Bryant Heater Company v. Commissioner of Int. Rev.

• Decision Date: 14 April 1956
• Docket Number: No. 12592.,12592.
• Parties: BRYANT HEATER COMPANY and Dresser Industries, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

231 F.2d 938 (1956)

BRYANT HEATER COMPANY and Dresser Industries, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12592.

United States Court of Appeals Sixth Circuit.

April 14, 1956.

Charles F. Taplin, Jr., and Alton W. Whitehouse, Jr., Cleveland, Ohio, McAfee, Grossman, Taplin, Hanning, Newcomer & Hazlett, Cleveland, Ohio, on brief, for petitioners.

Grant W. Wiprud, Washington, D. C., H. Brian Holland, Ellis N. Slack and David O. Walter, Washington, D. C., on brief, for respondent.

Before ALLEN, McALLISTER and STEWART, Circuit Judges.

STEWART, Circuit Judge.

Two separate questions are presented on this petition for review.

Petitioner Bryant Heater Company (hereinafter called "Bryant") was a wholly owned subsidiary of petitioner Dresser Industries, Inc. (hereinafter called "Dresser"). In 1949 Bryant sold all its assets in an arms-length transaction to a third party for a total consideration of $6,100,000. The agreement of sale did not recite any allocation of the sales price among the various classes of assets sold. Bryant concededly realized a total profit upon the sale in an amount of more than $250,000. It has been stipulated that all the assets sold other than capital assets and inventories were sold at a price equal to their tax basis. Therefore the gain realized on the sale was necessarily attributable to the inventories, to the capital assets or to both. The parties agree that to the extent the gain resulted from the sale of capital assets it was a long-term capital gain; to the extent it resulted from the sale of inventories it was ordinary income. Moreover, there remains no issue between the parties as to the proper basis of either of these groups of assets.

In its final return Bryant attributed the entire gain to the capital assets. The respondent Commissioner asserted a deficiency, based upon his determination that, as between inventories and capital assets, the gain attributable to each should bear the same ratio to the total gain as the book value of each bore to the total book value of the two groups of assets. The result of the application of this formula was to allocate approximately 73% of the entire gain to the inventories and approximately 27% of the gain to the capital assets. The Tax Court approved this allocation of gain between ordinary income attributable to inventory and long-term capital gain attributable to capital assets, and upheld the resulting tax deficiencies, although no evidence was offered to show that the Commissioner's computations reflected fair market value.

The petitioners offered testimony by representatives of both the buyer and the seller showing that at the time of the sale it was understood by each of them that the inventories were being sold at approximately their book value and that a substantial premium over book value was being paid for the capital assets. The effect of this evidence in our opinion was to overcome the presumption of correctness attaching to the Commissioner's determination by demonstrating the arbitrary nature of the formula upon which it was based, invitingly convenient though that formula undoubtedly was. See Helvering v. Taylor, 1935, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623. Cf. Thomas v. Commissioner, 6 Cir., 1955, 223 F.2d 83. While demonstrating that the determined deficiency was arbitrary and excessive, the petitioner's evidence was not sufficiently exact to establish their contention that no part of the gain was properly attributable to the sale of the inventories. It follows that the case should be remanded to the Tax Court for a redetermination of the amount of gain attributable to each group of assets, based upon evidence as to the fair market value of each at the...