Souther v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 25 January 1939 |
| Docket Number | 91700,Docket No. 80485,91701. |
| Court | U.S. Board of Tax Appeals |
| Parties | CHESTER A. SOUTHER AND MRS. CHESTER A. SOUTHER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOHN BROOK JACKSON AND ALICE F. JACKSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. RICHARD H. GRANT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
Joseph B. Coolidge, Esq., and Prewitt Semmes, Esq., for the petitioners.
Chester A. Gwinn, Esq., for the respondent.
These proceedings were consolidated for hearing and involve deficiencies in income tax as follows:
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Docket No. | Year | Deficiency
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80485__________________________________________ | 1932 | $6,758.01
91700__________________________________________ | 1934 | 22,015 05
91701__________________________________________ | 1934 | 155,048.91
Do_________________________________________ | 1935 | 122,738.30
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The questions raised are (1) whether the exchange by petitioners in 1930 of stock in the Managers Securities Co. for class A stock in the General Motors Securities Co. was in pursuance of a plan of reorganization so that the class A stock disposed of in the taxable years took the basis of the Managers Securities Co. stock for the purpose of determining gain or loss; (2) whether the petitioners, having joined with respondent for a number of years in treating the 1930 transaction as a reorganization, may now claim that it was not a reorganization in order to give the class A stock a stepped-up basis; (3) whether the surrender by petitioner Jackson in 1934 and by petitioner Grant in 1934 and 1935 of certain shares of the class A stock in the General Motors Securities Co. for common stock in the General Motors Corporation was in partial liquidation of the General Motors Securities Co. within the meaning of section 115 (c) of the Revenue Act of 1934; and (4) whether section 115 (c) of the Revenue Act of 1934 is violative of petitioners' rights under the Fifth Amendment to the Constitution because by the terms of the act it applies to exchanges in liquidation or in partial liquidation occuring during 1934 but prior to May 10, 1934, the date of its enactment.
FINDINGS OF FACT.
The joint individual income tax return for 1932 of Chester A. Souther and Mrs. Chester A. Souther was filed on March 14, 1933, with the collector of internal revenue for the collection district of Michigan. John Brook Jackson and Alice F. Jackson filed their joint individual income tax return for 1934 with the collector of internal revenue for the collection district of Michigan. Richard H. Grant filed his income tax return for 1934 with the collector of internal revenue for the collection district of Michigan and his return for 1935 with the collector of internal revenue for the first collection district of Ohio.
The officers of the General Motors Corporation, hereinafter referred to as General Motors, pursuant to the approval of its directors and stockholders and with a view to enabling the executives responsible for its success to become more largely interested in its welfare through the acquisition of a substantial interest in its common stock, caused the Managers Securities Co., a corporation hereinafter referred to as Managers, to be organized under the laws of Delaware on November 26, 1923. The immediate purposes for which Managers was organized were to enter into a contract with General Motors providing for the distribution to Managers of a certain percentage of the net earnings of General Motors, to acquire either directly or indirectly and deal in General Motors stock, and to distribute the profits from the contract and stock to its stockholders, all of whom were to be officers or employees of General Motors. The purposes of organization and the powers of Managers as provided in its certificate of incorporation were broad and general and there were few, if any, limitations, either expressed or implied, on its powers to engage in business.
Managers had an authorized capital stock of $33,800,000 divided into 288,000 shares of nonvoting 7 percent cumulative preferred stock of a par value of $100 each, 40,000 shares of full voting class A stock of a par value of $100 each, and 40,000 shares of full voting class B stock of a par value of $25 each. General Motors purchased the entire issues of class A and class B stock for $5,000,000 cash, or $4,000,000 for the class A stock and $1,000,000 for the class B stock.
In furtherance of the objects for which it was formed Managers, on November 27, 1923, entered into a contract with General Motors known as the "Five Over Seven" contract, wherein General Motors agreed to pay to Managers, on or before April 1 of each year, beginning with April 1, 1924, and ending with April 1, 1931, 5 percent of the net earnings of General Motors for the preceding calendar year after deducting from said net earnings 7 percent on the capital employed during such year. A minimum annual payment of $2,000,000 was to be made and, in the event the above 5 percent should be less than $2,000,000 in any year, the difference between the amount paid and the amount due was to be treated as an unsecured loan.
General Motors sold to about 80 of its officers and employees, including petitioners Chester A. Souther, John Brook Jackson, and Richard H. Grant, portions of the class A and class B stock which it had purchased in Managers. The stock was sold subject to an irrevocable option in General Motors to repurchase all or any portion of the stock at any time between January 1 to May 15, in any year up to and including May 15, 1930. The stock sold was to be endorsed in blank and placed in escrow during the existence of the option and if the option should not be exercised on or before May 15, 1930, the right to repurchase should expire and the certificates delivered to the owners on May 16, 1930.
With its preferred stock of a par value of $28,800,000 and $4,950,000 of the cash it had received from the sale of its class A and class B stock, Managers purchased 30 percent or 148,509 shares of the outstanding common stock of the General Motors Securities Co., a Delaware corporation hereinafter referred to as Motors Securities, all of whose capital stock was owned by E. I. du Pont de Nemours & Co. The sole assets of Motors Securities consisted of 7,500,000 shares of General Motors common stock. Prior to 1930 the only class of stock that Motors Securities had outstanding was common stock.
The number of shares of General Motors common stock owned by Motors Securities and the equivalent number of shares of the said stock proratable to the 148,509 shares, or 30 percent of the stock of Motors Securities owned by Managers, fluctuated during the period from November 27, 1923, to December 29, 1930, as follows:
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| | Equivalent of
| | General Motors
| General Motors | stock proratable
| stock | to
| owned by | 148,509 shares
| Motors Securities | of Motors
| | Securities
| | stock owned
| | by Managers
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| Shares | Shares
1923 — Nov. 27 ___________________________________ | 7,500,000 | 2,250,000
1924 — Exchange of 4 shares for 1 ________________ | 1,875,000 | 562,500
1926 — 50% stock dividend ________________________ | 937,500 | 281,250
1926 — After 50% stock dividend __________________ | 2,812,500 | 843,750
1927 — Exchange of 1 share for 2 _________________ | 5,625,000 | 1,687,500
1929 — Exchange of 1 share for 2½ ______________ | 14,062,500 | 4,218,750
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Under date of April 25, 1927, General Motors and Managers entered into a contract supplemental to the contract of November 27, 1923, eliminating the provision requiring General Motors to pay to Managers a minimum annual payment of $2,000,000. It was recited that the bonds of Managers had been canceled and its preferred stock had been retired. In 1930 and as of December 31, 1929, the said contract of November 27, 1923, was terminated. To determine the future course of Managers a questionnaire was submitted to the 74 stockholders owning the total of 40,000 shares of its class B stock then outstanding. Fifty stockholders, representing 20,900 shares, expressed themselves as being in favor of expanding Managers into an investment trust with the idea of raising additional capital through the sale of preferred stock so as to permit a diversification of its investments. Twelve stockholders, representing 3,380 shares of the class B stock, expressed a desire to continue the company as it was, provided it should be possible to perfect an arrangement whereby the holders of Managers stock might be enabled to effect a conversion of their stock into General Motors common stock as and when they might desire. Eleven stockholders,...
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