Portland Mfg. Co. v. Comm'r of Internal Revenue
| Decision Date | 15 April 1971 |
| Docket Number | Docket Nos. 3862-68— 3868-68. |
| Citation | 56 T.C. 58 |
| Parties | PORTLAND MANUFACTURING COMPANY, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frederick H. Torp and Harry S. Chandler, for the petitioners.
Lee A. Kamp and Joseph M. Wetzel, for the respondent.
1. By December 1962, PMC had advanced a total of $2,987,000 to MFP which had been operating at a considerable loss for the prior 14 months. A mortgage on all MFP's assets in the amount of $1,800,000 had been given to PMC as partial security for the advances. A projection of income in November revealed that MFP could not possibly be operated at a profit under prevailing conditions, and MFP proceeded to wind up its affairs. PMC, in December 1962, wrote down the debt of MFP in the amount of $2,365,000 which was the difference between the amount owed and the estimated salvage value of M.F.P's assets. On its 1962 income tax return, PMC deducted the amount of the write-down as representing the amount of partial worthlessness of MFP's debt. Held, deduction allowed, respondent exceeded his discretion under sec. 166(a)(2), I.R.C. 1954.
2. PMC owned a 50-percent interest in a joint venture. The other 50 percent was owned by Simpson Redwood Co., a corporation. Additionally PMC and Simpson each had a one-half interest in Springfield Lumber Mills, Inc. A separation of interests was desired by the two owners. There occurred a series of transactions, including a capital contribution, and a corporate separation, carried out over a short period of time, at the termination of which, on Jan. 2, 1962, PMC owned all the stock of Springfield and Simpson owned all of what had been the joint venture. Held, the events were in substance one transaction in which PMC exchanged its interest in the joint venture for Simpson's portion of the Springfield stock; and PMC realized taxable gain on the transaction. Held, further, the value of the Springfield stock received by PMC determined.
Respondent has determined deficiencies in the income taxes of Portland Manufacturing Co. of $402,131 for the taxable year ended December 31, 1959, and $569,040.75 for the taxable year ended December 31, 1962. It has also be determined by respondent that the petitioners Annabelle A. Houser; Duane Autzen; Thomas E. Autzen; Thomas Edward Autzen, Duane Autzen and United States National Bank of Oregon, Trustees U/W Thomas John Autzen, Deceased; Elizabeth J. Rossman; and the Autzen Foundation are liable for the above-stated deficiencies as transferees of Portland Manufacturing Co.
We must decide two issues in this case. We are to determine whether Portland Manufacturing Co. sustained a partial business bad debt loss in 1962 deductible under section 166(a)(2).2 Secondly, we are to decide whether a series of transactions occurring over a 5-day period from December 29, 1961, to January 2, 1962, should be treated as a single transaction wherein Portland Manufacturing Co. is deemed to have traded to Simpson Redwood Co. its interest in a corporation held jointly with Simpson Redwood Co. in exchange for Simpson's one-hald interest in a joint venture operated by the two parties. If this second issue is decided against the petitioner, we must go on and decide the value of the interest allegedly received.
Portland Manufacturing Co. (hereinafter referred to as PMC) is a corporation that was organized on May 8, 1901, under the laws of the State of Oregon. PMC at the time of the filing of the petition herein had its principal place of business in Portland, Oregon., and filed its U.S. corporate income tax returns for the taxable years here in issue with the district director of internal revenue at Portland, Oreg. PMC was completely liquidated on January 29, 1965.
The individual petitioners herein are:
+--------------------------------------+
¦Name ¦Docket No. ¦
+-------------------------+------------¦
¦Annabelle A. Houser ¦3863-68 ¦
+-------------------------+------------¦
¦Duane Autzen ¦3864-68 ¦
+-------------------------+------------¦
¦Thomas E. Autzen ¦3865-68 ¦
+-------------------------+------------¦
¦Thomas John Autzen, Trust¦3866-68 ¦
+-------------------------+------------¦
¦Elizabeth J. Rossman ¦3867-68 ¦
+-------------------------+------------¦
¦The Autzen Foundation ¦3868-68 ¦
+--------------------------------------+
The individual petitioners are transferee-stockholders of PMC and, to the extent of any tax liability of PMC determined in these proceedings, are, pursuant to section 6901 of the Internal Revenue Code of 1954, liable for the amount of PMC's tax liability so determined.
Duane Autzen (hereinafter referred to as Autzen) began his association with PMC in 1946, and became its president in 1955. In addition to operation responsibility for the Portland manufacturing Plant of PMC he assumed responsibility for the management of Springfield Lumber Mills, Inc., a sawmill operation in which PMC had a 50-percent interest. From July 12, 1954, until June 27, 1963, he was also a director and a principal operating officer of Silver Tip Logging Co. Autzen was a director of Nicolai Door Manufacturing Co. from August 5, 1953, until September 1, 1961, and of Purdy Brush Co. from November 28, 1950, until the latter part of 1953. From 1963 until 1965 he served on the Advisory Committee to the U.S. Forest Service for the Mt. Hood National Forest.
John B. Taylor (hereinafter referred to as Taylor) has been a certified public accountant since 1942. He became a director and secretary of PMC in 1953. He was president of the Oregon Society of Public Accountants in 1952.
1. Partial Bad Debt Issue
On September 17, 1959, PMC, together with Henry A. Buehner and A. E. Hurl, organized a corporation under the laws of the State of Montana known as Montana Forest Products, Inc. (hereinafter referred to as MFP), with a total authorized capital of $600,000, consisting of 6,000 shares of $100 par value stock. During the year 1962, the shareholders were as follows:
+-------------------------------------------+
¦Name ¦Number of paid-up shares ¦
+----------------+--------------------------¦
¦PMC ¦1,000 ¦
+----------------+--------------------------¦
¦Henry A. Buehner¦1,000 ¦
+----------------+--------------------------¦
¦A.E. Hurl ¦130 ¦
+----------------+--------------------------¦
¦Total shares ¦2,130 ¦
+-------------------------------------------+
The purpose of incorporating MFP was to construct and operate a sawmill in Montana together with the required timber and logging operation incident thereto. Prior to building a sawmill at Philipsburg, Mont., MFP had preliminary investigations made by consulting foresters as to the availability of timber for the proposed sawmill. The sawmill that was constructed at Philipsburg, Mont., was one of the finest designed mills on the West Coast at that time, incorporating all modern ideas in lumber manufacturing.
During the years 1960 to 1962, inclusive, the stockholders and one William Birkenfeld made the following cash advances to MFP on open account:
On February 19, 1962, Duane Autzen, William Birkenfeld, Henry A. Buehner, and John B. Taylor, were respectively elected president, vice president, secretary, and treasurer of MFP. These four were also on the board of directors of the company. On the same date the stockholders and directors of MFP authorized execution of both a promissory note to PMC in the amount of $1,800,000 for previous advances made by PMC and a mortgage covering all of the assets of MFP to secure payment of the note. The promissory note and mortgage were duly executed on February 19, 1962. The mortgage was recorded on February 27, 1962, in the mortgage records of Granite County, Mont. The promissory note provided for a maturity date of March 1, 1963, together with interest on the $1,800,000 at the rate of 6 percent per annum. The note did not provide for periodic payments of the $1,800,000 and the amount was not due until the maturity date of the note. After the execution of the promissory note and mortgage, PMC continued to make open advances to MFP and a portion of these advances was used to pay all taxes and insurance.
The sawmill started operations in October 1961. Personnel problems developed immediately. MFP experienced a labor turnover of approximately 50 percent, and had difficulty attracting key personnel such as a mill superintendent. By November 1962 labor turnover had stabilized at a low level due to the fact that local mines had closed down. The problem of obtaining key personnel continued however.
The anticipated log costs and the projections of operating income and expenses for the MFP operation were based in part upon projections of the Forest Service with respect to the quantity and quality of timber in the Philipsburg area to be purchased from the Forest Service. After operating the mill for a short period, it became apparent that the Forest Service projections were inaccurate as to both quantity and quality, with the result that the actual production...
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