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Barnes Group v. United States

decided: April 5, 1989.

BARNES GROUP INC., PLAINTIFF-APPELLANT,
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLEE



Appeal from a judgment of the United States District Court for the District of Connecticut, M. Joseph Blumenfeld, Judge, dismissing complaint for refund of corporate income taxes. See 697 F. Supp. 591 (1988). Vacated and remanded.

Feinberg, Kearse, and Winter, Circuit Judges.

Author: Kearse

KEARSE, Circuit Judge

Plaintiff Barnes Group Inc. ("Barnes") appeals from a final judgment of the United States District Court for the District of Connecticut, M. Joseph Blumenfeld, Judge, dismissing its complaint seeking a refund of corporate income taxes paid for its 1978 and 1979 tax years. The district court granted a motion by defendant United States to exclude from evidence certain contracts on which Barnes intended to rely at trial, and subsequently granted summary judgment in favor of the government. On appeal, Barnes contends that the court committed procedural error in excluding its contract evidence and committed various substantive errors in reaching the conclusion that Barnes was not entitled to a refund. For the reasons below, we conclude that the court should have permitted the submission of the contract evidence and we vacate the judgment and remand for further proceedings.

BACKGROUND

During 1978 and 1979, Barnes, a manufacturer of precision springs and distributor of various repair parts, acquired the stock of three closely held distributors of various automotive parts. Each of the acquired companies depended for its success on certain key employees who had close personal contacts with a small group of customers. As a condition of the acquisitions, Barnes required that each about-to-be-acquired company execute employment contracts with its key employees, obligating the employees (a) to work for specified periods after the company was acquired by Barnes, and (b) not to compete during that period plus an additional two years (the "key contracts"). According to Barnes, the key contracts were executed several months before the acquisitions were consummated.

When Barnes acquired the stock of the three companies, the key employees became employees of Barnes, and Barnes liquidated the companies in accordance with 26 U.S.C. ยงยง 332 and 334(b)(2) (1976), thereby receiving all of the acquired companies' assets. On its 1978 and 1979 income tax returns, Barnes claimed deductions for amortization attributable to the key contracts on the theory that they were amortizable assets received in liquidation. The Internal Revenue Service ("IRS"), however, disallowed, inter alia, the claimed deductions for the key contracts, treating the contracts as part of goodwill. Barnes paid the deficiencies assessed against it and brought the present suit for a refund.

A jury trial on Barnes's claims was scheduled to commence on April 12, 1988. On April 11, the government filed a motion in limine seeking to exclude evidence relating to the value of the key contracts. The district court heard argument on the motion on April 12. The government argued in part that no deduction was allowable with respect to these contracts because they were not in fact assets of the acquired companies, stating that the "agreements specifically stated in them that they would come into effect only if Barnes bought that corporation"; thus, it argued, each "agreement was not even in existence at the time [Barnes] acquired these corporations . . . ." The government's motion was not accompanied by copies of the key contracts or by any affidavits quoting those contracts.

Barnes's counsel, noting that the government's motion had been served only the day before, argued that the key contracts had been entered into, albeit at Barnes's insistence, several months prior to Barnes's acquisition of the stock and hence were assets of the acquired companies before Barnes acquired them. The court apparently rejected the suggestion that the key contracts predated the acquisitions, and it refused to receive copies of the contracts:

THE COURT: . . . So, when they [i.e., Barnes] acquired the business, and including whatever contractual or rights like they had to continue employment of these fellows, they did not acquire the right to stop them from competing; is that right?

MR. YAVIS [Barnes's counsel]: That is not right.

THE COURT: Oh, they were obligated not to compete before Barnes bought them?

MR. YAVIS: Yes.

THE COURT: But not by ...


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