Ruddick Corp. v. United States

• Decision Date: 25 February 1981
• Docket Number: No. 477-77.,477-77.
• Citation: 643 F.2d 747
• Parties: RUDDICK CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

643 F.2d 747

RUDDICK CORPORATION v. The UNITED STATES.

No. 477-77.

United States Court of Claims.

February 25, 1981.

James P. Parker, Washington, D. C., attorney of record, for plaintiff. William W. Goodrich, Jr., and Arent, Fox, Kintner, Plotkin, & Kahn, Washington, D. C., of counsel.

Donald H. Olson, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant. Theodore D. Peyser and Marc Levey, Washington, D. C., of counsel.

Before DAVIS, KASHIWA and SMITH, Judges.

ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, PLAINTIFF'S MOTION TO STRIKE, AND PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT

DAVIS, Judge:

At bottom this case presents a problem in the application of Section 482 of the Internal Revenue Code, 26 U.S.C. 482 (1954) (amended 1976), giving the Treasury Department certain discretion to allocate income between related corporations, but first we must decide whether Section 482 can be and has been invoked in this court.

I. Facts

On the cross-motions for summary judgment now before us the following are the facts on which both parties now agree:¹

Taxpayer Ruddick Corporation (Ruddick) is the parent (through a corporate reorganization) of R.S. Dickson and Company (RSD), a regional brokerage firm and dealer in the securities market. During 1968 RSD had a wholly-owned subsidiary, Ruddco, Inc. (Ruddco), which for a number of years had owned, as an investment, 52,638 shares of stock in American Credit Corporation (ACC), a company listed in the New York Stock Exchange. RSD caused Ruddco on October 25, 1968, to distribute to RSD as a dividend Ruddco's 52,638 shares of ACC stock. Three days later, on October 28, 1968, there occurred the corporate reorganization that created plaintiff Ruddick and made RSD a wholly owned subsidiary of Ruddick.² In December 1968 and January 1969 Ruddick directed the sale (to outsiders) by RSD of the ACC shares with a considerable gain.

At the time the ACC stock was distributed to RSD, Ruddco was a profitable company, taxable in 1968 and 1969 on any gain realized, but RSD had a large net operating loss carryforward (expiring due to the reorganization in 1970) that could be applied against a gain such as that from the later sale of the ACC stock. In fact taxpayer (and RSD) applied the gain from the sale of the ACC stock to this net operating loss.³ It is also admitted for the present that RSD needed, for purposes of the Securities and Exchange Commission and the Midwest Stock Exchange, certain net capital, a need which would be satisfied by the ACC stock.⁴

The Internal Revenue Service treated the gain from the sale by RSD (to outsiders) of the ACC stock as part of Ruddco's income rather than of Ruddick's (as parent and successor for these purposes of RSD). A deficiency in Ruddco's income taxes for the fiscal year ending September 28, 1969 was accordingly determined. This was paid, a refund claim filed and disallowed, and this refund suit filed.⁵

II. Invocation of Section 482.

The Government filed a motion for summary judgment that wholly relied on the power of the Commissioner of Internal Revenue under Section 482 of the Code to reallocate income between related corporations in order to prevent tax evasion (or avoidance) or clearly to reflect income. (At the time of the deficiency notice, the Service had not based its conclusion on Section 482 but on other interpretations of the transactions.) Taxpayer did not respond to the merits of the Section 482 position. Instead it moved to strike, asserting that the Internal Revenue Service had never applied Section 482 to the challenged tax and that the Department of Justice had no right of its own to invoke that provision in the absence of a Section 482 allocation by the Service.⁶

We do not detail the various charges and counter-charges because the upshot is that it has become indisputably plain that, before defendant's motion for summary judgment was filed, the relevant District Director (within the IRS) had actually invoked Section 482 "as an additional and/or alternative basis for attributing the gain on the sale of the American Credit Corporation ACC stock to Ruddco, Inc."⁷ Notice of this invocation was duly given to taxpayer. It makes no difference if, as taxpayer surmises, invocation here of Section 482 was made at the suggestion or instigation of the Department of Justice. Nothing bars the Service from accepting advice from the Department (which, of course, cannot legally compel the Service to follow its advice).⁸ Nor was it too late for the Treasury to invoke Section 482. The statute does not require such invocation before judicial proceedings; so long as the taxpayer, as here, has a fair and reasonable opportunity to challenge the Section 482 determination in the court suit, the Service can raise it and the Government can rely on it. Commissioner v. Transport Mfg. & Equipment Co., 478 F.2d 731, 734-36 (8th Cir., 1973); Nat'l Harrison Assoc. v. Commissioner, 42 T.C. 601, 617 (1964). Plaintiff has had that reasonable notice; invocation of Section 482 occurred before defendant's motion for summary judgment and plaintiff has had full notice and opportunity to respond fully to the point.⁹ By the same token it goes without saying that in this case the United States is not restricted to defending the refund suit only on the specific grounds raised in the original deficiency notice. See Eli Lilly & Co. v. United States, 178 Ct.Cl. 666, 676-677, 372 F.2d 990, 997 (1967) (per curiam); E. I. Du Pont de Nemours & Co. v. United States, 221 Ct.Cl. 333, ___, 608 F.2d 445, 454-55 (1979), cert. denied, 445 U.S. 962, 100 S.Ct. 1648, 64 L.Ed.2d 237 (1980); Commissioner v. Transport Mfg. & Equipment Co., supra.

It follows that plaintiff's motion to strike must be denied. Defendant can seek to rely in this suit on Section 482 which has been timely invoked by the Internal Revenue Service.¹⁰

III. Defendant's Motion for Summary Judgment

At the present stage, there is clear disagreement whether (i) a sale to strangers of the ACC stock was in contemplation when these shares were distributed in October 1968 by Ruddco to RSD and (ii) the concomitant October 1968 corporate reorganization was motivated, primarily or in lesser part, by tax motives tied to the then existence of RSD's operating loss. For that reason, defendant (as we understand its position on its summary judgment motion) accepts arguendo taxpayer's negative position on each of those issues. In like vein defendant also accepts arguendo at this point the business purpose stated for the transfer of the ACC shares from Ruddco to RSD — to enable the latter to continue to comply, after the reorganization, with the net capital requirements of the Midwest Stock Exchange and the S.E.C.

Accordingly, defendant does not now urge (in its summary judgment motion) that Section 482 can be properly used to prevent evasion or avoidance of taxes in this case; its contention is, rather, that the allocation made by the Service was necessary clearly to reflect the income of plaintiff, RSD, and Ruddco — a general objective likewise within the terms of Section 482¹¹ — regardless of the assumed absence of any tax taint, tax avoidance, or tax evasion purpose. In deciding that question we also have to postulate, as just pointed out, that there was a business purpose for the transfer of the ACC shares from Ruddco to RSD.

The first thing to note is that, where the clear-reflection-of-income branch of Section 482 is invoked, the presence of a business purpose or the absence of any plan to lessen taxes does not, in and of itself, exclude the operation of the provision. Eli Lilly & Co. v. United States, supra, 178 Ct.Cl. at 679-81, 372 F.2d at 998-99. The Treasury Regulations implementing Section 482 incorporate this theme when they provide (Treas.Reg. § 1.482-1(c)):

In determining the true taxable income of a controlled taxpayer, the district director is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income, deductions, credits, or allowances. The authority to determine true taxable income extends to any case in which either by inadvertence or design the taxable income, in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer. Emphasis added.

Hypothesizing for this motion the absence of tax avoidance or tax evasion and the presence of a business reason for the transfer of the ACC stock, the Government nevertheless insists that there was a distortion of income which the Service could remedy under Section 482. The overall objective of that provision "is to enable the IRS to treat controlled taxpayers as if they were uncontrolled." E. I. Du Pont de Nemours & Co. v. United States, supra, 221 Ct.Cl. at ___, 608 F.2d at 450; see Treas.Reg. § 1.482-1(b) and 1(c) (quoted above). Defendant then says that if Ruddco were uncontrolled it would not have transferred the ACC shares "for nothing" (as it did) but would have received the stock's fair value from an arm's length purchaser and accordingly would have received the large amount of gain now attributed to it by the Service under Section 482. Conversely, the gain to RSD (and to plaintiff) realized from the later outside sale by RSD resulted entirely from appreciation of the stock while in the hands of Ruddco. The Government then adds that the Service is not barred from utilizing Section 482 by the fact that the transfer from Ruddco to RSD was a "tax-free" dividend transaction;¹² for this it relies on a number of court decisions and Treas.Reg. § 1.482-1(d)(5), providing: "Section 482 may, when necessary to prevent the avoidance of taxes or to clearly reflect income, be applied in circumstances described in sections of...