Redington v. Commissioner

THOMAS H. REDINGTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Redington v. Commissioner Docket No. 50953. United States Board of Tax Appeals 25 B.T.A. 707; 1932 BTA LEXIS 1486; February 29, 1932, Promulgated *1486 1. During 1928 the petitioner exchanged certain shares of common stock in a Colorado corporation which he had acquired subsequent to March 1, 1913, at a cost of $40,000, with a Delaware corporation for certain shares of its common stock having a fair market value of $83,549 on the date of the exchange. By purchase and other exchanges the Delaware corporation acquired the remainder of the outstanding common stock of the Colorado corporation, but no part of the outstanding preferred stock. The Colorado corporation was not dissolved as a result of the transaction, but continued as a going concern, owning the same assets as were owned by it before the transaction took place. Held, that the transaction was not a reorganization within the meaning of subdivision (i) of section 112 of the Revenue Act of 1928. Held, further, that the transaction was one in which the entire amount of the gain thereon is to be recognized for the purpose of the tax under subdivision (a) of the same section. 2. Held, that since income was realized by the petitioner from the exchange, the tax on such income may, under the Sixteenth Amendment, be laid and collected without apportionment. *1487 George T. Evans, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. TRAMMELL *707 This proceeding is for the redetermination of a deficiency in income tax of $5,443.63 for 1928. The only matter in controversy is the respondent's action in determining that the petitioner realized taxable income from the exchange of stock in one corporation solely for stock in another corporation. The proceeding was submitted on a stipulation of facts, from which we make our findings of fact. FINDINGS OF FACT. 1. The petitioner herein is an individual residing in the City of Denver and State of Colorado, and the taxes in controversy are income taxes for the calendar year 1928 in the amount of $5,443.63. 2. On July 2, 1928, petitioner was the owner of 100,000 shares of the common stock of The Windsor Farm Dairy Company (hereinafter called the Windsor Company) which was then a corporation organized and existing under and by virtue of the laws of the State of Colorado, with its principal office at Denver, Colorado. These shares of stock were acquired by petitioner subsequent to March 1, 1913. 3. On July 2, 1928, petitioner exchanged his*1488 100,000 shares of the common stock of the Windsor Company with the Beatrice Creamery *708 Company solely for 1,247 shares (par value $50 per share) of the common stock of the said Beatrice Creamery Company (hereinafter called the Beatrice Company) which is a corporation organized and existing under and by virtue of the laws of the State of Delaware, with its principal office at Chicago, Illinois. 4. The 1,247 shares of the common stock of the Beatrice Company so received by petitioner in exchange for his 100,000 shares of the Windsor Company common stock were originally issued to him by the said Beatrice Company. 5. On July 2, 1928, the date of the transaction herein, the outstanding stock of the Windsor, company consisted of 1,031,250 shares of common voting stock, par value $1 per share, and 4,000 shares of nonvoting preferred stock, par value $100 per share, providing for 7% dividends per annum. On February 29, 1928, the Beatrice Company had an authorized capital stock of $8,000,000 par value 7 per cent cumulative preferred stock and $12,000,000 par value common stock, and on said date there were outstanding 57,445 shares of said preferred stock of a par value*1489 of $100 each, or a total par value of $5,745,500 for said preferred stock, and 134,265 shares of common stock of a par value of $50 each, or a total outstanding par value of $6,713,250 for said common stock. 6. The 4,000 shares of preferred stock of the Windsor Company outstanding on July 2, 1928, were, according to the terms of the certificates therefor, callable at any time, at the option of the said Windsor Company, at 105. 7. On July 2, 1928, the date of the transaction herein described, the Beatrice Company acquired through one purchase by cash from one stockholder and the aforesaid exchange with petitioner and other exchanges the immediate and absolute ownership and control of every share of the 1,031,250 shares of common stock of the Windsor Company then outstanding, but acquired none of the 4,000 shares of the outstanding preferred stock of the said Windsor Company. The common stock of the Windsor Company was held locally in Denver, Colorado. 8. None of the preferred stock of the Windsor Company was then owned or controlled by any then owner of common stock of the said Windsor Company. 9. At the time of the negotiations between the Beatrice Company and the*1490 common stock holders of the Windsor Company the said Beatrice Company offered to purchase the entire issue of Windsor Company preferred stock at 103, but the owners thereof, relying upon their right to have that stock called by the said Windsor Company at 105, refused to sell at 103, and retained their preferred stock during the year 1928. *709 10. The Windsor Company was not dissolved as a result of the transaction of July 2, 1928, but continued a going concern, owning the same assets as it did before the said transaction took place. 11. The cost basis of petitioner's 100,000 shares of Windsor Company common stock to petitioner was $40,000, and the fair market value of the Beatrice Company common stock received by petitioner in exchange therefor was on the date of the exchange, July 2, 1928, $83,549. In determining the deficiency here involved the respondent determined that the petitioner realized a taxable profit of $43,549 as a result of the exchange, or the difference between the cost to the petitioner of the stock exchanged, $40,000, and the fair market value of the stock received therefor, $83,549. OPINION. TRAMMELL: The petitioner contends that no taxable*1491 profit resulted from the exchange of his stock in the Windsor Company for stock in the Beatrice Company as set out in our findings of fact, since the acquisition by the Beatrice Company of all of the common stock of the Windsor Company was a reorganization within the meaning of the term as used in section 112(i)(1) of the Revenue Act of 1928. The respondent denies the correctness of this contention of the petitioner. Pertinent provisions of the Revenue Act of 1928 are as follows: SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS. (a) Computation of gain or loss. - Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized. * * * (c) Amount realized. - The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. (d) Recognition of gain or loss. - In the case of a sale or exchange, the extent to which the gain or loss determined under this section*1492 shall be recognized for the purposes of this title, shall be determined under the provisions of section 112. * * * SEC. 112. RECOGNITION OF GAIN OR LOSS. (a) General rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section. (b) Exchanges solely in kind. - (1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT. - No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of *710 trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment. * * * (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*1493 corporation a party to the reorganization. * * * (i) Definition of reorganization. - As used in this section and section 113 and 115 - (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 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, or (D) a mere change in identity, form or place of 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. * * * SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS. *1494 (3) Property acquired after February 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * * * * * SEC. 701. DEFINITIONS. (b) The terms "includes" and "including" when used in a definition contained in this Act shall not be deemed to exclude other things otherwise within the meaning of the term defined. Subdivision (a) of section 111 provides the method for computing the amount of gain or loss from the sale or other disposition of property. Subdivision (d) provides that the extent to which the gain or loss determined under the section shall be recognized for the purposes of the tax, shall be determined under the provisions of section 112. Section 112 provides that the entire amount of the gain or loss upon the sale or exchange of property determined under section 111 shall be recognized except in certain situations set out therein. Section 113 provides the basis for determining gain or loss. Under the provisions of sections 111 and 113 the amount of gain realized by the petitioner is the difference between the cost of the stock of the Windsor*1495 Company to him, $40,000, and the fair market *711 value of the stock of the Beatrice Company at the time of its receipt in exchange therefor, $83,549. This gain, or $43,549, shall be recognized for the purpose of the tax unless it comes within the exceptions provided in section 112. The stipulated facts show that the Beatrice Company acquired from the holders thereof for cash or in exchange for its own common capital stock all the common capital stock of the Windsor Company. It did not, however, acquire any of the preferred stock of the Windsor Company. The Windsor Company was not dissolved, but continued as a going concern, owning the same assets that it owned before the transaction took place. The capital structure of the Windsor Company was not changed in any way. Nor was the capital structure of the Beatrice Company changed as a result of the transaction. All the Beatrice Company did was to issue shares of its common stock in exchange for shares of stock in the Windsor Company. So far as the facts show there was no change in the identity, form or place of organization of the companies, nor did either of them acquire any of the assets of the other. The exchange*1496 by which the petitioner acquired stock of the Beatrice Company does not come within the exception in paragraph 1, subdivision (b) of section 112, since that subdivision specifically provides that stocks are not included therein. The exchange comes within the provisions of paragraph (3), subdivision (b) of section 112, provided there was a reorganization within the meaning of the term as defined in subdivision (i) of the same section. There, the term is defined as "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) * * *." It is plain that the transaction does not come within the parenthetical clause above quoted. It is not even claimed that any preferred stock was acquired and, clearly, it was not. A majority of each class of stock was not acquired, as is necessary to bring a transaction within the parenthetical clause. Nor did either company acquire any of the assets of the other as provided in section 112(i). There was no recapitalization of either*1497 of the corporations, nor any change in their identity, form or place of organization as set out in subsection (i) of section 112. The petitioner urges that while the Beatrice Company did not acquire any of the preferred stock of the Windsor Company, it acquired all of the common stock of that company; that under the circumstances here involved such acquisition constituted a reorganization within the commonly accepted meaning of the term and accordingly *712 meets the requirements of that portion of the parenthetical provision of subdivision (i) of section 112 relating to the acquisition by one corporation of stock in another. In support of this the petitioner relies on the provision of section 701 to the effect that the terms "includes" and "including" when used in a definition contained in the Act shall not be deemed to exclude other things otherwise within the meaning of the term defined. The transaction, however, clearly was not a merger, as both corporations continued their separate existence with the same assets as before. Nor was it a consolidation. Neither corporation was dissolved; no new corporation came into being; both corporations had their own assets as*1498 before, with separate management. They were organized and existed under laws of different States. In no sense were the corporations united. It does not meet the statutory definition. Section 709, which provides that "includes" and "including" shall not be construed to exclude other things otherwise within the meaning of the term defined, does not enlarge the definition of reorganization, but merely means that the parenthetical clause following "merger or consolidation" in which "including" is used is not to be considered as an all-inclusive definition of "merger or consolidation." To grant the petitioner's contention would mean going a step further and including within the meaning of the term "reorganization" a transaction coming within neither the parenthetical nor other provisions of subdivision (i). In view of the foregoing, we hold that the transaction was one the entire amount of the gain from which is to be recognized. See Robert D. Green,24 B.T.A. 719. The petitioner further contends that he did not realize any income from the exchange, having only received stock in one corporation for stock in another. He further contends that, in so far as sections*1499 111, 112 and 113 of the Act determine and recognize a taxable gain from the transaction, they lay a direct tax upon personal property without apportionment and contrary to Article I, section 2, clause 3, and Article I, section 9, clause 4, of the Constitution and are therefore to that extent invalid. The contention that income was not realized from the exchange or that it could not be constitutionally taxed as income must be decided adversely to the petitioner. Marr v. United States,268 U.S. 536. Income having been realized, the tax thereon may, under the Sixteenth Amendment, be laid and collected without apportionment. The petitioner's contentions as to the validity of sections 111, 112 and 113 of the Act must therefore be denied. The parties have stipulated that, if the respondent's determination is sustained, there is a deficiency for the calendar year 1928 of *713 $5,443.63, and that an order of redetermination may be entered for that amount. Reviewed by the Board. Judgment will be entered determining a deficiency of $5,443.63 for 1928.