# Appendix — Commissioner v. National Alfalfa Dehydrating & Milling Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1974
- **Citation:** 417 U.S. 134

## Text

Gn the Supreme Court of the Wnited States

OcroBeR TERM, 1973

No. 73-9
CoMMISSIONER OF INTERNAL REVENUE, PETITIONER
v.

NATIONAL ALFALFA DEHYDRATING AND MILLING CoMPANY

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE TENTH CIRCUIT

I

NG AE LILI LLL IEA ELLIS

INDEX

Page
Relevant Docket Entries:

Stipulation of Facts________--------------------------------+---
Stipulation Exhibit 1-A—Respondent’s U.S. Corporation licome
Tax Return (Form 1120) for Taxable Year Ending April 30, 1958,

and Amended Return for Same Period----_--------------------- 30
Stipulation Exhibit 9-I—Respondent’s U.S. Corporation Income Tax
Return (Form 1120) for Taxable Year Ending April 30, 1967-_-____- 49

Stipulation Exhibit 11— Minutes of Directors’ Meeting, April 8,

See ees eeseseee se ece ee ceeccecccecccecuececepeucccceceusc 53
Stipulation Exhibit 12—Indenture Dated as of July 1, 1957_-______- 66
Stipulation Exhibit 13—Specimen Form of Debenture-_-_---_-__-___-_-- 154
Stipulation Exhibit 14—Specimen Form of Warrant--------------- 155
Stipulation Exhibit 15—Journal Entries Re Debentures-_--------_-__- 157
Notation Re Stipulation Exhibit 16_-...__._.___-.---------------- 159
Stipulation Exhibit 17—Letter Dated August 14, 1959, from Francis I.
Dupont & Co_____________-_--__----------------------------- 160
Stipulation Exhibit 18—National Monthly Stock Summary, Issue of
October 1, 1957_.................-.---.----.----=----------- 162

Stipulation Exhibit 19—Summary of Sinking Fund Activity ------_-- 169
Stipulation Exhibit 20—Notice of Annual Meeting of Stockholders__ 171

Stipulation Exhibit 21—Specimen Form of 5% Cumulative Preferred
Stock Certificate

ee eee ee ee eee seen eseeseecec cose ce ee 183
Stipulation Exhibit 22—Composite Certificate of Incorporation_..... 186
Notation Re Opinion of Tax Court__-._.--_--------------------- 220
Decision of Tax Court___________-_---_------------------------- 221
Notice of Appeal___________-_--__------------------------------ 222
Notation Re Opinion and Judgment of Court of Appeals__-___-_--- 223

Order of the Supreme Court of the United States Granting a Writ of

RELEVANT DOCKET ENTRIES—TAX COURT

Date
Feb. 25, 1970

Feb. 25, 1970

May 1, 1970
Dec. 1, 1970

Feb. 17, 1971

Feb. 22, 23, 1971

Feb. 22, 1971

Feb. 23, 1971

(Docket No. 1081-70)

Filings and Proceedings

PETITION FILED: FEE PAID Feb. 25,
1970

REQUEST by petr. for trial at Kansas
City, Mo— GRANTED, Mar. 3, 1970

ANSWER filed by Resp.

NOTICE OF TRIAL at Kansas City, Mo.
on Feb. 22, 1971

MOTION by Petr. for leave to file
Amended Petition filed. (Amended
Petition Lodged )—WITHDRAWN See
Order 2/22/71

TRIAL at Kansas City, Mo. before Judge
Scott. Submitted on Feb. 23, 1971

Hrg. on. petrs. motion for leave to file
Amended Petition withdrawn see
Order Feb. 23, 1971 served.

Stipulation of Facts w/exhibits
BRIEFS due April 29, 1971
REPLY BRIEFS due May 25, 1971
SUBMITTED TO JUDGE SCOTT

(1)

2

Feb. 22, 1971 ORDERED: that petitioner’s ora] motion
to withdraw documents is granted and
petitioner’s motion for leave of Court
to file amended petition, filed Feb. 17,
1971, and petitioner’s amended peti-
tion, lodged with the Court on Feb. 17,
1971 are hereby removed from the file
and returned to petitioner’s counsel.

Mar. 8, 1971 TRANSCRIPT of Feb. 22 & 23, 1971 re-.
ceived (2)

April 9, 1971 BRIEF for Respondent filed.
April 12,1971 BRIEF for Petitioner filed (20-P)

May 24,1971 REPLY BRIEF for Petitioners filed
(20-P)

May 25,1971 REPLY BRIEF for Respondent filed

Oct. 14, 1971 OPINION filed Judge Scott (Decision
will be entered for respondent)

Oct. 18,1971 DECISION entered Judge Scott

APPELLATE PROCEEDINGS

Jan. 3, 1972 ENTRY OF APPEARANCE of Ronald
B. Stang for Petr.

Jan. 3, 1972 NOTICE OF APPEAL to U.S.C.A., 10th
Cir., filed by Petr.
Jan. 3, 1972 NOTICE OF FILING with copy of

Notice of Appeal served on Chief
Counsel], Mr. K. Martin Worthy.

Jan. 3, 1972 NOTICE to parties of assembling and
date for transmission of the record.

Jan. 3, 1972 CERTIFIED copy of notice of appeal was
mailed to Clerk, U.S.C.A., 10th Cir.

FOI SE OECTA SRO ER Bn Re = = =
2 TOTO NR MD Game rte

ae

Jan. 19, 1972 DESIGNATION of Charles White Hess

and Ronald B. Stang as counsel to re-
ceive all service, filed.

Date
2-14-72

2-18-72
2-22-72
2-28-72
3- 872
3 0-92

3-27-72

4-28-72

4-28-72

3- 5-72
3-22-72

6- 6-72
7-27-72
9-13-72
11-24-72
11-27-72
11-27-72

12-14-72

4

RELEVANT Docket ENtTRIES—CourtT OF APPEALS

Case No. 72-1125

National Alfalfa Dehydrating & Milling. Commission of I.R.

Filings—Proceedings Filed

Cause docketed: record on appeal, Vol. I, Vol. II, III
(transeript), Vol. IV (exhibits), orig. (over 300 pp.) ;
docketing statement, orig. & 3 cc.

Order—assigned to General Calendar; appellant’s brief
due 3-27-72—Lewis

Appearance—Aplt—Hess, Stang

Appearance—Appellee—Rothwacks, Crampton

Appearance—Appellee—Henkel, Jr., Frosch

Motion of Norton Simon, Inc. for leave to file brief amicus
curiae—0 & 5cec-c/s

Motion of Norton Simon, Inc., for leave to file brief as
Amicus Curiae Granted to File—Clerk-Rule 11 HKP

Appellant’s brief—25cc-c/s

Appendix—10cc-c/s

Exhibits to Appendix—4cc—c/s

Brief Amicus curiae—25cc-c/s (Norton Simon, Inc.)

C.LR.’s motion for ext. of time to and incl. 5-6-72 to file
brief—0 & 3cc-c/s

Order : C.I.R.’s motion for ext. of time granted to 5-6-72—
BHS

Appellee’s brief—25ec—c/s

Motion of Norton Simon for leave to file reply brief as
amicus curiae—0 & 3cc—c/ (to panel)

Reply brief for amicus curiae—25cc—(2cce sent to panel)
c/c—rec. but not filed pending Appellant's reply brief—
25ec—c/s filed 6-6-72

Order: Motion of Norton Simon, Inc. for leave to file reply
brief as amicus curiae granted. (Lewis, McWilliams)

Set for Hearing—Wichita, Kansas

Argued and submitted—Phillips, Hill, Holloway

Appellee’s addtl. authority (Classn’s, Inc. opinion) for
argument—and letter—0 & 3 cc-c/s

Appellant’s response to addtl. authority for argument—
0&4cc-/s

Appellee’s addtl. authority and Appellant's response for-
warded to panel ( Phillips, Hill, Holloway)

Amicus Ouriae’s objection to Government's additional au-
thority—0 only c/s (Fwd. to Panel)

A

OO + inte Ble rae

SE

1-26-73

2-20-73
3- 1-73
3- 2-73
3-13-73
3-26-73
4-19-73

~1

- 3-73

5

Opinion—Phillips, Hill, Holloway Judgment: Reversed
and remanded in accordance with the opinion; Hill,
Circuit Judge, dissenting

Mandate to-Tax Court

Receipt— Mandate

Letter to panel re: record

ORIG ROA to Clerk, Volumes I thru IV

Receipt—ORIG ROA, Vols I thru IV

Copy of letter Granting extension of time to file a petition
for writ of certiorari to 6-25-73

Supreme Court Notice of Filing Petition for Certiorari,
6-25-73, 73-9

PETITION
(Filed February 25, 1970)
THE TAX COURT OF THE UNITED STATES

NATIONAL ALFALFA DEHYDRATING °%
AND MILLING COMPANY,
Petitioner, et No.
hn ; 1081-70
COMMISSIONER OF INTERNAL REV-
* ENUE,
Respondent. |
PETITION

The above-named petitioner hereby petitions for a
redetermination of the deficiency set forth by the Com-
missioner of Internal Revenue in his notice of deficiency
(bearing symbols AP: KC: HWL: FMC:dDd-90D) dated De-
cember 17, 1969, and, as a basis of this proceeding, alleges
as follows:

1. The petitioner, National Alfalfa Dehydrating and
Milling Company, (hereinafter “National Alfalfa”) is a
Delaware corporation with its principal office at Clover-
leaf 1 Building, 6811 West 63rd Street, P.O. Box 500,
; Shawnee Mission, Kansas 66201. The return for the period
here involved, taxable year ended April -30, 1967, was
filed with the District Director of Internal Revenue for the
District of Kansas, Wichita, Kansas.

2. The notice of deficiency, a copy of which is at-
tached hereto and marked Exhibit “A”, was mailed to
the petitioner on December 17, 1969.

(7)

;
‘ :
i
Hl
‘

8

3. The Commissioner determined a deficiency in the
U.S. corporation income tax of petitioner for the taxable
fiscal year ended April 30, 1967 in the amount of $147,-
949.76 based upon a disallowance of the deduction for
amortization of the discount on debentures of petitioner
and based upon a recomputation of the net operating loss
deductions of petitioner for taxable years ending April 30,
1958, 1959, 1960, 1961, 1962, 1963, 1964, 1965 and 1966
due to the disallowance of the amortized bond discount
deductions for those years.

4. The determination of tax set forth in said notice
of deficiency is based upon the following errors:

(a) The Commissioner erred in determining that
petitioner, National Alfalfa, was not entitled to a de-
duction for amortization of the discount on debentures
of National Alfalfa in the amount of $109,804.00 for
the taxable year ended April 30, 1967, said disallow-
ance of the deduction for that year being allegedly
based on the fact that the difference between the
face value of the bonds issued in 1957 for certain then
outstanding cumulative preferred stock and the fair
market value of the preferred stock on the date on
which they were exchanged did not, considering the
character of the exchange, constitute bond discount.

(b) The Commissioner erred in determining that
petitioner, National Alfalfa, was not entitled to a por-
tion of its claimed net operating loss carry-forward
deduction for the taxable years ended April 30, 1958
through April 30, 1966 amounting to $321,657.00 be-
cause of the Commissioner’s disallowance for said
periods of the deduction for amortization of the dis-
count on debentures of National Alfalfa, said disallow-
ances of the deductions for said years being allegedly
based on the fact that the difference between the

oe A A en

face value of the bonds issued in 1957 for certain“then
outstanding cumulative preferred stock and the fair
market value of the preferred stock on the date on
which they were exchanged did not, considering the
character of the exchange, constitute bond discount.

5. The facts upon which the petitioner relies as the

‘basis for this case are as follows:

(a) On July 23, 1957 the preferred stockholders
of National Alfalfa agreed to exchange their $50 par
value preferred stock in National Alfalfa for 18-year
5% sinking fund debenture bonds of National Alfalfa
due in 1975. The exchange of the preferred stock for
the debenture bonds was treated as a taxable ex-
change by the preferred stockholders, as required by
Section 302(a) of the Internal Revenue Code of 1954,
as amended, and as required by the U.S. Treasury
Department in a ruling letter dated May 29, 1957, a
copy of which ruling letter is attached hereto and
marked Exhibit “B”.

(b) At the time of the exchange there were
47,059 shares of 5% cumulative preferred stock of
National Alfalfa with a par value of $50 per share is-
sued and outstanding the fair market value of which
was $33 per share which represented an aggregate
fair market value of $1,552,947.

(c) National Alfalfa in accordance with action
of its Board of Directors taken April 8, 1957 issued
$2,352,950 of its 5% sinking fund debenture bonds due
in 1975 in exchange for its preferred stock with an
aggregate fair market value of only $1,552,947 and
thus incurred bond discount amounting to $800,003.
According to the Internal Revenue laws (Sec. 1.61-12
(c)(3) Income Tax Regulations) said discount was

10

deductible and properly amortizable over the life of
the bonds. The deductions for the amortization of
discount on the bonds were taken on National Al-
falfa’s tax returns for the taxable years 1958 through
1967 based upon the appropriate discount for bonds
reacquired during each of said years as well as a pro-
rated amount of discount for the bonds still outstand-
ing at the end of National Alfalfa’s annual accounting

period.

(d) The deduction claimed for bond discount
amortization by National Alfalfa in each respective
year was as follows:

Amount of
bond discount
Year Ended amortization

4/30/58 $ 37,037.00
4/30/59 63,377.00
4/30/60 59,317.00
4/30/61 28,743.00
4/30/62 41,813.00
4/30/63 27,751.00
4/30/64 52,186.00
4/30/65 60,071.00
4/30/66 25,900.00
4/30/67 109,804.00

$505,999.00

———_

(e) The 5% sinking fund debenture bonds due
in 1975 issued in exchange for the preferred stock
represented and represent valid and subsisting -in-
debtedness in the original face amount of $2,352,950
within the meaning of the Internal Revenue laws and
expressed an unconditional and legally enforceable

11

obligation to pay their face amount upon redemption
on the part of National Alfalfa.

(f) The determinations of the Commissioner set
forth in Exhibit “A” attached hereto, are arbitrary,
discriminatory and in total disregard of the applicable
Internal Revenue laws (Sec. 1.61-12(c) (3) Income
Tax Regulations) in that the petitioner, National Al-
falfa, properly deducted on its U.S. corporation in-
come tax returns in all the years in question the ap-
propriate amount of bond discount amortization to
which it was entitled under the foregoing facts and
applicable federal income tax laws, and since the Com-
missioner improperly disallowed in the years in ques-
tion portions of petitioner’s net operating loss carry-
forward attributable to the deduction for amortized
bond discount in each respective year.

6. Wherefore the petitioner prays that the Court
hear the proceeding and:

1. Determine that the Commissioner erred as
alleged in each assignment of error set forth in para-
graph 4 above.

2. Determine that the petitioner was and is en-
titled to the deduction for amortization of bond dis-
count with respect to the debenture bonds for each
year in question.

3. Determine that the petitioner is entitled to
the portions of its net operating loss carry-forward
disallowed by the Commissioner for the years in
question.

4. Find that ‘ie-e is no deficiency in the cor-
porate income tax of petitioner for the year 1967.

12

5. Give such other and further relief as the
Court may deem proper.
/s/ James J. Melching
James J. Melching
/s/ Charles W. Hess
Charles W. Hess
3rd Floor-Columbia Union
National Bank Building
Kansas City, Missouri 64106
HA 1-6388
Counsel for Petitioner

STATE OF NEBRASKA _)
) ss:
COUNTY OF HOLT )

Charles R. Peterson, President of National Alfalfa
Dehydrating and Milling Company, petitioner in the fore-
going Petition in the Tax Court of the United States, being
duly sworn, says that he has read the foregoing petition,
or has had the same read to him, and is familiar with the
statements contained therein, and the statements con-
tained therein are true, except those stated upon informa-
tion and belief, and those he believes to be true; that he
is duly authorized as President of Petitioner to verify the
foregoing petition.

/s/ Charles R. Peterson
President
National Alfalfa Dehydrating
and Milling Company

Sworn to and subscribed before me this 3 day of Feb.,

1970.

/s/ William J. Edwards
[Seal]
My Commission Expires: Jan. 19, 1972.

13

Exhibit A

P.O. Box 13006. Com.trce ~ wer Siston Kars Cay Wo. 641A

US tres. wry DU Garmex?

Rogicanl Gomanss:toace
itezacl Rovensue Service

RIGWESR ROSIon

| 8 *epty voter wx

DEC 17 69 os. crt stsz cece,

Grtieusl £listia Potycraztiss ot
cies Gsta-e
Corony

Cals isc’ Core Lerecs, 2.0. ies 559

SSS eSinis 1255239 bLlS

This letter is te notify you—as required by law -that we have determined
the incose tax deficiencies shown above. I regret we have been unable to
reach a satisfactory agreement in your case. The enclosed statement shows how
the deficiencies rere computed.

If you de not intend to contest this determination in the Tax Court of the
United States, please Sign and return the enclosed waiver form. This will
permit an early assessment of the deficiencies and limit the accumulation of
interest. The enclosed pre-addressed envelope is for your convenience.

If you decide not to sisn and return the waiver, the law requires that after
90 days from the cate of this letter (150 Gays if this letter is addressed to
you outsice the United States and the District of Columbia) we assess the
Geficiencies and take action te collect the tax. However, if within the
time stated you contest this deterzination by filing @ petition with the Tax
Court, we gay not assess ary deficiencies for these years until after the
Tax Court has deci¢ed your case.

You say obtain a copy of the rules for Tiling a petition with the Tax Court
by writing to the Clerx, Tux Court of the United States, Box 70,

Washington, D. C. 20044,

fesr8 Eyer ce

Commissioner

Jaf Stuart 2. Sacer
4locrt &. terer

: Enclosures: Sy SK G7e Lice Stoned Cilica-
: Waiver, Fors 870

H Statement

} Pre-addressed envelope

Form LIA (Rew FAA

524-785 O- 73-2

ee

14

ve ‘BURY OL PAHTMERT- INTERWAR MEvinwe SCE ove sue’
‘ennoane a) STATUTORY NOTICE STATEKENT PCT LiF:
424-590

Katiozal Alfclfa Ichydratic> cad Uilling Coapenay

Cloverlesf 1 “uilding
6811 Cost 63rd Strcet

P.0, cox $00

Shewoee iifesica, Esnsaes 65201

Kim OF Tax

Ince=c
VARAGLE YEAR EnOCO a Strqctecy
April 50, 1967 $147,949.76

63] Copy to Authorized Reprecentative:

Mr. Jexces BH. Weicor
2990

Ccu=:ree Toucr

Senss3 City, Hicccuri 64199

ca ol cel Le Se EEE

eet Whe s

pny

C2]

vu. Tata
Fromm 3613

MEV. OCC CmOCe 927

OCP ARTEE ST - mT imma woVEw st CL awIce

~ORPORATION INCOME TAX

eS

name TACAM E YEARS ow OE Se
Eational Alfalfe Dchydrating |
__ end Millircs Cocpoay April 30, 1967
Teed mice. os iewem Im, s 5 £
TReaactuew as rico 124,499.80
PRE memaeny LETTER GaTCO
Osraturtcer OTE Osteo
Wwe MC O4Cs. > pated tess i COME (00 erteched
cop lense of ut
(s) Credit for son-highucy use of
geeoline 3,062.22
Taxeble inco=a to waich you have
(gnified ccceptcace by execution
~f Fora &70 127,562.02
()) ssortization of discount on debentures 109,804.00
(e) Wet operating loss deductica 321,657.00
TARAS. € InCOmME a5 REWISED s s 5559, 023. ,02
LESS: EXCESS OF WET \OnG-TEMe CamrTay Gaim
OVER MET SHOMT-TEmm Capita, LOSS
tmCOmE SUBJECT TO Tax 3 s 559 023,02
T s s s
Pantin, Tan _ "261,831.05 _
AO: 23% OF EXCESS SnOwN ABOVE
SUBTOTAL
$ s $261,831.05
3 [THEN [ADOITIONAL SUMTARES. CREDIVS, ETCT | TT" ana:

FH COME TAK LIABEITY s s $183,981.78
UV [umcome Tax PRE VOUS Y aSSESSE0
= Orisinsl retura - DLa ££31220090063 34,981.98
© | Additiozsl - GLa 4634725366200 1,050.04
JOEMOENCY (OveRassesmenT) s s 1467 94% 76

16
C -3-]
Bational Alfalfe Dehydrating end
Millins, Coupany Stateceat
Taxable Yerr Ended April 30, 1967
Explanction of Adiueteents

(2) This represents en edjusteent to which you heave proviously signified acceptance
by execution of Fora 870 cad on waich the tax hee been assessed.

(>) The differcace between the fcce value of the bonds icesucd and the fair csrxet

walue of the profcrred stock on the dste of the exchansze does act, consideric: the

@ -racter of the cxthoose, constitute bond ciccount sad, thus, ccortizction tioreof
» B0€ @ proper dccuction, Therciore, taxcble incece is increased $109 , 604.00,

(c) Since amortizction ef bond discount is not sllovable es expleized in edjust-
meat (b), elaic:d coortization is oliainated in co=puting the set operating
catryforvard. Taereiore, the net operating loss decuction is adjusted as follows:

As shown on returo $800,319.75

As tevised, coe Cxhibit A ~4£78 662,75

Increase in tcxable iacous $321,657.00

Other Adjuctrents
The izvestnent credit is recoaputed as follovs:

Tax as reco=tuted (A) $261,831.05 :

Lescer of (..) or $25,000.00 $25,000.00
28.516642.0f ($261,631.05 less $25,000.00) 267 642,83

Totel $92,642.83
Less 7% of ocuspension period property —14,793 56

Imvestmont credit $77,849.27
*Per prelimincry letter

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17

Exhibit B
U. S. TREASURY DEPARTMENT
Washington 25
May 29, 1957
T:R:R
LGH

Mr. James J. Davis

1342-43 Fidelity-Philadelphia Trust
Building

123 South Broad Street

Philadelphia 9, Pennsylvania

Dear Mr. Davis:

This is in reply to your letter of April 17, 1957, writ-
ten on behalf of the National Alfalfa Dehydrating and
Milling Company, Lamar, Colorado, requesting a ruling
as to the effect for Federal income tax purposes of a pro-
posed recapitalization. Your letter of April 23, 1957, sub-
mitting additional information in regard to the matter has
also been received.

National Alfalfa Dehydrating” and Milling Company
(hereinafter referred to as Company) was incorporated
on May 4, 1946, under the laws of Delaware, to engage in
the business of dehydrating and milling alfalfa. The bal-
ance sheet as of February 28, 1957, which was submitted
‘discloses that there were outstanding 47,059 shares of 5%
Cumulative Preferred Stock, par $50. per share, and 790,000
shares of Common Stock, par $1. per share. The Surplus
Accounts were as follows:

| omer eet al

Capital Surplus
Earned Deficit

Operating Profit or Loss for

Ten Months

Profit or loss on sale of Cap-

ital Assets

Less Reserve for Federal and

State Income Taxes

$3,378,361.61
( 257,180.91)

$255,375.37
( 380.27)
(12,000.00) 242,995.10
$3,364,175.80

The dividend arrearage on the preferred stock will
be $10.00 per share as of June 1, 1957.

It is stated that on April 8, 1957, the Board of Direc-
tors adopted a recapitalization plan under the terms of
which the following stock and securities would be issued
in exchange for all of Company’s presently outstanding

stocks:

Presently Outstanding

47,059 shares 5% Cumula-
tive preferred stock, par
$50. per share

Dividend arrearage on the
47,059 shares of preferred
stock as of June 1, 1957—
$10.00

790,000 shares common
stock, par value $1.00 per
share

Stock and Securities
to be Issued

$2,352,950., 5% Debenture
Bonds due 1975

Warrant to subscribe for 1/2
share of common stock of a
par value of $3. per share at
$10. per share

790,000 shares common stock
par value $3.00 per share

The new debentures would be issued pursuant to an

Indenture between Company and Fidelity-Philadelphia
Trust Company, Philadelphia, Pennsylvania a page proof
copy of which Indenture has been submitted and is in-
corporated herein by way of reference. Some of the

LET A nee ie SO

19

more important provisions are (1) the Debentures are
direct obligations of Company, but are not secured; (2)
the Debentures will be dated August 1, 1957, and are to
mature July 1, 1975, and are to bear interest at the rate
of 5% per annum, payable semi-annually on January 1
and July 1 in each year; (3) the Debentures are subor-
dinate to all bank loans for inventory purposes and obliga-
tions of Company to suppliers of materials, services and
labor incurred in the normal course of business; (4) the
Debentures are redeemable at the option of Company, as
a whole or in part, from time to time, on at least 60 days
published notice after July 1, 1958, and prior to July 1,
1975, at 100% of par, plus accrued interest to the date of
redemption; and (5) the Company will pay to the Trus-
tees annually commencing 90 days after April 30, 1959,
as and for a contingent sinking fund for the redemption
of Debentures at 100% with interest accrued to the date
fixed for redemption an amount which shall be the lesser
of the sum sufficient to redeem $196,080. principal amount
or an amount equal to 100% of the consolidated net earn-
ings for the next fiscal year of Company. The Company
will accrue 100% of its net earnings commencing on May
1, 1957, and set aside such sum to be able to meet the
sinking fund provisions. If in any year 100% of the net
earnings does not equal $196,080., such deficiency will ac-
crue against future earnings of the Company. and will be
paid over to the Trustee in such future years in order that
1/12th of the entire amount of the issue will be retired for
| each year subsequent to April 30, 1959. _The Company
reserves the right to purchase in the open market Deben-
tures for sinking fund purposes.

It was stated orally that The Securities and Exchange
Commission has now given its approval. A vote of 663%
of each of the classes of stock is required under Delaware
law to approve the recapitalization plan and it is expected

=a

20

that such plan will be submitted to the stockholders at the
annual meeting to be held on July 23, 1957.

The principal business reason for the recapitalization
is the Company’s expansion into eastern producing areas in
February, 1957, which made its credit requirements at
least 50% greater in order to carry increased inventories.

_ Based solely on the information submitted it is con-
cluded as follows:

(1)

(2)

(3)

The exchange by the holders of $1. par value
common stock for $3. par value common stock, on
the basis described above, will constitute a re-
capitalization and, therefore, a reorganization,
within the meaning of section 368(a)(1)(E), of
the Internal Revenue Code of 1954. No gain or
loss will be recognized to Company as a result of
the exchanges.

No gain or loss will be recognized to the holders
of common stock as a result of the exchange of
common stock (section 354(a)). The basis to
each stockholder of the stock received will be the
same as the cost or other adjusted basis of the
stock surrendered (section 358(a)). The holding
period of the stock received will include the hold-
ing petiod of the stock surrendered in the ex-
change (section 1223) ).

Assuming but not determining that the 5% de-
benture bonds to be issued qualify as securities
(create a genuine relationship of debtor and cred-

itor), gain. or loss will be recognized to the pre-

ferred stockholce-s from the exchange of 5%
cumulative preferred stock, par $50., and the
dividend arrearage thereon of $10. per share as

21

of June 1, 1957, for debenture bonds and warrants
to subscribe for the new common stock at $10.
per share (section 302(a)). The gain or loss
recognized from the exchange will be measured
by the difference between the cost or other ad-
justed basis of the preferred stock surrendered and
the fair market values of the debentures and war-
rants received and such gain or loss will con-
stitute capital gain or loss subject to the appli-
cable provisions and limitations of Subchapter P
Part I of Subtitle A of the Code.

The basis of.the debentures and the warrants re-
ceived by the holders of the old preferred stock
will be the fair market values used in the deter-
mination of the recognizable gain or loss.

(4) The fair market values prevailing on the date
the Plan is declared effective are the values to be
assigned to the debentures and the warrants re-
ceived in the exchange.

It is important that a copy of this letter be attached
to the income tax return of each taxpayer involved filed
for the year in which the transaction is consummated.

Very truly yours,

/s/ Frances B. Rapp
Chief, Reorganization and
Dividend Branch

22

ANSWER
(Filed May 1, 1970)
UNITED STATES TAX COURT

[CAPTION OMITTED]

ANSWER

THE RESPONDENT, in answer to the petition file:
in the above-entitled case. admits and denies as follows:

1. to 3., inclusive. .Admits the. allegations containex
in paragraphs 1. to 3., inclusive, of the petition.

4. (a) and (b). Denies the Commissioner erred a:
alleged in subparagraphs (a) and (b) of paragraph 4. of
the petition, or in any manner.

5. (a) to (c), inclusive. Denies the allegations of
fact contained in subparagraphs (a) to (c), inclusive, of
paragraph 5. of the petition.

5. (d) Admits petitioner claimed bond discount
amortization as set forth in subparagraph (d) of para-
graph 5. of the petition.

5. (e) and (f). Denies the allegations of fact con-
tained in subparagraphs (e) and (f) of Paragraph 5. of
the petition.

6. Denies generally and specifically each and every
allegation of the petition’ not hereinbefore expressly ad-
mitted, qualified or denied.

23

WHEREFORE, it is prayed that the deficiency deter-
mined by the respondent be in all respects approved.

/s/ K. Martin Worthy

K. Martin Worthy
Chief Counsel,
Internal Revenue Service.
Of Counsel:
Frank C. Conley,
Regional Counsel,
David A. Pierce,
Attorney,

Internal Revenue Service,
2700 Federal Office Building,
Kansas City, Missouri 64106.

24

STIPULATION OF FACTS
(Filed February 22, 1971)
UNITED STATES TAX COURT

[CAPTION OMITTED]

STIPULATION OF FACTS

IT IS HEREBY STIPULATED THAT, for the pw
poses of this case, the following statements may be a
cepted as facts and constitute all of the facts in this ca:
and all exhibits referred to herein and attached heret
are incorporated in this stipulation and made a part herex
subject to the right of either party to object to the ac
mission of such facts in evidence on the grounds of m:z
teriality and relevancy.

1.. National Alfalfa Dehydrating and Milling Com
pany (hereinafter referred to as National Alfalfa) is |
Delaware corporation with its principal office at Clover
leaf 1 Building, 6811 West 63rd Street, Post Office Bo:
500, Shawnee Mission, Kansas 66201. National Alfalfa wa
duly incorporated on May 4, 1946 under the laws of
ware to engage in the business of dehydrating and milli
- alfalfa.

2. Attached hereto and marked Exhibits 1-A throug

9-I are copies of Federal income tax returns filed by N
tional Alfalfa for its taxable years ended April 30, 19

through April 30, 1960 and April 30, 1962 through Ap

Re OT eee Oe near ty

25

30, 1967, respectively. Also attached hereto and marked
Exhibit 10-J is a photo copy of National Alfalfa’s retained
copy of the income tax return filed by it for its taxable
year ended April 30, 1961 which is a true and accurate
representation of the return filed by National Alfalfa for
that fiscal year with the District Director of Internal
Revenue.

3. Prior to July 23, 1957, National Alfalfa had 47,059
shares of its $50 par value cumulative preferred stock
issued and outstanding. The dividend arrearages on each
of these shares of preferred stock amounted to $10 as of
July 23, 1957.

4. On April 8, 1957 the Board of Directors of National
‘Alfalfa passed a resolution authorizing $2,352,850 in 5%
‘sinking fund debenture bonds to be issued in exchange for
National Alfalfa’s outstanding preferred stock. Attached
hereto and marked Exhibit 11 is a copy of this resolution.

5. If called as witnesses in this case the members
| of the Board of Directors during 1957 would testify that
| the principal business purpose behind the 1957 exchange
_ of debentures for the preferred stock was to enable
National Alfalfa to expand its eastern producing areas.
In order to expand into the eastern areas National Al-
falfa’s credit requirements for carrying inventory were
increased by 50%. To improve National Alfalfa’s credit
3 status this transaction also included the issuance of cer-
4 tain warrants to the cumulative preferred share holders
4} which permitted the holder to purchase common stock of
National Alfalfa at a stated price in order to eliminate
the dividend arrearages owed to them. In addition, the
cancellation of the preferred stock and elimination of the
dividend arrearages, made it possible for National Alfalfa
to declare dividends to the common stockholders there»,
after.

as al

26

6. Attached hereto and marked Exhibit 12 is a copy
of the indenture dated July 1, 1957 between National Al.
falfa and Fidelity-Philadelphia Trust Company, as trustee

7. Attached hereto and marked Exhibit 13 is a speci.
men copy of the debentures containing the terms and
conditions thereof.

8. Attached hereto and marked Exhibit 14 is a speci-
men copy of the warrants containing the terms and con-
ditions thereof.

9. On July 23, 1957 the cumulative preferred stock-
holders of National Alfalfa exchanged their preferred stock
of National Alfalfa for the debenture bonds of National
Alfalfa due in 1975. Each unit of the debenture had a
fixed maturity value of $50.

10. The preferred stock received by National Alfalfa
in exchange for the debenture was retired and cancelled
upon the issuance of the bond indebtedness by an entry
on National Alfalfa’s books debiting preferred stock for
$2,352,950 thereby completely eliminating the preferred
stock account and crediting the liability account for 18
year 5% debentures for the same amount. Attached
hereto and marked Exhibit 15 is a photocopy of the above
stated Journal Entry dated August 1, 1957.

11. On behalf of National Alfalfa, Fidelity-Philadel-
phia Trust Company requested a ruling from the United
States Treasury Department. Attached hereto and marked
Exhibit 16 is a photocopy of the United States Treasury
’ Department’s ruling letter signed by Francis B. Rapp and
dated May 29, 1957, in reply to the request for ruling.
(Respondent objects to the admission into evidence of the
foregoing facts and Exhibit 16 on the grounds of materialty
and relevancy.)

Oe IR Pe

27

12. On its return for its fiscal year ended April 30,
1958 National Alfalfa used the fair market value of $33
per share to determine the disallowed debt discount ex-

pense.

13. Attached hereto and marked Exhibit 17 is a copy
of a letter from Francis I. Dupont and Company dated
August 14, 1959 which accurately reflects the quoted over-
the-counter market value of National Alfalfa preferred
stock during the period July 15, 1957 through July 30,
1957, inclusive.

14. Attached hereto and marked Exhibit 18 is a copy
of the National Stock Summary dated October 1, 1957
relating to actual trades and established prices of the pre-
ferred stock of National Alfalfa made in July, 1957.

15. As a result of the exchange in 1957 National Al-
falfa claimed a deduction for debt discount attributable
to the aggregate amount of the difference between the
face value of the debentures ($2,352,950) and the deter-
' mined fair market value of the preferred stock on the date
of the exchange ($1,552,947). The difference of $800,003
/ was accordingly amortized over the years 1957 through
1975 and appropriate amounts were taken as deductions
each year through April 30, 1967.

: 16. The deduction claimed by National Alfalfa each

4 year for debt discount was computed on the basis of the
total of two different variables.

; 1. The unamortized discount of bonds redeemed or
repurchased and retired by National Alfalfa in the
year of the deduction, and

2. The annual straigit line amortization on those
bonds still outstanding at the end of the year.

ee eet ee ee ween

28

17. The deduction for discount taken by National
Alfalfa on its Federal Income Tax Returns for its fiscal
years ended April 30, 1958 through April 30, 1967 are as
follows:

Unamortized Discount
Year On Bonds Currently Straight-Line
Ended Repurchased or Redeemed Amortization Total
4/30/58 4 37,037.00 37,037.00
4/30/59 20,104.00 43,273.00 63,377.00
4/30/60 17,007.00 42,310.00 59,317.00
4/30/61 oe 28,743.00 28,743.00
4/30/62 14,062.00 27,751.00 41,813.00
4/30/63 O- 27,751.00 27,751.00
4/30/64 26,624.00 25,562.00 52,186.00
4/30/65 37,903.00 22,168.00 60,071.00
4/30/66 4,139.00 21,761.00 25,900.00
4/30/67 98,824.00 10,980.00 109,804.00
505,999.00

18. As required by the indenture a sinking fund was
established in order to secure funds to redeem the deben-
ture bonds. In lieu of making all or any part of the sink-
ing fund payments in cash National Alfalfa is also au-
thorized by the terms of the indenture in Article VI to
deliver outstanding debentures to the sinking fund trustee
which have either been redeemed or purchased by National
Alfalfa on the open market. .

. 19. National Alfalfa has at all times been on schedule
following the provisions of the sinking fund and is not
now nor at any time pertinent hereto been in default of
any of the terms of the indenture. Attached hereto and
marked Exhibit 19 is a composite report from the trustee of
the sinking fund showing National Alfalfa’s compliance

29

with the provisions of the indenture relating to the sink-
ng fund.

20. As of April 30, 1967, only 11,626 of the original
17,059 debenture bonds of National Alfalfa remained out-
standing, as a result of the sinking fund trustee and Na-
ional Alfalfa having redeemed or otherwise repurchased
and retired the other 35,433 debentures.

21. Attached hereto and marked Exhibit 20 is a
photocopy of the Notice of Annual Meeting of Stockholders
dated June 21, 1957.

22. Attached hereto and marked Exhibit 21 is a speci-
men copy of the 5% Cumulative Preferred Stock of the
par value of $50.00 per share of National Alfalfa which
was exchanged share for share for $50.00 Debentures on
July 23, 1957.

23. Attached hereto and marked Exhibit 22 is a
photocopy of Composite Certificate of Incorporation of
National Alfalfa dated May 3, 1946.

/s/ James J. Melching
/s/ Charles W. Hess
Counsel for Petitioner
/s/ K. Martin Worthy,
K. Martin Worthy,
Chief Counsel,
Internal Revenue Service

$24-785 O- 73-3

STrpuLaATION Exuifir 1-A

Corporation Income Taz Return (Form 1120) for Taxable
Year Ending April 30, 1958, and Amended Return for Same
Period.

(30)

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31
NATIONAL ATFALPA DEHYDRATING AND MILLING COMP AN
Lamar, Colorado

Amended U. S. Corporation Income Tax Return

Year Ended April 30, 195&
LIST OF ATTACHMENTS

,

Statement re preparation of retur..

Schedule

J Depreciation

J-1 Statement re change in depreciation rates

K Other deductions

K-i Statement re amortization of jiscount
-on debentures issued

K-2 Statement re loss om disposition of Pecos
Valley and Denver 4lfalfa assets

M Reconciliation of taxable income and analysis
of changes in surplus

x Disposition of net operating less deductions

of prior years

32

NAVIONAL ALFALFA DEHYDRATIING AND MILLING COMPANY
Laaar, Colorado
U. S. Corporution Income Tax Return

Amended Return

Year Ended April 50, 1958

I, Stewart S. Pinkler » acting on behalf

Price Waterhouse & Co.,; Pniladelpnia, Pennsylvania, declare und:
the penalty of perjury that I prepared the attached amended U. .
corporation income tax return of National Alfalfa Denz;drating @
Milling Company covering the fiscal year ended April 30, 1958 wi
shows a loss of $756,051.03, on the basis of information furnis!
by the taxpayer; that the information set out in the amended re
and accompanying schedules correctly and fairly reflects inform:
furnished to me during the course of the preparation of tne ret
that said information is true to the best of my information and

belief.

Schedule J

NATIONAL ALFALFA DEI[YDRATING AND MILLING COMPANY
Lamar, Colorado

Amended Return

Year Ended April 30, 1958

PIXE / "TS AND RESERVES FOR DEPRECIATION ©
Balance -
beginning Balance - end
Property Acquired of year Additions Retirements of year
uiidings Various $2,991,522.98 $137,853.26 $135,347.17 $2,994,029.07
i.cainery 4,776,827.22 696,714.75 276,215.21 5,197,526.7¢
arvesting :
equipment 998,969.56 109,660.72 41,596.81 1,067,033.49
fiscellaneous .
equipment 64,790.41 1,753.14 400.00 66,143.55
utos and trucks 492,051.95 43,519.83 129,280.96 406,299.82
urniture and
- fixtures 82,263.96 2,924.71 1,007.88 84,180.79
: onstruction ;
in progress 384,246.83 (249,191.76). 135,055.07

Geeserves for

$9,790, 672.93 $743,234.65 $583, 848.03 $9, 950,059.55

depreciation

-ildings $ 664,957.67 $104,190.84 $ 49,459.86 $ 719,868.65
f2chirnery 2,110,470.25 292,404.39 231,750.93 Ssh 71,325, 71
gine in nd 763,334.47 59,223.89 35,564.31 786,994.05
scellaneous

ecuipment 41,622.58 . 4,031.40 98.00 45,555.98
2908 and trucks 398,071.36 58,964.28 122,669.54 334,366.10
Fucaiture and

rixtures 48,599.31 5,911.65 53,610.96

$4,027,055.64 $523, 626.45*$439,542.64 $4,111, 332.45

See statement attached re amendment of depreciation rates.

Scnedule J-l

NATIONAL ALFALFA DEHYDRATING & MILLING COMPANY

Amended -
U. S. Corporation Income Tax -
Piscal Year Ended April 50, 1958

Statement re Provision for Depreciation

National Alfalfa Dehydrating & Milling Compuny was
incorporated ‘on May 4, 1956 for tie purpose of the manufacture
and.sale of alfalfa meal. ‘The company has acquired its fixed ‘
assets principally through the acquisition of existing plants from
other companies. The five major acquisitions that nave taxen place
since inception of the company are 2s follows:

Depreciable
Ma assets
Date acouired
Pecos Valley Alfalfa
Mill Company 5/17/46 $1,059,000
Denver Alfalfa "ivision 5/22/46 2,980,000
Cerophyl Laboratories, Inc. 4/1/54 1,050,090
~-
Caro-green, Inc. 4/ 1/54 870,000
Saunders Millis, Inc. 2/11/59 1,100,000
' $7,059,009

At the time of tne orzganizution of the company, a firm
of consulting engineers was engaged to appraise the properties
acquired from Pecos Valley and tne Denver Alfalfa Division and to
arrive at the reisaining useful lite of tnese properties.

Schedule j-1 | ‘
Page 2

—

Tne Stone & Webster Ungineering Corporation in its report
determined the following average useful lives for various types of
ecuipment:

Life of properties Remaining life of
pS

f new assets acquired
Buildings 25.35 years 20.14 years
Machinery 12.89 years 10.54 years
Harvesting equipment 7.05 years 5.47 years

On April 1, 1949 the coupany received a Revenue Agent's
Report covering the examination of the fiscal years ended April 30,
1947 and April 350, 1948. A substantial portion of this report
dealt with the proolem of depreciation rates.

in conjunction with this examination an engineer revenue
agent rendered = report dated November 29, 1946 with regard to
depreciation,

The lives assigned to certain fixed asset classifications
were as follows:

Assets acquired
from Pecos Valley « Asset additions V4

Denver Company to 4/30/48
* Buildings 28.57 years 28.57 years
Machinery 10 years (minimum) 15 years
Harvesting equipment (note) (note)

Note: No mention was made in the revenue agent's report
; concerning the rates used on harvesting equipment
except the general comment that “it appears that
the depreciation rates taken and bases on the
balance of the depreciable assets are approxi-
mately correct."

[ geneous sa]
Page 3

At the end of the 1958 fiscal year the company's former
president for reasons unknewn to present management, directed the
company controller to arbitrarily reduce its provision for depreci-
ation for that year. There was no logical basis for the reduction.
The company's original report to shareholders and the original
U. S. income tax return reflected the following changes in depreci-
ation rates:

Rate used con- Rate originally

sistently prior to used in fiscal
1958, and as amended year ended

in 1958 April 30, 1958

s Yrs. of life % Yrs. of lif:
Buildings 3-1/2 28.57 2-1/2 40
Nachinery 6-2/3 15 4 25
Harvesting equipment 20 Ss 10 10

These changes resulted in a reduction in the provision
for depreciation in the 1958 fiscal year in the amount of $169,758.

On March 12, 1959 Mr. W. A. Donnelly was elected president
of the company, replacing the former president and the arbitrary |
change in depreciation rates made in the company's accounts in
the fiscal year ended April 350, 1958 was discovered. Consequently,
tne published annual report to stockholders for the fiscal year
ended April 30, 1959 not only showed the profit and loss statement
for the fiscal year ended April 30, 1958, but restated this profit
and loss statement (over the one formerly published) to eliminate
this arbitrary change in depreciation. Similarly the financial
Statements which are reouired by law to be filed with the Securities
and Exchange Commission are being amended to restate the 1958
depreciation provision as comouted with the rates consistently in

used in prior years.

Schedule J-l
Page 4

The company is similarly amending its U. S. corporation
income tax return for the fiscal year ended April 30, 1958 to
claim as a deduction a provision for depreciation as computed with
the rates consistently used in prior years.

The company believes that the depreciation rates initially
established at the time of the organization of the company by an
outside firm of consulting engineers, as agreed to by the U. S.
Treasury Department in subsequent years and as reflected in the
amended U. S. corporation income tax return fer the fiscal year
ended April 30, 1958 represent a reasonable allowance for wear,
tear and obsolescence of the property used in the trade or business
as provided by Section 167 of the Internal Revenue Code of 1954,

In equating the reasonableness of these rates considera-
tion should be given to the fact that the major portion of the
company's fixed assets were acquired from other existing companies
and therefore these assets were used rather than new when acquired,
A brief description of these acquisitions prior to 1959 follows.

PECOS VALLEY

At the time of the organization of the company, substanti-
ally all of the alfalfa milling facilities of the Pecos Valley
Alfalfa Mill Company were purchased. The statemerts of that company
contained in the prospectus filed by National with the SEC in
1946 indicate that these assets were approximately 28%/depreciated
by 1946.

Other information contained in the prospectus indicates
that one of the nine locations acquired was originally opened in
1910 and that a second location had been constructed prior to 1926.
The remaining seven plants were originally constructed during the
period between 1926 and 1942 according to the prospectus.

Schedule J-l
Page 5 .

DENVER ALPALFA DIVISION

At the same time as the Pecos Valley acquisition, the
company purcnased the assets of the Denver Alfalfa Milling and
Products Division of the Ralston Purina Company. Financial
statements of this division contained in the 1946 prospectus indicate
that these assets were approximately 55 per cent depreciated at the
time of purchase by National.

Other information contained in the prospectus inmiic tus
that one of the mills purchased by National was built in 1908,
By 1926 the Denver Company was operating sixteen plants. At the
time of the sale to National in May 1946 the Denver Company was
operating twenty-five plants.

C4RO-GREEN, INC,

In 1954 the company purchased a storage facility in Omaha,
Nebraska-from Caro-green, Inc. Discussion with Kenneth Toma, company
manager of the Omaha plant, revealed that the original elevator
building was constructed in 1917 and that an addition to the
building was made in the late 1920's. The conveyor system and
certain other equipment in the elevator dates back to 1917 but a
fairly substantial portion of tne machinery and equipment was in-
stalled in 1952. Approximately $546,000 of the purchase price was
allocated to the buildings.

CEROPHYL LABORATORIES, INC.

A storage facility and an alfalfa mill at Midland, Kansas
and three other alfalfa mills in Kansas and Missouri were purchased
from Cerophyl Laboratories, Inc. in 1954.

The following information as to the approximate age of
these plants was obtained from W. Alex Donnelly, president of
National (formerly president of Cerophyl Laboratories, Inc.).

Schedule J-l
Page 6
The production facilities and dry storage warehouses at
Micland, Kansas were between nine and fifteen years old at the

time of accuisition by National and a number of the storage tanks
were five or more years old.

The dehydrator drums and mill buildings at the other
taree mills were all eight to nine years old at the time of ac-
cuisition by National,

The company has made a study of the dispositions of
buildings, machinery and harvesting equipment for the fiscal years
ending April 50, 1954 through April 30, 1959 to determine tne
average period that the essets were held prior to disposition.

The method used in accumulating the data presented in
the table below is as follows:

(1) “The company's detailed listings of fixed asset dispositions
were obtained,

(2) Tne abnormal dispositions from fire, windstorm, and sale
to affiliated companies were deleted from the listings.

(3) The holding period to the nearest one-half yeer was
multiplied times the cosi of the asset to obtain tae
number of dollar-years that the asset was held.

(4) Tne total of the dollar-years for each year wes accumulated
and divided by the total cost of the asset dispositions for
the year to arrive at the weighted-average life of the
assets retired.

A summary of this study follows:

WEIGHTED-AVERAGE LIFE OF FIXED
ASSET_DISPOSITIONS
Period
Piscal Fiscal Fiscal Fiscal Piscal Piscal 5/1/53-
1954 1955 1956 1957 1958 1959 4/30/59

Buildings tok 6.9 9.2 9.2 11.0 6.8 7.6
Machinery 4.9 7.4 8.0 7.8 tee 5.7 6.7
Harvesting equin.5.9 rp 6.9 8.2 8.5 7.6 Ye

The following table will indicate the dollar amounts of
the assets included in the study and also the aggregate gain or
loss from these sales during the period May 1, 1953 through
April 30, 1959.

Cost of Assets Gain (Loss)
Sold on Sale
Buildings $1,290,292 $(155, 696)
Machinery 1,126,144 (62,4135)
Harvesting equipment 326,645 40,110
Total $2,745,081 $(177,993)

A comparison of the loss on sale of buildings for the
period with the cost of these buildings indicates that approximately
12 per cent more depreciation should have been taken in total on the
buildings. When this fact is related to the previous table indicating
a weighted-average age of 7.6 years at the time of retirement, whicn
is approximately 25 per cent cf the life used by the company, it can
be scen that an increase in the depreciation rate of between 40 and
SO per cent would be justified. Since the company has used a 3.5
per cent rate, this would indicate that a rate of approximately 5
per cent would be more appropriczte.

A similar conclusion can be reached in connection with the
machinery. In tnis instance, an additional 5.5% of depreciation would
be needed to eliminate the loss. The equipment had been held an
average of approximately 45 per cent of the life assigned by the

41

Schedule J-l
Page 3

company. An increase in depreciation rate of approximately 12
per cent would be in order. This would result in an increased
rate frou the 6-2/3 per cent used by the company to approximately
7-1/2 per cent.

In the case of harvesting equipment, the above study
indicates that there should be an increase in the useful life
of this equipment from the 5S years used by the company to
approximately 7 years.

One factor that has not been considered in the preceeding
paragraphs is tne factor of inflation which during the period of the
study’ was such that gains reasonably could have been expected from
tne sales of fixed assets.

When all or these factors are considered, the company
firmly believes that the depreciation rates consistently used in
prior years and in this amended U. S. corporation income tax return
for the fiscal year ended April 30, 1958 result in a reasonable
allowance for wear and tear and obsolesence as provided by Section
167 of the Internal Revenue Code of 1954,

Schedule K

NATIONAL ALFALFA DENYDRAVING AND MILLING COMPANY
Lamar, Colorado

Amended Retur:.

Year Ended April 50, 1956

OTHER DEDUCTIONS

Other deductions per original return $324,268.04
Add
Amortization of discount on debentures issued - 37,037.00

see Scnedule K-1l

Loss on disposition of Denver Alfalfa assets - 1,742.90
see Schedule K-2

$565,067.04

enema

Jyh ag POET ES

fon

i

bes

eeu des

Schedule K-1l

NATIGNA:. ALPALRA’DEPYDRAT!ID G AND MILLING COMPANY

Lamar, Colorado

Amended U. S. Corporation Income Tax Return

Year Ended April 30, 1956

STATEMENT RE AMORTIZATION OF DISCOUNT
ON DESENTURES ISSUED

On. July 23, 1957 the preferred stockholders of the company
agreed to exchange their $50 par preferred stock for 18-year 5% sinking
fund debentures. This exchange was treated as a taxable-exchange by
the preferred stockholders, as required by the Internal Revenue Code
of 1954.

At the time of the exchange the fair market value of the
preferred stock of the company was approximately $33 per share. This
fair market value is measured by the average of the daily bid and asxed
prices of the preferred stock for vuhe period July 15 to July 23, 1957,
inelusive. Since this was a taxable exchange, the gompany is entitled
to amortize the difference between the principal amount of the 16-year
sinking fund debentures ($50 per share) and the fair market value of
the property received in exchange (preferred stock with fair market
value of $33 per share), This is as provided by section 1.61-12 of the
Internal Revenue Code Regulations. Also see: American Smelting &
Refining, Company v. U. S. 150 Feb. 2d 883 and Southern Fertilizer &
Chemical Cc. v. Edwards, 55-1 U.S.T.C. Par. 49155.

Accordingly the company is amending its U. S. corporation

2

income tax return for the fiscal year ended April 30, 1958 to include
a deduction in the amount of $37,057 representing the pro rata portions
of the total unamortized bond discount.

44

NATIONAL ALFALFA DEHYDRATING AND MILLING COMPANY
Lamar, Colorado
U. S. Corporation Income Tax Return
Year Ended April 30, 1958

STATEMENT RE LOSS ON DISPOSITION OF
PECOS VALLEY AND DENVER ALFALFA ASSETS

Pecos Valley Assets

On May 17, 1948, National Alfalfa Dehydrating and Milling
Company purchased for $1,600,000 in cash, certain assets from the
Pecos Valley Alfalfa Mill Company. These assets consisted of 9
plants for processing alfalfa and related equipment.

At the date of acquisition National Alfalfa recorded on
its books of account an amount of $546,810 (subsequently adjusted
to $524,433) as "excess of purchase consideration paid over ancunts
at which plant is recorded in the accounts.” This amount was
amortized for book purposes until 1954 when the unamortized balance
was charged to earned surplus. None of this amount has been
claimed as a deduction in any year in the company’s U. S. corporation

income tax returns.

Since the acquisition of these properties, there have
been certain technological changes in the alfalfa industry which
have rendered the Pecos Valley properties obsolete and the company
has since disposed of substantially all of these properties acquired

in 1948.

worign St ese

Secnedule K-2
Page 2 of 4

a ee

At date of acquisition the 9 plants acquired from Pecos

Valley had a total capacity of 108,000 tons and in the fiscal

year ended April 30, 1959, the only remaining operating plant

acquired with this acquisition produced only 3,141 tons.

In the first year of their operation while under the
ownership of National Alfalfa, sun-cured alfalfa accounted for
about 85% of the total production, whereas, during the fiscal
year ended April 30, 1959, it accounted for about only 1% of the
total production. A major portion of the plants acquired from
Pecos Valley were geared primarily to the sun-cure type of operation.
Purthermore, in the years following World War II, the plants in
Arizona, Idaho and New Mexico were able to ship their production
to the southeastern part of the United States by means of ocean
transportation and, therefore, the freight costs were low. When
these plants were no longer able to ship in this manner, the over-
land freight costs to the eastern markets were too high to permit
profitable operations. Also a number of the plants acquired from
Pecos Valley were disposed of because they were located in poor
producing areas. The company is, therefore, entitled to claim as
a deduction in the year of sale the pro rata portion of the cost
of these plants not previously claimed as a deduction. The summary

of this pro rata cost follows:

524-785 O- 73-4

46
cc
Schedule K-2
Page 3 of 4
Pro rata portion of
cost not previously
Plants sold in deducted applicable
fiscal year ended to plants sold
4/30/52 $ 63,036#
4/30/55 131,109
4/30/56 54,279
4/30/57 Sl wee
4/30/59 147,156

*This year is barred by statute of limitations.

Denver Alfalfa assets

Similarly on May 22, 1946 National Alfalfa purchased twenty-
five alfalfa plants from the Denver Alfalfa Milling and Products
Division of the Ralston Purina Company for $3,875,000. At the date
of acquisition National Alfalfa recorded on its books of account an
amount of $855,549 (subsequently adjusted to $757,544) as “excess of
purchase consideration paid over amounts at which plant is recorded
in the accounts.” National Alfalfa has similarly sold some of these
plants and is claiming as a deduction in the years of sale the pro
rata portion of the cost of these plants not previously claimed as a

deduction. The summary of this pro rata cost follows:

“=
47
Schedule K-2
Page 4 of 4
Pro rata portion of
cost not previously
Plants sold in deducted applicable
fiscal year ended to plants sold
4/30/48 $16,8938
4/30/54 76#
4/30/55 19,999
4/30/56 31,287
4/30/57 2,045
4/30/56 : 1,742
4/30/59 81,363

*This year barred by statute of limitations.

Schedule M

NATIONAL ALPALFA DEHYDRATING AND MILLING COMPANY
Lamar, Colorado

Amended U. S. Corporation Income Tax Return

Year Ended April 30, 1958

RECONCILIATION OF TAXABLE INCOME AND
ANALYSIS OF CHANGES IN EARNED SURPLUS

Line
tio,
Net loss per books $(327,508.35)
i0 Unallowable contri/utions due to loss 442.00
ll Federal income tax 243.91
is Premiums on insurance on officer's life 3,421.25
6 Accrual of refundable federal income tax 1957 (167,389.53)
6 Overaccrual of income taxes 1957 - (36,723.17)
6 Depreciation allowable in excess of La
amount per books (169, 758.29)
6 Amortization of discount on debentures
issued - Schedule K-1 (37,037.00)
Loss on disposition of Denver Alfalfa
assets - Schedule K-2 (1,742.00)
2 Loss for tax purposes $(736, 051.03)
rm Surplus at end of preceding taxable :
year - $ 95,633.91
Net loss per books ' _ (327,508.35)
2. Deficit at end of taxable year $(251, 874.44)

Schedule Y

NATIONAL ALFALFA DEHYDRATING AND MILLING COMPANY
Lamar, Colorado

Amended U. S. Corporation Insome Tax Return
Year Ended April 30, 1958

DISPOSITION OF NET OPERATING LOSS DEDUCTIONS OF PRIOR YEARS

Year Ended April 530,
1954 1955 1956 1957

Taxable income (loss) per original return $ 71,550.85 $481,521.08 $(775,290.87) $556,381.37
Adjustments - Loss on disposal of Pecos Valley
‘ assets - Schedule K-2 (131,109.00) (54,279.00) (37,130.00)
Loss on disposal cf Denver
Alfalfa assets - Schedule K-2 (19,999.00) (31,287.00) (2,045.00)

Adjusted taxable income 71,550.85 330,413.08 (860, 856.87) 517,206.37
Carry back of 1956 loss to 1955 and 1954 (71,350.85) (350,413.08) 401,765.93
Carry forward of unused 1956 loss to 1957 459,092.94 (459,092.94)
Net remaining income to which 1958 loss is

partially applied -0O- -0- -0- $ 58,115.43

SripuLaTION Exuisit 9-I

Corporation Income Tax Return (Form 1120) for Tazable
Year Ending April 30, 1967.
(49)

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0296%3A01. Public record. Not legal advice.