Pacific Transport Company v. CIR

• Decision Date: 10 September 1973
• Docket Number: 71-1810.,No. 71-1754 to 71-1764,71-1754 to 71-1764
• Citation: 483 F.2d 209
• Parties: PACIFIC TRANSPORT COMPANY and Subsidiaries, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee. PACIFIC ATLANTIC STEAMSHIP COMPANY, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases). STATES STEAMSHIP COMPANY, etc., Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases). STATES STEAMSHIP COMPANY, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee. PORTLAND STEVEDORING COMPANY, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases). PACIFIC TRANSPORT LINES, INC., Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee. CALIFORNIA EASTERN LINES, INC., Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases). PACIFIC TRANSPORT COMPANY, and Subsidiaries, et al., Appellants-Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

483 F.2d 209 (1973)

PACIFIC TRANSPORT COMPANY and Subsidiaries, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee.

PACIFIC ATLANTIC STEAMSHIP COMPANY, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases).

STATES STEAMSHIP COMPANY, etc., Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases).

STATES STEAMSHIP COMPANY, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee.

PORTLAND STEVEDORING COMPANY, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases).

PACIFIC TRANSPORT LINES, INC., Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee.

CALIFORNIA EASTERN LINES, INC., Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee (two cases).

PACIFIC TRANSPORT COMPANY, and Subsidiaries, et al., Appellants-Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant.

Nos. 71-1754 to 71-1764, 71-1810.

United States Court of Appeals, Ninth Circuit.

August 16, 1973.

Rehearing Denied September 10, 1973.

Janet R. Spragens, Atty. (argued), Fred B. Ugast, Acting Asst. Atty. Gen., Scott P. Crampton, Acting Asst. Atty. Gen., Tax Div., Dept of Justice, K. Martin Worthy, IRS Chief Counsel, Meyer T. Rothwacks, Ernest J. Brown, Tax Div., Dept. of Justice, Washington, D. C., for appellant and appellant and appellee in No. 71-1810.

Valentine Brookes (argued), Richard A. Wilson, of Brookes, Maier & Wilson, San Francisco, Cal., for the appellees and appellants in No. 71-1810.

Before ELY and KILKENNY, Circuit Judges, and SKOPIL, District Judge.^*

OPINION

PER CURIAM:

These appeals and cross-appeals are prosecuted from decisions of the tax court involving corporate income taxes for the tax year 1958 and certain tax periods in 1957. The taxpayers consist of a group of affiliated steamship companies. The deficiencies arise from the reduction of a net operating loss claimed by the group in 1959, a year not in issue, and carried back to taxable periods in 1957 and 1958, two open years.

Factual Background

The essential facts are not in dispute. In 1956, and prior years, Dant & Russell, Inc. D & R, was a family owned corporation of the Dant family, with interests principally involved in the lumber and shipping areas. The shipping interests of the corporation were in the main managed by D. R. (Jack) Dant Dant, who owned 19% of its capital stock. On July 10, 1956, D & R owned all of the capital stock of States Steamship Company, a Nevada corporation Old States, and of Pacific Atlantic Steamship Company Pacat. Old States, in turn, owned all of the capital stock of Pacific Transport Lines, Inc., Portland Stevedoring Company and Quaker Line, Inc. Additionally, it controlled 43.66% of the stock of California Eastern Lines, Inc. Dant was the vice-president and general manager of Old States from 1950 to 1956.

The problems with which we are concerned on this appeal are centered on the purchase of the stock of Old States July 11, 1956 and its subsequent liquidation June 30, 1957 by a newly formed corporation named States Line, Inc. New States. New States was incorporated in Nevada on June 28, 1956, by Dant, who paid cash for all of its capital stock. New States then borrowed additional amounts from banks and other sources and with these funds purchased the stock of Old States. Dant's overall plan was for New States to liquidate Old States and acquire its assets within two years as contemplated by Section 334(b) (2) of the Internal Revenue Code 26 U.S.C. § 334 (b) (2). Old States was then continued as a wholly owned subsidiary of New States for slightly less than a year and then liquidated on June 30, 1957.

The purchase of Old States' stock by New States was part of a larger transaction involving the sale of all of the stock of D & R to a third party, Blythe & Company Blythe followed by a resale of the steamship interests of the corporation back to Dant. Blythe's negotiations to acquire the D & R stock commenced early in 1956, when Blythe entered into an option, purchase and escrow agreement with all of the stockholders of D & R, with the exception of Dant. The following June, Blythe and Dant signed what was known as a "pledge" agreement with the Bank of California in an effort to allow Blythe to acquire all of the stock of D & R and then sell to Dant the stock of Old States and Pacat. In line with this agreement, Blythe on July 10, 1956, acquired all of the stock of D & R and then caused that company to be dissolved. Blythe then caused Old States, whose stock it had acquired in the dissolution, to pay a dividend of $2,500,000.00. On the following July 11th, Blythe sold to Dant the stock of Pacat for $1,950,000.00 and New States, formed less than two weeks before by Dant, purchased all of the stock of Old States for $11,050,000.00.

As an outgrowth of these transactions, Dant personally owned all of the capital stock of Pacat and New States. New States, in turn, owned all of the stock of Old States, which owned Portland Stevedoring Company, Pacific Transport Lines and California Eastern Lines. Consequently, the liquidation of Old States into New States occurred less than two years after New States had purchased the former's stock and the transaction qualified under 26 U.S.C. § 334(b) (2). Likewise, the liquidation fell within the provisions of § 78.540, Revised Statutes of Nevada, which required New States to assume all of the liabilities of Old States.

All of the above transactions occurred subsequent to and were based upon, at least in part, the decision of the United States District Court for the District of Oregon, dated November 17, 1955, in which the court limited liability of Old States for the loss of cargo in connection with the loss on January 9, 1952, of the vessel S.S. PENNSYLVANIA, a cargo ship owned and operated by Old States, which was lost at sea in the Pacific with all of its cargo and crew. The litigation involving the loss of the lives of the members of the crew was settled by Old States prior to 1956. All parties appealed from the decision of the district court in connection with the loss of cargo. The decision of the district court was affirmed by the court of appeals in States Steamship v. United States, 9 Cir., 259 F.2d 458, on May 31, 1957. Worthy of comment is the fact that the judgment was affirmed approximately one month prior to the liquidation of Old States into New States on June 30, 1957. Then the eccentricities of the law threw the master plan into a tailspin. The parties filed petitions for rehearing. On November 15, 1957, the court of appeals did an about face, reversed its previous stand and held that Old States liability to shippers could not be limited. States Steamship Co. v. United States, 259 F.2d 458, 463. The problem faced by the court in exercising the feminine prerogative of changing its mind is exemplified by the closing paragraph on the second petition for rehearing, which we quote:

"In this effort to clarify our decision we believe we have at least somewhat improved upon the statements made in our November 15, 1957, opinion."

Certiorari was denied, States Steamship Co. v. United States, 358 U.S. 933, 79 S.Ct. 316, 3 L.Ed.2d 305 (January 12, 1959), 359 U.S. 921, 79 S.Ct. 579, 3 L.Ed.2d 583 (February 24, 1959). On remand to the district court, the case was settled for $1,455,394.00.

While the appeal was pending, Dant had been advised by his attorneys that: ". . . While no law suit is a certainty . . .", and that a large adverse judgment ". . . Must be reckoned with as a possibility. . . .", the chances of an affirmance of the district court's opinion by the court of appeals, so that Old States would not be liable for the cargo loss in excess of its insurance coverage, were about ". . . 75 to 80%." The tax court found that on the date of New States' acquisition of Old States' stock, the cargo loss liability was both contingent and remote and that the parties did not discount the stock purchase price to account for it.

While many other transactions occurred with and between the affiliated groups, we believe the above statement is sufficient for our purposes.

In their 1959 consolidated income tax returns, Pacific Transport Company and its wholly owned subsidiaries Pacat, New States, California Eastern Lines, Inc. and Portland Stevedoring Company, reported a net operating loss of $1,455,802.07. This loss was made up of $1,431,267.78 net operating loss claimed by New States, of which, in turn, the major component was $1,348,868.00 named as a deduction for payment of the judgment rendered against Old States. After the return was filed, three of the affiliated corporations claimed carrybacks, pursuant to §§ 172(a) and (b) of the Internal Revenue Code. Pacific Transport Company claimed carrybacks to September-December, 1957, and to 1958. New States claimed a carryback to January-September, 1957. Pacat claimed a carryback to January-September, 1957. Upon the request of IRS, all of the parties executed the usual form, Consent Agreements, to extend the statute of limitations for assessment with respect to the taxable period from 1957 and 1958, here involved. Insofar as here relevant, the Commissioner determined that the cargo loss payment made by New States was not an allowable expense deduction, but should be added to New States' basis in the assets of Old States, as an additional cost thereof. On the taxpayer's petition for redetermination of the deficiency in the tax court, it was held that New States should be permitted a current deduction in 1959 for the cargo loss payment. It is from this decision that the Commissioner appeals.

Issue

Simply stated, the issue presented is whether a payment made by a parent corporation in discharge of a contested tort liability, first asserted against a subsidiary...