Opinion
Docket No. 4223.
1945-04-9
CLYDE BACON, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Arthur H. Kent, Esq., and J. N. Casella, C.P.A., for the petitioner. E. A. Tonjes, Esq., for the respondent.
1. Petitioner issued securities, called ‘debenture certificates,‘ in which it acknowledged itself indebted to the holder for the repayment of the principal at a definite due date, with interest at 6 percent, payable semiannually, with the option to defer interest payments for four years if petitioner's cash position should so warrant, but delinquency thereafter making the principal immediately due and collectible, the securities being subordinate to creditors but superior to holders of common stock, the only stock issuable under petitioner's articles of incorporation. The securities were created for proper business reasons. Held, the debenture certificates are evidences of indebtedness and interest payments thereon are deductible from gross income.
2. Pursuant to a plan of reorganization, individuals transferred certain assets to petitioner, the new corporation. The old corporation, of whose stock the individuals were the owners (except a nominal share) in practically the same proportion as their ownership of the individual assets, transferred its assets, excepting minor items, to the new corporation. The new corporation then issued its stock and debentures to the individuals in exchange for the assets so received. Held, no gain or loss may be recognized in the transaction and hence the basis of such assets to petitioner is their stipulated cost to transferors for the purpose of computing petitioner's excess profits and declared value excess profits taxes. Sec. 112(b)(4), I.R.C. Arthur H. Kent, Esq., and J. N. Casella, C.P.A., for the petitioner. E. A. Tonjes, Esq., for the respondent.
The respondent determined deficiencies of $6,330.87, $2,554.25, and $15,539.64 in the petitioner's income tax, declared value excess profits tax, and excess profits tax liabilities, respectively, for the taxable year ending March 31, 1943.
The issues originally pleaded in the petition, supplemented by those raised by the respondent's amended answer, are:
(1) Whether certain debentures issued by the petitioner were in fact stock or were evidences of indebtedness;
(2) Whether or not the transaction whereby the petitioner acquired certain farm lands, equipment, sheep, and other property, was a transaction upon which gain or loss is recognized;
(3) If the second issue is decided affirmatively, there arises the question of the fair market value of such properties at the date of acquisition, for the purpose of determining the proper amount of the petitioner's equity invested capital.
FINDINGS OF FACT.
Certain facts were stipulated and admitted in the pleadings. The portions thereof relevant to the issues are as follows:
The petitioner is a corporation organized under the laws of Idaho and has its principal office at Twin Falls, Idaho. It filed its income tax return, declared value excess profits tax return, and excess profits tax return for the taxable year with the collector of internal revenue for the district of Idaho. The petitioner kept its books and prepared its returns on the accrual basis.
The petitioner was incorporated March 5, 1942, with a capital stock of $30,000, consisting of 30,000 shares of the par value of $1 each. The petitioner's bylaws stated that its business was livestock, farming, and other kindred occupations, as set forth in its articles of incorporation, and also declared its capital stock was the same as that stated in those articles.
The minutes of a meeting of the petitioner's board of directors held March 20, 1942, record the following:
The matter of the corporation, Clyde Bacon, Inc., taking over the assets of B. and G. Land Company was then discussed, particularly the value of the assets of said B. and G. Land Company. Likewise the value of the sheep owned by T. C. Bacon, together with the camp equipment, automobiles, trucks, machinery and the like owned by the said T. C. Bacon was discussed and at the conclusion of the discussion, Director Clyde R. Bacon offered the following Resolution:
WHEREAS, T. C. Bacon is the owner and holder of 1500 shares of the capital stock of B. and G. Land Company; and
WHEREAS, Alice C. Bacon is the owner and holder of 1499 shares of the capital stock of B. and G. Land Company, all of which said shares of capital stock are the community property of the said T. C. Bacon and Alice C. Bacon, husband and wife; and
WHEREAS, Clyde R. Bacon is the owner and holder of 1 share of the capital stock of said B. and G. Land Company; and
WHEREAS, The above described shares of capital stock constitute all of the authorized, issued and outstanding capital stock of said B. and G. Land Company; and
WHEREAS, The assets of said B. and G. Land Company appear to have a reasonable market value of $177,641.64 and accordingly the above described 3000 shares of the capital stock of said B. and G. Land Company have a reasonable and fair market value of $177,641.64; and
WHEREAS, The said T. C. Bacon, Alice C. Bacon and Clyde R. Bacon, being all of the stockholders of said B. & G. Land Company desire to transfer and surrender to B. & G. Land Company all of said stock in consideration for the transfer to Clyde Bacon, Inc., a corporation, by said B. and G. Land Company of all of the assets of said corporation; and
WHEREAS, T. C. Bacon is now the owner and holder of approximately 12,556 head of sheep together with sheep camp equipment, automobiles, trucks, lambing sheds, machinery and other personal property used in carrying on his farming and livestock business, together with a personal checking account in the First Security Bank of Jerome, Idaho, in the amount of $6,804.97, all of which said assets and property are the community assets and property of T. C. Bacon and Alice C. Bacon; and
WHEREAS, The said T. C. Bacon and Alice C. Bacon have personally incurred considerable expense in connection with the handling of said 12,556 head of sheep and are about to receive an advance payment on the sale of the 1942 wool clip amounting to $12,700.00 and expect to personally retain said sum of $12,700.00 to reimburse them for the expenses paid by them from January 1, 1942 to March 31, 1942; and
WHEREAS, The aggregate fair market value of the assets of said B. and G. Land Company which consist of farm and range lands, is the sum of $177,641.64 and the aggregate fair market value of the above described personal property owned by the said T. C. Bacon and Alice C. Bacon is the sum of $122,358.36, or a total of $300,000.00; and
WHEREAS, The said T. C. Bacon and Alice C. Bacon, the owners of the above described community property and Clyde R. Bacon, the owner of the above described one share of the capital stock of said B. and G. Land Company, have heretofore offered and do now offer to cause all of the assets of the said B. and G. Land Company to be conveyed to Clyde Bacon, Inc. and do now offer to sell and convey to Clyde Bacon, Inc. the above described 12,556 head of sheep, camp equipment and other personal property herein described, except an interest in the wool on said sheep represented by an advance payment to be made on the purchase price of said wool in the amount of $12,700.00, in consideration of the issuance and delivery of 30,000 shares of the capital stock of Clyde Bacon, Inc. of the par value of $30,000.00 and its debenture certificates in the aggregate principal amount of $270,000.00 bearing interest at the rate of six per cent per annum, maturing April 1, 1967; and
WHEREAS, Clyde Bacon, Inc. is willing to accept and does hereby accept said offer and in consideration of a transfer to it of the above described personal property and assets is willing to issue or cause to be issued and delivered all of its capital stock in the amount of $30,000.00 and its debenture certificates in the amount of $270,000.00 to the said T. C. Bacon, Alice C. Bacon, and Clyde R. Bacon in such respective amounts as shall conform to the values of the properties respectively conveyed by said persons:
NOW, THEREFORE, BE IT RESOLVED That the Directors of Clyde Bacon, Inc. do hereby adjudge and declare that the assets of said B. and G. Land Company, together with the above described 12,556 head of sheep, less the interest in the 1942 wool crop on said sheep represented by the advance payment of $12,700.00, camp equipment and other personal property hereinabove described now possesses an actual value of $300,000.00 and that said property is necessary for the business of Clyde Bacon, Inc.; and
BE IT FURTHER RESOLVED, That Clyde Bacon, Inc. does hereby accept the above described offer of the said T. C. Bacon, Alice C. Bacon and Clyde R. Bacon to cause the assets of said B. and G. Land Company to be conveyed to said Clyde Bacon, Inc. and to sell, assign and convey to it the above described 12,556 head of sheep, less the interest in the 1942 wool crop on said sheep represented by the advance payment of $12,700.00, camp equipment and other personal property hereinabove described in consideration of $30,000.00 worth of the capital stock of Clyde Bacon, Inc. which it hereby promises and agrees to issue or cause to be issued and delivered to T. C. Bacon, Alice C. Bacon and Clyde R. Bacon, the certificates evidencing said stock to be issued and delivered by Clyde Bacon, Inc. to T. C. Bacon, Alice C. Bacon and Clyde R. Bacon to be in the following respective amounts:
1 certificate in the amount of 15,000 shares to be issued to T. C. Bacon;
1 certificate in the amount of 14,900 shares to be issued to Alice C. Bacon; and
1 certificate in the amount of 100 shares to be issued to Clyde R. Bacon;
and in consideration of $270,000.00 worth of its debenture certificates bearing interest at the rate of 6 per cent per annum maturing April 1, 1967, which it hereby promises and agrees to issue or cause to be issued and delivered in the following manner:
5 debenture certificates, each in the principal sum of $12,000.00 and 5 debenture certificates, each in the principal sum of $15,000.00 made payable to T. C. Bacon and 5 debenture certificates, each in the principal sum of $12,000.00 and 5 debenture certificates, each in the principal sum of $15,000.00 made payable to Alice C. Bacon, all of which said debenture certificates are to be the community property of the said T. C. Bacon and Alice C. Bacon.
The B. & G. Land Co., hereinafter called B. & G., was organized April 2, 1928, and owned farm and range lands. On March 23, 1942, minutes of the stockholders of B. & G. record the following:
T. C. Bacon, President, of the corporation then stated that he, Alice C. Bacon and Clyde R. Bacon had heretofore organized a corporation known as Clyde Bacon, Inc., with a capitalization of $30,000.00 for the purpose of conducting the farm and livestock business, a part of which has been conducted by B. and G. Land Company and that said Clyde Bacon, Inc. desires to acquire the farm and grazing lands now constituting the assets of this corporation. He also stated, among other things, that B. and G. Land Company owned in addition to the farm lands and grazing lands hereinabove referred to approximately 1290 bags of beans and a few other items of personal property of inconsequential value. A discussion of the business and affairs of B. and G. Land Company was thereupon entered into and at the conclusion of said discussion Clyde R. Bacon offered the following resolution:
‘BE IT RESOLVED That B. and G. Land Company liquidate and wind up its business and affairs by paying all of its debts and obligations and by distributing a liquidating dividend in kind of said 1290 bags of beans to the stockholders of said corporation and otherwise disposing of its other assets.‘
On the same day the minutes of another meeting of the same stockholders record the following:
Minutes of the annual meeting of stockholders held April 1, 1941 were read and approved.
T. C. Bacon, President of the corporation, then stated that he, Alice C. Bacon and Clyde R. Bacon had heretofore and on or about the 11th day of March, 1942 organized a corporation known as ‘Clyde Bacon, Inc.‘ with a capitalization of $30,000.00 for the purpose of conducting the farm and livestock business a part of which has been conducted by this corporation and that said Clyde Bacon, Inc. desires to acquire the farm and grazing lands now constituting the assets of this corporation. He further stated that the stockholders of this corporation believe it advisable to turn back and surrender to this corporation their stock in this corporation and as a consideration for the surrender of said stock to have this corporation make, execute and deliver warranty deeds to said Clyde Bacon, Inc. covering all of said farm and grazing lands. He stated that the assets of this corporation at the present time are of the reasonable market value of $177,641.64 and that the stockholders of this corporation desire to have issued to them stock and debentures of Clyde Bacon, Inc. for the value of said assets, and that he believed it advisable for this corporation to transfer and convey its assets to said Clyde Bacon, Inc. in order to simplify the farm and livestock business to be conducted by the said Clyde Bacon, Inc. T. C. Bacon then read to the stockholders an agreement which had been prepared by Frank L. Stephan, Attorney at Law, of Twin Falls, Idaho relative to transferring and surrendering to this corporation all capital stock of said corporation in consideration of the transfer of the assets of said corporation to said Clyde Bacon, Inc. After the Agreement had been read and discussed Clyde R. Bacon moved the adoption of the following Resolution:
‘RESOLVED that the proposal of T. C. Bacon, Alice C. Bacon and Clyde R. Bacon to transfer and surrender to this corporation all of the issued and outstanding capital stock of B. and G. Land Company in consideration for the transfer to Clyde Bacon, Inc. by this corporation of all of the assets of this corporation consisting of farm and range lands of the market value of $177,641.64 be, and the same is hereby approved.
BE IT FURTHER RESOLVED that the Agreement, hereinafter set out, with regard thereto, which said Agreement is in words and figures as follows; to-wit:
AGREEMENT
WHEREAS, B. and G. Land Company is now and ever since April 2, 1928 has been a corporation organized and existing under and by virtue of the laws of the State of Idaho with its principal place of business at Twin Falls, Idaho, having been capitalized for the sum of $300,000.00 divided into 3000 shares of capital stock of the par value of $100.00 each share; and
WHEREAS, The following stockholders of said B. and G. Land Company owning the number of shares set opposite each respective name, to-wit:
+---------------------------+ ¦T. C. Bacon ¦1500¦shares¦ +---------------+----+------¦ ¦Alice C. Bacon ¦1499¦shares¦ +---------------+----+------¦ ¦Clyde R. Bacon ¦1 ¦share ¦ +---------------------------+
desire to transfer and surrender to B. and G. Land Company all of said stock in consideration for the transfer to Clyde Bacon, Inc., a corporation, by this corporation of all of the assets of B. and G. Land Company; and
WHEREAS, all of the assets of said B. and G. Land Company consist of farm and range lands of the fair market value of $177,641.64;
NOW, THEREFORE, THIS AGREEMENT made and entered into this 23d day of March, 1942, by and between T. C. BACON and ALICE C. BACON of Twin Falls, Idaho, and CLYDE R. BACON of Jerome, Idaho, parties of the first part, and B. AND G. LAND COMPANY, a corporation organized and existing under and by virtue of the laws of the State of Idaho with its principal place of business at Twin Falls, Idaho, party of the second part, WITNESSETH:
That for and in consideration of the sum of $1.00, lawful money of the United States, by each of the parties hereto to the other in hand paid, receipt of which is hereby acknowledged and the surrender of all of the capital stock of B. and G. Land Company, a corporation by said parties of the first part to said party of the second part, it is agreed as follows:
That parties of the first part hereby tender to and surrender back to party of the second part the capital stock of B. and G. Land Company owned by them in the following amounts:
1500 shares owned by T. C. Bacon,
1499 shares owned by Alice C. Bacon, and
1 share owned by Clyde R. Bacon.
The party of the second part hereby acknowledges that said 3000 shares of capital stock of B. and G. Land Company have been surrendered and delivered back to party of the second part and hereby agrees to forthwith make, execute and deliver to Clyde Bacon, Inc., a corporation organized and existing under and by virtue of the laws of the State of Idaho with its principal place of business at Twin Falls, Idaho, Warranty Deeds conveying all of the farm and range lands now owned by it.
IN WITNESS WHEREOF, the parties of the first part have hereunto set their hands and the party of the second part has caused these presents to be executed by its proper officers first duly authorized the day and year last above written.‘ be and the same is hereby approved as to form and the President and Secretary of this corporation are hereby authorized to execute said Agreement for and on behalf of this corporation.
BE IT FURTHER RESOLVED that the President and Secretary of this corporation be and they are hereby authorized and directed to forthwith make and execute Warranty Deeds to Clyde Bacon, Inc. covering said farm and range lands subject to all taxes and assessments now a lien against said range and farm lands, and to deliver said Deeds to said Clyde Bacon, Inc. upon the return and surrender of 3000 shares of the capital stock of B. and G. Land Company to this corporation.
BE IT FURTHER RESOLVED that after said Warranty Deeds have been made, executed and delivered the said capital stock returned and surrendered to this corporation this corporation be dissolved and that the officers and Directors of this corporation make application to the District Court of the Eleventh Judicial District of the State of Idaho, in and for the County of Twin Falls for the dissolution of B. and G. Land Company.‘
The resolution was adopted.
On March 23, 1942, the board of directors of B. & G. adopted a resolution similar to that passed by the stockholders.
On or about March 24, 1942, the petitioner issued 30,000 shares of its common stock of a par value of $30,000 and its debenture certificates in the aggregate principal amount of $270,000, the common stock and the debentures being issued in the manner and amounts and to the persons stated in the resolutions duly adopted by the petitioner's stockholders and directors at the meetings of March 20, 1942.
The debenture certificates were in the following form:
INCORPORATED UNDER THE LAWS OF THE STATE OF IDAHO
CLYDE BACON, INC.
DEBENTURE CERTIFICATE
Date . . .
THIS IS TO CERTIFY THAT CLYDE BACON, INC., hereby acknowledges itself indebted to . . . in the sum of . . . dollars principal payable April 1, 1967, with interest at the rate of 6 per cent per annum, payable annually on or before the 1st day of April of each year. Should the cash position of Clyde Bacon, Inc., not justify the payment of interest in cash on any interest payment date the company shall have a period of four years from the due date of the interest to make payment thereof, but the continued delinquency in the payment of interest for a period of more than four years shall make the principal of this debenture certificate immediately due and collectible. Clyde Bacon, Inc., reserves the right to pay this certificate in full on any interest payment date by paying the principal plus accrued interest, or it may, on any interest payment date or dates, pay any portion of the principal together with the accrued interest.
In the payment of their several claims, all creditors, other than the stockholders of the corporation, shall rank superior to the holders of the debentures, but all holders of debentures shall rank pari passu with each other, and superior to the stockholders of the corporation, with respect to their shares.
. . . Secretary . . . President
SEAL
During the taxable year ended March 31, 1943, there were issued and outstanding documents denominated debenture certificates of the petitioner in the aggregate amount of $270,000, on which the petitioner made semiannual payments of amounts accrued during such year, denominated as interest in the certificates, to the holders thereof at the rate of 6 percent per annum, in a total sum of $16,200. Such payments were made by the petitioner without the adoption of any resolution or other action by the petitioner's stockholders or directors authorizing them. The amount of $16,200 was treated as interest upon the petitioner's books and was deducted as interest from gross income in its corporation income and excess profits tax returns for the taxable year ended March 31, 1943.
On its balance sheet of April 1, 1942, the petitioner showed its ‘debentures‘ as a liability of $270,000 and its ‘common stock‘ under a separate heading as a liability of $30,000.
The transaction in which certain real estate, sheep, equipment, and other personal property were acquired by the petitioner on or about March 24, 1942, by the issuance of 30,000 shares of its capital stock and $270,000 of its documents denominated ‘debenture certificates‘ was treated by the parties to the said transaction as an exchange on which no gain or loss was recognized under the applicable provisions of the Internal Revenue Code.
On or about March 24, 1942, the petitioner issued 30,000 shares of its common stock of a par value of $30,000 and its documents denominated ‘debenture certificates‘ in the aggregate principal amount of $270,000. The common stock of the petitioner was issued to the following persons and in the following amounts:
One certificate to T. C. Bacon in the amount of 15,000 shares.
One certificate to Alice C. Bacon in the amount of 14,900 shares.
One certificate to Clyde R. Bacon in the amount of 100 shares.
Documents denominated debenture certificates of the petitioner were issued to the following persons and in the following amounts:
Five documents denominated debenture certificates each in the amount of $12,000 and five documents denominated debenture certificates each in the amount of $15,000 to T. C. Bacon.
Five documents denominated debenture certificates each in the amount of $12,000 and five documents denominated debenture certificates each in the amount of $15,000 to Alice C. Bacon.
On or about March 24, 1942, the B. & G. Land Co., a corporation, pursuant to instructions from its stockholders, transferred all its assets, consisting of farm and ranch lands and improvements, farm equipment, sheep, cash in the amount of $25,713.60, and other personal property, directly to the petitioner. The adjusted basis of the said assets, including cash, to the transferor on the date of the transfer was $391,764.75. On that date the B. & G. Land Co. had accumulated earnings and profits of $16,240.87.
On or about March 24, 1942, T. C. Bacon and Alice C. Bacon transferred certain property consisting of sheep, bucks, equipment, cash in the amount of $1,804.97, and other personal property, to the petitioner. The adjusted basis of that property to the transferors, including cash, on the date of transfer was $122,358.36.
The petitioner owned no inadmissible assets as defined in section 720(a) of the Internal Revenue Code during the taxable year involved in this proceeding.
On or about March 24, 1942, T. C. Bacon, Alice C. Bacon, and Clyde R. Bacon surrendered all their shares of the capital stock of the B. & G. Land Co., to wit, 1,500 shares, 1,499 shares, and 1 share, respectively, to the B. & G. Land Co. which was dissolved immediately thereafter.
The record discloses the following additional facts:
The 1,500 and 1,499 shares of B. & G. stock recorded as owned by T. C. Bacon and Alice C. Bacon, respectively, constituted their community property. The property transferred by them to the petitioner on or about March 24, 1942, consisted of a herd of sheep and bucks, equipment, and other personal property constituting their community property. The common stock and debentures of the petitioner issued to T. C. Bacon and Alice C. Bacon were also their community property.
The debenture certificates issued by the petitioner constituted evidences of its indebtedness.
The fair market value of all the assets acquired by the petitioner from B. & G. and T. C. Bacon and Alice C. Bacon on or about March 24, 1942, was $504,768.26.
The basis of the property so transferred on or about March 24, 1942, in the hands of the transferors was $514,123.11.
In his amended answer the respondent recited that in his notice of deficiency he computed petitioner's average equity invested capital on the assumption that the transaction of March 24, 1942, was one upon which no gain or loss was recognized. He then alleged that a gain or loss should be recognized on that transaction and that the property transferred thereunder had a value of no more than $300,000.
OPINION.
VAN FOSSAN, Judge:
The first issue presents the question whether the petitioner's debenture certificates are evidences of indebtedness or of a proprietary stock interest in the corporation.
It is a familiar truism in cases of this kind that no universal rule can be laid down to control a decision, but that all facts of record must be considered and given their appropriate respective weight in arriving at a correct conclusion.
In Charles L. Huisking & Co., 4 T.C. 595, we set forth some of the factors commonly relied upon to determine the character of the security. They are: The name; maturity date, if any; dependence of annual payments on earnings; the position of the holder as a creditor of the corporation; and the right to participate in management.
It is well settled that the name given to the instrument is not conclusive, but it can not be ignored. Together with our indicia, it may be persuasive. Commissioner v. Proctor Shop, Inc., 82 Fed.(2d) 792; Jewel Tea Co. v. United States. 90 Fed.(2d) 451; Kentucky River Coal Corporation, 3 B.T.A. 644; I. Unterberg & Co., 2 B.T.A. 274. Here the security is labeled ‘debenture certificate‘ and words common to an evidence of indebtedness are used throughout, such as ‘acknowledge itself indebted,‘ ‘principal,‘ ‘interest,‘ ‘due date,‘ ‘collectible,‘ ‘acquired interest,‘ etc. There is no question that the nomenclature employed is consonant with the terms of an evidence of indebtedness.
A fixed amount to be repaid and a definite maturity date are set forth in the certificate. The payments of ‘interest‘ are definitely fixed at an agreed date and are not dependent on earnings. If the ‘cash position‘ of the petitioner—not its current earnings— does not warrant such payment, it may defer the payment for four years, but if it is in default after four years the entire principal immediately becomes ‘due and collectible.‘ Washmont Corporation v. Hendricksen, 137 Fed.(2d) 306; Commissioner v. O.P.P. Holding Corporation, 76 Fed.(2d) 11, affirming 30 B.T.A. 337.
The rights of the debenture holders are subordinate to those of all creditors but are superior to those of the petitioner's stockholders ‘with respect to their shares.‘ The certificates give the holder no share in the corporation's assets and no share in its net assets upon liquidation. See Commissioner v. O.P.P. Holding Corporation, supra, in which similar facts and the postponement of interest were discussed at length and held not to impair the character of the debenture bonds as evidences of indebtedness. The fact that the certificate holders had no voting right is not determinative, but it is persuasive. Commissioner v. H.P. Hood & Sons, Inc., 141 Fed.(2d) 467.
At the formation of the corporation there was no obligation on the petitioner to issue any definite amount of stock in exchange for the assets received. It had the privilege of determining the character and amount of its securities so exchanged if they were satisfactory to the recipient. The petitioner had the right to replace the stock interest with an evidence of indebtedness, if it so desired. Commissioner v. H.P. Hood & Sons, supra.
The petitioner also presented cogent and proper business reasons for creating the debenture certificates. It is not necessary to enumerate or discuss them, since the face of the instrument affords ample ground for our conclusion that the debenture certificates were evidences of indebtedness and not shares of stock. The petitioner is entitled to deduct the sum of $16,200 paid by it as interest on its debenture certificates during the taxable year.
In the second issue the petitioner contends that the transactions in which it acquired from B. & G. and T. C. Bacon and Alice C. Bacon farm lands, equipment, sheep, and other property, constituted tax-free transfers, with the result that the bases of the transferors carried over to the petitioner for excess profits tax purposes in computing its invested capital under section 718(a)(2) of the Internal Revenue Code. In the notice of deficiency the Commissioner agreed with this view, but by amended answer injected the issue and contends the transaction was not tax-free.
The petitioner argues that it obtained a portion of the property from the Bacons individually in a transfer rendered tax-free by section 112(b)(5) and the remainder thereof from B. & G. in a reorganization, as defined by section 112(g)(1)(D) and controlled by sections 117(a)(7) and 112(b)(4).
The transfers of property from the Bacons come precisely within the requirements of section 112(b)(5).
SEC. 112. RECOGNITION OF GAIN OR LOSS.(a) GENERAL RULE.— Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.(b) EXCHANGES SOLELY IN KIND.—(4) SAME.— GAIN OF CORPORATION.— No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.— No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. Where the transferee assumes a liability of a transferor, or where the property of a transferor is transferred subject to a liability, then for the purpose only of determining whether the amount of stock or securities received by each of the transferors is in the proportion required by this paragraph, the amount of such liability (if under subsection (k) it is not to be considered as ‘other property or money‘) shall be considered as stock or securities received by such transferor.
The assets owned by them, consisting of sheep, equipment, and other personal property, were transferred to the petitioner in exchange for an appropriate amount of its stocks and securities and immediately thereafter the Bacons were in control of the petitioner in substantially the same proportions as their interests in the transferred assets existed prior to the exchange between the corporations. The same stockholders also preserved their same respective interests in the assets through their holding of corporate stock.
In Commissioner v. Gilmore's Estate, 130 Fed.(2d) 791, the purpose of the reorganization statute is well set forth as follows:
The reorganization provisions were enacted to free from the imposition of an income tax purely ‘paper profits or losses‘ wherein there is no realization of gain or loss in the business sense but merely the recasting of the same interests in a different form, the tax being postponed to a future date when a more tangible gain or loss is realized.
In Morley Cypress Trust, Schedule ‘B‘, 3 T.C. 84, we said:
The recognized purpose and scheme of the reorganization provisions is to omit from tax a change in form and to postpone the tax until there is a change in substance or a realization in money.
In the case at bar, it is clear that all of the actions set forth in the record related to and were integral parts of the single transaction which occurred on or about March 24, 1942. Before that event T. C. Bacon and Alice C. Bacon individually owned assets valued at over $122,000. They, with their son, Clyde R. Bacon, the owner of one share, owned all of the capital stock of B. & G. After the transfers of their own assets and the assets of B. & G. they, as stockholders of the petitioner, owned precisely the same property as they had owned before the transfers. Included therein were the 1,290 bags of beans, etc., which were distributed in kind to them as stockholders of B. & G. Obviously, they were in control of the petitioner corporation and owned its stock in substantially the same proportions as they owned the stock and the individual assets before the transaction. Thus the ‘continuity of interest‘ element is conspicuously present.
The petitioner contends that the part B. & G. played in the reorganization plan is fully covered by the appropriate sections of the statute. It says, first, that both the petitioner and B. & G. were parties to the reorganization as defined in section 112(g)(2).
With this we agree. It then asserts that a reorganization took place as defined in section 112(g)(1)(D). We also agree with this view.
SEC. 112. RECOGNITION OF GAIN OR LOSS.(g) DEFINITION OF REORGANIZATION.— As used in this section (other than subsection (b)(10) and subsection (1) and in section 113 (other than subsection (a)(22))—(1) * * * (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred, * * *(2) The term ‘a party to a reorganization‘ includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.
The petitioner next contends that section 112(b)(4) is applicable and controlling. The petitioner issued its stock and securities in exchange for the assets of B. & G., but did not issue them directly to the transferor corporation. The petitioner maintains that the section does not require that the stock and securities must be issued directly to the transferor, but that its terms are satisfied by the issuance to the transferor's stockholders. It states that this view is supported by the decisions in analogous cases and particularly by the language of section 112(g)(1)(D), which, it says, contemplates the issuance either to the transferor corporation or to the stockholders.
The point relating to section 112(g)(1)(D) is well made. We see no purpose of including the italicized words in the definition of a reorganization as a transfer by a corporation of all or a part of its assets to another corporation when immediately thereafter ‘the transferor or its shareholders, or both,‘ are in control of the transferor corporation, unless the issuance of the stock involved in the reorganization plan is contemplated and permitted to be made to the stockholders of the transferor, as well as to that corporation itself.
We find no case exactly in point, but analogous cases lead to the conclusion that it matters not that stock and securities of the new corporation are issued to either the old corporation or to its stockholders, provided, of course, that all factors of the situation point to reorganization. Under circumstances that are similar to those in the instant case, the Board of Tax Appeals held in Frank Kell, 31 B.T.A. 212, that upon the dissolution of corporations, procured by their stockholders, and the transfer of the corporate assets to another corporation in exchange for the stock of the latter issued to the stockholders, a nontaxable reorganization was accomplished under section 112(b)(4) of the Revenue Act of 1928.
In Morley Cypress Trust, supra, the issue was the taxability of shares in the new corporation in the hands of the stockholders of the old corporation which had transferred its assets to the new corporation. The stockholders surrendered their shares in the old corporation to it for cancellation. The question for decision was whether the acquisition of the shares of the new corporation was by distribution in liquidation or in a statutory reorganization. We held that a statutory reorganization occurred and that gain should not be recognized under section 112(b)(3), Revenue Act of 1938.
The facts in the case before us differ slightly from those in the Morley Cypress Trust case in that the stockholders of B. & G. agreed to procure the transfer of its assets to the petitioner in consideration of their surrender of their stock in B. & G., but the underlying principle is the same.
In Raybestos-Manhattan, Inc. v. United States, 296 U.S. 60, involving stamp taxes on transfers of title to shares of stock or the rights to receive them, the Supreme Court held that the issue of shares by the new corporation, organized to carry out a plan for the consolidation of old corporations, directly to the stockholders of the old corporations was equivalent to a transfer by the corporations to their stockholders of the right of the corporations to receive such shares. In that case also no material distinction is made between the transfer of stock to the corporation and to its stockholders, provided that the essential elements of a reorganization are present.
The respondent's argument is that the stockholders of B. & G. ‘constructively received‘ the assets (transferred to the petitioner) as a liquidating dividend in exchange for the surrender of their B. & G. stock and that then the assets were transferred to the petitioner in exchange for its capital stock and debentures. This hypothesis does violence to the stipulated facts. It also ignores the plan of reorganization established by the record.
The respondent summarily asserts that subsections (1), (2), and (4) of section 112(b) are not applicable, demonstrates that subsections (3) and (6) are likewise inapplicable, and leaves for discussion only subsection (5). He then calls the transaction in substance a transfer of assets by the Bacons to the petitioner and asserts that the basis which the property takes in the hands of the petitioner is the fair market value of the assets on the date of transfer. However, this theory makes separate transactions of one unified plan in order to create as a new basis the fair market value of the assets at the time of the transfer, a basis which must carry over to the petitioner as the basis for computing its excess profits tax and declared value excess profits tax.
We believe that the Commissioner's original view was correct and that the transaction of March 24, 1942, constituted a single plan of reorganization and all component parts thereof must be considered in their relation to each other. All statutory requirements relating to reorganization have been respected and followed and, as we have found, section 112(b)(4) is applicable to the facts of record. No question has been raised that the transfer of assets by the Bacons to the petitioner is not governed by section 112(b)(5). Therefore, there was no gain or loss on the exchange of assets of B. & G. to the Bacons individually and consequently their cost to the transferors, stipulated to be $514,123.11, is the basis for computing the taxes under discussion.
Decision will be entered under Rule 50.