Metallics Recycling Co. v. Comm'r of Internal Revenue, Docket No. 21123-80.

Decision Date08 November 1982
Docket NumberDocket No. 21123-80.
Citation79 T.C. 730
PartiesMETALLICS RECYCLING COMPANY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Petitioner began doing business in 1976. During 1976 and 1977, it purchased from Company V and Company W equipment, machinery, and inventory. It also acquired customers and employees which had formerly been associated with Company V and Company W. Petitioner took a new jobs tax credit pursuant to secs. 44B and 52(c), I.R.C. 1954, for its 1977 tax year. Held, for purposes of determining the amount of the new jobs tax credit, the limitations of sec. 52(c) apply when employers acquire the major portion of more than one business. Held, further, petitioner acquired goodwill and tangible assets from both Company V and Company W. Held, further, under the facts and circumstances presented, petitioner acquired a major portion of Company V and a major portion of a separate part of Company W. Thus, petitioner is subject to the limitations of sec. 52(c). Arthur W. Moore and Robert W. Malone, for the petitioner.

Barbara B. McCaskill, for the respondent.

SHIELDS , Judge:

Respondent determined a deficiency of $23,997.16 in petitioner's income tax for the year ending December 31, 1977. Due to concessions, the sole issue for our decision is whether petitioner is entitled to a new jobs tax credit pursuant to sections 44B and 52(c).1

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference.

Petitioner Metallics Recycling Co. (Metallics) is an Ohio corporation. Its principal place of business was in Wooster, Ohio, when it filed its petition herein.

Metallics is in the business of purchasing and processing scrap metal and some scrap paper, and selling it to companies for reuse. It was formed in 1975 by Samuel Shapiro, the president and majority shareholder of Wayne Steel, Inc. (Wayne), and by Robert Polsky, the president and sole shareholder of Volper Iron & Metal, Inc. (Volper). It purchased assets and inventory from Wayne and Volper in 1976 and 1977. It also hired former employees of Wayne and Volper in 1976.

To set forth clearly the facts concerning Metallics, Volper, and Wayne, we shall discuss each company separately.

Wayne

Prior to 1977, Wayne carried on two distinct operations. It bought and sold scrap metal and it produced and sold new steel.

Wayne's scrap metal business involved both retail trade and industrial trade. The industrial trade consisted of purchasing large amounts of scrap metal from metal fabricators and processors. Wayne obtained this metal from huge haul boxes located on the fabricators' or processors' business premises.2 Wayne then separated, baled, weighed, and resold the scrap metal. The retail trade involved purchasing scrap metal from individuals or small businesses who brought the scrap to Wayne's yard. Only a small portion of Wayne's scrap metal operation was comprised of retail trade.

Wayne did not have contracts with its suppliers under which they were obligated to deliver scrap metal to it. Instead, they supplied Wayne with scrap based largely on the price which Wayne offered. If they could receive a better price from another scrap metal company, they sold to that company. Wayne did have a yearly contract with one supplier, but even this contract was nonbinding and merely established the pricing scale which Wayne would use to purchase that supplier's scrap metal. Thus, Wayne obtained its supplies of industrial scrap metal on a month-to-month basis.3

After Wayne processed the scrap metal, it sold it to brokers who purchased the scrap for company accounts. There were only a “handful” of scrap metal brokers to which a scrap metal processor could sell its products. These brokers would contact Wayne on a month-to-month basis and would specify a price at which they would purchase scrap. If the price desired was too high, the brokers would not buy from Wayne. Thus, Wayne's sales of processed scrap depended primarily upon whether the price at which it was willing to sell was equal to or lower than the price offered by the brokers.

The profitability of Wayne's scrap metal operations declined between 1974 and 1977. The gross sales and net profits attributable to Wayne's scrap metal operations for several years prior to the formation of Metallics were as follows:

+-----------------------------------------+
                ¦              ¦Net profit  ¦             ¦
                +--------------+------------+-------------¦
                ¦TYE Mar. 31-  ¦before tax  ¦Gross sales  ¦
                +--------------+------------+-------------¦
                ¦              ¦            ¦             ¦
                +--------------+------------+-------------¦
                ¦1974          ¦$311,526    ¦$1,704,810   ¦
                +--------------+------------+-------------¦
                ¦1975          ¦278,624     ¦2,489,164    ¦
                +--------------+------------+-------------¦
                ¦1976          ¦27,991      ¦1,349,048    ¦
                +--------------+------------+-------------¦
                ¦1977          ¦54,573      ¦1,359,478    ¦
                +-----------------------------------------+
                

Wayne's total sales and net profits during those years were as follows:

+-----------------------------------------+
                ¦              ¦Net profit  ¦             ¦
                +--------------+------------+-------------¦
                ¦TYE Mar. 31-  ¦before tax  ¦Gross sales  ¦
                +--------------+------------+-------------¦
                ¦              ¦            ¦             ¦
                +--------------+------------+-------------¦
                ¦1974          ¦$546,151    ¦$5,292,789   ¦
                +--------------+------------+-------------¦
                ¦1975          ¦729,484     ¦8,087,039    ¦
                +--------------+------------+-------------¦
                ¦1976          ¦384,962     ¦5,627,410    ¦
                +--------------+------------+-------------¦
                ¦1977          ¦1  451,663  ¦7,613,297    ¦
                +--------------+------------+-------------¦
                ¦              ¦            ¦             ¦
                +-----------------------------------------+
                

Thus, between 1974 and 1977, Wayne's pre-tax net profit on its scrap metal operations, measured as a percentage of its total pre-tax net profit, declined from 57 percent in 1974 to 12 percent in 1977.

Gary Plant, Wayne's former accountant and financial officer, and the other officers of Wayne were concerned about the decline in profitability of its scrap metal operations. In 1976, Mr. Plant felt that Wayne's scrap operation would become even less profitable unless new equipment was purchased. However, the new steel portion of Wayne's business had been increasing, and Wayne's management wanted to continue this expansion. Thus, Mr. Shapiro, Wayne's president and majority shareholder, indicated to Mr. Plant that he was not interested in making new investments in Wayne's scrap metal processing operation in 1976.

Volper

Prior to 1977, Volper was also in the business of buying and processing scrap metal and selling it for reuse. About 60 percent of Volper's scrap metal business was retail trade supplied by approximately 800 retail accounts. The remaining 40 percent of its business was in the industrial trade.

Volper had 48 lugger boxes which it supplied to 10 different industrial company locations during 1976. These companies were Volper's primary sources of industrial scrap metal for the years 1974 through 1976.

Customers sold scrap to Volper based on a competitive price. A significant factor in a dealer's obtaining scrap from suppliers was the competitiveness of its price with that of other dealers. The price at which a dealer, such as Volper, could sell its processed scrap depended upon the purchase price offered by the scrap metal brokers in the area.

Volper's gross sales and pre-tax net profit for several years prior to the formation of Metallics were as follows:

+-----------------------------------------+
                ¦              ¦Net profit  ¦             ¦
                +--------------+------------+-------------¦
                ¦TYE June 30-  ¦before tax  ¦Gross sales  ¦
                +--------------+------------+-------------¦
                ¦              ¦            ¦             ¦
                +--------------+------------+-------------¦
                ¦1974          ¦$214,738    ¦$2,102,314   ¦
                +--------------+------------+-------------¦
                ¦1975          ¦319,972     ¦2,281,620    ¦
                +--------------+------------+-------------¦
                ¦1976          ¦203,098     ¦1,529,090    ¦
                +--------------+------------+-------------¦
                ¦1977          ¦1  173,666  ¦889,919      ¦
                +--------------+------------+-------------¦
                ¦              ¦            ¦             ¦
                +-----------------------------------------+
                

1 Prior to sale of equipment to Metallics.

1 $64,490 was gain on the sale of equipment to Metallics Recycling.

Thus, both Volper's gross sales and pre-tax net profits declined somewhat over a 4-year period. However, its pre-tax net profits, when measured as a percentage of gross sales, actually increased from 10.2 percent in 1974 to 19.5 percent in 1977.4

Metallics

To establish Metallics in 1975, Robert Polsky, the president and sole shareholder of Volper, contributed $190,000. Samuel Shapiro, the president and majority shareholder of Wayne, did likewise. Mr. Polsky and Mr. Shapiro each received 50 percent of Metallics' stock in return, valued at $100,000. Each also received a note payable in the amount of $90,000. Metallics actually began its scrap metal and paper operations in December 1976.5

At all times relevant herein, Mr. Shapiro was chairman of Metallics' board of directors and Mr. Polsky was Metallics' president. Mr. Polsky supervised the company's daily operations, while Mr. Shapiro served as a consultant. The two were constantly in contact concerning the business of Metallics. Gary Plant was Metallics' treasurer.

In 1976 and 1977, Metallics purchased machinery, equipment, and supplies from Wayne for $136,600. In 1977, it purchased additional equipment, machinery, and supplies from Volper for $77,850. It paid for these items with three cognovit promissory notes bearing 61;4-percent annual interest, and payable on demand 1 year after the notes were made. Metallics also purchased approximately $30,000 of scrap inventory from...

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