60 F.2d 937 (2nd Cir. 1932), 335, Cortland Specialty Co. v. Commissioner of Internal Revenue

Docket Nº:335.
Citation:60 F.2d 937
Party Name:CORTLAND SPECIALTY CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.
Case Date:July 29, 1932
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 937

60 F.2d 937 (2nd Cir. 1932)

CORTLAND SPECIALTY CO. et al.

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 335.

United States Court of Appeals, Second Circuit.

July 29, 1932

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

Page 938

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
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