Martin Ice Cream Co. v. Comm'r Of Internal Revenue, Tax Ct. Dkt. No. 1477-93

CourtUnited States Tax Court
Citation110 T.C. No. 18,110 T.C. 189
Docket NumberTax Ct. Dkt. No. 1477-93
Decision Date17 March 1998

110 T.C. 189
110 T.C. No. 18


Tax Ct. Dkt. No. 1477-93


Filed: March 17, 1998

Patricia Y. Taylor and Clare W. Darcy, for respondent.

Frank Agostino, Alan G. Merkin, Mary Ann Perrone, and Susan M. Flynn, for petitioner.


110 T.C. 191

BEGHE, JUDGE: Respondent determined the following deficiency and additions to tax:

                | | |Additions to Tax| |
                |Year|Deficiency|Sec. 6653(a)(1) |Sec. 6661|
                |1988|$477,816 |$23,891 |$119,454 |

In so doing, respondent determined that Martin Ice Cream Co. (MIC or petitioner) recognized taxable gain of $1,430, 340 on the distribution of stock of its newly created subsidiary, Strassberg Ice Cream Distributors, Inc. (SIC), to one of petitioner's two shareholders, Arnold Strassberg (Arnold), in redemption of his 51-percent stock interest in petitioner. Shortly before trial, we granted respondent's motion for leave to amend answer to allege that a subsequent sale of assets to the Haagen-Dazs Co., Inc. (Haagen-Dazs), by Arnold and SIC should be attributed to petitioner under Commissioner v. Court Holding Co.., 324 U.S. 331, 89 L. Ed. 981, 65 S. Ct. 707 (1945).

We reject respondent's attempt to apply Court Holding, although we uphold respondent's original determination that petitioner recognized gain on the redemption of Arnold's stock in petitioner. We find that petitioner's gain is substantially less than the gain determined by respondent. We reject respondent's imposition of an addition to tax under section 6653(a)(1)but uphold the addition to tax for substantial understatement under section 6661. 1


Some of the facts are stipulated and are so found. MIC is a New Jersey corporation whose principal place of business was Bloomfield, New Jersey, when it filed its petition.

MIC was incorporated in 1971 as a wholesale ice cream distributor, with Martin Strassberg (Martin) as its sole shareholder. MIC was a C corporation from 1971 through 1986. On December 30, 1986, MIC filed with the Internal Revenue Service a Form 2553, Election by a Small Business Corporation, which took effect on November 1, 1987. As a

110 T.C. 192

result of the election, the accounting period of MIC was changed, commencing January 1, 1988, from an October 31 fiscal year to the calendar year.

Soon after World War II, Arnold, Martin's father, a high school mathematics teacher, began a part-time business after school hours, selling ice cream products wholesale to stores in Newark, New Jersey. During summer vacations, Arnold expanded his coverage to small stores and ice cream parlors on the Jersey Shore. By 1960, Arnold had incorporated his own company, Arnold's Ice Cream, and was engaging full time in the wholesale distribution of ice cream. In the 1960's, Arnold began to develop relationships with the owners and managers of several supermarket chains when he conceived an innovative packaging and sales campaign that used bright colors and catchy slogans to market ice cream products to supermarkets for resale to consumers. Ice cream had hitherto been sold by supermarkets to consumers as an undifferentiated product in large containers and multiserving packages with plain brown wrappers. Arnold subsequently developed other packaging ideas for ice cream products that helped supermarkets sell ice cream products under their private labels. Even with different kinds of packaging, supermarkets marketed ice cream to consumers mainly on the basis of price. In the late 1960's, Arnold had a falling-out with his major supplier, Eastern Ice Cream, which forced Arnold's Ice Cream into bankruptcy.

In 1971, Martin and Arnold organized MIC as a part-time business, with one delivery truck, distributing ice cream to small grocery stores and food service accounts (restaurants, hotels, and clubs) in northern New Jersey. Martin joined the business after having completed virtually all requirements for a Ph.D. in statistics and after spending several years doing operations research and statistical analysis as an employee of large corporations. In 1975, Martin began working in the ice cream distribution business full time. During most of the 1970's, Arnold owned no stock in MIC because he wished to avoid the claims of creditors of Arnold's Ice Cream. In 1979, Arnold became a 51-percent shareholder in MIC, and Martin's interest was reduced to 49 percent. At no time did Arnold or Martin have an employment agreement with MIC.

In 1974, Ruben Mattus (Mr. Mattus), the founder of Haagen-Dazs, asked Arnold to use his ice cream marketing

110 T.C. 193

expertise and relationships with supermarket owners and managers to introduce Haagen-Dazs ice cream products into supermarkets. Haagen-Dazs manufactured an entirely new range of "super-premium" ice cream products that were differentiated from the competition by both higher quality and higher price. Haagen-Dazs had initially marketed its products to small stores and restaurants for single-serving on-premises consumption. Haagen-Dazs had made only minimal inroads into the supermarkets, and now Mr. Mattus wanted to intensify his marketing efforts in that sector. Mr. Mattus asked for Arnold's help because he had been unable to convince the supermarkets to carry his products; they saw super-premium ice cream as too expensive for a retail setting designed for off-premises consumption.

Arnold, as the first distributor of Haagen-Dazs ice cream to supermarkets, sparked a revolution in the retail sale of ice cream. Arnold and Haagen-Dazs tapped a hitherto hidden demand for a super-premium ice cream in supermarkets by consumers who were willing to pay higher prices for higher quality. By the late 1970's, MIC was distributing ice cream products, including Haagen-Dazs ice cream, to four major supermarket chains, Pathmark, Shop Rite, Foodtown, and Acme in New York, New Jersey, Connecticut, and Pennsylvania (the supermarkets) and to smaller grocery stores. However, neither Arnold nor MIC ever entered into a written distribution agreement with Haagen-Dazs or Mr. Mattus.

Arnold was so successful that in the late 1970's or early 1980's Mr. Mattus invited Arnold to become his partner in a planned expansion of Haagen-Dazs' supermarket sales to the West Coast. Arnold declined the offer and continued to use MIC as his corporate vehicle to distribute Haagen-Dazs products in New Jersey and adjacent areas.

Martin did not support or participate in Arnold's efforts to expand ice cream distribution to the supermarkets. Martin disliked the social activities necessary to developing and sustaining personal relationships with supermarket owners and managers--activities that Arnold thrived on. Martin preferred to manage day-to-day operations at the MIC warehouse, arriving at work as early as 3 to 4 a.m. to supervise the loading of MIC's delivery trucks for delivery to the supermarkets

110 T.C. 194

and the small stores. 2 Martin employed route salesmen to expand and maintain wholesale distribution of ice cream, primarily Haagen-Dazs, to small independent grocery stores and food service accounts in New Jersey and New York. Martin did little or no solicitation himself. Arnold did not participate in Martin's development of the business of wholesale ice cream distribution to small grocery stores and food service accounts, focusing instead on the supermarkets.

In 1985, the Borden Co. (Borden) retained Arnold to use his contacts with the supermarkets to put Borden's ice cream products into supermarket freezers. Arnold worked as a broker for Borden, personally earning commissions on Borden's sales of ice cream products to supermarkets, rather than as a distributor buying from the manufacturer and reselling to retailers. MIC did not participate in Arnold's work for Borden. Arnold had the ability to--and did--put Borden's ice cream products into supermarket freezers at a time when many of his original contacts from the 1960's and earlier had passed from the scene. By 1988, Arnold no longer had a business relationship with Borden.

At some time in the early to mid-1980's, Ben and Jerry's, a competitor of Haagen-Dazs in the manufacture and marketing of super-premium ice cream, asked Arnold to help obtain supermarket freezer space for its products. Haagen-Dazs had not objected to Arnold's work for Borden but told him that he could not continue to distribute Haagen-Dazs ice cream products if he were to distribute Ben and Jerry's ice cream products. Arnold thereupon terminated further contact with Ben and Jerry's.

In 1983, the Pillsbury Co. (Pillsbury) purchased Haagen-Dazs from Mr. Mattus. Pillsbury promptly initiated a business plan to consolidate the distribution of Haagen-Dazs ice cream products into its own distribution centers, with the goal of delivering directly to retail stores, especially large supermarket chains. Pillsbury believed it could deliver a uniformly higher quality...

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7 cases
  • Martin Ice Cream Co. v. Comm'r of Internal Revenue, 1477–93.
    • United States
    • United States Tax Court
    • March 17, 1998
    ...110 T.C. 189110 T.C. No. 18MARTIN ICE CREAM COMPANY, Petitionerv.COMMISSIONER OF INTERNAL REVENUE, RespondentNo. 1477–93.United States Tax Court.March 17, [110 T.C. 190] Frank Agostino, Alan G. Merkin, Mary Ann Perrone, and Susan M. Flynn, for petitioner. [110 T.C. 191] Patricia Y. Taylor a......
  • Kellen v. Commissioner, Docket No. 5429-00.
    • United States
    • United States Tax Court
    • January 22, 2002
    ...The Commissioner's failure to waive the addition to tax is reviewed by this Court for abuse of discretion. Martin Ice Cream Co. v. Commissioner [Dec. 52,624], 110 T.C. 189, 235 (1998). There is nothing in the record to suggest that petitioner ever requested that respondent waive the additio......
  • Finazzo v. Commissioner, Docket No. 5727-00.
    • United States
    • United States Tax Court
    • February 27, 2002
    ...The Commissioner's failure to waive the addition to tax is reviewed by this Court for abuse of discretion. Martin Ice Cream Co. v. Commissioner [Dec. 52,624], 110 T.C. 189, 235 (1998). There is nothing in the record to suggest that petitioners ever requested that respondent waive the additi......
  • Dickerson v. Comm'r of Internal Revenue, Docket No. 20029-08.
    • United States
    • United States Tax Court
    • March 6, 2012
    ...Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2005), aff'g T.C. Memo. 2003-212); see also Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16 (1998) (holding that the allocation of the burden of proof was immaterial because the Court's conclusions were based on the prepon......
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