Avery v. United States

• Decision Date: 25 October 1965
• Docket Number: Civ. No. 8387.
• Parties: James A. AVERY, As Receiver in Supplementary Proceedings of the E. C. Brown Company, Canandaigua, New York, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of New York

247 F. Supp. 611

James A. AVERY, As Receiver in Supplementary Proceedings of the E. C. Brown Company, Canandaigua, New York, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 8387.

United States District Court W. D. New York.

October 25, 1965.

Frederick Thompson, Rochester, N. Y., for plaintiff.

John T. Curtin, U. S. Atty., for defendant; Louis F. Oberdorfer, Asst. Atty. Gen., C. Moxley Featherston, John B. Jones, Jr., Burton G. Lipsky, Attys., Dept. of Justice, of counsel.

BURKE, Chief Judge.

By order dated May 10, 1961, James A. Avery, Receiver in Supplementary Proceedings of The E. C. Brown Company, was substituted as plaintiff in place of The E. C. Brown Company.

This is an action for refund of income taxes and excess profits taxes, plus interest, allegedly paid for the fiscal years ended August 31, 1945 and August 31, 1947.

The facts have been fully reported in the consolidated cases of Bullock v. Commissioner and The E. C. Brown Company v. Commissioner, 26 T.C. 276, affirmed 2 Cir., 253 F.2d 715. The E. C. Brown Company on August 31, 1947, transferred velocipede machinery to Velo-King, Inc. in exchange for debenture bonds and then transferred the bonds to its principal stockholder, Giles E. Bullock, in exchange for capital stock of The E. C. Brown Company. This was intended to be a nontaxable reorganization under Section 112 of the Internal Revenue Code of 1939, in which no gain or loss would be realized by any of the participants. The transactions were so treated by The E. C. Brown Company and Bullock for tax purposes. Neither of them reported any gain or loss on their returns for 1947. The Commissioner of Internal Revenue contested the issue as against Bullock, claiming that the reorganization did not meet the requirements of the statute. The Tax Court upheld the Commissioner.

The Commissioner also assessed a deficiency against The E. C. Brown Company for the same year, but in a separate proceeding and on a different issue. The issue in that proceeding related to the amount of obsolescence taken on the machinery prior to its transfer to Velo-King, Inc. The obsolescence issue was also contested in the Tax Court. On this issue also the Tax Court sustained the position taken by the Commissioner. When the Tax Court determination became final, The E. C. Brown Company filed its claim for refund with the Commissioner. When the claim was rejected, it commenced this action.

The claims in this suit are: that because the Tax Court disallowed the $112,930.09 obsolescence deduction for 1947 in The E. C. Brown Company case, and held in the Bullock case that the reorganization was taxable. The E. C. Brown Company incurred a $140,180.71 loss on the sale of the machinery to Velo-King, Inc. in 1947, which loss is deductible in 1947, and that this loss further creates a net operating loss for 1947 which the taxpayer (The E. C. Brown Company) claims it is entitled to carry back to 1945.

In addition to the disallowance of obsolescence in 1947 there was also a disallowance of obsolescence on the same machinery in 1946. It is the combination of the disallowance of $27,060.62 in 1946 and the disallowance of $112,930.09 in 1947 which is the basis for the claimed operating loss of $140,180.71. The tax deficiency of $18,036.50 arising out of the disallowance in 1946 has been paid in full.

There is no issue of fact to be resolved in this action. All of the material facts are set forth in the Tax Court decision and in the claim for refund filed with the Commissioner.

Both plaintiff and defendant have moved for summary judgment. The motions were submitted upon briefs.

The filing of a petition in the Tax Court by The E. C. Brown Company regarding its tax liability for the year 1947 deprives this court of jurisdiction to entertain any suit by The E. C. Brown Company seeking a determination as to its tax liability for the year 1947. Sec. 6512(a), Internal Revenue Code of 1954. Empire Trust Co. v. United States, 324 F.2d 507 (2 Cir.), affirming 214 F.Supp. 731, 734. Elbert v. Johnson, 164 F.2d 421 (2 Cir.).

The plaintiff claims that The E. C. Brown Company is entitled to the benefits of Section 1311 et seq. of Title 26, U.S.C. These sections deal with the mitigation of effect of limitations and other provisions. The provisions of these sections were...