Court Opinion

ID: 9653016
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:37:10.48211+00
Date Added: 2024-06-11T18:12:54.391260
License: Public Domain

WOODROUGH, Circuit Judge
(dissenting).
The controlling facts in this case are very simple. The Minnesota Tea Company had negotiations for the sale of its stock of merchandise, its receivables, and the good will of its business at a price sufficient to make it a profit of more than $700,000 above the statutory cost of the items, and it decided to make the sale. It evidenced its decision on July 2, 1928, by giving its option contract to sell the property specified, expressly excluding its buildings, fixtures, and real estate, which the purchaser apparently did not want. The option was amended in particulars not material here, and, having been duly exercised, a sale was consummated in conformity with it as of the date of August 4, 1928. The sum of $426,842.52 was paid in cash, being $172,195.90 more than the statutory cost to the tea company. In addition, the tea company received 18,000 shares of the common stock of the purchaser, the Grand Union Company, then being sold on .the New York Stock Exchange for around 30 and so worth $540,000. There was an agreement that the tea company would not dispose of the Grand Union Company stock within a year.
Instead of reporting and paying tax on the $700,000 profit which it derived from the sale, the tea company has claimed the whole profit to be exempt, because it says the transaction was a reorganization within the purview of section 112 of the Revenue Act of 1928 (26 USCA § 2112). Its claim is: (1) That there was an acquisition by the Grand Union Company of all the properties of the tea company; and (2) the tea company took some of the purchase price in stock of the purchaser, and, because tliose two elements were present in the transaction, there was a reorganization and its gains are exempt from taxation.
1. In order to make it appear that there was “the acquisition by bne corporation of * * * substantially all the properties of another corporation” according to the wording of the statute, the tea company went through the following forms of operation after it had given its option contract covering the part of its property that its purchaser wanted (the items are detailed in the record filling fifty pages). It proceeded to organize a corporation called the Peterson Investment Company, and transferred to that corporation all its buildings and real estate and every other one of its assets which the purchaser was not buying in the sale; the purchaser agreeing to rent some of the real estate but not to buy any of it.
The stock of the new corporation was issued to the stockholders of the tea company, and so no real change of beneficial ownership in any property was occasioned, but, when all the assets which the tea company had not agreed to sell were by this device gotten out of its hands, the tea company deemed itself in position to assert its claim that the sale it was making was a sale of all its property — that the transaction was one in which there was “acquisition by one corporation of substantially all the property of another.”
I think the disguising of the true nature of the sale by this procedure is exactly the same in principle as that considered and exploded by the Supreme Court and the Circuit Court of Appeals of the Second Circuit in the case of Gregory (cited Helvering v. Gregory, 69 F.(2d) 809; Gregory v. Helvering, 293 U. S. 465, 55 S. Ct. 266, 267, 79 L. Ed., decided January 7, 1935). In that case there was a chance to sell certain assets belonging to a corporation of which the taxpayer was the sole owner; but, if the corporation had turned the assets over to the taxpayer so that she could sell them, or if the corporation had sold the assets and given the taxpayer the money, in either event there would have been a surtax to pay on the dividend. Accordingly, a new corporation was organized to which the specified assets were transferred and the stock of the new company was issued to the taxpayer. The taxpayer said that the transaction was a reorganization because there was “a transfer by a corporation of * * * *804a part of its assets to another corporation” in such circumstances that immediately thereafter “the transferor or its stockholders * * * are in control of the corporation to which the assets are transferred.” She said that, since the transaction was a reorganization, her gain (i. e., the stock she received in the new corporation) should not be recognized because the stock' of the new corporation was “distributed in pursuance of a plan of reorganization.” The new corporation distributed the specified assets to the taxpayer as a liquidating dividend and then went out of business, and the taxpayer thought she had evaded the tax on the dividend.
The Circuit Court of Appeals held that, even though the facts answered the dictionary definitions of each term used in the statutory definition, there was not presented what the statute means by “reorganization” because the transactions were no part of the conduct of the business of either or both companies; so viewed they were a sham. The Supreme Court said:
“It is earnestly contended on behalf of the taxpayer that since every element required by the foregoing subdivision (B) [Sec. 112 (i) (1) (B)] is to be found in what was done, a statutory reorganization was effected; and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 506 [21 L. Ed. 728]; Superior Oil Co. v. Mississippi, 280 U. S. 390, 395, 396 [50 S. Ct. 169, 74 L. Ed. 504]; Jones v. Helvering [63 App. D. C. 204], 71 F.(2d) 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said.
“When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made ‘in pursuance of a plan of reorganization’ (section 112 (g) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find ? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it.immediately was put to death.
“In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.”
So in this case there is nothing to indicate that the organization of the Peterson Investment Company and the transfer to it of the tea company’s property had anything to do with the corporate business of the tea company. It appears to have been simply a contrivance to enable the tea company to simulate a transfer of all its property when, in fact, the actual transaction had with its purchaser did not relate to all the tea company’s property. In substance, that transaction was a sale of part of its property— a taxable transaction — and the nature of the transaction could not be changed by the creation of another corporation merely to hold that part of the taxpayer’s property which was not sold.
In the case of Gregory, supra, the corporation owning property transferred the part of its property intended to be sold to *805the corporation created for the purpose. In this case the corporation keeps the property intended to be sold, and transfers the rest to a corporation created for the purpose of holding it. The principle applicable to each transaction is the same. The operations are equally artifices, and nothing more. Realities must control — not artifices.
2. But what was done in this case was not reorganization, even if there had been an acquisition by the one corporation of substantially all the property of the other— which there was not. The substance of the taxpayer’s claim is that its sale became a reorganization because it took some of the purchaser’s stock in part payment of the purchase price. The point is important because to sustain the contention would practically destroy the income tax on gains'from sale of capital assets. Whatever the canons may be of construction, certainly the main one is not to construe so as to destroy. If it is the law, it would be folly to close any large sale without including some of the purchaser’s stock in the purchase price, especially as in this case, where the purchaser’s stock was for sale on the New York Stock Exchange. Though the tax on gains from sales is not repealed, none but the simple would need to pay it. But the able majority opinion of the Board of Tax Appeals demonstrates to my mind that it is not the law, and the decisions of the Circuit Courts of Appeals in West Texas Refining & Development Co. v. Commissioner of Internal Revenue (C. C. A. 10) 68 F.(2d) 77; John A. Nelson Company v. Commissioner of Internal Revenue (C. C. A. 7) 75 F.(2d) 696, decided February 23, 1935; and John J. Watts, Hugh C. Sicard and Parker Sloane v. Commissioner of Internal Revenue (C. C. A. 2) 75 F.(2d) 981, confirm the Board.
In the case of Cortland Specialty Co. v. Commissioner, 60 F.(2d) 937, 940, the true intent and meaning of the reorganization provision of the Revenue Law was fully considered by the Court of Appeals of the Second Circuit, and it was shown that it was the purpose of Congress “to relieve those interested in corporations from profits taxes in cases where there was only a change in the corporate form in which business was conducted without an actual realization of any gain from an exchange of properties. * * * In defining ‘reorganization,’ section 203 of the Revenue Act [26 USCA § 934, now section 212, 26 USCA § 2112] gives the widest room for all kinds of changes in corporate structure, but does not abandon the primary requisite that there must be some continuity of interest on the part of the transferor corporation or its stockholders in order to secure exemption. Reorganization presupposes continuance of business under modified corporate forms.”
The Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, page 470, 53 S. Ct. 257, 77 L. Ed. 428, says that its general view (of the true meaning and intent of the statute) is adopted and well sustained in the Cortland Case, and it seems to me that declaration is conclusive against the claim for exemption in this case. The transaction of the tea company shown by the record in this case was simply a selling out of some of its property at a profit, and nothing else. Nothing indicates that the stock of the purchaser which it took on the sale as part of the purchase price was taken as a means of continuing its interest in the tea business. It only got 7j4 per cent, of the outstanding stock of the Grand Union Company, and it quit the tea business and took its gains in money and in stock which was equivalent to money, and which it was free to turn into money at the end of the year. To call the transaction anything other than a sale is to ignore the reality.
It is clear to my mind that the taxpayer owes the government some seventy odd thousands of dollars of income tax; that the forms it went through did not affect the substance of the transaction or its liability; and that the decision of the Board of Tax Appeals ought to be affirmed.