H.K. Porter Co. v. Comm'r of Internal Revenue
| Decision Date | 29 September 1986 |
| Docket Number | Docket No. 8237-84. |
| Citation | 87 T.C. 689,87 T.C. No. 42 |
| Parties | H. K. PORTER COMPANY, INC., AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Porter Australia, petitioner's wholly owned subsidiary, capitalized loans from petitioner and issued petitioner preferred stock. Approximately 10 years after Porter Australia issued the preferred stock, Porter Australia distributed all its assets in complete liquidation. The assets were distributed only with respect to the preferred stock, i.e., the assets did not cover the preferred stock's liquidation preference. No assets were distributed with respect to the common stock. HELD: The liquidating distribution was not in complete cancellation or redemption of all Porter Australia's stock. HELD FURTHER: Section 332 does not bar the recognition of petitioner's loss on the liquidation of Porter Australia. Commissioner v. Spaulding Bakeries, 252 F.2d 693 (2d Cir. 1958), affg. 27 T.C. 684 (1957), followed. C. J. Queenan, Jr., W. Henry Snyder, and David L. Ketter, for the petitioner.
Edward J. Laubach, Jr., for the respondent.
Respondent determined deficiencies in petitioner's 1978 and 1979 Federal income tax in the amounts of $105,281.00 and $745,161.00, respectively. After concessions, the issue for decision is whether section 332 applies to bar the recognition of gain or loss on the liquidation of H.K. Porter Australia, Pty., Ltd., petitioner's subsidiary.
This case was submitted under Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and the exhibits attached thereto are incorporated by this reference.
Petitioner, H. K. Porter Company, Inc., and Subsidiaries, is a Delaware business corporation. At the time it filed its petition in this case, petitioner's principal place of business was Pittsburgh, Pennsylvania.
In 1962, petitioner paid $219,336.00 for all of the outstanding stock of an Australian business corporation which manufactured saws, brake linings and clutch facings. Petitioner changed the name of the corporation to H. K. Porter Australia, Pty., Ltd. (Porter Australia) and loaned Porter Australia the funds it needed to operate. At all relevant times, petitioner owned all of Porter Australia's outstanding stock.
In 1966, Porter Australia authorized 400,000 shares of $1.00 par common stock and 1,000,000 shares of $1.00 par preferred stock. In 1968, it authorized 2,000,000 additional shares of preferred stock.
The preferred stock only had voting rights at meetings convened to wind up the business, reduce its capital, sanction the sale of a business, or consider any question affecting the rights and privileges of the preferred stock. It had a five percent, non- cumulative dividend, was redeemable and had a $2,452,000 liquidation preference over the common stock.
In September 1966, and again in December 1968, Porter Australia capitalized loans from petitioner of $1,000,000 and issued to petitioner 896,861 shares of preferred stock on each occasion. In November 1969, it capitalized loans from petitioner totalling $452,000 and issued petitioner 405,380 shares of preferred stock. 1 Porter Australia capitalized the loans because it was unable to ‘satisfy‘ the loans in the short term and it wanted to avoid any further claim by respondent that income should be allocated to petitioner by reason of those loans.
The chart below chronologically depicts when Porter Australia authorized/issued its new stock:
+------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦Loans ¦
+-----+--------------------+---------------------+-----------¦
¦Date ¦Authorized or issued¦Number of shares ¦capitalized¦
+-----+--------------------+---------------------+-----------¦
¦8/66 ¦Authorized ¦400,000 ¦(common) ¦--- ¦
+-----+--------------------+---------+-----------+-----------¦
¦ ¦ ¦1,000,000¦(preferred)¦--- ¦
+-----+--------------------+---------+-----------+-----------¦
¦9/66 ¦Issued ¦896,861 ¦(preferred)¦$1,000,000 ¦
+-----+--------------------+---------+-----------+-----------¦
¦11/68¦Authorized ¦2,000,000¦(preferred)¦--- ¦
+-----+--------------------+---------+-----------+-----------¦
¦12/68¦Issued ¦896,861 ¦(preferred)¦1,000,000 ¦
+-----+--------------------+---------+-----------+-----------¦
¦11/69¦Issued ¦405,380 ¦(preferred)¦452,000 ¦
+------------------------------------------------------------+
In October 1978, petitioner's board of directors voted to terminate Porter Australia's operations, because they were unprofitable, and dispose of all its assets. In May 1979, pursuant to Australian law, a certified liquidator was appointed to liquidate Porter Australia. In December 1979, petitioner surrendered all of its common and preferred stock in Porter Australia in exchange for a $477,876 liquidating distribution which included $10,288 to satisfy an intercompany receivable. Said distribution was not enough to cover the $2,452,000 liquidation preference of the preferred stock.
As of December 31, 1978, petitioner's adjusted basis in its 182,664 shares of Porter Australia's common stock was $249,981. As of January 1, 1979, petitioner's adjusted basis in its 2,199,102 shares of Porter Australia's preferred stock was $2,425,358. 2
On its 1978 and 1979 Federal income tax return, petitioner claimed losses with respect to its Porter Australia stock. In his notice of deficiency, respondent disallowed said losses because ‘under I.R.C. Sec. 332, no gain or loss is recognized on the receipt of property distributed in complete liquidation of a subsidiary corporation.‘
Section 332(a) 3 provides that a corporation shall not recognize gain or loss on the receipt of property distributed in complete liquidation of another corporation.
Section 332(b) provides:
SEC. 332(b). Liquidations to Which Section Applies.—For purposes of subsection (a), a distribution shall be considered to be in complete liquidation only if—
(1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends); * * *
(2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; * * *
Respondent contends that section 332 bars the recognition of petitioner's losses. Petitioner contends that section 332 is inapplicable and cites Spaulding Bakeries, Inc. v. Commissioner, 27 T.C. 684 (1957), affd. 252 F.2d 693 (2d Cir. 1958).
In Spaulding Bakeries, the taxpayer purchased all the outstanding common and preferred stock of Hazleton Bakeries, Inc. between 1930 and 1946. In 1950, Hazleton Bakeries was liquidated and the taxpayer received the assets distributed in the liquidation. The distributed assets failed to cover the preferred stock's liquidation preference. No assets were distributed with respect to the common stock. On its 1950 Federal income tax return, the taxpayer claimed a worthless stock deduction with respect to the common stock. Respondent disallowed the deduction because of section 112(b)(6), 4 the predecessor of section 332. The sole issue for decision was whether section 112(b)(6) barred the recognition of the taxpayer's claimed losses. Specifically, the issue focused on whether Hazleton Bakeries distributed its assets in complete cancellation or redemption of ‘all its stock.‘
In a court-reviewed opinion, we held that the phrase ‘all its stock‘ did not include ‘nonvoting stock which is limited and preferred as to dividends.‘ 27 T.C. at 688. Thus, Hazleton Bakeries' distribution, which was in respect of only the nonvoting preferred stock, was not a distribution in complete cancellation or redemption of all its stock.
The Second Circuit, in affirming this Court, stated:
The (taxpayer), it seems to us, argues with convincing force that the two classes of stock of Hazleton cannot be treated as though they were but one class, nor can the distribution in respect to the preferred stock be treated as though it were a distribution by Hazleton in respect to ALL its stock, all classes. It is convincingly argued as a matter of law, that there could be no distribution in respect to the common stock until the prior claim of the preferred stock had been satisfied. »252 F.2d at 697; Emphasis in original.†
Respondent, in essence, advances two arguments: 1) Spaulding Bakeries was erroneously decided and the decision should be reconsidered; and 2) even under the rational of Spaulding Bakeries, section 332 applies.
Respondent contends that Spaulding Bakeries was erroneously decided because: 1) the phrase ‘all its stock‘ was misread as referring to only voting or common stock and not to nonvoting preferred stock; 2) an inappropriate analogy was constructed between preferred stock and indebtedness; and 3) the legislative history suggests that section 332 applies when a liquidating distribution is made on preferred stock only.
‘all its stock‘
In Spaulding Bakeries we stated:
The statute is specific in that there must be a ‘distributi...
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