1960 U.S. Tax Ct. LEXIS 21">*21
Petitioner was incorporated for the purpose of dealing in foods and beverages. It operated a retail grocery and liquor store which for some years had been unprofitable. Its president and controlling stockholder was a minority stockholder in a corporation engaged in the hotel supply business consisting of selling food (principally meat) to hotels, restaurants, and home freezers. This latter corporation was insolvent but petitioner's president thought that if petitioner acquired its assets, used its own credit, and followed new policies it might make a profit from this new phase of the retail food business. Accordingly, petitioner acquired the assets of the other corporation and operated them at a profit. After some months it disposed of its unprofitable retail grocery and liquor business. In its return for the taxable year petitioner carried over its net operating loss for prior years and deducted it from income made by it during the taxable year from the so-called hotel supply business.
35 T.C. 299">*300 Respondent determined a deficiency in petitioner's Federal income tax for its fiscal year ended July 31, 1953, in the amount of $ 15,503.61. This deficiency resulted from respondent's disallowance of a net operating loss deduction of $ 18,932.37 and his disallowance of a "loss from operation of retail liquor and grocery store" in the sum of $ 3,186.93. At the trial herein respondent conceded error in his disallowance1960 U.S. Tax Ct. LEXIS 21">*23 of the second item. Thus the only issue remaining in the case is whether respondent erred in disallowing the deduction on account of a net operating loss.
FINDINGS OF FACT.
A large part of the facts was stipulated by the parties. We find those facts to be as stipulated and incorporate herein by this reference the stipulation and the exhibits attached thereto.
The petitioner, Kolker Bros., Inc., is a corporation organized and existing under the laws of the District of Columbia. Petitioner was incorporated on July 30, 1943, under the name Cathedral Super Markets, Inc., sometimes hereinafter referred to as Super Markets. The return for the period herein involved, August 1, 1952, to July 31, 1953, was filed with the district director of internal revenue at Baltimore, Maryland.
The object for which petitioner was incorporated is stated in its certificate of incorporation as being "to conduct, maintain and operate a grocery business and generally to buy, sell, prepare and deal in foods, and beverages, including alcoholic beverages of all kinds and descriptions, and in general to do and perform every lawful act and thing necessary or expedient to be done or performed for the efficient1960 U.S. Tax Ct. LEXIS 21">*24 and profitable conducting of said business; and to have and to exercise 35 T.C. 299">*301 all the power conferred by the laws of the District of Columbia upon this Corporation, under sub-Chapter 9 of Title 5 of the 1929 Code of the District of Columbia, or sub-Chapter 4 of Chapter 18 of the 1901 Code of the District of Columbia."
From the date of its incorporation to November 1, 1952, Super Markets operated a retail liquor and grocery store at 3000 Connecticut Avenue, N.W., Washington, D.C.
As of April 23, 1952, Sidney Kolker was a majority stockholder in the petitioner and neither Samuel Kolker, his father, nor Bernard Kolker and Irvin Kolker, his brothers, held any interest in the petitioner.
As of April 1, 1952, the officers and directors of the petitioner were as follows: Sidney Kolker, president and director. Anna M. Cromer, secretary and director. Joseph B. Danzansky, director. Beatrice S. Kolker (Mrs. Sidney Kolker), treasurer.
On April 23, 1952, Super Markets purchased all of the assets of Washington Beef & Provision Company, Inc., hereinafter referred to as Washington Beef, for $ 77,281.93 in cash. The basis of the transferred assets in the hands of petitioner was not determined by reference to the basis of the assets in the hands of Washington Beef.
Washington Beef was incorporated in 1931 and from that date operated a hotel supply house business until April 23, 1952, at 1110 E Street, S.W., Washington, D.C. The hotel supply house business furnishes meats and meat products and foods to hotels, restaurants, institutions, and home freezers. It brings in the prime cuts of beef, and cuts them into steaks, chops, and hamburger to serve in restaurants. It did not sell cereals. It sold dairy products in gallons. It did not sell cookies and cakes in nickel and dime packages as the retail grocery business did.
As of April 23, 1952, the stock ownership of Washington Beef was as follows:
| Shares of capital | Per | |
| Name | stock -- par value $ 100 | cent |
| Samuel Kolker | 210 | 60 |
| Sidney Kolker | 140 | 40 |
1960 U.S. Tax Ct. LEXIS 21">*26 Prior to September 6, 1951, 60 per cent of this stock was owned by Samuel Kolker and 40 per cent was owned by Sidney Kolker. On 35 T.C. 299">*302 September 6, 1951, Bernard Kolker and Irvin Kolker each received by gift from their father 15 per cent of the stock in this corporation.
On January 11, 1952, Bernard Kolker and Irvin Kolker returned all of their shares in Washington Beef to their father, Samuel Kolker, who thereafter owned 60 per cent of the outstanding stock. Samuel Kolker thereupon pledged all of his stock with Internal Revenue Service as collateral for his personal tax indebtedness.
As of April 23, 1952, the officers and directors of Washington Beef were as follows: Samuel Kolker, president and director. Bernard Kolker, vice president and director. Sidney Kolker, treasurer and director. Irvin Kolker, secretary and director.
In order to finance the purchase of the assets of Washington Beef, Super Markets borrowed the following amounts from the stated individuals:
| Jack Diener | $ 10,000.00 |
| Meyer Rappaport | 10,000.00 |
| Leo Bernstein | 20,000.00 |
| Beatrice Kolker | 5,993.70 |
| Irvin Kolker | 5,993.70 |
| Bernard Kolker | 5,993.70 |
| Bernie Kilsheimer | 10,000.00 |
| Beatrice Kolker | 3,341.16 |
1960 U.S. Tax Ct. LEXIS 21">*27 The several amounts of $ 5,993.70 advanced by Beatrice Kolker, Bernard Kolker, and Irvin Kolker represented withdrawals by them from Green Meadows Market, Inc.
On April 24, 1952, Super Markets borrowed $ 60,000 from the National Bank of Washington. The proceeds of this note were used in part to liquidate the loans payable to Jack Diener, Leo Bernstein, and Bernie Kilsheimer.
On July 31, 1952, Super Markets issued 60 shares of capital stock to Sidney Kolker in cancellation of the loan due his wife, Beatrice Kolker, in the amount of $ 5,993.70.
On the same date 160 shares were issued to Bernard Kolker in cancellation of the loans due to Meyer Rappaport and Bernard Kolker totaling $ 15,993.70. Meyer Rappaport is the father-in-law of Bernard Kolker and the loan due him was assumed by Bernard Kolker.
On October 28, 1952, 60 shares of stock were issued to Irvin Kolker in cancellation of the loan due him of $ 5,993.70.
On November 1, 1952, the stock of Super Markets was held as follows:
| Shares | |
| Sidney Kolker | 260 |
| Bernard Kolker | 160 |
| Irvin Kolker | 60 |
35 T.C. 299">*303 As of April 23, 1952, petitioner was controlled by Sidney Kolker and Washington Beef was controlled by Samuel Kolker.
Super1960 U.S. Tax Ct. LEXIS 21">*28 Markets has continued to operate the hotel supply house since the acquisition of the assets of Washington Beef on April 23, 1952. Super Markets continued operation of the retail liquor and grocery business until November 1, 1952. On November 1, 1952, Super Markets transferred the retail liquor and grocery business to Cathedral Stores, Inc., hereinafter referred to as Stores.
Stores was organized on May 26, 1952, and on June 3, 1952, 50 shares of its capital stock were issued as follows:
| Shares | |
| Sidney Kolker | 45 |
| Joseph B. Danzansky | 4 1/2 |
| Anna M. Cromer | 1/2 |
Stores sold the retail liquor and grocery business in 1953, and is no longer actively conducting a business. The sale price was $ 28,445.
Super Markets incurred the following losses from operation of the retail liquor and grocery business:
| Fiscal year ended July 31 -- | Amount |
| 1949 | $ 2,184.78 |
| 1950 | 9,628.27 |
| 1951 | 28,125.81 |
| 1952 | 18,245.88 |
During the period August 1 to November 1, 1952, petitioner operated the retail liquor and grocery business at a loss of $ 3,186.93. This is the same business which petitioner had operated prior to acquisition of the assets of Washington Beef. During the period August1960 U.S. Tax Ct. LEXIS 21">*29 1, 1952, to July 31, 1953, petitioner operated the hotel supply business at a profit.
The petitioner on its return for the fiscal year ended July 31, 1953, reported net income of $ 39,252.40 after offsetting the loss of $ 3,186.93 from operation of the retail grocery and liquor business from August 1 to November 1, 1952. From this amount petitioner deducted $ 18,932.37 as a net operating loss carryover from the fiscal years ended July 31, 1950 and 1951, and paid a tax of $ 6,085.45 on a net income of $ 20,320.03 after deduction of net operating loss.
The purchase by Super Markets of the Washington Beef assets was at arm's length.
Washington Beef, prior to the sale of its assets to petitioner, was indebted to the United States by reason of unpaid taxes for the years 1942 to 1948, inclusive. An assessment against Washington Beef had been made in the amount of $ 190,001.71 for these unpaid taxes. All of the assets of Washington Beef were subject to United States Tax Lien No. 25919. Because of the Commissioner's interest in the assets of Washington Beef by reason of this lien, the amount 35 T.C. 299">*304 of the sale was approved by the Commissioner who received the proceeds therefrom ($ 1960 U.S. Tax Ct. LEXIS 21">*30 77,281.93) in part satisfaction of Washington Beef's tax lien.
At the time Super Markets acquired the assets of Washington Beef, Sidney Kolker was interested in expanding the business of Super Markets. For many years he had been personally active in the meat phase of this business. He had also been active in the operation of Washington Beef which was controlled by his father. Sidney disagreed with his father as to business policies and had determined to sever business connections with him. Washington Beef was insolvent but was carrying on an active business. It reported a loss of over $ 36,000 in its Federal income tax return for 1952. Sidney anticipated that he could make it successful by following different policies from those followed by his father, but there was no assurance at that time that he could make a profit from the assets acquired from Washington Beef. One of the principal problems Sidney faced was the matter of credit by which to finance the business of Washington Beef after he acquired it without any cessation in the operation of that business. Super Markets had such credit with the same suppliers as those used by Washington Beef: Briggs & Co., Esskay, Goetze, 1960 U.S. Tax Ct. LEXIS 21">*31 Kilsheimer Brothers, Luters, Gwaltney, and all of the wholesalers in Washington at that time. These suppliers were among those used by petitioner. The competitors of Washington Beef were other hotel supply businesses and also independent retail grocery stores and chain retail grocery stores.
OPINION.
In this case petitioner, a single corporate taxpayer, which had been engaged for some years in the business of selling food (including meat and liquors) at retail to the general public, decided to and did acquire the assets of a corporation engaged in selling food (principally meats) at retail to hotels, restaurants, institutions, and home freezers and to continue the business of that corporation. Acting through its president and controlling stockholder petitioner took this action for legitimate business purposes with no aim or idea of obtaining a tax "windfall" by taking, either directly or indirectly, any of those actions which are referred to in
Acting pursuant to the literal provisions of
Respondent has disallowed this deduction and contends in this proceeding that "petitioner is not entitled to the deduction because the income against which the losses are claimed as an offset was not produced by substantially the same business which incurred the losses," citing as authority for this contention
In our opinion this case is distinguishable from the two cases cited above in the following respects: (1) In the instant case "a single corporate taxpayer changed the character of its business" but did not change the essential nature of its business (see footnote 9 of
We therefore conclude that under the provisions of
