Kansas Sand and Concrete, Inc. v. CIR, No. 71-1662.
| Decision Date | 25 August 1972 |
| Docket Number | No. 71-1662. |
| Citation | 462 F.2d 805 |
| Parties | KANSAS SAND AND CONCRETE, INC., Transferee and Kansas Sand and Concrete, Inc., Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Murray F. Hardesty, Topeka, Kan., for appellants.
John A. Townsend, Tax Div., Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and Ernest J. Brown, Tax Div., Dept. of Justice, Washington, D. C., on the brief), for appellee.
Before JONES*, McWILLIAMS and BARRETT, Circuit Judges.
Kansas Sand and Concrete, Inc. (taxpayer) appeals from a ruling by the Tax Court that the basis in the assets it acquired from its subsidiary is measured by reference to its basis in the subsidiary's stock prior to distribution and came within Section 334(b) (2) of the Internal Revenue Code. 56 T.C. 522 (1971). The Government determined deficiencies in the taxpayer's income taxes of $10,711.27 and $12,162.28 for 1965 and 1966 respectively.
In September of 1964 the Tax Court found that the taxpayer, a Kansas corporation doing business in Topeka, purchased all the 1,050 outstanding shares of Kansas Sand Company, Inc., (Sand), a Kansas corporation engaged in a related business in Topeka, from Fred and Kathryn Kuehne. An "Agreement and Plan of Merger" was thereafter entered into in November of 1964 between the taxpayer and Sand. The purpose of the merger was to ease record keeping and centralize management. On December 30, 1964 the officers in Sand and the taxpayer were the same persons. Sand merged into the taxpayer on December 31, 1964 in compliance with the Kansas statutes on merger. K.S.A. 17-3701 through 17-3709. The taxpayer's shares remained unchanged and each share of common stock of Sand owned by Concrete was cancelled. Sand's business activities were thereafter conducted by the taxpayer. All of the employees and customers of Sand became the employees and customers of the taxpayer.
The Commissioner of Internal Revenue determined the basis of depreciation was an allocation of the taxpayer's cost for the Sand stock among the assets received in the merger. The taxpayer's depreciation deduction allowed by the Commissioner amounted to $36,126.34 and $38,933.88, respectively, for 1965 and 1966. The Commissioner accordingly issued a deficiency notice inasmuch as the taxpayer had computed its depreciation in the amount of $52,589.77 and $64,525.36, respectively, for 1965 and 1966 under Section 362(b).
The issue is whether this transaction should be treated for federal income tax purposes as a reorganization under Section 368(a) (1) (A) as the taxpayer contends, or as a complete liquidation under Section 332(b) as the Government contends. Compliance with the taxpayer's position would require the basis to be determined by Section 362(b) which would authorize the taxpayer to carry over the adjusted tax basis assigned to the assets by Sand on the date of the merger. Under the Commissioner's theory the tax basis must be computed under Section 334(b) (2) which requires the taxpayer to allocate its basis in the Sand stock among the assets received from Sand.
The taxpayer strongly contends that the transaction complied with the statutory merger laws of Kansas and, accordingly, that it should be governed by the reorganization provisions of the Code. Section 368(a) (1) (A) defines a reorganization as a "statutory merger". Regulation 1.368-2(b) defines statutory merger as "a merger effected pursuant to the laws of the United States or a State . . ." Since the taxpayer strictly complied with Kansas statutes on merger, it contends that the transaction qualified as a reorganization under the Code. The taxpayer alleges that the continuity of interest requirement under Regulation 1.368-1(b) was met. There was a continuity of the business enterprise of Sand on a day to day operating basis in modified corporate form. There was also a continuity of interest of the owners before and after the reorganization. The only effect of the taxpayer's actions was to cancel Sand's stock.
Under Section 332(b), a distribution in complete liquidation occurs when:
The Tax Court found: On December 31, 1964 Sand's separate corporate affairs were wound up; Sand's resources were vested in the taxpayer; Sand's liabilities were settled; Sand's separate existence and separate business activity ceased; and the fact that the transaction qualified as a merger under the law of Kansas does not require that the distribution be exempted from the purview of Section 332. Nevertheless, we hold that the transaction also meets the definition of a reorganization under Section 368(a) (1) (A). The conflict can be resolved only by a determination as to which regulatory section controls.
Regulation 1.332-2(d) states in part that:
"If a liquidating corporation distributes all of its properties in complete liquidation and if pursuant to the plan for such complete liquidation a corporation owning the specified amount of stock in the liquidating corporation receives property constituting amounts distributed in complete liquidation within the meaning of the Code and also receives other property attributable to shares not owned by it, the transfer of the property to the recipient corporation shall not be treated, by reason of the receipt of such other property, as not being a distribution (or one of a series of distributions) in complete cancellation or redemption of all of the stock of the liquidating corporation within the meaning of Section 332, even...
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