South Lake Farms, Inc. v. Comm'r of Internal Revenue
| Decision Date | 15 September 1961 |
| Docket Number | 82945.,Docket Nos. 82944 |
| Citation | 36 T.C. 1027 |
| Parties | SOUTH LAKE FARMS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.SOUTH LAKE FARMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
H. D. Costigan, Esq., and Gordon M. Weber, Esq., for the petitioners.
John O. Hargrove, Esq., for the respondent.
1. Late in September 1956 purchasing corporation purchased all of the capital stock of old corporation for the purpose of dissolving it and immediately taking over its assets. Early in October 1956 and pursuant to a plan of dissolution and complete liquidation the old corporation distributed and transferred all of its assets to purchasing corporation without receiving any payment therefor and thereby was rendered without any assets. Held, that the market value of an unharvested cotton crop and certain land preparation included in the assets distributed and transferred is not includible in the income of the old corporation. Elsie SoRelle, 22 T.C. 459 (1954), followed.
2. Held, that the income of old corporation may not be increased by amount of expenses incurred by old corporation in producing unharvested cotton crop and in making land preparation where the amount of such expenses is not distributed, allocated, or apportioned to purchasing corporation as required by section 482, I.R.C. 1954. Chicago & North Western Railway Co., 29 T.C. 989 (1958), followed.
The respondent has determined deficiencies in the income tax of petitioner South Lake Farms, Inc., of $35,029.52, $37,791.98, and $853,731.09 for the fiscal years ended April 30, 1955, and April 30, 1956, and the period beginning May 1 and ending October 3, 1956, respectively. The respondent has determined that petitioner South Lake Farms is liable as transferee of the assets of South Lake Farms, Inc., for the foregoing deficiencies in the income tax of the latter corporation.
The issues for determination in the case of South Lake Farms, Inc., are the correctness of the respondent's action (1) in determining that the taxable income of the petitioner for the period May 1 through October 3, 1956, should be increased by the amount of $1,808,679.94 as representing the value of petitioner's growing crops at the time of petitioner's distribution in complete liquidation of all of its assets to its parent corporation, South Lake Farms, (2) in determining, in the alternative, in the event the preceding issue is decided adversely to him, that the taxable income of the petitioner for the period May 1 through October 3, 1956, should be increased by the amount of $847,632.58 as representing the expenses determined by respondent to have been incurred by petitioner in connection with its growing crops to the time of its liquidation, (3) in determining that the petitioner did not sustain a net operating loss of $150,618.26 for the period May 1 through October 3, 1956, and accordingly did not have a net operating loss carryback of $77,941.38 to the fiscal year ended April 30, 1955, and a net operating loss carryback of $72,676.88 to the fiscal year ended April 30, 1956.
In addition to the foregoing issues presented in the case of South Lake Farms, Inc., the case of South Lake Farms also presents as an issue the correctness of the respondent's action in determining that South Lake Farms is liable as transferee of the assets of South Lake Farms, Inc., for the deficiencies in income tax of the latter corporation involved herein.
Some of the facts have been stipulated and are found accordingly.
South Lake Farms, Inc., sometimes hereinafter referred to as the old corporation, was organized under the laws of California in May 1946, has its principal office at Fresno, California, and filed its Federal income tax returns for the fiscal years ended April 30, 1955, and April 30, 1956, and the period May 1 through October 3, 1956, with the district director in San Francisco, California.
South Lake Farms, sometimes hereinafter referred to as the purchasing corporation, is a California corporation with its principal office at Fresno, California. Its Federal income tax returns for the periods here involved were filed with the district director in San Francisco, California. The purchasing corporation originally was organized under the name of Ross Mercantile Company in May 1954 to conduct a general merchandising business. On January 3, 1956, its charter was suspended for failure to pay its annual license fee. The charter was revived on September 26, 1956, and the name of the corporation was changed to South Valley Farms. Thereafter, on October 8, 1956, the corporation's name was further changed to its present name, South Lake Farms.
From the time of its organization in May 1946 until October 3, 1956, the old corporation was engaged in the farming business in Tulare, Kings, and Kern Counties, California. Its principal products were cotton, barley, cover crops, and cattle and sheep and their byproducts. During the summer of 1956 its farming activities were conducted on approximately 33,424 acres of land owned by it and 43,470 acres of additional land leased by it.
At all times material herein the old corporation regularly kept its books and filed its income tax returns on the basis of an accrual method of accounting and on the basis of a fiscal year beginning on May 1 and ending on April 30, except for its final fiscal period which began May 1 and ended October 3, 1956. Crops unharvested at the end of each fiscal year were not inventoried or otherwise included in gross income until the following year when they were harvested. Crops harvested and on hand at the end of each fiscal year were included in inventories at the lower of estimated cost or actual market value.
On September 29, 1956, and for about a year prior thereto the stock of the old corporation was owned by approximately 30 individuals, most of whom were members of the Hill family.
On or about September 7, 1956, Carl Quandt and Kenneth Quandt made an offer to the owners of all of the capital stock of the old corporation and to two affiliated partnerships for the purchase by them, or by a corporation to which their rights might be assigned, of all of the capital stock of the old corporation and all of the interests in two partnerships for $5 million. The offer was conditioned upon the accomplishment of transactions necessary to the dissolution of the old corporation on or before October 5, 1956, in order that its assets could be transferred to a successor corporation by that date. The offer was accepted by all of the parties to whom it was addressed, including all of the shareholders of the old corporation, on or about September 19, 1956. On September 28, 1956, amendments not material herein were added to the contract of purchase and sale.
Both the offerors and the offerees expected that the harvest of the old corporation's 1956 cotton crop would commence on or shortly after October 5, 1956. The estimated value of the old corporation's unharvested crops was taken into account by the parties in fixing the purchase price of the old corporation's stock. The possibility of substantial refunds of Federal income tax to the old corporation as the result of an anticipated net operating loss sustained by the old corporation during its last or final taxable period also was taken into account by the parties in fixing the purchase price of the stock of the old corporation.
On September 26, 1956, the charter of the purchasing corporation, which had been suspended since January 3, 1956, because of failure to pay its annual license fee, was revived at the request, by telegram, of Producers Cotton Oil Company, Carl Quandt, Kenneth Quandt, and David S. Davis. On the same day, September 26, 1956, the foregoing persons purchased the capital stock of the purchasing corporation in the following indicated percentages:
+-----------------------------------------+
¦Stockholder ¦Percentage ¦
+----------------------------+------------¦
¦Producers Cotton Oil Company¦40 ¦
+----------------------------+------------¦
¦Carl Quandt ¦20 ¦
+----------------------------+------------¦
¦Kenneth Quandt ¦20 ¦
+----------------------------+------------¦
¦David S. Davis ¦20 ¦
+-----------------------------------------+
Immediately following the foregoing purchases A. T. Mann, an officer of Producers Cotton Oil Company, the Quandts, and Davis became directors of the purchasing corporation. On October 2, 1956, the Quandts executed a stock-voting proxy to the Producers Cotton Oil Company and thereafter, at all times material herein, that company controlled the purchasing corporation.
The principal business activity of Producers Cotton Oil Company is, and at all times material herein has been, the ginning of cotton, including cotton purchased, ginned, and sold by it, the purchase of cottonseed, and the manufacture and sale of cottonseed products. During 1956 Producers Cotton Oil Company held the controlling stock of Calflax Company and Sunset Farms, Inc., two corporations engaged in the business of farming, including the growing of cotton for sale to Producers for its ginning and manufacturing operations.
On or about September 27, 1956, the directors of the purchasing corporation authorized the acquisition by the corporation of the rights and the assumption by it of the obligations of the Quandts under the contract of September 7, 1956, as subsequently amended. Such contract was then assigned to the purchasing corporation which on September 29, 1956, purchased all the outstanding shares of the old corporation's stock.
The purpose of the purchasing corporation in purchasing the capital stock of the old corporation was to dissolve it immediately and take over its assets.
In order to finance the initial payment of $1 million for the stock of the old corporation and for...
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