Vahlsing Christina Corporation v. Commissioner

• Decision Date: 06 June 1985
• Docket Number: Docket No. 8571-73.
• Citation: 50 TCM (CCH) 75,1985 TC Memo 273
• Parties: Vahlsing Christina Corporation, formerly The Christina Corporation v. Commissioner.
• Court: U.S. Tax Court

50 T.C.M. (CCH) 75 (1985)

T.C. Memo. 1985-273.

Vahlsing Christina Corporation, formerly The Christina Corporation v. Commissioner.

Docket No. 8571-73.

United States Tax Court.

Filed June 6, 1985.

Roy S. Kaneda, for the petitioner. Eugene J. Wien, for the respondent.

Memorandum Findings of Fact and Opinion

FEATHERSTON, Judge:

Respondent determined the following deficiencies in petitioner's Federal income taxes and additions to tax for the fiscal years ended June 30, 1963 through June 30, 1967:

                                                                  Addition
                     Taxable                                     Sec. 6651(a)
                     Year Ended                  Deficiency      I. R. C. 1954
                     June 30, 1963 ...........  $  1,360.04       $  136.00
                     June 30, 1964 ...........    17,225.22        1,722.53
                     June 30, 1965 ...........   233,691.68        ---0---
                     June 30, 1966 ...........   217,388.52        ---0---
                     June 30, 1967 ...........   561,489.17        ---0---
                

The petition as filed raised a multitude of issues. All of them have been settled by agreement except two:

1. Whether the transfer by petitioner of 122,000 shares of Texas Plastics, Inc., stock to Texas Plastics, Inc., on August 29, 1966, in exchange for $419,680 was a redemption of stock "essentially equivalent to a dividend" within the meaning of section 302(b)(1)¹ and thus taxable to petitioner under section 301.

2. Whether petitioner is liable for the personal holding company tax under section 541 equal to 70 percent of its undistributed personal holding company income for the taxable year ended June 30, 1967.

Findings of Fact

Vahlsing Christina Corporation (formerly The Christina Corp.) is a corporation organized under the laws of Maine. It filed its Federal income tax returns for the taxable year ended June 30, 1963, with the District Director for Manhattan, New York, and for the other years in dispute with the District Director for Newark, New Jersey.

For many years prior to 1962, the Vahlsing family was engaged, through a large number of corporations, in far-flung agricultural and related operations in Idaho, California, Texas, Maine, New Jersey, and New York. These operations included not only the production of farm crops but the production and marketing of fertilizers and insecticides, construction work, cold storage facilities, and other endeavors. During the fiscal years June 30, 1964 through June 30, 1967, the stock of these numerous corporations was owned mainly by Fred H. Vahlsing, Sr., Josephine M. Vahlsing, his wife, or, after her death, her estate, and Fred H. Vahlsing, Jr.

Beginning at least as early as 1963, the Vahlsing family decided to reduce the number of their family corporations. Eventually, the number of family corporations was reduced from 26 to four or five.

Texas Plastics, Inc. (hereinafter Texas Plastics), one of the Vahlsing family corporations, was incorporated in 1944 under the laws of Texas. In 1962, it made an unsuccessful public offering of its stock. On July 25, 1966, Texas Plastics had only one class of stock, common voting, outstanding. Although it had authorized the issuance of 1,000,000 shares, it had issued only 345,583 shares at that time and they were owned as follows:

                       Vahlsing Foundation, Inc.1 .....   5,691
                       Albert Pfaffenroth ..................   2,500
                       Clifford Spatz ......................     500
                       Margaret Schenk1 ...............  12,500
                       Petitioner ..........................  99,797- 1/3
                       F. H. Vahlsing, Inc. (Texas) ........ 197,000- 2/3
                       Texas Plastics (treasury) ...........  27,594
                                                           _________
                       Total issued common stock ..........  345,583
                                                           _________
                1 Vahlsing Foundation, Inc., was a charitable
                foundation controlled by Vahlsing family members
                Margaret Schenk is the daughter of F. H
                Vahlsing, Sr
                

Disregarding the treasury shares, F. H. Vahlsing, Inc. (Texas) and petitioner thus together owned 93.33 percent of Texas Plastics' outstanding stock. F. H. Vahlsing, Inc. (Texas), was wholly owned by petitioner during the period from June 17, 1966 through June 30, 1967.

On July 24, 1966, the board of directors of F. H. Vahlsing, Inc. (Texas), authorized the sale to petitioner of its 197,000- 2/3 shares of Texas Plastics for a total price of $677,682.29. The resolution authorizing the sale includes the following:

It was the opinion of the Directors that the sale of this stock to *** petitioner would be a further step in consolidating the entire ownership of Texas Plastics in the hands of *** petitioner and thereby a further step in simplifying the overall stock ownership of the Vahlsing companies.

The minutes on the resolution adopted July 25, 1966, authorizing petitioner's purchase of the Texas Plastics stock reflect a statement by F. H. Vahlsing, Jr., who presided at the meeting, that the purchase "was desirable in order to simplify the stock ownership of the various Vahlsing companies" and to eliminate "a situation where a subsidiary of The Christina Corporation petitioner did itself own stock of another related family company." On July 26, 1966, the sale was completed and the shares were transferred to petitioner. As a result of this sale, petitioner became the owner of 296,798, or 93.33 percent of Texas Plastics' outstanding stock.

Immediately prior to July 25, 1966, Texas Plastics owned 490,000 shares and Fred H. Vahlsing, Sr., owned 35,000 shares of the total number of 525,000 shares of the issued and outstanding stock of Texas Polymer Corp. (hereinafter Texas Polymer). On July 25, 1966, Texas Plastics sold its 490,000 shares of Texas Polymer stock to petitioner for $490,000.

On August 28, 1966, the board of directors of Texas Plastics adopted a resolution authorizing the purchase from petitioner of 122,000 shares of Texas Plastics' own stock at $3.44 per share or an aggregate amount of $419,680. F. H. Vahlsing, Jr., who presided at the meeting, "suggested that it would be wise for the corporation Plastics to purchase shares of its own stock to be held in the treasury of the corporation for possible future needs." On August 29, 1966, the board of directors of petitioner authorized the sale of the 122,000 shares of Texas Plastics' stock for $3.44 per share or an aggregate of $419,680. On August 29, 1966, Texas Plastics paid petitioner the $419,680.

As of August 29, 1966, Texas Plastics' stock was held as follows:

                        Vahlsing Foundation, Inc......   5,691
                        Albert Pfaffenroth ...........   2,500
                        Clifford Spatz ...............     500
                        Margaret Schenk ..............  12,500
                        Petitioner ................... 174,798
                        Plastics (treasury) .......... 149,594
                                                      ________
                       Total issued common stock ..... 345,583
                                                      ________
                

Disregarding the treasury shares, petitioner thus owned 89.19 percent of Texas Plastics' outstanding stock as of that date.

On June 30, 1967, F. H. Vahlsing, Inc. (Texas), was merged into The Christina Corp., and the name of the surviving corporation was Vahlsing Christina Corp., petitioner herein. At the time of the merger, The Christina Corp. owned all of the stock of the merged company. The minutes of Christina on the merger include the following:

The Chairman stated that he believed this offer was to the benefit of the corporation since it would result in the entire ownership of the corporation being in the hands of The Christina Corporation, and thereby a further step in simplifying the overall ownership of the Vahlsing companies. ***

On July 7, 1967, the board of directors of Texas Plastics voted to merge with Texas Polymer as of July 31, 1967. On July 25, 1967, Texas Plastics, Inc.'s stockholders approved the merger in accordance with the terms of the Plan of Merger. On the same date, the board of directors of Texas Polymer adopted a resolution approving a plan of merger of Texas Polymer into Texas Plastics. The resolution states that —

the "terms and conditions of such merger, the mode of carrying the same into effect, and the manner of exchanging the shares of stock of the corporation Texas Polymer for shares of stock of Texas Plastics, Inc., shall be as set forth in the proposed Plan of Merger submitted to this meeting."

On July 25, 1967, the merger was approved at a special meeting of the shareholders of Texas Plastics and at a special meeting of the shareholders of Texas Polymer. The plan of merger provided that Texas Plastics' outstanding stock would not "be changed or converted as a result of the merger" and would continue to be issued and outstanding stock of the surviving corporation. Texas Polymer's stock would be converted into stock of the surviving corporation on the basis of one share of Texas Polymer stock for .235 of a share of the surviving corporation's stock. The merger was completed on July 31, 1967. Following the merger on July 31, 1967, the stock of Texas Plastics, the surviving corporation, was owned as follows:

                      Vahlsing Foundation, Inc........   5,691
                      Albert Pfaffenroth .............   2,500
                      Clifford Spatz .................     500
                      Margaret Schenk ................  12,500
                      Petitioner ..................... 289,948
                      Fred H. Vahlsing, Sr ...........   8,225
                      Plastics (treasury) ............  26,219
                                                      ________
                      Total issued common stock .....  345,583
                                                      ========
                

On August 2, 1967, petitioner purchased the remaining 26,219 shares of Texas Plastics' treasury stock from Texas Plastics for $90,193.36.

Between October 1968 and February 1969, a second public offering of Texas Plastics' stock was made and additional capital of some $3,000,000 was raised.

Opinion

At issue is whether petitioner's transfer on August 29, 1966, of 122,000 shares of Texas Plastics stock to...