Reeves v. Comm'r of Internal Revenue

Decision Date06 February 1979
Docket Number4953-74,5122-74,4828-74,5309-74,5310-74,5444-74,5375-74,5105-74,5305-74,5232-74,Docket Nos. 2914-74,6153-74,8602-74.,6077-74,5311-74,6187-74
Citation71 T.C. 727
CourtU.S. Tax Court


In 1968 and 1969, X corporation acquired approximately 8 percent of the stock of Y corporation from the latter's shareholders for cash. Such acquisitions were made for the purpose of furthering the efforts of X corporation to acquire Y corporation. In 1970, X corporation acquired more than 80 percent of Y corporation's then-issued and outstanding stock from the latter's shareholders in exchange solely for voting stock of X. The 1970 acquisition, in and of itself, satisfied the control requirement of sec. 368(c), I.R.C. 1954. Held, as a matter of law, X corporation's prior cash purchases of Y corporation stock are irrelevant and the 1970 exchange satisfies the “solely for * * * voting stock” requirement of sec. 368(a)(1)(B), I.R.C. 1954. James S. Eustice, Stephen D. Gardner, and Max Folkenflik, for the petitioners.

Theodore J. Kletnick, Gerald Backer, David R. Brennan, Hu S. Vandervort, Jr., and Michael J. Cooper, for the respondent.



This matter is before the Court on petitioner's motion for summary judgment, pursuant to Rule 121, Tax Court Rules of Practice and Procedure. The sole issue for our decision is whether the acquisition of stock of Hartford Fire Insurance Co. (Hartford) by International Telephone & Telegraph Corp. (ITT) qualified, as a matter of law, as a reorganization within the meaning of section 368(a)(1) (B),2 with the result that petitioners are not taxable on any gain on the receipt of stock of ITT in exchange for their Hartford stock. See sec. 354(a).

The table below sets forth the amount of deficiency determined by respondent in each petitioner's Federal income tax for the calendar year 1970, the residence of each petitioner at the time of filing the petition herein, and the place where each petitioner filed his income tax return for the year at issue:

                ¦Docket No.  ¦Deficiency  ¦Residence       ¦Place of filing3          ¦
                ¦2914-74     ¦$42,450.71  ¦Georgetown, S.C.¦District Director,        ¦
                ¦            ¦            ¦                ¦District of South Carolina¦
                ¦4828-74     ¦1,674.00    ¦Portland, Ore.  ¦Ogden, Utah               ¦
                ¦4953-74     ¦2,192.81    ¦Newark, Del.    ¦Philadelphia, Pa.         ¦
                ¦5105-74     ¦2,781.85    ¦Rancho Santa Fe,¦Ogden, Utah               ¦
                ¦            ¦            ¦Calif.          ¦                          ¦
                ¦5122-74     ¦46,207.00   ¦Garrison, Md.   ¦Philadelphia, Pa.         ¦
                ¦5232-74     ¦15,452.93   ¦Worcester, Mass.¦Andover, Mass.            ¦
                ¦5305-74     ¦7,651.00    ¦Tucson, Ariz.   ¦Ogden, Utah               ¦
                ¦5309-74     ¦43,962.66   ¦Lynnfield, Mass.¦Andover, Mass.            ¦
                ¦5310-74     ¦4,851.72    ¦Wayne, Maine    ¦Andover, Mass.            ¦
                ¦5311-74     ¦12,256.13   ¦Sparks, Md.     ¦Philadelphia, Pa.         ¦
                ¦5375-74     ¦6,601.00    ¦Baltimore, Md.  ¦Philadelphia, Pa.         ¦
                ¦5444-74     ¦1,248.57    ¦Spokane, Wash.  ¦Ogden, Utah               ¦
                ¦6077-74     ¦55,778.45   ¦Natick, Mass.   ¦Andover, Mass.            ¦
                ¦6153-74     ¦13,202.00   ¦Meadville, Pa.  ¦Philadelphia, Pa.         ¦
                ¦6187-74     ¦41,454.28   ¦Princeton, N.J. ¦Philadelphia, Pa.         ¦
                ¦8602-74     ¦1,684.74    ¦Scranton, Pa.   ¦Philadelphia, Pa.         ¦
                ¦            ¦            ¦                ¦                          ¦

Petitioners are all individuals who were shareholders of Hartford until they accepted ITT's offer, dated May 26, 1970, and exchanged their Hartford stock for ITT stock.

ITT first became interested in Hartford in 1968 and approached Hartford in October 1968 to suggest the possibility of a merger. ITT's overture was at that time rejected by Hartford, which was interested in pursuing its own program of diversification and acquisition.

In November 1968, ITT learned that a 6-percent block of Hartford's voting stock (1,282,948 shares) was for sale and began considering purchasing it. Harold S. Geneen, chairman of the board of ITT, met twice with Harry V. Williams, chairman of the board of Hartford, together with representatives of both companies, informed him of the prospective purchase, and assured him that ITT would not attempt to acquire control of Hartford against the will of Hartford's board of directors and management. Upon that assurance, Williams did not object to ITT's purchase of the 6-percent block of Hartford stock. He reiterated, at that time, that Hartford was interested in pursuing its own program of diversification and acquisition but agreed not to take any action that would preclude affiliation with ITT. On November 8, 1968, ITT offered to purchase for cash the 6-percent block of Hartford shares from a mutual fund managed by Insurance Securities, Inc.; the offer was accepted on November 10, 1968, and the purchase was subsequently consummated.

Between November 12, 1968, and January 10, 1969, ITT purchased on the open market 458,000 shares of Hartford, and on March 13, 1969, it purchased 400 shares of Hartford from Hamilton Management Corp., a subsidiary of ITT at that time. All of these purchases were made for cash. ITT then owned approximately 8 percent of Hartford's voting stock.

Solely for the purpose of this motion, petitioners concede that all of the foregoing purchases were made for the purpose of furthering ITT's efforts to acquire Hartford.

On December 23, 1968, ITT submitted a written proposal for a “combination and pooling of interests” of ITT and Hartford pursuant to which ITT would exchange 1 share of its new $2 cumulative convertible voting preferred stock for each share of Hartford's issued and outstanding voting common stock (Hartford's only stock). The proposal was rejected by Hartford, which then formulated its own proposal, and, on April 9, 1969, a provisional plan and agreement of merger was executed by both companies. Pursuant to the agreement, the ITT Hartford Insurance Corp., a wholly owned subsidiary of ITT formed for the purpose of this transaction, would be merged into Hartford. Each share of Hartford stock would be converted into a share of ITT $2.25 voting cumulative convertible preferred stock and the stock of the subsidiary would be converted into Hartford voting common stock, with the result that Hartford would be a wholly owned subsidiary of ITT. The agreement was conditioned upon the requisite approval, under State law, of the shareholders of the two corporations and of the Connecticut Insurance Commissioner. Hartford had an unqualified right to terminate the agreement if it believed there was any likelihood that antitrust litigation would be initiated. In June 1969, the Department of Justice announced it would seek to enjoin the proposed merger under the Federal antitrust laws. On June 24, 1969, Hartford recommended that its shareholders approve the merger notwithstanding the threat of litigation. In August 1969, the Department of Justice filed in the United States District Court for the District of Connecticut a motion to enjoin the merger, which was denied in October 1969.

On October 13, 1969, the Internal Revenue Service issued a private letter ruling stating that, for Federal tax purposes, the formation of the ITT Hartford Insurance Corp. and its merger into Hartford would be disregarded and the transaction would constitute a reorganization within the meaning of section 368(a)(1)(B) if ITT, prior to the date on which the Hartford shareholders voted to approve or disapprove, unconditionally disposed of the Hartford stock it had previously purchased by sale to third parties. Later in the same month, the Internal Revenue Service issued a supplemental ruling approving a proposed sale of such stock by ITT to an Italian bank.

On June 26, 1969, the shareholders of ITT approved the merger and on November 10, 1969, the shareholders of Hartford approved it.

On December 13, 1969, the Connecticut Insurance Commissioner refused to approve the merger. ITT then proposed to proceed with an exchange offer to the shareholders of Hartford on the same terms which they would have obtained via the merger. After public hearings and the imposition of certain requirements relative to post-acquisition operation of Hartford, the Connecticut Insurance Commissioner approved the exchange...

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4 cases
  • Heverly v. C. I. R.
    • United States
    • U.S. Court of Appeals — Third Circuit
    • March 25, 1980
    ...deferred clause B reorganization. We therefore reverse. I. The facts have been detailed in the trial court opinions, Reeves v. Commissioner, 71 T.C. 727, 728-31 (1979), and Pierson v. United States, 472 F.Supp. 957, 958-60 (D.Del.1979), so we need not elaborate them at length. The transacti......
  • Chapman v. C. I. R.
    • United States
    • U.S. Court of Appeals — First Circuit
    • March 31, 1980 stock. The Tax Court agreed with the taxpayers that the latter exchange constituted a valid tax-free reorganization. Reeves v. Commissioner, 71 T.C. 727 (1979). The Appellees were among the more than 17,000 shareholders of the Hartford Fire Insurance Company who exchanged their Hartf......
  • Pierson v. United States
    • United States
    • U.S. District Court — District of Delaware
    • April 24, 1979
    ...stock is furnished as consideration, the `solely for * * voting stock' requirement of section 368(a)(1)(B) is satisfied." Reeves v. Commissioner, 71 T.C. 727 at 741. The plurality opinion in Reeves views the prior cases deciding this question as factually distinguishable, and this Court agr......
  • Clark v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • February 6, 1986
    ...621 F.2d 1227 (3d Cir. 1980), revg. and remanding Pierson v. United States, 472 F.Supp. 957 (D. Del. 1979) and Reeves v. Commissioner, 71 T.C. 727 (1979); and Chapman v. Commissioner, 618 F.2d 856 (lst Cir. 1980), revg. and remanding Reeves v. Commissioner, supra), there never should be any......

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