Gallagher v. Comm'r of Internal Revenue

Decision Date17 October 1962
Docket NumberDocket Nos. 87610-87612,87667.
Citation39 T.C. 144
PartiesJOSEPH C. GALLAGHER AND SOPHIE GALLAGHER, ET AL.,1 PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Henry D. Costigan, Esq., Gordon M. Weber, Esq., and John B. Lowry, Esq., for the petitioners.

Donald G. Daiker, Esq., for the respondent.

Distributions upon redemption of all corporate stock pursuant to a plan under which corporate operating assets were sold to newly incorporated company, 72 2/3 percent owned by old company shareholders, followed by liquidation of old company, the plan accomplishing elimination of some old company shareholders and ownership, in part, of continuing business by some new shareholders, held properly treated as capital transaction under section 331(a)(2), I.R.C. 1954, and not to result in ordinary income.

Respondent has determined deficiencies in income tax in these consolidated cases as follows:

+--------------------------------------+
                ¦Docket¦          ¦          ¦         ¦
                +------+----------+----------+---------¦
                ¦No.   ¦Petitioner¦1955      ¦1956     ¦
                +------+----------+----------+---------¦
                ¦87610 ¦Gallagher ¦$16,884.90¦$2,214.10¦
                +------+----------+----------+---------¦
                ¦87611 ¦Bush      ¦178,236.52¦10,346.56¦
                +------+----------+----------+---------¦
                ¦87612 ¦Grant     ¦13,174.61 ¦207.43   ¦
                +------+----------+----------+---------¦
                ¦87667 ¦Cuffe     ¦126,933.87¦15,877.91¦
                +--------------------------------------+
                

The issues remaining for determination are (1) whether a series of distributions received in liquidation of a corporation should be treated as taxable dividends or distributions of earnings and profits incidental to a reorganization within the meaning of sections 354, 356, and 368 of the Internal Revenue Code of 1954 and, if either, (2) whether the amount taxed as ordinary income should be reduced by the capital contribution to the original corporation or the capital contributed to a new corporation formed to conduct the business of the original corporation.

FINDINGS OF FACT

The stipulated facts are hereby found accordingly.

West Coast Terminals, Inc., a Delaware corporation with its principal business office in San Francisco, California (hereinafter called Delaware), was organized on May 13, 1946. Delaware was at all material times until its dissolution, hereinafter described, engaged in the general stevedoring and terminal business, which consisted of providing under contract the services (including labor and equipment) required to load, and handle cargo carried on vessels, including both loading and unloading of vessels and both loading and unloading of freight cars, trucks, and other vehicles for the purpose of transferring cargo to or from vessels. The business was conducted principally at various points on San Francisco Bay, at the port of Stockton, at the port of Los Angeles, at Long Beach harbor, all in California, and at Portland, Oregon. The equipment used in the business was generally owned by Delaware. The labor required in the business was generally performed by longshoremen employed by Delaware who were members of the International Longshoremen's and Warehousemen's Union and whose terms of employment were subject to contracts between the union and Pacific Maritime Association on behalf of Delaware.

William J. Bush (hereinafter called Bush), one of the petitioners in Docket No. 87611, was president and a director and stockholder of Delaware, holding 391 shares of its stock at all material times until its dissolution. Bush was the chief executive officer of Delaware and devoted full time to its management, including the supervision of its stevedoring and terminal operations, the supervision of its financial affairs, and the supervision of relations with the ship operators who were its customers or potential customers.

Joseph C. Gallagher (hereinafter called Gallagher), one of the petitioners in Docket No. 87610, was vice president and general manager and a director and stockholder of Delaware, holding 58 shares of its stock, at all material times until its dissolution. Gallagher was the second highest executive officer of Delaware and devoted full time to participation in.its management, including participation in the supervision of its stevedoring and terminal operations, the supervision of its financial affairs, and the supervision of relations with the ship operators who were its customers or potential customers.

George H. Grant (hereinafter called Grant), one of the petitioners in Docket No. 87612, was a director and stockholder of Delaware, holding 57 shares of its stock at all material times until its dissolution. Grant was a member of the board of directors having general control of the management of Delaware and, in addition, assisted in its relations with the ship operators who were its customers or potential customers.

Thomas E. Cuffe (hereinafter called Cuffe) died on December 22, 1959. His estate, represented by the Bank of California, National Association, executor, is one of the petitioners in Docket No. 87667. Cuffe was a director and stockholder of Delaware, holding 267 shares of its stock, at all material times until its dissolution. Cuffe was a member of the board of directors having general control of the management of Delaware and, in addition, assisted in its relations with the ship operators who were its customers or potential customers and was himself president of one of the ship operators who were customers of Delaware, namely, Pacific Far East Lines, Inc.

The income tax returns for all petitioners for the years 1955 to 1957, inclusive, were filed with the district director of internal revenue at San Francisco, California.

The nine shareholders of Delaware consisted of two groups, as shown by the following schedule:

+---------------------------------------------------+
                ¦                       ¦Percentage of  ¦Shares of  ¦
                +-----------------------+---------------+-----------¦
                ¦Stockholders           ¦stock          ¦stock      ¦
                +-----------------------+---------------+-----------¦
                ¦                       ¦               ¦           ¦
                +-----------------------+---------------+-----------¦
                ¦Bush                   ¦30.24          ¦391        ¦
                +-----------------------+---------------+-----------¦
                ¦Cuffe                  ¦20.65          ¦267        ¦
                +-----------------------+---------------+-----------¦
                ¦Gallagher              ¦4.49           ¦58         ¦
                +-----------------------+---------------+-----------¦
                ¦Grant                  ¦4.41           ¦57         ¦
                +-----------------------+---------------+-----------¦
                ¦Burkman                ¦2.16           ¦28         ¦
                +-----------------------+---------------+-----------¦
                ¦Total                  ¦61.95          ¦801        ¦
                +-----------------------+---------------+-----------¦
                ¦                       ¦               ¦           ¦
                +-----------------------+---------------+-----------¦
                ¦Sexton (an estate)     ¦20.65          ¦267        ¦
                +-----------------------+---------------+-----------¦
                ¦Seid (an estate)       ¦5.80           ¦75         ¦
                +-----------------------+---------------+-----------¦
                ¦Lyon (a widow)         ¦5.80           ¦75         ¦
                +-----------------------+---------------+-----------¦
                ¦Seidenspinner (a widow)¦5.80           ¦75         ¦
                +-----------------------+---------------+-----------¦
                ¦Total                  ¦38.05          ¦492        ¦
                +-----------------------+---------------+-----------¦
                ¦                       ¦               ¦           ¦
                +-----------------------+---------------+-----------¦
                ¦Grand total            ¦100.00         ¦1,293      ¦
                +---------------------------------------------------+
                

The first group consisted of active executives and directors, as follows: Bush, Cuffe, Gallagher, and Grant, who were all directors of Delaware and two of whom were officers, and D. R. Burkman (hereinafter called Burkman), who was district manager in direct charge of all operations of Delaware in southern California, including Los Angeles and Long Beach harbor. The second group consisted of the remaining shareholders of record: Sexton Corporation, estate of J. J. Seid, deceased, Christine P. Lyon, and Mary Seidenspinner (hereinafter referred to as the estates and widows), all of whom were (or, in the case of Sexton Corporation, represented) shareholders who had acquired their stock through the death of persons formerly active in Delaware. In the case of Sexton Corporation, the stock had been transferred to William T. Sexton, who had subsequently died without such transfer being recorded on the books of Delaware. The beneficial owner of this stock at all times herein relevant was the estate of W. T. Sexton, deceased. Their predecessors in ownership of the stock of Delaware had been active in its business in the following capacities: William T. Sexton had been a director of Delaware and was also president of Coastwise Line, one of the customers of Delaware; J. J. Seid had been traffic manager of Crown Zellerbach Paper Corporation and an executive of Coastwise Line, one of the customers of Delaware; I. F. Lyon, the husband of Christine P. Lyon, until his death had controlled the shipping of a substantial amount of cargo as traffic manager of California Packing Corporation; and E. A. Seidenspinner, the husband of Mary Seidenspinner, before his death had been traffic manager of El Dorado Oil Company. The estates and widows were inactive and of no assistance to Delaware, and several members of this group wished to liquidate their interest because of the low yield and speculative nature of the business.

Article 40 of the by-laws of Delaware provided that each stockholder desiring to sell his shares—

must upon each occasion first offer for sale said shares to the other stockholders of record. The other stockholders of record shall be entitled to purchase said shares so offered on a pro rata basis dependent on the percentage of stock issued...

To continue reading

Request your trial
23 cases
  • Lammerts v. Comm'r of Internal Revenue (In re Estate of Lammerts) , Docket Nos. 6819-65
    • United States
    • United States Tax Court
    • March 10, 1970
    ...within the meaning of section 368(a)(1)(F). Cushman Motor Works v. Commissioner, * * * (130 F.2d 977); Joseph C. Gallagher, * * * (39 T.C. 144). [54 T.C. 432] Though the facts presented in the instant case do not closely parallel those which we had before us in Berghash, we believe the prin......
  • Tel. Answering Serv. Co. v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • December 24, 1974
    ...Compare Estate of Henry P. Lammerts, 54 T.C. 420 (1970), remanded per curiam on another issue 456 F.2d 681 (C.A. 2, 1972); Joseph C. Gallagher, 39 T.C. 144 (1962). Where such divergence in shareholder interest does not exist and the transferee corporation continues the business of the trans......
  • Smothers v. U.S.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • April 17, 1981
    ...423, cert. denied, 1977, 431 U.S. 914, 97 S.Ct. 2174, 53 L.Ed.2d 224; Breech v. United States, 9 Cir. 1971, 439 F.2d 409; Joseph C. Gallagher, 1962, 39 T.C. 144, acq. and nonacq., 1964-2 C.B. 5, 9.10 See, e. g., Liddon v. Commissioner, 6 Cir. 1956, 230 F.2d 304, cert. denied, 1956, 352 U.S.......
  • Aetna Casualty and Surety Co. v. United States, Civ. No. H-131.
    • United States
    • U.S. District Court — District of Connecticut
    • October 15, 1975
    ...... suit involving the complex reorganization provisions of the Internal Revenue Code. The plaintiff seeks over $4.4 million dollars, plus ...194, 62 S.Ct. 546, 86 L.Ed. 482 (1942), and Joseph C. Gallagher, 39 T.C. 144 (1962), inter alia, in finding that a significant shift in ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT