Opinion
Docket No. 3349-62.
1965-01-28
H. F. RAMSEY COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
R. Glenn Snipes and Harold K. Bennett, for the petitioner. Wallace E. Whitemore, for the respondent.
R. Glenn Snipes and Harold K. Bennett, for the petitioner. Wallace E. Whitemore, for the respondent.
Petitioner was in the road construction business and had suffered operating losses prior to and in 1956. In the middle of 1956 petitioner, under an agreement with its bonding company, curtailed its activities, took on no new business thereafter, and sold most of its equipment to complete its obligations under existing contracts and liquidate its debts. In December 1957 all of the petitioner's stock was acquired by purchase by T and B who were also in the construction business. T and B thereafter operated petitioner in road construction business at a profit. Held, petitioner continued to carry on substantially the same business it conducted prior to the change in control and is not denied the right to deduct its operating loss carryovers under section 382, I.R.C. 1954. Held, further, the principal purpose for the acquisition of control of petitioner by T and B was to avoid tax by securing the benefit of a deduction they would not otherwise have enjoyed, and petitioner's net operating loss deduction was properly disallowed under section 269(a), I.R.C. 1954.
DRENNEN, Judge:
Respondent determined deficiencies in petitioner's income tax for the taxable years 1958 and 1959 in the respective amounts of $34,416.70 and $16,127.37.
The only issue for decision is whether petitioner, all of whose issued and outstanding stock was acquired by Baxter H. Taylor and Sam H. Bushnell in December 1957, is entitled to net operating loss deductions in 1958 and 1959 comprised of net operating loss carryovers from years prior to 1957.
There is no real dispute between the parties with respect to the evidentiary facts important to a decision o? this issue, except for the testimony of witnesses interpreting those facts and reciting their reasons for entering into the principal transaction involved, so we will not state in detail herein many of the evidentiary facts upon which we base our findings and conclusions. Our findings of fact below represent in some instances our conclusions drawn from the evidentiary facts.
FINDINGS OF FACT
The stipulated facts are found accordingly.
Petitioner is a corporation incorporated under the laws of North Carolina on September $20, 1951, engaged in the construction business, principally in the excavation of rock incident to road construction. Its principal office is in Asheville, N. C. It filed Federal corporation income tax returns for the taxable years 1958 and 1959 with the district director of internal revenue, Greensboro, N.C.
From September 20, 1951, through December 9, 1957, H. F. Ramsey thereafter referred to as Ramsey) owned, directly or indirectly, a majority of the issued and outstanding stock of petitioner. During this period Ramsey served as petitioner's chief executive officer. H. C. Browning (hereafter referred to as Browning) has been a director and secretary-treasurer of petitioner from 1951 to date. On December 9, 1957, petitioner's outstanding stock was owned as follows:
+--------------------------+ ¦ ¦Number of ¦ +--------------+-----------¦ ¦Stockholder ¦Shares ¦ +--------------+-----------¦ ¦Ramsey ¦1,675 ¦ +--------------+-----------¦ ¦Browning ¦105 ¦ +--------------+-----------¦ ¦M. G. Ramsey ¦70 ¦ +--------------------------+
Asheville Contracting Co. (hereafter called Asheville) is a corporation incorporated under the laws of North Carolina, engaged in the road construction business. Prior to his death in 1950, W. H. Anderson (hereinafter called Anderson) was its principal officer and stockholder. Ramsey, a nephew of Anderson, was a director and vice president and fulltime employee of Asheville prior to 1950. Baxter H. Taylor (hereafter called Taylor) was a son-in-law of Anderson and was employed by Asheville for the periods January 1941 to May 1942, and November 1945 to December 1948. M. G. Ramsey, also a nephew of Anderson, was employed as a foreman by Asheville continuously for more than 10 years prior to Anderson's death.
Browning became employed by Ashville in March 1946 as its office manager and chief accounting officer and continued in this employment until the incorporation of petitioner in 1951. On April 29, 1957, Browning was reemployed by Asheville as chief accounting officer and comptroller, which positions he still holds.
In his will, Anderson provided that on his death any interest he had in any contracting business should be disposed of by his executors and that such interests should first be offered for sale to his children, their husbands, and trusted employees of the business.
Immediately following Anderson's death in 1950, Asheville began curtailing its business activities. Ramsey purchased some of the equipment of Asheville and he and others formed petitioner. Taylor began the operation of a contracting business as a sole proprietorship, doing business as Taylor Construction Do., in July 1950.
In 1954 Taylor acquired all of the outstanding stock of Asheville, and in 1955 transferred to it the assets and business of his sole proprietorship. Since that time he has owned a majority of the stock of Asheville. From 1955 to the present Asheville has engaged in road construction work, including the excavation of rock. When Taylor purchased all of the stock of Asheville, it had net operating loss carryovers totaling $74,286.03 which were used as deductions to reduce the taxable income of Asheville for 1955.
Throughout the period from petitioner's formation to 1956 petitioner and Asheville were closely associated, and petitioner was also closely associated with Taylor's sole proprietorship business. Their offices were adjoining in the same building which was owned by the estate of Anderson. From time to time petitioner performed subcontract work for Taylor Construction Co. and Asheville were engaged generally in the same type of business, were about the same size, and operated in the same general area.
Petitioner's operations were not successful and net operating losses were sustained in each of the years 1951 through 1956 as follows:
+-----------------------------------+ ¦Taxable year ¦Net operating loss ¦ +--------------+--------------------¦ ¦1951 ¦$6,753.23 ¦ +--------------+--------------------¦ ¦1952 ¦322.64 ¦ +--------------+--------------------¦ ¦1953 ¦15,308.40 ¦ +--------------+--------------------¦ ¦1954 ¦77,305.06 ¦ +--------------+--------------------¦ ¦1955 ¦49,411.32 ¦ +--------------+--------------------¦ ¦1956 ¦98,726.17 ¦ +--------------+--------------------¦ ¦Total ¦247,826.82 ¦ +-----------------------------------+
Up to December 9, 1957, petitioner had performed a total of 10 contracts for which it received gross income, as reported in its Federal income tax returns for the taxable years 1951 through 1957, in the total amount of $4,507,075.54. Four of these contracts were performed by petitioner as a subcontractor for Taylor Construction Co. or Asheville for a total gross amount of $741,172.78. The following is a summary of the 20 contracts:
+-----------------------------------------------------------------------------+ ¦Date of ¦Contract ¦Location ¦Year ¦Gross ¦ ¦ ¦No. ¦ ¦ ¦ ¦ +-------------+----------+---------------------------+-----------+------------¦ ¦contract ¦ ¦ ¦completed ¦income ¦ ¦ ¦ ¦ ¦1 ¦ ¦ +-------------+----------+---------------------------+-----------+------------¦ ¦Feb. ¦25, ¦S-2407-(3)¦Knox County, Tenn ¦Dec. ¦1955¦$32,998.79 ¦ ¦ ¦1955 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Nov. ¦15, ¦S-2522-(1)¦Hamblen County, Tenn ¦Sept. ¦1955¦80,610.10 ¦ ¦ ¦1954 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Apr. ¦15, ¦S-2379-(2)¦Carter County, Tenn ¦Apr. ¦1955¦162,381.51 ¦ ¦ ¦1954 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Sept.¦14, ¦S-2455-(1)¦Unicoi County, Tenn ¦Dec. ¦1954¦378,051.69 ¦ ¦ ¦1953 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Apr. ¦4, 1952¦F-001-9- ¦Sullivan County, Tenn ¦Nov. ¦1953¦293,769.40 ¦ ¦ ¦ ¦(18) ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦July ¦1, 1956¦8183 2 ¦Burke County, N.C. ¦Apr. ¦1957¦35,420.12 ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Feb. ¦29, ¦8182 2 ¦----do ¦Sept. ¦1957¦115,243.61 ¦ ¦ ¦1952 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Apr. ¦29, ¦4154 ¦Durham County, N.C. ¦July ¦1957¦148,880.82 ¦ ¦ ¦1955 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Mar. ¦4, 1955¦8-452 2 ¦Watauga County, N.C. ¦July ¦1957¦422,640.21 ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Sept.¦27, ¦5926 ¦Rockingham County, N.C. ¦Jan. ¦1957¦203,154.77 ¦ ¦ ¦1954 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Apr. ¦15, ¦0-100 ¦Avery County, N.C. ¦Mar. ¦1957¦254,456.86 ¦ ¦ ¦1954 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Jan. ¦6, 1954¦0-550 ¦Madison County, N.C. ¦Dec. ¦1955¦300,958.23 ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Mar. ¦10, ¦4156 ¦Durham County, N.C. ¦Apr. ¦1957¦141,151.82 ¦ ¦ ¦1954 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Oct. ¦29, ¦4175 ¦----do ¦Apr. ¦1956¦182,555.02 ¦ ¦ ¦1955 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Dec. ¦5, 1952¦9701 ¦Yancey-Madison Counties, ¦July ¦1955¦338,260.18 ¦ ¦ ¦ ¦ ¦N.C. ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Sept.¦15, ¦8041 ¦Avery County, N.C. ¦Mar. ¦1954¦118,328.03 ¦ ¦ ¦1952 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Oct. ¦13, ¦8055 ¦----do ¦Mar. ¦1955¦189,211.38 ¦ ¦ ¦1952 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Oct. ¦15, ¦5009 ¦Guilfold-Alamance Counties,¦Apr. ¦1955¦348, 597.43 ¦ ¦ ¦1952 ¦ ¦N.C. ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Feb. ¦29, ¦8162 ¦Burke County, N.C. ¦Apr. ¦1955¦592,536.73 ¦ ¦ ¦1952 ¦ ¦ ¦ ¦ ¦ ¦ +-----+-------+----------+---------------------------+------+----+------------¦ ¦Sept.¦26, ¦8035 2 ¦Avery County, N.C. ¦Oct. ¦1953¦167,868.84 ¦ ¦ ¦1951 ¦ ¦ ¦ ¦ ¦ ¦ +----------------------------------------------------+------+----+------------¦ ¦Total gross income 1951 through 1957 from contracts ¦ ¦ ¦4,507,075.54¦ +----------------------------------------------------+------+----+------------¦ ¦Total income from prime contracts ¦ ¦ ¦3,765,902.76¦ +----------------------------------------------------+------+----+------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------------------------------------------------+------+----+------------¦ ¦Total income from subcontracts ¦ ¦ ¦741,172.78 ¦ +-----------------------------------------------------------------------------+
Petitioner's losses resulted, in part at least, from the fact that Ramsey was suffering from arthritis and was otherwise in ill health starting about 1954 and could not properly supervise the contracts undertaken by petitioner.
Throughout the period of Ramsey's control of petitioner, Travelers Indemnity Co. (hereafter referred to as Travelers) provided the necessary performance bonds for petitioner's contracts summarized above. Ramsey, who had a sizable personal estate, was often called upon to personally indemnify Travelers from any loss on these bonds. In May 1956 petitioner informed Travelers that it us unable to pay outstanding debts for materials, supplies, and labor furnished petitioner in the course of performing its contracts, and that it was unable to obtain funds to complete its contracts without financial assistance. After consultation with representatives of Travelers, petitioner and Travelers entered into an agreement dated May 25, 1956, denominated a trust agreement, in which, after reciting that Travelers, as surety, had executed performance bonds in connection with contracts Nos. 4175, 4156, 0-100, 5926, and 4154, described above, it was agreed that Travelers might advance funds to petitioner to make performance of the contracts possible.
In the agreement, petitioner and Travelers agreed to open and maintain a special bank account at a bank to be chosen by Travelers and that any funds received with respect to the contracts (either by petitioner or by Travelers as petitioner's assignee) would be deposited in the account, together with any advances from Travelers and the proceeds of any loans negotiated by petitioner to pay the costs of the contracts. Any checks drawn on the account were to be jointly signed by Ramsey and Browning and approved by designated persons. The account was to be maintained for the purpose of paying the costs of completing the contracts, repaying any advances by Travelers, and indemnifying Travelers with respect to its liabilities as surety on the performance bonds. Any funds in the account were to be impressed with a trust. Upon completion and acceptance of the contracts and discharge of all obligations guaranteed by Travelers and of all costs incurred in performance of the contracts, Travelers was to relinquish claim to any balance remaining in the fund.
Pursuant to the trust agreement and through the efforts of Travelers, Ramsey, and others, petitioner was able to borrow $100,000 from the Wachovia Bank & Trust Co. to enable it to complete its projects in progress. Petitioner's note evidencing the loan was endorsed by Travelers and was secured by a first mortgage on all of petitioner's physical assets.
Proceeds of the loan were deposited on May 31, 1956, in the special account at the Wachovia Bank & Trust Co. maintained in accordance with the trust agreement of May 25, 1956. Travelers had final control over this special account, and, pursuant to the requirements of Travelers, petitioner utilized the funds made available to it to complete its then-existing contracts. All receipts from contracts on which Travelers had issued bonds and all receipts from petitionerS sale of its equipment were deposited in the special account. Thereafter, petitioner did not bid on or undertake any new jobs prior to December 10, 1957, except one small subcontracting job for Asheville undertaken July 1, 1956 (contract No. 8183).
As jobs were completed by petitioner, its equipment, when not needed on other jobs, was brought to petitioner's equipment yard where it was reconditioned. Many pieces of equipment were sold for the best price available without sacrifice and the proceeds from the sale were used to discharge the loan from Wachovia Bank & Trust Co. Ramsey's primary aim at this time was to complete contracts in progress and to do everything necessary and possible to discharge all of petitioner's debts and liabilities.
Petitioner's contracts which were uncompleted at May 31, 1956, were projects numbered 4154, 4156, 5916, 0-100, 8-452, 8182, and 8183. Contracts numbered 4154, 4156, 5926, and 0-100 were prime contracts while projects numbered 8182, 8183, and 8-452 were subcontracts for Asheville or for Taylor Construction Co. under which performance bonds were not required. Under these and similar contracts the awarding authority, usually the State or an agency or subdivision thereof, withheld a certain percentage of the amounts estimated to be due the contractor from time to time as work progressed, referred to as retainage. This retainage, or a part thereof, was not usually released to the contractor until the contract work had been accepted by the awarding authority and a final estimate had been made. This usually resulted in the contractor not receiving his retainage and the amount of the final estimate until 6 or more months after he had completed the project. At times a contractor was also required to do repair and cleanup work on a project after it had been completed and accepted but before the final payments were made. The contractor at times withheld retainage from subcontractors until the final estimates were made.
Petitioner had completed substantially all its work on all of these contracts prior to December 31, 1956, and it used none of its equipment for construction work on these or any new projects during 1957. However, it did not receive its final payments on the above contracts until various times in 1957, as indicated on the table above, the total amount received in 1957 being $65,877.35. It also paid out to its subcontractors in 1957 amounts of retainage it had withheld from them for work completed in 1956 totaling $11,567.60. Petitioner also paid in 1957 relatively small amounts for repair of equipment, insurance, and damage claims, totaling approximately $2,070, most of which expenses were incurred in connection with work completed prior to 1957.
Petitioner made it a practice to maintain payroll accounts at a bank in the locality of its construction projects, which were normally closed out when the projects were completed. All of these payroll accounts had been either closed out or left with minor balances by December 31, 1956. There was very little activity in any of petitioner's bank accounts during 1957, except the special account at Wachovia Bank & Trust Co. opened under the agreement with Travelers. All of these accounts, including the latter account, were closed out prior to or on December 10, 1957.
Prior to December 1957 petitioner had received final payments on all its contracts, had paid all of its obligations under its contracts, and had repaid the Wachovia Bank loan. Its only obligation left unpaid, except possible small current accounts, was to Ramsey for amounts advanced to it by Ramsey from time to time to meet operating expenses, plus interest thereon. In meeting its obligations petitioner had sold most of its construction equipment, retaining equipment having a book value of only about $60,000 as of December 9, 1957. It is not clear from the record whether Ramsey intended, during the latter part of 1956 and up until December 10, 1957, to discontinue the business or just to curtail it until petitioner's debts could be paid. His principal concern during this period was to complete petitioner's existing contracts and pay off all of its obligations so that no one would suffer a loss as a result of his dealings with petitioner.
An attorney for petitioner, in handling an excise tax matter for petitioner with the Department of Finance and Taxation, State of Tennessee, stated in a letter to that agency dated September 23, 1957, as follows:
Your letter of September 19th in reference to additional excise tax in the sum of $440.78 stated to be due your Department has been received, and I forthwith sent copies of same to H. F. Ramsey Company, Inc. at its office in North Carolina.
Upon inquiry I find that this company has no assets in Tennessee and has not had any assets in this state for the last two years or more. The Company is a North Carolina corporation and its offices are in Asheville. Most of its activities have been confined to that state; however, the Company became heavily involved, to such an extent in fact that it was necessary for the bonding company that was surety on its performance bonds to advance certain funds, and to secure same it took a mortgage on the assets of the Company. A liquidation has been in effect for more than a year. The Company has no existing contracts, all of same having been finished, and representatives of the Company and of the bonding company are endeavoring to sell the remaining assets to the end that its mortgage indebtedness may first be paid and, of course, if there is anything left, it will be paid to the other creditors.
* * * *
The information which I have given you was furnished me by Mr. Ramsey, the President of the Company.
Ramsey read the letter after it was dictated and approved generally its contents.
Petitioner did not accrue income due under its contracts when the work was completed and accepted but included it in income when the amounts were actually received. Petitioner reported gross receipts from contracts on its 1957 return in the total amount of $65,877.35, which included $52,392.67 of retainage from work completed prior to 1957 and $13,484.68 of final estimates on work substantially completed in 1956 but not billed or paid until 1957. From this it deducted $13,861.14 as cost of operations (being the retainage paid to subcontractors, insurance, etc.), and reported $52,016.21 as gross profit. To this was added $33,236.26 as gain on the sale of equipment, $1,252.47 as income from scrap iron sales, and $1,123.38 as miscellaneous income, for a total income of $87,628.32. From this it deducted $23,279 of general expenses, including $7,400 in salaries of Ramsey and Browning, and $3,650.74 in wages, to arrive at taxable income before operating loss deduction of $64,349.32. Petitioner had a net operating loss deduction of $241,073.59, arising from operating loss carryovers from 1952-56, which it applied against this taxable income, which resulted in no tax being due. Respondent did not disallow the net operationg loss deduction for 1957.
Beginning in 1956 and from time to time thereafter, Taylor discussed with Ramsey the possibility of his purchasing the stock of petitioner. Taylor did not want to purchase the equipment owned by petitioner, which largely duplicated equipment owned by Asheville, and Ramsey preferred to see it piecemeal since he thought he could get better prices if he sold individual pieces as he found buyers.
Taylor knew that petitioner had incurred losses, and he discussed the purchase of petitioner's stock with his tax adviser, a certified public accountant, R. Glenn snipes (hereafter referred to as Snipes), who was also accountant for petitioner. Taylor knew that net operating losses could be carried over and used as deductions in succeeding year for a certain period. Snipes told him that such deductions would be useless unless there was income in succeeding years against which the losses could be applied, and Snipes did not particularly encourage Taylor's purchase of the stock. Taylor did not see financial statements for petitioner, but he understood that petitioner's total net operating losses were in the neighborhood of $200,000.
Taylor also knew that petitioner possessed an unlimited license to contract within the State of Tennessee. Taylor had attempted to obtain such an unlimited license for Asheville, without success, and Asheville's license to bid on contracts within the State of Tennessee was limited to $750,000 in 1957. The limit for Asheville was raised to $1,500,000 in 1959 and in 1961 it was made unlimited. In 1957, at Asheville's request, Asheville had bid jointly with Nello Teer Construction Co. on a State contract in Blount County, Tenn., involving over $1 million, which Ashville nor the Teer company performed the contract; they assigned it at a profit. The share of this profit to the Teer Company was $62,500.
In 1958 Asheville realized total gross income of $3,107,615.02, of which the amount of $230,850.94 was attributable to work performed in Tennessee. In 1959 Asheville realized total gross income of $3,182,731.10, of which the amount of $481,750.53 was attributable to work performed in Tennessee.
From December 10, 1957, to December 31, 1959, petitioner performed a total of five contracts for which it received a total of $515,956.99 in gross income. All of these projects were in North Carolina.
Sam H. Bushnell (hereafter referred to as Bushnell), an engineer experienced in road contracting and excavation work, went to work for Asheville in September 1955. Taylor considered his services valuable, and Bushnell wanted a proprietary interest in some contracting company. Therefore, in December 1955 Asheville, Taylor, and Bushnell entered into an agreement which provided for Bushnell's employment by Asheville at a minimum salary of $9,000 per year plus a percentage of net profit bonus. Taylor also agreed to sell Bushnell 40 percent of the stock of Asheville and 40 percent of the stock of Blue Ridge Construction Co., another corporation wholly owned by Taylor, over a 5-year period at book value. Bushnell made several payments on the stock but became dissatisfied with this arrangement because he found it impossible to save enough money after taxes to pay for the stock. But Bushnell was still desirous of obtaining an equity interest in a contracting corporation, and Taylor was apprehensive that he might lose Bushnell's services. Therefore, when Taylor was considering buying Ramsey's stock, he suggested that Bushnell purchase 40 percent of the stock of petitioner, with Taylor purchasing the other 60 percent. Taylor and Bushnell agreed to purchase petitioner's stock in these proportions, and they also agreed to nullify their prior agreement for the purchase of a 40-percent interest in Asheville and Blue Ridge. Payments made by Bushnell on the latter two stocks were returned to him.
On November 18, 1957, Taylor agreed with Ramsey and the other stockholders to purchase all of petitioner's capital stock for $7,421.40. Such price contemplated that petitioner's office furniture and fixtures with an adjusted basis of $685.74 would remain as assets of petitioner, but that all other physical assets of petitioner were required to be purchased by Ramsey in full satisfaction of petitioner's obligations to Ramsey. Taylor paid Ramsey $50 on the purchase price on November 18, and paid the respective stockholders the balance of the purchase price on December 10, 1957. Simultaneously therewith Bushnell agreed to and did purchase 40 percent of the stock of petitioner for a consideration of $3,168.56, $500 of which Bushnell paid by check dated January 1, 1958, and the remainder of which was evidenced by a demand note dated November 18, 1957, which Bushnell paid in 1959.
By December 4, 1957, petitioner had sold all its physical assets except office furniture and fixtures and 11 pieces of construction equipment which had an adjusted basis of $60,239.46.
As of December 4, 1957, petitioner was indebted to Ramsey for moneys borrowed, accrued interest, and notes in the aggregate amount of $65,171.47 as follows:
+------------------------------------+ ¦Ramsey's account charged:¦ ¦ +-------------------------+----------¦ ¦Notes payable ¦$38,000.00¦ +-------------------------+----------¦ ¦Open account ¦19,605.65 ¦ +-------------------------+----------¦ ¦Accrued interest ¦7,565.82 ¦ +------------------------------------+
65,171.47 Dec. 10, 1957, Ramsey was paid the company's check 500.00 Reducing the aggregate balance to 64,671.47
On December 4, 1957, petitioner sold all of its remaining physical assets except office furniture and fixtures to Ramsey for $64,671.47. Thereupon petitioner's indebtedness to Ramsey was eliminated. The price of $64,671.47 was the approximate value of the assets and Ramsey later disposed of the equipment.
Petitioner's assets and liabilities on the dates indicated were as follows:
+-------------------------------------------------------------+ ¦ASSETS ¦ +-------------------------------------------------------------¦ ¦ ¦Dec. 9, 1957 ¦Dec. 31, 1957 ¦ +------------------------------+--------------+---------------¦ ¦ ¦ ¦ ¦ +------------------------------+--------------+---------------¦ ¦Cash ¦$201.43 ¦$235.00 ¦ +------------------------------+--------------+---------------¦ ¦Officer furniture and fixtures¦1,302.37 ¦1,302.37 ¦ +------------------------------+--------------+---------------¦ ¦Reserve for depreciation ¦(616.63) ¦(748.35) ¦ +------------------------------+--------------+---------------¦ ¦Total assets ¦887.17 ¦789.02 ¦ +------------------------------+--------------+---------------¦ ¦ ¦ ¦ ¦ +-------------------------------------------------------------+
LIABILITIES AND CAPITAL Liabilities--Accounts payable 431.16 1 750.00 Capital-- Capital stock 185,000.00 185,000.00 Surplus (deficit) (184,543.99) (184,960.98) Total liabilities and capital 887.17 789.02 6. To conclude otherwise would make the statute completely ineffective to prevent trafficking in loss corporations within the same industry.
“Year completed” means the date on which final payment was received.
$76,762.89, and $41,591.10. As a result of these deductions petitioner reported no taxable income for these 3 years. As previously noted, respondent allowed the claimed carryover for the year 1957. Respondent disallowed the claimed carryover to the taxable years 1958 and 1959 under the provisions of sections 382 and 269 of the Internal Revenue Code of 1954. By motion, not resisted or objected to by respondent, petitioner requests that a net operating loss determined by respondent to have been incurred by petitioner in 1961 be taken into consideration as a net operating loss carryback to the years here involved to the extent available and necessary in computing petitioner's taxable income for these years, in the event we decide the contested issue in favor of respondent. Petitioner's motion is granted and the contents thereof shall be taken into consideration in the Rule 50 computations, if necessary.
Subsequent to the acquisition of petitioner's stock by Taylor and Bushnell, petitioner has engaged in the road construction business similar to that conducted by petitioner while it was under the control of Ramsey.
As shown on its returns, petitioner owned equipment having the following bases on the following dates:
Subcontracts for Taylor Construction Co. and Asheville.
In Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957), the Supreme Court held that in order to be entitled to a net operating loss carryover, under the predecessor section 122 of the 1939 Code, the income against which the offset is claimed must be produced by substantially the same business which incurred the losses. Further limitations on the deductibility of loss carryovers are specifically provided in sections 269 and 382 of the 1954 Code. Section 269 of the 1954 Code
1To Taylor.
Petitioner claimed a net operating loss deduction for the years 1957, 1958, and 1959 in the respective amounts of $64,349.32,
+------------------------+ ¦¦Equipment per ¦ ++-----------------------¦ ¦¦depreciation schedule ¦ ++-----------------------¦ ¦¦ ¦ ¦ +------------------------+
Cost basis Adjusted basis Dec. 31, 1956 $426,195.71 $131,727.04 Dec. 9, 1957 1,302.37 685.74 Dec. 31, 1957 1,302.37 564.02 Dec. 31, 1958 91,122.95 74,044.37 Dec. 31, 1959 105,849.48 68,737.52 Dec. 31, 1960 255,610.28 157,742.74
Petitioner's net worth at December 31, 1958, 1959, and 1960, as shown on its returns, was in the respective amounts of $76,801.91, $117,421.01, and $133,848.92.
ULTIMATE FACTS
Petitioner continued to carry on, after December 1957, substantially the same trade or business conducted by it prior to December 1957.
In December 1957 Taylor and Bushnell acquired, by purchase of stock, control of petitioner within the meaning of section 269(a), I.R.C. 1954. The principal purpose of the acquisition was to avoid Federal income taxes be securing the benefit of deductions which they, the acquirers, would not otherwise enjoy.
OPINION
The issue for decision is whether a corporation engaged inthe road construction business, all of whose stock was sold in December 1957, may carry over and deduct its net operating losses incurred prior to the change in ownership from its income earned in the same type business after the change in ownership. Prior to December 1957 petitioner was principally owned and controlled by Ramsey. It suffered losses in its road construction business for the years 1951 through 1956. About the middle of 1956, because of its precarious financial position and under an agreement with its bonding company, petitioner began curtailing its activities and took on no new work after that date. It completed all contracts it then held and as its equipment was taken off a job it was reconditioned and sold. By December 1957 petitioner had liquidated all of its obligations, except those to Ramsey, and had sold all of its equipment except 11 pieces. As of December 10, 1957, the three stockholders of petitioner sold all their stock of petitioner to Taylor and Bushnell for about $7,500 under an agreement which provided that Ramsey would first take the 11 remaining pieces of construction equipment in full settlement of petitioner's obligations to him. This left petitioner with only a small amount of cash and some office furniture at the time of the sale. Taylor and Bushnell, who were also in the road construction business, thereafter caused petitioner to actively engage in the road construction business, which it did at a profit.
Petitioner claimed the operating losses it sustained in the years prior to 1957 as a carryover deduction against its income earned in years subsequent to the change in ownership of its stock. Respondent disallowed the net operating loss deduction for the years here involved under sections 382 and 269 of the 1954 Code.
A net operating loss deduction in an amount equal to the aggregate of the net operating loss carryovers to such year plus the net operating loss carrybacks to such year is provided by section 172 of the 1954 Code.