Stephenson Finance Co. v. South Carolina Tax Commission

• Decision Date: 12 March 1963
• Docket Number: No. 18037,PL-54,INS-569,18037
• Citation: 130 S.E.2d 72,242 S.C. 98
• Court: South Carolina Supreme Court
• Parties: STEPHENSON FINANCE COMPANY, Inc., Respondent, v. SOUTH CAROLINA TAX COMMISSION, Appellant. STEPHENSON MOTOR COMPANY, Inc., Respondent, v. SOUTH CAROLINA TAX COMMISSION, Appellant. SUPERIOR AUTOMOBILE INSURANCE COMPANY, Respondent, v. SOUTH CAROLINA TAX COMMISSION (), Appellant. SUPERIOR AUTOMOBILE INSURANCE COMPANY, Respondent, v. SOUTH CAROLINA TAX COMMISSION (), Appellant.

Page 72

130 S.E.2d 72

242 S.C. 98

STEPHENSON FINANCE COMPANY, Inc., Respondent, v. SOUTH CAROLINA TAX COMMISSION, Appellant.

STEPHENSON MOTOR COMPANY, Inc., Respondent, v. SOUTH CAROLINA TAX COMMISSION, Appellant.

SUPERIOR AUTOMOBILE INSURANCE COMPANY, Respondent, v. SOUTH CAROLINA TAX COMMISSION (PL-54), Appellant.

SUPERIOR AUTOMOBILE INSURANCE COMPANY, Respondent, v. SOUTH CAROLINA TAX COMMISSION (INS-569), Appellant.

No. 18037.

Supreme Court of South Carolina.

March 12, 1963.

Asst. Atty. Gen. James M. Windham, Columbia, for appellant.

Willcox, Hardee, Houck & Palmer, Florence, Sinkler, Gibbs & Simons, Charleston, for respondent.

BRAILSFORD, Justice.

These four actions to recover taxes assessed by the South Carolina Tax Commission and paid under protest were tried together in the court below and resulted in judgments in favor of the taxpayers. The Tax Commission has appealed on one record. All parties agree that each of the four appeals depends upon the same legal question, i. e., whether the 1957 acquisition by Stephenson Finance Company, Inc. of all of the capital stock of Superior Life Insurance Company and of Superior Automobile Insurance Company by an exchange of shares of its own stock amounted to a reorganization, consolidation or merger within the meaning of certain tax statutes.

Stephenson Finance Company, Inc. is a South Carolina Corporation engaged in the automobile finance and small loan business. Superior Life Insurance Company is a South Carolina corporation engaged in the business of writing credit life insurance. Such insurance is required of most borrowers from Stephenson Finance Company. Superior Automobile Insurance Company is a South Carolina corporation engaged in the business of writing physical damage insurance on automobiles. Such insurance is required of those who finance automobiles with Stephenson Finance Company. Prior to 1957 most of the insurance business engendered by the activity of the finance company was channeled to Superior Life and Superior Automobile insurance companies. In 1957 the finance company resolved to acquire ownership of the insurance companies so that its stockholders might profit from the insurance requirements of its borrowers. It accomplished this purpose by exchanging its own stock for that of the shareholders in the insurance companies on a book value basis. No corporate action was required of the insurance companies. The exchange of stock was between the individual shareholders and the finance company. Each of the three corporations retained its corporate existence, assets and liabilities and each continued to conduct the business authorized by its charter.

We now refer briefly to the facts of the case in which Stephenson Motor Company, Inc. is respondent. It will not be necessary to state those involved in the other cases, because it is conceded that all four appeals rest on the same legal bottom.

The respondent owned 50% of the capital stock of Superior Automobile Insurance Company--5,000 shares with a cost basis to it of $62,500.00. It exchanged this stock for 17,950 shares of Stephenson Finance Company stock having a market value of $159,396.00 and reported no gain on the transaction. Invoking Sec. 65-273, Code of Laws 1952, the Tax Commission assessed an additional income tax based on a gain of $96,896.00. We quote this section:

'When property is exchanged, * * * the gain or loss shall be the difference between the cost, * * * of the property exchanged and the value of the property received, whether bonds, stocks, securities or other tangible or intangible property.'

It must be conceded that the exchange resulted in a taxable gain unless it fell within the exception granted by Sec. 65-275, which we quote:

'In a reorganization, consolidation or merger the exchange of stock or property for stock of a corporation a party to the reorganization, consolidation or merger shall not be deemed to result in gain or loss.'

For a number of years the Internal Revenue Code has exempted gain or loss on an exchange of stock for stock in a corporate reorganization and has greatly expanded the exemption by defining the meaning of the term as used in the statute. By Act No. 647 of 1960, comprehensive amendments to the provisions of the South Carolina Income Tax Act relating to gain or loss on sales and exchanges of property were adopted, including the adoption of the definitions of corporate reorganization contained in the Internal Revenue Code, Section 368. However, this appeal turns upon whether the South Carolina Tax Commission properly interpreted and applied the provisions of the 1952 Code which have been quoted. Its determination is entitled to most respectful consideration and should not be overruled without cogent reasons. Roper v. South Carolina Tax Commission, 231 S.C. 587, 99 S.E.2d 377.

As here, Wilson v. South Carolina Tax Commission, 220 S.C. 171, 66 S.E.2d 698, from which we quote, involved a transaction which would have been exempt under the Federal definitions.

'The State law, here applicable, is quite different because it contains no such definition of 'reorganization' as does the Federal; and we are confined to the ordinary meaning of the proviso to our Code sec. 2447 (Sec. 65-275, supra) quoted above and relied upon by appellants. * * * The fair and ordinary meaning of the word 'reorganization' cannot, we think, include the formation of a new, separate and distinct corporation, without impairment of the corporate existence or function of the old corporation.'

To reorganize signifies the act or process of organizing again or anew. 'Ordinarily it involves the creation of a new corporation to take over the assets and property and continue the business of the old one.' Fletcher, Cyc. Corp. (Perm.Ed.) Sec. 7201. The term 'is commonly applied to the formation of a new corporation by the creditors and shareholders of a corporation which is in financial difficulties, for the purpose of purchasing the company's works and other property, after the foreclosure of a mortgage or judicial sale.' 19 C.J.S. Corporations § 1578.

Paraphrasing the above quotation from the Wilson case, the fair and ordinary meaning of the word reorganization cannot, we think, include the acquisition by one corporation of the capital stock of two others, without impairment of the corporate existence or functions of any of the three corporations.

It is settled law that corporations which are creatures of statute have no authority to consolidate or merge except as provided by statute. 19 C.J.S. Corporations § 1605; 13 Am.Jur., Corporations, Sec. 1179; Fletcher, Cyc. Corp., Sec. 7048. Our statute on the subject at the time of these transactions was codified as Chapter 8 of Title 12, Code of 1952. Respondents contend that this statute applies to consolidations only and not to mergers. They concede noncompliance with the statutory requirements, hence no consolidation. However, they contend that these transactions are 'readily classified as either a reorganization or merger.'

The statute does not observe the technical distinction between consolidation and merger, which is thus stated by Fletcher, Cyc. Corp., Sec. 7041:

'Taking up first the matter of consolidation, it should be observed that the term when accurately used, has a definite legal meaning. It is a combination by agreement between two or more corporations * * * and under authority of law, by which their rights, franchises, privileges and property are united, and become the rights,...