Lehn & Fink Prods., Corp.. v. Comm'r of Internal Revenue

• Citation: 7 T.C. 287
• Decision Date: 28 June 1946
• Docket Number: 5420.,Docket Nos. 3742
• Court: United States Tax Court
• Parties: LEHN & FINK PRODUCTS CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

7 T.C. 287

LEHN & FINK PRODUCTS CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 3742

5420.

Tax Court of the United States.

Promulgated June 28, 1946.

1. X corporation owned all of the stock of Y corporation and Z corporation. Its cost as to the Z stock was $5,000,000. In January 1936 Z was liquidated and X surrendered all its stock in exchange for its assets. At that time, under the provisions of the Revenue Act of 1934, X's basis as to these assets was $5,000,000. In April 1936 X and Y were merged into A corporation (the petitioner). In June 1936 the Revenue Act of 1936, retroactive to January 1, 1936, was passed, under which X's basis as to Z's assets acquired by it on Z's liquidation was Z's cost, or $144,000. In 1938 Congress, by a retroactive amendment of the 1936 provision, provided that, under the circumstances of such a liquidation, the basis of the assets in the hands of the recipient corporation should be the basis provided by the Revenue Act of 1934 ‘if such corporation * * * elects * * * to have such basis apply.‘ A filed such election, but respondent refused to give it effect, on the ground that A was not the recipient corporation and was not entitled to make such election. Held, A, the petitioner herein, formed by the merger of X and Y, is entitled to make such election.

2. An account receivable owing to Z by Y, a solvent corporation of the highest credit rating, is not to be considered as ‘money‘ distributed on the final liquidation of Z.

3. The fair market value of Z's assets as of the time of liquidation is determined from the evidence. Montgomery B. Angell, Esq., and Marvin Lyons, Esq., for the petitioner.

Robert S. Garnett, Esq., for the respondent.

In Docket No. 3742 the Commissioner determined a deficiency in petitioner's income tax for the calendar year 1938 in the amount of $69,829.81, and petitioner claims an overpayment of $18,000. In Docket No. 5420 the Commissioner determined deficiencies in income and declared value excess profits taxes for the taxable year ended June 30, 1941, in the respective amounts of $66,973.36 and $8,568.11, and petitioner claims an overpayment of $34,761.72 for that year. These deficiencies resulted from the failure on the part of the Commissioner to allow deductions claimed for depreciation.

On October 2, 1944, this Court severed the issues involved in these cases, and on October 4, 1944, there was presented to the Court for determination the question of whether the petitioner, a corporation resulting from a merger under the laws of Delaware, is entitled to file the election provided for in section 808 of the Revenue Act of 1938. On February 27, 1945, the cases were ordered set for hearing on all the issues not already tried, pursuant to which hearings were held on June 11, 13, 14, 15, 19, and 20, 1945.

The principal questions presented for determination are, first, whether petitioner is entitled to the election provided by section 808 of the Revenue Act of 1938, and, second, if so, what the fair market value of all the assets of the A. S. Hinds Co. was as of January 29, 1936, required for the application of the terms of section 808 in order to determine the allowance for depreciation to which petitioner is entitled.

FINDINGS OF FACT.

Petitioner is a Delaware corporation which resulted from a merger, on April 15, 1936, of three existing corporations. It filed its income and declared value excess profits tax returns for the tax years involved here with the collector for the fifth district of New Jersey at Newark.

Certain facts are stipulated, and we find them to be as stipulated. From them and from oral and documentary evidence before us is taken the following statement of facts.

The Lehn and Fink enterprises had their beginnings in a business conducted from 1874 to 1910 as a partnership. In 1910 Lehn & Fink, a corporation, was organized to conduct the business theretofore carried on by the partnership, and in 1916, Lehn & Fink, Inc., was incorporated to succeed to the business of Lehn & Fink. The directors of this and all of the subsidiaries hereinafter mentioned were, generally speaking, members of the Plant family, which controlled the business, and representatives of their banking institutions. The business carried on was originally the buying and selling, at wholesale, of drugs and related articles. At about the time of the organization of Lehn & Fink as a corporation in 1910, it began the manufacture of certain tinctures and pharmaceuticals. Later, it expanded its activities further into the proprietary field by engaging in the manufacture and sale, in the United States, of Lysol disinfectant and Pebeco tooth paste, nationally advertised and trade-marked products. Its manufacturing plant was located at Bloomfield, New Jersey, with its executive and sales offices in New York City.

As the business expanded, various subsidiaries were organized by Lehn & Fink, Inc., the first of which, Lysol, Inc., was incorporated in 1920 in Delaware to acquire control of the Lysol business throughout the world.

It was contemplated that Lehn & Fink, Inc., would continue the manufacture and sale of Lysol in the United States under a contract by the terms of which Lysol, Inc., employed Lehn & Fink, Inc., as its sole manufacturing and selling agent in the United States for a period of 20 years, and agreed to pay to Lehn & Fink, Inc., 15 per cent of the net sales for selling and the cost of production plus 30 per cent of the cost of operation of the Bloomfield plant for manufacturing. This was the first such contract entered into between Lehn & Fink, Inc., and a subsidiary, under a plan of operation later extended to Pebeco tooth paste and Hinds Honey & Almond Cream.

In 1924 Lehn & Fink, Inc., organized Pebeco, Inc., a wholly owned subsidiary, under the laws of New York, and transferred to it the title to the machinery and other assets used in the manufacture of Pebeco, and located at the Bloomfield, New Jersey, plant of Lehn & Fink. Shortly after its organization, Pebeco, Inc., entered into a contract with Lehn & Fink, Inc., which was similar to the Lysol contract, providing for the manufacture of Pebeco tooth paste at the Bloomfield plant by Lehn & Fink, Inc., which was to have supervision, direction, and control over the manufacturing and marketing of the product.

By 1925 the business of Lehn & Fink, Inc., had three aspects: (1) A wholesale business in pharmaceuticals and other items commonly carried by druggists; (2) the manufacture and sale of pharmaceuticals; and (3) the manufacture and sale of Lysol disinfectant and Pebeco tooth paste under the contracts referred to above. Early in 1925 an independent survey of the business was made, and, as a result thereof, it was decided to make substantial changes in the business. The management decided to abandon the wholesale drug business and the manufacture of pharmaceuticals, and to devote the entire facilities of the business to the manufacture and sale of Lysol, Pebeco, and such other nationally advertised and trade-marked products as it might thereafter acquire, the first of which was to be Hinds Honey & Almond Cream. The decision was motivated by a recognition on the part of the management that a single factory and laboratory staff, operating under a single executive and sales organization, could manufacture and market in the same trade channels three or more noncompetitive products more economically, and therefore more profitably, than the several products could be manufactured in separate plants and marketed by separate sales organizations.

Pursuant to the plan, a reorganization of the Lehn & Fink enterprises was effected in August of 1925. A new corporation, Lehn & Fink Products Co. (hereinafter sometimes referred to as the Products Co.), was incorporated in Delaware as a holding company. It immediately acquired all the stock of Lehn & Fink, Inc., and on August 10, 1925, it purchased all the stock of A.S. Hinds Co. at a net cost of $5,387,228.68.

The A.S. Hinds Co. was a Maine corporation, organized in 1922 to succeed to the sole proprietorship of A.S. Hinds, who had made and sold Hinds Honey & Almond Cream since 1870. The product, a skin lotion and remedy for chapped hands, had been widely sold and advertised through the years, and by 1925 had a wide domestic and a less extensive foreign market.

The A.S. Hinds Co. had a large plant and offices at Portland, Maine, for which the Lehn & Fink organization had no use, since the machinery and equipment for the manufacture of the Hinds product were to be moved to Bloomfield, New Jersey. To facilitate the disposition of the unwanted assets of Hinds, there was organized a New York corporation, known as Products Realization Corporation, which acquired the entire Hinds plant and machinery. A.S. Hinds Co. then reacquired from Products Realization Corporation the machinery and equipment which would be required for the future manufacture of the Hinds lotion at Bloomfield. The remaining Hinds assets, including the real estate, were sold by Products Realization Corporation.

The machinery and equipment so reacquired by A.S. Hinds Co. was physically transferred to and installed in the Bloomfield plant, where the facilities for manufacturing Lysol and Pebeco were already installed. The Hinds product, like the others, was to be manufactured and sold by Lehn & Fink, Inc., as exclusive manufacturing and sales agents, under formal contracts which were duly executed and which are hereinafter more fully described.

Thereafter, in 1926 and 1928, Lehn & Fink, Inc., purchased the cosmetics and toilet articles businesses of Dorothy Gray, a corporation, and Lesquendieu, Inc. It manufactured these products at Bloomfield, but these two corporations conducted their own selling and other activities.

The ownership of the names, trade-marks, formulas, and secret processes covering each of the products manufactured by Lehn & Fink, Inc., was held...