Boise Cascade Corporation v. United States

• Decision Date: 12 July 1968
• Docket Number: Civ. No. 1-67-16.
• Citation: 288 F. Supp. 770
• Parties: BOISE CASCADE CORPORATION et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Idaho

288 F. Supp. 770

BOISE CASCADE CORPORATION et al., Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 1-67-16.

United States District Court D. Idaho, S. D.

July 12, 1968.

Eberle & Berlin, Boise, Idaho, for plaintiffs.

Jerome Fink, James P. Parker, Dept. of Justice, Tax Division, Washington, D.C., Sylvan A. Jeppesen, U. S. Atty., Boise, Idaho, for defendant.

MEMORANDUM OF DECISION

FRED M. TAYLOR, Chief Judge.

This is an action for a refund of federal income taxes alleged to have been erroneously assessed and collected by the Commissioner of Internal Revenue. The total amount of refund sought is $318,263.81, plus statutory interest. This court has jurisdiction pursuant to 28 U. S.C.A. § 1346(a) (1).

Boise Cascade Corporation and its affiliated subsidiaries (taxpayer) filed a consolidated income tax return for the year 1960. Following an audit of said return, a deficiency was assessed and was paid by the taxpayer. A timely claim for refund was filed, which was disallowed by the Commissioner of Internal Revenue, through his authorized agent, the District Director of Internal Revenue. The deficiency was not as a result of operating income of taxpayer for 1960, but as a result of the method used in determining the bases of certain properties taxpayer acquired through a corporate acquisition made in 1960.

Pursuant to stipulated facts contained in the Pre-Trial Conference Order, taxpayer and the United States of America (defendant) each made separate motions for a summary judgment.

The stipulated facts disclose, inter alia, that on February 1, 1960, taxpayer purchased the capital stock of Hallack & Howard Lumber Company (H & H) directly from the stockholders of H & H. Taxpayer paid $5,463,058.67 for said stock and assumed the liabilities of H & H.

On November 30, 1960, H & H was merged into taxpayer and liquidated. This merger and liquidation met the requirements of § 332 of the Internal Revenue Code of 1954, thus no gain or loss was recognized by taxpayer as a result thereof. Since this stock acquisition, merger and liquidation met the requirements of § 334(b) (2) of the Internal Revenue Code of 1954, then in determining the basis of the assets acquired from H & H through the merger and liquidation § 334(b) (2) and the applicable regulations must be followed.

Taxpayer's adjusted purchase price of the H & H stock at the date of liquidation was $6,793,655.82, which included the assumed liabilities of H & H. The assets of H & H at the date of liquidation had a fair market value of $9,488,342.43. Included within said sum were pre-paid supplies with a fair market value of $30,083.00, marketable securities with a fair market value of $1,128,068.00, inventories with a fair market value of $1,119,508.00, accounts receivable with a fair market value of $3,424,406.00, cash in the amount of $99,296.00, and deposits in the amount of $103,000.00. On the date of liquidation taxpayer owed to H & H the sum of $2,302,856.04, which was an account receivable of H & H and is included in the figure of $3,424,406.00.

Section 334(b) (2) provides the method by which a corporation may purchase the stock of a second corporation, liquidate the acquired corporation, and treat the assets of the acquired corporation, for tax purposes, as if the assets had been purchased directly from the acquired corporation. The pertinent part of § 334(b) (2) provides:

"The basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. * * * Under regulations prescribed by the Secretary or his delegate, proper adjustment in the adjusted basis of any stock shall be made for any distribution made to the distributee with respect to such stock before the adoption of the plan of liquidation, for any money received, for any liabilities assumed or subject to which the property was received, and for other items." (emphasis added)

The Secretary pursuant to the directive contained in § 334(b) (2) promulgated regulations for determining the adjusted basis of stock and the allocation of that basis among the assets of a liquidated corporation. The question here is the interpretation to be given to the phrase "cash and its equivalent" as that phrase is used in the regulations promulgated by the Secretary.

Treasury Regulations §§ 1.334-1(c) (4) (v) (b) (1) and 1.334-1(c) (4) (viii) (1954) contain the phrase "cash and its equivalent" which is the subject matter of this action. The pertinent portion of § 1.334-1(c) (4) (v) (b) (1) provides:

"(v) The adjusted basis of the subsidiary's stock held by the parent with respect to which the distributions in liquidation are made * * *.

* * * * * *

(b) Shall be decreased:

(1) By the amount of any cash and its equivalent received, * * *." (emphasis added)

The pertinent portion of § 1.334-1(c) (4) (viii) provides:

"The amount of the adjusted basis of the stock adjusted as provided in this paragraph shall be allocated as basis among the various assets received (except cash and its equivalent) both tangible and intangible * * *. Ordinarily, such allocation shall be made in proportion to the net fair market value of such assets on the date received * * *. The basis of the property received shall be zero if the cash and its equivalent received is equal to or in excess of the adjusted basis of the stock." (emphasis added)

Taxpayer in allocating the adjusted basis of the H & H stock took the position that cash, deposits, marketable securities, inventories, accounts receivable and pre-paid supplies were included within the phrase cash and its equivalent. Accordingly, taxpayer deducted the total of said items from the adjusted purchase price of $6,793,655.82 and allocated the remainder to the remaining assets.

Defendant in assessing the deficiency took the position that only cash, deposits and accounts receivable should have been included with the phrase cash and its equivalent.¹

Since taxpayer used 100% of the fair market value as the basis of the marketable securities, inventories, accounts receivable and pre-paid supplies, taxpayer reported no gain on these assets when they were sold during the taxable period in question. The deficiency as assessed by the defendant was based on the difference between the fair market value and the new basis, as determined by the defendant, of the marketable securities, inventories and pre-paid supplies.

After a full and careful consideration of the excellent briefs filed by each of the parties, the oral arguments and the Pre-Trial Conference Order, this court is of the opinion that the phrase "cash and its equivalent" as used in Treas.Regs. §§ 1.334-1(c) (4) (v) (b) (1) and 1.334-1(c) (4) (viii) (1954) does not include marketable securities, inventories, pre-paid supplies² and accounts receivable. However, the debt owed by taxpayer to H & H ($2,302,856.04), which was an indebtedness of the taxpayer, should be treated as cash and its equivalent.

Defendant has conceded in its briefs that the $2,302,856.04 taxpayer owed to H & H should be treated as cash and its equivalent. This is necessarily correct because when an indebtedness of a parent is received upon liquidation of its subsidiary the indebtedness, in effect, ceases to exist because the parent receives its own indebtedness on liquidation.

Taxpayer contends that the disputed assets each had a readily realizable market value³ and because of this they should be treated as cash and its equivalent. Defendant contends that assets with a readily realizable market value are not to be treated as cash and its equivalent, since the phrase was meant to include only items which could not logically be given a basis, such as currency, coin, bank accounts, checks, drafts, money orders, etc.

At no other place in the current code and regulations has the phrase "cash and its equivalent" been used. There has been no judicial interpretation of the phrase as it is used in the present regulations. Taxpayer has placed great emphasis on prior revenue acts and the regulations applicable thereto wherein the phrase was used. In the opinion of the court, these prior acts, regulations and judicial interpretations of the phrase are inapposite to the question presented here. The decisions relied upon by taxpayer did not deal with an allocation of a basis problem such as is now before this court. Those decisions deal with income realization problems, whether a corporate reorganization qualifies for tax-free treatment and questions of taxable and non-taxable exchanges of property.

Section 334(b) (2) requires that certain adjustments be made to the basis of the stock of the subsidiary before that basis is allocated among the assets of the subsidiary. These adjustments are necessary...