American Potash & Chemical Corporation v. United States

• Decision Date: 17 July 1968
• Docket Number: No. 176-66.,176-66.
• Citation: 399 F.2d 194
• Parties: AMERICAN POTASH & CHEMICAL CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

399 F.2d 194 (1968)

AMERICAN POTASH & CHEMICAL CORPORATION v. The UNITED STATES.

No. 176-66.

United States Court of Claims.

July 17, 1968.

COPYRIGHT MATERIAL OMITTED

Karl R. Price, Washington, D. C., attorney of record, for plaintiff; Ivins, Phillips & Barker, Washington, D. C., of counsel.

Mason C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen., Mitchell Rogovin, for defendant. Philip R. Miller and Joseph Kovner, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

LARAMORE, Judge.

This is a corporate income tax refund case. The Commissioner of Internal Revenue reduced the amount of a depreciation deduction taken by plaintiff, American Potash & Chemical Corporation (hereinafter referred to as Potash) in each of the four fiscal years which followed July 1, 1956. The only issue before the court is the determination of the basis of depreciable assets upon which the deduction is based. Taxpayer argues that a cost basis is appropriate, and defendant contends that a carryover basis is required. Defendant has moved for summary judgment.

The facts are not in dispute. Taxpayer is engaged in the production and sale of industrial and agricultural chemicals. Between September 1954 and November 1955, Potash acquired all of the outstanding stock of Western Electro-chemical Company (hereinafter referred to as Wecco) in exchange for 66,662 shares of its voting stock and $466.12 in cash paid for fractional shares.¹

Between September 28, 1954 and November 3, 1954, Potash acquired 48 percent of the Wecco stock in exchange for 33,367 shares of Potash plus $466.12 in cash. On November 30, 1955 Potash acquired the remaining 52 percent of Wecco stock in exchange for 33,295 shares of Potash.

Potash made two separate offers to purchase all of the Wecco stock. In August, 1954 it offered each Wecco stockholder one share of Potash (selling at approximately $60 per share) for 6.5 shares of Wecco. For shares not evenly divisible by 6.5 it offered $9.23 per Wecco share (on the basis of $60 per Potash share). That offer expired on November 18, 1954, and some 52 percent of Wecco shareholders did not accept it.

In November, 1955 Potash again approached the Wecco shareholders with a new offer of one Potash share (now selling at $90 per share) for seven shares of Wecco. There were no fractional shares involved. The remaining 52 percent shareholders accepted this offer, and Potash acquired complete ownership.

Plaintiff admits that both of these stock acquisitions were to further its ultimate purpose — obtaining the Wecco assets — and that if it could not have obtained the remaining 52 percent ownership it would have sold the 48 percent interest acquired in 1954.

Potash did not acquire either 80 percent of the total combined voting power of all voting stock or 80 percent of the total number of shares of all other classes of stock during any 12-month period between September 1954 and November 1955.

For seven months, from December 1, 1955 to June 30, 1956, Wecco was operated by Potash. During that period taxpayer advanced $646,293 to Wecco for working capital and other miscellaneous current operating needs. On June 30, 1956, Wecco was completely liquidated and all of its assets were distributed to (and its liabilities were assumed by) Potash. The fair market value of the assets distributed to Potash was $10,843,023. The liabilities assumed were $4,934,448 which, together with the $646,293 advanced, totaled $5,580,741 in liabilities.

For 1957, 1958, 1959 and 1960 fiscal tax years Potash computed its depreciation deduction for the depreciable assets received from Wecco on an adjusted basis of $7,085,551. This was its "cost" of the depreciable assets. That "cost" included the value of the 66,662 shares transferred in acquiring Wecco stock, the liabilities assumed on the liquidation and the cash advanced during the seven months that it operated Wecco. Immediately prior to the liquidation Wecco's basis in these assets was $3,788,779.

On audit of Potash's 1956 and 1957 tax returns the Internal Revenue Service determined that the correct basis of these assets was $3,788,779, the basis in the hands of Wecco prior to the liquidation. Taxpayer's adjusted basis was reduced by $3,296,772 and, accordingly, its yearly depreciation deduction was reduced by $100,843 per year. Taxpayer paid the 1957 deficiency on May 19, 1961. It adjusted its 1958, 1959 and 1960 tax returns, and the increased tax was included in the taxes paid for those years.

Claims for refund for 1957 and 1958 were filed on May 17, 1963. The claims for 1959 and 1960 were filed on September 5, 1963 and September 11, 1964, respectively. The 1957, 1958 and 1959 claims were denied on June 10, 1964, and the 1960 claim was denied on May 25, 1965. Suit was timely filed on June 7, 1966.

For the purpose of this motion, both plaintiff and defendant agree that the stock acquisition of Wecco and its liquidation were undertaken for the purpose of obtaining the Wecco assets, i. e., plaintiff purchased the stock to reach the assets.

I.

The government, in support of its motion for summary judgment, argues that, as a matter of law, a carryover basis is required because either the entire transaction was a reorganization under section 368(a) (1) (C) of the Internal Revenue Code of 1954, 68A Stat. 120,² or alternatively, if the stock acquisition can be separated from the liquidation, the assets received in the liquidation are subject to a carryover basis under sections 332 and 334 as assets received by a parent (Potash) in the process of liquidating its wholly-owned subsidiary (Wecco). Plaintiff argues that the transaction cannot be termed a reorganization and that the liquidation transaction, separately considered, is excepted from the application of sections 332 and 334 by the doctrine enunciated in Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74 (1950), affirmed per curiam, 187 F.2d 718 (5th Cir. 1951), cert. denied, 342 U.S. 827, 72 S.Ct. 50, 96 L.Ed. 626 which remains viable and was not pre-empted by the enactment of section 334(b) (2), the legislative exception to the general rule of section 334(b) (1).

We will consider each of defendant's alternative arguments separately. We find that the facts do not establish that this transaction was a reorganization, and that the Kimbell-Diamond doctrine has not been pre-empted by the enactment of section 334(b) (2).

II.

Section 1012 provides that the basis of property is its cost except where otherwise provided. Section 362(b)³ requires a carryover basis for depreciable assets received in "connection with" a transaction which qualifies as a reorganization as defined in section 368(a) (1).⁴ Defendant concludes that a C reorganization has occurred and, therefore, a carryover basis is required for the assets.

A C reorganization, in general, is a transaction whereby one corporation (the acquiring corporation) acquires substantially all of the property of another corporation (the transferor corporation) as part of an exchange in which the acquiring corporation gives solely its voting stock (or the voting stock of its parent) to the transferor corporation in exchange for the transferor corporation's assets. Under certain limited circumstances, money or other property in addition to voting stock may be exchanged.

Before a transaction can be classified as a C reorganization three basic factors must be present. These are (a) an acquiring corporation gives stock to another corporation, and (b) receives in exchange for that stock (c) substantially all of the properties of the transferor corporation.

Defendant argues that taxpayer has not purchased Wecco's stock for cash and liquidated⁵ but has exchanged its stock for Wecco stock and then liquidated Wecco pursuant to its plan and intent to obtain Wecco's assets. Plaintiff, defendant continues, has therefore exchanged its stock for Wecco's assets, a transaction which qualifies as a C reorganization. Defendant contrasts a purchase of stock followed by a liquidation (in which the stockholders of the acquired company do not have any stock interest in the acquiring company) with an exchange of stock for stock followed by a liquidation (in which the stockholders of the acquired company become stockholders of the acquiring company). In the latter situation, defendant argues that there is a continuity of ownership, which, together with the basic intent to obtain assets establishes that the entire transaction was a reorganization.

Taxpayer's intent is considered in determining the existence of an overall plan to accomplish a particular result by a series of steps and in determining the existence of a plan to reorganize. The existence of either a plan to reorganize or a plan to accomplish a particular end result, however, does not necessarily mean that the particular route chosen to accomplish the desired result qualifies as a reorganization, as that term is defined in the statute.

A continuity of ownership and of interest are elements of a reorganization which must be present in addition to the specific exchange provided for by the statute.⁶ See: Reg.Sec. 1.368-1(b). The existence of either one or both elements does not establish that the particular process through which continuity was achieved is a reorganization. Nor does the end result of a transaction establish the presence of a reorganization. The existence of a continuity of ownership indicates only that one element of a re-organization is present. The particular transaction must meet all of the specific requirements of the statute before we can conclude that a reorganization occurred.

A regulation under section 368 (Reg. § 1.368-1(b)) explains the purpose of the specific requirements of the reorganization provisions. It states:

* * * In order to exclude transactions not intended to be included, the specifications of

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