Opinion
Docket No. 63076.
1959-03-19
DEAR PUBLICATION & RADIO, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James F. Watson, Esq., and John D. McMasters, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.
James F. Watson, Esq., and John D. McMasters, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.
Petitioner and another corporation equally owned the stock of a corporation engaged in the publication of a newspaper. Due to the inability of the two interests to agree on policy, the other owner sought and received under a State ‘deadlock statute’ an order to dissolve the corporation. In these circumstances, petitioner and the other owner entered into a competitive bidding agreement, whereby the parties bid upon the stock of each other. Petitioner sold its stock to the other owner, being unable or unwilling to outbid it. Held, that the sale of the stock was not an involuntary conversion within the meaning of section 112(f) of the Internal Revenue Code of 1939.
The respondent determined a deficiency in income tax against the petitioner for its fiscal year ended August 31, 1952, in the amount of $402,155.94. The questions for decision are (1) whether the sale of certain stock by petitioner was an involuntary conversion within the meaning of section 112(f) of the Internal Revenue Code of 1939, and, if so, (2) whether, within the meaning of the statute, certain expenditures by petitioner were for the purchase of property similar or related in service or use to the property converted.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioner is a New Jersey corporation, organized on August 16, 1946, with its principal office and place of business in Jersey City, New Jersey.
Petitioner keeps its books and files its income tax returns on an accrual basis of accounting and by fiscal year ending August 31.
Petitioner filed its income tax return for the fiscal year ended August 31, 1952, with the director of internal revenue at Newark, New Jersey. In a rider attached to the return, petitioner notified the respondent of its sale of 1,050 shares of stock of the Evening Journal Association and of its election to have the gain thereon not recognized.
Subsequent to its organization on August 16, 1946, petitioner issued all of its stock, having a face value of $539,558.23, to J. Albert Dear in exchange for 1,050 shares of stock of the Evening Journal Association. The 1,050 shares of Evening Journal Association stock so acquired by petitioner constituted one-half of the issued and outstanding stock of that corporation.
Petitioner's cost basis for the 1,050 shares of stock of the Evening Journal Association was $406,490.30, as determined by the respondent.
The Evening Journal Association, a New Jersey corporation and the publisher of a newspaper in Jersey City, known as the Jersey Journal, was organized on January 8, 1877, by J. Albert Dear's grandfather, and after the grandfather's death it was operated by Dear's father and uncle. The uncle, Walter Dear, sold his interest to Samuel I. Newhouse. During the period here material the Evening Journal Association was operated by Samuel I. Newhouse and J. Albert Dear. Dear had been an employee of the Evening Journal Association for some 28 years prior to October 16, 1951, and at that time he was president and editor.
For the purpose of voting its 1,050 shares of Evening Journal Association stock and qualifying Dear and his wife, Cyrene B. Dear, to act as directors, petitioner constituted Dear as its proxy for 1,048 shares, and 1 share each was nominally held by Dear and Cyrene B. Dear.
The other one-half, 1,050 shares, of the issued and outstanding stock of the Evening Journal Association was held by the Post-Standard Company, a New York corporation, with its principal office in Syracuse, New York. The Post-Standard Company was controlled by Samuel I. Newhouse, and for the purpose of voting the 1,050 shares of Evening Journal Association stock and qualifying its directors, the Post-Standard Company constituted Samuel I. Newhouse as its proxy for 1,048 shares, and 1 share each was nominally held by Newhouse and his brother, Norman N. Newhouse.
The board of directors of the Evening Journal Association consisted of four members. On March 23, 1948, the four directors were J. Albert Dear, Cyrene B. Dear, Samuel I. Newhouse, and Norman N. Newhouse. The board of directors, which was equally divided in accordance with the stock ownership of the corporation, was unable to agree with respect to the management of the corporation's affairs, and a stalemate resulted.
On March 30, 1948, the Post-Standard Company, Samuel I. Newhouse, and Norman N. Newhouse, as owners of one-half of the capital stock of the Evening Journal Association, filed a petition with the Superior Court of New Jersey, Chancery Division, Hudson County, in a proceeding entitled ‘In the Matter of the Application for a Dissolution of the Evening Journal Association, a corporation of the State of New Jersey.’ The petition requested an order directing the Evening Journal Association, petitioner, J. Albert Dear, and Cyrene B. Dear to show cause why the Evening Journal Association should not be dissolved in accordance with the provisions of the New Jersey General Corporation Law, title 14, N.J. Rev.Stat. 14:13-15, and for the appointment of a receiver to liquidate and distribute its assets.
Answers and counterclaims were filed by the Evening Journal Association, petitioner, and by J. Albert Dear and his wife, Cyrene B. Dear, as directors of the Evening Journal Association. The counter-claims were separately litigated before the New Jersey Superior Court, and on January 27, 1950, were dismissed.
Petitioner opposed the dissolution of the Evening Journal Association because it felt that much of the value of the newspaper might be sacrificed through the sale of the assets individually, rather than the sale of the newspaper as an operating business. After a hearing on the petition for dissolution, the court, on July 11, 1951, rendered its opinion, in which it held that the petition should be granted.
On July 19, 1951, the Post-Standard Company, Samuel I. Newhouse, and Norman N. Newhouse, through their counsel, presented a proposed judgment to the court, which provided that the Evening Journal Association be dissolved on July 19, 1951, and for the appointment of a receiver to take possession of all its property and assets, discharge its liabilities, and to liquidate and distribute the remaining assets of the corporation, as the court should direct. The terms and provisions of the judgment were argued by the opposing counsel, and as no agreement could be reached, the matter was continued until July 24, 1951. On that date, the parties still being unable to agree on the terms of the judgment, the matter was further continued until after August 31, 1951.
Under date of July 30, 1951, petitioner and the Post-Standard Company entered into a competitive bidding agreement, whereby each corporation would bid on each other's 50 per cent stock interest in the Evening Journal Association.
Pursuant to the competitive bidding agreement, an auction was held on October 16, 1951, before the escrow agent, and the 1,050 shares of Evening Journal Association stock owned by petitioner was bid in by the Post-Standard Company for $2,310,000. This amount was paid to petitioner on October 19, 1951.
On October 18, 1951, the proceeding for dissolution of the Evening Journal Association was dismissed by entry of an order which was consented to by the respective parties.
Petitioner computed the net proceeds from the sale of its Evening Journal Association stock by deducting from the bid price of $2,310,000 the sum of $582,789.72, representing its claimed expenses in connection with the litigation and sale. The computation resulted in a figure of $1,727,210.28, which petitioner designated as a ‘Replacement Reserve Fund.’
On or about July 8, 1953, petitioner wrote to the respondent in Washington, D.C., with respect to the sale of the 1,050 shares of stock which it had owned in the Evening Journal Association, and requested an extension of time within which to purchase property similar or related in service or use to the said stock, which had been sold on October 19, 1951.
Under date of July 28, 1953, respondent informed the petitioner that its request for an extension of time was not in order, as the sale of the Evening Journal Association stock was not subject to the provisions of section 112(f) of the Internal Revenue Code of 1939.
Under date of August 14, 1953, petitioner again wrote respondent, requesting an extension of time for the reinvestment of the balance of the aforesaid designated ‘Replacement Reserve Fund,‘ and under date of September 17, 1953, respondent reaffirmed his position in stating that an extension of time was not in order.
Subsequent to the sale of its 1,050 shares of stock of the Evening Journal Association, petitioner purchased the stock of various corporations engaged in the publication of newspapers, as follows:
+-----------------------------------------------------------------------------+ ¦Date ¦Company ¦Percentage of stock ¦Cost of ¦Expenses ¦ ¦ ¦ ¦ ¦stock ¦of ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦ ¦ ¦purchased ¦ ¦purchase ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Aug. 29, ¦The Advance, Inc ¦100 per cent ¦$291,210.50¦$1,443.89¦ ¦1952 ¦ ¦ ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Dec. 11, ¦Huntington Publishing¦50 per cent ¦7,500.00 ¦ ¦ ¦1952 ¦Co ¦ ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Feb. 13, ¦Gallipolis Publishing¦100 per cent ¦60,000.00 ¦6,840.71 ¦ ¦1953 ¦Co. 1 ¦ ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦June 25, ¦Gallipolis Publishing¦Additional cost of ¦2,710.00 ¦ ¦ ¦1953 ¦Co ¦above stock. ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Aug. 27, ¦(Aldon Publishing Co ¦100 per cent ¦) ¦11,147.29¦ ¦1953 ¦ ¦ ¦180,000.00 ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦ ¦(Juldon Realty Co. ¦100 per cent ¦) ¦ ¦ ¦ ¦2 ¦ ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Jan. 1, ¦The Advance, Inc ¦Additional cost of ¦41,500.00 ¦759.28 ¦ ¦1954 ¦ ¦above stock. ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Nov. 9, ¦Sedalia Democrat, Inc¦52 per cent ¦247,760.00 ¦14,242.00¦ ¦1954 ¦ ¦ ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦Dec. 29, ¦Huntington Publishing¦33 per cent ¦4,500.00 ¦ ¦ ¦1954 ¦Co ¦ ¦ ¦ ¦ +---------+---------------------+-----------------------+-----------+---------¦ ¦July 31, ¦Huntington Publishing¦Undisclosed ¦15,000.00 ¦ ¦ ¦1955 ¦Co ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
On August 25, 1953, the charter of the Gallipolis Publishing Company was amended so as to permit the issuance of additional shares of stock, and petitioner subscribed to 4,800 additional shares of the stock and paid $523,200 therefor. Gallipolis subsequently loaned R & T Music Company, Inc., $250,000, which R & T Music Company loaned to petitioner and petitioner used to purchase the stock of the Sedalia Democrat, Inc.
On March 17, 1953, petitioner purchased all of the assets of a newspaper known as the Wheaton Daily Journal, for $104,000, payable out of the revenues of the newspaper and the assets purchased. By a further agreement of the same date, petitioner agreed to pay the sellers $36,000 from the profits of the Wheaton Daily Journal, in consideration of their agreement not to compete with petitioner in the newspaper business in that area. On June 15 and 29, 1953, petitioner paid $630 and $4,000 in legal expenses and commissions, respectively.
On October 22, 1953, petitioner purchased a linotype machine at a cost of $18,215.92 for use in publishing the Wheaton Daily Journal. As of August 31, 1955, petitioner had advanced $74,592.99 for the operation of the Wheaton Daily Journal, in addition to the expenditure for the linotype machine.
Petitioner's income tax returns for the fiscal years ended August 31, 1953, August 31, 1954, August 31, 1955, and August 31, 1956, contained a rider stating that petitioner was following a course of action consistent with its treating the sale of the Evening Journal Association stock as an involuntary conversion.
OPINION.
TURNER, Judge:
In section 112(f) of the Internal Revenue Code of 1939,
it is provided that ‘(i)f property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted’ into money, the gain is not to be recognized to the extent that the amount realized is, within 1 year after the year of conversion or at the close of such later date as the Secretary may designate, used to acquire property similar or related in service or use to the property converted. And for the purposes of section 112(f)(3), relating to the nonrecognition of gain where the disposition occurred after December 31, 1950, the term ‘disposition of the converted property’ is defined to mean (the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation.'
Decision will be entered for the respondent. SEC. 112. RECOGNITION OF GAIN OR LOSS.(f) INVOLUNTARY CONVERSION.— If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted—(1) CONVERSION INTO SIMILAR PROPERTY.— Into property similar or related in service or use to the property so converted, no gain shall be recognized.(2) CONVERSION INTO MONEY WHERE DISPOSITION OCCURRED PRIOR TO 1951. * * * For the purposes of this paragraph and paragraph (3), the term ‘disposition of the converted property’ means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation.(3) CONVERSION INTO MONEY WHERE DISPOSITION OCCURRED AFTER 1950.— Into money or into property not similar or related in service or use to the converted property, and the disposition of the converted property (as defined in paragraph (2)) occurred after December 31, 1950, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph:(A) Nonrecognition of Gain.— If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the Secretary may by regulations prescribe. For the purposes of this paragraph—(i) no property or stock acquired before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition; and(ii) the taxpayer shall be considered to have purchased property or stock only if, but for the provisions of section 113(a)(9), the unadjusted basis of such property or stock would be its cost within the meaning of section 113(a).(B) Period Within Which Property Must Be Replaced.— The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition on condemnation of the converted property, whichever is the earlier, and ending—(i) one year after the close of the first taxable year in which any part of the gain upon the conversion is realized, or(ii) subject to such terms and conditions as may be specified by the Secretary, at the close of such later date as the Secretary may designate upon application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe. 2. SEC. 214. (a) That in computing net income there shall be allowed as deductions:(12) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (C) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. * * * -------- Notes:
As a part of the transaction whereby petitioner secured all of the stock of the Gallipolis Publishing Company, it purchased outstanding debentures of that company in the amount of $42,500. Also as a part of the same transaction, petitioner paid the prior owners $25,000, in consideration of their agreement to refrain from competing.
Admittedly petitioner's Evening Journal Association stock was neither destroyed, stolen, seized, requisitioned, nor condemned. It was sold pursuant to agreement. It is the contention of petitioner, however, that the Newhouse suit and the order of the New Jersey court directing dissolution of the corporation constituted a threat or imminence of destruction in whole or in part, seizure, or requisition of its property interest therein as represented by the stock owned by it, and that the sale of the stock under such circumstances was a compulsory or involuntary conversion within the meaning of the statute, and to the extent the proceeds of the sale were expended in the purchase of stock in corporations engaged in the publishing of newspapers and in the purchase of the assets of a newspaper-publishing corporation the gain realized on the said sale of its Evening Journal Association stock is not to be recognized.
Aside from any question as to whether the court proceeding and order pursuant thereto may be construed as being a threat or imminence of destruction or seizure of petitioner's Evening Journal Association stock, the statute itself makes it clear, we think, that a sale in such circumstances is not an involuntary conversion within the meaning thereof, since under the definition of the term ‘disposition of the converted property’ it is only where there is threat or imminence of requisition or condemnation that a sale or exchange under threat or imminence of any of the named causes of conversion is a conversion within the meaning of the statute. See and compare George S. Robins, 15 B.T.A. 1068, and Philip F. Tirrell, 14 B.T.A. 1399, wherein the words ‘threat or imminence thereof’ in section 214(a)(12) of the Revenue Act of 1921
were held to relate only to an exercise of the power of requisition or condemnation.
In order to acquire the stock of the Aldon Publishing Company, petitioner was required to purchase all of the stock of Juldon Realty Company, which owned the land, building, and all printing machinery used by Aldon Publishing Company.
Patently, a sale of property under threat or imminence of requisition is an involuntary conversion within the meaning of the statute, but in the instant case the facts do not, in our opinion, show a threat or imminence of requisition. Webster's New International Dictionary defines requisition as follows: ‘Act of requiring, or demanding, as of right; a demand or application made as by authority; specif., a formal application made by one officer or department to another for things needed in the service or business; as, a requisition for clothing, troops, money.’ The petitioner, in its argument, would have the definition end with the words ‘act of requiring, or demanding,’ its contention being that since the New Jersey court ‘had the ‘right’ under Revised Statute 14:13-15 of the New Jersey Corporation Law * * * to ‘require’ the dissolution of the Evening Journal Association and to ‘require’ a receiver to seize and liquidate Petitioner's property interest in the assets of that corporation,‘ then this right was a power of requisition.
In view of the statutory context, we are unable to agree that such a broad usage of the term ‘requisition’ was intended. The manner of its use in conjunction with the term ‘condemnation’ convinces us that requisition as used in section 112(f) means the taking of property by governmental authority for public use. In Filbin Corporation v. United States, 266 F. 911, an action to recover compensation for property taken, the court, in comparing requisition to condemnation, said:
In ordinary parlance— perhaps in legal parlance— the word ‘requisition’ is the more often used in reference to the taking of personal property, and the word ‘condemnation’ to the taking of real estate. * * *
The court goes on to point out that the result of either is a compulsory taking of private property for public use. See also Benedict v. United States, 271 F. 714.
Under the New Jersey statute, the court is merely empowered to decree the dissolution of a corporation where the management and ownership is equally divided and in disagreement. In such a situation, there is no taking by governmental authority, much less a taking for public purposes. There was no threat or imminence of a requisition in the instant case.
In Philip F. Tirrell, supra, the taxpayer sold his 50 per cent interest in a manufacturing corporation as a result of the threat of the corporation's creditors that if one of the two 50 per cent shareholders did not sell out to the other, the creditors would seek court action to have the corporation placed in a general receivership. The other 50 per cent shareholder offered either to buy the taxpayer's stock or to sell his own at a specified price. As the taxpayer was unable to raise the stated amount necessary to buy the stock of the other shareholder, he sold his own stock for that amount. He sought to qualify the transaction as an involuntary conversion as a result of the exercise of the power of requisition or condemnation, or the threat or imminence thereof. In denying that such a conversion was an involuntary conversion under the predecessor section to section 112(f), we held that ‘(n)o element of condemnation or the power of requisition or the threat or imminence thereof is present in this case.’
While there are factual differences between the instant case and the Tirrell case, we believe that the rationale of that case supports our conclusion in the instant case.
Since we have concluded that the transaction here was not an involuntary conversion with the nonrecognition provisions of section 112(f), the question whether certain expenditures by petitioner qualified as the cost of replacement property need not be considered or decided.