Arkansas Best Corp. v. Comm'r of Internal Revenue
| Decision Date | 29 October 1984 |
| Docket Number | Docket No. 18954-80. |
| Citation | 83 T.C. No. 35,83 T.C. 640 |
| Parties | ARKANSAS BEST CORPORATION and SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 1968, petitioner ABC, a diversified holding company, acquired approximately 65 percent of the stock of NBC, a bank. The transaction was intended by ABC and accepted by the Internal Revenue Service as a tax-free corporate reorganization under sec. 368(a)(1)(C), I.R.C. 1954. ABC acquired additional shares of NBC stock during the period 1969-l976 by purchase, capital calls and stock dividends.
Legislation enacted by Congress subsequent to 1968 regulating bank holding companies effectively required ABC to divest itself of the NBC stock. ABC sold 51 percent of NBC's stock in 1975 for cash and a note secured by the stock. ABC disposed of its remaining interest in NBC over the following five years.
HELD, the acquisition of NBC stock by ABC during the period 1968-1972 was motivated primarily by investment purpose and consequently ABC realized a capital loss upon disposition of the stock. HELD FURTHER, ABC's acquisition and retention of NBC stock during the years 1973-1976 was exclusively for business purposes and thus ABC incurred an ordinary loss from the sale of NBC stock acquired during this later period. W.W. Windle Co. v. Commissioner, 65 T.C. 694 (1976), appeal dismissed550 F.2d 43 (lst Cir. 1977), followed.
HELD FURTHER, ABC is barred from asserting under the doctrine of ‘duty of consistency‘ that its acquisition of 65 percent of the stock of NBC in 1968 was not a tax-free reorganization under sec. 368(a)(1)(C), I.R.C. 1954. Bartel v. Commissioner, 54 T.C. 25 (1970), followed.
HELD FURTHER, ABC is not entitled to deduct as a partially worthless debt its charge off of a portion of the note received from the sale of NBC stock. VESTER T. HUGHES, JR., DAVID F. P. O'CONNOR, ERIC R. CROMARTIE, and STEPHEN D. GOOD, for the petitioner.
RAYMOND L. COLLINS, and REBECC W. WOLFE, for the respondent.
Respondent determined deficiencies in petitioner's Federal income tax as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1969 ¦$20,224 ¦
+------+-------------¦
¦1970 ¦20,224 ¦
+------+-------------¦
¦1971 ¦50,560 ¦
+------+-------------¦
¦1972 ¦3,355,968 ¦
+------+-------------¦
¦1973 ¦244,352 ¦
+------+-------------¦
¦1974 ¦230,519 ¦
+------+-------------¦
¦1975 ¦928,911 ¦
+------+-------------¦
¦1976 ¦2,077,163 ¦
+--------------------+
After concessions, the issues presented for decision are (l) whether petitioner's loss on the sale of its controlling interest in a bank is ordinary or capital loss, (2) whether the bank stock was acquired in a transaction qualifying as a tax-free reorganization under section 368(a)(1)(C),1 and (3) whether petitioner is entitled to a bad debt deduction for the partial charge-off of a note acquired in connection with the sale of the bank stock.
Some of the facts have been stipulated and are found accordingly.
Petitioner had its principal office in Fort Smith, Arkansas, at the time the petition in this case was filed.
Arkansas Best Freight System, Inc. (ABF) is a successful trucking line operating in the midwestern United States. During its early existence, ABF grew primarily by acquiring established trucking companies. In the early l960's, ABF's banker, First National City Bank (now ‘Citibank‘), suggested that a holding company be formed to facilitate acquisitions and avoid various restrictions which accompanied the truckline's regulation by the Interstate Commerce Commission (ICC).
In March, 1966, Arkansas Best Corporation (hereinafter Arkansas Best or petitioner), was formed as a holding company. The management and control of Arkansas Best resided with Robert A. Young, Jr. (Young) and members of his family. Arkansas Best immediately embarked on a program of expansion with a plan of ultimately becoming a diversified conglomerate.
The envisioned conglomerate was to be composed of businesses from three sectors of the economy: transportation, consumer goods and financial services. Transportation was already represented by ABF, the trucking line. In rapid succession, Arkansas Best then acquired Riverside Furniture Corporation (Riverside), a company engaged in furniture manufacturing, distribution and sales, and Data-Tronics, a company which offered data processing services.
Riverside was to be the core of the consumer goods sector of the conglomerate. Data-Tronics was acquired for a slightly different reason. Arkansas Best desired the aid of a computer in the trucking business but could not afford the cost of the necessary computer. The acquisition of Data-Tronics permitted Arkansas Best to have use of a computer while marketing its services to third parties to reduce costs. Data-Tronics devoted approximately one-half of its services to the needs of Arkansas Best and its subsidiaries.
Arkansas Best then established Arkansas Bandag Corporation (Bandag), a company engaged in new tire sales and tire retreading. Bandag also held title to the real estate of Arkansas Best and the other subsidiaries. Initially, ABF (the trucking subsidiary) represented up to one-half of Bandag's tire business but that percentage had declined to approximately five percent by the time of trial.
In the financial services area, Arkansas Best acquired Universal Insurance Company (UIC) and Arkansas Underwriters Corporation (AUC). The companies were useful for the truckline which was ‘a high utilizer of insurance.‘
These five subsidiaries—ABF, Riverside, Data-Tronics, Bandag, UIC and AUC—were wholly owned by Arkansas Best. Arkansas Best provided financial planning and, in some cases, accounting and personnel services to its subsidiaries. In return, the companies paid a management fee to Arkansas Best.
From the date of Arkansas Best's incorporation in 1966 until his death in August, 1973, Robert A. Young served as chairman of the board of Arkansas Best. During the period from March, 1967, to April, 1968, Young personally acquired the following stock and security interests in National Bank of Commerce (NBC), a bank located in Dallas, Texas:
+--------------------------------------------------+
¦Interest ¦Book value ¦
+-------------------------------------+------------¦
¦ ¦ ¦
+-------------------------------------+------------¦
¦Capital convertible debentures of NBC¦$742,600 ¦
+-------------------------------------+------------¦
¦Contract to purchase 24,534 shares ¦ ¦
+-------------------------------------+------------¦
¦of convertible preferred stock of NBC¦1,145,700 ¦
+-------------------------------------+------------¦
¦209,013 shares of common stock of NBC¦5,798,196 ¦
+-------------------------------------+------------¦
¦Total ¦7,686,496 ¦
+--------------------------------------------------+
On June 6, 1968, Young transferred these interests to Young, Inc., a personal holding company incorporated by Young three weeks earlier. These interests, plus $1,000 cash, constituted the assets of Young, Inc.
Three weeks later, on June 29, 1968, Young, Inc. transferred to Arkansas Best all of its stock and securities in NBC. In return, Young, Inc. received 150,000 shares of Series ‘C‘ Convertible Preferred Stock of Arkansas Best2 plus the assumption by Arkansas Best of Young, Inc.'s liabilities which totaled $7,686,995. The Internal Revenue Service accepted the transaction as a tax-free reorganization.
As a result of the foregoing transaction, Arkansas Best owned 266,614 shares of NBC common stock at the end of 1968.3 These shares represented 64.97 percent of the outstanding common stock of NBC at that time.
In connection with its acquisition of the bank's stock, Arkansas Best obtained three appraisals of NBC's stock from unrelated investment banking firms. It also obtained five eight- year forecasts from Citibank projecting the expected growth and earnings of the bank.
At the time Arkansas Best acquired the bank stock, Arkansas Best was aware that there were bills pending in Congress which, if enacted, might impact upon its holding of NBC stock. In a notice to shareholders calling a special meeting for June 29, 1968, concerning the proposed acquisition of NBC stock, a proxy statement was included which informed shareholders of the following:
Bills affecting banking are pending in Congress. The Company is unable to predict whether any such bills will be passed or the effect on the Company's or NBC's business if one or more such bills were passed. However, one such bill, if passed, would amend the Bank Holding Company Act of 1956 to provide that the Company, by virtue of its ownership of NBC shares, would be a bank holding company. With certain exceptions, such Act requires bank holding companies to divest themselves of direct or indirect ownership of voting shares of companies which are not either banks or bank holding companies. A bank holding company is also prohibited, with limited exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or from engaging directly or indirectly in business unrelated to the business of banking or controlling banks.
Arkansas Best had a number of reasons for acquiring the stock of NBC. First, the city of Dallas was developing rapidly as a financial center and banks were at the center of the boom. NBC appeared likely to share in this growth and the value of its stock was therefore likely to appreciate.
Second, Arkansas Best planned to make a public offering of its stock. Under generally accepted accounting principles, Arkansas Best could not include NBC, a bank, in the consolidated financial statements of Arkansas Best and its...
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