Opinion
Docket Nos. 15998, 15999, 16000, 16001, 16002, 16003, 21392, 21393, 21394, 21395, 21396, 21397.
Promulgated September 28, 1950.
Exchange by A Corporation's stockholders of its entire stock solely for a part of B Corporation's voting stock held to constitute both corporations parties to a reorganization so that gain on the exchange is not recognized under sec. 112, I. R. C., notwithstanding that on the next day, due to subsequent developments and without the acquiescence of the A shareholders, B transferred the A Corporation stock to its subsidiary. Anheuser-Busch, Inc., 40 B. T. A. 1100, distinguished.
Lee W. Eckels, Esq., for the petitioners.
Francis X. Gallagher, Esq., for the respondent.
Respondent determined deficiencies in income and victory tax against petitioners in Docket Nos. 15998 to 16003 for the year 1943 in the following amounts:
Docket No. Petitioner Deficiency 15998 ........ Robert Campbell ................. $162,626.55 15999 ........ Andrew H. Campbell .............. 11,908.58 16000 ........ Joseph E. Campbell .............. 8,323.00 16001 ........ Earl F. Reed .................... 294.22 16002 ........ Robert Campbell Trust No. 1 ..... 67,297.87 16003 ........ Robert Campbell Trust No. 2 ..... 67,297.87 Respondent determined deficiencies against Atlas Steel Barrel Corporation, hereinafter called Atlas, of $206,046.66 in income tax and $77,946.22 in declared value excess profits tax for the year 1943, and determined that petitioners in Docket Nos. 21392 to 21397 were liable as transferees to the following extent: Liability for Liability for declared Docket Petitioner income tax value excess No. deficiency profits tax deficiency 21392 .... Robert Campbell ........... $206,046.66 $77,946.22 21393 .... Andrew H. Campbell ........ 42,690.91 16,149.72 21394 .... Joseph E. Campbell ........ 29,883.64 11,304.80 21395 .... Earl F. Reed .............. 853.82 322.99 21396 .... Robert Campbell Trust No. 1 206,046.66 77,946.22 21397 .... Robert Campbell Trust No. 2 206,046.66 77,946.22 The proceedings were consolidated.The controversy arises out of a transaction in which all the shareholders of Atlas transferred their stock to Bethlehem Steel Corporation in exchange for voting stock of that corporation. The latter corporation transferred to a subsidiary the stock which it had received and subsequently Atlas was liquidated. The primary issue is whether the exchange of stock constituted a tax-free reorganization; and, alternatively, whether the above events constituted a sale of assets by Atlas, and if a sale, whether petitioners are transferees of the assets of Atlas. Some of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found.
Petitioners, Robert Campbell, Andrew H. Campbell, and Joseph E. Campbell, are residents of New Jersey and filed their returns for 1943 with the collector for the fifth district of New Jersey. Petitioner Earl F. Reed, a resident of Pittsburgh, Pennsylvania, filed his return for 1943 with the collector for the twenty-third district of Pennsylvania. Petitioner Peoples-First National Bank Trust Co., the duly qualified and acting successor trustee of Robert Campbell Trust No. 1, hereinafter called Trust No. 1, and petitioner Peoples-First National Bank Trust Co., the duly qualified and acting successor trustee of Robert Campbell Trust No. 2, hereinafter called Trust No. 2, filed returns for 1943 with the collector for the fifth district of New Jersey. Atlas is a New Jersey corporation and filed its returns for 1943 with the collector for the fifth district of New Jersey.
In 1943 petitioners owned all the issued and outstanding stock (except for one share) of Atlas, which was engaged in manufacturing steel barrels, drums, and other containers. In the summer of 1943 petitioner Robert Campbell, hereinafter called Campbell, who was president and a director of Atlas and its largest shareholder, consulted petitioner Earl F. Reed, hereinafter called Reed, who was counsel to Campbell and Atlas, a shareholder and director of Atlas, and co-trustee of Trusts Nos. 1 and 2 with regard to a possible sale of the assets of Atlas. Reed advised Campbell that, as Campbell's counsel and as co-trustee of Trusts Nos. 1 and 2, he would approve an exchange of all of the Atlas stock for shares of voting stock of another company, but that he would not approve any other arrangement.
In July 1943 Campbell, with the approval of Reed, contacted Bethlehem Steel Corporation, hereinafter called Bethlehem, with reference to a possible exchange of Atlas and Bethlehem stock. Bethlehem representatives were permitted to examine the business and plant of Atlas. Subsequently Campbell and Reed, acting as representatives of the shareholders of Atlas, conducted negotiations with Bethlehem representatives. At all times Campbell and Reed kept the shareholders of Atlas advised as to the state of negotiations. The Atlas stockholders were interested only in a tax-free exchange of their stock for Bethlehem stock and they gave no consideration to the possibility of a sale of the assets of Atlas. It made no difference to Bethlehem which form the transaction would take.
Prior to and on September 14, 1943, the officers and directors of Bethlehem contemplated the continued operation of Atlas. At that time neither Bethlehem, which is a holding company, nor any of its subsidiaries was engaged in the manufacture of steel barrels. At that time Bethlehem was not engaged in any negotiations for acquisition by it of stock of Rheem Manufacturing Co., hereinafter called Rheem, and did not contemplate acquisition of Rheem stock. In the course of negotiations Bethlehem officials indicated to the Atlas stockholders that it was their intention to continue the operation of the Atlas business. Prior to, on, and immediately after September 14, 1943, Bethlehem, Atlas, and the latter's stockholders did not contemplate any transaction other than a mutual exchange of stock.
On September 9, 1943, Campbell and the Bethlehem representatives orally agreed, subject to the approval of the other Atlas stockholders, to exchange all of the Atlas stock for voting stock of Bethlehem, the Bethlehem stock to have a market value of $1,450,000 calculated on the basis of stock exchange quotations of that day. On the next day oral agreement was reached concerning the relative proportions in which Bethlehem common and preferred stock was to be delivered, and the question of a closing date was discussed. Bethlehem desired to close on December 20, 1943, to buy stock on the market to consummate the exchange. Campbell agreed to that date. To purchase shares of Bethlehem's stock on the New York Stock Exchange which it would use to consummate the exchange with Atlas was Bethlehem's own decision.
Bethlehem representatives stated to Campbell that they desired him to continue to manage the Atlas business for a period of 5 years and to stay out of competition during such period. Campbell indicated his consent if he were to receive the same compensation that he had been paid by Atlas, that is, $40,000 per year.
On September 14, 1943, Bethlehem, Atlas, and all of the shareholders of Atlas entered into an agreement called a "Memorandum of Agreement and Plan of Reorganization," providing in brief as follows: Atlas represented that a certain balance sheet set forth a correct statement of its financial position and that its total stock issued and outstanding was 1,195 shares of common stock, and Atlas agreed, pending consummation of the reorganization, to conduct business in its normal way without either incurring unusual liabilities or making extraordinary expenditures or declaring dividends or issuing additional shares of stock without the consent of Bethlehem; the Atlas stockholders agreed to deliver all their stock to Bethlehem in exchange for 7 shares of 7 per cent cumulative preferred stock and 6 2/3 shares of common stock of Bethlehem for each share of Atlas so transferred; Bethlehem agreed to consummate the exchange not later than December 20, 1943. In a letter, dated September 14, 1943, signed by Bethlehem with a written confirmation by Campbell dated the same day, Campbell agreed, among other matters, that simultaneously with the consummation of the exchange of stock, Campbell would enter into agreements providing that he would not compete with Atlas for 5 years, and that he would accept employment as manager of the Atlas business at a salary of $40,000 per year, if Atlas or its successors should so desire, for such period of time as they should desire, but not more than five years.
On September 14, 1943, the authorized capitalization of Bethlehem consisted of 1,000,000 shares of 7 per cent cumulative preferred stock of the par value of $100 per share, of which 933,887 shares were issued and outstanding, and 5,000,000 shares of common stock without par value, of which 3,194,314 shares, including 209,320 shares held in the treasury of Bethlehem, were issued and outstanding. No change in such capitalization or in the number of shares issued and outstanding took place between September 14, 1943, and December 31, 1943. Upon all elections of directors and upon all matters requiring the consent of shareholders of Bethlehem, the holders of its 7 per cent cumulative preferred stock were and are entitled to one vote for each such share held by them.
On September 14, 1943, no shares of the 7 per cent cumulative preferred stock of Bethlehem were sold on the New York Stock Exchange. The bid on such day was 116 and the asking price was 117. A total of 700 such shares were sold during the week commencing September 13, 1943, the low price being 116 1/4 and the high being 116 1/2. On September 14, 1943, 400 shares of the common stock of Bethlehem were sold at prices ranging from a low of 57 1/4 to a high of 57 3/8. A total of 6,800 shares of such stock was sold during the week commencing Monday, September 13, 1943.
In early October 1943, Bethlehem commenced negotiations for, and in November 1943, it acquired stock in Rheem, which was engaged in the manufacture of steel barrels. A decision to dispose of the stock of Atlas was made about that time by the officers of Bethlehem as a result of advice of counsel that ownership of stock both in Atlas and in its competitor, Rheem, might be regarded as a violation of section 7 of the Clayton Act.
On or prior to December 18, 1943, all of the Atlas shareholders and Atlas, at the request of Bethlehem, consented and agreed that the exchange should be consummated on December 29, 1943, rather than on or before December 20, 1943.
On December 29, 1943, Bethlehem delivered to the Atlas stockholders the following shares of Bethlehem's common and 7 per cent cumulative preferred stock, and simultaneously the Atlas stockholders transferred to Bethlehem all of the Atlas stock as follows:
Number Number of Bethlehem of Atlas shares received Name of holder shares delivered Preferred Common Robert Campbell ..... 608 4,256 4,053 1/3 Andrew H. Campbell .. 50 350 333 1/3 Joseph E. Campbell .. 35 245 233 1/3 Earl F. Reed ........ 1 7 6 2/3 Trust No. 1 ......... 250 1,750 1,666 2/3 Trust No. 2 ......... 250 1,750 1,666 2/3 Johnstone Campbell .. 1 7 6 2/3 Bethlehem also delivered one-third of one share of common stock more than was required under the agreement because Bethlehem shares were not issuable in denominations of less than full shares. At the time Bethlehem received said shares of Atlas stock, it also received $20, which amount represented payment for one-third of a share of its common stock. On the same day all of the officers and directors of Atlas resigned and persons designated by Bethlehem were elected to fill the vacancies.A letter to Bethlehem, dated December 29, 1943, signed by all the Atlas shareholders, acknowledging receipt of the Bethlehem stock, stated that the signatories "represent" that they were receiving the Bethlehem stock pursuant to the reorganization agreement, "for investment and not for redistribution or sale."
The shares of Bethlehem stock delivered to the Atlas stockholders had been purchased by Bethlehem on the New York Stock Exchange subsequent to September 14, 1943, for a total of $1,448,589.71, of which $999,877.50 was paid for 8,365 shares of preferred stock and $448,712.21 for 7,967 shares of common stock.
On December 29, 1943, the fair market values of Bethlehem's common stock and 7 per cent cumulative preferred stock were $55.3125 and $115.4375 per share, respectively.
On December 29, 1943, the following petitioners sold to Robert Campbell the following fractional shares of Bethlehem common stock:
Fractional Selling Name share sold price Andrew H. Campbell ..... 1/3 $20.00 Joseph E. Campbell ..... 1/3 20.00 Trust No. 1 ............ 2/3 40.00 Trust No. 2 ............ 2/3 40.00 Bethlehem Steel Co., a Pennsylvania corporation and subsidiary of Bethlehem, hereinafter called Pennsylvania, was engaged chiefly in the business of manufacturing and selling iron and steel products. On December 30, 1943, Bethlehem offered to sell and Pennsylvania agreed to buy 1,195 shares of the capital stock of Atlas for $1,448,569.71, plus $119.50 to cover the cost of the necessary stock transfer stamps. On the same day Bethlehem delivered to Pennsylvania certificates for the 1,195 shares of Atlas stock, and Pennsylvania paid the agreed purchase price of $1,448,689.21. On the same day all of the officers and directors of Atlas resigned and persons representing the interests of Pennsylvania were elected to fill the vacancies.On December 31, 1943, the board of directors of Pennsylvania adopted a resolution that Atlas be dissolved, and approved a Plan of Liquidation. On the same date the board of directors of Atlas authorized and directed its officers to carry out the liquidation and dissolution in accordance with that plan. On the same day Atlas conveyed all its real property to Pennsylvania.
Bethlehem Steel Co., a Delaware corporation and subsidiary of Bethlehem, hereinafter called Delaware, handled sales of steel products. Pennsylvania considered it desirable that Delaware should handle sales of the products of the business theretofore conducted by Atlas, and that the accounts and bills receivable of Atlas should pass to Delaware upon the liquidation of Atlas. On January 3, 1944, Pennsylvania offered to sell and, on January 4, 1944, Delaware agreed to buy 150 shares of Atlas stock at a price equal to the cost of said shares to Pennsylvania, namely, $181,843.50, plus $15, the cost of the requisite stock transfer stamps. On January 4, 1944, Pennsylvania delivered to Delaware certificates for 150 shares of Atlas stock and Delaware paid the agreed purchase price of $181,858.50.
On January 7, 1944, Atlas transferred to Delaware all of the accounts and bills receivable of Atlas as of the close of its business year on December 31, 1943, and the 150 shares of Atlas stock then owned by Delaware were thereupon surrendered, redeemed and canceled. On the same date Atlas assigned and transferred to Pennsylvania all of the remaining property and assets of Atlas, and the 1,045 shares of Atlas stock then owned by Pennsylvania were thereupon surrendered, redeemed and canceled.
On January 10, 1944, Atlas filed a certificate of dissolution by unanimous consent of all stockholders with the Secretary of State of New Jersey who issued, on the same day, a certificate of dissolution of Atlas.
Between September 14, 1943, and the summer of 1944, Bethlehem gave no information to Campbell or other shareholders of Atlas with respect to any negotiations or dealings it had or was carrying on with respect to the acquisition of shares of stock of Rheem, or as to any abandonment of its intention to continue the operation of business of Atlas, or of the fact that Atlas was liquidated shortly after the consummation of the exchange of Atlas stock for Bethlehem stock. None of the petitioners were aware of the liquidation of Atlas at the time that it occurred.
From December 30, 1943, to June 30, 1944, the business of Atlas was operated by Pennsylvania and Delaware. On June 30, 1944, all of the former Atlas assets were sold for cash to Rheem. At all times since that date and up to the present time Rheem has continued to operate that business.
Each of the petitioners in Docket Nos. 15998 to 16003, assigns error to a determination by respondent that "* * * during the taxable year 1943, you realized a long-term capital gain on the reorganization of the Atlas Steel Barrel Corporation, a New Jersey corporation, which should be included in your normal tax net income * * *." In addition, petitioners Andrew H. Campbell and Joseph E. Campbell assign error to respondent's determination that each of them realized a short term capital gain of $1.56 rather than a long term capital gain of $8.05 as reported, from the sale of Bethlehem stock on December 29, 1943, to Robert Campbell, while petitioners Trust No. 1 and Trust No. 2 assign as error respondent's determination that each of them realized a short term capital gain of $3.12 on the sale of December 29, 1943, rather than a long term capital gain as reported in the amount of $18.44.
Each of the petitioners in Docket Nos. 21392 to 21397 assigns error to respondent's determinations to the effect that Atlas "realized gain in the amount of $830,484.07 during the taxable year 1943, upon the transfer of its properties in exchange for stock of Bethlehem Steel Corporation," and that each of petitioners is a transferee of Atlas because its "assets were transferred to you on or about December 29, 1943".
OPINION.
Two concepts of reorganizations and other section 112 transactions appear interchangeably and sometimes confusingly in the authorities. There is on the one hand the technical approach which searches the statutory terminology for literal compliance, and casts aside situations not within the precise language even though the same practical result could have been attained by a faithful adherence to the formalities. The crux of this view finds expression in the words of the opinion in Weiss v. Stearn, 265 U.S. 242, 254: "Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants."
At the same time, regard for the broad aim and objective of the legislation, rather than word-for-word adherence, accounts for adding to the expressed requirements such supplementary concerns as "business purpose," Gregory v. Helvering, 293 U.S. 465; "continuity of interest," Helvering v. Minnesota Tea Co., 296 U.S. 378; and "proprietary stake," LeTulle v. Scofield, 308 U.S. 415. Perhaps the two approaches can best be reconciled by considering that since our taxing system requires gains and losses ordinarily to be taken into account when they occur, the tax-postponing effects of section 112 will not become effective unless there is conformity with both the narrow technicalities and the broad and ultimate purpose.
Fortunately, we need not now face the problem since even if both are requisite, we find them here. Narrowly the question is, as it was in Anheuser-Busch, Inc., 40 B. T. A. 1100, affd. (CCA-8), 115 F.2d 662, certiorari denied, 312 U.S. 699, whether the parent, Bethlehem, was a "party" to the reorganization, so that its stock could be received free from recognition of gain in the exchange by which petitioners acquired the Bethlehem shares in lieu of their holdings in Atlas.
The "plan" of reorganization did not, on this record, contemplate that any but Bethlehem should be the party to the reorganization, and we have so found as a fact. Although it was physically within the power of Bethlehem to transfer the Atlas stock when it became its owner, the evidence shows that not even Bethlehem, still less petitioners, contemplated it as a possible part of the plan. It was "an independent transaction" and not "an essential [or any] part of the plan." United Light Power Co., 38 B. T. A. 477, 485, affd. (CCA-7), 105 F.2d 866, certiorari denied, 308 U.S. 574. What was said in Anheuser-Busch, Inc., supra, can hence not be repeated here. As far as the plan itself went, there was thus an exact technical compliance with section 112 (b) (3), Internal Revenue Code. See S. H. Berch, 35 B. T. A. 385; Berch v. United States, 54 Fed. Supp. 175; cf. Hortense A. Menefee, 46 B. T. A. 865; Wilgard Realty Co., 43 B. T. A. 557, affd. (CCA-2), 127 Fed. 2d 514, certiorari denied, 317 U.S. 655.
"It is evident that at the time Borden formulated the proposal it had in mind a plan to organize a subsidiary to take over the assets of New York, and it required the taxpayer to agree to cooperate in the carrying out of that plan. * * * When the realities of the transaction are considered there can be no doubt that the plan contemplated, and that the parties so understood it, that Borden would organize Delaware and that Delaware would take over the assets and carry on the business of New York. The plan as thus conceived and formulated was fully consummated with the full cooperation of the taxpayer and its subsidiary, New York. * * *" ( 115 F.2d 662, 666).
SEC. 112. * * *
(b) EXCHANGES SOLELY IN KIND. —
* * * * * * *
(3) STOCK FOR STOCK ON REORGANIZATION. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
SEC. 112. * * *
(g) DEFINITION OF REORGANIZATION. — As used in this section (other than subsection (b) (10) and subsection (1)) and in section 113 (other than subsection (a) (22)) —
(1) The term "reorganization" means * * * (B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation * * *
On the other approach, petitioners bargained for and obtained a continuing interest in the assets transferred which, in the language of the first Minnesota Tea case, was "definite and material," receiving as they did "an interest in the affairs of the transferee which represented a material part [in fact all] of the value of the transferred assets." Parenthetically, the interest obtained in the transferee was, as it was here, a small minority interest. See, generally, 24 Va. L. Rev. (1938), 418, 429; Paul, "Step Transactions in Selected Studies in Federal Taxation" (2d Series), 200, 250-2; Magill, "Federal Taxation in the Pre-War Decade," 42 Col. L. Rev. (1942), 356, 370-1; "The Parent-Subsidiary Problem Under the Non-Recognition Provisions," 34 Ill. L. Rev. (1939), 303, 316; "Continuity of Interest in Reorganization Under The Federal Income Tax," 49 Yale L. J. (1940), 1078, 1085-7.
Helvering v. Minnesota Tea Co., 296 U.S. 378.
"It [taxpayer] only got 7 1/2 per cent. of the outstanding stock of the Grand Union Company * * *." Woodrough, Circuit Judge, dissenting, Minnesota Tea Co. v. Commissioner (CCA-8), 76 F.2d 797, 805.
That these assets were thereafter disposed of to a subsidiary would be significant only if that was the "plan." See Whitney Corp., 38 B. T. A. 224, 235, affd. (CCA-8), 105 Fed. 2d 438, or at least a contemplated variant of it. Anheuser-Busch, Inc., supra. The time element is a factor in reaching a conclusion on that issue. It is not by itself decisive. Cf. Gertrude B. Chase, 44 B. T. A. 39, affd. (CCA-2), 128 F.2d 740. Taken with other evidence it may show a preconcerted arrangement in spite of denials by interested parties. Here we prefer to accept the testimony of petitioners' witnesses and have so formulated our findings. Since this means the plan did not envisage the subsequent transfer, petitioners must be held to have retained the requisite continuity of proprietary interest as of the time the only transaction occurred in which they participated. See Darrell, "Corporate Reorganizations and Readjustments," Practising Law Inst. (1945), pp. 10, 11.
Respondent's alternative determination must likewise be disapproved. We could not here any more than in the Steubenville, Armored Tank, and Dallas cases, in all of which respondent has now acquiesced, acq. I. R. B. No. 9, May 1, 1950; 1949-1 C. B. 1, find that the sale of corporate shares constituted a transfer of its assets by the corporation.
Steubenville Bridge Co. et al., 11 T.C. 789; Armored Tank Corp. (N.Y.), 11 T.C. 644; Dallas Downtown Development Co., 12 T.C. 114.
Reviewed by the Court.
Decision will be entered under Rule 50.