Vulcan Materials Company v. United States

• Decision Date: 25 June 1971
• Docket Number: 30117.,No. 30116,30116
• Citation: 446 F.2d 690
• Parties: VULCAN MATERIALS COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

446 F.2d 690 (1971)

VULCAN MATERIALS COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

Nos. 30116, 30117.

United States Court of Appeals, Fifth Circuit.

May 28, 1971.

Rehearing Denied June 25, 1971.

COPYRIGHT MATERIAL OMITTED

Lee C. Bradley, Jr., William B. White, Jr., Birmingham, Ala., for plaintiff-appellant.

Wayman G. Sherrer, U. S. Atty., E. Ray Acton, Asst. U. S. Atty., Birmingham, Ala., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Meyer Rothwacks, Elmer J. Kelsey, Philip I. Brennan, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant-appellee.

Before BELL, AINSWORTH and ALDISERT,^* Circuit Judges.

ALDISERT, Circuit Judge:

Two principal issues are presented by these appeals from the district court's denial of federal income tax refunds: (I) whether organization or reorganization expenses incurred by appellant's predecessors, and concededly capital in nature and not deductible when incurred, became deductible upon the occurrence of statutory mergers carried out pursuant to 26 U.S.C. § 368(a) (1) (A); (II) whether appellant met its burden of overcoming the Commissioner's determination that one of its predecessors, Follansbee Steel Corporation, had acquired two other corporations for the principal purpose of tax avoidance. If appellant did not satisfy this burden, it is conceded that net operating loss carryovers were properly disallowed under 26 U.S.C. § 269(a) (2).

A stipulation of facts with accompanying documentary exhibits constituted the sole evidence at trial. No oral testimony was offered. The salient facts are summarized in the opinion of the district court, 308 F.Supp. 53, 54-55 (N.D.Ala. 1969):

On December 23, 1954, Consumers Company (Consumers) and Frontier Chemical Company (Frontier), both Delaware corporations, were merged into a third Delaware corporation theretofore named Follansbee Steel Corporation (Follansbee). Prior to the aforementioned merger, Follansbee disposed of all of its operating assets. Upon merger, the corporation owned approximately nine million dollars in liquid assets and had an approximate six million dollar net operating loss. In the merger proceedings, the name of the surviving corporation was changed from Follansbee Steel Corporation to Union Chemical and Material Corporation (Union Chemical). On December 31, 1957, Union Chemical was merged into the plaintiff. Each of the aforementioned mergers constituted reorganizations within the meaning of Sec. 368(a) (1) (A) of the Internal Revenue Code of 1954 * * *.

In 1934, the predecessor of Consumers filed a petition in the United States District Court for the Northern District of Illinois for a reorganization under Section 77B of the Bankruptcy Act. During the period 1933 through 1937, various expenditures were incurred with respect to the reorganization and to the organization of the former corporation into Consumers. Likewise, Follansbee\'s predecessor filed a petition in bankruptcy in 1934 and in 1940 was reorganized into Follansbee Steel Corporation. In 1946, a further corporation merged with Follansbee and as a result of the reorganization and merger, expenses were alleged to have been incurred. Each of the aforementioned expenditures is conceded to be capital in nature and thus not deductible when paid or incurred.

On its 1957 corporate income tax return, Union Chemical deducted all of the aforementioned expenses. A subsequent audit resulted in the disallowance of these deductions, followed by a deficiency assessment totalling $369,453.93 which was paid. A claim for refund of this amount was filed and thereafter rejected on the theory that the aforementioned expenditures were capital in nature and not deductible upon merger.

The Internal Revenue Service further refused to make a refund based on a depletion allowance on the ground that plaintiff had improperly carried over Follansbee\'s premerger net operating losses in contravention of Sec. 269 of the 1954 Code. Although the deficiency which resulted from the carry-forward was not assessable due to the bar of the statute of limitations, it was nevertheless of sufficient size to offset any recovery to which the plaintiff might otherwise have been entitled. On March 24, 1965, plaintiff\'s claim for refund was formally rejected.

* * * * * *

Prior to December 23, 1954, the date on which Consumers and Frontier merged into Follansbee, the latter corporation disposed of all of its machinery, tools, inventory, etc., which it used in its steel operation; hence, the corporation was but a mere shell. However, on the date of merger its sole possessions consisted of approximately nine million dollars in liquid assets and approximately a six million dollar net operating loss which it could not utilize due to the abatement of its operations. The companies which merged into Follansbee were engaged in the stone and chemical business. Following the merger, the new entity continued to operate profitably. In each of the years 1955, 1956 and 1957, portions of the pre-merger net operating loss suffered by Follansbee were used to offset the profits of the Consumers and Frontier enterprises.

I. Reorganization Expenses

It is well established that recapitalization or reorganization expenditures of a corporation are not ordinary and necessary business expenses but rather capital expenditures which are not deductible when incurred. General Bancshares Corp. v. Commissioner, 326 F.2d 712 (8 Cir.), cert. denied, 379 U.S. 832, 85 S.Ct. 62, 13 L.Ed.2d 40 (1964); Bush Terminal Bldgs. Co. v. Commissioner, 204 F.2d 575 (2 Cir. 1953); Missouri-Kansas Pipe Line Co. v. Commissioner, 148 F.2d 460 (3 Cir. 1945). In Godfrey v. Commissioner, 335 F.2d 82, 85 (6 Cir. 1964), the court stated:

An expenditure is of a capital nature "where it results in the taxpayer\'s acquisition or retention of a capital asset, or in the improvement or development of a capital asset in such a way that the benefit of the expenditure is enjoyed over a comparatively lengthy period of business operation." Louisiana Land & Exploration Co. v. Commissioner, 7 T.C. 507, aff\'d. 161 F.2d 842, C.A. 5 (1947) * * *.

While appellant concedes that the capital expenditures were not deductible when paid or incurred, the government acknowledges that capital expenditures of the nature here involved may be deducted upon the dissolution and liquidation of a corporation. Bryant Heater Co. v. Commissioner, 231 F.2d 938 (6 Cir. 1956); Commissioner of Internal Revenue v. Wayne Coal Mining Co., 209 F.2d 152 (3 Cir. 1954); Shellabarger Grain Products Co. v. Commissioner, 146 F.2d 177 (7 Cir. 1944); Koppers Co. v. United States, 278 F.2d 946, 150 Ct.Cl. 556 (1960); Pacific Coast Biscuit Co. v. Commissioner, 32 B.T.A. 39 (1935); Malta Temple Assn. v. Commissioner, 16 B.T.A. 409 (1929).

The issue here is whether the organization or reorganization expenses of appellant's predecessors may now be claimed as deductions, as urged by appellant, or whether the distinctions between dissolution and merger will preclude such deductions in a merger situation.

A statutory merger¹ effects a combination of two or more corporations in accordance with the detailed procedures established by the corporation laws of a state, with one of the corporations continuing as the same legal entity it was before the transaction. Stated differently, a merger is

the absorption of one corporation by another, which retains its name and corporate entity with the added capital, franchises and powers of the merged corporation. It is the uniting of two or more corporations by the transfer of property to one of them, which continues in existence, the others being merged therein.

15 Fletcher, Cyclopedia of Corporations § 7041. See Argenbright v. Phoenix Finance Co., 21 Del.Ch. 288, 187 A. 124 (1936); Fidanque v. American Maracaibo Co., 33 Del.Ch. 262, 92 A.2d 311 (1952). Thus, the distinguishing characteristics of a merger are (1) an assumption by the surviving corporation "of all the rights and liabilities of the disappearing entitles," 2 Cavitch, Business Organizations § 167.07 2, and (2) the cessation of the "separate existence of all the constituent corporations * * * except the one into which the other or others of such constituent corporations have been merged." 8 Del.Code Anno. § 259(a).

A corporate dissolution, on the other hand, represents the termination of the corporation's existence as a legal person. Once corporate existence ends, so do the privileges, powers, rights and duties which arose from corporate existence, except for specific purposes recognized by operation of law. 8 Cavitch, supra, § 185.02.

The term "dissolution" as applied to a corporation, signifies the extinguishment of its franchise to be a corporation and the termination of its corporate existence. It has been described as that condition of law and fact which ends the capacity of the body corporate to act as such and necessitates a liquidation and extinguishment of all legal relations existing in respect of the corporate enterprise. It denotes the complete destruction of the corporation, and, within contemplation of law, is equivalent to its death, being sometimes likened to the death of a natural person.

16A Fletcher, supra, § 7866.²

Thus, although in both a statutory merger and a dissolution the merged or dissolved corporate entity ceases to exist, fundamental distinctions inhere in the two processes. In a dissolution, the privileges, powers, rights and duties of the corporation come to an end and suffer a corporate death.³ In a merger, these attributes of corporate life are transferred to the surviving corporation and are there continued and preserved. It has been said that "all `rights, powers, liabilities and assets' survive except the `indicia and attributes of a corporate body distinct from that into which it is merged.'" Citizens Trust Co. v. Commissioner, 20 B.T.A. 392, 393 (1930).

Recognizing these distinctions, we accept the...