Litton Indus. v. Commissioner

*1087 FINDINGS OF FACT AND OPINION

Respondent determined a deficiency in petitioner's Federal corporate income tax for the year ended July 29, 1973, in the amount of $ 11,583,054. After concessions, the issue for decision is whether Litton Industries received a $ 30 million dividend from Stouffer Corp., its wholly owned subsidiary, or whether that sum represented proceeds from the sale of Stouffer stock to Nestle Corp.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the attached exhibits are incorporated by this reference.

Litton Industries, Inc. (petitioner), and its subsidiaries manufactured and sold, inter alia, business systems and equipment, defense and marine systems, *167 industrial systems and equipment, and microwave cooking equipment. It maintained its principal office in Beverly Hills, California, at the time it filed its petition in this case.

On October 4, 1967, petitioner acquired all the outstanding stock of Stouffer Corp. (Stouffer), a corporation whose common stock was listed and traded on the New York stock exchange. Stouffer manufactured and sold frozen prepared food, and operated hotels and food management services and restaurants. It consisted of three business segments, and the gross revenues for said segments over the 5-year period 1968 to 1972 were as follows:

Stouffer's consolidated net income (before-tax), taxes, and net income (after-tax) were as follows:

*168 *1088 The pre-tax income figures for 1969, 1970, and 1971 reflect a net loss from a discontinued operation in the amount of $ 42,000, $ 198,000, and $ 452,000, respectively. The pre-tax income figure for 1972 reflects an extraordinary gain from a sale of a leasehold interest in a restaurant in the amount of $ 807,000.

The financial statements on pages 1090-1095 further reflect Stouffer's financial profile.

In early 1972, Charles B. Thornton (Thornton), the chairman of Litton's board of directors; Joseph Imirie, president of Stouffer; and James Biggar, an executive of Stouffer, discussed project "T.I.B.," i.e., the sale of Stouffer. In July 1972, Litton's board of directors discussed the mechanics and problems of selling Stouffer. As of August 1, 1972, Stouffer's accumulated earnings and profits exceeded $ 30 million. On August 23, 1972, Stouffer declared a $ 30 million dividend which it paid to Litton in the form of a $ 30 million negotiable promissory note, and at that time, Thornton believed that Litton would have no difficulty in receiving an adequate offer for Stouffer. Two weeks later, on September 7, 1972, petitioner announced publicly its interest in disposing of*169 Stouffer. Subsequent to said announcement, Litton received inquiries from a number of interested sources, including TWA, Green Giant, investment banking houses, and business brokers about the possible purchase of all or part of the Stouffer business.

Beginning in mid-September 1972, Litton and several underwriters discussed the feasibility of a public offering of Stouffer Stock. In early September 1972, Litton negotiated with Lehman Bros. for a public offering of Stouffer stock, but Lehman Bros. decided not to participate in the offering. During October 1972, Litton, Stouffer, and Merrill Lynch, a brokerage firm that thought Stouffer had an excellent outlook, prepared a public offering of Stouffer stock. During November 1972, petitioner, Stouffer, and Hornblower and Weeks prepared a partial public offering of Stouffer stock. Merrill Lynch had a policy of not effecting partial distributions *1089 of corporate subsidiaries and thus did not participate in the negotiations with Hornblower and Weeks. In mid-December 1972, Litton decided that a complete public offering was preferable and abandoned the idea of a partial public offering. The S-1 Registration Statement, which Stouffer*170 filed with the Securities and Exchange Commission, stated that $ 30 million of the proceeds would be used to pay the promissory note which Litton received as a dividend.

On March 1, 1973, Nestle Alimentana S.A. Corp. (Nestle), a Swiss corporation, offered to buy all of Stouffer's stock for $ 105 million. On March 5, 1973, Nestle paid Litton $ 74,962,518 in cash for all the outstanding stock of Stouffer and $ 30 million in cash for the promissory note. Because Litton sold Stouffer to Nestle, the underwriters stopped work on the scheduled public offering.

OPINION

The issue for decision is whether the $ 30 million dividend declared by Stouffer on August 23, 1972, and paid to its parent, Litton, by means of a negotiable promissory note was truly a dividend for tax purposes or whether it should be considered part of the proceeds received by Litton from the sale of all of Stouffer's stock on March 1, 1973. If, as petitioner contends, the $ 30 million constitutes a dividend, petitioner may deduct 85 percent of that amount as a dividend-received credit pursuant to section 243(a), ¹ as that section read during the year at issue. However, if the $ 30 million represents part of the selling*171 price of the Stouffer stock, as contended by respondent, the entire amount will be added to the proceeds of the sale and taxed to Litton as additional capital gain. Respondent's approach, of course produces the larger amount of tax dollars.

The instant case is substantially governed by Waterman Steamship Corp. v. Commissioner, 50 T.C. 650 (1968), revd. 430 F.2d 1185 (5th Cir. 1970), cert. denied 401 U.S. 939 (1971). Respondent urges us to follow the opinion of the Fifth Circuit, which in substance adopted the position of Judge Tannenwald's dissent (concurred in by three other *1090

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