Opinion
Docket Nos. 1570-62— 1572-62.
1968-04-24
WERNER ABEGG, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Emilio A. Dominianni and John E. McDermott, for the petitioners. Eugene S. Linett, for the respondent.
Emilio A. Dominianni and John E. McDermott, for the petitioners. Eugene S. Linett, for the respondent.
Abegg, a nonresident alien in 1957, liquidated Hevaloid, a wholly owned Delaware corporation, which was a personal holding company, and exchanged the property and cash he then received for all the stock of Suvretta, a Panama corporation, also a personal holding company. The name Suvretta was changed to Cresta on or about Mar. 5, 1958. In February 1958 he contributed additional securities to the capital of Suvretta having fair market values some in excess of his basis and some below his basis. No ruling under sec. 367 was requested. In 1958, 1959, and 1960 Cresta unsuccessfully sought opportunities for investments in active businesses in the United States. Held:
1. Cresta was not engaged in trade or business in the United States during the taxable years ended in 1958, 1959, and 1960.
2. The liquidation of Hevaloid and transfer of its assets to Suvretta amounted to a reorganization under sec. 368(a)(1)(D), I.R.C. 1954.
3. Since no ruling under sec. 367 was sought, the gains realized by Hevaloid on liquidation and the transfer are recognized.
4. Cresta is liable as a transferee of assets for deficiencies determined against Hevaloid.
5. The transfer of assets to Suvretta in 1958 by its sole stockholder was a contribution to capital and not an exchange resulting in taxable gain to the transferor.
BRUCE, Judge:
These consolidated cases involve deficiencies determined as follows:
+-----+ ¦¦¦¦¦¦¦ +-----+
Addition Docket Petitioner Year or Deficiency to tax No FYE Sec. 6651(a), I.R.C. 1954 ( 1958 $20,213.96 1570-62 Werner Abegg ( 1959 146.00 ( 1960 27.15 1571-62 Cresta Corp., S.A., Transferee 1957 296,952.18 ( 2/28/58 19,258.45 1572-62 Cresta Corp., S.A. ( 2/28/59 35,292.99 $3,518.86 ( 2/29/60 43,264.30
Werner Abegg does not contest the deficiencies for 1959 or 1960 in docket No. 1570-62. Respondent concedes the addition to tax for 1959 for delinquent filing determined against Cresta Corp., S.A., in docket No. 1572-62. Other concessions were made by both parties which will be given effect under Rule 50.
The issues for decisions are (1) whether Cresta Corp., S.A., was engaged in trade or business in the United States in its fiscal years ended in 1958, 1959, and 1960; (2) whether the liquidation of Hevaloid and the activation of Suvretta amounted to a reorganization within the meaning of section 368(a)(1) of the 1954 Code; (3) whether the gains upon liquidation and transfer of assets are to be recognized; (4) whether Cresta is liable as a transferee for a deficiency determined against Hevaloid Corporation for 1957; and (5) whether a transfer of assets by Werner Abegg to Suvretta in 1958 resulted in taxable gain or recognizable loss to Abegg.
FINDINGS OF FACT
The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Werner Abegg has been a citizen of Switzerland since prior to 1938. Except for 1940 through 1946, he has not been a resident of the United States. He is an industrialist. From 1946 until 1966 he was not engaged in business in the United States. In 1957 he was in the United States from January 1 to March 27 only. Throughout the year 1957 his U.S. assets exceeded his liabilities by at least $2 million. He filed a Federal income tax return for 1958 with the district director of internal revenue for Upper Manhattan, New York. The return, on Form 1040NB, reported income of $12,912.55 from dividends and tax liability of $3,873.78, withheld at source.
Suvretta Corp., S.A., was incorporated in 1941 under the laws of the Republic of Panama. Its name was changed to Cresta Corp., S.A., on or about March 5, 1958. Its authorized capital stock was 1,000 shares of no-par-value common stock. In the years in issue Werner Abegg was its sole stockholder. It filed Federal corporation income tax returns for fiscal years ending the last day of February in 1958, 1959, and 1960 with the district director of internal revenue for Upper Manhattan, New York. It was organized to acquire certain patents registered under the laws of various foreign nations, but as a consequence of the German occupation of Luxembourg this purpose was not carried out and it was inactive until 1957.
Hevaloid Corp. was organized under the laws of the State of Delaware in 1938. Its authorized capital was 2,000 shares of no-par-value common stock of which 250 shares were issued to Werner Abegg. No other stock was issued. It filed corporation income tax returns for the calendar years 1956 and 1957 with the district director of internal revenue for Upper Manhattan, New York.
Robert A. Cavin has been a close associate, friend, and business adviser to Werner Abegg since prior to 1938. During the year 1957 Robert A. Cavin was president of Hevaloid. During the years 1958, 1959, and 1960 Robert A. Cavin was president and treasurer of Cresta.
On June 27, 1938, Hevaloid purchased from Cela Holding, S.A., a corporation organized under the laws of Luxembourg, 12 patents and patent applications registered under the laws of the United States and 10 patents and patent applications registered under the laws of Canada. These patents related to the manufacture of belts and belting and various rubber products from various chemical processes. Hevaloid also purchased presses and other machinery to be used in the manufacture of such belts and belting and rubber products.
From 1938 until November 1944 Hevaloid leased its patents and machinery to L. H. Gilmer Co. of Philadelphia, Pa. From 1944 until April 1947 Hevaloid leased its patents and machinery to the U.S. Rubber Co.
In April of 1945 Hevaloid acquired from Cela Holding, S.A., certain other patents registered under the laws of various foreign nations.
From April 1947 until November 1955 Hevaloid leased its patents and machinery to Globe Woven Belting Co. of Buffalo, N.Y. In 1955 all of Hevaloid's patents expired and it sold all of its machinery to Globe Woven Belting Co. in November of that year. In 1956 and 1957 Hevaloid's assets consisted exclusively of cash, stocks and securities, receivables, and certain rights in the motion picture, ‘Guest In The House.’
During the period March 28, 1957, to December 11, 1957, Hevaloid was completely liquidated and dissolved in the following manner:
(a) A special meeting of the board of directors of Hevaloid was held on March 28, 1957, and a plan of complete liquidation and dissolution was duly adopted.
(b) On April 3, 1957, a consent to the dissolution of Hevaloid was duly executed by Werner Abegg and was filed with the State of Delaware.
(c) A certificate of dissolution was issued by the State of Delaware on April 18, 1957, and was recorded, and immediately thereafter Hevaloid withdrew from the various States in which it was authorized to do business.
(d) During April and May of 1957 Hevaloid, pursuant to its plan of liquidation, sold the following stocks. The sales of these stocks were effected by Laird & Co., stockbrokers:
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Number Date Amount Name of stock shares Cost sold realized Gain on sale General American Oil Co. 7,926 88/ $122,254.42 4/26/ $317,981.88 $195,727.46 of Texas 100 57 5/1/ 57 Signal Oil and Gas Co 21,155 489,794.11 4/30/ 1,174,899.08 685,104.97 57 5/2/ 57 Great Northern Ore 37,000 75,014.71 4/25/ 114,281.17 39,266.46 Properties 57 5/1/ 57 Sinclair Oil Corp 1,000 51,576.20 4/25/ 64,178.58 12,602.38 57 Totals 738,639.44 1,671,340.71 932,701.27
These sales were included in Schedule D of Hevaloid's final Federal income tax return for the taxable year 1957 but were claimed as not recognized pursuant to the provisions of section 337 of the 1954 Code. The proceeds from the sales of such stocks were deposited to Hevaloid's account in the New York Trust Co., New York City, N.Y.
(e) On May 7, 1957, Hevaloid executed stock powers and distributed, pursuant to its plan of complete liquidation, the following stocks to Werner Abegg by delivery of the certificate and stock powers to Laird & Co. in New York, N.Y.:
+---+ ¦¦¦¦¦ +---+
Shares Corporation Adjusted Fair market basis value 7,470 Brazos River Gas Co $9,337.50 $22,410.00 2,720 Medallion Petroleum Ltd 4,767.54 13,545.60 13,692 Producing Properties, Inc 45,340.00 95,844.00 59,445.04 131,799.60
(f) On May 23, 1957, pursuant to instructions received from Hevaloid issued under its plan of complete liquidation, Laird & Co., New York, N.Y., transferred the following stocks from the account of Hevaloid to the account of Werner Abegg:
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Shares Corporation Adjusted Fair market basis value 1,945 Magma Copper Co $53,097.30 1 $145,996.95 2,600 Signal Oil & Gas Co 60,196.95 157,462.50 113,294.25 303,459.45
Proceedings of the following petitioners are consolidated herewith: Cresta Corp., S.A., Transferee, docket No. 1571-62; Cresta Corp., S.A., docket No. 1572-62.
1As shown by par. 11(f) of stipulation. Par. 15(b) of stipulation uses figure $145,996,56.
(g) On May 23, 1957, Hevaloid executed assignments in favor of Werner Abegg, transferring to him, pursuant to its plan of complete liquidation, its interest in the loan receivable due from Perosa Corp. and in the motion-picture film right ‘Guest In The House.’ Hevaloid had a zero basis for ‘Guest In The House.’
(h) During the period March 28, 1957, to December 11, 1957, Hevaloid made the following distributions in cash, pursuant to its plan of complete liquidation, to its sole stockholder, Werner Abegg, and closed its bank accounts with the New York Trust Co. and Hunterdon County National Bank, Hunterdon County, N.J. On May 1, 1957, Hevaloid drew its check payable to Werner Abegg on the New York Trust Co. in the amount of $1,500,000. On May 2, 1957, Hevaloid drew its check on the New York Trust Co. payable to Werner Abegg in the amount of $160,936.20. On December 11, 1957, Hevaloid drew its check on the Hunterdon County National Bank payable to Werner Abegg in the amount of $32,156.05. All three checks were deposited to the account of Werner Abegg at the Bankers Trust Co., New York City, N.Y. All of Hevaloid's assets were distributed in complete liquidation by December 11, 1957.
Meridan Corp., hereinafter called Meridan, was a corporation organized under the laws of Rhode Island in 1940. In 1951 all of its stock was owned by the following:
+-------------------------+ ¦ ¦Number of ¦ +-------------+-----------¦ ¦ ¦shares ¦ +-------------+-----------¦ ¦G. Fry ¦200 ¦ +-------------+-----------¦ ¦G.B. Fry ¦600 ¦ +-------------+-----------¦ ¦T. Hardwood ¦800 ¦ +-------------+-----------¦ ¦S. Schiff ¦800 ¦ +-------------+-----------¦ ¦Werner Abegg ¦2,500 ¦ +-------------+-----------¦ ¦ ¦4,900 ¦ +-------------------------+
In 1954 Werner Abegg purchased an additional 1,100 shares of the stock of Meridan, of which he transferred 600 shares to Robert A. Cavin, leaving Werner Abegg with 3,000 shares and Meridan with 6,000 shares issued and outstanding.
In 1954 Meridan acquired the plant, business, and other assets of Everett Piano Co. of South Haven, Mich.
The financial statement of Meridan as of December 31, 1957, which it is agreed fairly reflects the position of Meridan as of May 1, 1957, shows:
+------------------------------------------------+ ¦ ¦Everett Piano¦Total ¦ +--------------------+-------------+-------------¦ ¦ ¦Division ¦ ¦ +--------------------+-------------+-------------¦ ¦Assets ¦$1,845,991.89¦$3,276,125.94¦ +--------------------+-------------+-------------¦ ¦Liabilities ¦436,359.67 ¦765,453.07 ¦ +--------------------+-------------+-------------¦ ¦Stockholders' equity¦1,409,632.22 ¦2,510,672.87 ¦ +------------------------------------------------+
On May 6, 1957, Suvretta issued 1,000 shares of its no-par common stock to Werner Abegg in return for cash and other assets as follows:
(a) On May 7, 1957, Werner Abegg's check drawn on the Bankers Trust Co. payable to Suvretta in the amount of $1,500,000 was received by Suvretta and deposited to its account at the First National City Bank, New York. Of this amount, $1,250,000 was paid in for stock and $250,000 was a demand loan.
(b) On May 24, 1957, Laird & Co. under instructions of Werner Abegg transferred from the account of Werner Abegg to the account of Suvretta the following stocks:
+-----------------------------------------------------------------------------+ ¦Name of corporation ¦Fair market value ¦ +---------------------------------------------------------+-------------------¦ ¦2,600 ¦shares of Signal Oil and Gas Co ¦$157,462.50 ¦ +--------+------------------------------------------------+-------------------¦ ¦1,945 ¦shares of Magma Copper Co ¦145,996.56 ¦ +--------+------------------------------------------------+-------------------¦ ¦12,054) ¦ ¦ ¦ +--------+------------------------------------------------+-------------------¦ ¦7,470) ¦shares of Brazos River Gas Co ¦58,572.00 ¦ +--------+------------------------------------------------+-------------------¦ ¦2,720 ¦shares of Medallion Petroleum Ltd ¦13,545.60 ¦ +--------+------------------------------------------------+-------------------¦ ¦13,692 ¦shares of Producing Properties, Inc ¦95,844.00 ¦ +--------+------------------------------------------------+-------------------¦ ¦2,000 ¦shares of Illinois Central Railroad ¦111,500.00 ¦ +--------+------------------------------------------------+-------------------¦ ¦$160,000¦5 1/2 percent note, due 1976--Brazo River Gas Co¦118,400.00 ¦ +--------+------------------------------------------------+-------------------¦ ¦620 ¦shares 6 percent preferred of Producing ¦9,842.50 ¦ ¦ ¦Properties,Inc ¦ ¦ +--------+------------------------------------------------+-------------------¦ ¦$46,500 ¦5 percent bond due 1969--Producing Properties, ¦27,376.88 ¦ ¦ ¦Inc ¦ ¦ +--------+------------------------------------------------+-------------------¦ ¦1,000 ¦shares of Olin Mathieson Chemical Corp ¦53,562.50 ¦ +--------+------------------------------------------------+-------------------¦ ¦ ¦ ¦792,102.54 ¦ +-----------------------------------------------------------------------------+
All of the above stocks were marketable and could be sold on various stock exchanges in the United States and on the over-the-counter market.
(c) On May 24, 1957, Werner Abegg executed stock assignments in favor of Suvretta, transferring to Suvretta 3,000 shares of Meridan Corp. stock, having a fair market value of $1,291,080 and 1,000 shares of Perosa Corp. stock which had no value.
(d) On June 8, 1957, Werner Abegg executed assignments in favor of Suvretta, transferring to Suvretta his interest in the motion-picture film right ‘Guest In The House’ and his interest in a debt due from Perosa Corp. Approximately $18,000 was collected on this debt, and in a subsequent year the balance was written off as uncollectible. The sum of $2,550, all of which was collected prior to 1961 with respect to the motion-picture film right ‘Guest In The House,‘ has been collected to the date of trial. The film right has never been sold by Suvretta or Cresta.
On February 6, 1958, the directors of Suvretta held a meeting in New York, N.Y. The members of the board, Werner Abegg, Robert A. Cavin, James E. Hughes, and George F. Mason, Jr., were all present. It was resolved that the corporation take all action necessary to qualify it to do business in the State of New York, that it accept certain transfers of cash and securities from Abegg as contributions to capital, and that it borrow an additional $250,000 from Abegg on open account repayable on demand.
On February 13, 1958, Werner Abegg's check drawn on Bankers Trust Co. payable to Suvretta in the amount of $400,000 was received by Suvretta and deposited to its account at the First National City Bank, New York, N.Y. This amount was recorded as a contribution to capital.
On February 26, 1958, Abegg transferred to Suvretta the following shares of stock, and such transfer was recorded on the books of Suvretta as a contribution to capital. Suvretta did not issue its stock or any other property to Abegg in exchange therefor. All of the contributed stock was held by Abegg since prior to December 31, 1957, and as to Abegg were capital assets:
+--------------------------------------------------------------------+ ¦Stock ¦Adjusted basis ¦Fair market¦ +---------------------------------------+----------------+-----------¦ ¦ ¦ ¦value ¦ +---------------------------------------+----------------+-----------¦ ¦50,680 shares of Brazos River Gas Co ¦$55,850.00 ¦$101,360 ¦ +---------------------------------------+----------------+-----------¦ ¦4,250 shares of General American Oil Co¦91,653.12 ¦110,578 ¦ +---------------------------------------+----------------+-----------¦ ¦12,650 shares of Magma Copper Co ¦1,300,970.50 ¦449,075 ¦ +---------------------------------------+----------------+-----------¦ ¦ ¦1 1,448,473.62¦661,013 ¦ +--------------------------------------------------------------------+ 1Par. 20 of stipulation incorrectly stated total adjusted basis as $1,348,473.62.
Abegg effected the transfer of such stocks to Suvretta while present in the United States and the transfer was made in the United States. Abegg was present in the United States from January 17, 1958, through May 17, 1958.
On May 29, 1957, Abegg drew a check on Bankers Trust Co. payable to Suvretta in the amount of $400,000 which was received by Suvretta and deposited to its account at the First National City Bank, New York, N.Y. This amount was recorded as a contribution to capital.
On or about February 6, 1958, Suvretta attempted to register with New York State as a corporation which would do business in New York State and discovered that the similarity of its name to another corporate name would require it to change its name. Accordingly, Suvretta changed its name to Cresta on or about March 5, 1958, and on or about the same date registered with New York State as a corporation doing business in New York State.
Subsequent to the mailing of the notice of liability in case docket No. 1571-62, Cresta paid $296,952.18 with respect to the deficiency determined against Hevaloid for the taxable year ended December 31, 1957.
Subsequent to the mailing of the notice of deficiency in case docket No. 1572-62, Cresta made the following payments of tax with respect to the following taxable years (which payments were assessed on March 16, 1962, under section 6213(b)(3), 1954 Code):
+-----------------------------+ ¦FYE-- ¦Amount ¦ +------------------+----------¦ ¦February 28, 1958 ¦$19,258.45¦ +------------------+----------¦ ¦February 28, 1959 ¦35,292.99 ¦ +------------------+----------¦ ¦February 29, 1960 ¦43,264.30 ¦ +-----------------------------+
No determination or ruling under section 367, 1954 Code, was ever requested as to any of the transactions described herein by Abegg, Suvretta or Cresta, Hevaloid, or any other person.
Meridan owned interests in United Products Co., a machine shop in Tacoma, Wash., and Flexonics Corp., a Chicago corporation. United Products Co. had some 50 to 70 employees at Tacoma. Everett Piano Co. had over 300 employees at South Haven, Michigan. Cavin was president of Meridan in the years 1959 and 1960.
In Cresta's fiscal years ended in 1958, 1959, and 1960 Cavin investigated at least 11 business opportunities for the investment of Cresta's funds with a view to acquiring the stock or the assets of one or more going businesses. No such acquisition was made in those years. Cavin was the sole employee of Cresta in those years.
Hevaloid was a personal holding company in 1956 and 1957. Cresta was a personal holding company in its fiscal years ended in 1958, 1959, and 1960. Cresta was not engaged in trade or business in the United States in those years.
OPINION
Werner Abegg, a nonresident alien, was sole stockholder of a Delaware corporation, Hevaloid, which had for a number of years been engaged in business in the United States as owner and lessor of certain patents and machinery. In 1955 its patents expired and it sold the machinery. Thereafter, until liquidated in 1957, its sole assets were cash, securities, receivables, and certain rights in a motion picture. It was then a personal holding company and so characterized itself in its returns for 1956 and 1957. In 1957 Abegg liquidated Hevaloid and had the assets transferred to himself. In the same year he transferred to a Panamanian corporation, Suvretta (now called Cresta) all the securities and other properties he received from Hevaloid and certain additional securities and cash, and he received all the stock of this corporation. He also transferred to it 3,000 shares of stock (of 6,000 shares outstanding) of Meridan Corp., a Rhode Island corporation which controlled certain other active corporations in the United States. Suvretta was a personal holding company in 1957 and during the years in issue and so designated itself on its returns for the fiscal years ended in 1958 and 1959. In 1958 it was registered as a corporation doing business in New York State.