Distributors Finance Corp. v. Comm'r of Internal Revenue
| Decision Date | 06 July 1953 |
| Docket Number | Docket No. 27309. |
| Citation | 20 T.C. 768 |
| Parties | DISTRIBUTORS FINANCE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner purchased more than 80 per cent of the outstanding stock of X corporation and caused it to sell its operating assets to Y corporation in return for debentures of Y, the assumption of liabilities of X, and an adjustment in cash. Thereafter X was liquidate, petitioner receiving the debentures along with cash and other assets. Held, no gains was recognized on the liquidation of X under the provisions of section 112(b)(6), Internal Revenue Code. International Investment Corporation, 11 T.C. 678,affirmed175 F.2d 772 (C.A. 3); Tri-Lakes Steamship Co. v. Commissioner, 146 F.2d 970 (C.A. 6). The facts herein do not justify rendering section 112(b)(6) inapplicable on the theory that petitioner from the very outset intended to liquidate X and that therefore liquidation of X was merely one step in carrying out a preconceived plan which cannot be separated into its component parts. On this record the determination to liquidate X was independently made after petitioner entered into the basic transaction.
2. Held, the amount received by petitioner from a settlement of a disputed claim for dividends was accruable in 1946 when the compromise was made.
3. Held, petitioner failed to sustain its burden of proving that is did not become the owner of certain debentures prior to February 1946; accordingly, the interest from those debentures for a period prior to that time was properly included in petitioner's income as reported in its returns. Arthur A. Armstrong, Esq., for the petitioner.
Donald P. Chehock, Esq., for the respondent.
The respondent determined the following deficiencies:
On brief, the respondent abandoned his claim for personal holding company surtax liability for 1945.
The petitioner does not contest the adjustment made by the respondent which resulted in the determination of a deficiency in income tax for 1943, but urges that it has made an overpayment in its income tax for that year in the amount of $397.38. The basis for the alleged overpayment is a net operating loss deduction due to a net operating loss carry-back from the year 1945, the availability of which turns on whether respondent correctly asserted a deficiency for 1945.
The issues are stated in the opinion.
Some of the facts have been stipulated and are incorporated herein by reference.
Petitioner is a California corporation which formerly operated a Willys automobile agency in Los Angeles under the name of Willys Distributors. Early in the 1940's it relinquished that agency and changed its name to Distributors Finance Corporation. Thereafter, it financed used car dealers through the purchase of conditional sales contracts, and it also bought and sold used cars. In 1946 its principal office was moved to San Diego from Los Angeles, where it had previously been located. Its tax returns, made on the accrual method of accounting for the calendar years here involved, were filed with the collector of internal revenue for the sixth district of California at Los Angeles.
E. G. Davies was president of petitioner and dominated its affairs. During the years here involved, 88.57 per cent of the outstanding stock of petitioner was owned by Davies Motors, Inc. of San Diego, the outstanding stock of which, in turn, was owned 51 per cent by E. G. Davies, 33 per cent by F. E. Davies (adult son of E. G. Davies), 13 per cent by the wife of E. G. Davies, and 3 per cent by others. F. E. Davies also owned 11.2 per cent of petitioner's stock.
The Grand Rapids Home Furnishing Company (hereinafter also referred to as Grand Rapids) was a California corporation which had been organized in 1928 and which, until shortly prior to its dissolution in 1945, operated a department store in San Diego. Grand Rapids was about the third or fourth largest department store in San Diego, with annual gross sales in the fiscal years ended July 31, 1944, and July 31, 1945, in excess of $2,500,000. Throughout its existence in 1945 it had 3,781 shares of capital stock outstanding, all of which were of one class and had voting rights.
On February 6, 1945, and for some time prior thereto, Harry L. Kahn owned or controlled 2809.2 shares of the outstanding stock of Grand Rapids, which he was then willing to sell. Harlan B. Eldred, a resident of Los Angeles who had wide experience in the securities business, sought to obtain for himself and Edwin A. Barnes, also in the securities business, an option to purchase the stock owned or controlled by Kahn. Kahn's reluctance to dispose of the stock through the medium of an option was overcome by advice which he received from George Carlson, the resident managing partner in Los Angeles of the national accounting firm of Ernst & Ernst. Carlson and Eldred were friends, and Ernst & Ernst were the auditors and tax accountants not only for Grand Rapids but also for petitioner. Both Kahn and E. G. Davies leaned heavily on Carlson in the transactions here involved, both as to his business judgment and as to the manner and form which such transactions should take.
On February 6, 1945, Kahn executed a written option to Eldred and Barnes to purchase the Grand Rapids stock owned or controlled by him at $165 a share. 1 The option also contained provisions requiring the optionees to purchase at the same price any shares offered by minority stockholders within 30 days of the exercise of the option, with a further commitment to purchase at that price up to 300 additional shares offered by employee-stockholders within a year. The option was transferable at the optionees' election, and was irrevocable until noon of April 30, 1934, when it was to expire. The option was to be exercised by delivery, to the seller, of a commitment by the optionees or their transferees to purchase on or before July 31, 1945, all of the Kahn shares as well as the additional shares of the minority stockholders covered by the option. Eldred and Barnes originally considered selling the option or the shares to be purchased under it.
By the first part of April 1945, C. L. Dawson, Jr., and Charles R. Goff were taken into participation with Eldred and Barnes in the option, each with a one-fourth interest. Dawson was vice president of the Security-First National Bank of Los Angeles, one of the large banks of that city, and Goff was vice president and general manager of Walker-Scott Department Store, the second largest department store in San Diego. Goff was originally the source of the information that the Kahn shares could be purchased, and that information had been passed on successively to Dawson, Barnes, and Eldred. After Dawson and Goff joined in the option, Eldred was usually the spokesman for the four, hereinafter sometimes referred to as the Eldred group.
Grand Rapids had among its assets a large amount of cash, and the book value of its stock was substantially in excess of the option price. However, the Eldred group became interested primarily in acquiring only the operating asset of Grand Rapids and had formulated a plan to organize a new corporation to take over such assets, assume the liabilities of Grand Rapids, and give debentures of the new corporation in payment. Before this plan could be presented to Kahn, he died on April 24, 1945.
Although the Eldred group had considerable resources among themselves, and at one time had considered buying the stock of Grand Rapids under the option, they decided to seek outside financial assistance in their plan to acquire merely the operating assets of Grand Rapids. The Eldred group discussed the matter in length with Carlson.
Carlson knew that E. G. Davies has ‘gone into a number of deals‘ of this nature and that petitioner, by reason of its comparatively large capital and small income, was in a favorable tax position since it could make a profit without incurring excess profits tax liability. Carlson, therefore, arranged for a meeting between E. G. Davies and Eldred. The meeting was held in San Diego in the morning of April 26 or 27, 1945; Carlson, E. G. Davies, and Eldred were present. Eldred had never heard of E. G. Davies or petitioner prior to Carlson's suggestion that the desired financing might be obtainable from that source. At that meeting, E. G. Davies knew that Eldred was acting for himself, Barnes, Dawson, and Goff.
The plan of the Eldred group was there explained to E. G. Davies. Under...
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