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April 27, 1964

KOPPERS COMPANY, Inc., Plaintiff,
UNITED STATES of America, Defendant

The opinion of the court was delivered by: MARSH

This is an action for recovery of federal income taxes and interest in the amount of $ 25,089.41, paid by Koppers Company, Inc. (Koppers) as transferee of National Wood Treating Corporation (National) with respect to National's fiscal year ended April 30, 1956, together with interest according to law. (Pretrial stipulation, P I.)

In our opinion, the plaintiff is entitled to a recovery.

 The parties agreed upon the following factual issue to be litigated: Whether National, after the acquisition of its stock by Koppers in July, 1955, continued to carry on a trade or business substantially the same as it conducted prior to that acquisition. (Pretrial stipulation, P II-1.)

 If the affirmative of this issue were established, plaintiff would be entitled to carry over a claimed pre-acquisition net operating loss pursuant to § 382, 26 U.S.C.A. *fn1"

 However, the defendant attacked the amount of National's pre-acquisition net operating loss and presented a second factual issue: Whether National incurred a deductible net operating loss of $ 47,371.53 *fn2" in its fiscal year ended April 30, 1955 in accordance with § 172, 26 U.S.C.A.

 At the pretrial conference, the plaintiff objected to the interposition of the second issue for the following reasons: (1) it was raised in violation of the Order of Court Fixing Pretrial Procedure; *fn3" (2) the defendant was barred from raising the issue by the statute of limitations, 6501(a), 26 U.S.C.A.; *fn4" (3) review of National's 1955 return is prohibited by § 6406, 26 U.S.C.A. *fn5"

 In support of its first objection, the plaintiff pointed out that such an issue theretofore had not been mentioned although eight years had elapsed since National's 1955 tax return had been filed, that over one year had elapsed since the claim for refund was made, and that over six months had elapsed since suit was filed. *fn6"

 Notwithstanding, the court granted the defendant the right to include the second issue and allowed six more weeks for additional discovery. The court requested that the pretrial stipulation be amended by the parties after the discovery was completed. *fn7"

 The additional discovery was completed, but the pretrial stipulation was not amended which gave rise to further objections to issue No. 2 by the plaintiff at the trial. *fn8"

 The trial objections were based on the failure of the defendant to comply with the pretrial order to amend the pretrial stipulation after the additional discovery had been completed, and on the ground that the statute of limitations barred the issue.

 In our opinion, the plaintiff's objections should be overruled. *fn9" Of course, after the additional discovery was completed, the parties jointly should have amended their pretrial stipulation to specify the amount of the net operating loss to be litigated, and, perhaps, the court was remiss in failing to insist upon such an amendment before trial in order that issue No. 2 might have been formally narrowed. However, we are satisfied that issue No. 2 was effectively narrowed not only at the conference but at the trial itself.

 At the conference, defendant's counsel stated that it was contesting only a 'specific portion' of the $ 47,371.53 net operating loss, which portion he described as 'extraordinary selling expenses, some $ 7,300.00, more or less, of which is alleged to have been incurred in the alleged loss year' (i.e., the fiscal year ending April 30, 1955), and 'some $ 20,700.00, more or less, which was alleged to have been incurred in prior years, that is, years ended April 30, 1954 and earlier.' *fn10"

 At trial defendant's counsel further narrowed that issue. He stated:

 'The testimony to be introduced today is going to show that some $ 20,000 ($ 20,734.17) of that $ 28,000 ($ 28,089.17) was an expense which should have been accrued in prior years; that is, in 1951 through 1954.

 'It is our contention that these expenses not having been accrued in those years, the deduction is lost and only the current portion of the loss of expense can be properly claimed as a deduction.'11(Emphasis ours.)

 Subsequently, he stated:

 'We do in the first instance question so much of that net operating loss as represents a payment in the fiscal year ended April 30th, 1955 for extraordinary selling expenses which should properly have been accrued in prior years, and I think at this time it is only fair to point out that of this amount of some $ 28,000 of expenses, we understand that perhaps some $ 7,300 represents an expense incurred and properly accrued in the fiscal year ended April 30th, 1955, and that the balance -- some $ 20,000 -- which represents an alleged expense payment on behalf of earlier years in not a proper expense. It is an expense which should have accrued in the earlier years * * *.'12(Emphasis ours.)

 Therefore, although in the unamended pretrial stipulation, the defendant broadly contended in issue No. 2 that a deductible net operating loss of $ 47,371.53 was not incurred by National, and put plaintiff to its proof, at trial it effectively narrowed that issue to whether a portion of the net operating loss, comprised of certain itemized deductions totalling $ 20,734.17, was properly deductible. *fn13"

 From the evidence, stipulations, and exhibits, the court makes the following:


 1. The plaintiff, Koppers Company, Inc., a Delaware corporation with its principal place of business in this judicial district, is the transferee of all the stock of National Wood Treating Corporation, a Delaware corporation, which at all times pertinent to this ...

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