United States Freight Company v. United States

• Decision Date: 20 February 1970
• Docket Number: No. 138-66.,138-66.
• Citation: 422 F.2d 887
• Parties: UNITED STATES FREIGHT COMPANY and Subsidiaries v. The UNITED STATES.
• Court: U.S. Claims Court

422 F.2d 887 (1970)

UNITED STATES FREIGHT COMPANY and Subsidiaries v. The UNITED STATES.

No. 138-66.

United States Court of Claims.

February 20, 1970.

Walter D. Haynes, Washington, D. C., attorney of record, for plaintiff. J. Marvin Haynes, Haynes & Miller, N. Barr Miller, Joseph H. Sheppard, Jerome D. Meeker, and Robert S. Bersch, Washington, D. C., of counsel.

Joseph Kovner, Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant. Philip R. Miller and Ira M. Langer, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

OPINION^*

LARAMORE, Judge:

This is an action to recover Federal income taxes paid by the United States Freight Company and its subsidiaries for the year 1960. The issue before us involves the proper characterization for tax purposes of liquidated damages and consultant fees expended by plaintiff¹ during the year under review. The factual context in which this suit arises is detailed below.

The United States Freight Company is a Delaware corporation which maintains its principal office in New York City. It is engaged in the business of furnishing freight transportation services. The company's business includes within its scope domestic freight forwarding, foreign freight forwarding aboard ships, local cartage, truck rental, and freight warehouse operations. As indicated more fully in the findings of fact, the United States Freight Company conducts its business through subsidiary operating corporations. In 1960, the year that is involved in the present litigation, the company utilized 38 subsidiary operating corporations.

Plaintiff utilizes its trucks to pick up shipments at the premises of shippers. In connection with each such shipment, a bill of lading is issued by plaintiff to the shipper, and plaintiff assumes a common carrier's responsibility for the delivery of the freight to the consignee designated by the shipper.

From the premises of the shippers, the shipments are transported by plaintiff's trucks to freight forwarding terminals operated by plaintiff. At the freight forwarding terminals, less-than-carload or less-than-truckload shipments are consolidated into carloads or truckloads.

A carload or truckload of freight is thereafter transported from plaintiff's freight forwarding terminal by a long-haul common carrier (or succession of common carriers) selected by plaintiff to a destination terminal operated by plaintiff in the area where the consignees of the freight are located. At the destination terminal, the freight is unloaded and sorted, and it is then delivered to the designated consignees. The deliveries are effected either by plaintiff in its own trucks or by other truck operators selected by plaintiff.

By 1960, the concept of "through lading" had become basic to plaintiff's operations. Through lading is the transportation of a consignment of freight from origin to destination on one bill of lading, regardless of changes from one form of transportation to another in the course of such transportation. In furtherance of this concept, plaintiff in July 1958 initiated the development and promotion of "containerized" freight and "piggybacking." Containerized freight is freight which is packed in a container of standard size at the point of origin and is then moved to the destination point in the same container, without being unpacked en route even though there may be a transfer from one form of transportation to another. Piggybacking is the transportation of loaded truck trailers or containerized freight on railroad flatcars.

Historically, the railroads had charged separate rates for the various products carried, based primarily on the value of the products rather than on the cost of the transportation. As a result, in the 10 years prior to 1958 the long-haul trucking industry had succeeded in diverting from rail transportation to truck transportation a very substantial portion of the valuable finished products moving in commerce.

In July 1958, plaintiff's president, Morris Forgash, succeeded in convincing the railroads to set a single "freight — all kinds" rate for the rail service of transporting two 40-foot truck trailers or containers on a flatcar, regardless of the value of the products being carried inside. This was advantageous to plaintiff in offering its piggyback service to shippers.

In 1960, there was a substantial increase in plaintiff's containerized shipments to foreign countries. Under this method, goods are loaded in a container unit of standard size at an inland point of origin, and they are subsequently delivered to the overseas consignee in the same container, with no rehandling or platform delays. The shipper receives only one bill of lading. The container is piggybacked by truck, rail, and ship. Transfers from one form of transportation to another are fully mechanized. The costs of export packing are also eliminated. Thus, there is a substantial saving in costs over the conventional method of ocean transportation There is also a substantial saving in the time consumed during the course of the transportation between the point of origin and the final delivery.

Up to and including the year 1960, steamship companies charged separate rates for the various products carried, based primarily on the value of the products rather than on the cost of the transportation. Thus, even if goods were shipped inside sealed containers of standard size, the steamship companies charged rates based upon the contents of the containers. This was disadvantageous to plaintiff, because in its business of "through lading" freight to foreign countries, it would have been very desirable to be able to charge a single rate for the shipment of a container filled with freight, based upon the cost of the transportation and without regard to the nature of the products inside the container.

For several years prior to 1960, plaintiff had tried unsuccessfully to persuade steamship companies to set a "freight — all kinds" rate, similar to the one which plaintiff had convinced the railroads to set in July 1958. Plaintiff's officers asked American flag steamship companies, including American Export Lines, Inc., to set such a rate; and plaintiff's officers traveled to Europe on several occasions to ask foreign flag steamship companies to set such a rate. Plaintiff was turned down by all of the steamship companies which it approached.

Having failed in its efforts to induce the steamship companies to publish a "freight — all kinds" rate, plaintiff decided in 1960 that it would attempt to acquire control of American Export Lines, Inc., for use in its business. American Export Lines was a domestic corporation engaged in the operation of ocean-going vessels for the transportation of freight cargo, mail, and passengers. Plaintiff desired to acquire control over this company in order to establish a "freight — all kinds" rate for water transportation, and in order to introduce a "through lading" service over the routes of American Export Lines to Europe, the Mediterranean Sea, and the Middle East.

Plaintiff had learned informally that it might be possible to purchase from Mrs. Josephine Bay Paul, and from her husband and associates, their stock in American Export Lines. Mrs. Paul owned 236,505 shares of the stock; Mr. Paul owned 5,300 shares of the stock; and a foundation and certain trusts controlled by Mr. and Mrs. Paul severally owned a total of 72,195 shares of the stock. The 314,000 shares of stock referred to in this paragraph constituted approximately 26 percent of the outstanding shares of stock issued by American Export Lines. Plaintiff had ascertained that the ownership of the remainder of the stock was very widespread; that there were no other large outstanding blocks of stock; and that Mr. and Mrs. Paul had nominated the entire Board of Directors of American Export Lines. Plaintiff believed that if it stood in the place of Mr. and Mrs Paul, it could exercise the same control over American Export Lines which they had been exercising.

Early in February 1960, plaintiff began negotiations in New York City with respect to acquiring the 314,000 shares of stock in American Export Lines referred to in the preceding paragraph. Mr. and Mrs. Paul were represented in the negotiations by Robert W. Bachelor, who was an officer and director of American Export Lines and who had represented Mrs. Paul and her family in business transactions for many years.

At the first meeting between plaintiff and Mr. Bachelor, plaintiff asked Mr. Bachelor, if he could obtain for plaintiff an option on the American Export Lines stock owned by Mr. and Mrs. Paul. Mr. Bachelor replied that the Pauls would never grant plaintiff an option. Mr. Bachelor further stated that in all the business transactions in which he had represented Mrs. Paul and her family, they had never entered into an option, and he was positive that the Pauls would not deviate from that practice.

At the outset of the negotiations, Mr. Bachelor made it clear that Mr. and Mrs. Paul were not offering their stock in American Export Lines for sale, and that they would only consider a proposal in the form of an unsolicited offer from plaintiff to buy the stock. In this connection, Mr. Bachelor took the position that Mr. and Mrs. Paul would not consider any offer involving a price of less than $30 a share, and that it would be a waste of time for plaintiff to offer less than $30 a share. The price of $30 a share reflected some premium above the then-current market price for American Export Lines stock, because the Pauls' stock was control stock.

During the negotiations between plaintiff and Mr. Bachelor, plaintiff retained Elmer G. Gove, a management and financial consultant, to advise plaintiff with respect to certain management and financial aspects of the proposed transaction. Plaintiff paid Mr. Gove $2,003.67 for his services.

The negotiations...