Opinion
No. 42614.
April 7, 1941.
Action by the National Rubber Machinery Company against the United States to recover back income taxes paid.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the evidence adduced and the report of a commissioner, makes the following special findings of fact:
1. Plaintiff is, and at all times herein mentioned was, a corporation duly organized and existing under the laws of the State of Ohio, with its principal office in Akron, Ohio. It was organized for the purpose of acquiring and carrying on the business of five corporations, hereinafter sometimes for convenience referred to as the "transferor corporations," engaged in the manufacture and sale of rubber machinery.
2. On July 12, 1928, plaintiff acquired, as of April 1, 1928, the entire properties, assets, business, and goodwill of the Akron Rubber Mold Machine Company, a corporation, the Banner Machine Company, a corporation, the DeMattia Brothers, Inc., a corporation, and DeMattia Foundry Machine Company, a corporation (both hereinafter sometimes for convenience referred to collectively as the DeMattia Companies); and the entire property, assets, and goodwill, except the land, buildings, accounts, bills receivable, cash, and securities of the Kuhlke Machine Company, a corporation. These properties were acquired by payment to the respective corporations on the same date, to wit, July 12, 1928, of cash, issuance of plaintiff's no par value stock, and assumption of liabilities as follows:
----------------------------------------------------------------------------------------- Plaintiff's Name of corporation Cash shares of no Liabilities par value assumed stock ----------------------------------------------------------------------------------------- To Akron Rubber Mold Machine Co ........ $489,092.90 12,000 $136,679.74 To Banner Machine Co ...................... 499,818.00 4,000 38,924.50 To the Kuhlke Machine Co .................. 169,895.61 5,080 .............. To the DeMattia Cos ....................... 365,529.16 11,000 59,873.08 ----------------------------------------------------------------------------------------- 3. The costs of assets received by plaintiff from each of said corporations, computed on the basis of cash paid, stock issued at market value of $18 7/8 per share, and liabilities assumed, were as follows:Akron Rubber Mold Machine Co ..................... $852,272.64 DeMattia Companies ........ 633,027.24 Kuhlke Machine Co ......... 265,690.61 Banner Machine Co ......... 614,242.50
4. The allocation of the aforesaid costs to depreciable assets in the cases of the DeMattia Companies and of Akron Rubber Mold Machine Company, and additions subsequent to July 12, 1928, are as follows:
------------------------------------------------------------------------------------------ Akron Rubber Mold De Mattia Cos. Machine Co. Year and classification ------------------------------------------------------------ Allocated Additions Allocated Additions cost cost ------------------------------------------------------------------------------------------ Buildings: 1928 acquisitions ........ $153,057.00 ........... $174,334.97 ............. 1928 additions ........... ............. $52.65 ............ $5,920.06 1929 additions ........... ............. 16,570.87 ............ 85.92 1930 additions ........... ............. 3,240.00 ............ 21,339.46 Machinery: 1928 acquisitions ........ 281,568.62 ........... 163,224.93 ............. 1928 additions ........... ............. 24,520.72 ............ 11,586.57 1929 additions ........... ............. 56,318.19 ............ 4,079.72 1930 additions ........... ............. 13,049.03 ............ 2,491.65 Tools: 1928 acquisitions ........ 65,708.07 ........... 11,322.75 ............. 1928 additions ........... ............. 1,223.04 ............ 292.03 1929 additions ........... ............. 5,848.56 ............ 656.22 1930 additions ........... ............. 1,374.00 ............ 20.00 Automobiles: 1928 acquisitions ........ 1,534.47 ........... 1,723.89 ............. 1928 additions ........... ............. 882.75 ............ 1,400.00 1929 additions ........... ............. 3,126.60 ............ 814.53 1930 additions ........... ............. 817.00 ............ 362.50 Furniture and fixtures: 1928 acquisitions ........ 9,054.57 ........... 4,917.16 ............. 1928 additions ........... ............. 398.43 ............ 373.12 1929 additions ........... ............. 799.45 ............ 432.95 1930 additions ........... ............. 473.66 ............ 87.50 Patterns: 1928 acquisitions ........ 35,554.57 ........... 10,813.12 ............. 1928 additions ........... ............. 4,361.14 ............ 611.50 1929 additions ........... ............. 5,173.51 ............ 413.00 1930 additions ........... ............. 4,665.26 ............ ............. ---------------------------------------------------------------------------------------------------- 5. The assets acquired by plaintiff from the said five transferor corporations had estimated average useful lives after April 1, 1928, as follows:Estimated remaining Description of assets: useful life Buildings ............................. 28.57 years Machinery and equipment ............... 16.6 years Tools and implements .................. 3 1/3 years Furniture and fixtures ................ 10 years Automobile equipment .................. 4 years Patterns .............................. 4 years
6. The additions to the aforesaid assets had estimated remaining useful lives after the respective dates of acquisition as follows:
Estimated remaining Description of assets: useful life Buildings .................................... 40 years Machinery and equipment ...................... 25 years Tools and implements ......................... 4 years Furniture and fixtures ....................... 10 years Automobile equipment ......................... 4 years Patterns ..................................... 5 years
7. The depreciable assets acquired by plaintiff from the Akron Rubber Mold Machine Company and the DeMattia Companies represented costs to those corporations as follows:
Costs to said Name of transferor corporation: corporations Akron Rubber Mold Machine Co .......................... $394,255.50 DeMattia Companies .................... 259,710.85
8. The assets acquired by plaintiff from the said five transferor corporations had an aggregate fair market value as of the date of acquisition of $2,365,232.99 allocated to assets among the various corporations as follows:
-------------------------------------------------------------------------------------- Name of corporation from whom Depreciable Other fixed Current as- assets are acquired assets assets (non- sets (nono depreciable) depreciable. -------------------------------------------------------------------------------------- Akron Rubber Mold Machine Co .......... $546,477.30 $62,438.20 $243,357.14 DeMattia Companies ....................... 366,236.82 76,923.83 189,866.59 Kuhlke Machine Co ........................ 111,554.95 150,000.00 4,135.66 Banner Machine Co ........................ 417,201.57 6,602.87 190,438.06 -------------------------------------------------------------------------------------- 9. At all times prior and subsequent to the transfer of the assets to the plaintiff corporation (i. e., to date of dissolution of the respective transferors), the stockholdings of the respective corporations were as follows: S.W. Harris and G. F. Hobach together owned all of the stock of the Akron Rubber Mold Machine Company; M. D. Kuhlke and O. J. Kuhlke together owned all of the stock of the Kuhlke Machine Company; F. H. Groves and Elmer T. Coyle owned upwards of two-thirds of the stock of the Banner Machine Company; and Barthold and Peter DeMattia owned or controlled 80 percent of all of the stock of DeMattia Brothers, Inc., and 95 percent of all of the voting stock of DeMattia Foundry Machine Company. The balance of the stock of the Banner Machine Company and the DeMattia Companies was owned by other and disinterested parties.10. The fair market value of plaintiff's no par value stock on July 12, 1928, was $18 7/8 per share.
11. The aforementioned assets of the Akron Rubber Mold Machine Company, Kuhlke Machine Company, DeMattia Brothers, Inc., the DeMattia Foundry Machine Company, and the Banner Machine Company were acquired by plaintiff pursuant to contracts dated May 4, 1928, May 17, 1928, May 15, 1928, and May 4, 1928, respectively, between the majority stockholders of said corporations and one Francis Quinn. Said contracts were subsequently modified in minor respects not herein material, except that plaintiff's bond issue was definitely fixed at $1,350,000 par value.
12. The agreement between Quinn and Stanley W. Harris and G. F. Hobach, owners of all the stock of the Akron Rubber Mold Machine Company, provided for the sale of the entire properties, assets, business and goodwill of said Akron Rubber Mold Machine Company to plaintiff for cash, the assumption of liabilities and 12,000 shares of plaintiff's stock.
The agreement between Quinn and M. D. Kuhlke and O. J. Kuhlke, owners of all the stock of Kuhlke Machine Company, provided for the sale of only a portion of the assets of the Kuhlke Machine Company to plaintiff for cash and 5,080 shares of plaintiff's stock.
The agreement between Quinn and Barthold and Peter DeMattia, who owned or controlled 80 percent of all the stock of DeMattia Brothers, Inc., and 95 percent of all the voting stock of DeMattia Foundry Machine Company, provided for the sale of the entire properties, assets, business and goodwill of said corporations to plaintiff for cash, the assumption of liabilities and 11,000 shares of plaintiff's stock.
The agreement between Quinn and F. H. Groves and Elmer T. Coyle, who owned approximately two-thirds of the stock of Banner Machine Company, provided for the sale of the entire properties, assets, and goodwill of the Banner Machine Company to plaintiff for cash and 4,000 shares of plaintiff's stock.
13. Except for the provisions necessarily peculiar to each transferor, such as a description of parties, assets transferred, and consideration received, all of the agreements were similar in that each provided, among other things: that a corporation (plaintiff herein) would be formed with an authorized capital stock of 152,000 shares of common stock of no par value; that said corporation would issue first mortgage convertible 15-year Gold Bonds bearing interest at 6 percent per annum, payable semiannually, in an amount of approximately $1,300,000; that all of said agreements would be assigned to plaintiff in consideration for the issuance to said Quinn, as the promoter, of 15,000 shares of plaintiff's stock; that plaintiff would sell said bond issue to J. A. Sisto Company, bankers, hereinafter sometimes called Sisto, for and in consideration of a payment of 90 percent of the par value thereof, and 35,000 shares of its common stock for the sum of $15 per share; and the shares of plaintiff's stock to be issued to the transferor corporations in part consideration for their assets, as aforesaid, would, at the request of Sisto, be deposited in escrow.
14. On June 4, 1928, in accordance with the provisions of the said four agreements, Francis Quinn entered into an agreement with plaintiff whereby he agreed to assign, and in fact did assign, to plaintiff the aforesaid agreements, and plaintiff agreed to carry out their provisions.
15. On June 29, 1928, Sisto entered into an agreement with plaintiff to purchase $1,300,000 of its bonds at 90 percent of the par value thereof, and 35,000 shares of plaintiff's common stock at $15 a share. The agreement further provided that, subject to the approval of counsel as to legal proceedings, Sisto would make a public offering of the bonds and of the stock not later than sixty days after the execution of said agreement. Said agreements were carried out in accordance with their terms.
16. Immediately upon receipt of the cash from the plaintiff on July 12, 1928, as aforesaid, each of the transferor corporations distributed the cash received by it to its individual stockholders.
17. The corporations whose assets were transferred to plaintiff on July 12, 1928, as aforesaid, were dissolved on the following dates, respectively:
Akron Rubber Mold Machine Co................ Dec. 17, 1928 Kuhlke Machine Co.......... Mar. 20, 1931 DeMattia Foundry Machine Co................ Nov. 27, 1928 DeMattia Brothers, Inc..... Nov. 27, 1928 Banner Machine Co.......... Oct. 3, 1928
18. On June 26, 1928, Sisto entered into an agreement with Jerome B. Sullivan Co. and E. F. Gillespie Co., hereinafter called Sullivan and Gillespie, investment bankers with offices in New York City, for the sale to said investment bankers of 35,000 shares of stock of plaintiff. The terms of said agreement were embodied in a letter from Sisto to Sullivan and Gillespie, dated June 27, 1928, which is as follows:
"Confirming the agreement between us yesterday, we beg to advise you as follows:
"We have agreed to purchase, subject to the approval of counsel and other conditions usually contained in Bankers' contracts, $1,300,000 out of a total issue of $1,350,000 First Mortgage Convertible 6% Gold Bonds due July 1, 1943, of National Rubber Machinery Company, an Ohio Corporation, the issue being described more fully in the enclosed preliminary proof of circular.
"We have also agreed to purchase, subject to the same conditions, 35,000 shares of the Common Stock of this Company, which 35,000 shares of stock you have agreed to repurchase from us (when, as, and if we receive and accept the same) at $18.25 per share, payment to be made on the day of closing of our contract with the Company.
"In connection with your offering of the stock, you agree not to publicly offer the same in your initial advertisement at more than $22.75 per share and we are to have the right to withdraw 10,000 shares on the same terms that you offer the stock to other dealers. In connection with the Selling Group which we may form to distribute the bonds, we are to allot you, jointly, $200,000 face amount of bonds on the same terms that we allot the same to other Members of the Group.
"We also agree that you are to have an interest in our profits above 91, less expenses, in our sale of $100,000 face amount of said bonds, but the said last-mentioned $100,000 of bonds are not to be delivered to you, but are to be sold by us.
"We also agree to pay to you the sum of $5,000 to cover in part, your advertising expenses in connection with your public offering of the said stock, which payment is to be made upon demand by you, when, as, and if you are billed for said advertising."
19. The said stock and bonds were listed temporarily by Sullivan and Gillespie on the New York Curb Exchange on or about June 28, 1928. By July 12, 1928, Sisto, Gillespie, and Sullivan had made binding commitments for the sale to members of the public of said 35,000 shares of stock and $200,000 face value of bonds and had received payment in full therefor. By July 3, 1928, plaintiff's entire bond issue of $1,350,000 had been sold, and on July 5, 1928, Sisto Company, by letter, advised the New York Curb Market Association that it (Sisto) would be ready to make delivery of the bonds in temporary form on July 12, 1928.
20. On June 30, 1928, Sisto Company wrote the Banner Machine Company proposing to pay Banner Machine Company $2,000, or 50 cents a share, for an option to buy plaintiff's shares to be received by it within a period of sixty days at $24 a share, provided that Banner Machine Company escrow said shares on receipt thereof.
Said offer was accepted by the Banner Machine Company on or about July 2, 1928 (prior to July 12, 1928), and on that date (July 2, 1928), Sisto Company sent the Banner Machine Company a check for $2,000 as the consideration for the option.
On July 10, 1928, Sisto Company wrote E. F. Gillespie Company advising that a 25 percent interest in said option had been allocated to Gillespie Company and a 25 percent interest to Jerome B. Sullivan Company. Said option was exercised by Sisto Company, and 2,000 of said Banner shares were also subsequently sold by Sullivan and Gillespie.
21. Subsequent to September 10, 1928, the Banner stockholders retained no stock in plaintiff whatsoever.
22. Immediately after the issuance of its stock on July 12, 1928, plaintiff's total issued and outstanding stock consisted of 82,080 shares and, subject to the agreements and commitments hereinabove described, were owned as follows:
Name of owner: Number of Shares owned Akron Mold Machinery Co................. 12,000 Banner Machine Co.......................... 4,000 Kuhlke Machine Co.......................... 5,080 DeMattia Companies ....................... 11,000 J. A. Sisto Company, Bankers of New York . 35,000 Francis Quinn, Promoter .................. 15,000
23. Said 35,000 shares received by Sisto were on the same day, to wit, July 12, 1928, turned over to Sullivan and Gillespie, who paid Sisto $18.25 per share therefor from the proceeds of their public offering. The 35,000 shares were then distributed and delivered by Sullivan and Gillespie to the public in accordance with commitments theretofore made.
None of said shares was sold to any of the corporations whose assets were acquired by plaintiff, or their stockholders, nor did Gillespie, Sullivan or Sisto keep any of plaintiff's stock.
24. Immediately after the reorganization of the five companies permanent officers of the plaintiff were elected. Of these officers, S.W. Harris was president; Barthold DeMattia, Peter DeMattia, O. J. Kuhlke, Elmer T. Coyle, and F. H. Groves were vice presidents; M. D. Kuhlke was treasurer; G. F. Hobach was secretary; F. L. Haveron, of the same address as J. A. Sisto Co., was assistant secretary and assistant treasurer. The directors of plaintiff were the above officers, together with Graham Adams of the Sisto address, and S. Stanwood Menken, attorney for Sisto.
25. On March 15, 1930, plaintiff filed with the Collector of Internal Revenue at Cleveland, Ohio, its income tax return for the calendar year 1929, showing a total income tax liability for the said year of $54,097.77, which amount was duly paid in installments as follows:
Date: Amount Mar. 20, 1930 ...................... $13,524.45 June 16, 1930 ....................... 13,524.45 Sept 13, 1930 ....................... 13,524.45 Dec. 11, 1930 ....................... 13,524.42
In said return for the year 1929 plaintiff took a deduction for depreciation of $90,392.42, as follows:
--------------------------------------------------- Previous Year 1929 Kind of Property nine months --------------------------------------------------- Buildings.............. $12,970.93 $18,402.88 Machinery and equipment............. 50,802.73 66,637.64 Delivery equipment..... 2,246.67 3,103.71 Furniture and equipment.............. 1,778.99 2,248.19 ------------- ------------ Total ................. .......... 90,392.42 -----------------------------------------------------
26. On March 16, 1931, plaintiff filed with the Collector of Internal Revenue at Cleveland, Ohio, its income tax return for the calendar year 1930, showing a total income tax liability for said year of $11,651.82, which amount was duly paid in installments as follows:
Date: Amount March 19, 1931 ................... $2,912.96 June 16, 1931 .................... 2,912.96 Sept. 15, 1931 .................... 2,912.95 Dec. 16, 1931 .................... 2,912.95
In said return for the year 1930 plaintiff took a deduction for depreciation of $81,747.34, as follows:
------------------------------------------------- Kind of property Previous Year 1930 years ------------------------------------------------- Buildings............. $31,373.81 $17,629.48 Machinery and equipment............ 117,441.37 59,089.00 Furniture and fixtures.............. 4,027.18 1,940.48 Delivery equipment 5,350.38 3,087.48 ------------ ----------- Total ............ ........... 81,747.34 ------------------------------------------------
27. In these returns plaintiff computed depreciation on the basis of cost to its predecessor companies.
28. On October 5, 1931, plaintiff filed with the Collector of Internal Revenue at Cleveland, Ohio, a claim for refund for the calendar year 1929, in which it asked for the refund of $54,097.77, upon the ground, among others, that depreciation on its assets should be on the basis of the cost to it of those assets.
On March 6, 1933, plaintiff filed with the said Collector a claim for refund for the calendar year 1930, in which it asked for the refund of $11,651.82 upon the same ground with respect to depreciation as that contained in the claim for 1929.
29. On March 12, 1932, the Commissioner of Internal Revenue determined and allowed a refund to the plaintiff for the calendar year 1929 in the amount of $2,963.59, and he determined and allowed a refund to plaintiff for 1930 in the amount of $4,535.35.
The balance of the claim for refund for the year 1929 was disallowed on a schedule dated March 12, 1932, and the balance of the claim for refund for the year 1930 was disallowed on a schedule dated June 28, 1933, notice of which was mailed to plaintiff by registered mail on June 29, 1933.
30. In his determination of plaintiff's tax liability for 1929 and 1930, as aforesaid, the Commissioner of Internal Revenue computed plaintiff's depreciation, (1) with respect to assets acquired from the Banner Machine Company and the Kuhlke Machine Company on the basis of the cost thereof as reflected by the aggregate of cash and fair market value of stock paid and issued therefor, and the liabilities assumed in respect thereto; and (2) with respect to assets acquired from the DeMattia companies and the Akron Rubber Mold Machine Company on the basis of the cost thereof to said predecessor corporations as shown on the latter's books. The depreciation allowed for each year is as follows:
------------------------------------------------ Depreciation on assets acquired from each (plus Corporation additions) ---------------------------- 1929 1930 ------------------------------------------------ Banner Machine Co Co............... $49,740.37 $41,142.18 Kuhlke Machine Co............... 15,950.48 16,033.80 Akron Rubber Mold Machine Co............... 38,140.27 40,295.00 DeMattia Brothers, Inc............... 13,927.78 12,946.46 DeMattia Foundry Machine Co........ 7,835.23 7,681.18 ------------ ------------ Total ............ 125,594.13 118,098.62 ------------------------------------------------
Hamel, Park Saunders, of Washington, D.C. (Charles D. Hamel and Lee I. Park, both of Washington, D.C. Lloyd G. Wilson, of New York City, and C. F. Rothenburg, of Washington, D.C. on the brief), for plaintiff.
John W. Husey, of Washington, D.C. and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert A. Anderson and Fred K. Dyar, both of Washington, D.C. on the brief), for defendant.
Before WHALEY, Chief Justice, and WHITAKER, LITTLETON, MADDEN, and JONES, Judges.
The question in this case is the proper basis for the computation of depreciation on certain assets acquired by the plaintiff from the Akron Rubber Mold Machine Company, DeMattia Brothers, Inc., and De Mattia Foundry Machine Company.
These assets were acquired under these circumstances: In the early part of 1928 one Francis Quinn approached each of the three above companies, and also the Banner Machine Company and the Kuhlke Machine Company, with proposals for the transfer of their assets to a corporation to be organized, the plaintiff in this case. Contracts were entered into between him and each of these five companies, under which they agreed to convey all of their assets to this corporation for a certain amount in cash, the assumption of their liabilities, and the issuance to them of a certain number of shares of plaintiff's stock, except that the contract with the Kuhlke Machine Company provided for a transfer of only a portion of its assets to plaintiff, and none of its liabilities were assumed. Plaintiff was to have an authorized capital of 152,000 shares of common stock of no par value. 15,000 shares of it were to be issued to Francis Quinn for his services, and 35,000 shares were to be sold to J. A. Sisto Company, bankers, at $15 a share. The plaintiff was also to issue $1,300,000 of first mortgage six percent bonds, which were to be sold to J. A. Sisto Company at 90 percent of their par value.
Pursuant to these agreements, a total of 82,080 shares of plaintiff's stock were actually issued, 12,000 to the Akron Rubber Mold Machine Company, 11,000 to the DeMattia companies, 4,000 to Banner Machine Company, 5,080 to Kuhlke Machine Company, 15,000 to Francis Quinn, and 35,000 to J. A. Sisto Company.
The Commissioner of Internal Revenue held that this transaction was a reorganization and that the proper basis for depreciation of the assets received from the Akron Rubber Mold Machine Company and the two DeMattia companies was the cost of those assets to those companies, and not to the plaintiff. But, on the contrary, he held that the proper basis for the assets received from the Banner Machine Company and the Kuhlke Machine Company was their cost to plaintiff, or, in the absence of proof of cost, their market value at the time plaintiff acquired them. This, he held, was for the reason that neither the Banner Machine Company nor Kuhlke Machine Company was a party to the reorganization. The Banner Machine Company was not a party to the reorganization because prior to the time it received the stock from the plaintiff it had made commitments for the sale of it and, in fact, did later sell it; the Kuhlke Machine Company was not a party to the reorganization because the plaintiff did not acquire "substantially all of the properties of the company."
The assets of these companies being eliminated, the controversy is over the proper basis for depreciation of the Akron and DeMattia assets. The defendant says that this basis is their cost to the Akron and the DeMattia companies, for either one or two reasons: first, because the transaction was one described in section 112(b)(4) and 112(d)(1) of the Revenue Act of 1928 45 Stat. 791, 816, 817, 26 U.S.C.A.Int.Rev. Acts, pages 377, 378; or, second, it comes within one of the two exceptions to the general rule set out in subparagraphs (7) and (8) of section 113(a) of said act, 26 U.S.C.A.Int.Rev. Acts, page 382. The plaintiff says that cost to it is the proper basis.
It seems clear that the transaction is one such as is described in section 112(b)(4) and 112(d)(1). Section 112(b)(4) provides: "No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization."
Section 112(d)(1) makes this section applicable, even though property or money in addition to stock, be exchanged for other property, provided such property or money be distributed in pursuance to the plan of reorganization. The transaction here clearly was a reorganization, and the money received by the plaintiff's predecessors was distributed by them pursuant to the plan of reorganization, and the above-quoted sections, therefore, are applicable.
From this premise the defendant argues that since these sections provide that no gain or loss is recognized as the result of such a transaction, the proper basis for computing depreciation on the property received must be its basis in the hands of the transferor. This probably would follow, except for the fact that the method for computing depreciation in a transaction such as we have here is expressly provided for in sections 113 and 114, 26 U.S.C.A.Int.Rev. Acts, pages 380, 383.
Section 114 makes the basis for computing depreciation the same as the basis for computing gain or loss, and section 113 fixes cost as the ordinary basis for computing gain or loss on property acquired after February 28, 1913; but it sets out twelve exceptions to this general rule. Exception number (6) provides that if property was acquired in the manner this property was acquired, "the basis shall be the same as in the case of the property exchanged." This seems to support defendant's position; but the section concludes — "This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it."
Thus we see that while this section is applicable to the corporation transferring its property for stock, it is expressly made inapplicable to the corporation issuing its stock for property.
The case of the latter corporation, the one receiving property for its stock, is taken care of in the succeeding paragraphs. Paragraph (7), immediately following the above-mentioned paragraph, provides that the basis for the property received for stock in a reorganization shall be the same as it would be in the hands of the transferor, but only in the event that "immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them." If such interest or control did not remain in such hands, then, of course, the general rule applied, to wit, cost.
In subparagraph (8) another case is described where cost to the seller is not the proper basis. This is where property is transferred by one or more persons to a corporation solely in exchange for its stock or securities and where immediately after the exchange the persons transferring the property are in control of the corporation in substantially the same proportion as their former interests in the property transferred. (The defendant concedes that for this section to be applicable, as well as subsection (7), the transferors must have not less than an 80 percent interest or control in the transferee corporation.)
These are the only two exceptions that could have any application to the transaction in the case at bar. In all other cases section 113 expressly says that cost to the purchaser shall be the basis. Unless, therefore, 80 percent interest or control remains in the same persons after the transfer, the proper basis is the cost to the plaintiff, and not cost to the persons who transferred the property to plaintiff. The question to be answered, therefore, is, Did this 80 percent or more remain in the hands of the same persons ?
The total number of shares issued was 82,080. Eighty percent of this is 65,664 shares. It is conceded that the 23,000 shares issued to the Akron and the two De Mattia companies are to be counted in reckoning this 80 percent. On the other hand, it is conceded that the shares issued to the Kuhlke Machine Company are not to be counted, because the plaintiff did not acquire substantially all the property of that company; and it is also conceded that the shares issued to the Banner Machine Company are not to be counted because of the fact that prior to its receipt of these shares the Banner Machine Company had entered into a binding option to sell them, and because the option was later exercised and the shares were in fact sold.
This latter concession was in accord with the decision of the Sixth Circuit Court of Appeals in Banner Machine Co. v. Routzahn, 107 F.2d 147, 149, certiorari denied, 309 U.S. 676, 60 S.Ct. 713, 84 L.Ed. 1021; rehearing denied 310 U.S. 656, 60 S.Ct. 896, 84 L.Ed. 1420. It was there held, under the precise facts here, that, insofar as this company was concerned, the transaction then under review was "nothing but the purchase of appellant's assets." The court said: "It is true that in addition to cash, stock was received; but the purpose to reduce that stock to cash was clearly shown by the giving of the option to the underwriter for the sale of the stock prior to the receipt thereof. Appellant in effect discounted the stock for cash. The two corporations in fact did not contemplate a reorganization, merger or consolidation."
This reduces the controversy to the 35,000 shares of stock issued to J. A. Sisto Company. The plaintiff says that these also ought to be excluded from consideration on the same theory the Banner shares were excluded, because Sisto Company also had entered into a binding obligation to sell these shares prior to the time they received them. The facts are that prior to the reorganization J. A. Sisto Company, through their associates Jerome B. Sullivan Company and E. F. Gillespie Company, had entered into binding commitments with members of the public for the sale of all of said 35,000 shares of stock, and all of the bonds which Sisto Company had agreed to purchase; and immediately after the reorganization these stocks and bonds were in fact sold to the public, and Sisto Company had no further interest therein. (See finding 19.) It is true that immediately after the issuance of plaintiff's stock Sisto Company did own 35,000 shares, but they owned them under a binding agreement to sell them immediately. As was said by the Ninth Circuit Court of Appeals in Commissioner v. Schumacher Wall Board Corp., 9 Cir., 93 F.2d 81 — "* * * the series of transactions must be viewed as a unit, and the ownerships of 80 per cent. interest compared at the beginning and end of the consummation of the entire plan."
So viewing the transaction, and on the authority of the cases cited, these shares must be excluded in determining whether or not 80 percent control remained in the hands of the same persons.
Deducting these 35,000 shares from the total shares issued, leaves only 47,080 shares, which is considerably less than the 80 percent fixed by the statute.
It results that plaintiff is correct in saying the proper basis for the assets in question is their cost to it.
Entry of judgment will be deferred until the filing of a stipulation by the parties, or, in the absence of such stipulation, until the incoming of a report of a commissioner showing the amount due plaintiff in accordance with this opinion. It is so ordered.