Maytag Co. v. Commissioner , 17 B.T.A. 182 ( 1929 )

THE MAYTAG CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Maytag Co. v. Commissioner

Docket No. 25399.

United States Board of Tax Appeals

17 B.T.A. 182; 1929 BTA LEXIS 2338;

September 4, 1929, Promulgated

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The net loss of the Maytag Co., an Iowa corporation, during the year 1921, may not be deducted from net income of the petitioner, its successor, in the succeeding year.

Jesse I. Miller, Esq., for the petitioner.

Harry LeRoy Jones, Esq., for the respondent.

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ARUNDELL

In this proceeding, involving the redetermination of a deficiency of $36,481.43 in income tax for the year 1922, the petitioner assigns as error the disallowance as a deduction of a net business loss sustained by the Maytag Co., an Iowa corporation, in the preceeding year. The facts were stipulated.

FINDINGS OF FACT.

The petitioner is a Maine corporation with its principal office at Newton, Iowa.

Prior to the close of the year 1921 the board of directors of the Maytag Co., an Iowa corporation, considered it advisable to increase the corporation's authorized capital stock and to sell the additional stock to the public in order to raise working capital which they had concluded would be required during the following year. They subsequently ascertained, however, that it was impracticable to carry out the plan under the laws of Iowa. The capital stock of the Iowa corporation at that time consisted of 2,717.7 shares of preferred stock and 12,201.5 shares of common stock, each of the par value of $100.

Subsequently in the year 1921, a committee appointed by the Iowa corporation's directors, with the approval of its stockholders, organized the petitioner under the laws of Maine, with an authorized capital stock consisting of 2,717.7 shares of preferred stock and 80,000 shares of common stock divided equally between class A and class B stock of no par value.

On January 3, 1922, the Iowa corporation, pursuant to appropriate authority granted by its board of directors and stockholders at meetings held on december 31, 1921, conveyed all of its assets, subject to its liabilities, to the petitioner in exchange for all of the petitioner's preferred stock and 13,400 shares of its class A and 40,000 shares of its class B common stock. The stock thus acquired by the Iowa corporation was thereupon distributed among its stockholders by an exchange of old for new stock. The preferred stock was distributed share for share and the class A and class B common stock was distributed ratably according to the holdings of each stockholder. After all of the exchanges had taken place, the Iowa corporation cancelled its stock and immediately dissolved. There remained in the treasury of petitioner after the exchange had been completed 26,600 shares of its class A common stock, all of which was sold to the public in the year 1922.

The balance sheet of the Iowa corporation on December 31, 1921, was adopted by the petitioner as its balance sheet as of January 2, 1922, except that in lieu of the former's common stock account of $1,220,150 and surplus account of $54,002.69, a total of $1,274,152.69, it set up a surplus account of an equivalent amount represented by 13,400 shares of class A and 40,000 shares of class B stock.

During the calendar year 1921 the Maytag Co., the Iowa corporation, sustained a net operating loss of $246,807.66.

OPINION.

ARUNDELL: Under the provisions of section 204(b) of the Revenue Act of 1921, a taxpayer sustaining a net business loss for any taxable year beginning after December 31, 1920, is permitted to deduct such loss from his net income for the succeeding taxable year. There is no dispute about the amount or character of the loss sustained. The question to be decided is whether the Maytag Co. ofMaine is the taxpayer within the meaning of section 204, so as to be entitled to deduct from 1922 income the net loss sustained in 1921 by its predecessor, the Maytag Co. of Iowa.

So stated, the proposition has a paradoxical sound, for of course the Maine company is not the Iowa company, and it is conceded by the petitioner that upon the organization of the Maine company a new legal entity was created. The question argued is whether, despite the creation of a new legal entity, a new taxable entity came into existence.

There are cases in which a proper regard for "matters of substance and not mere form" in construing taxing statutes, has impelled courts to disregard a change of legal entities. See ; Western Maryland Railway Co. v. Commissioner, Fed.(2d) . On the other hand, it has been found necessary in many cases in order to give effect to tax laws, to regard a change in corporate identity as something more than a matter of form, as in , where a new corporation, organized to continue the business of the old, was created under the laws of another State and with a different capital structure. Weiss v. Stearn and Marr v.United States are distinguished in the latter case in these words:

In Weiss v. Stearn a new corporation had, in fact, been organized to take over the assets and business of the old. Technically there was a new entity; but the corporate entity was deemed to have been substantially maintained because the new corporation was organized under the laws of the same state, with presumably the same powers as the old. There was also no change in the character of securities issued.

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In the case at bar, the new corporation is essentially different from the old. A corporation organized under the laws of Delaware does not have the same rights and powers as one organized under the laws of New Jersey. Because of these inherent differences in rights and powers, both the preferred and common stock of the old corporation is an essentially different thing from stock of the same general kind in the new. But there are also adventitious differences, substantial in character. A 6 per cent, nonvoting preferred stock is an essentially different thing from a 7 per cent, voting preferred stock. A common stock subject to the priority of $20,000,000 preferred and a $1,200,000 annual dividend charge is an essentially different thing from a common stock subject to $15,000,000 preferred and a $1,050,000 annual dividend charge.

So here we have corporations organized under the laws of different States and presumably having different rights and powers, and, while both had the same amount of preferred stock, there was a change in common stock from 12,201.5 shares of $100 par to 80,000 shares of no par. These changes are matters of substance and not to be lightly disregarded. See . In our opinion they are conclusive against the claim that the new corporation is the same taxable entity as the old. Cf. , and .

It is worthy of note in passing that the petitioner's views, if accepted, would have far-reaching effects on other tax questions. The result would be that many corporations upon reorganization would be deprived of the benefits arising from a revaluation of assets acquired from predecessors. For example, it is held that the basis for depreciation of assets acquired for stock is the fair market value at the time of acquisition, regardless of cost to the predecessor. See . And for invested capital purposes, except as limited by section 208 of the 1917 Act and section 331 of the 1918 and 1921 Acts, assets may be revalued by the new corporation and included at their actual value without regard to the amount allowable to the predecessor. ; .

Judgment will be entered for the respondent.