Watts v. Commissioner ( 1933 )

JOHN J. WATTS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HUGH C. SICARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PARKER SLOANE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Watts v. Commissioner

Docket Nos. 44061, 47451, 47973.

United States Board of Tax Appeals

28 B.T.A. 1056; 1933 BTA LEXIS 1057;

August 11, 1933, Promulgated

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The transaction herein detailed not resulting in a reorganization, gain or loss is to be recognized to petitioners.

John F. McCabe, Esq., James P. Quigley, Esq., and John J. Heberle, Esq., for the petitioners.

W. E. Davis, Esq., and Paul Waring, Esq., for the respondent.

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VAN FOSSAN

These proceedings, which were consolidated for hearing, involve the redetermination of deficiencies in the income taxes of the respective petitioners for the year 1924, amounting in each case to the sum of $63,441.83.

The issue is whether the petitioners respectively realized income from the transfer to the Vanadium Corporation of America of all the capital stock of the United States Ferro Alloys Corporation, or whether the transaction is exempt from taxation under section 203(b)(2) of the Revenue Act of 1924.

FINDINGS OF FACT.

The United States Ferro Alloys Corporation (hereinafter called Ferro Alloys) was incorporated under the laws of the State of New York in January 1919, with a capital stock of $500,000, consisting of 5,000 shares of a par value of $100 each. Prior to the transaction herein involved the capital of the corporation was duly increased to the sum of $3,000,000, divided into 30,000 shares of a par value of $100 each, fully paid either in cash or property.

At the date of the agreement hereinafter referred to each of the petitioners herein owned one third of the capital stock of Ferro Alloys.

On or about December 6, 1924, the petitioner Parker Sloane, as party of the first part, acting on his own behalf, and on behalf of the other stockholders of Ferro Alloys, entered into a written agreement with the Vanadium Corporation of America (hereinafter referred to as the Vanadium Co.), as party of the second part, by which Sloane agreed to deliver to the party of the second part all of the 30,000 shares of the capital stock of Ferro Alloys. The Vanadium Co. is described in the agreement as a corporation incorporated under the laws of the State of Delaware, having its office at 120 Broadway, New York City.

The agreement recites that Sloane, individually and as trustee, owned and controlled all the outstanding issued shares of Ferro Alloys and was able to deliver to the Vanadium Co. duly endorsed certificates representing the entire interest in the assets of Ferro Alloys and was also able to deliver to the Vanadium Co. all the certificates of stock of all subsidiary corporations owned by Ferro Alloys or in which it had an interest.

The agreement recites further that Sloane had represented that the assets of Ferro Alloys consist of about 30 acres of land at Niagara Falls, New York, together with the buildings, plant, machinery, equipment, and raw and finished supplies; also a certain lease of silica or sandstone quarries situated at Lewiston, New York, contracts covering the delivery of electric power, certain processes and patents, a certain contract covering the delivery of chrome ore; also all outstanding and issued shares of the Colonial Chrome Co., Ltd., which owned a plant, real estate and a mine at Black Lake in the Province of Quebec, Canada; and also certain contracts not specifically described.

The recitals of the agreement also set forth the net worth of the Ferro Alloys as of May 1924, as the sum of $3,477,575.80. It is stated that this sum includes the sum of $338,815.50 representing advances to Ferro Alloys on chrome contracts of $298,815.50 and $40,000 due for unused power which is being paid and canceled.

The agreement also recites the obligations and liabilities of Ferro Alloys and it is stated that approximately $255,000 of the liabilities for materials delivered, labor, expenses, and accruals is assumed by the Vanadium Co. and will be paid out of current assets of Ferro Alloys.

Among other recitals the agreement contains the following:

WHEREAS, said Parker Sloane is exchanging and delivering to and with the Vanadium Corporation of America Thirty Thousand (30,000) shares of the stock of the United States Ferro Alloys Corporation, organized under the laws of the State of New York, each of the par value of One Hundred Dollars ($100.00) and aggregating Three Million Dollars ($3,000,000.00) and being the total capital stock of said Corporation; and

WHEREAS, the Vanadium Corporation of America is exchanging and delivering to said Parker Sloane, Trustee for the owners of said United States Ferro Alloys Corporation stock 66,666 2/3 shares of the stock of the Vanadium Corporation of America, each share being without par value, together with bonds of the United States Ferro Alloys Corporation, aggregating One Million, One Hundred Sixty-one Thousand One Hundred and Eighty-four Dollars and 50/100 ($1,161.184.50) secured by a Trust Mortgage on its land and plant at Niagara Falls and guaranteed as to payment of principal and interest by the said Vanadium Corporation of America, together with an assumption of the immediate payment by the Vanadium Corporation of America of certain due obligations as hereinafter set forth.

Article I of the agreement reads as follows:

That the parties hereto do hereby fix the following as a complete understanding and agreement as to the terms and conditions of said exchange. The said Parker Sloane shall or does hereby exchange, transfer and deliver to the said Vanadium Corporation of America, all the issued and outstanding stock of the United States Ferro Alloys Corporation, comprising Thirty Thousand (30,000) shares, and will have the present Directors and Officers resign to the intent that the Vanadium Corporation of America may replace same at its discretion.

Said exchange shall cover and entitle the party of the second part to all the assets of the said United States Ferro Alloys Corporation as of December 23rd, 1924, including all the assets mentioned herein and all the shares of stock in any subsidiary or subsidiaries owned by said United States Ferro Alloys Corporation or in which the Corporation has an interest.

The said Vanadium Corporation of America shall or does hereby exchange, transfer and deliver to said Parker Sloane as aforesaid, 66,666 2/3 shares of the stock of said Vanadium Corporation of America, each share being of no par value.

The said Vanadium Corporation of America hereby causes to be issued and delivered to said Parker Sloane valid bonds to the amount of One Million, One Hundred Sixty-one Thousand One Hundred Eighty-four Dollars and Fifty Cents ($1,161,184.50) each for One Thousand ($1,000.00) Dollars except one bond for One hundred eighty-four Dollars and Fifty Cents ($184.50) bearing interest at 6% payable January 1st and July 1st of each year, and the said principal being payable as follows:

$161,184.50	February 1, 1925
150,000.00	January 1, 1926
150,000.00	January 1, 1927
150,000.00	January 1, 1928
150,000.00	January 1, 1929
150,000.00	January 1, 1930
150,000.00	January 1, 1931
100,000.00	January 1, 1932
$1,161,184.50

said bonds to be secured by a Trust Mortgage or deed on the entire plant, property and equipment of the United States Ferro Alloys Corporation at Niagara Falls, New York, and the payment of the principal and interest of said bonds to be duly and properly guaranteed by said Vanadium Corporation of America. Said mortgage and bonds shall provide that they are to have no voting power, and shall be preferred over all present or future stock issues of said United States Ferro Alloys Corporation, and in dissolution, liquidation, merger and distribution of dividends and assets. Besides the usual default clauses, there shall be provided a default clause to the effect that the Vanadium Corporation of America shall always have on hand for the use of the Niagara Falls Plant or in good faith contracted for in advance, at least sixty (60) days' supply of such materials and products as may be necessary and sufficient to employ the power now under contract with The Niagara Falls Power Company, together with the usual provisions in a mortgage of this character, which shall be approved by said Parker Sloane or his Counsel representing him in this transaction, including an insurance clause, a clause to provide for the privilege of payment of part or all of the principal remaining due at any time on 90 days notice, and a clause to the effect that the machinery, equipment and buildings, and entire plant shall be kept in good order and repair, to the intent that there shall be no deterioration of the value or productive capacity of said plant, and that all taxes, water rates, assessments and government charges shall be properly paid and discharged; said Trust Mortgage shall be deposited in escrow with Guaranty Trust Company. Said bonds shall further provide that in case the holder thereof desires to part with the possession of any of said bonds, they will first be offered to the party of the second part at par and accrued interest and the party of the second part has the option to accept or reject said offer within ten days.

The Vanadium Corporation of America further agrees that upon the receipt of the Thirty Thousand (30,000) shares of the United States Ferro Alloys Corporation stock aforesaid that it will immediately forthwith pay or cause to be paid in cash, Two Hundred Ninety-eight Thousand Eight Hundred and Fifteen Dollars and Fifty Cents ($298,815.50) as directed by Parker Sloane, to the holders of certain obligations in the form of chrome contracts and representing moneys heretofore advanced to said United States Ferro Alloys Corporation, and upon the further production by said Parker Sloane or other person, of proper assignment or cancellation or under or by his direction of certain obligations amounting to Forty Thousand Dollars ($40,000.00) claimed to be due to the Niagara Falls Power Company by the said United States Ferro Alloys Corporation, that thereupon the Vanadium Corporation of America will forthwith immediately pay the said Parker Sloane or as directed by him said sum of Forty Thousand Dollars ($40,000.00).

Pursuant to the terms of the contract the parties agreed that it should be fully performed and carried out at noon on December 19, 1924, at which time all the shares of Ferro Alloys, including all shares of its subsidiary corporation, duly endorsed and assigned to the party of the second part together with the resignations of the officers and directors of each corporation should be delivered to the Vanadium Co. and that the Vanadium Co. should thereupon place 66,666 2/3 shares of its stock in escrow with Guaranty Trust Co. and should duly deliver to Ferro Alloys the bonds hereinbefore described and immediately pay the amounts it had "assumed to pay" under the provisions of article I of the agreement.

The agreement provides for a complete audit of the business, properties and profits of Ferro Alloys and the parties agreed that the escrow deposit with the Guaranty Trust Co. should be dissolved on January 1, 1926, and that the exact number of shares of Vanadium Co. to be then delivered to Sloane for himself and the other parties entitled thereto should be determined on the basis of the earning power of Ferro Alloys demonstrated during 1925.

By a supplemental agreement dated December 18, 1924, entered into by the parties to the original agreement, the amount of its stock which the Vanadium Co. was to "exchange, transfer and deliver" to Sloane as trustee was reduced to 33,333 1/3 shares.

The stock of Vanadium Co. was of no par value and for the purposes of the agreement its value was fixed at $30 per share.

The contract was duly executed in accordance with its terms, but as a result of the demonstrated earning power of Ferro Alloys during the year 1925 only 32,103 shares of the stock of the Vanadium Co. were delivered to Sloane for himself and the other persons entitled thereto upon the dissolution of the escrow with the Guaranty Trust Co.

Concurrently with the closing of the transaction and in accordance with the terms of the agreement, the Vanadium Co. paid to creditors of Ferro Alloys the sum of $338,815.50; $298,815.50 being paid to one Louise M. Higham and $40,000 being paid to the Niagara Falls Power Co. After these payments to the two creditors the Vanadium Co. appeared on the books of Ferro Alloys as a creditor to "the extent of $338,000."

On July 2, 1928, a certificate of the dissolution of Ferro Alloys was filed in the office of the Secretary of State of the State of New York.

In the respective deficiency letters the respondent held in substance that the transaction herein involved was a sale of the 30,000 shares of Ferro Alloys for the sum of $2,500,000, made up as follows:

33,333 1/3 shares of Vanadiumt	$1,000,000.00
Corporation stock at $30 a share
Bonds taken as part payment	1,161,184.50
Payment to Louise M. Higham	298,815.50
Payment to Niagara Power Co	40,000.00
	2,500,000.00

The respondent computed the capital net gain of each of the petitioners as follows:

Received for total stock of United States		$2,500,000.00
Ferro Alloys Corporation
1. Amount paid creditors of United States	$338,815.50
Ferro Alloys Corporation
2. Additional cost allowed	43,363.08
3. Value of undelivered stock	36,910.00
		419,088.58
Net sale price		2,080,911.42
1/3 interest		693,637.14
Cost of stock		186,102.49
Capital net gain		507,534.65

The sum of $43,363.08 described in the respondent's computation as "additional cost allowed" represents the liability of the petitioners under their agreement with the Vanadium Co. for taxes against the year 1924.

In computing the capital net gain the respondent stated that it was held that the amount of $338,815.50 "paid by the Vanadium Corporation to the creditors of the United States Ferro Alloys Corporation constituted constructive receipt to the owners of the stock disposed of and, therefore, represents part of the purchase price to the Vanadium Corporation." It was stipulated at the hearing that the payment of this sum by the Vanadium Co. did not make the same income to the petitioners.

OPINION.

VAN FOSSAN: The petitioners in these proceedings contend that they exchanged all of the stock of Ferro Alloys for stock of the Vanadium Co. and bonds of Ferro Alloys guaranteed by the Vanadium Co.; that these two corporations were parties to a reorganization and that, therefore, under the provisions of section 203(b)(2) of the Revenue Act of 1924, no gain may be recognized. The respondent, on the other hand, contends that the transaction between Sloane and the Vanadium Co. was a sale by the petitioners of all of the capital stock of Ferro Alloys and that it resulted in the creation of income taxable to the petitioners.

The applicable statutes are sections 202 and 203 of the Revenue Act of 1924. Section 202 provides, in part, as follows:

(a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be excess of such basis over the amount realized.

* * *

(d) In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purpose of this title, shall be determined under the provisions of section 203.

Section 203 provides, in part:

(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.

* * *

(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 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) * * *.

In our opinion the determinative question is that of reorganization and, unless the transaction stated in the findings of fact constituted a reorganization of Ferro Alloys and the Vanadium Co., it is unnecessary to discuss whether there was an actual sale of the stock of Ferro Alloys by the petitioners or whether the transaction was an exchange of all of the stock of Ferro Alloys for stock of the Vanadium Co. and bonds of Ferro Alloys. If the two corporations were not parties to a reorganization the gain, if any, accruing to the petitioners by reason of the transaction is taxable.

Under the provisions of section 203(h)(1)(A), hereinbefore quoted, the term "reorganization" means 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). While the Vanadium Co. acquired all the capital stock of Ferro Alloys and, therefore, obtained a full and complete control of the latter corporation, we are of the opinion that it does not appear that the two corporations were either consolidated or merged. 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. Railroad Co. v. Georgia,98 U.S. 359">98 U.S. 359, 362; Matter of Bergdorf,206 N.Y. 309">206 N.Y. 309; 99 N.E. 714">99 N.E. 714; Irvine v. N.Y. Edison Co.,207 N.Y. 425">207 N.Y. 425; 101 N.E. 358">101 N.E. 358; Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed.(2d) 188; affd., 287 U.S. 462">287 U.S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed.(2d) 937.

In the Cortland Specialty Co. case, supra, cited with approval by the Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, supra, the Circuit Court of Appeals for the Second Circuit, referring to state statutes relating to the consolidation and merger of corporations, said:

Undoubtedly such statutes vary in the different states particularly in respect to how far the constituent companies may be deemed to survive the creation of the new or modified corporate structure, but we believe that the general purpose of them all has been to continue the interests of those owning enterprises, which have been merged or consolidated, in another corporate form. * * * When describing the kind of change in corporate structure that permits exemption from these taxes, Section 203 does not disregard the necessity of continuity of interests under modified corporate forms. Such is the purpose of the word "reorganization" in Sec. 203(b)(3) where a corporation exchanges its property "solely for stock or securities." [Italics ours.]

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, 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.

Section 203(b)(2) provides that "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," etc. The evidence discloses no plan of reorganization and the agreement between Sloane and the Vanadium Co. contains none. There is no provision in the agreement that Ferro Alloys should be dissolved upon the performance of the agreement. On the contrary, there is evidence in the terms of the agreement that it was the intention of the parties thereto that that company was to maintain its separate corporate entity after the performance of the contract and the delivery of the stock of Ferro Alloys owned by the petitioners. Part of the consideration paid to the petitioners for the stock transferred by them was, under the terms of the agreement, bonds of Ferro Alloys. Some of these bonds, unless previously called, were not to mature prior to January 1, 1932, or eight years after the execution of the agreement and six years after the date provided in the agreement for the dissolution of the escrow deposit of the Vanadium Co.'s stock. At the very time, therefore, when it is contended that a merger of Ferro Alloys was effected it was provided that Ferro Alloys should issue obligations not maturing before 1932. At such time, therefore, it could not have been in contemplation of the parties that Ferro Alloys would be dissolved upon the performance of the agreement set out in the findings of fact.

It appears that the Vanadium Co. was incorporated under the laws of the State of Delaware and had its office in New York City. Presumptively, therefore, it was authorized as a foreign stock corporation under the laws of the State of New York to do business in that state. Ferro Alloys was organized under the laws of the State of New York. Section 85 of article 8 of the Stock Corporation Law of the State of New York, relating to the merger of corporations, provides in effect, among other things, that any foreign stock corporation authorized to do business in the State of New York owning all the stock of any domestic stock corporation may file in the office of the secretary of state a certificate of such ownership, duly executed in accordance with the provisions of the section, and that thereupon all of the estate, property, rights, privileges, and franchises of such other corporation shall vest in and be held and enjoyed by such possessor corporation as fully and entirely as the same were before held by such other corporation.

The evidence does not disclose that the Vanadium Co. at any time filed the certificate provided in the quoted statute. While it may be that a legal merger of Ferro Alloys and the Vanadium Co. might be effected without the filing of the certificate provided, yet evidence that the certificate had been filed contemporaneously with performance of the agreement between Sloane and the Vanadium Co. would be of weight with reference to the intent of the parties to merge Ferro Alloys with the Vanadium Co. Lack of such evidence is at least of some significance respecting the existence of a contrary intent.

It is true that the facts show that Ferro Alloys was dissolved in July 1928, but this date was several years after the performance of the agreement and the dissolution can not, therefore, be held to be evidence that an intention to merge the two corporations existed at the time of the performance of the transaction now in question.

It seems to us apparent that neither a merger nor a consolidation in the ordinary sense of the words occurred, nor do we believe in the face of the facts that the transaction was one of those "things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words * * *" embracing "circumstances difficult to delineate but which in strictness can not be designated as either a merger or consolidation," as was observed by the Supreme Court in Pinellas Ice & Cold Storage Co., supra. While the Supreme Court indicated in the above decision that it deemed the opinion of the circuit court in the Pinellas case to be too strict and that the language in parentheses in the statutory definition of a reorganization was intended to work an expansion or enlargement of the meaning of the words, it remains for us to determine whether the instant situation satisfies such expanded definition. In the construction of the language referred to the words "merger or consolidation" are still of guiding import; The transaction must resemble a merger or consolidation, though it fails to satisfy all of its legal requirements.

In the case before us, as already appears, there are certain facts of importance that weigh heavily against a conclusion that the transaction was "of the nature of a merger or consolidation." Definite evidence of an intention to effect a merger or consolidation is lacking. There was no provision for the dissolution of Ferro Alloys. The commitments assumed by it indicate an intended continuation of existence. Such obligations are not consistent with impending extinction. We believe them to be so foreign to the concept of a merger or consolidation that it can not be said that the transaction partook of the nature of a merger or consolidation. We, therefore, conclude that the transaction here involved did not constitute a reorganization under the statute and that any gain resulting to the petitioners therefrom must be recognized.

There is another fact which injects itself into the consideration of the case, and that is the agreement on the part of the Vanadium Co. to pay in cash the sum of $298,815.50 to the holders of certain obligations due under chrome contracts with Ferro Alloys and $40,000 to petitioner Sloane or his nominee on account of obligations due to the Niagara Falls Power Co. from Ferro Alloys. Though the parties stipulated that these payments did not of themselves constitute income to the petitioners, this does not remove the question of the effect of these payments on the alleged reorganization. Ferro Alloys was obligated on these accounts to the amount of $338,815.50. When Vanadium paid these accounts Ferro Alloys was relieved of the obligations to the creditors to the same extent as though it had been paid the cash by Vanadium and had in turn paid the obligations in the stated amount. Thereafter Vanadium appeared on the books of Ferro Alloys as a creditor. In view of these facts, can it be said that the consideration for the delivery of Ferro Alloys stock was solely stock or securities?

The petitioners have not objected to the valuation of the securities made by the respondent in his computation of the deficiency in tax. This valuation must, therefore, be presumed to be correct.

Reviewed by the Board.

Decisions will be entered under Rule 50.

STERNHAGEN

STERNHAGEN, concurring: I agree that this was not a statutory reorganization, but I would place less emphasis upon the omission to dissolve the Ferro Corporation. In other words, I should say that in a case which was otherwise within part (A) of the definition, there might be a statutory reorganization despite the continued legal existence of the corporations involved.

LEECH and ADAMS agree with the above.

TRAMMELL, ARUNDELL

TRAMMELL, dissenting: In my opinion, the facts in this case bring it squarely within the reorganization provisions of the statute as interpreted by the Supreme Court in the Pinellas case and by the court of appeals in the Cortland Specialty case, cited in the above case. The reorganization provisions do not require that one corporation be dissolved. The reorganization as defined in the statute is not limited to a technical merger or reorganization, but is made broader by the parenthetical clause. There was, in my opinion, the continuing interest which the above decisions referred to as being necessary.

ARUNDELL, dissenting: In my opinion the fects bring the case within the reorganization provisions of the statute. I think that too much stress is placed on the fact that dissolution of Ferro Alloys was delayed for several years after the acquisition of its stock by Vanadium. The statute does not in terms require dissolution at any time. While dissolution is a usual concomitant of a strict merger or consolidation, the parenthetical clause in section 203(h) (1) extends the application of the statute "to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words - so as to embrace circumstances difficult to delimit but which in strictness can not be designated as either merger or consolidation." Pinellas Ice & Cold Storage Co. v. Commissioner,287 U.S. 462">287 U.S. 462. The effect of the majority opinion is to disregard the words within the parentheses and this the Supreme Court in the Pinellas case has said very definitely may not be done. Nor is it material that petitioners received bonds of the Ferro Alloys Co. as well as stock in the Vanadium Co. Section 203(b)(2) contemplates just such cases. There was here present that continuity of interest emphasized in Cortland Specialty Co. v. Commissioner, 60 Fed.(2d) 937, and Pinellas Ice & Cold Storage Co., supra.

SMITH, BLACK, and GOODRICH agree with the above dissent.