B-87540, DEC. 16, 1957

B-87540, DEC. 16, 1957

TO THE HONORABLE RUSSELL C. HARRINGTON, COMMISSIONER, INTERNAL REVENUE SERVICE:

ON JUNE 20, 1956, THE DISTRICT DIRECTOR, UPPER MANHATTAN DISTRICT, INTERNAL REVENUE SERVICE, TRANSMITTED HERE SCHEDULES NOS. 1166-IT 187205 SUPPL. AND 1166-IT-PWC-4609 SUPPL., DATED JUNE 19, 1956, COVERING CERTAIN REFUNDS OF TAXES IN THE CASE OF THE EMPIRE ORDNANCE CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY PENCOYD REALTY COMPANY. THERE WAS ENCLOSED THEREWITH A LETTER FROM THE ACTING COMMISSIONER OF INTERNAL REVENUE (CC:C:EEH 497965), DATED APRIL 27, 1956, REQUESTING A DETERMINATION BY US AS TO WHETHER SET-OFFS SHOULD BE MADE OF THESE REFUNDS AGAINST REPORTED TAX INDEBTEDNESSES TO THE UNITED STATES OF CERTAIN CLOSELY RELATED COMPANIES. THESE RELATED COMPANIES ARE, AMONG OTHERS, THE WISSAHICKON TOOL WORKS, INC., AND THE WILKES-BARRE CARRIAGE COMPANY, BOTH OF 521 FIFTH AVENUE, NEW YORK, NEW YORK.

BY LETTER DATED AUGUST 27, 1956, B-87540, WE ADVISED YOU THAT SINCE THE EMPIRE ORDNANCE CORPORATION HAD FILED A MOTION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA FOR AN ORDER TO SHOW CAUSE WHY A MANDATORY ORDER SHOULD NOT ISSUE TO COMPEL PAYMENT OF THESE REFUNDS IT WOULD NOT BE APPROPRIATE FOR US TO TAKE ANY ACTION IN THE MATTER UNTIL THE LITIGATION WAS DISPOSED OF.

YOUR LETTER OF NOVEMBER 12, 1957, ADVISES THAT ON MARCH 27, 1957, THE DISTRICT COURT ISSUED AN ORDER DISMISSING THE COMPLAINT AND DISCHARGING THE RULE TO SHOW CAUSE, AND THAT ON OCTOBER 17, 1957, THE COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA AFFIRMED THE ACTION OF THE DISTRICT COURT. YOU ALSO ADVISE THAT THE PERIOD WITHIN WHICH EMPIRE AND PENCOYD MAY PETITION THE UNITED STATES SUPREME COURT FOR A WRIT OF CERTIORARI EXPIRES ON JANUARY 15, 1958, BUT THAT THE STATUE OF LIMITATIONS FOR THE COLLECTION OF THE TAX LIABILITIES OF THE CLOSELY RELATED CORPORATIONS (WISSAHICKON TOOL WORKS, INC., AND WILKES-BARRE CARRIAGE COMPANY) EXPIRES ON DECEMBER 31, 1957.

IN VIEW OF THE OUTCOME OF THE COURT ACTION YOU REQUEST THAT WE AGAIN CONSIDER THE QUESTION PRESENTED IN THE ACTING COMMISSIONER'S LETTER OF APRIL 27, 1956, AS TO WHETHER SET-OFFS SHOULD BE MADE. YOU FURTHER REQUEST THAT IF WE DETERMINE SET-OFFS ARE PROPER TO MAKE THEM, THE CREDITS TO BE APPLIED IN THE ORDER SET FORTH IN YOUR LETTER OF NOVEMBER 12.

THE ACTING COMMISSIONER IN HIS LETTER OF APRIL 27, 1956, REPORTS THAT:

1. ALL OF THE CAPITAL STOCK OF ALL OF THE RELATED COMPANIES OF EMPIRE CORPORATION, EXCEPT PENCOYD REALTY COMPANY, WAS OWNED BY SUBSTANTIALLY THE SAME PERSONS WHO OWNED EMPIRE, AND IN THE SAME PROPORTIONS. (THE STOCK OF PENCOYD WAS AT ALL TIMES OWNED BY EMPIRE. IN 1943 WISSAHICKON TOOL WORKS PURCHASED ALL OF THE COMMON STOCK OF ROXBORO AND NANAYUNK AND THE PREFERRED STOCK OF EMPIRE)

2. EMPIRE ORDNANCE CORPORATION AND RELATED COMPANIES HAD SUBSTANTIALLY IDENTICAL OFFICERS AND DIRECTORS.

3. THE CAPITAL STOCK OF ALL THE CORPORATIONS WAS SUBSCRIBED TO BY FRANK COHEN. AFTER INCORPORATION THE ACTUAL FINANCING WAS DONE BY WAY OF INTER- COMPANY LOANS.

4. FRANK COHEN CAUSED THE INCORPORATION OF ALL THE CORPORATIONS.

5. THE RELATED COMPANIES HAD INADEQUATE CAPITAL.

6. THE SALARIES, EXPENSES AND LOSSES OF ANY PARTICULAR COMPANY OF THE GROUP WERE PAID BY ANY OF THE OTHER COMPANIES WHICH HAD THE FUNDS.

7. THE RELATED COMPANIES HAD SUBSTANTIALLY NO BUSINESS EXCEPT WITH EMPIRE ORDNANCE CORPORATION.

8. IN THE CORRESPONDENCE AND OTHER PAPERS OF EMPIRE ORDNANCE CORPORATION THE RELATED COMPANIES WERE REFERRED TO AS DEPARTMENTS OR DIVISIONS OF EMPIRE.

9. THE DIRECTORS AND OFFICERS OF THE RELATED CORPORATIONS DID NOT ACT INDEPENDENTLY IN THE INTEREST OF ANY PARTICULAR COMPANY BUT WERE MORE CONCERNED WITH THE PRODUCTION OF GUNS WHICH WAS THE BUSINESS OF EMPIRE ORDNANCE CORPORATION.

10. THE FORMAL LEGAL REQUIREMENTS OF THE RELATED COMPANIES AS SEPARATE AND INDEPENDENT CORPORATIONS WERE NOT OBSERVED.

THE ASSISTANT COMMISSIONER ALSO ADVISES THAT:

"* * * THE COMPANIES INVOLVED HERE HAD A COMMON BOOKKEEPING DEPARTMENT, A COMMON PURCHASING DEPARTMENT, A COMMON MAIL SYSTEM, THEY USED INTER-OFFICE MEMORANDUM FORMS WITH THE NAME OF EMPIRE ORDNANCE ON THEM, KEY EMPLOYEES WERE HIRED BY EMPIRE ORDNANCE CORPORATION ALTHOUGH THEY WERE TO DEVOTE A PORTION OR ALL OF THEIR TIME TO OTHER CORPORATIONS AND THEY PAID SALARIES AND OTHER EXPENSES OF ANY PARTICULAR CORPORATION WITH THE FUNDS OF WHICHEVER CORPORATION HAD THE MONEY OR WAS IN A BETTER POSITION TO PAY.'

MOREOVER, HE ADVISES THAT IN A LETTER DATED NOVEMBER 22, 1955, ADDRESSED TO THE INTERNAL REVENUE SERVICE, THE FORMER ASSISTANT ATTORNEY GENERAL, CIVIL DIVISION, DEPARTMENT OF JUSTICE, AFTER REFERRING TO THE TAX REFUNDS DUE EMPIRE ORDNANCE CORPORATION AND PENCOYD REALTY COMPANY, MADE THE FOLLOWING STATEMENT:

" "IN VIEW OF THE IDENTITY, IN FACT, OF EMPIRE ORDNANCE CORPORATION, PENCOYD REALTY COMPANY, A WHOLLY OWNED SUBSIDIARY, AND WILKES BARRE CARRIAGE COMPANY, AN AFFILIATE AND IN VIEW OF THE INVOLVED FINANCIAL INTERRELATIONSHIPS OF THE EMPIRE ORDNANCE GROUP, WE BELIEVE THAT ANY PAYMENT TO EMPIRE ORDNANCE CORPORATION AND/OR PENCOYD REALTY COMPANY OF THE PROPOSED TAX REFUND WITHOUT APPLICATION TO TAX DEFICIENCIES OF OTHER AFFILIATES SHOULD NOT BE MADE, ABSENT JUDICIAL REVIEW OF THE CROSS- LIABILITIES OF EACH.'"

IN VIEW OF THE CIRCUMSTANCES REPORTED BY YOUR SERVICE WE FEEL THAT THERE IS SUFFICIENT COMMUNITY AND INTERRELATIONSHIP OF INTEREST BETWEEN THE CORPORATIONS INVOLVED TO JUSTIFY, IN THE ABSENCE OF A JUDICIAL DETERMINATION TO THE CONTRARY, THE APPLICATION OF THE TAX REFUNDS DUE THE EMPIRE ORDNANCE CORPORATION AND THE PENCOYD REALTY COMPANY AGAINST THE TAX DEBTS DUE THE UNITED STATES FROM THE WISSAHICKON TOOL WORKS, INC., AND THE WILKES-BARRE CARRIAGE COMPANY, BOTH OF 521 FIFTH AVENUE, NEW YORK, NEW YORK. THEREFORE, WE HAVE INSTRUCTED OUR CLAIMS DIVISION TODAY TO TAKE SET -OFF ACTION IN ACCORDANCE WITH THE DIRECTIONS IN YOUR LETTER OF NOVEMBER 12, 1957, AND TO ADVISE THE DEPARTMENT OF JUSTICE AS TO THE ACTION TAKEN IN CONNECTION WITH THE NOTE REFERRED TO IN YOUR LETTER.