Case Name: SNEAD v. JACKSON SECURITIES & INVESTMENT CO.
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1935-04-12
Citations: 77 F.2d 19
Docket Number: No. 7358
Parties: SNEAD v. JACKSON SECURITIES & INVESTMENT CO.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 77
Pages: 19–22

Head Matter:
SNEAD v. JACKSON SECURITIES & INVESTMENT CO.
No. 7358.
Circuit Court of Appeals, Fifth Circuit.
April 12, 1935.
SIBLEY, Circuit Judge, dissenting.
Maurice J. Mahoney, Atty., Department of Justice, of Washington, D. C., and Jim C. Smith, U. S. Atty., of Birmingham, Ala., for appellant.
Lee C. Bradley, Jr., of Birmingham, Ala., for appellee.
Before BRYAN, FOSTER, and SIB-LEY, Circuit Judges.

Opinion:
FOSTER, Circuit Judge.
This is an appeal from a judgment against appellant, a collector of internal revenue, in the sum of $51,286.50, an amount alleged to have been illegally assessed against appellee as income taxes for the year 1928, with interest thereon, demanded and collected by appellant. The case was tried by the court, without the intervention of a jury, on stipulations as to the material facts. The assignments of error run to the conclusions of the District Court as to the ultimate facts and the provisions of law applicable thereto.
From the findings by the court, supported by the stipulations, the following material facts appear: Appellee, Jackson Securities & Investment Company (hereafter referred to as investment company) was organized under the laws of Delaware with its entire authorized capital stock fixed at 5,000 shares, of nominal or no par value. On January 22, 1925, pursuant to a resolution adopted by its board of directors the same day, the investment company exchanged 4,095 shares of its stock, all that was then or thereafter issued, for various shares of stock, owned by five individuals, as follows : F. M. Jackson received 2,705 shares, for which he transferred 750 shares of capital stock of the National Cast Iron Pipe Company (hereafter referred to as pipe company), 500 shares of the capital stock of the Jefferson County Building & Loan Association, 700 shares of the capital stock of the Perfection Mattress & Springs Company, and 64 shares of the capital stock of the Jackson Securities Company; Mrs. Miriam M. Jackson received 1,175 shares, for which she transferred 250 shares of pipe company stock, 500 shares of Jefferson County Building & Loan Association stock, and 500 shares of the Perfection Mattress & Springs Company stock; Ervin Jackson received 125 shares, for which he transferred 50 shares of Pipe Co. stock; Chappell Cory received 85 shares, for which he transferred 34 shares of Jackson Securities Company stock; Gladys Buffington received 5 shares for which she transferred 2 shares of Jack son Securities Company stock. The fair market value per share of the stock exchanged on the date of transfer, was as follows : Investment company, $200; pipe company, $500; Jefferson County Building & Loan Association, $100; Perfection Mattress & Springs Company, $120; and Jackson Securities Company, $500, (A simple calculation demonstrates that each of the individual transferors received stock of the investment company exactly equal in value to his interest in thq other stock transferred.) None of the transferors had any interest, legal or equitable, in any of the stock transferred by the others. All the stock transferred to the investment company had been acquired by the transferors after February 28, 1913. The investment company was not at any time a dealer or trader in corporate stocks or securities. In 1928 the investment company sold the identical 1050 shares of pipe company stock acquired by it on January 22, 1925, at $350 per share, a total of $367,500, a loss of $157,500 measured by the fair market value of $525,000, which it had on January 22, 1925, when acquired. The investment company returned no income for taxation for 1928, claiming a net loss. The Commissioner held that the basis for determining loss or gain on the pipe company stock was what it had cost the transferors, $39.51 per share, a total of $41,-485.50, and determined a deficiency of taxes of $52,806.34, with interest amounting to $4,-723.89, a total of $57,530.23. This was paid on demand to appellant. The investment company filed claim for a refund of the entire amount paid, which was allowed to the extent of $5,731.05 principal and $512.68 interest, a total of $6,243.73, reducing the assessment to the amount for which judgment was rendered.
The case is governed by the Revenue Act of 1928, the pertinent provisions of which are as follows:
"Sec. 112 (a) Üpon the sale or exchange of property the entire amount of the gain or loss, determined under section 111 [section 2111], shall be recognized, except as hereinafter provided in this section.
"(b) (5) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange."
"Sec. 113(a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that —
"(8) If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) [section 2112 (b) (5)] (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;" 26 USCA § 2112 (a), (b) (5), 2113 (a) (8).
To restate the transaction briefly, the salient facts are these: By one transaction a corporation exchanged all its outstanding capital stock for property of equal value, consisting of various shares of stock of four other corporations, separately owned by five individuals, who separately received the number of shares of the corporation exactly equal in value to the value of the property they transferred. Immediately thereafter the transferors were in control of the corporation, owning over 80 per cent, of both the authorized and outstanding capital stock.
It is not disputed that the tax was properly assessed if the transaction falls within the provisions of section 112. However, it is contended by appellee that section 112 does not apply if property transferred by two or more individuals is separately and not jointly owned. We gather from the argument of appellee that the contention is based on the assumption that the part of the section coming after the semicolon is to be considered as a proviso qualifying and controlling what goes before; that within the meaning of the statute interest is not equivalent to ownership or value and connotes control; that, unless the transferors had joint, control of the property exchanged, substantially equal to the joint control of the corporation immediately acquired, the transfer does not fall within the terms of the section. No authorities in point are cited in support of the contention, and we know of none.
The statute must be given a practical construction. It is evident that it was the intent of Congress to permit persons to transfer their property to a corporation for convenience in accomplishing some lawful, practical purpose, provided no immediate gain accrues to the transferors and no substantial change occurs in the beneficial ownership and control of the property.
It is immaterial to the transferee whether the property transferred was owned jointly or separately. In either event the corporation receives the whole in full legal ownership and it becomes merged with its other assets. In no event could the transferor retain any distributable interest in the specific property transferred. His equitable ownership is in all the assets of the corporation, in common with other stockholders and in proportion to the number of shares he holds. If he receives stock of the corporation giving him an equitable interest in all its assets, substantially of the same value as his interest in the property transferred, he has neither lost nor gained by the transaction, and the provisions of the statute apply, if its other requirements are complied with. On the other hand, if he receives stock of more value, the exchange is equivalent to a sale from which profit is derived. Clearly, it was to prevent a transferor thereby escaping taxation that the provision was inserted in the section. If Congress had intended to make a distinction between property separately owned and jointly owned, it would have been very easy to say so. The contention of appellee is without merit.
The stock received by the «investment company must be considered as a whole. It is immaterial that it was not all sold at one time. The corporation could not evade the provisions of section 113 by selling the property piecemeal.
All the elements necessary to bring the transaction within the letter and intent of sections 112 and 113 are present. The profit on the subsequent sale of the pipe company stock was correctly determined by the Commissioner under the provisions of section 113. The following authorities support this conclusion: Newman, Saunders & Co. v. United States (Ct. Cl.) 36 F.(2d) 1009; Osburn California Corporation v. Welch (C. C. A.) 39 F.(2d) 41; T. W. Phillips, Jr., Inc., v. Commissioner (C. C. A.) 63 F.(2d) 101; American Compress & Warehouse Co. v. Bender (C. C. A.) 70 F.(2d) 655.
Reversed and remanded.