Love v. Commissioner

R. C. LOVE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MYRA LOVE LERMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. F. S. LOVE ESTATE, THE UNION TRUST COMPANY OF PITTSBURGH, REBECCA LUDWICK LOVE AND GEORGE HUTCHINSON LOVE, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Love v. Commissioner Docket Nos. 61768, 61770, 61771. United States Board of Tax Appeals 39 B.T.A. 172; 1939 BTA LEXIS 1057; January 24, 1939, Promulgated *1057 A corporation was organized prior to June 7, 1927, to receive all the assets, other than cash, of B company. On June 7, the directors of B company declared a dividend in partial liquidation, payable on or before June 14, in excess of earnings accumulated after February 28, 1913. Also on June 7, an agreement was executed between B company (subject to approval of its stockholders) and A corporation for the transfer of the former's assets, except cash, in exchange for all the capital stock of A corporation, to be issued directly to the stockholders of B company. The agreement was approved by the stockholders of B company on June 15 and shortly thereafter carried out. Held, the transaction constituted a reorganization, and the liquidation of B company was in pursuance of the plan of reorganization; held, further, (1) petitioners received cash and stock in A corporation in full payment in exchange for their stock in B company, of an aggregate value in excess of the cost basis of the B company's stock, and thereby derived gain in excess of the cash received; (2) such gain is taxable to the extent of the cash received; (3) the cash received is taxable as a dividend to the extent*1058 of the inclusion therein of the accumulated earnings, and the remainder of the recognizable gain is taxable as gain from the exchange of property. Floyd Toomey, Esq., and W. A. Seifert, Esq., for the petitioners. Arthur Carnduff, Esq., for the respondent. HILL *173 Respondent determined deficiencies in income tax as follows: Petitioner Docket No. Year Deficiency R. C. Love 61768 [1927] $20,812.94 Myra Love Lermann 61770 [1927] 21,174.88 F. S. Love 1 61771 [1927] 85,582.83 These proceedings were duly consolidated for hearing, and all the facts were stipulated by the parties. The stipulation in full is adopted as our findings of fact, but only so much will be set forth hereinbelow as is deemed pertinent to a discussion of the issue. The deficiencies result in part from the inclusion by respondent in the gross income of petitioners of certain amounts as unreported dividends or increases in dividends. The issue submitted for decision is*1059 whether such amounts so received by petitioners are nontaxable liquidating dividends or taxable dividends representing distributions of accumulated earnings, plus recognizable gain derived from the exchange by petitioners of their stock in the Bessemer Coal & Coke Co. for cash and stock in the Bessemer Coal & Coke Corporation, pursuant to a plan of reorganization. FINDINGS OF FACT. The petitioner, R. C. Love, is an individual residing at Johnstown, Pennsylvania. He filed his Federal income tax return for the year 1927 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania. The petitioner, Myra Love Lermann, is an individual residing at Pittsburgh, Pennsylvania. She filed her Federal income tax return for the year 1927 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania. At all times material herein, F. S. Love was an individual residing at Pittsburgh, Pennsylvania. He filed his Federal income tax return *174 for the year 1927 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania. He*1060 died September 26, 1933. The Union Trust Co. of Pittsburgh, Rebecca Ludwick Love, and George Hutchinson Love are the duly appointed, qualified, and acting executors of his estate. The Bessemer Coal & Coke Co., hereinafter called the Bessemer Co., was a corporation organized on April 17, 1902, under the laws of the Commonwealth of Pennsylvania. Its outstanding common stock was owned on June 15, 1927, by the following named individuals, in the amounts indicated: Shares R. C. Love [475] Myra Love Lermann [475] F. S. Love 1,425 E. M. Love 1,425 3,800 At all times material herein, the Bessemer Co. owned all the stock of the Harmar Coal Co. and the Harmar Coal Co. owned all the stock of the Indianola Coal Co. The Bessemer Coal & Coke Corporation, hereinafter called the Bessemer Corporation, is a corporation organized on April 7, 1927, under the laws of the Commonwealth of Pennsylvania, with an authorized capital of $5,000, divided into 50 shares of a par value of $100 per share, which was increased on June 15, 1927, to $2,500,000, divided into 25,000 shares of a par value of $100 per share. The Bessemer Corporation was organized to take over or purchase*1061 and acquire all the assets, franchises, and property of the Bessemer Co. and of the Harmar Co. and Indianola Co. At a special meeting of the board of directors of the Bessemer Co. held on June 7, 1927, at 9 o'clock a.m., E. M. Love, president of the company, stated that it was desirable to liquidate the company and for that purpose to collect all notes and bills receivable. He presented a balance sheet of the company, as of May 31, 1927, and stated that, after certain assets had been collected and certain other assets disposed of, it would be advisable to declare a liquidating dividend thereof which would amount to approximately 302.673 percent. On motion duly made and seconded, the following resolution was unanimously adopted: Resolved, That a dividend of 302.673 per cent., amounting in the aggregate to $1,150,157.95 in partial liquidation of this company, be and is hereby declared on the outstanding capital stock of this company, payable on or before June 14, 1927, to stockholders of record, as of June 7, 1927. *175 Pursuant to the foregoing resolution, the following amounts were paid to the stockholders of the Bessemer Co. on June 14, 1927: R. C. Love $143,769.74 Myra Love Lermann 143,769.75 F. S. Love 431,309.23 E. M. Love 431,309.23 *1062 Invoices and receipts for the foregoing amounts were signed by each of the stockholders, acknowledging such amounts to have been received in partial liquidation of the company. At a special meeting of the board of directors of the Bessemer Co. held on June 7, 1927, at 2:30 o'clock p.m., pursuant to notice duly given, the president submitted a tentative agreement under which the Bessemer Co., Harmar Coal Co., and Indianola Coal Co., agreed to sell, assign, dispose of, and convey all their assets, franchises, and property, real, personal, and mixed, as of June 15, 1927, to the Bessemer Corporation for a consideration of $2,175,800, payable in shares of stock of the purchasing corporation at par, such stock to be issued directly to the stockholders of the Bessemer Co. The board of directors thereupon unanimously adopted the following resolutions: RESOLVED, That it is the desire of this company to sell, assign, dispose of and convey all its assets, franchises and property, real, personal and mixed, to Bessemer Coal and Coke Corporation, in accordance with the terms of an agreement dated June 7, 1927, between this company, Harmar Coal Company, Indianola Coal Company and Bessemer*1063 Coal and Coke Corporation, said sale, assignment, disposition and conveyance to be subject to the approval of the stockholders of this company. RESOLVED, That a meeting of the stockholders be called and convened at the principal office of the company on the 15th day of June, 1927, at ten o'clock A.M., E.S.T., to take action on the approval or disapproval of the proposed sale, assignment, disposition and conveyance of all the assets, franchises and property, real, personal and mixed of this company, to Bessemer Coal and Coke Corporation, in accordance with the terms of an agreement dated June 7th, 1927, between this company, Harmar Coal Company, Indianola Coal Company and Bessemer Coal and Coke Corporation, the notice by publication required to be given by the Constitution of the Commonwealth of Pennsylvania and by the laws thereof, as well as by any By-Laws of this company, having been waived by the unanimous consent of the stockholders. At a special meeting of the stockholders of the Bessemer Co. held by unanimous consent on June 15, 1927, at 10 o'clock a.m., the following resolution was unanimously adopted: RESOLVED, That the Board of Directors of this company be and is hereby*1064 authorized to sell, assign, dispose of and convey all the assets, franchises and property, real, personal and mixed of this company to Bessemer Coal and Coke Corporation, in accordance with the terms of an agreement made and executed the 7th day of June, 1927, by and between this Company, Harmar Coal Company, Indianola Coal Company and Bessemer Coal and Coke Corporation. *176 At a special meeting of the board of directors of the Bessemer Co. held on June 15, 1927, at 2 o'clock p.m., pursuant to notice duly given, a resolution was adopted, authorizing the officers of the company to transfer all of its assets to the Bessemer Corporation, in accordance with the tentative agreement of June 7, 1927, and to take the proper steps for the dissolution of the company under the laws of the Commonwealth of Pennsylvania. Such resolution also directed the secretary to notify all stockholders of the company to surrender their certificates for cancellation. Pursuant to such authorization, the Bessemer Co. thereafter was dissolved. The stockholders and directors of the Harmar Coal Co. and of the Indianola Coal Co. took precisely the same action, and on the same dates, as was taken by*1065 the stockholders and directors of the Bessemer Co. Thereafter, on June 30, 1927, the Bessemer Co., Harmar Coal Co., and Indianola Coal Co., by separate deeds and bills of sale, transferred as of June 15, 1927, all of their assets, franchises, and properties, real, personal, and mixed, to the Bessemer Corporation. On July 13, 1927, there was filed with the Secretary of the Commonwealth of Pennsylvania a certificate of the auditor general, certifying that all reports required by that official from the Bessemer Co., Harmar Coal Co., and Indianola Coal Co. had been filed and that all taxes due the Commonwealth of Pennsylvania had been paid. On July 13, 1927, there was also filed in the office of the Secretary of the Commonwealth of Pennsylvania election return relative to the sale of franchises and property of the Bessemer Co. to the Bessemer Corporation, together with the president's return of actual sale. Similar returns were also filed on behalf of Harmar Coal Co. and Indianola Coal Co. On July 21, 1927, the Bessemer Corporation issued 21,758 shares of its common capital stock of a par value of $100 per share directly to the stockholders of the Bessemer Co., in proportion*1066 to their respective shares of the stock of that company. The undistributed earnings and profits of the Bessemer Co. on June 15, 1927, accumulated after February 28, 1913, were $658,020.18. The basis of the stock of the Bessemer Co. in the hands of each of the stockholders hereinbefore mentioned was in excess of the cash received by each of them on June 14, 1927, and the aggregate fair market value of the shares of stock of the Bessemer Corporation received by each of them on July 21, 1927, was in excess of their respective bases for their shares of stock of the Bessemer Co. OPINION. HILL: The questions presented in these proceedings are whether the amounts included in gross income by respondent represent (a) nontaxable liquidating distributions, or (b) liquidating distributions *177 taxable in whole as ordinary gains, or (c) distributions in liquidation having the effect in toto of taxable dividends, or (d) distributions having the effect in part of taxable dividends, and to that extent so taxable, and the remainder taxable as ordinary gain. Petitioners contend that the cash distribution of June 14, 1927, was not received by them in the exchange of stock of*1067 the Bessemer Co. for stock in the Bessemer Corporation, but was a distribution in partial liquidation of the Bessemer Co., and since the amount distributed was less than the cost basis of the stock, no taxable gain was realized. Petitioners further contend that they did not derive any taxable gain on the liquidation of the Bessemer Co., since they exchanged stock in a corporation a party to a reorganization, in pursuance of the plan of reorganization, solely for stock in another corporation a party to the reorganization, and under section 203(b)(2), Revenue Act of 1926, 2 neither gain nor loss in such circumstances is recognizable for tax purposes. Respondent takes the position that the reorganization was a single transaction, carried out step by step, pursuant to the plan of reorganization, so that the four stockholders of the old company would get cash and stock in the new corporation, *1068 of a greater value than the cost basis of the old stock; or as may be otherwise stated, that the stockholders of the company received in full payment in exchange for their stock in the company, pursuant to the plan of reorganization, stock in the corporation and cash, having a combined value in excess of the cost basis of the company's stock, and hence, under subdivision (d)(1) of section 203, supra,3 the gain realized is taxable to the extent of the cash so received. Respondent's contentions, we think, must be sustained. There was a reorganization of the Bessemer Co. and the Bessemer Corporation under section 203(h)(1)(B) 4 of the Revenue Act of 1926, for the reason that the Bessemer Co. *1069 transferred all of its assets, except cash, to the Bessemer Corporation and immediately after the transfer the Bessemer Co., or its stockholders, or both were in control of the Bessemer Corporation. Both the Bessemer *178 Co. and the Bessemer Corporation were parties to the reorganization. It is axiomatic that when a corporation is reorganized it is a party to the reorganization. In the instant proceeding both the petitioners and respondent concede that there was a statutory reorganization involving as parties thereto both the Bessemer Co. and the Bessemer Corporation. We think there can be no question of the correctness of that concession, and therefore hold that there was a reorganization of the Bessemer Co. and the Bessemer Corporation, to which both were parties. Cf. Groman v. Commissioner,302 U.S. 82; Helvering v. Bashford,302 U.S. 454; Claude Neon Lights, Inc.,35 B.T.A. 424, at pages 433, 435, and 437; Fifth Avenue Bank of New York, Executor,31 B.T.A. 945, 949; affd., *1070 84 Fed.(2d) 787. In the latter case we said at page 949: We are further of the opinion that, in so far as it concerns Lederle and Laboratories, Inc., there was a statutory reorganization to which both were parties. Laboratories, Inc., acquired all the assets of Lederle, and the stock of Lederle was turned in and it liquidated and dissolved. This acquisition was for stock, a part of which went to Lederle's stockholders * * * Under circumstances very similar to those present here we held, in First National Bank of Champlain, N.Y.,21 B.T.A. 415, that the term "party to the reorganization" includes the corporation which was reorganized and whose securities were surrendered as well as the corporation resulting from the reorganization. We said in part (p. 423): * * * Any other interpretation would stultify the statute. *1071 The plan of reorganization embraced (1) the incorporation of the Bessemer Corporation to take over or purchase and acquire all the assets, franchises, and property of the Bessemer Co. except cash, and of the Harmar Co. and Indianola Co.; (2) the merger of the Bessemer Co. in the Bessemer Corporation by a transfer if its franchise and all of its assets other than cash to the latter in exchange for all of the latter's capital stock; the distribution of such capital stock and of cash to Bessemer Co. stockholders in exchange for their stock in the company; and the dissolution of the Bessemer Co.; and (3) the liquidation of the Bessemer Co. by a series of two distributions to its stockholders in complete cancellation or redemption of its outstanding capital stock as follows: (a) Cash in the amount of $1,150,157.95, and (b) capital stock of the Bessemer Corporation. The reorganization was effected in accordance with this plan. It is contended by petitioners that the cash distribution was in partial liquidation of the Bessemer Co. and was a part of the plan of liquidation of that company, but that it was not a part of the plan of reorganization. We agree with the first part of petitioners' *1072 contention, but do not agree that the cash distribution was not a part of the plan of reorganization. *179 The first step in the plan of reorganization was taken on April 7, 1927, when the Bessemer Corporation was organized for the purpose of taking over all the assets, franchises, and property of the Bessemer Co. and the two subsidiary corporations. The reorganization, according to the plan thereof, was completed on July 21, 1927, upon the issuance on that date of 21,758 shares of the common capital stock of the Bessemer Corporation direct to the stockholders of the Bessemer Co. in proportion to their respective shares of the stock of that company. The intermediate steps were as set out in our findings of fact. The plan of reorganization contemplated and required the complete liquidation and dissolution of the Bessemer Co. Neither of the two distributions in liquidation, standing alone, constituted a distribution either in partial or complete liquidation, since neither of them in itself was in complete cancellation or redemption of either a part or all of the capital stock. Sec. 201(c) and (h), Revenue Act of 1926. 5 The cash distribution was a distribution in partial*1073 liquidation because it was one of a series of two distributions in complete cancellation or redemption of the stock of the Bessemer Co., the other of such distributions being the distribution of the stock of the Bessemer Corporation. The two distributions were inseparably connected as interdependent steps in effecting such liquidation, and the liquidation could only be completed through the execution of the plan of reorganization. Likewise, the execution of the plan of reorganization required the complete liquidation of the Bessemer Co. Hence, the cash distribution, being one of a series of interdependent steps in the liquidation, was a part of the plan of reorganization. *1074 Under the plan of reorganization the stock of the Bessemer Corporation and cash in the amount of $1,150,157.95 were to be distributed to Bessemer Co. stockholders in full liquidation of their stock holdings in the latter company, and the board of directors of the Bessemer Co. directed that notice be given to the stockholders to surrender their stock in that company. The record is silent as to what, if anything, was done pursuant to that direction. It may reasonably be assumed that the direction of the board of directors was carried out and the stock surrendered, since such action was inherent *180 in the plan of reorganization. But whether or not the certificates evidencing such stock were actually surrendered, the stock became nonexistent as an asset or thing of value upon the liquidation and dissolution of the Bessemer Co. and in lieu thereof the petitioners had their proportionate shares of the liquidating distributions of cash and stock. The petitioners as stockholders gave formal approval to the transactions under the plan of reorganization, which rendered their Bessemer Co. stock valueless, and thereby surrendered it in exchange for the liquidating distributions. *1075 Moreover, under section 201(c) and (h), supra, the liquidation operated as full payment in exchange for the Bessemer Co. stock and as a complete cancellation or redemption thereof. We hold, therefore, that petitioners, in pursuance of the plan of reorganization, exchanged and surrendered their stock in the Bessemer Co., a party to the reorganization, for cash and stock in the Bessemer Corporation, a party to the reorganization. Such exchange would be within the provisions of section 203(b)(2) of the Revenue Act of 1926, 6 but for the fact that the exchange was for stock and cash and not solely for stock. The exchange, therefore, falls within the provisions of section 203(d)(1). 7 Respondent has determined that the entire amount of the cash distribution of June 14, 1927, had the effect of the distribution of a taxable dividend, and on brief asserts that such dividend, to the extent of the accumulated earnings or 57.2113 percent of the total cash distributed, consisted of profits accumulated since February 28, 1913, and to the extent of the balance of the cash distribution represented gain from the exchange*1076 of stock. We do not agree with the determination by respondent that the entire cash distribution is taxable as a dividend. We do agree that such distribution, under the plan of reorganization, had the effect of a distribution of a taxable dividend to the extent of the accumulated earnings of the company at the time the distribution was made and should be taxed as such. But we do not agree that that part of the cash distribution in excess of such earnings was a taxable dividend or had the effect of a taxable dividend. It might properly have been taxed as a gain from the exchange of property at ordinary tax rates, since the petitioners did not elect to have such gain taxed at the capital gains rate. However, respondent in determining the deficiencies computed a surtax only on the entire cash distributions and has not asked for increased deficiencies. Respondent further contends that the cash distribution was not a liquidating dividend, and argues that by such distribution there was no partial liquidation of the Bessemer Co. This view, we think, *181 is erroneous. In support of his contention, respondent cites, among other similar decisions, *1077 Edison Securities Corporation,29 B.T.A. 483; affd., 78 Fed.(2d) 85. The cited case is distinguishable on the facts. There the distributions made were not in excess of the accumulated earnings, and at that time no dissolution or winding up had been decided upon or definitely planned, although a later determination to liquidate and dissolve was carried out. In the instant case, the liquidation of the Bessemer Co. had been definitely planned prior to the cash distribution on June 14, 1927; the distribution made was far in excess of the accumulated earnings available for distribution as ordinary dividends; the resolution of the directors declared it was in partial liquidation of the company, and shortly thereafter a distribution in final liquidation was made and the company was dissolved. The fact that a distribution is called a "dividend" and is made in part from earnings and profits and before liquidation or dissolution proceedings are commenced, is not controlling. Hellmich v. Hellman,276 U.S. 233; *1078 Canal-Commercial Trust & Savings Bank v. Commissioner, 63 Fed.(2d) 619, 620; Gossett v. Commissioner, 59 Fed.(2d) 365, 367; Tootle v. Commissioner, 58 Fed.(2d) 576, 580. "The determining element is whether the distributions were made in the ordinary course of business and with intent to maintain the corporation as a going concern, or after deciding to quit and with intent to liquidate the business." Holmby Corporation v. Commissioner, 83 Fed.(2d) 548, 549; affirming 28 B.T.A. 1092. See also Rollestone Corporation,38 B.T.A. 1093. In support of their contention that they realized no taxable income from the reorganization here involved, petitioners cite and rely upon our decision in Georgia Savings Bank & Trust Co., Executor,28 B.T.A. 1153. That case is distinguishable on the facts from the present proceedings, and in our opinion is not controlling here. There A corporation sold its real estate and part of its personal property for $200,000 cash and declared and paid a dividend out of surplus in that amount. The stockholders of A then exchanged their*1079 stock in that corporation for stock only in B corporation, pursuant to the plan of reorganization. We held there were two separate transactions, and that the gain derived from the exchange of stock for stock was not recognizable for tax purposes. It is to be noted that there was no liquidation of A corporation, and the cash distribution was taxed to the stockholders of A as an ordinary dividend. The cited case affords no support for petitioners' contention that they should not be taxed upon the cash distribution in question either as an ordinary dividend or as gain derived from an exchange of property. *182 It is our opinion, and we so hold on the facts disclosed in the instant case, that petitioners received as liquidating dividends in full payment in exchange for their stock in the Bessemer Co., pursuant to the plan of reorganization, (1) their proportionate parts of the cash distribution of June 14, 1927, and (2) stock in the Bessemer Corporation distributed to them on July 21, 1927. The gain derived has been determined by respondent to be in excess of the cash distributed, and such determination is not questioned by petitioners. *1080 The gain is, therefore, taxable under section 203(d)(1), supra, to the extent of the cash received. Since the cash distribution was made in pursuance of the plan of reorganization and included undistributed earnings and profits accumulated after February 28, 1913, to the extent of such accumulated earnings and profits it clearly had the effect of the distribution of a taxable dividend. 8George Woodward,23 B.T.A. 1259; John S. Woodward,30 B.T.A. 1216, dismissed on appeal. It follows that the cash distribution is taxable as dividends to the distributees in the amounts of their ratable shares of the accumulated earnings, and the remainder of the cash distribution is taxable as gain from the exchange of property. 9 *1081 The deficiencies determined by respondent are approved. Decisions will be entered for the respondent. Footnotes 1. F. S. Love died September 26, 1933, and his estate represented by the executors named in the caption above, was substituted as petitioner in Docket No. 61771. ↩ 2. SEC. 203(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. ↩ 3. SEC. 203(d)(1). If an exchange would be within the provisions 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. ↩ 4. SEC. 203(h). As used in this section and sections 201 and 204 - (1) The term "reorganization" means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. * * * ↩ 5. SEC. 201. (c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * * * * * (h) As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. ↩ 6. See footnote 2, supra.↩ 7. See footnote 3, supra.↩ 8. SEC. 201. (a) The term "dividend" when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings accumulated after February 28, 1913. ↩ 9. SEC. 203(d)(2). If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as gain from the exchange of property. [See paragraph (1) under footnote 3, supra.↩ ]