Bassick v. Commissioner of Internal Revenue
| Decision Date | 06 July 1936 |
| Docket Number | No. 35,36.,35 |
| Citation | 85 F.2d 8 |
| Parties | BASSICK v. COMMISSIONER OF INTERNAL REVENUE. PERKINS v. SAME. |
| Court | U.S. Court of Appeals — Second Circuit |
Louis B. Eppstein, of New York City (Louis B. Eppstein, Ira W. Hirshfield, and Louis J. Altkrug, all of New York City, of counsel), for petitioners.
Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. to the Atty. Gen., for respondent.
Before MANTON, SWAN, and CHASE, Circuit Judges.
These two petitions are similar, and will be considered in one opinion.
Deficiencies were charged against the respective petitioners for their income tax returns for 1923. The issue is whether the provisions of section 202 of the Revenue Act of 1921, c. 136, 42 Stat. 227, 229, require that a gain shall be recognized on a transaction in 1923 whereby the petitioners secured in exchange for common stock of the Bassick Company cash, bonds, and promissory notes admittedly the equivalent of cash, and certificates of deposit and voting trust certificates representing shares of the common stock of Bassick-Alemite Corporation.
The Bassick Manufacturing Company, a Delaware corporation, had 15,000 shares of its common stock outstanding. Fesler & Overton owned 5,000 of these, and the remaining 10,000 shares were owned by the Bassick Company, a Connecticut corporation. Both petitioners were stockholders of the latter company, and Bassick was also its president. In 1922 Bassick entered into negotiations with the Central Securities Company of Chicago, Ill., and made tentative arrangements whereby a new corporation was to be organized having 200,000 shares of no-par value common stock and an authorized issue of 5,000,000 of preferred stock. It was planned that the Central Securities Company was to cause the new corporation to acquire the 5,000 shares of the Bassick Manufacturing Company's common stock owned by Fesler and Overton, and that the new corporation was to acquire from or through Bassick not less than 90 per cent. of the Bassick Company common stock at $131.75 per share, to be paid, at the stockholder's option, all in cash or half cash and half common stock of the new company at $20 a share. It was further planned that the stock of the new company so received would be subject to limitations on its marketability, and, moreover, that 50,000 of the shares so received should be made subject to a voting trust agreement which was to cover in like manner 50,000 shares which the Central Securities Company was to acquire. During December, 1922, Bassick, in order to be in a position to carry out this plan, secured commitments from the stockholders of Bassick Company which recited the plan as outlined above and indicated that the stockholder would sell his shares at $131.75 and his preference as to payment therefor, all in cash or half cash and half stock. Bassick also got an option for the Central Securities Company to buy the 5,000 shares of the Bassick Manufacturing Company owned by Fesler & Overton.
With these commitments as his basis, Bassick contracted with the Central Securities Company January 27, 1923, to organize a new corporation to acquire at least 95 per cent. of the common stock of the Bassick Company and 5,000 shares of the Bassick Manufacturing Company. This new company was to be capitalized as proposed and was to issue $1,250,000 in ten-year serial notes. Bassick agreed to assign to the new corporation the stock of the Bassick Company for 147,500 shares of its common stock and the $1,250,000 in notes, and the Central Securities Company agreed to transfer the 5,000 shares of the Bassick Manufacturing Company's stock for the remaining 52,500 shares of the new company's common stock. It was further agreed that, of the 147,500 shares of the new company issued for the Bassick Company's stock, the Central Securities Company would buy 65,000 shares at $20 a share, and also that they would take up the note issue of $1,250,000 by delivery of $1,050,000 in government bonds. A voting trust was to be set up in which 5,000 of the shares of the new corporation to be issued to the stockholders of the Bassick Company and 50,000 of the shares to be issued to the Central Securities Company should be held for five years with certificates to be issued therefor. All the remaining new stock, 32,499 shares, acquired by the Bassick Company's shareholders, was to be deposited under an agreement withholding possession until January 1, 1924, to keep it off the market.
On February 7, 1923, the new corporation, called Bassick-Alemite Corporation, was organized with an authorized capital of 200,000 shares of no-par common stock. On February 13, 1923, the directors of the Bassick-Alemite Company authorized the contract for the purchase of the shares of the Bassick Company on the terms previously agreed upon. This action was ratified by the Bassick-Alemite stockholders on the same day and the contract carried out. February 14, 1923, Central Securities Company and Bassick, for himself and the other stockholders of the Bassick Company, contracted with the voting trustees for the deposit, under the voting trust previously agreed upon, of 100,000 of the shares of new stock received or to be received by the parties. On the same day, Bassick deposited the stock and debentures of the Bassick-Alemite Company received by him with a trust company, instructing them to deliver the notes to the Central Securities Company for $1,050,000 in government bonds; to deliver 65,000 shares of the stock of the Bassick-Alemite Corporation to Central Securities Company for $1,300,000 in cash and their notes; to issue voting trust certificates for 5,000 according to the terms of the trust; and to issue certificates of deposit for the remainder of the shares pursuant to the agreement for depositing shares so received to keep them off the market until January 1, 1924.
These instructions were carried out, and the trust company distributed to the petitioner Bassick for his original 11,524 shares of Bassick Company stock $27 in cash, $506,500 in notes of the Central Securities Company, $421,400 in Liberty bonds, 30,801 voting trust certificates, and 3,717 certificates of deposit. Jessie S. Perkins likewise received her proportionate amount of cash and securities.
On February 15, 1923, the Bassick-Alemite Corporation issued 52,500 shares of its common stock in exchange for the 5,000 shares of Bassick Manufacturing Company to Central Securities Corporation pursuant to the agreed plan.
The petitioners contend that the transfer of Bassick Company stock to the Bassick-Alemite Corporation in exchange for that company's shares and notes was a tax-free exchange within section 202 (c) (3) of the Revenue Act of 1921 (42...
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