Calavo, Inc., and Calavo Growers of California, Successor to Assets and Liabilities of Calavo, Inc. v. Commissioner of Internal Revenue

This case presents the question whether additions to a bad debt reserve may be made on the basis of circumstances rendering precarious (but not yet worthless) a specific item of indebtedness. The commissioner, ruling that such additions to reserve were not reasonable, determined deficiencies in income tax of Calavo, Inc., for the taxable years ending September 30, 1953, and September 30, 1955. The Tax Court upheld the commissioner and the taxpayer has petitioned for review.

Calavo Growers of California is a California corporation composed of avocado growers operating on a cooperative basis. Calavo, Inc., was a California corporation during and prior to the year 1955 and was a wholly owned subsidiary of Calavo Growers. It was engaged in the business of marketing the produce of its parent corporation and it also operated as commission sales agent for various other growers and shippers, selling pineapplés, limes, dates, figs, and other produce in addition to avocados. It kept its books on an accrual method of accounting.

On September 30, 1965, a statutory merger (a non-taxable transaction under § 332(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 332 (a), was effectuated…