Court Opinion

ID: 9639389
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:15:23.104652+00
Date Added: 2024-06-11T18:10:17.296855
License: Public Domain

WILSON, Circuit Judge
(dissenting).
I dissent from the majority opinion in this case. The two banks, it is true, started out with a plan which might have complied with the definition of a reorganization under section 112 (i) (1) (A) (all references are to the 1928 Act), but which, by reason of the federal statutes requiring a new issue of capital stock of a national bank to be paid for in cash, was changed to a sale and purchase of a part of the as*819sets of a state bank without acquiring its capital stock.
Under the new plan the same partial liquidation of the assets of the Savings Bank was had; but, instead of an exchange of capital stock, the National Bank purchased the remaining assets of the Savings Bank for the sum of $467,947.74, which was paid to a committee or trustees selected by the stockholders of the Savings Bank for the purpose, and the trustees immediately -indorsed the check of the cashier of the National Bank over to the National Bank in payment for 1,500 shares of its capital stock authorized by the National Bank for the purpose of acquiring the assets of the Savings Bank.
The opinion of the majority holds that there was an exchange of the stock of the Savings Bank for the stock of the National Bank in accordance with the original plan; that the sale of assets and purchase of stock was a matter of form. The burden is on the petitioner to prove that the National Bank acquired control of the capital stock of the Savings Bank in order-to comply with the definition of a reorganization under section 112 (i) (1) (A). Clearly there was no reorganization under B of that paragraph, since the Savings Bank, háving been dissolved, did not, after the transfer, control the National Bank.
I find no evidence, or finding by the Board of Tax Appeals, that under the revised plan the National Bank acquired the capital stock of the Savings Bank and the control of that institution. By the new plan it acquired for cash all the assets of the Savings Bank except certain stocks and cash, and therefore had no occasion to acquire its capital stock. A sale of the assets of the Savings Bank for cash and the purchase of the capital stock of the National Bank was necessary to comply with the federal statutes. It does not now lie in the mouths of the trustees of the Savings Bank, in order to escape income taxes, to say that this was in effect, an exchange of stock of the Savings Bank for the stock o'f the other bank, which was prohibited by law. The only mention in the record of an exchange of Savings Bank stock for that of the National Bank is in a vote of the stockholders of the Savings Bank at a meeting held on March 3, 1930, in which it was voted that two trustees be elected with authority to receive the stock of the Savings Bank and exchange it for 1,500 shares of the National Bank. The call for this meeting was issued February 13, 1930.
Undoubtedly some time prior to March 24, 1930, the banks learned that the issuance of the National Bank stock could only be for cash, or the National Bank officials were aware of the law on this point, as in the vote of the stockholders of the National Bank at a meeting held on March 24, 1930, to complete the transfer, there was no mention of an exchange of National Bank stock for the stock of the Savings Bank. The vote was to purchase the assets of the Savings Bank and to sell the newly issued stock of the National Bank. There never was any vote by the directors or stockholders of the National Bank to exchange its stock for that of the Savings Bank. It is the method of merger or consolidation, if there be one, and not the result intended which determines whether a tax results under sections 111 and 112, Revenue Act 1928 (26 U.S.C.A. §§ 111 and note, 112 and note).
On April 5, 1930, the trustees of the Savings Bank voted to contract to sell its assets to the National Bank in accordance with a certain “contract of sale” which was presented and read at the meeting. It is significant, I think, that there is no mention in this “contract of sale” of any transfer or exchange of Savings Bank stock for National Bank stock; nor is there any mention in the meetings of the stockholders of the Savings Bank of an exchange of stocks between the two banks after the meeting of March 4, 1930. Excepting as above mentioned, the records of both corporations are silent as to an exchange of stock and refer only to a sale of the assets of the Savings Bank and a purchase of the 1,500 shares of the stock of the National Bank with the purchase price of the Savings Bank’s assets.
The sale was completed in accordance with the contract authorized on April 4. The National Bank stock was transferred to the two trustees authorized to make the transfer of the assets of the Savings Bank, who afterward upon the deposit of the stock of the Savings Bank with them, distributed to the stockholders of the Savings Bank stock of the National Bank in the proportion of three shares of National Bank stock for four shares of Savings Bank stock, which was the relative value of the two stocks agreed upon by a committee of the two banks.
*820Such, in substance, were the findings of the majority of the members of the Board of Tax Appeals and also of the minority members of the Board.
The testimony of the members of the trustees of the Savings Bank is to the same effect, viz.: that the 1,500 shares of capital stock of the National Bank was conveyed to the trustees named by the Savings Bank to receive them for the Savings Bank and who later exchanged them with the stockholders of the Savings Bank as they deposited their shares of the Savings Bank with said trustees. Proof is lacking of any transfer of Savings Bank stock to the National Bank under the contract of. sale; nor does the contract provide for such a transfer.
A sale of assets does not constitute a reorganization within the language of section 112 (i) (1) (A). Pinellas Ice Co. v. Commissioner, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428.
A merger or consolidation or reorganization is a statutory concept. Upon the record in the case the National Bank, by this transaction, did not acquire a majority of the voting stock of the Savings Bank or any portion of it; nor was there a reorganization under section 112 (i) (1) (B) whereby the transferor (the Savings Bank), after the transfer of its assets, was in control of the corporation to which its assets were transferred.
The only question here bearing on the issue of a merger of these banks is whether the National Bank acquired substantially all the property of the Savings Bank; whether the acquiring of the assets of the Savings Bank back of the deposits, for which the Savings Bank was liable, can be considered in determining whether the National Bank by the sale for which it paid only $497,000, which represented the amount of capital stock of the Savings Bank, its surplus account and undivided profits on June 2, 1930, can be said to have acquired nearly $4,000,000 of assets, which were held in trust by the Savings Bank to secure its depositors. It may be doubtful whether the National Bank, within the meaning of section 112 (i) (1) (A), acquired these accounts or assets held in trust for the security of the deposits until the accounts were later transferred to the National Bank by the depositors in the Savings Bank.
The Board of Tax Appeals found that the National Bank did not acquire by the sale substantially all the property of the Savings Bank, since there was reserved for distribution to the stockholders 1,000 shares of Pullman stock, 1,000 shares of the preferred stock of the Nashua Manufacturing Company, and a certain amount of cash, which were distributed ratably among the stockholders of the Savings Bank.
. But assuming that the National Bank by this sale acquired substantially all the property of the Savings Bank and a reorganization was effected under section 112 (i) (1) (A) by what was done under the plan finally agreed to, gain or loss might still result which would be taxable, or deductible, if the transaction did not fall within one of the five subparagraphs of 112 (b). Rose v. Trust Co. of Georgia (C.C.A.) 77 F.(2d) 355. Each of these sub-paragraphs relates to the exchange of properties, not to a sale. Cortland Specialty Co. v. Commissioner (C.C.A.) 60 F.(2d) 937, 940. Unless the exemptions of gain or loss provided by Congress in section 112 (b) are present, even though a reorganization resulted within the meaning of section 112 (i) (1), an income tax results whatever may have been the intent of the parties. ' Sections 111, 112 (a).
While in certain cases substance rather than form governs in computing income taxes, the courts have often said: “Income-tax liability must be determined by what actually takes place, rather than by what might have taken place.” Hoult v. Commissioner, 24 B.T.A. 79; Clemmons v. Commissioner (C.C.A.) 54 F.(2d) 209, 211; Weiss, Collector of Internal Revenue v. Stearn, 265 U.S. 242, 254, 44 S.Ct. 490, 68 L.Ed. 1001, 33 A.L.R. 520. The rule that substance, not form, determines the tax, does not apply where the alleged substance of the transaction on which the tax is based is prohibited by law. Income taxes may be avoided by a lawful transaction, Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355; but a taxpayer cannot avoid a tax by a subterfuge, especially if unlawful, either in form or substance.
The original intent to make an exchange of stock with the Savings Bank for capital stock of the National Bank was prohibited. The merger of these banks, therefore, could only be effected by a sale of the assets of the Savings Bank. It is what is actually done, not what the parties intended to be done, which determines lia*821bility for income taxes. Both in form and in substance the transaction in this instance constituted a sale of the assets of the Savings Bank. If it resulted in a liability for an income tax, the result must be accepted.
I think the decision of the Board of Tax Appeals should be affirmed.