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September 13, 1982


Sweet, D.J.

The opinion of the court was delivered by: SWEET


A post trial hearing was conducted on June 2, 22 and July 1, 1982 at which evidence was presented with respect to the calculation of damages to be awarded by way of judgment in favor of plaintiffs Reprosystem B, B.V. ("Reprosystem") and N. Norman Muller ("Muller") against defendant SCM Corporation ("SCM"). Judgment will be entered in accordance with this memorandum opinion on notice within ten (10) days of the date hereof.

 Prior Proceedings

 On June 30, 1981 an opinion was filed which determined the liability issues raised in Reprosystem's action against SCM arising out of SCM's failure to transfer its European copier assets to Reprosystem. Certain issues as to the calculation of damages remained outstanding and a further opinion was issued on September 15, 1981 on that subject. The effect of taxes on the damages calculation became a principal issue, since the judgment to be entered sought to award Reprosystem the profit which SCM had garnered by its conduct, held to be a breach of its duty. The difficulty, of course, arose because the transaction upon which Reprosystem sued did not in fact take place, and the tax effect on the theoretical transaction became more difficult to determine. Reprosystem sought recovery for pre-tax profits, while SCM urged that the post tax profits constituted the proper measure of damages under the June opinion.

 The September 15, 1981 memorandum opinion sought to deal with the issue by stating:


Thus, borrowing the traditional unjust enrichment analysis, it would be inappropriate for SCM to have to disgorge to plaintiffs a sum representing taxes paid on the profits while this court has held SCM unjustly retained. This deduction for taxes will be allowed.

 As subsequent events have established, "taxes paid" became as difficult to determine as a consequence of the change in circumstances and the difference between tax treatment in the United States and Europe as the original liability issues had been.

 Discovery was conducted, a hearing was held and on March 31, the court issued yet another memorandum opinion on the subject of damages and taxes, concluding that a factual hearing would be required to establish the amount of German and French taxes paid attributable to the period as well as the effect of certain currency transactions. Reprosystem's claim that SCM should also pay over a judgment tax was rejected. More discovery took place, and a final hearing was held on June 2, 22 and July 1, 1982 as recounted above.

 By and large the amount of gross profits for the period in question have been determined. These amounts will be affected by the treatment to be accorded the following items.


(1) the $25,107 attributable to income of the Chur.


(2) The $191,000 adjustment to the profits of its French subsidiary for the period from August 25 to August 31, 1976 ("the French adjustment").


(3) The $171,000 interest accrued to the German subsidiary as a result of the intercompany loan to the Canadian subsidiary ("the Canadian transaction").


(4) Foreign currency adjustments.


(5) The $55,000 attributable by SCM to a corporate assessment ("the SCM corporate assessment").


(6) The $196,000 SCM claims is payable and therefore deductible on the assets of the foreign subsidiaries ("the SCM interest").


(7) The tax deductions for


(a) United Kingdom and Belgium.


(b) Chur


(c) Switzerland


(d) Germany


(e) France

 As to the overall income calculation, I conclude on the evidence submitted that Chur subsidiary profits were mistakenly overstated by $25,107.

 The French adjustment of $191,000 must be determined on the basis of the allocation of the burden of proof. The change between the August 25 and 31 figures is dramatic and is based solely upon a one-page revision without any evidence adduced from books of original entry. However, this revision went unchallenged by Reprosystem's accountants in the fall of 1976, and no direct evidence has been adduced to support a conclusion, urged by Reprosystem, that the revision was unjustified. Although there is evidence that the treatment given by SCM is atypical, there has been no direct challenge to the original records which have been produced. Contrary to Reprosystem's contentions, I conclude that the burden of proof did not shift after the decision on liability was reached and that the plaintiffs have failed to establish that the SCM revision was other than what it was represented to be, either in 1976 or today. Were more evidence available, the result might well be otherwise.

 The Canadian transaction resulted when the German subsidiary accrued interest on a loan which it had made to the Canadian SCM subsidiary. Regardless of how this asset would have been treated upon the completion of the transaction, in the meantime, interest, either paid or accrued by a subsidiary, was an appropriate item for profit determination and was so considered by SCM with respect to all other interest items. This reduction in income was first raised by SCM after Egli's year end examination and was not explained satisfactorily to Reprosystem in January, 1977. Consistency requires that the Canadian interest be added to the income of the German subsidiary. A concomitant of the determination on the Canadian transaction is that any currency adjustment for such a transaction must also be allowed as well as the $17,000 conceded by Reprosystem.

 The corporate assessment and the SCM interest were never paid by the subsidiaries and were SCM adjustments rather than entries on the subsidiaries' books. These deductions are not appropriate in this context, for there is no evidence that they would have been made had the transaction gone forward.

 No taxes claimed by SCM were actually paid by the United Kingdom, Belgium or Chur subsidiaries and therefore none are deductible from the profits of those subsidiaries. As to Switzerland, SCM has failed to establish that taxes were paid or that reserves for taxes were established on the books of the subsidiary during the relevant period.

 The problem is heightened with respect to France and Germany where no taxes were actually paid during the period, attributable to the period, but rather were paid or assessed at a later period. To fix the amount of tax attributable to the damage period becomes a theoretical calculation which varies depending on whether United States, French or German accounting principles are applied, what taxes are considered, and even which books of account are to be employed.

 Since it was contemplated that Reprosystem would take over the French and German subsidiaries, less the typewriter assets, the tax liability for the period when ultimately decided, would have served to reduce its profit. Reprosystem has adduced no testimony to conflict with that presented by SCM as to the tax liability which would have ultimately accrued for the German and French subsidiaries during the damage period and the SCM calculation for German taxes paid will be employed in calculating damages.

 With respect to the French subsidiary the taxes paid for fiscal 1977 are known and can be attributed mathematically to the damage period. What appears to be at issue is the profit calculation against which this deduction is to be made. This figure should be calculated in the same fashion that was employed in the preparation of the "flash reports" and adjustments for profits earned agreed upon by the parties during the damage period.

 Submit judgment on notice within ten (10) days.



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