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July 18, 1961


The opinion of the court was delivered by: GRIM

This is an action to recover corporate income tax paid because the taxing authorities disallowed a deduction claimed for interest which the taxpayer paid on its debentures.

For an understanding of this case there must be a recital of some corporate history.

 William H. Luden, Inc., a Pennsylvania corporation, manufactured and sold cough drops and candies. The manufacturing plant was, and still remains, in Reading, Pennsylvania.

 In 1926 or 1927 Daniel W. Dietrich purchased all or substantially all of the outstanding stock of William H. Luden, Inc. Shortly thereafter the name of the corporation was changed to Luden's, Inc. *fn1"

 In 1929 a new corporation, Food Industries, Incorporated, was formed under the laws of Delaware. Daniel W. Dietrich transferred all his Luden's, Inc., stock to Food Industries, Incorporated, in exchange for half of the latter's common stock. At the same time other members of the Dietrich family transferred stock they held in four other corporations to Food Industries, Incorporated, in exchange for all of its preferred stock and the remaining half of its common stock. The recipient of the latter was H. Richard Dietrich, brother of Daniel W., so that the two brothers owned all the common stock of Food Industries, Incorporated. The preferred stock of the corporation was held by three Dietrich brothers of the 'older generation', the father and uncles of the two common stockholders. This preferred stock had voting rights only on default on three successive dividends.

 In 1951 the original Luden's, Inc., *fn2" the manufacturing company, had outstanding 17,000 shares (of 35,000 authorized) of $ 10 par value stock, all owned by Food Industries, Incorporated. Luden's, Inc. then had outstanding no preferred stock and no bonds, debentures, or other long-term indebtedness.

 In 1951, in order to solve corporate tax problems with the state of Pennsylvania, Food Industries, Incorporated, was merged into Luden's, Inc., the subsidiary corporation. *fn3" The capital structure of Luden's, Inc., the surviving corporation, was thereupon changed to 110,000 shares of $ 100 par value common stock, held half by Daniel W. Dietrich and half by H. Richard Dietrich, and 35,000 shares of $ 100 par value 6% Preferred stock, held by various family trusts, the 'older generation' being then deceased. In 1953 another 10,000 shares of preferred stock was issued.

 Following the merger, the assets of the surviving corporation consisted of a portfolio of investment securities formerly held by Food Industries, Incorporated, and the plant and manufacturing business formerly held by the subsidiary. This business was operated as the Luden's division of the surviving corporation.

 In June of 1954, the name of the surviving corporation, Luden's, Inc., was changed to The Dietrich Corporation. At the same time a new corporation, Luden's Inc., was formed under the laws of Pennsylvania as a subsidiary of the surviving corporation. It is this subsidiary which is the taxpayer and plaintiff in this case. The assets of the surviving corporation's manufacturing division, including the right to use the name Luden's, trademarks, and good will, were transferred to the taxpayer in exchange for all of the taxpayer's common stock and debentures, as follows: Parent Corporation's Additional Cost Adjusted Book Value by Appraisal n4 Figures ///////////-- ////////////////-- //////-- Cash $ 100,000.00 $ 100,000.00 Marketable Securities 24,811.94 24,811.94 Accounts Receivable 340,456.34 340,456.34 Inventories 942,662.94 942,662.94 Investments 123,493.06 123,493.06 Plant and Equipment 942,981.71 $ 1,883,069.85 2,826,051.56 Deferred Charges 9,951.83 9,951.83 $ 2,484,357.82 $ 4,367,427.67 Accounts Payable $ 282,551.56 282,551.56 Accrued Liabilities 84,876.11 84,876.11 $ 367,427.67 $ 367,427.67 Excess of Assets over Liabilities $ 2,116,930.15 $ 4,000,000.00


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