Morgan Mfg. Co. v. Commissioner of Internal Revenue

• Decision Date: 20 December 1941
• Docket Number: No. 4857.,4857.
• Citation: 124 F.2d 602
• Parties: MORGAN MFG. CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

124 F.2d 602 (1941)

MORGAN MFG. CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 4857.

Circuit Court of Appeals, Fourth Circuit.

December 20, 1941.

Junius G. Adams, of Asheville, N. C. (Adams & Adams, of Asheville, N. C., on the brief), for petitioner.

Samuel H. Levy, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Gerald L. Wallace, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before SOPER and DOBIE, Circuit Judges, and William C. COLEMAN, District Judge.

SOPER, Circuit Judge.

Deficiencies for the year 1936 in income tax in the sum of $5,844.14 and in excess profits tax in the sum of $509.97 assessed against Morgan Manufacturing Company are the subject of this petition for review. The first question involved requires the determination of the basis for depreciation of certain assets of the taxpayer, and the answer depends upon whether the assets were acquired in connection with a statutory corporate reorganization or as the result of a sale. The Board of Tax Appeals held that under the circumstances now to be outlined a sale and not a reorganization had taken place.

Morgan Manufacturing Company and Dimension Manufacturing Company were North Carolina corporations. Morgan had 100 shares of stock outstanding of which D. B. Morgan and Kent Smith each held 45 shares and D. B. Morgan, Jr. 10 shares. Dimension had outstanding 1,611½ shares of common stock in the hands of six shareholders, of which 550 shares were held by D. B. Morgan; and in addition it had outstanding 250 shares of preferred stock. It owed $62,500 upon mortgage notes which were held in varying amounts by four persons (other than D. B. Morgan) who held in the aggregate a majority of the common stock.

Prior to December 1, 1934, Dimension leased to Morgan certain assets, with an option to purchase the same. On October 31, 1934 the Board of Directors of Dimension adopted a resolution to extend the lease and option for a year ending December 1, 1935. The renewal of the contract was not actually executed; nevertheless, Morgan with the consent of Dimension continued to possess and use the property until the formal acquisition thereof by a successor corporation on June 16, 1936 in the manner following:

In 1936 before the middle of June, the stockholders of the two corporations entered into an oral agreement that if Morgan as it was to be constituted after June 16, 1936, would pay the mortgage notes of Dimension in the sum of $62,500, the stockholders of Dimension would release their rights in the stock of Morgan as then constituted. In effect the agreement contemplated the acquisition by Morgan of the leased assets for the sum named. Accordingly, on June 15, 1936, the Board of Directors of each organization adopted a resolution providing for the consolidation of the two corporations under the name of Morgan Manufacturing Company, and on the same date these resolutions were approved by the stockholders of each corporation. In order to carry the resolutions into effect, an agreement of merger consolidating the two corporations was executed under date of June 15, 1936, and filed in the office of the Secretary of State of North Carolina on June 16, 1936. These proceedings conformed to the pertinent provisions of the statutes of North Carolina, Art. 13, Ch. 22, Sections 1224(a) and 1224(b) of the North Carolina Code for the merger or consolidation of North Carolina corporations; and the result was, by virtue of the statutes, that on June 16, 1936 the merged corporations ceased to exist and the consolidated corporation came into being possessed of all the rights and vested with all the property of the constituent bodies.

The agreement of merger provides that upon the filing thereof in the office of the Secretary of State, the outstanding shares of stock of each corporation should ipso facto and without any other action on the part of the respective holders thereof, be converted into shares of the new corporation, each share of preferred stock of Dimension to become 1 share, each share of common stock of Dimension to become 1/3 of a share, and each share of Morgan to become 1.71 share of the stock of the new corporation. The conversion was to be evidenced by a surrender and cancellation of the old certificates and the issuance of new certificates by the new Morgan; but this formality was not carried into effect. The new corporation, resulting from the consolidation or merger, was to have an authorized capital stock of 1,000 shares of no par value. The directors named were to be three in number, all of them from old Morgan.

On or about July 7, 1936, the new corporation paid off the $62,500 of mortgage notes of Dimension, and the rights of the stockholders of Dimension in the stock of the taxpayer were thereby released. The money used to pay the mortgage notes was borrowed from the Reconstruction Finance Corporation, as will appear hereafter in the recital of the facts giving rise to the second question for decision. Application for the loan was made by Morgan on December 28, 1935, and the loan was made on July 6, 1936. On or about the same date 900 shares of the taxpayer's stock were issued in addition to the 100 shares of old Morgan then outstanding, so that thereafter the taxpayer had 1,000 shares outstanding as follows: 450 shares each to D. B. Morgan and Kent Swift, 99 shares to D. B. Morgan, Jr., and 1 share to William McCants.

We are to consider whether these transactions effected a reorganization within the meaning of Section 112 of the Revenue Act of 1936, 49 Stat. 1648, 26 U.S.C.A. Int.Rev. Acts, page 858, or, as the Board of Tax Appeals held, a sale of the assets by one corporation to the other. The answer is determinative, for if a reorganization was effected, then the basis for depreciation of the assets was the original cost thereof to Dimension; but if a sale took place, the basis was the cost to new Morgan, the taxpayer. See Sections 113(a), 113(b) and 114(a) of the Revenue Act of 1936, 26 U. S.C.A. Int.Rev.Acts, pages 859, 866.

Section 112 provides in part as follows:

"(g) Definition of reorganization. As used in this section and section 113 —

"(1) The term `reorganization' means (A) a statutory merger or consolidation, or (B) 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; or of substantially all the properties of another corporation, or (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected."

It will be observed that the federal statute defines the term "reorganization" in the alternative in clauses (A) to (E) of subsection (g). The taxpayer cites decisions of this and other courts wherein it is indicated that each clause is sufficient in itself, so that compliance with it alone accomplishes a reorganization within the meaning of the section, although the conditions of the other lettered clauses are not met. See C. H. Mead Coal Co. v. Commissioner, 4 Cir., 72 F.2d 22; Britt v. Commissioner, 4 Cir., 114 F.2d 10, and cases cited. The contention of the taxpayer seems to be that it has complied with the conditions of each of the clauses (A), (B) and (C) of the statute. It is said (1) that "a statutory merger or consolidation" of the old Morgan and Dimension took place under the laws of North Carolina, and hence the conditions of...