Opinion
No. F-319.
October 20, 1930.
Suit by the Alpha Portland Cement Company against the United States.
Judgment for plaintiff.
This suit is for the recovery of $20,028.90, profits tax for the calendar year 1917 with interest from October 6, 1925.
Plaintiff took over the property and assets of the Catskill Cement Company, an affiliated corporation, the entire capital stock of which it owned, and claimed as a deduction from gross income for both income and profits tax purposes a loss of $416,627.27 for 1917 alleged to represent its investment in the stock of the affiliated corporation.
The Commissioner of Internal Revenue in auditing the income and the consolidated returns for 1917 determined that plaintiff sustained a loss in 1917 of $365,189.61 in this transaction and allowed this loss as a deduction in determining the net income for income-tax purposes but disallowed the loss in determining the net income for excess-profits tax purposes.
Plaintiff contends that the loss was a proper deduction in determining the net income for both income and profits tax purposes.
The defendant contends, first, that any loss which occurred prior to January 1, 1917, resulted from an intercompany transaction and cannot be deducted; secondly, that any loss which occurred after January 1, 1917, would be the difference between the value of the plant on January 1 and its salvage value when it was abandoned; and that this is not established by the facts.
Special Findings of Fact.1. The plaintiff, a New Jersey corporation, is engaged in the manufacture of Portland cement at its several mills in various parts of the country. It was organized in 1910 through a consolidation of other corporations.
2. In 1909 one of the plaintiff's predecessors had acquired all of the capital stock of the Catskill Cement Company, a New Jersey corporation, for $416,627.27, and in the consolidation of 1910 this stock was acquired by the plaintiff.
The Catskill Cement Company, hereinafter referred to as the Catskill Company, was then engaged in the manufacture of Portland cement at Catskill, N.Y. From 1910 to 1912 the Catskill Company operated its mill as a separate corporation, although plaintiff owned its entire capital stock. In 1912 the plaintiff, through a lease reduced to writing in 1914, took over the operation of the Catskill mill. Under the terms of this lease plaintiff agreed to pay the Catskill Company a royalty of 2 cents a barrel on all cement made or manufactured during its term; the interest on the issue of mortgaged bonds of the Catskill Company and the interest upon any renewal or replacement thereof; and to pay all taxes, duties, and assessments upon the leased premises. No cash was actually paid by plaintiff to the Catskill Company under this lease. All expenses of operation of the Catskill plant were borne by plaintiff under the lease. All moneys necessary for improvements and additions thereto were advanced by plaintiff to the Catskill Company and were expended by plaintiff on behalf of the Catskill Company in making such additions and improvements, and were charged by plaintiff on its books against the Catskill Company. The amounts so expended were carried on plaintiff's books as accounts receivable.
3. When the plaintiff on organization in 1910 came into ownership of the entire capital stock of the Catskill Company, it found the facilities of the latter company in bad condition. Among other things, the plant furnishing power for the mill was inadequate.
During the years 1910 to 1914 the plaintiff advanced to the Catskill Company large sums, which were expended by the plaintiff in enlarging and improving the Catskill plant. Among other things, there was purchased, erected, and installed in the Catskill plant a complete new power plant, consisting of a gas-generating plant, seven gas engines, and the necessary housing and equipment. This new power facility was completed in 1914 at a cost of $454,696.78.
4. During that time litigation was pending against the Catskill Company by the owners of ice fields on the Hudson River because of dust discharged from the kilns of the Catskill mill. There was at that time no practical method known for reducing such discharge. During the course of said litigation plaintiff's engineers invented a method of collecting the dust by first cooling the gases from the cement kilns by passing such gases through steam boilers. In order to meet this change of conditions, the Catskill Company and the plaintiff decided to install such waste-heat boilers and turbines, and to generate the power for the mill in this way. Construction of the waste-heat boilers was commenced late in 1915 or the early part of 1916 and was completed early in 1917 before the sale and transfer by the Catskill Company of its business and assets to plaintiff. Thereupon, the Catskill Company permanently abandoned the gas-engine plant in the operation of the mill and it was not thereafter used for any other purpose. Prior to this time the gas-engine plant had been used to furnish the power for the cement mill and was continued in full use until closed down and replaced by another method. The new power plant was completed and the gas-engine plant was abandoned prior to March 10, 1917. At the time of abandonment the gas-engines and the equipment had a salvage value of $15,000. After the installation of the new power system, the abandonment of the gas-engine plant, and the sale and transfer of the assets of the Catskill Company, plaintiff made efforts to sell the gas engines and the equipment through advertisements and solicitation of secondhand dealers and manufacturers. No purchasers could be found until 1923 and 1924, in which years these engines and equipment were sold for $15,000. The salvage value of the building constructed to house the gas-engine power plant was $24,850.60 at the time of abandonment of the gas power facilities.
5. The Commissioner of Internal Revenue allowed an annual rate of depreciation upon the Catskill Company's plant of 5 per cent.
6. The Catskill Company owned a large plant and equipment, and considerable real estate and quarries. On March 10, 1917, the Catskill Company, by written deeds of transfer of that date, sold and transferred to plaintiff all of its business and properties for a price of $1,222,079.73; the transfer being made effective as of January 1, 1917. The Catskill Company was thereafter, on November 6, 1918, legally dissolved.
From March 10, 1917, until the date of dissolution, the Catskill Company owned no assets and carried on no business of any kind. The price of $1,222,079.73, at which the Catskill Company transferred all of its properties to plaintiff, represented advancements of money from plaintiff to the Catskill Company, and expended by the Catskill Company, or by the plaintiff in its behalf for improvements and additions to the Catskill Company's plant. Apart from the capital-stock liability, the indebtedness of the Catskill Company to the plaintiff represented the sole liability of the Catskill Company. After the transfer to plaintiff the Catskill Company owned no assets and owed no debts. At the time of the transfer plaintiff credited $1,222,079.73 to the Catskill Company in full payment for all of the assets transferred. The indebtedness of the Catskill Company to the plaintiff for money advanced was thereupon satisfied and discharged. The amount of $416,627.27 which plaintiff carried on its books as the cost to it of the entire capital stock of the Catskill Company was credited to the Catskill account and charged to profit and loss on December 31, 1917.
7. For the calendar year 1917 the plaintiff on March 29, 1918, filed a consolidated excess-profits tax return for itself, the Catskill Company, and the Alpha Portland Cement Company of Pennsylvania. The plaintiff, the Catskill Company, and the Alpha Portland Cement Company of Pennsylvania filed separate individual tax returns for 1917 for income-tax purposes. Plaintiff paid the income and profits tax of $33,495.13 shown upon the plaintiff's separate income-tax return, and the consolidated profits tax return filed.
The income-tax return filed by the Catskill Company showed no income and no expenses during the year and contained the statement, "no income and no expenses during the year 1917." The officers of the plaintiff and the Catskill Company were the same.
8. The cost to the plaintiff of the stock of the Catskill Company in 1910 was $416,627.27. Its fair market value on March 1, 1913, was $365,189.61. Upon audit of the returns filed by the plaintiff for 1917 the Commissioner of Internal Revenue held that the plaintiff had sustained a loss in that year on account of its investment in the stock of the Catskill Company of $365,189.61, being the March 1, 1913, value of the stock of that company which was lower than cost. The commissioner allowed the plaintiff this amount as a deduction in determining its net income for income-tax purposes, but refused to allow the same as a deduction in determining the net income for excess-profits tax purposes.
9. No loss was allowed specifically because of the abandonment of the gas-engine plant of the Catskill Company, although that item entered into the commissioner's determination of the amount of loss which he allowed for income-tax purposes through the investment by plaintiff in the stock of the Catskill Company.
10. The commissioner determined and assessed an additional tax of $28,352.76 which the plaintiff paid October 6, 1925. April 26, 1926, it filed claim for refund, which claim was denied by the commissioner July 22, 1926, whereupon it brought this suit to recover $20,028.90 with interest from October 6, 1925.
F. Carroll Taylor, of New York City (Louis H. Porter, of New York City, on the brief), for plaintiff.
Ralph C. Williamson, of Washington, D.C., and Herman J. Galloway, Asst. Atty. Gen. (Ottamar Hamele, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The Catskill Cement Company was affiliated with plaintiff and a consolidated profits tax return for 1917 was filed for this and other affiliated corporations.
The facts establish that the gas engine plant, including the building in which it was housed, was installed and constructed in 1914 at a cost to the Catskill Company of $454,696.78. It was abandoned and its use discarded early in 1917 before the sale and transfer by the Catskill Company of its entire business and assets to the plaintiff on March 10, 1917. The building, which was included in the aforementioned cost, had a fair market value of $24,850.60 at the time the gas power plant was abandoned and the gas engines and equipment had a salvage value at the time of the abandonment of $15,000. Therefore, upon the abandonment of the gas power plant, the Catskill Company sustained a loss of the difference between the original cost, less depreciation of 5 per cent. for two years on the gas engines and equipment, and the salvage value, or $369,376.51. This loss was in no sense intercompany and was therefore a proper deduction in determining the consolidated net income of the group for excess-profits tax purposes.
The fact that the power plant was erected and installed by the plaintiff which owned all the stock of the Catskill Company did not change the situation, since, at that time, the corporations were separate entities and the amount expended in construction and installation of the power plant was an expenditure by the Catskill Company. The fact that it borrowed the money from the plaintiff does not change the situation. Legal ownership of all of the assets of the Catskill Company was in that company until the sale and transfer on March 10, 1917. The fact that the deeds recite that the transfer was effective as of January 1, 1917, is of no significance in connection with the question involved. The Catskill Company was not dissolved until November, 1918.
The above deduction, which we hold was allowable from the consolidated net income for excess-profits tax purposes, results in no excess-profits tax liability. The plaintiff is therefore entitled to recover, and judgment in its favor for $20,028.90, with interest, will be entered. It is so ordered.