Mills v. Comm'r of Internal Revenue, Docket Nos. 85593-85595.

Decision Date09 November 1962
Docket NumberDocket Nos. 85593-85595.
Citation39 T.C. 393
PartiesRICHARD M. MILLS AND MOISE W. MILLS, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Charles M. Cork, Esq., for the petitioners.

James E. Johnson, Jr., Esq., for the respondent.

G corporation acquired all of the stock of three corporations controlled by petitioners in exchange for a part of its stock (valued at $27,912.50) and $27.36 in cash in lieu of fractional shares of stock. Held: The ‘solely for all or a part of its voting stock’ requirement of section 368(a)(1)(B), I.R.C. 1954, is to be literally interpreted. Therefore, when stock and a relatively small cash payment in lieu of fractional shares of the acquiring corporation are received in exchange for stock of the acquired corporation, gain or loss, if any, will be recognized to the extent realized and not merely to the extent of the cash payment.

FORRESTER, Judge:

Respondent has determined the following deficiencies in income tax for the taxable year 1954:

+-------------------------+
                ¦Docket No.  ¦Deficiency  ¦
                +------------+------------¦
                ¦85593       ¦$3,864.22   ¦
                +------------+------------¦
                ¦85594       ¦3,537.88    ¦
                +------------+------------¦
                ¦85595       ¦3,125.46    ¦
                +-------------------------+
                

The issue before us is whether a certain transaction constituted a corporate reorganization as defined in section 368(a)(1)(B) or (C) of the Internal Revenue Code of 19542 which would entitle petitioners to nonrecognition of the gain realized on the transaction.

FINDINGS OF FACT.

Some of the facts have been stipulated and are so found.

Richard M. Mills and Moise W. Mills, petitioners in Docket No. 85593, are husband and wife residing in Macon, Georgia. William R. Mills and Lorene M. Mills, petitioners in Docket No. 85594, are husband and wife residing in Wadley, Georgia. James S. Mills and Mary F. Mills, petitioners in Docket No. 85595, are husband and wife, also residing in Wadley, Georgia. All three couples filed their joint Federal income tax returns for the year 1954 with the district director of internal revenue at Atlanta, Georgia.

Richard, William, and James Mills are brothers. Since the wife petitioners are involved solely because of the filing of joint returns, the husbands will hereinafter be referred to as petitioners.

On and prior to May 20, 1954, and until the exchanges hereinafter referred to, each petitioner was the owner of 30 shares of the common capital stock of Mills Gas and Appliance Company, Inc., a Georgia corporation, with its principal office and place of business in Louisville, Georgia; 6 shares of the common capital stock of Dixie Gas and Electric Company; and 6 shares of the common capital stock of Dixie Gas Distributors Corporation, the last two named corporations being South Carolina corporations with their principal offices and places of business in Ridgeland, South Carolina.

Early in 1954 petitioner and seven small gas companies in Georgia and South Carolina were negotiating a merger and pooling of assets to form one corporation to be known as Trans-Gas Corporation. Pursuant to these negotiations Arthur Andersen & Company was hired to prepare an audit.

Before the Trans-Gas negotiations had reached fruition, General Gas Corporation (hereinafter called General) contacted petitioner Richard M. Mills concerning a possible merger with General. General was a Delaware corporation with a listed stock and had supply facilities and a retail gas business in Louisiana and Mississippi.

Further negotiations between General and the 10 companies planning to merge into Trans-Gas occurred and culminated in the signing of an option agreement on May 20, 1954. This agreement provided in pertinent part:

For value received and the sum of One Dollar ($1.00), receipt of which is hereby acknowledged, the undersigned do severally grant to General Gas Corporation, a corporation organized and existing under the laws of the State of Delaware, an option for thirty (30) days from this date to acquire all of the capital stock of the corporation set opposite my name, whether the same be owned by the undersigned, or held or transferred to undersigned in . . . and now in his possession, the undersigned by this instrument hereby warranting his right to execute this agreement, as to the number of shares set down opposite the name of the corporation for the price and upon the terms and conditions hereinafter set out.

An audit of the books and affairs of each corporation as of the close of business on April 30, 1954, has been prepared or will be prepared by Arthur Andersen & Company, Certified Public Accountants, of Atlanta, Georgia, not later than thirty (30) days from this date applying its usual accounting methods and principles, all at the expense of each corporation for which said audit is made, and the parties hereby agree to accept the net book value of the capital stock of each corporation as thus determined by Arthur Andersen & Company as of April 30, 1954, as the price at which the stock will be sold.

In the event this option is exercised, the General Gas Corporation will issue and deliver to the undersigned, a sufficient number of shares of the common stock, of the par value of Five Dollars ($5.00) per share, of the General Gas Corporation, said stock to be taken at a value of Fourteen Dollars ($14.00) per share, as will equal the price of the stock owned or held by each of the undersigned, as determined above, 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.

+-------------------------------------------------------------+
                ¦* * * * * * *                                                ¦
                +-------------------------------------------------------------¦
                ¦Stockholder     ¦Corporation                        ¦Shares  ¦
                +-------------------------------------------------------------¦
                ¦* * * * * * *                                                ¦
                +-------------------------------------------------------------¦
                ¦R. M. Mills     ¦Mills Gas & Appliance Company, Inc.¦30      ¦
                +----------------+-----------------------------------+--------¦
                ¦/s/ R. M. Mills ¦Dixie Gas & Electric Company       ¦6       ¦
                +----------------+-----------------------------------+--------¦
                ¦                ¦Dixie Gas Distributors Corporation ¦6       ¦
                +----------------+-----------------------------------+--------¦
                ¦W. R. Mills     ¦Mills Gas & Appliance Company, Inc.¦30      ¦
                +----------------+-----------------------------------+--------¦
                ¦/s/ Wm. R. Mills¦Dixie Gas & Electric Company       ¦6       ¦
                +----------------+-----------------------------------+--------¦
                ¦                ¦Dixie Gas Distributors Corporatin  ¦6       ¦
                +----------------+-----------------------------------+--------¦
                ¦J. S. Mills     ¦Mills Gas & Appliance Company, Inc.¦30      ¦
                +----------------+-----------------------------------+--------¦
                ¦/s/ J. S. Mills ¦Dixie Gas & Electric Company       ¦6       ¦
                +----------------+-----------------------------------+--------¦
                ¦                ¦Dixie Gas Distributors Corporation ¦6       ¦
                +-------------------------------------------------------------¦
                ¦* * * * * * *                                                ¦
                +-------------------------------------------------------------¦
                ¦                ¦GENERAL GAS CORPORATION                     ¦
                +----------------+--------------------------------------------¦
                ¦                ¦By /s/ R. D. Phillips                       ¦
                +----------------+--------------------------------------------¦
                ¦                ¦President                                   ¦
                +-------------------------------------------------------------+
                

Pursuant to the option agreement, Arthur Andersen & Company made an audit of the books of each of the above corporations. These audits were originally started in connection with the Trans-Gas venture but were completed under the option agreement. When the option agreement was signed the Trans-Gas negotiations ceased.

On July 8, 1954, General informed the stockholders of Mills Gas and Appliance Company, Inc., Dixie Gas Distributors Corporation, and Dixie Gas and Electric Company of its intention to exercise the option. On July 26, 1954, each of the petitioners was issued 1,321 shares of the common voting stock of the par value of $5 per share of General and was paid in cash $10.88 on account of the 30 shares of the capital stock owned by him of Mills Gas and Appliance Company, Inc.; 251 shares of said common voting stock of General and $8.36 in cash on account of the 6 shares of the capital stock owned by him of Dixie Gas Distributors Corporation; and 23 shares of said common voting stock of General and $8.12 in cash on account of the 6 shares owned by him of the capital stock of Dixie Gas and Electric Company. In each case, the issuance of stock of General and the payment of said amounts of cash were in exchange for all of the shares of each petitioner in each corporation.

The liabilities of Mills Gas and Appliance Company, Inc., Dixie Gas Distributors Corporation, and Dixie Gas and Electric Company were in excess of 20 percent of all their properties as of April 30, 1954, and July 26, 1954.

At the time of each such exchange the fair market value of the common voting stock of General was $17.50 per share.

At the time General exercised its option with respect to the capital stock owned by the petitioners in the Mills Gas and Appliance Company, Inc., Dixie Gas Distributors Corporation, and Dixie Gas and Electric Company, it also exercised options with respect to the capital stock owned by all of the other stockholders in said three corporations, and thereupon exchanged its common voting stock and cash in lieu of fractional shares for all of the stock of said three corporations owned by all of the stockholders of said three corporations. Immediately after these exchanges, General was...

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7 cases
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    ...71 T.C. at 736. Included in this category were Turnbow v. Commissioner, 368 U.S. 337, 82 S.Ct. 353, 7 L.Ed.2d 326 (1961), Mills v. Commissioner, 39 T.C. 393 (1962), rev'd, 331 F.2d 321 (5th Cir. 1964), and Howard v. Commissioner, 24 T.C. 792 (1955), rev'd on other grounds, 238 F.2d 943 (7th......
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