#### EDWARD A. NOLL v. THE UNITED STATES1

[No. B-450.

Decided November 16, 1925]

*On the Proofs*

*Taxes; income; exchange of stoclc.-*— Where stock in one distinct corporation is exchanged for stock in another, it is an exchange of property, and any gain realized from such exchange is income and taxable as such, gee *Marr ease,*58 C. Ols. 658; 268 U. S. 536.

*181*The Reporter’s*statement of the case:

*Mr. L. L. Hamby*for the plaintiff.

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

.The court made special findings of fact, as follows:

I. During the year 1916 plaintiff, Edward A. Noll, was a citizen of the United States and a resident of Cleveland, Ohio. At the proper time he made an income-tax return for the year 1916 and paid the taxes shown by the return to be due, in the amount of $40.10, to the collector of internal revenue at Cleveland, Ohio.

Plaintiff filed an amended return in October, 1917, in Avhich he included in his gross income the difference between the value of certain new corporate stock, hereinafter described, and the cost of certain old corporate stock, hereinafter described, which said amended return indicated a tax liability of $36,223.18, which was not paid by the plaintiff when filing said return. Subsequently the collector of internal revenue at Cleveland, Ohio, after assessment by the Commissioner of Internal Revenue of the additional taxes indicated to be due by said amended return in the amount of $36,183.08, made demand upon the plaintiff for the payment of said additional taxes, which plaintiff paid under protest on January 2, 1918.

Plaintiff thereafter, on January 13, 1921, made his appeal to the Commissioner of Internal Revenue according to the provisions of law and the regulations of the Treasury Department by filing a claim for the refund of $27,605.51, of which the sum of $24,792.97 was due to the inclusion in the said assessment against him of the alleged gain or income derived through the receipt of the aforesaid new corporate stock. Said claim for refund was rejected by the Commissioner of Internal Revenue on January 3, 1923.

II. The said assessment upon which the said taxes were collected was arrived at by adding to the plaintiff’s other net income the sum of $242,181.40, upon the ground that such *182income had been derived when in December, 1916, plaintiff received 14,107 shares of the common stock of the National Tool Company (organized in 1916) in exchange for 2,903 shares of the common stock of the National Tool Company (organized in 1905). The stock of the National Tool Company (organized in 1916) so received was of the value of $33.96 per share, making the total value of the shares so received $433,771.08. The shares of the National Tool Company (organized in 1905) held by plaintiff at the time of the exchange of shares referred to cost the plaintiff $165,-164.20 for 1,606 shares thereof, the remaining 1,297 shares having been received as a stock dividend on October 6, 1916. The difference between the value of the new shares and the cost of the old shares was treated as income and resulted in $24,792.97 of the assessment made, which is the amount sought to be recovered.

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

(1) The National Tool Company, hereinafter designated “the old company,” was organized in 1905, under the laws of the State of Ohio, and had outstanding at the time of the transaction herein described 5,000 shares of common stock of the par value of $10.00 per share.

(2) In 1916 the banking firm of Hayden Miller & Company made the following written offer, dated December 4, 1916, to E. A. Noll (the plaintiff), F. L. Boas, and Samuel Kornhauser, stockholders of the old company:

Messrs. E. A. Noll, F. L. Boas, Samuel KoenilauseR,

% *National Tool Company, Cleveland.*

GeNtlemeN : After a careful consideration of the preliminary appraisal of your property by the Lloyd-Thomas Company, as set forth in a letter from that company to Mr. Noll, bearing date of November 11, 1916: Messrs. Ernst & Ernst’s audit of the National Tool Company, bearing date of November 10, 1916, and being a condition as of September 30, 1916, and certain memoranda of current assets taken by Mr. Charles Bradley at the last meeting of the board of directors of your company, which shows your current assets to be substantially as follows:

*183Steel_$250,000

Work in process- 175,000

Finished manufacture_ 40,000

Accounts receivable_ 160,000

Monies in bank_ 75,000

Total_ 700,000

we beg to submit to you the following proposition:

If you will incorporate or cause to be incorporated under the laws of the State of Ohio a new company under the same name as your present company for the sum of $1,800,000, of which $500,000 shall be preferred stock and $1,300,000 shall be common stock, we will purchase the $500,000 of preferred stock at $90.00 per share subject to the following conditions:

1. That all the assets of every nature and description of the present National Tool Company be transferred, sold, and delivered to the new company in payment for the entire issue of the common stock of the new company of a par value of $1,400,000.00.

2. That until such time as all the preferred stock shall have been retired the compensation of all executive officers shall not be increased beyond $30,000.00 aggregate.

3. That the $500,000 of preferred stock bear 7% interest, payable 1%% quarterly; that it be redeemable in whole.or in part at any interest-paying period at 110; that there be a compulsory redemption each year of not less than 5% of the greatest amount at any time outstanding; and that said preferred stock have such other reasonable conditions as are ordinarily placed in stocks of this nature, including a surr plus-retirement fund for the benefit of the preferred stock of substantially the following description: In any year, beginning with the year 1918, after the company has declared and paid 10% of its then common capital stock, which shall not be in excess of $1,300,000, for each dollar of dividends paid on its common capital stock in excess of the foregoing in any year there shall be an equivalent amount transferred to the retirement fund for the benefit of the preferred stock. The net current assets of the company must at all times be equal to or greater than 110% of the par value of the preferred stock then outstanding, and in the event of two successive quarterly dividends on preferred stock being in arrears, or if there be any arrearage in the payments due to the preferred stock retirement fund, or if the net quick assets of the company fall below 110% of the par value of the preferred stock then outstanding, then in any of these *184events the preferred stockholders shall be entitled to a representation on the directorate of the company equal in numbers to that of the common stock, and such representation shall continue until all defaults are cured and until six months thereafter.

4. That from the $1,400,000 of the common capital stock, all of which we understand will be the property of the three gentlemen to whom this letter is addressed, there be set aside, in such manner as shall be acceptable to you three, $200,000 of the common capital stock, which you will sell to us at $50.00 per share.

5. That from the proceeds of the sale to us of the $500,000 of preferred stock you will at once pay to the Union National Bank or to any other banks to which you may be indebted any sums which the company may be owing to it or them, more especially any monies which the company may be owing in' connection with new construction and the recent purchase of your real estate.

6. That from the proceeds of the sale of the 2,000 shares of common stock, you pay, in so far as the monies coming to you will cover your individual indebtedness to the Union National Bank arising from the sale to you some time since of conflicting interests.

7. As you are aware, it is our purpose to attempt to create a market not only for your preferred stock, but in time for your common stock. This, however, can not be done if for any reason whatever your stocks, beyond the 2,000 shares above referred to, are from time to time thrown upon the market. With this in mind, we would expect you to agree in writing that for a period of ninety days from the date of the delivery to us of the shares purchased you will not dispose of any of your stock other than the 2,000 shares above referred to, except with our consent.

8. That no further dividends be declared or paid by the old company in cash or otherwise, the object being that the assets *of*the corporation be not further diminished.

As an alternative to such of the above conditions as are affected, we would state that if you wish at this time to pay up all of your personal obligations at the Union National Bank it can be done by declaring at this time a 240% cash dividend on the present outstanding stock of $50,000, which dividend when applied towards your indebtedness at the bank will reduce it to $100,000, which can be taken care of by the proceeds of the sale of 2,000 shares of the common stock to us. If this be done the new company should be incorporated for $1,700,000 instead of $1,800,000 and the *185amount of the common stock issue should be reduced from $1,400,000 to $1,300,000.

In the event you accept our proposals as above set forth we desire that the legal work necessary in the incorporation of the new company, the preparation of the certificates, the issuing of the stock, etc., be done by Treadway & Marlatt, and all legal expenses and fees must be paid by the new company. We would also desire that a satisfactory stock registrar and transfer agent be appointed for the new company.

Yours very truly,

Hayden Miller & Co.

The aforesaid offer was accepted on December 5, 1916, by indorsement thereon as follows:

December —, 1916.

We, the undersigned, accept the foregoing proposition as described on the basis as to $1,300,000.00 of common share capital to be issued.

Ed. A. Noll.

F. L. Boas.

S. J. KorNI-iauser.

Said acceptance was ratified by the board of directors and stockholders of the National Tool Co., with modifications, on December 20, 1916, as shown by the following reports of special meetings of said directors and stockholders:

SPECIAL MEETING OE THE BOARD OE DIRECTORS OE THE NATIONAL TOOL COMPANY, HELD DECEMBER 20, 1916

A special meeting of the board of directors of the National Tool Company was held at the office of the secretary, 620 Citizens Building, Cleveland, Ohio, on December 20, 1916, at 2 o’clock p. m., pursuant to notice. *

Present: All the directors of the company, to wit, Ed. A. Noll, F. L. Boas, Wm. H. Marlatt, C. L. Bradley, S. J. Kornhauser.

The minutes of the last meeting were read and approved. The president presented a report of the business of the company for the month of November, showing the net profits for the month of October had been exceeded.

The treasurer reported that all bills for the month had been paid and that there was on deposit this day a balance of $81,320.87.

*186Mr. Marlatt then presented, read, and moved the adoption of the following resolution:

“ Resolved, That the sum of one hundred twenty thousand ($120,000.00) dollars be, and it is hereby, appropriated and set aside from the surplus profits of this company for the payment of a dividend of 240 per cent on the issued and outstanding capital stock, the same to be due and payable forthwith to stockholders as shown by the books of the company this date.”

The motion was seconded by Mr. Bradley, and being put to *vote*was unanimously carried.

Mr. Bradley then moved that the president and treasurer of the company be authorized to borrow the sum of $120,-000.00 from the Union National Bank and execute a note on behalf of the company therefor. The motion was seconded by Mr. Marlatt, and being put to vote was unanimously carried.

Mr. Boas then presented, read, and moved the adoption of the following resolution:

“Whereas on December 4, 1916, an offer in writing was made by Hayden Miller & Company to E. A. Noll, F. L. Boas, and S. J. Kornhauser for themselves and on behalf of this company for the purchase of all of the assets, business, and good will of the National Tool Company, which offer was submitted to this meeting and is attached to and made part'of these minutes; and

*“*Whereas Messrs. Ernst & Ernst have brought down to November 30, 1916, their audit of the National Tool Company referred to therein, and there has this day been declared payable forthwith a dividend of 240 per cent on the capital stock of this company as in said offer provided, and it has been further agreed that there shall be paid over as a part of the assets of this company the further sum of four hundred and fifty thousand ($450,000.00) dollar's, together with all accretions to or deductions from said audit of November 30, 1916, incurred in the ordinary and normal transactions of the business of the company, in consideration of which there shall also be paid over to this company all of the proposed issue of preferred stock of said new company, to wit, of the par value of five hundred thousand ($500,000) dollars, and all of the proposed issue- of common stock of said company, to wit, of the par value of one million three hundred thousand ($1,300,000) dollars.

“ Resolved, That said offer of Hayden Miller & Company hereinbefore recited subject to the amendments and changes contained in the second preamble hereof, in so far as same relates to and is to be performed by this company, be, and *187same is hereby, accepted, adopted, and made the contract of this company; and further

*“*Resolved, That a special meeting of the stockholders of said company be called to meet at the office of the secretary, 620 Citizens Bank Building, Cleveland, Ohio, on Wednesday, December 20, 1916, at 4 o’clock p. m., to consider and approve said contract and to authorize the sale to Hayden Miller & Company of all of the assets of this company for the purpose therein provided.”

The motion was seconded by S. J. Kornhauser, and being put to vote was unanimously carried.

Mr. Bradley moved that the president and secretary be authorized to sign on behalf of this company a consent to the use of the name “The National Tool Company” by the company about to be organized. The motion was duly seconded, and being put to vote was unanimously carried.

There being no further business the meeting adjourned.

Ed. A. Noll, *President.*

S. J. Kornhattsee, *Secretary.*

SPECIAL MEETING OR THE STOCKHOLDERS OR THE NATIONAL TOOL COMPANY, HELD DECEMBER 20, 1916

Pursuant to the resolution of the board of directors and the foregoing waiver of notice, the stockholders of the National Tool Company met at the office of the secretary, 620 Citizen Building, Cleveland, Ohio, on the 20th day of December, 1916, at 4 o’clock p. m.

The meeting was called to order by E. A. Noll, president of the company, who presided over the meeting. Mr. S. J. Kornhauser, secretary of the company, acted as secretary of the meeting.

The president requested the secretary to call the roll of the stockholders and directed all persons holding proxies to deposit the same with the secretary, which was accordingly done. Thereupon the secretary announced that out of 5,000 shares entitled to vote, 5,000 were represented at the meeting as follows: 4,819 shares by stockholders in person and 181 shares by proxy.

Mr. Boas then presented, read, and moved the adoption of the following resolution:

“Whereas the board of directors of this company, at a special meeting of said board regularly called and this day held,, adopted the following resolution:

“Whereas on December 4th, 1916, an offer in writing was made by Hayden Miller & Company to Ed. A. Noll, F. L. Boas, and S. J. Kornhauser for themselves and on behalf of *188this company for the purchase of all of the assets, business, and good will of the National Tool Company, which offer was submitted to this meeting and is attached to and made a part of these minutes; and

“Whereas, Messrs. Ernst & Ernst have brought down to November 30, 1916, their audit of the National Tool Company referred to therein, and there has this day been declared payable forthwith a dividend of 240 per cent on the capital stock of this company as in said offer provided, and it has been further agreed that there shall be paid over as a part of the assets of this company the further sum of four hundred fifty thousand ($450,000.00) dollars, together with all accretions to or deductions from said audit of November 30, 1916, incurred in the ordinary and normal transaction of the business of this company, in consideration of which there shall also be paid over to this company all of the proposed issue of preferred stock of said new company, to wit, of the par value of five hundred thousand ($500,000) dollars, and all of the proposed issue of common stock of said company, to wit, of the par value of one million three hundred thousand ($1,300,000) dollars;

“Resolved, That said offer of Hayden Miller & Company hereinbefore recited subject to the amendments and changes contained in the second preamble hereof, in so far as same relates to and is to be performed by this company, be, and the same is hereby, accepted, adopted, and made the contract of this company; and further

“Resolved, That a special meeting of the stockholders of said company be called to meet at the office of the secretary, 620 Citizen Building, Cleveland, Ohio, on Wednesday, December 20,1916, at 4 o’clock p. m., to consider and approve said contract and to authorize the sale to Hayden Miller *&*Company of all the assets of this company for the purpose therein provided.

*“Resolved,*That the action of the board of directors in authorizing and entering into said contract with Hayden Miller & Company for the sale of all the assets of this company for the purpose therein recited be, and the same is hereby, ratified, approved, and confirmed, and the same is hereby made the act and contract of this company.”

The motion was duly seconded by Mr. S. J. Kornhauser and was duly carried by unanimous vote, 5,000 shares being cast in favor of said resolution and none cast against its adoption. Thereupon the president declared the resolution duly adopted.

There being no further business, the meeting adjourned.

Ed. A. Noll, *President.*

S. J. KoRNHattsee, *Secretary.*

*189(3) In carrying ont the foregoing proposal and acceptance the common capital stock of the new corporation was made $1,300,000, consisting of 26,000 shares of the par value of $50.00 per share; and the banking firm in purchasing from the old stockholders $200,000 of the new capital stock received 4,000 shares of the par value of $50.00 each, paying $25.00 per share therefor.

(4) The new corporation having the same name was created immediately thereafter, i. e., on December 22, 1916, with a new charter and by-laws, and all of the assets, by resolution of the board of directors of the old corporation, were transferred to the new corporation, which assumed all of the liabilities of the old corporation, as shown by the following minutes of a special meeting of the board of directors of the new corporation:

SPECIAL MEETING OF THE BOARD OF DIRECTORS OF THE NATIONAL TOOL COMPANY HELD DECEMBER 2 9, 1916

A special meeting of the board of directors of the National Tool Company was held at the office'of the secretary, 620 Citizen Building, Cleveland, Ohio, at 2 o’clock p. m., December 29, 1916, pursuant to notice duly given to all the directors

Present: Ed. A. Noll, F. L. Boas, C. L. Bradley, S. J. Kornhauser.

Mr. Boas presented, read, and moved the adoption of the following resolution:

“ Whereas, pursuant to the agreement heretofore made, there has been issued and delivered to this company by the National Tool Company, incorporated December 22nd, 1916, five thousand (5,000) shares of the preferred capital stock of said company; and

“Whereas there has been tendered by Hayden Miller & Company, in payment for five thousand (5,000) shares of said preferred stock, their check for four hundred and fifty thousand dollars ($450,000), as provided in the contract with said Hayden Miller & Company, for the purchase of said preferred stock:

“ Resolved, That the president of this company, Ed. A. Noll, be authorized and directed to endorse said certificates for five thousand (5,000) shares of preferred stock of said the National Tool Company, incorporated December 22, 1916, and to deliver the same to said Hayden Miller & Company in accordance with the terms of said contract.”

*190The motion was duly seconded and, being put to vote, was unanimously carried.

Mr. Bradley then presented, read, and moved the adoption of the following resolution:

“ Whereas'this company has this date received from the National Tool Company, incorporated December 22nd, 1916, twenty-six thousand (26,000) shares of the common capital stock of said company, and in payment therefor this company has executed and delivered unto said the National Tool Company,, so incorporated, a deed and bill of sale of all its assets of every kind and description, and said company has assumed and agreed to pay all of the liabilities of this company, as shown by its books:

“ Resolved, That said stock be distributed to the stockholders of this company in the proportion of their holdings of stock therein as follows, to wit: To Edward A. Noll, 14,904 shares; to S. J. Kornhauser, 5,547 shares; to F. L. Boas, 5,547 shares; to C. L. Bradley, 1 share; to Wm. H. Marlatt, 1 share.”

This motion was duly seconded and, being put to vote, was unanimously carried.

There being no further business, the meeting’ adjourned.

Ed. A. Noll, *President.*

S. J. KoRNHauseR, *Secretary.*

At no time after the organization of the new corporation did the old corporation have any assets or liabilities or carry on any business, and it was dissolved by operation of law on April 2, 1919, on certificate of the tax commissioner of the State of Ohio, for failure to file required returns.

(5) Plaintiff received by virtue of the acceptance of said offer 14,107 shares of the common stock of the new company, of which 1,334 shares were sold by him to said banking firm, as provided in the agreement, for the sum of $33,333.33. (It is conceded by claimant that he realized a profit from the sale of the said shares to the banking firm and the tax thereon has been paid and refund thereof is not demanded in this claim.)

(6) Plaintiff received no part of the preferred stock issued by the new company, which was delivered to the said bankers alone under the terms of the said agreement.

(7) The value of the outstanding stock of the National Tool Company (organized in 1905) was at the time of the transfer of its assets to the National Tool Company (organ*191ized in 1916) equal to the value of the outstanding stock of the latter company upon the receipt by it of such assets; and the fair market value on March 1, 1913, of the shares purchased by the claimant prior to said date was less than the cost to claimant of said shares.

IV. On the date of organization of the new company the 5,000 shares of the old company stock were held in the following manner:

Shares

Mr. Noll (the plaintiff)_2,003

Mrs. Noll_ 181

Mr. Kornhauser_ 958

Mr. Boas_ 958

5, 000

Upon reorganization, the capital being increased to 26,000 shares, the respective shareholders, in order to receive the same proportionate number of shares in the new company that they had in the old (that is, 5% times the amount of stock held in the old company), would have received the

following number:

Shares

Mr. Noll (the plaintiff)_ 15,095%

Mrs. Noll_ 941%

Mr. Kornhauser_ 4, 981%

Mr. Boas_ 4, 981%.

26, 000

By agreement among the shareholders at or after the passing of the resolution of December 29, 1916, providing for the distribution of the stock in the new company to the stockholders of the old company in proportion to their holdings of stock therein, the stock of the new company was actually distributed as follows:

Shares

Mr. Noll (plaintiff) 14,107

Mrs. Noll-797

Mr. Kornhauser_ 5,547

Mr. Boas-5, 547

Mr. Marlatt_ 1

Mr. Bradley-1

Thus the plaintiff parted with or released 988% shares and Mrs. Noll 144% shares of their proportionate interest *192in the stock of the new company, these shares so parted with or released being distributed as follows: To Mr. Kornhause" 565% shares, to Mr. Boas 565% shares, and to Mr. Bradley and Mr. Marlatt, employees of the company, 1 share each. No consideration was received by either Mr. Noll (the plaintiff) or Mrs. Noll for parting with or releasing these shares, the primary object being that each of the stockholders in the old company, after the sale of 4,000 shares of the new stock to the bankers, should have exactly the same proportionate interest in the remaining stock to be distributed among them as each had in the stock of the old company.

In making the sale of 4,000 shares to the bankers Mr. Noll (the plaintiff) sold 1,334 shares of his stock and Mr. Korn-hauser and Mr. Boas each sold 1,333 shares of their new stock.

The court decided that plaintiff was not entitled to recover.

1

 Writ of certiorari denied.

Hay, Judge,

delivered the opinion of the court:

The court is of opinion that this case is governed by the case of *Marr*v. *United States,*58 C. Cls. 658, affirmed by the Supreme Court of the United States June 1, 1925, 268 U. S. 536. See also *United States*v. *Phellis,*257 U. S. 156; *Cullinan*v. *Walker,*262 U.S. 134.

Graham, Judge, and Booth, Judge, concur.

Downey, Judge, and Campbell, *Chief*Justice, dissent.