Court Opinion

ID: 9444454
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:01:37.037173+00
Date Added: 2024-06-11T17:29:52.763449
License: Public Domain

RIVES, Circuit Judge
(dissenting).
Further consideration has convinced me that the taxpayer corporation acquired the assets of Smith Brothers Properties Company in a nontaxable reorganization as defined in Section 112(g) (1) (B) of the Revenue Act of 1936 (quoted in footnote 2 to the main opinion). The appellant collector insisted that there was no such reorganization upon the following grounds: (A) A continuity of interest, which is requisite to a reorganization, was lacking; (B) The taxpayer did not acquire “substantially all the properties” of the alleged transferor; (C) The taxpayer did not acquire the property of the transferor “solely” for “voting stock.”
(A) Continuity of Interest.
This ground of attack, or this ground coupled with (B), “substantially all the properties”, was the ground sustained in our original opinion:
“We simply hold that in this case, where the taxpayer acquired what amounts to only one property of a substantial enterprise as a result of proceedings and activities completely separate from all other property and from the claims of all other credi-. tors, the necessary continuity of interest is not shown. Under no. reasonable view can it be said that the old corporation has emerged as substantially the same enterprise in new form - or that substantially all of its property was transferred to the new corporation.”
The broad rationale of tax-free corporate reorganizations is thus stated in 3 Mertens Law of Federal Income Taxation, Section 20.50, p. 183:
“The justification for-the exemption from taxation of gains realized in corporate reorganizations is that the parties making the exchanges have simply changed the form of their corporate holdings and that what was formerly a corporate business carried on by a particular corporation, or corporations, in a particular corporate form, or forms, is to be now carried on and continued by other and perhaps new corporations having new corporate form.”
Applying that rationale, the courts have developed certain basic requirements implicit, if not expressed, in the statutes. 3 Id. Sec. 20.49, et seq. Among *157these is the “continuity of interest” test developed in Pinellas Ice and Cold Storage Company v. Commissioner, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428, and Le Tulle v. Scofield, 308 U.S. 415, 60 S.Ct. 313, 84 L.Ed. 355. The essence of the “continuity of interest” rule is that the transferor or its stockholders must receive stock or a proprietary or equity interest in the transferee as opposed to solely a creditor’s interest. Since the Pinellas and Le Tulle decisions, this requirement has been embodied in what is now Section 112(g) (1) (C), requiring that the exchange be “solely for all or a part of its (the new corporation’s) voting stock.” It seems to me that, though the continuity of interest requirement in such reorganization was theretofore implicit, it then became expressed and that if the requirement of the statute is met that is all that is necessary.
A very clear discussion of the “continuity of interest” requirement is contained in an article in the March, 1954, Tax Law Review published by the New York University School of Law on “realignment of Stockholders’ Interests in Reorganizations under Section 112(g) (1) (D)”. While that article relates to reorganization under Section 112(g) (1) (D),1 rather than under Section 112(g) (1) (B), as in our case, the hypothetical case with which it concerns itself is very much the same as the case before us, and is stated as follows at the beginning of the article:
“A and B are the sole stockholders (each owning a substantial block of the stock) of a corporation engaged in conducting two separate operations, each of which in itself is a substantial business. They are actively engaged in managing the affairs of the corporation and have devoted a good part of their lives to it. They have reached an impasse on a fundamental question of management policy affecting the future course of the business of the corporation. Neither wishes to sell his interest and neither wishes to liquidate. What they would like to do is to divide the business into two corporations, each corporation taking over one of the operations, A acquiring control of one corporation and B acquiring control of the other, so that each may pursue what he regards as the proper management policy in conducting one of the two divisions of the existing business.
“To what extent is it possible to effect a reorganization of the business to accomplish this result and also to vest the ownership of the stock of one corporation in A and the other in B, without recognition of gain to the existing corporation and its stockholders? This question in its various aspects is the subject of this paper.”
That article insists that there can be and is “a strict statutory test of continuity of interest”, page 239, see also page 240. It quotes as the post-1934 concept of continuity of interest what this Court had stated in Southwest Natural Gas Company v. Commissioner, 5 Cir., 189 F.2d 332, 334:
“While no precise formula has been expressed for determining whether there has been retention of the requisite interest, it seems clear that the requirement of continuity of interest consistent with the statutory intent is not fulfilled in the absence of a showing: (1) that the transferor corporation or its shareholders retained a substantial proprietary stake in the enterprise represented by a material interest in the affairs of the trans*158feree corporation, and, (2) that such retained interest represents a substantial part of the value of the property transferred.”
In the present case, the retained interest was common stock, the purest form of proprietary or equity interest \n a corporation, and that stock represented the full value of the property transferred. It seems clear to me that the court made rule of continuity of interest has been met. Whether the stricter statutory test was also complied with is the subject of ground of attack (G) to be briefly discussed hereinafter.
(B) “Substantially All The Properties”.
In our original opinion, referring to the Limestone case, 315 U.S. 179, 62 S.Ct. 540, 86 L.Ed. 775, we held that the critical time for determining whether the taxpayer acquired “substantially all the properties” of the transferor was 1932 or 1933, the date of insolvency, rather than 1937, when the title to the property passed to the new corporation. It now seems clear to me that, under the teachings of the Limestone case, supra, the earlier date has reference only to the time when the bondholders stepped into the shoes of the stockholders, and that the later date is the one when the reorganization was perfected, and which we should consider in determining whether the taxpayer acquired “substantially all the properties” of the old corporation. In the Limestone case, supra, the tax-free reorganization was approved even though the bondholders had theretofore stepped into the shoes of the stockholders. In the present case, as of 1937, there can be no question but that the taxpayer acquired not substantially, but literally, all of the properties of Smith Brothers Properties Company.
In 1932 or 1933, the separate sets of bondholders stepped into the shoes of the stockholders. The bondholders were divided into two separate groups, each interested in the properties securing their respective bonds. Neither group was interested in the other group or in the properties securing its bonds, because the corporation was insolvent, the security represented the value of the bonds of either group and was insufficient to pay those bonds in full. There was no remaining equity in which the other group could be interested. In 1932 or 1933, the properties of Smith Brothers Properties Company were thus, in effect, split into two portions, and as to each portion separately the bondholders stepped into the shoes of the stockholders. Further, the other group of bondholders and the security for its bonds had been completely severed from the old corporation before the present reorganization was effected. While, therefore, it may not be necessary for a decision of the case, there seems to me to be no objection to divisive or multiple reorganization. That was held by the Tax Court in Peabody Hotel Company v. Commissioner, 7 T.C. 600, and is further demonstrated in the Tax Law Review article heretofore referred to, and in a number of decisions cited by. appellee in support of its petition for rehearing.2
(C) “Solely For Voting Stock”.
The taxpayer corporation itself parted with nothing but voting stock in acquiring the Tower Building. The fact that part of that voting stock went to reimburse or compensate Rupe & Son, who furnished the funds to pay off the nonassenting bondholders, representing about 10'% of the total bonds, does not defeat this requirement. The taxpayer got the property “solely for voting stock”, even though R,upe & Son stepped *159into the shoes of the dissenting bondholders.
Originally, at the time of its formation as Smith & Young Tower Corporation, taxpayer’s only asset, received in exchange for all of its then outstanding voting stock, was the Smith-Young Tower Building. The net result of the reorganization was that the bondholders who had in 1932 or 1933 become the equity owners of the Smith-Young Tower Building became the stockholders of the taxpayer corporation which had as its only asset the same building. The bondholders simply changed the form of their corporate holdings. It appears to me that all of the requirements of a nontaxable reorganization as defined in Section 112(g) (1) (B) of the Revenue Act of 1936 have been met.
So thinking, I would express no opinion on the taxpayer’s alternative position that it acquired the Tower building in a nontaxable exchange under Section 112(b) (5) further than to say that I think that we erred in holding that the bondholders rather than the old corporation transferred the Tower building to taxpayer. Cf. Bard-Parker Co., Inc., v. Commissioner, 2 Cir., 218 F.2d 52.
I respectfully dissent.

. Subsection (D), as it now reads, was not in force at the time of the reorganization in the present ease. It was amended to read in its present form by Section 213(b) of the Act of June 29, 1939, and made applicable to tax years beginning after December 31, 1938, by Section 213(e) of said Act. See Historical Note to 26 U.S.C.A. § 112; 26 U.S.C.A. Internal Revenue Acts, 1924 to Date, pp. 1176, 1177; 53 Stat. 862-885.

. Ir! re Prudence Bonds Corporation, 2 Cir., 79 F.2d 205; In re Parker-Young Co.; D.C.N.H., 15 F.Supp. 965; Morldy Cypress Trust v. Commissioner, 3 T.C. 84; Cullinan v. Walker, 262 U.S. 134, 43 S.Ct. 495, 67 L.Ed. 906; Rockefeller v. United States, 257 U.S. 176, 42 S.Ct. 68, 66 L.Ed. 186; Reilly Oil Company v. Commissioner, 5 Cir., 189 F.2d 382; Lewis v. Commissioner, 1 Cir., 176 F.2d 646.