Manhattan General Equipment Co v. Commissioner of Internal Revenue Collier Service Corporation v. Same

• Decision Date: 03 February 1936
• Docket Number: Nos. 226,227,s. 226
• Citation: 80 L.Ed. 528,297 U.S. 129,56 S.Ct. 397
• Parties: MANHATTAN GENERAL EQUIPMENT CO. v. COMMISSIONER OF INTERNAL REVENUE. * COLLIER SERVICE CORPORATION v. SAME
• Court: U.S. Supreme Court

297 U.S. 129

56 S.Ct. 397

80 L.Ed. 528

MANHATTAN GENERAL EQUIPMENT CO.

v COMMISSIONER OF INTERNAL REVENUE.^* COLLIER SERVICE CORPORATION v. SAME.

Nos. 226, 227.

Argued Jan. 8, 1936.

Decided Feb. 3, 1936.

Mr. Laurence Graves, of Washington, D.C., for petitioners.

The Attorney General and Mr. Golden W. Bell, Asst. Sol. Gen., of Washington, D.C., for respondent.

Mr. Justice SUTHERLAND delivered the opinion of the Court.

These cases involve identical facts and questions of law, and were disposed of by the court below in one opinion. 76 F.(2d) 892. The facts, so far as they concern the question here, are taken from the statement of that court:

'The petitioners are affiliates of United Brokerage Company. That corporation filed income tax returns for itself and its affiliates for 1925 and 1926, and the petitioners seek to review tax deficiencies attributed to them by the Commissioner, which the Board of Tax Appeals has affirmed. * * *

'On June 30, 1925, the United Brokerage Company purchased for $3,41 ,345.63 in cash all the capital stock of Artemas Ward, Inc. (a New York corporation), that was issued and outstanding consisting of 4,964 shares of no par value. * * *

'On December 31, 1925, pursuant to a plan of reorganization, Artemas Ward, Inc. (N.Y.) transferred to Artemas Ward, Inc. (a Delaware corporation), in exchange for 100 shares of stock of the latter company of no par value, all its assets, then of a net book value of $1,246,920.07, with the exception of cash and accounts receivable aggregating $284,967.21—that is to say, the New York corporation transferred to the Delaware corporation assets of the value of $961,952.86. Immediately after the transfer, and on December 31, 1925, Artemas Ward, Inc. (N.Y.) distributed to United Brokerage Company the 100 shares of stock of Artemas Ward, Inc. (Del.) and accounts receivable amounting to $234,967.21. In December, 1926, United Brokerage sold the entire 4,964 shares of Artemas Ward, Inc. (N.Y.) for $49,640. That stock had cost the United Brokerage $3,414,345.63 and the total must be apportioned between the 100 shares of the Delaware corporation (which it still owns) and the 4,964 shares of Artemas Ward, Inc. (N.Y.) in order to determine the loss suffered by the United Brokerage Company through its sale of the 4,964 shares at $49,640. * * *

'Upon the reorganization, the New York corporation had left among its assets, valued at $1,246,920.07, accounts receivable and cash aggregating $284,967.21, or approximately 22.85% thereof, after $961,952.86 had been transferred to the Delaware Company. Under Art. 1599(2) (as amended, infra) the portion of $3,414,345.63 paid by the United Brokerage Company for the stock of Artemas Ward, Inc. (N.Y.) represented by that stock after the reorganization was $780,303.97. If from this be deducted $234,967.21 accounts receivable and the $49,640 realized from the sale in December, 1926, there would be a loss of $495,696.76. This loss the Commissioner allowed in assessing the income tax for 1925. The second point raised on this appeal is whether the loss, for the year 1926, to which the United Brokerage Company and its affiliates were entitled was only the sum of $495,696.76 or was the sum of $2,167,785.56 which would arise through deducting from $3,414,345.63 (the cost of the stock of the New York company) the value at the time of the reorganization of the Delaware stock which was $961,952.86 and $234,967.21 realized from accounts receivable and $49,640 realized from sale of the 4,964 shares.'

It thus appears, the New York company having parted with all its assets except $50,000 in cash, that the assets behind the 4,964 shares when the 100-share distribution was made consisted of only that sum, while the 100 shares of the Delaware company stock were represented by the transferred assets of the New York company of the value of $961,952.86. The sale of the 4,964 shares brought $49,640; and the simple question to be determined is, What method for the purposes of taxation should be employed to determine the loss in respect of the 4,964 shares under the Revenue Act of 1926, § 204(a)(9), c. 27, 44 Stat. 9, 14, 15 (26 U.S.C.A. § 113 note)? That section provides that the basis for determining the gain or loss from such sale shall be the cost of the property, except that,

'(9) If the property consists of stock or securities distributed after December 31, 1923, to a taxpayer in connection with a transaction described in subdivision (c) of section 203,¹ the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed.'

At the time of the reorganization, article 1599 of Treasury Regulations 69, which had been promulgated on August 28, 1926, was in force. Petitioners invoke subdivision 2 of that regulation which provided:

'Where the stock distributed in reorganization is in whole or in part of a character or preference materially different from...