Coats & Clark, Inc. v. Comm'r of Internal Revenue, Docket No. 34679.
| Decision Date | 25 October 1960 |
| Docket Number | Docket No. 34679. |
| Citation | 35 T.C. 113 |
| Parties | COATS & CLARK, INC., SUCCESSOR TO CROWN FASTENER CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: Petitioner's claim for excess profits tax relief under section 722(b) (4), I.R.C. 1939, is denied. Although there was a change in the character of its business within the meaning of section 722(b)(4), I.R.C. 1939, the petitioner failed to establish a fair and just amount representing normal base period earnings for the changed business. Richard P. Jackson, Esq., Foster Bam, Esq., and Doris L. Bosworth, Esq., for the petitioner.
William V. Crosswhite, Esq., for the respondent.
Respondent disallowed the petitioner's applications for excess profits tax relief under section 722 of the Internal Revenue Code of 19391 for the years 1941 through 1945. Petitioner originally based its claims for relief on section 722(b)(1), (4), and (5), but section 722(b)(1) and (5) was waived at the trial. The questions presented are:
(1) Whether the petitioner's business, because of purported qualifying changes in the character of its business within the meaning of section 722(b)(4), did not reach, by the end of the base period, the earnings level it would have reached if it had made such changes 2 years earlier; and
(2) Whether the petitioner has established that its excess profits tax, computed without the benefit of section 722, is excessive and discriminatory and has established a fair and just amount representing normal earnings to be used as a constructive average base period net income.
Proposed findings of fact were made by a commissioner of this Court and served upon the parties. Petitioner, with one exception, makes no objections to those findings of fact though it seeks additional findings, and respondent makes several objections to the commissioner's findings of fact and also requests additional findings. The facts as stipulated are now found, and the commissioner's findings of fact which are not objected to are now adopted for the purposes of this opinion. Where, in the following summary of our findings of fact, we relate facts objected to or requested by the parties, our inclusion of such facts will be deemed rulings on the objections or requests without specifically noting each such objection or request. For the purposes of this opinion, the pertinent facts will be summarized.
Crown Fastener Corporation, hereinafter referred to as Crown, was incorporated under the laws of Delaware on May 23, 1934, and has its principal office and place of business in Warren, Rhode Island. Coats & Clark, Inc., by merger, is now the successor to Crown.
Crown kept its books and filed its Federal income tax returns under the accrual method of accounting on a calendar year basis for the years here involved. Crown filed its income, declared value, and excess profits tax returns for the years 1940 through 1945 with the then collector of internal revenue for the district of Rhode Island at Providence, Rhode Island.
Crown's excess profits tax liability for each of the years 1941 through 1944, as finally determined by respondent without the application of section 722, was as follows:
+--------------------------------+
¦ ¦Excess profits ¦
+---------------+----------------¦
¦Calendar year ¦tax liability ¦
+---------------+----------------¦
¦1941 ¦$43,195.01 ¦
+---------------+----------------¦
¦1942 ¦236,633.15 ¦
+---------------+----------------¦
¦1943 ¦520,850.46 ¦
+---------------+----------------¦
¦1944 ¦1 491,027.26 ¦
+---------------+----------------¦
¦ ¦ ¦
+--------------------------------+
All of the foregoing taxes have been paid by Crown.
Crown was in existence during the entire base period, 1936 through 1939, and was entitled to use an excess profits credit based on income, computed under section 713. Inasmuch as its excess profits credit based on invested capital, computed under section 714 exceeded the credit computed under section 713 for each of the excess profits tax years 1941 through 1944, Crown used the invested capital method in computing its excess profits tax liability. The credits computed under sections 714 and 713 were as follows:
+---------------------------------------+
¦Calendar year¦Credit under¦Credit under¦
+-------------+------------+------------¦
¦ ¦sec. 714 ¦sec. 713 ¦
+-------------+------------+------------¦
¦1940 ¦$159,200.00 ¦$92,507.14 ¦
+-------------+------------+------------¦
¦1941 ¦168,141.54 ¦108,443.98 ¦
+-------------+------------+------------¦
¦1942 ¦179,674.27 ¦108,443.98 ¦
+-------------+------------+------------¦
¦1943 ¦182,392.95 ¦108,443.98 ¦
+-------------+------------+------------¦
¦1944 ¦196,708.85 ¦108,443.98 ¦
+-------------+------------+------------¦
¦1945 ¦222,005.69 ¦108,443.98 ¦
+-------------+------------+------------¦
¦1946 ¦237,471.61 ¦ ¦
+---------------------------------------+
Crown's actual base period net income under the 1940 and 1941 laws was as follows:
+---------------------------------------+
¦Calendar year¦1940 law ¦1941 law ¦
+-------------+------------+------------¦
¦1936 ¦($76,266.47)¦($76,266.47)¦
+-------------+------------+------------¦
¦1937 ¦(47,830.08) ¦(47,830.08) ¦
+-------------+------------+------------¦
¦1938 ¦16,077.72 ¦18,607.81 ¦
+-------------+------------+------------¦
¦1939 ¦97,375.94 ¦114,151.56 ¦
+-------------+------------+------------¦
¦Aggregate ¦(10,642.89) ¦8,662.82 ¦
+---------------------------------------+
Crown's average base period net income for the excess profits tax years 1940, 1941, and 1942 to 1945, inclusive, computed with the benefits of section 713(f) and section 713(e)(1), was as follows:
+------------------------------------+
¦Year ¦Sec. 713(f)¦Sec. 713(e)(1)¦
+---------+-----------+--------------¦
¦1940 ¦$97,375.94 ¦$16,405.90 ¦
+---------+-----------+--------------¦
¦1941 ¦114,151.56 ¦21,232.32 ¦
+---------+-----------+--------------¦
¦1942-1945¦114,151.56 ¦26,540.40 ¦
+------------------------------------+
Crown was incorporated on May 23, 1934, at the instance of Elisha Walker, the managing partner of the investment banking firm of Kuhn, Loeb & Company, New York, New York, for the purpose of manufacturing slide fasteners or ‘zippers' by the die-cast method. This method of manufacturing slide fasteners was the outgrowth of the inventions and patents of Louis H. Morin and his father, David Marinsky. Walker and his associates were the original stockholders of Crown with Morin and Marinsky purchasing a small amount of the stock.
After Crown was organized, Whitehall Patent Corporation, a patent holding company formed by Morin and Marinsky to which they transferred their zipper patents and developments, including the application for the patent on the diecasting machine, licensed it under the aforementioned zipper patents and zipper patent applications, including the patent application on the diecasting machine. Under the licensing agreement Whitehall was to receive a royalty of $200,000, plus a fixed amount per zipper. After Coats & Clark, Inc., obtained control of Crown, the royalty was modified to a percentage basis instead of a fixed amount per zipper.
Upon starting operations in 1934, Crown retained Morin and Marinsky as consultants on a yearly retainer basis, which arrangement was in effect throughout the base period. During these years Marinsky and Morin continued their experimental and development work on zippers and zipper parts.
Crown was the only manufacturer of zippers that used the die-cast method. In manufacturing its zippers, Crown heated a zinc alloy until it was molten (825 degrees Fahrenheit) and then forced the molten metal into a die that closed around the tape. The dies were cooled so that the heat of the molten metal was dissipated without burning, discoloring, or weakening the tape. This method of casting the scoops (the teeth which mesh together to effect the closure) directly on the tape enabled the metal to penetrate into the tape fabric and anchor the scoops securely.
Crown's operations for calendar year 1935 showed the following results: Gross sales, $48,535.63; net sales, $42,743.96, but after an adjustment of returns and allowances by a revenue agent, net sales of $42,121.57; gross profit, $6,077.32; and a loss of $30,633.22.
In the summer of 1936 the Coats & Clark organization, hereinafter described, became interested in Crown and its method of manufacturing zippers by diecasting. John B. Clark, president, and Frank B. Hutton, treasurer, of J. & P. Coats (R.I.) Inc., one of the constituent companies of the Coats & Clark group, negotiated with Elisha Walker, who, together with his family, controlled Crown.
The purchase of control of Crown was effected on or about August 19, 1936. As a result of meetings of Crown's directors held on August 19, and 20, 1936, the Coats & Clark organization caused its representatives to be elected so as to constitute a majority of the board of directors. By virtue of action taken at the directors meeting of August 20, 1936, the Coats & Clark directors caused its representatives to be elected as the chief executive officers of Crown.
Prior to and during the base period, J. & P. Coats (R.I.) Inc. was one of a group of 10 American companies, exclusive of Crown, controlled by J. & P. Coats, Ltd., of Glasgow, Scotland, one of the largest, if not the largest, thread-manufacturing company in the world. These American companies, together with the parent, will hereinafter sometimes be called the Coats & Clark organization. The chief executive and operating officer of each of the American companies was John B. Clark. The American companies were...
To continue reading
Request your trial
-
A. Finkl & Sons Co. v. Comm'r of Internal Revenue
...Farmers Creamery Co. of Fredericksburg, Va., supra at 255; Patent Button Co. of Tennessee, 27 T.C. 471, 478 (1956); Coats & Clark, Inc., 35 T.C. 113, 134 (1960). On the record before us we are compelled to give a negative answer. As respondent has amply demonstrated on brief, the large upsu......
- Harvey v. Comm'r of Internal Revenue