Britt v. Commissioner of Internal Revenue

• Decision Date: 14 August 1940
• Docket Number: No. 4632.,4632.
• Citation: 114 F.2d 10
• Parties: BRITT v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

114 F.2d 10 (1940)

BRITT v. COMMISSIONER OF INTERNAL REVENUE.

No. 4632.

Circuit Court of Appeals, Fourth Circuit.

August 14, 1940.

Robert A. Littleton, of Washington, D. C., for petitioner.

Lee A. Jackson, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

In order to decide this case, we must determine the basis for computing the gain realized by the taxpayer in 1934 from the redemption of 72 shares of preferred stock of United Carbon Company at $110 per share. The taxpayer acquired the stock in 1925 in the course of a liquidation distribution of the assets of the Liberty Carbon Company, of which he was a stockholder. In the latter year, the Liberty Carbon Company and a number of other corporations, engaged in the manufacture of carbon black, transferred their assets to the United Carbon Company, the inventories for cash and the other assets in exchange for shares of preferred and no-par common stock of the transferee. Thereafter the Liberty Carbon Company was dissolved and the taxpayer received in liquidation 72 shares of the preferred and 288 shares of the common stock of the United Carbon Company. The preferred stock at the time had a fair market value of $100 per share and the common stock, $26.88 per share.

The taxpayer adopted $7,200 as the basis for computing the gain from the redemption of the preferred stock in 1934, and reported a gain of $720. But the Commissioner of Internal Revenue asserted, and the Board of Tax Appeals held, that the true basis was a proportionate part of the basis of the assets of the Liberty Carbon Company, for which the stock of the United Carbon Company was exchanged. Computing the profit on this basis, the Commissioner determined a deficiency of $933.12.

The Board's decision was grounded upon the theory that the transaction in 1925, wherein the United Carbon Company acquired the assets of the Liberty Carbon Company, constituted a reorganization and nontaxable exchange within the meaning of § 203 of the Revenue Act of 1926, Ch. 27, 44 Stat. 9, 26 U.S.C.A.Int.Rev. Acts, page 148, and therefore the basis of the preferred stock received by the taxpayer in 1925 and redeemed in 1934, was the allocated cost of the property exchanged therefor, by reason of the provisions of § 113(a) (6) of the Revenue Act of 1932, Ch. 209, 47 Stat. 169, 26 U.S. C.A.Int.Rev.Acts, page 515, and § 113(a) (12) of the Revenue Act of 1934, Ch. 277, 48 Stat. 680, 26 U.S.C.A.Int.Rev.Acts, page 700. The taxpayer challenges this theory, but not the computation of the tax, if the theory is sound.

The relevant provisions of § 203 of the Revenue Act of 1926 are as follows:

§ 203 (a) "Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section."

§ 203 (b) (3) "No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization."

§ 203 (h) (1) (A) "The term `reorganization' means a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation)."

The facts with regard to the formation of the United Carbon Company and the transfer to it of the assets of the Liberty Carbon Company and other like business organizations in 1925 were found by the Board of Tax Appeals as follows:

"In that year, the Liberty Carbon Co., along with 11 other corporations and a partnership, transferred specific properties and inventories to United Carbon Co., in exchange for preferred and common stock, and cash.

"At the time of that exchange the transferred assets of Liberty Carbon Co. had a total original cost of $318,873.40. The cost of such of these assets as were transferred in exchange for United Carbon Co.'s stock was $213,856.02, but at the time of the exchange, these assets had a fair market value of $256,293.92. Such cost of assets not transferred for stock was $105,017.38, of which $79,539.43 covered inventory. For the purposes of the transaction, this inventory was taken at cost and United Carbon Co. paid Liberty Carbon Co. $79,539.43 in cash, for it.

"The stock received by Liberty Carbon Co. in exchange for that part of its assets which aggregated $256,293.92 in market value on the day of the transfer, as above set forth, consisted of 1,506 shares of $100.00 par value preferred and 6,024 shares of no par common stock of United Carbon Co. All these transfers were effectuated as a part of a plan of reorganization, to bring together, in one organization, the assets of various corporations engaged in the manufacture of carbon black, United Carbon Co. having been organized under the laws of Delaware to acquire the assets of the various concerns in pursuance of the plan.

"Thereafter, the Liberty Carbon Co. was dissolved, and petitioner, being a stockholder, received a liquidating distribution of 72 shares of the preferred stock of United Carbon Co. and 288 shares of its common stock. At the time of the exchange between Liberty Carbon Co. and United Carbon Co., the preferred stock received by petitioner had a fair market value of $7200.00 and, based upon the Liberty Carbon Co. stock exchanged therefor, an allocated value of $3,485.67.

"Petitioner reported no taxable profit in his income tax returns for 1925 as a result of the exchange of stock of the Liberty Carbon Co. for stock of the United Carbon Co., nor was any information relative to the transaction set forth in the return."

The ultimate undisputed findings of the Board were that the Liberty Carbon Company transferred 92 per cent, i. e., "substantially all" of its assets, to the United Carbon Company for stock and cash; and that the stock received in the exchange represented 73 per cent, i. e., a "material" part of the value of the transferred assets. These facts being established, the conclusion that a statutory reorganization took place is inevitable. The taxpayer received the United Carbon Company stock within the meaning of § 203(b) (3) as the result of a transaction in which the Liberty Carbon Company, a party to a reorganization, exchanged property "in pursuance of the plan of reorganization, solely for stock or securities" in United Carbon Company "another corporation a party to the reorganization". The term "reorganization" as defined in § 203(h) (1) (A) is satisfied by a merger or consolidation in which there is an acquisition by one corporation of substantially all the property of another. This conclusion is supported by decisions of the Supreme Court in Nelson Co. v. Helvering, 296 U.S. 374, 375, 56 S.Ct. 273, 80 L.Ed. 821; Helvering v. Minnesota Tea Co., 296 U.S. 378, 56 S.Ct. 269, 80 L.Ed. 284; G. & K. Mfg. Co. v. Helvering, 296 U.S. 389, 56 S.Ct. 276, 80 L.Ed. 291. These decisions are summed up by the Supreme Court in LeTulle v. Scofield, 308 U.S. 415, 420, 60 S.Ct. 313, 315, 84 L.Ed. 355, as follows: "We have held that where the consideration consists of cash and short term notes the transfer does not amount to a reorganization within the true meaning of the statute, but is a sale upon which gain or loss must be reckoned. We have said that the statute was not satisfied unless the...