Murrin v. Commissioner

James G. Murrin and Willetta D. Murrin, Petitioners, v. Commissioner of Internal Revenue, Respondent. Walter P. Dolle, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Walter P. Dolle, Sr., Deceased, Walter P. Dolle, Jr., and Willetta D. Murrin, Executors, and Bessie H. Dolle, Surviving Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Murrin v. Commissioner Docket Nos. 45376, 45377, 45378 United States Tax Court 24 T.C. 502; 1955 U.S. Tax Ct. LEXIS 161; June 24, 1955, Filed *161 Decisions will be entered under Rule 50. The absence of a written plan will not preclude a reorganization pursuant to plan within the meaning of section 112 (b), 1939 Code, if the actual circumstances warrant a finding that such a reorganization occurred. If 72 per cent of the shareholders of the transferor corporation participate and own 100 per cent control of the transferee, section 112 (g) (1) (D) is satisfied. Carl Tangeman, Esq., and Burton E. Robinson, Esq., for the petitioners. *162 Robert E. Johnson, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *502 The Commissioner determined the following deficiencies in income tax of the several parties for the year 1944: Name Amount James G. Murrin and Willetta D. Murrin $ 14,361.84 Walter P. Dolle, Jr 14,107.82 Estate of Walter P. Dolle, Sr.., Deceased, Walter P. Dolle, Jr., and Willetta D. Murrin, Executors, and Bessie H. Dolle, Surviving Wife 4,609.81 Hereinafter we will sometimes refer to the persons named above as son-in-law, daughter, son, father, and mother, respectively. Certain of the facts were made the subject of a written stipulation which is incorporated herein in its entirety by this reference. FINDINGS OF FACT. Walter P. Dolle, Sr., now deceased, and Bessie H. Dolle, his wife, were residents of Cincinnati, Ohio, during the taxable year involved. They filed a joint return with the collector of internal revenue for the first district of Ohio. Walter P. Dolle, Jr., son of Walter P. Dolle, Sr., and Bessie H. Dolle, is an individual who resides in Sarasota, Florida. He filed his return for 1944 with the collector of internal revenue for the eleventh district of Ohio. *163 James G. and Willetta D. Murrin, the latter being a daughter of Walter P. Dolle, Sr., and Bessie H. Dolle, are husband and wife who *503 reside in Columbus, Ohio. They filed their joint income tax return with the collector of internal revenue for the eleventh district of Ohio. Fireproof Warehouse & Storage Company (hereinafter referred to as Fireproof) is an Ohio corporation with offices in Columbus. It has been engaged in the moving and storage business since its incorporation in 1909. During 1944, the common stock of Fireproof was owned exclusively by the petitioners. Certain of the father's shares were held in the names of two of his nieces, Bessie J. Dolle and Anna Mae Dolle. The record stockholders of Fireproof were as follows: Shares Walter P. Dolle, Sr. [11] Walter P. Dolle, Jr. [409] Bessie H. Dolle [160] Anna Mae Dolle [166] Bessie J. Dolle [166] Willetta D. Murrin [304] James G. Murrin [105] Total 1,321 Among the assets of Fireproof were 2 parcels of real estate, including buildings, which had a book value on April 1, 1944, of $ 152,897.83. One of the said parcels was leased to a third party and Fireproof conducted its moving and storage business in *164 the other. The father was president of the corporation and the son was secretary and each received a salary though neither was actively engaged in the conduct of the business. The father's salary had been questioned by the Internal Revenue Service during several taxable years prior to 1943. Previous to 1944, three other family relatives who were at that time shareholders had also been on the corporate payroll. The shares of these persons had been purchased prior to 1944 either by the father or the corporation. The son-in-law had been employed by Fireproof since 1928 and for some years prior to 1944, he had been the active head of the business acting in the capacity of general manager. During his association with the company, he had expressed dissatisfaction with the number of relatives who were on the payroll and the fact that he and his wife had only a minority interest in the corporation. He had threatened to leave the company if certain demands were not met. The petitioners had knowledge of the fact that moving and storage companies had been forced into bankruptcy as a result of liability claims after their vans were involved in accidents or as a result of warehouse fires and*165 desired to limit such a liability. Shortly prior to March 31, 1944, the father and his son and son-in-law held a conference, at which the corporation attorney also was *504 present. The father offered a plan whereby his officer and salary status with the corporation would be terminated if his proposals were accepted by the son-in-law. The plan involved the transfer of controlling interest to the daughter and son-in-law. A means of protecting the realty from liability claims was also discussed. On March 31, 1944, the father transferred 217 shares of his Fireproof stock to his daughter and 112 shares to his son. The respective amounts of these transfers when added to their previous holdings gave each an equal number of shares. On the same day as the father's transfers, all of the petitioners, with the exception of the son-in-law, surrendered portions of their Fireproof stock in various amounts to the corporation. The stock surrender was in pursuance of a corporate resolution of March 31, which provided: Be It Resolved that The Fireproof Warehouse & Storage Company excnange the real estate which it owns on North High Street and East Main Street, in the City of Columbus, Ohio, *166 to the said stockholders of this company and/or their nominee, upon the surrender to said company and the retirement of 940 shares of its stock, which said stock and real estate are of the identical book value. * * * * Be It Resolved that the President and Secretary of this Company be and they are hereby authorized to execute and deliver to the proper person or persons, corporation, or otherwise, a deed for the real estate of this corporation owned on North High Street and East Main Street, to execute, acknowledge and deliver said deed and any other papers necessary to carry out the purpose and intent of the previous resolution adopted by the Directors and Shareholders of this company, upon receipt of certificates representing 940 shares of stock of this company. Contemporaneously with the stock surrender by the shareholders, Fireproof transferred its realty to a newly formed corporation named Briar-Gate Realty, Inc. This latter corporation, in return for the properties, issued shares of its stock directly to the petitioners in the ratio of 1 for every 5 shares of Fireproof which they had surrendered. The realty transfer and stock issuance was in accordance with a Briar-Gate resolution*167 of March 31 which had provided as follows: Mr. W. P. Dolle, Sr., acting as Chairman, then stated that he, W. P. Dolle, Jr., Bessie H. Dolle and Willetta D. Murrin had made arrangements to acquire the real estate on North High Street, Columbus, Ohio, * * * and also real estate located on East Main Street * * * and that they would exchange said property for 188 shares of stock in this corporation with the number of shares to each as subscribed, and that they would convey the same by warranty deed. Whereupon a resolution was presented to this effect and unanimously approved * * * The following tables set out the holdings of the parties in Fireproof and Briar-Gate subsequent to the time of the father's transfer which equalized the ownership of his son and daughter and immediately *505 before and after the surrender of the Fireproof shares and the stock issuance by Briar-Gate: Shares of Fireproof Fireproof Briar-Gate Fireproof before shares shares shares surrender surrendered received retained Father [4] Mother [40] Son [116] Daughter [116] Son-in-law [105] Total 1,321 [381] A*168 form filed with the Ohio State Securities Division listed the petitioners as subscribers to the Briar-Gate stock and stated that the consideration for the stock issuance was real estate in each instance. The Fireproof stock in respect of each of the petitioners had a cost basis of $ 39.0107 per share. The Commissioner has determined that upon the stock surrender each petitioner received an undivided share of the Fireproof realty of the following fair market value: Father $ 1,808.51 Mother 21,702.13 Son 73,244.68 Daughter 73,244.68 The Commissioner, in the statements attached to the notices of deficiency, held substantially as follows: It has been determined that you received an undivided fractional interest in certain real estate from the Fireproof Warehouse and Storage Company in exchange for shares of stock of that corporation and that the transaction constituted a distribution in partial liquidation of that corporation. It is held that the transaction was not one in which no gain or loss is recognized under Section 112 (b) (3) or any other section of the Internal Revenue Code and that the transaction was not a part of a reorganization as defined in Section 112 (g) *169 (1) (D) of the Internal Revenue Code. The amount of the long term capital gain to be taken into account in accordance with the provisions of Section 115 (c) of the Internal Revenue Code is computed * * * as therein set out in the following amounts: Docket No. 45376 $ 28,722.67 Docket No. 45377 28,722.68 Docket No. 45378 9,219.62 OPINION. The deficiencies are based upon respondent's determination that certain transactions of the petitioners which occurred in 1944 constitute a partial liquidation of Fireproof, the resultant gain being taxable under section 115 (c) of the Internal *506 Revenue Code of 1939. 1*170 Petitioners contend that the transaction comes within the statutory definition of a corporate reorganization as set out in section 112 (g) (1) (D), 2 and that any gain from such a reorganization was within the nonrecognition provision of section 112 (b) (3). 3 The issue is pivoted upon a conveyance of realty in 1944. The circumstances surrounding the transfer can be summarized as follows. The several petitioners, which we have individually denominated as the*171 father, mother, son, daughter, and son-in-law, were the shareholders during 1944 of a corporation named Fireproof. It was in the nature of a closely held family enterprise. Fireproof owned 2 parcels of realty, the corporate business of moving and storage being conducted in one and the other being leased. The son-in-law was the general manager and was the only shareholder that was actively engaged in the conduct of the business. The father and son, though not active, were on the corporate payroll prior to the reorganization and other relatives had drawn salaries in prior years when they had owned shares. The son-in-law was discontented with this situation and with the fact that he and his wife had only the minority interest in the enterprise to which he had devoted many years of service. Due to this discontent he had threatened to terminate his association with the company. The father, who was the dominant figure, recognizing the possible loss of the son-in-law's services, held a conference with him at which the son and Fireproof's attorney also were present. The text of this discussion was never reduced to writing but both the son and the attorney testified that the parties*172 decided upon a plan of reorganization for the primary purpose of satisfying *507 the son-in-law's demands. They also testified that a secondary reason for reorganizing was to protect the corporate realty from liability claims which were prevalent in the trade at that time. Shortly after the conference, i. e., on March 31, 1944, the father transferred blocks of Fireproof shares individually to his son and daughter so as to equalize their share ownership. Pursuant to a corporate resolution of the same day, all the petitioners, except the son-in-law, surrendered varying portions of their Fireproof stock. A new corporation (Briar-Gate) was formed for the purpose of acquiring and holding title to the Fireproof realty. Both realty parcels were then conveyed directly from Fireproof to Briar-Gate. At the same time, in accordance with a resolution, the new corporation, Briar-Gate, issued shares of its stock to the petitioners in proportion to the Fireproof shares which they had surrendered. Subsequent to the aforementioned transactions, the daughter and son-in-law owned a controlling interest in Fireproof. The petitioners, other than the son-in-law, held a decreased number of Fireproof*173 shares but had acquired stock in the new corporation, Briar-Gate. Fireproof continued to occupy the premises in which it conducted business but as a lessee rather than as owner. Respondent contends that the transactions cannot be brought within the nonrecognition provisions of section 112 (b) (3) due to the absence of a plan of reorganization evidenced by some sort of written document. This point has been raised in previous cases and the fact that the plan was not reduced to writing has been held not to preclude a "reorganization pursuant to plan" within the section if the other circumstances warrant a finding that such a plan did in fact exist. William H. Redfield, 34 B. T. A. 967; Hortense A. Menefee, 46 B. T. A. 865; Edison Securities Corporation, 34 B. T. A. 1188. We have no reason for discounting the testimony of the corporation attorney and the son that a plan of reorganization was formulated and agreed upon at the conference. It is our opinion that the record here, including the happening in one day of the several events, warrants such a finding. We so hold. But, assuming the existence*174 of a plan, respondent denies that the transactions of the instant case involved an exchange of stock for stock in another corporation and thus are not within the cited section. In support of this, our attention is directed to the corporate resolutions of both Fireproof and Briar-Gate along with a form filed with the State Securities Division. Literally construed, these written declarations indicate that the realty was transferred to the shareholders in return for the surrender of stock and that the shareholders were conveying the properties to the newly formed Briar-Gate. What actually occurred, however, is that the properties were conveyed directly from Fireproof to Briar-Gate and the shareholders never had title. Further, *508 Fireproof's attorney testified that he phrased the corporate resolutions and State registration form in such a way so as to comply with, while not being inconvenienced by, certain State laws. Moreover, corporate declarations could not alter the events as they actually happened. "Questions of taxation must be examined by what was actually done rather than the declared purpose of the participants." Weiss v. Stearn, 265 U.S. 242.*175 Even if it be assumed that the properties were conveyed directly to Briar-Gate as the nominee of the shareholders, respondent's position could not be sustained. Each of the petitioners involved in the surrender had mutually agreed to and was obligated to convey the properties to Briar-Gate immediately. At best, they would have had only bare legal title and would have been a mere conduit. "A given result at the end of a straight path is not made a different result because reached by following a devious path." Minnesota Tea Co. v. Helvering, 302 U.S. 609. Respondent cannot atomize the several transactions and view the surrender merely as an exchange for undivided fractional shares in the realty. See Richard H. Survaunt, 5 T. C. 665, affd. 162 F. 2d 753. By such a view, each step is considered as though it happened alone. Such treatment of several related transactions has been held not tenable. Helvering v. New Haven & S. L. R. Co., 121 F. 2d 985. All of the transactions occurred in one day and the first would not have happened without a view to the last, *176 for each of the several steps was in pursuance of a previously agreed upon plan. "Where transfers are made pursuant to such a plan of reorganization, they are ordinarily parts of one transaction and should be so treated in application of the well-settled principle that, in applying income tax laws, the substance, and not the form, of the transaction shall control." Starr v. Commissioner, 82 F. 2d 964, 968. The change effected only a readjustment of continuing interests in property under a modified corporate arrangement. As a result of the transactions, those persons who had previously owned 92 per cent of Fireproof stock now held 72 per cent and became 100 per cent owners of the stock of the newly formed Briar-Gate. The Fifth Circuit in Reilly Oil Co. v. Commissioner, 189 F. 2d 382, affirming 13 T. C. 919, held that there was sufficient continuity of interest where 69 per cent of the shareholders participated in the formation of the new corporation. The court said at page 384: We are aware of no authority or valid reason which would support the contention that all or substantially *177 all of the transferor's shareholders must acquire an interest in the corporation before a nontaxable reorganization can be effected. In addition to conforming to the literal requirements of the statute, the reorganization served a proper corporate purpose. As a result of the transaction, the daughter and son-in-law, who formerly held a *509 minority interest, had a 58 per cent interest in Fireproof and the corporation thereby retained the services of its general manager. Furthermore, since title was now held and owned by a separate entity, the realty would be insulated from liability claims. The case thus presents a factual pattern within the statutory definition of a reorganization, as set out in section 112 (g) (1) (D). An exchange of stock by parties to such a planned reorganization results in nontaxable gain within section 112 (b) (3) and the respondent's determination is, therefore, incorrect. Decisions will be entered under Rule 50. Footnotes 1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS. (c) Distribution in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed (whether before January 1, 1939, or on or after such date) in partial liquidation (other than a distribution to which the provisions of subsection (h) of this section are applicable) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits. * * *↩ 2. 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) The term "reorganization" means * * * (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, or * * *↩ 3. SEC. 112. RECOGNITION OF GAIN OR LOSS. (b) Exchanges Solely in Kind. -- * * * * (3) Stock for stock on reorganization. -- 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.↩