Court Opinion

ID: 4617804
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:37:18.774422+00
Date Added: 2024-06-11T07:55:21.541324
License: Public Domain

Austin Transit, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.  Bus Leasing Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.  Zachry Realty Co., Petitioner, v. Commissioner of Internal Revenue, RespondentAustin Transit, Inc. v. CommissionerDocket Nos. 35411, 35412, 35413United States Tax Court20 T.C. 849; 1953 U.S. Tax Ct. LEXIS 85; July 23, 1953, Promulgated *85 Decisions will be entered under Rule 50.  Two brothers, the Murchisons, purchased all the stock of Austin Transit Company and liquidated the corporation.  Its assets were transferred to the three petitioner corporations for a total amount equivalent to the purchase price of the stock. Upon completion of the transactions, the Murchisons owned 69 per cent of the stock of each of the three petitioner corporations.  Held, that the acquisition of the assets by petitioner corporations was not a tax-free reorganization within the meaning of section 112 (g) (1) (D), since the Murchisons owned less than 80 per cent of their stock and the petitioners are entitled to their own cost basis of the assets.  Oliver W. Hammonds, Esq., and George D. Ray, Esq., for the petitioners.J. Marvin Kelley, Esq., for the respondent.  Black, *86 Judge.  BLACK *849  The respondent has determined the following deficiencies in income taxes:Austin Transit, Inc.Docket No. 35411YearDeficiencyPeriod Dec. 29, 1945, to July 31, 1946$ 28,215.06Fiscal year July 31, 194728,648.19Fiscal year July 31, 194826,308.46Bus Leasing CorporationDocket No. 35412YearDeficiencyPeriod Dec. 29, 1945, to July 31, 1946$ 2,374.93Fiscal year July 31, 19481,906.84Zachry Realty Co.Docket No. 35413YearDeficiencyPeriod Dec. 29, 1945, to July 31, 1946$ 145,76Fiscal year July 31, 19484,999.97The cases have been consolidated.Originally the pleadings raised many issues for each of the petitioners for each of the years in question.  The parties have filed a memorandum of settlement agreement with the Court which has settled *850  most of the issues.  The remaining contested issues relate to the amount of deductions to be made for depreciation and amortization.Without setting out in detail the particular adjustment by respondent for each taxpayer for each year involved, the following adjustments by respondent for the petitioner Austin Transit, Inc., for the period December*87  29, 1945, to July 31, 1946, illustrate the source of controversy:(a) Depreciation on car, equipment and furniture and fixtures is determined by prorating undepreciated cost over the remaining life of the asset.  The amount allowed for this period is $ 423.15 instead of $ 1,629.87 as claimed, a reduction of $ 1,206.72.(b) Franchises are amortized over the remaining life and the excessive amount claimed disallowed, as follows:Basis to predecessor$ 366,047.00Less amortization allowed359,401.92Remaining basis$ 6,645.08Remaining life Jan. 1, 1946, to Oct. 12, 1969.Amortization -- 1 year276.88Amortization -- 7 months161.53Amortization claimed19,657.33Excessive amount$ 19,495.80The only legal question raised by this controversy is whether, as petitioners contend, the three corporate petitioners acquired the assets of Austin Transit Company through a taxable transaction entitling the petitioners to use their own cost basis or, as respondent contends, a nontaxable transaction took place requiring a substitute basis under the Internal Revenue Code.  In their Memorandum of Settlement Agreement the parties have agreed on the details and consequences of determining*88  this basic question.FINDINGS OF FACT.Many of the facts have been stipulated and are found accordingly.The three petitioners, Austin Transit, Inc., Bus Leasing Corporation, and Zachry Realty Co., are corporations duly incorporated under the laws of the State of Texas on or about December 28, 1945, and the principal place of business of each is located in Austin, Texas.  The petitioners filed their income tax returns for the periods involved here with the collector for the first district of Texas, at Austin.Three family groups, the Springfields, Cravens, and Marshes, hereinafter referred to as the Springfield group, owned 97.296 per cent of the outstanding stock of the Austin Transit Company, a corporation whose principal business consisted of the conduct of a public transportation system in and about Austin, Texas, and the management of the various assets owned by it.*851  C. W. Murchison is a resident of Dallas County, Texas, and is the father of John Dabney Murchison and C. W. Murchison, Jr., the family group sometimes hereafter referred to as the Murchisons.  C. W. Murchison had a general power of attorney to transact business for his sons, both of whom were in the armed*89  services.C. W. Murchison entered into negotiations about September 1, 1945, with respect to the purchase of the properties of Austin Transit Company.  After the parties more or less agreed upon a price for the properties, the owners of Austin Transit Company refused to sell the assets but desired to sell the stock of said company.  The Murchisons were interested only in purchasing the assets.When the owners of Austin Transit Company refused to sell the assets Murchison contacted his tax counsel, Clark Breeding, for advice with respect to the acquisition of the stock of Austin Transit Company.  As a result of such counsel a plan of reorganization was adopted by Murchison, acting for his sons, and the plan was put into effect through D. R. Zachry, agent or trustee.The plan provided for the purchase of the stock of Austin Transit Company by Murchison brothers; Murchison brothers would follow through with the liquidation of Austin Transit Company and convey the assets of Austin Transit Company to three new corporations to be organized for the purpose of holding and operating the properties of the transit business.  At least 31 per cent of the stock in the three new corporations was*90  to be held by persons other than Murchison brothers.  This plan was adopted in order that Murchison brothers could get a stepped-up basis in the properties, "otherwise economically the transaction was not profitable." The plan was developed and set up before October 30, 1945.  Paul D. Lindsey purchased from D. R. Zachry, agent for the Murchisons, 21 per cent of the stock in the new corporation on December 28, 1945, and Norman Hirshfield was to receive 10 per cent as fees for his services.  Lindsey had contracted to purchase his stock during the September-October period.  One of the purposes of setting up three new corporations, instead of operating through the old one, was to obtain better finances for the purchase and operations.  This was a real and bona fide business purpose.  This enabled the owners to make three types of loans: (1) Against real estate, (2) against rolling stock, and (3) against "the operations of franchise business."On October 30, 1945, and until the final disposition of their stock D. R. Zachry acted solely in his capacity as agent for the Murchisons.  The Springfield group actively controlled the management of the Austin Transit Company on October 30, 1945, *91  and up until the final disposition of all their stock in that company to D. R. Zachry, agent for the Murchisons.*852  On or about October 30, 1945, the Murchisons, acting through their agent, D. R. Zachry, acquired 97.296 per cent of the total outstanding preferred and common stock of the Austin Transit Company which had been owned by the Springfield group.  The consideration paid by Zachry, as agent for the Murchisons, for the acquisition of the aforementioned 97.296 per cent of the total outstanding preferred and common stock of the Austin Transit Company was $ 1,172,420.42, later adjusted to $ 1,139,703.67, of which $ 1,000,000 was paid in cash.  D. R. Zachry also acquired, as agent for the Murchisons, between October 30, 1945, and December 28, 1945, the remaining outstanding preferred and common stock of the Austin Transit Company in the amount of 2.704 per cent, hereinafter referred to as the minority interest, for a consideration of $ 35,000, later adjusted to $ 31,031.  Finders' fees, legal and accounting fees, and other expenses incurred by the Murchisons in the acquisition of the outstanding stock of the Austin Transit Company amounted to $ 7,995.71 so that the total*92  cost to the Murchisons of the 100 per cent of the Austin Transit Company stock acquired by them was $ 1,181,730.38.In the purchase of the stock of the majority stockholders of the Austin Transit Company, the Murchisons obtained a guaranty from said stockholders that the net quick assets of the company would amount to $ 75,000.  A subsequent audit revealed a deficiency in net quick assets of $ 31,212.46.  This amount was refunded to the Murchisons by the majority stockholders. It was in turn used to organize the three petitioner corporations on December 28, 1945, under the laws of the State of Texas with a capital stock of $ 10,000 each.  The excess amount, or $ 1,212.46, was treated as an advance by the Murchisons on the books of petitioner Austin Transit, Inc.On or about December 28, 1945, the following three corporations were incorporated under the laws of the State of Texas with authorized and paid-in capital of $ 10,000 each: Austin Transit, Inc., Bus Leasing Corporation, and Zachry Realty Co., the three petitioners in this proceeding.  Stock certificates in these corporations were issued on December 28, 1945, as follows:AustinBus LeasingZachryNameTransit,CorporationRealtyInc.Co.D. R. Zachry9989898Paul Carrington111Joe C. Stephens111Totals1,000100100Par value per share$ 10$ 100$ 100Total par value$ 10,000$ 10,000$ 10,000*93 *853   The stock was reissued immediately as follows:AustinBus LeasingZachryDateNamePer centTransit,CorporationRealtyreissuedInc.Co.(1945)D. R. Zachry636296363Dec. 29Paul Carrington1Dec. 28Paul D. Lindsey212102121Dec. 28Frank H. Hemby66066Dec. 28Norman Hirshfield101001010Dec. 29Totals1001,000100100Paul Carrington and Joe C. Stephens, two of the original incorporators, held their stock as nominees of D. R. Zachry, who, in turn, was the agent for the Murchisons.  Norman Hirshfield assisted in the acquisition of the stock of the Austin Transit Company and received his stock in petitioners as a finder's fee.  Paul D. Lindsey was an attorney for the Murchison interests and gave his note for $ 6,300 (par value) for his stock. On or about February 15, 1946, he secured a loan at the Mercantile National Bank of Dallas and used the proceeds to liquidate his $ 6,300 note due the Murchisons for his stock. Since then he has paid off the bank and now owns his 21 per cent free and clear.Prior to the incorporation of petitioners, it was agreed that Frank Hemby was to be the general*94  manager and to own 6 per cent of the stock in the petitioners.  The Murchisons were to advance to Hemby the cost of his stock, or $ 1,800, for Hemby's note for $ 1,000 together with an option to reacquire Hemby's stock for $ 1,000 at any time within the next 3 years.  The agreement was carried out upon incorporation of petitioners.  In less than 1 year Frank Hemby was discharged as general manager, and his stock in petitioners was acquired by the Murchisons under the terms of the option.  On May 2, 1946, his stock was reissued to Virginia Murchison, mother of the Murchisons.On August 30, 1946, the stock in the name of D. R. Zachry in petitioners Austin Transit, Inc., and Bus Leasing Corporation, and the stock in the name of Paul Carrington in petitioner Austin Transit, Inc., were reissued as follows:AustinBusTransit,LeasingNameInc.Corp.John Dabney Murchison31532Clint W. Murchison, Jr31531The Austin Transit Company was liquidated on December 31, 1945.  On December 31, 1945, D. R. Zachry, as transferee of all the assets of the Austin Transit Company, conveyed all those assets to petitioners for the following considerations: *854 NameAssets transferredAmountAustin Transit, IncFranchise, net current assets, and$ 800,000.00miscellaneous fixed assets.Less later adjustment5,013.70Net$ 794,986.30Bus Leasing CorpBuses236,744.08Zachry Realty CoReal estate150,000.00Total$ 1,181,730.38*95  The following balance sheets show the status of Austin Transit Company prior to liquidation and how these assets were shown on the opening balance sheets of the petitioners, Austin Transit, Inc., Bus Leasing Corporation, and Zachry Realty Co.:AustinAustinTransitTransit,CompanyInc.AssetsCash for stock$ 10,000.00Cash for advance1,212.46Net Current$ 31,351.8231,351.82Travis Heights Lots349.89Plant site6,300.00Stone repair shop -- net755.63Other bldgs. etc. -- net1,757.05Shop tools, etc. -- net2,757.158,668.72Office f.& f. -- net1,602.431,411.50Autos -- net146.773,233.73Buses -- net166,051.98Franchise6,645.08795,320.53Refund purchase price5,013.70Total assets$ 217,717.80$ 856,212.46Liabilities1st mortgage payable$ 600,000.00Notes payable200,000.00Common stock$ 560,000.00 10,000.00Preferred stock250,000.00 Appreciation(889,373.44)Earned surplus297,091.24 Reserve for damages45,000.00Advance by stockholders1,212.46Total liabilities$ 217,717.80 $ 856,212.46BusZachryLeasingRealtyCorp.Co.AssetsCash for stock$ 10,000.00$ 10,000.00Cash for advanceNet CurrentTravis Heights Lots349.89Plant site100,250.11Stone repair shop -- net49,400.00Other bldgs. etc. -- netShop tools, etc. -- netOffice f.& f. -- netAutos -- netBuses -- net236,744.08FranchiseRefund purchase priceTotal assets$ 246,744.08$ 160,000.00Liabilities1st mortgage payable$ 150,000.00Notes payable$ 236,744.08Common stock10,000.0010,000.00Preferred stockAppreciationEarned surplusReserve for damagesAdvance by stockholdersTotal liabilities$ 246.744.08$ 160,000.00*96  Among the assets transferred on December 31, 1945, from the Austin Transit Company was the franchise to operate a transit system in Austin, Texas, which franchise had a remaining life to October 12, 1969.OPINION.The only issue presented in this case is whether the three corporate petitioners acquired the assets of Austin Transit Company through a taxable transaction entitling the petitioners to use their own cost basis or a tax-free transaction requiring a substituted basis of the Austin Transit Company.  Respondent contends that petitioners acquired the assets as a result of a tax-free reorganization within the meaning of section 112 (g) (1) (D) and 112 (h), Internal Revenue Code, which provides the following:*855 SEC. 112. RECOGNITION OF GAIN OR LOSS.(g) Definition of Reorganization. -- As used in this section (other than subsection (b) (10) and subsection (1)) and in section 113 (other than subsection (a) (22)).  -- (1) The term "reorganization" means * * * (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the*97  assets are transferred, or * * ** * * *(h) Definition of Control.  -- As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.Under the statutory definition above an essential requirement of a reorganization is that immediately after the transfer the transferor corporation or its shareholders own at least 80 per cent of the stock of the new corporation.  Spang, Chalfant & Co., 31 B. T. A. 721; Schumacher Wall Board Corporation, 33 B. T. A. 1211, affd.  93 F.2d 79">93 F. 2d 79.A good part of petitioners' brief is devoted to an argument that there was no reorganization under section 112 (g) (1) (D) because the facts clearly show that the Murchisons set out to acquire the assets of Austin Transit Company and not its stock and that the acquiring of the stock was merely incidental to acquiring the assets and that the whole transaction should be regarded as one of purchasing assets*98  and not stock and should be so treated in applying the reorganization provisions of the statute.  Petitioners contend that when this is done, there was no tax-free reorganization and rely upon such cases as Kimbell-Diamond Milling Co., 14 T. C. 74, affd.  187 F.2d 718">187 F. 2d 718, and cases there cited.Respondent on his part contends that the petitioners, Austin Transit, Inc., Bus Leasing Corporation, and Zachry Realty Co., acquired the assets of Austin Transit Company through a nontaxable reorganization under the provisions of section 112 (g) (1) (D) and the basis of such assets to the petitioners is the basis of such assets in the hands of Austin Transit Company, the predecessor corporation.  Respondent relies in support of his contention upon Estate of John B. Lewis, 10 T. C. 1080, affd.  176 F.2d 646">176 F. 2d 646; Survaunt v. Commissioner, 162 F.2d 753">162 F. 2d 753.If we should discuss the foregoing respective contentions of the parties and the cases upon which they rely, it would add very considerably to the length of this opinion.  We find it unnecessary to do *99  so.  Even if we assume that the Commissioner is correct in his contention that there was a statutory reorganization under the authorities which he cites, nevertheless, he could not win.  It is not every reorganization under section 112 (g) (1) (D) that is tax free. In order that the reorganization shall be nontaxable there must be a compliance with the control provisions of the statute defined in section 112 (h).*856  Petitioners raise this ground under paragraph B of their brief which says:B. There could, in any event, be no tax free reorganization because there was missing the requisite 80 per cent control in the Murchison brothers as required by Section 112 (h) of the Internal Revenue Code.We sustain this contention of petitioners.  It is unnecessary to discuss the other grounds urged by petitioners.The Austin Transit Company conducted the public transportation system in Austin, Texas.  The Murchisons purchased all the stock of the Austin Transit Company for a total cost of $ 1,181,730.38 between October 30 and December 28, 1945.  On December 28, 1945, the three petitioner corporations were formed with $ 10,000 capital each, which was new capital representing additional*100  investments of the Murchisons to take over the assets of the Austin Transit Company.  On December 31, the Austin Transit Company was liquidated, and its assets were divided up into real estate, buses, and all other assets, and transferred respectively to the three petitioner corporations, as set out in the Findings of Fact, for a total consideration of $ 1,181,730.38.  At the conclusion of the reorganization the Murchisons owned 69 per cent of the stock of each of the three petitioner corporations.  Lindsey, the attorney for the Murchisons, owned 21 per cent of the stock of each corporation which he purchased for a total sum of $ 6,300 and Norman Hirshfield owned 10 per cent of the stock of each corporation.  There seems to be no doubt from the record that both Lindsey and Hirshfield owned outright their shares of stock in each corporation.  Even if the 6 per cent owned by Hemby be regarded as owned by the Murchisons, they still owned only 69 per cent of the stock in each corporation which acquired the assets of Austin Transit Company.Since the Murchisons owned less than 80 per cent of the stock of the new corporations, the acquisition of the assets of the Austin Transit Company *101  is precluded from being a tax-free reorganization within the meaning of section 112 (g) (1) (D).  Respondent's argument is based solely on this subsection.  It is proper to point out that in the cases of Estate of John B. Lewis, supra, and Survaunt v. Commissioner, supra, relied upon by respondent, there was no lack of control on the part of the transferors. They owned 100 per cent of the stock of the acquiring corporations.  That fact serves to clearly distinguish those cases from the instant case.  The three petitioner corporations are entitled to their own cost basis of the assets in question under the general rule of section 113 of the Code.In the Memorandum of Settlement Agreement filed in this case the parties have settled all other issues raised by the pleadings.Decisions will be entered under Rule 50.