Collins v. United States

• Citation: 193 F. Supp. 602
• Decision Date: 10 April 1961
• Docket Number: 59-275-F.,Civ. A. No. 59-154-F
• Parties: R. Perry COLLINS and Marjorie Collins v. UNITED STATES of America. R. P. COLLINS & COMPANY, Inc., v. UNITED STATES of America.
• Court: U.S. District Court — District of Massachusetts

193 F. Supp. 602

R. Perry COLLINS and Marjorie Collins v. UNITED STATES of America.

R. P. COLLINS & COMPANY, Inc., v. UNITED STATES of America.

Civ. A. Nos. 59-154-F, 59-275-F.

United States District Court D. Massachusetts.

April 10, 1961.

Roger P. Stokey, Goodwin, Proctor & Hoar, Boston, Mass., for plaintiffs.

Elliot L. Richardson, U. S. Atty., James C. Heigham, Asst. U. S. Atty., Boston, Mass., for defendant.

FRANCIS J. W. FORD, District Judge.

These are actions to recover income taxes and interest alleged to have been illegally assessed and collected. The parties have entered into stipulations as to several counts in each action. In 59-154-F the remaining issues to be decided involve the tax status of a payment received by the individual plaintiffs for stock transferred to plaintiff corporation and the deductibility of a claimed casualty loss. In 59-275-F there remain for decision questions as to the deductibility of losses incurred by a subsidiary of plaintiff corporation.

Deductibility of Losses

R. P. Collins & Company, Inc. is a Massachusetts corporation organized in 1934 engaged in the wholesale buying and selling of wool and mohair unprocessed or in the form of tops. Of the 1472 shares of stock outstanding on September 1, 1954, plaintiff R. Perry Collins owned 672 shares, his wife Marjorie C. Collins owned 356 shares and the remaining shares were owned by their four daughters or owned in trust for the benefit of the daughters. Collins Wool Corporation, a Massachusetts corporation organized in 1942, was a wholly owned subsidiary of R. P. Collins & Company, Inc. and was engaged in a similar line of business.

Priscilla Worsted Mills was a Rhode Island corporation organized in 1906. It owned a mill at Johnston, Rhode Island, and its principal business was the manufacture of worsted yarns of various sizes and characteristics. It had operated at a small profit in 1950, 1951 and 1952. In 1953 it had an operating loss of $222,806 and the principal stockholders during that year decided to dispose of the business. David Seaman, a minority stockholder, did not wish to sell his interest. He believed that the mill as a result of recent renovations was capable of efficient operation, that its overhead expenses could be substantially reduced and its sales organization improved and hence that it could be operated profitably if, as he expected, there would be an upturn in the textile industry after a slump which it had suffered during 1953. He made unsuccessful efforts during the latter part of 1953 to secure financing from banks or to persuade some other mill owner to acquire the stock of Priscilla at $200 a share. In October he talked with Collins, who was not then interested in buying the stock. He met Collins and his attorneys in January 1954, at which time they discussed among other factors the operating losses of Priscilla and also the possibility of a substantial tax loss which might result from a quick sale of Priscilla's assets. Collins was still not interested in acquiring an interest in Priscilla. Priscilla suffered further losses in January and February of 1954. In February, Collins, after further consideration and after discussion with his tax advisers, offered to buy the Priscilla stock at $175 a share subject to certain adjustments. This offer was accepted and an agreement for the purchase and sale of the stock was signed March 1, 1954.

On March 24, 1954, pursuant to that agreement R. P. Collins & Company, Inc. bought 800 shares and Collins Wool Corporation 400 shares of the common stock of Priscilla, at $170.34 a share, for a total price of $204,408. The only other stock of Priscilla outstanding was 200 shares owned by Seaman. Under an agreement made on or about March 1, 1954, R. P. Collins & Company, Inc. had an option to purchase these shares. It exercised that option on May 21, 1954, acquiring the 200 shares for the price of $25,396.22. On March 30, 1954, Priscilla had purchased from Collins Wool Corporation 400 shares of its own stock at $170.34 a share, so that after May 21, 1954, there were 1,000 shares outstanding, all owned by R. P. Collins & Company, Inc.

Priscilla continued to operate at a loss after March 1, 1954, in spite of certain changes undertaken in accordance with Seaman's ideas for making the operations profitable. Sometime before May 21, 1954, a decision was made to close the business. In June an agreement was made for the sale of the plant and equipment for $115,000 and this sale was carried out in July, 1954.

Some months after this sale Priscilla began to do business as a wholesaler of wool and mohair, the same type of business conducted by R. P. Collins & Company, Inc. and its other subsidiary Collins Wool Corporation. On May 26, 1955, Priscilla changed its name to Collins Wool Corporation and on December 1, 1955, qualified to do business in Massachusetts. Meanwhile the original Collins Wool Corporation was liquidated and dissolved on August 31, 1955. The new Collins Wool Corporation (formerly Priscilla) was liquidated and dissolved on August 31, 1957.

In the amended consolidated income tax return of plaintiff corporation for the fiscal year ending August 31, 1954, the post-affiliation losses of Priscilla Worsted Mills in the amount of $193,067.13 (consisting of operating losses of $42,139.45 for the period from May 21 to the end of the fiscal year and capital losses of $150,927.67 consisting chiefly of the loss on the sale of the plant and equipment) were used to fully offset the total profit of both R. P. Collins & Company, Inc. and Collins Wool Corporation.

Plaintiff corporation's right to use these losses of Priscilla to offset gains of the other corporations on its consolidated return depends on the purpose for which it acquired the Priscilla stock.

Under § 141 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 141, affiliated corporations were given the privilege of filing a consolidated income tax return. Corporations were considered to be affiliated when the parent owned at least 95 per cent of the stock of the subsidiary. Hence in this case Priscilla became an affiliate on May 21, 1954. Under this section an affiliated corporation may not be included in the consolidated return where it was brought into the affiliated group solely for tax savings reasons without any independent business reason. David's Specialty Shops v. Johnson, D.C., 131 F.Supp. 458; Elko Realty Company v. Commissioner of Internal Revenue, 29 T.C. 1012, affirmed per curiam, 3 Cir., 260 F.2d 949; J. D. & A. B. Spreckels Co. v. Commissioner, 41 B.T.A. 370.

Under § 129 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 129, where a corporation acquired control of the property of another corporation and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit or allowance which the corporation would not otherwise enjoy, then such deduction is not to be allowed. As to this section the significant date is March 24, 1954, when R. P. Collins & Company, Inc. acquired control of Priscilla by purchase of a majority of its stock.

Plaintiff corporation contends that apart from the prospective tax benefits to be derived from application of Priscilla's losses to the consolidated returns, it had other substantial business reasons for the acquisition of Priscilla. Basically the important one, if it could be shown, is that Collins believed, as Seaman apparently did, that Priscilla could be restored to profitable operations and acquired the corporation for that purpose. On the evidence it cannot be found that this was the fact. Priscilla was running at a loss. The textile business generally was in a depressed state in New England. Seaman in the course of several months had not been able to induce anyone else to take any serious interest in the possible rehabilitation of Priscilla. Collins had no experience with operating a yarn mill. He was nearing retirement age and on his own testimony within a year or two thereafter was seeking to simplify the operations of his business. The subsequent events do not show there was any real intention on the part of Collins as of March 24 to make any real effort to restore Priscilla to profitable operation. Even under Seaman's optimistic view this would require extensive changes in Priscilla's business methods. Collins himself would not say that there was even a fair chance of producing a profit within four months of operation, yet within two months the decision to liquidate had been made. It seems clear that Collins had no serious expectation of restoring Priscilla to profitable operation in its yarn business and that this was not the purpose which motivated the acquisition.

Other suggested business purposes, such as the possibility of increasing plaintiff corporation's business through top sales to Priscilla or the acquisition of market information through control of a company engaged in manufacturing operations, are merely incidental benefits which might have accompanied a successful operation of Priscilla. Standing alone they would not be of sufficient importance to explain the acquisition of an unsuccessfully operating subsidiary. Moreover, while Priscilla had at one time been a substantial buyer of wool from the Collins corporations, it had changed to the manufacture of yarns from synthetic materials and was no longer a prospective customer for wool.

Plaintiff corporation points to the fact that it was foreseeable that liquidation of Priscilla's plant and machinery would be a profitable operation and urges that this prospect of profit apart from tax benefits was a sufficient business reason for acquiring the stock of Priscilla. It is true that in fact, after the liquidation, Priscilla had a net worth in cash or liquid assets of $269,476.86, while plaintiff corporation had paid a total of $161,668.22. Thus, apart from any tax benefits to be derived from the...