Frank Spingolo Warehouse Co. v. Commissioner

Frank Spingolo Warehouse Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Frank Spingolo Warehouse Co. v. Commissioner Docket No. 76980 United States Tax Court 37 T.C. 1; 1961 U.S. Tax Ct. LEXIS 60; October 6, 1961, Filed *60 Decision will be entered under Rule 50. Petitioner corporation was organized in 1947 and engaged in the refrigeration and air-conditioning business. It had net operating losses from 1950 through 1953. At the end of 1953 petitioner was reduced to a corporate shell and all of its stock was sold to Frank Spingolo, who had been operating a profitable trucking business as a sole proprietorship. On January 9, 1954, Spingolo transferred to petitioner all of the assets and liabilities of his sole proprietorship and petitioner has since engaged in the trucking business. Held, that the net operating loss deduction arising from the operation of the refrigeration and air-conditioning business from 1950 through 1953 is not available to petitioner in 1954 to reduce its net profits from its trucking business. Robert E. Tout, Esq., for the petitioner. James Booher, Esq., for the respondent. Raum, Judge. RAUM *1 The Commissioner determined deficiencies in petitioner's income tax for the calendar year 1954 in the amount of $ 17,413.10 and for the taxable period January 1 to September 30, 1955, in the amount of $ 2,342.48. After certain concessions by the parties, the only issue remaining is the deductibility of the $ 28,561.12 net operating loss deduction which*62 petitioner claimed on its income tax return for 1954. FINDINGS OF FACT. Some of the facts were stipulated and, as stipulated, are incorporated herein by this reference. Petitioner, formerly known as Valley Refrigeration and Air Conditioning Company (hereinafter sometimes referred to as Valley), was organized as a California corporation in 1947. Its outstanding stock consisted of 2 shares, 1 owned by James D. Glenn and the other by Robert E. Connolly. From its inception and until December 31, 1953, its business consisted of and was limited to the sale and installation of refrigeration and air-conditioning equipment. Valley incurred net operating losses during each of the years 1950 through 1953, aggregating $ 28,561.12. *2 Toward the end of 1953 Glenn and Connolly decided to terminate their association in the refrigeration and air-conditioning business. Glenn wanted to get out of the enterprise entirely, and Connolly proposed to continue Valley's business as a sole proprietorship. Accordingly, Connolly entered into a contract on December 9, 1953, to purchase all of Valley's "assets and business, except $ 100 cash, as a going concern" in consideration of his canceling certain*63 obligations of the corporation to him and the assumption by him of specified liabilities of the corporation. Valley's directors, by resolution, and Valley's stockholders, by written consent, approved this sale. Robert E. Tout, a certified public accountant, who later became an attorney and is counsel for petitioner in this Court, had been doing Valley's accounting work at least since 1950 and was familiar with Valley's net operating losses. Tout had also been doing accounting work since 1948 for Frank Spingolo, who conducted a profitable trucking business as a sole proprietorship. Tout had prepared income tax returns for both Valley and Spingolo during these years. Spingolo was considering incorporating his business, and Tout suggested to him that he purchase Valley's stock. Spingolo's attorney, Marquam C. George, advised him that he saw no objection to taking over an existing corporation provided that Spingolo could be assured that "he was not taking over liabilities." On or about December 9, 1953, Spingolo executed a written offer to purchase the Valley stock then owned by Glenn and Connolly. The offer read in part as follows: I, Frank Spingolo agree to pay $ 1,000.00 for *64 the entire present stock issue of Valley Refrigeration and Air Conditioning Company, a California Corporation, and have deposited $ 1,000.00 with John Burd, attorney at law, Central Bank Bldg., Oakland, California, escrowholder herein. This purchase is subject to the following conditions: (1) That R. E. Connolly and James Glenn agree to sell and do deposit with said escrowholder duly executed assignments to Spingolo of the shares of stock owned by them, which shares are agreed to be the entire stock issue of Valley Refrigeration and Air Conditioning Company. (2) That the said Connolly and Glenn promptly and successfully take all necessary proceedings to change the name of the corporation to Frank Spingolo Trucking Company, and to amend the Articles of Incorporation to include transportation and trucking within the business purposes of the corporation. That Frank Spingolo obtain approval by the California Public Utilities Commission of the transfer of the present carrier franchises of Frank Spingolo, an individual, to Frank Spingolo Trucking Company, Inc. The minutes of Valley's board of directors meeting held on December 10, 1953, record the following events occurring at this meeting: *65 The Treasurer announced that he had received a written offer to purchase the shares of Mr. Glenn and Mr. Connolly * * *. He advised the directors that it was the intention of himself and of Mr. Glenn to sell the shares, but that a condition to such sale was that the corporation amend its Articles so as to change the corporate name and to include transportation and trucking *3 within the business purposes of the corporation. After considerable discussion, upon motion being duly made, seconded and carried, the following resolution was adopted: * * * * Now, Therefore, be it Resolved, that Article I of the Articles of Incorporation be amended to read in its entirety, as follows: "That the name of said corporation shall be FRANK SPINGOLO TRUCKING COMPANY." And be it Further Resolved, that Article II, Section (a), be amended to read in its entirety as follows: "(a) To engage in and to conduct any and all kinds of manufacturing, fabricating, installation, sales, and trucking and transportation business." Valley's stockholders, by written consent, approved the foregoing change in the corporation's name and business purposes. On or about December 29, 1953, Valley filed a certificate*66 with the California secretary of state's office amending the corporation's articles as to name and purposes. By this amendment, its name became Frank Spingolo Trucking Company and its business purposes became "to engage in and to conduct any and all kinds of manufacturing, fabricating, installation, sales and trucking and transportation business." On or about December 30, 1953, Valley transferred to Connolly assets of $ 83,915.44 subject to liabilities of $ 84,339.15, pursuant to their written agreement dated December 9, 1953. Subsequent to this transfer, Connolly as an individual owner continued to operate the air-conditioning and refrigeration business formerly operated through Valley. Frank Spingolo, on or about December 9, 1953, had issued a check to the designated escrow agent in the amount of $ 1,000, payable to Connolly and Glenn, pursuant to the terms of his written purchase offer of December 9, 1953. These funds were released to Connolly and Glenn by the escrow agent on or about December 30, 1953. The Valley stock owned by Connolly and Glenn was transferred to Frank Spingolo on or about December 30, 1953. In addition to the above $ 1,000 payment, Frank Spingolo paid Connolly*67 $ 100 in respect of the $ 100 cash which remained in the corporation when Spingolo purchased all of its stock. Spingolo paid an attorney named Dozier $ 166.07 for legal services rendered in connection with his acquisition of the Valley stock. On or about January 9, 1954, Frank Spingolo transferred to petitioner, known at that time as the Frank Spingolo Trucking Company, assets of $ 173,042.46 subject to liabilities of $ 93,857.40. The assets and liabilities so transferred constituted the entire assets and liabilities of the trucking business formerly operated by Frank Spingolo as a sole proprietorship. During 1954 petitioner engaged solely in the trucking business. *4 Subsequent to 1954, petitioner's name was changed from the Frank Spingolo Trucking Company to the Frank Spingolo Warehouse Company, Inc. The income reported by petitioner on its 1954 Federal income tax return, filed with the district director of internal revenue at San Francisco, consisted of income derived during the year 1954 from the trucking business. Petitioner claimed a net operating loss deduction of $ 28,561.12 on its 1954 income tax return. This claimed net operating loss deduction was based on net*68 operating losses arising from 1950 through December 31, 1953, from Valley's air-conditioning and refrigeration business. The respondent disallowed the deduction. The principal purpose of Frank Spingolo in acquiring control of petitioner was to avoid Federal income tax by securing the benefit of petitioner's net operating loss deduction which he would not otherwise enjoy. OPINION. Two separate contentions are made by the Commissioner in support of his disallowance of petitioner's claimed net operating loss deduction in 1954, both of which are fairly comprehended within his broad determination that "the deduction is not allowable within the meaning and intendment of the applicable provisions of the Internal Revenue Code (1954)." 1 The two issues are thus stated in petitioner's opening brief: a. Was the principal purpose of the acquisition of the corporation by its sole stockholder that of tax avoidance so as to bar the deduction under the provisions of Section 269 (except subsection c thereof) of I.R.C. 1954? b. May single corporation offset losses incurred in one business activity against profits earned in a different business activity? [The doctrine of Libson Shops, Inc. v. Koehler, 353 U.S. 382.*69 2] A negative answer to either question is fatal to petitioner's position. 1. In language comparable to that contained in the predecessor provisions of section 129 of the 1939 Code, section 269(a) of the 1954 Code, 3 which governs here, provides: *5 (a) In General. -- If -- (1) any person or persons acquire * * * control of a corporation * * * * * * * and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax*70 by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. * * * The statutory prohibition embodied in these provisions*71 was once thought to be inapplicable where the contested deduction or other tax benefit was claimed by the corporation whose control was acquired rather than by the acquiring person or corporation. See British Motor Car Distributors, Ltd., 31 T.C. 437, 440-441. But the decision in that case was reversed by the Court of Appeals for the Ninth Circuit, Commissioner v. British Motor Car Distributors, Ltd., 278 F. 2d 392; and the result thus finally reached has been accepted in a number of cases in this Court as well as in other courts. Thomas E. Snyder Sons Co., 34 T.C. 400, affirmed 288 F. 2d 36 (C.A. 7); Urban Redevelopment Corporation, 34 T.C. 845, affirmed 294 F. 2d 328 (C.A. 4); Army Times Sales Co., 35 T.C. 688, 702; Temple Square Mfg. Co., 36 T.C. 88; F. C. Publication Liquidating Corporation, 36 T.C. 836; Mill Ridge Coal Company v. Patterson, 264 F. 2d 713 (C.A. 5), certiorari*72 denied 361 U.S. 816; James Realty Company v. United States, 280 F. 2d 394, 402 (C.A. 8). We are thus called upon to decide whether Spingolo's "principal purpose" in acquiring petitioner's stock was the avoidance of tax by obtaining the benefit of petitioner's accumulated net operating losses as a deduction against the income of the trucking business. The inquiry is a factual one, and the burden of proof was, of course, upon petitioner, as recognized by petitioner's counsel both in his opening statement at the trial and in his brief. Naturally, in cases of this character, it is not to be expected that there will be any direct evidence of the interdicted purpose. That purpose can more readily be ascertained by a searching evaluation of all the evidence. We heard and observed on the witness stand not only Spingolo but also his former attorney George. We found some of the testimony evasive and some of it even lacking in credibility. Granted that Spingolo may have had a business reason for incorporating his trucking business -- an assumption that is by no means clearly warranted on the record before us --, 4*75 the question*73 is whether the acquisition of this corporation had as its principal purpose the avoidance *6 of taxes, not whether there was a business reason in general for incorporating the trucking enterprise. The mere fact that there was oral testimony attempting to suggest possible business reasons for acquiring petitioner's stock does not require us to conclude that the "principal purpose" was other than to avoid Federal income tax. We did not find such testimony convincing, and it is no more binding upon us than the oral testimony in Army Times Sales Co., 35 T.C. 688, 704; Urban Redevelopment Corporation, 34 T.C. 845, 850-851, affirmed 294 F. 2d 328 (C.A. 4); and Thomas E. Snyder Sons Co., 34 T.C. 400, 405-406, affirmed 288 F. 2d 36, 39 (C.A. 7); cf. also Clearview Apartment Co., 25 T.C. 246, 253-254. Without discussing the evidence it is sufficient to state that we have carefully considered the entire record and do not believe any of the oral testimony to the extent that it attributed any purpose to Spingolo*74 other than avoidance of Federal tax in acquiring petitioner's corporate shell. We may add also that Tout, who, it is clear to us, masterminded the entire transaction and who alone of those participating therein on Spingolo's behalf appeared to be concerned with or sophisticated in Federal tax matters, did not take the witness stand and subject himself to examination under oath. 5 His failure to testify gives further weight to our conclusion that petitioner has not carried its burden of proof, cf. Snyder Sons Co. v. Commissioner, 288 F. 2d 36, 39 (C.A. 7), and we have found as a fact that Spingolo's principal purpose in acquiring control of petitioner was the avoidance of Federal income tax by securing the benefit of a net operating loss deduction which he would not otherwise enjoy. 2. In view of the conclusion reached above, it becomes unnecessary to decide whether the doctrine underlying Libson Shops, Inc. v. Koehler, 353 U.S. 382, also requires a decision against petitioner in connection with the net operating*76 loss deduction. However, it may be noted that strong support for the Commissioner's position on this issue is found in Mill Ridge Coal Company v. Patterson, 264 F. 2d 713 (C.A. 5), certiorari denied 361 U.S. 816; Commissioner v. Virginia Metal Products, Inc., 290 F. 2d 675 (C.A. 3); J. G. Dudley Co., 36 T.C. 1122. Decision will be entered under Rule 50. Footnotes 1. In any event, the issues presented are plainly before us. See Coastal Oil Storage Co. v. Commissioner, 242 F. 2d 396, 400↩ (C.A. 4). 2. Petitioner filed a "Motion For Amendment To Answer" prior to trial seeking clarification of the issues raised. However, when the Court learned from counsel in an informal pretrial conference that the issues stated above were the ones to be presented and was satisfied that both parties fully understood the situation it became unnecessary to take any action upon the motion.↩ 3. The taxable year 1954 is here involved and section 269(a) of the 1954 Code is therefore applicable. However, the effective dates of certain other provisions of the 1954 Code which might also be pertinent make such provisions inapplicable here. Thus, section 382(a) which would otherwise be dispositive of this case (since directly concerned with the limitation on net operating loss carryovers when a corporation is purchased and its trade or business changed) is inapplicable because it is not effective until taxable years beginning on June 22, 1954, or later. Sec. 394(b), I.R.C. 1954. Similarly, by its own terms section 269(c)↩ does not apply to this proceeding since the presumption created therein "shall apply only with respect to acquisitions after March 1, 1954." 4. Thus, one reason advanced by Spingolo for incorporating the trucking business was an alleged 15-percent interest in the enterprise supposedly owned by Spingolo's mother that presumably could be more precisely defined if it were incorporated and that somehow or other would cease to be a threat to the continuity of the business. However, petitioner's 1954 return in evidence shows Spingolo as owning 100 percent of petitioner's stock, and there is nothing in the record to show that his mother's alleged interest was ever segregated.↩ 5. As already noted, Tout was petitioner's counsel at the trial herein. He referred modestly in his opening statement to "the small part that I had in the matter," which would "be brought out fully by the witnesses," and concluded by stating that "should there remain any question in the Court's mind, I will certainly cooperate to put forth any information that might be helpful." However, the Court is not required to tell the parties what witnesses to call, and if there is any failure to present crucial witnesses, the situation is not helped by any such anticipatory statement as was made by counsel herein. Furthermore, if his failure to testify was occasioned by difficulties or embarrassment growing out of his being counsel in the case, the situation was one of his own making, and he could in any event have removed himself as counsel.↩