Court Opinion

ID: 4630563
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:07:44.926+00
Date Added: 2024-06-11T07:57:34.082906
License: Public Domain

ABBOTT LIGHT & POWER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Abbott Light & Power Co. v. CommissionerDocket No. 14572.United States Board of Tax Appeals14 B.T.A. 656; 1928 BTA LEXIS 2942; December 10, 1928, Promulgated *2942  The petitioner disposed of substantially all of its physical properties to the Central Illinois Public Service Co. and received from the latter in exchange therefor stock and securities, which stock and securities were subsequently distributed by the petitioner to its stockholders.  Held, that the transaction constituted an exchange of property for other property having a readily realizable market value and resulted in a gain to the petitioner.  William L. Latimer, Esq., for the petitioner.  W. F. Wattles, Esq., for the respondent.  SMITH *656  This proceeding is for the redetermination of income tax for the year 1923.  The respondent asserts that for that year there is a deficiency of $13,646.57.  The petitioner alleges that the respondent erred in including in gross income the sum of $103,372.32 as taxable gain realized from the sale of capital assets.  It was stipulated at the hearing that the basis employed by the respondent in computing such taxable gain was in error and that the figure of $103,372.32 should be reduced by $7,000.  FINDINGS OF FACT.  The petitioner was incorporated under the laws of the State of Illinois in 1913 and*2943  has been continuously in existence since that time.  In 1922 and for a number of years prior thereto it was engaged in the business of generating and distributing electrical energy in various municipalities and communities within the State of Illinois.  Its principal office was located in Petersburg, Ill.  It has never engaged in any business other than the production and distribution of electrical energy.  It had an authorized capital stock of $300,000, of which 2,453 shares, aggregating $245,300 in par value, were outstanding during the year 1922.  All of this stock was owned or controlled by three members of the Abbott family, namely, Ira Reid Abbott, Mabel W. Abbott, and Ira Richmond Abbott, Jr.  In 1922 Ira Reid Abbott, Mabel W. Abbott, and Ira Richmond Abbott, Jr., hereafter referred to collectively as the Abbotts, were unable to borrow for the petitioner or to supply from their own resources the additional capital required by the growth of its business.  They desired to be relieved, and to have Ira Reid Abbott, president of the petitioner, relieved, of the responsibility of managing and financing petitioner's operations.  They also desired to remove their investments in the*2944  petitioner from the uncertainties and risks to which *657  these investments were subject.  For these reasons they decided to sell the properties of the petitioner.  On October 28, 1922, the Abbotts entered into a contract with the Central Illinois Public Service Co., an Illinois corporation, by the terms of which they agreed, subject to the approval of the Illinois Commerce Commission, to cause the petitioner to sell and convey to the Central Illinois Public Service Co. all the property of every kind, franchises and business of the petitioner as a going concern, excepting only (a) a certain gasoline storage tank; (b) cash on hand at date of transfer; and (c) accounts receivable due the petitioner on date of transfer for services rendered by it prior thereto.  By a separate agreement in writing dated October 28, 1922, the Abbotts agreed to sell and deliver or cause to be sold and delivered to the Central Illinois Public Service Co. $60,000 in principal amount of "First and Refunding Mortgage Gold Bonds" of the Central Illinois Public Service Co. for the sum of $51,000, plus accrued interest, and 528 shares of preferred stock of the Central Illinois Public Service Co. for*2945  the sum of $47,520, plus pro rata accrued dividends thereon.  The $60,000 of bonds and 528 shares of preferred stock covered by the agreement were part of the bonds and stock which the Central Illinois Public Service Co. were to deliver in payment for the public utility properties of the petitioner.  The Central Illinois Public Service Co. agreed with the Abbotts to pay for such bonds and shares of stock by assuming outstanding indebtedness of the petitioner, evidenced by notes, in the amount of $83,578.72 and by paying to the petitioner or its assigns in cash the balance of the agreed purchase price.  At a special meeting of the board of directors of the petitioner held in October, 1922, the following resolution was unanimously adopted: Whereas, the Central Illinois Public Service Company, an Illinois corporation, has proposed and offered, subject to the approval of the Illinois Commerce Commission, to purchase all the property of every kind, including franchises and business, of the Abbott Light and Power Company, excepting only the gasoline storage tank located in the sidewalk adjoining the real estate owned by said company in Petersburg, Illinois, on which the power plant of*2946  the company is situated, and the cash on hand at date of transfer, and the accounts receivable due to the Abbott Light and Power Company on date of transfer of the property for service rendered by it prior to such date, and said Central Illinois Public Service Company has agreed to pay for said property Two Hundred Thousand Dollars in principal amount of the first and refunding mortgage gold bonds of said Central Illinois Public Service Company, dated August 1, 1912, and Two Hundred Thousand Dollars in par amount of the preferred stock of said Central Illinois Public Service Company, and said Central Illinois Public Service Company has further offered, in consideration for said property, to pay the taxes levied on said property for the year 1922 and to pay any federal income tax incurred by the Abbott Light and Power Company by *658  reason of the sale and conveyance of said property; and whereas, it is the opinion of this Board of Directors that it will be for the best interest of the Abbott Light and Power Company and its stockholders to convey the said property for the consideration above mentioned and merge and consolidate the property and business of said Abbott Light and*2947  Power Company with said Central Illinois Public Service Company in exchange for said stock and bonds of said Central Illinois Public Service Company and that said offer should be accepted, therefore BE IT RESOLVED that subject to the approval of the stockholders of said Abbott Light and Power Company said offer of the Central Illinois Public Service Company be accepted and that unless notice thereof is duly served a meeting of the stockholders of said Abbott Light and Power Company he called by the president of said company at the earliest practicable date by giving to each and all of said stockholders notice in writing of the time and place and object of said meeting at least ten days prior to the time fixed therefor.  BE IT FURTHER RESOLVED that upon approval of the acceptance of said offer of the Central Illinois Public Service Company by the stockholders of the Abbott Light and Power Company the President and Secretary of this company be and they are hereby authorized and directed to make, execute, acknowledge and deliver such agreements, conveyances, assignments, releases and other instruments as may be necessary for the purpose of effecting the sale of said property and the*2948  conveyance and delivery thereof to the said purchaser.  At a special meeting of the stockholders of the petitioner, held subsequent to the foregoing special meeting of its directors, the owners of all of the outstanding capital stock of the corporation being present in person, the following resolution was adopted: Whereas, the Board of Directors of the Abbott Light and Power Company has determined and reported that it will be for the best interest of the stockholders of said company to accept the offer of the Central Illinois Public Service Company to purchase all of the property of said Abbott Light and Power Company of every kind and character, including franchises and business, of said company as a going concern, excepting only the gasoline storage tank located in the sidewalk adjoining the real estate owned by said company in Petersburg, Illinois, on which the power plant of said company is situated and the cash in hand at date of transfer of the property and the accounts receivable due said company on said date of transfer for services rendered by it prior to such date in exchange for Two Hundred Thousand Dollars in principal amount of the first and refunding mortgage gold*2949  bonds of said Central Illinois Public Service Company dated August 1, 1912, and Two Hundred Thousand Dollars in par amount of the preferred stock of said Central Illinois Public Service Company and the payment by said Central Illinois Public Service Company of the taxes levied on said property for the year 1922 and any federal income taxes payable on account of the sale and transfer of the said property to said Central Illinois Public Service Company, and it appears that it will be for the best interest of the stockholders of this company to approve the said action of the board of directors; therefore the said offer of said Central Illinois Public Service Company is accepted and the sale and conveyance of said property and a consolidation and merger of the business of this company with the said Central Illinois Public Service Company is approved and the officials of this company are hereby authorized and directed to execute, acknowledge and deliver such agreements, conveyances, assignments, releases and other instruments as may be necessary or proper for effecting the sale, conveyance *659  and transfer of said property to said Central Illinois Public Service Company and said*2950  officials are authorized and directed to make application and take such steps as shall be necessary and proper for the purpose of obtaining the consent and permission of the Illinois Commerce Commission to such sale, transfer and consolidation.  By an order entered under date of January 23, 1923, in case No. 12809, the Illinois Commerce Commission authorized the Central Illinois Public Service Co. to purchase, free of all liens, as of January 1, 1923, the entire electric utility properties of the petitioner, constituting all of the fixed assets of the petitioner excepting a certain gasoline tank, and in payment therefor to issue and deliver $200,000 in par value of preferred stock of the Central Illinois Public Service Co. at par and $200,000 in principal amount of First and Refunding Mortgage Gold Bonds of the Central Illinois Public Service Co. at 85 per centum of their face value.  This order of the Illinois Commerce Commission also required that upon completion of the transfer of its utility properties the petitioner should cease operation as a public utility.  Also, under date of January 23, 1923, the Illinois Commerce Commission issued to the Central Illinois Public Service*2951  Co. a certificate of convenience and necessity authorizing it to conduct a public utility and electric utility business in the territory theretofore served by the petitioner.  Under date of February 26, 1923, the petitioner executed an instrument of conveyance reading as follows: KNOW ALL MEN BY THESE PRESENTS: That ABBOTT LIGHT AND POWER COMPANY, a corporation organized and existing under and by virtue of the laws of the State of Illinois, grantor herein, for and in consideration of the sum of One Dollar ($1.00) and other good and valuable considerations, the receipt whereof by said grantor is hereby acknowledged, does hereby grant, bargain, sell, convey and warrant, transfer, assign and set over unto CENTRAL ILLINOIS PUBLIC SERVICE COMPANY, also a corporation organized and existing under and by virtue of the laws of the State of Illinois, its successors and assigns forever, the following described property and rights: FIRST.  All contracts, accounts receivable, bills receivable, credits, choses in action of every kind whatsoever, now belonging to or owing to, or hereafter accruing to the said grantor (except accounts receivable standing upon the books of grantor for services*2952  rendered by grantor prior to January 1, 1923), hereby authorizing said Central Illinois Public Service Company, in the name of Abbott Light and Power Company, or otherwise, to collect, receive, sue for and receipt for any and all moneys which may be due or may hereafter become due to said grantor on said accounts receivable, bills receivable, credits, contracts, choses in action or any of them.  SECOND.  All and singular the electrical plants and distribution systems of the grantor situated in and near the City of Petersburg in Menard County, in and near the City of Mason City in Mason County, in and near the Village of Tallula in Menard County, in and near the Village of Ashland in Cass County, and in and near the Village of Pleasant Plains in Sangamon County, all in the State of Illinois; and all electrical transmission lines of the grantor connecting *660  said cities and municipalities, together with all leases, rights of way, licenses, permits, structures, buildings, engines, boilers, condensers, pumps, generators, meters, transformers, machinery, appliances, tools, mains, pipes, conduits, insulators, dynamos, poles, wires, lamps, equipment, supplies, property, contracts, *2953  ordinances, franchises, rights, privileges and easements in any wise appertaining to said plants, systems and transmission lines, or any of them, and the operation thereof.  THIRD.  The following described real estate, together with all tenements, hereditaments and appurtenances thereunto belonging or appertaining: Lots Three (3), Four (4), Five (5) and Six (6), in Block Sixty Six (66) in John Taylor's Addition to the Town (now City) of Petersburg, in the County of Menard and State of Illinois.  Lot Seventeen (17) in Block One (1) in Thomas L. Harris' Addition to the Town (now City) of Petersburg, in the County of Menard and State of Illinois.  All that part of Lot Twenty Nine (29) of County Clerk's Plat of Petersburg No. 2 lying west of the west line of Douglas Street produced north through said Lot Twenty Nine (29), said plat being recorded in the office of the Recorder of Deeds of Menard County, Illinois, in Book 52, page 266; said Lot Twenty Nine (29) being part of the East Half of the Northwest Quarter of Section Fourteen (14) in Township Eighteen (18) North, Range Seven (7) West of the Third Principal Meridian in the County of Menard and State of Illinois.  FOURTH. *2954  All and singular the property, real, personal and mixed, wherever situated, patents, franchises, rights, licenses, privileges and easements now owned by or belonging to or hereafter accruing to the said grantor and not hereinabove mentioned (except accounts receivable standing upon the books of grantor for services rendered by grantor prior to January 1, 1923), it being the intention of the grantor to convey, transfer and assign by this deed all the property and rights of the grantor of every description, wheresoever situated, except amounts receivable standing upon the books of grantor for services rendered by grantor prior to January 1, 1923.  This deed is made by Abbott Light and Power Company pursuant to the authority of a resolution duly passed by its Board of Directors and pursuant to the authority of a resolution passed at the stockholders' meeting by the affirmative vote of every share of its capital stock, and also pursuant to the consent and authority of the Illinois Commerce Commission of the State of Illinois, as evidenced by an order entered under date of January 23, 1923, in case No. 12809.  IN WITNESS WHEREOF said Abbott Light and Power Company has caused this instrument*2955  to be signed in its corporate name by its President and to be sealed with its corporate seal, attested by its Secretary.  Dated this 26th day of February, 1923.  ABBOTT LIGHT AND POWER COMPANY, By I. R. ABBOTT, President.Attest: M. M. RUFUS, Secretary. (Corporate seal.) The Central Illinois Public Service Co. took over, early in 1923 as of January 1, 1923, the operation of and the income from all the public utility properties of the petitioner.  Thereupon the petitioner ceased to operate as a public utility.  In execution of the provisions *661  of the separate agreement dated October 28, 1922, the Central Illinois Public Service Co., in February and March, 1923, assumed the payment of $83,578.72 in principal amount of outstanding notes of the petitioner and paid to the petitioner $15,712.28 in cash, of which $14,941.28 represented the net cash payment on the purchase price of the $60,000 of bonds and the 528 shares of preferred stock and $771 represented accrued interest and dividends on the bonds and stock.  Stock certificates representing the 528 shares of preferred stock covered by the separate agreement were issued by Central Illinois Public Service*2956  Co. in the name of petitioner and on or about March 17, 1923, were delivered to Ira Reid Abbott, president of the petitioner, who, immediately upon receipt thereof, endorsed the certificates in blank and redelivered them to the Central Illinois Public Service Co.  The $60,000 in bonds covered by the separate agreement, without actual delivery or redelivery thereof, were treated by all the parties as having been issued and reacquired by the Central Illinois Public Service Co. in the month of March, 1923, in execution of the provisions of the separate agreement relative thereto.  On January 1, 1923, the value on the books of the petitioner of the public utility properties of the petitioner, including the excepted gasoline storage tank which cost, originally, about $135, and unexpired insurance in the amount of $318.18, was $357,342.50.  The balance sheet taken from petitioner's books as at December 31, 1922, showed the following items: AssetsCash$28,997.37Accounts receivable22,317.96Bills receivable18,300.53Supplies916.11Plant and equipment356,108.21Unexpired insurance318.18426,958.26LiabilitiesCustomers' advances$500.34Accounts payable2,644.17Bills payable83,578.72Accrued expenses2,014.94Federal taxes 1919144.31Federal taxes 1920917.03Federal tax delinquency for 1921157.49Bad debts reserve2,108.34Depreciation reserve109,480.53Capital stock245,300.00Surplus or (deficit)(19,887.61)426,958.26*2957  The current assets of the petitioner, which, on January 1, 1923, consisted of cash $28,997.37, accounts receivable $22,317.96, and bills receivable $18,300.53, were not acquired by the Central Illinois Public Service Co.  The deed executed by petitioner on February 26, 1923, was delivered to the Central Illinois Public Service Co. on June 1, 1923.  Also, on June 1, 1923, the Central Illinois Public Service Co. delivered to Ira Reid Abbott $140,000 in principal amount of "First and Refunding Mortgage Gold Bonds," payable to bearer, of the Central Illinois Public Service Co. and certificates for a total of *662  1,472 shares of preferred stock of the Central Illinois Public Service Co., all of these certificates having been issued in the name of the Abbott Light & Power Co.  Under a prior direction, which was superseded, the individual Abbotts had authorized the $140,000 of the bonds and the 1,472 shares of preferred stock to be delivered to them as individuals, a specified amount of the bonds and a number of shares of stock to be delivered to each.  The $140,000 of bonds and the 1,472 shares of stock were not divided among the Abbotts during the year 1923.  A special meeting*2958  of the stockholders and the petitioner was held on May 3, 1924, the minutes of which meeting read as follows: A special meeting of the stockholders of the Abbott Light and Power Company was held at the office of the company in Petersburg, Illinois, at 10 o'clock A.M. on the 3rd day of May, 1924, pursuant to written waiver of notice of the time, place and object of said meeting, signed by each and all of the stockholders of said company and filed with the secretary thereof.  The President and Secretary of the company acted as chairman and secretary, respectively, of said meeting.  The following, being all of the stockholders of the company, were present in person: NameShares ownedIra R. Abbott, Sr817Ira R. Abbott, Jr817Mabel W. AbbottRichard H. Abbott, Jr817M. M. Rufus2Upon motion duly made and seconded, the following resolution was unanimously adopted: RESOLUTION.  Be it resolved by the stockholders of the Abbott Light and Power Company that the capital stock of said company be reduced from Three Hundred Thousand Dollars, consisting of three thousand shares of the par value of One Hundred Dollars each, to Three Thousand Dollars, consisting*2959  of thirty shares of the par value of One Hundred Dollars each.  Upon motion duly made, seconded, and carried, the following resolution was adopted: RESOLUTION.  Be it resolved by the stockholders of the Abbott Light and Power Company that the President and Secretary of the company be and they are hereby authorized and directed to make and execute, file and record such certificates or other instruments as shall be necessary or proper for the purpose of reducing the capital stock of the company from Three Hundred Thousand Dollars to Three Thousand Dollars and that upon completion of such reduction the outstanding stock certificates of the company be cancelled and new certificates issued for the proportionate shares of the reduced capital stock to which the respective stockholders are entitled.  *663  Pursuant to such resolution a certificate was filed with the office of the Secretary of State for the State of Illinois reading as follows: STATE OF ILLINOIS, County of Menard ss.I hereby certify that at a special meeting of the stockholders of The Abbott Light and Power Company held at its office in Petersburg, Illinois on the 3rd day of May, A.D. 1924, at 10 o'clock*2960  A.M., pursuant to waiver of notice required by law, a copy of which waiver of notice is as follows, to-wit: We, the undersigned, being all the stockholders of Abbott Light and Power Company do hereby waive all notice required by statute for the purpose of convening a meeting of the stockholders to vote on the proposition of reducing the capital stock and do hereby consent that said meeting shall be held at Petersburg, Ill. on the 3rd day of May, A.D. 1924.  (Signed) IRA R. ABBOTT, Sr.  IRA R. ABBOTT, Jr.  MABLE W. ABBOTT.  RICHARD H. ABBOTT, Jr.  M. M. RUFUS.  Dated this 3rd day of May, A.D. 1924.  The following resolution was adopted, at least two-thirds of all the votes represented by the whole stock of said Corporation issued and outstanding voting therefor: RESOLVED, That the capital stock is hereby decreased from $300,000 consisting of 3,000 shares of the par value of $100 and no shares of stock of no par value to $3,000 consisting of 30 shares of the par value of $100 and no shares of no par value.  The total amount of capital stock at present authorized, issued and outstanding is $245,300.00, all of which was issued prior to July 1, 1919, and the reduction*2961  will be made by voluntary surrender of all outstanding stock and issuance of new certificates in lieu thereof.  The total amount of capital stock already authorized is $ .The amount of the increased capital stock which is proposed to issue at once and which will be paid in cash is as follows:  shares having a par value of $ per share is common $ preferred $  shares having no par value is common $ preferred $ The amount of the increased capital stock which is proposed to issue at once for property, and appraised value thereof are as follows:  shares having a par value of $ per share is common $ preferred $  shares having no par value is common $ preferred $ The location and a general description of such property are as follows: The certificate of decrease of capital stock of the petitioner was approved by the Secretary of State on May 6, 1924.  During the years 1924 and 1925 the petitioner was in the process of liquidation and distributions of securities and cash were made to its stockholders on various dates during these years.  Prior to the time that the petitioner made the first of its distributions of cash *664  and securities to the individual Abbotts*2962  it had exchanged 300 shares of Central Illinois Public Service Co. preferred stock for "First Mortgage Seven Per cent Bonds" of the L. H. Gilmer Co.; exchanged 600 shares of Central Illinois Public Service Co. preferred stock for preferred stock of the Illinois Power & Light Corporation; and purchased for cash 5 1/2 per cent bonds of the Illinois Central Railroad Co. in the principal amount of $5,000.  These securities received in exchange and purchased for cash were included in the distributions made to the individual Abbotts.  OPINION.  SMITH: The petitioner contends that the transaction under consideration constituted a reorganization which, in accordance with the provisions of section 202(c) of the Revenue Act of 1921, resulted in no gain or loss and in which the individual Abbotts received in place of the stock of the petitioner stock and securities in a corporation which was a party to such reorganization.  With the contention of the petitioner that the transaction resulted in no gain or loss we can not agree.  We are convinced that this proceeding presents a clear-cut case of the exchange by the petitioner of substantially all of its properties for other property having*2963  a readily realizable market value, which other property was received by it and subsequently distributed to its stockholders.  In accordance with the foregoing, we find that the transaction resulted in a gain to the petitioner amounting to $96,372.32.  Judgment will be entered under Rule 50.