Kansas Sand & Concrete, Inc. v. Comm'r of Internal Revenue

• Decision Date: 17 June 1971
• Docket Number: Docket Nos. 1854-69,3833-69.
• Citation: 56 T.C. 522
• Parties: KANSAS SAND AND CONCRETE, INC., TRANSFEREE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTKANSAS SAND AND CONCRETE, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

56 T.C. 522

KANSAS SAND AND CONCRETE, INC., TRANSFEREE, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTKANSAS SAND AND CONCRETE, INC., PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 1854-69

3833-69.

United States Tax Court

Filed June 17, 1971.

Murray, F. Hardesty, for the petitioners.

Edward G. Lavery, for the respondent.

In September 1964 petitioner purchased all of the stock of another corporation, S. Pursuant to an agreement between petitioner and S and in substantial accordance with Kansas corporation law, S was merged into petitioner in December 1964. Held, petitioner's basis in the assets it acquired from S as a result of the December transaction must be measured by reference to the September stock purchase price and not by reference to S's basis in those assets. Sec. 334(b)(2), I.R.C. 1954.

OPINION

FORRESTER, Judge:

In docket No. 3833-69, respondent has determined deficiencies in petitioner's income taxes of $10,7-1.27 and $12,162.28 for the taxable years ending in 1965 and 1966, respectively. In docket No. 1854-69 respondent has determined that petitioner is liable as transferee of the assets of Kansas Sand Co., Inc. (hereinafter referred to as Sand), for an income tax deficiency of $2,015.38 for the taxable year ending in 1964. The parties agree that in docket No. 1854-69 petitioner is liable as transferee for any income tax deficiency that may be due from Sand for the taxable year ending in 1964. The only issue remaining for our decision is whether the basis of certain assets held by petitioner should be computed by reference to section 334(b)(2) or by reference to section 362(b).¹

All of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.

Petitioner is a Kansas corporation whose principal place of business at the time of the filing of the petition herein was in Topeka, Kans. Petitioner filed Federal corporation income tax returns for the taxable years ending December 31, 1965, and December 31, 1966, with the district director of internal revenue in Wichita, Kans. On March 18, 1968, petitioner filed an amended Federal corporation income tax return for the taxable year ending December 31, 1966, with the district director of internal revenue in Wichita, Kans. Sand was a Kansas corporation and filed a Federal corporation income tax return for the taxable year ending December 31, 1964, with the district director of internal revenue in Wichita, Kans. On March 15, 1966, an amended Federal corporation income tax return for the taxable year ending December 31, 1964, was filed for Sand with the district director of internal revenue in Wichita, Kans.

On September 28, 1964, petitioner purchased from Fred Kuehne and Kathryn Kuehne all of the 1,050 outstanding shares of Sand's stock. Petitioner continued to own all of his stock until December 31, 1964.

Petitioner (also referred to as Concrete) and Sand entered into an ‘Agreement and Plan of Merger’ which was dated November 30, 1964, and which is hereinafter referred to as the November agreement. The stipulated purposes of the November agreement were ‘to ease the burden of record keeping, centralize management, etc.’ The November agreement provided in part as follows:

2. TERMS OF MERGER.

The terms of the merger are:

(a) Sand shall be merged into Concrete in accordance with the statutory procedure set forth in the General Statutes of Kansas, 1949, Sections 17-3701 through 17-3709, as amended.

(b) Concrete shall be the surviving corporation and the corporate identity, existence, purposes, powers, franchises, rights, and immunities of Concrete shall continue unaffected and unimpaired by the merger. The Articles of Incorporation and the By-Laws, each as heretofore amended of Concrete shall remain in effect unaltered as the Articles of Incorporation and the By-Laws of the surviving corporation, and the duly qualified and acting directors and officers of Concrete immediately prior to the time when the merger becomes effective as provided in paragraph 5 hereof, hereinafter called the Effective Time, shall be the directors and officers of the surviving corporation.

(c) The corporate identity, existence, purposes, powers, franchises, rights, and immunities of Sand shall be merged into Concrete and Concrete shall be fully vested therewith.

(d) The separate existence of Sand, except insofar as specifically otherwise provided by law, shall cease at the Effective Time, whereupon Concrete and Sand shall become a single corporation.

(e) At the Effective Time, all of the outstanding shares of common stock of Sand, of which Sand is then the holder of record, if any, shall be void, and each other outstanding share of such common stock of Sand shall be converted into one share of common stock of Concrete, fully paid and nonassessable by Concrete.

(f) At the Effective Time, all option agreements, if any, then outstanding entered into pursuant to any agreement by Sand shall be vested in and assumed by Concrete.

6. DIRECTORS AND OFFICERS. The directors and all officers of the two corporations shall take all necessary action and file all necessary forms and papers to effect this Agreement and Plan of Merger without gain or loss or tax consequences for Federal income tax purposes under the provisions of U.S. Internal Revenue Code, Section 332, and all other applicable sections and provisions of the U.S. Internal Revenue Code, including notice of the adoption of the plan of liquidation of Kansas Sand Company, Inc., a corporation, within 30 days to the U.S. Internal Revenue Service on Form 966 and the surviving corporation (Kansas Sand and Concrete, Inc.) shall maintain permanent records of all necessary data in accordance with Regulations, Section 1.332-6.

On December 30, 1964, the officers of both Sand and petitioner were as follows: John R. Neuner, president; Robert R. Turney, secretary; Donna Neuner, treasurer.

Pursuant to the November agreement Sand was merged into petitioner on December 31, 1964, in substantial accordance with Kan. Stat. Ann. secs. 17-3701-17-3709. As a result of this December transaction, all of petitioner's outstanding shares of capital stock remained unchanged and outstanding while each share of the common stock of Sand owned by petitioner became void. On January 1, 1965, the stock certificate representing the 1,050 shares of Sand's stock owned by petitioner was marked canceled.

Prior to December 31, 1964, Sand engaged in the manufacture and sale of prepared concrete. As had been anticipated by Sand and petitioner, none of Sand's previously conducted business activities were terminated. Petitioner continued all such activities on and after December 31, 1964. Sand's customers generally became petitioner's customers and petitioner retained all of Sand's employees in their former occupational capacities.

On September 28, 1964, petitioner purchased all of the capital stock of another corporation, Sand. On December 31, 1964, in substantial accordance with Kansas corporation law, Sand was merged into petitioner. It appears from the positions which the parties have taken that the part of the September purchase price allocable to Sand's depreciable assets was appreciably less than Sand's basis in those same assets. The issue raised is whether petitioner must use a purchase-price basis as prescribed by section 334(b)(2) or a carryover basis as prescribed by section 362(b) in computing its allowable depreciation deduction with respect to assets which it acquired from Sand as a result of the December transaction.² Respondent favors the lower purchase-price basis while petitioner, in seeking larger allowable depreciation deductions, would employ the higher carryover basis.

Respondent argues that petitioner received the assets of Sand in a distribution considered to be in complete liquidation under section 332. He then contends that the facts here establish that since the distribution was pursuant to a plan of liquidation adopted (i) after June 22, 1954, and (ii) not more than 2 years after petitioner had acquired by purchase³ (during a period of not more than 12 months) at least 80 percent of Sand's stock, the special rule of section 334(b)(2) requires that the basis of Sand's assets in petitioner's hands be measured by reference to petitioner's basis in Sand's stock prior to the distribution.

In opposition to respondent's analysis, petitioner contends that the transaction of December 31, 1964, was not a complete liquidation within the meaning of section 332, but was instead a reorganization as defined under section 368(a)(1)(A). 368(a)(1)(A).⁴ Petitioner does not argue that the facts in the instant case fail to satisfy the requirements of section 332(b). Instead, it urges that the ‘term ‘complete liquidation’ as used in Section 334 and Section 332 is a technical term with technical legal requirements, which include an intention to wind up the corporate affairs, gather resources, settle liabilities and cease business activity' and apparently further urges that, since this intention was lacking, the December transaction cannot be considered a ‘complete liquidation’ for the purposes of section 332 and 334. See William C. Kind, 54 T.C. 600, 605 (1970).

As the facts were fully stipulated, the evidence bearing upon the ‘intention’ of the parties with respect to the December transaction must be gleaned from those facts alone. The stipulated purpose of the November agreement which led to the December transactions was ‘to ease the burden of record keeping, centralize management, etc.’ This purpose is compatible with and does not belie the existence of the ‘intention’ which petitioner claims is necessary for our finding that petitioner received ‘property distributed in complete liquidation’ of Sand. Furthermore, if the stipulated facts are any indication of ‘intention,‘ they would show that on December 31, 1964, Sand's separate corporate...