Textron, Inc. v. United States
| Decision Date | 07 June 1976 |
| Docket Number | Civ. A. No. 4072. |
| Citation | 418 F. Supp. 39 |
| Parties | TEXTRON, INC., Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Rhode Island |
Morris B. Abram, Peter J. Rothenberg, of Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Edward F. Hindle, of Edwards & Angell, Providence, R. I., for plaintiff.
Scott P. Crampton, Asst. Atty. Gen., Tax Div., Dept. of Justice, Jerome Fink, Acting Chief, Refund Trial Section No. 1, Dept. of Justice, Stephen J. Csontas, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., Lincoln C. Almond, U. S. Atty., Providence, R. I., for defendant.
In this action the plaintiff seeks a refund of federal income taxes and interest paid by it on June 15, 1964 in the total amount of $3,706,028.03 for its 1959 taxable year1 plus statutory interest thereon from the date of payment.
The parties submitted this action for determination upon an agreed statement of facts. Said stipulation established the following facts.
Early in 1956, a corporation which was in no way connected with Textron, Inc. (hereinafter Textron), and which was known as Hawaiian Steamship Co. Ltd. (hereinafter Steamship) purchased a former World War II troop ship, then called the LaGuardia, from the U. S. Maritime Administration for $3,850,438, and paid for it in large part by executing a large note secured by a first mortgage on the vessel in favor of the United States. The note provided that the sole recourse of the mortgagee would be limited to repossession of said vessel.
Under the terms of said mortgage, Steamship was required to recondition the LaGuardia to make it suitable for passenger service between the West Coast and the Hawaiian Islands. This was obviously a costly undertaking. Steamship needed financing. It approached Textron with a proposal that the latter finance said reconditioning.
After negotiations, the following arrangement was effectuated: Textron purchased said ship from Steamship at Steamship's actual cash cost and assumed the payment of said first mortgage held by the Maritime Commission. Textron also agreed to recondition said vessel and then to charter it to Steamship on a bareboat basis for fifteen (15) years for $100,000 per month (later increased to $110,000). Textron financed a part of said cost of reconditioning through a loan from the Bowery Savings Bank, secured by a second mortgage on said vessel that was insured by the Maritime Administration.
Steamship began to operate the reconditioned vessel—now renamed Leilani—in January, 1957; its maiden voyage through the Panama Canal was a well publicized fiasco from which the ship never recovered. By October, 1957, Steamship was not only three months in arrears in its payments to Textron for charter hire, but owed substantial amounts to other creditors such as suppliers of fuel and goods; on November 22, 1957, Textron repossessed the ship for nonpayment of the charter hire.
Textron wanted to keep said ship in service so that a sale thereof might be arranged in the future. But Textron was faced with an immediate difficulty; under its corporate charter Textron's management doubted whether it could operate a ship without first obtaining the approval of its shareholders. Its management then made a decision to create a wholly owned subsidiary to operate the Leilani.
Accordingly, on November 29, 1957, Hawaiian Textron, Inc. (hereinafter Hawaiian Textron) was incorporated. Shortly thereafter, said corporation issued 1,000 shares of its stock to Textron for the sum of $200,000. It became Hawaiian Textron's sole stockholder. In addition, Textron loaned $600,000 to Hawaiian Textron on its 6% note due December 1, 1967. On December 4, 1957, Textron chartered the Leilani to Hawaiian Textron on substantially the same terms as it had previously been chartered to Steamship.
Meanwhile, Textron continued to search for a buyer of the Leilani without success. Finally, on February 11, 1958, officials of Textron met with the Maritime Administration in Washington, D. C. At this meeting it was agreed that the operation of the Leilani would continue, but that title to the ship would be transferred to Hawaiian Textron. As consideration therefor, Hawaiian Textron issued additional shares of stock and a promissory note to Textron and agreed to assume Textron's various obligations on the ship, although the Maritime Administration insisted that Textron guarantee that all conditions of the "sole recourse" provisions of the mortgages would be met by Hawaiian Textron. As part of this agreement Textron advanced to Hawaiian Textron an additional sum of $589,843.32 in exchange for another promissory note of Hawaiian Textron.
Hawaiian Textron continued to operate the Leilani between the West Coast and Hawaii—but at a loss—and required additional financial assistance from Textron which, from time to time, advanced funds to its subsidiary as open account advances. The unpaid balance of these advances amounted to more than $1,500,000 by June 2, 1959. And in a further effort to make a profitable operation of the Leilani, the management of Hawaiian Textron chartered two additional vessels to provide more cargo capacity and greater frequency of voyages in the hope of increasing its business.
These efforts proved futile. Hawaiian Textron continued to lose money at an alarming rate. In August, 1958, the Maritime Administrator agreed to a moratorium on further payments of principal on said first mortgage by Hawaiian Textron for the remainder of 1958—but only after Hawaiian Textron agreed to waive the "sole recourse" provisions of said mortgage and thus assumed personal liability for any deficiency.
However, Hawaiian Textron's losses continued to increase and it was finally decided to put an end to the constant financial drain. On January 6, 1959, the Leilani was placed temporarily in dry dock; on January 9, 1959, it was tied up at a pier in Alameda, California.
Officers of Hawaiian Textron then undertook negotiations with the Maritime Administration and several potential purchasers of the Leilani, none of which resulted in the sale of said vessel. On May 11, 1959, the Maritime Administration which had previously satisfied the second mortgage pursuant to its insurance obligation, filed a notice of foreclosure of the Leilani under both mortgages in the United States District Court in San Francisco, California. The foreclosure was completed by the sale of the Leilani at an auction on June 2, 1959, resulting in a deficiency against Hawaiian Textron in the amount of $688,000.
After said foreclosure, Hawaiian Textron had no assets other than nominal cash, accounts receivable and office furniture. As of June 6, 1959, its total assets as shown on its books were $139,000 and its liabilities to creditors other than Textron amounted to $1,254,000 (including said mortgage deficiency of $688,000 which was ultimately settled in December, 1959 for the sum of $100,000). In addition, Hawaiian Textron owed Textron a total amount of $4,585,476.02 in unpaid debt and accrued interest.
This was the situation on June 2, 1959, the date of the foreclosure of said mortgage on the Leilani which deprived Hawaiian Textron of the capacity to conduct its business, to earn profits and recover from its hopeless insolvency.
As of June 2, 1959, Textron's total investment in Hawaiian Textron consisted of the following:
At this point, all of this investment of nearly $6,000,000 was hopelessly lost. In view of this fact, Textron wrote off on its books its investment in Hawaiian Textron, declared its stock to be worthless and the debt owed to it uncollectible, and claimed appropriate deductions on its Federal income tax return for its 1959 taxable year.
After the mortgage deficiency of $688,000 was settled for $100,000 at the end of 1959, Textron began to consider the possibility of future plans for Hawaiian Textron. As a preliminary step towards preparing Hawaiian Textron to enter into some new line of business, in February of 1960 Textron released Hawaiian Textron from all obligations it then owed to Textron.
By March, 1960, Textron believed it had located a favorable business opportunity for Hawaiian Textron. In late 1959, Textron had entered into an agreement to purchase Cleveland Pneumatic Industries, Inc. ("CPI"); at the time of the agreement it was contemplated that Textron would make the purchase either directly or through a subsidiary to be formed for that purpose. Textron assigned the contract to purchase CPI to Hawaiian Textron on March 9, 1960.
The CPI deal was not consummated. On April 4, 1960, the shareholders of CPI voted to reject the proposed acquisition.
In March of 1960, Textron also decided to acquire the assets of the Bell Defense Group from Bell Aircraft Corporation ("Bell") through a wholly owned subsidiary. A contract of sale was signed by Bell and Textron in April, 1960. On July 2, 1960, Hawaiian Textron (which had changed its name to Bell Aerospace Corporation) acquired the Bell Defense Group assets. This acquisition was made possible by a transfer of cash from Textron to Hawaiian Textron in the total amount of $16,500,000.
The new investment by Textron in its subsidiary, renamed Bell Aerospace Corporation, proved successful. Bell Aerospace made money....
To continue reading
Request your trial
-
In re South Beach Securities, Inc.
...Drew Indus., Inc. (In re White Metal Rolling & Stamping Corp.), 222 B.R. 417, 424 (Bankr.S.D.N.Y.1998); see also Textron, Inc. v. United States, 418 F.Supp. 39, 46 (D.R.I.1976) (noting that an NOL carryover is "simply a tax deduction"); Salsberg v. Trico Marine Servs., Inc. (In re Trico Mar......
-
U.S. v. Textron Inc. and Subsidiaries
...Textron, Inc. v. Comm'r, 336 F.3d 26 (1st Cir.2003) (appeal regarding a different issue raised in the tax court); Textron, Inc. v. United States, 418 F.Supp. 39 (D.R.I.1976) (relating to tax years 1959 through 1962). 2. Professor Douglas Carmichael, the government's expert, explained that t......
-
Triad Guar. Inc. v. Triad Guar. Ins. Corp. (In re Triad Guar. Inc.)
...holder is a domestic corporation owning a specified minimum percentage of stock of the worthless corporation. See Textron, Inc. v. U.S., 418 F. Supp. 39, 44 (D.R.I. 1976). The legislative history of the predecessor to § 165(g) indicates that the provision was enacted to remove the "peculiar......
-
In re Carpenter
...Inc. v. Commissioner , 807 F.2d 59, 62 (6th Cir.1986).Delk v. C.I.R. , 113 F.3d 984, 986 (9th Cir.1997). See also Textron, Inc. v. U.S. , 418 F.Supp. 39, 44–47 (D.RI.1976) (requiring that the stock be wholly worthless and that the “deduction for a worthless security be claimed for the year ......