United States v. Fenix and Scisson, Inc., 8135.

• Decision Date: 15 June 1966
• Docket Number: No. 8135.,8135.
• Citation: 360 F.2d 260
• Parties: UNITED STATES of America, Appellant, v. FENIX AND SCISSON, INC., a corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

360 F.2d 260 (1966)

UNITED STATES of America, Appellant, v. FENIX AND SCISSON, INC., a corporation, Appellee.

No. 8135.

United States Court of Appeals Tenth Circuit.

May 12, 1966.

Rehearing Denied June 15, 1966.

Robert A. Bernstein, Atty., Dept. of Justice (C. Moxley Featherston, Acting Asst. Atty. Gen., Lee A. Jackson, Gilbert E. Andrews, Attys., Dept. of Justice, John M. Imel, Jr., U. S. Atty., and Sam E. Taylor, Asst. U. S. Atty., on the brief), for appellant.

J. Glenn Hahn, Kansas City, Mo., (Joseph A. Hoskins, Walter J. Kennedy and Hoskins, King, Springer & McGannon, Kansas City, Mo., on the brief), for appellee.

Before PICKETT, HILL and SETH, Circuit Judges.

HILL, Circuit Judge.

Taxpayer corporation instituted this suit in the court below seeking a refund of $40,618.90 of income taxes paid for the fiscal year ending October 31, 1958. From a jury verdict based upon interrogatories, the trial court granted judgment for the taxpayer. The government's motion for judgment notwithstanding the verdict and alternatively for a new trial was denied and this appeal was taken.

While the complaint sought to reinstate several deductions previously disallowed by the Commissioner, the only matter for review is whether taxpayer is entitled to deduct certain net operating loss carryovers incurred by its wholly owned subsidiary, Oronogo Mutual Mining Company (hereafter called Oronogo).

The taxpayer, Fenix and Scisson, Inc., is an Oklahoma corporation which during all the time in question engaged in heavy construction activity, particularly excavation of underground caverns for the storage of propane and butane gas. It has also conducted some mineral exploration. On October 14, 1955, it purchased all of Oronogo's stock and thereafter maintained it as a subsidiary until October 31, 1957, when Oronogo was liquidated in accordance with § 332 of the 1954 Internal Revenue Code, 26 U.S.C., and its assets merged into taxpayer. In its return for the fiscal year ending October 31, 1958, the taxpayer, relying on § 381(a) (1) and (c) (1),¹ deducted net operating loss carryovers incurred by Oronogo in 1953 ($28,222.80), 1954 ($10,441.72), and 1957 ($320.55).

The Commissioner disallowed taxpayer the losses first under § 269 claiming that the principal purpose for taxpayer's acquisition of Oronogo was the evasion of income tax by securing a deduction. The jury, however, found against the Commissioner on this point and no appeal is taken from that determination. The Commissioner's other basis for disallowing the loss carryovers was under § 382(a).² The theory being that Oronogo's net operating losses did not survive its stock acquisition by taxpayer in 1955 because Oronogo did not continue to carry on a trade or business after its acquisition which was substantially the same as it carried on before such acquisition.³ Thus Oronogo did not have these losses available when it was liquidated by taxpayer.

The principal factual issue litigated below may be stated as follows: Was Oronogo engaged in a trade or business at the time of its acquisition by taxpayer on October 14, 1955, and did it continue to carry on substantially the same trade or business thereafter as it conducted prior to the acquisition. An interrogatory stating a similar question was submitted to the jury and it answered the question in the affirmative. Whether this finding by the jury can be supported by any substantial evidence is the question to decide; the government contending the evidence was insufficient as a matter of law to sustain the verdict.

In reviewing the record, we are mindful that the jury verdict must not be preempted unless it has no basis in fact. Insufficiency of the evidence is a ground for directing a verdict or granting a new trial, Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 61 S.Ct. 189, 85 L.Ed. 147, and see Vol. 2B Barron and Holtzoff, § 1075. But, as we said in United States v. Hess, 10th Cir., 341 F.2d 444, "* * * to be insufficient to support a verdict, the evidence must all be one way from which only one reasonable inference can be drawn." In this regard, the evidence must be viewed in a light most favorable to the party against whom a motion is made and he must be given the benefit of all inferences fairly drawn therefrom. Commercial Standard Insurance Co. v. Feaster, 10th Cir., 259 F. 2d 210.

With these principles in mind, we will review the facts. Oronogo was a Missouri mining corporation engaged in the mining of lead and zinc principally in Southwest Missouri. Prior to its acquisition by the taxpayer in 1955, its stock was owned by Guy and Georgia Waring and their daughter, who was the wife of G. J. Fenix, a principal stockholder of the taxpayer corporation. From the time of its inception in 1936 until some time around 1948 and 1949, Oronogo mined lead and zinc in the so-called Oronogo mining district near Joplin, Missouri. Additionally, it conducted a coal mining operation near Bates, Arkansas, at least until 1951. While Oronogo performed the mining operation, the land it mined was leased to Guy and Georgia Waring. Although the company may have been initially profitable, poor economic conditions in the lead and zinc mining industry after World War II precipitated by a declining market price forced Oronogo to curtail much of its former activity. But Oronogo was not alone; expert testimony revealed that most of the mining in the area was suspended around 1947 and 1948. Shortly after this, in no event later than 1950, the mines in the district including the mines of Oronogo were allowed to fill with water and the evidence conclusively bears out that the water was never removed from the mines.

Shortly after World War II, Oronogo's profit and loss situation reflected consistent annual net operating losses which continued until its purchase by taxpayer.⁴ 1949 was the last year Oronogo had any substantial ore sales. Of the $67,936 gross receipts in that year, ore sales accounted for about $50,000 and gravel sales for the balance. The tax return listed ore mining as the company's principal business. In 1950, ore sales slipped to only $167.04 and gravel sales rose to $27,291.64. The return that year showed ore mining and quarry as the principal business. Ore sales in 1951 were only $56.08 and gravel sales were about $30,000. 1951 was the last tax year Oronogo reported ore sales. The nature of the gross receipts in 1952 is not known. In 1953, only sale of gravel and chat was reported which totalled $33,662.44. One significant factor occurred in 1953. Whereas prior returns reflected the nature of the company business as ore mining and quarry, the 1953 return dropped ore mining and only listed operation of a gravel quarry.

The 1954 return again listed the principal business activity as operating a gravel quarry. Gross income consisted of $3,154.00 of equipment sales and slightly over $4,000 of income derived from equipment rental, scrap sales, and interest earned. The 1955 return showed income of $4,315.00 for sale of scrap and miscellaneous receipts of $2,060.33. Subsequently, an amended return was filed for the year showing net gains on sale of assets of $25,402.61 and a taxable income for the year of $18,485.20. The 1950 net operating loss was then carried over the year to offset the gain. In 1956, Oronogo changed its accounting period to a fiscal year ending October 31 to coincide with the fiscal year of taxpayer. Oronogo's return for this ten month period shows taxable income of $33,596.09 based solely on equipment sales and rentals, completely offset by carryover losses from 1951-1952. The return for 1957 was Oronogo's final corporate return since it was liquidated in the year. It reported $2,953.14 on sale of supplies, rental income of $13,419 and a loss on an asset sale of $1,980.66, making a gross of $14,391.48 with expenses of $14,712.03, leaving another net loss of $320.55.

While Oronogo's tax returns give some idea of its activities, they by no means tell the whole story. Apparently in May, of 1952, Mr. Waring, acting for Oronogo, engaged General Steel Products Company to sell a substantial part of Oronogo's assets including the equipment used in the coal mining operation in Bates, Arkansas. Mr. Kirk of General Steel Products Company testified that he was authorized to sell between eighty and ninety per cent of Oronogo's assets but that he was only successful in selling about ten per cent. He did relate however that the company trucks were not listed with him. Another factor regarding Oronogo's equipment bears mentioning. During the time after 1951, much of the equipment was located on property belonging to the American Zinc Lead and Smelting Company which had leased land in the mining district.

On August 12, 1953, the minutes of Oronogo's board of directors reveal a resolution to dissolve the company.⁵ The directors then resolved that the company be dissolved, that the remaining assets be liquidated, and that the company transact no further business except to wind up its affairs. On September 25, 1953, articles of dissolution were filed with the State of Missouri.

Sometime in early 1955, the Potter and Sims Mining Company which had leased land adjoining the leases owned by Guy Waring, attempted to purchase the leases and Oronogo's remaining equipment, with a view toward resuming mining activity in the area. Potter and Sims offered $50,000 for Oronogo's stock and leases plus the usual royalty and overriding royalty. Apparently the main reason Potter and Sims Company wanted the Waring leases was to enable them to pump all the water out of the area prior to mining. The nature of the underground water in the mines is such that one cannot de-water his mine without also de-watering the land of his neighbor, and Potter and Sims Company wanted to make sure they could mine all the area they de-watered. Expert testimony did opine that had the water been removed, profitable mining operations could have resumed. The...