Greenstein v. Comm'r of Internal Revenue (In re Estate of Munter)
| Decision Date | 19 March 1975 |
| Docket Number | 1534-72.,Docket Nos. 8178-71 |
| Citation | 63 T.C. 663 |
| Parties | ESTATE OF DAVID B. MUNTER, DECEASED, ANDREW M. GREENSTEIN, MANUEL D. GOLDMAN AND SUZANNE M. COHEN, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT GERTRUDE M. DEMERER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Andrew M. Greenstein, for the petitioners.
John E. White, for the respondent.
Held: Recovery of previously expensed items in a liquidating sale is not protected from recognition by sec. 337. Therefore, the recovery is taxable under the tax benefit rule to the extent of the tax benefit, and petitioners are liable for the tax as transferees of the assets of the corporation.
Respondent determined a deficiency in income tax of Neat Laundry, Inc., for the taxable year 1967 in the amount of $75,190.16, and notified petitioners that the following liabilities, constituting their liability as transferees of the assets of the corporation, would be assessed against them:
+-----------------------------------+
¦Docket No. ¦Transferee liability ¦
+------------+----------------------¦
¦ ¦ ¦
+------------+----------------------¦
¦8178—71 ¦$75,190.16 ¦
+------------+----------------------¦
¦1534—72 ¦61,781.97 ¦
+-----------------------------------+
The issues for determination are: (1) Whether Neat Laundry, Inc., is required under the tax benefit rule to include in its 1967 income the amount received from the sale of its previously expensed rental items even though such sale was made pursuant to a plan of complete liquidation under section 337;1 and (2) whether the method of accounting employed by Neat Laundry, Inc., whereby the cost of rental items purchased and sold in 1967 was claimed as an expense deduction, clearly reflects its taxable income for 1967.
All of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, are found accordingly.
Petitioners Andrew M. Greenstein, Manuel D. Goldman, and Suzanne M. Cohen are the duly appointed and acting executors of the Estate of David B. Munter, who died on July 2, 1967, having been so appointed by the Surrogate's Court of Monroe County, N.Y., on July 26, 1967. At the time of the filing of the executors' petition with this Court, the office of the Estate of David B. Munter was located in Rochester, N.Y.
Petitioner Gertrude M. Demerer is an individual residing in Hallandale, Fla., at the time of the filing of her petition with this Court.
Neat Laundry, Inc. (hereinafter referred to as Neat), was a New York corporation organized under the laws of the State of New York on January 12, 1948, to engage, among other things, in the business of renting cleaned and laundered sheets, pillow cases, towels, table cloths, napkins, industrial and commercial uniforms and garments, wiping cloths and materials, other textiles and apparels, and in general to conduct an industrial and other laundry business.
Neat's customers consisted of restaurants, hotels and motels, various industrial users of wiping rags, walk-on mats and dust control devices, and those whose business required its employees to be appropriately clothed in industrial uniforms. A substantial amount of the rental business was handled pursuant to 1- and 2-year lease agreements with the number of linen items and garments furnished by Neat dependent solely upon the requirements of its customers. The useful life of most of the rental items was 12 to 18 months, depending on the type of item, the frequency of its cleaning, and the use to which it was put.
Neat timely filed a Federal income tax return for each of the calendar years 1965, 1966, and 1967 with the district director of internal revenue at Buffalo, N.Y., and reported gross receipts of $502,472.95, $592,436.29, and $497,708.20, respectively, derived from the following sources:
+--------------------------------------------------------------------+
¦ ¦1965 ¦1966 ¦1967 ¦
+--------------------------------+-----------+-----------+-----------¦
¦ ¦ ¦ ¦ ¦
+--------------------------------+-----------+-----------+-----------¦
¦Rental of linen supplies ¦$327,452.51¦$368,095.59¦$278,112.35¦
+--------------------------------+-----------+-----------+-----------¦
¦Rental of commercial garments ¦37,470.79 ¦82,254.87 ¦84,958.12 ¦
+--------------------------------+-----------+-----------+-----------¦
¦Towel rental ¦23,511.39 ¦26,312.10 ¦18,528.51 ¦
+--------------------------------+-----------+-----------+-----------¦
¦Rental of industrial uniforms ¦99,416.60 ¦95,593.47 ¦91,668.85 ¦
+--------------------------------+-----------+-----------+-----------¦
¦Dust control (wiping rags, etc.)¦8,701.60 ¦19,816.40 ¦24,210.11 ¦
+--------------------------------+-----------+-----------+-----------¦
¦College linen supply rental ¦5,786.00 ¦0 ¦0 ¦
+--------------------------------+-----------+-----------+-----------¦
¦Resale of items purchased ¦134.06 ¦2,363.84 ¦0 ¦
+--------------------------------+-----------+-----------+-----------¦
¦Rag sales ¦0 ¦0 ¦230.26 ¦
+--------------------------------+-----------+-----------+-----------¦
¦Total gross receipts ¦502,472.95 ¦595,436.29 ¦497,708.20 ¦
+--------------------------------------------------------------------+
For Federal income tax purposes, Neat charged the cost of the linen supplies and other rental items to an inventory account at the time they were purchased. When a rental item was first placed in service by delivery to the customer's place of business, the cost of such item was removed from the inventory account and charged to the applicable expense account. The inventory value reported by Neat in the balance sheets on its Federal income tax returns as of the end of each taxable year reflected the aggregate cost of the purchased rental items not yet placed in service.
On its Federal income tax returns for the taxable years 1965, 1966, and 1967, Neat claimed deductions for ‘Cost of Goods Sold’ in the amounts of $295,288.17, $294,739.40, and $181,514.30, respectively. Such deductions included the cost of rental items placed in service during the years, computed as follows:
Neat reported taxable income of $3,664.54, $37,324.41, and $2,321.34 on its Federal income tax returns for the taxable years 1965, 1966, and 1967, respectively.
On September 19, 1967, Gertrude M. Demerer and the executors of the Estate of David B. Munter, being all of the shareholders of Neat, and Suzanne I. Munter, Walter E. Loebmann, Andrew M. Greenstein, and Gertrude Demerer, being all the directors of Neat, unanimously voted to sell the corporate assets and completely liquidate Neat within 12 months. Following the adoption of the liquidation resolution, Neat entered into an agreement dated September 19, 1967, with Consolidated Laundries Corp.2 (hereinafter referred to as Consolidated) whereby Consolidated agreed to purchase Neat's linen supply and industrial uniform business for the sum of $350,250. Paragraph 4 of the agreement provided that the total purchase price of $350,250 was to be applied and allocated as follows:
(a) All laundry, office and plant machinery and equipment, all trucks and vehicles, all furniture and fixtures . . . . . $100,000
(b) All used and new linens and garments, laundry supplies, office supplies and stationery, towel cabinets, bags, hampers, and all other personal property used in connection with service to the customers of the Seller . . . . . $175,000
(c) All outstanding accounts receivable of customers presently being served by the Seller . . . . . $55,250
(d) All customer contracts, customer lists, customer cards, route books, route lists and all other books and records pertaining to service to customers together with all right, title and interest of the Seller in and to the name ‘Neat Laundry’ and all of the Seller's right, title and interest in and to the telephone number or numbers used by it . . . . . $20,000
The agreement of September 19, 1967, was supplemented and amended by a letter dated November 19, 1967, from Neat to Consolidated. Pursuant to the terms of this letter, the final selling price of the accounts receivable was reduced from $55,250 to...
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