Robinson's Dairy, Inc. v. Commissioner , 35 T.C. 601 ( 1961 )

Robinson's Dairy, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Robinson's Dairy, Inc. v. Commissioner

Docket No. 80269

United States Tax Court

35 T.C. 601; 1961 U.S. Tax Ct. LEXIS 250;

January 18, 1961, Filed

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Decision will be entered under Rule 50.

1. New Corporation -- Secs. 430(e)(2)(B), 445(g)(2)(C), and 474(c). -- The petitioner was not a "new corporation" under section 430(e), 1939 Code.

2. Additions to Tax -- Secs. 291(a) and 293(a). -- The Commissioner did not err in determining that additions to tax are due under sections 291(a) and 293(a).

Stanley L. Drexler, Esq., Edward I. Haligman, Esq., and Ellis J. Sobol, Esq., for the petitioner.

Donald L. Sturm, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined deficiencies in the petitioner's income tax and additions to tax, as follows:

		Additions to tax under --
Year ended June 30 --	Deficiency
		Sec. 291(a)	Sec. 293(a)
1951	$ 4,802.25	$ 1,200.56	$ 1,790.72
1952	3,476.86	869.21	2,489.92
1953	341.68	85.42	1,687.03
1954	160.47	40.12	1,326.08

The issues for decision are: (1) Whether the petitioner is a "new corporation" within section 430(e); ^{*251 under both sections 291(a) and 293(a); and (4) whether the Commissioner in computing the addition to tax under section 293(a) made the computation on the correct amount of deficiency.}

FINDINGS OF FACT.

The returns for the taxable periods in question were filed at Denver, Colorado.

The Supreme Dairy Company was incorporated in Colorado in February 1930 to conduct a general dairy business. It engaged in such business in Denver, including buying cream and churning it into butter, manufacturing ice cream mix, and selling its products to grocery, drug, and retail dairy stores. It also operated two retail stores.

The stockholders of Supreme Dairy Company agreed on July 14, 1947, to sell all of their stock in that company to a new group. The stated purchase price for the stock was $ 125,000, which was to be adjusted for such factors as inventory, cash, and liabilities. The purchasers paid an aggregate of $ 100,000 for the stock. It was stated in the agreement that the purchasers were buying, inter alia, goodwill, association membership, truck leases, neon signs, a complete list of customers, routes, suppliers, and the prices currently charged. That agreement required the Supreme Dairy Company officers and stockholders to cooperate fully so that the purchasers could retain the goodwill, customers, and outlets of the Supreme Dairy Company. The agreement also noted that upon the acquisition of the stock a new corporation, Supreme Dairy, Inc., would operate the business. The Supreme Dairy Company was required to protect the purchasers from Federal and State tax deficiencies by placing $ 10,000 in escrow. The reason for the creation of the new corporation was to protect further the purchasers from any liabilities of the acquired corporation.

The Supreme Dairy Company was liquidated on July 15, 1947. Supreme Dairy, Inc., was incorporated in Colorado on July 16, 1947. *253 Its corporate purposes were stated to be to manufacture, store, and deal in produce and food products of all kinds, including dairy products. All the assets received on the liquidation of the Supreme Dairy Company were contributed to the petitioner and its stock was issued as follows:

	Common	Preferred
Hyman H. Robinson	1	0
Samuel M. Robinson	99	0
G. L. Davine	100	0
Charles V. Suchotzki	28	70
Samuel Chutkow	28	70
Dorothy R. Atler	28	70
Charles A. Atler	16	40

Hyman and Samuel Robinson are father and son. Samuel and some others of the purchasing group were working for various Denver dairies, and Hyman had had prior experience in the dairy business. They wanted to get into that business as owner-managers. The equipment was not in good condition and some changes were made in some of it after the petitioner took over. All plant equipment was replaced within 3 or 4 years.

The petitioner added more than 50 institutional accounts with restaurants, hospitals, hotels, and clubs within 15 days after it started operation. It completely eliminated the sale of ice cream mix within 6 months and eventually gave up churning butter. It bought all the butter it sold thereafter.

The State Board of Health closed the petitioner shortly after its incorporation because of a health law violation. This fact received wide local publicity and caused the petitioner to lose much of its retail store business.

The two retail stores which the Supreme Dairy Company had operated were leased to others for a time. One was soon taken back and used as a company office and the other was eventually sold.

The petitioner, when it commenced business, continued to employ the same route men and used the same equipment and facilities the Supreme Dairy Company had used. It served the same customers and made purchases from the same suppliers.

The Supreme Dairy Company had gross sales, gross profits from sales, and taxable income, for the periods indicated, as follows:

	1943	1944	1945
Gross sales	$ 346,827.65	$ 351,816.83	409,676.66
Gross profit from sales	115,697.35	118,284.38	123,305.01
Taxable income	7,207.55	2,983.27	1,097.63

	1946	Period ended
		July 15,1947
Gross sales	$ 586,081.61	$ 248,214.92
Gross profit from sales	149,697.31	81,352.51
Taxable income	(559.71)	10,564.22

The petitioner for the taxable period ended June 30, 1948, had gross sales of $ 471,959.36 and gross profit from sales of $ 62,473.77.

The petitioner, in answer to questions about its incorporation, on its return for the taxable year ended June 30, 1948, stated that it was not a "completely new business" but was a "successor to previously existing business" i.e., "Supreme Dairy Company."

The Commissioner determined that the petitioner was not entitled to the benefit of the "new corporation" status under section 430(e) for the purpose of computing its excess profits tax.

The petitioner was not a "new corporation" within the meaning of section 430(e).

The petitioner filed "tentative returns" for its taxable years ended June 30, 1951, 1952, 1953, and 1954, none of which lists any item of income or deduction or contains any other tax-computing information. Those returns were filed by the 15th of September of the respective year. The "tentative returns" showed the tax liability as "None" for the year ended June 30, 1951, and as $ 15,300 for each of the years ended June 30, 1953 and 1954. The "tentative return" for the year ended June 30, 1952, showed tax liability of $ 20,500. The liabilities shown were based on estimated profits.

The petitioner made payments to the district director of internal revenue, as follows:

Sept. 15, 1952	$ 7,175
Sept. 15, 1953	6,885
Dec. 15, 1953	6,885
Sept. 15, 1954	6,885
Dec. 14, 1954	6,885

The petitioner requested and was granted for each taxable year an extension of 5 or 6 months within which to file its return for that year but did not file any within the time as extended.

The petitioner was notified on September 23, 1952, and on November 17, 1952, that it was delinquent in filing its income tax returns for its years ended June 30, 1950 and 1951.

The petitioner filed returns for its years ended June 30, 1951, 1952, 1953, and 1954, on April 1, 1955, and showed on those returns items of income, and deductions. Tax liabilities were shown as follows:

Year ending June 30 --	Tax liability
1951	1952	32,412.10
1953	22,142.77
1954	23,020.25

These amounts were assessed, along with the additions to tax for delinquency and statutory interest.

The petitioner on April 3, 1957, agreed to additional deficiencies as follows:

Year ending June 30 --
1951	$ 11,031.56
1952	13,909.36
1953	11,256.11
1954	3,340.85

A Waiver of Restriction on Assessment (Form 870) was filed, and these amounts were assessed. The statute of limitations was extended for each taxable year to June 30, 1959. The statutory notice of deficiency was issued on February 20, 1959.

The Commissioner, after the execution of the Waiver of Restriction on Assessment, made the determination in the notice of deficiency that the petitioner was not entitled to the benefit of the "new corporation" status.

Charles Atler was employed by the petitioner as its auditor and accountant. He had ready access to its books and was charged with the responsibility for filing its returns, some of which he prepared and filed on time. He was in an automobile accident in 1949. He was hospitalized in December of that year, at sometime in 1951 and in April and June 1956. He had a brain tumor removed in June 1956. He suffered some physical disability during the taxable years, but he profitably continued his accounting practice during that period and at times was physically able to do his work. He had practiced accounting for many years, was registered as an accountant under the Colorado statutes, and was well known to the stockholders and officers of the petitioner. He was a stockholder of the petitioner. He knew that an excess profits tax schedule should have been filed for each of the years in question as called for on Form 1120 used for both the tentative returns and the later returns filed by the petitioner for the last 3 taxable years. Such schedules were not filed as a part of those returns and no resulting tax was shown thereon.

The fact that required returns for each of the taxable years had not been filed was well known to those representing the petitioner and the delay in filing the returns was a subject of discussion in directors meetings in 1953, 1954, and 1955. The services of Charles as auditor and accountant for the petitioner were terminated as of November 10, 1955.

There was not reasonable cause for the petitioner's failure to file the required return for any of the taxable years.

A part of the deficiency for each year was due to negligence, or intentional disregard of rules and regulations.

The stipulated facts are incorporated herein by this reference.

OPINION.

The Commissioner has determined that the petitioner does not qualify as a "new corporation" under section 430(e) of the Internal Revenue Code of 1939. He relies particularly in his brief on sections 430(e)(2)(B)(i) and 445(g)(2)(C). Section 430(e) provides for an alternative tax rate which can be applied to so-called new corporations in case it is lower than the maximum rate applicable to corporations generally. The benefit thus accorded new corporations was to give them some relief through lighter tax during the early growth years of their existence. The provisions of the law in this respect are rather complicated. See Phinney v. Tuboscope Co., 268 F.2d 233">268 F. 2d 233.

The legislative history relating in general to these provisions includes the following from S. Rept. No. 781, 82d Cong., 1st Sess., pp. 72 and 73 (1951):

In addition, your committee believes that despite the need for revenue in the present emergency every possible effort must be made to assure the creation and development of new techniques, new processes, and new corporations. This is desirable if the ability of this country to produce is to continue to expand.

As a result it is believed necessary to give assurance to new corporations in their initial period of development that the excess profits tax will not work undue hardship upon them.

* * * *

These special ceiling rates available to new corporations in their period of development are not to be available to new corporations created as the result of either a tax-free reorganization or a taxable transaction of the type where, under your committee's action, the purchasing corporation would be entitled to base its income credit on the earnings experience of the predecessor. Your committee believes that such corporations do not truly represent "new business." * * *

Section 430(e)(2)(B)(i) is one of the provisions which tacks the life of a previous corporation onto the life of the taxpayer corporation so as to disqualify the taxpayer in whole or in part for the new corporation relief. The petitioner conceded that if this provision applies it gets no relief. The section provides that the date on which the taxpayer commenced business shall be that of any corporation which prior to the taxable year was a party with the taxpayer to a transaction described in section 445(g)(2)(C), substituting therein July 1, 1945, for December 1, 1950. A transaction thus described in section 445(g)(2)(C) is the acquisition by the taxpayer of a substantial part of the properties distributed on or after July 1, 1945, by another corporation if such properties constituted a substantial part of the business assets of such other corporation, and if 50 per centum or more in value of the outstanding stock of the taxpayer is owned directly or indirectly by individuals who at the time of such distribution owned directly or indirectly 50 per centum or more in value of the outstanding stock of such other corporation. The stockholders of Supreme Dairy Company on July 15, 1947, when it was liquidated, were identical in all respects with the stockholders of the petitioner at all times material hereto. All of the assets of Supreme Dairy Company were transferred to the petitioner on July 16, 1947. Those assets just before being distributed by Supreme Dairy Company had constituted all of the business assets of that corporation and upon their receipt by the petitioner constituted all of the business assets of the petitioner. The petitioner states in its brief:

It follows that although in form there was a purchase of stock and within the literal confines of the statute the petitioner acquired a substantial part of the properties distributed by the old company, and the stockholders of the old company at the time of the distribution were the same individuals who became stockholders in the new company, in substance these individuals bought assets. The steps of the transaction must be disregarded to get at its substance. In reality the purchasers never were stockholders of the old company.

In other words, the petitioner concedes that under a literal application of the statute it should not be regarded as a new corporation for the purpose of section 430(e). This concession is obviously fully justified by the facts of record.

The petitioner argues that its stockholders never intended to continue the Supreme Dairy Company but intended merely to acquire all of its assets, that form should be disregarded in favor of substance, and if that is done, then the stockholders of the petitioner never were stockholders of the old company and sections 430(e)(2)(B)(i) and 445(g)(2)(C) would not apply to rule the petitioner out as a new corporation under section 430(e). One sufficient answer to that argument is that there is no occasion to look through form to substance in order to give relief which Congress did not intend. The relief in question was intended by Congress to help a new corporation to establish a new business. Here the petitioner acquired and continued to operate a long-established business. The petitioner argues that this is not so because it intended to abandon some of the activities of the old corporation and to develop some new activities of its own. But even assuming that those were its intentions, it certainly did not start its business from scratch or develop an entirely new business. Instead, it began business by taking the full benefit of the long-established business of its predecessor and rather obviously Congress did not intend to give such a corporation relief of the kind provided in section 430(e). There is no reason to believe that Congress wanted to give relief where there was little more than a change in the owners of an existing business. Stated affirmatively, there is reason to believe that Congress intended disqualification where the old business continued without interruption, thus avoiding a difficult period of developing a new business.

Furthermore, the petitioner fails to demonstrate that it would be in any better position if it had acquired only the assets and going business of Supreme Dairy Company without its stockholders ever acquiring the stock of Supreme Dairy Company. It is not clear, for example, that sections 430(e)(2)(B)(iii) and 474(c)(1), (2), and (3) would not disqualify it for relief in that case. Section 430(e)(2)(B)(iii) refers to a purchasing corporation and a selling corporation as defined in part IV whose properties were acquired in a part IV transaction and for the taxable year or for any preceding taxable year the conditions of paragraphs (1), (2), and (3) of section 474(c) were satisfied with respect to such transaction. "Part IV" means section 474.

The acquisition of the assets of Supreme Dairy Company by the petitioner without the acquisition of Supreme Dairy Company stock by the stockholders of the petitioner would have been a transaction as defined in section 474(a)(1). Section 474(c)(1) is satisified here since the selling corporation did not continue any business activities after the transaction other than those incident to liquidation and promptly liquidated in a transaction other than that described in section 461(a), and ceased existence. Section 474(c)(2), which relates to the base period of the purchasing corporation before the acquisition transaction, is satisfied since the petitioner had no such period and the assets in question were used, until distributed in liquidation, by the old corporation in the production of its income. Section 474(c)(3) requires that the business acquired in the transaction be operated by the purchasing corporation from the date of such transaction to the end of the taxable year, and that occurred here. However, it is not necessary to decide that these provisions would disqualify the petitioner for relief if it had acquired the assets without its stockholders acquiring the stock of the Supreme Dairy Company, since its stockholders did acquire the stock of the Supreme Dairy Company.

The petitioner, as it recognizes, must prove that its failure to file timely returns was due to reasonable cause and "It is not enough that it was not due to willful neglect." The petitioner argues that the addition to tax under section 291(a), as determined by the Commissioner for its failure to file timely returns, is not proper because the failure was due to reasonable cause. The record as a whole clearly shows that the failure to file timely returns was not due to reasonable cause. The officers and directors of the petitioner were well aware that the returns were long overdue and had not been filed. They seek to excuse themselves because they relied upon a "registered accountant" who was also a stockholder of the petitioner. They mention his poor physical condition but they were well aware of that at all times and if he was incompetent they did not exercise ordinary business care and prudence in failing to obtain and follow competent advice and assistance. The accountant admitted that he knew the returns should be filed, and he never advised the corporation otherwise. The petitioner did not rely upon any advice of his in failing to file timely returns. The Commissioner did not err in determining the additions to tax under section 291(a) for failure to file timely returns. R. A. Bryan, 32 T.C. 104">32 T.C. 104, affirmed this issue 281 F. 2d 238 (C.A. 4), certiorari denied 364 U.S. 931">364 U.S. 931; Babetta Schmidt, 28 T.C. 367">28 T.C. 367, remanded other issues 272 F. 2d 423 (C.A. 9); Home Guaranty Abstract Co., 8 T.C. 617">8 T.C. 617. However, the Commissioner at page 9 of his reply brief makes a concession with respect to the computation of the amount of the addition which can be given effect under Rule 50.

The Commissioner also determined additions to tax under 293(a) on the ground that a part of the deficiency for each year was "due to negligence, or intentional disregard of rules and regulations but without intent to defraud." The petitioner argues that the addition under 293(a) and the addition under 291(a) should not both be imposed in this case because the only negligence on the part of the petitioner which could give rise to any part of the deficiency for any year was its failure to file the returns and the two additions to tax should not be imposed for the same negligence. This Court held to the contrary in Vahram Chimchirian, 42 B.T.A. 1437">42 B.T.A. 1437, affirmed per curiam 125 F. 2d 746. Cf. Pincus Brecher, 27 B.T.A. 1108">27 B.T.A. 1108; Arthur M. Slavin, 43 B.T.A. 1100">43 B.T.A. 1100; Richard Law, 2 T.C. 623">2 T.C. 623. The petitioner suggests that we may want to reconsider our holding in the Chimchirian case, in the light of Commissioner v. Acker, 361 U.S. 87">361 U.S. 87. We see no reason in that case for reconsidering our prior decision. Furthermore, the failure to file timely returns was not the only negligence or disregard of rules and regulations attributable to the petitioner.

The petitioner also argues that the Commissioner erred in computing the addition to tax under section 293(a) on its total tax liability for each year without deducting therefrom the tax shown on the final return, the delinquent return, or the amount assessed for each year. Section 293(a) provides that the addition to tax is to be computed on "the total amount of the deficiency." Section 293(b) contains an identical provision. The petitioner wants to rely upon the definition of deficiency given in section 271(a) and to argue therefrom that a portion of the tax upon which the Commissioner has computed the addition in question was not a part of the deficiency and should not be included in the computation of the addition. This Court has consistently held that --

the phrase "total deficiency" as used in section 293(b) where fraud is present can only mean the amount which is the difference between the tax liability and the amount shown on the return. The return referred to undoubtedly means the original return due at the times provided by law.

( Maitland A. Wilson, 7 T.C. 395">7 T.C. 395, 397), and this is so "regardless of the fact that a taxpayer may have paid the tax prior to the mailing of the deficiency notice." ( Aaron Hirschman, 12 T.C. 1223">12 T.C. 1223, 1230.) See also Harry Sherin, 13 T.C. 221">13 T.C. 221; Arlette Coat Co., 14 T.C. 751">14 T.C. 751; Herbert Eck, 16 T.C. 511">16 T.C. 511, affirmed per curiam 202 F. 2d 750 (C.A. 2), certiorari denied 346 U.S. 822">346 U.S. 822; Middleton v. Commissioner, 200 F. 2d 94, affirming a Tax Court Memorandum Opinion. The principle of those cases applies as well under section 293(a) as under section 293(b), the basis for the addition cannot be expunged by later acts, and it follows that the Commissioner did not err as alleged.

Decision will be entered under Rule 50.

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Footnotes

• 1. All statutory references are to the Internal Revenue Code of 1939.↩

• 2. Its name was changed to Robinson's Dairy, Inc., in December 1947 and both will be hereinafter referred to as the petitioner.

• 1. Adjusted on face of return to $ 19,980.61.↩