HART SCHAFFNER & MARX AND SUBSIDIARIES v. Commissioner

• Decision Date: 21 June 1982
• Docket Number: 16475-79,Docket No. 16474-79,16476-79.
• Citation: 1982 TC Memo 348,44 TCM (CCH) 184
• Court: U.S. Tax Court
• Parties: Hart Schaffner & Marx and Subsidiaries, et al. v. Commissioner.

44 TCM (CCH) 184

1982 TC Memo 348

T.C. Memo. 1982-348.

Hart Schaffner & Marx and Subsidiaries, et al.¹ v. Commissioner.

Docket Nos. 16474-79, 16475-79, 16476-79.

United States Tax Court.

Filed June 21, 1982.

Edward C. Rustigan and Martin G. Rosenstein, 231 S. LaSalle St., Chicago, Ill., for the petitioners. Seymour I. Sherman and Val J. Albright, for the respondent.

Memorandum Findings of Fact and Opinion

DAWSON, Judge:²

In these consolidated cases respondent determined the following deficiencies in petitioners' Federal income taxes:

                _______________________________________________________________________________________________
                                                                             Taxable Year
                                 Petitioner                   Docket No.        Ended          Deficiency
                _______________________________________________________________________________________________
                     Hart Schaffner & Marx and Subsidiaries    16474-79    January 31, 1976    $1,801,635
                     Wallach's, Incorporated ...............   16475-79    January 31, 1975       136,943
                     Jack Henry Clothing Company ...........   16476-79    January 31, 1975         5,344
                _______________________________________________________________________________________________
                

Certain issues have been resolved by agreement of the parties. The only issue presented for decision is whether a transaction between petitioners and PHS Finance Company constituted a sale or other disposition of certain intercompany inventory outside the Hart Schaffner & Marx group of related corporations.³

Findings of Fact

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

Hart Schaffner & Marx (hereinafter HSM) was a New York corporation with its principal office in Chicago, Illinois, at the time it filed its petition herein. On October 15, 1976, HSM and 105 other corporations, consisting of subsidiaries of HSM, and subsidiaries of subsidiaries, filed their original consolidated corporate income tax return for the fiscal year ended January 31, 1976, with the District Director of Internal Revenue at Chicago, Illinois. On October 17, 1977, the same entities filed an amended consolidated return for that year. The business of HSM, since its inception in 1887, has been the making and selling of apparel.

Wallach's, Incorporated (hereinafter Wallachs) was a New York corporation with its principal office in Long Island City, New York, at the time it filed its petition herein. On April 15, 1975, it filed its corporate income tax for fiscal year ended January 31, 1975, with the Internal Revenue Service Center at Holtsville, New York. For the fiscal year ended January 31, 1976, it joined in the consolidated return and the amended consolidated return filed by HSM and various subsidiaries. At all times here pertinent, Wallachs has been a wholly owned subsidiary of HSM.

Jack Henry Clothing Company (hereinafter Henry) was a Missouri corporation with its principal office in Kansas City, Missouri, at the time it filed its petition herein. On April 15, 1975, it filed its corporate income tax return for the fiscal year ended January 31, 1975, with the Internal Revenue Service Center at Kansas City, Missouri. For the fiscal year ended January 31, 1976, it joined in the consolidated return and the amended consolidated returns filed by HSM and various subsidiaries. At all times here pertinent, Henry was also a wholly owned subsidiary of HSM.

Prior to filing a consolidated Federal income tax return for the fiscal year ended January 31, 1976, HSM and its subsidiaries had filed separate returns. HSM and its manufacturing subsidiaries had filed their prior returns and maintained their books and records on the basis of a fiscal year ended November 30. Substantially all of HSM's retail subsidiaries (and their subsidiaries) at all times here pertinent maintained their books and records and filed their separate returns on the basis of a fiscal year ended January 31.

HSM filed its last full year separate return for the fiscal year ended November 30, 1974. It subsequently changed its fiscal year to one ending January 31, filed a separate return for a short fiscal period December 1, 1974 to January 31, 1975, and then filed a consolidated return with its subsidiaries, including Wallachs and Henry, for the fiscal year ended January 31, 1976.

HSM and certain of the corporations which joined in filing the consolidated return for fiscal year ended January 31, 1976, were at all times here pertinent manufacturers of men's clothing. The items manufactured consisted principally of men's suits, sports coats, slacks, outercoats, rainwear and sportswear. Thirteen such manufacturing subsidiaries (hereinafter referred to as the "manufacturing subsidiaries") are:

Hickey-Freeman Co., Inc. Thorngate, Ltd. M. Wile & Company Johnny Carson Apparel, Inc. Gleneagles, Inc. Hanover Slack's, Inc. Silver/Gulf Manufacturing Co. Anniston Sportswear Corp. Albert Given Manufacturing Co. Jaymar-Ruby, Inc E-Town Sportswear Rector Sportsyear Russellville Sportswear

HSM also had a retail operating division known as the Patterson-Fletcher Division, as well as numerous retailing subsidiaries. On January 31, 1975, HSM and its retailing subsidiaries owned and operated in excess of 250 retail stores at which men's and women's apparel was sold. HSM and its manufacturing subsidiaries sell apparel manufactured by them to HSM's retailing subsidiaries and retailing division as well as to independent retailers.

Field Enterprises, Inc. (hereinafter Field Enterprises) was a diversified company which engaged in many businesses including the publication of the Chicago Sun-Times and Chicago Daily News, the processing of paper, the publication and sale of encyclopedias and reference books, and television broadcasting. Field Enterprises also had divisions or subsidiaries related to real estate, insurance and the direct sale of cosmetics, a venture which was later aborted.

PHS Finance Company (hereinafter PHS) was an Illinois corporation which, since its inception on or about January 28, 1975, was a wholly owned subsidiary of Field Enterprises. The principal office and place of business of both PHS and Field Enterprises is Chicago, Illinois.

Under date of January 31, 1975, HSM and PHS executed a document entitled "Inventory Sale Agreement" (hereinafter referred to as the Agreement). The Agreement contained the following pertinent provisions:

1. Sale of Intercompany Inventory

Section 1.1 Sellers hereby sell, transfer, assign and deliver to Buyer, and Buyer hereby purchases and acquires from Sellers, as of the close of business on the Sale Date, all the Intercompany Inventory then owned by Sellers.

Section 1.2 The purchase price for the Intercompany Inventory shall be an amount equal to the dollar value of such Intercompany Inventory shown on Sellers' books and records as of the Sale Date, adjusted, as provided in Section 1.3B, by a physical inventory to be taken by Sellers as of the close of business of each store of the Sellers on the Sale Date less a fee of $285,000, which fee includes interest as well as risk of obsolescence ("Purchase Price"). The Purchase Price plus the fee is hereinafter referred to as the "Exact Amount Due". Sellers warrant that Purchase Price will be not less than $20 million nor more than $30 million.

Section 1.3 The Purchase Price shall be paid as follows:

A. Simultaneously with the signing of this Agreement, Buyer shall pay $5,000.000 to HSM. Buyer shall at the same time execute and deliver to HSM a promissory note payable to the order of HSM in a principal amount equal to the maximum Purchase Price of $30,000,000 less $5,000,000. The promissory note for $25,000,000 shall be dated January 31, 1975 and shall be dated January 31, 1975 sic and shall be in the form of Exhibit III attached hereto.

B. On or before March 15, 1975, Sellers shall furnish Buyer with a written statement of the Purchase Price and the Exact Amount Due, which will be determined by the aforesaid physical inventory as of the Sale Date.

C. If the Purchase Price shown on said written statement is less than Sellers' maximum thereof set forth above in Section 1.3A, a new promissory note payable to HSM shall immediately be executed by Buyer and delivered to HSM. The new promissory note shall be in all respects identical to Exhibit III, except that the principal amount thereof shall be decreased by an amount equal to such deficiency. Thereupon, the January 31, 1975 promissory note (Exhibit III) delivered at the signing of this Agreement will be marked "cancelled" and returned to Buyer by HSM.

Section 1.4 The Settlement Schedule is shown on Exhibit IV attached hereto.⁴ The term "settlement period" refers to the time periods specified in Column 1 of Exhibit IV. The term "settlement date" refers to the dates specified in Column 2 of Exhibit IV. On each settlement date, commencing with March 17, 1975, HSM shall remit to Buyer, by payment through the First National Bank of Chicago, an amount equal to the percentage specified in Column 3 of Exhibit IV of the Exact Amount Due. Each of said percentages represents Seller's forecasts of approximate sales of Intercompany Inventory (which shall be sold by Sellers as agents for the Buyer) during the settlement period immediately preceding such settlement date.

Section 1.5 By giving the other party at least 10 days written notice of its election, Buyer or HSM may, at any time between March 18, 1975 and September 14, 1975, require an adjustment to reconcile any difference between:

(i) the dollar amount of the Intercompany Inventory on hand (at values used in determining the Purchase Price), as verified by a physical inventory to be taken as of the last day of the settlement period in which such notice is given (the "reconciliation date"), and

(ii) the dollar amount shown as Intercompany Inventory

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