Opinion
Docket Nos. 52570 52571.
1956-05-31
WILLIAM HOLTON GEORGE AND AMELIA MORAST GEORGE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas A. Williams, Esq., for the petitioners. Robert B. Wallace, Esq., for the respondent.
Thomas A. Williams, Esq., for the petitioners. Robert B. Wallace, Esq., for the respondent.
Petitioner (William Holton George) owned all the stock of W. H. George, Inc., a Louisiana corporation, which corporation in turn owned 50 per cent of the stock of a Mississippi corporation. Both the old corporations and the stockholders thereof in 1942 agreed upon a plan to transfer all the assets and liabilities of the old corporations (including the Louisiana corporation's equity in the net worth of the Mississippi corporation, but not the physical shares) in exchange for all the stock of a new Louisiana corporation to be organized for that purpose. Under the plan, the stock in the new corporation was to be delivered to the stockholders of the old companies upon surrender of their stock ownership in the old companies, after which the old companies were to go out of their business existence. The plan was fully executed. Petitioner, in pursuance of the plan, exchanged his stock in W. H. George, Inc., for stock in the new Louisiana corporation. Held, there was a reorganization under section 112(g)(1)(C), I.R.C. 1939. Held, further, under section 112(b)(3) and (g)(2), I.R.C. 1939, no gain or loss should be recognized on the exchange made by petitioner.
Respondent determined a deficiency of $38,606.66 in income and Victory tax against each petitioner for the taxable year ended December 31, 1943. The only remaining issue is whether the respondent erred in determining ‘that the exchange in 1942 of 900 shares of stock of W. H. George, Inc., for 3,214 shares of stock of Mississippi Tractor and Equipment Company of Louisiana, Inc., was an exchange upon which gain was recognized under the provisions of Section 112(a) of the Internal Revenue Code’ of 1939. The cases were consolidated for trial.
FINDINGS OF FACT.
Most of the facts were stipulated. The stipulation is incorporated herein by this reference.
Petitioners are husband and wife. They reside in New Orleans, Louisiana, and filed their income tax returns for the taxable years 1942 and 1943 with the collector of internal revenue for the district of Louisiana.
W. H. George, Inc., was incorporated under the laws of the State of Louisiana in 1925 to take over and operate an oil business then being conducted individually by William Holton George, hereinafter referred to as petitioner. In 1928 the oil business ceased to be profitable and was abandoned. W. H. George, Inc., was then used as a holding company largely to finance and extend credit to Mississippi Tractor and Equipment Co., a Mississippi corporation, hereinafter referred to as Mississippi Corporation. W. H. George, Inc., owned one-half of the authorized and outstanding capital stock of Mississippi Corporation. Petitioner owned all of the capital stock of W. H. George, Inc.
Mississippi Corporation was incorporated under the laws of the State of Mississippi in 1928, and during its entire business life was an authorized dealer and distributor of tractors and tractor parts for Caterpillar Tractor Company of Peoria, Illinois. On December 30, 1942, the stockholders of Mississippi Corporation were W. H. George, Inc., 250 shares, and R. G. George Machinery Company, 250 shares.
R. B. George Machinery Company was incorporated under the laws of the State of Texas in 1924 under the corporate name of Moline George Company until 1928 when it changed its name to R. B. George Machinery Company. It operated a machinery business until December 31, 1942.
For several years prior to 1942 petitioner and W. H. George, Inc., had extended considerable credit to Mississippi Corporation. On December 30, 1942, Mississippi Corporation owed petitioner interest-bearing notes payable of $101,400 and W. H. George, Inc., interest-bearing notes payable of $45,000.
On December 15, 1942, petitioner addressed a letter to Mississippi Corporation in which he suggested the advisability of forming a new Louisiana corporation for the purpose of taking over all the assets and liabilities of Mississippi Corporation and W. H. George, Inc., in consideration of the issuance of all the capital stock of the new corporation. In this letter he further suggested that the directors of the corporation meet and recommend to the stockholders the adoption of the necessary resolutions to carry out the proposed plan.
On December 17, 1942, at 10 a.m., the board of directors of Mississippi Corporation held a special meeting. The minutes of this meeting indicate that:
There followed a thorough discussion of all the points raised in the letter of Mr. George. It was brought out that arrangements for financing the corporation would be greatly improved in the future when such financing is necessary by having the resources of W. H. George, Inc. and Mr. George directly available under one corporate structure, instead of proceeding indirectly through the holding company. It was agreed also that many other advantages would accrue to the corporation as a result of the reorganization suggested by Mr. George.
Whereupon, upon motion * * * the following plan of reorganization of the corporation was decided upon, to-wit:
That a new Louisiana corporation should be formed * * * which new corporation should, among other powers it may be vested with, succeed to substantially the same inherent rights and powers as are vested in Mississippi Tractor and Equipment Company, insofar as that is possible under the law of Louisiana. * * * The new Louisiana corporation to issue its capital stock to the old Mississippi corporation * * * upon the transfer to the new Louisiana corporation by the old Mississippi corporation of all the old Mississippi corporation's net assets, the book value of the capital stock to be issued to equal the book value of said net assets transferred. The new Louisiana corporation will necessarily assume all the outside liabilities of the old Mississippi corporation to accomplish this purpose.
The effective date of the reorganization and time of said transfer etc. to be at the close of business December 30, 1942 * * *
That this corporation * * * enter into an agreement with W. H. George, inc., a Louisiana corporation and a holding company, by virtue of which the holding company shall also transfer all its net assets except the capital stock evidencing its equity in the net worth of the old Mississippi corporation, to the new Louisiana corporation in exchange for the latter's capital stock at book value, following the same plan and procedure, in substance, as is provided hereinabove in the case of the old Mississippi corporation, such transfer to be made for the same purposes and with the same intentions as in the case of the old Mississippi corporation.
Upon motion duly made * * * the vice-president was directed to call a special meeting of the stockholders of the corporation for the purpose of submitting to them the foregoing plan of reorganization * * *
On December 17, 1942, at 2 p.m., a special meeting was held of the stockholders of Mississippi Corporation, at which meeting the recommendations of the corporation's board of directors were adopted and the plan of reorganization was adopted by the vote of all shares outstanding.
On December 17, 1942, the secretary of Mississippi Corporation addressed a letter to petitioner advising him that the plan of reorganization had been approved by both the board of directors and the stockholders of the corporation and in this letter requested petitioner to have W. H. George, Inc., ‘take appropriate action, so as to authorize for its part, the reorganization as outlined.’
On December 21, 1942, the board of directors and stockholders of W. H. George, Inc., met and approved the aforementioned plan and instructed the secretary to notify Mississippi Corporation ‘that this corporation as adopted the suggested plan of reorganization and properly authorized its officers to put it into effect.’ Such a letter was duly written on the same day.
On December 23, 1942, a new Louisiana corporation was incorporated under the provisions of Act 250 of 1928 of the Legislature of Louisiana. The name of the new corporation was Mississippi Tractor and Equipment Company of Louisiana, Inc., hereinafter referred to as Louisiana Corporation. The amount of the authorized capital stock of Louisiana Corporation was 10,000 shares of common stock of the par value of $100 per share.
On December 29, 1942, at 10 a.m., the board of directors of Louisiana Corporation held its organization meeting and adopted several resolutions, the first being that this corporation ‘proceed with all and necessary steps to take over, continue, and operate the said business and affairs now conducted and operated by’ the two old companies in the manner thereinafter set forth. This manner followed the plan of reorganization previously adopted by the boards of directors and stockholders of the two old companies. Other resolutions adopted consisted of authorizing the offices of the new corporation to open an account with Capital National Bank of Jackson, Mississippi, and to borrow from time to time such sums of money as may seem advisable, and also similar authorizations respecting the Jackson State National Bank of Jackson, Mississippi, and Whitney National Bank of New Orleans, Louisiana.
On December 29, 1942, at 2 p.m., a special meeting of the stockholders of Louisiana Corporation was held to confirm the taking over, continuation, and operation of the two old companies ‘all in pursuance of a plan of reorganization.’
On December 30, 1942, Mississippi Corporation and W. H. George, Inc., entered into an agreement with Louisiana Corporation in which the first two corporations were referred to as the Old Corporations and Louisiana Corporation was referred to as the New Corporation. Among other things, the agreement provided:
The Old Corporations hereby agree to transfer, assign, set over and deliver unto, and for the benefit of the New Corporation all assets * * * at the values appearing on their books and as reflected by their financial statements at the close of ordinary business transactions on December 30, 1942.
Excepted from the assets to be transferred, etc., by the Old Corporations is the capital stock owned by W. H. George, Inc., evidencing its equity in the net worth of the Old Mississippi Corporation.
The New Corporation hereby agrees to accept and take over the corporations' net equities in all said assets hereinbefore mentioned and on the bases hereinbefore described, and as a necessary consequence thereof agrees to assume and pay and discharge as they mature all outside liabilities now due or to become due, including accounts and notes payable, contracts, etc., of said Old Corporations and for the excess between the total amount of assets taken over and the total amount of liabilities assumed, to issue and deliver to said Old Corporations, a requisite number of shares of its capital stock at book value to equal the amount of said equities.
Pursuant to the agreement of December 30, 1942, Mississippi Corporation on the same date transferred to Louisiana Corporation all of its assets amounting to $710,154.02 and liabilities amounting to $266,870.29. For these net assets of $443,283.73, Louisiana Corporation issued to Mississippi Corporation 3,572 shares of its capital stock in two certificates of 1,786 shares each. Mississippi Corporation immediately delivered one of the certificates for 1,786 shares to W. H. George, Inc., who in turn surrendered the 250 shares of stock it held in Mississippi Corporation; and immediately delivered the other certificate for 1,786 shares to R. B. George Machinery Company who in turn surrendered the 250 shares of stock it held in Mississippi Corporation. Mississippi Corporation then went out of its business existence and later surrendered its charter to the State of Mississippi.
Pursuant to the agreement of December 30, 1942, W. H. George, Inc., on the same date transferred to Louisiana Corporation all of its assets (except the 250 shares of Mississippi Corporation) amounting to $211,559.46 and liabilities amounting to $34,457.79. For these net assets of $177,101.67, Louisiana Corporation issued to W. H. George, Inc., 1,428 shares of its capital stock. W. H. George, Inc., immediately delivered these 1,428 shares, together with the 1,786 shares received from Mississippi Corporation, or a total of 3,214 shares of Louisiana Corporation to petitioner who in turn surrendered the 900 shares of stock he held in W. H. George, Inc. W. H. George, Inc., then went out of its business existence.
The 3,214 shares of stock of Louisiana Corporation received by petitioner on December 30, 1942, had a fair market value when received of $398,783.48. The cost basis to petitioners of the 900 shares of capital stock of W. H. George, Inc., was $90,000.
The respondent determined that a gain of $308,783.48 ($398,783.48 less $90,000) resulted from the exchange of 900 shares for 3,214 shares; that all of the gain should be ‘recognized’ under section 112(a) of the Internal Revenue Code of 1939; that one-half of the recognized gain was long-term capital gain; and that one-half of the long-term capital gain was taxable to each petitioner as community income.
After December 30, 1942, Louisiana Corporation continued to operate the business from its office in Jackson, Mississippi, in the same manner as Mississippi Corporation had operated.
OPINION.
ARUNDELL, Judge:
The question is whether the conceded gain of $308,783.48 should be recognized under the general rule stated in section 112(a) of the Internal Revenue Code of 1939 or whether no part of the gain should be recognized under the exception stated in section 112(b)(3).
SEC. 112. RECOGNITION OF GAIN OR LOSS.(a) GENERAL RULE.— Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.(b) EXCHANGES SOLELY IN KIND—(3) STOCK FOR STOCK ON REORGANIZATION.— No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.(g) DEFINITION OF REORGANIZATION.— As used in this section (other than subsection (b)(10) and subsection (1)) and in section 113 (other than subsection (a)(22)).—(1) The term ‘reorganization’ means (A) a statutory merger or consolidation, or * * * (C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all the properties of another corporation, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded, or (D) 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 shareholders or both are in control of the corporation to which the assets are transferred * * *(2) The term ‘a party to a reorganization’ includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.
Petitioners contend that both W. H. George, Inc., and Louisiana Corporation were parties to a reorganization; that petitioner exchanged stock in W. H. George, Inc., solely for stock in Louisiana Corporation; that the exchange was in pursuance of the plan of reorganization and that, therefore, no gain should be recognized.
First, we must determine whether there was a ‘reorganization’ within the meaning of that term as defined in section 112(g)(1) of the 1939 Code. (See footnote 1, supra.) Petitioners rely principally upon clause (A) of the definition but they also contend that the facts support a reorganization under either clause (C) or (D) of the 1939 Code.
Congress inserted the word ‘statutory’ in clause (A) for the first time when it enacted the Revenue Act of 1934, at which time it eliminated the parenthetical phrase.
Although this change was intended somewhat as a restriction of the definition of ‘reorganization,‘ the evil that Congress intended to correct was the practice of casting taxable ‘sales' into the form of nontaxable reorganizations. See H. Rept. No. 704, 73d Cong., 2d Sess., 1939-1 C.B. (Part 2) 554, 564.
Clause (A) of the then existing law, section 112(i)(1), Revenue Act of 1932, read as follows: ‘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).'
Care was taken, however, to preserve in the definition as much uniformity among the 48 States as possible. See S. Rept. No. 558, 73d Cong., 2d Sess., 1939-1 C.B. (Part 2) 586, 598.
Among other things, the House Report stated:The reorganization provisions have been in effect for many years, having been adopted in substantially their present form in 1924. They state in detail how each step of a reorganization should be treated for tax purposes. The policy was adopted of permitting reorganizations to take a wide variety of forms, without income-tax liability. As a result, astute lawyers frequently attempted, especially during the prosperous years, to take advantage of these provisions by arranging in the technical form of a reorganization, within the statutory definition, what were really sales.The committee proposes to limit the application of the reorganization provisions by two principal changes. * * * In the second place, the definition of a reorganization has been restricted so that the definition will conform more closely to the general requirements of corporation law, and will limit reorganizations to (1) statutory mergers and consolidations: (2) transfers to a controlled corporation, ‘control’ being defined as an 80 per cent ownership; and (3) changes in the capital structure or form of organization.By these limitations the committee believes that it has removed the danger that taxable sales can be cast into the form of a reorganization, while at the same time, legitimate reorganizations, required in order to strengthen the financial condition of the corporation, will be permitted.
So, in enacting the Revenue Act of 1934, Congress included in the definition of the term ‘reorganization’ clause (B) substantially as it was stated in the Senate Report, the only change being that instead of the words ‘in exchange solely for its voting stock’ Congress enacted the words ‘in exchange solely for all or a part of its voting stock.’ Later, by section 213(b) of the Revenue Act of 1939, Congress amended the definition to read as set out in footnote 1 above, by taking out of clause (B) the phrase ‘substantially all the properties of another corporation’ and placing it in a separate clause, namely, clause (C).
Among other things, the Senate Report stated:Your committee is in complete agreement with the purposes of the House bill which aim at tax-avoidance schemes in this connection. However more are recommended in order to bring about a more uniform application of the provisions in all 48 of the States. Not all of the States have adopted statutes providing for mergers or consolidations; and, moreover, a corporation of one State can not ordinarily merge with a corporation of another State. The committee believes that it is desirable to permit reorganizations in such cases, with restrictions designed to prevent tax avoidance. Consequently, the committee recommends the insertion in the House bill of an addition to the definition of the term ‘reorganization’ as follows:‘(B) the acquisition by one corporation in exchange solely for its voting stock: of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation;’The committee believes that these transactions, when carried out as prescribed in this amendment, are in themselves sufficiently similar to mergers and consolidations as to be entitled to similar treatment.
It would appear from the above brief history of the reorganization provision that Congress never intended the gain or loss in a transaction such as the one now before us to be recognized. The two old corporations and the stockholders thereof fully and clearly intended to effectuate a consolidation of the two old corporations into a new corporation and in fact this was accomplished. The new Louisiana corporation continued the operation of the consolidated business in Jackson, Mississippi, and its right to do so was not questioned by the State of Mississippi. There was no taxable sale involved in the consolidation. Instead there was present the continuity of interest and business purpose tests which are prerequisites in every legitimate reorganization. Cf. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462; LeTulle v. Scofield, 308 U.S. 415; Cortland Specialty Co. v. Commissioner, 60 F.2d 937; Gregory v. Helvering, 293 U.S. 465; Erie County United Bank, 21 T.C. 636, 645; Helvering v. Minnesota Tea Co., 296 U.S. 378; and Helvering v. Leary, 93 F.2d 826.
The respondent, however, contends that notwithstanding all that occurred there could be no ‘statutory * * * consolidation’ under clause (A) for the reason that under the Louisiana law
a domestic corporation and a foreign corporation could be consolidated only if the law of the government under which the foreign corporation was formed authorized such a consolidation, and that ‘It will suffice to say that the Mississippi Corporation was not authorized by the laws of Mississippi to effect a consolidation.’ Cf. 39 Col.L.Rev. 933, 948. We need not, however, decide whether there was a reorganization under clause (A) if under one of the other clauses a reorganization occurred. Helvering v. Minnesota Tea Co., supra.
Louisiana Revised Statutes of 1950. Title 12. Corporations and Associations.Sec. 47. Merger and Consolidation.A. Any two or more corporations formed for the purpose of carrying on the same or similar business, and any one or more corporations and any one or more foreign corporations with authority to carry on the same or similar business may be:(1) Merged into one of the corporations, or(2) Consolidated into a new corporation to be formed under this Chapter: provided the foreign corporations are authorized by the law or laws of the government under which they were formed to effect the merger or consolidation.(B) Any corporations and any foreign corporations may be:(1) Merged into one of the foreign corporations, or(2) Consolidated into a new corporation to be formed under the law or laws of the government under which one of the foreign corporations was formed, provided the laws of such foreign government authorize the merger or consolidation.
We think there was a reorganization within clause (C). Respondent concedes that as far as the transfer of all the assets and liabilities of Mississippi Corporation to Louisiana Corporation in consideration for 3,572 shares of stock of the latter is concerned, there was clearly a reorganization between those two companies within clause (C). He contends, however, that the same result does not follow as far as the transfer of assets and liabilities of W. H. George, Inc., to Louisiana Corporation is concerned. His reasons for this contention are that since W. H. George, Inc., did not transfer to Louisiana Corporation the 250 shares it held in Mississippi Corporation, it cannot be said that W. H. George, Inc., transferred ‘substantially all’ of its properties as is required under clause (C). The respondent points out that the 250 shares represented on December 30, 1942, a value of $221,641.87 (one-half the value of the net assets of Mississippi Corporation) and that the net assets actually transferred by W. H. George, Inc., amounted to only $177,101.67 or about 44 per cent of the total. We do not agree with this contention. Both of the old corporations transferred 100 per cent of all the business assets and liabilities held between them. These net assets amounted to $620,385.40 for which Louisiana Corporation issued 5,000 shares of its capital stock having a par value of $500,000. This was all in accordance with the plan of reorganization and the December 30, 1942, agreement among the three corporations, which agreement provided in part:
Excepted from the assets to be transferred, etc., by the Old Corporations is the capital stock owned by W. H. George, Inc., evidencing its equity in the net worth of the Old Mississippi Corporation.
This equity was in fact transferred to the new corporation in exchange for a separate certificate of 1,786 shares of the new corporation's stock, which certificate was immediately delivered to W. H. George, Inc., in surrender of the 250 shares it held in the old Mississippi Corporation. We hold, therefore, that both of the old corporations transferred all of their properties to the new corporation in exchange solely for its voting stock and that there was a reorganization under clause (C) of section 112(g)(1) of the 1939 Code.
Both W. H. George, Inc., and Louisiana Corporation are clearly included within the term ‘a party to a reorganization’ under the express language of section 112(g)(2), supra. It is also clear that under the integrated plan of reorganization the purpose was that instead of the two old corporations there would be one new corporation. The plan was fully executed by the old corporations transferring all their net assets to the new for the latter's stock and then distributing the stock of the new corporation to the stockholders of the old corporations.
We hold, therefore, that since petitioner, in pursuance of the plan of reorganization, exchanged his 900 shares of stock in W. H. George, Inc., a party to a reorganization, solely for stock in Louisiana Corporation, a party to the reorganization, no gain shall be recognized on the exchange.
Due to some minor adjustments to be made for the years 1942 and 1943 under section 6 of the Current Tax Payment Act of 1943, not here in dispute,
Decisions will be entered under Rule 50.