Nassau Lens Co. v. CIR
| Decision Date | 17 September 1962 |
| Docket Number | Docket 26946.,No. 309,309 |
| Citation | 308 F.2d 39 |
| Parties | NASSAU LENS CO., Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Harry PILDES and Sarah Pildes, Respondents. |
| Court | U.S. Court of Appeals — Second Circuit |
Bernard Jaffe, New York City (Axelrod & Jaffe) New York City, on the brief (Raymond Rubin, New York City, of counsel), for petitioner, Nassau Lens Co., Inc. and respondents, Harry Pildes and Sarah Pildes.
Harvey G. Schneider, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Joseph Kovner, Attys., Department
of Justice, Washington, D. C., on the brief), for the Commissioner.
Before LUMBARD, Chief Judge, and SMITH and MARSHALL, Circuit Judges.
Both the Commissioner and the corporate taxpayer (Nassau) have petitioned for review of a Tax Court decision holding that a deficiency asserted against the corporation was properly determined.1 35 T.C. 268 (1960).
In reaching its determination, the Tax Court made findings of fact. It found that Harry Pildes and his wife, Sarah Pildes, are residents of Brooklyn, New York. For a period of years prior to 1954 Harry Pildes operated two businesses as sole proprietorships: Pildes Company was a retail dispensing optician and Nassau Lens Company was a wholesale dealer in lenses and optical equipment.
On January 3, 1954, Nassau Lens Co., Inc., hereinafter referred to as Nassau, was organized as a New York corporation to take over the business of Nassau Lens Company, and Harry Pildes, as hereinafter described, became the sole stockholder of the corporation. Nassau filed its corporate income tax return for 1954, on an accrual basis, with the district director for the Lower Manhattan District of New York; Harry Pildes and Sarah Pildes filed their joint income tax return for 1954, also on an accrual basis, with the district director in Brooklyn.
On January 6, 1954, Harry Pildes made a formal written offer to Nassau suggesting the transfer of all of the assets of the predecessor proprietorship to Nassau and the acquisition of all of is securities (stock and debenture notes) by Harry Pildes. The offer was promptly accepted by Nassau's board of directors. The transaction was consummated by the actual transfer of the assets to Nassau, which in turn issued its stock and debenture notes to Harry Pildes in accordance with the foregoing offer.
The balance sheet of the predecessor proprietorship as of December 31, 1953, was as follows:
ASSETS
Cash on Hand ......................................... $ 10.00
Cash — Marine Midland Bank ........................... 18,517.54
Cash — Corn Exchange Bank ............................ 3,612.22
Accounts Receivable .................................. 40,173.40
Security and Deposits ................................ 10.00
Merchandise Inventory — December 31, 1953 ............ 160,752.74
Auto Equipment ............................ $2,767.55
Reserve for Deprec. ...................... 230.63 2,536.92
_________
Furniture and Fixtures .................... $7,069.38
Reserve for Deprec. ...................... 1,943.14 5,126.24
_________ ___________
Total Assets ...................................... $230,739.06
===========
LIABILITIES AND CAPITAL
Accounts Payable ..................................... $ 35,318.92
Sales Taxes Accrued .................................. 1,788.80
Taxes and Expenses Accrued ........................... 532.28
___________
Total Liabilities ................................. $ 37,640.00
Net Worth — December 31, 1953 ........................ 193,099.06
___________
Total Liabilities and Capital ..................... $230,739.06
===========
The Tax Court found no evidence that there was any change in any item in the balance sheet prior to the transfer of assets to the corporation. It also found that all of such assets were in fact so transferred, and that the inventory item was based upon a physical count and represented an accurate reflection of fair market value.
Harry's offer of January 6, 1954 divided the assets into three parts as follows:
The various steps outlined in the offer were formally carried out. All of the assets on the balance sheet were in fact transferred to Nassau, and Nassau assumed the liabilities of the proprietorship and issued its stock and debenture notes to Harry Pildes. The liabilities were stated to be $37,640, and on its balance sheet Nassau treated as paid-in surplus $23,112.74 of the transferred assets not allocated to any other item. On January 7, 1954, the 100 registered debenture notes, which by their terms were transferable on the books of the corporation only, were issued to Harry Pildes. Nassau was required to pay the registered holder $1,500 for each note (i. e., an aggregate of $150,000) on January 7, 1964, and the notes were redeemable prior to maturity at Nassau's election in accordance with the schedule in the offer. However, the registered holder had no right to call for redemption. No interest payments were provided for in the notes.
Nassau did not redeem any of the debenture notes during the taxable year 1954, and Harry Pildes did not receive cash during the taxable year by reason of the ownership of any of the debenture notes. In filing its 1954 corporate return, as the Tax Court said, The Commissioner disallowed this deduction.
In filing their 1954 joint return, Harry and Sarah Pildes did not include any income based on ownership of the debenture notes. The Commissioner determined a deficiency against them for failure to include $4,000 of taxable income based on the increase in the redemption value of the 100 debenture notes. During all of 1954 Harry Pildes was the sole stockholder of Nassau. He served as its president and his sister-in-law, Doris Philipson Press, was secretary-treasurer. The Board of Directors consisted of Harry, Doris, and Doris' husband, Lewis Press.
Upon these facts the Tax Court held:
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