BRUMLEY-DONALDSON COMPANY, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee, 443 F.2d 501

BARNES, Circuit Judge: Taxpayer, Brumley-Donaldson Co., seeks review of the decision of the Tax Court (T.C. Memo. 1969-183) upholding the Commissioner’s assessment of $4,-172.36 tax deficiency for the taxpayer’s taxable year ended June 30, 1960. Jurisdiction of this Court is based on Sections 7482 and 7483 of the Internal Revenue Code of 1954. • Both parties agree that the basic facts of this case are essentially as found by the Tax Court. Summarized briefly, they are as follows.

Taxpayer was organized in September, 1964, to engage in the business, in and about Los Angeles, California, of manufacturing, importing and distributing industrial materials, including the selling of firebricks of various grades. Taxpayer’s business was located adjacent to the St. Louis Firebrick & Insulation Company (hereinafter St. Louis) which manufactured second-quality firebricks. Until the date that taxpayer acquired the stock of St.

Louis, taxpayer had not manufactured firebricks of any grade but had always purchased its supply of first-quality bricks from North American Refractories of Missouri, and second-quality bricks from St. Louis. The demand for second-quality bricks steadily declined beginning in the late 1920’s and only St. Louis and one other company were supplying the Los Angeles market by 1959. By September 1960, second-quality firebricks were considered as only a complementary item to round out the inventory of a general foundry supply business. Under this market condition St.

Louis began incurring net operating losses in 1952 and by December 23, 1959 (the date of acquisition) had an accumulated net operating loss of $59,547.03. Gross sales of the operation continued to decline subsequent to acquisition. At the time of acquisition, St. Louis’ sole shareholder was Alois J. Mesmer, who individually owned the land which St. Louis occupied. All fixed assets which St. Louis owned had been fully depreciated, except for $543, and as of October 31, 1959, there was a retained earnings deficit of $111,503.

In July or August of 1959, at the request of Mesmer, the officers of taxpayer conferred with auditors of St. Louis. At that time they learned of the existing operating losses. After negotiation, it was agreed that Mesmer would exchange all of the outstanding St. Louis stock for 6,577 shares of taxpayer’s stock, and that Mesmer would become assistant to the President of taxpayer at the salary of $1,000 per month. The exchange was accomplished on December 23, 1959. On December 28, 1959 (two business days later) taxpayer liquidated St. Louis and took over all assets and assumed all liabilities of St. Louis.

The issue before the Tax Court was whether taxpayer was entitled to carry over net operating losses of St. Louis or was precluded from doing so by

Section 269 of the Code which prohibits the use of net operating loss carry forwards from acquired businesses if the principal purpose of the acquisition was to avoid Federal income taxes. The Tax Court determined that the evidence supported the conclusion that tax avoidance exceeded in importance any other purpose which taxpayer had in acquiring St. Louis. Taxpayer in this appeal contends that this finding was clearly erroneous, in that the Tax Court ignored undisputed evidence which established that taxpayer had sound business reasons for acquiring St. Louis. .Taxpayer’s position is without merit.

The Tax Court, in its opinion, specifically stated that the steady decline in demand for second-quality firebrick (St. Louis’ sole product), the similarly steady decline in St. Louis’ profitability and sales, and the awareness of the accumulated net operating losses obtained by officers of taxpayer in meeting with St. Louis’ auditors, all supported the conclusion that tax avoidance was the principal reason for acquisition. Going to the heart of taxpayer’s contentions on appeal, the Tax Court did not ignore the evidence which taxpayer argues supports a contrary decision.

Taxpayer advanced three business purposes which it argued were the real reasons for acquisition. The evidence which taxpayer now argues was ignored by the Tax Court was related to those three reasons. The Tax Court in its opinion meticulously examined each of these three reasons, and at times referred directly to the evidence offered in support thereof. The first reason, that acquisition of St. Louis could increase its overall foundry business, the Tax Court did not believe.

It noted that a study in April, 1960 (the Doolittle report, made after the acquisition), had been made by taxpayer’s employees with respect to increasing sales of second-quality firebricks and that the study had recommended construction of a new kiln and renovation of old equipment. But no action was taken thereon. Aside from this study, no evidence was presented to show in what manner the purchase would or could increase overall foundry business. The Tax Court concluded that this was not a purpose for acquisition and we find that conclusion was not clearly erroneous.

The second reason relied on by the taxpayer, which it argues was ignored or misconstrued by the Tax Court, indicated that the adjacent land was needed by taxpayer for the purpose of expansion and that this was the reason for acquisition. But the Tax Court found as a fact that the adjacent land was owned by Mr. Mesmer individually and concluded that the alleged purpose in acquiring the corporation was inconsistent with the fact of Mesmer’s ownership of the land. No evidence was introduced to show that Mesmer was unwilling to sell his land absent acquisition of St. Louis by taxpayer.

Therefore, the Tax Court’s rejection of this purpose was not erroneous. Finally, taxpayer urged that the purpose of acquisition was to obtain the services of Mesmer. However, the Tax Court stated that in light of Mesmer’s lack of success with St. Louis, it did not give much weight to the alleged purpose. Again, the judgment of the Tax Court in this respect was not clearly erroneous. Because none of the three purposes for acquisition was persuasive to the Tax Court, it found that taxpayer had failed to carry the burden of proving that tax avoidance was not the primary purpose for acquisition. We agree.

Taxpayer emphasizes the proposition that facts supporting the three business purposes advanced were stipulated by both parties. The Commissioner is quite right in his response to this argument. The stipulation in this case went to the authenticity of the documents stipulated, not to the truth of the matters stated therein. Consequently, the documents constituted some evidence which the Tax Court was required to consider (which we have determined it did), in reaching its conclusion. But it was not bound by the statements contained therein.

In the same vein, the Tax Court did not draw inferences contrary to any uncontradicted evidence when it viewed the factors of decreasing demand, declining sales, and awareness of a net operating loss as support for the presumption of a tax avoidance purpose. The fact that there was no direct testimony contradicting evidence which the Tax Court could reasonably conclude was inherently improbable, unconvincing, and which was given by uncorroborated, interested witnesses does not prevent the Tax Court from drawing the inferences which it did.

Furthermore, the legislative statement cited by taxpayer does not support reversal. Our review of the Tax Court’s findings of fact and opinion indicates that the Tax Court did scrutinize the entire transaction and course of conduct surrounding the circumstances of acquisition. For the reasons we have stated, we affirm. The Commissioner argues alternatively, as he did below, that if this Court determines that the principal purpose for acquisition was not tax avoidance, part of the net operating loss carry forward must be disallowed under

Section 382(b) (2). The Tax Court pinned its decision on

Section 269 which disallows the entire carry forward and declined to discuss the

Section 382(b) (2) issue. In view of the disposition of this appeal based on

Section 269, and because the Tax Court gave no opinion on the

Section 382(b) (2) issue, this Court likewise refrains from reaching that issue. Affirmed. . Internal Revenue Code of 1954 (26 U.S.C.) : “Sec. 269. Acquisitions Made to Evade or Avoid Income Tam. (

a) In general. — If— (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed.

For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.” . S.Rept.No.627, 78th Cong., 1st Sess. (1943), 1944 C.B. 973, 1017. “The House bill made

section 129 operative if one of the principal purposes was tax avoidance. Your committee believes that the

section should be operative only if the evasion or avoidance purpose outranks, or exceeds in importance, any other one purpose.” . It is well settled that the Tax Court’s determination of the principal purpose for acquisition is a factual matter which this Court cannot disturb unless the determination is clearly erroneous. Kessmar Construction Co. v. C.I.R., 336 F.2d 865 (9th Cir. 1964). . Taxpayer entered this suit faced with a presumption that tax avoidance was the principal purpose for acquisition. That presumption disappeared upon presentation of some evidence to the contrary.

Nevertheless, taxpayer still faced the burden of proving by at least a preponderance of the evidence that tax avoidance was not the principal purpose for acquisition. American Pipe & Steel Corp. v. C.I.R., 243 F.2d 125 (9th Cir. 1957); Thomas E. Snyder Sons Co. v. Comm. of Internal Revenue, 288 F.2d 36, 38 (7th Cir. 1961); J. T. Slocomb Company v. C.I.R., 334 F.2d 269 (2nd Cir. 1964). . Taxpayer’s reliance upon Hawaiian Trust Co., Ltd. v. United States, 291 F.2d 761 (9th Cir. 1961) is misplaced.

The Court in that case stated that “[t]he parties have stipulated that at the time of the acquisition of the stock on October 6, 1950, ‘no consideration was given by Refiners to the tax aspects of the transaction.’ ” (p. 766) Such a stipulation went to the very substance of the controlling fact and could not be ignored to reach a contrary conclusion. But the stipulations in this case were not decisive on the controlling fact.

Paragraph 32 of the stipulation of facts (Rec. 26-27) states: “In paragraphs 13, 14, 15, 19, 20, 21, 22, 25 and 29 hereof, the parties have stipulated to the authenticity of the documents referred to in said paragraphs; however, in no way has the respondent stipulated to the basis of the opinions expressed in such documents or to the truth of the matters contained in them. Additionally, in paragraphs 10, 11, 13, 14, 15, 19 and 20, inclusive, the respondent is stipulating only to the form of said transactions and by so stipulating does not agree that the form constituted the substance of said transactions.” .

S.Rept.No.627, 78th Cong., 1st Sess. (1943), 1944 C.B. 973, 1017. “The House bill made

section 129 dependent upon the purpose for which the acquisition was made or availed of. Your committee eliminated “availed of” from the requirement. The determination of the purpose for which the acquisition was made necessarily requires a scrutiny of the entire transaction, or course of conduct, with all its surrounding circumstances.” [Emphasis added.]