Commissioner of Internal Revenue v. Tyng, 17-19.
| Decision Date | 03 August 1939 |
| Docket Number | No. 17-19.,17-19. |
| Citation | 106 F.2d 55 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. TYNG. SAME v. BUCHSBAUM. |
| Court | U.S. Court of Appeals — Second Circuit |
James W. Morris, Asst. Atty. Gen., and Sewall Key and Carlton Fox, Sp. Assts. to Atty. Gen., for petitioner and cross-respondent Commissioner of Internal Revenue.
Wayne Johnson, of New York City, for respondent and cross-petitioner Lucien Tyng.
J. R. Sherrod, of Washington, D. C., and C. E. Paxson, of New York City (Miller & Chevalier and Robert M. Weston, all of New York City, of counsel), for respondent and cross-petitioner William Buchsbaum.
Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.
Both the Commissioner of Internal Revenue and the taxpayers Tyng and Buchsbaum appeal from orders of the Board of Tax Appeals redetermining the income of the taxpayers for 1929.
Two questions are involved in the appeals. The first is whether the transaction about to be described was a "reorganization" within Section 112 (i) (1) of the Revenue Act of 1928, 26 U.S.C.A. § 112 note. If it was such a "reorganization" (and that it was one the Board found), then by virtue of Section 112 (b) (3) and (c) (1), 26 U.S.C.A. § 112(b) (3), and (c) (1), no gain should be recognized upon the property received in exchange other than the cash.
Subdivision (i) (1) of Section 112 defines reorganization thus:
The other provisions of Section 112 which are relevant read as follows:
* * * * * *
W. S. Barstow & Co. of Delaware (hereinafter referred to as Barstow & Co.) owned about 55½% of the voting stock of General Gas & Electric Corporation. Barstow Securities Corporation of Delaware (hereinafter called Securities) owned 94,005 shares of the common stock of Barstow & Co. that was issued and outstanding, William Buchsbaum owned 1,800 shares, and others the remaining 9,960 shares. There were also 6,981 shares of preferred stock of Barstow & Co.
Of the stock of Securities outstanding the taxpayers Tyng and Buchsbaum owned 21,665 and 7,540 shares respectively and their associates owned the remainder. The Associated Gas & Electric Co. (hereinafter called Associated) sought control of General Gas & Electric Corporation and finally gained it by buying up stock control of Securities and Barstow & Co.
On February 5, 1929, the owners of the stock of Securities and of Barstow & Co. signed a contract for the sale of their stock to Associated Gas & Electric Company for the sum of $50,000,000 in cash, but three of the twenty-three stockholders of Securities, namely, Tyng, Buchsbaum and W. S. Barstow signed the contract subject to an oral agreement simultaneously entered into that the written contract should be modified by providing for payment of part of the consideration, to be furnished by Associated, in obligations of the latter, rather than wholly in cash. One of the reasons for demanding that the payment be made in part in such obligations was the desire of the three stockholders to lessen their income taxes, and they advised one Daly, who represented Associated in the negotiations, that the transaction would not be made on a cash basis.
On February 11, 1929, an agreement was made, supplementary to that of February 5, by the terms of which the transferors could, in payment for their stock, demand certain obligations of Associated for all or any part of the purchase price above the $10,000,000 cash already deposited by it in escrow.
Under this agreement the transferors elected to receive and actually were paid cash in the sum of $34,699,528.54 and the following securities in Associated valued at $15,208,021.60:
4½% convertible gold debentures
dated January 15
1929, due January 15
1949, face value $11,776,000
at 93 ............................. $10,951,680.00
Accrued interest .................... 138,368.00
Gold debenture bonds, consolidated
refunding 5%
series, dated October 1
1928, due October 1, 1968
face value $4,255,000 at 90 3,829,500.00
Accrued interest .................... 117,012.50
5½% convertible investment
certificates, due November
15, 1938, face value $175,000
at 97 ............................. 169,750.00
Accrued interest .................... 1,711.10
_______________
$15,208,021.60
The agreement of February 11 also provided for the purchase by Associated of preferred stock of Barstow & Co.
The taxpayer Tyng received the following (exclusive of his share of the interest accrued upon the initial deposit of $10,000,000):
Cash ................................ $ 4,233,231.97
4½% convertible debentures
at 93 ............................. 3,092,250.00
Accrued interest thereon ............ 39,068.75
Gold debenture bonds, consolidated
refunding 5%
series, at 90 ..................... 2,790,000.00
Accrued interest thereon ............ 85,250.00
______________
Total ........................... $10,239,800.72
The taxpayer Buchsbaum received the following (exclusive of his share of the interest accrued upon the initial deposit made by Associated of $10,000,000):
Cash ................................ $1,285,613.15
4½% convertible debentures
at 93 ............................. 3,093,180.00
Accrued interest thereon ............ 39,080.50
Gold debenture bonds, consolidated
refunding 5% series
at 90 ............................. ......
Accrued interest thereon ............ ......
_____________
Total ........................... $4,417,873.65
The Commissioner held that the transaction was a sale, and not a reorganization, within the meaning of Section 112 (i) (1), 26 U.S.C.A. § 112 note. He, therefore, included the value of the obligations of Associated received by the taxpayers in their gross income for 1929 and, as a result of this and other adjustments, determined certain tax deficiencies.
The Board of Tax Appeals held that the transaction involved a reorganization within the meaning of Section 112 (i) (1) and reduced the deficiencies accordingly.
The Commissioner contends that the Board was in error in holding that the purchase by Associated of substantially all the outstanding stock of Securities and Barstow & Co. in consideration for the payment of $34,699,528.54 in cash, and of $15,208,021.60 (including interest) in its unsecured "Convertible Gold Debentures", "Gold Debenture Bonds" and "Convertible Investment Certificates" constituted a "reorganization" within the meaning of Section 112 (i) (1).
We think the Board was right in holding that the transaction was a reorganization rather than a sale.
In Cortland Specialty Co. v. Commissioner, 2 Cir., 60 F.2d 937, we held that the transfer of substantially all of the properties of one corporation to another corporation in exchange for cash and notes (payable within a few months) was not a "reorganization" within the meaning of the income tax statute because there was no continuity of interest on the part of the transferor.
In Worcester Salt Co. v. Commissioner, 2 Cir., 75 F.2d 251, we held that a transfer of all the assets of Kerr-Remington Salt Co. to Worcester Salt Co. in exchange for $680,000 in bonds of the latter was not a reorganization because the bonds did not preserve "continuity of interest" which "is a requisite". The bonds there involved were apparently five year bonds.
In Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428, the Supreme Court held that a transfer of property for a consideration of cash and promissory notes payable within less than a year was not a "reorganization".
It may be argued that under the foregoing decisions a transaction like the one before us was not a reorganization within the meaning of the statute, yet in each case the securities given in exchange were short term obligations involving no substantial continuity of interest on the part of the transferors. Here the bonds were payable in twenty and forty years respectively.
In Helvering v. Watts, 296 U.S. 387, 56 S.Ct. 275, 276, 80 L.Ed. 289,...
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