J. S. Rippel & Co. v. Commissioner

J. S. RIPPEL & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. S. Rippel & Co. v. Commissioner Docket No. 59009. United States Board of Tax Appeals 30 B.T.A. 1146; 1934 BTA LEXIS 1226; June 29, 1934, Promulgated *1226 Where A corporation acquired in excess of 60 percent of the outstanding capital stock of B corporation for cash and bonds, and the latter corporation was not dissolved but continued to operate its business without modification in any way, held, there was no reorganization within the meaning of section 203(h)(1) of the Revenue Act of 1926. Held, further, the gain derived by the petitioner upon the exchange of its stock in B corporation for cash and bonds of A corporation is recognizable for tax purposes to the extent of both the cash and the bonds so received. John A. Conlin, C.P.A., for petitioner. Paul A. Sebastian, Esq., for the respondent. TRAMMELL *1146 This is a proceeding for the redetermination of a deficiency in income tax for 1928 in the amount of $1,920.01. The question involved is whether the acquisition of a majority of the capital stock of the Southern California Gas Co. by the Southern California Gas Corporation for cash and bonds of the latter corporation constitutes a reorganization within the provisions of section 203(h)(1) of the Revenue Act of 1926, thus resulting in the taxability of only the cash received from*1227 the transaction in accordance with the provisions of section 203(d)(1) of that act, or whether both the cash and bonds should be considered in determining the gain taxable to the petitioner. FINDINGS OF FACT. The facts were stipulated by the parties as follows: The petitioner is a corporation incorporated under the laws of the State of New Jersey for the purpose of engaging in the business of broker and dealer in investment securities and was so engaged at all times here material. On and prior to January 1, 1928 the petitioner was the owner or 272 shares of Southern California Gas Company capital stock. Said capital stock was *1147 reflected on the books of account and records of the petitioner at no basis or value. In the year 1927 there were two existing corporations, Southern California Gas Company and the Midway Gas Company, which were incorporated under the laws of the State of California, on October 5, 1910 and November 11, 1911, respectively. Under date of October 17, 1927 an agreement was entered into between the stockholders of the Southern California Gas Company and the Midway Gas Company and a Syndicate of Bankers composed of Chase Securities Corporation, *1228 Stone and Webster, Hunter, Dulin and Company, and Pynchon and Company, which agreement provided among other things that the Southern California Gas Company was to acquire the properties and business of the Midway Gas Company for capital stock and bonds of the Southern California Gas Company, and for the organization of a new corporation which was to acquire all or practically all of the common stock of the Southern California Gas Company and all of the capital stock of the Midway Gas Company for cash and bonds of the Southern California Gas Corporation. On October 4, 1927 the Midway Gas Company adopted resolutions authorizing the sale of its properties and business to the Southern California Gas Company. Said resolution provided that it was the plan of the Board of Directors that "said common capital stock and said bonds of the Southern California Gas Company (to be received for Midway Gas Company assets) shall be distributed to the stockholders of this corporation when, as and if received by this corporation and as soon as such distribution may lawfully be made." On October 17, 1927 the Southern California Gas Company had issued and outstanding 240,000 shares of common stock*1229 of a par value of $25.00 a share and 182,226 shares of preferred stock of a par value of $25.00 a share. Both classes of stock had equal voting rights. On said date the Midway Gas Company had issued and outstanding 23,264 shares of capital stock of a par value of $100.00 a share. On October 31, 1927 the Southern California Gas Company acquired all of the properties and business of the Midway Gas Company in consideration of a new issue of 80,000 shares of its capital stock of a par value of $25.00 a share and $2,942,000.00 face value of a new issue of bonds of said Southern California Gas Company due in 1957. Immediately after this transaction the Southern California Gas Company had outstanding 320,000 shares of common capital stock. In accordance with the terms of the agreement of October 17, 1927 a new corporation, the Southern California Gas Corporation, was organized under the laws of the State of Delaware on November 12, 1927. Said corporation had an authorized capital stock of $16,500,000.00 consisting of $7,500,000.00 preferred and $9,000,000.00 common, all of which was issued and outstanding on November 17, 1927. Under date of November 17, 1927 the Southern California*1230 Gas Corporation acquired 23,121 shares out of a total of 23,264 shares of capital stock of the Midway Gas Company, and 319,116 shares out of a total of 320,000 shares of the outstanding common stock of the Southern California Gas Company for cash and bonds of the said Southern California Gas Corporation. The transfer of said above-mentioned stock was effected under the terms of a deposit agreement. After the acquisition of the capital stock of the Midway Gas Company by the Southern California Gas Corporation the total assets of the Midway Gas Company consisting of capital stock and bonds of the Southern California*1148 Gas Company were distributed on November 17, 1927 and December 10, 1927, respectively, to the stockholders of said Midway Gas Company. After the acquisition of the 319,116 shares of common stock of the Southern California Gas Company by the Southern California Gas Corporation, the Southern California Gas Company continued its corporate existence and operations in exactly the same manner as prior thereto, unaffected and without modification in any way as a result of the change in the ownership of its common capital stock. It was the intention of the parties*1231 to the agreement that the corporate existence and operations of the Southern California Gas Company would continue without modification in any way. Said corporation is still in existence and operating up to the present time. Pursuant to the agreement of October 17, 1927, the petitioner in 1928 received for its 272 shares of Southern California Gas Company capital stock, cash in the amount of $20,896.07 and Southern California Gas Corporation 5 per cent collateral trust bonds, due in 1937, having a value of $16,000.00, representing the face value thereof as of said date. The bonds issued were part of an authorized bond issue of $25,000,000, all of which were sold or otherwise disposed of on or before the date that petitioner received its stock and bonds in 1928. The petitioner in reporting the transaction in its income tax return for the year 1928 reported as taxable income for said year the cash received in the sum of $20,897.06 but did not return as taxable income any part of the Southern California Gas Corporation bonds having a value of $16,000.00. The petitioner did not sell or otherwise dispose of the $16,000.00 of bonds during the year 1928. The respondent adjusted*1232 the petitioner's income for the year 1928 by increasing same in the amount of $16,000.00 as representing the par value of these bonds with the following statement as found in sixty day letter dated June 10, 1931: On the basis of available information now before the Bureau it has been held that the so-called reorganization, on November 17, 1927, between the Southern California Gas Corporation of Delaware and the Southern California Gas Company did not constitute a reorganization within the meaning of section 203(d)(1) of the Revenue Act of 1926, in view of which the entire amount received becomes taxable income and has so been treated herein. OPINION. TRAMMELL: The petitioner's contention is that the exchange by the petitioner and other stockholders of the Southern California Gas Co., and the Midway Gas Co., both California corporations, of a majority of the voting capital stock of those corporations for cash and bonds of the Southern California Gas Corporation, a Delaware corporation, organized for that purpose, was a merger or consolidation, or something in the nature thereof, and as such constituted a reorganization within the provisions of section 203(h)(1) of the Revenue*1233 Act of 1926; that as a result of such reorganization the value of the bonds received in connection with the transaction was not subject to tax, in accordance with the provisions of section 203(d)(1) of the same act. *1149 It is respondent's contention that the acquisition by one corporation of a majority of the capital stock of another corporation under the circumstances here stated does not constitute a reorganization and hence both the cash and bonds which petitioner received for the stock it owned in the Gas Co. constitute taxable profit. The pertinent provisions of the statute are as follows: Section 203, Revenue Act of 1926: 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) (2) 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 corporation a party to the reorganization. * * * (d) (1) If an exchange would be within the provisions*1234 of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient 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. * * * (h) (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), * * * There is no contention that the facts in this case constitute a reorganization unless they bring the transaction within the scope of subdivision (A) of section 203(h)(1). That provision is quoted above. We have heretofore held that in order to come within the scope of this provision there must be a merger or a consolidation, or something analogous thereto. It is clear that there was no strict merger or consolidation. In*1235 the case of a merger one of the corporations loses its identity by merging into another which survives and absorbs the property and assets of the merged corporation. See ; . In the case of a consolidation of two or more corporations the old corporations are dissolved and their assets are taken over by a new corporation. The question then is, Are the facts and circumstances in this case of such a nature as to constitute a transaction analogous to or in the nature of a merger or consolidation? We see no facts which bring it within such scope. The old corporation was not dissolved, but continued operation of its business *1150 without change in corporate structure, capitalization, or otherwise, and is still in existence. What occurred in this case was in fact merely a change in the ownership of a majority of the voting capital stock of the Gas Co. A partial or even complete change of stock ownership does not constitute a statutory reorganization. There was no transfer of assets, followed by a continuity of interest under a new or modified corporate structure; nor*1236 was there a merger or consolidation, or anything in the nature thereof, which effected such continuity of interest through an exchange of stock for stock. As we said in : A consolidation of two corporations involves the dissolution of both and the transfer of their corporate assets and franchises to a new corporation. In a merger, on the other hand, one of two merged corporations loses its identity in the other. One corporation goes out of existence; the other corporation survives and the latter absorbs the property and franchises of the merged corporation whose stock it has acquired. * * * The petitioners contend that there was a merger of the two corporations arising out of the provisions of the agreement between Sloane and the Vanadium Co. In our opinion the evidence does not lead to this conclusion. Under the provisions of the agreement the Vanadium Co. did acquire all of the capital stock of Ferro Alloys. This acquisition, however, created merely a change in the stock ownership of the latter company. The agreement contains no provisions looking to the creation of a "new or modified corporate structure." Therefore, *1237 although the former stockholders of Ferro Alloys secured for their stock in that company an interest in Vanadium Co., the transaction was not within the provisions of section 203(b)(2) for the reason that their interest was not continued under a new or modified corporate form. In , we held that the transaction there involved constituted a reorganization. The reasoning which lead us to that conclusion, when applied to the facts of the instant proceeding, leads to a reversed result. In that case all the assets of the old company were purchased by the new company for cash at a foreclosure sale. The stockholders of the old company received stock in the new company. The facts found do not indicate whether the old company was formally dissolved, but certainly it was left without business or assets, only the old corporate shell remaining. In our opinion, we said: It seems to us immaterial that there was a foreclosure sale of the old corporation's assets. Foreclosure sales are the common concomitant of reorganizations * * *. What is essential, however, to constitute a reorganization is continuity of interest from the old corporation*1238 into the new, and it is this element which distinguishes a reorganization from a mere sale by the old corporation of its assets for cash and notes to be distributed to its stockholders in liquidation. In the case at bar there was no continuity of stockholders' interests from the old corporation into the new; there was no change *1151 in the form of corporate ownership through which the interests of the old stockholders were continued in the same property. The new corporation merely purchased for cash and bonds approximately 60 percent of the voting stock of the old corporation, which latter company "continued its corporate existence and operations in exactly the same manner as prior thereto, unaffected and without modification in any way as a result of the change in the ownership of its common capital stock." If the old corporation had exchanged all of its assets for stock of the new corporation, and if the old corporation had thereupon distributed the stock so received among its stockholders in liquidation, the transaction would have amounted to a reorganization, within the meaning of the statute. Cf. *1239 . But this was not done. A wholly different situation is presented, which in our opinion falls short of constituting a statutory reorganization. It follows that the petitioner is taxable upon both the cash and the bonds in question. Reviewed by the Board. Judgment will be entered under Rule 50. BLACK AND ARUNDELL dissent.