Court Opinion

ID: 4496307
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:47.355662+00
Date Added: 2024-06-11T15:04:03.672487
License: Public Domain

ARNOLD,
dissenting: I agree that the transaction whereby petitioner acquired the assets of the Fisher Body Corporation in exchange for 1,600,000 shares of its stock and received 935,280 shares of its own stock in exchange for 1,402,920 shares of stock which it owned in the Fisher Body Corporation as a liquidating dividend is nontaxable under the reorganization provisions of the statute. I do not agree that when petitioner used the General Motors stock it received in exchange for its Fisher Body stock to satisfy its obligation to the General Motors Securities Co., no taxable gain resulted.
The ultimate question here is whether petitioner realized gain ■upon the disposition of the Fisher Body stock. Since the exchange of petitioner’s Fisher Body stock for assets of the Fisher Body Corporation (which then consisted solely of General Motors stock) was a nontaxable transaction, it is evident that the shares of stock petitioner .received for its Fisher Body stock were assets in its hands, and, unless *527there is a taxable transaction upon the disposition of the assets (General Motors stock) for which its Fisher Body stock was exchanged, (any gain derived from petitioner’s investment in Fisher Body stock will never be subject to tax.
In Charles T. Fisher, 34 B. T. A. 1215, we had a similar question before us, arising from the same reorganization and dependent on the same basis, with the exception that Charles T. Fisher sold the General Motors stock which he had received in exchange for his Fisher Body stock on the market, while here petitioner used the General Motors stock which it had received in exchange for its Fisher Body stock to satisfy an outstanding obligation to the General Motors Securities Co. Clearly there is no difference in principle in these two transactions. In the Fisher case we held the difference between the cost of the Fisher Body stock and the price received for the General Motors stock for which it was exchanged was taxable gain. Had petitioner sold the stock it received for its Fisher Body stock on the market as the taxpayer did in the Fisher case, undoubtedly the difference between the cost of its Fisher Body stock and the amount received would be taxable gain, as we held in that case. The majority opinion here holds that no taxable gain was realized on the disposition of the General Motors stock to satisfy a binding and enforceable obligation of petitioner.
I do not think it can be successfully argued that the transaction wherein petitioner used the General Motors stock received in exchange for its Fisher Body stock to satisfy its obligation to General Motors Securities Co. did not constitute a final disposition of its Fisher Body stock. When petitioner obtained the 935,280 shares of stock from the General Motors Securities Co. a valid contractual obligation was created to return an equivalent amount of stock within thirty days, Provost v. United States, 269 U. S. 443, and the law imposed upon petitioner a legal liability to comply with the agreement or respond in damages for its failure so to do. Profits realized by a taxpayer in paying or satisfying an outstanding obligation give rise to taxable gain. Twin Ports Bridge Co., 27 B. T. A. 346 ; Hagan Corporation, 21 B. T. A. 41; Carlisle Packing Co., 29 B. T. A. 514; United States v. Kirby Lumber Co., 284 U. S. 1; Helvering v. American Chicle Co., 291 U. S. 426; Commissioner v. Coastwise Transportation Corporation, 71 Fed. (2d) 104, reversing 28 B. T. A. 725; certiorari denied, 293 U. S. 595; Garland Coal & Mining Co., 28 B. T. A. 348; affd., 75 Fed. (2d) 663; Consolidated Gas Co. of the City of Pittsburgh, 24 B. T. A. 901; Woodward Iron Co., 24 B. T. A. 1050; Ohio Central Telephone Co., 28 B. T. A. 96; B. F. Avery & Sons, Inc., 26 B. T. A. 1393; E. F. Simms, 28 B. T. A. 988; Peerless Investment Co. v. Commissioner, 80 Fed. (2d) 427, affirming 30 B. T. A. 491.
*528Petitioner satisfied its obligation by delivering to the General Motors Securities Co. 935,280 shares of stock it received for its Fisher Body stock. The cost basis of this stock for the purpose of determining gain or loss on sale or other disposition was the cost of the Fisher Body stock. Sec. 204 (a) (6), Revenue Act of 1926. The basis of the decisions of the Board and the courts in the cases referred to above is that the discharge of a solvent taxpayer’s obligation for less than the amount due releases assets offset by the obligation, resulting in a corresponding accession to income. The same is equally true when a taxpayer’s obligation is discharged by the use of an asset having a cost basis less than the amount of the obligation satisfied. In both instances the net worth of the taxpayer is correspondingly increased to the extent of the difference between the amount of the obligation and what it cost to satisfy it.
Had petitioner discharged this obligation by stock other than by the use of the stock it received for its Fisher Body stock it would have cost it the market price of the stock the day the obligation was satisfied, or $137,603,070 for the 935,280 shares required. This I think is the amount realized by petitioner on disposition of the General Motors stock — a realization of the increase in value of its Fisher Body stock.
The General Motors Securities Co. was not a party to the reorganization or merger and the acquisition by petitioner of the 935,280 shares from it and the discharge of the obligation so incurred were wholly foreign to any part of the reorganization. It was petitioner’s method of financing its deal with the Fisher Body Corporation in which it acquired all of the Fisher Body assets.
The fact that the stock certificate which was obtained from General Motors Securities Co. was endorsed in blank when it was delivered to petitioner and used in the several transactions does not render the transaction between the General Motors Securities Co. and petitioner any the less a valid and enforceable obligation, nor doe's the fact that it was called a loan serve to absolve petitioner from tax on any profit or gain on the delivery to the General Motors Securities Co. of the number of shares required to discharge its obligation. Neither is it material that the obligation to restore the General Motors Securities Co. to the same economic position it was in with reference to the ownership of the stock at the time it was obtained, Avas not a direct money obligation. It was a definitely ascertainable amount, cf. A. F. Osterloh, 13 B. T. A. 713. This satisfies the revenue laAV for the purpose of determining the realization of gain or loss. The obligation was a liability against petitioner’s assets which could be discharged only by assets of equivalent Avalué and that value Avas the market value of 935,280 shares of General Motors stock on the day the obligation Avas discharged. The stock used in discharging *529tlie obligation was that acquired in exchange for Fisher Body stock, and can no longer be considered the identical stock obtained from the General Motors Securities Co.
The parties stipulated that the full legal title to the 935,280 shares of General Motors stock passed from the General Motors Securities Co. to petitioner and that the certificate was endorsed in blank to enable petitioner unconditionally to transfer full legal title to the Fisher Body Corporation. The General Motors Securities Co. was completely divested of title to the stock when the stock certificate was delivered to petitioner and petitioner was completely divested of title to the stock when it exchanged the stock for Fisher Body assets.
Title passed to the Fisher Body Corporation in the exchange of its assets for stock and the stock so acquired merged in the assets of the Fisher Body Corporation, which then consisted of 1,600,000 shares of General Motors Corporation stock. There was very definitely a conversion of the stock obtained from the Securities Co. when it was exchanged for Fisher Body assets.
In substance petitioner purchased the assets of the Fisher Body Corporation for 1,600,000 shares of General Motors stock. It is not disputed that the stock and assets acquired were equivalent in value. It owed the Securities Co. 935,280 shares for the shares obtained from it and used in part payment for Fisher Body assets. It paid the obligation by using the stock it received for its Fisher Body stock. It was not a return of the identical stock, nor was it an exchange of stock for stock. It was a satisfaction of the agreement to return an equal number of shares. Petitioner’s investment in the Fisher Body Corporation discharged the obligation under this contract.
Clearly the shares of General Motors stock which petitioner received in exchange for its Fisher Body stock were assets in its hands, in lieu of its investment in Fisher Body stock and took the same cost basis, and when they were used to satisfy the obligation to the General Motors Securities Co. it constituted a final disposition of petitioner’s Fisher Body stock.
A certificate of stock is but the evidence of individual ownership of corporate assets in the proportion the number of shares named bears to the entire number of shares issued. The use of the one certificate here as stipulated was for convenience only. It did not change the effect of the passing of title to the number of shares it represented in the several transfers, or prevent this stock from merging with the assets of the Fisher Body Corporation — its identity was lost.
Congress intended to tax gains and profits and so provided. It made provisions for the postponement of the tax in certain in*530stances, designated as nontaxable transactions. Such, provisions were not intended to relieve profits and gains from tax, but to postpone the tax until such profits and gains were realized upon final disposition. Here there was a final disposition of the stock petitioner received in exchange for its Fisher Body stock through a nontaxable transaction and, I think, the gain thus realized should be included in income.
I do not think that Helvering v. Winston Brothers Co., 76 Fed. (2d) 381, relied upon in the majority opinion, is in point or is controlling here. There the stock received in exchange was' canceled. The Board specifically said “such cancellation is not a ‘sale or other disposition’ of such stock as is referred to in section 113. The ownership did not pass to others.”
Here there was clearly a sale or other disposition of the stock petitioner received for its Fisher Body stock and the gain realized is taxable under sections 202 and 203 of the Revenue Act of 1926. The gain petitioner derived is not immune from tax under article 543 of Treasury Regulations 69, on the theory that a corporation dealing in its own stock realizes no gain. Notwithstanding some of the early Board decisions and the regulations cited above, the later decisions of both the Board and the courts are to the effect that the real nature of the transaction in each particular case must be considered, and if the transaction is in connection with the assets of the corporation, of a commercial nature, or beyond the pale of capital transactions involving the capital structure, the gain or loss is recognized for tax purposes. Commissioner v. Woods Machine Co., 57 Fed. (2d) 635, reversing 21 B. T. A. 818; certiorari denied, 287 U. S. 613; Commissioner v. Boca Ceiga Development Co., 66 Fed. (2d) 1005, reversing 25 B. T. A. 941; Houghton & Dutton Co., 26 B. T. A. 52; Allyne-Zerk Co., 29 B. T. A. 1194; affd., 83 Fed. (2d) 525; Spear & Co. v. Heiner, 54 Fed. (2d) 134; affd., 61 Fed. (2d) 1030; Dorsey Co. v. Commissioner, 76 Fed. (2d) 339, affirming memorandum opinion of the Board not reported; certiorari denied, 296 U. S. 589.
The acquisition of General Motors stock in exchange for Fisher Body stock and the use of such General Motors stock to discharge petitioner’s obligation to the General Motors Securities Co. had no more effect on the capital structure of petitioner than a sale or disposition of any other asset.
I submit that when petitioner used stock received in a. nontaxable exchange for its Fisher Body stock, which had cost $31,254,825, to discharge an obligation that would otherwise cost $137,603,070 to procure the necessary amount of stock with which to satisfy it, petitioner realized a taxable gain to the extent of the difference.
Tysoüst, Hill, and Miller agree with this dissent.