Court Opinion

ID: 4626099
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:30.95268+00
Date Added: 2024-06-11T07:56:48.926875
License: Public Domain

PORTLAND FURNITURE MANUFACTURING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  C. B. VAN VORST & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  FURNITURE CORPORATION OF AMERICA, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Portland Furniture Mfg. Co. v. CommissionerDocket Nos. 61809, 70366, 70367, 72800, 72801.United States Board of Tax Appeals30 B.T.A. 878; 1934 BTA LEXIS 1255; June 7, 1934, Promulgated *1255  1.  In 1929 a merger of a number of furniture companies was proposed, and one of petitioners participated in the negotiations and incurred and paid expenses in investigating the feasibility of the proposal.  The project was definitely abandoned in 1929.  Held petitioner's right to deduct as a loss the amount so paid is not to be denied because it entered into another and different combination in 1930.  2.  Corporations retaining their identities are not relieved of tax upon their income by reason of a contract to sell their assets, including income, to another corporation.  O. A. Neal, Esq., for the petitioners.  W. R. Lansford, Esq., for the respondent.  ARUNDELL*878  The respondent has determined deficiencies in income tax in the cases of the Portland Furniture Manufacturing Co. for the year 1929 and the period January 1 to September 30, 1930, in the respective amounts of $393.38 and $1,896.31.  In the C. B. Van Vorst & Co. case the income tax deficiency proposed is $3,242.31 for the period January 1 to September 30, 1930.  In the proceedings of the Furniture Corporation of America, Ltd., the respondent asserts transferee liability for*1256  the deficiencies asserted against the Portland Furniture Manufacturing Co. and C. B. Van Vorst & Co. for the period January 1 to September 30, 1930.  In the transferee cases the parties stipulated as follows: That the Furniture Corporation of America, Ltd., was duly incorporated under the laws of the State of Nevada on June 23, 1930, and that on said date its Board of Directors and Officers were duly elected.  That Furniture Corporation of America, Ltd., above referred to, in so far as may be affected by the appeals above set forth, is a transferee of Portland Furniture Manufacturing Company, petitioner, and of C. B. Van Vorst Company, petitioner, having received from said Portland Furniture Manufacturing Company and C. B. Van Vorst Company, in 1930, assets of the last named companies, having a fair value in each case in excess of the amount of the deficiencies alleged herein.  In Docket No. 70366, petitioner C. B. Van Vorst & Co. alleged erroneous disallowance of (a) $296.09 as merger expense, and (b) of expenses paid in 1930 in connection with negotiations for a proposed *879  merger in 1929 which was abandoned in that year.  These matters were settled by stipulation*1257  at the hearing and will be reflected in the recomputation to be made under Rule 50.  In the same case an error alleged as to inventory adjustment was waived by petitioner at the hearing.  In Docket No. 61809, petitioner Portland Furniture Manufacturing Co. claims an expense deduction for the year 1929 in the amount of $3,576.18, representing its share of expenses of negotiating for a proposed merger which was abandoned in 1929.  In the other case of the same petitioner, Docket No. 70367, and in Docket No. 70366, the case of C. B. Van Vorst & Co., the petitioners allege error in attributing any income to them in view of contracts whereby their income was taken over by the Furniture Corporation of America, Ltd.  FINDINGS OF FACT.  Portland Furniture Manufacturing Co. - Docket No. 61809.In 1929 a number of furniture companies, including petitioner, proposed to form a merger and appointed a committee "for the purpose of investigating, and, if feasible, carrying forward the merging of their properties." The committee was authorized to employ appraisers, accountants, attorneys, and an engineer in investigating and carrying out the proposed merger.  The investigating committee*1258  was appointed in writing and therein the several interested companies agreed that: In the event the merger is completed all expenses will be paid by the merger company.  If the merger is not completed, the bills of the appraisers and auditors will be paid by the individual companies and all other expenses pro-rated among the parties hereto in proportion to their gross sales for the year ending December 31st, 1928.  In November 1929 the investment bankers who were participating in the merger negotiations notified the committee that they were unable to perform their part of the plan.  Thereupon the proposed merger was abandoned.  Within the year petitioner paid $3,576.16 as its share of the investigating committee expenses, and it claimed a deduction therefor in its income tax return for 1929.  In 1930 petitioner and several other furniture companies entered into negotiations for the formation of a merger or consolidation which was consummated in June of that year by the organization of the Furniture Corporation of America, Ltd., hereinafter called the Furniture Corporation.  The substance of the 1930 transaction was that the Furniture Corporation acquired all the assets and assumed*1259  the liabilities of petitioner, the amounts thereof being based on the audits, appraisals, and reports prepared in connection with the *880  1929 proposed merger which had been abandoned.  Such audits, appraisals, and reports did not give the figures upon which the deal was finally closed, but were brought down to date for the closing.  C. B. Van Vorst & Co. - Docket No. 70366.Portland Furniture Manufacturing Co. - Docket No. 70367.On March 15, 1930, petitioner C. B. Van Vorst & Co. entered into an agreement with a firm of bankers, reciting that the organization of a new corporation was contemplated and giving the bankers an option to purchase "all the properties and business" of the Van Vorst Co. at a stated price.  It was understood, and so recited in the agreement, that the bankers would assign the option to the new corporation.  On April 15, 1930, petitioner Portland Furniture Manufacturing Co. hereinafter called the Portland Co. entered into a similar agreement with the same bankers.  The agreements, substantially identical, both contained the following provision: It is understood and agreed that the transfers and conveyances herein provided shall be effected*1260  as of January 1, 1930, and that if the same shall be effected, all business transacted or to be transacted after said date and prior to the execution and delivery of said instruments of transfer and conveyance shall be for the benefit of said New Corporation * * *.  The agreements further provided that the new corporation should have the right to carry on business in the manner of petitioners, and that petitioners would cause their stock to be deposited in escrow, with instructions for the delivery of the stock to the new corporation.  The new corporation, the Furniture Corporation, was organized under the laws of Nevada under date of June 23, 1930, and the bankers assigned to it their rights under the options.  At the time of organization of the Furniture Corporation, or very shortly thereafter, it took over the assets of petitioners, including income from January 1, 1930, and assumed all expenses, with exceptions not here material.  The Furniture Corporation filed a consolidated return for the year 1930, including therein the income and deductions of the petitioners, Portland Furniture Manufacturing Co. and C. B. Van Vorst & Co. for the entire year.  The respondent determined*1261  that said petitioners should have filed separate returns for the period January 1 to September 30, 1930, and computed the deficiencies on that basis.  The respondent allowed affiliation for the period October 1 to December 31, 1930.  OPINION.  ARUNDELL: We have but two questions for decision.  First, whether the Portland Co. is entitled to a deduction of the amount paid in 1929 as its share of the expenses of investigating the feasibility *881  of a proposed merger in 1929.  Petitioner claims, and has offered evidence to establish its claim, that the proposed merger was abandoned in 1929.  Respondent resists the allowance on the ground that petitioner made use of some of the information gathered in 1929 when it entered into the combination in 1930 headed by the Furniture Corporation.  The evidence establishes that the 1929 merger proposal was definitely abandoned in that year.  If nothing more were shown petitioner would unquestionably be entitled to the deduction claimed.  See ; *1262 , allowing deductions for architects' fees where building plans were discarded and the building projects abandoned.  We fail to see why the deduction should be denied because of petitioner's subsequent participation in a different combination from that proposed in 1929.  True, it appears that some of the reports prepared in 1929 were used as a starting point in the 1930 negotiations, but that does not change the fact that the project in connection with which the reports were prepared was abandoned in 1929 and in that year petitioner had suffered a loss of the amount paid.  We are of the opinion that the amount paid by petitioner in 1929 should be allowed as a loss.  The other question is whether the income of the Portland Co. and Van Vorst Co. should be combined with and taxed to the Furniture Corporation for the period January 1 to September 30, 1930.  The respondent has allowed affiliation and the filing of a consolidated return from October 1 to the end of the year 1930 and his action in that respect is not in issue.  Affiliation is not now claimed by petitioners prior to October 1; apparently the requisite amount of stock was*1263  not owned by the Furniture Corporation prior to that date.  In the absence of affiliation, we know of no provision in the statute which would permit the taxing of the income of the Portland Co. and Van Vorst Co. to the Furniture Corporation.  Clearly the options to purchase the assets and assume the liabilities of those companies, which were exercised sometime subsequent to June 23, 1930, were not sufficient to relieve petitioners of tax liability on their income, even though their operations were taken over as of the first of the year and the income was paid over to the purchaser of their assets.  Throughout the period here involved petitioners retained their identities and the income they earned was taxable to them.  Decision on this issue is for respondent.  The stipulation as to the transferee liability of the Furniture Corporation obviates any need for discussion of that point.  Decision will be entered under Rule 50.