#### WALTER L. MARR v. THE UNITED STATES.1

[No. 0-12.

Decided November 21, 1923.]

*On the Proofs.*

*Refund of internal-revenue taxes; exchange of stock.; income.*— Where there are two distinct corporations organized under the laws of different States, with different powers and different capital, and stock in one is exchanged for stock in the other, it is in law an exchange of property, and any gain realized from such exchange of stock is taxable as income.

*The Reporter’s*statement of the case:

*Mr. William. L. Frierson*for the plaintiff. *Williams & Frierson*were on the briefs.

*Mr. Chester A. Gwinn,*with whom was *Mr. Assistant Attorney General Robert H.*Lovett, for the defendant. *Messrs. Fred K. Dyar*and *Nelson T. Hartson*were on the brief.

The following are the facts of the case as found by the court:

I. During the year 1916, the plaintiff, W. L. Marr, and his wife were residents of the State of Michigan. At the proper time they made a joint income tax return and paid the taxes shown by said return to be due to the- collector of internal revenue at Detroit.

II. On March 19, 1921, the plaintiff was notified that the Commissioner of Internal Revenue had made an additional assessment against him for the year 1916 of $23,098.40 and payment of the same was demanded. The plaintiff filed with the Commissioner of Internal Revenue a claim in abatement. On December 29,1921, he was notified that this claim had been rejected and disallowed. The plaintiff having then become a resident of Tennessee, the assessment was sent to the collector of internal revenue at Nashville for collection and demand was made of plaintiff for the payment of said assessment with interest, aggregating $24,944.12, which amount he paid, under protest, on January 7, 1922.

Plaintiff then made his appeal to the Commissioner of Internal Revenue according to the provisions of the law *659and the regulations of the Secretary of the Treasury by filing a claim for the refund of said taxes and interest upon the grounds set out in the petition in this cause. This claim, after consideration by the commissioner, has been refused and disallowed.

III. Said assessment was arrived at by adding to the net income shown by the original return the sum of $324,466.57, upon the ground that that much income had been derived when, in 1916, plaintiff and his wife received 451 shares of the preferred and 2,125 shares of the common stock of General Motors Corporation, a corporation organized under the laws of Delaware and hereinafter called the Delaware corporation, and $100 in cash in exchange for 339 shares of the preferred and 425 shares of the common stock of the General Motors Co., a corporation existing under the laws of New Jersey and hereinafter called the New Jersey corporation. The market value of the stock of the Delaware corporation so received was preferred $94.6875 and common $168.50 per-share, making the total market value of the shares received $400,766.57, and adding the $100 received in cash makes the total value received $400,866.57. The shares of the New Jersey corporation had been acquired at par, or a total cost of $76,400. The difference between these ¡amounts was treated as income, and this resulted in the assesment as made.

IY. The transaction culminating in said exchange of stock was as follows:

(1) The New Jersey corporation had outstanding $15,-000,000 of 7 per cent preferred stock and $15,000,000 of common stock of the par value of $100 per share. It had accumulated a large surplus, and the actual value of its common stock was, at the date of the exchange, $842.50 per share.

(2) In 1916 the officers of the New Jersey corporation caused the Delaware corporation to be organized for the purpose of taking over and continuing the business of the New Jersey corporation. The authorized capital of the Delaware corporation was $82,600,000 of common and $20,-000,000 of nonvoting preferred stock.

(3) The plan by which the Delaware corporation proposed to take over and continue the business of the New *660Jersey corporation-was set forth in a letter addressed by 11 of the directors of the New *Jersey*corporation to its stockholders, which letter was as follows:

CxENicral Motors Company,

*Nexo*York, *October 16, 1916.*

*To the stockholders of General Motors Go.:*

The undersigned members of the board of directors of your company, pursuant to the request of their associate directors and of shareholders representing upwards of 70 per cent of the outstanding stock of the company present for your favorable consideration the following plan, the adoption of which in their opinion will afford the present stockholders of the company a more liquid and satisfactory investment and eventually will lead to economies in administration to the benefit of all shareholders.

General Motors Corporation has been organized under the laws of Delaware, with an authorized capital stock of $102,-600,000, of which $82,600,000 is common stock and $20,000,-000 is nonvoting preferred stock. The shares are of the par value of $100 each. The preferred stock is entitled to receive cumulative dividends at the rate of 6 per cent per an-num, and is subject to redemption, at the option of the company, at $1.10 a share on November 1, 1918, or on any subsequent dividend-paying date. In the event of dissolution the preferred stock is preferred as to assets to the extent of its par value and accrued dividends.

General Motors Corporation of Delaware offers to the shareholders of General Motors Co. of New Jersey the privilege of exchanging their shares of stock for shares of the Delaware corporation on the following basis:

(«) One and one-third *(If)*shares of preferred stock of the Delaware corporation for one (1) share of preferred stock of the New Jersey company.

(Z>) Five (5) shares of common stock of the Delaware corporation for one (1) share of common stock of the New Jersey company.

(Certificates'for fractional shares will not be issued, but, in place thereof, the Delaware corporation will pay in cash at the. rate of $100 a share for its preferred stock and $150 a share for its common stock.)

Every stockholder of General Motors Co. is extended the same privilege of exchange and on the same basis as has already been accepted by shareholders representing upward of 70 per cent of the outstanding stock of General Motors Co.

The plan is to become effective as of November 1, 1916, and all exchanges of stock under this offer will be made as *661of that date. Stockholders of the New Jersey company of record at the close of business October 14, 1916, will thus receive the dividend payable thereon by that company November 1, 1916. Dividends upon the preferred and common stock of the Delaware corporation will be computed from November 1,1916, upon .all of its stock issued, and exchanged within the period hereinafter fixed for effecting such exchange.

Deposits for exchange are to be made with the Guaranty Trust Co. of New York, No. 140 Broadway, New York City, between October 16, 1916, and December 15, 1916, both dates inclusive. Upon the deposit of your certificates of stock of General Motors Co., of New Jersey, duly indorsed in blank (with New York State stock transfer tax stamps attached at the rate of 2 cents per share, or accompanied by an equivalent amount of cash), the Guaranty Trust Co. will immediately cause to be issued and forwarded to you temporary certificates (pending the engraving of permanent certificates) for shares of stock of General Motors Corporation of Delawai’e, in accordance with the foregoing offer. '

A form of acceptance of this offer to accompany your certificate of stock and to be signed by you is herewith inclosed, together with a stamped envelope addressed to the Guaranty Trust Co., of New York.

A. H. Wiggin, C. H. Sabin, L. G. Kaufman, P. S. du Pont, W. S. Leland, C. S. Mott, J. H. McClement, J. J. Raskob, F. L. Belin, A. G. Bishop, W. C. Durant.

(4) This offer was accepted by all the holders of common stock and $75,000,000 of the authorized $82,600,000 common stock of the Delaware corporation was issued in exchange for the $15,000,000 of outstanding stock of -the New Jersey corporation.

The holders of all of the preferred stock of the New Jersey corporation, except the holders of a few shares, also accepted the offer. The few shares mentioned were paid off or redeemed in cash and retired. In exchange for the shares of those who accepted the offer the Delaware corporation issued its own 6 per cent preferred stock at the rate of one and a third shares for one. But all fractional shares *to-*which stockholders were thus entitled were paid in cash as provided in offer above set out.

*662The remaining $7,600,000 of tbe authorized common stock of the Delaware corporation and such part of its authorized $20,000,000 of preferred stock as. was not thus issued in exchange for preferred stock of the New Jersey corporation, were either sold or held for sale as additional capital should be desired.

(5) The Delaware corporation having thus become the owner of all the outstanding stock of the New Jersey corporation caused the latter to be dissolved and all its assets and liabilities to be transferred to the Delaware corporation.

(6) The Delaware corporation continued the business of the New Jersey corporation. It had no assets except those transferred from the New Jersey corporation and such cash as had been realized by the sale of its own stock not used in acquiring the stock of the New Jersey corporation. And its liabilities were only those which had been the liabilities of the New Jersey corporation.

V. The plaintiff and his wife accepted the offer.

He had 15 shares of common and 11 shares of preferred stock of the New Jersey corporation. He received in exchange 75 shares of the common and 14 shares of the preferred stock of the Delaware corporation and $66.67 in cash.

His wife had 410 shares of the common and 328 shares of the preferred stock of the New Jersey corporation. She received in exchange 2,050 shares of the common and 437 shares of the preferred stock of the Delaware corporation and $33.33 in cash.

VI. The plaintiff is a citizen of the United States and resides in Hamilton County in the State of Tennessee, has at all times borne true allegiance to the Government and has not aided, abetted, or given comfort to any enemy of the United States. He has not transferred or assigned the claim sued on or any part of it and no action has been taken on it except as stated in the petition.

1

**Appealed.

MEMORANDUM BY THE COURT.

The. plaintiff exchanged stock in the New Jersey corpoi'ation for stock in the Delaware corporation on the basis of five shares for one. Preferred stock was exchanged on a dif*663ferent basis, but all of the preferred stock was not exchanged, and holders of that kind who declined to make the proposed exchange were paid in cash for their preferred stock. Having acquired all of the stock in the New Jersey corporation, the Delaware corporation caused all of the former’s assets and liabilities to be transferred to itself and the New Jersey corporation to be dissolved.

The Delaware corporation had $82,600,000 of common stock and used $75,000,000 of it in acquiring the outstanding stock in the New Jersey corporation. It sold and realized cash for some of its stock in excess of that involved in the exchange. It thus had after the transfer all of the property the New Jersey corporation owned and some cash, realized, as stated, from its treasury stock.

Plainly the transactions involved two distinct entities, organized under the laws of different States, with different powers, and with different capital. Plaintiff exchanged his stock in one of these entities for stock in the other. This was an exchange of property.

When the exchange became effective we think that the plaintiff “ in a legal sense realized his gain.” *Gullinan*v. *Walicer,*262 U.- S. 134; *Phellis case,*257 U. S. 156; *Rockefeller case,*257 U. S. 176.

The petition is dismissed.