Mariani Frozen Foods, Inc. v. Comm'r of Internal Revenue
| Decision Date | 21 September 1983 |
| Docket Number | Docket Nos. 11129–78,13830–79.,13828–79,13826–79,13827–79,13829–79 |
| Citation | 81 T.C. No. 29,81 T.C. 448 |
| Parties | MARIANI FROZEN FOODS, INC., Successor in Interest to INTERNATIONAL FOOD TECHNOLOGY SERVICE, INC., ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During their fiscal years beginning May 1, 1973, IFTS and LFC each held 40 percent of the outstanding shares of Simarloo, an Australian corporation. Y corporation, a subsidiary of X corporation, held the remaining 20 percent of Simarloo's shares. During its fiscal year ended June 30, 1973, Simarloo sold X corporation shares at a profit of A$1,200,052. Translated to U.S. dollars, Simarloo's gain was $1,595,231, $250,016 of which was foreign currency exchange gain attributable to the increase in value of the Australian dollar against the U.S. dollar between the dates on which Simarloo acquired and the dates on which it sold X corporation shares.
IFTS and LFG both qualify as personal holding companies for their taxable years beginning May 1, 1973, if for that taxable year they must include in income (as dividends under sec. 543(a)(1), I.R.C. 1954) section 551(b), I.R.C. 1954, constructive dividends from Simarloo. Neither IFTS nor LFG reported, or paid any tax attributable to, sec. 551(b), I.R.C. 1954, constructive dividends from Simarloo for their taxable years in question.
The sole business of IFTS was holding Simarloo shares. On December 4, 1973, IFTS was merged into MFF, a corporation owned by the same individuals that owned IFTS. Shortly thereafter MFF disposed of the Simarloo shares formerly held by IFTS.
On its tax returns for its fiscal year ended April 30, 1974, LFG disclosed that Simarloo had realized gain on the sale of X corporation stock during its fiscal year ended June 30, 1973, but did not disclose Simarloo's gross income for that fiscal year. During 1974 LFG distributed all of its assets and dissolved.
On June 29, 1979, respondent sent deficiency notices assessing liabilities against the distributees of LFG as transferees of LFG. Held, IFTS and LFG together held Simarloo stock worth more than 50 percent in value of Simarloo's outstanding shares. Held further, the foreign currency exchange gain attributable to the sale of X corporation shares is gain from the sale of securities under the intendment of sec. 553(a)(2), I.R.C. 1954, and more than 60 percent of Simarloo's gross income for its fiscal year ended June 30, 1973, is therefore gain from the sale of securities. Held further, Simarloo had a substantial investment motive for holding its X corporation shares during its fiscal year ended June 30, 1973, and those shares were capital assets in its hands. Held further: Alvord v. Commissioner, 277 F.2d 713 (4th Cir. 1960), distinguished. Simarloo was a foreign personal holding company for its fiscal year ended June 30, 1974. Held further, sec. 551(b), I.R.C. 1954, constructive dividends includable in gross income by LFG and IFTS are dividends under the intendment of sec. 543(a)(1), I.R.C. 1954. Held further, LFG and IFTS are not entitled in their taxable years beginning May 1, 1973, to a dividends paid deduction pursuant to sec. 562, I.R.C. 1954, for corporate taxes attributable to amounts included in gross income in their taxable years beginning May 1, 1973, pursuant to sec. 551(b), I.R.C. 1954, since those corporate taxes are not properly accruable in LFG and IFTS's fiscal years beginning May 1, 1973. Held further, the merger of IFTS into MFF does not qualify as a sec. 368 (a)(1)(F), I.R.C. 1954, reorganization. Held further, IFTS may increase its basis in its Simarloo shares in the amount of the sec. 551(b), I.R.C. 1954, constructive dividend it must include in gross income, for purposes of calculating its dividends paid deduction under sec. 562, I.R.C. 1954. Held further, respondent is not barred by the statute of limitations from assessing liabilities against the transferees of LFG. JAY R. Oliff, for the petitioners.
Robert W. Towler, for the respondent.
Respondent determined deficiencies and or liabilities in petitioners' Federal income taxes as follows:
+-----------------------------------------------------------------------------+
¦Docket No. ¦Petitioners ¦Year ending ¦Deficiency or liability ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦Mariani Frozen Foods, ¦ ¦ ¦
¦ ¦Inc., successor in ¦ ¦ ¦
¦11129—78 ¦interest to ¦4/30/74 ¦$1,217,489.00 ¦
¦ ¦International Food ¦ ¦ ¦
¦ ¦Technology Service, Inc.¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦13826—79 ¦Melinda L. Gee Trust, ¦4/30/74 ¦30,374.23 ¦
¦ ¦Robert E. ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦Gee and Kathleen L. Gee,¦1/3/75 ¦ ¦
¦ ¦Trustee, ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦Transferee of L.F.G., ¦ ¦ ¦
¦ ¦Inc. ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦13827—79 ¦Kathleen E. Gee Trust, ¦4/30/74 ¦30,374.23 ¦
¦ ¦Robert E. ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦Gee and Kathleen L. Gee,¦1/3/75 ¦ ¦
¦ ¦Trustees, ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦Transferee of L.F.G., ¦ ¦ ¦
¦ ¦Inc. ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦13828—79 ¦Joel-Ann Foote, ¦4/30/74 ¦643,213.00 ¦
¦ ¦Transferee of ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦L.F.G., Inc. ¦1/3/75 ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦13829—79 ¦Robert E. Gee, ¦4/30/74 ¦428,808.00 ¦
¦ ¦Transferee of ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦L.F.G., Inc. ¦1/3/75 ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦13830—79 ¦Kathleen L. Gee, ¦4/30/74 ¦582,465.34 ¦
¦ ¦Transferee of ¦ ¦ ¦
+------------+------------------------+-------------+-------------------------¦
¦ ¦L.F.G., Inc. ¦1/3/75 ¦ ¦
+-----------------------------------------------------------------------------+
Prior to January 1974, International Food Technology Service, Inc. (hereinafter IFTS), and L.F.G., Inc. (hereinafter LFG), were shareholders in Simarloo Pty., Ltd. (hereinafter Simarloo), an Australian corporation organized under the laws of the State of South Australia.
After concessions by the parties, the following issues remain for our decision:
(1) was Simarloo a foreign personal holding company for its fiscal year ended June 30, 1973;2
(2) Do section 551(b)3 constructive dividends includable in gross income by LFG and IFTS qualify as dividends within the intendment of section 543(a)(1);
(3) Are corporate tax liabilities attributable to amounts includable in gross income pursuant to section 551(b) by LFG and IFTS in their taxable years beginning May 1, 1973, properly deductible in calculating their undistributed personal holding company income;
(4) Does the merger of IFTS into Mariani Frozen Foods, Inc. (hereinafter MFF), qualify as a section 368(a)(1)(F) reorganization so that, pursuant to section 381(b), net operating losses of MFF's may be carried back to offset IFTS's income for its taxable year beginning May 1, 1973; (5) May IFTS increase its basis in its Simarloo shares pursuant to section 551(e) for purposes of calculating its dividends paid deduction under section 562;
(6) Is respondent barred by the statute of limitations from assessing liabilities against the transferees of LFG. We need reach issues (2) through (6) only if we find that Simarloo was a foreign personal holding company.
Some of the facts have been stipulated and are so found.
Petitioner MFF was a California corporation with its principal office in Cupertino, California, when its petition in this case was filed.
On December 4, 1973, IFTS distributed its assets to MFF in complete liquidation. The deficiency in docket No. 11129–79 relates to IFTS's taxable year beginning May 1, 1973, and ending on December 3, 1973.
Robert E. Gee and Kathleen L. Gee resided in Los Altos, California, when their petitions in this case were filed. Robert E. and Kathleen L. Gee were trustees for the Melinda L. Gee and Kathleen E. Gee trusts when those trusts filed petitions in this case. Joel-Ann Foote resided in Santa Cruz, California, at the time of filing her petition in this case...
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