per share if the stock were redeemed prior to July 16, 1967. The closing of the sale occurred on August 17, 1962, and on that day, petitioner's common stock sold on the American Stock Exchange at a high of 11 1/4 and a low of 10 3/4. The fair market value of the yacht and of the 949 shares of petitioner's preferred stock on the date of the exchange was $177,500.

Shortly after the transaction was closed, the yacht was delivered to petitioner. On or about September 14, 1962, petitioner changed the name of the corporation, Norango, Inc., to Sea Research, Inc. (Sea Research), and the name of the vessel, M/Y Norango, to M/S Sea Search (hereinafter sometimes Sea Search). The names were changed in order to reflect the intended use of the vessel in oceanographic research. Also, additional work was performed to ready the vessel for charter. Lifesaving equipment, generators, and certain oceanographic and marine equipment were purchased and installed...