West Texas Refining & Development Co. v. Commissioner

WEST TEXAS REFINING & DEVELOPMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COL-TEX REFINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. West Texas Refining & Development Co. v. Commissioner Docket Nos. 43547, 45653, 46633. United States Board of Tax Appeals 25 B.T.A. 1254; 1932 BTA LEXIS 1401; April 25, 1932, Promulgated *1401 1. Where assets are transferred by one corporation to another pursuant to a definite plan of organization, the steps necessary to complete the plan will be considered as a single transaction in determining whether or not there was a statutory reorganization. 2. Where stock of a new corporation and cash are paid for the tangible assets of a taxpayer having a value greatly in excess of the cash payment, the amount of which is insufficient to discharge the taxpayer's indebtedness, it is held that the new corporation is liable as transferee for income taxes due from the taxpayer. Charles H. Garnett, Esq., and Walter G. Kirkbride, Esq., for the petitioners. E. A. Tonjes, Esq., for the respondent. LANSDON *1254 The proceeding at Docket No. 43547 is an appeal by the West Texas Refining & Development Company from a deficiency in income tax asserted for the fiscal year ended September 30, 1925, in the amount of $7,574.44. The single question involved is whether certain transactions by which the Col-Tex Refining Company acquired the tangible assets of the West Texas Refining & Development Company constitute a reorganization within the meaning*1402 of section 203 of the Revenue Act of 1926, or whether it was a sale from which gain is to be recognized. Dockets 45653 and 46633 are proceedings under section 280 of the Revenue Act of 1926. The latter docket is a duplicate proceeding of the former except that the deficiency notice in the former is addressed to the Col-Texas Refining Company while in the latter docket the deficiency notice is correctly addressed to the Col-Tex Refining Company. By order entered April 7, 1930, the two proceedings were consolidated. The deficiency determined in each case is identical in amount and is for the same year. The two proceedings will be disposed of as though they constituted one appeal. The only issue presented is whether the Col-Tex Refining Company is liable as a transferee for income tax due from the West Texas Refining & Development Company for 1925. FINDINGS OF FACT. The West Texas Refining & Development Company, hereinafter referred to as the West Texas Company, is a Delaware corporation, *1255 with its principal place of business in Oklahoma City, Oklahoma. The Col-Tex Refining Company is a Delaware corporation, organized on August 24, 1925. Its principal office*1403 is in Oklahoma City. On June 2, 1925, the West Texas Company, the Hickok Producing Company, which was a stockholder of the West Texas Company, and certain individuals who were stockholders and directors of the Hickok Producing Company and the Anderson-Prichard Oil Corporation, which companies owned all of the outstanding capital stock of the West Texas Company, entered into a contract with the Standard Oil Company of California whereby they agreed to transfer or cause to be transferred to such company 50 per cent of the capital stock of a corporation owning the refinery, pipe lines and gathering lines then owned by the West Texas Company. The Standard Company agreed to pay $72,000 for such stock and in addition to pay 50 per cent of the cost of any improvements or additional construction at the refinery after the date of the contract. The stock was to be delivered and payment was to be made on or about September 1, 1925. At a meeting of the stockholders of the West Texas Company held on September 3, 1925, a so-called plan of reorganization was adopted as follows: THAT, all of the Refinery property, Pipe lines, and Gathering Lines and Pumping Stations of this Corporation be*1404 transferred to the COL-TEX REFINING COMPANY, a Corporation organized under the Laws of the State of Delaware, in consideration of the issuance by the said Corporation of 2,000 shares of its Capital Stock of the par value of $100.00 each; the payment of $72,000.00 and the further payment of one-half of the amount expended by this Corporation since July 1st, 1925, in the construction of additions and improvements to said refinery, pipe lines, gathering lines and pumping stations. That on the receipt of said sums they be applied by this corporation, together with the proceeds of all other accounts receivable and other assets of this corporation in payment of the indebtedness of this Corporation. That subject to the payment by the Stockholders of this Corporation ratably of all the indebtedness of this corporation which may remain unpaid after the application of said monies, the stock of said COL-TEX REFINING COMPANY so to be received be distributed as a dividend to the shareholders of this corporation. * * * Also on September 3, 1925, the stockholders of the Col-Tex Company held a meeting and elected directors. Immediately thereafter, at 11.45 a.m., the directors so elected*1405 held a meeting and, after electing officers, adopted a resolution accepting the offer of the West Texas Company to transfer its refinery, pipe lines, etc., in exchange for stock and cash. Another meeting was held by such directors at 2 p.m. of the same day, at which the president stated that in order *1256 to carry out the plan for acquisition of the refinery property from the West Texas Company it would be necessary to obtain funds by the sale of stock. He reported that individuals representing the Standard Oil Company of California had offered to purchase 2,000 shares of the capital stock for the total sum necessary to make the cash payment to the West Texas Company. A resolution was adopted approving such sale of stock. By proper corporate action, deeds of conveyance and bills of sale, the properties were transferred by the board of directors to the Col-Tex Company. All instruments of transfer are set out in the minutes of a special meeting of the board of directors held on September 3, 1925. Stock of the Col-Tex Company which was sold to the Standard Oil Company interests was issued at the same time as that delivered to the West Texas Company, but delivery of the*1406 certificates was made several days thereafter, on September 19, 1925, when the cash payment of $184,771.34 was made by the Standard Oil Company. The money so received by the Col-Tex Company was paid to the West Texas Company in accordance with their agreement. Individuals representing the Standard Oil Company were elected directors of the Col-Tex Company at the afternoon meeting of the board of directors on September 3, 1925, which was prior to delivery of the 2,000 shares of the capital stock. None of them, however, were incorporators of the Col-Tex Company and none of them participated in the stockholders' and directors' meetings in the forenoon of September 3, 1925. The cash payment of $184,771.34 received by the West Texas Company was insufficient to pay all of its indebtedness and stockholders of the West Texas Company supplied the additional amount necessary. The 2,000 shares of Col-Tex Company stock was subsequently distributed to the West Texas Company by stockholders after contribution by them of cash sufficient to discharge the debts, on the basis of one share for each share owned in the West Texas Company. After distribution of the 2,000 shares of stock by the*1407 West Texas Company, the date of which is not disclosed by the record, it had no property or assets of any kind remaining. With the exception of a few qualifying shares, stock of the West Texas Company was owned by the Hickok Producing Company and the Anderson-Prichard Oil Corporation. The assets acquired from the West Texas Company were set up on the Col-Tex Company's books of account by the following journal entry: [1925] Folio Debit Credit 8/29 Refinery Land [237] $3,103.50 Refinery Equipment [239] 172,407.56 Pipe Line Land [237] 342.50 Pipe Line Equipment [241] 139,116.24 Good Will [197] 85,030.20 Capital stock $400,000.00 Capital stock issued for property of the West Texas Ref. & Dev. Co. Value of Plant A/C set up in the depreciated cost value of the properties of the West Texas Ref. and Dev. Co., as of the date of transfer. *1257 The amount stated for good will is a balancing figure rather than the good will value. The amounts shown for other assets represent cost to the West Texas Company, less depreciation sustained. The fair market value of the assets other than good will was equal to the depreciated cost. In January, 1929, *1408 pursuant to the provisions of section 279(a) of the Revenue Act of 1926, the respondent assessed against the West Texas Company the amount of $7,574.44 as income taxes due for 1925. The taxpayer was notified thereof by deficiency letter dated February 11, 1929. No part of the deficiency has been paid. On October 30, 1929, the Col-Tex Company was notified that it was liable as transferee for the deficiency determined, plus interest as provided by law. OPINION. LANSDON: The respondent has determined that the transfer of assets by the West Texas Company to the Col-Tex Company was a sale from which the West Texas Company realized a gain of $58,830.61. The petitioners contend that such transfer was pursuant to a plan of reorganization and that no gain should be recognized under the provisions of section 203 of the Revenue Act of 1926. 1 *1409 *1258 The petitioners argue that immediately after the transfer of assets by the West Texas Company to the Col-Tex Company, the former owned all of the outstanding capital stock of the latter; and that the Standard Oil Company became a stockholder thereafter when stock was delivered to it. We think the record fails to support such a contention. All of the transactions set forth in our findings were pursuant to a plan of organization conceived by the parties prior to the contract of June 2, 1925, and set forth in detail at the stockholders' meeting of the West Texas Company on September 3, 1925. Such plan of organization was completed by delivery of stock to the Standard Oil Company for $184,771.34 in cash, which was then paid to the West Texas Company in accordance with the agreement between that company and the Col-Tex Company. We think the provisions of section 203 are applicable as of the date the plan was completed. Where there are several steps to be taken in effecting the organization of a new corporate enterprise, it is impossible to have them all occur at the same instant. One step must precede another and we do not think the language of section 203, "immediately*1410 after the transfer," intended that questions of tax liability should be determined by the fact that a transfer of property occurred a few days before cash was paid in, when both are essential steps in the plan of organization. Cf. . We conclude that, at the determinative date, stock of the Col-Tex Company was owned 50 per cent by the West Texas Company and 50 per cent by the Standard Oil Company. There was no reorganization within the meaning of section 203 of the 1926 Act. Cf. . It remains for us to determine whether the Col-Tex Company is liable under section 280 of the Revenue Act of 1926 as a transferee of assets of the taxpayer. The petitioner contends that it was a purchaser for value and that no liability at law or in equity attaches to such a transaction. The respondent contends that the Col-Tex Company acquired assets having a value of $314,969.80 in exchange for $184,771.34, in cash and its own capital stock; and that it was not a *1259 purchaser for value, since it acquired the property for less than a fair consideration. *1411 We have heretofore held that where a new corporation acquires all the assets of a taxpayer in exchange for common stock which is delivered to the taxpayer the new corporation is liable as transferee to the extent of the value of the assets received. , and . In those cases the assets were acquired subject to the liabilities. Here the taxpayer transferred its assets in exchange for stock and an amount of cash which was insufficient to satisfy its liabilities. Unless certain of the creditors are allowed to follow the assets into the transferees' hands they will be forced to substitute as security for their debts corporate stock of a speculative value. The courts have repeatedly held that a creditor may not be forced to give up tangible assets as security for his debt and thereafter look for payment to shares of corporate stock. ; ; *1412 ; ; ; ; ; ; ; ; . The depreciated cost to the taxpayer of the assets transferred was $314,969.80 and we have found that on the date of the transfer the assets had a value equal to the depreciated cost. The cash consideration paid of $184,771.34 can not be held to be a fair and adequate payment for assets having a value of $314,969.80. We think the Col-Tex Company is liable as a transferee for taxes due from the West Texas Company for 1925. Decision will be entered for the respondent. Footnotes 1. SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section. * * * (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. * * * (e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then - (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but (2) If the corporation receiving such other property or money does not distribute at in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed. * * * (h) As used in this section and sections 201 and 204 - (1) The term "reorganization" 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 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, or (D) a mere change in identity, form, or place of organization, however effected. * * * (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. ↩