
    KOPPERS COMPANY, INC., SUCCESSOR ON MERGER TO KOPPERS COMPANY, TRANSFEREE OF KOPPERS BUILDING, INC., TRANSFEROR v. THE UNITED STATES
    [No. 478-58.
    Decided June 8, 1960]
    
      Mr. David W. Richmond for plaintiff. Messrs. John M. Bixler, Miller <& Chevalier, E. 8. Ruffin, Jr., and C. M. Crick were on the briefs.
    
      Mr. Eugene Emerson, with whom was Mr. Assistant Attorney General Charles K. Rice, for defendant. Messrs. James P. Garlg/nd and Philip R. Miller were on the brief.
   Littleton, Judge {Ret.),

delivered the opinion of the court:

Plaintiff, a Delaware corporation, sues, as a successor by operation of law, to recover income tas and interest in the amount of $6,409.85, together with interest thereon, allegedly overpaid for the year 1944.

The stipulated facts necessary to an understanding and determination of the question presented in the case follow.

During 1936, Koppers Building, Inc. (hereinafter referred to as KBI), a Delaware corporation, purchased certain real estate in Pennsylvania including the building known as the Koppers Building. Under the law of Pennsylvania, then in effect, a corporation employing capital in that state was required to file a so-called bonus report and to pay to the state a bonus amounting to one-third of one percent of its capital so employed. Whenever a corporation increased its capital employed wholly within Pennsylvania, it was required to pay an additional bonus on such increase. Accordingly, in 1937 KBI reported the increase of capital employed in Pennsylvania mentioned above, and paid a bonus of $16,038.53 thereon. No deduction for Federal income tax purposes was claimed in either 1936 or 1937, and no deduction was allowed with respect to this bonus payment in the final settlement of KBI’s Federal income tax liability for those two years.

On September 30, 1944, KBI distributed all of its assets subject to its liabilities to Koppers Company, its sole stockholder, pursuant to a plan of complete liquidation under the provisions of Section 112(b) (6) of the Internal Kevenue Code of 1939, and it was formally dissolved on October 26, 1944, and its stock cancelled.

After receiving the assets of KBI, Koppers Company, also a Delaware corporation, reported an increase in its capital employed within Pennsylvania, and paid a bonus of $15,022.88 thereon in 1945. In computing this bonus, no credit was allowed the Koppers Company by the State of Pennsylvania for any part of the bonus paid by KBI in 1937 with respect to the same property.

KBI had kept its books and filed its Federal income and excess profits tax returns for calendar years on the accrual basis. Its corporation income and declared value excess-profits tax return for the period January 1,1944, to October 26,1944, the date of its dissolution, was filed on January 15, 1945, and in that return it claimed the amount of the bonus paid in 1937, $16,038.53, as a deduction for “organization expense”. Such deduction was disallowed in audit as one of several adjustments which increased net income shown on KBI’s return from $81,397.60 to $93,294.37. This increase resulted from the disallowance of four different items (including an amount of $16,253.03 for organization expense) aggregating $20,294.98, and from the allowance of five different items aggregating $8,398.21. The net increase of $11,896.77 resulted in a recommendation of a deficiency in tax of $4,758.71 which was accepted and approved by the Commissioner of Internal Revenue who timely assessed such amount and $1,651.14 as interest thereon; a total of $6,409.85. The plaintiff, as the successor on merger to Koppers Company which in turn was the transferee of KBI, paid the deficiency on November 10,1950.

A timely claim for refund was filed in 1952. The ground for this claim, upon which no administrative action has been taken, was that—

the rights acquired by Koppers Building, Inc., by virtue of the Pennsylvania bonus payment of $16,038.53, lost their useful value upon liquidation and dissolution of Koppers Building, Inc., in 1944 and such amount is, therefore, an allowable deduction in 1944.

The sole question presented is whether the bonus paid to Pennsylvania by KBI in 1937 for the privilege of employing its capital within that state is deductible as a loss in 1944, the year that corporation liquidated and was dissolved.

There have been several cases dealing with the problem here involved that support plaintiff’s position. Malta Temple Assn. v. Commissioner, 16 B.T.A. 409, Acq. XIII-2 C.B. 12, held that corporate organization expenses constituted a capital expenditure deductible under the loss provisions of Section 234(a) (4) of the Revenue Act of 1924, 43 Stat. 253, upon the dissolution of the corporation and the abandonment of its corporate franchise. The language of that section is substantially the same as that of Section 23(f) of the Internal Revenue Code of 1939, tbe section plaintiff relies on, which is as follows:

Sec. 23. Deductions From Gross Income.
In computing net income there shall be allowed as deductions:
*****
(f) Losses by Corporations. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
*****
26 U.S.C. §23(1952)

In Bryant Heater Company v. Commissioner, 231 F. 2d 938, the Sixth Circuit Court of Appeals allowed, in the year in which the taxpayer was liquidated and dissolved, the deduction as a loss of the amount of organizational expenses incurred in securing a corporate charter.

On facts very similar to those of the instant case, it has been held that the Pennsylvania bonus was deductible as a loss in the year the corporation was liquidated and dissolved. Wayne Coal Mining Company v. Commissioner, 12 TCM 345 (1953).

The defendant seeks to distinguish the Bryant case, where there was also a Section 112(b)(6) liquidation, on the ground that in Bryant, the subsidiary had, prior to dissolution, sold all its assets to a third party and merely turned the cash over to its parent corporation. The fact situation of the case at bar, defendant argues, is more akin to a merger, and the rule of Citizens Trust Co. v. Commissioner, 20 B.T.A. 392, that the amount of organizational expenses cannot be deducted as a loss resulting from a merger, controls. See also Motion Picture Capital Corp. v. Commissioner, 80 F. 2d 872. This, however, has not been a uniform holding. Dragon Cement Company v. United States, 144 F. Supp. 188 held that where there was a statutory merger rather than a complete liquidation and dissolution, the Pennsylvania bonus is deductible as a loss in the year of the merger.

Tire defendant says that the Citizens Trust case confined Malta Temple Assn., supra, “to a situation where there is a complete extinction of the corporate business and held its reasoning not applicable to a continuing business taken over by another corporation.” We do not think that the Board of Tax Appeals said that. What they did say was that where a merger occurred, the ending of the corporate life of a corporation is entirely unlike a situation where there was a surrender of the corporate charter and a dissolution of the corporation.

An analysis of the defendant’s interpretation of the cases cited above indicates that the Government’s position is premised in part upon the continuity of the business in the hands of the taxpayer’s parent company.

We do not think that the presence or absence of continuity of the business enterprise is the proper basis upon which to resolve this question. The Federal income tax is levied on the corporation, not the enterprise it is engaged in.

As a matter of tax consequences, we can perceive no difference between the fact situations in the Malta Temple and Bryant cases and the case before us. In each instance, the corporation was completely dissolved, and lost its corporate identity. That is what distinguishes the instant case from a merger situation. When KBI lost its privilege of doing business as a corporation in Pennsylvania by reason of its liquidation and dissolution, it lost or abandoned something for which it had paid and it was entitled to a deduction resulting from the loss. This is what the cases have held, and we see no basis for disagreement.

Prior to the filing of this suit, it appears that the defendant concurred in the view expressed in the cases. The Commissioner acquiesced in the Malta Temple decision, and apparently conceded the correctness of the holding in the Wayne case, because he did not raise the question in appealing the case on another point. See Commissioner v. Wayne Coal Mining Co., 209 F. 2d 152.

The opinion of the Sixth Circuit Court of Appeals in the Bryant case states that—

The Commissioner concedes that, except for the incidence of § 112(b) (6), Bryant would be entitled to deduct its organizational expenses in the year of its dissolution as an uninsured loss under § 23(f) of the Internal Kevenue Code of 1939, * * *

The defendant also contends that there was no loss to KBI in 1944 because its liquidation was pursuant to Section 112 (b) (6) of the Internal Revenue Code of 1939, and because the closing agreement executed by KBI and the Commissioner of Internal Revenue provided that the transfer of its assets and liabilities by KBI to Koppers Company, its sole stockholder, “will result in no recognizable gain or loss.”

We cannot agree. By its very nature, the privilege acquired by KBI through the payment of the bonus was not transferable. It was not and could not be “property distributed in complete liquidation” to its parent corporation. Bryant Heater Company, supra. Furthermore, Section 112(b) (6) does not apply to the corporation being liquidated. It is applicable to the corporation receiving the property as a result of a liquidation.

Since we find that KBI should have been allowed to deduct the amount of the 1937 bonus payment in its 1944 tax return, the deficiency assessed as the result of an adjustment smaller in amount than the deductible loss was erroneously exacted.

Plaintiff is entitled to recover, and shall have judgment for $6,409.85, with interest thereon as provided by law.

It is so ordered.

LakamoRE, Judge; Madden, Judge; Whitakek, Judge; and Jones, Chief Judge, concur.

BINDINGS OF FACT

The court makes findings of fact, based upon the stipulation of the parties, and the briefs and argument of counsel, as follows:

1. Koppers Company, Inc., hereinafter referred to as the plaintiff, is a corporation organized under the laws of the State of Delaware with its principal office in the Koppers Building in Pittsburgh, Pennsylvania. As a successor by operation of law, it is the real party in interest to a claim against the defendant for an alleged overpayment of income tax for the period January 1 to October 26, 1944, which it asserts upon behalf of Koppers Building, Inc., hereinafter referred to as KBI.

2. KBI was organized under the laws of the State of Delaware on December 19,1918, at which time its name was Kop-pers Products Company. On December 29, 1934, its name was changed to American Tar Products Company, Inc., and on March 10, 1938, its name again was changed to Koppers Building, Inc. It first was registered to do business in Pennsylvania on June 20, 1918, under its original name. It later was re-registered on January 18,1935.

3. During the year 1936, KBI purchased certain real estate in Pennsylvania including the building now known as the Koppers Building which it transferred to Koppers Company, also a Delaware corporation, on September 30, 1944. The Koppers Building was acquired by the plaintiff on November 10, 1944, from the Koppers Company, under circumstances set forth in paragraph 9.

4. Pursuant to the laws of the Commonwealth of Pennsylvania, KBI reported in its bonus report filed with the Pennsylvania Department of Revenue for the year 1936 an increase in its capital employed within the Commonwealth on account of its acquisition in 1936 of the Koppers Building. A bonus of $16,038.53 shown on this report was paid by KBI to the Department of Revenue of Pennsylvania on March 15,1937. No deduction for federal income tax purposes was either claimed in KBI’s returns as filed for 1936 or 1937 or allowed with respect to this payment in the final settlement of its tax liability for those years.

5. Pursuant to the laws of the Commonwealth of Pennsylvania, Koppers Company reported an increase in its capital employed within the Commonwealth of Pennsylvania in the amount of $4,506,862.77 in its bonus report filed with the Pennsylvania Department of Revenue for the period January 1 to November 10, 1944. To the extent of $4,255,599.15, such increase was attributable to the Koppers Building which was acquired by Koppers Company on September 30,1944. A bonus of $15,022.88 shown on this report was paid to the Department of Revenue of Pennsylvania in 1945 by the plaintiff as successor on merger to Koppers Company. No deduction for federal income tax purposes was allowed with respect to this payment.

6. In computing the bonus of Koppers Company for the period January 1 to November 10, 1944, resulting primarily from its acquisition during that period of the Koppers Building from KBI, no credit was allowed Koppers Company by the Pennsylvania Department of Revenue for any part of the bonus paid by KBI in 1931 with respect to the same property.

7. The bonus reports and the payments described in paragraphs 4 and 5 were made pursuant to statutory provisions set forth below:

Sec. 706. Bonus reports of foreign corporations and payment of bonus — Every corporation, limited partnership, or joint-stock association, chartered or created under the laws of any other State, or of the United States, or of any foreign country, shall make a bonus report of the Department of Revenue, before going into operation or transacting any business in this Commonwealth, and annually thereafter at the same time that such corporation, limited partnership, or joint-stock association is required by law to file with the Department of Revenue a capital stock or franchise tax report. Every such corporation, limited partnership, or joint-stock association, at the time of making every report required by this section, shall compute and pay to the department the bonus, if any, then due to the Commonwealth. 1929, April 9, P.L. 343, art. YU, Sec. 706; 1937, Feb. 2, P.L. 3, Sec. I.
See. 1851. Certain foreign corporations and associations — From and after the passage of this act all corporations, limited partnerships or joint-stock associations, except foreign insurance companies, chartered or created by or under the laws of any other state, or of the United States, or of any foreign country, whose principal office or chief place of business is located in this commonwealth, or which have any part of their capital actually employed wholly within this state, in addition to complying with the laws now in force as to such corporations, limited partnership or joint-stock associations, shall pay to the state treasurer, for the use of the commonwealth, a bonus of one-third of one per centum upon the amount of their capital actually employed or to be employed wholly within the state of Pennsylvania, and a like bonus upon each subsequent increase of capital so employed. 1901, May 8, P.L. 150, Sec. 1.

8. KBI kept its books and filed its federal income and excess profits tax returns for calendar years on the accrual basis. Its corporation income and declared value excess-profits tax return for the period January 1 to October 26, 1944, was filed with the Collector of Internal Revenue in Pittsburgh on January 15, 1945. It disclosed a net income of $81,397.60 and an income tax liability of $32,548.97. This amount was paid during 1945 in quarterly installments of $8,137.25 on January 15 and of $8,137.24 on April 13, on July 13, and on October 15, by the plaintiff as a transferee under circumstances set forth in paragraph 9.

9. On September 30,1944, KBI distributed all of its assets subject to its liabilities to Koppers Company, then its sole stockholder, pursuant to a plan of complete liquidation under provisions in Section 112(b) (6) of the Internal Revenue Code of 1939, and it was formally dissolved on October 26, 1944, and its stock cancelled. On November 10, 1944, Koppers Company (together with Koppers United Company, The Koppers Erecting Corporation, and Fuel Investment Associates) was merged into the plaintiff. KBI and the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, in accordance with provisions in Section 3760 of the Internal Revenue Code of 1939, executed a formal closing agreement. Such agreement read in part as follows:

The transfer by said corporation [Koppers Building, Inc.] of all its assets and liabilities to its sole stockholder, Koppers Company, in exchange for and in complete cancellation and redemption of all its outstanding capital stock will result in no recognizable gain or loss.

10. The amount of $16,038.53, paid in 1937 as shown in paragraph 4 above, was claimed as a deduction for “organization expense” on KBI’s return for the period January 1 to October 26, 1944. Such amount was disallowed in audit as one of several adjustments which increased net income shown on the return from $81,397.60 to $93,294.37. This increase resulted from the disallowance of four different items (including an amount of $16,253.03 for organization expense) aggregating $20,294.98, and from the allowance of five different items aggregating $8,398.21. The net increase of $11,896.77 resulted in a recommendation of a deficiency in tax of $4,758.71 which was accepted and approved by the Commissioner of Internal Revenue who timely assessed such amount and $1,651.14 as interest thereon, a total of $6,409.85, which the plaintiff paid on November 10,1950.

11. On November 3,1952, the plaintiff filed a formal claim for refund as the successor on merger to Koppers Company which in turn was the transferee of KBI. Such claim set forth as a ground of overpayment on the return of KBI for the period January 1 to October 26,1944 that—

“the rights acquired by Koppers Building, Inc. by virtue of the Pennsylvania Bonus payment of $16,038.53, lost their useful value upon liquidation and dissolution of Koppers Building, Inc., in 1944 and such amount is, therefore, an allowable deduction in 1944.”

No administrative action has been taken upon such refund claim by the Commissioner of Internal Revenue and no part of the payment of $6,409.85 has been refunded or repaid to the plaintiff.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and it is therefore adjudged and ordered that it recover of and from the United States six thousand four hundred nine dollars and eighty-five cents ($6,409.85), with interest thereon as provided by law. 
      
       In 1936 the name of this corporation was actually American Tar Products Company, Inc. On March 10, 1938, its name was changed to Koppers Building, Inc. For the purpose of this opinion, the corporation will be referred to by the latter name, Koppers Building, Inc. (KBI).
     
      
       KBI was probably dissuaded from claiming a deduction by the opinion of the Third Circuit Court of Appeals in United Gas Improvement Co. v. Commissioner, 64 F. 2d 957 (1933), which held that the Pennsylvania bonus was not deductible as a tax. I.T. 3210, 1938-2 C.B. 141, held that the bonus payment was to be treated as a nondeductible capital expenditure.
     
      
       See. 112. Recognition of Gain or Loss.
      (b) Exchanges Solely in Kind—
      (6) Property received by corporation on complete liquidation of another.— No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. For the purposes of this paragraph a distribution shall be considered to be in complete liquidation only if—
      (C) The distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; * * «
      « » * * »
      26 U.S.C. § 112 (1952)
     
      
       Tlie 1937 amendment substituted the words “or franchise tax report” for the words “tax returns” at the end of the first sentence of this section, and also added the second sentence.
     
      
       This Section was repealed July 25, 1953, effective January 1, 1953 for foreign corporations reporting on a calendar year basis. P.L. 560, Sec. 8.
     