Barker v. United States, 12826.
| Decision Date | 09 January 1953 |
| Docket Number | No. 12826.,12826. |
| Citation | 200 F.2d 223 |
| Parties | BARKER v. UNITED STATES. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Irell & Manella, Lawrence E. Irell and Arthur Manella, Los Angeles, Cal., for appellant.
Charles S. Lyon, Asst. Atty. Gen., Tax Division, Ellis N. Slack, Lee. A. Jackson, Edward J. P. Zimmerman, Sp. Asst. Attys. Gen., Walter S. Binns, U. S. Atty., E. H. Mitchell, and Edward R. McHale, Asst. U. S. Attys., Los Angeles, Cal., for appellee.
Before STEPHENS and HEALY, Circuit Judges, and McCORMICK, District Judge.
Lawrence Barker, the appellant, is one of two brothers who, with members of their families, were interested in the business of dealing in furniture and household furnishings in Southern California for many years. The business prospered, was incorporated, and the several individual interests have been the subject of many changes. The business is presently a large going concern.
On October 19, 1923, and up to and including December 28, 1923, Barker Bros., Inc., was a California corporation, hereinafter referred to as "Barker California". As of the last date mentioned, its outstanding capital stock consisted of 5750 shares of voting preferred stock and 17,894.35 shares of common stock. The common stock was owned as follows:
Share Owner Number of Shares
Charles Lawrence Barker
as Executor of the
Estate of W. A. Barker
Deceased .................. 3418.19
Pauline Barker .............. 1660
Lawrence Barker, individually 1841.50
F. K. Colby, Trustee ........ 300
Lawrence Barker, Trustee .... 960
_______
The above stock will
hereinafter be referred
to as the "Lawrence
Barker Interests" ................. 8179.69
C. H. Barker, C. A. Barker,
and Erle P. Barker ................ 8187.69
J. W. Beam:
Individually .............. 226.
Trustee for Employees
of Barker, California
(Employee Trust) ........ 1300.97
_______
1526.97
________
Total ............................... 17894.35
We graphically illustrate the various stock changes which are hereinafter detailed:
COPYRIGHT MATERIAL OMITTED
On December 20, 1923, an agreement was entered into between the Lawrence Barker Interests and the C. H. Barker group, meaning C. H. Barker, C. A. Barker, and Erle P. Barker, for the purpose of readjusting the corporate and business affairs of the enterprise, and the stock interests of the parties; and an agreement was made by the Lawrence Barker Interests and the C. H. Barker group with Marshall Field, Glore, Ward & Co., investment bankers hereinafter called "Bankers", as a part of the readjustment plan.
Prime objects of the plan as expressed and agreed to in writing were to enable the Lawrence Barker Interests to change their voting stock interest in Barker Bros. (Barker California) to a non-voting stock or investment interest, and to thus afford the C. H. Barker-Employee Trust groups the exclusive control of the enterprise. Accordingly, the plan agreed upon provided for the formation of a new corporation, hereinafter called "Barker Delaware" in which the C. H. Barker group and the Employee Trust were to receive all the common voting stock and in which the Lawrence Barker Interests and the J. W. Beam individual interest were to receive preferred nonvoting stock which they were free to sell on the market. To this effect, a contract was made between the C. H. Barker group and the Lawrence Barker Interests on the one hand and the Bankers on the other whereby the Bankers agreed to buy 4130 shares of the Barker Delaware first preferred stock from Barker Delaware and 10,870 shares of Barker Delaware first preferred stock from the Lawrence Barker Interests; and the Lawrence Barker Interests agreed to give (and they subsequently did give) Bankers an option to purchase the remaining 10,000 shares of Barker Delaware first preferred stock. The Lawrence Barker Interests and J. W. Beam would thus end up with cash and Barker Delaware second preferred stock which they could dispose of as they wished.
In furtherance of the plan a California corporation called Lawrence Barker, Inc., hereinafter referred to as the "Securities Company", was created as of December 22, 1923, with an authorized capital stock of 20,000 shares of common stock with a par value of $100.00 per share. The purpose of the Securities Company was to receive the shares inuring to the Lawrence Barker Interests, pursuant to the plan.
On December 28, 1923, a Delaware corporation named Barker Bros., Inc., i. e. Barker Delaware, was created. The purpose of this corporation was to take over the affairs of Barker California, the original company. Barker Delaware's authorized capital stock consisted of:
25,000 shares, first preferred, $100. par per share;
25,000 shares, second preferred, $100. par per share;
100,000 shares, common, $100. par per share.
Accordingly, on December 28, 1923, the owners of the common stock of Barker California exchanged their stock for Barker Delaware common stock in the following several interests:
Share Owner Number of Shares
C. H. Barker Group .............. 43,946.09
Employee Interests .............. 6,945.91
Lawrence Barker Interests (issued
in the name of the Securities
Company) ...................... 43,870.
J. W. Beam and Martha Beam ...... 935.
Also, on December 28, 1923, 19,997 shares of the stock in the Securities Company were distributed proportionately among the Lawrence Barker Interests.1
The Securities Company exchanged its 43,870 shares of common stock of Barker Delaware for 20,870 shares of first preferred stock of Barker Delaware, and 23,000 shares of second preferred stock of Barker Delaware on December 29, 1923. J. W. Beam and Martha Beam received 935 shares of second preferred in exchange for 935 shares of common stock. On January 3, 1924, Barker Delaware amended its Articles of Incorporation to change its authorized common stock from 100,000 shares at $100 par to 100,000 shares at no par. And on January 5, 1924, the C. H. Barker group, and J. W. Beam as Trustee for the Employees exchanged their 50,892 shares of Barker Delaware par common for 100,000 shares of Barker Delaware no par common. Thus the C. H. Barker group together with the Employee Trust group ended up with exclusive voting control of Barker Delaware.
In February, 1924, Barker Delaware sold to Bankers all its remaining unissued first preferred stock, 4130 shares. Pursuant to the terms of the agreement of December 20, 1923, the Securities Company sold to Bankers 10,870 shares of first preferred stock of Barker Delaware for $1,000,040 plus dividends accrued. From February 11, 1924, to May 16, 1924, Bankers exercised their option to acquire of the Securities Company its remaining 10,000 shares of Barker Delaware first preferred stock.
All of the assets of Barker California were transferred to Barker Delaware on March 1, 1924, subject to all of the outstanding liabilities of Barker California, including the liability for the outstanding preferred stock of Barker California which Barker Delaware thereupon redeemed.
In December, 1943, the appellant-taxpayer sold thirty of the 19,997 shares of stock in Lawrence Barker, Inc., the Securities Company,2 for $5,000 and included the entire amount as income from capital gain. On March 15, 1947, the taxpayer filed a claim for refund of his 1943 income tax payments in the amount of $1,818.98 on the ground that the basis of the Securities Company stock was $219.35 per share, or $6,580.50 for thirty shares; and therefore, no gain, but rather a loss of $1,580.50 was realized on the sale of the shares for $5,000. The district court found that the 30 shares had a basis for determining gain or loss of $52.18 per share, and that accordingly the taxpayer was entitled to a refund in the amount of $434.61 since the gain realized was $3,434.60 on the sale of the thirty shares, rather than the full $5,000.
While it is the gain from the sale of the Securities Company stock in 1943 which the Commissioner is here taxing, the issue in dispute before us on appeal is confined to the determination of the basis for gain or loss which should be assigned to the Barker Delaware stock. For, both parties agree that the basis of the shares of the Securities Company stock is the same as the basis of the shares of the Barker Delaware stock for which they were exchanged.3
In order to ascertain the basis of the Barker Delaware stock, the Barker California-Barker Delaware transaction must be analyzed under the Revenue Act of 1932 to determine whether or not it was a "tax-free" exchange.4 For, the Barker Delaware stock was acquired prior to 1934; and section 113(a)(12) of the Internal Revenue Code, 26 U.S.C.A. § 113(a)(12), requires that property which was acquired prior to 1934, in a "tax-free" exchange where the basis was provided for in section 113(a)(6), (7), or (9) of the 1932 Revenue Act, must retain said basis.
Since the 1934 Revenue Act changed some of the definitions of tax-free exchanges, including the definition of a "tax-free reorganization", Congress enacted section 113(a)(12), supra, in the 1934 Act to continue the basis of property acquired prior to January 1, 1934, under a tax-free exchange as described in the Revenue Act of 1932. When Congress in 1936 made further changes in the exchange and basis provisions of the Revenue Act, it passed section 113(a)(16) to continue the basis for property acquired in the years when the 1934 Act applied. Both section 113(a)(12) and section 113(a)(16) were made part of the Revenue Code, Title 26. We therefore conclude that in enacting subsection (16), Congress did not repeal or replace subsection (12), but...
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