Maine Steel, Inc. v. United States

• Decision Date: 23 June 1959
• Docket Number: Civ. No. 5-50.
• Citation: 174 F. Supp. 702
• Parties: MAINE STEEL, INC., v. UNITED STATES of America.
• Court: U.S. District Court — District of Maine

174 F. Supp. 702

MAINE STEEL, INC., v. UNITED STATES of America.

Civ. No. 5-50.

United States District Court D. Maine, S. D.

June 23, 1959.

COPYRIGHT MATERIAL OMITTED

Vincent L. McKusick, Portland, Me., Carl J. Marold, Boston, Mass., Jotham D. Pierce, Portland Me., for plaintiff.

Peter Mills, U. S. Atty., Portland, Me., Rufus Stetson, Jr., Sp. Atty., Tax Division, Dept. of Justice, Washington, D. C., for defendant.

GIGNOUX, District Judge.

This is an action brought pursuant to the provisions of 28 U.S.C.A. § 1346(a) (1) to recover $299,803.02 of Federal excess profits taxes, with interest, paid by plaintiff for the fiscal year ended March 31, 1945. The net amount sought (after adjustment for related deficiencies in income taxes and declared value excess profits taxes) is some $274,700. The Commissioner has tentatively conceded a net overpayment of such taxes of some $122,300, so that the amount at issue is approximately $152,000.

Since part of the claimed overpayment results from the carry back to the fiscal year ended March 31, 1945 of a net operating loss sustained by plaintiff in its fiscal year ended March 31, 1947, the amount of which is in issue, the amounts of plaintiff's net income, excess profits tax net income and excess profits tax credit for both years are involved. Except for the minor issues referred to below, the determination of these amounts turns principally upon the tax cost or basis of that portion of the assets sold by plaintiff in fiscal year 1947, comprising plaintiff's plant and equipment at South Portland, Maine, which plaintiff acquired from its predecessor, Maine Steel Products Co. (hereinafter called "Products"), on April 5, 1937 when plaintiff was organized. (These assets will be hereinafter called the "1937 Assets".)

Most of the facts were presented in a Stipulation of Facts, and the Court finds the facts as stipulated. Plaintiff also presented oral testimony at a hearing on April 7 and 8, 1958, relating chiefly to the transaction by which plaintiff acquired the 1937 Assets and the value of those Assets at the time of their acquisition.

At the Pre-Trial Conference, the parties agreed that the issues which this Court is called upon to determine are:

1. Determination of the basis of the 1937 Assets:

(a) Whether the transaction by which plaintiff acquired the 1937 Assets from Products was "tax free" under either Section 112(b) (4) or Section 112(b) (5) of the Internal Revenue Act of 1936, 49 Stat. 1679, 26 U.S.C.A. § 112(b) (4, 5), so that under Section 113(a) (7) or (8) of the 1939 Code, 26 U.S.C.A. (I.R.C.1939) § 113(a) (7), (8), plaintiff's basis of such Assets for the purpose of determining depreciation and gain or loss on their disposition and for computing its excess profits tax credit would be fixed with reference to their basis in the hands of its predecessor.

(b) If it is determined that the transaction by which plaintiff acquired the 1937 Assets from Products was not tax free:

(i) what was the fair market value of the 1937 Assets at the time of their acquisition by plaintiff;

(ii) whether the aggregate amount of the money and property paid-in components used in determining the excess profits tax credit of plaintiff was $65,500 as determined by the Commissioner, or whether, as plaintiff contends, the aggregate of these components was the sum of $170,861.67 (the amount of the excess of all assets, other than the 1937 Assets, transferred to plaintiff over the liabilities assumed by plaintiff on April 5, 1937) plus the fair market value of the 1937 Assets as determined by the Court.

2. Whether the basis of other assets owned by plaintiff may be reduced to reflect depreciation which the Commissioner contends was improperly allowed in previous years, which are closed, with respect to the 1937 Assets.

3. Whether plaintiff was entitled to deduct in its fiscal year ended March 31, 1945 $12,500 which it paid during that year as Federal capital stock taxes for the capital stock tax year ended June 30, 1944 rather than $2,500 paid the following year for the capital stock tax year ended June 30, 1945.

4. Whether for the fiscal year ended March 31, 1947 plaintiff was entitled to a deduction of $6,225.25 for vacation pay to union employees under union contract, which amount had been accrued at the close of that fiscal year with respect to vacations in the following year.

5. Whether the Commissioner incorrectly determined that a loss sustained by plaintiff in the fiscal year ended March 31, 1947 on account of abandonment of a patent was $828.50 rather than $2,403.80.

6. Whether, in determining the amount of plaintiff's net income for the fiscal year ended March 31, 1945 and plaintiff's unused excess profits tax credit for the fiscal year ended March 31, 1947 available as a carry back to the fiscal year ended March 31, 1945, the Commissioner erred in failing to give effect to the carry back of the net operating loss incurred in the fiscal year ended March 31, 1946, to the fiscal years ended March 31, 1944 and March 31, 1945.

(Defendant reserved the right to object to the determination of Issue No. 6, or any part thereof, on the grounds of variance, if any, from the claim for refund and any rights which it may have under the applicable statutes of limitations.)

The parties further stipulated that after the Court has determined the foregoing issues, the parties will, by agreement, if possible, submit computations pursuant to the Court's determination showing the correct amount of the net overpayment of excess profits taxes for the year 1945 to be entered as a judgment. It was also stipulated that if the parties are unable to agree as to the amount of such overpayment, either of them may file with the Court a computation of the amount believed to be in accordance with the decision and request that the Court determine the correct amount of such overpayment and enter its judgment accordingly.

Briefs have been filed by the parties, and oral argument was heard on March 23, 1959. The Court will now consider the stipulated issues in the order in which they are listed above.

Issue No. 1—Basis of 1937 Assets

The principal amount at issue turns upon a determination of the proper tax basis of the 1937 Assets because such basis (a) determines the amount of gain or loss realized by plaintiff on the sale of the 1937 Assets in the fiscal year ended March 31, 1947, which in turn affects the amounts to be carried back to 1945; (b) governs the amount of the deduction for depreciation allowable with respect to the 1937 Assets from the time of acquisition, and particularly for the fiscal years ended March 31, 1945 and March 31, 1947; and (c) has a major effect upon the determination of plaintiff's excess profits tax credit with respect to both fiscal years ended March 31, 1945 and March 31, 1947.

The dispute over the proper tax basis of the 1937 Assets arises from the manner in which they were acquired by plaintiff from Products in 1937. Plaintiff has fixed the basis of such Assets with reference to their basis in the hands of Products, asserting that the transaction by which it acquired the Assets was tax free under either Section 112(b)(4) (exchange of property by one corporation in pursuance of a plan of reorganization solely for stock or securities in another corporation) or Section 112(b) (5) (a transfer to a corporation controlled by the transferor), with the result that Products' basis of such Assets was carried over to plaintiff under Section 113 (a) (7) or (8). Defendant contends that the transaction was not tax free, so that the basis of the 1937 Assets to plaintiff was their fair market value as of the time of acquisition, which the Commissioner has determined to be zero.

Plaintiff contends that defendant is in error in regarding the transaction by which it acquired the 1937 Assets as taxable and that the fair market value of the Assets at the time of acquisition therefore need not be determined. If it should be determined that the transaction in question was not tax free and that the basis of such Assets is to be fixed with reference to their fair market value, then plaintiff asserts, in the alternative, that the 1937 Assets had substantial value, and plaintiff has introduced testimony as to their value.

The essential facts relating to the acquisition can be summarized as follows: Plaintiff is a Maine corporation, which was organized on April 5, 1937 to take over the assets of Products, also a Maine corporation. Since 1928 Products had been engaged in the manufacture of marine hardware and snow plowing equipment at South Portland, Maine. On March 1, 1933 Products, in addition to amounts owed trade creditors, was indebted to Fidelity Trust Company of Portland, Maine, three other Maine banks, New England Public Service Company and New England Industries, Inc. in the total amount of some $425,800, plus interest. New England Industries, Inc., an industrial subsidiary of New England Public Service Company, owned all of the First Preferred Stock and a majority of the Common Stock of Products. Fidelity, which was the principal creditor of Products and the only secured creditor, had not reopened after the March, 1933 bank holiday, and Mr. Robert Braun had been appointed its Conservator on March 18, 1933. As of March 1, 1933, Products' indebtedness to Fidelity was in the principal amount of $252,000, of which $78,000 was secured by mortgage. This indebtedness was appraised in the Conservator's inventory at only $20,000.

Sometime in 1933, shortly after Mr. Braun's appointment as Conservator, Mr. George Soule, then President and General Manager of Products, approached Mr. Braun to ascertain whether a settlement could be made with Products' creditors which would permit the business to continue and permit Mr. Soule and five associates (all of whom were employees of Products, but none of whom were stockholders) to acquire an equity interest in the business. Informal negotiations...