JORDAHL & COMPANY, INC. v. Commissioner of Internal Revenue, Docket No. 59581.
| Decision Date | 27 May 1937 |
| Docket Number | Docket No. 59581. |
| Citation | 35 BTA 1136 |
| Parties | JORDAHL & COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Richard S. Holmes, Esq., Harvey L. Rabbitt, Esq., and David A. Buckley, Jr., Esq., for the petitioner.
Daniel A. Taylor, Esq., for the respondent.
This proceeding involves deficiencies in petitioner's income tax for 1927 and 1928 in the amounts of $13,394.61 and $12,664.18, respectively. There are four major issues involved — (1) gain or loss on the sale of assets; (2) losses on match transactions; (3) amortization of patents; and (4) gain on exchange of assets for petitioner's own capital stock. The fourth issue is raised by an affirmative plea in the respondent's amended answer. There are also several collateral issues which will be set forth below.
The petitioner was incorporated in the State of New York on November 19, 1919, under the name of American Kreuger & Toll Corporation. In 1927 its name was changed to "Jordahl & Company, Inc." During the taxable years involved the petitioner was engaged in the business of importing chemicals, steel, scientific instruments, matches, and other products, and in holding stocks of subsidiary corporations. Until 1927 all of the petitioner's stock stood in the name of Ivar Kreuger. Kreuger served as president from the date of petitioner's organization until December 28, 1925, when he was succeeded by Anders Jordahl.
Issue 1. — Gain or Loss on Sale of Assets.
Pursuant to an agreement entered into between Anders Jordahl and Ivar Kreuger in November 1927, the petitioner during that year sold all of the capital stock of three of its subsidiary corporations, the Midwest Steel & Supply Co., hereinafter referred to as Midwest Co.; Akatos, Inc., formerly known as C. P. Chemical & Drug Co.; and Deutsche Kahneisen Gesellschaft, a German corporation, hereinafter referred to as the D. K. Co.
The sale of the stock of the Midwest Co. carried with it the sale of the stock of two other subsidiary corporations, Midwest Air Filters, Inc., and Holly Pneumatic Systems, Inc.
The transaction was recorded in petitioner's books by a journal entry charging the account of petitioner's president, Jordahl, with $680,757.21 representing the purchase price of all the assets. This figure included an amount of $30,088.92 representing an indebtedness of the Midwest Co. for moneys advanced to it by the petitioner. The amount charged to Jordahl's account, $680,757.21, was later paid to the petitioner by Kreuger.
The facts and discussion regarding the petitioner's gain or loss on the several assets will appear below under separate subheadings.
The parties agree that the selling price of the Midwest Co. stock was $300,000, but they disagree as to its cost. In his deficiency notice the respondent has determined that the cost of such stock to the petitioner was $275,000 and that the petitioner realized a profit of $25,000 on its sale. In this proceeding the respondent pleads affirmatively that petitioner's net income as determined in the deficiency notice should be increased by $216,496.75, representing the amount of the operating net losses of the Midwest Co. and its subsidiaries for the prior years 1921 to 1927, inclusive, which were claimed and allowed as deductions in consolidated income tax returns filed by the petitioner and its affiliates for such years. In other words, the respondent now contends that the petitioner realized, instead of a profit of $25,000 as determined in the deficiency notice, a profit of $241,496.75 on the sale of the Midwest Co. stock.
Altogether, there were 5,000 shares of the Midwest Co. stock. The petitioner acquired 1,250 of those shares from the Midwest Co. on October 15, 1920, for which it credited that company's account with $125,000 representing the par value of such shares. It acquired from Ivar Kreuger 2,250 shares on October 30, 1920, for which it credited his account with $225,000, and 1,500 additional shares on December 31, 1923, for which it credited his account with $150,000.
The evidence before us is not clear as to the details of these transactions. According to the petitioner's books the Midwest Co.'s indebtedness to it on October 15, 1920, was less than $10,000. At the end of 1921, however, the Midwest Co.'s account showed a debit balance of over $74,000, after allowing for the credit of $125,000 in 1920.
The petitioner's capital account in 1920 showed bills receivable from Kreuger in the amount of $1,675,000; real estate, $3,000,000; and cash, $1,325,000. At the end of 1923 Kreuger's account showed a debit balance of $434,385.57. In 1932 the petitioner's books showed a balance of $278,903.96 in Kreuger's favor.
These facts indicate that the petitioner paid par value for all of the Midwest Co.'s shares. The oral evidence adduced at the hearing supports this conclusion. We therefore find that the cost to the petitioner of the 5,000 shares of Midwest Co. stock was $500,000.
The further question remains as to what treatment is to be accorded the operating losses of the Midwest Co. and its subsidiaries in prior years which were deducted from gross income in the consolidated returns filed by the petitioner and its affiliated companies.
Net losses of the Midwest Co. and its subsidiaries were availed of to reduce the consolidated net income of the petitioner and its affiliates for the years 1921 to 1927, inclusive, as follows:
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Name of corporation | Year | Amount
---------------------------------------------------|-----------|-------------
Midwest Steel & Supply Co ________________________ | 1921-1926 | $111,795.20
Midwest Steel & Supply Co ________________________ | 1927 | 40,088.96
Midwest Air Filters, Inc _________________________ | 1927 | 22,032.65
Holly Pneumatic Systems, Inc _____________________ | 1926-1927 | 42,579.94
| | ____________
Total _______________________________________ | _________ | 216,496.75
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Petitioner contends, however, that it was not affiliated with the Midwest Co. until December 31, 1923, and that the operating losses of the Midwest Co. for 1924, 1925, 1926, and 1927 only may be used to reduce the loss on the sale of the Midwest Co. stock.
This contention is without merit. It is now well settled that the loss on the sale of the stock or liquidation of a subsidiary company must be reduced by the amount of the subsidiary's operating losses which were availed of to reduce the taxable income of the affiliated group. Ilfeld Co. v. Hernandez, 292 U. S. 62; McLaughlin v. Pacific Lumber Co., 293 U. S. 351; Commissioner v. National Casket Co., 78 Fed. (2d) 940; Greif Cooperage Corporation v. Commissioner, 85 Fed. (2d) 365. In Ilfeld Co. v. Hernandez, supra, the Court said:
3. The allowance claimed would permit petitioner twice to use the subsidiaries' losses for the reduction of its taxable income. By means of the consolidated returns in earlier years it was enabled to deduct them. And now it claims for 1929 deductions for diminution of assets resulting from the same losses. If allowed, this would be the practical equivalent of double deduction. In the absence of a provision of the Act definitely requiring it, a purpose so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers. * * *
Again, in McLaughlin v. Pacific Lumber Co.,supra, the Court said that "Losses of Thane & Co. the subsidiary that were subtracted from respondent's the parent company's income are not directly or indirectly again deductible." On the reasoning of the Supreme Court in those cases it is unnecessary to inquire, and it is doubtful whether it could be satisfactorily determined on the evidence before us, whether the corporations here properly filed consolidated returns in the years when the operating losses of the Midwest Co. were availed of to reduce the net income of the alleged affiliated group. The reason for the denial of the deductions claimed in the cited cases loses none of its force because of the fact that error may have been committed in the filing of the consolidated returns for the prior years and in the allowance of the subsidiary's operating losses in such returns. In Summerfield Co., 29 B. T. A. 77, decided before the Supreme Court's decisions in the cases cited above, we considered this angle of the question, saying:
* * * During the previous period of affiliation the consolidated income was offset by operating losses of the Taylor Co. totaling $155,581.19. Respondent maintains that the loss sustained at liquidation upon open account must be reduced by that amount, citing Riggs Nat. Bank, 17 B. T. A. 615; affd., 57 Fed. (2d) 980; Burnet v. Aluminum Goods Co., 287 U. S. 544; Hernandez v. Ilfeld, 66 Fed. (2d) 236. With that we agree. Petitioner cannot deny that during these prior years it was treated as affiliated — whether rightly or not we need not decide — and that it obtained a benefit from that affiliation through the reduction of its taxable income on account of the operating losses of its then subsidiary. To hold that it may now deduct the advances in their entirety would be to allow a second time the amounts deducted during the period of affiliation. That is contrary to our understanding of the view expressed in the cases above cited. * * *
Since the aggregate of the operating losses of Midwest Co. for the years 1921 to 1927, inclusive, availed of to reduce the net taxable income of the petitioner and other companies with which it joined in filing consolidated returns, is greater than the excess of the cost of the Midwest Co. shares over their selling price, no loss is allowable to ...
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