Court Opinion

ID: 4477346
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:12:29.307231+00
Date Added: 2024-06-11T14:53:31.154602
License: Public Domain

Pierce, J., dissenting: On the first issue, which pertains to petitioner’s acquisition of the net assets of the Crosley Corporation and the liquidation of such subsidiary, I am unable to agree with the majority opinion, for the following reasons: 1. I believe that the Findings of Fact made by the majority do not present a complete or adequate factual picture of the various steps and transactions here involved, for the reason that they incorporate the several exhibits by reference, without describing them sufficiently to reveal their importance and bearing on the issue. 2. I believe that the majority opinion, by focusing attention almost entirely upon a sale by petitioner to a third party for $5,225, of only 200 shares of Crosley stock out of petitioner’s total holding of 496,030 shares of such stock, has diverted attention from the more important factors, including: (a) The nature of the particular transaction by which petitioner acquired the entire net assets and going business of Crosley, including gross assets carried on the latter’s books at approximately 18 million dollars and liability of approximately 8 million dollars; (b) the delivery by petitioner to Crosley of the equivalent of 2,183,200 shares of its own stock, as the agreed consideration for the net assets and going business of such subsidiary; (c) the identity of the particular properties or securities, if any, which were distributed to petitioner upon the liquidation and winding-up of the Crosley Corporation; and (d) the continuing 90 per cent, or more, interest and control which petitioner had in the going business of Crosley, both before and after the elimination of the corporate structure under which such business had been operated. The 200-share sale of Crosley stock was, in my opinion, merely a diversionary maneuver which did not affect the reorganization of the business or the amount which any other stockholder of Crosley would receive in liquidation, and should not have been regarded as the determinative factor in deciding the present issue. 3. I believe that the application and construction of section 112 (b) (6) in the majority opinion are erroneous, in the light of all the evidence, including the exhibits; and that such application and construction are out of harmony, not only with the purpose and intent of the reorganization provisions of the Code, but also with the principle of Gregory v. Helvering, 293 U. S. 465, affirming (C. A. 2) 69 F. 2d 809. 4. I do not agree with the conclusion in the majority opinion that the evidence “clearly establishes such loss in the amount of $6,833,907.85.” I agree with respondent that neither the loss nor the amount thereof has been proved. It should be observed that the majority opinion does not pass upon the related issue raised in the amendment to the petition, wherein petitioner contends that the transactions here involved produced, in addition to a recognizable loss of $6,833,907.85, a stepped-up basis for depreciation of the Crosley assets, in the amount of approximately 14 million dollars if the loss is allowed, or otherwise in the amount of approximately 21 million dollars. I. The exhibits, together with the stipulation through which they were incorporated in the record, reveal the following: Exhibit 1-A is an excerpt from the minutes of the special meeting of petitioner’s board of directors, held on October 4, 1946, at which the procedures here involved were formulated. These minutes throw light on what petitioner’s board of directors intended to accomplish through the transactions with Crosley, and what were the steps by which such objectives were to be attained. The chairman of the meeting stated that the principal business for which the meeting had been convened was to consider “a proposal to consolidate the operations” of Crosley and two other subsidiaries of petitioner with the parent corporation, through (a) the acquisition of the assets and the assumption of the liabilities of said subsidiaries, and (b) the issuance of certain shares of petitioner’s stock to the respective subsidiaries “to be distributed to the stockholders of the subsidiary corporations upon dissolution.” Explanations, reports, and recommendations relating to “the plan to integrate the subsidiaries with the parent company,” were then received and considered. One of these reports, which was accepted and spread upon the minutes of the meeting, contained the following recommendation: That we proceed with our plans for the acquisition of all of the assets of said corporations on a basis that will afford to the minority stockholders of said corporations as a result of the sale Of their assets, or the dissolution and liquidation of said corporations, or pursuant to a plan for their reorganization, the distribution of The Aviation Corporation [petitioner’s] stock in the following proportions for each minority share of stock of the subsidiaries outstanding: In the case of The Crosley Corporation four shares for one. [Other ratios were specified for the other subsidiaries.] This same report also stated: We shall endeavor to prepare detailed plans * * *, and in doing so shall keep foremost in mind that the officers and directors of all of these corporations which The Aviation Corporation [petitioner] controls have fiduciary responsibilities to the stockholders of the four corporations; that we are trying to eliminate the minority interests against their will and without their consent; that this can only be done legally as the law provides; that it is our duty and responsibility to see that the desired objectives are accomplished on the fairest possible basis to the minority interests of the subsidiaries and to all of the stockholders of all four corporations. Resolutions were then adopted, which approved “the plan of integrating this corporation’s subsidiaries” with the petitioner, in accordance with the recommendations made; and which authorized petitioner to acquire all of Crosley’s net assets and business, and to issue a maximum of 2,183,200 shares of petitioner’s common stock; said acquisition to be upon the terms and conditions set forth in a proposed agreement between petitioner and Crosley (which is hereinafter identified as Exhibit 4^D). It was then further Resolved that the Board of Directors of this corporation, after examination of reports of accountants and engineers and from other investigations, do hereby declare and find that the fair value to this corporation of the property, assets and business of The Crosley Corporation so to be acquired less the total of the liabilities and obligations to be assumed, in accordance with the aforesaid Agreement, is in excess of the par value of said 2,183,200 shares; provided, however, inasmuch as this corporation owns 496,030 shares of the issued and outstanding Common Stock of The Crosley Corporation and upon the liquidation of The Crosley Corporation, as provided in said Agreement, this corporation would receive from The Crosley Corporation in liquidation 1,984,120 shares of Common Stock of The Aviation Corporation [petitioner], this corporation waive its rights as a stockholder of The Crosley Corporation to receive such shares of Common Stock of The Aviation Corporation upon such liquidation of The Crosley Corporation and issue to The Crosley Corporation upon the acquisition of said property, assets and business not in excess of 199,080 shares of Common Stock of The Aviation Corporation; Exhibit Jy-D is the proposed agreement between the two corporations (called agreement and plan) which was subsequently approved and given effect. The salient features of the same are summarized in the notice sent to the Crosley stockholders (Exhibit 10-J), as follows: Summary op Material Features op Proposed Plan and Dissolution 1. Crosley will transfer and deliver to Avco all of its property, assets and business of every nature and kind, tangible and intangible, real and personal, including among other things its accounts receivable, cash, inventories, patents, trade marks and good will. 2. Avco will deliver to Crosley not more than 2,183,200 shares of the Common Stock of Avco of the par value of §3 per share and, in addition, will assume all of the liabilities and obligations of every nature and kind of Crosley including, but without limitation, tax liabilities. The number of shares to be delivered by Avco will be subject to reduction or adjustment to the extent that Avco may waive its rights as a shareholder of Crosley to receive such shares of Common Stock of Avco which, except for such waiver, would be distributable to Avco in redemption of the shares of stock of Crosley owned by Avco and to the extent that any dissenting shareholder of Crosley may demand payment of the value of his shares in the manner hereinafter provided. 3. Crosley will distribute to its shareholders the shares of Common Stock of Avco received by Crosley, and will be dissolved. 4. Upon such distribution the bolder of each one share of the outstanding Common Stock without par value of Crosley will receive 4 shares of Common Stock of the par value of $3 per share of Avco. 5. Crosley will retain cash to pay shareholders who, within the required time, object in writing to the proposed transfer and demand payment of the value of their shares. Upon the consummation of the transfer of assets, holders of certificates of stock of Crosley will be advised of the date on and after which, and of the place or places where they may surrender such certificates and receive a certificate or certificates for the shares of stock of Avco to which they shall be entitled as set forth above. The above-mentioned 2,183,200 shares of petitioner’s stock was exactly equal to 4 times the number of issued and outstanding shares of Crosley stock, which was 545,800 shares. Paragraph Eighth of the agreement recognized that after Crosley had transferred its business to petitioner and received the shares of the latter’s stock, its assets would thereafter consist of shares of petitioner’s stock; and that these shares of petitioner’s stock would be distributed in liquidation to its stockholders. This paragraph of the agreement also shows that the minimum amount of petitioner’s stock to be delivered to Crosley was the number of shares which would permit distribution to the minority stockholders on a 4-to-l exchange basis; and that, in the event any minority stockholder dissented from the plan, the number of shares to be transferred by petitioner and also the amount of cash assets to be received by petitioner would be reduced, so that the dissenters could be paid in cash. Exhibit 6-F is a copy of the minutes of the special meeting of the Crosley stockholders on November 18, 1946, at which the agreement was approved. These minutes show that three separate propositions were there presented to the stockholders, and were approved on separate ballots. The first proposition called for approval or rejection of the proposed transfer of all net assets of Crosley to petitioner, and the issuance by petitioner to Crosley of not more than 2,183,200 shares of its own stock, upon the terms and conditions set forth in the agreement. The second proposition was that Crosley elect to wind up and dissolve in accordance with said agreement. And the third proposition was for approval or rejection of the agreement as a whole. On each proposition, 499,268 shares were voted; and of these 496,133 shares were voted in favor and 3,135 shares were voted in opposition. The number of these shares held by petitioner was 496,030. Exhibit 8-H is the deed and bill of sale dated November 18, 1946, by which Crosley granted and conveyed to petitioner all its property and assets “of every kind and nature wheresoever situated,” including among others, real estate, machinery, tools, inventories, books, records, accounts receivable, cash in bank, goodwill, going business, unfilled orders, trade-marks and trade names; but excepting therefrom the shares of petitioner’s stock “delivered to The Crosley Corporation as consideration for the foregoing property and assets”; and excepting also such amount of cash as might be sufficient to enable Crosley to pay its dissenting minority stockholders and to defray expenses incident to complying with the agreement. The stipulation shows that petitioner transferred to Crosley, pursuant to the agreement, 173,688 shares of its common stock; and that it also waived, pursuant to the agreement, its right as a stockholder of Crosley to receive upon the latter’s liquidation, such shares of its own stock as would, except for the waiver, have been distributable to it. Exhibit 7-G is a broker’s statement which shows that on November 18,1946, petitioner sold to a third party in New York City, 200 shares of Crosley stock for the gross price of $5,225 cash. A pencil notation on the statement indicates that the sale was made at 1:22 p. m. It has been stipulated that this was after the adoption of the agreement by the Crosley stockholders at a meeting held in Cincinnati at 12 o’clock noon of the same day; and that it was before the transfer of Crosley’s assets to petitioner and before the liquidation of Crosley. It also has been stipulated that the Crosley Corporation ceased doing business as of November 18, 1946, pursuant to notice of liquidation. The record does not show whether this stock was transferred of record on the Crosley books, or whether the new holder received shares of petitioner’s stock or cash on the liquidation of Crosley. The stipulation shows that upon the liquidation of the Crosley Corporation, all the above-mentioned 173,688 shares of petitioner’s stock which were transferred to Crosley were distributed to Crosley stockholders, other than petitioner. They were delivered to the consenting stockholders in exchange for 43,422 shares of Crosley stock. The stipulation also shows that the holders of 6,545 shares of Crosley stock dissented and received cash. Exhibit 9-1 is the certificate of dissolution of Crosley Corporation, which shows that it was filed in the office of the Secretary of State of Ohio on December 31, 1946. Other exhibits (Exhibits 15-0 and 18-E) show that the business thereafter was operated as the Crosley Division of petitioner. II. 1. The factual picture presented by all the evidence is this: Prior to the transaction involved, petitioner had increased its shareholdings in the Crosley Corporation. On November 30,1945, it had held 483,409 shares; and then before March 4,1946, it had purchased an additional 12,621 shares, thereby enlarging its holdings to 496,030 shares, representing 90.88 per cent of all Crosley stock outstanding. At the meeting of petitioner’s board of directors held on October 4, 1946, plans were formulated “to consolidate the operations” of Crosley and two other subsidiaries with those of the parent, and to eliminate the separate corporate entities of the subsidiaries. Why petitioner did not proceed to effect this objective by buying up the remaining 9.12 per cent minority stock is not shown, and is not a matter for our concern. What petitioner did was to employ its voting control over Cros-ley to adopt a plan which would produce the same practical result, i. e.: First, to purchase or acquire, in a transaction between the two corporations, the entire net assets of Crosley in consideration for the delivery of shares of petitioner’s own stock; and then to have Crosley liquidate and dissolve, with the result that the Crosley stockholders would receive upon the liquidation, no interest in the Crosley assets or going business but merely shares of petitioner’s stock or a cash equivalent. The objective, as stated in the recommendation accepted at the meeting of petitioner’s board of directors (Exhibit 1-A) was, “that we are trying to eliminate the minority interests against their will and without their consent; and that this can only be done legally as the law provides * * 2. In considering the income tax consequences of what was done, it is to be observed that under the agreement petitioner had an election to follow either one of two courses, which might have different tax results: (a) It could acquire all the Crosley assets and going business by issuing and delivering to Crosley 2,183,200 shares of its own stock. If this course were chosen, petitioner would, as pointed out in the resolution of petitioner’s board of directors (Exhibit 1-A), receive back from Crosley, as a distribution in liquidation to it as a stockholder, 90.88 per cent of the same shares (estimated in the resolution to be 1,984,120 shares); or (b) Petitioner could, if it elected, acquire the Crosley assets and going business by issuing and delivering only that number of its own shares which would represent the difference between the above-mentioned 2,183,200 shares and the portion of the same which it would, as a stockholder of Crosley, receive back as a distribution upon the subsequent liquidation. But this course could be followed only on the condition that petitioner waive its right, as a stockholder of Crosley, to receive such of its own shares as it would be entitled, except for the waiver, to receive upon the liquidation. Because petitioner did not have 2,183,200 shares available for delivery, it elected the latter course. The effect of petitioner’s election and waiver of rights was that the number of shares of its stock to be delivered to Crosley for the latter’s net assets was reduced, and petitioner’s right to receive shares of its own stock from Crosley (which after the latter’s transfer of its business were practically its only remaining assets) was extinguished. Thus, upon the subsequent liquidation of Crosley, petitioner was not entitled to receive, and in fact did not receive, any distribution from Crosley with respect to which the loss on liquidation here claimed could have been realized. Having used its Crosley investment in the acquisition of the assets, it could not use it again to establish a loss on the liquidation. I would have held that the loss claimed on the liquidation of the Crosley Corporation is not allowable. 3. If, in the alternative, we accept the petitioner’s contention that the Crosley assets were received as a distribution upon liquidation of the subsidiary (which appears to be the theory on which both parties have presented the case to this Court), then it becomes necessary to give effect to two important factors in the evidence which are the very antithesis of liquidation: (a) The issuance and delivery by petitioner to Crosley of the 173,688 shares of its own stock; and (b) the waiver of rights which petitioner gave in connection with the delivery of this stock. These shares, which were of reduced number by reason of the operation of the waiver, cannot be regarded reasonably as a capital contribution to Crosley. This is so, not only because the result would be to greatly increase the Crosley assets available for distribution to all stockholders, in violation of the intent of the agreement and plan; but also for the reason that under the provisions of the agreement this stock did not become a free asset of Crosley but was earmarked for use only in redeeming shares of minority stockholders on a 4-to-l exchange basis. Thus, if we accept the premise that petitioner received the Crosley assets in liquidation rather than by purchase, it must follow logically that the 173,688 shares of stock were merely deposited with Crosley for use in redeeming the minority holdings, on a 4-to-l exchange basis in accordance with the agreement; and that by reason of such redemptions, petitioner became substantially the only remaining stockholder, and was thereby enabled to take out the remaining assets in liquidation, without interference from any other stockholder. Under this analysis, petitioner held a greater percentage of the stock of Crosley at the time of the liquidation than it had held at the time of the adoption of the agreement, notwithstanding its interim sale of 200 shares to a third party. It follows that, under section 112 (b) (6) of the Code, no gain or loss on the liquidation may be recognized ; and that the determination of the Commissioner should be approved. 4. With further regard to petitioner’s sale of the 200 shares of Cros-ley stock for $5,225,1 would hold that this had no effect on the income tax consequences of the principal transactions here involved. At the time these shares were sold, the agreement had been adopted, the last stockholders’ meeting had been concluded, and Crosley had either ceased or was in the process of ceasing to carry on business. These shares had lost their vitality so far as pertains to the right to vote, the right to receive dividends, and the right to participate in a going business; and even as to liquidation, these shares had, by the adoption of the agreement, lost all right to acquire any interest in the going business, and could receive nothing except shares of petitioner’s stock on a fixed 4-to-l basis, or the cash equivalent. Thus, the new holder of these 200 shares which had been purchased for $5,225, became entitled to receive 800 shares of petitioner’s stock which, valued at the stipulated figure of $6.50 per share, would equal $5,200; and the petitioner, by making the sale, merely increased by 800 shares the amount of stock to be delivered to Crosley under the agreement. The net result was equivalent to petitioner selling 800 shares of its own stock, which would have no effect upon the continuity of interest in the business or upon the amount which any other stockholder of Cros-ley would receive in the liquidation. In the event the new stockholder elected to take cash in lieu of stock, the result would be simply a reduction of approximately $5,200 in the amount of the Crosley assets which petitioner would otherwise acquire; and thus the sale of the stock would be tantamount to an assignment by petitioner of part of the cash which it was entitled to receive under the agreement, with the same absence of effect on the continuity of interest in the business and the rights of other stockholders. Moreover, this 200-share sale, which had no business purpose and no effect on the principal transactions involved, should not be permitted to interfere with giving effect' to the purpose and intent of the reorganization provisions of the Code, which include section 112 (b) (6). The intent of these sections, so far as they apply to the incorporation or dissolution of “controlled” subsidiaries, is to eliminate such corporate transactions from the class of events which give rise to recognizable gains or losses for income tax purposes. The last clause of section 112 (b) (6) (A), upon which petitioner relies, was intended, in my opinion, to operate like the second clause of the first sentence of section 112 (b) (5) — that is, to preserve the continuity of interest in the going business by preventing the parent corporation from dividing and splitting off portions of such business through sales of stock, which might entitle the new holders to take over parts of the business on the liquidation. I cannot believe that the Congress intended that section 112 (b) (6) should be rendered ineffectual by a transaction having the character of the present 200-share sale — where the petitioner, in the fractional part of a day between adoption of the agreement and receipt of the deed, transferred an unsubstantial portion of its 90 per cent controlling interest, without in any way affecting either the continuity of interest in the business, or the rights or interests of any other stockholder of the subsidiary. As was said by the Supreme Court in Gregory v. Helvering, supra: 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. As previously indicated, I would deny petitioner’s claim to any loss on the liquidation of the Crosley Corporation. Since the majority opinion does not deal with the basis question, I have not dealt with it in this dissenting opinion.