Cortland Specialty Co. v. Commissioner of Internal Rev.

Decision Date29 July 1932
Docket NumberNo. 335.,335.
Citation60 F.2d 937
PartiesCORTLAND SPECIALTY CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.
CourtU.S. Court of Appeals — Second Circuit

M. Manning Marcus, of Washington, D. C., for petitioners.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Francis H. Horan, Sp. Assts. to Atty. Gen., and C. M. Charest and H. B. Hunt, Gen. Counsel, Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The question raised by this appeal is whether the transfer by Cortland Specialty Company to Deyo Oil Company, Inc., hereinafter described was a reorganization within the meaning of section 203 (h) (1) of the Revenue Act of 1926, 26 USCA § 934 (h) (1), which relieved the Cortland Company from paying an income tax upon any gain that might result therefrom, or whether the transfer was a mere sale which subjected the transferor to a tax on any profit which it realized. The Cortland Company made its return upon the theory that the transfer was in effect a reorganization. The Commissioner held that it was nothing but a sale, and assessed a tax deficiency against it for the year 1925 in the sum of $13,412.82 because of a profit of $101,175.58 over the depreciated cost of the property transferred. A similar tax deficiency was assessed against Mr. and Mrs. Sargent as transferees of the assets of the Cortland Company. Their liability is undisputed in case that of the company should stand. The Board of Tax Appeals affirmed the action of the Commissioner.

During the year 1925 the Cortland Company was engaged in the business of buying and selling petroleum products. Herbert R. Sargent and his wife, Bertha C. Sargent, were the sole owners of its stock. Mr. Sargent was the president, treasurer and general manager, and Mrs. Sargent was the secretary. The Deyo Oil Company was a corporation engaged in the same business, and each of the companies were New York corporations. On September 26, 1925, agreements were entered into between the Cortland Company and Deyo Company, and by Sargent and the latter, whereby the greater part of the assets of the Cortland Company were turned over to the Deyo Company, the Cortland Company agreed to discontinue business after October 1, 1925, and Sargent became the general manager of the business of the Deyo Company in the territory previously served by the Cortland Company. The assets to be transferred under the contract were:

(1) Real property, leases, and physical equipment of Cortland.

(2) Merchantable petroleum products of Cortland.

The consideration for the transfer, according to the contract, was:

Payments by Deyo for real property, leases, and physical equipment of business made under articles first and third of the contract of transfer:

                  Cash ...........................................   $ 53,070.00
                  Promissory notes of Deyo, each
                   dated October 1, 1925, and payable
                  December 1, 1925 ...................  $35,500.00
                  January 1, 1926 ....................   21,300.00
                  March 1, 1926 ......................   26,625.00
                  June 1, 1926 .......................   26,625.00
                  September 1, 1926 ..................   26,625.00
                  December 1, 1926 ...................   23,075.00
                                                        __________
                      Total notes ................................    159,750.00
                                                                     ___________
                                                                     $212,820.00
                  Payment by Deyo, on October 9, 1925, for
                   merchantable petroleum products purchased
                   from Cortland under article
                   fourth of the contract ........................     23,803.82
                                                                     ___________
                      Total receipts by Cortland on account
                       of transfer ...............................   $236,623.82
                

The $53,070 of cash paid by Deyo to Cortland, and the $159,750, in notes of Deyo, were distributed by Cortland to Mr. and Mrs. Sargent, its sole stockholders, shortly after the transfer occurred. They collected the notes as they fell due, the note for $21,300 payable December 1, 1925, on that date, and the remaining notes when they matured in 1926.

The Cortland Company proceeded to liquidate its accounts receivable and trade notes and other property not included in the transfer to Deyo, to pay its debts, and in general to prepare for dissolution which occurred June 30, 1926.

The following assets of Cortland were not transferable to Deyo under the contract with the latter:

                  Accounts and trade notes receivable
                   amounting to about ........................   $60,000.00
                  Stock of garage company valued at ..........     4,000.00
                  Estimated cash on hand, not included in
                   transfer ..................................    14,000.00
                                                                 __________
                  Total assets not transferred under contract    $78,000.00
                  Amount owing by Cortland to its creditors
                   was .......................................    56,000.00
                                                                ___________
                  Net amount of assets of Cortland not covered
                   by contract with Deyo .....................   $22,000.00
                

From the foregoing, it is probable that, in view of an immediate proposed distribution by Cortland to its stockholders and of the possibility of poor returns from the $60,000 of accounts, Cortland omitted from the contract the $78,000 of assets in order safely to pay its own creditors, and relied on the assets which it retained and the amount which its petroleum products sold to Deyo would later yield to care for its existing obligations and for further expenses connected with the transfer and the dissolution proceedings.

                  The net result of its transactions was to
                   transfer to Deyo assets amounting to ......  $236,623.82
                  and to withhold net assets from the transfer
                   of ........................................    22,000.00
                                                                ___________
                  making its total assets at the date of
                   transfer equal.............................  $258,623.82
                

The foregoing tabulation shows that about 91½ per cent. of Cortland's assets were transferred to Deyo and only about 8½ per cent. were retained. There can be no doubt that by the transfer Deyo acquired substantially all the properties of Cortland, and so the Board of Tax Appeals found.

Whether the above transfer of real property, leases, and equipment was a sale resulting in a gain on which Cortland was taxable, or whether it represented an exchange in pursuance of a "plan of reorganization" on which no gain should be recognized, depends on the effect to be given to the provisions of section 203 of the Revenue Act of 1926 (26 USCA § 934).

It may be said at the outset that the contract of Cortland with Deyo and the corporate resolution authorizing it to be made treat the transfer to the latter as a sale. The instrument begins by reciting that Cortland "has determined * * * to sell and dispose of all its physical and tangible assets," and that Deyo "has determined to purchase said assets." It goes on to say that Cortland "agrees to sell, transfer and convey * * * all and singular its real property, interests in real property, leases of real property * * * and equipment * * *" and later to say that it "shall sell * * * all of the merchantable gasoline, kerosene, oils and other petroleum products," and that Deyo "agrees to pay" the "purchase price of $213,000.00" for the "real property * * * and equipment" and a further "purchase price" to be determined by "an inventory taken at prevailing cost prices" for the "petroleum products." Nothing is said about the acquisition of any vested interest by Cortland or its stockholders in the business or assets of Deyo, but, on the contrary, it is provided that their interest shall be completely severed for, under article fifth of the contract, Cortland is "not to engage in the business of buying, selling or dealing in gasoline, kerosene or other petroleum products from and after October 1st, 1925," and is to receive nothing but cash and short time promissory notes as the consideration for the business and property sold. The transaction certainly bore all the characteristics of a simple sale.

But it is argued that under subdivisions (e) and (e) (1) of section 203 of the Revenue Act of 1926, 26 USCA § 934 (e) and (e) (1) "no gain or loss shall be recognized if a corporation a party to a reorganization" distributes "stock or securities" and "money" "in pursuance of the plan of reorganization," and that under...

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