Cocker v. Comm'r of Internal Revenue, Docket Nos. 2754—74—2756—74.
| Citation | 68 T.C. 544 |
| Decision Date | 25 July 1977 |
| Docket Number | Docket Nos. 2754—74—2756—74. |
| Parties | JOHN COCKER III AND DOROTHY COCKER, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Petitioners entered into an agreement in 1964 to exchange stock in one corporation for stock in another corporation in a transaction qualifying as a reorganization under sec. 368(a)(1)(B). The agreement called for two distributions of the acquiring corporation's stock: the first in 1964 on the date of the agreement, and the second in 1969. No provision was made for the payment of interest on the second distribution. Petitioners actually received three distributions under the agreement: one in 1964, one in 1969, and one in 1971. Held, a portion of the stock received by petitioners in 1969 and 1971 is taxable as interest income under the provisions of sec. 483. Catterall v. Commissioner, 68 T.C. 413 (1977), and Solomon v. Commissioner, 67 T.C. 379 (1976), followed. Steve C. Horowitz and Joseph B. Alala, Jr., for the petitioners.
Frank D. Armstrong, Jr., for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax for the calendar years 1969 and 1971 as follows:
+-----------------------------------------------------------------+
¦ ¦ ¦Deficiencies ¦
+--------+----------------------------------+---------------------¦
¦Docket ¦ ¦ ¦ ¦
+--------+----------------------------------+----------+----------¦
¦No. ¦ ¦1969 ¦1971 ¦
+--------+----------------------------------+----------+----------¦
¦2754-74 ¦John Cocker III and Dorothy Cocker¦$20,526.10¦$24,973.93¦
+--------+----------------------------------+----------+----------¦
¦2755-74 ¦F. Hoyt Cunningham, Jr., and Helen¦ ¦ ¦
+--------+----------------------------------+----------+----------¦
¦ ¦Cunningham ¦168.90 ¦209.71 ¦
+--------+----------------------------------+----------+----------¦
¦2756-74 ¦Mary C. Parker ¦257.40 ¦175.59 ¦
+-----------------------------------------------------------------+
The three dockets have been consolidated for purposes of trial, briefing, and opinion. The only issue we have to decide is whether any portion of the Walter other adjustments in the received by certain of the petitioners pursuant to a plan of reorganization under section 368(a)(1)(B) of the Internal Revenue Code of 19542 constitutes interest income under section 483. Petitioners in docket No. 2754—74 have conceded the correctness of respondent's of filing their petitions in notice of deficiency (except to the extent the computation of the medical expense deduction hinges on the outcome of the section 483 issue). Respondent made no other adjustments in the notices of deficiency in the two remaining dockets.
Most of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners John Cocker III and Dorothy Cocker, husband and wife, and Mary C. Parker (formerly Mary Elva Cocker) resided in Clover, S.C., at the time of filing their petitions in this Court. Petitioners F. Hoyt Cunningham, Jr., and Helen Cunningham, husband and wife, resided in Gastonia, N.C., at the time of filing their petition. All the petitioners filed Federal income tax returns for the years in issue with the Director, Southeast Service Center, Chamblee, Ga.
Cocker Machine & Foundry Co., Inc. (hereafter referred to as Cocker), was a corporation organized under the laws of the State of North Carolina, and was engaged in the manufacture of textile machines in Gastonia, N.C.
Walter Kidde & Co., Inc. (hereafter referred to as Kidde), was organized under the laws of the State of New York, and has its principal place of business in Belleville, N. J. Kidde is a national and international conglomerate with businesses in the fields of safety security and protection, aerospace systems and equipment, merchandising equipment, consumer products, and textile machinery.
On July 1, 1964, the shareholders of Cocker entered into an ‘Agreement and Plan of Reorganization’ (hereafter referred to as the agreement or reorganization agreement) with Kidde. Under the terms of the agreement, Kidde acquired all of the outstanding capital stock of Cocker in exchange solely for common stock of Kidde having a par value of $2.50 per share.
The above agreement was executed on July 3, 1964, at which time there were 1,867 shares of Cocker stock issued and outstanding. Kidde issued 78,361 shares of its common stock (having a fair market value at that time of $18 per share) in exchange for all the outstanding Cocker stock.
The parties to this exchange determined that the book value of the Cocker stock on July 3, 1964, was $1,410,498. Respondent adjusted this value to $1,429,177 after audit without objection from petitioners.
The names of the Cocker shareholders at the time of the exchange, the number of Cocker shares relinquished by such shareholders, and the number of Kidde shares received in the exchange are as follows:
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¦ ¦Number ¦Numberof ¦of ¦
+-----------------------------------------+--------------+---------------+----¦
¦ ¦Kidde shares ¦Cocker shares ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Name of shareholder ¦received ¦given ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦ ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦John Cocker III ¦48,183 ¦1,148 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Dorothy Cocker ¦3,274 ¦78 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦John C. Bodansky ¦2,099 ¦50 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦F. Hoyt Cunningham ¦839 ¦20 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Wachovia Bank & Trust Co., as executor ¦ ¦ ¦ ¦
¦and trustee, and ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦John Cocker III, as trustee named under ¦ ¦ ¦ ¦
¦the last will ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦and testament of Mary Lovett Cocker, ¦20,860 ¦497 ¦ ¦
¦deceased ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Wachovia Bank & Trust Co., and Kattie ¦ ¦ ¦ ¦
¦Moore Rankin ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Cunningham, as co-executors named under ¦ ¦ ¦ ¦
¦the last will ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦and testament of James W. Cunningham ¦839 ¦20 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦First Union National Bank, as general ¦ ¦ ¦ ¦
¦guardian for Mary ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Elva Cocker, a minor ¦1,763 ¦42 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦First Union National Bank, as general ¦ ¦ ¦ ¦
¦guardian for Ann ¦ ¦ ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Elise Cocker, minor ¦504 ¦12 ¦ ¦
+-----------------------------------------+--------------+---------------+----¦
¦Totals ¦78,361 ¦1,867 ¦ ¦
+-----------------------------------------------------------------------------+
The above distribution of Kidde stock on July 3, 1964, had a total fair market value of $1,410,498 and will hereafter sometimes be referred to as the ‘first distribution.’
A ‘second distribution’ was provided for in paragraph 2.2 of the reorganization agreement as follows:
2.2 Second Distribution. The second distribution by KIDDE of KIDDE STOCK (valued at the average closing price per share during the period of 30 market days prior to the end of the period ending December 31, 1968) shall be in an amount determined, and shall be delivered, as follows:
a. The aggregate net earnings before income taxes but after intercompany eliminations of COCKER and the present Kidde Textile Machinery Division (excluding exceptional items of a non-recurring nature aggregating in excess of $100,000) determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods for the three years most favorable to COCKER STOCKHOLDERS of the four years beginning January 1, 1965, and ending December 31, 1968, will be reduced by...
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