Koppers Company v. United States

• Decision Date: 27 April 1964
• Docket Number: Civ. A. No. 62-985.
• Parties: KOPPERS COMPANY, Inc., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

229 F. Supp. 159

KOPPERS COMPANY, Inc., Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 62-985.

United States District Court W. D. Pennsylvania.

April 27, 1964.

John M. Crimmins, T. D. Taubeneck, Pittsburgh, Pa., for plaintiff.

Edward J. Snyder, Dept. of Justice, Washington, D. C., for defendant.

MARSH, District Judge.

This is an action for recovery of federal income taxes and interest in the amount of $25,089.41, paid by Koppers Company, Inc. (Koppers) as transferee of National Wood Treating Corporation (National) with respect to National's fiscal year ended April 30, 1956, together with interest according to law. (Pretrial stipulation, ¶ I.)

In our opinion, the plaintiff is entitled to a recovery.

The parties agreed upon the following factual issue to be litigated: Whether National, after the acquisition of its stock by Koppers in July, 1955, continued to carry on a trade or business substantially the same as it conducted prior to that acquisition. (Pretrial stipulation, ¶ II-1.)

If the affirmative of this issue were established, plaintiff would be entitled to carry over a claimed pre-acquisition net operating loss pursuant to § 382, 26 U.S. C.A.¹

However, the defendant attacked the amount of National's pre-acquisition net operating loss and presented a second factual issue: Whether National incurred a deductible net operating loss of $47,371.53² in its fiscal year ended April 30, 1955 in accordance with § 172, 26 U.S.C.A.

At the pretrial conference, the plaintiff objected to the interposition of the second issue for the following reasons: (1) it was raised in violation of the Order of Court Fixing Pretrial Procedure;³ (2) the defendant was barred from raising the issue by the statute of limitations, § 6501(a), 26 U.S.C.A.;⁴ (3) review of National's 1955 return is prohibited by § 6406, 26 U.S.C.A.⁵

In support of its first objection, the plaintiff pointed out that such an issue theretofore had not been mentioned although eight years had elapsed since National's 1955 tax return had been filed, that over one year had elapsed since the claim for refund was made, and that over six months had elapsed since suit was filed.⁶

Notwithstanding, the court granted the defendant the right to include the second issue and allowed six more weeks for additional discovery. The court requested that the pretrial stipulation be amended by the parties after the discovery was completed.⁷

The additional discovery was completed, but the pretrial stipulation was not amended which gave rise to further objections to issue No. 2 by the plaintiff at the trial.⁸

The trial objections were based on the failure of the defendant to comply with the pretrial order to amend the pretrial stipulation after the additional discovery had been completed, and on the ground that the statute of limitations barred the issue.

In our opinion, the plaintiff's objections should be overruled.⁹ Of course, after the additional discovery was completed, the parties jointly should have amended their pretrial stipulation to specify the amount of the net operating loss to be litigated, and, perhaps, the court was remiss in failing to insist upon such an amendment before trial in order that issue No. 2 might have been formally narrowed. However, we are satisfied that issue No. 2 was effectively narrowed not only at the conference but at the trial itself.

At the conference, defendant's counsel stated that it was contesting only a "specific portion" of the $47,371.53 net operating loss, which portion he described as "extraordinary selling expenses, some $7,300.00, more or less, of which is alleged to have been incurred in the alleged loss year" (i. e., the fiscal year ending April 30, 1955), and "some $20,700.00, more or less, which was alleged to have been incurred in prior years, that is, years ended April 30, 1954 and earlier."¹⁰

At trial defendant's counsel further narrowed that issue. He stated:

"The testimony to be introduced today is going to show that some $20,000 $20,734.17 of that $28,000 $28,089.17 was an expense which should have been accrued in prior years; that is, in 1951 through 1954.

"It is our contention that these expenses not having been accrued in those years, the deduction is lost and only the current portion of the loss of expense can be properly claimed as a deduction."¹¹ (Emphasis ours.)

Subsequently, he stated:

"We do in the first instance question so much of that net operating loss as represents a payment in the fiscal year ended April 30th, 1955 for extraordinary selling expenses which should properly have been accrued in prior years, and I think at this time it is only fair to point out that of this amount of some $28,000 of expenses, we understand that perhaps some $7,300 represents an expense incurred and properly accrued in the fiscal year ended April 30th, 1955, and that the balance — some $20,000 — which represents an alleged expense payment on behalf of earlier years is not a proper expense. It is an expense which should have accrued in the earlier years * * *."¹² (Emphasis ours.)

Therefore, although in the unamended pretrial stipulation, the defendant broadly contended in issue No. 2 that a deductible net operating loss of $47,371.53 was not incurred by National, and put plaintiff to its proof, at trial it effectively narrowed that issue to whether a portion of the net operating loss, comprised of certain itemized deductions totalling $20,734.17, was properly deductible.¹³

Although plaintiff had the burden of proving that the $20,734.17 represented a payment for ordinary and necessary business expenses so as to properly comprise a portion of the deductible net operating loss, it was the defendant who undertook to produce the testimony of William B. Land by way of deposition. His uncontradicted testimony established that the so-called "extraordinary selling expenses" were ordinary and necessary business expenses incurred for services actually rendered and beneficial to National, and that the payment for such expenses was reasonable. It is our opinion in the circumstances that these expenses were properly accrued in the year ending April 30, 1955.

From the evidence, stipulations, and exhibits, the court makes the following:

FINDINGS OF FACT

1. The plaintiff, Koppers Company, Inc., a Delaware corporation with its principal place of business in this judicial district, is the transferee of all the stock of National Wood Treating Corporation, a Delaware corporation, which at all times pertinent to this action had its principal place of business at Oroville, California.

2. The defendant is the United States of America.

3. A deficiency of $25,089.41 with respect to the income tax liability of National for the fiscal year ending April 30, 1956, was assessed against Koppers. The assessment was paid by Koppers to the defendant on January 8, 1960. On December 28, 1961, a claim for refund was duly filed. The claim for refund has not been allowed, and six months elapsed from the date of filing the claim until commencement of this action.

4. On July 25, 1955, Koppers acquired all of the stock of National from the Georgia Pacific Corporation. On that date, Koppers by purchasing the stock of National owned a percentage of the total fair market value of the outstanding stock of National which was at least 50 percentage points more than Koppers owned on May 1, 1955, the beginning of National's taxable year. § 382(a) (1) (A) (i), Title 26 U.S.C.A.

5. Prior to July 1, 1955, the Georgia Pacific Corporation had purchased all of the stock of National.

6. Also, by July 1, 1955, the Georgia Pacific Corporation had purchased from Feather River Pine Mills, Inc. (Feather River) wood products¹⁴ consisting of poles, posts, and lumber which had been stored by Feather River on the property of National at Oroville, California.

7. On or shortly after July 25, 1955, Koppers also purchased from Georgia Pacific "inventory", the value of which was approximately $1,000,000.00 (T., p. 28).

8. Pursuant to a plan of liquidation and dissolution, National was liquidated on December 31, 1955 (Ex. D).

9. For several years prior to the acquisition of its stock by Koppers and continuing up to the date of acquisition, National, at its plant in Oroville, was engaged in the business of treating various wood products such as telephone poles, posts, and lumber.

10. Prior to the acquisition by Georgia Pacific, 90% of the wood products stored on National's property belonged to Feather River, and National was engaged in treating these wood products and selling them for Feather River.

11. After these wood products were purchased by Georgia Pacific Corporation, National treated and sold for Georgia Pacific's account.

12. After these wood products were purchased by Koppers, National treated and sold for Koppers' account (T., p. 27).

13. After the acquisition of the stock of National by Koppers, National purchased merchandise for sale in the amount of $564,513.66, consisting predominantly of wood products, a portion of which it treated and sold (Ex. D).

14. National's plant consisted, inter alia, of an office building and other miscellaneous buildings, two treating cylinders, pumps, motors, storage and mixing tanks, a pole peeling machine, a planer and incising machine, trucks, and other pertinent equipment and land for storage (Ex. 2 and Ex. D).

15. The wood treating industry in which National was engaged is defined in the 1958 Census of Manufacturers (Ex. E, p. 24C-2) as follows:

"2491 — Wood Preserving

"This industry comprises establishments primarily engaged in treating wood, sawed or planed in other establishments, with creosote or other preservatives to prevent decay and to protect against fire and insects. This industry also includes the cutting, treating, and selling of poles, posts, and piling, but establishments primarily engaged in manufacturing other wood products which they may also treat with preservatives, are not

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