Source: https://law.justia.com/cases/federal/appellate-courts/F2/299/199/237260/
Timestamp: 2019-08-21 23:04:53
Document Index: 755455190

Matched Legal Cases: ['§ 51', '§ 248', '§ 248', '§ 25', '§ 25', '§ 115', '§ 115', '§ 346', '§ 346']

Gravois Planing Mill Company, Charles A. and Florence Beckemeier, Petitioners, v. Commissioner of Internal Revenue, Respondent, 299 F.2d 199 (8th Cir. 1962) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Eighth Circuit › 1962 › Gravois Planing Mill Company, Charles A. and Florence Beckemeier, Petitioners, v. Commissioner of In...
Gravois Planing Mill Company, Charles A. and Florence Beckemeier, Petitioners, v. Commissioner of Internal Revenue, Respondent, 299 F.2d 199 (8th Cir. 1962)
US Court of Appeals for the Eighth Circuit - 299 F.2d 199 (8th Cir. 1962)
Property Value Cash .................. $41,884.27 Land .................. 19,200.00 Improvements .......... 96,000.00 Insurance policy ..... (in dispute)"
The Commissioner, however, on this appeal places some emphasis on the cited factors of the lease back and the lack of contraction of the corporation's business. He also mentions the closely held character of the Gravois stock, the buy-and-sell agreement, the lack of cash, the absence of over-capitalization, the continuance in business, the necessary borrowing from shareholders, and substantial rights of repurchase of the real estate. He then argues that there was no liquidation or dissolution but, on the contrary, a reorganization or recapitalization and "an intent to continue the undiminished operation of the business". The Commissioner justifies making this argument now on the familiar rule that a Tax Court decision may be affirmed upon a theory not presented to or considered by that court. Helvering v. Gowran, 1937, 302 U.S. 238, 245-247, 58 S. Ct. 154, 82 L. Ed. 224. Gravois rejoins by pointing out that the Commissioner before the Tax Court took no position against the existence of a partial liquidation but, on the contrary, argued that the transaction in fact was in part a partial liquidation and in part a recapitalization, and that he thus waived or abandoned any theory of absence of partial liquidation. Helvering v. Wood, 1939, 309 U.S. 344, 60 S. Ct. 551, 84 L. Ed. 796; 9 Mertens, The Law of Federal Income Taxation, § 51.26.
The first is that the expenses of a reorganization or recapitalization do not qualify as ordinary and necessary business expenses. International Bldg. Co. v. United States, 8 Cir., 1952, 199 F.2d 12, 26, reversed on other grounds 345 U.S. 502, 73 S. Ct. 807, 97 L. Ed. 1182; Skenandoa Rayon Corp. v. Commissioner, 2 Cir., 1941, 122 F.2d 268, 271, cert. den. 314 U.S. 696, 62 S. Ct. 413, 86 L. Ed. 556; Missouri-Kansas Pipe Line Co. v. Commissioner, 3 Cir., 1945, 148 F.2d 460, 462. Compare, however, § 248 of the 1954 Code, 26 U.S.C.A. § 248. The theory usually expressed to support this conclusion is that expenditures of this kind have to do with a continuing capital asset. 4 Mertens, The Law of Federal Income Taxation, § 25.35.
The second is that attorneys' fees and other expenses incurred in connection with a corporation's complete liquidation and dissolution are deductible. Pacific Coast Biscuit Co., 1935, 32 B.T.A. 39, 42-43; Commissioner of Internal Revenue v. Wayne Coal Mining Co., 3 Cir., 1954, 209 F.2d 152; United States v. Arcade Co., 6 Cir., 1953, 203 F.2d 230, 235-236, cert. den. 346 U.S. 828, 74 S. Ct. 48, 98 L. Ed. 352; Braicks v. Henricksen, W.D. Wash., 1942, 43 F. Supp. 254, 261, affirmed, 9 Cir., 137 F.2d 632; E. C. Laster, 1940, 43 B.T.A. 159, 177, affirmed in part and reversed in part on other grounds, 5 Cir., 1942, 128 F.2d 4; Rite-Way Products, Inc., 1949, 12 T.C. 475, 481. The theory most frequently advanced for this conclusion is that expenditures of liquidation do not concern the creation or continuance of a capital asset. 4 Mertens, § 25.35.
Of course the intent of Beckemeier and Gravois to effect the transaction as of the end of 1953 or as of January 1, 1954, is clear and indisputable; nevertheless, the deed and the lease were not executed until March 2, 1954, after the directors' meeting of that day. In spite of these contrasting facts, we feel that the transaction, from any viewpoint which takes substance and practicalities into account, achieved binding status no later than January 27, 1954, and that the time lag in the directors' meeting and the real estate papers was not significant. The shareholders' meeting of January 11, 1954, purported to effect a formal and binding agreement with Beckemeier; by one of the resolutions then adopted Beckemeier's offer was "hereby accepted". It is apparent, however, and conclusively so, we think, that the definite figures embraced in the January minutes became available and were arrived at only later in that month and that the minutes were written or revised thereafter accordingly. We are content to hold that the January meeting did complete the agreement except for the determination of those factors and that that determination came along by the end of the month. When this was done, Beckemeier acquired an interest in the improved real estate sufficient to support a depreciation deduction. Compare Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 60 S. Ct. 209, 84 L. Ed. 226. The action of the directors at their meeting on March 2, 1954, then becomes no more than confirmatory of what had been done by unanimous shareholder action on January 11 and the subsequent monetary determinations. Futhermore, the corporation's payments of rent beginning January 1, 1954, its non-assertion of depreciation for 1954 and the cessation of Beckemeier's compensation at the end of 1953, are all supporting factors against the critical character of the March date. While perhaps the corporate procedures could have been more helpfully coalesced timewise, a measure of realism is to be the guide here. The Commissioner's disallowance of the deduction for February was improper as a matter of law; his disallowance for January, however, was correct.
The Tax Court in the present case relied on Parsons and also on the gift tax measure of value of a single premium policy as prescribed by Guggenheim v. Rasquin, 1941, 312 U.S. 254, 61 S. Ct. 507, 85 L. Ed. 813. It noted that the Beckemeier contract was fully paid up and saw no difference between it and a single premium policy. It concluded that "Beckemeier in receiving this fully paid $25,000 life insurance policy received valuable rights other than merely the right to surrender the policy for cash. Clearly it was worth more to Beckemeier than its cash surrender value".
Accord: Citizens & Southern Nat. Bank v. Commissioner, 5 Cir., 1943, 136 F.2d 406, cert. den. 320 U.S. 752, 64 S. Ct. 57, 88 L. Ed. 447; Johnson, Carvell & Murphy v. Riddell, S.D. Cal., 1959, 173 F. Supp. 214; Dill Manufacturing Co., 1939, 39 B.T.A. 1023, 1030; L. B. Coley, 1941, 45 B.T.A. 405, 415; George F. Jones, 1945, 4 T.C. 854; Union Starch & Refining Co., 1959, 31 T.C. 1041
In this connection it is appropriate to observe that, despite the Commissioner's suggestion to the contrary, some contraction of the corporate activity has been held not to be an essential element of a § 115(i) partial liquidation. Sheehan v. Dana, 8 Cir., 1947, 163 F.2d 316, 319, 173 A.L.R. 684; Stern v. Harrison, 7 Cir., 1945, 152 F.2d 321, 324, cert. den. 327 U.S. 807, 66 S. Ct. 967, 90 L. Ed. 1031; Dill Manufacturing Co., supra, 39 B.T.A. 1023, 1030; Hamilton Allport, 1944, 4 T.C. 401, 403; Union Starch & Refining Co., supra, 31 T.C. 1041, 1045-1046. As some of these cases correctly point out, § 115(i) is primarily concerned with distributions in partial liquidation of the corporation's "stock" rather than with distributions in partial liquidation or cessation of the corporate activity. For what it may be worth, the 1954 Code does make this latter factor relevant. See 1954 Code, § 346(a) and (b), 26 U.S.C.A. § 346(a, b)
Citing only the two nonacquiescences in Pacific Coast Biscuit Co., supra, XIV-1 C.B. 35 (1935) and 1937-1 C.B. 45, and that in Mills Estate, 1952-1 C.B. 6. It is to be noted now, however, that since the Second Circuit's opinion, the Commissioner has acquiesced in Pacific Coast Biscuit Co. and has withdrawn his prior nonacquiescences therein. 1954-1 C.B. 6.
We are fully aware of the statement in Standard Linen that, as to the expenses claimed, there "must be a further showing that no part thereof represented the cost of a capital item". We are inclined to think, as we have stated, that the author of that opinion intended by this statement to conform his result to the Mills Estate standard of dominant purpose. If we are mistaken as to this, then Standard Linen is a holding that all expenses of a partial liquidation must be treated as a lump sum which is not deductible if any part of that sum was expended for a change in capital structure typically attained through a recapitalization or reorganization. This, of course, in practical application, would disqualify as a deduction most partial liquidation expenses and would effect a departure from the statements to the contrary in Mills Estate (Tax Court) and Tobacco Products. If this is what the Tax Court meant to do in Standard Linen, we are constrained to disagree with it for the reasons suggested in the next succeeding paragraph of the opinion.