Campbell Taggart, Inc. v. U.S.
| Decision Date | 19 October 1984 |
| Docket Number | No. 83-1528,83-1528 |
| Parties | , 84-2 USTC P 9869 CAMPBELL TAGGART, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Jay W. Miller, Glenn L. Archer, Asst. Atty. Gen., Michael L. Paup, Jonathan S. Cohen, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.
Peter J. Turner, Neil J. O'Brien, Donald H. Mackaman, Dallas, Tex., for plaintiff-appellee.
Appeals from the United States District Court for the Northern District of Texas.
Before GEE, POLITZ and RANDALL, Circuit Judges.
The United States appeals from a judgment granting a corporate taxpayer a refund for federal income taxes paid in 1975. The issue presented is whether the taxpayer is entitled, under the Corn Products doctrine, to an ordinary deduction for losses sustained on the sale of stock in a foreign corporation. For the reasons set forth below, we agree that the taxpayer sustained an ordinary rather than a capital loss. We affirm. 552 F.Supp. 355.
Campbell Taggart, Inc. ("CTI") claimed an ordinary deduction on its 1975 federal income tax return for losses sustained on the sale of stock in a Spanish corporation known as Superdescuento Uno, Dos, Tres, S.A. ("Supermarkets"). The Commissioner of Internal Revenue ("Commissioner") disallowed the deduction in its entirety. CTI paid deficiencies assessed against it and, after exhausting its remedies before the Commissioner, brought this suit for refund in the district court.
The material facts surrounding CTI's purchase and sale of the Supermarkets stock are not disputed. 1 CTI is a Delaware corporation that operates as a holding and service company: its income derives principally from service fees paid and dividends declared by operating subsidiaries. Its subsidiaries are engaged in the manufacture, sale and storage of food products, primarily through bakeries and related facilities. CTI currently owns stock in approximately sixty-three domestic and foreign subsidiaries. Most of these subsidiaries have been acquired by CTI as going businesses. In fact, CTI's growth and expansion into new markets has historically been primarily through acquisitions.
Since a 1967 Federal Trade Commission order restricting CTI's further expansion in the domestic baking industry, CTI has been actively pursuing foreign acquisitions. In 1971, for example, CTI acquired a 50% interest in a Spanish bakery from Jaime Jorba ("Jorba"), a Mexican national. In late 1972, CTI commenced negotiations with Jorba concerning acquisition of a 50% interest in Supermarkets, which negotiations culminated in the transaction underlying the deduction involved in this appeal.
Supermarkets owns twelve grocery stores in Spain. In 1972, Jorba and certain of his Spanish relatives owned 100% of Supermarkets' stock. On December 6, 1972, CTI entered into a preliminary agreement (the "Preliminary Agreement") to purchase 50% of Supermarkets' stock from Jorba. 2 CTI agreed to pay Jorba 7,000,000 pesetas and to pay 80,000,000 pesetas to Supermarkets itself, as a contribution to capital. Under the Preliminary Agreement, the parties agreed, upon satisfaction of four conditions, to close the transaction by executing a more detailed agreement (the "Final Agreement") conveying the stock and governing the division of management powers between CTI and Jorba. The Preliminary Agreement conditions the obligation to close the deal, by executing the Final Agreement, on the following: (1) approval of the transaction by the Spanish government; (2) an independent audit of Supermarkets by accountants hired by CTI; (3) "no material adverse change" in Supermarkets' financial condition between execution of the Preliminary Agreement and the Final Agreement; and (4) satisfaction of certain warranties and representations that Jorba made with respect to the condition of Supermarkets and his ownership thereof. Closing of the Final Agreement was scheduled to occur within thirty days of the Spanish government's approval of the transaction. Government approval was required because the stock purchase would result in 100% foreign ownership of Supermarkets' stock.
On October 10, 1973, the parties modified the Preliminary Agreement. Spanish lawyers advised that the petition for approval of foreign ownership would receive more favorable treatment if CTI acquired a small interest in Supermarkets and joined in the petition. Therefore, an agreement (the "October Modification") was signed on October 10, 1973, pursuant to which CTI purchased 25% of Supermarkets' stock from Jorba 3 for 7,000,000 pesetas. The October Modification contemplated that, upon receipt of government approval, the deal would close on the same basic terms outlined in the original documents. 4 For example, the October Modification contains the same four conditions found in the Preliminary Agreement. It also obligates Jorba to repurchase the stock at the original sale price of 7,000,000 pesetas, if government approval is denied. 5
Sometime after October of 1973, but before execution of the Final Agreement, CTI discovered that Supermarkets' financial condition had deteriorated. On the advice of counsel, CTI determined that, under the "no material adverse change" clause of the Preliminary Agreement and the October Modification, it was not obligated to purchase the Supermarkets' stock if and when government approval was received. By January of 1974, CTI had decided to sell its interest in Supermarkets. On January 18, 1974, Jorba agreed to join CTI in efforts to find a buyer for all of Supermarkets' stock. Thus, CTI and Jorba were actively seeking to dispose of Supermarkets even before the Final Agreement was executed.
Initial efforts to sell the Supermarkets stock proved unsuccessful. In the meantime, the Spanish government approved 100% foreign ownership of Supermarkets and, on November 20, 1974, the Final Agreement, as amended to reflect the October Modification, was executed. CTI acquired an additional 25% of Supermarkets' stock and contributed 80,000,000 pesetas to Supermarkets' capital account.
After closing the transaction, CTI and Jorba continued their efforts to dispose of the Supermarkets stock. They finally found a buyer late in 1975 and, on December 15, 1975, sold the stock at a substantial loss. CTI claimed a deduction on its 1974 tax return for legal and professional fees related to the acquisition and sale of the stock. On its 1975 return, CTI claimed a deduction for additional professional fees related to the Supermarkets deal and an ordinary deduction for the loss suffered on the sale of the stock. The Commissioner disallowed these deductions and CTI paid assessed deficiencies and brought this suit for a tax refund.
At trial, CTI claimed alternatively that, with respect to the loss it sustained on the sale of Supermarkets stock, 6 it is entitled to (1) an ordinary loss deduction in 1975 under I.R.C. Sec. 165(a) 7 or (2) an ordinary and necessary business deduction in 1974 under I.R.C. Sec. 162(a). 8
Although the parties stipulated to most of the material facts, CTI presented four witnesses at trial who testified primarily about CTI's reasons for purchasing the Supermarkets stock. CTI concedes that, when it executed the Preliminary Agreement, it intended to acquire the Supermarkets stock as a capital investment, pursuant to its traditional pattern of growth through acquisitions. 9 CTI maintains, however, that, in effect, it changed its corporate mind long before the deal actually closed in November of 1974: the stock was ultimately purchased for business reasons, not investment reasons. CTI offered evidence that its attorneys determined that CTI was not bound under the Preliminary Agreement or the October Modification to purchase the Supermarkets stock in November of 1974, but that it did so anyway to protect its goodwill and reputation. 10 CTI argued that, because it lacked an investment motive in November of 1974, the stock, which all agree is normally a capital asset, was an ordinary asset under the Corn Products doctrine. 11
The Government argued at trial that CTI's original purpose in purchasing the Supermarkets stock, which was admittedly to acquire a capital asset, should control the nature of the stock in CTI's hands. Alternatively, the Government argued that, even assuming CTI purchased the stock on November 20, 1974 solely to protect its goodwill, CTI necessarily had an investment motive on that date because the goodwill that it thereby protected reflected on its ability to make future investments, not its ability to carry on ordinary business activities.
The district court held that CTI is entitled to an ordinary deduction in 1975, under I.R.C. Sec. 165, for the loss sustained on the sale of the Supermarkets stock. The court applied the Corn Products doctrine on the following fact findings: (1) CTI was attempting to sell its interest in Supermarkets even before the Final Agreement was executed; (2) CTI was not legally obligated to purchase the Supermarkets stock; (3) CTI knew when it executed the Final Agreement that it was paying more than fair market value for the Supermarkets stock and that "Supermarkets' prospects were dim"; (4) CTI bought the stock to protect its "business reputation, goodwill and credibility as an acquirer of businesses"; (5) CTI's original investment motive "played no part in the consummation of the bargain"; and (6) CTI purchased the stock with "only the single motive of wanting to preserve its goodwill." 552 F.Supp. at 357-59. 12
The Government appeals from the district court's judgment and contends that the Corn Products doctrine does not apply on these facts. CTI cross appeals, arguing that, if it is not entitled to an ordinary loss deduction in 1975 when it sold the stock, it is entitled to a...
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