Buffalo Tool & Die Mfg. Co. v. Comm'r of Internal Revenue

• Decision Date: 27 May 1980
• Docket Number: Docket No. 6553-77.
• Citation: 74 T.C. 441
• Parties: BUFFALO TOOL & DIE MANUFACTURING CO., INC., TRANSFEROR, PETER HOSTA, JR., and ELEANOR HOSTA, TRANSFEREES, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

74 T.C. 441

BUFFALO TOOL & DIE MANUFACTURING CO., INC., TRANSFEROR, PETER HOSTA, JR., and ELEANOR HOSTA, TRANSFEREES, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 6553-77.

United States Tax Court

Filed May 27, 1980.

Individual petitioners H and W are liable as transferees of Corporation B, which sold all its machinery for a lump sum to a syndicate of used machinery dealers pursuant to a plan to liquidate the corporation within 12 months. At closing, H, on behalf of B, presented a letter to the syndicate containing an alleged allocation of the sales price. The syndicate resold most of the machinery in an auction held 21;2 months later, and the remainder in individual sales. Held, in calculating depreciation recapture, the allocation contained in the letter was neither realistic nor the result of arm's-length negotiations and is therefore not binding on respondent. Held, further, all of the items sold by B will not be treated as a single item for purposes of depreciation recapture. BASF Wyandotte Corp. v. Commissioner, 62 T.C. 704 (1974), affd. 532 F.2d 530 (6th Cir. 1976), distinguished. Held, further, respondent's valuation method, applying a single percentage factor to reduce subsequent auction and individual sale prices, is not binding on petitioners. Paul R. Comeau and Victor T. Fuzak, for the petitioners.

Louis J. Zeller, Jr., for the respondent.

TANNENWALD, Judge:

Respondent determined a deficiency in the corporate income tax for 1973 of the transferor, Buffalo Tool & Die Manufacturing Co., Inc. (hereinafter Buffalo Tool or the corporation), of $403,541, based upon adjustments for depreciation recapture under section 1245.¹ He determined that petitioners Peter Hosta, Jr. (hereinafter Hosta), and Eleanor Hosta are liable as transferees of Buffalo Tool as follows:

+--------------------------+
                ¦Hosta         ¦$403,541.00¦
                +--------------+-----------¦
                ¦Eleanor Hosta ¦267,811.88 ¦
                +--------------------------+
                

By amendment to answer, respondent redetermined the transferor's deficiency to be $653,979.64 and asserted a transferee liability against Hosta in that amount; he also increased the asserted transferee liability against Eleanor Hosta to $323,000.² At trial, the Court severed certain issues relating to the allocation of the overall purchase price to individual pieces of machinery.³ The issues presented herein for resolution are whether, on the basis of the record thus far developed, (a) Buffalo Tool's allocation of the purchase price should be binding upon respondent, (b) the sale of the machinery should be treated as a bulk sale for purposes of applying the depreciation recapture provisions, and (c) respondent's allocation of the purchase price, which was based upon applying a percentage factor to the amounts received by the purchaser on subsequent resales of the machinery, should be binding upon petitioners.

FINDINGS OF FACT

The individual petitioners resided in Athol Springs, N.Y., at the time the petition herein was filed. During 1973, Buffalo Tool was a corporation organized under the laws of the State of New York with its principal place of business in Buffalo, N.Y. It filed its income tax return for 1973 with the North Atlantic Service Center, Andover, Mass., on March 4, 1974.

Hosta founded Buffalo Tool in 1942. During 1973, he owned 86.32 percent of the stock of Buffalo Tool; Eleanor Hosta owned the remaining 13.68 percent. Hosta served as its president, Eleanor Hosta as its secretary, and Floyd G. Wehrlin was the vice president. The board of directors consisted of Hosta, Eleanor Hosta, and Geoffrey Hosta. Buffalo Tool's primary business was the manufacture of tools and dies to be used in automotive production. During 1972, Hosta decided to discontinue the business of the corporation. He first attempted to sell Buffalo Tool as a going business, placing advertisements in the Wall Street Journal. Such efforts proved unsuccessful, so he concentrated on selling the machinery of the corporation, together with the land and building whereon the machinery was located, which was owned by the individual petitioners.

Hosta was unwilling to sell the building and land separate from the machinery, because he thought it impractical to move the machinery and store it for the period of time that might be necessary to get a fair price for it. He refused to sell the machinery piecemeal, because he feared any piece he might sell would be the key to a sale of a larger, or even the entire, lot.

During the late summer of 1972, Hosta was approached by a group of prospective purchasers, who eventually purchased the machinery and the realty. The primary business of the members of this group (hereinafter the syndicate or purchasers) was the purchase and resale of used machinery. Some members of the syndicate examined the machinery at that time but rejected the asking price as too high. Hosta provided them with an inventory list of the machinery without any prices for individual items contained therein.

During the first quarter of 1973, the syndicate again became interested in acquiring the property. Meetings were held between Hosta and representatives of the syndicate, including Joseph and Bill O'Connell of O'Connell Machinery Co., Leonard Morey of Morey Machinery Co., and Harold Goldstein of Cadillac Machinery Co. Harold Goldstein conducted the negotiations on behalf of the syndicate. Hosta rejected an offer by the syndicate to simultaneously purchase the real estate in one name and the machinery in another, requiring them to take the whole package as one buyer.

On March 16, 1973, Hosta and the syndicate reached agreement on a sales price of $2,600,000 for the machinery and $350,000 for the land and building, or $2,950,000 in total.⁴ No further negotiations were conducted regarding either the sales price or the allocation of the price.

On March 21, 1973, Buffalo Tool's board of directors met and resolved to sell substantially all of the corporation's assets and adopted a plan to liquidate the corporation within 12 months. That evening, the individual petitioners and Buffalo Tool as sellers and David J. Kayner (hereinafter Kayner) as nominee for the purchasers⁵ signed an agreement for the sale of all of the assets of Buffalo Tool (except cash and office furniture), together with the land and building.

Prior to the signing of the agreement, while the final draft was being retyped, Hosta's attorney presented Kayner with a letter, for his signature, stating that the parties agreed to an allocation of $350,000 to the land and building and of $2,600,000 to the personal property, as was set forth in the attached schedule. The schedule included an inventory of the major machinery items, with alleged sales prices (allegedly equal to fair market value) for each item.⁶ Goldstein told Kayner to sign the letter. Kayner did so only after calling his law office in Chicago, which made sure that the allocations would not be inconsistent with their accountant's projected allocations. The letter and attached schedule had been presented to neither Kayner nor any member of the syndicate prior to the closing. Prior to this time, the only discussions between the parties regarding individual prices had been to test the overall sales price.

Hosta had prepared the schedule of individual pieces for his attorney prior to the reaching of a preliminary agreement with the eventual purchasers. The allocation was based on Hosta's estimate of the fair market value of each item, given its condition, demand for it, the current price of new machinery, and the length of time required for a similar new machine to be delivered. He obtained no independent appraisals of the individual pieces at that time. When the parties negotiated the $50,000 reduction in total price, Hosta reduced the prices allocated to the cranes and perishable tubes by that amount.

Industrial Plants Corp., a member of the syndicate, undertook to conduct an auction sale of the machinery for the syndicate. An auction of most of the machinery was held on June 7, 1973, at the location of Buffalo Tool. Between 250 and 300 prospective buyers attended the auction. The machinery was sold as is, where is. Buffalo Tool had allocated no portion of its sales proceeds to miscellaneous items of machinery and equipment which later provided the majority of the number of pieces sold at the auction.⁷

Several items of machinery were not offered for sale at the auction but were instead sold separately in “liquidation sales” by members of the syndicate to unrelated third-party purchasers. Seventeen pieces of machinery were sold in this manner. Five of these machines were sold in June 1973; seven later in the year, four in 1974, and one in 1976.

Respondent does not challenge the bases and amounts of depreciation for the machinery as reported on Buffalo Tool's 1973 corporate income tax return.

OPINION

Section 1245(a) requires ordinary income treatment, upon the disposition of property, of that portion of the amount realized exceeding an item's basis, limited by the depreciation taken on the item after December 31, 1962, even where a section 337 liquidation is involved, and petitioners have not argued otherwise.⁸ Clayton v. Commissioner, 52 T.C. 911 (1969). Thus, the ultimate issue herein is how the total purchase price of $2,600,000 for the machinery is to be allocated in order to calculate the section 1245 recapture.

In an attempt to facilitate the resolution of this case, the Court severed the issue related to the valuation of the individual items of machinery from the issue of the allocation of the overall purchase price to such individual pieces. At the moment, therefore, we are concerned only with the legal issues as to whether, on the basis of the record thus far developed, (a) petitioners' allocation of the purchase price set forth in the March 21 letter should be held to be binding upon the respondent, (b) the sale of the machinery should be treated as a...