(c) In November 1947, R. C. Owen made an exchange with his sons, R. C. Owen, Jr., and Roy Owen, giving 4,000 shares of stock to each in return for $4,000 in debentures from each.10 Thereafter, R. C. Owen, Jr., and Roy Owen each owned 8,900 shares of stock, representing a total of 10 R. C. Owen, Jr., testified that the swap was recognized as an uneven exchange, in that father and sons considered the stock to be of greater value than $1 per share. He further testified that he did not recognize his gain as income. 96 Findings of Fact 17,800 shares, or 50.86 percent of the 35,000 shares issued. The placing of control of the corporation in the sons was the purpose of the exchange. R. C. Owen then owned debentures in the amount of $584,000, representing 73 percent of the $800,000 of debentures, while his sons retained $108,000 (13.5 percent) each. (d) On December 1, 1947, R. C. Owen placed his 17,200 shares of stock 11 in a trust for the benefit of his six children.12 He retained the debentures, upon which he has since received the income as it became due in the amount of $20,440 per annum. 4. (a) The debentures were issued on the day of their date, December 1, 1946, to mature on December 1, 1966, bearing interest at the rate of 32 percent per annum, payable semiannually upon surrender of attached coupons. (b) Each debenture 13 contained the following provisions: This Debenture Bond may be called and paid at any time up to and including December 1, 1956, at the price of 101% of principal and all accrued and unpaid interest, and thereafter at par plus accrued and unpaid interest ***. Interest shall cease on any Debenture Bond, or that part of it called for redemption on the date fixed for redemption, ***. All Debenture Bonds called and redeemed by the Company shall be cancelled and not reissued. Until the entire amount of Debenture Bonds of this series are paid in full, R. C. Owen Company covenants and agrees not to mortgage, pledge, or place any lien on any property of the Company to secure indebtedness, other than notes for deferred purchase price of realty or personalty secured by a lien on the property purchased or retention of title of personalty, and that it will maintain net current assets in the amount of $400,000, or fifty per cent of the outstanding Debenture Bonds, whichever amount is smaller. The placing of a lien in violation of this agreement or failure to maintain net current assets as herein provided, constitutes an event of default. "The transaction was subsequently noted in a gift tax return, wherein the shares were listed at par value. 19 Ownership of the stock passed from R. C. Owen under the trust indenture. He continued thereafter to serve the corporation as chairman of the board. 13 There were 800 debentures, each of face value of $1,000. Findings of Fact 149 C. Cls. By the acceptance of this Debenture Bond, the holder hereof, for himself and all subsequent holders expressly agrees that this Debenture Bond shall be subject and secondary to any and all indebtedness incurred by R. C. Owen Company, to banks or to others in the ordinary course of business. This subordination shall cease when surplus equals the amount of these Debenture Bonds. Any and all provisions and agreements of this Debenture Bond, insofar as they affect the holders hereof, may be changed, altered, or amended by a vote in writing of the holders of these Debenture Bonds holding seventyfive per cent of the principal amount thereof. To accomplish this, a writing shall be executed, signed by at least seventy-five per cent of said holders and filed with the Company, and thereupon, the Company is authorized and empowered to execute new Debenture Bonds in exchange for the outstanding Debenture Bonds, with the alterations or amendments as provided in said instrument. In the event R. C. Owen Company fail to pay interest on this Debenture Bond when due, or commit any other event of default hereinabove set out, then and in such event, and after thirty (30) days' notice in writing to the Company of the existence of the default, the holders of 75% in amount of Debenture Bonds then outstanding may declare the entire series of Debenture Bonds due and payable by a notice in writing to the Company, and such declaration shall mature all outstanding Debenture Bonds, with the same effect as if they had matured by lapse of time. (c) Plaintiff has paid the interest on the debentures as and when due and there has been no default in any of the debentures' terms and conditions. 5. (a) From December 1, 1946, through April 30, 1956, plaintiff carried all net profits to earned surplus.1 dends were paid on the common stock. No divi (b) The following tabulation reflects the results of plaintiff's operations in terms of net profits for the period from December 1, 1946, through April 30, 1956: Net profits were determined after taking into account all adjustments in Federal income taxes required by the Internal Revenue Service, excepting the assessments involved in this case of $14,560 for each of the years ended April 30, 1953, 1954, and 1955. This period was for 5 months only, from December 1, 1946, through April 30, 1947. The loss reflected during this period ensued from the absorption by plaintiff of a loss by fire. (c) The following tabulation reflects the total capital of plaintiff at the end of each of the fiscal years listed: 15 6. (a) The business of plaintiff's predecessor partnership was (as was and is the business of the plaintiff corporation) the manufacture and marketing of tobacco products, predominantly chewing tobacco of the variety known as twist.16 Plaintiff produces 25 percent or more of the twist tobacco manufactured and marketed for domestic use in the United States. During 1946 sales amounted to 1,600,000 pounds. (b) Practically all twist tobacco was and is sold under brand names 17 and within limited trade areas.18 15 Included are $35.000 of capital stock and paid-in surplus of $6,127.71, as well as earned surplus. Twist tobacco differs substantially from plug tobacco and scrap tobacco. 17 Brand names have consistently been indispensable to the sale of the product, although the formulas used varied little and sometimes not at all. 18 The trade areas include Arkansas, Kentucky, Missouri, and Tennessee, and parts of Alabama, Georgia, Illinois, Indiana, North Carolina, Ohio, Oklahoma, Virginia, and West Virginia. 625946-62 Findings of Fact 149 C. Cls. (c) Plaintiff acquired from its predecessor partnership 27 brand names. Four of the brand names had been initiated and developed by the partnership, while 23 of them had been purchased by the partnership from other manufacturers.19 The partnership balance sheet reflected intangible values represented by the brand names to the extent of their cost, $13,375,20 (d) Some cost to the business was involved in the development and maintenance of brand names.21 Similarly, some value accrued to the business from the ownership and in the use of such brand names.22 7. (a) The earnings of the partnership, after partners' salaries, for the 6 years 1936-1941 totaled $577,628.33, for an average of $96,271.47.23 (b) The earnings of the partnership, after partners' salaries, for the 5 years 1942-1946 totaled $315,784.72, for an average of $63,156.94.24 (c) The earnings of the corporation, before Federal income taxes, for the 10 years 1947-1956 totaled $930,800.05, for an average of $93,080.01.25 (d) Following is a tabulation of the partnership's capital 19 Many of the purchases were made during the war years (1942-1945) from competitors who had encountered financial difficulties as the result of the price squeeze attendant upon price control. In some instances the partnership bought the brand names only; in others it acquired the brand names with quantities of tobacco, for which a small premium had been paid. 20 Plaintiff increased this figure by $976.30, to show intangible values of $14,351.30. The increase was in reality only an incident to the rounding out of figures after other and unrelated modifications had been made in partnership affairs in anticipation of the transfer of its assets to the corporation. In 1946, the cost of putting a new brand name into use would have been of the order of 65 cents per pound of annual sales, wherefore the cost of marketing 10,000 pounds under a new brand name would have been $6,500 for the brand name, exclusive of the product. Witnesses for plaintiff estimated the fair market value of brand names of twist tobacco in 1946 as being not less than 12 cents per pound of annual sales. As applied to the partnership sales of 1,600,000 pounds that year, this estimate would reflect a fair market value of the brand names used in the business of $200,000. By years the figures were: 1936, $103,815.10; 1937, $61,672.29; 1938, $97,960.25; 1939, $115,141.33; 1940, $111,777.15; and 1941, $87,262.44. By years the figures were: 1942, $36,613.32; 1943, $71,481.46; 1944, $58,710.00; 1945, $92,206.86; and 1946, $56,773.08. The figures by years are set forth in finding 5 (b). 26 The figures are for the beginning of the years 1936, 1937, and 1938, and for the end of the years thereafter. |