Daniels Buick, Inc. v. Commissioner

Daniels Buick, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Daniels Buick, Inc. v. Commissioner Docket No. 56832 United States Tax Court 26 T.C. 894; 1956 U.S. Tax Ct. LEXIS 115; July 31, 1956, Filed *115 Decision will be entered for the respondent. Held, petitioner is not a "purchasing corporation" within the meaning of section 474(a) of the Internal Revenue Code of 1939, since it did not purchase substantially all of the properties (other than cash) of another corporation, and therefore is not entitled to use the base period experience of that corporation in computing its excess profits credit for the year 1951. Clark E. Loofbourrow, Esq., for the petitioner. Bernard J. Doyle, Esq., for the respondent. Tietjens, Judge. TIETJENS *895 The respondent determined a deficiency in income tax of the petitioner for the year 1951 in the amount of $ 2,793.53. The only issue to be decided is whether petitioner is a "purchasing corporation" within the meaning of section 474 (a) of the Internal Revenue Code of 1939. Some of the facts are stipulated. The petitioner filed corporation income tax and excess profits tax returns for the calendar year 1951 with the collector of internal revenue at Columbus, Ohio. FINDINGS OF FACT. The stipulated facts are found as stipulated and the exhibits to the stipulation are incorporated by this reference. The petitioner was incorporated under the laws of Ohio in 1950 and its principal place of business is in Columbus, Ohio. The petitioner was*117 granted a direct dealer franchise by Buick Division of General Motors Corporation as of July 1, 1950. On July 6, 1950, the petitioner purchased certain assets and leased certain premises for use in its business and commenced its business of selling and servicing Buick automobiles, which business it continued without interruption through the taxable year 1951. The Kelley Buick Sales & Service Company, hereinafter referred to as Kelley Buick, was incorporated in 1936 under the laws of Ohio. This corporation held a direct dealer franchise from Buick Division of General Motors Corporation. This franchise was conditioned upon the affiliation of Lawrence T. Kelley personally with the business. The shareholders of Kelley Buick were Lawrence T. Kelley and Elsie J. Kelley, husband and wife. Certain real estate used or acquired by the Kelleys or Kelley Buick is described as lots 1 to 6 of John R. Dunlap's North Broadway Extension in the city of Columbus. These lots are hereinafter referred to by lot numbers. Prior to December 17, 1947, Kelley Buick leased lots 5 and 6 from Elizabeth Clifton and Dorothy Byers. These lots were improved with a 1-story brick building approximately 195 feet*118 long by 77 feet wide, adapted to use as an automobile sales and service facility and so used by Kelley Buick. On December 11, 1945, the Kelleys purchased lots 3 and 4 for a consideration of $ 12,000. These lots were then unimproved. On June 20, 1946, the Kelleys purchased lots 1 and 2 for a consideration of $ 15,000. Lot 2 was vacant and lot 1 was improved with an old frame dwelling. *896 On June 30, 1947, Kelley Buick purchased from the Kelleys lots 1, 2, 3, and 4 for a consideration of $ 38,770. On December 17, 1947, the Kelleys purchased lots 5 and 6 and thereafter leased these lots and the building thereon to Kelley Buick. Between September 1948 and June 1949, Kelley Buick applied blacktop to a portion of lots 3 and 4 at a cost of $ 2,508.50. In September 1949 Kelley Buick completed erection of a building for use as a body repair shop on portions of lots 3 and 4 at a cost of $ 17,680.98. Lawrence T. Kelley died May 13, 1950, and his shares in Kelley Buick passed to his estate. Elsie J. Kelley was the sole beneficiary. On June 30, 1950, Kelley Buick's shareholders elected to wind up and dissolve. A copy of a certificate of dissolution was filed on August 13, 1950, with*119 the secretary of state of Ohio. On June 30, 1950, lots 1, 2, 3, and 4 were transferred by Kelley Buick to Elsie J. Kelley in liquidation of the corporation. The books of Kelley Buick show the following: Kelley Buick Sales & Services Company Assets, June 30, 1950 Daniels Buick Total purchased from Kelley Buick Cash $ 156,271.12 Accounts rec. customer 2,183.51 Prepaid insurance 805.68 Prepaid rent 3,000.00 Discounts receivable 3,957.95 Ohio sales tax stamps 22.35 GMAC repossession reserve 5,421.44 Due from L. T. & E. J. Kelley 39,824.06 Total $ 211,486.11 Inventory: One new car $ 2,282.46 $ 2,282.46 Used cars 5,786.83 Parts 20,610.30 20,610.30 Accessories 2,878.12 2,878.12 Gas, oil, grease 199.81 199.81 Paint material 691.80 691.80 Sublet repairs 31.26 31.26 Work in process (350.46) (350.46) Total inventory $ 32,130.12 $ 25,343.29 Property (less depreciation): Land (lots 1, 2, 3, & 4) $ 34,224.00 Body shop 17,238.98 Rental house [0] Machinery & shop equipment 4,118.90 $ 4,118.90 Parts & accessories equipment 934.84 934.90 Furniture & fixtures 1,877.99 1,877.99 Service cars 387.56 387.56 Signs & lot equipment 3,047.42 3,047.42 Leasehold improvements 2,925.59 2,925.59 Total property assets (net) $ 64,755.28 $ 13,292.30 *120 Kelley Buick Sales & Services Company Assets, June 30, 1950 Daniels Buick Retained by leased from Kelley Buick or Elsie Kelley transferred to Elsie Kelley Cash $ 156,271.12 Accounts rec. customer 2,183.51 Prepaid insurance 805.68 Prepaid rent 3,000.00 Discounts receivable 3,957.95 Ohio sales tax stamps 22.35 GMAC repossession reserve 5,421.44 Due from L. T. & E. J. Kelley 39,824.06 Total $ 211,486.11 Inventory: One new car Used cars $ 5,786.83 Parts Accessories Gas, oil, grease Paint material Sublet repairs Work in process Total inventory $ 5,786.83 Property (less depreciation): Land (lots 1, 2, 3, & 4) $ 34,224.00 $ 34,224.00 Body shop 17,238.98 17,238.98 Rental house [0] Machinery & shop equipment Parts & accessories equipment Furniture & fixtures Service cars Signs & lot equipment Leasehold improvements Total property assets (net) $ 51,462.98 $ 51,462.98 The assets purchased on July 6, 1950, from Kelley Buick by the petitioner were for a consideration of $ 38,742.83. The petitioner leased from Elsie J. Kelley the premises, lots 1 to 6, for a term of 5 years, *121 with an option to renew for a like term, at a net rental of $ 1,000 per month. *897 Lot 1 was never used by Kelley Buick in its business. Until June 1949 lots 2, 3, and 4 were only occasionally used to store cars. After June 1949 lots 3 and 4 were used extensively by Kelley Buick in carrying on its business. In the purchase the petitioner acquired the right to advertise as successor to Kelley Buick. Petitioner did not purchase the used car inventory but agreed to sell these cars for Elsie Kelley. OPINION. Petitioner contends that it acquired "substantially all the properties (other than cash) of another corporation" and is therefore a "purchasing corporation" within the intent of section 474 of the Internal Revenue Code of 1939, 1 and is entitled to utilize the earnings experience of the "selling corporation," here Kelley *898 Buick, in computing its excess profits credit based on income, for purposes of the Excess Profits Tax Act of 1950. *122 Section 474 was added to subchapter D of chapter 1 of the 1939 Code by section 521 of the Revenue Act of 1951. Its application was limited to transactions which had occurred before December 1, 1950. The transaction here involved occurred prior to that date and prior to enactment of the Excess Profits Tax Act of 1950, which was approved January 3, 1951. The intent of this provision is explained in Senate Report No. 781, Eighty-second Congress, First Session (1951-2 C. B. 458, pp. 511-512), as follows: Part 2 of the Excess Profits Tax Act of 1950 provides rules under which an acquiring corporation may utilize the earnings experience of a predecessor corporation in computing its own average earnings base. However, under the Excess Profits Tax Act of 1950, the acquiring corporation may use this earnings experience only where the assets of the predecessor corporation were acquired in certain tax-free exchanges. In general, these tax-free exchanges occur where the assets of a predecessor corporation are acquired by the acquiring corporation in exchange for its stock. Under the present law the earnings experience of a predecessor corporation may not be used*123 by an acquiring corporation where the assets were acquired by purchase for cash or in some other type of taxable exchange. * * * Your committee believes that, in the case of taxable exchanges, subject to certain limitations, where purchasing corporations have obtained substantially all of the assets of a predecessor corporation and such predecessor is liquidated, the earnings experience base of the predecessor corporation should be available to the purchasing corporation. * * * However, it is to be permitted the use of this base only to the extent that new funds were used for the purchase of these assets. * * * Petitioner contends that it is a "purchasing corporation" as defined in section 474 since it acquired 87.25 per cent of the available assets of Kelley Buick. Its computation is as follows: Total assets of Kelley Buick were $ 308,371.51 on June 30, 1950, of which $ 211,486.11 consisted of "cash assets" and $ 96,885.40 of "property assets"; of the "property assets," $ 51,462.98 represented lots 1, 2, 3, and 4 which petitioner leased; this left assets of $ 45,422.42 available for purchase; petitioner purchased all of these except the used car inventory carried on the books at*124 $ 5,786.83, or 12.75 per cent of those available, thus acquiring 87.25 per cent of the available assets with a book value of $ 39,635.59. This, says the petitioner, was "substantially all" of the assets (other than cash) of Kelley Buick. Petitioner points out that the major property asset used by Kelley Buick, the showroom and service building which cost the Kelleys $ 65,000 was never owned by the corporation but was leased and that petitioner also leased this asset for the same use, thus "acquiring" it within the meaning of the statute. Whether one corporation has acquired "substantially all" of the properties (other than cash) of another is a question of fact to be *899 resolved as an ultimate conclusion based upon the peculiar facts and circumstances attending the transfer and not upon any particular percentage. Milton Smith, 34 B. T. A. 702 (1936); Daily Telegram Co., 34 B. T. A. 101, 105 (1936). We cannot agree with petitioner's contentions. In the first place the petitioner did not "acquire" lots 1, 2, 3, and 4 within the meaning of section 474. Kelley Buick owned these lots from June 30, 1949, until its*125 dissolution in 1950 when it transferred them to Elsie J. Kelley. Lots 3 and 4 had been improved in 1949 with a building for use as a body repair shop and a part of the lots was black-topped for auto storage space. The petitioner did not purchase these lots in 1950 when it took over the other assets, but leased them for a period of 5 years with an option to renew for a like period. The petitioner's lease is not equivalent to its vendor's fee interest in the same property. This result is not inconsistent with R. & J. Furniture Co., 20 T. C. 857 (1953), reversed on another ground (C. A. 6, 1955) 221 F. 2d 795, where we held that the taxpayer acquired certain real estate when it leased it for a period of 55 years, or for a period which was longer than the useful physical and economic life thereof. Such is not the situation here. Petitioner's lease would last no more than 10 years, and possibly only 5. The body repair shop was less than 1 year old when petitioner's lease began and had a useful physical and economic life considerably longer than the term of the lease. But petitioner contends that the nonacquisition of these*126 lots should not change the situation since lots 1 and 2 were never used in Kelley Buick's business and lots 3 and 4 were only used the last 3 to 6 months of the base period of 1946 through 1949. Section 474 makes no provision for such a distinction, nor is it indicated in the legislative history of that section. Furthermore, petitioner attributes too large a scope to the parenthetical phrase "other than cash." Petitioner argues that cash as used in section 474 means "cash assets" which includes all current assets. Hence, accounts receivable, prepaid insurance, sales tax stamps, prepaid rent, and loans to officers are all "cash" items. We see no basis for this interpretation. Cash as used in common speech has been defined to mean "ready money or money in hand, either in current coin or other legal tender, or in bank bills or checks paid and received as money, and does not include promises to pay money in the future." In re Palliser, 136 U.S. 257, 263 (1890). Nor does the legislative history of section 474 offer support for the petitioner's position. Senate Report No. 781, supra, does not elaborate as to the meaning of the parenthetical phrase, *127 but merely says, "For the purpose of the above subsections the properties acquired need not include cash." *900 The amount due from the Kelleys to Kelley Buick at least should not be regarded as a cash asset, but as an asset other than cash. This item was not acquired by the petitioner. This item, the body shop, and lots 1, 2, 3, and 4 were properties, other than cash, which were not acquired by the petitioner. Under this computation Kelley Buick had non-cash assets with a book value of over $ 136,000 at June 30, 1956, of which petitioner acquired a part which had a book value of $ 39,635.59. This is less than 30 per cent of the non-cash assets. It follows that petitioner did not acquire "substantially all" of the properties (other than cash) of Kelley Buick within the intent of section 474. Decision will be entered for the respondent. Footnotes 1. SEC. 474. EXCESS PROFITS CREDIT BASED ON INCOME -- CERTAIN TAXABLE ACQUISITIONS. (a) Definitions. -- For the purpose of this part -- (1) Purchasing corporation. -- The term "purchasing corporation" means a corporation which, before December 1, 1950, acquired -- (A) In a transaction other than a transaction described in section 461 (a), substantially all of the properties (other than cash) of another corporation, of a partnership, or of a business owned by a sole proprietorship; or * * * * (2) Selling corporation. -- The term "selling corporation" means a corporation, a partnership, or a business owned by a sole proprietorship, as the case may be, properties of which were acquired by a purchasing corporation in a transaction described in paragraph (1). (3) Part IV transaction. -- The term "part IV transaction" means a transaction described in paragraph (1). * * * * (c) Limitations. -- This part shall apply only if each of the following conditions is satisfied: * * * * (2) During so much of the base period of the purchasing corporation and of the period thereafter as preceded the part IV transaction, the properties acquired in the part IV transaction were substantially all of the properties (other than cash) which were used, or which in the ordinary course of business replaced properties used, by the selling corporation (or by a component corporation, as defined in section 461 (b), of such selling corporation) in the production of the excess profits net income (or deficit therein) which under subsection (b) increases or decreases the excess profits net income of the purchasing corporation. For the purpose of this paragraph, if a business in the hands of both the selling corporation and the purchasing corporation was operated under a substantially identical franchise or license, granted by the same person, such franchise or license shall be deemed acquired by the purchasing corporation from the selling corporation. (3) The business or businesses acquired in the part IV transaction (including the properties so acquired or properties in replacement thereof) were operated by the purchasing corporation from the date of such transaction to the end of the taxable year * * * (d) Special Rules. -- (1) For the purpose of subsection (a) (1), the properties of a selling corporation shall be considered to have been acquired by a purchasing corporation only if acquired from -- (A) such selling corporation, or (B) persons who received the properties upon the liquidation of such selling corporation and who forthwith transferred such properties to the purchasing corporation in a transaction other than a transaction described in section 461 (a).↩