October 5, 1942.
John E. McClure, of Washington, D.C. (O.H. Chmillon, David W. Richmond, and Miller Chevalier, all of Washington, D.C., Spalding, Sibley, Troutman Brock, of Atlanta, Ga., and Maud Ellen White, of Washington, D.C., on the brief), for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by the Coca-Cola Company against the United States to recover back alleged overpayment of income taxes for the year 1931.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following Special findings of fact:
The First Cause of Action.
1. Plaintiff is a Delaware corporation which was organized September 11, 1919, with its corporate office and principal place of business located at Wilmington, Delaware. Its business and that of its subsidiaries and affiliates is the manufacturing, selling, bottling, distributing, and marketing of a syrup and soft drink, both under the trade-mark "Coca-Cola."
2. March 15, 1932, plaintiff filed a consolidated income tax return on behalf of itself and its affiliated domestic subsidiary corporations for the taxable year ending December 31, 1931, which return showed a consolidated net income of $14,191,010.55 and a tax due of $1,662,458.78. That tax was paid as follows:
March 15, 1932 ......................... $ 415,614.70 June 13, 1932 .......................... 415,614.70 September 14, 1932 ..................... 415,614.69 December 14, 1932 ...................... 415,614.69
3. Thereafter upon an audit of that consolidated income tax return the Commissioner of Internal Revenue advised plaintiff that the consolidated net income for the taxable year 1931 had been adjusted to $19,388,314.64 and that the adjustments resulted in additional income tax due from plaintiff in the amount of $166,547.61 plus interest in the amount of $61,951.15. After appropriate assessment, plaintiff paid $210,702.62 of the total amount in cash June 8, 1938, and the balance ($17,796.14) was satisfied by a credit on or about May 27, 1938, by the application of an overpayment of taxes and interest for the calendar year 1930.
4. August 31, 1938, plaintiff filed a claim for refund for the calendar year 1931 in the amount of $228,498.76 and assigned as the principal ground for recovery that stock of a subsidiary company, The Rohawa Company, which had been received by plaintiff under certain circumstances hereinafter set forth, did not constitute a taxable dividend.
5. On or about November 29, 1939, the Commissioner, on a reexamination of plaintiff's consolidated income tax return for 1931 and on consideration of the claim for refund referred to above, determined that plaintiff's consolidated net income for 1931 amounted to $19,299,976.58, and that its income tax liability for that year amounted to $1,796,356.91, and issued a certificate of overassessment in the amount of $44,794.19 representing an overpayment of tax in the amount of $32,649.48 and an overpayment of interest in the amount of $12,144.71, which amounts (together with interest thereon as provided by law in the amount of $3,962.14) were refunded to plaintiff. January 11, 1940, the Commissioner notified plaintiff by registered mail that the remainder of the claim for refund was rejected.
6. In making the determination as set out in the preceding findings, the Commissioner included in plaintiff's taxable income an amount of $5,109,608 representing the fair market value of thirty shares of no par value stock of The Rohawa Company as constituting a taxable dividend from a foreign corporation.
7. The Coca-Cola Company of Canada, Ltd., hereinafter sometimes referred to as the Canadian Company, was a Canadian corporation organized September 29, 1923, and its entire capital stock was owned by plaintiff. The Rohawa Company was a Delaware corporation organized February 5, 1926. On June 27, 1931, it had outstanding twenty shares of capital stock, all of which was owned by plaintiff and which had been issued as set out in finding 10. On the latter date The Rohawa Company issued thirty additional shares of its stock to the Canadian Company for assets having a value of $5,109,608, and the Canadian Company immediately transferred the thirty shares of stock to plaintiff for reasons and under circumstances which will hereinafter appear.
8. By 1927 plaintiff's business and that of its subsidiaries had already proved very successful, its net income for 1927 amounting to more than $9,000,000. At this time there were in existence approximately 1,100 plants for the bottling of Coca-Cola throughout the country which plants with one or two exceptions were owned and operated independently of plaintiff. Some of these bottling plants were not being efficiently and profitably operated. About 1926 plaintiff decided upon an expansion program under which it would acquire bottling plants located at strategic points throughout the United States, improve their operating facilities, develop their territories, and put them on a profitable basis as an example for other outside bottlers of Coca-Cola.
9. The Rohawa Company was incorporated as a subsidiary of plaintiff in order to acquire and develop these bottling plants. At that time plaintiff had a board of directors consisting of nineteen members scattered throughout various sections of the United States and for this reason it was sometimes difficult to conduct business expeditiously. The Rohawa Company at first had a board of directors consisting of three members which was later increased to five, all of whom were officers or employees of the plaintiff and located in the same building so that special meetings could be held when necessary. The formation of The Rohawa Company thus provided a less cumbersome and more flexible method of acquiring and operating the bottling plants. Another reason for the organization of The Rohawa Company was to enable plaintiff to acquire its own Class A and common stock in the open market without its becoming generally known to the public.
10. The Rohawa Company was dependent on plaintiff for financing and it was necessary in order to enable The Rohawa Company to purchase and finance the bottling plants for plaintiff to make capital contributions to The Rohawa Company from time to time. The following tabulation shows the changes in the capital stock and capital surplus accounts of The Rohawa Company from March 1, 1927, through December 14, 1935, the name The Coca-Cola Company appearing therein having reference to plaintiff:
March 1, 1927: Original investment of $1,000,000 cash in The Rohawa Company by The Coca-Cola Company: 10 shares Common Stock (no par) ...................... $ 1,000.00 Contributed Surplus .................................. 999,000.00 ____________ 1,000,000.00 November 19, 1928: Additional cash investment by The Coca-Cola Company to the Rohawa Company's contributed surplus ........................ 1,000,000.00 April 8, 1930: The Coca-Cola Company purchased for cash an additional 10 shares Common Stock (no par) ....................................... 702,800.00 June 11, 1930: Additional contribution to surplus consisting of 193,686 shares of The Coca-Cola Company's Class "A" Stock having a value of .................................. 9,442,066.45 June 27, 1931: 30 shares Common Stock (no par) issued to The Coca-Cola Company of Canada, Ltd., in exchange for: 31,204 shares of the Coca-Cola Company's Class "A" Stock ............................... 1,610,906.50 U.S. Government Bonds ................................ 3,400,000.00 ____________ 5,010,906.50 February 29, 1932: The Coca-Cola Company made an additional contribution to surplus of amounts aggregating $2,055,948.13, representing loans previously made to The Rohawa Company.
December 30, 1933: The Coca-Cola Company made a further contribution to surplus of amounts aggregating $439,865.61, representing loans previously made to The Rohawa Company.December 30, 1933: The Rohawa Company issued 50 shares of Common Stock (par value of $5.00 per share) to The Coca-Cola Company in exchange for: The Capital Stock of the following companies: New England Coca-Cola Bot. Co ....................... $ 250,000.00 Coca-Cola Bot. Co. of Conn .......................... 50,000.00 The Coca-Cola Bot. Co. (Atlanta) .................... 4,946,223.97 _____________ 5,246,223.97 And Accounts Receivable Against: New England Coca-Cola Bot. Co. ...................... 117,519.87 Coca-Cola Bot. Co. of Conn .......................... 305,132.17 ____________ 5,668,876.01 ============ Amount credited to Capital Stock .................... 250.00 Amount credited to Capital Surplus .................. 5,668,626.01 ____________ 5,668,876.01 ============ January 31, 1934: The Coca-Cola Company made an additional contribution to Surplus of $952,500.00 representing advances for purchase of Common Stock of The Coca-Cola Company.
The Class A stock paid dividends during the periods here involved of $3.00 per share.
Loss from operations was reduced $9,900 by Class "A" Dividend received by The Coca-Cola Export Corporation.
November 30, 1934: After setting up a Reserve for Subsidiary Losses at 9-30-34, amounting to $1,012,459.72, out of earned surplus, The Rohawa Company declared a dividend in kind consisting of 200,000 shares of The Coca-Cola Company Class "A" Stock,fn1 having a value of $9,767,109.50, payable to The Coca-Cola Company.
November 30, 1934: Said stock being transferred for purpose of retirement. $2,303,342.88 of the amount of the above dividend was charged against earned surplus, being the balance remaining in the earned surplus account after providing for subsidiary losses at September 30, 1934. $7,463,766.62, representing the remainder of the above dividend, was charged against Capital, or Contributed Surplus.
March 2, 1935: A dividend in kind, consisting of 14,100 shares of the Common Stock of The Coca-Cola Company, was declared. The value of the dividend, represented by cost of stock was ............................... $1,319,711.72 Earned Surplus available for dividends ............... 66,096.92 _____________ Balance charged against Capital Surplus ............................................ 1,253,614.80 ============= November 2, 1935: A dividend in kind, consisting of 124,520 shares of Class "A" Stockfn1 of The Coca-Cola Company was declared. The value of the dividend, represented by cost of stock was ............................... 6,360,903.92 Earned Surplus available for dividends ............... 470,635.86 ____________ Balance charged against Capital Surplus .......................................... 5,890,268.06 ============ December 14, 1935: A cash dividend was declared in the amount of ............................................ 1,000,000.00 Earned Surplus available for dividends ................ 675,399.33 ____________ Balance charged against Capital Surplus ............................................. 324,600.67
11. Pursuant to the purposes for which it was formed, The Rohawa Company acquired three bottling companies in 1928, three in 1929, two in 1930, five in 1931 (two of which were merged), one in 1932, and four in 1933. The balance sheets of The Rohawa Company from the beginning of its operations on March 1, 1927, to July 31, 1936, show the details of its investments in these various bottling companies, the advances or loans to the bottling companies so acquired, amounts borrowed by The Rohawa Company from plaintiff or its affiliates, and other facts as set out in Appendix A.
The investments by The Rohawa Company in these bottling companies are set out in the foregoing balance sheets under the heading "Inter-Company Investments" and represent the amounts paid for these subsidiaries, either for their capital stock or their assets. The amounts shown in these balance sheets under the heading "Inter-Company Accounts Receivable" show the cash or merchandise advanced to these companies by The Rohawa Company. In the "Inter-Company Accounts" in these balance sheets are shown amounts owing by The Rohawa Company to plaintiff and its affiliates, which amounts represent loans or advances to The Rohawa Company.
During the period from December 31, 1928, to December 3, 1934, the property, plant, and equipment accounts of the bottling companies acquired by The Rohawa Company increased from $164,071.23 to $1,604,142.72.
12. During the early part of the period when these bottling companies were being acquired and their plant facilities improved, the net result of their operations was a loss. However, from 1934 until 1940 substantial profits were shown. The following tabulation shows the balance (or deficit) in the surplus account of these various bottling companies (subsidiaries of The Rohawa Company) at the beginning of each year, the profit or loss during each year, dividends paid, and the balance at the end of each year:
Surplus Balance was adjusted by $361,554.11 net due to acquisition of The Coca-Cola Bottling Company — Atlanta, New England Coca-Cola Bottling Company, and Coca-Cola Bottling Company of Connecticut and disposition of the Coca-Cola Export Corporation, Sethness Products Company, and Atlanta Baseball Corporation.
The Rohawa Company was dissolved in 1936 and Subsidiaries transferred to The Coca-Cola Company. Beginning with year 1936 and through year 1940, Companies formerly held by The Rohawa Company are included.
13. Due to the losses which were being sustained by the bottling companies during their early period of development and in order that The Rohawa Company would have an adequate income to finance these companies during their period of development, various contributions were made to the surplus account of The Rohawa Company from time to time as shown in Finding 10. One of the changes in the capital account of The Rohawa Company gave rise to one of the major issues in this suit, namely, the change which occurred on June 27, 1931, through which The Rohawa Company increased its capital stock and acquired certain assets of the Canadian Company. That transaction was carried out in the following manner:
(a) June 17, 1931, a special meeting of the board of directors of The Rohawa Company was held at 10 a.m. in Atlanta, Georgia, with the following directors present: R.W. Woodruff, Harold Hirsch, A.A. Acklin, Harrison Jones.
The question under consideration at that meeting was a plan of reorganization which required an increase in the capital stock of The Rohawa Company whereby such increased capital stock would be exchanged for certain assets of the Canadian Company and the stock received therefor by the Canadian Company would be distributed to plaintiff. A resolution was adopted by the board of directors which provided for the increase of the authorized capital stock of The Rohawa Company to fifty shares without nominal or par value and that such stock might be issued by the corporation for such consideration as might be fixed from time to time.
(b) Immediately after the meeting referred to above, namely, June 17, 1931, at 10:30 a.m., a special meeting of the stockholders of The Rohawa Company was held in Atlanta, Georgia, at which meeting it was voted to increase the capital stock of The Rohawa Company from twenty shares no par value to fifty shares no par value as recommended by the board of directors at its special meeting which had just been held.
(c) Immediately after the stockholders meeting, namely at 10:45 a.m. on June 17, 1931, another special meeting of the board of directors of The Rohawa Company was held in Atlanta, Georgia, at which time a resolution was adopted reading so far as here material as follows:
"Whereas, it is the desire, pursuant to the plan of reorganization that this corporation make an offer to The Coca-Cola Company of Canada, Ltd., to acquire certain assets of The Coca-Cola Company of Canada, Ltd., by issuing stock in this corporation in exchange therefor:
"Now, Therefore, Be It Resolved, that this corporation acquire the following described assets of The Coca-Cola Company of Canada, Ltd., pursuant to the plan of reorganization to-wit:
"31,204 shares Class `A' Stock of The Coca-Cola Company valued at $1,610,906.50:
"$1,400,000.00 U.S. Bonds 3 3/8 % due June 15, 1949,
"$1,000,000.00 U.S. Bonds 3¾% due June 15, 1941,
"$1,000,000.00 U.S. Bonds 3 1/8 % due June 15, 1946,
in exchange for thirty shares of the capital stock of this corporation."
The plan of reorganization referred to in the above resolution and which plan was adopted read in part as follows: "The Coca-Cola Company of Canada, Ltd., a Canadian corporation, was to transfer to The Rohawa Company, a Delaware corporation, certain surplus assets in exchange for a certain number of shares of stock in The Rohawa Company, a Delaware corporation, which shares of stock were to be issued by The Rohawa Company to The Coca-Cola Company of Canada, Ltd. The Coca-Cola Company of Canada, Ltd., was to immediately distribute to its sole shareholder, The Coca-Cola Company, a Delaware corporation, the shares of The Rohawa Company's stock that the Canadian Company received, so that The Coca-Cola Company, a Delaware corporation, would then own the entire capital stock of The Rohawa Company, and no stock of The Coca-Cola Company of Canada, Ltd., was surrendered by The Coca-Cola Company, a Delaware corporation."
(d) On June 17, 1931, at 11 a.m., a special meeting of the board of directors of the Coca-Cola Company of Canada, Ltd., was held at Atlanta, Georgia, with the following directors present: R.W. Woodruff, Eugene Kelly, Harold Hirsch, Harrison Jones, A.A. Acklin, and S.F. Boykin.
At that meeting a resolution was adopted to the effect that pursuant to the plan of reorganization referred to in subsection (c) above, the Coca-Cola Company of Canada, Ltd., would exchange certain of its assets for thirty shares of the capital stock of The Rohawa Company and immediately distribute to its sole stockholder, plaintiff, the shares of stock of The Rohawa Company received by it.
The above directors of the Canadian Company occupied the following positions with plaintiff: R.W. Woodruff was president of plaintiff and a member of its board of directors. Eugene Kelly was not an officer or director but was employed by plaintiff and was president of the Canadian Company. Harold Hirsch was general counsel of plaintiff and a member of its board of directors. Harrison Jones and A.A. Acklin were vice presidents of plaintiff, and S.F. Boykin was its treasurer. Two other directors of the Canadian Company, who were not present, were C.E. Duncan and E.W. Grant who were treasurer and assistant treasurer, respectively, of the Canadian Company. As shown in subsection (a) above, Messrs. Woodruff, Hirsch, Acklin, and Jones were also directors of The Rohawa Company.
14. Pursuant to the corporate actions taken, as set out in the preceding finding, The Rohawa Company increased its capital stock to fifty shares and on June 27, 1931, issued to the Coca-Cola Company of Canada, Ltd., the thirty shares of its capital stock representing the increase thereof in exchange for property of the Coca-Cola Company of Canada, Ltd., which had a then value of $5,109,608 and consisted of the following assets:
"31,204 shares of class A stock of plaintiff;
"$1,400,000 U.S. Bonds 3 3/8 % due June 15, 1947-43;
"$1,000,000 U.S. Bonds 3 3/8 % due March 15, 1943-41;
"$1,000,000 U.S. Bonds 3 1/8 % due June 15, 1949-46."
Also pursuant to the corporate actions set out above, the Coca-Cola Company of Canada, Ltd., upon receipt of the thirty shares of capital stock of The Rohawa Company, distributed to plaintiff, its sole stockholder, these thirty shares of stock of The Rohawa Company without the surrender by the plaintiff of the stock which it owned in the Coca-Cola Company of Canada, Ltd.
15. Plaintiff did not receive in the year 1931 any of the assets of the Canadian Company which were transferred to The Rohawa Company in the transaction referred to in the preceding finding. The United States bonds received by The Rohawa Company in that transaction were sold by it in 1931 and the proceeds used to purchase class A stock of plaintiff. This class A stock and other stock of a like kind of plaintiff held by The Rohawa Company paid a dividend of $3.00 annually throughout the period of The Rohawa Company's existence and furnished substantial funds for The Rohawa Company with which to defray expenses and make capital expenditures.
16. The plan of expansion for the acquisition and improvement of bottling plants proved successful and by 1934 substantial profits began to be realized by these subsidiaries of The Rohawa Company. These profits largely passed into The Rohawa Company in the form of dividends, as shown by finding 12 where dividends amounting to $919,724.67 were paid to The Rohawa Company in 1934. With the successful operation of the subsidiaries of The Rohawa Company and the receipt by the latter Company of substantial dividends, The Rohawa Company in 1934 began making large distributions from its surplus account in the form of dividends or distributions to plaintiff its sole stockholder and parent company, as follows:
"November 30, 1934, a dividend in kind consisting of 200,000 shares of plaintiff's class A stock having a value of $9,767,109.50;
"March 2, 1935, a distribution in kind consisting of 14,100 shares of plaintiff's common stock having a value of $1,319,711.72;
"November 2, 1935, a dividend in kind consisting of 124,520 shares of class A stock of plaintiff having a value of $6,360,903.92;
"December 14, 1935, a cash dividend of $1,000,000."
The Rohawa Company began paying dividends to plaintiff from earnings and profits in 1933 and from that time until it was dissolved on July 31, 1936, it paid dividends from that source in the total amount of $7,311,342.96, leaving a balance of earned surplus at July 31, 1936, of $42,623.25.
It was the usual policy of the plaintiff to have its subsidiaries pay dividends to the parent each year based on the ability of the subsidiaries to pay, though this policy was not always observed as indicated in the succeeding finding.
17. The Canadian Company had undivided profits as of December 31, 1928, of $1,632.481.10; as of December 31, 1929, of $3,395,502.95; as of December 31, 1930, of $5,533,890.89; and as of December 31, 1931, of $7,557,803.73. For the years ending December 31, 1928 and 1929, the Canadian Company did not pay any dividends to plaintiff, its parent company, but in 1930 and 1931 paid cash dividends of $100,000 and $400,000, respectively.
The transaction of June 27, 1931, heretofore referred to, whereby the Canadian Company transferred certain assets to The Rohawa Company, as well as the transaction of June 11, 1930, when the plaintiff contributed 193,686 shares of its class A stock of the value of $9,442,066.45, and the transaction of February 29, 1932, when plaintiff contributed to the capital of The Rohawa Company $2,055,948.13 representing loans previously made, had for their purpose the building up of sufficient capital in the form of income-producing securities to enable The Rohawa Company to finance itself. The reason for having the transfer made directly from the Canadian Company to The Rohawa Company in the transaction of June 27, 1931, instead of in the manner in which other funds and assets were transferred to the Rohawa Company was, first, that it was less expensive and easier mechanically to have it done in that way; and second, on the advice of counsel, it was expected that it would minimize the expenses in the form of taxes incident thereto.
The Second Cause of Action.
18. In its income tax return for the taxable year 1931, which was filed as set out in finding 2, plaintiff signified its desire to have the benefits of section 131 of the Revenue Act of 1928, 45 Stat. 791, 26 U.S.C.A. Int.Rev. Acts, page 394, applied in the determination of its tax liability for that year.
19. At all times during the calendar year 1931 and prior thereto plaintiff owned all the authorized and outstanding stock of the Coca-Cola Company of Canada, Ltd., Toronto, Canada, a foreign corporation. Plaintiff and that subsidiary kept their books and filed their income-tax returns on the accrual basis of accounting. Their taxable year was the calendar year. During 1931 plaintiff received from the Coca-Cola Company of Canada, Ltd., dividends which were not deductible under section 23(p) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 359, as follows:
January 31, 1931 ............ $100,000.00 (Canadian currency) June 26, 1931 ............... 300,000.00 (Canadian currency) ___________ Total .................... 400,000.00 (Canadian currency)
These dividends of $400,000 were paid out of the accumulated profits of the Coca-Cola Company of Canada, Ltd., on which it paid Canadian income taxes both Dominion and provincial.
20. The dividends of $400,000 received by plaintiff from the Coca-Cola Company of Canada, Ltd., were included in plaintiff's Federal income-tax return for the year 1931 under Item 10 "Other income (including dividends received on stock of foreign corporations)." With that return and as a part thereof, plaintiff filed Treasury Department Form 1118 "Claim for Credit on Corporation Income-Tax Return for Taxes Paid or Accrued to a Foreign Country or Possession of the United States," and the supporting evidence required by that form. On that form and in its Federal income-tax return, plaintiff claimed a credit of $40,462.49 under the provisions of section 131(f) of the Revenue Act of 1928 for Canadian income taxes paid by the Coca-Cola Company of Canada, Ltd.
21. As shown in the findings relating to the first cause of action, the Commissioner, in reexamining plaintiff's consolidated income-tax return for the taxable year 1931, included in plaintiff's consolidated net income the sum of $5,109,608 representing an alleged dividend paid by the Coca-Cola Company of Canada, Ltd., to plaintiff, its sole stockholder. As a part of such redetermination, the Commissioner determined plaintiff's credit for foreign taxes deemed to have been paid by it under section 131(f) of the Revenue Act of 1928 to be $519,640.28 as shown in the certificate of overassessment, a copy of which is attached to the petition marked "Exhibit 2" and incorporated herein by reference. In determining that credit, the Commissioner followed the method of computation provided for in principle in the "new" Form 1118 (revised), a copy of which is attached to the petition marked "Exhibit 4" and incorporated herein by reference.
22. Prior to 1930 the consistent practice of the Commissioner was to determine the credit allowable under section 131(f) of the Revenue Act of 1928 and corresponding provisions of prior revenue acts in accordance with the method shown in the old Treasury Department Form 1118, Exhibit 5 of the petition, which is incorporated herein by reference.
Beginning in 1930, the consistent practice of the Commissioner was to determine the credit allowable under section 131(f) of the Revenue Act of 1928 and corresponding provisions of other revenue acts in accordance with the method shown in a new Treasury Department Form 1118, a copy of which appears in the record as Joint Exhibit 2 and is made a part hereof by reference.
Form 1118 was again amended in 1938 (Exhibit 4 of the petition which is incorporated herein by reference) and the Commissioner in his final computation of plaintiff's tax liability for 1931 followed the method outlined in that revised form in computing the foreign tax credit.
April 30, 1940, plaintiff filed a claim for refund of income taxes for 1931 in the amount of $56,300.24 and interest thereon of $20,942.15, a total of $77,242.39, and assigned as a ground therefor that its foreign tax credit had been erroneously computed by the Commissioner. The Commissioner rejected that claim of plaintiff and on May 24, 1940, notified plaintiff by registered mail of that action.
The question is whether a transfer of assets by a foreign subsidiary to a domestic subsidiary of plaintiff in exchange for a stock issue of the domestic subsidiary followed by a dividend of such stock to plaintiff should, in the circumstances of this case, be treated as a taxable dividend to plaintiff or as a transfer of assets through reorganization and hence nontaxable under the provisions of section 112(g) of the Revenue Act of 1928, 45 Stat. 791, 26 U.S.C.A. Int.Rev. Acts, page 379.
Plaintiff is a Delaware corporation which was organized in 1919 and which since that time has been engaged with its subsidiaries in the manufacturing, selling, bottling, and marketing of a syrup and soft drink under the trade-mark "Coca-Cola." In 1923 it organized the Coca-Cola Company of Canada, Ltd., hereinafter referred to as the "Canadian Company," and since that time has owned the entire stock of the Canadian Company. Prior to 1927, there were approximately 1,100 plants for the bottling of Coca-Cola throughout the United States, all of which with one or two exceptions were owned independently of plaintiff. Some of these bottling plants were not being efficiently and profitably operated. About 1926, plaintiff decided upon an expansion program under which it would acquire bottling plants located at strategic points throughout the United States and put them on a profitable operating basis as an example for other outside bottlers of Coca-Cola. In order to acquire and develop these bottling plants, plaintiff organized The Rohawa Company in 1926, all of its stock being owned by plaintiff.
The Rohawa Company was dependent on plaintiff for financing and it was necessary in order to enable that company to purchase and finance the bottling plants for plaintiff to make capital contributions to it from time to time. These contributions were very substantial, as shown from our findings. In furtherance of the major purpose for which it was formed, The Rohawa Company acquired eighteen bottling companies during the period from 1928 to 1933. Prior to 1934, these bottling companies had either operated at a loss or at most had shown only a small profit. On the other hand, over the period of its existence, plaintiff's operation as a whole had been very successful and the same was true of its foreign subsidiary, the Canadian Company, which had a surplus as of December 31, 1930, of over $5,500,000.
In 1931, when The Rohawa Company was still carrying out its policy of purchasing bottling companies and needed funds with which to finance its operation, plaintiff decided upon a plan through which assets having a value of $5,109,608 would be transferred from the Canadian Company to The Rohawa Company. This transaction was carried out in the following manner: The capital stock of The Rohawa Company which was then twenty shares was increased to fifty shares and on June 27, 1931, it issued the thirty additional shares to the Canadian Company for class A stock of plaintiff and United States bonds which had a total value at that time of $5,109,608. Immediately after the transfer the Canadian Company distributed the thirty shares of Rohawa stock to plaintiff without the surrender by plaintiff of any of the stock which it owned in the Canadian Company. All of these transactions were carried out in pursuance of a plan evolved by plaintiff which controlled all of the corporations in question. Thereafter, all of the corporations remained in existence and continued to carry on their normal functions as theretofore. None of these assets received by The Rohawa Company from the Canadian Company was distributed to plaintiff by dividends or otherwise in 1931.
The Commissioner of Internal Revenue determined that the amount of $5,109,608, representing the fair market value of the thirty shares of stock of the Rohawa Company which had been distributed to plaintiff as shown above, constituted a taxable dividend from a foreign corporation and included it in plaintiff's taxable income for 1931. The contention of plaintiff is that the transaction by which this stock came to it was in pursuance of a plan of reorganization as defined by section 112(i)(1)(B) of the Revenue Act of 1928, supra, and that since it was in pursuance of that plan of reorganization the distribution was nontaxable under section 112(g) of the same act.
The Revenue Act of 1928 contains the following provisions with respect to reorganizations and the distribution of stock in pursuance of a plan of reorganization:
Sec. 112(i) —
"(1) The term `reorganization' means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. * * *
"(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."
Sec. 112 "(g) Distribution of Stock on Reorganization. If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized."
An examination of this transaction shows that it comes clearly within the wording of the definition of a reorganization as set out above in that the Canadian Company transferred a part of its assets to The Rohawa Company and immediately after the transaction the transferor (the Canadian Company), or its sole stockholder (plaintiff), was in control of the transferee (The Rohawa Company), and that both The Rohawa Company and the Canadian Company were parties to the reorganization as defined by section 112(i)(2) set out above. The transaction also comes within section 112(g), supra, in that in pursuance of the same plan the Canadian Company distributed to its sole stockholder, plaintiff, the shares of stock of The Rohawa Company received by it without the surrender by plaintiff of any of the stock of the Canadian Company which it then owned. In form, therefore, it is clear that the transaction was a reorganization and in fact defendant admits that it falls "within the literal language of the reorganization provision." The position of the Government is that this so-called plan of reorganization was not a real plan but was conceived and carried out with the main purpose of tax avoidance and was not within the intent of the statute providing that such transactions do not result in taxable gain, or, as stated at one place in its brief, "The whole transaction was in reality a sham and it should be disregarded in determining plaintiff's tax liability."
We have, therefore, a situation where plaintiff has brought itself within the language of the statute which would make the transaction tax exempt, but where the defense is presented that it comes within the statute only because what was done was a mere sham or subterfuge designed for the purpose of tax avoidance. Admittedly, and we have so found as a fact, the transaction was carried out in this particular form in order to minimize the tax thereon. Where transactions are carried out in that manner, we should scrutinize the transaction closely in order to determine whether the statute has been strictly complied with. In other words, the oftrepeated principle "Men must turn square corners when they deal with the Government" is applicable. Rock Island, Arkansas Louisiana R. Co. v. United States, 254 U.S. 141, 41 S.Ct. 55, 56, 65 L.Ed. 188. To vary the illustration, the bridge has been crossed safely by plaintiff insofar as the letter of the statute is concerned and it remains only to determine whether it was a sham or a real crossing. The fact that the transaction was carried out in this particular manner in order to make its taxes as low as possible is not necessarily fatal to plaintiff's claim. Helvering v. Gregory, 2 Cir., 69 F.2d 809, affirmed in Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355, and Chisholm v. Commissioner, 2 Cir., 79 F.2d 14, 101 A.L.R. 200. The same cases, however, are authority for the proposition that the transactions must be real and, as the court said in Helvering v. Gregory, supra, must be "undertaken for reasons germane to the conduct of the venture in hand." [69 F.2d 811.]
We are convinced and have found as a fact that the underlying purpose for the transaction in question was of a business nature, namely, the transfer of funds to The Rohawa Company from the Canadian Company for use by the former company in its business. No one of the three corporations involved in the plan of reorganization was in any sense a dummy corporation. Plaintiff had been in successful operation since 1919 and the Canadian Company had been a profitable subsidiary of plaintiff carrying on business in Canada since 1923. The Rohawa Company was formed in 1926 for the genuine business purpose of acquiring and operating bottling plants and had been engaged in operations of that character since that time. There were, therefore, no dummy corporations, such as were involved in Gregory v. Helvering, supra, which were set up for the purpose of the transaction and immediately liquidated when it was completed without performing any business functions. What was desired by plaintiff was to transfer surplus funds which were in the Canadian Company to The Rohawa Company and that was accomplished by the transaction. The transfer of funds to The Rohawa Company was nothing new since that had been done from time to time over the period of its existence.
It is true that in prior instances the transfers had been made directly from plaintiff to The Rohawa Company and that method could have been followed in this instance, that is, the Canadian Company could have first declared a dividend to plaintiff and then plaintiff in turn could have made the advances directly to The Rohawa Company. If carried out in that manner the dividend to plaintiff by the Canadian Company would have been taxable under section 22(d) of the Revenue Act of 1928 and apparently a part of defendant's complaint is that plaintiff did not proceed in that manner. The fact, however, that plaintiff chose a different course in carrying out a real transaction does not make the transaction any less real. Taxpayers are not required to carry out their transactions in a way that will produce the most tax for the Government, Gregory v. Helvering, supra. It is only when transactions which otherwise conform to the statute are unreal that they are condemned under the principles laid down in Gregory v. Helvering, supra. As the court said in Chisholm v. Commissioner, supra, in commenting on what was decided in the Gregory case: "That was the purpose [creating corporations in form only] which defeated their exemption, not the accompanying purpose to escape taxation; that purpose was legally neutral. Had they really meant to conduct a business by means of the two reorganized companies, they would have escaped whatever other aim they might have had, whether to avoid taxes, or to regenerate the world." [79 F.2d 15, 101 A.L.R. 200] See, also, Commissioner of Internal Revenue v. Estate of Anna V. Gilmore et al., 3 Cir., 130 F.2d 791, decided August 28, 1942.
It would be difficult to find a case that would fall more clearly within the terms of the statute. Evidently it was the purpose of the Congress to permit through reorganization the shifting of funds or assets from one bona fide corporation to another under the same control in order to meet changing conditions and needs which might make such a transfer desirable. Such a transaction, under the conditions named in the statute, was to be treated not as income in fact but as a mere transfer of funds or assets already available.
Some argument is advanced by the defendant to the effect that the governing statute was a loophole provision which taxpayers were using to avoid taxes and that in recognition of this fact the provision was eliminated from the 1934 and later acts. Whatever may be the merits of that contention, we are governed in this instance by the 1928 act, and what the later acts may have contained is of no avail in this proceeding. Whatever loophole may have existed in the 1928 act which the taxpayer took advantage of in carrying out a genuine business transaction is something over which we have no control. We are not privileged to nullify a valid provision of law nor to question the wisdom of its enactment. That it was eliminated in later years does not affect this transaction which was completed while the 1928 act was still in effect.
In view of the above considerations, we are of the opinion that the transaction in question was a nontaxable reorganization within the meaning of the statute and that accordingly the transfer of The Rohawa Company's stock by the Canadian Company to plaintiff was not subject to tax.
For a second cause of action plaintiff states that the Commissioner of Internal Revenue improperly computed plaintiff's foreign tax credit under section 131(f) of the Revenue Act of 1928. However, prior to the submission of the case, the Supreme Court affirmed the decision of this court in American Chicle Co. v. United States, 41 F. Supp. 537, 94 Ct.Cl. 699, and counsel for plaintiff, in his oral argument, conceded that that decision (American Chicle Co. v. United States, 316 U.S. 450, 62 S.Ct. 1144, 86 L.Ed. 1591) required an affirmance of the commissioner's action on this point.
Entry of judgment in favor of plaintiff will be withheld pending the filing of a stipulation showing the amount due in accordance with this opinion or, in the event the parties are unable to agree upon the amount, the filing of a report by a commissioner of the court.