Ulman v. Commissioner

ESTATE OF EMANUEL ULMAN, THE CITIZENS & SOUTHERN NATIONAL BANK, CO-TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ulman v. Commissioner Docket No. 100771. United States Board of Tax Appeals 46 B.T.A. 517; 1942 BTA LEXIS 853; March 10, 1942, Promulgated *853 During the taxable year, petitioner gave a brokerage firm an order to sell 100 shares of Coca-Cola International stock which it owned. Upon the advice of the brokers petitioner exchanged the 100 shares of International for 800 shares of Coca-Cola and thereafter the brokers sold the 800 shares of Coca-Cola for petitioner's account. None of the Coca-Coal stock was sold to the Coca-Cola Co.Held, the exchange of petitioner's International common for Coca-ColaCola common represented "amounts distributed in partial liquidation" of International as that term is used in section 115(c) and defined in section 115(i) of the Revenue Act of 1936; that 100 percent of petitioner's gain should be taken into account in computing net income as provided in section 115(c), rather than 40 percent thereof as provided in section 117(a) of the same act; and that the transaction can not be regarded as in substance mere sale of International for cash, for to do so would necessitate the disregard of the exchange and the statutory tax consequences thereof. Gus T. Dodd,46 B.T.A. 7, followed. John W. Townsend, Esq., and M. H. Barnes, C.P.A., for the petitioner. *854 F. L. Van Haaften, Esq., for the respondent. BLACK *517 This is a petition for a redetermination of a deficiency in income tax determined by the respondent against petitioner for the calendar year 1936 in the amount of $10,850.80. The deficiency is due to three adjustments made by the respondent in petitioner's net income as follows: (a) Increase in profits on exchange of Coca Cola International Corporation common stock for stock of Coca Cola Company $40,530.61 (b) Georgia State Income taxes [Disallowed] 2,383.55 (c) Trustees' commissions [Disallowed] 1,900.93 Petitioner assigned error only as to adjustments (a) and (b). At the hearing assignment of error as to (b) was abandoned. This leaves only adjustment (a) in issue. In a statement attached to the deficiency notice, the respondent explained adjustment (a) as follows: (a) The exchange of 100 shares of Coca Cola International Corporation common stock for 800 shares of Coca Cola Company stock is held to be a partial liquidation of the Coca Cola International Corporation and 100% of the profit realized thereon is taken into account in computing net income in accordance with*855 Section 115(c) of the Revenue Act of 1936. It is held that the 800 shares of Coca Cola Company stock had a value of $96,926.02 on the date they were received in exchange and that the cost or other basis of the 100 shares of Coca Cola International Corporation stock exchanged therefor was $29,375.00 resulting *518 in a total profit of $67,551.02. The profit reported of $27,020.41, therefore, was understated by the amount of $40,530.61. Petitioner by an appropriate assignment of error assails the correctness of this determination as to adjustment (a) and contends (1) that since the 800 shares of Coca-Cola Co. common stock were sold for $96,926.02 in cash within a comparatively short time following the exchange of 100 shares of Coca-Cola International Corporation common stock for 800 shares of Coca-Cola Co. common stock, the exchange and sale should be regarded in substance as steps in a single transaction, namely, as in substance a sale of the 100 shares of International for $96,926.02 in cash, and (2), in the alternative, that there was no "distribution" in partial liquidation of International. Both parties agree that petitioner realized a total profit of $67,551.02. They*856 disagree as to the percentage of that profit that should be taken into account in computing net income. Petitioner contends that, viewing the exchange and sale as in substance a single transaction and a sale for cash, since it had held the 100 shares of International for more than five years but not for more than ten years, it is entitled to the benefit of section 117(a) of the Revenue Act of 1936, and that only 40 percent of the total profit, or $27,020.41, should be taken into account in computing net income. The respondent contends that the exchange can not be ignored; that the exchange resulted in a partial liquidation of International; and that, under section 115(c) of the Revenue Act of 1936, "Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income." FINDINGS OF FACT. Petitioner's Federal income tax return for the year in question was filed with the collector of internal revenue for the State of Georgia at Atlanta, Georgia. Emanuel Ulman died testate during July, 1929. In his will he appointed the Citizens & Southern National Bank of Macon, Georgia (petitioner), his wife, Floretta F. Ulman, *857 and Joseph W. Popper, a lawyer, as executors and trustees of his estate. On April 21, 1938, the Superior Court of Bibb County, Georgia, discharged Floretta F. Ulman and Popper as trustees, thereby continuing the petitioner as the only trustee to act for the estate. The decedent's will provided that his residuary estate should be held in trust by the trustees during the lifetime of certain beneficiaries and upon termination of the trust the remainder should be paid to his nephew, George Birkenstein. While the will gave the trustees full power of sale, it contained no provision concerning the type of investments in which the trustees were authorized to hold the assets of the estate. *519 At the time of decedent's death his assets consisted, in part, of various blocks of bonds and stocks, including 100 shares of the common stock of the "Coca-Cola International Corporation" (herein sometimes referred to as International). The parties agree that these 100 shares of International common had a value of $29,375 at date of decedent's death, which was the value used for Federal estate tax purposes. No stocks held by Ulman at his death were considered legal investments by trustees*858 under the Georgia laws. The trustees continued to hold most of the stocks and securities owned by the decedent at the date of death until the year 1936. Some had declined in value while others, including International common, had enhanced in value, with the result that in the spring of 1936 such assets had an aggregate value about equal to their aggregate value at the date of decedent's death. Petitioner had a trust committee whose duty it was to consider, from time to time, the assets held in the several estates it was administering and to make recommendations to petitioner's board of directors concerning the desirability of sales and reinvestments. In March 1936 this trust committee recommended that some of the International common stock be sold, since about 70 percent of all the investments of the entire estate was represented by this stock. Petitioner's trust officers thereafter consulted with the other trustees, and they decided that, since the assets of the estate were not invested in securities which constituted legal investments under the Georgia statutes restricting the type of investments for trustees, the then assets of the estate should be sold and the proceeds*859 reinvested in authorized securities, unless all the beneficiaries of the estate should consent in writing that the trustees might continue to hold the original stocks and bonds. Although several letters were directed to the remainderman, Birkenstein, seeking his consent, he failed to give his consent. Since the trustees considered that they might be held personally liable in the event they continued to hold the assets of the estate in nonlegal investments and a loss should result, and since the consent of all the beneficiaries could not be obtained, they decided to sell all of the stocks and bonds held in the estate, with a view to reinvestment in legal investments under Georgia laws. E. C. Scott, trust officer of petitioner, was directed by the trustees to proceed with the sale. On or about September 5, 1936, Scott placed an order with the Macon branch of the brokerage firm of Fenner & Beane to sell the 100 shares of International common stock. The branch manager of that firm, J. T. Hogan, transmitted by wire the order to sell to the New York office of Fenner & Beane. The New York office wired Hogan suggesting that the sale would be facilitated if the international common*860 *520 would first be exchanged for 800 shares of common stock of "The Coca-Cola Company" (herein sometimes referred to as Coca-Cola), there then existing an arrangement whereby stockholders of International common might turn in their stock to that corporation and receive in exchange eight shares of Coca-Cola common for each share of International common. Hogan conveyed this suggestion to Scott, pointing out that it would be difficult to find buyers for International common, as each share had a value of over $900, whereas there was an active market for Coca-Cola common. Scott then instructed Hogan to go ahead and exchange the 100 shares of International common for 800 shares of Coca-Cola common and t0 sell the 800 shares of Coca-Cola common at a fixed price. In accordance with these instructions the certificate for the 100 shares of International common was delivered to Fenner & Beane on September 8, 1936. Thereafter, Fenner & Beane exchanged with International the certificate for 100 shares of International common for eight certificates of 100 shares each of Coca-Cola common, and charged petitioner with the transfer tax and exchange fee, amounting to $65, which petitioner*861 later paid. The new certificates were issued in the name of Fenner & Beane and were never actually delivered to petitioner. Fenner & Beane never buy or sell stocks for their own account. Typed on the back of the certificate for 100 shares of International was a certification as follows: WE HEREBY CERTIFY THAT WE HAVE NO OWNERSHIP, OR INTEREST IN SHARES OF THE STOCK ABOVE TRANSFERRED. THE TRANSFER BY THE OWNER TO US BEING MERELY FOR THE PURPOSE OF SALE. FENNER & BEANE, 67 BROAD ST., N.Y.C. On September 29, 1936, Fenner & Beane made three sales for petitioner's account of 100 shares each of the Coca-Cola common at 121 1/2, and on October 5, 1936, they made two sales of 200 each and one sale of 100 shares, all at 121 1/2. The net proceeds of the sales, amounting to $96,926.02 were duly remitted to petitioner. Not any of the sales were made to Coca-Cola. If the bank (petitioner) had intended to make a mere exchange of International common for Coca-Cola common, unaccompanied by a sale of the Coca-Cola common, the exchange would have been handled through its own facilities and not through those of a broker, for it ordinarily attended to transfers and exchanges of stock*862 of its own and for the account of others. On September 11, 1936, the trust committee of the bank, which previously had taken informal action to authorize the sale, passed a formal resolution recommending sale of all investments held by the *521 estate and reinvestment of the proceeds in legal investments. All the assets, including the 800 shares of Coca-Cola common received in exchange for International common, were sold in due course and reinvested. The bank's board of directors by resolution on December 4, 1936, approved the sales and reinvestments. The records of the Equitable Co. of Atlanta, Georgia, show a purchase on September 29, 1936, of one share of International at $960, and another purchase of one share on October 30, 1936, at $976. No sales of International have been made on the New York Stock Exchange since November 1934. In accordance with a stipulation of the parties to this proceeding, "the facts in the record, including the stipulations of the parties, in the proceeding entitled 'Gus T. Dodd versus Commissioner of Internal Revenue, Docket No. 99323,' are to be considered as incorporated by reference in the record in this proceeding * * *." The facts*863 contained in the Dodd record which may be considered material to the instant proceeding are set forth in the following paragraphs. Coca-Cola is a Delaaware corporation whose principal place of business is in Atlanta, Georgia. It was formed on September 5, 1919, with an authorized capital stock of 500,000 shares of no par value common and 100,000 shares of $100 par value 7 percent preferred. The common shares were sold for cash. On September 11, 1919, it acquired all the properties of "Coca-Cola Company," a Georgia corporation, for a purchase price consisting of $15,000,000 chsh and $10,000,000 of 7 percent preferred stock. International was organized on November 18, 1922, under the laws of the State of Delaware, with an authorized capital stock of 251,000 shares of no par value common stock, as a holding corporation to carry on the function of a preexisting voting trust among the majority stockholders of Coca-Cola. At the time of organization it issued one share of its own capital stock for each share of Coca-Cola common stock transferred to it until it held 251,000 of the 500,000 shares of Coca-Cola common stock then outstanding. During 1925 and 1926, $4,000,000 and $6,000,000, *864 respectively, of the 7 percent preferred stock of Coca-Cola was retired, leaving only the common stock outstanding. On March 3, 1927, Coca-Cola amended its charter and issued a 100 percent stock dividend in common stock, so that there were then outstanding 1,000,000 shares of common stock of no par value, and none other. On February 9, 1926, the board of directors of International held a special meeting and adopted an irrevocable resolution whereby its stockholders might at any time exchange their shares, plus a small exchange fee, for the same number of shares of Coca-Cola. On February 13, 1926, the stockholders of International held a special meeting and unanimously adopted the following resolution: *522 Be It Resolved, That pursuant to the provisions of the resolutions so adopted by the Board of Directors and this day ratified, approved, confirmed and adopted by the Stockholders, the capital stock of this Company be and hereby is reduced to the extent that shares of stock of this Corporation may be exchanged for shares of stock of The Coca-Cola Company, as provided in said resolution; and as such reduction is accomplished by such exchange of shares the shares the shares*865 so exchanged and as exchanged, hereby are retired until all of the Common Capital Stock of the Company, if exchanged, has been so retired. Pursuant to the above resolutions of February 9 and 13, respectively, International, on March 20, 1926, filed with the Office of the Secretary of State of the State of Delaware a "Certificate of Amendment of Certificate of Incorporation" which, after setting out in full such resolutions, stated: That the provisions of the Laws of the State of Delaware relating to the reduction of the capital stock of a corporation organized under its laws were in all other respects fully complied with, including the payment of all the Corporation's debts not otherwise fully secured, and the reduction of the capital stock is accomplished as provided for in such resolutions. When Coca-Cola issued the common stock dividend on March 3, 1927, International received 243,355 shares of Coca-Cola common stock. International did not make any corresponding increase in its own outstanding capital, but thereafter, until October 28, 1935, by appropriate action taken on the part of International, one share of International common could be turned in to the corporation*866 for two shares of Coca-Cola common. Pursuant to authorization of its directors, International, on January 5, 1935, filed with the office of the Secretary of State of the State of Delaware a "Certificate of Amendment of Certificate of Incorporation" which, among other things, provided in part as follows: That at a meeting of the Board of Directors of said Coca-Cola International Corporation duly held and convened, it was resolved to amend the Certificate of Incorporation of the said Coca-Cola International Corporation in the following respects, to-wit: * * * Second, by striking out the first paragraph of Article Fourth of the Certificate of Incorporation, * * * and substituting therefor the following: Fourth: * * * From time to time the corporation may acquire by purchase, gift or otherwise, any of the shares of * * * Common Stock; and upon such acquisition by the corporation of any of its own shares, such shares shall not be reissued but shall be permanently retired. No amendment or certificate affecting International's charter or its outstanding stock has been filed with the Secretary of State of Delaware since the above mentioned amendment filed on January 5, 1935. *867 On October 28, 1935, Coca-Cola amended its charter and increased its outstanding common stock by issuing three additional shares for each share then outstanding, leaving the old shares outstanding, so *523 that Coca-Cola's authorized, issued, and outstanding no par value common stock then consisted of 4,000,000 shares. The effect of this increase was to make one share of International common the equivalent of eight shares of Coca-Cola common, as International did not make any corresponding increase in its own outstanding capital. At no time since the organization of International has the number of its outstanding shares of common stock exceeded 251,000 shares, and since 1926 there has been a gradual decrease in the number of shares outstanding without the reissuance of any shares. The 100 shares of International common here in question which were delivered to International in exchange for 800 shares of Coca-Cola common were permanently retired by International. OPINION. BLACK: In our opening statement we set forth briefly the contentions made by the petitioner and respondent, respectively. We shall now consider those contentions in connection with our findings*868 of fact. The evidence plainly shows that, when Fenner & Beane exchanged the 100 shares of International common for the 800 shares of Coca-Cola common, it was acting for the account of petitioner and not for its own account, and we do not understand petitioner to contend otherwise. In any event, we have found and also hold that the exchange is accountable to petitioner. Petitioner's principal contention is that the exchange of the 100 shares of International common for the 800 shares of Coca-Cola common and the sale of the latter for cash should in substance be regarded as if petitioner had sold the 100 shares of International for cash. It is true that if petitioner had actually sold the 100 shares of International to an outsider for cash, it would have been entitled to the benefits of section 117(a) of the Revenue Act of 1936, and, since it had held the 100 shares for more than five years but not for more than ten years, only 40 percent of the total profit would have been taken into account in computing net income. The material provisions of section 117(a) are in the margin. 1 It is also true that petitioner started out to do that very thing when it placed its order with*869 Fenner & Beane to sell the 100 shares. But the transaction was not consummated as it was originally planned. There had been no sales of International on the New York Stock Exchange since November *524 1934, whereas Coca-Cola common was being bought and sold almost daily. At that time there existed the irrevocable resolution of the board of directors of International whereby the stockholders of International might at any time exchange their shares in International, plus a small exchange fee, for 8 times the number of shares of Coca-Cola. Petitioner was advised by Fenner & Beane that it would facilitate matters if petitioner's 100 shares of International common were first exchanged with International for 800 shares of Coca-Cola common. Following this advice, petitioner, through its trust officer Scott, told Fenner & Beane to "Go ahead and handle it in that manner." Fenner & Beane then went ahead on September 12, 1936, and made the exchange, and charged petitioner with the transfer tax and exchange fee, amounting to $65, which petitioner later paid. The 100 shares of International common transferred to International were permanently retired. Fenner & Beans then on September*870 29 and October 5, 1936, sold the 800 shares of Coca-Cola common to miscellaneous buyers other than Coca-Cola, and remitted the net proceeds therefrom to petitioner. Petitioner in support of its contention that there was in substance but one transaction involved, namely, a sale of International common for cash, thereby disregarding as an incidental step the actual exchange of International common for Coca-Cola common, cites and relies upon the same line of cases 2 that the petitioner in Gus T. Dodd,46 B.T.A. 7, relied upon in support of his contention, as stated in our report in that case, that "should the Board hold, as we have above, that petitioner must be regarded as having exchanged his International A for Coca-Cola A, then the transaction must be viewed as a whole; and*871 that the separate steps in a single transaction can not be regarded as separate transactions." *872 We held in the Dodd case that the exchange of International A for Coca-Cola A was one of the material facts of the case and that it could not be disregarded. We think the same holding must apply here as to the exchange of International common for Coca-Cola common. Although in the instant case petitioner exchanged International common for Coca-Cola common, and sold the Coca-Cola common to several miscellaneous purchasers other than Coca-Cola for cash, *525 whereas Dodd exchanged International A for Coca-Cola A, and sold the Coca-Cola A to the Coca-Cola Co. for retirement and for cash, we do not think these differences in the facts of the two cases warrant any different result for the reason that, in our opinion, the principle involved in both cases is the same. The irrevocable resolution of the board of directors of International relative to the exchange of International stock with International for Coca-Cola stock was applicable to both common and class A stock. So when Fenner & Beane in accordance with this irrevocable resolution exchanged with International for petitioner's account the 100 shares of International common, which were then retired, and received from*873 International the 800 shares of Coca-Cola common, the receipt of such shares for petitioner's account represented, contrary to petitioner's alternative contention, "amounts distributed in partial liquidation" as that term is used in section 115(c) and defined in section 115(i) of the Revenue Act of 1936. 3W. R. Prescott,31 B.T.A. 17, petition for review denied, 76 Fed.(2d) 3; rehearing denied, April 30, 1935; Rose v. Trust Co. of Georgia, 77 Fed.(2d) 355; L. B. Coley,45 B.T.A. 405; Gus T. Dodd, supra.If petitioner realized any gain from such "partial liquidation", the statute plainly provides that "Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income." With this plain provision of the statute before us, we do not think we can ignore or disregard the partial liquidation of International and treat the transaction as if petitioner merely sold its International common to an outsider for cash. *874 The respondent determined that on the exchange of the 100 shares of International common for 800 shares of Coca-Cola common petitioner realized a recognizable gain of $67,551.02 as representing the difference between the adjusted basis of International common of $29,375 and the fair market value of Coca-Cola common of $96,926.02; that petitioner realized neither gain nor loss on the Coca-Cola common; and that under section 115(c), supra, 100 percent of the gain of $67,551.02 should be taken into account in computing net income. This *526 determination of the Commissioner it seems to us is correct and must be sustained. Gus T. Dodd, supra. The differences in the treatment, so far as tax consequences are concerned, of the gain which a taxpayer receives from a partial liquidation of his shares from that where he sells them outright are due to a change which Congress made in the Revenue Act of 1934. Prior to that act the tax consequences would have been the same and there would have been no occasion for the controversy which we have here. See *875 W. C. Robinson,42 B.T.A. 725. It is also undoubtedly true that, if the taxpayer had sold its International stock instead of exchanging it in partial liquidation, the tax consequences of such sale would have been as petitioner contends they should be in this proceeding. It takes no argument, however, to establish the proposition that tax consequences are frequently very different under one state of facts from what they are under another state of facts. Cf. General Securities Co.,42 B.T.A. 754; affd., 123 Fed.(2d) 192. The court in affirming our decision in that case, among other things, said: Counsel for the taxpayer assert that had the corporation declared a cash dividend of $1,068.33, sold the Tramway stock, and paid the dividend out of the proceeds derived from the sale, the taxpayer could have deducted the amount of the loss suffered through the sale of the stock. The simple answer is that the taxpayer did not follow that course and its tax liability must be determined on the basis of what was done and not what might have been done. So we think it must be in the instant case. Decision will be entered for the respondent.*876 Footnotes 1. SEC. 117. CAPITAL GAINS AND LOSSES. (a) GENERAL RULE. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income: * * * 40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years; ↩ 2. Tulsa Tribune Co. v. Commissioner, 58 Fed.(2d) 937; reversing 21 B.T.A. 1405; Carter Publications, Inc.,28 B.T.A. 160; Prairie Oil & Gas Co. v. Motter, 66 Fed.(2d) 309; West Texas Refining & Development Co. v. Commissioner, 68 Fed.(2d) 77, affirming 25 B.T.A. 1254; Ahles Realty Corporation v. Commissioner, 71 Fed.(2d) 150; certiorari denied, 293 U.S. 611, affirming B.T.A. memorandum opinion; Helvering v. Security Savings & Commercial Bank, 72 Fed.(2d) 874, reversing 29 B.T.A. 176; Helvering v. General Utilities & Operating Co., 74 Fed.(2d) 972; reversed on other grounds, 296 U.S. 200; First Seattle Dexter Horton National Bank v. Commissioner, 77 Fed.(2d) 45, affirming 27 B.T.A. 1242; Bassick v. Commissioner, 85 Fed.(2d) 8; certiorari denied, 299 U.S. 592, affirming 30 B.T.A. 163; Muskegon Motor Specialties Co.,35 B.T.A. 851; and Commissioner v. Ashland Oil & Refining Co., 99 Fed.(2d) 588; certiorari denied, 306 U.S. 661, reversing 32 B.T.A. 777↩. 3. SEC. 115. DISTRIBUTIONS BY CORPORATIONS. * * * (c) DISTRIBUTIONS IN LIQUIDATION. - 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. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income. * * * * * * (i) DEFINITION OF PARTIAL LIQUIDATION. - 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. ↩