Court Opinion

ID: 4595134
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:14:24.403032+00
Date Added: 2024-06-11T07:59:22.204812
License: Public Domain

BENJAMIN R. BRITT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Britt v. CommissionerDocket No. 91568.United States Board of Tax Appeals40 B.T.A. 790; 1939 BTA LEXIS 800; October 24, 1939, Promulgated *800  1.  In order to be availed of, res judicata must be pleaded.  2.  Where res judicata has not been pleaded in respect of a prior judgment holding that a series of transactions did not constitute a reorganization within a certain section of the Revenue Act of 1926, the Board may determine anew whether there may not have been a reorganization under some other section of the statute.  3.  A reorganization results under sections 203(b)(3) and 203(h)(1)(A) of the Revenue Act of 1926 when, pursuant to a plan of reorganization, corporation A transfers over 90 percent of its assets to corporation B in exchange for stock and cash, since the stock received represents a material percentage of the value of the assets transferred.  4.  The basis of petitioner's stock in corporation B is the allocated cost of the stock formerly held by him in corporation A and exchanged for the stock in corporation B pursuant to a statutory reorganization.  Revenue Act of 1926, section 204(a)(6).  5.  Petitioner's gain from the redemption of preferred stock by corporation B, in 1934, is taxable in the full amount, under section 115(c) of the Revenue Act of 1934, because it resulted from a distribution*801  in partial liquidation within section 115 of that act.  Robert A. Littleton, Esq., for the petitioner.  D. D. Smith, Esq., for the respondent.  LEECH*791  Petitioner in this proceeding seeks redetermination of a deficiency in income tax in the amount of $933.12, for the calendar year 1934.  The first issue is the proper basis for computing gain on a sale of stock in the taxable year.  The second is whether the gain, realized by petitioner upon the redemption of 72 shares of United Carbon Co. preferred stock, is taxable in full as a distribution in partial liquidation under section 115(c) of the Revenue Act of 1934, or only to the extent of 40 percent under section 117(a) of the same act.  There is a third issue raised by the affirmative plea of estoppel by respondent in his answer.  From the pleadings and documentary evidence, we make the following findings of fact.  FINDINGS OF FACT.  Petitioner is a resident of Clarksburg, West Virginia.  During the year 1925, he owned stock in the Liberty Carbon Co.  In that year, the Liberty Carbon Co., along with 11 other corporations and a partnership, transferred specific properties and inventories*802  to United Carbon Co. in exchange for preferred and common stock, and cash.  At the time of that exchange, the transferred assets of Liberty Carbon Co. had a total original cost of $318,873.40.  The cost of such of these assets as were transferred in exchange for United Carbon Co.'s stock was $213,856.02, but, at the time of the exchange, these assets had a fair market value of $256,293.92.  Such cost of assets not transferred for stock was $105,017.38, of which $79,539.43 covered inventory.  For the purposes of the transaction, this inventory was taken at cost and United Carbon Co. paid Liberty Carbon Co. $79,539.43, in cash, for it.  The stock received by Liberty Carbon Co. in exchange for that part of its assets which aggregated $256,293.92 in market value on the day of the transfer, as above set forth, consisted of 1,506 shares of $100 par value preferred and 6,024 shares of no par common stock of United Carbon Co.  All these transfers were effectuated as a part of a plan of reorganization, to bring together, in one organization, the assets of various corporations engaged in the manufacture of *792  carbon black, United Carbon Co. having been organized under the laws of*803 Delaware to axquire the assets of the various concerns in pursuance of the plan.  Thereafter, the Liberty Carbon Co. was dissolved, and petitioner, being a stockholder, received a liquidating distribution consisting of 72 shares of the preferred stock of United Carbon Co. and 288 shares of its common stock.  At the time of the exchange between Liberty Carbon Co. and United Carbon Co., the preferred stock received by petitioner had a fair market value of $7,200 and, based upon the Liberty Carbon Co. stock exchanged therefor, an allocated value of $3,485.67.  Petitioner reported no taxable profit in his income tax return for 1925 as a result of the exchange of stock of the Liberty Carbon Co. for stock of the United Carbon Co., nor was any information relative to the transaction set forth in the return.  The return, which was filed March 25, 1926, gives no indication that petitioner owned the stock of either company.  On February 8, 1927, petitioner's books and records were investigated by a revenue agent and at that time petitioner failed to inform the agent or respondent of the exchange of stock.  A subsequent audit of petitioner's 1925 income disclosed a tax deficiency for that*804  year of $20.01.  This additional tax was not computed upon nor did it arise by virtue of the exchange of stock.  Petitioner consented to the assessment and collection of the additional tax by an agreement dated February 11, 1927.  Respondent was familiar with the United Carbon Co.'s activities in 1925.  Upon an examination of United Carbon Co.'s return for that year, he had taken the position that a reorganization had been effected and that the proper basis for depletion with respect to the exhaustible assets acquired in the various exchanges was the cost of such assets in the hands of the transferors.  The Board sustained the , but the Circuit Court of Appeals reversed the Board and held that no reorganization had been effected within section 203(b)(4) of the Revenue Act of 1926, on the ground that the amount of stock received by each transferor was not substantially in proportion to its interest in the property prior to the exchange. . The pleadings upon which the hearing in the present proceeding was conducted did not include res judicata.Respondent did not*805  know that petitioner held stock in either Liberty Carbon Co. or United Carbon Co. and was first apprised of the fact that petitioner had exchanged these stocks in 1925 when petitioner's return for 1934 was filed.  The statutory period for assessment and collection of a deficiency in tax for the year 1925 has expired.  *793  On the back of each certificate of preferred stock of the United Carbon Co. there were contained the following provisions: (b) This corporation shall have the right to purchase or redeem and retire all or any part of the preferred stock.  No sinking fund shall be required to be created for the purchase or redemption of the preferred stock, but the Board of Directors shall have the right in its discretion in any year to set aside for such purpose, out of any surplus or net profits remaining available after provision has been made for the payment of the non-cumulative dividends on the preferred stock for the current year such amounts as it may deem advisable.  The Board of Directors shall have the right to use any such remaining surplus or net profits for the purchase or redemption of preferred stock to the exclusion of all dividends upon the common stock. *806  Whenever, in any year, any amount shall be set aside for such purchase or redemption, this corporation shall, on or before the next ensuing February 1st, by notice to be mailed to each holder of preferred stock at his record address, or published once each week for two weeks in some newspaper published at New York, N.Y., invite offers tendering such stock for sale to this corporation to the amount of the fund available for such purpose, and the offer or offers which, in the opinion of the Board of Directors, are most favorable to this corporation shall be accepted; provided that there be paid for each share of said stock an amount not exceeding One Hundred and Ten ($110.00) Dollars per share, plus the declared accrued dividends thereon, if any.  In case more preferred stock is offered at the same price or prices, than can be so purchased, the Board of Directors in its discretion, shall purchase pro rata or determine by lot which share shall be taken.  If on any such notice to the holders of such preferred stock, no such stock shall be offered at or below the price aforesaid, or if the offers shall not be sufficient to exhaust the amount set aside for such purpose, the Board of Directors*807  shall have the right, after the next ensuing March 1st, to use such amount so set aside, or the balance thereof, for the redemption of preferred stock at One Hundred and Ten ($110,00) Dollars per share, plus the declared accrued dividend thereon, if any.  The shares of stock to be so redeemed shall be selected by the Board of Directors by lot and the corporation shall have the right, upon mailing notice to each holder of preferred stock so selected for redemption, or publishing the same, as aforesaid, at least sixty (60) days prior to any dividend date, to retire the shares of such preferred stock so selected by paying for each share thereof an amount equivalent to one hundred and Ten ($110.00) Dollars, plus the declared accrue d dividend One Hundred and Ten ($110.00) Dollars, plus the declared accrued dividend to each holder of preferred stock, or publishing the same as aforesaid, at least sixty (60) days prior to any dividend date, to retire the entire issue of preferred stock at any time outstanding by paying for each share thereof an amount equivalent to One Hundred and Ten ($110.00) Dollars, plus the declared accrued dividend thereon, if any.  Dividends shall cease on all such*808  stock so called for redemption from and after such dividend date.  Preferred stock purchased or redeemed and discharged in accordance with the provisions hereof shall not be re-issued.  * * * (e) In the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, of the corporation, the holders of the preferred stock shall share equally and be entitled to be paid in full the par amount of their shares, plus seven (7%) per cent or a total of One Hundred and Seven ($107.00) Dollars per share before any amount shall be paid to the holders of the common stock and after the payment to the holders of the preferred *794  stock of its par value plus seven (7%) per cent, the remaining assets and funds (including any accumulated surplus or net profits) shall be divided among and paid to the holders of the common stock equally and pro rata according to their respective shares to the exclusion of the preferred stock.  In 1934, United Carbon Co. redeemed the 72 shares of preferred stock held by petitioner and paid him $7,920, or $110 per share, therefor.  At that time petitioner had held this stock for more than 5 years, but less than 10 years.  OPINION. *809 LEECH: The first question involves the proper basis for computing petitioner's gain on the redemption of the United Carbon Co. stock held by him.  The transactions, as a result of which petitioner acquired this stock, appear in the findings of fact.  In a proceeding brought by United Carbon Co. to redetermine deficiencies in its income tax for 1925, the Circuit Court of Appeals, reversing the Board's decision at , held that no reorganization had occurred within section 203(b)(4) of the Revenue Act of 1926 by reason of these same transactions.  . This decision resulted from the court's view that, since the values of the shares of certain of the transferors before the exchange differed substantially from the respective values of the stock received from United Carbon Co. in the exchange, the condition of section 203(b)(4) of the Revenue Act of 1926 1 had not been met.  *810 Although alternative grounds for holding that a statutory reorganization had resulted were urged before the Board and by it were disregarded because of the conclusion it reached (see , the Commissioner abandoned these alternative grounds on appeal, and the Circuit Court confined itself to the question there presented.  Since res judicata has not been pleaded by petitioner here, we can not even consider whether the United Carbon Co. case is decisive of all questions that might have been raised.  ; ; . The United Carbon Co. case, then, stands for the proposition that the transactions engaged in, during 1925, by Liberty Carbon Co., 11 corporations and a partnership, on one hand, and United Carbon Co., *795  on the other, did not constitute a reorganization within section 203(b)(4) of the Revenue Act of 1926.  We now consider whether there was a reorganization under other sections of the 1926 Act, to wit, section*811  203(b)(3) and section 203(h)(1)(A).  If petitioner acquired his stock in United Carbon Co. as a result of such a reorganization, then its basis will be the same as in that of the property exchanged therefor.  The basis of the preferred stock, thus received, will be the allocated cost of the Liberty Carbon Co. stock exchanged therefor, rather than the fair market value of the Liberty Carbon stock on the date of the exchange.  Revenue Act of 1926, sec. 204(a)(6).  Attacking this point, petitioner argues that the condition of section 203(h)(1)(A) 2 has not been met for the reason that United Carbon Co. did not acquire "substantially all" the properties of Liberty Carbon Co. in exchange for stock.  It is argued that while assets of a cost of $213,856.02 were exchanged for stock, other assets costing $105,017.38 were retained by Liberty Carbon Co.  However, the record shows that, of the assets not transferred for stock, inventory valued at $79,539.43 was transferred to United Carbon Co. for cash.  In other words, Liberty Carbon Co. parted with approximately 92 percent of its property in exchange for stock and cash.  *812 Such a percentage is high enough to satisfy the statute.  ; . Petitioner, however, contends, in effect, that we must segregate the transaction into two parts - the transfer of property, costing $213,856.02, in exchange for stock; and the transfer of inventory, costing $79,539.43, for $79,539.43 in cash.  There is no merit in this position.  In , the taxpayer transferred all of its assets to a corporation in exchange for 18,000 shares of the transferee's stock and $426,000 in cash.  In holding that a reorganization had resulted under section 112(i)(1)(A) of the Revenue Act of 1928 (worded identically with section 203(h)(1)(A) in the 1926 Act), the Court said: * * * Also, a large part of the consideration was cash.  This, we think, is permissible so long as the taxpayer reserved an interest in the affairs of the transferee which represented a material part of the value of the transferred assets.  There can be no question but that the interest received by Liberty Carbon Co. in United Carbon Co. represented a "material*813  part" of the value of the transferred assets.  By a simple calculation, it is seen that the United Carbon stock received by Liberty Carbon Co. in the *796  exchange here represented at least 73 percent of the value of the Liberty Carbon assets transferred.  That percentage constituted a "material" part of the value of those transferred assets.  ; ; . We conclude that a statutory reorganization resulted, under sections 203(b)(3) and 203(h)(1)(A) of the 1926 Act, when Liberty Carbon Co. transferred 92 percent of its assets to United Carbon Co. in exchange for stock and cash.  In view of our conclusion that the first issue must be resolved against petitioner, we do not need to consider the affirmative defense of estoppel raised in respondent's answer.  There remains to be decided the question of whether the gain realized by petitioner on the redemption of his preferred stock by United Carbon Co. in 1934 is taxable to the extent of 40 percent on the theory that it resulted from the sale of a*814  capital asset held for more than 5 but less than 10 years or whether it is taxable, in full, as a distribution in partial liquidation.  Revenue Act of 1934, sec. 115(c).  Petitioner urges that since $110 per share was the price paid, the stock could not have been reacquired by the company in liquidation, dissolution, or winding up, because paragraph (e) of the provisions on the back of the certificates $107mentioned as the per share price to be paid in that event.  The price of $110, he contends, was paid pursuant to paragraph (b), and indicates a straight purchase.  If this be the case, he argues, , is controlling. But, in the Smith case, all the element of a sale were present.  The reacquired stock was not retired, but was held in the treasury of the corporation subject to reissuance.  The last sentence of paragraph (b) of the stock certificates, involved here, provides that preferred stock purchased or redeemed or discharged shall not be reissued.  The redemption, in other words, was to be complete.  It is proper to presume, therefore, that that procedure was followed when petitioner's stock was reacquired in 1934.  *815 . This factual distinction prevents, in our opinion, the application of the Smith case here.  Section 115(i) of the Revenue Act of 1934 defines "amounts distributed in partial liquidation" to mean "a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock." To be a partial liquidation it is not necessary that the corporation be planning a cessation of business *797  or be in the process of final liquidation or that all of the preferred stock be retired at once.  ; . In , holding that amounts paid to redeem outstanding preferred stock constituted amounts distributed in partial liquidation, the Board said: "As set forth in the statute, section 201, supra, [the counterpart of section 115(i) in the 1934 Act], a partial liquidation takes place whenever a corporation distributes money*816  or assets in complete cancellation or redemption of a part of its capital stock.  No particular portion is mentioned, nor is the the word 'part' in any way limited.  Whether the amount so redeemed be all of a series or class, or only a part thereof, apparently makes no difference under the definition adopted by Congress." See also . Petitioner further contends that United Carbon Co. redeemed this stock out of profits, rather than capital, and that section 115 of the 1934 Act deals only with distributions which effect a change in the capital structure of the corporation.  Implicit in this is the view that a distribution of profits can not be a partial liquidation.  The decision of the Supreme Court in , concludes the petitioner in that position.  This cancellation of this stock did reduce its capital.  When United Carbon Co. reacquired its stock, it canceled it, and could not reissue the shares acquired.  Petitioner also intimates that United Carbon Co. was obligated to acquire the stock by the contract appearing on the back of each stock certificate, and that*817  a compliance with this obligation was not a liquidation of the stock.  The factual premise is not correct.  But even if it were, the conclusion that the acquisition and cancellation of this stock was a partial liquidation, would still follow.  . Thus, since the money paid for the stock constituted a distribution in partial liquidation, it follows that 100 percent of the gain realized by petitioner from the redemption of his preferred stock in 1934 is taxable.  Revenue Act of 1934, sec. 115(c).  As previously indicated, this gain is equivalent to the difference between the amount received for the stock in 1934 and the allocated cost of the Liberty Carbon Co. stock exchanged therefor in 1929.  Decision will be entered under Rule 50.Footnotes1. SEC. 203(b)(4).  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. ↩2. SEC. 203(h)(1).  The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *. ↩