Reeves v. Commissioner , 71 T.C. 727 ( 1979 )

Wilbur, J.,

dissenting: I respectfully dissent from the majority opinion. The Court has dealt too casually with a formidable body of directly contrary precedents.

For purposes of the issue we decide, the specific words of the statute before us have been essentially the same since 1934. They require that, to qualify as a (B) reorganization, the acquisition of stock in the target corporation must be “in exchange solely” for voting stock of the acquiring corporation or its parent, and immediately after the acquisition, the acquiring corporation must be in control of the acquired corporation. A question immediately arises: Does this language require that all of the stock of the target corporation acquired be acquired solely for the stock of the acquiring corporation; or if the controlling interest (80 percent or more) is acquired for voting stock, may the remainder be acquired for cash of other property?

Despite what the majority says, this specific question has been litigated in this Court, the Court of Claims, and the Courts of Appeals, and these courts have squarely and unequivocally held that acquisition of some of the stock of the target corporation for cash is fatal to a (B) reorganization, even though the controlling interest (80 percent or more) is acquired solely for stock.¹

In Howard v. Commissioner, 24 T.C. 792 (1955), revd. on another issue 238 F.2d 943 (7th Cir. 1956), we specifically found that the acquiring corporation acquired control — 80.19 percent of the total outstanding shares of the target corporation — solely for voting stock. We stated: “The 3,700 shares of Binkley common stock acquired in exchange for common stock of Truax-Traer constituted 80.19 per cent of the total outstanding stock of Binkley.” (24 T.C. at 800; emphasis added.) The petitioners in Howard (like those before us) argued that the acquisition for cash and the acquisition for stock were separate transactions, and that in any event cash acquisitions are permissible as long as the controlling interest was acquired solely for stock. After holding that the “singleness and unity of the transaction in which Truax-Traer acquired [the target corporations] is apparent,” (24 T.C. at 801) we stated:

We now turn to petitioners’ main contention which is, in effect, that the acquisition by one corporation of at least 80 per cent of the only class of stock outstanding of another corporation for stock is an acquisition “solely” for stock within the meaning of the definition of a reorganization under section 112(g)(1)(B)* * * [²] [24 T.C. at 803.]

In order to avoid any possible misunderstanding of the question presented, we then succinctly and unequivocally restated the question decided:

Basically the question before us is whether the statute requires all of the Binkley stock acquired by Truax-Traer in the transaction of June 23,1950, to have been acquired only (“solely”) for stock, or whether it is sufficient if a minimum of (“at least”) 80 per cent of the outstanding Binkley stock was acquired for an appropriate amount of Truax-Traer stock, even though the remainder acquired in excess thereof was so acquired for a consideration other than stock. * * * [24 T.C. at 804.]

The issue decided was thus stated and restated with unmistakable precision. And the decision itself was also stated with unmistakable clarity:

We think, however, that the authorities have clearly established the applicable rule of law to be that the consideration for whatever stock is acquired by the transferee corporation in a transaction such as that before us must be solely the transferee’s voting stock, and nothing else. * * * [24 T.C. at 804; emphasis added.]

The Seventh Circuit, in affirming our opinion on this issue, restated and decided the question in equally unequivocal language, after a careful and extensive review of the relevant legislative history:

The primary problem confronting us, then, is the taxable effect of the cash or “boot” transferred by Truax-Traer in its acquisition of 19.81% of the stock of Binkley. Petitioners urge that the "solely for voting■ stock” requirement of sec. 112(g)(1)(B) merely refers to the 80% promisión and is not in itself an independent requisite, regardless of the amount of stock acquired. * * *

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We conclude that because of the cash payment, the transaction in question fails to meet the “solely” requirement of sec. 112(g)(1)(B) of the 1939 Code. * * * [Howard v. Commissioner, 238 F.2d 943, 945, 947 (7th Cir. 1956); emphasis added.]

In affirming our decision in Howard, the Seventh Circuit, like this Court, relied in part on Commissioner v. Air Reduction Co., 130 F.2d 145 (2d Cir. 1942). In Air Reduction, the Second Circuit specifically stated that “about 82% of the Pure Carbonic stock [the target corporation] was acquired for shares of Air Reduction stock [the acquiring corporation] and the balance for cash.” (130 F.2d at 146.) The Second Circuit then rejected the taxpayer’s argument that this exchange was a (B) reorganization, again in unequivocally clear language:

this theory is not tenable because the definition of reorganization in sec. 112(g)(1)(B) of the 1934 Act, 26 U.S.C.A. Int. Rev. Acts, page 695, contemplates only situations where the exchange is made “solely” for voting stock. Here over 17% of the Pure Carbonic stock was purchased for cash. * * * [130 F.2d 145,148.]

We again squarely addressed the issue of whether a (B) reorganization permits any cash acquisitions of target company stock in Mills v. Commissioner, 39 T.C. 393 (1962), revd. 331 F.2d 321 (5th Cir. 1964). In Mills, more than 99.9 percent of the target companies’ stock was acquired for the voting stock of the acquiring corporation, the remaining one-tenth of 1 percent being acquired for cash ($27.36 for a fractional share, apparently as a bookkeeping convenience). We again stated in unequivocally clear language:

We construe the word “solely” as meaning precisely what it purports to mean, namely that the receipt by the stockholders of an acquired corporation of any consideration whatsoever other than voting stock forbids a transaction from being a reorganization as defined under section 368(aXl)(B). * * * We cannot assume that Congress was incapable of expressing a grant of leeway when that was its purpose. [39 T.C. at 400; emphasis added.]

The words “any consideration whatsoever other than voting stock” leave no room for interpretation. And the holding that a cash acquisition of less than one-tenth of 1 percent is not consistent with a (B) reorganization clearly rules out cash for 5, 10, or 20 percent of the stock. Yet without reversing or distinguishing Mills, the majority now holds that up to 20 percent of the target company’s stock may be acquired for cash consistent with the mandate that the acquisition be “solely” for voting stock.

The dissenting Judges in Mills took the majority to task for literally applying the term “solely” to a $27.36 payment for a fractional share, a payment apparently made as a bookkeeping convenience. But the author of the dissenting opinion also stated that “I interpret the word ‘solely’ as requiring that there be no consideration other than voting stock” and suggested that the $27.36 was not additional consideration but simply a rounding off for mathematical convenience. (39 T.C. at 403). In reversing the Tax Court on the basis of this dissent, the Fifth Circuit specifically quoted this statement that the word “solely” requires “that there be no consideration other than voting stock.” (331 F.2d at 324.) While the Fifth Circuit held that the $27.36 paid in Mills for a fractional share “simply [as] a mathematical rounding” was not “consideration,” its opinion assumes the validity of the view embraced by all of the Judges of this Court in Mills that the word “solely” means that the voting stock is the only consideration that may be given by the acquiring corporation in a section 368(a)(1)(B) reorganization.³

But the line of contrary precedents, formidable as it already is, does not terminate here. For in Lutkins v. United States, 312 F.2d 803 (Ct. Cl. 1963), the Court of Claims also squarely decided the issue. The court noted that as a result of acquisitions over a considerable period of time that “in 1952 American [the acquiring corporation] owned 94.864 percent of the voting stock of International [the target corporation] which it had obtained solely in exchange for shares of its own voting stock.” (312 F.2d at 804.) The court pointed out that over this period of time American had also “purchased on the market an adjusted total of 16,150 shares of International stock which comprised 2.691% percent of that company’s outstanding stock.” (312 F.2d at 804.)

The Government argued that no (B) reorganization existed because the acquisitions over time could not be combined, and that in any event, although 94.864 percent of the voting stock was acquired for voting stock, 2.691 percent was acquired for cash, thus violating the requirement that “solely” voting stock be used. It was only the second contention that the Court of Claims considered and ruled on. Focusing on the use of cash to acquire 2.691 percent of the target company’s stock, the court clearly stated the question it decided: “did the acquisition of stock for cash between 1929 and 1951 prevent the 1952 stock for stock exchange from being a reorganization under the terms of section 112(g)(1)(B).” (312 F.2d at 804.) Quoting from and squarely relying on Howard, the court held that even though 94.864 percent of the stock had been acquired for voting stock, the acquisition of 2.691 percent for cash violated the requirement that stock be acquired “solely” for voting stock. See 312 F.2d at 805.⁴

Thus, in Howard, Lutkins, and Air Reduction, the Second Circuit, the Seventh Circuit, and the Court of Claims all held that the acquisition of some stock for cash is incompatible with a reorganization even though 80 percent or more of the stock is acquired solely for stock. This also clearly appears to be the view of the Fifth Circuit (Mills v. Commissioner, 331 F.2d 321 (5th Cir. 1964)). In Howard (“voting stock, and nothing else”) and Mills (“any consideration whatsoever other than stock forbids a transaction from being a reorganization”), we have also squarely decided this issue in accord with these decisions. It is therefore more than a little surprising to read in the majority opinion that “we are confronted * * * with a case of first impression.”⁵

The majority opinion creates many potential problems, and they are not trivial. Mills was undoubtedly too literal in not allowing a de minimis exception to the “solely” voting stock requirement for fractional shares. But we there noted that “where a taxpayer has a loss which he wishes to recognize, adding a minimal amount of other consideration to what would otherwise be a (B) reorganization will compel such recognition.” (39 T.C. at 401.) Tax advisers have long been aware of this and have undoubtedly structured many transactions for years that are still open to take advantage of this rule. These transactions will, in the light of the majority opinion, now be retroactively clouded with uncertainty, litigation may ensue, and the results may in some cases be the opposite of those the parties planned for and reasonably anticipated.

And the problems do not end there. For we must ask what rule of law the majority opinion establishes. By way of answer, the majority opinion includes this summary:

We hold that where, as is the case herein, 80 percent or more of the stock of a corporation is acquired in one transaction in exchange for which only voting stock is furnished as consideration, the “solely for voting stock” requirement of section 368(a)(1)(B) is satisfied. * * * [Emphasis added.]

The key words here are “one transaction.” The majority tells us that “in determining what constitutes 'one transaction,’ we include all the acquisitions from shareholders which were clearly part of the same transaction.” (Emphasis added.) To understand why this tautology is so confusing, we must realize that it does not respond to the issue argued and decided. Petitioners’ first argument was that “the prior cash purchases were not part of the 1970 exchange offer reorganization,” — that is, the cash and stock acquisitions were different transactions. Although the majority opinion expressly passes over this issue, it nevertheless holds that the acquisition of control for stock was one transaction, and the acquisition of additional stock for cash was another transaction — that is, they were different transactions.

Yet for purposes of their second argument (the one the majority sustains), petitioners concede throughout their brief that the cash and voting stock acquisitions were part of one transaction, arguing only that this is inconsequential since cash acquisitions of up to 20 percent are permissible. Thus, petitioners argued that “Even if ITT’s cash purchases in 1968 and early 1969 could be viewed as parts of the 1970 exchange offer reorganization,” cash acquisitions are permissible as long as at least 80 percent of the target corporation’s stock is acquired solely for voting stock. (Emphasis added.) That is, the cash and voting stock acquisitions were both "parts of the 1970 exchange offer reorganization;” or put another way, they were both parts of the same transaction — the 1970 exchange offer reorganization.⁶

Yet despite this, in summarizing its holding, the majority fragments the cash and voting stock acquisitions into two transactions, focusing only on the latter and ignoring the former. They lay the foundation for their holding with this surprising statement:

The facts of the matter are that the 1970 exchange, standing by itself, satisfied in every way the literal requirements of section 368(a)(1)(B) and that neither legislative nor judicial history nor policy requires that that exchange (involving in excess of 80 percent of Hartford’s stock) not be separated from the other acquisitions of Hartford stock by ITT for cash, .at least for the purpose of disposing of the legal issue raised by petitioners’ second contention. * * * [Emphasis added; fn. ref. omitted.]

But again petitioners’ first argument, which the majority passes over, asked that the cash and voting stock acquisitions be separated; their second argument (on the basis of which the majority decides the case), concedes they are part of the 1970 exchange offer reorganization.

In light of petitioners’ concession in this second argument, what rule then does the majority adopt? What do they mean by “one transaction”? They tell us “one transaction” means the “same transaction,” yet petitioners concede for purposes of the issue decided that all of the acquisitions before us — both for cash and for stock — were part of the same transaction (the 1970 exchange offer reorganization).

Additionally, the majority appears to recognize that under the law as it now stands, if 80 percent of the stock is acquired solely for voting stock, and at about the same time, additional shares are acquired for cash, the cash acquisitions are inimical to a reorganization. On the other hand, if the cash acquisitions are sufficiently remote from the stock acquisitions — are “old and cold” — the cash acquisitions are not inimical to a reorganization. Where does the majority’s rule fit into this settled and well understood structure? In view of the majority’s use of the phrase “one transaction” as related to the facts before us, how is it tó be distinguished from our common understanding and prior usage of the term “same transaction”?

Unfortunately, the confusion does not end here. For in integrating this new rule with existing doctrine, the practitioner is warned by the majority that:

assuming the continued vitality of Howard, any attempt to circumvent the decision in that case by splitting what was otherwise intended to be a single transaction into two transactions in order to receive the benefit of our decision herein could be readily dealt with under the rationale of such decisions as Commissioner v. Court Holding Co., 324 U.S. 331 (1945).

This stern admonition against doing what the majority itself has done adds even further confusion. For can anyone now understand what is meant by “one transaction,” and “two transactions,” or how these terms will be applied to the existing rules as amended by whatever rule the majority has promulgated?

This substitution of uncertainty for certainty is both undesirable and unnecessary. As we observed in a similar context:

-The respondent is an ubiquitous silent partner in all commercial transactions, claiming priority for his share of the profits — often the largest single share. The other participants in commercial transactions — suppliers, lenders, investors, etc, — need to know the terms of respondent’s participation. As concerns the issue before us, we regard the terms of his participation as well settled. * * * [Putoma Corp. v. Commissioner, 66 T.C. 652, 671, 672, (1976), on appeal (5th Cir., Mar. 14, 1977, by respondent, and Apr. 11, 1977, by petitioner.]

The statute we interpret was enacted nearly one-half century ago. During the interim, the Courts have squarely decided the specific issue before us. The issue was a close one, but it was fairly raised and carefully decided. If there is to be an end to litigation at some point consistent with judicial economics; if some certainty and stability are to be provided the lenders, investors, and businessmen who adapt business organizations to current requirements; if predictability is a tool to be made available to legal advisers in complex business transactions; if the courts, striving for at least a minimum level of doctrinal continuity must be aware of what their colleagues elsewhere have done and are doing; and if Congress, in amending the statute is to have any working understanding of the state of the law being amended, then we must adhere to a substantial and undeviating body of precedent developed over nearly half a century of experience when it is directly dispositive of the issue. That is what I would do in this case.

Dawson, Simpson, and Wiles, JJ., agree with this dissenting opinion.

1 This assumes, of course, that the acquisitions for stock and for cash are not clearly separable. Petitioners’ first contention, on which the majority specifically declined to rule, was that the acquisitions for stock and for cash were separable. Petitioners concede, for purposes of the second issue, that the acquisitions were part of the same transaction (not separable), but argues that cash acquisitions are nevertheless permissible as long as the controlling interest (80 percent or more) is acquired solely for stock.

2 The statutory predecessor of sec. 368(a)(1)(B), I.E.C. 1954.

3 And it is clear that the approximately $89 million paid by ITT to acquire 8 percent of Hartford’s voting stock in the instant case was additional “consideration.”

4 The court passed by the respondent’s first argument and went on to hold that, even assuming 80 percent of the target corporation’s stock was acquired only for voting stock, the small cash acquisition of 2.691 percent in itself violated the requirement that “solely” voting stock be used. For this reason, the court did not "find it necessary to consider the question of whether the 1912 exchange of stock ‘solely’ for stock and the 1952 exchange can be combined in order to meet the 80 percent requirement of section 112(g)(1)(B).” Lutkins v. United States, 312 F.2d 803, 805 (Ct. Cl. 1963). However, in response to an argument by the taxpayers, the court noted that “we do not see how the plaintiff can take advantage of the unrelated 1912 exchange in order to meet the 80 percent requirement and at the same time disregard the similarly unrelated cash purchases.” (312 F.2d at 805.)

5 The majority distinguishes most of these precedents by referring to alternative issues not considered by the courts involved (i.e., prior acquisitions), or facts not relevant under the statute nor of any significance to the issue decided (i.e., that although 80.19 percent of the stock was acquired for voting stock in Howard, one of the shareholders who received stock also received a small amount of cash). It is also implied that the precedents are really more relevant to asset acquisitions than stock for stock. However, all of the precedents above cited deal with (B) transactions — stock for stock.

6 And if these are parts of the same transaction, why are they not parts of “one transaction,” particularly when the majority tells us that the term “one transaction” means the “same transaction.”