The opinion of the court was delivered by: LEVET
Findings of Fact and Conclusions of Law
In this tax refund action, plaintiff, Meridan Corporation (hereinafter "Meridan") seeks to recover $111,516.10 plus interest which it paid pursuant to a corporate income tax deficiency determined by the Commissioner of Internal Revenue for the year 1955. The taxpayer's claim is that certain net operating loss carryovers from 1950 and 1953 against its 1955 income were erroneously disallowed by the Commissioner. Under the special transitional rules of Section 172(g), Internal Revenue Code of 1954, this claim must be determined under the net operating loss carryover provisions of the Internal Revenue Code of 1939.
After hearing testimony of the parties, examining the exhibits, the pleadings, the briefs and proposed findings of fact and conclusions of law submitted by counsel, this court makes the following Findings of Fact and Conclusions of Law.
1. The plaintiff, Meridan, was formerly known as the Flax Processing & Linen Company (hereinafter "Flax"). Flax was a corporation organized in 1940 under the laws of Rhode Island. Flex-O-Tube Company (hereinafter "Flex-O-Tube") was an Illinois corporation, organized in 1945. On October 31, 1951, Flax and Flex-O-Tube were merged into Flax, the Rhode Island corporation, above named, and the name of the surviving corporation was changed to "Meridan Corporation."
2. The plaintiff, Meridan, is presently a corporation organized under the laws of Washington with its principal place of business at 200 Park Avenue, New York, New York. This results from the fact that in September, 1961, "Meridan," the Rhode Island corporation into which Flex-O-Tube had been merged, and United Power Control Corporation, a Washington corporation, were merged into United Power Control Corporation, the name of which surviving corporation was thereafter changed to Meridan Corporation.
3. From its inception until October 31, 1951, Flax was wholly owned by one Werner Abegg.
4. Between 1941 and 1947, Flax was engaged in spinning and weaving operations at Greystone, Rhode Island.
5. In November, 1947, Flax ceased all spinning and weaving operations at its plant in Greystone, Rhode Island. It reduced its staff to a few employees whose sole function was to maintain the machinery. The machinery and equipment were maintained in good operating condition and kept repaired by Flax employees from 1947 to May of 1953.
6. After the cessation of operations at the Greystone plant, Flax had on hand certain fabric and yarn inventory.
7. The fabric inventory was sold off by the end of 1950.
8. The yarn inventory consisted of linen yarn, containing 27% hemp and showing signs of mildew, which was not readily salable. It was converted into linen towels at a plant of the Meredith Linen Mills in Meredith, New Hampshire, which Flax leased. By May, 1950, all the yarn inventory had been converted.
9. During the years 1949 and 1950, Flax conducted a mail order business under the trade name, "Irish Maid Linens" at Greystone. This business consisted of cutting, sewing, and selling the towels made in Meredith, New Hampshire. Selling of linen towels continued through June, 1953, when the towel inventory was exhausted.
10. Subsequent to 1947, aside from liquidating fabric inventory, converting yarn inventory into salable towels, and liquidating the towel inventory, Flax' activity was limited to attempts by management to sell the machinery, equipment, and buildings at Greystone, Rhode Island. Also, it appears that Flax' management was alternatively interested in finding a suitable business partner with whom diversification and expansion of operations would be possible.
11. From 1947 through 1951 and thereafter, Flax, through its officers and agents, continuously attempted to sell off the machinery, equipment, buildings and land located in Greystone, Rhode Island.
12. In 1950, Flax sold its buildings and land at Greystone, Rhode Island, and the machinery and equipment was stored there rent free ...