Frederick Steel Co. v. Comm'r of Internal Revenue, Docket No. 92949.

• Decision Date: 08 April 1964
• Docket Number: Docket No. 92949.
• Citation: 42 T.C. 13
• Parties: FREDERICK STEEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

42 T.C. 13

FREDERICK STEEL CO., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 92949.

Tax Court of the United States.

Filed April 8, 1964.

[42 T.C. 13]

William R. Seaman and William K. Hoskins, for the petitioner.

Gerald W. Fuller, for the respondent.

1. Losses incurred by corporation in beer and ice businesses, which were discontinued in 1952, and in carrying idle real estate previously used in those businesses, may not be used as carryovers for purposes of deductions in 1954 and later years against income realized from entirely different enterprise that was transferred to the corporation in 1954.

2. B, the sole stockholder in D and controlling stockholder

in F, caused the D stock to be transferred to F, which shortly thereafter liquidated D, and then sold some of the assets received in the liquidation. Held: In computing the holding period for those assets in F's hands there must be added the time that they were held by D. Sec. 1223(2), I.R.C. 1954. Rule of Kimbell-Diamond Milling Co., 14 T.C. 74,affirmed187 F.2d 718 (C.A. 5), inapplicable.

3. Payments in nature of commercial bribes by petitioner to purchasing agent of its largest customer held not deductible as ‘ordinary and necessary’ business expenses. There was no convincing evidence that such payments were normal, usual, or customary in the industry.

Respondent determined deficiencies in petitioners income tax as follows:

+--------------------+
                ¦Year ¦Deficiency ¦
                +------+-------------¦
                ¦1954 ¦$109,678.11 ¦
                +------+-------------¦
                ¦1955 ¦13,189.63 ¦
                +------+-------------¦
                ¦1956 ¦52,580.73 ¦
                +------+-------------¦
                ¦1957 ¦39,468.99 ¦
                +--------------------+
                

The issues are:

(1) Whether losses incurred in beer and ice business, discontinued in 1952, and in carrying idle real estate previously used in that business, may be used as carryovers to 1954 and later years in determining

[42 T.C. 14]

net operating losses to be deducted from income of entirely different enterprise that was transferred to the corporation in 1954.

(2) Whether petitioner's holding period of assets acquired upon liquidation of subsidiary must be computed by taking into account the time that such assets were in the hands of the subsidiary.

(3) Whether payments in the nature of commercial bribes made by petitioner to the purchasing agent of its largest customer are deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954.

FINDINGS OF FACT

Some of the facts and exhibits have been stipulated by the parties and are incorporated herein by this reference.

Loss Carryover Issue

Petitioner, a corporation organized under the laws of Ohio, with its principal place of business in Cincinnati, Ohio, filed its income tax returns for the years in question (1954-57) with the district director of internal revenue at Cincinnati. Its business is that of a ‘finished steel jobber.’ Abe Byer of Cincinnati owns 17,917 of its 18,000 outstanding shares of stock, most of which he acquired in 1952, as hereinafter set forth.

Petitioner's former name was Cleveland Home Brewing Co. Prior to 1952 it was engaged in Cleveland, Ohio, in the business of brewing and selling beer and, to a considerably lesser extent, manufacturing and selling ice. Its beer business had resulted in large operating losses and was discontinued in January 1952. Its 18,000 outstanding shares of stock were then owned by a number of persons, prominent among them being its president, A. L. DeMaioribus, his brother, and other members of his family. Disharmony existed among the stockholders.

At some time prior to March 10, 1952, the corporation entered into a contract with the Effron Auction Co. of Cincinnati, hereinafter referred to as Effron, whereby the latter agreed to auction the corporation's assets, except the iceplant. These assets consisted of: Approximately 3 1/2 acres of land, in a mediocre to poor section of east side Cleveland; 97,000 to 100,000 square feet of single-story, single-purpose, and multistory buildings, ranging from 5 years to 35 years in age; and equipment, the general status of which was good. The real estate consisted of the main plant (brewery), a bottle house, a garage building, an office building, and the iceplant.

Harold K. Hirschberg, a vice president of Effron, participated in the negotiations for the auction contract. He was an acquaintance of many years of Abe Byer, a Cincinnati businessman who owned

[42 T.C. 15]

substantially all of the stock of at least several corporations which were engaged in various businesses. Shortly after Effron had obtained the contract to sell the assets of Cleveland Home Brewing Co., Hirschberg called Byer's attention to the possibility of buying the stock in that corporation for less than $300,000, and, based upon his appraisal of its assets, he told Byer that he felt that ‘if the deal could be purchased for approximately $300,000 or less,‘ Byer could make a quick $200,000 or $250,000 profit.

The corporation had net operating losses from prior years in excess of $400,000, and Byer learned of the possibility of a net loss carryover.

On March 10, 1952, Sidney C. Brant, acting as trustee for Byer, entered into an agreement with A. L. DeMaioribus and another stockholder whereby Brant agreed to purchase, through an escrow agent, the stock of Cleveland Home Brewing Co. at a price of $15 per share. The remaining stockholders were to be notified of the proposed purchase, and any of them similarly desiring to sell their stock could deposit their certificates with the same escrow agent. The purchaser reserved the right to rescind the agreement if he could not purchase at least 90 percent of the outstanding stock. This agreement provided, in part, as follows:

The stockholders further warrant that the corporation has good title to all assets listed on the balance sheet of said corporation, and that the real estate is free, clear, and unincumbered, except for current taxes as shown on the balance sheet, and that the corporation may continue to use the real property of said corporation for its present uses, and that proceedings are not in effect to limit the rights of the corporation to its present use of real estate or to change zoning of the real estate to a more restricted use than presently authorized.

The purchaser understands that the corporation has an outstanding contract with Effron Auction Company to auction assets of the company as provided in said contract, and officers and directors agree that in all matters in the conduct of said sale wherein the corporation has discretionary rights that no decisions will be made without the concurrence of purchaser. The stockholders agree that the purchaser may send a representative to remain at the company until this transaction is concluded, which said representative shall exercise joint control with the stockholders.

An understanding existed between DeMaioribus and Byer that after March 10, 1952, Byer was to be in control of Cleveland Home Brewing Co. Hirschberg, after March 10, 1952, considered himself as working for Byer. The auction was held thereafter, in March or Paril 1952.

The machinery and equipment sold at the auction was reported by the auctioneer as sold for a gross price of $188,094.25. Against this amount the auctioneer charged commissions and expenses of $20,309.43. The gross selling price of $188,094.25 included sales of $23,766.38 which were bids on behalf of the corporation itself in respect of steel beer storage tanks, lines, cooperage, and office equipment, The

[42 T.C. 16]

reported net proceeds of the sale were $144,018.44, but these proceeds appear on the corporation's cash journal as receipts of $142,244.27. The iceplant was withheld from the auction sale.

None of petitioner's real estate was sold at the auction. However, offers totaling $142,000 were received for various pieces of this property; approximately $20,000, $90,000, and $32,000 were offered for the garage, bottle shop, and office building, respectively. These offers were rejected under orders of Byer because he felt they were too low and because he felt the properties should be sold in their entirety. There was no bid on the main plant and the iceplant was not open for bidding. The sale of...