American Bantam Car Co. v. Comm'r of Internal Revenue
| Decision Date | 27 September 1948 |
| Docket Number | Docket No. 11531. |
| Citation | 11 T.C. 397 |
| Parties | AMERICAN BANTAM CAR COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
On June 2, 1936, petitioner was incorporated and on June 3, 1936, acquired capital assets subject to $219,099.83 of liabilities plus $500 in cash in exchange for 300,000 shares of its common stock. Held, on the facts presented that this was a nontaxable exchange under section 112(b)(5) of the Revenue Act of 1936 and the proper basis for depreciation of those capital assets for the taxable years 1942 and 1943 is their basis in the hands of the transferors, as provided in section 113(a)(8) of the code. L. W. Eckels, Esq., and C. W. Barstow, C.P.A., for the petitioner.
Stanley W. Herzfeld, Esq., for the respondent.
Respondent determined deficiencies against petitioner for the fiscal years ended June 30, 1942 and 1943, respectively, as set forth below, and petitioner claims refunds of overpayments for such years as set forth:
+--------------------------------------------------------------------+
¦Year ended¦ ¦Deficiencies¦Refunds ¦
+----------+---------------------------------+------------+----------¦
¦June 30— ¦Tax ¦determined ¦claimed ¦
+----------+---------------------------------+------------+----------¦
¦ ¦ ¦ ¦ ¦
+----------+---------------------------------+------------+----------¦
¦1942 ¦Income tax ¦$36,661.76 ¦$2,500.00 ¦
+----------+---------------------------------+------------+----------¦
¦1943 ¦Declared value excess profits tax¦5,082.07 ¦4,022.90 ¦
+----------+---------------------------------+------------+----------¦
¦1943 ¦Excess profits tax ¦176,112.41 ¦311,239.10¦
+----------+---------------------------------+------------+----------¦
¦ ¦ ¦ ¦ ¦
+--------------------------------------------------------------------+
Petitioner claims that it is entitled to deductions for depreciation in the amount of not less than $78,641.70 for the fiscal year ended June 30, 1942, and $70,050.75 for the fiscal year ended June 30, 1943.1 In his determination of the above stated deficiencies, respondent allowed deductions for depreciation sustained of $21,298.95 for the taxable year ended June 30, 1942, and $22,316.77 for the taxable year ended June 30, 1943.
The basic issue in this case is whether the exchange on June 3, 1936, whereby petitioner's assets were acquired, was one in which gain or loss is to be recognized for tax purposes. If gain or loss is to be recognized, then the proper basis for the assets is their cost to petitioner on the date of their acquisition, as is contended by the petitioner. If the exchange is one in which no recognition is given to gain or loss, then the proper basis for the assets is their basis in the hands of the transferors, as contended by the respondent.
It is stipulated that petitioner's closing inventory on June 30, 1943, as shown in its original returns for the taxable year ended on that date, was inadvertently understated by the amount of $65,305.87, and petitioner's net income, net income for declared value excess profits, and adjusted excess profits net income were accordingly understated by the same amount. Appropriate adjustments for this item may be made in a recomputation under Rule 50.
Petitioner filed its income and declared value excess profits tax returns for the taxable year ended June 30, 1942, and its income, declared value excess profits, and excess profits tax returns for the taxable year ended June 30, 1943, with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.
The case was submitted on a stipulation of facts, oral testimony, and evidence admitted at the hearing. The facts as stipulated are so found. Such parts of the stipulation of facts and facts found from the evidence as are considered necessary are set forth below.
Petitioner, a Pennsylvania corporation, was incorporated on June 2, 1936 and its principal office and place of business is in Butler, Pennsylvania.
American Austin Car Co. (hereinafter called Austin), a Delaware corporation organized in February 1929, which owned and operated an automobile-manufacturing plant in Butler, Pennsylvania, filed a voluntary petition for reorganization under section 77-B of the National Bankruptcy Act on June 29, 1934.
On July 23, 1935, upon a petition of the Pullman Standard Car Manufacturing Co., the mortgagee, the United States District Court entered an order declaring that no reorganization of Austin could be effected and directing that Austin be liquidated. The reorganization court decided that an appraisal be made of the value of the Austin assets, and on August 10, 1935, the appointed appraisers found their worth to be $246,114.02.
On August 21, 1935, the liquidating trustee sold the assets of Austin to R. S. Evans, Martin Tow and W. A. Ward, Jr., (hereinafter collectively called the associates) for the price of $5,000 cash. The assets were bought subject to certain liabilities of Austin in the amount of $219,099.83, consisting of a mortgage of $150,000 upon the Austin Plant at Butler, Pennsylvania, accrued and unpaid interest upon the mortgage in the amount of approximately $36,000 and accrued and unpaid real estate taxes thereon in the amount of approximately $33,100.
A general plan of organizing the petitioner to take over the Austin assets from the associates was conceived in May 1936. The plan contemplated the organization of a Pennsylvania corporation, to be known as the American Bantam Car Co. The salient points of the contemplated plan included the following: The associates were to receive in exchange for their transfer of Austin assets to petitioner 300,000 shares of no par common stock, which would comprise all of the petitioner's issued stock upon its issuance to the associates; transfer to petitioner of such assets would be subject to liabilities totaling $219,099.83; 90,000 shares of petitioner's preference stock would be offered to the public at $10 a share; the underwriters of such issue of preferred stock were to receive from the associates, in addition to their underwriting discounts and commissions, and as further compensation for their services as underwriters, certain amounts of the common stock issued to the associates as and if they effected sale to the public of certain amounts of the preference stock. All the interested parties orally agreed to the substance of this plan prior to June 2, 1936, though there was no formal written contract between the parties at this time.
On May 25, 1936, the associates secured the services of the American Appraisal Co. to value the Austin assets. That company found that the Austin assets had a worth of $840,800 to a going concern engaged in the manufacturing of automobiles at normal plant capacity.
On June 2, 1936, petitioner was incorporated under the laws of the Commonwealth of Pennsylvania, with an authorized capital stock of 700,000 shares, consisting of 100,000 shares of preference stock of the par value of $10 per share and 600,000 shares of common stock without par value.
Petitioner's articles of incorporation provided:
At all meetings of stockholders the holders of preferred stock shall be entitled to 3 votes for each share of preferred stock held by them, and the holders of common stock shall be entitled to 1 vote for each share of common stock held by them.
On June 3, 1936, the associates transferred to petitioner the Austin assets, subject to liabilities which at the time amounted to $219,099.83, together with the sum of $500 in cash and, simultaneously therewith, petitioner issued to the associates 300,000 shares of its common stock in proportion to their respective interests in these properties.
The respective interests of the associates in the Austin assets acquired by them on August 21, 1935, were on such date and at the time of the transfer by them of such assets to petitioner as follows:
+---------------------+
¦Martin Tow ¦46.25%¦
+--------------+------¦
¦R.S. Evans ¦46.25%¦
+--------------+------¦
¦W.A. Ward, Jr ¦7.50% ¦
+---------------------+
The 300,000 shares of common stock issued to the associates by petitioner on June 3, 1936, were issued in the following proportions:
+------------------------------------+
¦Martin Tow, 138,750 shares ¦46.25%¦
+-----------------------------+------¦
¦R.S. Evans, 138,750 shares ¦46.25%¦
+-----------------------------+------¦
¦W.A. Ward, Jr., 22,500 shares¦7.50% ¦
+------------------------------------+
On June 3, 1936, when the Austin assets were acquired, petitioner had no working capital, no labor force, and no sales organization.
On June 8, 1936, petitioner executed a written contract with Dingwall & Co., a New York corporation, and Tooker & Co., a partnership, providing for an irrevocable and exclusive selling order on 90,000 shares of petitioner's convertible preference stock for a period of 6 months from the effective date granted by the Securities Exchange Commission at a public offering price of $10 per share, less commissions of 15 per cent and allowance expenses of 5 per cent. The following selling schedule was provided: 20,000 shares during the first 2 months after the effective date granted by the Securities Exchange Commission; 15,000 shares during the third month after such date; 17,500 shares during the fourth month after such date; 17,500 shares during the fifth month after such date; and 20,000 shares during the sixth month after such date. If Dingwall & Co. and Tooker & Co. failed to execute the selling order in accordance with this schedule, petitioner was given the option to cancel the selling order on 10 days' notice.
On June 8, 1936, concurrently with the above...
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