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PACIFIC FRUIT & PRODUCE CO. v. UNITED STATES

April 13, 1945

PACIFIC FRUIT & PRODUCE CO., Inc.,
v.
UNITED STATES



Findings of Fact.

I. The plaintiff's, Pacific Fruit and Produce Company, Inc., principal place of business is Seattle, State of Washington, and it was organized under the laws of the State of Delaware in 1931 under the name of General Fruit Corporation. Pursuant to a merger agreement, dated December 2, 1935, the plaintiff changed its name to Pacific Fruit and Produce Company, Inc. Prior thereto the General Fruit Corporation was the owner of all of the capital stock, both common and preferred, of the Pacific Fruit and Produce Company, a Washington corporation, and all of this stock was cancelled on January 1, 1936. The plaintiff corporation had 131,293 shares of common stock issued and outstanding and this stock was cancelled and converted into the same number of shares with a par value of $ 10.00 each. Under the merger agreement, dated December 2, 1935, all of the assets of the Pacific Fruit and Produce Company were acquired, as of January 1, 1936, by the plaintiff, Pacific Fruit and Produce Company, Inc., and it assumed all of the liabilities of the Pacific Fruit and Produce Company, and the agreement specifically provided that all rights of creditors and all liens upon any property of the Pacific Fruit and Produce Company should be preserved, unimpaired and all debts, liabilities and duties of that corporation should be henceforth attached to and be enforced against the plaintiff corporation, Pacific Fruit and Produce Company, Inc., to the same extent as if said debts, liabilities and duties had been incurred or contracted by it.

The Pacific Fruit and Produce Company had issued 850,000 par value, six per cent serial gold notes on December 1, 1927, which was one of the liabilities so assumed by the plaintiff corporation under the merger agreement. The National Bank of Commerce of Seattle, Washington, was made trustee for these notes and Article I of the note indenture reads, in part, as follows:

'Article I.

 'Section 1. The aggregate face amount of all the notes issued hereunder shall not exceed the sum of eight hundred fifty thousand dollars ($ 850,000.00). The notes shall be known as the Six Per Cent. Serial Gold Notes of the Company, shall be substantially of the tenor and effect hereinbefore recited, and shall be in the denomination of one thousand dollars ($ 1,000.00) or of five hundred dollars ($ 500.00).

 'There shall be six hundred fifteen (615) notes of the denomination of one thousand dollars ($ 1,000.00) each, numbered from M-1 upwards consecutively and continuously, thirty (30) of which shall mature and be payable on the 1st day of December, 1928, and thirty (30) of which shall mature and be payable on the first day of June and the first day of December of each year thereafter up to and including the 1st day of June, 1933; thirty-five (35) of which shall mature and be payable on the 1st day of December, 1933, and thirty-five (35) of which shall mature and be payable on the first day of June and the first day of December of each year thereafter up to and including the 1st day of December, 1937.

 'There shall be four hundred seventy (470) notes of the denomination of five hundred dollars ($ 500.00) each, numbered from D-1 upwards consecutively and continuously, twenty (20) of which shall mature and be payable on the 1st day of December, 1928, and twenty (20) of which shall mature and be payable on the first day of June and the first day of December of each year thereafter up to and including the 1st day of June, 1933; thirty (30) of which shall mature and be payable on the 1st day of December, 1933, and thirty (30) of which shall mature and be payable on the first day of June and the first day of December of each year thereafter up to and including the 1st day of December, 1937.'

 Section 15 of Article II of the indenture reads as follows:

 'Article II.

 'Section 15. That in case of any default in the payment of any of the notes or any interest thereon, it will not during the existence of such default, declare or pay any dividends upon any of its capital stock. Nor will it pay any dividends upon any of its common stock or make any payments by way of bonuses or gratuities to any of its employees or stockholders other than dividends upon its preferred stock unless an amount of money sufficient to pay all of the next maturing semi-annual payments of principal and interest of the notes shall first have been set aside for, and thereafter applied to, the payments last mentioned.' II. The plaintiff's total obligations evidenced by notes on May 1, 1936, amounted to $ 2,416,164.20, a part of which it retired as follows: Creditors Amount Retired by Payment ///////-- ///////////////////////-- 1936 1937 //-- //-- * 6% Serial Gold Notes $ 100,000.00 $ 100,000.00 Seattle-First Nat. Bank 250,000.00 -- Bank of California 200,000.00 -- Nat. Bank of Commerce 200,000.00 -- Peoples Bank & Trust Co. 50,000.00 -- First Security--commercial paper 100,000.00 -- Conrad Bruce & Company 280,000.00 -- Palmer Stacy-Merrill 14,108.79 14,108.79 Bank of Manhattan -- 250,000.00 Notes Payable -- 114,950.00 ////////////-- //////////-- Total $ 1,194,108.79 $ 479,058.79 * Payments made on serial gold notes in accordance with the provisions in the above-mentioned note indenture, and there had been no default in the payment of these notes.

 At the beginning of years 1936 and 1937 plaintiff had cash on hand in the amounts of $ 410,135.15 and $ 470,227.57, respectively, and during said years it paid dividends in the amounts of $ 393,879.00 and $ 425,000.29, respectively. Plaintiff's adjusted taxable net income for said years was $ 622,562.68 and $ 551,681.77, respectively. In its returns, plaintiff reported an aggregate paid in and earned surplus of $ 2,671,892.46 on December 31, 1935, $ 2,229,009.93 on December 31, 1936, and $ 615,881.93 on December 31, 1937. III. On March 15 and May 15, 1937, plaintiff filed with the then Collector of Internal Revenue for the District of Washington, Thor W. Henricksen, a tentative corporation income and excess profits tax return and a completed return, respectively, for the year 1936. The completed return disclosed a net income of $ 578,008.59, total normal tax of $ 60,041.29, surtax on undistributed profits of $ 13,325.50 and a total tax liability of $ 73,366.79, which amount was duly assessed and paid as follows: Year Amount Date Paid //-- ////-- ///////-- 1936 $ 18,390.20 (tax) Mar. 15, 1937 1936 18,293.20 " June 15, 1937 1936 18,341.69 " Sept. 15, 1937 1936 18,341.70 " Dec. 14, 1937

19450413

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