Green v. Commissioner

*719 The Commissioner determined a deficiency of $435.05 in the petitioner's income taxes for 1927. The petitioner alleges that:

The Commissioner erred in holding that the entire gain alleged to have been derived by petitioner as a common stockholder of Community Power and Light Company of Illinois in an exchange of securities upon a reorganization participated in by Community Power and Light Company of Delaware, Community Power and Light Company of Illinois, American Commonwealths Power Corporation and American States Securities Corporation, represented taxable income of petitioner to be recognized for tax purposes in the year 1927, the year in which the transaction occurred.

The facts were stipulated.

FINDINGS OF*1604 FACT.

Prior to the transactions here involved petitioner was the owner of voting trust certificates, representing 234 shares of the common stock of the Community Power and Light Company of Illinois (hereinafter referred to as Community of Illinois ). This was an Illinois corporation owning and controlling a certain number of operating public utilities. Its outstanding capital stock consisted *720 of 45,000 shares of first preferred, 12,576 shares of second (participating) preferred and 200,000 shares of common. Petitioner's 234 shares of common stock were acquired at a cost of $4,500.

American States Securities Corporation (hereinafter referred to as States ) was a Delaware corporation, formed on November 16, 1925, as a holding company of public utility securities. Prior to the transactions here involved the issued and outstanding stock of States consisted of 724,994 shares of Class A (non-voting) common stock and 405,785 shares of Class B (voting) common stock.

The ownerships of Community of Illinois and of States were in separate and independent groups, not related to each other.

On December 21, 1926, the majority common stockholders of*1605 Community of Illinois, through their representatives, Whitaker & Company and Wm. L. Ross & Company, Inc., entered into a contract with States (Exhibit 1). On January 15, 1927, a supplemental agreement was similarly executed by the same parties (Exhibit 2).

Thereafter the preliminary acts of authorization, preparation, etc., including the requisite stockholders' and directors' meetings, resolutions, etc., necessary to the carrying out of the provisions of the foregoing agreements, were duly performed, the so-called plan of reorganization being submitted to these several bodies. The stockholders of States were furnished with a notice and report bearing date of January 15, 1927 (Exhibit 3). The common stockholders of Community of Illinois were sent a statement bearing date of January 17, 1927 (Exhibit 4). States, by independent negotiation, purchased 62,892 shares of the common stock of Community of Illinois not owned by the majority group which was party to the above-described agreements. A new corporation, the Community Power and Light Company of Delaware (hereinafter referred to as Community of Delaware ) was organized under the laws of Delaware*1606 on February 9, 1927, with exactly the same capital stock structure as that of Community of Illinois.Another new corporation, American Commonwealths Power Corporation (hereinafter referred to as Power ), was organized on January 18, 1927, under the laws of Delaware, with an authorized (not issued) capital structure consisting of not less than 2,500,000 six per cent gold debentures, Series A, 200,000 shares first preferred stock, 100,000 shares second preferred, 1,000 shares Class A common and 150,000 shares Class B common, the latter being the only voting stock.

Thereafter, on the 17th day of February, 1927, the following transactions were had, in the order of their statement, and all on the same day:

Community of Illinois transferred all its assets to Community of Delaware for all the capital stock of the latter, which stock was then *721 distributed share for share (of the same kind) to the stockholders of Community of Illinois, the stock of the latter being surrendered and canceled.

The majority common stockholders of Community of Delaware, owning 137,108 shares out of 200,000 outstanding shares of that stock, transferred that stock to Power*1607 in exchange for the following securities of that corporation (Power): $2,364,000 principal amount of six per cent gold debentures (which was a majority of the total issue), 13,711 shares of second preferred (which was the total issue), and 27,422 shares of common. No first preferred and no Class A common of Power was issued.

States transferred all its assets (including 62,892 shares of Community of Delaware common) to Power in exchange for 82,266 shares of the common stock of Power, issued in addition to the abovementioned 27,422 shares of this common, which total of 109,688 shares was the total issue of the common stock of Power.

States issued, fully paid and non-assessable, to the former majority common stockholders of Community of Delaware 237,276 shares of States Class A common and 132,768 shares of its Class B common (these shares being in addition to its then outstanding stock), in exchange for 27,422 shares of Power common stock. Upon the completion of the transaction the entire issued voting common stock of said Power corporation was owned by the American States Securities Corporation, while the debenture bonds and the*1608 second preferred stock, non-voting, of Power corporation were owned by the persons represented by Ross & Company, Inc., and Whitaker & Company, who did not own any voting stock in Power corporation, but did own one-third of the Class A non-voting common stock and one-third of the Class B voting common stock of the American States Securities Corporation.

Both Class A and Class B common stock of States were listed on the Chicago Stock Exchange and the New York Curb.

Each common stockholder of the new Community Power and Light Company of Delaware who participated in the exchange received from the new Power Corporation of Delaware for each share of common stock (or voting trust certificate) of the former company the following:

(1) Six per cent debenture bond, par value $17.2418, market value $15, less reorganization expenses of $.746, making a net received of $14.254.

(2) One-tenth of a share of second preferred stock, par value $10, market value $8.

(3) Two shares of Class B common stock no par value, market value not indicated. The two shares of Class B common stock of the Power corporation *722 were in turn immediately exchanged for the following*1609 from the American States Securities Corporation:

(1) 1.73 shares Class A common stock, market value $6.055.

(2) .968 of a share Class B common stock, market value $3.509.

Upon the completion of the exchanges the total consideration received by the former majority common stockholders of the new Community Power and Light Company of Delaware, for each share of common stock (or voting trust certificate) of that company amounted to $31.818 in market values of securtities less reorganization expenses.

Upon completion of the above-described transactions the several former common stockholders of Community of Illinois were sent a letter, the material portions of which are set out in Exhibit 5.

The exhibits, numbered one to five, inclusive, referred to above, are incorporated herein by reference. The petitioner was one of the majority stockholders of Community of Illinois participating in the above transactions.

OPINION.

SMITH: The petitioner contends that:

* * * If these exchanges were one transaction, they were a reorganization within the definition in the Act, since under that view, two corporations, in one transaction, transferred all their assets to two new*1610 corporations for the securities of the latter, and, in the same transaction, these securities were cross-exchanged. In that view, if these constituted but one transaction, Community of Delaware and Power were parties to this same reorganization and the exchanges fall squarely within Section 203(b)(2). On the other hand, if these are to be considered as separate transactions and to be viewed independently each of the other, there is no contention by petitioner that the exchange of Community of Delaware stock for securities of Power came within subdivision (2) of Section 203(b); our contention is that the transaction, if viewed separately and apart from the others, is covered by subdivision (4) of that section. * * *

The respondent contends that the petitioner realized a taxable gain upon the exchange of his common stock in Community of Illinois through the medium of these several transactions for debentures and preferred stock of Power and Class A and Class B common stock of States.

It is to be noted that the agreements for the consummation of the stipulated transactions were made by and between a group of the common stock holders of Community of Illinois*1611 and the corporation designated as States. As a corporation Community of Illinois had no part in the several agreements and resulting transactions except to be reorganized into Community of Delaware with the same capital structure and assets. In the original agreement (Exhibit 1), between the majority common stock holders of Community of Illinois and States is the following:

*723 * * * It is the desire and plan of the parties hereto to effect a reorganization and consolidation of their * * * public utility holdings, while preserving their control of and proportionate interests in the aggregate property to be included in the consolidation and, pursuant to said general plan of reorganization and consolidation, to organize a new corporation under the laws of Delaware, to be called American Commonwealths Power Corporation, for the purpose of consolidating said properties and interests now owned and controlled by the respective parties hereto * * *

On brief the petitioner argues that:

* * * The properties owned by two corporations were consolidated into one new corporation and through an exchange of stock and securities the equities of the former unrelated*1612 groups of shareholders were preserved.

The stipulated facts show this argument to be erroneous. Power acquired the property of States and certain shares of the common stock of Community of Delaware, the property of the petitioner and other stockholders in that corporation. Viewing the transactions here involved as a whole, we are convinced that there were two parallel reorganizations with two resulting corporations, Community of Delaware and Power, which, for reasons hereinafter stated, were neither merged nor consolidated.

As we said in William H. Mullins,14 B.T.A. 426, 433:

It may be conceded that the purpose and plan of this transaction was a reorganization * * * but that fact is not determinative of the question here nor is it of any special significance. * * *

We are here concerned with whether the petitioner realized a taxable gain within the purview of the statute.

* * * And this question must be resolved upon what was actually done, and not the effect of what was done. (*1613 B. F. Saul,4 B.T.A. 639, 647), nor upon what may have been the design and purpose of the parties to the transaction (United States v. Phellis,257 U.S. 156, 172). Neither is it material that the same result might have been obtained by some other method or plan of reorganization. In the case of Anna M. Harkness,1 B.T.A. 127, 130, we said:

It seems to us to be fundamentally unsound to determine income tax liability by what might have taken place rather than what actually occurred. Even though the practical effect may be the same in either case, the resulting tax liability may be quite different. United States v. Isham,17 Wall. 496.

Speaking generally, in determining what was actually done in any case, this Board will regard substance rather than form. However, material and essential facts will not be dismissed or put aside as mere matters of form simply because they are related to and are steps in a comprehensive plan of reorganization, or together constitute a method for the attainment of a single desired result. *1614 Edward A. Langenbach,2 B.T.A. 777, 784. In the instant case each step employed to bring about the ultimate result was essential to the consummation of the transaction and it can not be said that each, or any one, was not substantial.

* * *

*724 * * * The fact that these several transactions together comprised a single plan of reorganization does not render them any the less separate and distinct undertakings. The nature of each transaction is determinable from the facts relating to it, and is not changed because of its association with other transactions in a larger and more comprehensive plan. [William H. Mullins, supra. ]

The material provisions of the Revenue Act of 1926 are as follows:

SEC. 203. (b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

(3) 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*1615 for stock or securities in another corporation a party to the reorganization.

(4) 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.

* * *

(h) As used in this section * * *

(1) The term "reorganixation" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) 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 stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, *1616 or (D) a mere change in identity, form, or place or organization, however effected.

(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

(i) As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

Transaction One. - Pursuant to their agreement, the majority common stockholders of Community of Illinois caused Community of Delaware to be organized and the assets of Community of Illinois conveyed to Community of Delaware in exchange for the latter's capital stock, which was issued in the same amount as that of Community of Illinois. This was a reorganization (section 203(h)(1)) resulting in no recognized gain (section 203(b)(3)).

Transaction Two. - The stockholders of Community of Illinois, a party to the reorganization*1617 under Transaction One, exchanged their *725 stock for stock in Community of Delaware, a party to the same reorganization (section 203(h)(2)), and there was no recognized gain or loss upon the exchange (section 203(b)(2)).

Transaction Three. - The petitioner and other former stockholders of Community of Illinois transferred their 137,108 shares of the common stock of Community of Delaware (acquired by Transaction Two) to Power in exchange for $2,364,000 (par) debentures, 13,711 shares of preferred and 27,422 shares of common stock of Power. This was not a reorganization, since Power did not acquire the first and second preferred stock of Community of Delaware (see section 203(h)(1)(A)), but merely acquired the property of individual stockholders in exchange for its securities and stock. The record indicates that each transferor received stock and securities "substantially in proportion to his interest in the property" exchanged. This transaction falls within the purview of section 203(b)(4), since the transferors received all of the then issued stock and were in control of Power "immediately after the exchange" (section 203(i)). The fact*1618 that this control was soon relinquished does not negative the import of the statute, the requirement of which is fulfilled when the transferor is in control immediately after the exchange. Cf. Federal Grain Corporation,18 B.T.A. 242; Minnie C. Brackett,19 B.T.A. 1154; affirmed by Circuit Court of Appeals, 7th Circuit, Apr. 21, 1931.

Transaction Four. - Power acquired all the assets of States in exchange for 82,266 shares of the common stock of Power. This was a reorganization within the purview of section 203(h)(1)(A), resulting in no recognized gain under section 203(b)(3). However, the language used in section 203(h)(1)(B) would seem to indicate otherwise, but, as stated in G.C.M. 1753 (Cumulative Bulletin VI-1, p. 138):

Section 203(h)(1)(A) is not inconsistent with section 203(h)(1)(B). One supplements the other. For example, a transfer of all the assets of a corporation constitutes a reorganization under the second part of definition (A) irrespective of the element of 80 per cent control demanded by definition (B). Again, a transfer of but a part of the assets of a corporation can never, of itself, result*1619 in a reorganization under section 203(h)(1)(A), but it does result in a reorganization under section 203(h)(1)(B) if there is present an additional element, namely, immediate control of the transferee corporation by the transferor or its stockholders, or both.

Cf. National Pipe & Foundry Co.,19 B.T.A. 242; Crosby-Wirth Sales Book Co.,19 B.T.A. 1074; First National Bank of Champlain, N.Y.,21 B.T.A. 415; A. W. Leonard et al.,21 B.T.A. 549; Cortland Specialty Co. et al.,22 B.T.A. 808.

Transaction Five. - The petitioner and other stockholders who acquired 27,422 shares of common stock of Power (Transaction Three), a party to a reorganization (Transaction Four), exchanged *726 this stock for 237,276 shares of Class A common and 132,768 shares of Class B common of States, a party to the reorganization (Transaction Four), and there was no recognized gain upon the exchange (section 203(b)(2)).

It follows, therefore, that the petitioner realized no present gain recognized under the taxing acts, upon the exchanges by which he disposed of his stock in Community of Illinois*1620 and ultimately acquired stock and securities in Power and States. The respondent's determination of a deficiency can not be approved.

Reviewed by the Board.

Judgment will be entered for the petitioner.

MARQUETTE concurs in the result only.

ARUNDELL, concurring: In my opinion the several transactions discussed in the Board's report were all steps in carrying out one general plan and their effect should be considered as a whole and not separately. So considered, they constitute a reorganization within the meaning of the Act, and, by reason of section 203(b)(2), the exchange does not give rise to gain or loss.

GOODRICH agrees with the foregoing.