Decision Date19 February 1941
Docket NumberDocket No. 97262.
Citation43 BTA 677
CourtU.S. Board of Tax Appeals

William A. Borrusch, Esq., for the petitioner.

Homer J. Fisher, Esq., for the respondent.

The respondent determined a deficiency of $1,094.38 in income tax for the year 1935. He also has determined an overassessment of $48.70 for 1936. Taxpayer attempts by his petition to bring both years within the scope of this proceeding.

The single issue before the Board is whether or not petitioner realized a recognizable gain upon an exchange of stock.


Petitioner is an individual and resides in Detroit, Michigan. He has been employed by the Dibble Color Co., hereinafter referred to as Dibble, for 20 years in the capacity of secretary and treasurer of the company. At the date of the hearing petitioner was still treasurer and secretary of Dibble. The company was organized by petitioner, Fred T. Dibble, and E. A. Dreves.

On December 1, 1935, the shares of Dibble were held as follows:

                R. W. Lindsey _____________       1
                F. W. Robinson ____________       2
                H. E. Webster _____________       1
                Fred T. Dibble ____________     300
                E. A. Dreves ______________      56
                R. A. Pulfer ______________     200
                Pratt & Lambert, Inc ______   1,220
                     Total ________________   1,780

Of the shares of Dibble owned by petitioner, 190 were pledged with the receiver of the First National Bank, Detroit, as collateral for a loan. The remaining 10 shares were in petitioner's own possession.

Pratt & Lambert, Inc., of Buffalo, New York, sometimes hereinafter referred to as Pratt, first acquired an interest in Dibble in 1921. Almost all of Pratt's holding of Dibble stock was acquired at that time. Pratt acquired a few additional shares of Dibble at a later date. The stock was originally held in the name of the then president of Pratt, as nominee. Later the stock was transferred to the name of the succeeding president of Pratt, A. D. Graves. After the death of Graves, 1,220 shares of Dibble stock were transferred to the name of Pratt on December 18, 1930. In the year 1930 there was no plan in existence for the acquisition of all the stock of Dibble by Pratt.

For some time prior to December 1935, petitioner had attempted to sell his Dibble stock in order to pay off the loan at the bank for which the stock was pledged as collateral. On or about December 1. 1935, petitioner began negotiations with Harold E. Webster, president of Pratt, with regard to an exchange of the Dibble stock held by petitioner, Dibble, and Dreves.

The board of directors of Pratt, at a meeting called and held on December 3, 1935, passed the following resolution:

RESOLVED, that authority be and the same hereby is given for the acquisition by Pratt & Lambert, Inc., of all or any part of the 556 shares of outstanding capital stock of Dibble Color Company of the par value of $100.00 each, not already owned by Pratt & Lambert, Inc., by the exchange therefor of common stock of Pratt & Lambert, Inc. now held as treasury stock, on the basis of six (6) shares of such treasury stock for each share of said stock of Dibble Color Company, the shares of stock of Pratt & Lambert, Inc. so to be exchanged to be those represented by or included in certificates Nos. * * * now held in its treasury; and be it further RESOLVED, that the officers of this company are hereby authorized and empowered to take any and all action which may be necessary or advisable to acquire the said shares of stock of Dibble Color Company on the basis above mentioned and to obtain the approval or consent thereto of any public authorities if any such is required.

Petitioner, Dibble, and Dreves were agreeable to making the exchange and by letter dated December 12, 1935, petitioner notified Webster that they accepted the proposal for exchange authorized by the resolution of the board of directors of Pratt dated December 3, 1935. In the middle of December 1935 petitioner, by letter, instructed the receiver of the First National Bank-Detroit to send his stock to Buffalo, New York, for the exchange. Petitioner sent the 10 shares of Dibble stock which he had in his possession to the Marine Trust Co. of Buffalo, New York, and on December 31, 1935, received 60 shares of Pratt stock in exchange for these shares.

The receiver of the First National Bank-Detroit sent petitioner's 190 shares of Dibble stock to the Marine Trust Co., Buffalo, New York, with the following letter of transmittal:

Enclosed please find the following stock certificates of Dibble Color Company, Capital Stock, endorsed in blank, registered in the name of R. A. Pulfer, Certificate No. 35, 55 shares, No. 36, 55 shares, No. 60, 80 shares, together with check of R. A. Pulfer in the amount of $13.30 for revenue stamps.

These certificates are being forwarded to you for exchange into 1,140 shares of Pratt & Lambert, Inc., Common stock, we understand the Certificates of Pratt & Lambert, Inc., will be in negotiable form and in the name of Knack & Co., properly endorsed by them with the endorsement guaranteed by Schoelkopf, Hutton & Pomeroy, and by the Marine Trust Company, Buffalo, New York.

It is our understanding that the details of the exchange have been worked out by Mr. H. E. Webster, President of Pratt & Lambert, Inc., and it will be appreciated if you will contact him inasmuch as it is desired that the exchange will be completed on or before December 31, 1935.

Upon completion of the exchange will you kindly forward the new certificates representing 1,140 shares of Pratt & Lambert, Inc., stock, to this Bank, for the attention of the Bond Department.

Kindly acknowledge receipt by signing and returning the copy of our letter enclosed.

The letter of transmittal, signed by an assistant secretary of the Marine Trust Co. and dated December 30, 1935, was received back by the receiver of the First National Bank-Detroit on December 31, 1935.

By registered mail on January 2, 1936, the receiver of the First National Bank-Detroit received the 1,140 shares of Pratt stock which were in exchange for petitioner's 190 shares of Dibble stock pledged as collateral. As a result of the exchange Pratt became the owner of all the outstanding stock of Dibble, with the exception of qualifying shares. Dibble has never been dissolved or liquidated nor have its assets been taken over by Pratt. It has continued to operate in Detroit as a subsidiary of Pratt.

The exchange of Dibble stock for stock of Pratt & Lambert, Inc., occurred in 1935.

The cost to petitioner of the 200 shares of Dibble stock was $10,000. The fair market value of the 1,200 shares of Pratt stock received in exchange for the Dibble stock, at $36.25 a share, was $43,500. Respondent determined a gain on the exchange in the sum of $33,500, representing the difference between the cost of Dibble stock and the fair market value of the Pratt stock. He included in petitioner's gross income for the year 1935 that gain, as limited by section 117 of the Revenue Act of 1934, so that petitioner's gross income for 1935 was increased by the amount of $10,500 (30 percent of $33,500).



The Board has no jurisdiction of the year 1936, as to which respondent determined an overassessment. Cornelius Cotton Mills, 4 B. T. A. 255. Consequently, the only issue for our consideration is whether or not petitioner realized recognizable gain in the year 1935 upon an exchange of stock.

Petitioner contends that he exchanged his stock in the Dibble Color Co. for stock in Pratt & Lambert, Inc., pursuant to a plan of reorganization, and that no gain is recognizable on the exchange. In the alternative, he contends that even if gain is recognized, the exchange occurred in 1936.

Respondent argues that no tax-free reorganization was effected by the exchange because Pratt did not acquire "in exchange solely for all or a part of its voting stock * * * at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares" of Dibble stock. He urges that gain is recognized on the transaction in 1935 since the exchange for which petitioner transferred his holdings in Dibble for stock in Pratt occurred in that year.

The applicable provisions of the statute are section 112 (b) (3) and (g) (1) (B) of the revenue Act of 1934.1

Petitioner relies heavily on Commissioner v. Dana, 103 Fed. (2d) 359, in his argument that the "80 per centum" requirements of section 112 (g) (1) (B) are fulfilled by the "tacking" of Pratt & Lambert's prior ownership of 1,220 shares of Dibble stock to the stock acquired by exchange with petitioner. See also Rawco, Inc., Ltd., 37 B. T. A. 128. Assuming, but not deciding, that Pratt acquired at least 80 percent of the voting stock and at least 80 percent of all other classes of shares of Dibble, we are yet of the opinion that there was no reorganization within the meaning of the statute. Section 112 (g) (1) (B) plainly states that the acquisition must be solely in exchange for all or a part of its voting stock. The acquisition by Pratt was not of the category stipulated by the statute. Petitioner, upon cross-examination at the hearing, stated that he believed Pratt's original holding of Dibble stock had been purchased for cash. No proof was presented which would indicate otherwise. Petitioner failed to sustain the burden of proving that the acquisition of the Dibble stock by Pratt was in exchange solely for all or a part of its voting stock. Petitioner, therefore, did not receive the shares of Pratt stock in the course of a tax-free reorganization.

Thus it becomes necessary that we determine the year in which the exchange occurred. Petitioner contends that title to the shares could not pass until delivery of the Pratt stock and that since those shares were not received by the Detroit bank until January 2, 1936, the exchange was not...

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