Opinion
Docket No. 5973.
1946-08-2
Charles W. Moxley, Esq., and John Wiseman, C.P.A., for the petitioner. Paul Waring, Esq., for the respondent.
Substantially all of the properties of corporation A were sold under foreclosure and purchased by the mortgagee. Some of the creditors tried to reorganize the company, and a new company was organized, in which two of the old unsecured creditors, who had held a small part of the unsecured claims, became majority stockholders. Other stockholders entering into the majority stock ownership had been minority stockholders in a corporation holding a large claim against the old corporation. All stock was issued for cash. Pursuant to negotiations prior to the sale, the mortgagee, which had purchased, offered to sell the property, within 30 days, to the new company, and did so sell, for an amount settled between it as owner and the new corporation. Held, reorganization of the old corporation not shown, so that the basis of the old corporation may not be used by the new for purposes of depreciation on the property. Charles W. Moxley, Esq., and John Wiseman, C.P.A., for the petitioner. Paul Waring, Esq., for the respondent.
This case involves Federal income taxes for the calendar years 1940, 1941, and 1942, deficiencies having been determined in the respective amounts of $352.56, $550.24, and $1,620. The petitioner urges that there were overassessments in the respective amounts of $8,752.06, $11,304.75, and $14,586.77. The only issue presented is whether there was a reorganization of a prior corporation, giving petitioner the right, in computing depreciation of certain properties, to use the basis of such earlier corporation, under the provisions of section 203(h) of the Revenue Act of 1926. A part of the facts were stipulated, and we adopt such stipulation. Those parts considered pertinent are set forth with findings from evidence adduced, in our findings of fact.
FINDINGS OF FACT.
1. On June 18, 1926, the petitioner was incorporated under the laws of the State of West Virginia, with its principal office and place of business at Clarksburg, West Virginia. It filed its corporation income, declared value excess profits, and defense tax returns for the taxable years 1940, 1941, and 1942, the years involved in this proceeding with the collector of internal revenue for the district of West Virginia.
2. During the year 1924 the Clarksburg Glass Co. (hereinafter sometimes called Clarksburg Co.), a West Virginia Corporation of Clarksburg, West Virginia, was in need of additional funds with which to finance its operations, which had been unsuccessful for several years. On August 27, 1924, that company entered into an agreement with the Pittsburgh Plate Glass Co. (hereinafter sometimes called Pittsburg Co.), whereby the Pittsburgh Co. agreed to advance to Clarksburg Co. the sum of $70,000 to be used to pay its current notes and account, and also agreed to advance further sums at its discretion from time to time in the aggregate amount of not to exceed $100,000, to be used as temporary working capital during the period of experimental operation of the Fourcault Process by the Clarksburg Co. By the agreement of August 27, 1924, the Pittsburgh Co. also became actively interested in the operation of the Clarksburg Co., agreed to use its officers, employees, and agents for advice and counsel in such operations, was to receive one-fifth of the stock of the Clarksburg Co. if the Clarksburg Co. continued operation after the experimental period ended, as consideration for financial and operating assistance, and received an option to purchase the assets of Clarksburg, other than raw materials, goods in process and finished products, for the sum of $535,000, the option to be exercised not later than June 30, 1925, and not to cover an agreement of October 10, 1923, between W. M. B. Sine, trustee for the Clarksburg Co., and the American Fourcault Machine Co.
3. Pursuant to that agreement, $70,000 was borrowed by the Clarksburg Glass Co. from the Pittsburgh Plate Glass Co. and was repaid to that company in 1925.
4. Also, pursuant to that agreement, the Pittsburgh Plate Glass Co. advanced to the Clarksburg Glass Co. the sum of $100,000 in September 1924. As of January 1, 1926, this indebtedness of $100,000 due from the Clarksburg Glass Co. to the Pittsburgh Plate Glass Co. was evidenced by the following notes: Note dated June 30, 1925, for $30,000 due on or before January 1, 1926; note dated June 30, 1925, for $20,000 due on or before January 1, 1926; note dated June 30, 1925, for $50,000 due on or before July 1, 1926, all of which notes provided for interest at 6 per cent per annum and were secured by a deed of trust on the properties of the Clarksburg Co., the lien of which deed of trust was junior to a deed of trust securing the payment of nine notes dated November 1, 1923, one in the amount of $30,000 and eight in the amount of $18,750 each, payable to W. M. B. Sine, trustee, and due one each year on October 31, 1925, to 1932, inclusive. The $20,000 note of June 30, 1925, was endorsed, ‘Protest waived. W. M. B. Sine‘; and the $50,000 note of June 30, 1925, was endorsed, ‘W. M. B. Sine.‘ W. M. B. Sine was president of Clarksburg Glass Co.
5. On February 9, 1925, The Clarksburg Flat Glass Co. was incorporated under the laws of the State of West Virginia, with an authorized capital of $625,000, consisting of 2,500 shares of the par value of $25 each, designated as class A stock, and 50,000 shares of capital stock of no par value, designated as class B. stock.
6. On February 19, 1925, the Clarksburg Flat Glass Co. and the Clarksburg Glass Co. entered into an agreement, pursuant to which the Clarksburg Glass Co. offered to sell to the Clarksburg Flat Glass Co. all of its properties in exchange for 21,285 shares of the class B common no par value stock of Clarksburg Flat Glass Co., which stock was to be delivered to such party or parties as might be determined and directed by the board of directors of the Clarksburg Glass Co. and the assumption by the Clarksburg Flat Glass Co. of all the liabilities and obligations of the Clarksburg Glass Co.
7. Prior to July 7, 1925, the Clarksburg Flat Glass Co. had realized the amount of $200,000 from the sale of its class A common stock, all of which was used in payment of obligations of the Clarksburg Glass Co. and the American Sheet Glass Co., as evidenced by the minutes of a meeting of the board of directors of the Clarksburg Flat Glass Co. held on July 7, 1925.
8. The options which the Clarksburg Flat Glass Co. had to acquire the properties of the Clarksburg Glass Co., as set forth in agreement dated February 19, 1925, were not exercised within a six-month period provided in said agreement, and the merger of said corporations never took place in accordance with that agreement. The so-called merger between the Clarksburg Glass Co., the Clarksburg Flat Glass Co., and the American Sheet Glass Co. was never effected or completed, since the parties were unable to raise the necessary funds to effect said merger. Efforts to effect a merger of the Clarksburg Flat Glass Co.with the Clarksburg Glass Co. and the American Sheet Glass Co. continued without success until January of 1926.
9. On January 20, 1926, the Clarksburg Flat Glass Co. had advanced to the Clarksburg Glass Co. sums of money in the total amount of $171,800, on which interest had accrued in the amount of $8,032.09, making a total of $179,832.09, against which the Clarksburg Glass Co. had credits amounting to $321.22, leaving the net amount of $179,510.87 due from Clarksburg Glass Co. to Clarksburg Flat Glass Co. The Clarksburg Flat Glass Co. did not receive any sums of money from the receiver of the Clarksburg Glass Co. as the result of the sale of the assets of that company.
10. On January 1, 1926, Clarksburg Glass Co. defaulted in payment of its notes totaling $50,000 due Pittsburg Plate Glass Co. on or before that date. Additional notes in the face amount of $50,000, due to the acceleration clause contained therein, became due and payable during the pendency of the receivership proceedings.
11. On January 2, 1926, the Pittsburgh Plate Glass Co. wrote a letter to Steptoe & Johnson, its attorneys at Clarksburg, West Virginia, directing their attention to the fact that there remained unpaid $100,000 of the notes of Clarksburg Glass Co., of which $50,000 was due January 1, 1926, and that the payment had been defaulted. It was further stated that Sine had been advised that Pittsburgh Plate Glass Co. would arrange to foreclose on the plant about February 1, unless his January production was sufficiently satisfactory to enable him to obtain financial assistance outside. It was also stated that, subject to Sine's approval, Pittsburgh Plate Glass Co.would start the necessary machinery in motion for the foreclosure of the trust deed, so that they would be ready to have the property sold as near February 1 as possible, with the understanding, however, that, in the event matters improved sufficiently so that the Clarksburg Glass Co. could raise additional capital, the foreclosure would be withdrawn, or, if necessary, carried through under arrangements which would not prejudice the interest of the Clarksburg Glass Co. On January 18, 1926, the Pittsburgh Plate Glass Co. wrote a letter to Philip P. Steptoe, one of its attorneys, in which it was noted that Sine was still working on the project of raising enough money to make payment on the past due note, and requested to be advised when this had been accomplished.
12. On January 20, 1926, the Pittsburgh Plate Glass Co. instituted a suit in the District Court of the United States for the Northern District of West Virginia, under the name and caption of ‘Pittsburgh Plate Glass Company v. Clarksburg Glass Company, a corporation et al., In Equity, No. 107,‘ asking for the appointment of a receiver to foreclose its deed of trust.
13. H. E. Davisson was appointed receiver by the court for the property and assets of Clarksburg Glass Co., who operated the said company until May 22, 1926. From January 22 to May 22, 1926, Davisson was in control of the corporation, and W. M. B. Sine operated the company under his direction and supervision during that period. W. M. B. Sine recommended the appointment of H. E. Davisson as receiver.
14. During this period, January 22 to May 20, 1926, W. M. B. Sine was negotiating to raise funds to retain the property and assets of the Clarksburg Glass Co.
On February 9, 1926, at the annual meeting of the stockholders of Clarksburg Glass Co., the president reported the institution of the suit by Pittsburgh, and that the officers and directors had been unable to raise money sufficient to pay the debt and prevent foreclosure, and suggested that the stockholders subscribe funds sufficient to purchase the claim. Subscriptions having been solicited, it was found that sufficient funds could not be obtained at that meeting and a committee consisting of W. M. B. Sine and two others was appointed to arrange a general meeting of stockholders of Clarksburg Glass Co., Clarksburg Flat Glass Co., and American Sheet Glass Co. for the purpose of determining what action should be taken, and taking any feasible action, to protect the stockholders of Clarksburg Glass Co. On April 12, 1926, a committee for the stockholders of the Clarksburg Glass Co. and the Clarksburg Flat Glass Co. addressed to their stockholders a report in which it was stated that it was the opinion of the committee that the only practical way of protecting the investment made in the stock of those companies was for the stockholders to subscribe to the capital stock of a new corporation to be formed, which would attend the sale of the Clarksburg Glass Co. when and if the said sale was held, and to acquire the said assets at the sale if they could be had at a price that would insure the subscribers an adequately capitalized business. The report also stated, in part, as follows:
* * * The management and directors of The Clarksburg Glass Company, even with the assistance of some of its creditors, have found it impossible to raise sufficient money to prevent the foreclosure of the Pittsburgh Plate Glass Company's lien, and it is now apparent that a decree of sale will be entered in this suit, under which the property and assets of The Clarksburg Glass Company will be sold, subject to the prior lien existing on the real estate owned by the company.
A form of agreement to form a corporation to purchase the assets of Clarksburg Glass Co., when and if sold, was enclosed with the report. The agreement was recommended to the stockholders by the committee, it being stated that they were tendered the opportunity, by subscribing, of protecting their original investment. There was attached to the report a condensed statement of the assets and liabilities of the proposed new company, ‘Giving effect to the new financing and the purchase of the property of The Clarksburg Glass Company at receiver's sale for the amount of the liens and the costs of the receivership. ‘ The statement showed assets of $742,100.61, consisting of $550,810.78 plant and equipment, $74,000 ‘Machine rights,‘ and $117,289.83 current accounts; while liabilities (aside from $300,085.23 capital) were shown as $566,967.40 notes and accounts payable, $44,582.05 reserve for depreciation and tank repairs, and $169,534.07 (deficit) in reserve for depreciation and tank repairs.
On April 16, 1926, judgment was rendered in favor of Pittsburgh for the amount due and providing that in default of payment within five days the real and personal property of the Clarksburg Glass Co. be sold in satisfaction of the lien debt to Pittsburgh Plate Glass Co. and subject to the prior lien of the deed of trust of November 1, 1923, by special commissioners.
15. On April 26, 1926, the Pittsburgh Plate Glass Co. wrote a letter to Steptoe, in which it was stated:
Mr. Sine was at our office last week and although the time is drawing near for the sale the question of the probable course that will be followed still remains considerably in doubt. There are about three possibilities, as we see it. First, the possibility of Mr. Sine and his associates raising a sufficient amount of money to purchase our notes before the sale, thereby cleaning up the situation; second, the possibility of Mr. Sine and his associates bidding in the property at the sale; third, the possibility of Mr. Sine and his associates being unable to line up the necessary capital to accomplish either the first or the second plan, in which event we would have to buy in the property and either operate the same or dispose of it, as circumstances seem to indicate. We would rather that either propositions one or two would go through as our only desire is to obtain our money. We do not particularly care to acquire the plant. I think from the way Mr. Sine talked that he feels proposition No. 1 is practically out of the question, but he still has hopes of being able to carry out proposition No. 2. Concerning this, from what he has said I have serious doubts, and I think the probability is that we will have to buy it ourselves.
Mr. Sine has told us that he would definitely and finally advise us as to the plan which he and his associates will follow by the end of this week. From your letter I understand you have advertised and are preparing for the sale. I will try to keep you posted in respect to the developments.
On May 17, 1926, the Pittsburgh Plate Glass Co. wrote a letter to Steptoe, which reads as follows:
Confirming telephone conversation with you today, wish to say that Mr. W. M. B. Sine of your city was in my office making tentative arrangements concerning the sale of the Clarksburg Glass Company's property on Thursday next.
Our position in respect to this matter I think is already pretty well known to you and to Mr. Sine: that is that we do not care to acquire the property and only do so to protect our interests. Mr. Sine has perfected arrangements which will enable him and his associates to ultimately acquire the property. Were he to acquire the property at public sale, as we understand the situation we would expect that he would pay an amount equal to the amount of the unpaid notes, plus interest, which are secured by the second Trust Deed, such sale to be made subject to the first Trust Deed, and with the understanding that the purchaser should also assume all charges and costs which attach themselves to the sale and to the receivership. The purchaser would be obligated to pay the fixed charges, interest, and one-third of the unpaid notes secured by the Mortgage—that is to say, one-third of $100,000; the remaining two-thirds to be paid in two equal installments in one and two years following the sale. These details I think Mr. Sine thoroughly understands.
The question which I desired to submit to you today for your consideration was whether it was best for us to bid in the property and then convey to Mr. Sine, or whether it would be best for Mr. Sine to bid in the property? By that I mean, in which way would we obtain the most satisfactory security for the payment of the remaining two-thirds? What amount will be required as earnest money by the Court upon the date of the sale? We assume that the actual settlement and payment will be made when the sale is confirmed by the Court.
The above letter of May 17, 1926, is the substance of the agreement between Pittsburgh Plate Glass Co. and W. M. B. Sine.
16. Prior to May 22, 1926, the receiver petitioned the court for permission to sell the properties of the Clarksburg Glass Co. and, pursuant to said request, a decree of the court was issued pursuant to which a sale was made of the property and assets of the Clarksburg Glass Co. on May 20, 1926, by commissioners appointed for that purpose, to Pittsburgh Plate Glass Co. for the sum of $100,000, which sale was confirmed by the court on May 22, 1926. Neither W. M. B. Sine nor his associates bid on the property of Clarksburg Glass Co. at the public sale held on May 20, 1926, though Sine was present at the sale. The deed dated May 26, 1926, between the special commissioners and the Pittsburgh Plate Glass Co. recited ‘That for and in consideration of the sum of $100,000, of which amount the sum of $33,500 was cash in hand paid on day of sale, the receipt of which is hereby acknowledged and the residue to be paid on or before the 31st day of December 1926, with interest as evidenced by a negotiable promissory note in the sum of $66,500, dated May 22, 1926, * * * do hereby grant and convey to the party of the second part, with covenant of special warranty and subject to prior deed of trust hereinafter specified, all of those certain parcels of land, together with buildings, warehouses, and improvements thereon located, and all fixtures and appurtenances thereunto belonging, situated at Adamston, in the City of Clarksburg, West Virginia, * * * .‘ On May 26, 1926, the special commissioners appointed by the court to make sale of the property and assets of Clarksburg Glass Co. as aforesaid executed a bill of sale of said property to the Pittsburgh Plate Glass Co. The $33,500 cash payment was from funds of Pittsburgh Plate Glass Co. The day before the receiver's sale, W. M. B. Sine deposited with the attorneys from Pittsburgh Plate Glass Co. $33,500, to show good faith that he and his associates would be taking over the property, and subject to the final transaction being carried out.
17. On June 3, 1926, the Pittsburgh Plate Glass Co. wrote a letter to W. M. B. Sine, offering to sell the property and assets of the Clarksburg Glass Co. on the following basis:
We hereby offer to sell to you all of the plant and property of the Clarksburg Glass Company recently purchased by us in our foreclosure suit against it, together with all our interest in the assets in the Receiver's hands, subject to the exceptions contained in the Deed and Bill of Sale to us and such changes as have since occurred on the property, on the basis or in substance that you pay to us the full amount of our claim against the Clarksburg Glass Company and repay or reimburse us for all payments, costs, expenses and all other ‘out of pocket‘ amounts arising from the foreclosure proceedings. This will be substantially as follows:
You will repay to us the cash payment of $33,500, with interest, that we paid to the special commissioners appointed by the Court, plus the principal of $100,000 and accrued interest on notes due us of the Clarksburg Glass Company, and all of the costs of said suit, sale and receivership, including our counsel fees incurred therein and any deficit in the Receiver's account. You are further to pay all taxes accrued or to accrue against the property and the first mortgage note, with interest (amount $20,000), now past due.
This offer must be accepted within thirty days from this date and $80,000 paid to us by you thereupon, and within thirty days after acceptance additional cash to reduce the total of your indebtedness to $66,666.66, for which we will accept your notes, with interest at six per cent., to be secured by a mortgage on the property substantially in form and effect as the mortgage heretofore given us by the Clarksburg Glass Company.
If this offer is not accepted within thirty days from date, it becomes null and void. If accepted, other details and more exact figures will be compiled immediately together with necessary adjustments.
18. On June 15, 1926, Sine wrote a letter to the Pittsburgh Plate Glass Co., accepting the offer of June 3, 1926. This letter further stated:
I have accepted the option of June 3, 1926, given by your president, to acquire the Clarksburg Glass Company and all of its assets, in the hands of a receiver heretofore appointed by the district court of the United States for the Northern District of West Virginia, on the terms and conditions outlined in your written offer.
As discussed in our conference, I make this acceptance on behalf of a West Virginia corporation entitled Adamston Flat Glass Company,
an application for chartering which company has been made and forwarded to the secretary of state for the state of West Virginia.
The prospective new company had been given that name about April 1926.
19. On June 18, 1926, the Adamston Flat Glass Co., the petitioner herein, was chartered under the laws of the State of West Virginia. The authorized capital stock of said corporation was $200,000, divided into 2,000 shares of par value of $100 each.
20. On June 21, 1926, the Pittsburgh Plate Glass Co. wrote a letter to Steptoe, Maxwell & Johnson, which reads as follows:
Receipt is acknowledged of your letter of June 18th enclosing certified check of W. M. B. Sine and J. A. McNicol, Trustees, in the amount of $80,000, together with letter of formal acceptance of option to purchase the Clarksburg Glass Company's assets from W. M. B. Sine.
We understand from Mr. Sine that the Adamston Flat Glass Company has been organized and will take title to the property formerly belonging to the Clarksburg Glass Company, and in this connection we desire that you shall handle all of the details in relation to the transfer of the property to the new corporation as well as the details to clean up the various matters which relate to the purchase price of the assets at the Receiver's sale or anything that pertains thereto.
21. On June 29, 1926, settlement was effected between Pittsburgh Plate Glass Co. and Adamston Flat Glass Co. relative to the purchase of properties from said Pittsburgh Co. by said Adamston Co. by payment as follows:
+-------------------------------------------------------------------+ ¦Check of Sine and McNicol, trustees, dated June 16, 1926¦$80,000.00¦ +--------------------------------------------------------+----------¦ ¦Check dated June 29, 1926 ¦7,116.52 ¦ +--------------------------------------------------------+----------¦ ¦Notes (2) each face value $33,333.33 ¦66,666.66 ¦ +--------------------------------------------------------+----------¦ ¦Interest paid June 16 to 30 ¦186.67 ¦ +--------------------------------------------------------+----------¦ ¦ ¦153,969.85¦ +-------------------------------------------------------------------+
22. The $153,969.85 for which Pittsburgh sold to petitioner consisted of the following items:
+--------------------------------------------------------------------------+ ¦Three notes ($30,000, $20,000, and $50,000) ¦ ¦$100,000.00¦ +---------------------------------------------------+----------+-----------¦ ¦Interest to June 30, 1926 ¦ ¦6,000.00 ¦ +---------------------------------------------------+----------+-----------¦ ¦ ¦ ¦106,000.00 ¦ +---------------------------------------------------+----------+-----------¦ ¦Cash payment on purchase May 20, 1926 ¦$33,500.00¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦Interest on June 20, 1926 ¦223.33 ¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦ ¦ ¦33,723.33 ¦ +---------------------------------------------------+----------+-----------¦ ¦Payment on account purchase, advanced June 24, 1926¦ ¦9,580.09 ¦ +---------------------------------------------------+----------+-----------¦ ¦Fee of Steptoe, Maxwell & Johnson ¦ ¦4,500.00 ¦ +---------------------------------------------------+----------+-----------¦ ¦Expenses of Steptoe, Maxwell & Johnson ¦ ¦166.43 ¦ +---------------------------------------------------+----------+-----------¦ ¦ ¦ ¦153,969.85 ¦ +---------------------------------------------------+----------+-----------¦ ¦Credit Adamston Flat Glass Company ¦ ¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦1926 ¦ ¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦June By check to Pittsburgh Plate Glass Company ¦$80,000.00¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦Interest June 16th to June 30th, 1926 ¦186.67 ¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦June 30 By two notes ¦66,666.66 ¦ ¦ +---------------------------------------------------+----------+-----------¦ ¦ ¦ ¦$146,853.33¦ +---------------------------------------------------+----------+-----------¦ ¦Balance Due ¦ ¦7,116.52 ¦ +--------------------------------------------------------------------------+
23. On June 28, 1926, Pittsburgh Plate Glass Co. executed and delivered a deed to the properties Pittsburgh Plate Glass Co. had acquired from Clarksburg Glass Co. to Adamston Flat Glass Co., subject only to the deed of trust dated November 1, 1923, which is represented by first mortgage notes totaling $150,000, but Adamston Flat Glass Co. did not assume any of the former indebtedness of Clarksburg Glass Co. to Clarksburg Flat Glass Co. in the amount of $179,510.87.
24. The liabilities of Adamston Flat Glass Co. ‘upon their purchase from Pittsburgh Plate Glass Company the property and equipment of the Clarksburg Glass Company‘ were as follows:
+------------------------------------+ ¦Pittsburgh Plate Glass Co¦$87,116.52¦ +-------------------------+----------¦ ¦First mortgage notes ¦150,000.00¦ +-------------------------+----------¦ ¦Second mortgage notes ¦66,666.66 ¦ +-------------------------+----------¦ ¦Accrued interest ¦1,675.00 ¦ +-------------------------+----------¦ ¦Accrued taxes ¦4,019.98 ¦ +-------------------------+----------¦ ¦Reserve for depreciation ¦55,067.77 ¦ +-------------------------+----------¦ ¦Capital surplus ¦323,054.69¦ +-------------------------+----------¦ ¦Total ¦687,600.62¦ +------------------------------------+
25. On September 15, 1926, 1,500 shares of capital stock of Adamston Flat Glass Co. were issued to 43 stockholders. The stockholders acquired their stock by purchase. Of the 79 stockholders of Clarksburg Glass Co. only 10 subscribed for 729 shares of the 1,500 shares of stock of Adamston Flat Glass Co. J. H. Fox, trustee for Pittsburgh Plate Glass Co., owned 4,257 shares of stock of Clarksburg Glass Co., but no stock of Adamston Flat Glass Co. was subscribed for, purchased, or acquired by, or in trust for Pittsburgh Plate Glass Co.
26. On January 20, 1926, the total outstanding capital stock of Clarksburg Glass Co. consisted of 18,215 voting and 3,061 nonvoting shares. Of the outstanding capital stock 9,663 shares of voting and 2,482 shares of nonvoting stock were held by persons who were not stockholders of Adamston Flat Glass Co.
The following is a list of stockholders of Adamston Flat Glass Co. who held stock in Clarksburg Glass Co.:
+------------------------------------------------------------------+ ¦ ¦Stock held in Clarksburg¦ ¦ +------------------+------------------------+----------------------¦ ¦Name ¦Voting ¦Nonvoting ¦Stock held in Adamston¦ +------------------+---------+--------------+----------------------¦ ¦J. L. Nelson ¦2,200 ¦ ¦150 ¦ +------------------+---------+--------------+----------------------¦ ¦W. R. Hook ¦86 ¦258 ¦35 ¦ +------------------+---------+--------------+----------------------¦ ¦P. D. Cutlip ¦7 ¦21 ¦2 ¦ +------------------+---------+--------------+----------------------¦ ¦W. A. Stone ¦8 ¦24 ¦3 ¦ +------------------+---------+--------------+----------------------¦ ¦A. W. Robertson ¦78 ¦235 ¦10 ¦ +------------------+---------+--------------+----------------------¦ ¦E. M. Coll ¦5 ¦15 ¦5 ¦ +------------------+---------+--------------+----------------------¦ ¦M. O. Moore ¦6 ¦18 ¦5 ¦ +------------------+---------+--------------+----------------------¦ ¦F. G. Kittle ¦2 ¦8 ¦2 ¦ +------------------+---------+--------------+----------------------¦ ¦A. B. Marston ¦110 ¦ ¦10 ¦ +------------------+---------+--------------+----------------------¦ ¦W. M. B. Sine ¦6,050 ¦ ¦507 ¦ +------------------+---------+--------------+----------------------¦ ¦Total ¦8,553 ¦579 ¦729 ¦ +------------------+---------+--------------+----------------------¦ ¦Shares outstanding¦18,215 ¦3,061 ¦1,500 ¦ +------------------------------------------------------------------+
27. A list of those direct creditors of Clarksburg who subscribed for the stock of Adamston and became stockholders follows:
+----------------------------------------------+ ¦Name: ¦Shares subscribed for and issued¦ +-------------+--------------------------------¦ ¦W. M. B. Sine¦507 ¦ +-------------+--------------------------------¦ ¦H. B. Curtin ¦300 ¦ +-------------+--------------------------------¦ ¦Total ¦807 ¦ +----------------------------------------------+
Sine also was endorser on $70,000 in notes in default to Pittsburgh Plate Glass Co.
28. A list of the stockholders of Flat Glass, the largest unsecured creditor of Clarksburg, who subscribed for the stock of Adamston and became stockholders, and the number of shares so subscribed and issued, follows:
+-----------------------------------------------------------------------------+ ¦Name: ¦Shares subscribed for¦Name: ¦Shares subscribed for¦ ¦ ¦and issued ¦ ¦and issued ¦ +------------------+---------------------+--------------+---------------------¦ ¦W. M. B. Sine ¦507 ¦L. L. Young ¦15 ¦ +------------------+---------------------+--------------+---------------------¦ ¦H. B. Curtin ¦300 ¦L. S. Horner ¦10 ¦ +------------------+---------------------+--------------+---------------------¦ ¦W. B. Gribble ¦10 ¦Victor Orestes¦2 ¦ +------------------+---------------------+--------------+---------------------¦ ¦John A. & D. E. ¦48 ¦J. Horner ¦10 ¦ ¦McNicol, Jr ¦ ¦Davis ¦ ¦ +------------------+---------------------+--------------+---------------------¦ ¦H. E. Kettering ¦10 ¦C. W. Fowkes ¦1 ¦ +------------------+---------------------+--------------+---------------------¦ ¦S. R. Bentley ¦25 ¦Clyde L. Moore¦1 ¦ +------------------+---------------------+--------------+---------------------¦ ¦Empire Laundry Co ¦25 ¦O. A. Moore ¦1 ¦ +------------------+---------------------+--------------+---------------------¦ ¦H. E. Davisson ¦5 ¦L. S. Horner ¦ ¦ ¦ ¦ ¦and F. C. ¦ ¦ +------------------+---------------------+--------------+---------------------¦ ¦Lloyd P. Sanders ¦10 ¦Devericks ¦10 ¦ +------------------+---------------------+--------------+---------------------¦ ¦A. H. Cundell ¦5 ¦O. S. Gribble ¦22 ¦ +------------------+---------------------+--------------+---------------------¦ ¦Arthur Parsons ¦10 ¦A. F. Wagner ¦15 ¦ +------------------+---------------------+--------------+---------------------¦ ¦W. A. Carver ¦10 ¦ ¦ ¦ +------------------+---------------------+--------------+---------------------¦ ¦F. L. Wilson ¦15 ¦Total ¦1,067 ¦ +-----------------------------------------------------------------------------+
29. A list of the stockholders and creditors of Clarksburg who subscribed for the stock of Adamston follows:
+-----------------------------------------------------------------------------+ ¦ ¦Shares ¦ ¦ ¦subscribed for ¦ ¦ ¦and issued ¦ +------------------------------------------------------------+----------------¦ ¦Stockholders of Clarksburg Glass Co.: ¦ ¦ +------------------------------------------------------------+----------------¦ ¦J. L. Nelson ¦150 ¦ +------------------------------------------------------------+----------------¦ ¦W. R. Hook ¦35 ¦ +------------------------------------------------------------+----------------¦ ¦P. D. Cutlip ¦2 ¦ +------------------------------------------------------------+----------------¦ ¦W. A. Stone ¦3 ¦ +------------------------------------------------------------+----------------¦ ¦A. W. Robertson ¦10 ¦ +------------------------------------------------------------+----------------¦ ¦E. M. Coll ¦5 ¦ +------------------------------------------------------------+----------------¦ ¦M. O. Moore ¦5 ¦ +------------------------------------------------------------+----------------¦ ¦Frank G. Kittle ¦2 ¦ +------------------------------------------------------------+----------------¦ ¦A. B. Marston ¦10 ¦ +------------------------------------------------------------+----------------¦ ¦W. M. B. Sine ¦507 ¦ +------------------------------------------------------------+----------------¦ ¦A. F. Wagner ¦15 ¦ +------------------------------------------------------------+----------------¦ ¦Total ¦744 ¦ +------------------------------------------------------------+----------------¦ ¦Creditors of Clarksburg Glass Co.: ¦ ¦ +------------------------------------------------------------+----------------¦ ¦H.B. Curtin (owned one of the first mortgage notes) ¦300 ¦ +------------------------------------------------------------+----------------¦ ¦Stockholders of Clarksburg Flat Glass Co., except Sine, ¦ ¦ ¦Curtin, and ¦ ¦ +------------------------------------------------------------+----------------¦ ¦Wagner ¦245 ¦ +------------------------------------------------------------+----------------¦ ¦Total Adamston stock subscribed for by and issued to former ¦ ¦ ¦stockholders and first mortgage noteholders of the ¦1,289 ¦ ¦Clarksburg Glass Co ¦ ¦ +-----------------------------------------------------------------------------+
30. The total number of shares of Adamston stock subscribed for and issued originally was 1,500.
31. Books and records were opened on June 29, 1926, for what the bookkeeper considered the Adamston Flat Glass Co., as of May 22, 1926. The books contained reference to notes dated June 29, 1926. From May 22 to June 28, 1926, W. M. B Sine operated the plant under authority from Pittsburgh.
OPINION.
DISNEY, Judge:
The question to be answered here is whether, under the facts above found, the petitioner is entitled to calculate depreciation upon the basis which the Clarksburg Glass Co. had in the property later owned by the petitioner, which in turn depends upon whether the facts involved in the acquisition of the property by the petitioner come within the ambit of certain sections of the Internal Revenue Code. Section 114(a) provides that the basis for depreciation shall be the adjusted basis provided in section 113(b), for the purpose of determining gain on sale or other disposition of property; while section 113(b) provides that such adjusted basis shall be the basis determined under subsection (a), as adjusted. Section 113(a) in turn provides, including subsection (7)(A), that the basis shall be the cost, except that:
(7) TRANSFERS TO CORPORATION.— If the property was acquired
(A) After December 31, 1917, and in a taxable year beginning before January 1, 1936, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 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 * * * .
Section 203(h) of the Revenue Act of 1926, applicable to the transactions here to be considered, provides, inter alia, as follows:
(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), * * *
Two primary questions, therefore, are presented: First, whether the property here involved was ‘acquired * * * in connection with a reorganization,‘ as defined by the law applicable in 1926, and, second, whether, if there was a reorganization, a 50 per cent or more interest or control in the property ‘remained in the same persons or any of them.‘ Both elements must, of course, appear.
We shall assume, without deciding, that the minimum 50 per cent interest in the property remained, after the transfer, in creditors of the old corporation, ‘or any of them,‘ within the statutory language, and shall assume also that there was insolvency, so that, under Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, the creditors may for this case be considered the equity owners of the old corporation; for, in our opinion, there was no reorganization, and the petitioner can not prevail. There was a plan by some creditors to take over the corporate assets, resulting eventually in the acquisition, for cash, by two of them, of the majority stock of a corporation which purchased the assets of the old corporation from Pittsburgh, which had purchased at commissioner's sale. But reorganization means that the transferor corporation, or some one representing the ownership of its property, stockholders or creditors, retains a ‘substantial stake‘ in the new corporation. Helvering v. Minnesota Tea Co., 296 U.S. 378; LeTulle v. Scofield, 308 U.S. 415. Such a fact is noticeably absent here, for the two creditors, Sine and Curtin, who participated in the ownership of the majority stock of the new corporation, held only a small fraction of the debts against the old corporation, even if, as in Montgomery Building Realty Co., 7 T.C. 417, we consider only the unsecured creditors. We do not think it can truly be said that the mere emerging in the new corporation of the holders of such a small amount of debts indicates the continuity of the old corporation requisite for ‘reorganization.‘ Here, in fact, only the creditors, and not the debts they held, emerge in the second organization, and the only connection the debts against the old corporation have with the new is to cause the creditors to help organize and buy stock in the new. Their new stock was issued for cash and not for the old claims, as in the Alabama Asphaltic Limestone Co., case, supra, and LeTulle v. Scofield, supra, and it is not easy to see a connection between old ownership (by creditors) and the new ownership in the petitioner. It is true, of course, as petitioner argues, that the statute literally requires only acquisition of substantially all of the properties of old corporations by new, but, just as we may not read that language as literally permitting a mere purchase, Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, so we may not neglect the requirement that there be a substantial part of the ownership of the old corporation merged or fused with the new entity. The petitioner has argued that stockholders of Clarksburg Flat Glass Co. became a part of the majority ownership of petitioner, thus representing a considerable part of the claims against the old corporation. We are, however, unable to agree with the view, for just as in the Alabama Asphaltic case the Court did not take into consideration the creditors' stockholdings in a corporation which was the parent of one of the reorganizing corporations, we think we may not here go so far afield as to disregard the corporate entity of Clarksburg Flat Glass Co. in order to find creditors. There the court said, ‘The equity interest in the parent is one step removed from the equity interest in the subsidiary. ‘ Moreover, the stockholders in Clarksburg Flat Glass Co. who became stockholders in petitioner represent only a minority of the entire stock ownership in Clarksburg Flat Glass Co., so that we can not view them as representing that creditor.
In addition, we note that though the petitioner rightly argues that the transaction should be viewed as a whole, and that passage of the property through a transitory owner to the petitioner does not necessarily prevent reorganization, Helvering v. Bashford, 302 U.S. 454; Gertrude B. Chase, 44 B.T.A. 39, nevertheless the nature of the property ownership by Pittsburgh forbids consideration of that company as a mere step in a reorganization, originating prior to receiver's sale and duly consummated when Pittsburgh was paid and it transferred to petitioner. It is true that letters set forth in the findings do indicate some idea, on Pittsburgh's part, that it would, so to speak, ‘go along‘ with the plan if made whole on its claim; but closer examination of the entire facts shows that such was not in fact the arrangement, and that Pittsburgh was, in fact, left in the position of an independent owner of the property, rather than a step in the plan. For we note, first, that Pittsburgh had in mind also that, if it had to buy the plant at receiver's sale, it would ‘either operate the same or dispose of it, as circumstances seem to indicate‘; second, that in its offer to sell on June 3, 1926, Pittsburgh set a dead line of 30 days, after which its offer would be ‘null and void‘— not at all the act of a company obligated to be a mere transitory step in a merger, but indicative of its free and independent status as a vendor negotiating, on its own terms, a sale; and, third, the record indicates that the petitioner settled with Pittsburgh for less than the amount of its claim and expenses— again showing Pittsburgh not in the position of one contracting, as a part of the original plan, to take its debt and pass the property along. Petitioner on brief agrees with respondent's statement that, ‘on June 29, 1926, settlement was effected between Pittsburgh Plate Glass Company and Adamston Flat Glass Company * * * .‘ Had Pittsburgh been shown under agreement to take the amount of its debt and step out, and that plan had been carried out, more semblance to a reorganization might appear, but neither fact was proven. Pittsburgh, though having given its note for $66,500 in part payment for the property, is not shown to be freed therefrom by assumption, and received $153,969.85 an amount not sufficient to carry out the alleged plan to make Pittsburgh ‘whole‘ on the matter.
If there was such a plan, it is not shown to have been consummated, and Pittsburgh appears in the role of vendor, setting a time limit on its offer to sell, and actually selling for less than the alleged plan of reorganization contemplated.
If on the other hand (as does not appear from the record to be the case) petitioner, in addition to the other payments made, assumed the $66,500 (apparently paid to the extent of $9,580.09) due from Pittsburgh to the special commissioners for sale, Pittsburgh is then seen to be receiving for the property, much more than the amount necessary to make it whole on its debt; in other words, Pittsburgh then appears to be making a profit, inconsistent with the alleged plan of reorganization. Apparently, though the record does not explain, Pittsburgh as creditor, may have been able to receive back the $33,500 cash and $66,500 note given to the sale commissioners. Pittsburgh thus appears either making a profit or taking a loss. If it received back the $33,500, charged in purchase price to petitioner, then much profit was involved.
All this, in our view, destroys continuity between the old corporation and the new, for freedom of action on Pittsburgh's part and that of petitioner in acquiring the property is inconsistent with the requisite continuity from one corporation to the other. No case cited, or of which we know, goes so far with the reorganization idea as to apply it to acquisition of property by settlement with an owner, after acquisition at a sale which ended ownership in the old corporation. The fact that any of the creditors, such as two, satisfies the provision of section 113(a)(7)(A) as to 50 per cent interest does not, of course, satisfy as to definition of reorganization, under section 203(h), Revenue Act of 1926.
We conclude and hold that there was no reorganization, from which it follows that the petitioner is not, in calculating depreciation, entitled to use the basis of Clarksburg Glass Co. Therefore,
Decision will be entered for the respondent.