Howard v. Comm'r of Internal Revenue

Decision Date29 July 1955
Docket Number51830,52869.,Docket Nos. 51709-51714
Citation24 T.C. 792
PartiesHUBERT E. HOWARD AND HELEN B. HOWARD, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Truax-Traer acquired 80.19 per cent of the only outstanding class of stock of Binkley for a part of its own voting stock and also acquired the remainder of the stock of Binkley and the stock of Pyramid, a subsidiary of Binkley, other than that owned by Binkley, for cash in a single transaction. Held, that the transaction did not constitute a nontaxable exchange under section 12(b)(3), 1939 Code, to the extent that stock was exchanged for stock, since it did not qualify as a ‘reorganization’ within the meaning of section 112(g)(1)(B) which requires that such acquisition be solely for stock. William P. Sutter, Esq., for the petitioners.

J. Bruce Donaldson, Esq., and Thomas C. Cravens, Jr., Esq., for the respondent.

The respondent determined deficiencies in the Federal income taxes of petitioners for the taxable year 1950 as follows:

+------------------------------------------------------------------------+
                ¦Hubert E. and Helen B. Howard                               ¦$145,732.93¦
                +------------------------------------------------------------+-----------¦
                ¦John A. Howard                                              ¦1,119.28   ¦
                +------------------------------------------------------------+-----------¦
                ¦William A. Ruschke and Edna M. Ruschke                      ¦120.28     ¦
                +------------------------------------------------------------+-----------¦
                ¦George A. Merchant and Maude A. Merchant                    ¦9,084.46   ¦
                +------------------------------------------------------------+-----------¦
                ¦Gregory S. Devine and Ursula B. Devine                      ¦484.44     ¦
                +------------------------------------------------------------+-----------¦
                ¦Rantz E. Snoberger and Elizabeth Snoberger                  ¦20,340.25  ¦
                +------------------------------------------------------------+-----------¦
                ¦Clyde W. Woosley and Lois Jane Woosley                      ¦683.24     ¦
                +------------------------------------------------------------+-----------¦
                ¦Estate of E. J. Coffey, Dec'd, et al., and Blanche B. Coffey¦3,026.94   ¦
                +------------------------------------------------------------------------+
                

The single issue presented for our consideration is whether the acquisition by Truax-Traer Coal Company in 1950 of the stock of Binkley Coal Company and Pyramid Coal Corporation, a subsidiary of Binkley, from their stockholders constituted a nontaxable exchange pursuant to a plan of reorganization within the purview of sections 112(b)(3) and 112(g)(1)(B) of the Internal Revenue Code.

FINDINGS OF FACT.

All of the pertinent facts have been stipulated and are incorporated herein by reference.

Hubert E. and Helen B. Howard, William A. and Edna M. Ruschke, Gregory S. and Ursula B. Devine, Rantz E. and Elizabeth Snoberger are all residents of Chicago, Illinois, and for the calendar year 1950 filed their respective joint Federal income tax returns with the then collector of internal revenue for the first Illinois district. E. J. Coffey, now deceased, and Blanche B. Coffey were husband and wife, and in 1950 resided in East St. Louis, Illinois, filing a joint Federal income tax return for that year with the then collector of internal revenue for the eighth Illinois district. John A. Howard is a resident of Rolling Hills, California, and for the calendar year 1950 filed a Federal income tax return with the then collector of internal revenue in Los Angeles, California. George A. and Maude A. Merchant are residents of River Forest, Illinois, and for the calendar year 1950 filed a joint Federal income tax return with the then collector of internal revenue for the first Illinois district.

During 1950, Binkley Coal Company (hereinafter called Binkley), an Illinois corporation, was engaged principally in the wholesale purchase and sale of coal. In June 1950, the total outstanding stock of Binkley consisted of 4,614 shares of $100 par value common stock.

During 1950, Pyramid Coal Corporation (hereinafter called Pyramid), an Illinois corporation, was engaged principally in the production and sale of coal. In June 1950, the total outstanding stock of Pyramid consisted of 20,000 shares of $100 par value common stock, of which Binkley owned 12,285 shares and various individuals owned 7,715 shares.

During 1950, Truax-Traer Coal Company (hereinafter called Truax-Traer), a Delaware corporation, was engaged principally in the production, distribution, and sale of coal. In June 1950, the total outstanding stock of Truax-Traer consisted of 985,104 shares of $5 par value voting common stock. The total authorized stock of the company consisted of 30,000 shares of $100 par value preferred stock, none of which was outstanding, and 2,000,000 shares of $5 par value common stock.

After certain negotiations between A. H. Truax, on behalf of Truax-Traer, and Hubert Howard, on behalf of Binkley, the board of directors of Truax-Traer, on May 24, 1950, held a special meeting, recorded and reported in the minutes by the secretary of Truax-Traer, in pertinent part, as follows:

The Chairman stated that Mr. Truax and he had carried on negotiations for some time with Mr. Hubert Howard, the principal stockholder of Binkley Coal Company, for the acquisition of all of the outstanding shares of that company and of its subsidiary, Pyramid Coal Corporation; that there were outstanding 4,615 shares of Binkley Coal Company and 20,000 shares of Pyramid Coal Corporation, of which 12,285 shares are held by Binkley Coal Company and 7,715 shares by others; that it appears that the outstanding shares of Binkley Coal Company can be acquired at a value of $400 per share and the outstanding shares of Pyramid Coal Corporation (except those held by Binkley Coal Company) can be acquired at a value of $50 per share; that 3,700 shares of Binkley Coal Company can be acquired in exchange for shares of Common Stock of this Company to be issued at the rate of 32 to one and the remaining shares of Binkley Coal Company and Pyramid Coal Corporation can be Purchased for cash; and that if the 3,700 shares of Binkley Coal Company were acquired in exchange this company would issue 118,400 shares of its authorized but unissued Common Stock and would be called upon to pay $366,000 cash for the remaining shares of Binkley Coal Company and $385,750 in cash for the shares of Pyramid Coal Corporation.

The Chairman further stated that the shares proposed to be acquired by this company were reasonably worth the consideration asked by Mr. Howard for the following reasons:

The total consideration to be paid by Truax-Traer Coal Company, assuming the entire outstanding stocks of the Binkley and Pyramid Coal Companies are acquired as outlined above, would be as follows:

+-----------------------------------------------------------------------------+
                ¦CASH                                                           ¦$751,750.00  ¦
                +---------------------------------------------------------------+-------------¦
                ¦118,400 Shares of Truax-Traer Coal Company Common Stock at 12 1¦1,480,000.00 ¦
                ¦/2                                                             ¦             ¦
                +---------------------------------------------------------------+-------------¦
                ¦                                                    ¦          ¦$2,231,750.00¦
                +---------------------------------------------------------------+-------------¦
                ¦Outstanding long term indebtedness of Binkley and Pyramid as of¦$1,553,000.00¦
                ¦February 28, 1950, was                                         ¦             ¦
                +---------------------------------------------------------------+-------------¦
                ¦                                                    ¦          ¦$3,784,750.00¦
                +---------------------------------------------------------------+-------------¦
                ¦The consolidated net book value of the stocks of both companies¦4,643,000.00 ¦
                ¦as of that date was                                            ¦             ¦
                +-----------------------------------------------------------------------------¦
                ¦A summary of a reasonable depreciated value of the major items of assets that¦
                ¦would be useful in connection with the consolidated operations of Truax-Traer¦
                ¦and Binkley, as estimated by Mr. Truax and his assistants, are as follows:   ¦
                +-----------------------------------------------------------------------------¦
                ¦A—Net current assets, in excess of                  ¦          ¦$750,000     ¦
                +----------------------------------------------------+----------+-------------¦
                ¦B—Machinery and Equipment                           ¦          ¦             ¦
                +----------------------------------------------------+----------+-------------¦
                ¦1. Shovels, Machinery, Equipment & Buildings at     ¦$2,500,000¦             ¦
                ¦Pyramid Mine                                        ¦          ¦             ¦
                +----------------------------------------------------+----------+-------------¦
                ¦2. Victory Mine salvage value                       ¦750,000   ¦             ¦
                +----------------------------------------------------+----------+-------------¦
                ¦3. Stripping shovel leased to Shasta Coal Co. at    ¦380,000   ¦             ¦
                ¦$61,200 per year, depreciated value                 ¦          ¦             ¦
                +----------------------------------------------------+----------+-------------¦
                ¦Total buildings, machinery & equipment              ¦          ¦3,630,000    ¦
                +----------------------------------------------------+----------+-------------¦
                ¦C—Coal Reserves                                     ¦          ¦             ¦
                +----------------------------------------------------+----------+-------------¦
                ¦1. Jamestown (Perry County) 17,500,000 tons under 60¦$1,750,000¦             ¦
                ¦feet overburden at 10¢                              ¦          ¦             ¦
...

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