Bercy Indus., Inc. v. Comm'r of Internal Revenue
| Decision Date | 17 April 1978 |
| Docket Number | Docket No. 5879-76. |
| Citation | 70 T.C. 29 |
| Court | U.S. Tax Court |
| Parties | BERCY INDUSTRIES, INC., and SUBSIDIARIES, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
OPINION TEXT STARTS HERE
Petitioner, a wholly owned subsidiary of B, was a shell corporation with no business activity. Pursuant to a plan of reorganization, B transferred some of its voting common shares to petitioner and petitioner transferred said shares to the shareholders of T, a target corporation. All T stock was canceled and T merged into petitioner, petitioner receiving all T's assets and assuming its liabilities. After the merger petitioner's business was a continuation of T's business and it incurred a net operating loss. Petitioner carried back net operating loss to the pre-reorganization taxable income of T. Held, the transaction does not qualify as a (B), (E), or (F) reorganization and, accordingly, pursuant to sec. 381(b)(3), petitioner is not entitled to carry back a post-reorganization net operating loss to a taxable year of T. Don M. Pearson and Robert P. Beckham, for the petitioner.
Marion L. Westen, for the respondent.
Respondent determined deficiencies in petitioner's Federal income taxes for its fiscal years ended May 25, 1968, and May 31, 1969, in the amounts of $18,786 and $367,638, respectively. Due to petitioner's previous acceptance of many of respondent's adjustments the remaining issue for decision is whether petitioner may carry back, under section 172, I.R.C. 1954, a post-reorganization net operating loss, for the short period April 23, 1970, through December 31, 1970, to the pre-reorganization income of an acquired corporation for its taxable years ended May 25, 1968, and May 31, 1969.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto is incorporated, herein by this reference.
Petitioner Bercy Industries, Inc., and subsidiaries, is a corporation organized under the laws of the State of California with its principal office in Pasadena, Calif. Bercy Industries, Inc., is the corporate successor to Beverly Manor Inc. of Santa Clara to whom the statutory notice of deficiency was also sent. Petitioner's corporate tax returns for the taxable years ended May 25, 1968, and May 31, 1969, were timely filed with the Internal Revenue Service Center, Ogden, Utah.
On April 12, 1968, petitioner was incorporated under the laws of the State of California under the name of Beverly Manor Inc. of Santa Clara (hereinafter Beverly Manor). From its incorporation until April 23, 1970, Beverly Manor was a shell corporation and had no operating business activity whatsoever. Since its incorporation, and at all times thereafter, Beverly Manor's sole shareholder was Beverly Enterprises (hereinafter Beverly).1 As of April 17, 1968, Beverly Manor's directors and officers were as follows:
+------------------------------------------------------------+
¦Roy E. Christensen ¦president, treasurer, and director ¦
+--------------------+---------------------------------------¦
¦Edward L. Rimpau, Jr¦vice president, secretary, and director¦
+--------------------+---------------------------------------¦
¦William F. Rinehart ¦assistant secretary and director ¦
+------------------------------------------------------------+
On July 19, 1968, Orlin C. Munns replaced Edward Rimpau as vice president and director; Christensen and Rinehart served as directors of the corporation until August 15, 1971.
On July 29, 1965, an entity, Bercy, was incorporated under the laws of the State of California. On September 8, 1966, Bercy changed its name to Bercy Industries, Inc. (hereinafter Old Bercy). The directors and officers of Old Bercy at the date of its incorporation were as follows:
+----------------------------------------------------------+
¦Bernard Fleisher ¦president and director ¦
+--------------------+-------------------------------------¦
¦Seymour Katz ¦vice president-treasurer and director¦
+--------------------+-------------------------------------¦
¦Harned Petetus Hoose¦secretary and director ¦
+----------------------------------------------------------+
Fleisher and Katz continued as directors and officers of Old Bercy until April 23, 1970.
Old Bercy's business, from date of incorporation to April 23, 1970, was the design, manufacture, and distribution of personal care products. The major product lines were incandescent and fluorescent lighted travel and vanity mirrors. Fleisher and Katz were in charge of the daily operation and management of Old Bercy from its incorporation through April 23, 1970. From the summer of 1969 to April 23, 1970, its principal office was located at 1741 North Ivar Avenue, Hollywood, Calif. Additionally, Old Bercy had a manufacturing plant located in Torrance, Calif.
On April 23, 1970, pursuant to a plan and agreement of reorganization among Beverly, Beverly Manor, Old Bercy, and the shareholders of Old Bercy, Old Bercy merged into Beverly Manor. Beverly Manor, the surviving corporation, pursuant to the merger agreement, changed its name to Bercy Industries, Inc. (hereinafter New Bercy or petitioner). Shareholders of Old Bercy received 171,429 voting common shares of Beverly in sole consideration for the merger. 2 Said shares represented approximately 4.4 percent of the 3,908,536 Beverly shares then outstanding. On the merger date all outstanding shares of Old Bercy were canceled and the Old Bercy shareholders ceased to have any rights to said stock, except the right to participate pro rata in the distribution of shares of Beverly common stock.3 Moreover the plan and agreement of reorganization provided as follows:
(c) Financing Commitment.
On March 4, 1970 Beverly loaned Bercy $200,000 in return for a promissory note of even date. On the Merger Date, said note shall be continued or shall be forgiven by Beverly as a contribution to the capital of the Surviving Corporation. Within thirty (30) days after the Merger Date Beverly will provide an additional $300,000 to the Surviving Corporation either by capital contribution, director loan or guarantee of a bank loan, or any combination of the foregoing or otherwise. * * *
(d) Tax Free Reorganization.
The parties adopt this Plan intending that it shall constitute a tax-free reorganization under the provisions of Section 368(a)(1)(A) and related sections of the Internal Revenue Code of 1954, as amended.
Only one set of operating assets was involved in the reorganization, only one set of accounting books was maintained and only one “tax history” was involved. New Bercy received all the assets and assumed all the liabilities of Old Bercy and New Bercy's business was a continuation of Old Bercy's business.
In May 1970 the officers and directors of New Bercy were as follows:
+--------------------------------------------+
¦Bernard Fleisher ¦president ¦
+-------------------+------------------------¦
¦Seymour Katz ¦executive vice president¦
+-------------------+------------------------¦
¦J. Robert Holt ¦vice president ¦
+-------------------+------------------------¦
¦Grover Rogers ¦vice president ¦
+-------------------+------------------------¦
¦Orlin C. Munns ¦secretary & director ¦
+-------------------+------------------------¦
¦Roy E. Christensen ¦director ¦
+-------------------+------------------------¦
¦William F. Rinehart¦director ¦
+--------------------------------------------+
Fleisher and Katz were in charge of the daily operations of New Bercy and they were employed on a month-to-month basis. In November or December of 1970, Fleisher and Katz were no longer employed by New Bercy and Holt assumed the responsibility for petitioner's operations.4
New Bercy's offices, after the reorganization, were located at the same addresses as Old Bercy's. In the latter part of 1970 the office at Ivar Avenue was closed and thereafter petitioner's principal offices were located at, what was, Old Bercy's manufacturing plant in Torrance, Calif.
For the short period April 23, 1970, through December 31, 1970, New Bercy incurred a net operating loss. The loss was incurred in connection with the same business activity which was formerly conducted by Old Bercy.5 Thereafter petitioner filed an application for a tentative carryback adjustment, pursuant to section 6411, offsetting its post-reorganization net operating loss against pre-reorganization taxable income of Old Bercy. Initially, respondent tentatively allowed the application but in the notice of deficiency, dated March 31, 1976, he determined that the refund was erroneous explaining as follows:
(c) It is determined that the net operating loss deduction you claimed in the amount of $729,313 attributable to Bercy Industries, Inc., for the period April 24, 1970 through December 31, 1970 from the consolidated return of Beverly Enterprises & Subsidiaries for its period ended December 31, 1970 and carried back to the consolidated return of Bercy Industries, Inc., for its period ending May 31, 1969 is not allowable, because the merger effective April 23, 1970 between you, Bercy Industries, Inc., and Beverly Manor of Santa Clara, Inc., a subsidiary of Beverly Enterprises, Inc. in exchange for voting stock of Beverly Enterprises, Inc. the only asset of Beverly Manor of Santa Clara, Inc., was a reorganization within the meaning of Section 368(a)(1)(A) of the 1954 Internal Revenue Code. It is further determined that the reorganization did not qualify under the provisions of Sections 368(a)(1)(B) or 368(a)(1)(F) of the 1954 Internal Revenue Code. Accordingly, the full amount of the net operating loss deduction has been disallowed and the tentative allowance must be recouped.
OPINIONSection 381(a)6 provides the general rule for carryovers “In the case of the acquisition of assets of a corporation by another...
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