Philadelphia Paper Mfg. Co. v. Commissioner ( 1932 )

PHILADELPHIA PAPER MANUFACTURING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Philadelphia Paper Mfg. Co. v. Commissioner

Docket No. 44110.

United States Board of Tax Appeals

25 B.T.A. 1231; 1932 BTA LEXIS 1404;

April 22, 1932, Promulgated

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Respondent's determination that the petitioner did not sustain any deductible loss on the liquidation of a subsidiary corporation sustained for lack of evidence.

Theodore B. Benson, Esq., for the petitioner.

W. F. Gibbs, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income tax of $51,020.16 for 1925. The only matter in controversy is the correctness of the respondent's action in disallowing a deduction of $105,464.11 taken by the petitioner in its return as a "bad debt" resulting from the liquidation of a wholly owned subsidiary corporation. The proceeding was submitted on a stipulation of facts and the petitioner's income-tax return, from which we make our findings of fact.

FINDINGS OF FACT.

1. The petitioner is a Pennsylvania corporation organized on July 1, 1923, and having its principal place of business in Philadelphia.

2. "At the time of its organization, and at July 1, 1923, the petitioner acquired the assets and assumed the liabilities of an old corporation of the same name, Philadelphia Paper Manufacturing Company, a Pennsylvania corporation, by issuing fifty shares of its stock at a par value $50of for one share of the stock of the old corporation at a par value of $100, and acquired the assets and assumed the liabilities of Fibre Container Company, also a Pennsylvania corporation, by the issuance of five shares in exchange for one share of the stock of the Fibre Container Company, having a par value of $100." The Fibre Container Company was liquidated and merged into the petitioner on July 1, 1923.

3. Prior to July 1, 1923, and on June 1, 1923, the Fibre Container Company acquired all of the capital stock of Fibopak Sales Company, a Pennsylvania corporation, amounting to $46,000, and took over certain assets and assumed certain liabilities of that company. On June 1, 1923, after the taking over of certain assets and the assumption of certain liabilities by the Fibre Container Company, the Fibopak Sales Company was indebted to that company on open account in the amount of $31,080.17, on notes in the amount of $67,000 and in addition was indebted to the Philadelphia Paper Manufacturing Company (old company) on notes in the amount of $1,000. These amounts, plus the $46,000 of capital stock of the Fibopak Sales Company held by the Fibre Container Company, make a total of $145,080.17 and disclose a deficit of assets of the Fibopak Sales Company over liabilities and capital stock in the amount of $34,575.88.

4. A consolidated return was filed by the Fibre Container Company, Fibopak Sales Company and other affiliates for the period from June 1, 1923, to June 30, 1923. In adjusting the taxable net income of the Fibre Container Company and its affiliates for the period covered by the return the respondent allowed a deduction for bad debts in the amount of $34,575.88, being the amount of the deficit of the Fibopak Sales Company. The charging off of this indebtedness by the Fibre Container Company reduced the amount of the indebtedness owing by the Fibopak Sales Company to the Fibre Container Company and the Philadelphia Paper Manufacturing Company (old company) and the investment of the Fibre Container Company in the stock of the Fibopak Sales Company from $145,080.17 to $110,504.29 at June 30, 1923.

5. Subsequent to July 1, 1923, the petitioner made advances to the Fibopak Sales Company. Notwithstanding the fact that the Fibre Container Company had been liquidated and merged with the petitioner on July 1, 1923, the Fibopak Sales Company carried such advances in its books of account as indebtedness owing to the Fibre Container Company.

6. The Fibopak Sales Company was liquidated during the month of September, 1925, and the petitioner received in liquidation all of the company's assets, consisting of cash, $3,735.90; accounts receivable, $45,395.42, and notes receivable, $823.46, making a total of $49,954.78.

7. On September 30, 1925, and immediately preceding the liquidation of the Fibopak Sales Company, its indebtedness on open account to the Fibre Container Company, as shown by its (Fibopak Sales Company) books, was $56,066.99, of which amount $24,985.82 represented advances made by the petitioner to Fibopak Sales Company subsequent to July 1, 1923.

8. For the year 1925 a consolidated return was filed for the petititioner and the National Fibre Box Company. In that return a deduction was taken for a bad debt in the amount of $105,464.11, which the petitioner determined to be the amount of a loss sustained on the liquidation of the Fibopak Sales Company. The petitioner determined the loss to be $105,464.11, without taking into consideration the bad debt previously written off in the amount of $34,575.88 and without taking into consideration certain other adjustments which show the excess of the outstanding advances made by the Fibre Container Company and the petitioner to the Fibopak Sales Company over the amount received in liquidation to be $85,535.33 instead of $105,464.11 as deducted in the return.

9. During the taxable period June 1 to June 30, 1923, the Fibopak Sales Company was operated at a loss in the amount of $6,854.79, which was allowed as a deduction in the consolidated return filed by it and Fibre Container Company for that period. For the period July 1 to December 31, 1923, the Fibopak Sales Company operated at a loss in the amount of $35,339.49, which was allowed as a deduction in the consolidated return filed by the petitioner and affiliates for that period. During the calendar year 1924 the Fibopak Sales Company was operated at a loss in the amount of $61,830.79, which was allowed as a deduction in the consolidated return filed for that year.

In determining the deficiency here involved the respondent disallowed the deduction of $105,464.11 taken in the consolidated return as a bad debt.

OPINION.

TRAMMELL: Although the petitioner took a deduction of $105,464.11 in its return and asked in its petition that that amount be allowed, it now concedes that the amount deducted was erroneous and asks that there be allowed the amount of $85,535.33, which is computed in the following manner:

Capital stock of Fibopak Sales Company held by Fibre Container Company on June 1, 1923, and taken over by petitioner on July 1, 1923	$46,000.00
Indebtedness on open account owing by Fibopak Sales Company to Fibre Container Company on June 1, 1923, and taken over by the petitioner on July 1, 1923	31,080.17
Indebtedness of Fibopak Sales Company to Fibre Container Company on notes on June 1, 1923, and acquired by the petitioner on July 1, 1923	67,000.00
Indebtedness of Fibopak Sales Company to the Philadelphia Paper Manufacturing Company (old company) on notes on June 1, 1923, and acquired by petitioner on July 1, 1923	1,000.00
Total	145,080.17
Less indebtedness of Fibopak Sales Company charged off by Fibre Container Company in 1923	34,575.88
	110,504.29
Advances to Fibopak Sales Company by petitioner from July 1, 1923, to September 30, 1925	$24,985.82
	135,490.11
Less assets received by petitioner in liquidation of Fibopak Sales Company	49,954.78
Balance	85,535.33

The petitioner contends that as a result of taking over the assets of the Fibopak Sales Company in liquidation of that company it sustained a deductible loss of $85,535.33. The respondent denies that the petitioner sustained any deductible loss.

Of the deduction now claimed by the petitioner $24,985.82 represents advances made by it to the Fibopak Sales Company during the period of affiliation between July 1, 1923, and the date of the liquidation of the latter company in September, 1925, and owing to the petitioner on the latter date. In liquidation the petitioner received $49,954.78, which is in excess of the amount of the advances owing to it at that time. The evidence does not establish a loss either as a bad debt or otherwise, even if such intercompany transactions might give rise to a bad debt deduction. These advances could not have been considered a part of the cost of the stock acquired because they were in the first place mere loans and not made until after the acquisition of the stock upon liquidation of the Fibre Container Company.

With respect to the remainder of the deduction contended for, $1,000 represents the indebtedness of the Fibopak Sales Company to the old company on notes which were outstanding prior to affiliation and which apparently were acquired by the petitioner on July 1, 1923, when it acquired the assets of the old company. The record does not show what the cost of such notes to the petitioner was, nor does it disclose what the value was at the time of acquisition by the petitioner. Without such information we are not in a position to determine at what amount, if any, they are to be considered in determining the loss contended for, if any amount is allowable as a matter of law. At any rate if they are given a value of $1,000, that amount plus advances made subsequent to affiliation is still less than the amount received in liquidation. Therefore, the amount of $1,000 can not be considered as a loss arising either from an indebtedness owing the petitioner or otherwise.

The remaining portion of the deduction contended for relates to the capital stock of the Fibopak Sales Company formerly held by the Fibre Container Company and certain indebtedness owing by the former to the latter on open account and on notes. This stock and the right to receive payment of the indebtedness were acquired by the petitioner upon the liquidation of the Fibre Container Company on July 1, 1923, the stock of that company having been acquired previously by the petitioner in exchange for its own stock. Regardless of any other legal question presented, it does not appear from the record what the stock of the Fibopak Sales Company and the right to receive payment of the indebtedness cost the petitioner. The evidence does not disclose what the stock of the Fibre Container Company cost the petitioner. The fact that the petitioner exchanged shares of its capital stock having a certain par value for stock of the Fibre Container Company having a certain other par value is not sufficient to warrant us in making any finding as to either the cost or value of such stock at the time of acquisition. We are not informed as to the value of the stock of the Fibopak Sales Company and the indebtedness at the time of their acquisition by the petitioner on July 1, 1923, nor do we know the value of that company's assets at that time. We therefore do not feel called upon to pass upon the questions of law which have been argued by counsel as to the effect of operating losses of the subsidiary during the period of affiliation or to determine whether any losses constitute intercompany transactions. In the absence of basic facts upon which to determine whether the petitioner has sustained a loss, such would be merely moot questions.

Judgment will be entered for the respondent.