Case Name: Allyne-Zerk Company, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1934-02-23
Citations: 29 B.T.A. 1194
Docket Number: Docket No. 34826
Parties: Allyne-Zerk Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Murdock: dissents.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 29
Pages: 1194–1200

Head Matter:
Allyne-Zerk Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 34826.
Promulgated February 23, 1934.
John S. Watson, Jr., Esq., for the petitioner.
Arthur H. Fast, Esq., for the respondent.

Opinion:
OPINION.
Abundell :
This proceeding was brought to redetermine a deficiency in income tax of the petitioner for the year 1924 in the sum of $27,362.89.
A bad debt issue was settled by stipulation. The remaining issue is whether or not the sale by a corporation of its property and assets for cash, and the surrender for cancellation of a portion of its own outstanding shares of capital stock resulted in taxable income to petitioner.
The facts were stipulated and so far as material they are as follows:
The petitioner is a corporation, organized under the laws of the State of Ohio, with its principal office in the city of Cleveland, Ohio. The petitioner filed a certificate of dissolution with the Secretary of State of the State of Ohio on February 9, 1925, but under the laws of the State of Ohio it retains and has the right to institute and prosecute this proceeding in its corporate name.
On December 29, 1924, the petitioner and the Bassick Manufacturing Co., hereinafter called the Bassick Co., entered into a contract which provided for the sale to the Bassick Co. of all the property and assets of the petitioner. The Bassick Co. agreed to pay the sum of $410,066.67, to assume and pay all of the petitioner's liabilities (except taxes and assessments for 1928 and preceding years and claims against the petitioner not appearing on the petitioner's books and also income taxes due from the petitioner by reason of the said sale) and " to surrender or cause to be surrendered (to petitioner) for cancellation " 5,640 ¾3 shares of the petitioner's capital stock. The assets of the petitioner cost and were of the value of $597,044.65. Its liabilities were $130,047.41. Therefore, the net cost or value of the assets so sold was $466,997.24. The contract was duly and fully performed during the year 1924. The Bassick Co. paid $410,066.67 in cash and surrendered the 5,640 ⅛ shares of the petitioner's capital stock, which thereupon were canceled at the same time as the transfer of the property and assets of the petitioner and the delivery of the said shares of stock, as a part of the closing of the transaction.
On December 29, 1924, and up to the time of the closing of the transaction, shares of the capital stock of the petitioner were issued and outstanding to the number of 12,533, all of one class.
Apart from the profit or loss incident to the sale provided for in the contract of December 29, 1924, the petitioner's net income for the year 1924 was $248,003.99. In its income tax return for that year the petitioner deducted $61,214.83 as representing its loss in the above transaction.
In his deficiency notice dated December 12, 1927, the respondent computed the petitioner's profit from the sale of its assets by adding to the cash price of $410,066.67 the value of 5,640¾3 shares of its stock at $37.40 per share, or $210,961.89, making total receipts of $621,028.56, from which, he deducted a net cost of assets at $468,747.24 (instead of $466,997.24 as stipulated). There is no issue as to the value of the stock.
The first matter requiring consideration is whether the transaction was a unified whole and so to be considered, or whether the parts thereof Avere susceptible of separate and individual treatment. More concretely, did the surrender for cancellation of 5,640 ¾3 shares of petitioner's stock form part of the consideration for the sale ?
On study of the contract it is evident that all of the commitments of the Bassick Co. — to pay $410,066.67, to assume petitioner's liabilities, and to surrender the stock — were integral parts of the consideration moving to petitioner and inducing the sale. To hold otherwise would be to hold that the surrender of the stock was a gift, which is contrary both to fact and reason. Undoubtedly the surrender of the stock was a vital part of the consideration. It follows that the transaction was not divisible and was such as may give rise to gain or loss. It was an ordinary sale of property for cash and other considerations, among them, the surrender for cancellation of a block of petitioner's stock.
Various views have been expressed on the question here presented, but the latest pronouncements arc to the effect that the receipt by a corporation of its own stock as consideration upon the sale of property or in satisfaction of indebtedness may result in gain or loss. See Houghton & Dutton Co., 26 B.T.A. 52; Walville Lumber Co. v. Commissioner, 35 Fed. (2d) 445; Spear & Co. v. Heiner, 54 Fed. (2d) 134; affd., 61 Fed. (2d) 1030; Commissioner v. S. A. Wood Machine Co. 57 Fed. (2d) 635; certiorari denied, 287 U.S. 613; Commissioner v. Boca Ciega Development Co., 66 Fed. (2d) 1004. True, in the cases cited, the stock surrendered was the sole consideration, but the decisions do not rest on that fact. They treat the stock as but a medium of payment for the property sold or the debt satisfied. The fact that part of the consideration is cash does not change the character of the stock as consideration.
On authority of the above cases we hold that petitioner realized income to the extent of the difference between cost of the assets sold and the consideration received, consisting of cash plus stock at its then value.
Reviewed by the Board.
Decision will be entered wider Rule 50.
Murdock: dissents.