Case Name: Morgan Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1941-06-10
Citations: 44 B.T.A. 691
Docket Number: Docket No. 101444
Parties: Morgan Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Leech dissents on the second point.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 44
Pages: 691–700

Head Matter:
Morgan Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 101444.
Promulgated June 10, 1941.
Junius G. Adams, Esq., for petitioner.
Lloyd W. Oreason, Esq., for the respondent.

Opinion:
OPINION.
Black :
The first issue relates to the correct amount of depreciation which should be allowed petitioner as a deduction from 1936 income. There is no dispute as to the life of the property or the rate of depreciation which is to be used. The question at issue is the cost basis of the assets upon which depreciation is to be computed.
Petitioner contends that it is entitled to use the cost basis of the Dimension Co., adjusted by the amount of depreciation which had accrued to it at the time the property was transferred to petitioner. Respondent contends that the basis which should be used is $62,500, which represents the cost of the assets to petitioner. The statutes upon which petitioner relies are printed in the margin.
Petitioner's contention is that there was a merger of the Dimension Co. with the old Morgan Co. and that immediately upon the com pletion of the merger the new Morgan Co. owned all the assets of the Dimension Co. and the Morgan Co. and had assumed all of their liabilities and the stockholders of the two old companies had become stockholders in the new Morgan Co. In support of this contention, petitioner says in its brief:
So therefore on the effective date of the merger, namely, June 16, 1936, and immediately thereafter, that is to say until July 7, 1936, the former stockholders of the constituent Dimension Manufacturing Company were the owners of 829⅛ shares (or 82.9%) and the former stockholders of the constituent original Morgan Manufacturing Company were the owners'of 171 (or 17.1%) of the outstanding capital stock of the consolidated corporation.
The difficulty with petitioner's contention in this respect, it seems to us, is that petitioner would treat as entirely separate transactions the formal merger agreement which is in evidence and an oral agreement between the stockholders of both corporations entered into prior to June 15, 1986, and within the year 1936, by which it was agreed that:
if tiie Morgan Co. as it was to be constituted subsequent to June 16, 1936, should pay off the then existing notes payable of the Dimension Co. in the amount of $62,500, the stockholders of the Dimension Co. would release their rights if any in the Morgan Co. as constituted subsequent to June 16,1936.
We do not think it is permissible to treat these two steps as separate transactions but that the transaction as a whole determines its legal consequences. See Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309.
When the whole transaction as disclosed by the stipulated facts is viewed, we think it shows an acquisition by the Morgan Co. of all the properties of the Dimension Co. in consideration of the payment in cash by the Morgan Co. of $62,500 indebtedness which Dimension Co. owed to its stockholders. This was a sale by one corporation of its assets to another corporation for a consideration of $62,500 in cash. Neither the Dimension Co. .nor any of its stockholders ever received any stock of the Morgan Co. in consideration of the sale of the Dimension Co.'s assets. . There was, therefore, not that continuing interest remaining in the old corporation or its stockholders which is required before there is a statutory reorganization. Cf. Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937.
We, therefore, hold that petitioner did not acquire the assets in question in a statutory reorganization in which no gain or loss was recognized, but acquired them in a purchase for $62,500, and this latter amount represents the cost of such assets to petitioner and is the correct basis for depreciation. On this issue we sustain the Commissioner.
The second issue relates to petitioner's claim for a credit under section 26 (c) (1) of the Bevenue Act of 1936, printed in the margin. The respondent has determined that the petitioner was not under any written contract restricting the payment of dividends prior to May 1, 1936; that petitioner's contract with the Keconstruction Finance Corporation by its expressed terms did not become effective and binding upon the parties until the funds had been paid to or made available to the petitioner, which did not occur until on or about July 6, 1936.
On the facts of record the respondent's determination in this respect must be sustained. See Florence Cotton Mills, 44 B. T. A. 436; Bethlehem Silk Co., 43 B. T. A. 515.
Reviewed by the Board.
Decision will l>e entered for respondent.
Leech dissents on the second point.
Revenue Act of 1936—
SEC. 112. RECOGNITION OE GAIN OR LOSS.
*
(g) Definition of Reoroanization.—As used In this section and section 113—
(1) The term "reorganization" means (A) a statutory merger or consolidation .
*
SEC. 113. ADJUSTED BASIS EOR DETERMINING GAIN OR LOSS.
(a) Basis (unadjusted) of Property.—The basis of property shall be the cost of such property; except that—
*
(7) Transfers to corporation.—If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, 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. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
# * #
(b) Adjusted Basis.—The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a) .
⅜ *,-
SBC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(a) Basis foe Depreciation.—The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.
*
North Carolina statutes—
Sec. 1224 (a). Merger, proceedings for.—Any two or more corporations organized under the provisions of this chapter, or existing under the laws of this State, for the purpose of carrying on any kind of business, may consolidate into a single corporation which may be either one of said consolidated corporations or a new corporation to be formed by means of such consolidation; the directors, or a majority of them, of such corporations as desire to consolidate, may enter into an agreement signed by them and under the corporate seals of the respective corporations, prescribing the terms and conditions of consolidation, the mode of carrying the same into effect, and stating such other facts as are necessary to be set out in the certificate of incorporation, as provided in this chapter, as well as the manner and basis of converting the shares of each of the old corporations into stock of the new corporation, with such other details and provisions as are deemed necessary or desirable. and the agreement so certified and acknowledged shall be filed in the office of the Secretary of State, and shall thence be taken and deemed to be the agreement and act of consolidation of the said corporation ;
Sec. 1224 (b). Merger, status of old and new corporations.—When the agreement is signed, acknowledged, filed and recorded, as in the preceding section is required, the separate existence of the constituent corporations shall cease, and the consolidating corporations shall become a single corporation in accordance with the said agreement, possessing all the rights, privileges, powers and franchises, as well of a public as of a private nature and all and singular the rights, privileges, powers and franchises of each of said corporations, and all property, real, personal and mixed and all debts due on whatever account, and all other things in action or belonging to each of such corporations, shall be vested in the consolidated corporation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the consolidated corporation as they were of the several and respective former corporations, and the title to any real estate, whether by deed or otherwise, under the laws of this State, vested in either of such corporations, shall not revert or be in any way impaired by reason of this article;
SEC. 26. CREDITS OF CORPORATIONS.
In the case of a corporation the following credits shall be allowed to the exte.Tt provided In the various sections imposing tax—
* ⅜ ⅜
(e) Contracts Restricting Payment of Dividends.—
(1) Prohibition on payment of dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends.