Clarksdale Rubber Co. v. Comm'r Ofinternal Revenue
| Decision Date | 08 December 1965 |
| Docket Number | Docket No. 663-64. |
| Parties | CLARKSDALE RUBBER COMPANY, PETITIONER v. COMMISSIONER OFINTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James F. Kennedy, Jr., for the petitioner.
Buckley D. Sowards, for the respondent.
Petitioner, a financially distressed producer of rubber products, was acquired by Cooper, who leased petitioner's assets and transferred its production and sales activities to a newly formed sister subsidiary until petitioner's financial position was improved. Cooper then caused the production and sales activities to be returned to petitioner and it continued the manufacture and sale of rubber products as before. Held:
1. Cooper did not purchase petitioner for the principal purpose of avoiding Federal income taxes. Sec. 269(a), I.R.C. 1954, inapplicable.
2. Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957), inapplicable on these facts.
3. Petitioner continued to carry on the same business after resuming production and sales activities. H. F. Ramsey Co., 43 T.C. 500, 512-516 (1965), followed on this issue.
Respondent determined the following deficiencies in petitioner's income taxes:
+----------------------------+
¦TYE Dec. 31- ¦Deficiency ¦
+---------------+------------¦
¦1958 ¦$104,584.25 ¦
+---------------+------------¦
¦1959 ¦76,461.63 ¦
+---------------+------------¦
¦1960 ¦8,109.18 ¦
+----------------------------+
Two issues raised in the notice of deficiency have been conceded by the parties. There remains for decision only the question as to whether petitioner is entitled to net operating loss carryover deductions claimed in its returns for the taxable years 1958 and 1959.
Some of the facts have been stipulated by the parties and are so found.
Clarksdale Rubber Co. (hereafter called petitioner) was incorporated under the laws of the State of Mississippi on January 28, 1946, under the name of Dismuke Tire & Rubber Co., Inc. Petitioner filed its 1958 and 1960 Federal corporate income tax returns with the district director of internal revenue at Jackson, Miss. Petitioner filed its 1959 Federal corporate income tax return with the district director of internal revenue at Cleveland, Ohio.
From the time of its incorporation until sometime in May 1955, petitioner manufactured rubber products for the automotive industry, principally camelback (tread rubber) and tubes, and sold them under the following brand names: Premium Quality, Billups, Dismuke Five Star, Meridian, profitable through the taxable year 1953. However, in 1954 petitioner began to encounter financial difficulties. Its working capital was almost completely exhausted and it could not pay its creditors. W. O. Dismuke (hereafter called Dismuke), petitioner's key officer, convinced its largest creditors to accept a delayed payment plan which temporarily relieved the situation. Petitioner was then placed in the hands of Stuart W. Cochran & Co., an industrial broker, for sale. In January 1955, petitioner experienced production troubles and began shipping defective products. When its customers refused to pay their accounts because of this, the payments to creditors were again delayed, thus resulting in their refusal to supply petitioner with needed raw materials.
Petitioner suspended its manufacturing operations in March 1955 and leased its facilities to a subsidiary of the Mansfield Tire & Rubber Co. (hereafter called Mansfield) for a period of 90 days from May through July 1955. Mansfield retained most of petitioner's employees, adding only its own plant manager and superintendent in charge.
During the lease term, Mansfield and petitioner attempted to negotiate an agreement to extend Mansfield's control beyond the 90-day period. Ultimately Mansfield, believing it could not meet the terms of petitioner's principal shareholder Dismuke, closed the plant in late July 1955. Throughout this period petitioner had also been negotiating with other firms in the rubber industry, especially Cooper Tire & Rubber Co. (hereafter called Cooper), a Delaware corporation with its principal offices in Findlay, Ohio. Cooper had been engaged in the production and sale of rubber products for many years through its own facilities and that of its subsidiaries. It sought expansion into the Southern States because it had developed markets there and because that area supplies the raw materials necessary for the manufacture of rubber products. Cooper first became aware of petitioner in August 1954, when Dismuke advertised the petitioner with Cochran. In early August 1955, however, the officers of Cooper visited petitioner's plant site and made a hurried examination of petitioner's books and records. As a result, the plant reopened on August 8, 1955, under a temporary lase and a statement of intent whereby Cooper was to take possession and manage the operation at a rental of $300 a day pending the negotiation and execution of a formal lease and stock option agreement. Dismuke had offered to sell only petitioner's assets to Cooper, but Cooper rejected the offer because the assets were already encumbered by a mortgage indebtedness and Cooper did not want to expose itself to petitioner's liabilities.
Upon taking possession of the plant, Cooper ordered an audit which disclosed that petitioner was the defendant in two lawsuits and that Federal tax liens, totaling $90,567.91, had been filed in the Chancery Court of Coahoma County, Miss. Furthermore, there were $133,435.93 in outstanding accounts receivable. Of this total, $23,296.44 represented potential losses due to customer allegations of defective products, $41,928.28 represented receivables from corporations related to petitioner's owners, and an additional $51,138.38 (and substantially all of the merchandise inventory) was pledged to banks for loans. All of the fixed assets were pledged as security for a mortgage loan. Finally, current liabilities exceeded current assets by over 2 to 1.
About the same time the statement of intent with petitioner was signed, Cooper formed a new wholly owned Mississippi subsidiary, the Clarksdale Rubber Manufacturing Co. (hereafter called Clarksdale Manufacturing), and on or about August 12, 1955, Cooper assigned its rights to lease the petitioner's facilities to this subsidiary. Clarksdale Manufacturing immediately entered into the manufacture of tubes and camelback, selling them under the brand names of Cooper and two of its subsidiaries, Grant Tire & Rubber and Fall Tire & Rubber. These names were used since petitioner's brand names had lost their retail position due to the defective materials produced by petitioner before its arrangement with Cooper.
When Cooper first assumed control of petitioner's manufacturing operations in August 1955, the same employees who had originally worked for the petitioner and then for Mansfield were brought back into the plant. The same operation, viz, the manufacture of tubes and camelback, was continued. Production procedures remained the same and the market area was left unchanged.
Clarksdale Manufacturing continued to operate petitioner's facilities throughout the remainder of 1955 under the letter of intent signed with Cooper on August 8, 1955, while Cooper's directors negotiated with Dismuke over the future of petitioner. In January 1956, negotiations broke down and Cooper's directors temporarily ceased operating petitioner's facilities, vacated the premises, and dismissed all the employees except Leland Gough, an accountant with the petitioner since 1951, who had subsequently worked as office manager for Mansfield and then Clarksdale Manufacturing. Cooper suspended operations to force Dismuke to terms. Negotiations continued throughout the first months of 1956. They ultimately resulted in the execution of a final agreement dated March 6, 1956, between Cooper, petitioner, and the petitioner's shareholders. Under the terms of this agreement Cooper (or its subsidiary) was to continue to lease petitioner's plant and facilities for a period of 3 years at a rental of $10,000 per month. Petitioner was also to be paid by Cooper (or its subsidiary) an additional rental equal to 25 percent of the net profit before taxes in excess of $120,000 a year derived from the production and sales of products from the petitioner's plant. The agreement contained a provision giving Cooper the right to terminate the lease for any reason at the end of the first 6 months and also provided Cooper with an option to purchase all of petitioner's outstanding stock for $100,000. After the execution of the agreement on March 6, 1956, Cooper immediately assigned its lease rights (but not the option to purchase stock) to Clarksdale Manufacturing.
After Clarksdale Manufacturing resumed manufacturing activities in March 1956, it put in its own management at the petitioner's plant but reemployed the other production employees that had worked there before. Clarksdale Manufacturing sold in the same market area as petitioner and to some of the same customers. There were no changes made by Clarksdale Manufacturing in the type of product manufactured, although the quality improved.
Having transferred its manufacturing and sales activities to Clarksdale Manufacturing, petitioner began to cope with its financial difficulties. Petitioner worked out an arrangement with its supplier-creditors that resulted in a note being issued to them setting up a 3-year moratorium for payment. With its most pressing concern thus resolved, petitioner then turned to the settlement and collection of its accounts receivable. Because of the defective products petitioner had manufactured and sold before Cooper entered the picture, many of petitioner's customers withheld payment for the goods they received. Others demanded that petitioner pay them for the expenses incurred due to the defective products. Petitioner was thus forced to engage as both plaintiff and defendant in over a...
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