6336 Annotations: Value of Property- Levy

Sale of Perishable Goods: Value of Property

[82-1 USTC ¶9365]Miracle Span Corporation, Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. S. D., No. Div., Civ. No. 79-1047, 4/23/82

[Code Sec. 471]

Cost of goods sold: Inventory method: LIFO inventory improper.--The Commissioner's rejection of a corporate taxpayer's LIFO computations and recalculation of its cost of goods sold deduction under the FIFO method were upheld. The taxpayer failed to show that its LIFO inventory valuation method was accurate and reliable where it had omitted inventory items and used false inventory values.

[Code Secs. 61 and 461]

Gross income: Salaries accrued but not paid: Accrual basis taxpayer: Inclusion in next year's income: Commissioner's determination.--A corporation did not have to include in income a deduction taken in the previous year for accrued salaries to its Canadian officers that were never paid. The fact that the method of paying the salaries was changed in the year from direct payment to the officers to payment to corporations owned by the officers was not inconsistent with the accrual of salary in the prior year and did not undercut the factual basis of the accrual. Further, even though not paid, the officers had not forgiven payment of their salaries for that year.

[Code Sec. 167]

Deductions: Depreciation: Salvage value: Personal use.--Adjustments made by the Commissioner in the corporate taxpayer's depreciation deductions, which resulted in additions to the taxpayer's income for the years in question, were upheld. These adjustments were made because certain automobiles for which the taxpayer claimed depreciation were partially for non-business use and partially for the use of another corporation outside the U. S. Additionally, a boat kept in another state by the taxpayer had no business use and the taxpayer's trucks were being depreciated below salvage value.
[Code Sec. 162]

Business expense deductions: Head office expenses: Burden of proof.--A. U. S. corporation's deductions for payments made to its Canadian equivalent corporation for management, planning, engineering and sales functions performed by the Canadian personnel for the U. S. corporation were not deductible as business expenses by the U. S. corporation. The taxpayer (the U. S. corporation) failed to establish that it had actually incurred the expenses, or that such expenses were ordinary and necessary.

[Code Sec. 162]

Business expense deductions: Losses on advances to affiliated corporations: Contractual obligations.--Amounts paid to independent sales corporations based upon contracts between the taxpayer and its affiliates, which provided that the taxpayer would reimburse each affiliate for losses under a distributorship agreement, were not deductible by the taxpayer as ordinary and necessary business expenses. The affiliates were independent sales corporations and their operating deficits were not expenses of the taxpayer despite their contractual agreement.
[Code Sec. 6653]

Civil penalties: Fraud: Evidence.--The imposition of the 50% penalty for civil fraud was sustained for the taxpayer's fiscal years 1975 and 1976 but was not sustained as to its fiscal year 1977. Evidence clearly showed that deductions for false steel purchases in 1975 and 1976, which lowered the taxpayer's profits and tax liability for those years, constituted fraud on the part of the taxpayer. A corporate officer's later embezzlement of a refund of money "paid" by the taxpayer to a supplier for the false steel purchases was subordinate to, and did not alter, the original intent of the officer to gain a tax break for the corporate taxpayer for fiscal year 1975. As to the taxpayer's 1977 fiscal year, the refund check for false steel purchases in excess of $1.4 million did not constitute unreported income to the taxpayer since the money went solely to one of the corporate officers and was embezzled without the knowledge of other officers. Even though the taxpayer failed to show that it was entitled to deductions for "head office" expenses, boat expenses, auto depreciation, and losses on advances to affiliates, the court could not find any clear evidence of fraud related to such items.

[Code Sec. 6336]

Lien for taxes: Action to enforce lien: Seizure of property: Value of property.--A corporate taxpayer whose property was seized for tax deficiencies was not entitled to a credit against such deficiencies in the amount of the company's "going concern value", as determined by the taxpayer. The Commissioner, who had valued the business at approximately half of the "going concern value" advocated by the taxpayer, was under no duty to sell business assets so that "going concern values" could be realized. Neither the statute cited by the taxpayer (Code Sec. 6336) nor any other statute relating to the seizure and sale of property (Code Secs. 6331-6344) imposes upon the Commissioner any duty of disposing of collateral in good faith and in a commercially reasonable manner.

James W. Littlefield, Briggs & Morgan, 2200 First National Bank Building, St. Paul, Minnesota 55101, Irvin A. Hinderaker, 25 First Avenue, S. W., Watertown, South Dakota 57201, for plaintiff. Mary Frances Clark, Allan B. Goldstein, Department of Justice, Washington , D. C. 20530, for defendant.

Memorandum Opinion

Case Summary

PORTER, District Judge:

Plaintiff Miracle Span Corporation brought this action to recover a refund of federal income taxes it claimed was owing it, jurisdiction for this action being grounded on 28 U. S. C. §1346(a)(1). Defendant United States denied that it owed the refund, and counterclaimed, under 28 U. S. C. §§ 1340, 1345 and 26 U. S. C. §7402, for substantial assessments of tax against Miracle Span in its 1975, 1976 and 1977 taxable years. After a trial to the Court, and the submission of lengthy briefs by the parties, the Court concludes that judgment on the complaint must be for defendant, and that judgment must be entered for defendant on its counterclaim in all respects except for the adjustment of $130,000 for professional services in taxable year 1975, and the imposition of the civil fraud penalty in taxable year 1977, on which two issues judgment must be entered for plaintiff Miracle Span.

Facts

Miracle Span Corporation, an entity incorporated under South Dakota law in 1972, was located in Watertown , South Dakota . It was engaged in the manufacture of pre-engineered steel buildings, with sales--which were primarily to farmers for crop storage--conducted through a number of independent sales corporations. Miracle Span had three principal shareholders, each holding an equal amount of stock: Peter Hooper, President, Arnold Davis, Secretary, and Tom Chernoff, Treasurer. All three men were Canadian, were principals in a similar business in Canada, Wonder Steel, Ltd., and also held stock in the affiliated sales corporations. Hooper, Davis, and Chernoff did not operate Miracle Span directly, but managed it through three Canadian management corporations, Empire Management Services, Ltd., owned by Hooper; A. A. Davis Enterprises, Ltd., owned by Davis; and Lamaline Development, Ltd., owned by Chernoff. Hooper's responsibility was production, while Davis and Chernoff were responsible for sales. None of the three men resided in Watertown ; the Miracle Span plant in Watertown was managed by Dominic DiCarlo, with Lambert Gerlach as comptroller. The corporation operated on a fiscal year ending March 31 of each year.

Discussion

Following the filing of plaintiff Miracle Span's complaint seeking a refund of federal income taxes for taxable years ending March 31, 1974 , in the amount of $88,036; March 31, 1975 , in the amount of $57,383 and March 31, 1976 in the amount of $89,285, defendant (the Government) asserted a counterclaim for an assessment made against Miracle Span for additional income taxes, interest and fraud penalties for the year ending March 31, 1975 , in the amount of $1,466,459.69; the year ending March 31, 1976 , in the amount of $550,362.25, and the year ending March 31, 1977 , in the amount of $635,573.71.

It must be observed at the outset that a tax "assessment is presumptively correct, and 'the burden is on the taxpayer to overcome this presumption' by countervailing proof." United States v. Strebler, [63-1 USTC ¶9278], 313 F. 2d 402, 403-4 (8th Cir. 1963); Anderson v. United States [77-2 USTC ¶9614], 561 F. 2d 162 (8th Cir. 1977); Kiesel v. United States [77-1 USTC ¶9101], 545 F. 2d 1144 (8th Cir. 1976). On the other hand, "the burden is upon the Government . . . for justifying the imposition of fraud penalty with respect to each taxable year . . . the Government must establish fraud by clear and convincing evidence. . . . Fraud is never presumed. . . . Taxpayer's failure to overcome the presumption of correctness of the Commissioner's determination of a tax deficiency will not, standing alone, support a finding of fraud." Lessman v. Commissioner [64-1 USTC ¶9261], 327 F. 2d 990, 993 (8th Cir. 1964). With these basic precepts in mind, the Court turns to the issues before it.

Inventory. Miracle Span took deductions for its cost of goods sold in the amount of $6,055,391 in the year ending March 31, 1975 ; $5,578,695 in the year ending March 31, 1976 ; and $4,331,353 in the year ending March 31, 1977 . The Government determined that there was additional taxable income in this category of $60,360 in the year ending March 31, 1975 , and $232,045.68 in the year ending March 31, 1976 (as well as a decrease in taxable income of $69,448.97 in the year ending March 31, 1977 ).

Miracle Span calculated its cost of goods sold deduction in these years by the last in, first out (LIFO) mathod, authorized by 26 U. S. C. §472, and 26 C. F. R. §1.472-8(e) while the Government's recomputation of the deduction was done under the first in, first out (FIFO) method. The Government's chief authority for its rejection of Miracle Span's use of LIFO is 26 C. F. R. §1.472-8(e):

The taxpayer may use an index method for computing all or part of the LIFO value. . . . The appropriateness of the method of computing the index and the the accuracy, reliability, and suitability of the use of such index must be demonstrated to the satisfaction of the district director in connection with the examination of the taxpayer's income tax returns.

The evidence at trial showed that, in 1975, Hooper instructed Gerlach to drop inventory from Miracle Span's March 1975 inventory sheet, so that corporate taxes for the year ending March 31, 1975 might be reduced by increasing expenses. Further, in fiscal year 1976, Gerlach valued a portion of Miracle Span's ending inventory using a value given in a contract and invoice that Miracle Span had never entered into, a value that was approximately half of the price of steel bought by Miracle Span during this period and produced an undervaluation of approximately $238,000.

Miracle Span's main contention in this regard is that, assuming that the rest of its 1976 inventory computations are correct, the 1976 undervaluation of part of its inventory actually resulted in no tax loss. The Government appears to concede the validity of this particular point, but still maintains that the inventory valuation errors justified its rejection of the LIFO method. As the Government urges, the regulation allowing Miracle Span to utilize the LIFO method requires Miracle Span to demonstrate the "accuracy, reliability, and suitability" of its inventory valuation method, not whether the computation resulted in a tax loss to the Government in a particular year. It is obvious from the evidence that Miracle Span's inventory valuation was lacking accuracy and reliability. The Court must therefore conclude that Miracle Span failed in its burden of proving that the Government was incorrect in applying regulation §1.472-8(e). The Government's rejection of Miracle Span's LIFO computations and the recalculation of Miracle Span's cost of goods sold deduction under the FIFO method is accordingly upheld.

Professional Services. In the year ending March 31, 1974 , Miracle Span took a deduction for $130,000 for salary that accrued in that year for its three principal officers. This salary has never been paid. Following the 1974 fiscal year [March 31, 1973 to March 31, 1974 ] Miracle Span ceased to pay salary directly to its officers, and instead paid a fee to each officer's management corporation. The Government does not dispute that the expense was properly accrued in fiscal year 1974 and properly deducted in that year. Instead, the Government has included the $130,000 in Miracle Span's income for the year ended March 31, 1975 .

As the Government itself recognizes, the proper year for inclusion in Miracle Span's income if such an item is disallowed is the year during which the liability is actually extinguished or during which some other event occurs which is inconsistent with the priod deduction or undercuts the factual basis for the deduction. The "triggering" event here, the Government claims, is the change in the fiscal year 1975 of the method by which the Miracle Span officers received their compensation. But the one officer who testified at the trial, Davis , testified that he had never forgiven payment of his portion of the $130,000. Likewise, the evidence indicated that neither of the other two officers had ever forgiven payment of their 1974 salaries. The Court can find nothing in the change in method of compensation, standing alone, that is inconsistent with the accrual of salary in a prior year or would "undercut" the factual basis of the accrual. In the absence of any clear reason why the Government chose fiscal year 1975 to include the $130,000, the Court must conclude that the Government was arbitrary in its treatment of this item. As Ehlers v. Vinal [67-2 USTC ¶9612], 382 F. 2d 58, 65 n. 11 (8th Cir. 1967) said, "once the deficiency is shown to be arbitrary, the presumption of correctness disappears." Under these circumstances, the Court must find for plaintiff Miracle Span on the issue of the $130,000 salary deduction.

Depreciation. The Government added $50,444.54 to Miracle Span's income in fiscal year 1975, $115,649.09 in fiscal year 1976, and $88,088.29 in fiscal year 1977 under the category of Depreciation. These adjustments were made on the basis that certain automobiles for which Miracle Span claimed depreciation were being used personally and by Wonder Steel, the Canadian equivalent of Miracle Span, that a boat kept in Florida by Miracle Span had no business use, and that Miracle Span's trucks were being depreciated below salvage value.

At the trial, Gerlach testified that when he set up the depreciation schedule for the Miracle Span trucks, he did not recognize any salvage value. It is clear that Miracle Span was required to establish a salvage value for the trucks, and that depreciation not be claimed below that value. In making its adjustments as to the trucks, the Government accepted Miracle Span's depreciation method and the useful life assigned to each truck, and established a salvage value based on a nationally used manual. Miracle Span presented virtually no evidence at trial to support its contention that the salvage values established by the Government were faulty, and must be considered to have failed in its burden to prove the incorrectness of these adjustments.

As to the other depreciation assessments, the Government disallowed entirely the claimed depreciation on one Rolls-Royce owned by Miracle Span which was located in London , England on the basis that Miracle Span did no business outside the United States . Depreciation was likewise totally disallowed for the boat on the ground that it appeared to have been solely devoted to personal use of a Miracle Span officer. For the remainder of the Miracle Span automobiles, which were Rolls-Royce and Mercedes Benz, the Government reduced the depreciation allowed Miracle Span, having determined that 40% of the use of these vehicles was attributable to Wonder Steel and 20% to personal use. The evidence presented at trial was often vague and conflicting as to the use of the boat, the location and use of the automobiles in North America, and whether Miracle Span ever actually engaged in any foreign business, but the Court is unable to find that Miracle Span has succeeded in its burden of showing the incorrectness of the Government's assessments. ¹ The ruling must therefore also be for the Government on this issue.

Head Office Expenses. Miracle Span claimed deductions for payments made to its Canadian equivalent, Wonder Steel, contending that the greater part of Miracle Span's management, planning, engineering and sales functions were performed by Wonder Steel personnel. In fiscal year 1976, $295,371 was deducted under this category without itemization. In fiscal year 1977, Miracle Span recorded $788,302 on its books as "head office expense", and deducted $649,619 as various operating expenses and $138,683 as "other costs" under cost of goods sold. Miracle Span's comptroller, Gerlach, testified in this regard that he was sent monthly invoices from Canada indicating dollar amounts, with no further identification, and that he paid these amounts without knowing what the Canadian expenses were for. At the end of fiscal year 1977, Gerlach received a breakdown of these expenses by category, but with no supporting documentation. (There was apparently not even a breakdown by category for 1976.)

From the evidence presented at trial, the Court must find that neither Miracle Span nor Wonder Steel ever properly cooperated with the Government to make the records substantiating these expenses available to Government examiners, even though the records were sufficiently under Miracle Span's control so that it was able to produce them--in vast, jumbled quantities--on the second day of the trial. The Government disallowed these "head office" expenses on the ground that Miracle Span had not established that it had actually incurred the expenses or that the expenses were ordinary and necessary within the meaning of 26 U. S. C. §162(a).

It is clear that Miracle Span was required under 26 U. S. C. §§ 6001, 7602 and relevant regulations, e.g. 26 C. F. R. §1.6001-1(a), to maintain records and to make them available to the Government so that its tax liability could be determined. Miracle Span's failure to provide these records, especially when this failure is considered in light of its own comptroller's ignorance of the nature of the expenses, is adequate justification for the disallowance of the "head office" expenses.

Further, Miracle Span failed to provide these records of the Government in the discovery conducted during the pendency of this action, and also failed to provide the records to the Government as it was required to do under this Court's pre-trial order. ² Miracle Span did, however, bring in voluminous records purporting to document these "head office" expenses on the second day of the trial. Miracle Span has given no adequate explanation of why these records could not have been produced long before; the burden was on it, as the taxpayer contesting the accuracy of the assessment, to do so. Accordingly, to prevent a flagrant violation of this Court's own order that would result in considerable prejudice to the Government, this Court must refuse to admit these records into evidence. See MinnKota Power Co-op, Inc. v. Manitowoc Co., Inc., 669 F. 2d 525 (8th Cir. 1982). After assessing the other, very uncertain evidence presented on this point by Miracle Span, the Court must conclude that Miracle Span has failed here to carry its burden. The Government's assessments are thus upheld as correct.

Loss on Advances to Affiliates. The final disputed deduction ³ is one of $500,406 in 1977, which Miracle Span described as "loss on advances to affiliates." These affiliates, as noted earlier, were independent sales corporations through which the Miracle Span product was sold. Miracle Span's theory of this deduction rests upon contracts between Miracle Span and the affiliates providing that Miracle Span would reimburse each affiliate for losses "sustained as a consequence of the conduct of the [affiliates'] business under the Distributorship Agreement." Miracle Span now concedes that the $500,462 deduction was incorrect, in that it had not been paid solely in fiscal year 1977, but asserts that it was entitled to a 1975 deduction for $213,944, a 1976 deduction for $117,987, and a 1977 deduction for $81,854, a total of $413,785. Miracle Span contends that it "was contractually obligated to make these payments, and they were incurred for the purpose of expanding the sales of its product. As such, they represent ordinary and necessary business expenses". ⁴

It must be recognized that whether a corporation is created to "gain an advantage under the law of the state of incorporation, or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity." Moline Properties v. Commissioner [43-1 USTC ¶9464], 319 U. S. 436, 438-39 (1943). A case somewhat similar to the facts here is Interstate Transit Lines v. Commissioner [43-1 USTC ¶9486], 319 U. S. 590 (1943), where the taxpayer had organized a wholly owned subsidiary, and contracted with the subsidiary to reimburse the subsidiary for any operating deficit. The Court stated that the "mere fact that the expense was incurred under contractual obligation does not of course make it the equivalent of a rightful deduction . . . paid or incurred 'in carrying on any trade or business.'" 319 U. S. at 594. Because "the assumption of the deficit was not dependent upon a corresponding service or benefit rendered to the [taxpayer] by [its subsidiary] in connection with [taxpayer's] business," id., and because the businesses of the two companies were distinct, the Court found that the operating deficit of the subsidiary was not an expense of the taxpayer's business.

Here, Miracle Span argues its payments to the affiliates were necessary because Miracle Span was contractually empowered to control the prices at which the Miracle Span product was sold, and therefore controlled the affiliates' abilities to earn a profit. Yet the contract on which this argument is based provides only that Miracle Span was entitled to fix the prices paid by the affiliates to Miracle Span for the product, and said nothing about control of the price to the ultimate consumer. The Court is unable to conclude, from all the evidence before it, that Miracle Span has proved that its payments to the affiliates were ordinary and necessary business expense under 26 U. S. C. §162(a); the Government's assessment must therefore be upheld. See Elot H. Raffety Farms, Inc. v. United States [75-1 USTC ¶9271], 511 F. 2d 1234 (8th Cir. 1975).

Civil Fraud Penalty. The principal factual basis on which the Government asserts the 50% civil penalties for the three years in question is essentially undisputed. In January or February 1975, Hooper told Gerlach that Miracle Span needed to reduce its profits for fiscal year 1975. Hooper gave Gerlach a specific figure for what the profit should be, and told Gerlach the best way to arrange a lower profit would be to make up an invoice for steel purchases. Under instructions from Hooper, Gerlach prepared a false draft invoice in the amount of $1,388,907.94, and contacted a Miracle Span steel supplier, Royal Metal Corporation in Minnesota . Ned Blaz, a vice president in Royal Metal, agreed to issue an invoice, number 5152A, in this amount, making a notation to the Royal Metal copy that the "invoice was requested by Hooper for Miracle Span bookkeeping reasons." No steel was ever delivered pursuant to the invoice. Gerlach recorded the invoice on the Miracle Span books, and these books were subsequently used to prepare Miracle Span's 1975 tax returns.

In April, 1975, during Miracle Span's fiscal year 1976, an additional $43,000 in false steel purchases was entered on the Miracle Span books. The surrounding circumstances of this entry were not made entirely clear at the trial, although the false figure was utilized in the 1976 Miracle Span tax return.

Between March, 1976 and May, 1976, Miracle Span sent Royal Metal $1,431,907.94 in three installments--the same amount that Miracle Span falsely showed on its books as steel purchases. Since Royal Metal had not actually sold any steel to Miracle Span for these amounts, the money was placed in a suspended account for Miracle Span's benefit. On May 28, 1976 , however, Hooper asked for a refund of this money, with a cashier's check made payable to "Steel Distributors"--an apparently nonexistent business. The check was later traced to a numbered account in a bank in the Grand Cayman Islands .

Miracle Span contends that this evidence shows only a scheme on Hooper's part, initiated in early 1975 and culminating in May, 1976, to embezzle this $1,431,907.94. While his actions may have resulted in false deductions for the corporation, Miracle Span argues, Hooper's conduct was personal to him and cannot be ascribed to the corporation. This issue has been addressed in a number of cases, among them Ruidoso Racing Ass. v. C. I. R. [73-1 USTC ¶9330], 476 F. 2d 502 (10th Cir. 1973):

A corporation is not absolved from liability for the fraudulent acts of an agent by the fact that the agent derived benefit therefrom. . . . The pertinent questions are (1) whether the corporate agent so controlled the corporation that the corporate entity is destroyed and the corporation becomes the individual's alter ego and (2) whether the agent was acting in behalf of and not against the corporation, with the result that the corporation benefited from his fraudulent acts. . . . If either (1) and (2) applies, the fraud of the agent may be imputed to the corporation.

476 F. 2d at 505-6. See also Loftin and Woodward, Inc. v. United States [78-2 USTC ¶9645], 577 F. 2d 1206, 1244 (5th Cir. 1978); Asphalt Industries, Inc. v. C. I. R. [68-2 USTC ¶9620], 384 F. 2d 229 (3rd Cir. 1967).

While the first of the Ruidoso theories is apparently not present here, the Court must find that the Government has proved by clear and convincing evidence that the deductions for false steel purchases in 1975 and 1976 constituted fraud by Miracle Span. Nothing could be clearer that in early 1975 Hooper wanted to lower Miracle Span's profits and thus its tax liability--an act taken in behalf of the corporation and very much resulting in a benefit to it. This seems to have been the sole purpose of the false invoice for $1,388,907.94, and in this respect this case seems the opposite of Asphalt Industries, supra, on which Miracle Span relies. In Asphalt Industries, the corporate officer had committed tax fraud "in the name of the corporation as a subordinate element in his need to conceal his embezzlement of its funds." 384 F. 2d at 235 (emphasis supplied). Here, on the other hand, it seems clear that Hooper's initial intent in early 1975 was to gain a tax benefit for the corporation, and only later, in May 1976, did he take advantage of the bookkeeping discrepancies thus created to embezzle corporate funds. There can be no doubt that the January or February 1975 false entry was made to fraudulently lower taxes in fiscal year 1975, and the Court thus finds that the Government has carried its burden for the imposition of the civil fraud penalty in that year.

Although the evidence is less direct for fiscal year 1976, the Court is satisfied that here also the Government has proved fraud by clear and convincing evidence. The false $43,000 entry was made April, 1975 [fiscal year 1976], not more than three months after the false $1,388,907.94 entry, and like that earlier entry, the $43,000 represents nonexistent steel purchases. The inference follows irresistibly from these circumstances that the $43,000 false entry was meant for the same purpose as the $1,388,907.94 false entry--to defraud the Treasury. United States v. Gray, 464 F. 2d 632, 636 (8th Cir. 1972) (`If intent is an essential element . . . evidence of other acts similar in nature and closely related in time to those encompassed in the charge is admissible to establish intent.'")

Matters stand differently as to fiscal year 1977. The Court is unpersuaded by the Government's argument that the refund check from Royal Metal for $1,431,907.94 constituted unreported income to Miracle Span; here, at least, it seems evident that the money went solely to Hooper and was embezzled without the knowledge of the other officers. In no way can it be said that the act of receiving the refund check and putting it in a foreign bank account was on behalf of Miracle Span, or resulted in a benefit to it. As to the remaining grounds upon which the Government contends the fraud penalty should be imposed in 1977--i. e., the "head office" deductions, the boat expense, the "prepaid rent" in London, the automobile depreciation, inadequate records, loss on advances to associates--on all these, the Court can find no "clear and convincing" evidence of fraud. Miracle Span may have failed in its burden of proof of showing that it was entitled to these deductions, but this cannot be considered as the equivalent of a finding of fraud. The imposition of the civil fraud penalty in fiscal year 1977 is therefore unsupported by the evidence, and will not be sustained.

Credit for Going Concern Value. On April 15, 1981 , the Government seized the Miracle Span business to collect the assessments it had made for additional taxes in 1975, 1976 and 1977. Miracle Span contends that it had at that time a going concern value of $2,730,000, and that it was entitled to a credit for this amount. The Government valued the business at $1,472,938.04, based on the real and personal property, not all of which had been sold by the time of trial. ⁵

Miracle Span contends that 26 U. S. C. §6336 imposes upon the Government the duty of Uniform Commercial Code §§ 1-203 and 9-504 of disposing of collateral in good faith and in a commercially reasonable manner. As the Government points out, however, neither this statute nor any other statute relating to the seizure and sale of property, 26 U. S. C. §§ 6331-6344, make any reference to "commercially reasonable" sales or "good faith" on the part of the Government. Further, §6336, on which Miracle Span chiefly relies, states that the Government will either return the property (on payment of the value of the property or the furnishing of a bond for that amount) or immediately sell the property "[i]f the Secretary determines that any property seized is liable to perish or become greatly reduced in price or value by keeping." (Emphasis supplied). The most that this statute appears to do is to give the Secretary discretionary powers in the treatment of seized property. In no way does it impose an affirmative duty on the Government to sell a business so that 'going concern' values can be realized; there is accordingly no basis for Miracle Span's claim that a credit for its 'going concern' value must be given it. ⁶

Miracle Span's Claim for Refund. One final word remains to be said concerning the claim for refund which initiated this lawsuit. The 1977 Miracle Span income tax return claimed a net operating loss of $509,659, which it sought to carry back to 1974, 1975, and 1976. The adjustments to Miracle Span's 1977 income which have been upheld by this Court, however, total well over one million dollars. As Miracle Span itself concedes, it is therefore not entitled to any net operating loss carryback. Judgment on Miracle Span's complaint must therefore be against it.

This memorandum opinion constitutes the findings of fact and conclusions of law of this Court. The parties are ordered to submit proposed forms of judgment in accordance with this opinion within thirty days, and judgment will be stayed during that time.

¹ Miracle Span's failure to carry its burden to show business purpose for the boat, likewise compels a finding that the Government's disallowance of deductions in 1975 and 1976 for repair and rent expense for the boat is correct.

² "[T]he attorneys shall . . . not less than 10 days prior to the date set for trial . . . submit [all] exhibits or true copies thereof to opposing counsel for examination. . . . Except for good cause shown, no party shall be permitted to offer in evidence . . . any exhibit not . . . submitted by said party."

³ Miracle Span has conceded the correctness of the 1975 and 1976 adjustments under "purchases" in the respective amounts of $1,388,907.94 and $43,000 as well as the 1976 and 1977 adjustments for rent expenses of $10,000 each year.

⁴ Miracle Span also argues these payments are sales discounts, citing Schiffman v. Commissioner [CCH Dec. 28,353], 47 T. C. 537 (1967). The facts in Schiffman seem to have little relevance here, and in ay event, Schiffman was reversed by Alex v. Commissioner [CCH Dec. 35,169], 70 T. C. 322 (1978), aff'd [80-2 USTC ¶9689] 628 F. 2d 1222 (9th Cir. 1980).

⁵ The evidence indicated the real property had been sold for approximately $492.000 and personal property sold for approximately $369,000. These receipts were credited against the Miracle Span tax liability.

⁶ A case which Miracle Span urges in support of its position, United States v. Pittman [71-2 USTC ¶9650], 449 F. 2d 623 (7th Cir. 1971), involved a seizure of rental property in which the Government claimed it had seized only the rents, not the property itself. The Pittman court found the Government had actually seized the property, and the taxpayer was therefore entitled to a credit for the property's value. This has no relevance to the issue of whether a taxpayer whose corporate assets have been seized is entitled to a credit for 'going concern' value as well as the value of the corporeal property.