DocketNumber: Docket No. 75820.
Citation Numbers: 1935 BTA LEXIS 804, 33 B.T.A. 144
Judges: Murdock
Filed Date: 9/30/1935
Status: Precedential
Modified Date: 1/12/2023
*804 The taxpayer corporation transferred substantially all of its assets to another corporation in exchange for a stated principal amount of the serial gold bonds of the latter (which were part of an issue made prior to the exchange and had a market value equal to par at the time of the exchange), together with a small amount of cash in adjustment of interest on the bonds. Shortly thereafter the taxpayer distributed the bonds and cash to its stockholders and was dissolved.
*144 OPINION.
MURDOCK: The Commissioner determined a deficiency of $78,834.84 in the income tax of the petitioner for the period January 1 to April 30, 1931. *805 The petitioner has waived all assignments of error except one. The parties have stipulated the facts. The sole question for decision is whether the gain which the petitioner admits it realized from the transfer of its assets to the Bethlehem Steel Corporation (hereinafter called Bethlehem) in exchange for bonds of the latter and cash is recognized for tax purposes.
The petitioner wrote a letter dated March 21, 1931, to Bethlehem granting to the latter an option to "acquire" subsantially all of the assets of the petitioner in exchange for $2,000,000 principal amount of Bethlehem's 4 1/2 percent serial gold bonds and $26,250 in cash. The cash "was in adjustment of interest" on the bonds. The bonds were part of an issue of $25,000,000 made in 1930, and had a market value equal to par at the time of the exchange. The letter stated that the petitioner desired "to be a party with you [Bethlehem] to a reorganization of the undersigned pursuant to which" the properties of the petitioner should be acquired by Bethlehem in exchange for the securities and cash and the petitioner should thereafter be dissolved. It further stated that in the letter exercising the option *145 *806 Bethlehem should,
The petitioner concedes that it realized a profit in the amount determined by the Commissioner, but contends that the gain is not recognized because subsections (b)(4) and (d)(1) of section 112 of the Revenue Act of 1928 apply. 1 The bonds received by the petitioner were clearly securities within the meaning of section*807 112(b)(4). If there was a reorganization, then both the petitioner and Bethlehem were parties to it. Furthermore, if there was a reorganization, the exchange and the distribution were made pursuant to the plan of reorganization. Thus the case seems to depend upon whether there was or was not a reorganization.
*808 The Commissioner contends that there was merely a sale of assets for bonds and cash and a "reorganization" was prominently mentioned by the petitioner in the records and evidence of the exchange just for the purpose of avoiding tax. The petitioner contends that there was a reorganization within the definition of that term as given in section 112(i)(1)(A), which provides that "the term 'reorganization' means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation)." Although there was neither a merger nor a consolidation, Bethlehem acquired substantially all of the properties of the petitioner. The words within the parenthesis "expand the meaning of 'merger' or 'consolidation' so as to include some things which partake of the nature of a merger or consolidation but are *146 beyond the ordinary and commonly accepted meaning of those words." .
Did the transaction "partake of the nature of a merger or consolidation?" The properties of two existing businesses were combined, as in a merger or consolidation, and the*809 petitioner was promptly dissolved. Cf. . The interest of the stockholders of the combining corporations continues in a merger or consolidation. Neither the petitioner nor its stockholders received any stock of Bethlehem. But section 112(b)(4) says "stock or securities" and the petitioner, therefore, contends that this transaction, in which the property was exchanged for securities, comes precisely within the provisions of section 112(b)(4); since the word "securities" was used as an alternative to stock in section 112(b)(4) and section 112(d), it is unreasonable to conclude that Congress meant to nullify that use of the word "securities" by the provisions of section 112(i)(1)(A); therefore the bonds of Bethlehem furnish the necessary continuity of interest to bring the transaction within section 112(i)(1)(A).
The rule that some continuity of interest was necessary in a statutory reorganization was first laid down by the Court of Appeals for the Second Circuit in ; certiorari denied, *810 . The Supreme Court approved that rule in In each of those cases the court held that the necessary continuity of interest was not furnished by the receipt of short term promissory notes. The Circuit Court of Appeals for the Second Circuit, with the author of the
Reviewed by the Board.
1. SEC. 112(b). (4) SAME - GAIN OF CORPORATION. - No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
* * *
(d)
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange * * *. ↩