Forrest Hotel Corp. v. Fly
| Decision Date | 22 May 1953 |
| Docket Number | No. 1327,1600.,1327 |
| Citation | 112 F. Supp. 782 |
| Parties | FORREST HOTEL CORP. v. FLY. |
| Court | U.S. District Court — Southern District of Mississippi |
Luther A. Smith, Hattiesburg, Miss., for plaintiff.
Joseph E. Brown, U. S. Atty., by Edwin R. Holmes, Jr., Asst. U. S. Atty., Jackson, Miss., for defendant.
In these consolidated actions, Forrest Hotel Corporation, the plaintiff in both, seeks to recover against the government a refund for taxes alleged illegally collected by the defendant from the plaintiff. The principal contention of the plaintiff is that the transaction, hereinafter specifically described, which occurred January 1, 1939, between Forrest Hotel Corporation and Maybar Corporation, was a sale or exchange and not a reorganization, merger or consolidation, under sections 112(b) (3), 112(g), and 113(a) (7) of the Internal Revenue Code; and hence plaintiff should be allowed to amortize the cost to it of acquiring through the transaction the leasehold interest of Maybar.
On March 21, 1949, plaintiff filed suit for refund of taxes alleged to have been illegally collected by the defendant from the plaintiff for the years 1942, 1943, and 1944, in the sum of $52,214.03, together with interest. On March 12, 1951, plaintiff filed a second suit, identical in form to the first but seeking a refund for taxes alleged illegally collected by the defendant from the plaintiff for the years 1945, 1946, and 1947. These consolidated actions present the same issues and were heard as one.
The Forrest Hotel Corporation was chartered under the laws of the State of Mississippi on September 26, 1928, with an authorized capital stock of $250,000, consisting of 2500 shares of seven percent cumulative preferred stock with a par value of $100 each and 5000 shares of common stock of no par value. Upon the payment of the par value of a share of preferred stock, there was also issued to the subscriber one share of common stock. At the time of its organization, the Forrest Hotel Corporation, hereinafter called Forrest, issued and sold 1987 shares of its preferred stock of the par value of $198,700, and also issued 1,987 shares of its common stock, for which it received no additional consideration. Soon after the incorporation of Forrest, there was organized under the laws of the State of Mississippi the Maybar Corporation, hereinafter called Maybar, with an authorized capital stock of $80,000, all of which was subscribed and paid for before Maybar began business.
Forrest was organized primarily for the purpose of building a hotel in the City of Hattiesburg, Mississippi. After its organization, Forrest issued and sold bonds in the principal sum of $250,000, $100,000 of which were in serial bonds, $10,000 of which matured annually, the balance of $150,000 maturing January 1, 1939. With the proceeds of the sale of the $198,700 in stock and the $250,000 bond issue, Forrest constructed a hotel building in Hattiesburg, Mississippi; and on December 11, 1928, entered into a contract with Maybar, under the terms of which Maybar leased the building for a period of twenty years at an annual rental of approximately $40,000. Maybar equipped the hotel and gave a chattel mortgage to Forrest on this equipment to secure the performance of the lease. This lease and the chattel mortgage securing it were transferred by Forrest to the trustee under the bond mortgage as security for the payment of the bonds. Some of the stockholders of Forrest were also stockholders of Maybar.
Maybar began the operation of the hotel under the lease contract, but in a short time it was found that this operation was unsuccessful, and Maybar began to default in the payment of the rentals due Forrest. As Forrest's only source of income was the rentals to be paid by Maybar, Forrest began to default in its obligations under the bond issue, so that in 1934 by agreement with the bondholders, the maturity date of all bonds was extended until January 1, 1939. The defaults by Maybar continued from year to year until January 1, 1939, at which time Maybar owed Forrest $148,014.16 in rentals. Substantially, the only property Maybar had with which to meet this obligation was the furniture, fixtures, and furnishings with which it equipped the hotel, and certain other assets of questionable value, all of which were carried on its books at a depreciated value of $38,300.52.
When Maybar began to default in the payment of its rental in 1932, Forrest each year charged off the amount of the deficit, so that as of January 1, 1939, the books of Forrest showed a surplus deficit of $68,542.28. Prior to January 1, 1939, the date of the maturity of all the bonds, various conferences were held between representatives of the bondholders, of Maybar, and of Forrest, in an effort to work out some plan by which the bonds could be extended and something salvaged for the stockholders of Forrest and Maybar. For various reasons, it was decided that it would not be wise for Forrest to foreclose its chattel mortgage and bring distress proceedings against Maybar.
On January 1, 1939, a plan was finally worked out between the bondholders of Forrest and the representatives of the two companies. Payment of the bonds was extended for a period of years, the stockholders of Maybar transferred all of their stock to a trustee for Forrest, so that Forrest became the sole stockholder of Maybar. Forrest, in turn, issued to the individual stockholders of Maybar a total of $40,000 par value of the preferred stock authorized by its charter, which had not theretofore been issued, together with 400 shares of its common stock, likewise authorized by its charter, which had never theretofore been issued. This stock was issued to the Maybar shareholders in proportion to the stock previously owned by them in Maybar, so that for each share of Maybar, the stockholders of Maybar received one-half share of preferred and one-half share of common of Forrest. After this was done, Maybar conveyed all of its physical assets to Forrest, these assets having a net book value of $38,300.52. Forrest assumed and promptly satisfied the liabilities of Maybar, except the liability to itself in the amount of $148,014.16. Since the date of this transaction Maybar has been for all intents and purposes fully liquidated, having no assets or liabilities and not having functioned as a corporate entity.
Although the entire debt of Maybar to Forrest, aggregating $148,014.16 for unpaid rentals from 1932 through 1938, had been charged off the books of Forrest as bad debts from year to year, the entire charge-off had not been used as a deduction for tax purposes. The first charge-off was in 1932, amounting to $28,223.97; but as a result of this charge-off and its operations that year, Forrest sustained a loss of $17,992.81, so that the amount of the charge-off used as a credit against tax liability was the difference, amounting to $10,231.16. Likewise, in 1933 the charge-off was $27,530.29; but as a result of its operations and this charge-off, Forrest sustained a loss that year of $15,237.61, so that only the difference was used as a credit against tax liability, this difference being $12,292.68. Putting it in statement form for these years through 1938, the charge-offs and credits are as follows:
Amount Used as
Credit Against
Total Charge-off Tax Liability
1932 $ 28,223.97 $10,231.16
1933 27,530.29 12,292.68
1934 30,164.39 13,721.28
1935 24,433.11 12,122.66
1936 15,247.66 15,247.66
1937 7,994.94 7,994.94
1938 14,419.90 14,419.90
___________ __________
$148,014.16 $86,030.18
The difference between the total charge-off and the amount used as a credit against tax liability is $61,983.98. In other words, in addition to the $40,000 of capital stock issued, Forrest forgave a debt due it, of which $61,983.98 had never been used by it as a credit against any tax liability.
The amount which Forrest now seeks to use as a credit against its tax liability for the years 1942 through 1947 includes this total charge-off of $148,014.16, and is computed as follows:
It is this $149,713.64 which Forrest claims was the cost to it of acquiring the lease, and which it seeks to amortize over the ten year period from 1939 to 1949.
On December 31, 1938 and 1939, Forrest's bonds aggregating $150,000 were still outstanding and were not paid until May 27, 1942. The bonds and interest were paid by Forrest out of the earnings of the hotel after Forrest took over its operation from Maybar.
For the year 1939 and subsequent years, Forrest filed its returns and paid its taxes on the assumption and representation to the Commissioner that in 1939 there was a reorganization, merger, or consolidation by and between Forrest and Maybar under sections 112(b) (3), 112(g) and 113(a) (7) of the Internal Revenue Code. When the taxing authorities proposed to tax Forrest for the years 1939 and 1940 on the theory that the transaction in 1939 was a sale and exchange resulting in a substantial taxable gain, Forrest filed a protest and briefs urging that the transaction be considered a tax-free...
To continue reading
Request your trial
-
Bell v. Harrison
...Co. v. United States, 53 F.2d 295, 71 Ct.Cl. 485; King Amusement Co. v. Commissioner, 6 Cir., 44 F.2d 709, 710; Forrest Hotel Corp. v. Fly, D.C., 112 F. Supp. 782, 790. The principal cases relied upon by the government in support of its merger theory are Boos v. Commissioner, 30 B.T.A. 882;......
-
Howard v. Commissioner of Internal Revenue
...denied 328 U.S. 838, 66 S.Ct. 1013, 90 L.Ed. 1613; Central Kansas T. Co. v. Commissioner, 10 Cir., 141 F.2d 213; Forrest Hotel Corp. v. Fly, D.C., 112 F.Supp. 782. It is true, as petitioner points out, that these cases may well be distinguished from the present transaction on the ground tha......