Bausch & Lomb Optical Co. v. CIR

• Decision Date: 19 May 1959
• Docket Number: No. 239,Docket 25424.,239
• Parties: BAUSCH & LOMB OPTICAL COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

267 F.2d 75 (1959)

BAUSCH & LOMB OPTICAL COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 239, Docket 25424.

United States Court of Appeals Second Circuit.

Argued March 6, 1959.

Decided May 19, 1959.

Hugh Satterlee, Washington, D. C. (Scott Stewart, Jr. and Thomas C. Taylor, Rochester, N. Y., on the brief), for petitioner.

Morton K. Rothschild, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Harry Baum and Melvin L. Lebow, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.

Before MEDINA and HINCKS, Circuit Judges, and MATHES, District Judge.^*

MEDINA, Circuit Judge.

Petitioner Bausch & Lomb Optical Company, a New York corporation engaged in the manufacture and sale of ophthalmic products, on March 1, 1950 owned 9923¼ shares of the stock of its subsidiary Riggs Optical Company, or 79.9488% of the 12,412 outstanding shares of Riggs. In order to effectuate certain operating economies, Bausch & Lomb decided to amalgamate Riggs with itself. To this end on April 22, 1950 Bausch & Lomb exchanged 105,508 shares of its unissued voting stock for all of the Riggs assets. An additional 433 shares of Bausch & Lomb stock went to 12 Riggs' employees.

On May 2, 1950, according to a prearranged plan, Riggs dissolved itself, distributing its only asset, Bausch & Lomb stock, pro rata to its shareholders. Bausch & Lomb thus received back 84,347 of its own shares which became treasury stock, while 21,161 shares went to the Riggs minority shareholders.

The Commissioner determined that the substance of these transactions was that Bausch & Lomb received the Riggs assets partly in exchange for its Riggs stock and partly for its own stock, and that the gain which Bausch & Lomb realized upon the Riggs "liquidation" was subject to tax. In other words, that Bausch & Lomb parted with 21,161 shares of its own voting stock, plus 9923¼ shares of its Riggs stock, for the transfer to it of all of the Riggs assets. Bausch & Lomb contends, however, that a "reorganization" was effected under Section 112(g) (1) (C) of the 1939 Internal Revenue Code,¹ and that it is therefore entitled to tax-free treatment.² The Tax Court sustained the Commissioner's position and held that the acquisition of the Riggs assets and the dissolution of Riggs must be viewed together, and that the surrender by Bausch & Lomb of its Riggs stock was additional consideration. The Tax Court accordingly held that the Riggs assets were not obtained "solely for all or a part of its voting stock." We agree.

Bausch & Lomb concedes that to qualify as a "C" reorganization, it could not furnish any additional consideration over and above its own stock. Helvering v. Southwest Consolidated Corp., 1942, 315 U.S. 194, 62 S.Ct. 546, 86 L.Ed. 789; Adwood Corp. v. Commissioner, 6 Cir., 1952, 200 F.2d 552, certiorari denied 346 U.S. 818, 74 S.Ct. 30, 98 L.Ed. 344; Stoddard v. Commissioner, 2 Cir., 1944, 141 F.2d 76. Moreover, Bausch & Lomb admits, as the correspondence and minutes of pertinent meetings plainly show, that the acquisition of the Riggs assets and the dissolution of Riggs were both part of the same plan. Nevertheless, Bausch & Lomb asserts that the exchange of the Riggs assets for its stock should be treated as separate and distinct from the dissolution. The argument runs to the effect that, if the two steps are viewed apart from one another, a "C" reorganization is effected.

Petitioner contends that, even if a qualification according to the literal terms of Section 112(g) (1) (C) is not found, the amalgamation was in substance a "reorganization" because it has the attributes of one, including "continuity of interest" and business purpose. This is factually not quite true for, while the amalgamation may have been for genuine business reasons, the division into two steps served only to facilitate the liquidation of Riggs. It was considered easier to distribute Bausch & Lomb stock than distribute the Riggs assets. Hence the "business purpose" of dividing the liquidation into two steps lends no support to Bausch & Lomb's contention that in substance and actuality a reorganization was achieved. Moreover, the Congress has defined in Section 112 (g) (1) (C) how a reorganization thereunder may be effected, and the only question for us to decide, on this phase of the case, is whether the necessary requirements have been truly fulfilled. It is for the Congress and not for us to say whether some other alleged equivalent set of facts should receive the same tax free status.

Nor does the fact that Bausch & Lomb may well have desired to hold the 84,347 shares of its own voting shares as treasury stock change our opinion of the transaction as a whole.

Bausch & Lomb suggests that under our present holding even if it had but a 1% interest in Riggs, the requirement that the acquisition be "solely for * * its voting stock" could defeat Section 112 (g) (1) (C) reorganization treatment. This hypothesis is a far cry from the facts disclosed in this record, and the lack of controlling interest surrounds it with a mist of unreality. In any event, it will be time to consider such a situation in all its aspects when, as and if it comes before us. We merely hold that the attempt to thwart taxation in this case by carrying out the liquidation process in two...