Sarther Grocery Co. v. Commissioner

SARTHER GROCERY COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SARTHER BAKING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sarther Grocery Co. v. Commissioner Docket Nos. 46523, 46524. United States Board of Tax Appeals 22 B.T.A. 1273; 1931 BTA LEXIS 1977; April 22, 1931, Promulgated *1977 1. The terms "sale" and "exchange" are to be applied to promote the intendment of the taxing act, and, while for other purposes they may be interchangeable, for its own purposes the revenue act applies the word "sale" to a transaction in terms of money. 2. Petitioner agreed to "sell, transfer and deliver" its property to another corporation and to distribute its assets among its stockholders and dissolve. At the same time its stock was surrendered and the purchase price was paid to petitioner, and, after payment of debts, the remainder was distributed to its stockholders. Neither petitioner nor its stockholders acquired any stock of the purchasing corporation. Held, that the transaction was a sale for cash, upon which the gain or loss, based on cost of property acquired after March 1, 1913, must be recognized under the Revenue Act of 1926. Irwin T. Gilruth, Esq., and F. B. Andrews, C.P.A., for the petitioners. J. M. Leinenkugel, Esq., and T. G. Histon, Esq., for the respondent. STERNHAGEN *1274 Respondent has determined deficiencies in income tax of $17,875.29 and $3,887.25 for 1927. The deficiencies arise from increasing*1978 petitioners' net income by gain derived from the disposition of assets in a transaction treated by the Commissioner as a sale but regarded by petitioners as a reorganization and exchange in which no gain should be recognized for taxing purposes. FINDINGS OF FACT. Both petitioners are Illinois corporations in process of liquidation and have no place of business. In December, 1927, petitioner in Docket No. 46523 was known as the Great American Stores, and petitioner in Docket No. 46524 as the Sterling Baking Company. In June, 1928, the names of both were changed, without change in the corporate structure or identity, to Sarther Grocery Company, Inc. (hereinafter called the Grocery Company), and to Sarther Baking Company, Inc. (hereinafter called the Baking Company). respectively, by actions taken in the manner prescribed by law for the accomplishment of a change in corporate name. The business of the Grocery Company was the operation of cash and carry chain grocery stores located in small towns and rural districts within a radius of 150 miles of Chicago. Having begun in 1917 with two stores, it had grown by 1927 to operate seventy-three, and did an annual business of about*1979 $4,500,000. All the capital stock (except three shares) of the Baking Company, a bakery, was owned by the Grocery Company; and the latter's stock, consisting of 2,500 shares of the par value of $100 each, was held, on December 10, 1927, as follows: J. M. Sarther, 2,473 shares; J. A. Ramsperger, 16 shares; E. A. Sarther, 10 shares; G. K. Wetzell, 1 share. Of both petitioners John M. Sarther was president and G. K. Wetzell secretary. *1275 In about a third of the localities where petitioners' stores were located, the National Tea Company also operated grocery stores. In August, 1926, a representative of the Tea Company approached John M. Sarther, stating that his company was desirous of expanding its out-of-town business and would be interested in the purchase of petitioners' stores because of their locations. Sarther later discussed the matter with Massmann, vice president of the Tea Company, who proposed that petitioners sell the Tea Company their assets, distribute the proceeds to their stockholders, retire from business, and dissolve. After some initial objections to the last three proposals, advanced by one Cowin, a stockholder of the Grocery Company, Sarther bought*1980 his shares and reached a definite understanding with Massmann on December 8, 1927. He then informed petitioners' stockholders on December 9, that he had tentatively agreed to sell the business to the Tea Company; that he was to enter its employ, and any of them could arrange to do likewise; that petitioners were to go out of business, liquidate and distribute all assets to the stockholders. On December 10, 1927, a draft of the proposed contract, embodying these terms, was submitted to the stockholders of both corporations and the corporate officers, being authorized by resolutions of both groups of stockholders, entered into and carried out the terms of a contract providing in part as follows: WHEREAS, the first party desires to sell to the second party and the second party desires to purchase from the first party the property and assets owned by the first party and used in and about its business, hereinafter described; NOW, THEREFORE, in consideration of the premises and the sum of one dollar by each party to the other in hand paid, receipt of which is hereby acknowledged, and in further consideration of the prompt performance by each of the parties respectively of the several*1981 agreements by them, respectively, hereinafter agreed to be performed, said parties agreed to and with each other as follows: * * * The first party agrees to sell, transfer and deliver to the second party or to any corporation or corporations now existing or hereafter to be organized by the second party, the following property: * * * It is further understood and agreed that the first party hereby consents to the organization of a company or companies by the second party, * * * under the name of THE GREAT AMERICAN STORES CO., or THE STERLING BANKING COMPANY, or such other name similar thereto as may be permitted by the secretary of any state mentioned herein, and hereby further agrees to take such corporate action by changing its name or otherwise, as may be deemed necessary by second party in order to enable said corporation to be organized by second party and to use or adopt the name of THE GREAT AMERICAN STORES CO., or THE STERLING BAKING COMPANY. * * * It is further understood and agreed that the first party shall distribute all of its assets to and among its stockholders and/or to trustees for such stockholders, as promptly and expeditiously as possible, and having made*1982 distribution, will dissolve and surrender its charter to the end that the good will of *1276 the business of the first party may inure to and be enjoyed by said subsidiary corporation so to be organized by the second party. On the same date the parties entered into an escrow agreement, by reference made a part of the the above agreement, whereby all the capital stock of petitioners was surrendered for deposit and $375,000 was paid the Grocery Company by the Tea Company. After receipt, the proceeds of the sale were kept in liquid form, petitioners' indebtedness was first paid off, and the remainder of the purchase price as received was distributed to the stockholders. The Baking Company was thereafter dissolved, but the Grocery Company was not, having an account of $16,000 uncollected, which is at present the subject of litigation. Neither petitioners nor their shareholders acquired any stock in the Tea Company at the time of the sale. Six months later J. M. Sarther bought 50 shares, representing, however, a very small part of its outstanding shares. In computing the taxable income of the Grocery Company and of the Baking Company for 1927, the Commissioner added profits*1983 of $132,437.19 and of $26,696.23, respectively, which gave rise to the deficiencies here in question. The parties have agreed that if any profit from the disposition of petitioners' assets is taxable, said deficiencies are correct, but if not, then there are no deficiencies. OPINION. STERNHAGEN: Although, in words of common speech, the petitioners sold their assets for cash, an elaborate argument is offered to demonstrate that the transaction was an "exchange," and therefore requires consideration of section 203(b) and (e), Revenue Act of 1926, and, furthermore, that it was a "reorganization," as defined in that section, and hence that no gain or loss on the "exchange" will be recognized. The argument is so plainly unsound that its fallacy is demonstrable in a few words. The terms "sale" and "exchange" are to be applied to promote the intendment of the taxing act. While for other purposes the words may be interchangeable, see Williston on Sales, Uniform Sales Act, the Revenue Act for its own purposes applies the word "sale" to a transaction in terms of money. As to such transactions the general rule applies that gain or loss shall be recognized and that its computation*1984 shall be based on cost of property acquired after March 1, 1913. It is the exceptional cases alone in which gain or loss is not to be recognized and such exceptions are confined to exchanges involving circumstances expressly described. A sale for cash is not among the enumerated exceptions. Cf. ; . The sale *1277 here in question was no less a sale because the vendor was contractually obligated to distribute its assets and dissolve. . This consideration requires the decision that respondent correctly applied the statute to the transaction and affirms his determination. We may add, however, that were it necessary to pass upon petitioners' further argument, it could not be found that there was, as to petitioners, a reorganization under the statute. ; ; *1985 Judgment will be entered for the respondent.