Carter Publications, Inc. v. Commissioner

CARTER PUBLICATIONS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Carter Publications, Inc. v. Commissioner Docket Nos. 44838 66891. United States Board of Tax Appeals 28 B.T.A. 160; 1933 BTA LEXIS 1173; May 23, 1933, Promulgated *1173 The petitioner, a newspaper corporation, purchased the circulation structure and part of the physical assets of a competing company for an agreed price based upon an appraisal of the assets taken over. Prior to the transfer the selling corporation distributed all assets not included in the sales agreement to its president and sole stockholder, in liquidation of his stock, which was thereupon canceled and reissued, without consideration, to petitioner's president and four other stockholders, who took control and through proper corporate formalities completed the transfer as per agreement and then dissolved that corporation. Held, under the facts shown, the petitioner's acquisition of the assets involved was by purchase and not through reorganization as defined in section 203 of the 1924 Act. H. A. Mihills, C.P.A., for the petitioner. F. B. Schlosser, Esq., for the respondent. LANSDON *160 The respondent has determined deficiencies in income tax for the years 1926 and 1929, in the respective amounts of $2,111.55 and *161 $2,929.39. For its causes of action the petitioner alleges (1) that the respondent has erroneously disallowed*1174 a loss sustained in 1926 by the sale of certain assets acquired in the year 1925, and (2) that he has erroneously decreased the depreciation to which the petitioner is entitled for 1929. The second allegation of error involves both the rate and the basis for depreciation in 1929, but the petitioner has abandoned his contention for a higher rate. The two proceedings have been consolidated for hearing and report. The parties have filed a stipulation which we accept and adopt as our finding of fact. FINDINGS OF FACT. (1) The Wortham-Carter Publishing Company was incorporated under the laws of the State of Texas in January 1909, and has been engaged in publishing and distributing an evening newspaper called "The Star-Telegram" in Fort Worth, Texas. The name of the company was subsequently changed to Carter Publications, Incorporated, the petitioner. A. G. Carter was President of the company during the taxable year and owned a majority of the outstanding stock. (2) The Fort Worth Record Company published a morning newspaper in Fort Worth, Texas, known as the "Fort Worth Record." The principal stockholder of the company was W. R. Hearst who owned no stock of the petitioner. *1175 (3) The petitioner desired to publish a morning newspaper and upon learning that the Forth Worth Record was being offered for sale, A. G. Carter, acting for and on behalf of the petitioner as its agent, entered into negotiations with W. R. Hearst. On October 8, 1925, in a letter addressed to W. R. Hearst, A. G. Carter agreed to purchase from him the entire capital stock of the Fort Worth Record Company, effective as of November 1, 1925. (4) Preparatory to carrying out the agreement of October 8, 1925, the Fort Worth Record Company, pursuant to a resolution of its Board of Directors passes at a special meeting held on October 30, 1925, assigned and distributed to W. R. Hearst its cash, receivables, claims and all other assets with the exception of physical property, rights, franchises and privileges. After this assignoment and distribution the Fort Worth Record Company had assets consisting of physical property, rights, franchises and privileges and liabilities of $350,000. W. R. Hearst then transferred to A. G. Carter or his nominees all of the capital stock of the Fort Worth Record Company. No consideration passed for this transfer, as under agreement of October 8, 1925 the*1176 purchase price of $350,000 was to be liquidated or reduced by bills and accounts payable and other obligations of the Fort Worth Record Company assumed by the purchaser. After such transfer the stock of the two companies was held as follows: Stockholders Carter Ft. Worth (Names) Publications, Inc. Record Co. (Number shares) (Number shares) A. G. Carter 5,000 1,392 B. W. Honea [2] A. L. Sherman [2] J. M. North, Jr [2] H. V. Hugh [2] Total 7,500 1,400 *162 (5) Following the transfer of stock to Carter and his nominees they caused the Fort Worth Record Company to convey to the petitioner all of its assets which as heretofore stated consisted only of physical properties, rights, franchises and privileges. The consideration for the conveyance was $175,000 for the physical properties and $175,000 for the rights, franchises and privileges. This consideration was paid by the assumption of liabilities of the Fort Worth Company of $350,000 by the petitioner. Upon conveyance of its assets to the petitioner, the Fort Worth Record Company dissolved. (6) The foregoing properties were duly conveyed to petitioner on October 31, 1925, by*1177 appropriate bill of sale which recorded the consideration of $350,000 as being paid for the properties acquired on the basis of $175,000 for the physical properties and $175,000 for the rights, franchises and privileges. (7) A. G. Carter, as an individual, had no intention of acquiring either the capital stock or the assets of the Fort Worth Record Company, but was acting in the capacity of agent for and on behalf of the petitioner. The entire purchase price of the said Fort Worth Record Company was paid by petitioner and no part of the personal funds of A. G. Carter was used in any manner in connection with the transaction. (8) A. G. Carter was informed that it would facilitate closing up the affairs of the Fort Worth Record Company if the capital stock of the company could be transferred rather than the assets which petitioner desired to purchase. Upon making inquiry of the attorneys for the petitioner, A. G. Carter was informed that under the laws of the State of Texas, a corporation was not permitted to own the capital stock of another corporation, and for this reason it would be necessary for him, as the nominee of petitioner, to acquire the capital stock of the Fort Worth*1178 Record Company and cause the assets of that company to be conveyed to petitioner. It was the purpose and intent at all times that petitioner should acquire certain specific assets - the physical properties, and the rights, franchises and privileges. The transfer of the capital stock of the Fort Worth Record Company was merely a formality. (9) Prior to October 31, 1925, A. G. Carter did not own any of the capital stock of the fort Worth Record Company, nor did any of the stockholders of petitioner. (10) The petitioner used an appraisal prepared by the American Appraisal Company at July 1, 1924, showing a reproductive sound value on that date of $185,015.36, as a basis for valuation of the physical assets acquired. An actual inventory of physical assets on October 31, 1925, based upon the appraisal, and subsequent additions at cost, amounted to $189,241.40, from which depreciation of 8% was deducted to arrive at the purchase price of $175,000 which was then recorded upon the books of petitioner in accordance with the detailed classification used in the appraisal report. (11) The valuation of $175,000 for intangibles was determined on the basis of 24,000 daily and 30,000 Sunday*1179 subscribers, at an average between $6.00 and $7.00 for each subscriber. (12) On November 1, 1925, the petitioner began the publication of a morning newspaper known as the Record-Telegram. It was considered to be more economical for petitioner to publish the two newspapers with one plant and one organization rather than to maintain two plants and separate organizations, and for this reason the plant of the Fort Worth Record Company was dismantled, part of the machinery being put in use at petitioner's plant, and the balance sold and siposed of at the best available prices. (13) During the latter part of November and December, 1925, the petitioner sold and junked certain equipment which it decided not to use in the converted *163 plant, and deducted as a loss the difference between the proceeds therefrom and the specific cost to petitioner of the asset disposed of as shown in the detailed cost classification of $175,000 as spread upon its books on October 31, 1925. Respondent has limited the loss claimed to the book value of the asset disposed of as shown by the books of the predecessor company, the Fort Worth Record Company, and has allowed depreciation only on the book*1180 value to the predecessor, the Fort Worth Record Company. (14) During the taxable year 1926 the balance of the equipment acquired from the Fort Worth Record Company was put in use, sold, turned in with other equipment of petitioner in part payment for new machinery, or junked. The combined cost to petitioner of the assets disposed of in 1926 as shown by the classified cost aggregating $175,000 as spread upon its books was $22,591.61 and the proceeds therefrom were $14,988.56, the difference of $7,603.05 being deducted by petitioner as a loss in its return for the taxable year. Respondent has disallowed the aforementioned loss of $7,603.05 and in lieu thereof computed a profit on the sales transaction by use of the book value to the predecessor, the Fort Worth Record, as a basis for computing gain or loss, and has determined in this manner that the cost of the assets disposed of by petitioner was $8,200.76 and a profit resulted in the amount of $6,787.80, which accounts for the amount of income in controversy, $14,390.85 for the taxable year 1926. (15) The amount of $39,405.76 shown in the tax return of petitioner for the taxable year as being the amount received, includes the*1181 cost of assets put in use during the taxable year aggregating $24,417.20 in addition to the proceeds of assets disposed of aggregating $14,988.56. (16) Petitioner deducted in its tax return for the taxable year 1929 depreciation on its physical equipment in the amount of $71,929.06, whereas respondent has allowed as a deduction the amount of $47,025.40 and disallowed the amount of $24,903.66, the difference resulting from reduction of rates of depreciation as computed by petitioner and reduction of the basis upon which depreciation was computed by petitioner. (17) The aforementioned reduction in basis to be used in computing depreciation is in the amount of $73,421.65 and is represented by the difference between the book value of certain assets shown by the books of the predecessor company, the Fort Worth Record Company, and the recorded cost of the same assets included in the aforementioned detailed classified cost of $175,000 as spread upon the books of the petitioner on October 31, 1925. (18) The parties are in agreement that the sole controversy before this Board relates to the basis for computing depreciation, and the basis for computing gain or loss on subsequent disposition, *1182 of the physical assets acquired by petitioner from the Fort Worth Record Company on October 31, 1925, the petitioner having used as its basis the cost of $175,000 attributed to the physical assets the amount of which is not in controversy between the parties, whereas the respondent has determined that the purchase of the assets by the petitioner from the Fort Worth Record Company constituted a reorganization under the provisions of Section 204(a)(7) of the Revenue Act of 1926, and that thereunder the petitioner is limited to the use of the basis in the hands of the predecessor company. OPINION. LANSDON: In this proceeding we are required to decide only a question of law. The petitioner contends that in the circumstances set out in our findings of fact it purchased certain of the physical *164 assets of the Fort Worth Record Co. for $175,000 and, therefore, is entitled to compute gain or loss from the sale of such property and depreciation sustained in the use thereof on a cost basis of $175,000. The respondent has determined the transactions in question effected a reorganization as defined in section 203(h)(1) of the Revenue Act of 1924 and therefore that the basis for*1183 computing gain or loss from sales or depreciation sustained in the use of assets so acquired is that to which the transferor was entitled under the provisions of section 204(a)(7) of the same act. The Fort Worth Record Co. distributed a part of its assets to its principal shareholder, thereafter sold the remainder to the petitioner and was at once dissolved. Instead of being a continuing reorganized corporation in any sense it ceased to exist, and from the date of its dissolution neither as a corporation nor through its stockholders dis it have any continued interest in or control over the corporation that had purchased a portion of its assets for cash. ; . It is equally difficult to see any reorganization of the petitioner, which merely bought some property and thereafter remained under and was operated for the same body of stockholders that controlled it prior to the transaction. In the circumstances herein some of petitioner's stockholders took legal title to the stock of the Fort Worth Record Co., but only for the purposes of carrying out the agreement*1184 with Hearst. In their ad interim holding thereof, Carter and his associates were no more than trustees charged with the duty of accomplishing the terms of such agreement. Since none of such stockholders owned a majority of the Fort Worth Record Co. at the inception of this transaction, the procedure followed is not within the definition of a reorganization as contended by the respondent. The whole series of acts, corporate and otherwise, constituted only a single transaction in which the petitioner purchased certain tangible assets for cash. On this issue the determination of the respondent is reversed. ; ; ; ; ; . Cf. ; . The petitioner has abandoned its claim for a rate of depreciation higher than that allowed by the Commissioner. On this issue the*1185 determination of the respondent is affirmed. Reviewed by the Board. Decision will be entered under Rule 50. GOODRICH and LEECH dissent.