United States Holding Co. v. Comm'r of Internal Revenue

• Decision Date: 09 June 1965
• Docket Number: Docket No. 92152.
• Citation: 44 T.C. 323
• Parties: UNITED STATES HOLDING Co., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

44 T.C. 323

UNITED STATES HOLDING Co., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 92152.

Tax Court of the United States.

Filed June 9, 1965.

C. Hugh Friedman, for the petitioner.

Michael P. McLeod, for the respondent.

1. Respondent, after examining Pasadena's books and records for the years 1954-56, proposed certain adjustments. These adjustments were subsequently settled under administrative procedures. Thereafter, without giving proper written notice pursuant to section 7605(b), I.R.C. 1954, respondent requested permission to reexamine Pasaden's books for the same years. Such request was denied, whereupon respondent, without the aid of Pasedena's books, proposed additional adjustments for the years 1954 and 1956 which became the basis of the notice of deficiency in this case. Held, since respondent did not, in fact, reexamine the books and records of Pasadena, the failure to give written notification of such inspection pursuant to section 7605(b) does not render the deficiency notice invalid.

2. Petitioner acquired by purchase over 80 percent of the stock of Pasadena. Within 2 years after the purchase Pasadena adopted a plan of liquidation. Pasadena, subsequent to the adoption of said plan, sold some assets at a loss of $248,634.51 and other assets at a gain of $852,312.35. Pasadena, within 12 months after the adoption of its plan to liquidate, did, in fact, liquidate. Held, section 337(c)(2)(B), I.R.C. 1954, makes section 337(a) inapplicable to a liquidation governed by section 332 where basis of the subsidiary's assets in the hands of the petitioner is governed by section 334(b)(2) to the extent that the sale of assets by Pasadena results in a loss, the gains and losses from each sale are not to be ‘netted.’

OPINION

FAY, Judge:

The Commissioner determined deficiencies in income tax for the taxable years 1954 and 1956 against Pasadena First National Bank, a transferor corporation, in the respective amounts of $22,983.70 and $295,430.78. This proceeding involves the liability of the petitioner as transferee of the assets of the aforementioned transferor corporation.¹ The parties by agreement have disposed of certain issues raised by the pleadings. The first issue for decision is whether the proposed deficiencies are improper, illegal, and invalid because of the Commissioner's alleged violation of section 7605(b) of the Internal Revenue Code of 1954² by conducting a second examination of the transferor corporation without giving written notice thereof. If the issue is decided in favor of respondent, there remains the question of whether certain losses realized by the transferor corporation on the sale of some of its assets during the process of liquidation should be recognized.

All of the facts have been stipulated, are so found, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Those necessary to an understanding of the issues presented are recited below.

United States Holding Co. (hereinafter referred to as petitioner) is a corporation organized and existing under the laws of the State of California, with its principal office and place of business in San Diego, Calif. Petitioner is the transferee of assets of Pasadena First National Bank. Petitioner filed its Federal income tax returns for the years 1954 and 1956 with the district director of internal revenue at Los Angeles, Calif.

Pasadena First National Bank, transferor (hereinafter referred to as Pasadena), was a national bank organized under the laws of the United States with its principal offices located in Pasadena, Calif.

Pasadena timely filed its Federal income tax returns on the cash basis for the year 1954 and on an accural basis for the year 1956 with the district director of internal revenue at Los Angeles, Calif., and the taxes shown to be due on such returns were paid at the time of filing.

The Commissioner examined the books and records of Pasadena for the years 1954, 1955, and 1956, and the findings of said examination were set out in a revenue agent's report dated August 22, 1957.

The adjustments proposed in the revenue agent's report of August 22, 1957, were settled by administrative procedure.

Prior to July 18, 1960, the Commissioner, without properly notifying petitioner in writing that an additional inspection was necessary, requested the books and records of Pasadena for the purpose of reexamination. The petitioner refused to make the books and records available to the agents of the Commissioner.

On July 18, 1960, a letter of necessity of reexamination of Pasadena was served upon M. N. Wilson, president of United States National Bank of San Diego and the purchaser of the assets of Pasadena. The letter stated:

July 14, 1960

Pasadena First National Bank

Pasadena, California

Gentlemen:

While it is the policy of the Internal Revenue Service to make as few inspections of books of account and records of taxpayers as possible, it is deemed necessary before finally closing your income tax case, to make a reinvestigation of your books and records for the years 1954 and 1956 in order to properly verify your returns for those years. A reexamination, therefore, will be made.

Your cooperation in permitting our representatives access to all of your books and records will be appreciated. I trust this will not cause you any inconvenience.

This notice is sent in compliance with Section 7605(b) of the Internal Revenue Code of 1954.

Very truly yours,

(S) HAROLD HAWKINS Regional Commissioner

Wilson was not, on the date said notice was served nor at any time, an officer, director, or shareholder of Pasadena or the petitioner, nor was he authorized by Pasadena, or its liquidating agent, to accept service of process or any other offical notification, or in any other manner act on behalf of, or as an agent for, Pasadena, its liquidating agent, or petitioner.

Subsequent to service of the notification on July 18, 1960, the agents of the Commissioner, though requested by petitioner, failed or refused to issue or have issued legal process requiring the production of the books and records of Pasadena.

The Commissioner was denied access to the books and records of Pasadena, at no time were such books and records made available to the Commissioner for reexamination, and at no time has the Commissioner made a reexamination of such books and records.

Petitioner subsequently made certain books and records available to respondent's counsel for the limited purpose of reaching agreement for the stipulation of facts. It is agreed that petitioner did not thereby waive any right to contend that the deficiency proposed by the Commissioner is illegal, invalid, and void because of the Commissiioner's failure to comply with the provis'ons of section 7605(b).

During the period not more than 12 months immediately preceding November 19, 1956, petitioner acquired by purchase the stock of Pasadena, representing in excess of 80 percent of the total combined voting power of all classes of stock entitled to vote and in excess of 80 percent of the total number of shares of all class of stock. At all times pertinent hereto, petitioner was the owner of Pasadena stock as set out above.

Pasadena entered into a purchase and sale agreement dated October 31, 1956, with the United States National Bank of San Diego (hereinafter referred to as San Diego) whereby San Diego agreed to purchase all assets of Pasadena on hand as of the close of business of Pasadena on December 7,1956, and to assume the liabilities of the seller under the terms and conditions as set forth in the agreement.

At a special meeting of the shareholders of Pasadena held November 19, 1956, the following resolution was adopted:

RESOLVED, That Pasadena-First National Bank, Pasadena, California, be placed in voluntary liquidation, under the provisions of sections 5220 and 5221 of the United States Revised Statutes (12 U.S.C. 181, 182) to take effect at the close of business 6:00 o'clock p.m., December 7, 1956, and that C. Arnholt Smith be appointed liquidating agent of said bank.

On October 15, 1956, and November 15, 1956, prior to the resolution to dissolve, Pasadena sold certain securities, as such term is defined by section 582(c), at a total loss of $107,840.14.

On November 30, 1956, December 3 and 5, 1956, subsequent to the resolution to dissolve, Pasadena sold certain securities, as such term is defined by section 582(c), at a total loss of $248,634.51. Additional assets were sold subsequent to the resolution at a gain of $852,312.35.

At the close of business on December 7, 1956, all of the remaining assets of Pasadena were sold to, and its liabilities were assumed by, San Diego in accordance with the terms and conditions of the agreement of October 31, 1956.

Most of the losses in issue herein, sustained on the sale of securities by Pasadena, were sustained as a result of a declining market between March 1956, the date of the purchase of stock by petitioner, and the dates on which such securities were sold.

On March 13, 1957, subsequent to the sale of assets and in accordance with the agreement of October 31, 1956, all of the assets of Pasadena (cash of $1,770,643.20) were distributed to petitioner in complete liquidation.

Regarding the first issue, petitioner argues that the failure of the respondent to comply with the written-notice requirement of section 7605(b) renders the deficiency notice invalid. In the alternative, petitioner maintains that even if the notice of deficiency is not invalid, it is arbitrary and excessive, thereby placing the burden of proof as to establishing the correct amount of the tax on respondent.

Respondent, on the other hand, contends that since he did not reexamine the books and records of Pasadena, the written notice provided for in section 7605(b) was not required. In addition, respondent claims that his notice of deficiency was not arbitrary and that the burden of proof in...