Appeal of Langenbach , 2 B.T.A. 777 ( 1925 )

OPINION.

Sternhagen:

The taxpayer urges us to look to substance and not to form, contending that in substance he merely changed the evidence of his capital interest in the business without realizing income. At the completion of the reorganization his stock in the new corporation represented, he contends, approximately the same proportionate interest in the same assets, and'in this situation the intermediate facts leading to this result are matters of form which should not control the determination of taxable income. The Commissioner insists that each step is a matter of substance, and that the moment the taxpayer received for his stock more than its value' on March 1, 1913, he realized taxable income notwithstanding his obligation to continue his interest in the business and his subsequent use of the proceeds in the acquisition of stock in the new corporation. Both parties rely upon decisions of the Supreme Court.

The argument that we must regard substance and not form is elusive, for its adoption leaves us confronted with the equally difficult task of distinguishing form from substance. The taxpayer here with his associates was primarily concerned with the need of securing new capital for the business. In order to accomplish this it was necessary for financing reasons to organize a new corporation with stock of no par value; and this could not be done under the laws of Ohio. The corporation was organized in New York with new directors and additional capital. These two corporations were essentially different, and it is only by recognizing them as essentially different that the new organization can be explained. Were it not so, why were such meticulous efforts made to adhere to the program of reorganization? — the stockholders’ authorization in Ohio, the solemn declaration of a dividend and its actual payment by check, the borrowing against it by the taxpayer from the trust company, and the deposit of certificates and issuance of the checks, the separate sale by the taxpayer of his old shares and. the receipt of the separate check as the purchase price? These acts were the validating and enabling acts by which the plan was fulfilled. They were important in that they were essential to the reorganization of the business. Because they were all related to the whole plan, as they undoubtedly were, it can not be said that each was not substantial. The parties were under no legal compulsion to adopt this method or perform these acts. They voluntarily chose the plan and presumably undertook all the obligations it entailed, including State and Federal taxes. Surely the State of New York would have been deaf to a plea for exemption from organization fees or franchise tax on the ground that the new corporation was a mere form and not a matter of substance.

The taxpayer cites Weiss v. Stearn, 265 U. S. 242, as an authoritative disposition of a similar problem. We think it is not controlling here, not only because we have a new corporation of a different State from the old, but also because there is a substantial difference in the new no-par-value stock from the -old par-value stock, Paul v. Pacific Development Corporation, 197 N. Y. S. 811; and, further, because here the taxpayer actually received a cash dividend and not, as there, a direct exchange of stock. The more recent decision in Marr v. United States, 268 U. S. 536, is in onr opinion more nearly in point, for the exchange of stock in that case being a taxable transaction, a fortiori the receipt of cash here is taxable. The taxpayer also cites Eisner v. Macomber, 252 U. S. 189, in which stock dividends were held not to be income. But in that case the court made clear the opinion that a cash dividend, even although used immediately to purchase new stock, would be taxable.

In United States v. Phellis, 257 U. S. 156, and Rockefeller v. United States, 257 U. S. 176, the court considered situations where the stockholder received, not cash, but stock in a new corporation holding some of the same assets which the old stock had theretofore represented; and the stockholder was held taxable upon the value of the stock thus received as a dividend, notwithstanding that the new stock was part of a reorganization. In those cases the stockholders urged that they were merely receiving new symbols of ownership of the same interest their right in which had never changed and never come to realization; but this the court declined to adopt. Here the corporation declared and the stockholder received a cash dividend, which, were it not for his voluntary contract, he had under his complete dominion. At the moment of its receipt he realized income, and what he did with it thereafter, irrespective of how soon, can not change its character at that time. Appeal of Regal Shoe Co., 1 B. T. A. 896; Appeal of E. C. Huffman, 1 B. T. A. 52.

It is our opinion, therefore, that the taxpayer can not escape tax because the amounts received were incidental to the reorganization. The Commissioner, however, stands in an equivocal position. Defending the tax on the ground that each step in the reorganization is independent of the others, he nevertheless treats the dividend of $966.66% per share and the sale of each old share to the new corporation for $100 as a single act in liquidation. He then compares the $1,066.66% per share so received with the agreed March 1, 1913, value of $441.47 and treats the difference as taxable gain. But the amount of $966.66% was a dividend on each share in ordinary course, duly covered by corporate resolution distributing only the corporation’s surplus. By the Revenue Act of 1916, section 1 (b), such dividend was subject in the hands of the'receiving stockholder to the surtax only. This amount on his 912 shares, or $881,600, was all that this taxpayer received from the old corporation. After the payment of this dividend out of its surplus the old corporation still had its capital stock of $1,500,000, represented by 15,000 shares of $100 par value. Of these the taxpayer sold his 912 shares to the new corporation at par. This had nothing to do with the old corporation. It was not a liquidation distribution, for that corporation was neither liquidating nor dissolving at that time. What it did later by way of reducing its capital was of no concern to this taxpayer, who was no longer a stockholder. The sale price of $100 a share, or $91,200, resulted in gain or loss, the measure of which depended upon the original cost and March 1, 1913, value of the shares. Goodrich v. Edwards, 255 U. S. 527; United States v. Flannery, 268 U. S. 98. We have the value on March 1, 1918, stipulated at $441.47, but this alone is not determinative, and there is in the record no evidence of original cost. The deficiency must be recomputed by imposing surtax upon the $881,590 of dividends, and both normal and surtax upon the gain derived from the disposition of the shares for $91,200.

ARtjndell not participating.