Los Angeles Shipbuilding & Drydock Corp. v. United States

• Decision Date: 22 March 1961
• Docket Number: No. 16630.,16630.
• Citation: 289 F.2d 222
• Parties: LOS ANGELES SHIPBUILDING & DRYDOCK CORPORATION, Appellant, v. UNITED STATES of America, Appellee. UNITED STATES of America, Appellant, v. LOS ANGELES SHIPBUILDING & DRYDOCK CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

289 F.2d 222 (1961)

LOS ANGELES SHIPBUILDING & DRYDOCK CORPORATION, Appellant, v. UNITED STATES of America, Appellee.

UNITED STATES of America, Appellant, v. LOS ANGELES SHIPBUILDING & DRYDOCK CORPORATION, Appellee.

No. 16630.

United States Court of Appeals Ninth Circuit.

March 22, 1961.

COPYRIGHT MATERIAL OMITTED

William L. Kumler and Arthur H. Deibert, Los Angeles, Cal., for appellant.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz and Carolyn R. Just, Attorneys, Department of Justice, Washington, D. C., Laughlin E. Waters, U. S. Atty., and Robert H. Wyshak, Asst. U. S. Atty., Los Angeles, Cal., for appellee.

Before CHAMBERS, BARNES and JERTBERG, Circuit Judges.

JERTBERG, Circuit Judge.

The district court entered judgment in favor of Los Angeles Shipbuilding & Drydock Corporation (hereinafter called "taxpayer") and against the United States for refund of income taxes erroneously paid for the taxable year 1941, in the sum of $208,870.78 together with interest on said amount at the rate of Six per centum (6%) per annum from the date of payment thereof to March 4, 1949, and interest at the rate of Six per centum (6%) per annum on the amount of $33,381.60 from March 4, 1949, to the date described by section 2411 of Title 28, U.S.C., less the amount of $175,489.18 which defendant shall have and recover of plaintiff against amounts herein adjudged due plaintiff from defendant.

The United States appeals from the judgment in favor of taxpayer, and the taxpayer appeals from that part of the judgment allowing the amount of $175,489.18 to defendant by way of offset and recoupment against amounts therein adjudged due taxpayer from the United States.

The district court had jurisdiction under Title 28 U.S.C.A. § 1346(a), and this Court's jurisdiction is based upon Title 28 U.S.C.A. §§ 1291 and 1294.

In order to point up the questions presented by these cross appeals, it is necessary to summarize events extending over a period of many years. The taxpayer is a California corporation which since February 1946 has been engaged in winding up its business and liquidating its assets. Taxpayer was organized in and pursuant to reorganization proceedings, under Section 77B of the National Bankruptcy Act, 48 Stat. 912, which proceedings were under the jurisdiction of the district court, and bore the title "In the Matter of Los Angeles Lumber Products Company, Ltd., a corporation, debtor". The debtor, (hereinafter referred to as "Lumber") was incorporated on or about June 6, 1922, and continued to exist until its dissolution after 1941. Prior to March 8, 1924, Lumber had acquired and thereafter until the commencement of the reorganization proceedings was the sole owner of six subsidiary corporations, of which the one important on this appeal is Puget Sound Lumber & Box Company (hereinafter referred to as "Puget"). In September 1922 Lumber became the sole owner of all of the outstanding stock of Puget in exchange for 730 shares of Lumber's capital stock, plus $25,049.44 in cash. At the time of such acquisition by Lumber, Puget was under-capitalized in view of the extensive expansion program contemplated by Lumber. On or about March 8, 1924, Lumber executed a trust indenture securing an authorized issue of $3,500,000 of its first lien and collateral trust, 20-year, seven and one-half per cent sinking fund gold bonds. From August 1922 to October 1923, Puget expended approximately $700,000 in acquiring land and erecting and equipping a sawmill and box factory thereon. From November 1922 to June 1939, Lumber disbursed sums of money to and on behalf of Puget, of which $195,876.29 was paid, during 1924, directly to banks on account of loans made by Puget and guaranteed by Lumber. From November 1922 to January 1, 1939 sums of money were from time to time advanced by Lumber to and on behalf of Puget, and from time to time other sums were repaid by Puget to Lumber and by the latter credited against sums then owing to it by Puget. As of January 1, 1939, the effective date of Lumber's reorganization, the net amount of sums loaned by Lumber to Puget, less amounts paid by Puget to Lumber, as shown by the records of the two companies, was $1,696,061.56. On May 27, 1937, $2,565,000 of the principal amount of the bonds secured by the trust indenture remained outstanding, and on or before said date Lumber had become insolvent.

On or about January 28, 1938, Lumber filed its petition for reorganization hereinbefore mentioned. Pursuant to proceedings had therein, a plan of reorganization was submitted to and approved by the district court, by order dated July 19, 1938. Pursuant to said plan of reorganization, taxpayer herein was organized to act as transferee and successor of the assets and business of Lumber and its subsidiaries. See In re Los Angeles Lumber Products Co., 24 F.Supp. 501, affirmed 9 Cir., 100 F.2d 963. Certain interested parties objected to the plan. Upon petition for certiorari to the Supreme Court of the United States, the plan was set aside and the matter re-referred to the district court for further proceedings. Case v. Los Angeles Lumber Products Company, Ltd., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. Subsequently, by order of the district court dated April 30, 1940, a new plan of reorganization of Lumber was approved. Pursuant to said new plan of reorganization: (1) taxpayer's articles of incorporation were amended to provide for one class of $1.00 par value, common, voting stock; (2) all of the assets and properties of Lumber (except stock of its subsidiaries which then had no value) of every kind and description, and all assets of Lumber's subsidiaries, except the assets of Puget, were assigned and transferred to taxpayer effective as of January 1, 1939, and all transfers, assignments and deliveries of such assets and properties made under the previous plan were ratified and confirmed by Lumber. Among the assets acquired by taxpayer from Lumber, pursuant to said transfers and assignments, was the aforesaid debt claim covering the indebtedness owed Lumber by Puget; (3) as the sole consideration given by taxpayer in exchange for the assets and properties acquired by it as aforesaid, taxpayer issued to Security-First National Bank of Los Angeles, as distributing agent for Lumber's bondholders 859,628 shares of its common voting stock; (4) in December 1940 Puget's assets were sold and on January 16, 1941, the net proceeds of said sale, $29,403.70, were paid over to taxpayer by Puget, and by taxpayer applied against the debt claim against Puget, acquired by taxpayer from Lumber, which said payment and application of moneys paid to taxpayer by Puget were specifically approved and ratified by order of the district court dated December 27, 1943, as being consistent with and in accordance with the plan approved by order of the court on April 30, 1940.

Taxpayer did not claim any loss on its income tax return for 1941, because of the alleged worthlessness of the debt from Puget to Lumber, but in its return for 1942 it claimed a net operating loss carry-over for 1941 by offsetting against 1941 net income a bad debt in the amount of $1,673,242.74 allegedly owing to its predecessor, Lumber, by Puget. The taxpayer filed timely claims for refund for the year 1941 based on the claimed bad debt loss of $1,673,242.74, which was disallowed by the Commissioner.

The district court found that Puget was indebted to Lumber on January 1, 1939, in the amount of $1,696,601.56, but that to arrive at the taxpayer's basis for the alleged debt there should be deducted from this sum the amount of $700,000, representing the sum of amounts of cash paid by Lumber to Puget, plus the indebtedness of Puget to Lumber cancelled as of October 7, 1923, which said cash was paid and indebtedness cancelled by action of Lumber's board of directors upon said date, in consideration of the transfer by Puget to Lumber of certain real estate and improvements then owned by Puget in the City of Seattle, Washington.

The district court also found that such indebtedness must be further reduced by the amount of $301,210.45, representing interest charged by Lumber on said records as due from Puget upon loans made by Lumber to Puget, but which interest taxpayer had not proved was included in Lumber's taxable income or was properly includible in Lumber's basis for its debt claim against Puget. From the remaining sum of $694,851.11 the district court then deducted the amount of $29,403.70, which the taxpayer received on January 16, 1941 on account of the sale of the last remaining assets of Puget on December 16, 1940.

The district court found:

That the records of both Lumber and Puget show that the moneys advanced to and on behalf of Puget by Lumber were intended to be and were, in fact, loans by Lumber to Puget;

As of January 1, 1939, the effective date of the acquisition of Lumber's properties by taxpayer, Puget was indebted to Lumber upon loans made by Lumber to Puget in the net amount of $694,851.11;

That Lumber's debt claim against Puget in said amount was, by order of the district court dated April 30, 1940, transferred to taxpayer as an incident of the reorganization of Lumber under Section 77B of the National Bankruptcy Act;

At all times after October 23, 1923, to and including the date that Lumber's assets, including said debt claim, were transferred to taxpayer in the reorganization proceedings, Puget owned substantial amounts of real and personal properties to which resort could have been had by Lumber for the partial satisfaction of its debt claim against Puget;

That at all times prior to taxpayer's acquisition of said debt claim from Lumber said claim had substantial realizable value;

That at all times from the date the debt claim against Puget was acquired by taxpayer from Lumber, and until Puget's last remaining assets were paid over to taxpayer to be applied in partial satisfaction of said debt claim, to-wit, in January 1941, said...