Fairmont Aluminum Co. v. Commissioner of Int. Rev., 5943.

• Decision Date: 08 March 1950
• Docket Number: No. 5943.,5943.
• Citation: 180 F.2d 832
• Parties: FAIRMONT ALUMINUM CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

180 F.2d 832 (1950)

FAIRMONT ALUMINUM CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 5943.

United States Court of Appeals Fourth Circuit.

Argued January 4, 1950.

Decided March 8, 1950.

Earl Q. Kullman, New York City, (Kirlin, Campbell, Hickox & Keating, New York City, on the brief), for petitioner.

Virginia H. Adams, Special Assistant to the Attorney General (Theron Lamar Caudle, Assistant Attorney General; Ellis N. Slack and Helen Goodner, Special Assistants to the Attorney General, on the brief), for respondent.

Before PARKER, Chief Judge and SOPER and DOBIE, Circuit Judges.

PARKER, Chief Judge.

This is a petition by the Fairmont Aluminum Company to review a decision of the Tax Court of the United States; and the only material question presented relates to the affirmance of a deficiency assessment of corporate excess profits taxes for the year 1944. Taxpayer had included in the equity invested capital reported in its return an item of $950,000; and the exclusion of this item resulted in the deficiency assessment of which complaint is made. The facts may be stated briefly as follows:

Petitioner was organized in the year 1926 and acquired property which had formerly belonged to the West Virginia Metal Products Corporation. The balance sheet of that corporation of June 30, 1923 shows capital liabilities of $2,448,750, including first mortgage bonds of $1,448,405, and capital assets of $2,529,774.33 consisting of real estate, plant and development listed at $1,669,247.20 and machinery and equipment at $860,527.13. The property was sold under foreclosure proceedings on March 15, 1924 and purchased by a committee of first mortgage bondholders, who held it until September 1926, when they transferred it to the taxpayer corporation pursuant to a contract entered into after "arm's length" negotiations with one W. J. Adam acting in behalf of himself and other individuals known as the "Adam group."

The taxpayer was organized by the Adam group who paid into its treasury $200,000 for 2,000 shares of its preferred stock. Under the contract between this group and the bondholders committee, the latter sold and transferred to the taxpayer the property which had been acquired in the foreclosure proceedings two years before, with the exception of two pieces of real estate and certain personal property, for eight non-negotiable notes in the aggregate sum of $550,000, and 3,000 shares of the common stock of taxpayer, being 5% of the 60,000 shares of common stock issued. The notes were to be secured by mortgage on the property and were to bear 7% interest, with a provision that one should mature each year.

The taxpayer contends that the item of $950,000 included in equity invested capital in its 1944 excess profits tax return represents the value of the assets acquired by taxpayer from the bondholders' committee in excess of the $550,000 of notes executed at the time, its contention being that the property was worth $1,500,000. No evidence was offered in support of this valuation, however, except the 1923 balance sheet above mentioned. There is no proof that the property transferred to taxpayer exceeded in value the amount of notes executed; nor is there proof as to the value of the property shown on the balance sheet, nor as to what, if anything, was paid in cash or in property for the stock there listed. The Tax Court, without going into the question of reorganization, denied taxpayer's claim because of this lack of proof, saying:

"Though reluctant to base our conclusions on failure of proof, we can only conclude that the necessary proof has not been made. The balance sheet of the predecessor corporation, without more, cannot logically be regarded as proof of its basis. It does not disclose the manner of acquisition of the assets by the predecessor corporation, whether by issuance of stock or for cash or in connection with a reorganization. It does not indicate necessarily whether the figures were original cost or cost less adjustments or whether inventories were at cost or on some other basis. Moreover, the balance sheet in evidence before us is that of the old corporation, at an earlier date, whereas we are just here concerned with the basis of the property transferred to the petitioner. * * * Assuming that property was transferred for petitioner's stock, we are unable to say what the substituted basis thereof in the hands of the old corporation may have been. Undoubtedly no basis for some other amount of property, greater by an unknown quantity, can be used. We conclude that the petitioner has failed to show the substituted basis of the predecessor corporation. Doyle v. Mitchell Bros. Co., 247 U.S. 179 38 S.Ct. 467, 62 L.Ed. 1054; Hollywood, Inc., 10 T.C. 175; Stock Yards Nat. Bank v. Commissioner. 8 Cir., 153 F.2d 708.

"The same indefiniteness and difference between property inventoried in September 1926 and property covered by the balance sheet of ...