France Co. v. Commissioner

THE FRANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. France Co. v. Commissioner Docket No. 64869. United States Board of Tax Appeals 29 B.T.A. 661; 1934 BTA LEXIS 1502; January 3, 1934, Promulgated *1502 A corporation, owning by cash purchase all the shares of its subsidiary, received all the subsidiary's assets and assumed all its liabilities pursuant to an agreement whereby it surrendered the shares for cancellation by the subsidiary. The difference between the cost of the shares and the net value of the subsidiary's assets when received, held to constitute a taxable gain to the corporation from a distribution in liquidation. H. A. Mihills, C.P.A., and S. Sanger, Esq., for the petitioner. R. M. Coon, Esq., and F. S. Gettle, Esq., for the respondent. STERNHAGEN *662 The petitioner assails the respondent's determination that in 1929 it received a liquidating distribution of $89,863.53, which included a gain of $60,763.53, and of a resulting deficiency of $6,683.99 in its income tax for 1929. FINDINGS OF FACT. During 1924 and 1925 petitioner, an Ohio corporation, purchased for $29,100 the entire outstanding capital stock, consisting of 400 shares, of the Bascom Quarries Co. It held this stock until 1929. On January 2, 1929, the shareholders of the Bascom Co. adopted the following resolution, and on the same date its board*1503 of directors authorized its officers to enter into the agreement contained therein: RESOLUTION BE IT RESOLVED by the Shareholders of The Bascom Quarries Company that the Board of Directors of said corporation be, and it hereby is directed to authorize the proper officers of the Company to enter into a contract with The France Company under the terms of which it shall be provided that the entire assets and property of The Bascom Quarries Company shall be sold and delivered to The France Company upon the terms and conditions and for the considerations set forth in the agreement presented at this meeting, a copy of which agreement is as follows: AGREEMENT THIS AGREEMENT entered into and concluded at Toledo, Ohio, as of this 2nd day of January, A.D. 1929, by and between The Bascom Quarries Company, an Ohio corporation of Toledo, Ohio, hereinafter called the Seller, and The France Company, an Ohio corporation of Toledo, Ohio, hereinafter called the Purchaser. WITNESSETH: In consideration of the mutual agreements between the parties hereto, it is agreed by and between them as follows: 1. The Seller agrees to and does hereby sell to the Purchaser and the Purchaser agrees to*1504 and does hereby purchase from the Seller, the entire assets and property of the Seller including accounts receivable and cash on hand existing at the close of business on December 31st, 1928. 2. The Seller will accept and the Purchaser will pay for such assets and property the sum of $51,598.90 payable as follows: $40,000.00 thereof by the endorsement and surrender for cancellation to the Seller of 400 shares of its common capital stock being all of the outstanding shares of the Seller, and the balance of said purchase price by the assumption and payment of the indebtedness due and owing by The Bascom Quarries Company at the close of its business on December 31st, 1928, amounting to $11,598.90. The purchaser will also assume, do, and perform all of the obligations agreed to be done and performed by the Seller in any and all contracts that shall be assigned by the Seller to the Purchaser pursuant to the terms of this agreement. 3. The Seller will convey said assets and property by proper instruments of assignment and conveyance in such form as shall be satisfactory to the Purchaser which assets and property shall be free and clear of all encumbrances *663 except the*1505 taxes and assessments due thereon and payable in June 1929 and thereafter. 4. The Purchaser will deliver to the Seller for cancellation, duly endorsed, all certificates evidencing the above mentioned shares of stock of the Seller upon the delivery by the Seller of the aforesaid proper instruments of assign ment and conveyance, vesting the absolute title in and to all of said property and assets in the Purchaser. On January 18, 1929, petitioner's board of directors authorized its officers to enter into said agreement by virtue of a shareholders' resolution passed on the same date. On or after January 18, 1929, the agreement, reciting that it was "entered into and concluded * * * as of this 2nd day of January, A.D. 1929," was duly executed. Under date of February 21, 1929, an entry on petitioner's journal reflects the transfer to it of the Bascom Co.'s assets and liabilities. A second journal entry, dated March 1, 1929, crediting petitioner with the Bascom Co.'s check for $2,160.13, contains the following notation: "To transfer business transacted by The Bascom Quarries Co. for the France Co. from Jan. 1 to Feb. 28, 1929." On April 15, 1929, the Bascom Co. acknowledged a*1506 bill of sale, "as of this 2nd day of January, A.D. 1929," transferring to petitioner all its assets, which consisted of cash, accounts receivable, land, machinery, buildings, and equipment, and on the same date acknowledged a deed transferring its real estate. On October 29, 1929, the Bascom Co.'s shareholders passed a resolution to dissolve the corporation, and authorized its officers to take the proper steps to that end. Its shares of stock were canceled in October. During January and February 1929 the Bascom Co. continued making sales of products, which were reflected in its invoices, and continued to issue checks on its separate bank account in payment for labor, services and materials connected with activities carried on in its name. Petitioner filed a separate income tax return for 1929, which reflected without segregation the income and deductions of the business carried on by itself and that conducted in the name of the Bascom Co. In answer to the question, "Is This a Consolidated Return of Two or More Corporations," petitioner wrote "No." The Bascom Co. filed a separate return for 1929, reporting no income and no deductions. On the margin was written: As of January 1, 1929, The*1507 France Co. acquired all of the assets and assumed all of the indebtedness of this corporation, by surrendering for cancellation all of this corporation's outstanding stock. This corporation was dissolved during 1929. Respondent computed a taxable profit of $60,763.53, the difference between $89,863.53, the net book value of the assets transferred, and $29,100, the cost of the stock to petitioner. *664 OPINION. STERNHAGEN: This was so obviously a distribution to petitioner in complete liquidation of all its shares in the Bascom Co. that it deserves but brief consideration. The petitioner labors an argument (1) that the transaction was a purchase; (2) that, if a distribution, it was essentially the equivalent of an ordinary dividend; (3) that it was a statutory reorganization, and thus relieved from tax; (4) that the corporations were affiliated and filed a consolidated return; and (5) that upon a consolidated return the transaction was an intercompany transaction upon which no gain may be recognized. The transaction was in destruction of the affiliation and was the occasion for the realization by petitioner of its investment in the Bascom stock. *1508 ; ; certiorari denied, . Were this not so, petitioner would still be not entitled to the benefits of a consolidated return, for it deliberately elected to file a separate return. . There was not a statutory reorganization, but quite the reverse, for instead of acquiring all the Bascom Co.'s property in a transaction which partakes of a merger or consolidation, cf. ; ; certiorari denied, , it acquired it in a transaction which completely separated the two corporations. Finally, whether the acquisition of the property be for some legalistic purposes called a purchase, it was at the same time an acquisition in liquidation, to which the statute is expressly applicable, as the respondent has determined. Having paid $29,100 for the shares in 1924 and 1925, and had the shares*1509 liquidated by the receipt of assets worth $89,863.53 in 1929, the respondent correctly held that petitioner realized in that year a taxable gain of $60,763.53. Judgment will be entered for the respondent.