SEAS SHIPPING COMPANY, INC. v. Commissioner
| Decision Date | 31 August 1965 |
| Docket Number | Docket No. 3105-62. |
| Citation | 1965 TC Memo 240,24 TCM (CCH) 1222 |
| Parties | Seas Shipping Company, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Richard H. Appert, 14 Wall St., New York, N. Y., and David Sachs, for the petitioner. George T. Rita, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined a deficiency in petitioner's income tax for the calendar year 1957 in the amount of $1,476,539.74.
The issues for decision are:
(1) What was the fair market value, for purposes of computing the correct amount of gain on sale, of a block of 300,000 shares of Moore-McCormack Lines, Inc., stock received by petitioner as part of the consideration for the sale of ten ships to Moore-McCormack Lines, Inc.?
(2) Is petitioner entitled to a deduction for depreciation on ten vessels in the year in which those vessels were sold for a price in excess of their adjusted basis as of the beginning of that year?
(3) Did the cost of "strapping" four vessels constitute a repair or a capital expenditure?
Some of the facts have been stipulated and are hereby adopted as our findings. The stipulation and exhibits attached thereto are hereby incorporated by reference.
Petitioner is a New York corporation with its principal office in New York City. Its 1957 calendar year income tax return was prepared on the accrual basis and filed with the district director of Internal Revenue for the then Lower Manhattan District. Petitioner was engaged, at the time of the transaction involved herein, in the business of owning and operating ships in international commerce.
Facts Related to the Sale of Ten Ships to Moore-McCormack Lines, Inc.
Reference is made to the report of the case of Moore-McCormack Lines, Inc. Dec. 27,538, 44 T. C. ___ (Aug. 27, 1965); all findings of fact in such report under the heading "Facts Common to This Case and to Docket No. 3105-62, Seas Shipping Company, Inc.," are hereby found and such findings are incorporated herein by this reference.
Prior to 1957 petitioner operated the Robin Line under a subsidy agreement with the Federal Maritime Board. In late 1956 negotiations between petitioner and the Maritime Board for renewal of the subsidy agreement broke down and petitioner determined that it would have to sell its fleet of ships. Petitioner wished to sell all its ships to a single purchaser who could continue with its established trade routes and would employ the petitioner's employees.
After the agreement with Mooremac was reached the parties applied to the Maritime Board for approval of the proposed sale. In its letter of approval, the Maritime Board referred to the Mooremac stock as to be "issued to Seas at $30.00 per share."
The petitioner objected to this language in the Maritime Board's letter and, together with Mooremac, sent a telegram to the Board requesting that the letter of approval be amended in such a way as would have eliminated the reference to a $30 price per share. The Maritime Board refused to change its letter,1 and the petitioner ultimately accepted it upon advice of counsel that the valuation of the shares for tax purposes would not be affected thereby.
In conjunction with the proposed sale of ships by petitioner to Mooremac the Ship Valuation Committee of the Federal Maritime Administration was asked to determine whether the proposed prices to be paid by Mooremac were "within the present market values" of the ships to be purchased. In a report of April 10, 1957, the Committee listed the then-current domestic market values as follows:
ROBIN LOCKSLEY ................ $1,300,000
ROBIN SHERWOOD ................ 1,300,000
ROBIN TUXFORD ................. 1,300,000
ROBIN WENTLEY ................. 1,300,000
ROBIN DONCASTER ............... 1,300,000
ROBIN KETTERING ............... 1,300,000
ROBIN GOODFELLOW .............. 1,650,000
ROBIN GRAY .................... 1,650,000
ROBIN HOOD .................... 1,650,000
ROBIN KIRK .................... 1,650,000
ROBIN MOWBRAY ................. 1,650,000
ROBIN TRENT ................... 1,650,000
Without the shareholders' agreement entered into by petitioner and other principal stockholders of Mooremac contemporaneously with the contract of sale, petitioner would not have been assured of any representation on Mooremac's board of directors since the 300,000 shares received represented less than 50 percent of the outstanding stock and Mooremac did not have cumulative voting.
The promissory notes of Mooremac received by the petitioner had a fair market value equal to their par or face value.
Petitioner took the Mooremac stock under a representation that it was acquiring the shares solely for investment and not with a view to the resale or further distribution thereof. The shares so received were not registered with the Securities and Exchange Commission.
The highest price at which Mooremac stock has ever been traded on the New York Stock Exchange is 25¼, reached in January and February of 1957. However, the stock has traded as low as 17 in December 1957, and 10 5/8 in 1960.
The book value per share and the high and low selling prices on the New York Stock Exchange of the common stock of two other corporations which are also engaged in the business of owning and operating ships in international commerce were as follows at the times indicated:
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High Low
Book Value Selling Selling
Dec. 31 Price Price
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American Export Lines, Inc. .................. 1956 $53.03 $30 1/8 $17 3/8
1957 59.11 31¼ 19¼
United States Lines Company .................. 1956 46.65 36¾ 22 5/8
1957 49.67 37 1/8 22½
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The petitioner sold the SS Robin Kettering and the SS Robin Doncaster, the two ships which had been excluded from the sale to Moore-McCormack, to Isbrandtsen Company, Inc., for cash and mortgage notes (at face value) in the aggregate amount of $1,350,000 for each ship. Said mortgage notes had a fair market value equal to their face value and were not disposed of by the petitioner at a discount. The petitioner paid selling commissions in the amount of $40,625 with respect to each of these two ships.
Other sales of similar vessels were made at or about the same time at comparable prices. The fair market values of the ships sold by Seas to Mooremac were at least the amounts of the assigned contract values.
In its income tax return for 1957 petitioner reported the sale of its fleet of vessels as resulting in a long-term capital net gain of $6,440,627.17. In his notice of deficiency respondent increased the total net gain to $11,305,594.46. A portion of this income was due to respondent's action in placing a value of $39.17 per share on the 300,000 shares of Mooremac stock received by petitioner as part payment for the ships.
No explanation for the $39.17 per share valuation ascribed to Mooremac's stock by the respondent is made but it apparently derives from the fact that the stock had a book value of approximately that amount throughout 1957.
The 300,000 shares of Mooremac stock received by petitioner as part payment for the ten Robin Line ships sold to Mooremac in 1957 had a fair market value of $9,000,000, or $30 per share.
The 12 ships which were sold by the petitioner2 were used in its trade or business during the course of the year 1957 from January 1st to the date of sale of each respective ship. From the time of acquisition of the 12 ships, the petitioner adopted a consistent policy of depreciating them, for accounting and tax purposes, on a straight-line basis, using a useful life of 20 years from the date of construction and a salvage value of 2½ percent of cost. Similar depreciation bases are used by owners of similar subsidized vessels. The useful life and salvage values were prescribed under General Order No. 24 of the Maritime Board. In a closing agreement between the taxpayer and the respondent proposed in 1947, such depreciation bases were approved as proper for Federal income tax purposes. In a letter of the respondent dated July 7, 1947, interpreting the closing agreement, it was specifically provided that:
It is intended by Article VIII of the closing agreement to provide an annual depreciation rate consistent with the Maritime Commission's treatment of subsidized vessels as having a total useful life of 20 years from construction (Maritime Commission General Order No. 24) or an appropriately higher annual rate for vessels acquired after the expiration of a portion of such life. * * *
Under the subsidy agreement between the petitioner and the Maritime Board, the Board would not subsidize any of petitioner's vessels after they were 20 years old. Only once in the history of the petitioner was it permitted to use a vessel longer than 20 years. This was allowed in a shipping emergency in 1939. The Maritime Board permitted the vessel to be used for only one voyage after its twentieth year, in a special amendment to the subsidy agreement in which a finding was made "that a period of actual emergency exists."
Petitioner computed depreciation, in accordance with the method described above, for the period from January 1, 1957, to the date of sale of each vessel, and depreciation so computed was deducted in petit...
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