Budd International Corporation v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 19 November 1941 |
| Docket Number | Docket No. 102842. |
| Parties | BUDD INTERNATIONAL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Henry S. Drinker, Esq., Frederick E. S. Morrison, Esq., and John W. Bodine, Esq., for the petitioner.
Brooks Fullerton, Esq., for the respondent.
The Commissioner determined deficiencies of $631,006.24 and $25,296.31 in petitioner's income taxes for 1936 and 1937, respectively. For 1936, petitioner assails (1) the use of the transferor's cost as its own basis for computation of gain, and (2) the treatment of the transaction as a sale and not as in part an exchange; (3) petitioner demands a deduction for Pennsylvania taxes; (4) petitioner demands a larger deduction for Federal capital stock tax for 1936; (5) respondent demands a disallowance of deduction for capital stock tax for 1937; (6) petitioner demands a greater undistributed profits tax credit for 1936; and (7) petitioner demands a full loss deduction upon shares surrendered instead of the $2,000 allowed by the Commissioner as upon a capital loss.
Many of the facts are stipulated and may be regarded as found in the language of the stipulations.
FINDINGS OF FACT.
Petitioner, a Delaware corporation with principal office at Philadelphia, Pennsylvania, filed its income tax returns for 1936 and 1937 in the first district of Pennsylvania. It was organized on August 7, 1930, pursuant to the terms of an agreement dated April 24, 1930, between the Edward G. Budd Manufacturing Co. (herein called the Manufacturing Co.), J. Henry Schroder & Co., a London banking house (herein called Schroder), and the J. Henry Schroder Banking Corporation, of New York. The purpose of the agreement was to turn over to a new corporation, the petitioner, the entire European interests and business of the Manufacturing Co. in a manner enabling the transferee to secure funds for the conduct of that business and for liquidation of an indebtedness of Ambi-Budd Presswerk (herein called Ambi-Budd), in which the Manufacturing Co. owned shares.
The Manufacturing Co. was organized as a Pennsylvania corporation in 1912, and has since engaged in the manufacture of railroad rolling stock and of all-steel bodies for automobiles. It developed and improved the all-steel body, protecting its manufacturing processes and product by United States and foreign patents. In 1924 it granted a nonexclusive license to Citroen for the manufacture of all-steel bodies in France, and under the license it was receiving royalties of $10,000 a month in 1926, and $20,000 a month in 1929. In 1926 it granted an exclusive license for Germany and a number of small countries in Europe and Asia to Ambi-Budd, a newly organized German corporation, which engaged in the manufacture of automobile bodies in Germany. During 1926 it organized the "Pressed Steel Company of Great Britain, Limited" (herein called Pressed Steel), granted to it a 99-year exclusive license for the use of the processes and patents in the manufacture of all-steel bodies in the British Isles, and sent to England the manufacturing machinery and a staff of technical experts for production organization and the training of English managers and workmen. Of Pressed Steel's capital stock the Manufacturing Co. acquired 64 percent of the common shares. consisting of 20,900 class A and 17,500 class B, each of a par value of £10, at a cost of $1,000,000, and it also, by subscription, acquired 1,000 preference shares of a par value of £100 each. Of the subscription price of £100,000 it paid only £70,000 (equivalent to $344,458.01). Schroder acquired all the rest of Pressed Steel's shares: 21,600 class A common and 5,000 preference.
On September 19, 1930, as contemplated by the agreement of April 24, 1930, petitioner made agreements with the Manufacturing Co. pursuant to which the Manufacturing Co. sold, assigned, and transferred to petitioner the folowing property, constituting a small part of its assets:
The Manufacturing Co. further promised to assign petitioner licenses for the use of future patents and processes of body manufacture; to give advice and information on operation; to furnish petitioner with funds to pay the dividends on preferred shares in case its earnings should be insufficient, and to guarantee that payment; to subscribe and pay for 3,428 more preferred and 3,428 more common shares if petitioner should be required to pay the additional £30 a share on the price of its Pressed Steel preference shares.
The petitioner issued 360,000 common shares to the Manufacturing Co.; promised to pay to it $344,458.01 (the amount which had been paid by the Manufacturing Co. on the price of the 1,000 preference shares of Pressed Steel), and to assume the obligation for the balance of £30 a share.
Simultaneously and pursuant to the agreements, the Manufacturing Co. subscribed for 76,572 preferred and 76,572 common shares of petitioner's stock for $3,350,025, and Schroder, having previously agreed to take over 68,572 shares of each class, paid $3,000,025 to the Manufacturing Co., which immediately paid this amount, together with $350,000 to petitioner. Thereupon petitioner paid the Manufacturing Co. "$350,000 cash in accordance with the above promise." (The promise was to pay $344,458.01.) Petitioner then issued 76,572 preferred and 76,572 common shares to the Manufacturing Co., which simultaneously transferred 68,572 of each to Schroder. After the consummation of these transactions the Manufacturing Co. held 8,000, or 10.45 percent, of petitioner's preferred shares and 368,000, or 84.29 percent, of its common shares; Schroder held the remainder, 68,572 preferred and 68,572 common.
On its books petitioner entered the assets received by it from the Manufacturing Co. as follows:
7% Cumulative Participating Preference Shares of Pressed Steel
Co., Ltd. (1000 shares of £100 par value each, less 30% uncalled
Ordinary Shares of Pressed Steel Co. Ltd. (38400 shares of £10
par value each) _______________________________________________________ $2,350,000.00
Common Capital Stock of Ambi-Budd Presswerk ______________________________ 500,000.00
Patents and Process Rights, Contracts and Goodwill as valued by
Board of Directors as at date of acquisition ___________________________ 1,800,000.00
_____________
$4,650,000.00
Entries in its capital stock account were as follows:
$3.50 cumulative convertible preferred stock, no Shares Stated value
par value _____________________________________________ 80,000 $3,500,000.00
Common Stock, no par value, authorized ___________________ 600,000
Reserve for conversion of preferred stock ________________ 160,000
________
440,000 4,100,000.00
______________
$7,600,000.00
Together
Unissued 3,428 units each of 1 share preferred stock and 1
share common stock — subscription price ________________ 149,975.00
______________
$7,450,025.00
==============
Surplus _____________________________________________________________ $200,000.00
In 1935 Pressed Steel reduced the par value of all its shares to £1; its shares were thereafter held as follows:
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| Common | Percent | Preference | Percent
| shares | | shares |
----------------------------------|----------|---------|------------|--------
Petitioner ______________________ | 332,595 | 57.79 | 81,667 | 16.7
Schroder ________________________ | 242,975 | 42.21 | 408,333 | 83.3
| ________ | _______ | __________ | _______
Total ________________________ | 575,570 | 100 | 490,000 | 100
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In January 1936 Pressed Steel reduced the par value of its common shares to 5 shillings, and each shareholder became entitled to receive four new shares for each £1 share held.
When petitioner was organized in 1930. its authorized capital stock was 80,000 cumulative preferred shares and 600,000 common shares, all without par value. Each preferred share outstanding was convertible at the holder's option into two common shares, and for fulfillment of this obligation 160,000 of the authorized common shares were reserved. By petitioner's amended certificate of incorporation, holders of preferred shares were entitled to receive out of surplus or net profits "cumulative dividends at the rate of $3.50 per annum and no more * * * before any dividend shall be paid or set apart upon the common stock." Preferred shares were subject to redemption on notice at $52 a share plus accrued dividends, and a sinking fund was required for that purpose in which petitioner should place each year an amount equal to 3 percent of the largest...
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