Pomeranz v. Commissioner
| Decision Date | 06 February 1980 |
| Docket Number | Docket No. 3147-73. |
| Citation | 1980 TC Memo 36,39 TCM (CCH) 1010 |
| Parties | Robert E. Pomeranz and Annie L. Pomeranz v. Commissioner. |
| Court | U.S. Tax Court |
Philip B. Whiting, for the petitioners. Gary F. Walker, Paul J. Weiss, Jr., and Stephen L. Robbins, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioners' income tax as follows:
Year Deficiency
1966 .................. $29,414.48
1967 .................. 77,756.48
1968 .................. 45,411.00
1969 .................. 32,783.00
These deficiencies arise from petitioners' deductions from income and the carryback of alleged net operating losses resulting from their purchase, pursuant to prior agreement, of corporate stock at a price greater than its market value. In addition, petitioners amended their petition to claim a refund of $38,846.41 for the taxable year 1968, based upon alleged net operating loss carrybacks from 1970 and 1971.
The issues for decision are: (1) whether and when petitioners sustained any recognizable loss within the meaning of sections 165 and 2671 with respect to the Clarkton Mills transaction; (2) the character and proper year of deduction of losses of petitioner Robert E. Pomeranz with respect to the Sparkle Mills transactions; (3) the character and proper year of deduction of losses of petitioner Robert E. Pomeranz from the Roxanne Mills transactions.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners were residents of Sanford, N.C., on the date the petition herein was filed. They filed joint income tax returns on the cash basis for the taxable years 1966 through 1969 with the Director, Southeast Service Center, Chamblee, Ga. Their cash basis joint returns for 1970 and 1971, as well as their cash basis amended returns for those years, were filed with the Director, Internal Revenue Service Center, Memphis, Tenn.
Petitioner Robert E. Pomeranz (hereinafter Pomeranz) was educated and trained as a mechanical engineer. In 1946, he became the sole general partner, with an inactive limited partner, in a North Carolina limited partnership named Roberts Company, which manufactured parts for cotton-spinning frames. In 1953, the partnership purchased all the outstanding shares of the General Foundry and Machine Co., a North Carolina corporation which manufactured farm machines. The companies were combined into said corporation, which thereafter changed its name to Roberts Company (Roberts). Roberts expanded into moderizing and overhauling spinning frames and later began manufacturing spinning and twisting frames. It also became engaged in engineering and developing complete plans for new and rebuilt spinning equipment, including study of work loads, floor layouts for yarn mills, and operating data.
Roberts made its initial public offering of stock in 1957, but Pomeranz was still the majority shareholder in a fairly closely held situation. In 1964, the complexion of the board changed with the addition of Julius Abernathy. Abernathy, who became chairman of the executive committee, was responsible for the private placement of 230,000 shares of common stock and $5,000,000 in debentures of Roberts. This group of investors, represented on the board by Abernathy, had a financial interest in Roberts exceeding that of Pomeranz.
Pomeranz, during the years in question, was in the trade or business of being a paid employee of Roberts. He served as its chairman, president, chief executive officer, and general manager. He was also its chief engineer and designer and played an important role in its sales efforts. Although there had been discussion by the board of hiring an additional executive to help run the company, Pomeranz' job was in no danger at any time during the period when the transactions involved herein took place. Nor did Pomeranz believe or have reason to believe that any such danger existed during such periods. Pomeranz' salary and bonus compensation from Roberts during the years in issue were:
Year Compensation
1966 ............. $53,625
1967 ............. 50,000
1968 ............. 48,000
1969 ............. 48,000
1970 ............. 16,500
In order to smooth out the cyclical sales pattern in textile machinery, Pomeranz conceived of the "turnkey" mill as a potentially profitable activity of Roberts and/or its subsidiaries. A turnkey project was one in which all elements of a textile spinning mill were completed by Roberts or one of its subsidiaries. Roberts conducted feasibility studies and arranged for community grants, mortgage loans, and government financing. It also handled site selection, building design and construction, machinery selection and installation, selection and training of operating personnel, and establishment of production and quality standards. The concept envisioned that once the owner was given the key, he need only turn it and the mill would be ready to run.
Roberts was the first American textile machinery manufacturer to build entire mills in this fashion when it began to do so in 1960. At first, the mills were built for specific purchasers. In 1965, the first mill was built on speculation, i.e., without a commitment by a purchaser to acquire the same, but a purchaser was found prior to the installation of the machinery. Following that period, however, several more mills, some speculative, were constructed due to Pomeranz' efforts. In part, the building of mills on speculation was designed to keep the unit cost of machinery down, so that, if and when the demand for Roberts' machinery declined, the company could continue to manufacture machines and install them in new, speculative turnkey projects.
Roberts used two wholly owned subsidiaries in constructing and selling the turnkey mills. Roberts Engineers, Inc., acted as the project manager in designing and constructing the mills as well as supervising the plant start-up. Millcraft Corporation (Millcraft) arranged the financing for these plants and machinery. An attempt by Millcraft to go public in 1967 failed due to the small number of subscribers. Had it been successful, Millcraft would have taken over the turnkey mill development from Roberts. Pomeranz was neither an officer nor director of Millcraft.
Roberts' published financial statements were on a consolidated basis which included its subsidiaries.
Until they could be sold, Millcraft controlled the operations of the speculative mills through wholly owned subsidiaries. Most members of Roberts' board of directors were continually concerned that operating these mills, and thereby competing with Roberts' customers, presented a conflict of interest. The board, therefore, was at all times desirous of having the speculative mills disposed of as promptly as possible.
After experiencing fluctuating profits and losses from 1957 through 1963, Roberts showed rapidly increasing sales and profits in 1964, 1965, and 1966.2 Sales slowed down in 1967, as Roberts was planning another public stock underwriting. In order to offset the sales decline, preserve Roberts' image as a growing company, and remove the company from being in competition with its customers, the board ordered Pomeranz to make sure Millcraft sold the two speculative turnkey mills which it then operated by the end of fiscal 1967 (December 2, 1967). Both mills were sold December 1, 1967, for approximately $5.7 million, contributing almost $1.3 million to profits for the year.
As of the end of each year indicated, the issued and outstanding common shares of Roberts and the number of shares owned by Pomeranz of record and beneficially were as follows:
Total Roberts Roberts Co
Co. Issued and Common
Year Outstanding Shares Owned
End Common Shares by Pomeranz
1966 ......... 1,052,177 285,466
1967 ......... 1,160,026 291,925
1968 ......... 1,460,026 273,525
1969 ......... 1,460,026 170,932
At least as of March 15, 1968, Pomeranz was deemed a "parent" of Roberts, within the meaning of the regulations of the Securities and Exchange Commission. The over-the-counter quotations for Roberts' shares at the dates indicated were as follows:
Quarter Ending Bid Asked
4/ 1/68 ............ 15¾ 16¼
7/ 1/68 ............ 23¼ 23¾
9/30/68 ............ 20 7/8 21 3/8
12/31/68 ............ 24 3/8 24 7/8
4/ 1/69 ............ 15¾ 16¼
6/30/69 ............ 12 3/8 12¾
9/30/69 ............ 9¼ 9¾
12/31/69 ............ 6½ 7
3/31/70 ............ 3 5/8 4
6/30/70 ............ 1 7/8 2 1/8
9/30/70 ............ 1¼ 1 5/8
12/30/70 ............ Not Listed
3/31/71 ............ Not Listed
6/30/71 ............ Not Listed
9/30/71 ............ Not Listed
12/31/71 ............ Not Listed
During the periods indicated, Roberts paid dividends on its common stock as follows:
Year Cash Stock
1957 ............ $.21
1958 ............ .10 8 percent
1959 ............ ...
1960 ............ ...
1961 ............ ... 10 percent
1962 ............ ...
1963 ............ ... ..........
1964 ............ ... ..........
1965 ............ ... 5 percent
1966 ............ .20 25 percent
1967 ............ .40 10 percent
1968 ............ .30 ..........
1969 ............ .10 5 percent
Issue 1. Clarkton Mills
Clarkton Mills, Inc. (Clarkton) had been incorporated in 1966 for the purpose of...
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