Clark Thread Co. v. Commissioner of Internal Revenue
| Decision Date | 13 January 1939 |
| Docket Number | No. 6245-6247.,6245-6247. |
| Citation | 100 F.2d 257 |
| Court | U.S. Court of Appeals — Third Circuit |
| Parties | CLARK THREAD CO. v. COMMISSIONER OF INTERNAL REVENUE (two cases). J. & P. COATS (R. I.), Inc., v. SAME. |
Albert L. Hopkins, Jay C. Halls, and Peter L. Wentz, all of Chicago, Ill. (Cornelius W. Wickersham and Clarence Castimore, both of New York City, of counsel), for petitioners.
James W. Morris, Asst. Atty. Gen., and Morton K. Rothchild and Sewall Key, Sp. Assts. to the Atty. Gen., for respondent.
Before BUFFINGTON and BIGGS, Circuit Judges, and WATSON, District Judge.
These are three petitions for review of decisions of the Board of Tax Appeals on petitions of the Appellants for redetermination of deficiencies in income taxes found by the Respondent for the taxable fiscal year ended June 30, 1923 and the taxable calendar year of 1927. The petitions were consolidated for hearing and decision.
The questions raised are: (1) Whether The Clark Thread Company is entitled to deductions from gross income for the taxable years on account of amortization of a certain contract executed in 1897 by it and George A. Clark & Brother, Inc., covering a period of forty five years, the latter corporation having been dissolved in 1917 and the Petitioner thereafter in the same year having taken over the assets and assumed the liabilities of George A. Clark & Brother, Inc.; (2) whether The Clark Thread Company is entitled to deduct from gross income for the taxable year 1927, as an ordinary and necessary business expense, the sum of $525,000 paid in that year by it to a competitor, the Blodgett & Orswell Company, as consideration for the discontinuance of the competitor's use of the trade name "Clark"; and (3) whether the Board correctly approved the Commissioner's determination of the amount of gain derived by the J. & P. Coats (R.I.), Inc., from the sale in 1923 of certain real property and abandoned and scrapped machinery?
The transaction in 1917, by which the George A. Clark & Brother, Inc., was dissolved, its assets and liabilities transferred to The Clark Thread Company and the forty five year contract (1896 to 1941), which still had about twenty five years to run, extinguished, amounted to the discontinuance of two things so far as The Clark Thread Company was concerned: (1) Its right to receive yearly the entire cost of its output, plus a fixed profit of $225,000, and (2) its duty to supply its entire output to the George A. Clark & Brother, Inc., at cost plus $225,000. During the approximately twenty year period the contract was in existence prior to 1917, the contract proved to be a bad one so far as The Clark Thread Company was concerned. While it was receiving a fixed profit of $225,000 per year, George A. Clark & Brother, Inc., over a period of fifteen years, derived a net profit in excess of $2,000,000 per year on account of this contract. Thus, in 1917, it was highly desirable to The Clark Thread Company to extinguish its obligations under the contract and market its product itself. Extinguishment of the contract was accomplished as an incident to the dissolution of George A. Clark & Brother, Inc., and the acquisition by The Clark Thread Company of all of the former company's assets and liabilities. The contract, although a very valuable intangible asset of George A. Clark & Brother, Inc., was never carried on the books of the company as such. At the beginning of 1917, the assets of George A. Clark & Brother, Inc., according to its books were $2,738,879.75 and its liabilities $2,509,779.85, plus a loan account with Clark & Company, Ltd., of $9,182,689.29. This loan account was closed out July 1, 1917 by a transfer by George A. Clark & Brother, Inc., to Clark & Company, Ltd., of the capital stock of The Clark Thread Company, which had been owned by George A....
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