United Light & Power Co. v. Commissioner of Int. Rev.
| Decision Date | 12 July 1939 |
| Docket Number | No. 6890.,6890. |
| Citation | 105 F.2d 866 |
| Parties | UNITED LIGHT & POWER CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Seventh Circuit |
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Homer Hendricks, of Washington, D. C., and Thomas K. Humphrey and Kenneth F. Burgess, both of Chicago, Ill. (Miller & Chevalier, of Washington, D. C., and Sidley, McPherson, Austin & Burgess, of Chicago, Ill., of counsel), for petitioner.
James W. Morris, Asst. Atty. Gen., and Sewall Key and Maurice J. Mahoney, Sp. Assts. to Atty. Gen., for respondent.
Before EVANS, SPARKS, and TREANOR, Circuit Judges.
Did the taxpayer's (petitioner herein) exchange of securities constitute a "statutory reorganization" so that the profits realized therefrom were non-taxable? This is the question for our determination on this appeal.
The Board affirmed the Commissioner's determination of a deficiency income tax of $1,076,314.40 for the year 1928. There is no dispute as to the amount, if the Board's determination of liability be sound.
The Parties. The United Light and Power Company, petitioner-taxpayer, filed a consolidated tax return for the year 1928, for itself and subsidiaries, one of which was the United Light and Railways ("Railways"), which company participated in the exchanges of stock which afford the basis of petitioner's claim of a statutory reorganization. Railways was also a holding company of companies supplying electrical energy to the public. To carry out the contemplated exchanges of stock, it caused the Dexter Company to be organized, July 11, 1928, in New Jersey, and also caused the incorporation, at that time, of ten New Jersey corporations herein called the A-J New Jersey corporations.
The American Light and Traction Company ("American") was also a holding company, its subsidiaries being Milwaukee Gas and Light Company, and four New Jersey Companies (Mutual, Waverly, Bexley, Provident). It was primarily interested in gas utilities.
The Koppers Company ("Koppers") was the third large holding company which played a major role in these security exchanges. It dealt in coke products, etc., and its subsidiaries were Koppers Gas & Coke Company and Milwaukee Coke and Gas Company.
The asserted reorganizations involved the transfer of two large blocks of stock — Detroit Edison and Brooklyn Borough — held by Railways, to the newly created New Jersey Corporations in exchange for a large block of its stock. Absence of a statutory control of American by Railways is one of the grounds advanced by respondent to support his argument that there was no statutory reorganization. The Board found that all the transfers were part of one plan and for tax purposes were to be considered as a single transaction and not as a series of independent transfers. Respondent also argues that even if the transactions be divided and each step treated as a separate one for purposes of taxation, there was no statutory reorganization of Railways.
The situation before and after the transactions is as follows:
Before:
Railways had 75,000 shares of Detroit Edison stock and 39,582 shares of Brooklyn Borough stock.
After:
Railways had 131,248 shares of American.
American had all the stock of Dexter (and Dexter held the 75,000 shares of Detroit Edison).
American had all the stock of the 10 N. J. companies (and the N. J. companies had the 39,582 shares of Brooklyn Borough stock).
Graphically summarized, the transactions might be presented thus:
The net result was that Railways received 131,248 shares of American in exchange for American's receiving all stock of subsidiaries which held all the Edison and Brooklyn stock which Railways had given on reorganization. Instead of Railways' having direct ownership of the Edison and Brooklyn stock it (and a subsidiary) held or controlled the majority voting stock in the company (American) which owned all the stock of the corporations which now held said Edison and Brooklyn stock.
Financial Aspects of the Transactions. While there is no dispute as to amounts involved, we briefly state, for the purpose of clarity, the facts as to value of stocks.
Railways originally acquired the 75,000 shares of Detroit Edison at a cost of $11,490,432.32, and the 39,582 shares of Brooklyn Borough stock at a cost of $4,424,707.53. In the final exchange for the Edison stock, Railways received 75,000 shares of American stock of the fair market value of $15,000,000. The gain was $3,509,567.68. In the final exchange of the Brooklyn stock, Railways received 56,248 shares of American having a fair market value of $11,249,600. Its profit over cost was $6,824,892.47. The total gain of $10,334,460.15 from the combined transactions was subject to a tax of $1,076,314.40.
Respondent also contends that Railways did not maintain sufficient continuity of interest because the transferred assets went to a subsidiary of the company of which it acquired control, and not to said company.
He also argues that if it be conceded the initial exchanges of each of the two transactions — between Railways and the newly formed subsidiaries — were non-taxable statutory reorganizations, the next step — the immediate transfer of the newly formed subsidiaries' stock to American for its stock — was an integral part of a single plan and changed the legal aspect of the transactions, which change resulted in taxable gain (the difference between the cost price of the Edison and Brooklyn stock to Railways and the value of the American stock finally received therefor).
The controlling statutes are:
Revenue Act of 1928, c. 852, 45 Stat. 791, 816:
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26 U.S.C.A. §§ 112(a), (b) (3-5), 112 note, 112(h).
Our question narrows down to a construction of section 112 of the Revenue Act of 1928 and, more particularly, the application of sub-sections (i) and (j) which define the terms "reorganization" and "control" as there used.
It is, however, necessary to also read section 111, 26 U.S.C.A. § 111, which defines gains and losses, although there is no controversy about the construction of this section which imposes the tax liability and defines the permissible deductions therefrom. Section 112(a) imposes a tax upon the gain or loss from the "sale or exchange" of property. If here the section stopped, there would be no question of petitioner's liability. Its subsidiary transferred securities and received others of a market value in excess of the cost price of the securities transferred. The use of the word "exchange" in the expression "sale or exchange" eliminates any successful contention that there was no gain, although the securities received were of a market value equal to the securities exchanged.
Section 112 provides, however, for an exception which reads: "except as hereinafter provided in this section."
In other words, the gains are taxable except as section 112 otherwise provides. Undoubtedly, Congress could have exempted all such "sales and exchanges," and it could have eliminated the exception provisions entirely. It saw fit to impose a tax upon all exchanges not within the exceptions. The taxpayer is therefore under the obligation of bringing its facts within the exception. Inasmuch as there is no dispute about the determinative facts, the burden of proof is a matter of no importance.
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