ALTEC CORPORATION v. Commissioner, Docket No. 6378-73.
| Decision Date | 29 December 1977 |
| Docket Number | Docket No. 6378-73. |
| Citation | 1977 TC Memo 438,36 TCM (CCH) 1795 |
| Parties | Altec Corporation, Transferee of the Assets of LTL Corporation, Transferee of the Assets of ARC Liquidating Corporation v. Commissioner. |
| Court | U.S. Tax Court |
William A. Cromartie, John L. Snyder, Frank P. VanderPloeg, Francis O. McDermott, Burton H. Litwin, and Douglas L. Barnes, One First Nat'l Plaza, Chicago, Ill., for the petitioner. Seymour I. Sherman, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined that petitioner is liable as transferee of the assets of LTL Corporation, which, in turn, was transferee of the assets of ARC Liquidating Corporation (formerly Allied Radio Corporation) for the following Federal income tax deficiencies of ARC Liquidating Corporation:
Taxable Year
(Period) Ended Deficiency
July 29, 1966 ......... $ 533,758.90
July 28, 1967 ......... 81,056.00
December 31, 1967 ..... 1,043,954.00
_____________
Total .............. $1,653,768.90
Petitioner does not deny that it is the transferee of the assets of LTL Corporation or that LTL Corporation was the transferee of the assets of ARC Liquidating Corporation (formerly Allied Radio Corporation and hereinafter referred to as Allied). However, petitioner seeks review of the determined deficiencies in the latter corporation's income taxes and raises the following issues:
1. Whether amounts realized in the course of a section 3371 liquidation sale with respect to previously expensed items should be included in Allied's income for its last taxable period.
2. Whether Allied could deduct certain expenses incurred in the course of the section 337 liquidation sale.
3. Whether respondent properly adjusted Allied's cost of goods sold by requiring for each of the taxable periods in question that the closing inventory reported by Allied for each such period be increased by amounts carried in various inventory reserve accounts.
4. Whether legal fees of $30,542.42 paid by Allied during the fiscal year ended July 28, 1967, were currently deductible expenses or nondeductible capital expenditures.
5. Whether respondent properly determined the amount of depreciation recapture recognizable to Allied pursuant to sections 1245 and 1250 for its last taxable period.
The correctness of respondent's adjustments to net operating loss deductions claimed by Allied for its taxable periods ended July 28, 1967, and December 31, 1967, is dependent upon the resolution of the other issues herein.
Petitioner Altec Corporation (hereinafter Altec or petitioner) was organized under Delaware law as LTV Ling Altec on October 20, 1967. Petitioner's name was changed to that which it now bears on April 27, 1972. At all relevant times, Altec has maintained its principal place of business in Dallas, Texas.
ARC Liquidating Corporation (formerly named Allied Radio Corporation and herein referred to as Allied), the taxpayer whose income tax liabilities are in controversy, was organized under Illinois law on July 21, 1928, and maintained its principal office and place of business in Chicago, Illinois. For its taxable years prior to and including 1964, Allied filed its Federal income tax returns on the accrual method of accounting, utilizing a fiscal year ending July 31. Allied thereafter adopted a 52-53-week taxable and fiscal year ending with the last week ending in July. Its fiscal year for bookkeeping purposes was divided into 13 periods of 4 weeks each, with the last such period consisting of 5 weeks in those years where necessary in order to maintain consistency with the fiscal year itself. Allied's Federal income tax returns were timely filed with the District Director of Internal Revenue, Chicago, Illinois, for the taxable and fiscal years ended July 31, 1961, to 1964, inclusive, the taxable and fiscal years ended the last week of July 1965 to 1967, inclusive, and the final taxable and fiscal period July 29, 1967, to December 31, 1967.
During the years in issue, Allied distributed and sold electronic and related products, parts, components, and equipment. Through its Knight Division (hereinafter Knight, a wholly owned subsidiary until liquidated and made a division in 1967), it also engaged in the development and sale of amateur radio kits. Allied carried on its business through mail-order sales, ten retail stores which it owned, an industrial division which sold on a national scale, and a dealer division.
Allied's inventory consisted of thousands of separate items of electronic parts and equipment, which were purchased from numerous suppliers. Its products included the lines of major manufacturers, and it also distributed its own brand products, which were manufactured for it by others, under the names "Knight" and "Allied." Allied itself did no manufacturing. Allied issued two major catalogues annually, known as "Electronics for Everyone" and "Industrial Electronics Catalogue." It also published approximately 14 mail-order paperback manuals on electronics subjects for beginners, and supplemented its annual catalogues from time to time with fliers and special sales books, such as a Christmas sale book. During the taxable year ended July 28, 1967, its then current mail-order catalogue, "Electronics for Everyone — 1967," which was first mailed in August 1966, was supplemented by five additional sales books.
A. General. On October 27, 1967, Allied's shareholders approved the following measures: (1) a plan of complete liquidation pursuant to section 337; (2) an agreement dated September 18, 1967, whereby Allied was to sell all of its assets, subject to all of its liabilities, to Altec in exchange for 992,800 shares of Altec common stock and cash in the amount of $5,666.60; and (3) a change in Allied's name from Allied Radio Corporation to ARC Liquidating Corporation.
On or about October 20, 1967, Altec organized a wholly owned Delaware subsidiary under the name of Alvis Ward, Inc. (hereinafter referred to as Delaware), which name was subsequently changed to Allied Radio Corporation. Shortly after Delaware's formation, all of Allied's assets were transferred to Delaware in fulfillment of its agreement of sale with Altec. Allied thereafter changed its name to ARC Liquidating Corporation and was liquidated.
The transaction between Allied and Delaware was treated as a pooling-of-interests for accounting purposes; thus, Allied's assets, liabilities, and retained earnings were carried forward on the statements of the acquiring corporation at the same amounts as they had been carried on Allied's books at the time of the acquisition.
Delaware continued to operate the former assets and business of Allied until April 13, 1970, when it sold such assets and business (except certain of its accounts receivable) to a Texas corporation known as Color Tile of Idaho, Inc. On May 3, 1970, Delaware changed its name to LTL Corporation, and on January 3, 1972, was merged into Altec. In October 1969, Delaware executed a Transferee Agreement, assuming liability for any income tax finally determined to be due from Allied for each of the taxable periods in controversy.
B. Tax benefit recovery. Among the assets sold to Delaware were supplies, drawings, tooling, and artwork, which had been developed by Knight's engineering department. The cost of these items had been previously deducted in Federal income tax returns of the seller. Delaware recorded the acquired Knight drawings, tooling, and artwork on its books in the amount of $623,700, and thereafter claimed deductions for depreciation of these items in its own returns and in consolidated returns filed with petitioner. Delaware did not record the acquired supplies on its books, and claimed no deduction with respect thereto either in its own returns or in the said consolidated returns.
The negotiations between Allied and petitioner leading to the eventual acquisition of Allied's assets were brief and related primarily to the total price to be paid in shares of petitioner's stock. Values were not separately assigned to the various assets of Allied.
However, in connection with the acquisition of Allied's assets, Ling-Temco-Vought, Inc., petitioner's parent corporation, caused an appraisal to be made of the assets and business of Allied, as of October 20, 1967, by Marshall and Stevens, Inc. (hereinafter M & S), independent appraisal consultants. The appraisal by M & S was quite detailed, and the report includes more than 200 pages devoted to the valuation of specific assets, including the drawings, tooling, and artwork developed by Knight. Those assets which would be continued in use were valued on the basis of market value in continued use; assets which were to be disposed of were valued on the basis of orderly liquidation values.
In its report, M & S determined that the foregoing drawings, tooling, and artwork developed by Knight had a reproduction cost of $1,015,000, and a market value in continued use in the amount of $623,700. M & S concluded that the total value of the equity in the Allied business acquired by Delaware was $21,448,085, as of October 20, 1967.
Prior to the sale to petitioner, an effort had been made by Allied's management to sell either the total Knight operation or, alternatively, to sell its separate assets, including the drawings, tooling, and artwork. Richard Silberbach, who had been the research and development engineering manager and later became Knight's general manager, made a proposal to Allied with respect to the Knight division. This proposal, dated September 21, 1967, was for the purchase by Silberbach of Knight's fixed assets for $41,500, its inventory for $571,500, and all rights to Knight's intangibles including name, design rights, tools, files, etc. No value was assigned to these intangibles in...
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