Frelbro Corp. v. Comm'r of Internal Revenue
| Decision Date | 18 August 1961 |
| Docket Number | Docket No. 65552. |
| Citation | 36 T.C. 864 |
| Parties | FRELBRO CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
J. Sterling Halstead, Esq., for the petitioner.
Paul D. Barker, Esq., for the respondent.
Petitioner, an accrual basis taxpayer, prior to July of the calendar year in issue (1952), owned all the outstanding stock of Brown-Longyear Motors. It also derived income from rental of real estate and from other investments. Transactions between the two corporations (including declared but unpaid dividends) had been recorded in a system of intercompany accounts on the books of both corporations. The items in these accounts were discharged when and as Brown-Longyear felt it was in a cash position which enabled it to do so, there being no policy to clear the account periodically. In July 1952, incident to a sale of a portion of the Brown-Longyear stock, petitioner agreed to donate a sum to the ‘capital surplus' of Brown-Longyear; in October 1952, it issued its check as ‘donated surplus' to Brown-Longyear. Subsequent to the sale, but still in 1952, Brown-Longyear made payments to petitioner to discharge the open account between them. Petitioner filed a consolidated return including Brown-Longyear's income therein for the period 1947-1951. It filed a separate return for 1952 as did Brown-Longyear. Brown-Longyear had been formed by the statutory consolidation of two corporations each of which had accumulated deficits in their earnings and profits accounts at the time of the consolidation. Held:
1. Amount of payment to petitioner for 1952 determined. Portion of the 1952 payment which represented payment of dividends previously declared determined by applying the earlier payments on account to debts as they arose. The dividend portion of the payment was income in 1952.
2. The combined deficits of the predecessor corporations could not be used to offset earnings arising subsequent to consolidation to determine the balance in Brown-Longyear's earnings and profits account.
3. Petitioner could not file a consolidated return with Brown-Longyear for the full calendar year 1952 but must include in its 1952 return the net income of Brown-Longyear for that portion of the year during which Brown-Longyear was affiliated with it.
4. Brown-Longyear's operating loss for the remainder of 1952 could be used as a net operating loss deduction on petitioner's 1952 return to the extent of the income of Brown-Longyear included in that return.
5. Federal income taxes paid by Brown-Longyear on its erroneously filed separate return for the full calendar year 1952 are available as a credit against petitioner's 1952 Federal income tax liability.
6. On the facts, taking into account petitioner's dividend income above determined, petitioner was a personal holding company in 1952.
Respondent has determined a deficiency in income tax for the calendar year 1952 in the amount of $1,473.04 and a personal holding company surtax, under section 500,1 of $24,462.07. By amended answer he seeks to increase both amounts.
The issues presented for our determination are:
(1) What was the amount of the payment to petitioner in 1952 from Brown-Longyear Motors and what portion of it was a dividend to petitioner in that year?
(2) Whether Brown-Longyear had a credit balance in its earnings and profits account at the end of 1951 so as to constitute the above distribution a dividend;
(3) In any event, whether the dividend was required to be eliminated as an intercompany transaction;
(4) Whether petitioner, in its consolidated return for 1952, is entitled to a net operating loss deduction by virtue of the net operating loss incurred by its former subsidiary in the period immediately after petitioner and its subsidiary ceased to be affiliated corporations;
(5) Whether petitioner, in the determination of its liability for 1952, is entitled to credit for the tax paid by its former subsidiary subsequent to the affiliation on the latter's return for the full calendar year 1952;
(6) Dependent on the above issues, whether petitioner was a personal holding company in 1952.
Some of the facts have been stipulated and are so found.
Petitioner is a corporation, organized under the laws of the State of New York in 1931. It maintains its principal office in White Plains, New York. Its principal business activity is the holding of real estate for investment purposes. Its other activities are more fully described below. At all times, including 1952, it has kept its books and records on an accrual, calendar year basis and has so filed its Federal income tax returns. It filed such returns with the director of internal revenue for the fourteenth district of New York.
Prior to 1929, Fred L. Brown, as sole proprietor, had been operating agencies for the sale of Buick and Chevrolet automobiles. John K. Longyear had been working for him since February 1920. In 1929 the Buick franchise was incorporated under the name of Brown-Buick Corporation and in 1930 the Chevrolet franchise was separately incorporated under the name of Brown-Chevrolet Corporation (hereinafter referred to as Buick and Chevrolet, respectively). On December 31, 1941, these two corporations were consolidated, pursuant to the New York Stock Corporation Law, into Brown Buick-Chevrolet Corporation. When the two franchises were lost in 1944 the corporate name was changed to Brown-Longyear Corporation, hereinafter referred to as B-L, which name was retained through 1952. At all times material herein, prior to July 15, 1952, B-L's 310 outstanding shares were all held by petitioner.
Fred L. Brown died in April 1944 and Longyear assumed most of the management duties although at this time he had no ownership interest in the corporation.
In April 1945, however, Longyear entered into a management agreement with B-L under which he was to receive 50 percent of that corporation's net profits. At the same time petitioner granted him an option to purchase 51 percent of the B-L stock (158.1 shares) for $42,500.
When B-L declared a dividend it would charge its ‘earned surplus' account for the amount thereof and make a corresponding credit to an intercompany account with petitioner. This was a running account reflecting various transactions (including dividends) between B-L and petitioner. There was no practice to clear its balance periodically, said balance merely being altered as one party or the other made payments on account. Likewise, there was no policy to make cash transfers simultaneous with or corresponding to dividend declarations. B-L simply made cash transfers when and as warranted by its financial position. Thus, the account on B-L books reflected the following transactions from the start of 1949 to the end of 1951:
+---------------------------------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦ ¦Discharged by ¦“Dividends”¦ ¦
+-------+-----------+---------+----------+---------+-------------------+-----------+----------¦
¦ ¦ ¦ ¦ ¦ ¦transaction ¦owing ¦Other ¦
+-------+-----------+---------+----------+---------+-------------------+-----------+----------¦
¦Date ¦ ¦Debit * ¦Credit * ¦Credit ¦ ¦(balance) ¦credit ¦
+-------+-----------+---------+----------+---------+-------------------+-----------+----------¦
¦ ¦ ¦ ¦ ¦balance ¦ ¦ ¦ ¦(balance) ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦ ¦ ¦ ¦ ¦ ¦Dividends¦Other ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦credits ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦1/1/49 ¦Opening ¦ ¦ ¦10,613.46¦ ¦ ¦ ¦$10,613.46¦
¦ ¦balance ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦Through¦Other ¦$537.96 ¦ ¦10,075.50¦ ¦$537.96 ¦ ¦10,075.50 ¦
¦2/18/49¦debits ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦3/28/49¦Dividend ¦ ¦$45,437.48¦55,512.98¦ ¦ ¦$45,437.48 ¦10,075.50 ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦3/31/49¦Cash to ¦a ¦ ¦45,437.48¦ ¦10,075.50¦45,437.48 ¦0.00 ¦
¦ ¦petitioner ¦10,075.50¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦1949 ¦Other ¦1,362.16 ¦ ¦44,075.32¦$1,362.16¦ ¦44,075.32 ¦0.00 ¦
¦ ¦debits ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦ ¦Other ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦ ¦credits ¦ ¦2,025.00 ¦ ¦ ¦ ¦ ¦ ¦
¦ ¦† ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+-----------+---------+----------+---------+---------+---------+-----------+----------¦
¦1949 ¦Taxes ** ¦ ¦4,726.43 ¦50,826.75¦ ¦ ¦44,075.32 ¦6,751.43 ¦...To continue reading
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