Court Opinion

ID: 4601696
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:28:10.376799+00
Date Added: 2024-06-11T07:52:32.524408
License: Public Domain

THE CONNECTICUT ELECTRIC SERVICE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Connecticut Elec. Service Co. v. CommissionerDocket No. 78279.United States Board of Tax Appeals35 B.T.A. 444; 1937 BTA LEXIS 875; February 10, 1937, Promulgated *875  The petitioner and its subsidiary, filing a consolidated income tax return, held entitled to deduction for annual amortization of discount at which bonds were sold by two predecessor corporations which were merged into the subsidiary by statutory mergers under the laws of Connecticut.  John H. Minds, Esq., for the petitioner.  Samuel L. Young, Esq., for the respondent.  ARUNDELL*444  This proceeding is for the redetermination of a deficiency of $2,497.50 in income tax for the year 1931.  The only issue is the deductibility by the Connecticut Light & Power Co., on its consolidated return with the petitioner, of bond discount amortization covering two bond issues of corporations which were merged into the Connecticut Light & Power Co. in 1929 and 1931, respectively.  FINDINGS OF FACT.  The parties have entered into the following stipulation of facts: 1.  That The Connecticut Electric Service Company, of 36 Pearl Street, Hartford, Connecticut, is a corporation created by statute of the State of Connecticut entitled "An Act Incorporating The Connecticut Electric Service Company", approved June 15, 1925.  2.  That The Eastern Connecticut*876  Power Company was a corporation organized and existing under the laws of the State of Connecticut, and on the 31st day of July, 1929, and for some years prior thereto was located and doing business in Norwich, Connecticut.  3.  That The Waterbury Gas Light Company was a corporation organized and existing under the laws of the State of Connecticut, and on the 27th day of November, 1931, and for some years prior thereto was located and doing business in Waterbury, Connecticut.  4.  That The Connecticut Light and Power Company is a corporation organized and existing under the laws of the State of Connecticut, with its principal office at 36 Pearl Street, Hartford, Connecticut, where it was located during the year 1931.  5.  That as of the first of April, 1923, The Eastern Connecticut Power Company issued, at a discount of $451,833.62, its First Mortgage Five Per Cent.  Bonds in the amount of $3,000,000, due and payable at par on the first day of April, 1948.  This discount was carried as a deferred charge account.  6.  That as of the first day of November, 1928, The Waterbury Gas Light Company issued, at a discount of $85,739.94, its First Mortgage Four and One-half Per Cent. *877  Bonds in the amount of $1,000,000, due and payable at par on the first day of November, 1958.  This discount was carried as a deferred charge account.  *445  7.  That as of the 31st day of July, 1929, The Eastern Connecticut Power Company merged into The Connecticut Light and Power Company all of its rights, powers, franchises and property, real, personal, and mixed, so that all of its rights, powers, franchises and property, real, personal and mixed, vested in said The Connecticut Light and Power Company, which Company assumed all the outstanding obligations of The Eastern Connecticut Power Company.  8.  That as of November 27, 1931, The Waterbury Gas Light Company merged into The Connecticut Light and Power Company all of its rights, powers, franchises and property, real, personal and mixed, so that all of its rights, powers, franchises and property, real, personal and mixed, vested in said The Connecticut Light and Power Company, which Company assumed all of The Waterbury Gas Light Company's outstanding obligations.  9.  That prior to the year 1929, and ever since, The Connecticut Electric Service Company has been owner of all the outstanding The Connecticut Light and*878  Power Company voting stock, was the owner of all The Waterbury Gas Light Company stock when The Waterbury Gas Light Company was merged into The Connecticut Light and Power Company, and, with the exception of 345 shares (out of 25,000 shares outstanding) of Second Preferred Stock owned by The Hartford-Connecticut Trust Company, was the owner of all the outstanding stock of The Eastern Connecticut Power Company when The Eastern Connecticut Power Company was merged into The Connecticut Light and Power Company.  10.  That at the time The Eastern Connecticut Power Company and The Waterbury Gas Light Company merged into The Connecticut Light and Power Company, the owners of all the stock of The Waterbury Gas Light Company and The Eastern Connecticut Power Company surrendered their certificates, as provided by the agreements of merger, to The Waterbury Gas Light Company and The Eastern Connecticut Power Company, respectively, for cancellation, and the said The Waterbury Gas Light Company and The Eastern Connecticut Power Company thereupon ceased to exist.  11.  That during the year 1931 The Connecticut Electric Service Company was a member of an affiliated group of corporations under*879  Section 141(a) of the 1928 Revenue Act, which group included The Connecticut Light and Power Company and The Waterbury Gas Light Company to November 27th, on which date The Waterbury Gas Light Company was merged into The Connecticut Light and Power Company.  The books were kept on an accrual basis, according to classifications prescribed by the Connecticut Public Utilities Commission, and a consolidated income tax return for the year 1931 was filed by The Connecticut Electric Service Company in the office of the Collector of Internal Revenue, Hartford, Connecticut, which consolidated income tax return purported to included the income of The Connecticut Light and Power Company and of The Waterbury Gas Light Company up to November 27th, on which date The Waterbury Gas Light Company was merged into The Connecticut Light and Power Company.  The affiliation has not been questioned by the Internal Revenue Commissioner.  12.  That in arriving at its net income for the year 1931, The Connecticut Light and Power Company deducted the sum of $20,812.51, being the allocable portion of discount applicable to the issue of The Waterbury Gas Light Company and The Eastern Connecticut Power Company*880  bonds plus the unamortized discount on bonds of The Eastern Connecticut Power Company retired during the year, no part of which sum had theretofore been deducted on any income tax return.  *446  13.  That the only question in this case is the right of The Connecticut Light and Power Company to deduct from gross income an annual proportion of the bond discount suffered by The Waterbury Gas Light Company and The Eastern Connecticut Power Company on bonds issued by them prior to their respective mergers into The Connecticut Light and Power Company.  If the Connecticut Light and Power Company has such right, no deficiency exists.  If it does not have such right, there is a deficiency of $2,497.50 as found by the Commissioner of Internal Revenue, and it is so agreed.  Each of the two merger agreements here concerned, after setting out the respective rights, powers, and franchises of the merging companies, contains the following provisions, of which the general terms are almost identical in both agreements: WHEREAS subject to the approval of the Public Utilities Commission of the State of Connecticut said The Connecticut Light and Power Company has the right to merge with itself*881  other corporations in this state authorized to do a light, heat or power business, and all other such corporations are authorized to merge with said The Connecticut Light and Power Company; and both The Waterbury Gas Light Company and the Winsted Gas Company are authorized to do a light, heat or power business; and WHEREAS it is the desire of the parties hereto that said The Connecticut Light and Power Company shall merge with and into itself said The Waterbury Gas Light Company and said The Winsted Gas Company, and that said The Waterbury Gas Light Company and The Winsted Gas Company shall become merged with and into said The Connecticut Light and Power Company so that said The Connecticut Light and Power Company shall have and possess all of the rights, powers, franchises and property, real, personal and mixed, of said The Waterbury Gas Light Company and The Winsted Gas Company, and all debts, liabilities and duties of said The Waterbury Gas Light Company and said The Winstead Gas Company, shall thereafter attach to said The Connecticut Light and Power Company and may be enforced against it to the same extent as if they had been incurred or contracted by it.  Now, THEREFORE, *882  THIS AGREEMENT WITNESSETH: That 1.  Said The Connecticut Light and Power Company, in consideration of the premises and of the terms and conditions herein set forth, and other good and valuable consideration mutually agreed upon, does hereby agree to and with said The Waterbury Gas Light Company and The Winsted Gas Company to merge with and into itself said corporations, and said The Waterbury Gas Light Company and The Winsted Gas Company, in consideration of the premises and of the terms and conditions herein set forth, and of other good and valuable consideration, do hereby mutually agree to and with said The Connecticut Light and Power Company to merge with and into said The Connecticut Light and Power Company their respective rights, powers, franchises and property, real, personal and mixed, so that all of the rights, powers, franchises and property, real, personal and mixed, vested in said The Waterbury Gas Light Company and The Winsted Gas Company shall be transferred, merged and vested in said The Connecticut Light and Power Company.  2.  Said merger shall be upon the following terms: Said The Connecticut Light and Power Company shall issue 31,400 shares of common stock*883  of the par value of $100.00 each, as follows: *447  (a) 26,400 shares aggregating $2,640,000 par value pro rata to the holders of common stock of The Waterbury Gas Light Company in lieu of its $2,640,000 par value of outstanding common stock.  (b) 5,000 shares aggregating $500,000 par value pro rata to the stockholders of The Winsted Gas Company in lieu of its $500,000 par value of outstanding common stock.  3.  Upon the issue and delivery by said The Connecticut Light and Power Company of said shares of its common stock as hereinbefore provided to the stockholders of The Waterbury Gas Light Company and The Winsted Gas Company, said stockholders shall surrender their certificates for shares of the capital stock of each of said companies and the same shall be cancelled.  4.  Said The Connecticut Light and Power Company hereby further agrees to pay all debts and liabilities of each of said The Waterbury Gas Light Company and The Winsted Gas Company, and all debts and liabilities of each of said corporations shall attach to said The Connecticut Light and Power Company, and may be enforced against it to the same extent as if they had been incurred or contracted by it, and*884  all liens upon the property of any of said corporations shall be preserved unimpaired.  5.  This agreement of merger is made subject to the approval of the Public Utilities Commission of the State of Connecticut in accordance with the provisions of the General Statutes of the State of Connecticut, and if approved by said Public Utilities Commission it shall be submitted to meetings of the stockholders of each of the parties hereto called for that purpose, and shall take effect and be deemed and taken to be the agreement and act of merger of said corporations upon the approval thereof by the stockholders of each of said corporations, parties hereto, at said meetings and upon the filing with the Secretary of the State of Connecticut of a certificate subscribed and sworn to by the President or a Vice President and the Secretary or an Assistant Secretary of The Connecticut Light and Power Company setting out the terms of this agreement in full.  6.  Upon the consummation of the merger herein provided for, said The Connecticut Light and Power Company shall have and possess all the rights, powers, franchises and property, real, personal and mixed, of said The Waterbury Gas Light Company*885  and The Winsted Gas Company so merged with and into The Connecticut Light and Power Company subject, however, to any existing liens thereon, and the same shall thereafter be as effectually the rights, powers, franchises and property of said The Connecticut Light and Power Company as they were of the respective merged corporations, and the title to any real estate, whether by deed or otherwise, vested in any of the merged corporations, shall not revert or the deed become in any way impaired by reason of said merger.  A certificate shall be filed with the Town Clerk of each town where the property of any of the companies so being merged is located, setting forth the name of the company into which said companies owning said property shall become merged, the name of said companies, the date of this agreement of merger, and the fact that the same has been filed and recorded in the office of the Secretary of the State of Connecticut in accordance with the provisions of Section 3846 of the General Statutes of Connecticut, Revision of 1930.  7.  Said The Connecticut Light and Power Company shall pay all of the expenses in any way connected with the merger herein provided for.  8.  This*886  agreement of merger shall be executed on the part of said The Connecticut Light and Power Company, The Waterbury Gas Light Company and *448 The Winsted Gas Company by their proper officers and under their corporate seals in as many counterparts as such officers may determine, and each such counterpart shall be held an original.  IN WITNESS WHEREOF the parties to this agreement of merger, pursuant to resolutions duly passed by their respective Directors at meetings at which a quorum was present, have caused the respective corporate seals of said corporations to be hereunto affixed and these presents to be signed by their respective Presidents or Vice Presidents and attested by their respective Secretaries or Assistant Secretaries, the day and year first above written.  The supplemental stipulation of facts provides: "It is further stipulated that all things necessary were had and done to make said mergers effective in accordance with the terms of said agreements." OPINION.  ARUNDELL: The sole issue is whether the Connecticut Light & Power Co., an affiliate of the petitioner, is entitled to deductions in 1931 for amortization of the bond discount on bonds issued by the*887  Eastern Connecticut Power Co. and the Waterbury Gas Light Co., which corporations were merged into the Connecticut Light & Power Co. in 1929 and 1931, respectively.  The two mergers here concerned were effected pursuant to the provisions of the Connecticut statutes providing for the merger or consolidation of utility companies.  (Ch. 166, Pub. Acts 1927; secs. 3651, 3520-23 Gen. Stats. Conn., Revision of 1918; secs. 3846, 3616, 3462-3465, Gen. Stats. Conn., Revision of 1930.) The merger agreements were made subject to the approval of the Public Utilities Commission, as required by section 3651 of the General Statutes of Connecticut, Revision of 1918, and section 3616 of the General Statutes of Connecticut, Revision of 1930.  They provided for the required notice to the secretary of state and the filing of the required certificates with the local authorities, as provided in chapter 166 of the Public Acts of 1927 and section 3846 of the General Statutes of Connecticut, Revision of 1930.  They were passed by the respective boards of directors, subject to the approval of their stockholders, as required by sections 3520-23 of the General Statutes of Connecticut, Revision of 1918, and*888  sections 3462-3465 of the General Statutes of Connecticut, Revision of 1930.  The stipulation of facts shows that "all things necessary were had and done to make said mergers effective in accordance with the terms of said agreements." Thus, the two combinations concerned must be held to be effective statutory mergers under the laws of Connecticut.  Three courts and this Board have now spoken on the right of a corporation resulting from a statutory merger to deduct bond discount on bonds issued by a constituent corporation, and they have *449  all reached the same result in allowing such deduction.  The Circuit Court of Appeals for the Fourth Circuit, in ; the Circuit Court of Appeals for the Second Circuit, in , and ; the Court of Claims, in ; and this Board, in *889 , all allowed the deduction where the consolidation or merger was effected pursuant to the provisions of state statutes.  , did not involve a statutory merger. In the recent opinion of the Circuit Court of Appeals for the Second Circuit in , the court held: The situation in New York Central R. Co. v. Commissioner, 79 F.(2) 247, (C.C.A. 2), and Western Maryland R. Co.v. Commissioner, 33 F.(2) 695, (C.C.A. 4), was different.  In each of those cases there was a consolidation of the corporations and amortization was allowed for the life of the bonds on the ground that the consolidated corporation succeeded to the rights and liabilities of the constituent companies not as a purchaser, but by operation of law. A merger will in general preserve corporate identity and continue the obligations against a successor company, which is treated as identical with the former obligor.  *890 Cortland Specialty Co.v. Commissioner, 60 F.(2) 937, 939, (C.C.A. 2).  * * * We have held that there could be no deductions for amortization in case of the bonds of Virginian and of Electric Company of New Jersey because the obligations of the original obligors were not carried forward against the transferees by consolidation or merger so as to preserve the identities of the transferor companies.  But the situation of the bonds of the Appalachian Power Company is different.  Under the decisions of New York Central R. Co. v. Commissioner, 79 F.(2) 247, (C.C.A. 2), and Western Maryland R. Co.v. Commissioner, 33 F.(2) 695, (C.C.A. 4), deductions should be allowed in the case of those bonds if there was a merger of Appalachian Power Company in the Appalachian Electric Power Company which essentially preserved the identity of the transferor.* * * The decisions of the Virginia Court of Appeals * * * seem to show that where there is a merger or consolidation under the Virginia law the transferee corporation succeeds by operation of law to all the rights and liabilities of the former company and carries forward*891  its identity. The allowance of the deductions for the bonds of the Appalachian Power Company is governed, then, by our decision in  [Italics supplied.] All of the corporations concerned in the mergers in the case at bar were Connecticut corporations, and the law of Connecticut is particularly *450  clear in providing that the constituent corporations in the case of a merger or consolidation continue their existence in the corporations into which they are merged or consolidated. 1*892  In view of the unanimity of result reached in the decided cases on the rather narrow issue in the case at bar, we hold the deduction for amortization of bond discount allowable to the Connecticut Light & Power Co. on its consolidated return with the petitioner.  Reviewed by the Board.  Decision will be entered under Rule 50.STERNHAGEN concurs only in the result.  Footnotes1. General Statutes of Connecticut, Revision of 1930.  Sec. 3465.  Rights, duties and liabilities of consolidated corporations. Upon the completion of such consolidation, the several corporations shall become a corporation by the name provided in such agreement, and shall possess all of the rights, privileges, powers and franchises of each of the consolidating corporations; and all property, real, personal and mixed, and all debts due to them on whatever account, shall be vested in the consolidated corporation; and all rights of creditors and all liens upon the property of either of such consolidating corporations shall be preserved unimpaired, and the respective corporations shall continue in existence↩ so far as may be necessary to preserve the same; and all debts, liabilities and duties of either of such consolidating corporations shall thenceforth attach to the consolidated corporation, and may be enforced against it to the same extent as if they had been incurred or contracted by it.  An amount of the stock of the consolidated corporation equivalent to the amount of the stock of the merged corporations on which a franchise tax has been paid shall be exempt from taxation under section 3478.  [Italics supplied.]