Mente & Co. v. Commissioner , 24 B.T.A. 401 ( 1931 )

MENTE & COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mente & Co. v. Commissioner

Docket No. 39083.

United States Board of Tax Appeals

24 B.T.A. 401; 1931 BTA LEXIS 1644;

October 22, 1931, Promulgated

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">*1644 Petitioner in 1925 acquired all the stock of another company in exchange for its own stock and bonds. On the same day the other company was dissolved and its assets conveyed to petitioner. Following these transactions, petitioner's stock was owned by the same persons who had formerly owned the stock of the other company. Held that the assets of the other company were acquired "in connection with a reorganization" under section 204(a)(7) of the Revenue Act of 1926 and the basis for depreciation is the same as it would be in the lands of the transferor.

J. Marvin Haynes, Esq., and W. C. Magathan, Esq., for the petitioner.

T. M. Mather, Esq., and J. M. Morawski, Esq., for the respondent.

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ARUNDELL

">*401 Respondent determined deficiencies in income taxes for the fiscal years ended March 31, 1926, and March 31, 1927, in the respective amounts of $4,950.06 and $6,433.72. Petitioner alleges that respondent erred in not allowing it to deduct the full amount to which it was entitled for depreciation of assets.

Upon motion of petitioner the issue was severed so as to allow for presentation at this hearing only the following question:

">*1645 Whether, as a matter of law, in view of the reorganization provisions of the Revenue Act of 1926, the petitioner is entitled to use as a basis for depreciation the fair market value of assets acquired by it from a predecessor corporation, or whether it must use the depreciation basis of such predecessor corporation.

If it is decided that petitioner may use fair market value as the basis then a further hearing will be had on the question of such value. If the question stated is decided the other way, it is stipulated that judgment may be entered for respondent without further proceedings. The facts were stipulated.

FINDINGS OF FACT.

The petitioner is a Louisiana corporation, with its principal office at New Orleans.

At the first meeting of the board of directors of the petitioner, held at New Orleans, La., on August 6, 1925, resolutions were adopted ">*402 authorizing the acquisition by the petitioner of the entire outstanding capital stock of the Burlap Manufacturing Company, Inc., a Louisiana corporation, consisting of 12,365 shares of the par value of $100 per share in exchange for 7,000 shares of the preferred stock and 100,000 shares of the Class A common stock">*1646 of the petitioner, and further in exchange for $750,000, principal amount of ten-year, 7 per cent sinking fund, gold debenture bonds, with stock purchase warrants attached, of the petitioner.

On the same day the exchange authorized as aforesaid was consummated, the stockholders of the said Burlap Manufacturing Company, Inc., transferred to the petitioner the said stock (except for directors' qualifying shares) of the Burlap Manufacturing Company, Inc., and the petitioner issued in exchange therefor 7,000 shares of its preferred stock, 100,000 shares of its Class A common stock and $750,000, principal amount, of its ten-year, 7 per cent sinking fund, gold debenture bonds with stock purchase warrants attached.

At the said meeting of the board of directors of the petitioner, the treasurer of the petitioner was authorized to sign an act of dissolution of said Burlap Manufacturing Company, Inc., on behalf of the petitioner as one of the stockholders thereof, and the president of the petitioner was authorized to purchase from the liquidators of the said Burlap Manufacturing Company, Inc., all of its property and assets, real, personal and mixed, including real estate, buildings, improvements, ">*1647 machinery, supplies, merchandise, cash on hand and in bank, accounts and bills receivable, business, good will and everything whatsoever of whatever nature, sort and kind belonging to said Burlap Manufacturing Company, Inc., and/or its liquidators, said purchase to be in consideration of the assumption by the petitioner of all of the debts and obligations of said Burlap Manufacturing Company, Inc., and/or its liquidators and the cancellation of the certificates representing all of the issued and outstanding capital stock of the said Burlap Manufacturing Company, Inc.

On August 6, 1925, the treasurer of the petitioner, together with the directors of the said Burlap Manufacturing Company, Inc., who had retained their directors' qualifying shares in the said Burlap Manufacturing Company, Inc., signed and executed an act of dissolution of the Burlap Manufacturing Company, Inc. The said act of dissolution was filed and recorded in the office of the Secretary of the State of Louisiana on August 7, 1925.

On August 6, 1925, pursuant to the act of dissolution, the petitioner acquired, as of April 1, 1925, all of the assets, subject to all of the liabilities of said Burlap Manufacturing">*1648 Company, Inc.

Prior to the exchange of stock for stock and bonds as above described the stock of the said Burlap Manufacturing Company, Inc., was owned as follows:

Stockholder	Shares owned
Isaac T. Rhea	7,960
George W. Billups	1,293
J. C. Mente	869
E. W. Mente	558
Max Goldsmith	619
H. Danziger	374
F. O. Reinecke	247
C. H. Hamilton, Jr	124
James A. Rhea	124
P. S. Forstall	74
F. M. Repass	74
William Younge	49
Total	12,365

">*403 After the exchange the stock of the petitioner was owned as follows:

	Shares owned
Stockholder	Common	Preferred
	stock	stock
Isaac T. Rhea	64,375.3	4,507.4
George W. Billups	10,452.0	731.9
J. C. Mente	7,027.9	492.9
E. W. Mente	4,512.7	316.9
Max Goldsmith	5,007.0	350.4
H. Danziger	3,024.7	207.7
F. O. Reinecke	1,997.6	140.8
C. H. Hamilton, Jr	1,003.8	70.2
James A. Rhea	1,003.7	70.2
P. S. Forstall	599.5	41.9
F. M. Repass	599.5	41.9
William Younge	397.3	27.8
Total	100,000.	7,000.0

In connection with these transactions and transfer of property from the Burlap Manufacturing Company, Inc., to the petitioner, no gain or loss has been recognized">*1649 or charged to the Burlap Manufacturing Company, Inc.

In connection with these transactions the assets of the Burlap Manufacturing Company, Inc., were revalued and placed upon the books of the petitioner at an appraised valuation.

OPINION.

ARUNDELL: Petitioner contends that it should be allowed to take depreciation deductions on the increased value shown by the appraisal of assets taken over from the Burlap Manufacturing Company, Inc., hereinafter called the Burlap Company. Respondent's position is that the correct basis for depreciation is the same basis upon which the Burlap Company was entitled to compute depreciation.

Section 204(c) of the Revenue Act of 1926 provides as follows:

The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that -

">*404 Section 204(a)(7) reads:

The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; ">*1650 except that -

* * *

If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Section 203(h) provides that:

(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), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets">*1651 are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an 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.

It seems to us that the above provisions exactly fit the present case. The assets of the Burlap Company were acquired by petitioner in connection with a reorganization as defined in section 203(h) and immediately after the transfer control remained in the same persons. In such cases the statute - section 204(a)(7) - provides that the basis shall be the same as it would be in the hands of the transferor, with adjustment for gain or loss recognized on the transfer. No adjustment is to be made in this case, as no gain or loss has been recognized to the Burlap Company. Cf. .

Counsel for petitioner admit that the case falls within section 204(a)(7), except for the phrase "in connection">*1652 with a reorganization." They say that the petitioner acquired the Burlap Company assets in liquidation and upon the dissolution of that company and they contend that the dissolution of a corporation is not a reorganization within the meaning of the law. We think that this argument is premised on too narrow a view of the matter. It is not enough to look only at the dissolution of the Burlap Company and to use that as a basis for deciding the question. The several steps taken by the directors and stockholders of the two companies on the same ">*405 day must be taken into consideration as they were obviously each a part of the entire scheme. Those steps, stated in brief, were: (a) resolutions of petitioner's directors to acquire the entire stock of the Burlap Company for stock and bonds of petitioner; (b) the actual exchange of Burlap stock for stock and bonds of petitioner; (c) resolutions to dissolve the Burlap Company and for petitioner to acquire its assets in consideration of petitioner's assumption of its liabilities; (d) the execution of an act of dissolution of the Burlap Company; (e) the acquisition by petitioner of the Burlap Company's assets subject to its liabilities. ">*1653 When these several steps were completed the same persons who had owned the stock of the Burlap Company owned all the stock of petitioner. We think that clearly these transactions bring the case within the definition of a "reorganization" contained in section 302(h)(1), and that upon consideration of these several steps it must be held that petitioner acquired the Burlap Company's assets "in connection with a reorganization."

, cited by petitioner, is not in point. That was not a reorganization case. There the taxpayer issued its stock for securities owned by another corporation. We held that upon the sale of such securities by the taxpayer the basis for gain or loss purposes was cost to the taxpayer as the case did not come within any of the exceptions enumerated in section 204(a) of the 1926 Act.

Reviewed by the Board.

Decision will be entered for the respondent.