HAWAIIAN TRUST COMPANY v. United States, Civ. No. 1619.
| Decision Date | 24 November 1959 |
| Docket Number | Civ. No. 1619. |
| Citation | 178 F. Supp. 637 |
| Parties | HAWAIIAN TRUST COMPANY, Limited, a Hawaii corporation, Trustee for the Creditors and Stockholders of Pacific Refiners, Limited, a dissolved Hawaii corporation, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Hawaii |
Anderson, Wrenn & Jenks, by Marshall M. Goodsill, Honolulu, Hawaii, for plaintiff.
Louis B. Blissard, U. S. Atty., Honolulu, Hawaii, for defendant.
While counsel for the plaintiff has shown considerable industry and ingenuity in presenting his arguments, that industry and that ingenuity have not availed to counterbalance the essentially tenuous character of his reasoning.
In contrast, the defendant's position is simple, clear, and based upon elementary logic, as well as being supported by statute law and the applicable Treasury Regulations.
The plaintiff seeks recovery of $109,692.18, representing the principal amount of income taxes alleged to have been illegally and erroneously assessed and collected for 1953 and 1955, plus interest paid thereon, amounting to $15,055.76, or a total of $124,747.94. In addition, the plaintiff claims that it is entitled to interest on the entire amount of principal and interest paid. In other words, there is presented the familiar problem of "interest on interest."
The amounts of the alleged overassessments and overpayments are claimed by the plaintiff to be as follows:
Year Principal Interest Total
1953 $ 58,472.39 $11,309.99 $ 69,774.38
1955 51,219.79 3,753.77 54,973.56
___________ __________ ___________
$109,692.18 $15,055.76 $124,747.94
The parties have stipulated that three issues are presented in this case, as follows:
I.
Can the net operating loss suffered by Hilo Gas Company, Limited, hereinafter Hilo Gas, in 1950 be carried forward by its parent, Pacific Refiners, Limited, hereinafter Refiners, on a consolidated return basis to 1953?
The plaintiff's position is that, under the plain terms of the statute (Section 141, Internal Revenue Code (hereinafter sometimes the Code) of 1939, 26 U.S.C.A. § 141) and the Consolidated Return Regulations, Refiners is entitled to carry forward the Hilo Gas 1950 loss as a consolidated net operating loss to 1953. It is contended that there was a sound business purpose for the acquisition of control of Hilo Gas by Refiners and that there was no tax evasion or avoidance purpose.
The position of the defendant is that the carry-forward can be denied because the "principal purpose" of the acquisition of control of Hilo Gas was tax evasion or avoidance within the meaning of Section 129 of the Code of 1939, 26 U.S.C.A. § 129, or because there was no "business purpose" for the acquisition or because there was no "economic loss" to the parent corporation.
II.
Can Refiners deduct in the year of its liquidation expenses of selling its capital stock?
The plaintiff's position is that these expenses are deductible in the year of complete liquidation.
The defendant contends that these expenses are not deductible in any year.
III.
Can Refiners deduct in 1955 Territory of Hawaii income taxes allocable to gain from the sale of its properties realized in 1955 but not recognized for Federal income tax purposes by reason of Section 337 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 337?
The plaintiff maintains that the Hawaii income taxes are deductible under Section 164(a) of the Internal Revenue Code of 1954 and that Section 265 of that Code is not applicable.
The defendant insists that Section 265 is applicable, and that for this reason the deduction for Territorial taxes was correctly disallowed.
The case was submitted to the Court on a stipulation of facts. Sharply abridged, that stipulation is as follows:
Refiners was organized as a corporation under the laws of Hawaii in 1949. It was dissolved on November 19, 1956, and the plaintiff was appointed Trustee for the creditors and the stockholders.
Refiners had an initial authorized capital of $250,000, represented by 250,000 shares of common stock of the par value of $1 each. Honolulu Gas Company, Limited, hereinafter Honolulu Gas, purchased at par the initial 250,000 shares of common stock of Refiners, and in 1949 distributed such stock as a dividend to the stockholders of Honolulu Gas.
After its organization, Refiners engaged in the merchandising of gas appliances, and commenced the construction of its refinery. To pay for that construction work, it borrowed $650,000 on short-term promissory notes. In May, 1950, Refiners sold to the public an additional 500,000 shares of common stock and $750,000 worth of 15-year, 6%, sinking fund debentures. The net proceeds of this issue were estimated at $1,225,445. In connection with this offering, Refiners incurred expenditures attributable to the issuance of its shares of common stock in the amount of $9,259.74.
In December, 1950, Refiners completed the construction of its refinery.
In April, 1951, Refiners sold an additional 750,000 shares of common stock to the public. The net proceeds from this issue were estimated at $734,400. In connection with this issue, Refiners incurred capital stock expenses of $21,418.88.
Refiners' principal business was the manufacture and sale of petroleum products and the distribution of butane—a form of liquefied petroleum gas—in Hawaii. The corporation was not a public utility, and none of its business was subject to regulation by the Public Utilities Commission of Hawaii, hereinafter the Commission.
Refiners entered into an oil and butane contract with Standard Oil of California, hereinafter Standard, in 1949, for a period of ten years for the purchase of petroleum and butane. The Hilo Gas Company, Limited, hereinafter Hilo Gas, after its conversion to butane air in 1951, used more than 500,000 gallons of butane annually, accounting for about one-third of the total butane sales of Refiners.
Hilo Gas was organized as a corporation in Hawaii in 1927. It manufactured gas from oil and distributed it through gas mains in Hilo, and was a public utility subject to regulation by the Commission.
In 1948-1949, Hilo Gas was in financial difficulty. In 1950, A. E. Englebright, who was then the general manager of Refiners, was approached by Orlando Lyman, the president and largest stockholder of Hilo Gas, for assistance in solving the problems of the latter company.
The proposition was made that Hilo Gas cease the manufacture of gas from oil and buy butane from Refiners, which Hilo Gas would then distribute through its gas mains in Hilo as a public utility. This would save manufacturing costs and reduce gas rates to a point where they might be competitive with electric rates.
The feasibility of the Hilo Gas plan depended to some extent on the condition of its gas mains. Englebright sent L. L. Gowans, chief engineer of Honolulu Gas, to Hilo to make a survey. Gowans reported that the gas mains were in adequate condition, and that it would be entirely feasible to distribute butane air mix in the Hilo Gas distribution system without too great a loss in leakage.
On August 7, 1950, Refiners proposed to Lyman that it supply Hilo Gas with butane at 16 cents per gallon. Refiners would also provide equipment and appurtenances for butane air installation at the Hilo plant for about $25,000, to be repaid by Hilo Gas through an additional 1 cent per gallon payment for all butane used in its system. Lyman, however, in addition wished to acquire the franchise for distribution of "Isle-Gas", Refiners' trade name for butane that it distributed in tanks or containers for use by rural customers, throughout the Island of Hawaii at the price quoted for use in the Hilo Gas mains.
After extended negotiations, on October 5, 1950, the Board of Directors of Refiners authorized the purchase by it of all the stock of Hilo Gas.
The Hilo Gas stock was purchased by Refiners rather than by Honolulu Gas, because Refiners, as the distributor of butane, had the primary interest in securing the Hilo market.
On October 25, 1950, the General Manager reported to the directors of Refiners that 96% of the stock of Hilo Gas had been acquired by Refiners—all but 164 shares. Refiners never acquired more than 1,872 of the 1,929 outstanding shares of the 7% preferred stock of Hilo Gas and did not acquire the last minority-owned share of the 8% preferred stock until shortly before the dissolution of Hilo Gas in 1956.
The total cost to Refiners of the Hilo Gas stock was $63,897.20.
Under Hawaiian law, no public utility may dispose of property connected with its duties without first securing from the Commission an "order" authorizing it to do so. Without such order, every such disposition of property shall be void. Section 104-18, Revised Laws of Hawaii 1955.
On October 20, 1950, Hilo Gas filed a petition with the Commission in which it recited that it proposed to sell all its assets, except those related to the appliance sales and liquefied petroleum gas business, to Honolulu Gas for approximately $60,000. The Commission, in an order filed on November 15, 1950, authorized Hilo Gas to sell its utility assets to Honolulu Gas for $64,000.
Hawaiian law requires that the sale of substantially all of the property receive the affirmative vote of three-fourths of all stock issued and outstanding and having voting power. Section 172-30, R.L.H. 1955. The stockholders of Hilo Gas authorized the sale of the Company's utility assets to Honolulu Gas and the sale of the appliance and liquefied petroleum gas business and assets to Refiners. On October 31, 1950, Hilo Gas executed a bill of sale transferring to Refiners for $18,500 the assets relating to the appliance sales and liquefied gas business.
On October 31, 1950, Hilo Gas and Honolulu Gas executed an...
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