Mills v. CIR

• Decision Date: 06 May 1964
• Docket Number: No. 20467.,20467.
• Citation: 331 F.2d 321
• Parties: Richard M. MILLS and Moise W. Mills et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

331 F.2d 321 (1964)

Richard M. MILLS and Moise W. Mills et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 20467.

United States Court of Appeals Fifth Circuit.

May 6, 1964.

Charles M. Cork, Jr., Macon, Ga., Charles M. Cork, Macon, Ga., Jones, Sparks, Benton & Cork, Macon, Ga., of counsel, for petitioners.

John B. Jones, Acting Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Crane C. Hauser, Chief Counsel, I. R. S., Charles S. Casazza, Atty., I. R. S., Louis F. Oberdorfer, Asst. Atty. Gen., Harry Baum, Crombie J. D. Garrett, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before MARIS,^* GEWIN and BELL, Circuit Judges.

MARIS, Circuit Judge.

These consolidated petitions to review three decisions of the Tax Court present the issue whether the common transaction in question qualifies as a nontaxable reorganization within the meaning of section 368(a) (1) (B) of the Internal Revenue Code of 1954, 26 U.S.C. § 368 (a) (1) (B).

The petitioners, three brothers,¹ who owned in equal shares all the stock of three small gas corporations, were negotiating early in 1954 to merge their corporations with seven other small gas corporations into one corporation. Before this proposed merger reached fruition, negotiations were commenced for a possible merger of these ten corporations with General Gas Corporation, as a result of which on May 20, 1954 an option agreement was signed with General Gas Corporation which provided that General Gas Corporation, in return for the stock it received, would distribute to each stockholder of each acquired corporation a sufficient number of its shares of common stock to be valued at $14.00 per share, to equal the net book value of each acquired corporation as determined by audit, and further provided "that in the event the purchase price is not evenly divisible by shares at Fourteen Dollars ($14.00) per share, the difference will be paid in cash."

The option was exercised and on July 26, 1954 each of the petitioners, in exchange for all his shares in each corporation, was issued 1595 shares of common voting stock of General Gas Corporation. The value of the shares to which the petitioners became entitled was not evenly divisible at $14.00 per share into the net book value of the acquired corporations and each petitioner was accordingly paid $27.36 in cash in lieu of fractional shares.² In their federal income tax returns for 1954 the petitioners did not report any income from this transaction. The Commissioner determined that the transaction resulted in a long-term capital gain for the year 1954 and did not constitute either a non-taxable or a partially non-taxable exchange under the Internal Revenue Code of 1954, basing his determination on the ground that there had not been a corporate reorganization as defined in section 368.³ Deficiencies were assessed against each of the petitioners based upon the value of the stock, which was found to be $27,912.50, and the cash payment of $27.36, after deducting $4,000.00, the basis of each petitioner's stock interest in the three corporations. Review of the Commissioner's determination was sought in the Tax Court. The cases were tried by Judge Forrester and reviewed by the court in banc. Judge Forrester, in an opinion concurred in by an undisclosed number of his colleagues, assumed that under the facts a plan of reorganization did exist but concluded that the transaction did not fall within section 368(a) (1) (B) because, as he believed, the exchange was not solely for stock but rather one for stock and cash. Six judges dissented.⁴ Accepting the assumption that the option was part of a plan of reorganization rather than an outright sale of stock, the dissenting judges took the view that under the facts the cash given in lieu of fractional shares did not constitute part of the consideration for the shares being acquired and thus the requirement of a reorganization under section 368(a) (1) (B), that the exchange be "solely" for stock was met. Three judges⁵ concurred on a finding that the transaction was a purchase and sale of stock and not a stock-for-stock exchange, concurring with Judge Forrester only in the resulting decisions sustaining the deficiency determinations of the Commissioner. Accordingly, assuming that the remaining six judges of the Tax Court⁶ voted with Judge Forrester, thirteen judges agreed that the exchange was made pursuant to a plan of reorganization but seven of them believed that the statute and the decided cases required the conclusion that the exchange made was one for "stock and cash". The Tax Court entered decisions sustaining the determination of the Commissioner. Mills et al. v. Commissioner of Internal Revenue, 1962, 39 T.C. 393. These petitions followed.

We observe, in limine, that the Commissioner places no reliance on the theory of the three concurring judges that the transaction constituted a purchase and sale. It appears that the Commissioner accepts the theory that the option agreement was intended to be a plan of reorganization and that the parties intended to exchange stock for stock but that the provision of the agreement for cash payments in lieu of fractional shares disqualified the transaction as a reorganization within the meaning of section 368 (a) (1) (B).

We have carefully considered the legislative history of the analogous provisions of the prior statutes from which section 368 of the 1954 Code was derived and the cases construing those provisions, but find nothing to justify the position taken by the Commissioner.

The legislative history indicates that the Congressional committees, in considering the reorganization provisions of the Internal Revenue Code, recognized that reorganizations might be required in order to strengthen the financial condition of corporations, but that these provisions could be used as a method of tax avoidance by arranging in the technical form of reorganizations what were in reality sales. It was considered commendable that the courts had looked through the mere form of such transactions into their substance and that the Supreme Court had indicated that the broad principle underlying these sections is that no taxable profit is realized from a reorganization, if no money passes and if the changes in corporate organization are essentially changes only in form, with the stockholders continuing their former interest in the original enterprise.⁷

In the Revenue Act of 1934, and the succeeding Internal Revenue Code of 1939, Congress had provided in section 112(g) (1) (B) that the term "reorganization" means, inter alia, "the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation." Emphasis supplied. In Helvering v. Southwest Consolidated Corp., 1942, 315 U.S. 194, 198, 62 S.Ct. 546, 550, 86 L.Ed. 789, 794, the Supreme Court, applying this definition, which was the precursor of section 368(a) (1) (B) of the Internal Revenue Code of 1954, said: "`Solely' leaves no leeway. Voting stock plus some other consideration does not meet the statutory requirement * * * the requirements of § 112(g) (1) (B) are not met if properties are acquired in exchange for a consideration other than, or in addition to, voting stock." See, also Turnbow v. Commissioner, 1961, 368 U.S. 337, 82 S.Ct. 353, 7 L.Ed.2d 326.

We turn then to consider the narrow question presented in these cases whether the exchange was "solely" for voting stock as required by the Code, in other words, whether any consideration of value in...