1974 Tax Ct. Memo LEXIS 68 | Tax Ct. | 1974
Petitioner's predecessor purchased all the outstanding stock of another corporation for an adjusted cost of $8,767,184.17 and immediately liquidated it under
Held, the aggregate fair market value of the assets received in liquidation for purposes of applying
MEMORANDUM FINDINGS OF FACT AND OPINION
GOFFE, Judge: Respondent determined a deficiency in the Federal income tax of T.J. Moss Tie Company (Delaware) for its taxable year ended June 30, 1964, in the amount of $1,663,429.25. Petitioner is the surviving corporation of a merger with the taxpayer and is liable for any Federal income tax which may be due from the taxpayer. 1974 Tax Ct. Memo LEXIS 68">*69
The issue arises from the purchase by the taxpayer of all the outstanding stock of another corporation and immediate liquidation into the taxpayer-parent.
The issue is whether, in allocating its cost basis in the stock among the assets received in liquidation of its subsidiary under
FINDINGS OF FACT
Some of the facts were stipulated. The stipulation of facts and exhibits are incorporated by reference.
T.J. Moss Tie Company (Delaware) filed its Federal income tax return and its amended Federal income tax return for the taxable year ended June 30, 1964, with the district director of internal revenue at St. Louis, Missouri. It was subsequently merged into petitioner and petitioner is liable for any Federal income tax which may be due from T.J. Moss Tie Company (Delaware). The principal office of petitioner when it filed its petition was located in Oklahoma City, Oklahoma. For convenience, T.J. Moss 1974 Tax Ct. Memo LEXIS 68">*70 Tie Company (Delaware) will hereafter be referred to as petitioner.
T.J. Moss Tie Company (Missouri), hereafter referred to as Moss Tie, was incorporated under the laws of Missouri on September 12, 1893, and from its incorporation it was primarily engaged in producing railroad ties and it also engaged in preserving timber for other uses. Moss Tie operated wood preserving plants in East St. Louis, Illinois; Granville, Wisconsin; Bossier City, Louisiana; and Columbus, Mississippi. It operated three dealer service wholesale lumber yards which sold lumber, roofing and hardware. In addition, it owned ten other yard sites and leased approximately 50 sites from railroads for use as concentration points. It owned 21 saw mills and owned interests in 11 other saw mills. All of the saw mills were leased to independent operators. Moss Tie also owned 231,168.73 acres of timberland located in 11 states.
In the early 1950's, the shareholders of Moss Tie began to consider selling their stock. The stock was not traded on an exchange and 80 percent of the shareholders did not actively participate in the operations of the corporation. They desired investments that were more marketable and were 1974 Tax Ct. Memo LEXIS 68">*71 apprehensive about the future success of the railroad tie business.Unsuccessful attempts were made to sell the stock to Allied Chemical and U.S. Steel.
Moss Tie owned 133,527.38 acres of land in southeast Missouri and prior to 1960 it employed a geophysicist to determine the potential for mineral production from such land. He concluded that the potential was speculative and Moss Tie abandoned any hopes of mineral exploration because of the high costs involved.
In 1960, Kerr-McGee Corp. began exploration activities for lead and zinc deposits in southeast Missouri. Kerr-McGee's business included exploration for oil, gas and uranium and refining and marketing petroleum products. Between 1961 and 1963, Kerr-McGee acquired exploration permits for 20,000 to 30,000 acres of Federal lands in southeast Missouri and in May 1961 sought to obtain an option for 30,000 acres of land owned by Moss Tie in that area.
In 1961, the president of J.M. Huber Co. offered, on behalf of the corporation, to enter into a joint venture with Moss Tie for mineral exploration of Moss Tie's land in southeastern Missouri. Moss Tie declined that offer.
In 1962, Moss Tie learned that Huber was acquiring timberland 1974 Tax Ct. Memo LEXIS 68">*72 in Tennessee near like property owned by Moss Tie.Moss Tie satisfied itself as to Huber's financial soundness and advised Huber that it was willing to sell its assets.
After some discussions, Huber, on August 22, 1962, offered to purchase all the assets of Moss Tie for $5,676,000. Moss Tie rejected the offer but its shareholders made a counteroffer to sell all of their stock of Moss Tie for $8,800,000 plus a retained interest in the minerals underlying the timberlands. The counteroffer also provided an alternative whereby Huber would pay $3,200,000 for the stock and vote to liquidate; the liquidation would be handled by Moss Tie; and the Moss Tie shareholders would receive the proceeds from the sale of the operating assets which had a book value of $5,600,000 as of October 31, 1961.
Huber rejected the counteroffer and on October 23, 1962, offered to purchase the timberlands, including the mineral rights, for $2,300,000. Moss Tie rejected this offer because the shareholders desired to dispose of the entire corporation.
The shareholders and directors of Moss Tie considered liquidation with operating assets going to one group of shareholders and timberlands to another group but no 1974 Tax Ct. Memo LEXIS 68">*73 agreement could be reached.
In 1962, Kerr-McGee began negotiations to acquire Moss Tie. The shareholders of Moss Tie, on January 3, 1963, agreed to sell their shares to Kerr-McGee for $10,750,000 or to exchange such shares for 200,000 shares of Kerr-McGee common stock.
As negotiations progressed, Kerr-McGee's geologist concluded from his survey of Moss Tie properties in southeast Missouri that the possibility of mineral extraction looked promising.Kerr-McGee officials inspected some of the operating assets of Moss Tie and financial data of Moss Tie was furnished to accountants for Kerr-McGee. Kerr-McGee employed an independent appraiser to render an opinion as to the value of the timberlands. He completed his report in March 1963 with an opinion of $5,685,567.04 for the value of the timberlands.
On March 29, 1963, Kerr-McGee rejected the offer of the shareholders of Moss Tie and offered to purchase their stock for $8,000,000. In April 1963, the Moss Tie shareholders unsuccessfully attempted to raise the price to $9,000.000.
On April 19, 1963, Kerr-McGee formally offered to purchase all the outstanding shares of Moss Tie for $8,000,000 and the shareholders accepted the offer. 1974 Tax Ct. Memo LEXIS 68">*74 The purchase was effected on July 1, 1963, by a wholly-owned subsidiary of Kerr-McGee, Kermac Tie Co., Inc., whose funds for the purchase came from Kerr-McGee. On the same date, Moss Tie was merged into Kermac Tie with the intent that the merger would effect a liquidation of a wholly-owned subsidiary within the meaning of
After the acquisition, merger and liquidation, petitioner continued to operate the business as it had operated prior to such transactions but in addition Kerr-McGee actively explored the Missouri timberlands previously owned by Moss Tie for mineral deposits. It drilled 23 core holes but found no deposits of commercial quantity and discontinued such operations in 1969. Kerr-McGee hopes to explore further in the future. Kerr-McGee did not explore for minerals on any of the other properties formerly owned by Moss Tie. Petitioner 1974 Tax Ct. Memo LEXIS 68">*75 continues to own most of the timberlands formerly owned by Moss Tie.
On its income tax return for the taxable year ended June 30, 1964, petitioner allocated its adjusted cost of the stock of Moss Tie ($8,767,184.17) among the assets it received upon the liquidation of Moss Tie on the basis of a total fair market value of $8,767,184.17 under the provisions of
In his statutory notice of deficiency, the Commissioner valued the assets of Moss Tie at $21,270,208.72 and allocated the adjusted cost of the stock ($8,767,184.17) differently than did petitioner.
The following schedule depicts the assets received by petitioner from liquidation of Moss Tie, their book values, the valuation and allocated cost bases reported by petitioner on its income tax return and the valuation and allocated cost bases determined by the Commissioner in his statutory notice of deficiency.
| Assets | Moss Tie Book Value | Valuation & Allocation per Return | Commissioner's Valuation | Commissioner's Allocation |
| Cash | $ 504,522.14 | $ 504,522.14 | $ 504,522.14 | $ 504,522.14 |
| U.S. Treasury Bills | 570,715.83 | 570,715.83 | 570,715.83 | 570,715.83 |
| Cash Value - Life Insurance | 385,608.55 | 385,608.55 | 385,608.55 | 385,608.55 |
| Notes Receivable | 30,987.46 | 30,987.46 | 30,987.46 | 11,690.14 |
| Accounts Receivable | 1,198,346.07 | 1,198,346.07 | 1,198,346.07 | 441,302.79 |
| Prepaid Expenses | 74,779,14 | 74,779.14 | 74,779.14 | 27,764.08 |
| Prepaid Operating Expenses | 12,776.34 | 12,776.34 | 12,776.34 | 4,383.80 |
| Inventory | 2,700,707.67 | 3,825,086.85 | 3,825,086.85 | 1,410,123.17 |
| Timber on Time Lands | ||||
| 52,040.58 | 52,040.58 | 52,040.58 | 18,996.48 | |
| Investments | 71,855.69 | 182,106.50 | 182,106.50 | 67,218.31 |
| Land - Plant sites | 122,687.30 | 122,687.30 | 564,859.00 | 208,961.26 |
| Yard & Mill sites | 76,480.00 | 76,480.00 | 204,197.00 | 75,985.91 |
| Timberlands | 126,630.79 | 126,630.79 | 3,180,709.90 | 1,173,397.83 |
| Timber 1 | - | - | 4,388,627.36 | 1,619,084.42 |
| Plants & Equipment | 559,507.03 | 1,181,424.42 | 4,296,715.00 | 1,584,744.64 |
| Yard Equipment | 88,904.86 | 148,037.51 | 1,294,042.00 | 477,103.85 |
| Production Equipment | 162,470.96 | 259,772.87 | 417,909.00 | 154,163.72 |
| Office Equipment | 5,744.90 | 15,181.82 | 86,000.00 | 31,417.25 |
| Total | $6,744,765.30 | $8,767,184.17 | 2 $21,270,208.72 | $8,767,184.17 |
The valuations used by the Commissioner in his statutory notice of deficiency exceeded the adjusted cost basis of the stock by $12,503,024.55 and were based upon the valuation report which Kerr-McGee had obtained with certain adjustments and valuations by the Commissioner's valuation engineer.
The reallocation of the adjusted cost basis of the stock by the Commissioner in his statutory notice of deficiency produced most of the deficiency in income tax he determined by reason of sales of inventories, timber and equipment and collection of accounts receivable.
ULTIMATE FINDINGS OF FACT
The price which Kerr-McGee paid for the stock of Moss Tie represented the fair market value of the net assets of Moss Tie.
OPINION
The issue in this case concerns determination of the basis of assets received in corporate liquidation as part of an acquisition described in
Petitioner contends that in allocating the cost of the stock to the assets, the aggregate of the fair market values of the assets should not exceed 1974 Tax Ct. Memo LEXIS 68">*79 the adjusted cost of the stock.
Respondent disagrees, contending that the fair market value exceeds the cost of the stock. In his statutory notice of deficiency, he applied an aggregate fair market value which exceeded the adjusted cost of the stock by $12,503,024.55.
The allocation urged by respondent results in lower allocations of basis to inventory, timber and timberlands, accounts receivable and prepaid expenses thereby generating income in addition to that reported on the return as a result of subsequent business operations and collections of accounts receivable.
It is undisputed that petitioner is entitled to allocate its adjusted cost of the stock ($8,000,000 cost of stock plus $767,184.17 of liabilities assumed) among the assets it received upon the liquidation of Moss Tie.
Petitioner contends that the total fair market value to be allocated among the assets should not exceed the amount that petitioner paid for the stock because the sale of the stock is the best evidence of the aggregate fair market value of the assets involved herein. On the facts before us, we agree with petitioner.
It is doubtful that respondent would dispute 1974 Tax Ct. Memo LEXIS 68">*80 the proposition that the price paid for the stock ($8,000,000) plus the liabilities assumed ($767,184.17) is the best evidence of the fair market value of the stock on the date petitioner purchased the stock. It must be so, because it fits within the well-accepted definition of fair market value; i.e., the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. Petitioner liquidated Moss Tie on the date the sale was consummated.
Whether such selling price represents the fair market value of the underlying assets of the corporation is the point of disagreement between the parties.
The regulations provide that the adjusted cost basis in the stock shall be allocated among the assets on the basis of the net fair market values of the assets. Sec. 1.334-1(c) (4) (viii). The regulations do not, however, indicate how the fair market value will be determined but presumably the usual, above-described, well-accepted definition applies. The record herein shows clearly that the price ultimately paid by Kerr-McGee was the result of hard bargaining 1974 Tax Ct. Memo LEXIS 68">*81 on an arm's-length basis, and we conclude that such price represented what the parties considered to be the value of the underlying assets.
Respondent relies upon
In
For income tax purposes the basis of assets acquired in a transaction that falls under
We had previously held that where a corporation sold its accounts receivable, the need for its reserve for bad debts ceased to exist, resulting in realization of income.
In
In the course of our opinion, we stated at
The purpose of enacting
We find nothing inconsistent with the purpose of
* * *
Extending this to the final step, it follows that the purchase of the stock actually is the purchase of the assets, n6 the holding period attaching at that time, and the liquidation no more than a formalistic measure employed to reduce the then-owned assets to petitioner's possession. [Footnote omitted.]
* * *
Finally, not only do we believe that our decision obtains the proper legal result in holding that petitioner may avail itself of section 1223(1), but it also comports with the equitable motives of Congress manifested in its enactment of
Since we have concluded that the fair market value of the underlying assets herein was equal to the amount paid by Kerr-McGee for the stock 3 (adjusted, of course, for liabilities assumed) it is that amount which is to be used in allocating the cost under the foregoing rationale.
Respondent also relies upon
As we have already pointed out, the adjusted cost of the stock ($8,767,184.17) was negotiated between the parties dealing at arm's-length after unsuccessful attempts by Moss Tie and its shareholders to sell 1974 Tax Ct. Memo LEXIS 68">*88 stock, assets or to liquidate, while the fair market value of the assets determined by respondent ($21,270,208.72) is a theoretical figure based upon the opinion of an independent appraiser modified by those of a valuation engineer. As we do not accept such valuations, no useful purpose would be served by commenting upon our doubts as to the weight to be accorded such opinions or admissibility as evidence. We do not consider such countervailing evidence sufficient to have us treat the purchase of the stock of Moss Tie as a bargain purchase, which respondent would have us do. If such a purchase had, in fact, occurred, we would, of course, be faced with a different question and respondent's position would have merit.
There is no question in this case that petitioner acquired the Moss Tie stock in order to liquidate the corporation as it was liquidated on the date the sale was consummated and the record as a whole undeniably supports such a conclusion. Accordingly, we are not faced with a factual situation or legal issues such as were involved in
Having concluded that $8,767,184.17 represented the fair market value of the underlying assets, we must, nevertheless, proceed to allocate that amount in accordance with the regulations under
The Commissioner, in his statutory notice of deficiency, determined that certain prepaid operating expenses and prepaid expenses, including prepaid insurance, did not represent "cash and its equivalent" within the meaning of section 1.334-1(c) (4) (v) (b ) (1 ), Income Tax Regs. He, nevertheless, determined the value of such items in amounts identical to the valuations used by petitioner on its income tax return. He determined an allocated basis for such items differently than petitioner *90 because he used the $21,270,208.72 aggregate fair market value of the assets rather than $8,767,184.17. Having decided that the foundation of the Commissioner's allocation was improper, the question of "cash and its equivalent" for such items becomes moot and the allocations of the petitioner are approved.
Petitioner conceded the correctness of the Commissioner's adjustments wherein he disallowed capital gains treatment under section 631(a) as to $79,178 in timber sales; disallowed a deduction for attorneys' fees in the amount of $1,132.06; determined the useful life of buildings to be 15 years with no salvage value in lieu of a 10-year useful life with a 10 percent salvage value.
In order to reflect the concessions of petitioner,
Decision will be entered under Rule 155.
Footnotes
1. All references to the Internal Revenue Code of 1954 in effect for the taxable period involved here. ↩
1. The book value of the timberland and timber was combined. ↩
2. The total is the amount used in the statutory notice of deficiency. The correct total is $21,270,028.72. ↩
2.
SEC. 334 . BASIS OF PROPERTY RECEIVED IN LIQUIDATIONS.(b) LIQUIDATION OF SUBSIDIARY. -
* * *
(2) EXCEPTION. - If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of
section 332(b) ), and if -(A) the distribution is pursuant to a plan of liquidation adopted -
(i) on or after June 22, 1954, and
(ii) not more than 2 years after the date of the transaction described in subparagraph (B) (or, in the case of a series of transactions, the date of the last such transaction); and
(B) stock of the distributing corporation possessing at least 80 percent of the total combining voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) during a 12-month period beginning with the earlier of,
(i) the date of the first acquisition by purchase of such stock, or
(ii) if any of such stock was acquired in an acquisition which is a purchase within the meaning of the second sentence of paragraph (3), the date on which the distributee is first considered under section 318(a) as owning stock owned by the corporation from which such acquisition was made, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. For purposes of the preceding sentence, under regulations prescribed by the Secretary or his delegate, proper adjustments in the adjusted basis of any stock shall be made for any distribution made to the distributee with respect to such stock before the adoption of the plan of liquidation, for any money received, for any liabilities assumed or subject to which the property was received, and for other items. ↩
3. It should be remembered that in this case the purchase of stock and the liquidation occurred virtually simultaneously. We do not herein decide the question of fair market value where there is a significant interim period between the purchase and the liquidation. ↩
