Southern Cal. Rock & Gravel Co. v. Commissioner

THE SOUTHERN CALIFORNIA ROCK AND GRAVEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PACIFIC ROCK AND GRAVEL COMPANY, W. L. HODGES, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Southern Cal. Rock & Gravel Co. v. Commissioner Docket Nos. 28776, 30898. United States Board of Tax Appeals 26 B.T.A. 296; 1932 BTA LEXIS 1328; June 8, 1932, Promulgated *1328 The petitioners exchanged property for stock before Dec. 31, 1920. Held that the basis for computing profit upon sale of the stock is the fair market value of the property exchanged therefor. A. Calder Mackay, Esq., George M. Thompson, C.P.A., John B. Milliken, Esq., and Dan J. Chapin, Esq., for the petitioners. J. A. Lyon, Esq., and E. L. Updike, Esq., for the respondent. LANSDON *297 The respondent has asserted deficiencies against the Southern California Rock and Gravel Company and the Pacific Rock and Gravel Company for the calendar year 1922, in the respective amounts of $31,049.45 and $53,509.11. The deficiencies arise from the respondent's determination that the basis for computing profit on the sale of stock owned by each of the petitioners was to be determined under section 202 of the Revenue Act of 1921, and was the cost of certain property exchanged for stock pursuant to a plan of reorganization. The petitioners contend that such stock was acquired in exchange for property on November 2, 1919, and that under the provisions of the Revenue Act of 1918, the basis for computing profit upon the sale of the stock is the*1329 fair market value of the assets exchanged therefor. FINDINGS OF FACT. The Southern California Rock and Gravel Company, hereinafter referred to as the Southern Company, is a California corporation, with its principal office in Los Angeles. Prior to its merger with the Pacific Rock and Gravel Company it was engaged in extracting, manufacturing and selling crushed rock, sand and gravel. The Pacific Rock and Gravel Company, hereinafter referred to as the Pacific Company, is a California corporation, organized to engage in extracting, manufacturing and selling crushed rock, sand and gravel. It was dissolved by order of the Superior Court of California on October 25, 1923, and the appeal here was filed by its statutory trustee, W. L. Hodges. Prior to April, 1919, the petitioners and the Russell-Green-Foell Corporation were competitors in the rock, sand and gravel business. In order to eliminate ruinous competition the three companies organized the Union Rock Company in April, 1919, to market the products of all three on a commission basis. On November 2, 1919, the petitioners acquired a four-year lease, with option to purchase, on the entire properties of the Russell-Green-Foell*1330 Corporation. Also, on November 2, 1919, the petitioners entered into an agreement providing that they would transfer all of their plants, equipment and assets to the Union Rock Company in exchange for 4,000 shares of preferred stock having a par value of $100 per share and 16,000 shares of common stock having no par value, to be divided equally between them. On that date the Union Rock Company took physical possession of the tangible assets and thereafter operated them as a unit. *298 On December 6, 1920, the stockholders of the Union Rock Company met and adopted a resolution to amend the certificate of incorporation increasing that company's authorized capital stock from 250 shares of common having a par value of $100 to 4,000 shares of preferred having a par value of $100 per share and 16,000 shares of common, without par value. Such resolution approved the action taken by the board of directors on December 4, 1920. On December 24, 1920, the board of directors of the Pacific Company met and adopted a resolution to the effect that the terms of a certain agreement theretofore executed by the officers of the company under date of November 2, 1919, and providing for a*1331 transfer of assets to the Union Rock Company in exchange for stock, should be forwarded to the Union Rock Company in the form of an offer. The officers of the company were directed forthwith to make such offer to the Union Rock Company. On the same date the board of directors of the Southern Company met and adopted a similar resolution. The board of directors of the Union Rock Company also met on December 24, 1920. The minutes of such meeting state that the Pacific Company and the Southern Company had offered to transfer all of their real and personal property to the Union Rock Company in exchange for 4,000 shares of preferred stock and 16,000 shares of common stock. A resolution was adopted accepting such offer and directing the president and secretary to carry out the details of the transaction. On January 20, 1921, the Union Rock Company, pursuant to the laws of California, filed an application with the commissioner of corporations, requesting permission to issue 3,970 shares of preferred stock and 16,000 shares of common stock in exchange for assets acquired from the Pacific Company and the Southern Company. On January 24, 1921, the commissioner of corporations granted*1332 such permission and the stock was issued and delivered to trustees for the Southern Company and the Pacific Company in February, 1921. One-half of such stock was held for each of the companies. At various times between February 10, 1921, and April 18, 1922, instruments of assignment, transfer or conveyance were executed by each of the petitioners and delivered to the Union Rock Company, covering the properties to be transferred under the agreement of November 2, 1919, and referred to in the minutes of the board of directors' meeting of each of the three corporations on December 24, 1920. Attached to each of the several instruments of transfer was a document executed and acknowledged by individuals purporting to be stockholders of the corporation, executing such instrument in the following form: *299 We, the undersigned, being the holders of record of more than 2/3rds of the issued capital stock of * * * the above named corporation, do hereby consent and agree to the making of the transfer * * * of the property described in the foregoing instrument. * * * The parties have stipulated that if the Pacific Company and the Southern Company are entitled to use any other*1333 basis than that determined by the respondent in computing profit from the sale in 1922 of their stock in the Union Rock Company, such basis to be used in each case is the amount of $537,604.75. They further stipulate that if the basis used by the Commissioner in determining profit on such sale is correct in law, the deficiencies set forth in his notices of deficiency are in all respects correct. The parties also agree that in 1922 the Pacific Company and the Southern Company sold their stock in the Union Rock Company for $573,007.56 and $550,000, respectively. OPINION. LANSDON: The proceeding at Docket No. 28776 was brought by the Pacific Company through its statutory trustee, W. L. Hodges. At the hearing counsel for the respondent suggested the death of Hodges and moved to dismiss the appeal for lack of jurisdiction, on the ground that no successor trustee had been appointed. Counsel for the petitioner then moved to substitute Agnes Wiley Hodges, Executrix of the estate of W. L. Hodges. The deficiency notice was addressed to the Pacific Company, W. L. Hodges, Trustee, and the petition was filed by Hodges, acting for the corporation. Upon filing of the petition with deficiency*1334 notice attached, the Board acquired jurisdiction over the proceeding. At the hearing, counsel for the taxpayer, who had been employed prior to Hodges' death, appeared and offered evidence in support of allegations in the petition. In such circumstances, we think this Board has jurisdiction to hear the appeal and redetermine the deficiency. The petitioner, the Pacific Company, is still in existence for purposes of dissolution, and while there is a vacancy in the trusteeship, the Superior Court of California will doubtless appoint a successor upon proper application of any interested creditor or stockholder. Accordingly, both the respondent's motion to dismiss and the petitioner's motion to substitute the executrix of the estate of W. L. Hodges are denied. Cf. . The only controversy here relates to the basis for computing profit on the sale in 1922 of Union Rock Company stock by each of the petitioners. If the exchange by which the Union Rock Company stock was acquired occurred prior to December 31, 1920, the basis *300 for valuing the stock in petitioner's hands will be cost, which is the fair market value of the property exchanged*1335 therefor. If the exchange occurred after December 31, 1920, the stock will be treated as taking the place of the property and the basis for computing profit will be cost of the property exchanged for the stock. Section 202(d)(1) of the Revenue Act of 1921. The petitioners contend that the transfer of assets in exchange for stock actually occurred on November 2, 1919, and that only the legal formalities incident to such transfer and issue of stock remained to be done thereafter. The respondent contends that while physical possession of the assets was transferred on November 2, 1919, no title passed under the laws of California until stockholders of the petitioners consented to the transaction, either in a meeting called for that purpose, or by an instrument attached to each assignment or conveyance. The facts disclose that for several years prior to 1919 the Pacific Company, the Southern Company and the Russell-Green-Foell Company were engaged in ruinous competition in the rock, sand and gravel business in Los Angeles. To eliminate such competition the three concerns organized the Union Rock Company in March, 1919, which thereafter marketed the products of all three. Apparently*1336 such arrangement did not prove satisfactory for on November 2, 1919, the two petitioners bought out the Russell-Green-Foell Company and transferred the combined assets of the three companies to the Union Rock Company under a contract providing that they should receive 4,000 shares of preferred stock and 16,000 shares of common stock in exchange therefor. Thereafter the Union Company operated the combined properties. By December 24, 1920, possession of all of the property covered by the agreement of November 2, 1919, had been transferred by the petitioners to the Union Company and on that date the board of directors of each of the petitioners met and adopted a resolution directing that the terms of the agreement of November 2, 1919, be forwarded to the Union Rock Company as a formal offer. On the same date the directors of the Union Rock Company met and accepted the offer. While there had been no meeting of stockholders of either petitioner on or before December 31, 1920, all of the stockholders were directors, and, having voted in favor of the sale as directors, they could not avoid the sale on the ground that the stokcholders had not assented. *1337 . Tax liability resulting from sales of property is not determined by the date when legal title is transferred or the date on which certificates of stock are received in payment. Such liability is fixed as of the date the real benefits and burdens of ownership are transferred. ; Grace Harbor*301 ; ; and . Ownership of corporate stock may vest prior to delivery of stock certificates. ; ; ; and In our opinion the exchange was effected prior to December 31, 1920, and the basis for computing profit upon sale of the stock acquired in exchange for the business and assets of each of the petitioners is the fair market value of such property. The basis stipulated by the parties will be used in the recomputation under Rule 50. Decision will be entered under Rule 50.*1338