Opinion
Docket Nos. 15101 15102.
1949-01-31
RICHARD K. MELLON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.SARAH MELLON SCAIFE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William M. Robinson, Esq., Joseph D. Hughes, Esq., D. A. Banks, Esq., and William Wallace Booth, Esq., for the petitioners. Stanley L. Drexler, Esq., for the respondent.
Pursuant to agreement between Standard and Pullman, Standard on March 1, 1930, transferred approximately 66 per cent in value of its assets to New Standard, a newly organized subsidiary of Pullman. The latter, in consideration of such transfer, issued 560,000 shares of its common stock and paid $6,067,848.34 in cash to Standard, which stock and cash were distributed by Standard to its shareholders in redemption of their shares, whereupon Standard dissolved. In anticipation of the above transfer, Standard on February 8, 1930, transferred approximately 34 per cent in value of its assets to Securities Co. organized by it, and distributed the shares of that company received by it therefor pro rata to its shareholders without surrender of their Standard shares. The Commissioner had knowledge of the transactions and he and taxpayers thought the transactions between Standard, Pullman, and New Standard resulted in a nontaxable reorganization except to the extent of the cash received. Held:
(1) The transaction in 1930 between Standard, Pullman, and New Standard did not constitute a tax-free reorganization under section 112 of the Revenue Act of 1928.
(2) The taxpayers are not estopped from using the proper statutory basis in computing gain or loss on the sale of Pullman stock distributed by Standard in 1930 and sold by taxpayers in the taxable years. William M. Robinson, Esq., Joseph D. Hughes, Esq., D. A. Banks, Esq., and William Wallace Booth, Esq., for the petitioners. Stanley L. Drexler, Esq., for the respondent.
The Commissioner determined income and victory tax deficiencies as follows:
+---+ ¦¦¦¦¦ +---+
Docket No. Docket No. Year Tax 15101 15102 1941 Income tax $352,620.68 $357,047.89 1943 Income and victory tax 333,753.06 164,392.62
The question involved is whether certain transactions in 1930 constituted a nontaxable reorganization under the applicable revenue act for the purpose of determining the basis of shares of certain stock sold by petitioners in 1941, 1942, and 1943.
The cases were presented on a stipulation of facts and documentary evidence.
FINDINGS OF FACT.
Petitioners Richard K. Mellon and Sarah Mellon Scaife are brother and sister. Each petitioner maintains a business office at 525 William Penn Place, Pittsburgh, Pennsylvania. Their Federal income tax returns for the periods here involved were filed with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburg, Pennsylvania.
On June 13, 1941, petitioner Richard K. Mellon sold 44,800 shares of common stock of Pullman Inc. (hereinafter called Pullman) for a net consideration of $1,299,200 and petitioner Sarah Mellon Scaife sold 46,102 shares of said stock for a net consideration of $1,336,958.
In his income tax return for the calendar year 1941, petitioner Richard K. Mellon reported such sale, using as a basis $3,698,000 (being $82.50 per share) and claimed a long term capital loss in the amount of $2,396,800, of which 50 percent, or $1,198,400, was taken into account. Respondent reduced the basis from $82.50 per share to $30.668 per share, reduced to $37,363.20 the amount of the long term capital loss to be taken into account, and disallowed the difference of $1,161,036.80.
In her income tax return for 1941, petitioner Sarah Mellon Scaife reported the sale of her 46,102 shares, using as a basis $3,803,415 (being $82.50 per share), and claimed a long term capital loss in the amount of $2,466,457 of which 50 percent, or $1,233,228.50, was taken into account. Respondent reduced the basis from $82.50 per share to $30.668 per share, reduced to $38,449.07 the amount of the long term capital loss to be taken into account, and disallowed the difference of $1,194,779.43.
At various times in 1942, petitioner Richard K. Mellon sold 25,500 shares and petitioner Sarah Mellon Scaife sold 8,600 shares of the common stock of Pullman for net considerations of $705,068.28 and $224,813.91, respectively. The foregoing amounts do not include certain sales of Pullman stock the basis of which has not been disturbed by respondent.
In his income tax return for the year 1942, petitioner Richard K. Mellon reported sales of his 25,500 shares, using as a basis $2,103,750 (being $82.50 per share) and claimed a long term capital loss of $1,398,681.75, of which 50 per cent, or $699,340.86, was taken into account. Respondent reduced the basis from $82.50 to $30.668 per share, reduced to $38,482.86 the amount of the long term capital loss to be taken into account, and disallowed the difference of $660,858.
In her income tax return for the year 1942, petitioner Sarah Mellon Scaife reported sales of her 8,600 shares, using as a basis $709,500 (being $82.50 per share) and claimed a long term capital loss in the amount of $484,686.09, of which 50 percent, or $242,343.04, was taken into account. Respondent reduced the basis from $82.50 to $30.668 per share, reduced to $19,465.44 the amount of the long term capital loss to be taken into account, and disallowed the difference of $222,877.60.
At various times in 1943, petitioner Sarah Mellon Scaife sold an aggregate of 14,400 shares of common stock of Pullman for a net consideration of $430,312.27.
In her income tax return for the year 1943, petitioner Sarah Mellon Scaife reported such sales, using as a basis $1,188,000 (being $82.50 per share) and claimed a long term capital loss in the amount of $757,687.73, of which 50 per cent, or $378,843.87, was taken into account. Respondent reduced the basis from $82.50 to $30.668 per share, reduced to $5,663.46 the amount of the long term capital loss to be taken into account, and disallowed the difference of $373,180.41.
On March 1, 1930, petitioner Richard K. Mellon was the owner of 2,000 shares and petitioner Sarah Mellon Scaife was the owner of 1,000 shares of the common stock of Standard Steel Car Co. (hereinafter called Standard).
On March 1, 1930, the Union Trust Co. of Pittsburgh, trustee under agreement of trust of Richard B. Mellon, dated December 7, 1926, for the benefit of petitioner Richard K. Mellon, was the owner of 45,845 shares of common stock of Standard and, as trustee under a similar agreement of trust for the benefit of petitioner Sarah Mellon Scaife, was the owner of 45,845 shares of such stock.
Standard was incorporated January 2, 1902, under the laws of Pennsylvania. At all times relevant hereto, the issued and outstanding capital stock of Standard consisted of 280,000 shares of common stock having a par value of $100 per share. From incorporation and until the disposition of its assets in 1930, Standard was engaged directly and through various subsidiaries in the manufacture of railway freight and passenger cars and parts and in carrying on other business incidental thereto, including the leasing of such equipment to various domestic and foreign private and governmental carriers, and financing the purchases thereof.
The assets of Standard, until the disposition thereof in 1930, consisted of various freight and passenger car building plants and equipment, coal properties, a hotel, inventories, accounts receivable, cash, and various securities consisting of notes of domestic and foreign railroads, notes and stocks of corporations other than subsidiaries, and all of the issued and outstanding stocks of approximately twelve subsidiaries, all of which were engaged in carrying on business similar or incidental to that carried on by Standard.
Pullman was incorporated June 21, 1927, under the laws of the State of Delaware, with an authorized capital of 3,375,000 shares of no par value common stock, increased on January 28, 1930, to 3,875,000 shares. At all times relevant hereto, Pullman owned more than 99 per cent of the outstanding stock of the Pullman Co. (engaged in the operation of sleeping and parlor cars and other railroad services) and 100 per cent of the outstanding capital stock of Pullman Car & Manufacturing Co. (engaged in the manufacture and repair of all kinds of railroad cars including sleeping and parlor cars). At all times relevant hereto, Pullman was a holding company and not an operating company. Pullman did not directly own any manufacturing plants or other assets necessary for or incidental to the operation thereof. The total assets of Pullman (not including any assets of subsidiaries) as of December 31, 1929, were as follows:
+------------------------------------------------------------------------+ ¦Investments in subsidiaries: ¦ ¦ ¦ +-----------------------------------------+--------------+---------------¦ ¦Pullman Co ¦ ¦$215,751,768.50¦ +-----------------------------------------+--------------+---------------¦ ¦Pullman Car & Mfg. Corporation of Ill ¦ ¦53,969,149.28 ¦ +-----------------------------------------+--------------+---------------¦ ¦Pullman Car & Mfg. Corporation of Ala ¦ ¦2,000.00 ¦ +-----------------------------------------+--------------+---------------¦ ¦Furniture and fixtures ¦ ¦2,957.45 ¦ +-----------------------------------------+--------------+---------------¦ ¦Organization expense ¦ ¦8,470.89 ¦ +-----------------------------------------+--------------+---------------¦ ¦Cash in bank ¦ ¦490,499.77 ¦ +-----------------------------------------+--------------+---------------¦ ¦Accounts receivable ¦ ¦4,988,480.81 ¦ +-----------------------------------------+--------------+---------------¦ ¦Stocks, bonds, and equipment trust notes:¦ ¦ ¦ +-----------------------------------------+--------------+---------------¦ ¦United States Government bonds ¦$10,255,000.62¦ ¦ +-----------------------------------------+--------------+---------------¦ ¦Miscellaneous stocks and bonds ¦4,453,375.88 ¦ ¦ +-----------------------------------------+--------------+---------------¦ ¦Equipment trust notes ¦1,787,294.76 ¦ ¦ +-----------------------------------------+--------------+---------------¦ ¦Stock, Pullman Inc. (114,528 shares) ¦9,283,496.06 ¦ ¦ +-----------------------------------------+--------------+---------------¦ ¦ ¦ ¦25,779,167.32 ¦ +-----------------------------------------+--------------+---------------¦ ¦Total ¦ ¦300,992,494.02 ¦ +------------------------------------------------------------------------+
In the summer of 1929, representative of Pullman commenced negotiations with representatives of Standard with a view to the acquisition by Pullman, or one or more of its subsidiary companies already existing or to be organized, of a portion of the assets of Standard and of certain of Standard's subsidiaries (hereinafter referred to as ‘wanted assets‘). Such wanted assets consisted principally of inventories, work in process, accounts receivable, plants, and equipment owned and used by Standard and of certain of its subsidiary companies in the car-building business. Pullman did not desire to acquire certain assets of Standard and of certain of its subsidiary companies, such as corporate stocks and notes, car trust notes, and notes and debentures of domestic and foreign railroad and car-owning companies and financing commitments (hereinafter referred to as ‘unwanted assets‘).
During the month of December 1929, representatives of Pullman submitted to representatives of Standard a tentative proposal for the acquisition of that portion of the wanted assets of Standard and certain of its subsidiaries, consisting of so-called ‘Fixed Assets,‘ in exchange for stock of Pullman and also for the acquisition of that portion of the wanted assets, consisting of inventories, work in process, and current receivables in exchange for cash, United States Government bonds, or stock of Pullman at its cash equivalent. It also was tentatively proposed that certain of the unwanted assets of Standard and certain of its subsidiaries be taken over under guaranty of Standard or for liquidation for its account.
The tentative proposal was unacceptable to representatives of Standard, who insisted that the unwanted assets be included in the proposed transaction at values to be mutually agreed upon and without guaranty by Standard. Representatives of Pullman determined that unless the unwanted assets were eliminated from the proposed transaction the tentative proposal would be withdrawn. After further consideration, representatives of Standard agreed to the elimination of the unwanted assets.
The executive committee of Pullman at a meeting held on December 13, 1929, considered and approved a tentative plan for the acquisition of the wanted assets of Standard and certain of its subsidiaries through the instrumentality of a subsidiary to be organized, and authorized the president of Pullman to initial and exchange copies of the tentative plan with representatives of Standard.
The board of directors of Pullman, at a meeting held on December 19, 1929, approved the proposed acquisition of the wanted assets of Standard and of certain of its subsidiaries theretofore approved by the executive committee. The board also authorized the president to cause a new corporation to be organized under the name of Standard Steel Car Corporation having such authorized capital stock as in his judgment might be necessary and convenient for acquiring and operating the properties to be acquired by Pullman or one or more of its subsidiaries from Standard.
On January 9, 1930, Standard called a special meeting of its stockholders to be held on January 28, 1930, for the purpose of considering and voting upon plans approved by the directors, including, among other things, the following: The transfer of certain of the assets owned by Standard and its subsidiaries, which Pullman did not want (unwanted assets) to a new subsidiary to be organized by Standard in exchange for all the capital stock of the new subsidiary; the transfer of other assets of Standard and its subsidiaries (wanted assets) to a new subsidiary or subsidiaries to be organized by Pullman in exchange for common stock of Pullman and cash; the distribution of the stocks and cash to be received as considerations for the above transfers to the stockholders of Standard in complete cancellation and redemption of the stock of Standard; and the dissolution of Standard.
On January 24, 1930, Standard caused the incorporation under the laws of the State of Delaware of Standard Car Securities Co. (hereinafter referred to as Securities Co.); with an authorized capital consisting of 280,000 shares of common stock without par value.
At the special meeting of the stockholders of Standard held on January 28, 1930, the plan of reorganization with Securities Co. was adopted. The transfer of all the assets of eight of the subsidiaries of Standard in complete liquidation thereof to Standard as the owner of all of their stock was also approved. No action was taken with respect to the transfer of the wanted assets to Pullman. The meeting was adjourned to February 11, 1930.
By letter dated January 28, 1930, Standard offered to enter into a plan of reorganization with Securities Co. which the latter accepted on January 29, 1930.
In the annual report of the president to the stockholders of Standard for the year 1929, dated February 3, 1930, he stated, in part, as follows:
The stockholders of your Company at their special meeting held on January 28, 1930, authorized the exchange of certain property, securities, and assets of your Company for all of the shares of Capital Stock of Standard Car Securities Company, a corporation of the State of Delaware. After the consummation of that transaction there will be distributed to the stockholders of your Company the shares of stock of Standard Car Securities Company so that each stockholder in your Company will receive for each share of stock held by him one share of stock of Standard Car Securities Company. At their said meeting the stockholders also authorized the liquidation of certain of your Company's subsidiary corporations and the distribution of their respective properties and assets to your Company.
Negotiations are now being carried on with the officers of Pullman Incorporated whereby it is contemplated that a reorganization and consolidation will be effected between your Company and Pullman Incorporated. These negotiations will not be concluded, however, until after the distribution to the stockholders of your Company of the stock of Standard Car Securities Company, as above stated. If the negotiations with Pullman Incorporated concerning the said reorganization and consolidation are consummated and approved by the directors and stockholders of your Company, your Company will transfer to Pullman Incorporated, or in accordance with its directions, all or substantially all of the property and assets of your Company in exchange for shares of stock of Pullman Incorporated and cash or United States Government securities.
Some of these transactions have already been explained to and acted upon by the stockholders of your Company and the others will be submitted to the stockholders for their approval at the adjourned special meeting of the stockholders of your Company to be held on February 11, 1930.
Standard transferred on February 8, 1930, to Securities Co. the unwanted assets, consisting of cash in the sum of $519,090.73, government and corporate bonds, notes and common and preferred stocks of certain corporations, all of the outstanding stock of two of its subsidiary companies, amounts due for advances to one subsidiary company and miscellaneous assets, all having an aggregate book value of $24,698,535.15 and an aggregate market value of $29,971.735.57; and Securities Co. assumed certain liabilities of Standard. In exchange for such net assets, Securities Co. issued all of its outstanding 280,000 shares of capital stock to Standard.
On February 10, 1930, all of the 280,000 shares of stock of Securities Co. were distributed by Standard pro rata share for share to the stockholders of Standard without the surrender by such stockholders of their shares of Standard stock.
At the adjourned special meeting of the stockholders on February 11, 1930, Standard was authorized to:
* * * enter into a plan of reorganization with Pullman Incorporated whereby this Company shall exchange substantially all of the property and assets of whatsoever description owned by this Company at the time of such exchange for shares of stock of Pullman Incorporated, or, in lieu of a portion of such stock, cash and/or United States Government Bonds at their market value.
A resolution provided for the winding up and dissolution of Standard after the completion of the above exchange was also adopted.
On February 18, 1930, representatives of Standard and representatives of Pullman met at Pittsburgh and executed an agreement which provided in part as follows:
WHEREAS, Standard owns all of the shares of capital stock of the following named companies (hereinafter for convenience referred to collectively as ‘Standard's American Subsidiaries‘): and
WHEREAS, Standard owns, directly or indirectly, all of the shares of capital stock of Middletown Car Company, a corporation of the state of Pennsylvania, and all of the share capital of Societe Anonyme des Enterprises Industrielles Charentaises, a French corporation, (hereinafter for convenience referred to collectively as ‘Standard's Foreign Subsidiaries‘); and
WHEREAS, Standard also owns all of the shares of capital stock of Lyndora Land and Improvement Company, a corporation of the State of Pennsylvania; and
WHEREAS, Standard proposes to cause Standard's American Subsidiaries to be liquidated and their assets distributed to Standard, as the owner of all of the shares of stock of Standard's American Subsidiaries; and
WHEREAS, Standard has heretofore, and in pursuance of a plan of reorganization entered into with Standard Car Securities Company, a corporation of the State of Delaware, transferred certain property, securities, and assets to said Standard Car Securities Company in exchange for all of the shares of capital stock of that Company, which said shares of stock have heretofore been distributed to the stockholders of Standard pro rata; and
WHEREAS, Standard and Pullman propose to enter into and become parties to a plan of reorganization and consolidation whereby Standard will exchange substantially all of its property and assets (including the property and assets of Standard's American Subsidiaries distributed in liquidation of said companies to Standard) for shares of stock of Pullman or in lieu of a portion of such shares of stock and at Pullman's option cash and/or United States Government Bonds; and
WHEREAS, in pursuance of the said plan of reorganization and consolidation, Pullman may cause to be organized a corporation to be known as ‘Standard Steel Car Corporation,‘ all of the shares of capital stock whereof will be owned by Pullman;
NOW, THEREFORE, in consideration of the premises and the stipulations, covenants and agreements hereinafter set forth faithfully to be kept and performed, it is stipulated, covenanted and agreed by and between the parties hereto, as follows:
2. For the considerations in paragraph 3 hereof nominated, Standard covenants and agrees to convey and assign, or cause to be conveyed and assigned; to Pullman, on the Closing Date, the following described real and personal property:
3. For and in consideration of the conveyance and assignments of the property, real and personal, described in paragraph 2 thereof, and on the Closing Date, upon the receipt of said conveyances and assignments, Pullman covenants and agrees to pay, transfer, and deliver to Standard the following described shares of stock and cash or its equivalent, and to do and perform or cause to be done and performed, the following things:
5. While the various items of real and personal property which are to be conveyed and assigned in pursuance hereof are separately enumerated and the prices to be paid therefor to some extent divided among the various items, it is understood and agreed by the parties hereto that the real and personal property to be conveyed and assigned are to be conveyed and assigned as a whole in exchange for the shares of stock and cash or its equivalent which are to be transferred and paid as a whole on the Closing Date.
15. * * *
Standard further covenants and agrees that it will transfer or cause to be transferred all tangible personal property and good will, intended to be transferred to and acquired by Pullman hereunder, by good and sufficient bills of sale, that it will assign or cause to be assigned all contracts and patents intended to be assigned to Pullman hereunder, by good and sufficient instruments of assignment, subject, however, to the terms and conditions of such contracts, that it will assign or cause to be assigned all shares of stock and other securities, intended to be transferred to and acquired by Pullman hereunder, by good and sufficient assignments, and that it will pay or cause to be paid all stamp taxes incident to said instruments of conveyance, transfer and/or assignment.
19. It is stipulated and agreed by and between the parties hereto that details in respect of the performance of this agreement may from time to time prior to the Closing Date be modified by a supplemental agreement or supplemental agreements to be signed by William Bierman, representing Standard, and D. A. Crawford, representing Pullman; provided, however, that the amount of the property and assets to be conveyed and assigned by Standard and the amount of the consideration therefor to be paid and delivered by Pullman shall not be substantially altered.
Simultaneously with the execution of the foregoing agreement, Pullman delivered to Standard a letter authorizing and directing Standard to make the deeds and instruments of transfer for conveyance of the wanted assets to Standard Steel Car Corporation, a new subsidiary corporation to be organized by Pullman.
On February 24, 1930, Pullman caused the incorporation of a new subsidiary, Standard Steel Car Corporation (hereinafter referred to as ‘New Standard ‘) under the laws of Pennsylvania.
On March 1, 1930, representatives of Standard and of Pullman met at Pittsburgh, Pennsylvania, and executed an agreement supplemental to the agreement of February 18, 1930, wherein the closing date was fixed as of March 1, 1930; and also the number of shares of stock of Pullman and cash to be delivered by Pullman to Standard on the closing date, the latter being subject to further adjustment.
On March 1, 1930, Standard delivered various deeds; bills of sale and instruments of transfer, conveyance, and assignment for all the assets to be transferred pursuant to the agreement of February 18, 1930, and March 1, 1903. In all of such documents, New Standard was designated as the grantee, vendee, or transferee. Pullman acknowledged receipt thereof by written instrument.
The assets deeded, assigned, and conveyed by Standard to New Standard on March 1, 1930, had a total book value of $34,010,771.28 and a market value of $58,782,952.04. The transfer of the assets was made subject to the assumption of notes payable in the amount of $4,100,000 and current accounts receivable and miscellaneous liabilities in the amount of $1,647,903.70. The net consideration, namely $53,035,048.34, was received by Standard as follows:
+-----------------------------------------------------------------------------+ ¦March 1, 1930, cash on account ¦$4,964,720.00¦ +---------------------------------------------------------------+-------------¦ ¦March 1, 1930, 452,000 shares of stock of Pullman at an agreed ¦37,909,240.00¦ ¦value of $83.87 per share ¦ ¦ +---------------------------------------------------------------+-------------¦ ¦March 1, 1930, 96,000 shares of stock of Pullman at an agreed ¦8,051,520.00 ¦ ¦value of $83.87 per share ¦ ¦ +---------------------------------------------------------------+-------------¦ ¦March 7, 1930, 12,000 shares of stock of Pullman at an agreed ¦1,006,440.00 ¦ ¦value of $83.87 per share ¦ ¦ +---------------------------------------------------------------+-------------¦ ¦April 18, 1930, cash on account ¦1,000,000.00 ¦ +---------------------------------------------------------------+-------------¦ ¦January 20, 1931, cash in full ¦103,128.34 ¦ +---------------------------------------------------------------+-------------¦ ¦Total ¦53,035,048.34¦ +-----------------------------------------------------------------------------+
On March 1, 1930, Pullman delivered to Standard certificates for 548,000 shares of common stock of Pullman and a check for $4,964,720. On March 7, 1930, Pullman delivered to Standard 12,000 additional shares of common stock of Pullman, making a total delivery of 560,000 shares.
On March 26, 1930, Standard distributed to its stockholders 560,000 shares of common stock of Pullman and $3,360,000 in cash as the first of a series of distributions in complete liquidation; on April 22, 1930, Standard distributed to its stockholders $2,240,000 in cash as the second of such series of distributions in complete liquidation; and on February 10, 1931, Standard distributed to its stockholders $614,320 in cash as the third and final distribution in complete liquidation and in complete cancellation and redemption of all of its outstanding stock.
Petitioner Richard K. Mellon, as the owner of 2,000 shares of stock of Standard, received, as his pro rata share of such distributions, 4,000 shares of common stock of Pullman on March 26, 1930, and also his pro rata share of cash. On or about February 10, 1931, he surrendered the 2,000 shares of stock of Standard for cancellation and redemption. The Union Trust Co. of Pittsburgh, trustee for petitioner, as the owner of 45,845 shares of stock of Standard, received as its pro rata share 91,690 shares of common stock of Pullman on March 26, 1930, and also its pro rata share of cash. On or about February 10, 1931, the trustee surrendered the 45,845 shares of stock of Standard for cancellation and redemption. On December 7, 1936, the trust established for petitioner under the agreement of trust dated December 7, 1926, terminated and the trustee distributed to petitioner all of the assets of the trust, including 91,690 shares of common stock of Pullman acquired as hereinbefore stated.
Petitioner Sarah Mellon Scaife, as the owner of 1,000 shares of stock of Standard, received, as her pro rata share, 2,000 shares of common stock of Pullman on March 26, 1930, and also her pro rata share of cash. On or about February 10, 1931, she surrendered the 1,000 shares of stock of Standard for cancellation and redemption. The Union Trust Co. of Pittsburgh, trustee for petitioner, as the owner of 45,845 shares of stock of Standard, received, as its pro rata share, 91,690 shares of common stock of Pullman on March 26, 1930, and also its pro rata share of the cash. On or about February 10, 1931, the trustee surrendered the 45,845 shares of stock of Standard for cancellation and redemption. On December 7, 1936, the trust established petitioner under the agreement of trust dated December 7, 1926, terminated and the trustee distributed to petitioner all of the assets of the trust, including 91,960 shares of common stock of Pullman acquired as hereinbefore stated.
The average selling price of the common stock of Pullman on the New York Stock Exchange on March 26, 1930, was $82.0625 per share, being the average of the high, $82.50 and the low, $81.625.
All shares of common stock of Pullman sold by petitioners in the years 1941, 1942, and 1943 were a portion of the shares of that stock distributed by Standard on March 26, 1930.
Based upon fair market value, the assets transferred to Securities Co. and the assets transferred to New Standard represented 34.15429 per cent and 65.84571 per cent, respectively, of the total assets of Standard.
The transaction carried out on March 1, 1930, pursuant to the provisions of the agreement entered into February 18, 1930, was recorded on the books of Pullman in the following manner:
Two new accounts, designated ‘121-19 Standard Steel Car Company Purchase Account— Lands, Buildings and Equipment‘ and ‘121-17 Standard Steel Car Company Purchase Account— Net Current Assets,‘ were opened on the general ledger of Pullman as of March 1, 1930. Account No. 121-19 was debited as of March 1, 1930, with the amount of $37,909,240, being the fair market value of all of the so-called fixed properties transferred by Standard on March 1, 1930; the capital stock account was credited with $22,600,000, being the par value of 452,000 shares of stock of Pullman; and the paid-in surplus account was credited with $15,309,240, being the difference between the par value of 452,000 shares of stock of Pullman and the fair market value of the fixed properties as aforesaid. Account No. 121-17 was debited as of March 1, 1930, with cash in the sum of $4,964,720 and the amount of $9,057,960, being the value of 108,000 shares of common stock of Pullman at the agreed upon value of $83.87 per share. This account was also debited as of March 1, 1930, with cash in the amount of $1,000,000 paid to Standard on April 18, 1930, and also debited with the amount of $103,128.34 paid on January 20, 1931, and representing the balance of the total net consideration payable to Standard.
As of March 1, 1930, Pullman opened a new account on its general ledger designated ‘121-2B Stock, Standard Steel Car Corporation,‘ and as of the same date debited the account with the amount of $53,035,048.34; crediting account Nos. 121-19 and 121-17 with the amounts of $37,909,240 and $15,125,808.34, respectively, or a total of $53,035,048.34.
The books of New Standard recorded the aforementioned transaction in the following manner: Account No. ‘392 Pullman Incorporated‘ was debited in the amount of $57,332,338.88, and account No. ‘4800 Capital Stock-Common‘ was credited with the amount of $1,000,000 and account No. ‘491 Paid-in Surplus‘ was credited with the amount of $56,332,338.88. The aforesaid amount, $57,332,338.88, includes the amount of $53,035,048.34 referred to in the preceding paragraph.
New Standard caused the incorporation on February 24, 1930, under the laws of the State of Delaware of two new corporations; namely, Steel Car Forge Corporation and Richmond Car Corporation, and on February 26, 1930; proposed in writing to each of these new corporations that it would exchange certain assets to be received by it as of March 1, 1930, for all of the authorized capital stock of each of the new corporations.
As of March 1, 1930, New Standard transferred to Richmond Car Corporation assets having a market value of $2,049,723.16 and liabilities in the amount of $1,188.89 and to Steel Car Forge Corporation assets having a market value of $3,816,873.96 and liabilities in the amount of $35,205.61, in exchange for all of the authorized capital stock of each of those corporations.
As of March 1, 1930, at the request of Pullman, New Standard transferred to Osgood Bradley Car Corporation (a new subsidiary organized by Pullman, February 24, 1930) assets having a market value of $2,054.029.01 and liabilities of $2,458.76.
At all times material hereto, petitioners and the Union Trust Co. of Pittsburgh, trustee for petitioners, collectively owned 34.175 per cent of the outstanding capital stock of Standard, and, after the distribution by Standard on March 26, 1930, of shares of the common stock of Pullman, collectively owned 4.887225 per cent of the outstanding common stock of Pullman. The 560,000 shares of common stock of Pullman received by Standard on March 1, 1930, and distributed by Standard to its stockholders on March 26, 1930, represented 14.4516 per cent of the total outstanding common stock of Pullman.
At all times material hereto, petitioner Richard K. Mellon and Alan M. Scaife, husband of petitioner Sarah Mellon Scaife, were stockholders of Standard and members of its board of directors, and each attended all meetings of the board of directors and all meetings of the stockholders having to do with the disposition of assets of Standard. At the special meeting of the stockholders held on February 11, 1930, petitioner Richard K. Mellon and Alan M. Scaife voted in person the shares of stock of Standard owned by them and they were members of the proxy committee of three that voted 269,090 shares of stock of Standard. They continued as members of the board of directors of Standard Car Securities Co.
Under date of February 10, 1931, Standard addressed a circular letter to its stockholders setting forth, inter alia, the opinion of counsel for Standard with respect to the income tax liability of its stockholders in connection with receipt of the distributions of stocks and cash as a result of the transactions between Standard and Securities Co. and between Standard and Pullman.
Under date of March 30, 1931, counsel for petitioner Sarah Mellon Scaife addressed a letter to respondent requesting a ruling with respect to (1) whether or not any gain to petitioner was to be recognized as a result of the receipt by her from Standard of Pullman stock and cash and (2) whether or not the gain, if any, was taxable as a dividend or as a distribution in liquidation. Her counsel filed briefs and held conferences with representatives of respondent, who thereafter, by letter dated June 20, 1931, addressed to petitioner Sarah Mellon Scaife, advised her that the gain, if any, resulting from the receipt of shares of common stock of Pullman and cash distributed by Standard constituted capital gain, and the amount thereof to be recognized for income tax purposes should not be in excess of the amount of cash received.
By letter dated June 30, 1931, the acting Commissioner of Internal Revenue advised the internal revenue agent in charge at Pittsburgh, Pennsylvania, inter alia, as follows:
The Bureau has recently had occasion to consider the status for income tax purposes of the exchanges made in pursuance of the plan of reorganization carried out under the agreement dated February 18, 1930, whereby Pullman Incorporated (hereinafter referred to as Pullman) acquired substantially all the properties of the Standard Steel Car Company of Pittsburgh, Pennsylvania, (hereinafter referred to as Standard) in exchange for stock of the former and a sum in cash. As many of the participating stockholders no doubt reside in your district, the ruling herein is furnished for use in determining the tax liability of such stockholders as a result of the exchanges.
The three questions involved are as follows:
(1) Whether the acquisition by Pullman of the assets of Standard constitutes a reorganization under section 112(i) of the Revenue Act of 1928 and whether any gain is recognized to Standard under section 112(c)(1).
(2) Whether the stockholders of Standard exchanged their stock in that corporation for stock in Pullman and cash, and if so, whether under section 112(c)(1) gain on the exchange is recognized but in an amount not in excess of such cash; and
(3) Whether to the extent of earnings and profits accumulated after February 28, 1913, the distribution of cash by Standard had the effect of a taxable dividend under section 112(c)(2).
Since the transaction (acquisition by Pullman of assets of standard) meets the requirement of section 112(i) it must be considered to be a reorganization, and since Standard pursuant to the plan of reorganization exchanged property for stock of Pullman and cash and distributed such cash to its stockholders the transaction satisfies the requirements of section 112(d)(1) and no gain to Standard is recognized. The fact that the property was transferred by Standard to a nominee of Pullman does not affect the situation. (Tulsa Oxygen Co. v. Commissioner, 18 B.T.A. 1283.)
If Pullman stock only and no cash had been received and distributed by Standard to its stockholders in return for the surrender by the stockholders of their stock in Standard, the situation as affecting the stockholders would be within section 112(b)(3) and no gain would be recognized (G.C.M. 7472, C.B. IX-1, 184, 190). It follows, therefore, that since the exchange included cash the provisions of section 112(c)(1) govern, and gain is to be recognized but in an amount not in excess of the cash. This gain is subject to both normal tax and surtax or in lieu thereof, to tax as capital gain under section 101 of the Revenue Act of 1928 if the stock of Standard had been held for a period of more than two years.
The third question, however, presents a more difficult situation.
It is accordingly held that the distributions in liquidation of Standard did not have the effect of distributions of taxable dividends but that the entire amounts should be considered as having been received in exchange, with the limitation on gain as set forth in the discussion of the second point.
Petitioner Richard K. Mellon, in his income tax return filed for 1930, included in ‘Item 11— Other Income‘ the $40,000 cash distributed to him during that year by Standard, and attached to the return was a rider stating as follows:
Item #11— Liquidating Dividend (Other Income)
During the year 1930 the Standard Steel Car Company of Butler, Pa., of which the taxpayer was a stockholder, was merged with Pullman, Inc., stockholders of Standard Steel Co. receiving two shares of Pullman, Inc. for each share of Standard Steel Car Co. Certain assets of Standard Steel Car Co. were liquidated from which the taxpayer received the sum of $40,000.00 in cash, and which is reported under Item #11— Other Income.
Petitioner Sarah Mellon Scaife, in her income tax return filed for 1930, reported in ‘Item 11— Other Income‘ the $20,000 cash distributed to her during that year by Standard as a distribution in liquidation ‘of Certain Assets in merger with Pullman, Inc.‘
In the income tax returns filed for 1930 by the Union Trust Co. of Pittsburgh, trustee for each petitioner under separate agreements of trust of Richard B. Mellon, dated December 7, 1926, the $916,900 cash distributed to each trust by Standard during 1930 was included in ‘Schedule D— Capital Net Gain,‘ with the explanation: ‘45,845 Shrs. Standard Steel Car (Cash Distribution).‘
The Federal income tax return, Form 1120, filed by Standard for 1929 contained a statement which is in part as follows:
During the year 1930, Standard Steel Car Company entered into two reorganizations, as a result of which there was distributed to its stockholders on each share of stock held by them, respectively, the following securities and cash:
One Share of Stock of Standard Car Securities Company, Par Value $1.00
Two Shares of Stock of Pullman Incorporated, without nominal or Par Value
$20.00 in Cash
The first transaction was between Standard Steel Car Company and Standard Car Securities Company, whereby, as a result of a plan of reorganization entered into on January 29, 1930, Standard Steel Car Company transferred certain of its properties, securities and assets in exchange for all of the capital stock of the Standard Car Securities Company on February 8, 1930, which said shares of stock were thereupon distributed on February 9, 1930 to the stockholders.
The second transaction was between Standard Steel Car Company and Pullman Incorporated, whereby, as a result of a plan of reorganization entered into on February 18, 1930, Standard Steel Car Company transferred substantially all of its property and assets of every description owned by it at the time of such exchange, for shares of stock of Pullman Incorporated and cash, and/or United States Government bonds at their market value. the plan of reorganization also provided for the distribution, as soon as practicable, to the stockholders of Standard Steel Car Company of all the stock and cash so received from Pullman Incorporated, the surrender of their stock by the stockholders of the Standard Steel Car Company after such distribution, and the dissolution of the Standard Steel Car Company following said distribution.
Pursuant to the plan of reorganization so entered into, Standard Steel Car Company, on March 1, 1930, delivered to Pullman Incorporated deeds and instruments of conveyance and assignment for substantially all of its properties, not including any cash, and received from Pullman Incorporated in exchange therefor an aggregate amount of 460,000 shares of Pullman Incorporated stock and cash.
During March and April, 1930, pursuant to the plan of reorganization, Standard Steel Car Company distributed to its stockholders said 560,000 shares of Pullman Incorporated stock and approximately 93.5% of the cash so received by it. The balance of the cash received by Standard Steel Car Company, on March 1, 1930, could not be immediately distributed by it for the reasons that, under the provisions of the contract, the aforesaid cash payment made by Pullman Incorporated was an estimated amount, being subject to adjustment when the exact amount due was finally determined by the accounting representatives of Pullman Incorporated and Standard Steel Car Company, to which such adjustments had been left under the contract for determination.
These transactions have, in the opinion of Counsel, Messrs, Moorehead & Knox, Pittsburgh, Pennsylvania, constituted reorganizations within the meaning of the Revenue Laws of the United States, and in the preparation of this return they have been returned accordingly.
In the revenue agent's report dated October 14, 1932, covering the examination of the income tax return and books and records of petitioner Richard K. Mellon for 1930, the item of $40,000 was transferred from ‘Other Income‘ to ‘Capital Gain,‘ with the following explanation: ‘Item 11— Other Income— $40,000.00 is also shown and fully explained on schedule attached to the original return.‘
In the revenue agent's report dated September 12, 1932, covering the examination of the income tax return and books and records of petitioner Sarah Mellon Scaife for 1930, the item of $20,000 was transferred from ‘Other Income‘ to ‘Capital Gain‘ with the following explanation:
* * * Further income of $20,000.00 was received by the taxpayer in cash from the merger of the Standard Steel Car Company with the Pullman, Inc., the entire amount of cash received is reported as income.
The taxpayer reported the sum of $20,000.00, cash received in the merger of the Standard Steel Car Company, with the Pullman, Inc., as ordinary income, whereas, the said income is held to be a capital net gain from assets held more than two years, and the same is applied against a capital net loss of $33,420.00 sustained in the sale of stock of the American Locomotive Company, said stock also being held for more than two (2) years, leaving a capital net loss of $13,420.00 taxable at 12 1/2% * * * .
The above adjustments in the revenue agent's reports were approved by the Bureau of Internal Revenue in the final determination of the income tax liability of both petitioners for 1930.
Petitioner Sarah Mellon Scaife on August 13, 1942, sold 1,000 shares of stock of Pullman acquired on January 19, 1932, by gift from her father, Richard B. Mellon, who had acquired these shares by purchase on September 23, 1931, at a cost of $30,862.50. Petitioner in her income tax return for the year 1942 reported the selling price of such shares, $24,898 using as basis the donor's cost, $30,862.50 and claimed a long term capital loss in the amount of $5,964.50 and took into account 50 per cent thereof, $2,982.25. The average selling price of common stock of Pullman on the New York Stock Exchange on the date of the gift, January 19, 1932, was $21.8125. The loss claimed by respondent and petitioner agrees that, under the provisions of section 113(a)(2) of the Internal Revenue Code, no loss is allowable on the sale.
It was stipulated, in the event of a final decision in favor of respondent, that:
(a) the basis of all shares of common stock of Pullman sold by petitioners in the years 1941, 1942 and 1943 is $30.668 per share for the purpose of determining gain and $6.2861 for the purpose of determining loss;
(b) with respect to petitioner Richard K. Mellon, respondent erred in allowing deductible capital losses in the amounts of $37,363.20 and $38,482.86 on sales of stock of Pullman in the years 1941 and 1942, respectively, by using a basis of $30.668 per share instead of $6.2861 per share;
(c) with respect to petitioner Sarah Mellon Scaife, respondent erred in allowing deductible capital losses in the amounts of $38,449.07, $19,465.44 and $5,663.46 on sales of stock of Pullman in the years 1941, 1942 and 1943, respectively, by using a basis of $30.668 per share instead of $6.2861 per share. For the year 1943, said petitioner realized a net long-term capital gain in the amount of $5,229.24 of which 50% thereof, namely $2,614.62, should be taken into account; and
(d) the adjustments resulting from the facts stipulated in this paragraph and in the foregoing paragraph with respect to the 1,000 shares of Pullman sold on August 13, 1942, by petitioner Sarah Mellon Scaife shall be given effect in any computations to be made under Rule 50.
OPINION.
VAN FOSSAN, Judge:
The question to be determined is the proper basis to be used in determining gain or loss on the sale of certain Pullman stock by petitioners in the taxable years. The decision of this question depends upon whether the Pullman stock was received in 1930 by petitioners in a taxable or nontaxable transaction.
It is contended by petitioners that the transaction did not constitute a reorganization within the meaning of section 112(i)(1)(A) of the Revenue Act of 1928
for the reasons, (1) that the ‘plan of reorganization and consolidation‘ under the agreement between Standard and Pullman of February 18, 1930, as supplemented by the agreement of March 1, 1930, was not intended to, nor did it, comply with any requirements for consummating a merger or consolidation as provided by the statutes of the states of their creation; (2) that Pullman did not acquire ‘substantially all of the properties‘ of Standard; and (3) that Pullman was not a ‘party to the reorganization‘ within the meaning of section 112 of the Revenue Act of 1928, and that therefore the 1930 transaction was taxable and the basis to be used in determining gain or loss on the sale of the Pullman stock in the taxable years is the fair market value thereof at the time of distribution, viz., $82.0625 per share, as stipulated.
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.(i) DEFINITION OF REORGANIZATION.— As used in this section and sections 113 and 115—(1) The term ‘reorganization‘ means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * * .(2) The term ‘a party to a reorganization‘ includes a corporation resulting from a reorganization and includes both corporations in the case of an 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.
It is contended by respondent that the transaction as carried out as of March 1, 1930, between Standard, Pullman, and New Standard except to the extent of the cash received, constituted a nontaxable reorganization under section 112(i)(1)(A); that accordingly the basis of the Pullman stock in the hands of petitioners must be determined by reference to the basis of the stock of Standard.
The respondent argues that the transaction by which Standard divested itself of 34.15429 per cent in value of its assets by transfer thereof to Securities Co. should be regarded as a separate transaction for the purpose of determining whether the remaining assets subsequently transferred by Standard constituted all or substantially all of the assets of Standard; that Pullman was a party to the contract of February 18, 1930; that New Standard, its subsidiary, was not a party to such contract and was not in existence at that time; that Pullman, whose stock, plus cash, formed the entire consideration paid to Standard for its remaining assets, ‘was entitled to receive all of the assets of Standard and did receive such assets,‘ and should be held to be a party to the reorganization on the authority of Schuh Trading Co. v. Commissioner (CCA-7), 95 Fed.(2d) 404; and that the facts herein are distinguishable from the facts before the Supreme Court in Groman v. Commissioner, 302 U.S. 82, and Helvering v. Bashford, 302 U.S. 454, relied upon by petitioners and hence such cases are not controlling.
In Gilbert d. Hedden, 37 B.T.A. 1082; affd. (CCA-3), 105 Fed.(2d) 311; certiorari denied, 308 U.S. 575; rehearing denied, 308 U.S. 636, corporation H gave corporation B an option to acquire substantially all of its assets for bonds of B and a small amount of cash. B accepted, but named two subsidiaries U and M to receive the H assets. It was held that the entire gain to H was recognizable. The Board of Tax Appeals in its opinion, in reference to the Schuh Trading Co. case, stated, in part, as follows:
* * * We respectfully decline to follow the opinion of the Circuit Court in the Schuh case because we can not distinguish it from the Groman and Bashford cases.
See also Davis v. United States, 26 Fed.Supp. 1007; Whitney Corporation v. Commissioner, 105 Fed.(2d) 438; and Lawrence v. Commissioner (CCA-7), 123 Fed.(2d) 555, in which the Circuit Court of Appeals, Seventh Circuit, stated that the cases, including the Schuh Trading Co. case cited by petitioner to sustain his position that Socony-Vacuum was a party to the reorganization ‘cannot, in the light of the Groman case, be regarded as authorities.‘
The fact that Pullman was a party to the agreement of February 18, 1930, and the supplemental agreement thereof of March 1, 1930, is not determinative of the question whether it was a party to the reorganization. In Groman v. Commissioner, supra, Glidden also was a party to an agreement with the shareholders of Indiana, pursuant to which Indiana transferred its assets and Indiana's shareholders their stock in Indiana to Ohio, a corporation organized by Glidden, which became the owner of all of Ohio's common stock, but none of its preferred stock. The shareholders of Indiana received 5,276 shares of the prior preference stock of Glidden, valued at $553,980; 5,000 shares of the preferred stock of Ohio, valued at $500,000; and cash of $153,036.66. Indiana dissolved. The Supreme Court in that case stated, in part, as follows:
* * * Do the facts that Glidden contracted for the exchange and made it possible by subscribing and paying for Ohio's common stock in cash, so that Ohio could consummate the exchange, render Glidden a party to the reorganization? No more so that if a banking corporation had made the agreement with Indiana's shareholders and had organized the new corporation, and, by subscription to its stock and payment therefor in money and the banking company's stock put the new company in position to complete the exchange. Not every corporate broker, promoter, or agent which enters into a written agreement effectuating a reorganization, as defined in the Revenue Act, thereby becomes a party to the reorganization. And, if it is not a party, its stock received in exchange, pursuant to the plan, is ‘other property‘ mentioned in section 112(c)(1) and must be reckoned in computing gain or loss to the recipient. Glidden was, in the transaction in question, no more than the efficient agent in bringing about a reorganization. It was not, in the natural meaning of the term, a party to the reorganization.
Herein the exchange was between Standard and New Standard, the subsidiary organized by Pullman. The fact that Pullman entered the transaction on its books did not make it the owner of such assets. Pullman was merely the ‘efficient agent‘ making it possible for New Standard to acquire the assets of Standard by furnishing the cash and 560,000 shares of its own stock.
The respondent also argues that New Standard was simply a creature of Pullman's convenience in whose name Pullman chose to place the assets, and that through ownership of all of the stock of such subsidiary Pullman controlled the assets acquired from Standard as effectively as if the assets had been transferred to it, and that as shareholders of Pullman the relationship of the former Standard shareholders to the assets transferred continued to be the same. Again we quote from the Groman case, wherein a similar argument was made, as to which the Court stated:
It is argued, however, that Ohio was the alter ego of Glidden; that in truth Glidden was the principal and Ohio its agent; that we should look at the realities of the situation, disregard the corporate entity of Ohio, and treat it as Glidden. But to do so would be to ignore the purpose of the reorganization sections of the statute, which, as we have said, is that where, pursuant to a plan, the interest of the stockholders of a corporation continues to be definitely represented in substantial measure in a new or different one, then to the extent, but only to the extent, of that continuity of interest, the exchange is to be treated as one not giving rise to present gain or loss. * * *
The Court held that the former shareholders of Indiana, as shareholders of Glidden, had no continued substantial interest in the assets of Indiana transferred to Ohio, ‘but an interest in the assets of Glidden a part of which was the common stock of Ohio.‘ There is even less continuity of interest in the instant case. The shareholders of Standard received no stock whatever of New Standard, to which the assets involved were transferred by Standard. They lost all their interest as corporate shareholders in the assets transferred and acquired an interest in other assets, i.e., the assets of Pullman, a part of which was the common stock of New Standard. The 560,000 shares of Pullman distributed by Standard to its shareholders in redemption of their Standard shares represented only 14.4516 per cent of the total outstanding common stock of Pullman. This represents a very substantial change in their interest in the assets of Standard.
Upon authority of the Groman and Bashford cases we hold that Pullman was not a ‘party to the reorganization.‘ See also A. W. Mellon, 36 B.T.A. 977; Samuel A. Neidich, 38 B.T.A. 1178; affd., 105 Fed.(2d) 1019; certiorari denied, 308 U.S. 599; Anheuser-Busch, Inc., 40 B.T.A. 1100; affd., 115 Fed.(2d) 662; certiorari denied, 312 U.S. 699.
Nor do we agree with the respondent that Standard transferred substantially all of its assets to New Standard within the meaning of section 112(i)(1)(A). In Koppers Coal Co., 6 T.C. 1209, 1218, it is stated that if:
* * * several transactions were in fact merely steps in carrying out one definite preconceived purpose, the object sought and obtained must govern and the integrated steps used in effecting the desired result may not be treated separately for tax purposes either at the instance of the taxpayer or the taxing authority, or by agreement between both. * * *
At the very outset and throughout the conferences between the representatives of Standard and Pullman it was understood that Pullman was interested only in a portion of the assets of Standard and certain of its subsidiaries, which constituted approximately 66 per cent in value of all the assets of Standard. The creation of Securities Co. and the transfer to it of the unwanted assets was but a step to effectuate the transfer of the wanted assets. The transfer of the unwanted assets by Standard served no purposes except to strip that corporation of the unwanted assets in anticipation of the transfer of the wanted assets to a new corporation, New Standard, and Standard's dissolution, which was the object sought to be obtained. Elkhorn Coal Co. v. Helvering (CCA-4), 95 Fed.(2d) 732; certiorari denied, 305 U.S. 605; rehearing denied, 305 U.S. 670, and A. W. Mellon, supra.
It is conceded by respondent that the facts in Elkhorn Coal Co., supra, and in A. W. Mellon, supra, relied upon by petitioners are closely analogous to the facts in this proceeding. He argues, however, that such cases are not controlling because of one important difference, i.e., in both cases the taxpayer was asserting the nontaxability of the reorganization in order to escape taxation upon the gain realized, whereas the petitioners herein ‘have successfully avoided taxes on the stock which they received in 1930 based upon the contention, fortified by a Bureau ruling to that effect, that the reorganization was nontaxable and in the instant proceedings they are contending and asking the Court to find that the reorganization was taxable for the purpose of avoiding further taxes by obtaining an increased basis for the stock which they received in 1930.‘
The respondent concedes that the evidence shows no concealment or misrepresentation and accordingly he has not pleaded and does not assert a technical estoppel. He argues, however, that even though the elements of a technical estoppel are absent, there is a duty of consistency which prevents petitioners from maintaining in these proceedings that less than all of the assets of Standard were conveyed to Pullman or that Pullman was not a party to the reorganization, particularly since assessment and collection of 1930 taxes are barred by the statute of limitations and adjustment thereof can not be made under section 3801, Internal Revenue Code. Similar concessions and arguments were made by respondent in American Light & Traction Co., 42 B.T.A. 1121; affd. (CCA-7), 125 Fed.(2d) 365. The Board in its opinion stated in part:
* * * Since both parties have full opportunity to have the tax liability determined in accordance with the statutes, the statutory test should not be abandoned for a test based upon the ethics or morals of the conduct of one of the parties except under exceptional circumstances. Tide Water Oil Co., 29 B.T.A. 1208. The Board said in James Couzens, 11 B.T.A. 1040, that ‘such an argument must be treated with the utmost caution, since its sanction in any case would result in having an individual tax liability depend, not upon the factors and measures prescribed by Congress as applicable to all, but upon the statements and conduct of a particular‘ person.
In that case it was held that the taxpayer was not estopped to have its taxes for 1930 and 1931 determined in accordance with the statute where the Commissioner, with full knowledge of the facts, failed to collect taxes due for 1928 because he thought an exchange in that year was a reorganization and the gain not recognizable. To similar effect are: Ross v. Commissioner (CCA-3), 169 Fed.(2d) 483; Pancoast Hotel Co., 2 T.C. 362, 369; Mahlon D. Thatcher, 46 B.T.A. 869, 881 (reversed on another issue, 137 Fed.(2d) 128); Helvering v. Williams (CCA-8), 97 Fed.(2d) 810; United States v. Dickinson (CCA-2), 95 Fed.(2d) 65; Florida Machine & Foundry Co. v. Fahs, 73 Fed.Supp. 379; affd. (CCA-5), 168 Fed.(2d) 957.
It is our conclusion that Standard did not transfer ‘substantially all‘ of its assets to New Standard and that therefore the transactions in 1930 between Standard, Pullman, and New Standard did not constitute a reorganization within the meaning of section 112(i)(1)(A) of the Revenue Act of 1928. Elkhorn Coal Co. v. Helvering, supra; A. W. Mellon, supra; Pillar Rock Packing Co. v. Commissioner (CCA-9), 90 Fed.(2d) 1223. It follows that the basis to be used in computing the gain realized by petitioners on the sale of the Pullman stock in the taxable years is its fair market value at the time of its distribution, or $82.0625 per share.
Reviewed by the Court.
Decisions will be entered under Rule 50.