Opinion
No. 45283, 45284.
March 6, 1944.
Robert P. Smith, of Washington, D.C. (William Ristig and Smith, Ristig Smith, all of Washington, D.C., on the brief), for plaintiff.
John A. Rees, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and WHITAKER, MADDEN, and LITTLETON, Judges.
Separate actions by Mrs. Rose Berch and by S.H. Berch against the United States for taxes wrongfully collected.
Petitions dismissed.
This case having been heard by the Court of Claims, the court, upon the report of a commissioner and the evidence, makes the following special findings of fact:
1. S.H. Berch and Rose Berch, plaintiffs herein, now residents of the State of California, are husband and wife, and resided in the State of Washington during the year 1926 and prior thereto, a community property state which entitles the plaintiffs to compute their income on a community property basis by reporting one-half of the income in their separate returns.
2. The plaintiffs on April 16, 1927, pursuant to extensions granted, each separately filed with the Collector of Internal Revenue for their collection district separate individual federal income tax returns for the calendar year 1926, each reporting a gross income of $83,483.52, deductions therefrom amounting to $4,909.25 and net incomes subject to tax of $78,574.27. These returns indicated that they were filed upon the community property basis; that the plaintiffs had a total gross income of $166,967.03, total deductions of $9,818.51 and a total net taxable income of $157,148.52; and that these several totals were equally divided between them and reported as aforesaid upon their separate individual returns.
One of the several items of community gross income aggregating $166,967.03 was an item of $125,366.98 reported on line 6 of each return as "Profit from Sale of Real Estate, Stocks, Bonds, etc.," and on Schedule C which was attached to and filed with each of plaintiffs' returns there appeared a calculation as follows:
-------------------------------------------------------------------------------- Stocks | Amount | Cost | Gain | Loss | received | | | -------------------------------------------------------------------------------- 50 Shs. Nat'l Cash Register | | | | "A" 1/6/26 .............. | $2,370.91 | $2,500.00 | ......... | $129.09 80 Shs. General Motors 1926 | 10,020.00 | 9,480.00 | $540.00 | ........ 300 Shs. General Motors ... | 37,023.00 | 39,000.00 | ......... | 1,977.00 400 Western Dairy Products | | | | "A" 1926 ................ | 18,000.00 | 17,500.00 | 500.00 | ........ 11,000 Shares Western Dairy | | | | Products "B" 1925/26 .... | 137,376.62 | 10,700.00 | 126,676.62 | ........ | __________ | __________ | __________ | _________ | 204,790.53 | 79,180.00 | 127,716.62 | 2,106.09 | 79,180.00 | ......... | 2,106.09 | ........ | __________ | __________ | __________ | _________ Net gain on stocks .... | 125,610.53 | ......... | 125,610.53 | ........ --------------------------------------------------------------------------------There also appeared as part of Schedule C a further calculation showing a net loss on bonds of $243.55, and the net gain on stocks calculated as shown above to be $125,610.53 less the net loss on bonds of $243.55 produced the sum of $125,366.98 reported as aforesaid on line 6 of each of the plaintiffs' returns. Copies of the returns are in evidence and made a part hereof by reference.
The return of S.H. Berch reported a tax of $11,418.97 and that of Rose Berch a tax of $11,407.34. These amounts were timely assessed and were paid in five installments. The last payment by each taxpayer was made December 15, 1927.
On January 11, 1929, each plaintiff separately filed a formal claim for refund. Plaintiff S.H. Berch claimed a refund of $3,130, or "such greater amount as is legally refundable." It was based upon the privilege claimed by the taxpayer under section 208 of the Revenue Act of 1926, 44 Stat. 9, 19, 26 U.S.C.A. Int.Rev. Acts, page 157, providing for the taxation of the gains from the sale of capital assets held for more than two years at the rate of 12½ percent; whereas, it was stated that the returns filed had included this gain in ordinary income and the tax computed at the ordinary rate, resulting in a much larger tax than would have been due had the tax on the capital net gain been computed at 12½ percent. Mrs. Rose Berch claimed refund of $3,035, but the claim was based upon the identical ground asserted in the claim of S.H. Berch.
Both of the claims were formally rejected by the Commissioner of Internal Revenue, and plaintiffs were so advised by separate letters sent to them by registered mail on July 3, 1940.
3. During the time that the claims for refund for the year 1926 were under consideration by the office of the Commissioner of Internal Revenue and prior to the rejection of them, each of the plaintiffs on September 20, 1939, filed with the office of the Internal Revenue Agent in Charge at Los Angeles, California, a communication addressed to the Commissioner of Internal Revenue, setting forth under oath the following statement:
"Furthermore, we call your attention to the fact that the Class `B' stock of the Western Dairy Products Company which you have valued at 50¢ a share for the purpose of determining gain or loss had an actual value at the time of the exchange in 1925 of approximately $10.00 a share. The value of 50¢ per share was an arbitrary value fixed by the underwriters but the first sales of this stock in 1925 ranged from $5.00 to $10.00 a share. Consequently, the amount of $125,366.98 representing profit from the sale of this stock, as shown in your report, is overstated. If it is finally determined that the liquidation of the Berch Ice Cream Company in 1925 was not a part of the plan of reorganization, and constituted a taxable transaction, then the basis for determining gain or loss on subsequent sale of the stock received is the fair market value of the Class `B' stock of the Western Dairy Products Company, which ranged from $5.00 to $10.00 a share, and the arbitrary value of 50¢ per share cannot be used as a base. Full facts and information regarding the value of this Class `B' stock has previously been submitted to the Department and is on file in your office."
4. Part of the class A and class B stock of Western Dairy Products Co. was sold by plaintiff S.H. Berch during the year 1927 and the same issue herein involved was submitted to the United States Board of Tax Appeals, whose decision is reported in Berch v. Com'r, 35 B.T.A. 385. A timely appeal by the plaintiffs from the decision of the United States Board of Tax Appeals was taken to the Court of Appeals of the District of Columbia and during the pendency of the appeal in the Court of Appeals of the District of Columbia a compromise settlement of the deficiency tax and interest involved was entered into between the parties hereto and the office of the Attorney General for the United States. Plaintiffs' attorney thereafter dismissed their appeal pursuant to Rule 12 of the court's rules, and a certificate to that effect from the Court of Appeals dated December 9, 1938, was filed with the Board of Tax Appeals on December 10, 1938.
5. From October 1922, to August 5, 1925, S.H. Berch owned all of the stock of the Berch Ice Cream Company of Seattle, Washington. Berch Ice Cream Co. owned 20 percent of the stock of the Crystal Investment Company, the other 80 percent being owned by Kassel and Rebecca Gottstein Company, J.L. Gottstein, F.V. Fisher, and Associated Dairies, Inc. The Crystal Investment Co. owned all of the stock of the Velvet Ice Cream Company, Inc., and the Seattle Ice Cream Company, both located in Seattle, Washington.
6. During the latter part of 1924 Spencer Trask Co., brokers, entered into negotiations with S.H. Berch for the purchase of the business of the Velvet Ice Cream Co. and the Seattle Ice Cream Co., with a view to creating an organization to handle all the dairy and ice cream business along the entire Pacific Coast.
7. On or about July 20, 1925, S.H. Berch secured an oral agreement with his associates, who owned 80 percent of the capital stock of the Crystal Investment Co., whereby they would sell all of the capital stock of the Seattle Ice Cream Co. and the Velvet Ice Cream Co. for an agreed consideration of $1,250,000, and Mr. Berch was to negotiate the sale.
8. On August 3, 1925, the owners of all the stock of the Crystal Investment Co. and Spencer Trask Co. entered into an option agreement, which was called "Escrow Letter and Contract" and was addressed to the Dexter Horton National Bank of Seattle. The agreement recited that Spencer Trask Co. was given the right until October 15, 1925, to purchase all of the capital stock of the Velvet Ice Cream Co. and Seattle Ice Cream Co. for $1,250,000. Pursuant to this agreement, all of the stock of the Seattle Ice Cream Co. and Velvet Ice Cream Co., being 1,500 shares for each company, was deposited at the Dexter Horton National Bank at Seattle, Washington, in escrow.
9. On the same date, August 3, 1925, the same group of stockholders delivered to the escrow holder of the stock of the Seattle Ice Cream Co. and Velvet Ice Cream Co. an "Instruction Letter," authorizing the escrow holder to use $250,000 of the total consideration to buy class A stock of the proposed new corporation and to distribute such stock and the balance of the cash in the same proportions as set out in the letter above cited. Berch's associates later decided not to take the $250,000 in stock but took all cash.
10. On the same date, August 3, 1925, S.H. Berch entered into a separate agreement with Spencer Trask Co. which recited that Berch was to receive for his interest in the stock of the Seattle Ice Cream Co. and the Velvet Ice Cream Co. first issue of class A stock of the new company in the amount of $250,000 at the price per share paid for other first issue class A stock by Spencer Trask Co. for their allotment of said stock, and 35% of the total first issue class B stock of the new company, plus additional class A stock of the new company, to the value of $20,000.
11. Also on August 3, 1925, S.H. Berch, J.L. Gottstein, F.V. Fisher, Frank R. Burns, and A. Shumanski entered into an agreement with Spencer Trask Company that after the stocks of the Velvet and Seattle ice cream companies were purchased by them the individuals named would not engage in the manufacture or wholesaling of ice cream within the State of Washington for five years, nor within such time and place be a stockholder or officer of or otherwise associated "with a corporation engaged primarily in the manufacture or wholesaling of ice cream."
12. The first issue of stock of the new company was to consist of 80,000 shares of class A (nonvoting) stock and 116,000 shares of class B (voting) stock. Spencer Trask Co. were to buy the class A stock at $40 per share and sell to the public at $45 per share. Berch's portion of the issue of class A stock amounted to 6,750 shares and of the class B stock 40,600 shares, which he agreed to take in exchange for his interest in the stock of the Seattle Ice Cream Co. and Velvet Ice Cream Co. The reference in the Instruction Letter (Finding No. 9) to the purchase of $250,000 worth of class A stock is not the same stock that S.H. Berch was to receive as referred to in the separate agreement (Finding No. 10), but is in addition thereto for the benefit of S.H. Berch and his associates. Berch's associates decided not to take the $250,000 in stock and took all cash so that the said class A stock referred to in the Instruction Letter (Finding No. 9) was never purchased by Berch or his associates.
13. Mr. Davenport, representing Spencer Trask Co., bankers, came to Seattle on August 2, 1925, and after examining the earning statement of the Seattle Ice Cream Co. and the Velvet Ice Cream Co. was anxious to close the deal and the agreements were signed by the parties on August 3, 1925. Immediately thereafter, Mr. Davenport stated he was satisfied with the deal and that his company was going through with the transaction, and thereupon directed and ordered Berch to dissolve the Crystal Investment Co. and the Berch Ice Cream Co. and pursuant to said instructions on August 5, 1925, the Crystal Investment Co. was, by appropriate corporate action, ordered dissolved and the stock which it owned in the Seattle Ice Cream Co. and Velvet Ice Cream Co. was distributed to its stockholders. On the same date, after the dissolution of the Crystal Investment Co. the Berch Ice Cream Co., which owned 20 percent of the stock of the Crystal Investment Co., was dissolved and its assets distributed to Mr. Berch, who owned all of the stock of the Berch Ice Cream Co. The only asset of the Berch Ice Cream Co. was its stock in the Crystal Investment Co. The final orders dissolving the Crystal Investment Co. and Berch Ice Cream Co. were issued November 4, 1925.
14. On or about August 10, 1925, all of the stock of the Seattle Ice Cream Co. and the Velvet Ice Cream Co. was deposited with the Dexter Horton National Bank in escrow. Spencer Trask Co. also deposited $10,000 in accordance with the terms of the Escrow Letter and Contract.
15. Under date of August 25, 1925, Spencer Trask Co. issued instructions to the Dexter Horton National Bank informing them that $1,250,00 would shortly be deposited with them to take up the stock of Seattle Ice Cream Co. and Velvet Ice Cream Co., and instructed them not to pay S.H. Berch his share because of a separate agreement with him.
The aforesaid amount of money, that is $1,250,000, was deposited August 26, 1925, and the Dexter Horton National Bank was ordered to distribute $1,000,000 less $10,000 to S.H. Berch's associates, leaving S.H. Berch's stock in the Seattle Ice Cream Co. and the Velvet Ice Cream Co. and his interest in the consideration still in escrow with the bank.
The associates of S.H. Berch elected to take all cash and did not buy any of the class A stock, as provided by the Instruction Letter, by reason of the fact that the new company intended to issue bonds.
16. Thereafter S.H. Berch was elected president of the Seattle Ice Cream Co. and the Velvet Ice Cream Co. and managed their affairs until October 8, 1925, when the stock of these companies was taken over by the new company, the Western Dairy Products Company. Western Dairy Products Co. was incorporated on October 1, 1925, whereupon S.H. Berch became its first president and has been president of the company since the date of incorporation.
17. From the period August 5, 1925, to October 8, 1925, the stock of the Seattle Ice Cream Co. and the Velvet Ice Cream Co. was owned by S.H. Berch and Spencer Trask Co. and during that period of time they owned all of this stock.
The entire first issue of class A and class B stock of the Western Dairy Products Co. was issued to Spencer Trask Co. and S.H. Berch. This consisted of 80,000 shares of class A stock, and 116,000 shares of class B stock, so that all of the stock of the new company was owned by Spencer Trask Co. and S.H. Berch immediately after its organization.
Part of the aforesaid first issue of stock of the new company was exchanged for the stock of Seattle Ice Cream Co. and Velvet Ice Cream Co., and S.H. Berch, who was the owner of 20 per cent of the stock of Seattle Ice Cream Co. and Velvet Ice Cream Co., was entitled to receive in exchange for his stock, in accordance with the separate agreement between S.H. Berch and Spencer Trask Co., 6,750 shares of class A stock and 40,600 shares of class B stock. Instead of taking the full amount of class A stock allotted to him, Berch received only 2,250 shares of class A stock and gave up his rights to 4,500 shares of class A stock, receiving instead cash in the amount of $180,000. Consequently, the consideration actually received by Berch for his 20 percent interest in the stock of the Seattle Ice Cream Co. and Velvet Ice Cream Co. was as follows:
Cash .......................... $180,000 2,250 shares ............ class A stock 40,600 shares ........... class B stock
The 4,500 shares of class A stock were given up by Berch by reason of the fact that the first issue of stock offered to the public was oversubscribed and there was not sufficient stock to cover the sales, so that Mr. Berch gave up part of the class A stock which he was entitled to receive.
18. The class A stock of the new company was nonvoting stock. The class B stock of the new company, which was the only voting stock, was placed in a voting trust, consisting of three trustees. S.H. Berch and his attorney, Mr. Campbell, constituted two of the trustees, the other trustee representing Spencer Trask Co. Berch was also the president of the new company.
19. Mr. Berch's interest in the new company was approximately the same as his interest in the stock of the Seattle Ice Cream Co. and Velvet Ice Cream Co., namely, 20 percent, his interest in the stock of the new company being 21.75 percent.
Immediately after the signing of the agreements on August 3, 1925, the deal was closed by the parties and the attorneys were ordered to incorporate the new company, Western Dairy Products Co. The documents pertaining to the formation of the corporation were prepared and completed sometime in September 1925, and the corporation received its charter on October 1, 1925.
20. The exchange by S.H. Berch and Spencer Trask Company of all the stock of the Velvet and Seattle companies for stock of the Western Dairy Products Company was a nontaxable exchange that came within section 203(b)(2) of the Revenue Act of 1924, 43 Stat. 253, 256, 26 U.S.C.A. Int.Rev. Acts, page 4, as an exchange of stock in a corporate party to a reorganization for stock in another corporate party.
The dissolution of the Berch Ice Cream Company was not a step in the plan of reorganization and the gain derived on its liquidation, therefore, is subject to tax. It was so held by the Commissioner of Internal Revenue after an audit of plaintiffs' tax returns for the taxable year 1925, and this was acquiesced in by plaintiffs. This audit resulted in an additional assessment against Mrs. Rose Berch of $8,656.43, and an overassessment against S.H. Berch of $3,031.04. Mrs. Berch paid the additional assessment and Mr. Berch accepted refund of the overassessment.
In computing the gain derived upon the liquidation of the Berch Ice Cream Company and the Crystal Investment Company the stock received by plaintiff Berch in the Velvet Ice Cream Company and the Seattle Ice Cream Company was valued by the Commissioner of Internal Revenue at $258,000. The returns were filed on the community property basis, but the Commissioner held that a loss sustained by Mr. Berch was from property not held on a community property basis.
In 1926 plaintiff S.H. Berch sold 11,000 shares of Class B stock of the Western Dairy Products Company. Plaintiffs filed separate individual income tax returns for the calendar year 1926 on a community property basis and the profit on the sale of this stock was returned as ordinary income. However, within two years from the time they paid their taxes they filed claims for refund on the ground that they were taxable on the profit received, not as ordinary income, but as a capital net gain at the rate of 12½ percent. These claims were rejected and plaintiffs brought these suits.
1. The profit is taxable as a capital net gain only if the capital asset had been held by plaintiff Berch for more than two years. He had not held this particular stock for more than two years, but he claims the right to tack on to the period he had held this stock the period he had held other stock for which he says it was received in exchange.
Section 208(a)(8) of the Revenue Act of 1926, 44 Stat. 9, 19, 26 U.S.C.A. Int.Rev. Acts, page 158, provides:
"* * * In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 204 the property received has * * * the same basis in whole or in part in his hands as the property exchanged. * * *"
Section 204, 26 U.S.C.A. Int.Rev. Acts, page 151, provides it shall have the same basis if acquired in the manner described in subdivision (b), (d), (e), or (f) of section 203.
Subdivision (b)(2) of section 203, 26 U.S.C.A. Int.Rev. Acts, page 148, on which plaintiffs rely, deals with a case where "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."
Under these sections plaintiffs can add to the period plaintiff S.H. Berch had held the Western Dairy Products stock the period he had held other stock if, pursuant to a plan of reorganization, he exchanged this other stock for the Western Dairy Products stock.
The facts relative to his acquisition of the latter stock are these: Prior to August 3, 1925, the Crystal Investment Company had owned all of the stock of both the Velvet Ice Cream Company and the Seattle Ice Cream Company. Eighty percent of the stock of the Crystal Investment Company was owned by Kassel and Rebecca Gottstein Company, J.L. Gottstein, F.V. Fisher, and Associated Dairies, Inc. The other 20 percent was owned by the Berch Ice Cream Company, all of whose stock in turn was owned by S.H. Berch.
In July of 1925 S.H. Berch entered into an oral agreement with the other stockholders of the Crystal Investment Company to sell all the stock of the Velvet and Seattle ice cream companies, subsidiaries of the Crystal Investment Company, both his stock and theirs, for $1,250,000. Later, on August 3, 1925, Spencer Trask Company, New York bankers, were given an option to purchase all of the stock of the Seattle Ice Cream Company and Velvet Ice Cream Company for $1,250,000. On the same date the plaintiff S.H. Berch entered into a separate agreement with Spencer Trask Company, whereby he was to receive for his interest in the Seattle Ice Cream Company and the Velvet Ice Cream Company, held through the Berch Ice Cream Company and the Crystal Investment Company, not cash, but stock in the new company to be organized, to which the stock in the Seattle Ice Cream Company and the Velvet Ice Cream Company was to be transferred.
The option was exercised. The Crystal Investment Company was dissolved and its stock in the Velvet and Seattle ice cream companies was distributed to its stockholders. All of it, except that held by plaintiff, was transferred to Spencer Trask Company for $1,000,000. The Berch Ice Cream Company was also dissolved, Berch receiving for his stock therein 20 percent of the stock of the Velvet Ice Cream Company and the Seattle Ice Cream Company.
From August 5, 1925, to October 8, 1925, all of the stock of the Velvet and Seattle companies was owned by plaintiff and Spencer Trask Co., and all of this stock was transferred to the Western Dairy Products Company, organized on October 1, 1925, in return for stock of that company.
Plaintiffs are clearly entitled to tack on to the period S.H. Berch had held the Western Dairy Products Company stock the period he had held the stock of the Velvet and Seattle ice cream companies, as the Commissioner of Internal Revenue concedes, but this does not give them the necessary two years. In their petitions and briefs they treat the Berch Ice Cream Company stock and the stock in the Seattle and Velvet ice cream companies as one and the same, and claim the right to tack on the period S.H. Berch had held the Berch Ice Cream Company stock, although this stock was not exchanged for the Western Dairy Products stock.
Corporate entities cannot be so completely ignored. Plaintiff S.H. Berch did not acquire the Velvet and Seattle ice cream companies' stock until August 5, 1925; prior thereto this stock was owned by the Crystal Investment Company; nor did plaintiff S.H. Berch own any of the stock of the Crystal Investment Company. Eighty per cent of it was owned by J.L. Gottstein, Kassel and Rebecca Gottstein Company, F.V. Fisher, and Associated Dairies, Inc.; the other 20 per cent was owned not by plaintiff Berch, but by the Berch Ice Cream Company. We cannot ignore the corporate existence of the Berch Ice Cream Company and the Crystal Investment Company and treat plaintiff as the owner, prior to the liquidation of these two companies, of the stock of the subsidiaries.
Plaintiff S.H. Berch acquired the Velvet and Seattle ice cream companies' stock as a result of the liquidation of the Berch Ice Cream Company and the Crystal Investment Company. By the liquidation of the Berch Ice Cream Company he exchanged his stock in that Company for 20 per cent of the stock in the Crystal Investment Company, and by the liquidation of the Crystal Investment Company he exchanged his 20 per cent of the stock in that company for 20 percent of the stock in the Velvet and Seattle ice cream companies.
If these two exchanges of stock in liquidation come within the provisions of subdivision (b)(2) of section 203, supra, it may be that plaintiffs can add to the period S.H. Berch held the Western Dairy Products stock the period he held the Velvet and Seattle ice cream companies' stock, plus the period he had held the Berch Ice Cream Company stock.
The Commissioner of Internal Revenue says the liquidation of neither the Berch Ice Cream Company nor the Crystal Investment Company comes within the provisions of the section because neither company was a party to the reorganization, and that, therefore, plaintiffs cannot tack on to the period S.H. Berch held the Western Dairy Products' stock the period he had held the stock in the Berch Ice Cream Company. He says their dissolution were not steps in the plan of reorganization. This is the issue.
Spencer Trask Company desired to establish a dairy products company which would handle ice cream and other dairy products throughout the Pacific Coast. To carry out this plan it decided to acquire the stock in the Velvet Ice Cream Company and the Seattle Ice Cream Company, two companies manufacturing ice cream in Seattle, Washington. As stated, all of the stock of these two companies was owned by the Crystal Investment Company. Some of the stockholders of the Crystal Investment Company wanted cash for their indirect interest in the Velvet and Seattle companies and plaintiff Berch wanted stock in the new corporation to be organized. Therefore, the most convenient thing to do appeared to be to liquidate the Crystal Investment Company and to transfer to its stockholders the stock it held in the Velvet and Seattle companies. This was done. Spencer Trask Company then paid cash to those stockholders who wanted cash for their holdings, and issued stock in the newly organized corporation to plaintiff Berch who wanted this stock.
Plaintiff Berch held his stock in the Crystal Investment Company through the medium of the Berch Ice Cream Company. The stock in the newly organized company could have been issued to the Berch Ice Cream Company in exchange for its holdings in the Velvet and Seattle companies acquired through the liquidation of the Crystal Investment Company, and plaintiff Berch would have owned the stock in the newly organized company through the medium of the Berch Ice Cream Company just as he had owned the stock in the Crystal Investment Company through the medium of the Berch Ice Cream Company. The plan of reorganization, therefore, did not require the dissolution of the Berch Ice Cream Company; its dissolution was a purely voluntary act on the part of plaintiff Berch, not necessitated by the plan of reorganization.
This being true, it does not seem that its dissolution and the transfer of its holdings to plaintiff Berch come within the provisions of section 203(b)(2) relied upon by plaintiffs.
The Berch Ice Cream Company was not a party to the plan of reorganization.
Had there been no plan of reorganization and plaintiff Berch had chosen on his own motion to dissolve the Berch Ice Cream Company and have it transfer to him its stock in the Crystal Investment Company, or the stock in the Velvet and Seattle ice cream companies acquired on dissolution of the Crystal Investment Company, it could hardly be said that such a transaction did not come within the provisions of section 201 of the Act, 26 U.S.C.A. Int.Rev. Acts, page 146, which provides for the taxation of the gain incident to the distribution of the assets of a corporation on liquidation. If this is so, we see no reason why the gain should not be subject to tax merely because this company was dissolved at the same time that a plan of reorganization was being carried out, its dissolution not being a necessary step toward the consummation of that plan.
Plaintiffs, conceding that section 203(b)(2) is applicable only if the dissolution of the company was a necessary step toward the consummation of the plan of reorganization (R. 34), undertake to show that it was a step in the plan because required by the provision of the contract prohibiting the individuals indirectly owning stock in the Velvet and Seattle companies from engaging in the ice cream business individually in the State of Washington for five years or from becoming an officer or stockholder in a corporation "engaged primarily in the manufacture or wholesaling of ice cream." But plaintiff Berch's ownership of stock in the Berch Ice Cream Company did not violate that provision of the contract because that company was only a holding company and had not been engaged in the business of manufacturing or wholesaling of ice cream for a number of years. So long as it did not do so this provision of the contract was not violated, notwithstanding plaintiff Berch's ownership of stock in it.
The dissolution of the Berch Ice Cream Company was not a necessary step in the plan of reorganization.
The Board of Tax Appeals (now the Tax Court) arrived at the same result in a case involving the sale of this Western Dairy Products stock in a later year. It said that the only agreement to which the Berch Ice Cream Company was a party was an agreement to sell, and that it was not a party to the agreement of the plaintiff Berch to take stock in the newly organized corporation. Plaintiffs in their briefs in this court criticize this holding and say that Berch's individual agreement to take stock in the new company was necessarily made on behalf of the Berch Ice Cream Company. Suppose this is true; in that event the Western Dairy Products Company's stock would have been issued to the Berch Ice Cream Company. If the matter had stopped there, it is probable that no gain or loss would have been recognized; but it would not have stopped there. Berch wanted to acquire the stock in his own name. To do so he would have had to liquidate the Berch Ice Cream Company, as he actually did. We are unable to see why the gain realized from such a liquidation would not be subject to the tax, since it was not a step pursuant to the plan of reorganization, but a step beyond it. The plan of reorganization was complete when the stock in the Velvet and Seattle ice cream companies was transferred to the Western Dairy Products Company and the required amount of the stock of the latter company was transferred to the Berch Ice Cream Company.
The liquidation of the Berch Ice Cream Company not being a part of the plan of reorganization, it does not come within the exceptions to section 201(c) of the Revenue Act of 1924, 43 Stat. 253, 255, 26 U.S.C.A. Int.Rev. Acts, page 3, which provides for the taxation of the gain derived on liquidation. It reads:
"(c) 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. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. * * *"
Since the transaction was not within the exceptions stated in section 203, 26 U.S.C.A. Int.Rev. Acts, page 4, the period of holding of the stock received on liquidation cannot be tacked on to the period the Western Dairy Products' stock was held.
This holding is in accord with an agreement between the parties with reference to the year 1925. The Commissioner of Internal Revenue in auditing plaintiffs' returns for that year ruled that the liquidation of the Berch Ice Cream Company and of the Crystal Investment Company was taxable, and assessed Mrs. Berch with additional taxes of $8,656.43, and found an overassessment of $3,031.04 against S.H. Berch. Both parties acquiesced in the Commissioner's action.
Plaintiffs rely on a decision of the 2nd Circuit Court of Appeals in Helvering v. Schoellkopf, 100 F.2d 415, to support their statements that if the liquidation of the Berch Ice Cream Company was a necessary step in the plan of reorganization it would be nontaxable. This is conceded. Sections 201 and 203 so provide. Our holding is based upon our opinion that it was not a necessary step.
2. Plaintiffs' alternative proposition is: "If the liquidation of the Crystal Investment Company and the Berch Ice Cream Company in 1925 constituted a taxable transaction, then the value of the stock received in liquidation, which was exchanged for Class A and Class B stock of the Western Dairy Products Company, becomes the basis for determining gain or loss in the subsequent sale of said stock."
Plaintiffs are in no position to rely upon this ground because their claims for refund were based wholly on the ground that the profit as computed upon the valuation fixed by the Revenue Agent was taxable as a capital net gain instead of as ordinary income. In their claims they did not rely upon this alternative ground. This ground was first advanced on September 20, 1939, in a communication addressed to the Commissioner of Internal Revenue. This reads:
"Furthermore, we call your attention to the fact that the Class `B' stock of the Western Dairy Products Company which you have valued at 50¢ a share for the purpose of determining gain or loss had an actual value at the time of the exchange in 1925 of approximately $10.00 a share. The value of 50¢ per share was an arbitrary value fixed by the underwriters but the first sales of this stock in 1925 ranged from $5.00 to $10.00 a share. Consequently, the amount of $125,366.98 representing profit from the sale of this stock, as shown in your report, is overstated. If it is finally determined that the liquidation of the Berch Ice Cream Company in 1925 was not a part of the plan of reorganization, and constituted a taxable transaction, then the basis for determining gain or loss on subsequent sale of the stock received is the fair market value of the Class `B' stock of the Western Dairy Products Company, which ranged from $5.00 to $10.00 a share, and the arbitrary value of 50¢ per share cannot be used as a base. Full facts and information regarding the value of this Class `B' stock has previously been submitted to the Department and is on file in your office."
Plainly, this has no reference whatever to plaintiffs' position as set forth in their claims for refund and cannot be considered as an amendment thereof. When this communication was filed the statute had long since run and, therefore, plaintiffs are in no position to rely upon this ground. Wrightsman Petroleum Co. v. United States, 35 F. Supp. 86, 92 Ct.Cl. 217, certiorari denied, 313 U.S. 578, 61 S.Ct. 1095, 85 L.Ed. 1535; Hanna Furnace Corp. v. United States, 31 F. Supp. 136, 90 Ct.Cl. 439; United States v. Henry Prentiss Co., 288 U.S. 73, 53 S.Ct. 283, 77 L.Ed. 626; United States v. Factors Finance Co., 288 U.S. 89, 53 S.Ct. 287, 77 L.Ed. 633.
But aside from the bar of the statute, we do not think plaintiffs are entitled to recover. Plaintiffs say that if the liquidation of the Berch Ice Cream Company and the Crystal Investment Company was taxable, they have a right in determining the gain from the sale of the Western Dairy Products Company stock to use as a basis the value of the stock of the Velvet and Seattle ice cream companies at the time it was received in liquidation and that this value was $670,000; but plaintiffs agreed on the settlement of their tax liability for 1925 upon the basis of a valuation of $258,000 for this stock, and they are, therefore, in no position now to say that the value of this stock was $670,000. If its actual value was $670,000, as now claimed, plaintiffs' tax liability for 1925 would have been much greater than that assessed, but the statute against the assessment of additional taxes for this year has now run. Plaintiffs cannot take a position which is to their advantage in one year, and then change their position in a later year when they find it to their advantage to do so. Alamo National Bank v. Commissioner, 5 Cir., 95 F.2d 622, 623, certiorari denied, 304 U.S. 577, 58 S.Ct. 1047, 82 L.Ed. 1541; Naumkeag Steam Cotton Co. v. United States, 2 F. Supp. 126, 76 Ct.Cl. 687, certiorari denied, 289 U.S. 749, 53 S.Ct. 694, 77 L.Ed. 1495; R.H. Stearns Co. v. United States, 2 F. Supp. 773, 77 Ct.Cl. 264, affirmed 291 U.S. 54, 54 S.Ct 325, 78 L.Ed. 647; Daube v. United States, 5 F. Supp. 769, 78 Ct.Cl. 754.
Plaintiffs are not entitled to recover on either ground set forth in their petitions. Their petitions, therefore, must be dismissed. It is so ordered.
JONES, Judge, took no part in the decision of this case.