Western Industries Co. v. Commissioner

WESTERN INDUSTRIES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Western Industries Co. v. Commissioner Docket No. 42794. United States Board of Tax Appeals 30 B.T.A. 809; 1934 BTA LEXIS 1257; May 31, 1934, Promulgated *1257 The petitioner transferred not more than 85 percent of its properties to a newly formed corporation for cash, most of which was immediately distributed to its stockholders, notes, and preference and common stock. The petitioner continued to exist as a going concern and to hold the stock without any change in its stockholders. Held, that no reorganization occurred within the meaning of section 203 of the Revenue Act of 1926. Joseph C. Meyerstein, Esq., and W. W. Spalding, Esq., for the petitioner. Bruce A. Low, Esq., and T. G. Histon, Esq., for the respondent. SEAWELL *809 This proceeding was brought to redetermine a deficiency of $69,404.52 in income tax for 1926. The issues are (1) whether a certain transaction was a reorganization resulting in nontaxable gain in excess of the amount reported by the petitioner, and (2) if the transaction was not a reorganization, the value of certain preference stock received by the petitioner as part consideration for the transfer of a portion of its assets. FINDINGS OF FACT. The petitioner, a California corporation then engaged in alcohol distillation, on April 9, 1926, transferred its*1258 manufacturing plant, inventory of materials and supplies, good will, trade-marks, patents, and certain other assets, having a book value of $479,835.75, to the American Solvents & Chemical Corporation, hereinafter referred to as the Chemical Corporation, for $580,000 cash, notes in the amount of $78,537.26, 15,000 shares of preference stock, and 22,000 shares of common stock of the Chemical Corporation. The petitioner retained assets of a book value of $302,225.52, including a certificate of deposit in the amount of $165,000 and cash amounting to $34,719.34, of deposit in the amount of $165,000 and cash amounting to $34,719.34, and had liabilities of $107,650.43 at the time of the transfer, the net book value of such retained assets being $194,575.09. On *810 April 15, 1926, it made a cash distribution of $22,500 to its common stockholders and on April 26, 1926, it made a cash distribution of $500,000 to its common and preference stockholders at the rate of $50 per share. The petitioner continued to exist, primarily as a holding company. The outstanding common and preference stock of the petitioner at the time of the transfer in 1926 was $500,000 par value, divided into*1259 2,500 shares of preference and 7,500 shares of common, each of the par value of $50. In 1927 it completed a plant at a cost of about $158,000 for the manufacture of acetic acid. The Chemical Corporation was organized April 9, 1926, for the purpose of consolidating a number of alcohol and by-products plants and businesses for cash and its stock. In addition to the property of the petitioner, it acquired all of the assets and assumed the liabilities of the Jefferson Distilling Co., Crescent Industrial Alcohol Co., and Everett Distilling Co. for cash and its preference stock. Upon its organization the Chemical Corporation issued $2,200,000 of 6 1/2 percent 10-year sinking fund bonds, 100,000 shares of no par preference stock and 160,000 shares of no par common stock. It issued 33,433.61 shares of preference stock to the petitioner and the three other companies in connection with the acquisition of their properties. No common stock was issued to the three other companies for assets. At the time of its organization the Chemical Corporation placed an arbitrary value of $1,750,000 on patents and good will. The preference stock of the Chemical Corporation was entitled to cumulative*1260 dividends of $3 per annum and to participate with the common stock in additional dividends up to $1 per share. It was callable at $60 per share plus accrued dividends and upon liquidation was entitled to $40 per share plus accrued dividends. It was convertible into common stock, share for share. In April 1926 a syndicate, of which Lage & Co., a member of the New York Stock Exchange, was a member, purchased about 35,000 units of the stock from the Chemical Corporation for $31 per unit for the purpose of selling it to the public for $35 per unit. A unit consisted of one share of preference stock and one half share of common stock. The common stock had no fair market value. The petitioner and the three other companies agreed not to dispose of the preference stock they had received until the syndicate operations had been completed. The petitioner also agreed to refrain indefinitely from entering into the alcohol industry and not to sell the common stock for a period of three years. The syndicate operations were completed about November 1, 1926. While the stock was being sold the syndicate placed an undisclosed number of bids in the market for the stock at $30 per unit. *811 *1261 From November 1926 to February 1927, inclusive, 3,094 shares of the preference stock changed hands through the offices of Lage & Co. and other members of the syndicate, at prices ranging from $32.50 down to $19.50 per share. The stock was listed on the New York Curb Market early in 1927. The first sale on the New York Curb Market occurred during the week ending April 8, 1927, and involved 100 shares at $12.125 per share. During the week ending May 6, 1927, a like quantity of the stock was sold for $11 per share, which was the lowest price of the year. By the week ending November 18, 1927, the stock was selling for as high as $23.25 per share. About 15,000 shares of the stock changed hands from November 1, 1926, to July 1, 1931. The tangible book value of the preference stock of the Chemical Corporation on April 9, 1926, based on the net book value of the assets acquired from the petitioner and the three other companies, less the amount of the debenture bonds, was $4.05 per share. The earnings of the preference stock for the period from April 9, 1926, to December 31, 1926, were $1.845 per share. Dividends of 75 cents per share were paid on the stock October 1, 1926, and January 1, 1927, and*1262 then suspended for a considerable period. The preference stock of the Chemical Corporation had a fair market value on April 9, 1926, of $30 per share. The return filed by the petitioner for 1926 showed a gain of $643,701.51 from the transaction, this sum being the difference between the sale price of $1,123,537.26 for the assets transferred and their book value of $479,835.75. The selling price was arrived at by adding to the amount of cash and notes received the preference stock at a fair market value of $30 per share and the common stock at $.68181 per share. Of the gain so computed, the petitioner returned as taxable income the sum of $136,037.26, representing the difference between the amount of cash and notes received in the sale and the amount of cash distributed to stockholders. In his determination of the deficiency the respondent determined that the preference stock had a fair market value of $30 per share when received by the petitioner and that the transaction was not within the provisions of section 203(h)(1)(A) of the Revenue Act of 1926. Accordingly, he increased the taxable gain on the transaction from $136,037.26 to $643,701.51. OPINION. SEAWELL: The theory*1263 of the respondent's determination is that the transaction between the petitioner and the Chemical Corporation was nothing more than a sale, and therefore not one falling within section 203 of the Revenue Act of 1926, the material portions *812 of which are set forth in the margin. 1 The petitioner, in contending that a reorganization, not a sale, took place, claims that the question turns upon whether the petitioner transferred substantially all of its properties to the Chemical Corporation. No issue was raised as to the fair market value of the notes and common stock received in the sale, or the basis used by the respondent in computing the taxable gain realized from the transaction. If the petitioner is to escape tax on the full amount of profit realized from the transaction, it must be because of a clear showing that it is within the exceptions set forth in section 203 of the statute. ; affd., ; ; . *1264 The petitioner transferred assets of a book value of $479,835.75 for cash, notes, and stock, of an aggregate value, as reported, of $1,123,537.26, and retained net assets of a book value of $194,575.09. Computing it on the basis of book value, the petitioner transferred about 71.2 percent of its assets to the Chemical Corporation and retained about 28.8 percent. If we use as a factor the value of property received for the assets transferred, including the value placed upon the common stock by the petitioner, as the court did in ; certiorari denied, ; affirming , we find that about 85.2 percent of the petitioner's assets was transferred and about 14.8 percent was retained. Thus the petitioner did not divest itself of more than approximately 85.2 percent of its assets. This does not constitute substantially all of petitioner's properties within the meaning of *813 the statute. ; *1265 ; ; certiorari denied, ; ; ; . It is not necessary to rest the decision on this point. A taxpayer claiming the benefits of the statute must show that the parties to the transaction had a plan of reorganization. ;. The negotiations resulting in the transfer of the assets extended over a period of about six months and were conducted by Roger Bacqueraz, vice president and manager of the petitioner, and Henry I. Peffer, organizer of the Chemical Corporation, through an exchange of letters and telegrams and by verbal conversations. We have not been advised of any understanding reached during such negotiations respecting a plan of reorganization, and it appears that no formal agreement was entered into covering the transfer of petitioner's assets. *1266 No attempt was made to offer in evidence any resolution the petitioner may have adopted on the subject. Peffer testified that "It was essentially necessary to acquire the assets of the Western Industries in order to bring about the organization of the new corporation." This testimony of Peffer proves nothing more than that the Chemical Corporation had some plan for the acquisition of the assets of the petitioner. This constitutes all of the evidence on the question and is insufficient to show that the petitioner or any of the other parties to the transaction had a plan of reorganization. The petitioner distributed most of the cash to the stockholders and continued to hold the stock received in the transfer. Instead of dissolving it continued as a going concern, apparently without any change in the ownership of its stock. Under similar facts we have held that the statute does not apply. Minnesota Tea Co., 28 B.A.T. 591. The respondent did not err in computing the taxable gain realized in the transfer on the basis of a sale. The petitioner returned the preference stock received in the sale at a value of $30 per share, with the statement that "The actual value of the*1267 preferred stock was probably less than $30.00 per share, but it does not appear that the net gain to be recognized would be affected thereby." The respondent found a value for the stock equal to the amount returned. The petitioner's present contention is that the stock should be valued at its book value of $4.05 per share. We think the evidence supports rather than overcomes the presumption existing in favor of the respondent's determination of value. The agreement of the petitioner to refrain from selling its block of the stock until after the completion of the syndicate operations *814 did not leave the securities without fair market value. Minnesota Tea Co., supra; . Frederick O. Lage, of the firm of Lage & Co., one of the members of the syndicate which underwrote about 35,000 shares of the stock in April 1926 at $31 per unit, testified on behalf of the petitioner that he considered such purchase price a fair market value of the stock at that time. The record does not show the price at which the syndicate offered the stock to the public, but it was acquired for the purpose of placing it on the market at a price of*1268 $35 per unit, consisting of one share of preference stock, and one half share of common stock having no fair market value. The record does show, however, that all of the stock was sold by November 1, 1926, without loss to the syndicate, and the testimony of Lage is that the members of the syndicate considered the price at which the stock was being offered a fair price for the securities. After the completion of the syndicate operations the stock sold for as high as $32.50 per share. The petitioner relies upon , in support of its method of determining the fair market value of the stock. In that case there was proof of the fair market value of the assets behind the stock. That is lacking here. The respondent's finding of a fair market value for the stock of $30 per share has not been overcome and is sustained. Decision will be entered for the respondent. Footnotes 1. 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) (3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization. * * * (e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then - (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but (2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation 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 so received, which is not so distributed. * * * (h) As used in this section and sections 201 and 204 - (1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *. ↩