Opinion
Docket No. 65357.
1959-02-25
UNION STARCH AND REFINING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William F. Welch, Esq., for the petitioner. Hubert E. Kelly, Esq., for the respondent.
William F. Welch, Esq., for the petitioner. Hubert E. Kelly, Esq., for the respondent.
Petitioner transferred 8,700 shares of the common stock of Sterling Drug Company, Inc., in exchange for 1,609 3/4 shares of its own stock owned by two minority stockholders. The transaction was initiated by the stockholders. Held, the transaction constituted a partial liquidation within the meaning of section 115(c) and (i) of the 1939 Code, and no taxable gain was realized by petitioner.
Respondent determined a deficiency in petitioner's income tax for the calendar year 1954 in the amount of $82,313.98.
The question is whether petitioner realized a long-term capital gain as a result of the transfer of 8,700 shares of the stock of another corporation, held by petitioner, in exchange for 1,609 3/4 shares of its own stock owned by a former officer-employee and his wife.
FINDINGS OF FACT.
Some of the facts are stipulated, the stipulation being incorporated herein by this reference.
Petitioner, a corporation, was organized and incorporated in the State of Indiana in 1912. Its general offices are located at 301 Washington Street, Columbus, Indiana. Petitioner maintains its books on a calendar year basis and uses an accrual method of accounting. It filed its Federal income tax return for the year 1954 with the district director of internal revenue for the district of Indiana on March 14, 1955.
Petitioner's principal business activity is the refining of various corn products, such as corn syrup, cornstarch, caramel coloring, corn sugar, and feeds. It has manufacturing facilities at Edinburg, Indiana, and Granite City, Illinois.
On January 26, 1954, all of the petitioner's authorized 30,000 shares of common stock were issued and outstanding. This stock has always been closely held, the majority being owned by the Irwin-Sweeney-Miller family of Columbus, Indiana. The balance has been held by various individuals who, with one exception, mere either employees or former employees of the petitioner.
Philo R. King (hereinafter sometimes referred to as King), a former officer and employee of petitioner, served for many years as plant superintendent in charge of manufacturing at its Granite City plant. At the time of the transaction here involved, King and his wife, Cathryn, were minority stockholders of petitioner, owning an aggregate of 1,609 3/4 shares of Union Starch stock. They acquired this stock between 1914 and 1925, while King was in petitioner's employ.
King retired in 1943 at the approximate age of 65. Since his retirement petitioner has paid him a pension of $5,000 annually, and is continuing to do so. The payment of this pension bears no relation to the Kings' ownership of Union Starch stock. Aside from the obligation to pay King a pension, there is no evidence that petitioner was in any way indebted to King or his wife.
Upon various occasions in the period from 1945 to 1947 King inquired of one of petitioner's officers whether petitioner might be interested in acquiring his stock in the company. These conversations were infrequent and informal. There were further discussions a few years later.
King felt that the major portion of his estate was tied up in Union Starch stock and he desired to secure diversification and marketability for his holdings.
As a result of a reorganization in 1948 involving the exchange of all the capital stock of a former affiliate, petitioner acquired a block of 13,323 shares of the common stock of Sterling Drug Company, Inc. Sterling Drug stock is listed on the New York Stock Exchange. From the time the stock was acquired by petitioner in 1946 it has been held as an investment asset.
In 1953 King engaged an officer of the St, Louis Union Trust Company to help ascertain the fair market value of the Union Starch stock held by him and his wife. Petitioner employed a Chicago investment company to evaluate the stock. There was considerable difference in the resulting appraisals and there seemed to be no opportunity for the parties to get together. King's adviser determined that the fair market value of the stock was $250 per share. Petitioner's investment counsel determined a value of $165 to $167 per share.
Not being able to arrive at a value for the stock, the parties finally discussed the possibility of transferring shares of Sterling Drug stock for the redemption of King's stock in petitioner. Petitioner's first offer was 8,200 shares of Sterling Drug stock. King rejected this offer and countered with 8,700 shares. This was accepted by petitioner on January 26, 1954.
The primary consideration in determining the number of shares of Sterling Drug stock to be exchanged for King's stock was the question of income or yield from one as compared to the other.
The following resolution was adopted at a meeting of petitioner's board of directors, called on January 29, 1954:
BE IT RESOLVED, that this Company assign and transfer to P. R. King and Cathryn N. King an aggregate of 8,700 shares of the common stock of Sterling Drug, Inc., now owned by the Company, in retirement and redemption of an aggregate of 1,609 3/4 shares of the stock of this Company now held by the said P. R. King and Cathryn N. King.
King and his wife received 8,700 shares of Sterling Drug stock on February 23, 1954, and the petitioner received the 1,609 3/4 shares of Union Starch stock on February 24, 1954. The Union Starch stock was canceled on February 26, 1954.
The following schedule is a tabulation of the stockholdings in the petitioner as of January 1, 1943, January 1, 1954, August 1, 1955, and May 16, 1958:
+------------------------------------------------------------------------------+ ¦ ¦Jan. 1,¦Jan. 1,¦Aug. 1,¦May 16,¦ ¦ ¦1943 ¦1954 ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦ ¦ ¦ ¦1955 ¦1958 ¦ ¦ ¦ ¦ ¦1 ¦1 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Chase Manhattan Bank (formerly Chase National ¦6,000 ¦6,000 ¦72,000 ¦72,000 ¦ ¦Bank) Trustee u/a 6/4/32—F. T. Bedford ¦ ¦ ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Irwin Union Bank & Trust Co. Trustee u/a/ ¦8,629 7¦9,374 7¦112,495¦112,495¦ ¦dated 2/1/30—W. S. Irwin ¦/24 ¦/24 ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Irwin Union Bank & Trust Co. Trustee u/a dated¦8,629 7¦9,374 7¦112,488¦112,488¦ ¦2/6/30—L. I. Sweeney ¦/24 ¦/24 ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦William G. Irwin 2 ¦2,722 ¦ ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Joseph E. Irwin ¦391 2/3¦391 2/3¦4,700 ¦4,700 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Philo R. King ¦1,000 ¦1,000 ¦(3 ) ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Mrs. Cathryn King ¦609 3/4¦609 3/4¦(3 ) ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Hugh Th. Miller 4 ¦1,200 ¦ ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Nettie S. Miller ¦ ¦10 ¦120 ¦120 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Joseph Irwin Miller ¦ ¦1,610 ¦19,320 ¦19,320 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Linnie I. Sweeney 5 ¦818 ¦ ¦ ¦ ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Elsie I. Sweeney ¦ ¦10 ¦120 ¦120 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Clementine M. Tangeman (E. Clementine Miller) ¦ ¦1,610 ¦19,320 ¦19,320 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Earl B. Pulse ¦ ¦10 ¦120 ¦120 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Guy's Sales and Service, Inc. (Issued 7/5/55) ¦ ¦ ¦18,000 ¦18,000 ¦ +----------------------------------------------+-------+-------+-------+-------¦ ¦Total ¦30,000 ¦30,000 ¦358,683¦358,683¦ +------------------------------------------------------------------------------+ FN3 Stock canceled Feb. 26, 1954.FN4 Deceased May 26, 1947.FN5 Deceased Feb. 2, 1944.
Petitioner's cost basis for the 8,700 share of Sterling Drug stock transferred to the Kings was $15,407.74. The fair market value of the stock at the time of the transfer was approximately $332,000.
Petitioner recorded the transaction by debiting its capital stock account in the amount of $80,487.50 (par value of 1,609 3/4 shares at $50 per share), crediting capital surplus in the amount of $65,079.76, and crediting its asset account labeled ‘Stocks— Other Corporations' in the amount of $15,407.74.
Petitioner has not redeemed the shares of any other minority shareholder since the transaction with the Kings, and has continued to hold, as an asset, the balance of the Sterling Drug stock acquired in 1948.
OPINION.
VAN FOSSAN, Judge:
The question is whether petitioner realized a long-term capital gain as a result of the transfer of 8,700 shares of Sterling Drug stock, held by the petitioner as an investment, in exchange for 1,609 3/4 shares of its own stock, owned by a former officer-employee and his wife.
Petitioner urges that the transaction constituted a redemption and cancellation of a part of petitioner's outstanding common stock and was, in effect, a partial liquidation.
It is the respondent's contention that the transaction was in reality a sale of the Sterling Drug stock and resulted in a long-term capital gain taxable to petitioner pursuant to sections 22(a), 117(a), and 117(c) of the Internal Revenue Code of 1939 and the Regulations thereunder.
We are of the opinion that the petitioner's view is correct, that the transaction constituted a partial liquidation, and that, accordingly, no taxable gain was realized by petitioner. Sec. 115(c), I.R.C. 1939;
Decision will be entered for the petitioner. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(c) DISTRIBUTION IN LIQUIDATION.— Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * * 2. Sec. 39.22-20 Gross income of corporation in liquidation. * * * No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition. * * * -------- Notes:
Giving effect to 12 to 1 stock split in recapitalization in April 1955.
Deceased Dec. 14, 1943.
Section 115(i) of the Internal Revenue Code of 1939 defines a partial liquidation as ‘a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.’
Regulations 118, section 39.22(a)-15, relied upon by both petitioner and respondent, provides, inter alia, that
(a) Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. * * *
(b) However, if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. * * *
Here, the facts and circumstances lead to the conclusion that the real nature of the transaction was a partial liquidation of Union Starch stock, not a sale of Sterling Drug stock.
It is clear that the transaction was initiated by King and came about as a result of his desire to have the petitioner reacquire his Union Starch stock. He was anxious to secure diversification and easier marketability for his holdings. Negotiations for the transfer of Sterling Drug stock, which was listed on the New York Stock Exchange, in redemption of his stock arose only after the parties had been unable to agree upon a fair market value for the Union Starch stock. King's primary consideration in determining the number of shares of Sterling Drug to be transferred in exchange for the shares of Union Starch stock was the question of yield or income to be derived from one as compared with the other.
Aside from an obligation to pay King a pension of $5,000 a year, there is no evidence that petitioner was in any way indebted to King or his wife. Petitioner has continued to pay King his pension.
According to the record, petitioner was not dealing in its own shares or in Sterling Drug stock. The 13,323 shares of Sterling Drug held by petitioner were acquired in 1948 upon the reorganization of a former affiliate and were held as an investment asset. The Kings' Union Starch stock was canceled 2 days after its acquisition by petitioner and did not participate in a 12 for 1 stock split effected by the petitioner in April 1955. Petitioner has not redeemed the shares of any other minority shareholders since the transaction with the Kings and has continued to hold the balance of the Sterling Drug stock as an asset.
Respondent argues that there could not have been a partial liquidation since there was no genuine contraction of petitioner's business, citing Joseph W. Imler, 11 T.C. 836 (1948). This argument is without merit. The Imler case does not stand for the proposition for which it is cited. Furthermore, section 115(i) of the Internal Revenue Code of 1939, defining a partial liquidation, applies not to a distribution in cancellation or redemption of a part of the business of a corporation, but to a distribution in cancellation or redemption of a part of its stock. Hamilton Allport, 4 T.C. 401 (1944).
Respondent points out that there was no amendment of the petitioner's corporate charter reducing its authorized capital stock. While this failure of the petitioner was relevant evidence on respondent's part, we do not think it is of sufficient weight to overcome the other facts in the record, all pointing to the conclusion that the transaction in question was a partial liquidation. Cf. United States v. Anderson, Clayton & Co., 350 U.S. 55 (1955).
All the cases relied upon by the respondent may be distinguished on their facts.
We hold that the transaction constituted a partial liquidation within the meaning of section 115(c) and (i) of the Internal Revenue Code of 1939, and that no taxable gain was realized by petitioner. General Utilities Co. v. Helvering, 296 U.S. 200 (1935); Lencard Corporation, 47 B.T.A. 58 (1942).