Tulsa Oxygen Co. v. Commissioner

TULSA OXYGEN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tulsa Oxygen Co. v. Commissioner Docket No. 20925. United States Board of Tax Appeals 18 B.T.A. 1283; 1930 BTA LEXIS 2486; February 21, 1930, Promulgated *2486 Where one corporation exchanges substantially all its assets for the stock of another, a merger or consolidation of the two corporations is effected within the meaning of section 203(h)(1) of the Revenue Act of 1924, and under the provisions of (b)(3) of the same section, no gain or loss results therefrom. Charles H. Garnett, Esq., for the petitioner. Phil M. Clark, Esq., for the respondent. LANSDON *1284 The respondent asserts a deficiency in income tax for the year 1925 in the amount of $44,772.96. For its cause of action the petitioner alleges error in "The holding by the Commissioner that the exchange by the petitioner of all of its properties and its entire net assets to the Union Carbide & Carbon Corporation for 10,000 shares of the capital stock of the latter corporation was not a reorganization of the corporations involved to which the petitioner was a party within the meaning of section 203 of the Revenue Act of 1926." FINDINGS OF FACT. The petitioner is an Oklahoma corporation. Prior to the transaction here involved it was engaged in the manufacture and sale of oxygen and hydrogen gas and carbide, and the resale of carbide*2487 and oxyacetylene apparatus and supplies. Its principal offices are at Tulsa, Okla. In August, 1925, petitioner, through its officers, entered into negotiations with the Union Carbide & Carbon Corporation of New York, a holding corporation for the stock of a number of subsidiary corporations, all engaged in business similar to that of the petitioner, for the sale of its business and properties. In these negotiations the Union Carbide & Carbon Corporation was represented by its secretary and treasurer, Clifford R. Oviatt, who was also vice president of several members of the subsidiary group. These negotiations resulted in an agreement between the petitioner and the Union Carbide & Carbon Corporation for the sale of all of petitioner's assets to said corporation for the consideration of 10,000 shares of the latter's capital stock. The terms of such agreement were concluded and approved by the parties sometime prior to the 28th day of September, 1925, and on that date the stockholders of the petitioner, by the adoption of appropriate resolutions directing its board of directors to consummate the transfer, ratified and approved the plan and agreement. A sales contract was drawn*2488 by the attorney for the Union Carbide & Carbon Corporation and presented to officials of the petitioner on or about September 29 for final execution. This contract was in all respects in accordance with the agreements concluded by the negotiations, except that the "Linde Air Products Company," one of the subsidiary group, was designated therein as the purchasing corporation. This substitution, however, was accepted by petitioner and correction made in the minutes of its meeting theretofore held ratifying such contract, showing said subsidiary corporation to be the purchaser of its assets. The assets sold by the petitioner were described in the contract as constituting "all property, real, personal and mixed, tangible *1285 and intangible, and all rights and privileges of every kind whatsoever that it now owns, holds or is entitled to and all contracts to which it is a party, excepting therefrom only the franchise right of Tulsa [petitioner] to be a corporation under and by virtue of the laws of the State of Oklahoma." At the final closing of this contract representatives from the several subsidiary corporations were present, and the assets sold by the petitioner were*2489 parceled out and distributed among the members of said subsidiary group by assignments direct from the petitioner, without regard to the contract. The 10,000 shares of the stock of the Union Carbide & Carbon Corporation paid to the petitioner in consideration of this sale were held theretofore by the Union Carbide Co. of Canada, Ltd., one of the subsidiary group whose common stock was owned by the Union Carbide & Carbon Corporation. After receipt of such shares the petitioner distributed them to its shareholders in accordance with their stockholdings. In 1925 the outstanding capital stock of the Linde Air Products Co. consisted of 119,123 1/3 shares of common and 7,500 shares of preferred, all of the par value of $100, each. At September 30, 1925, the Union Carbide & Carbon Corporation owned 119,112 shares of such common stock. The terms of the sales contract were all accomplished. The petitioner received the specified shares of stock and transferred its assets to the purchaser, or its nominees. At some date subsequent to the disposition of its assets, as above set forth, the petitioner distributed to its stockholders the 10,000 shares of stock received therefor as a dividend*2490 in kind. On September 28, 1925, the Union Carbide & Carbon Corporation common stock was quoted at 70 on the New York Curb Market. In its income-tax return for 1925 the petitioner included in its gross income no profit realized from the sale of its assets to the Linde Air Products Co. Upon the audit of such return the Commissioner determined a profit from such transaction in the amount of $342,633.63 and asserted the deficiency here in controversy. OPINION. LANSDON: There is no controversy here over any of the basic facts. The petitioner admits that in exchange for all its assets it acquired shares of the Union Carbide & Carbon Corporation that, at date of such exchange, had a fair market value of $700,000, and does not controvert the determination of the Commissioner that the purchaser assumed and paid its liabilities in the amount of $49,642.01, and *1286 that the depreciated cost of the property sold was $407,008.38. If the exchange here involved was a taxable transaction, the resulting profit to be included in petitioner's gross income in the taxable year was $342,633.63, as determined by the Commissioner. The petitioner's main contention here is that the*2491 transaction through which it exchanged its assets for stock and for the assumption of certain of its liabilities was a reorganization within the meaning of the following provisions of the Revenue Act of 1924: SEC. 203. * * * (b)(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 for stock or securities in another corporation a party to the reorganization. * * * (h) As used in this section * * * (1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *. It is apparent that the transaction here involved almost literally satisfies the statutory definition of a nontaxable corporate reorganization. It is clear that the transaction was between the petitioner and the Union Carbide & Carbon Corporation. All details of the sale were worked out in advance between them and payments made, in accordance with such agreement, out of the stock of this holding corporation. The substitution, therefore, of the name of a subsidiary corporation, in the contract*2492 at the suggestion of the attorney was a mere expediency that in no practical way changed the status of the parties responsible for the deal. . By the terms of this contract the purchasing corporation acquired all the petitioner's properties, tangible and intangible, except the bare franchise right "to be a corporation under and by virtue of the laws of the State of Oklahoma." We think, therefore, that such acquisition was of "substantially all the properties of another corporation," and that the transaction constituted a "reorganization" within the meaning of section 203, supra. No gain or loss can be attributed to the exchange of the petitioner's assets for stock in the Union Carbide & Carbon Corporation. The action of the respondent in respect to such determination must be disapproved. In his brief counsel for the petitioner raises and discusses several collateral and subsidiary issues. In the light of our conclusions above it is not necessary to discuss or decide such questions. Decision will be entered under Rule 50.