Court Opinion

ID: 4616442
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:34:29.967153+00
Date Added: 2024-06-11T07:55:07.496315
License: Public Domain

NEW COLONIAL ICE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.New Colonial Ice Co. v. CommissionerDocket No. 27726.United States Board of Tax Appeals24 B.T.A. 886; 1931 BTA LEXIS 1573; November 24, 1931, Promulgated 1931 BTA LEXIS 1573">*1573  A new and separate corporation, organized to take over the business, assets and liabilities of its predecessor, is not entitled to carry forward net losses of its predecessor for 1921 and the period January 1, 1922, to April 13, 1922, in computing its income for the period April 14, 1922, to December 31, 1922.  Joseph Sterling, Esq., for the petitioner.  John D. Kiley, Esq., for the respondent.  SEAWELL24 B.T.A. 886">*886  This proceeding involves deficiencies in income tax as determined by the Commissioner for 1922 and 1923 in the respective amounts of $4,853.06 and $828.07.  In addition, the Commissioner, by way of affirmative relief, has asked for an increase in the deficiency for 1922 from $4,853.06 to $6,282.93.  The only question involved is whether the petitioner, in determining its tax liability for the period from the date of its organization on April 14, 1922, to December 31, 1922, may have the benefit of the net losses sustained by its predecessor for 1921 and the period January 1, 1922, to April 13, 1922.  FINDINGS OF FACT.  The following stipulation of the facts involved was submitted: (A) COLONIAL ICE CORPORATION, (hereinafter referred to1931 BTA LEXIS 1573">*1574  as the "old company"), was incorporated under the Laws of the State of New York, on April 20th, 1920.  Its authorized capital was $750,000, consisting of 6,500 shares of preferred stock of $100.00 par value, and $20,000 shares of common stock, of $5.00 par value.  (B) The corporation was promoted by one, Edmon C. Turner, who had associated with him his wife, Florence C. Turner, and one Michael McCarlo.  These persons instituted a stock selling campaign among small ice and coal dealers in the City of New York.  The stock was sold in units of one share of common and one share of preferred, the sale price per unit being $100.00.  (C) The corporation purchased a block in Manhattan, New York, bounded by Eighth Avenue, McCoombs Place, 151st Street and 152nd Street.  On this block, there were substantial buildings, susceptible to alterations into an ice-plant.  Extensive contracts were entered into for structural improvements and for the installation of refrigerating machinery in the building.  The largest contract was with the De La Vergue Machine Company.  The Contracts with the De La Vergne Machine Company and with the other creditors who installed equipment provided that the title1931 BTA LEXIS 1573">*1575  to the property installed remained in the vendor until the purchase price was fully paid.  The installation of equipment proceeded to a point when, in about August, 1921, the plant was in condition to operate at approximately forty per cent of the entire capacity contemplated.  At that time, the Company owed creditors 24 B.T.A. 886">*887  approximately $285,000, and was not in a financial conditon at that time to liquidate this indebtedness or to supply the additional equipment required to operate at a profit.  (D) The inability of the Company to meet its obligations resulted in the creditors forming a Creditors' Committee, which acted through the De La Vergne Machine Company, and in the organization of a Stockholders' Committee.  (E) The Creditors' Committee caused an investigation to be had of the affairs of the Company.  It was discovered that the promotors had caused the issuance of a large number of shares, for which no consideration had been received by the corporation, and that much of this stock was not even recorded in the records of the company.  (F) Because of this situation, Turner resigned as an officer and director of the company, disassociating himself from any connection1931 BTA LEXIS 1573">*1576  therewith.  He reassigned to the corporation the shares of stock which had been improperly issued to him and consented to the cancellation of these shares of stock.  The company also procured surrender for cancellation of such other certificates of stock as were improperly issued and of which it had acquired knowledge through the investigation.  After these shares had been returned to the corporation and cancelled, it was ascertained that 3,385 shares of preferred stock and the same number of shares of the common stock of the corporation had been legally issued and recorded.  (G) In August, 1921, at the instigation of the creditors of the company, a stockholders' meeting was held, at which time new officers and directors of the creditors' choosing were elected.  Protracted negotiations, commencing in August, 1921, and extending to April, 1922, were had between the creditors and the bona fide stockholders.  These negotiations resulted in the Colonial Ice Corporation entering into an agreement with the De La Vergne Machine Company, acting on behalf of itself and other creditors, (copy of which agreement is attached hereto as "Exhibit A" and made a part hereof.) The agreement referred1931 BTA LEXIS 1573">*1577  to in the last paragraph above of the stipulation recites an indebtedness of the old company to creditors of approximately $285,000 and its inability to pay such indebtedness; that in order to complete the plant it was necessary for the De La Vergne Machine Company (the largest creditor) to furnish and install additional machinery, funds for the payment of which were not available; and that the old company was desirous of accepting a proposed "scheme of reorganization" under which the creditors would agree to complete the plant and grant a reasonable time within which to pay its present indebtedness and also the cost of the additions to the plant.  Then there followed covenants and provisions in substance as follows: 1.  The old company agreed that it would cause a new corporation to be organized under the laws of New York to be called the "New Colonial Ice Company, Inc.," and with a capitalization as follows: 6,000 shares of cumulative 6 per cent non voting preferred stock of $100. par value per share and 20,000 shares of common stock at $5.00 par value per share, the Charter and By-laws of said Corporation to provide for a Board of Directors of seven members, and that the date1931 BTA LEXIS 1573">*1578  upon which said preferred stock shall commence to accumulate its dividends shall be from the date of issue.  24 B.T.A. 886">*888  2.  The old company would enter into an agreement with the aforementioned new company to sell to the latter all of the former's assets of every nature and description and in consideration therefor would accept the undertaking of the new company to assume and pay all of its indebtedness and as further consideration would accept approximately 3,400 shares of preferred stock and the same number of voting trust certificates for common stock of the new company.  3.  The creditors agreed to complete the plant at a cost of approximately $132,000 and to extend the time for the payment of the old and new indebtedness for a period not to exceed five years, provided: (a) That paid in subscriptions for the stock of said New Colonial Ice Company, Inc. shall be received by it to the amount of $100,000 before this agreement shall become binding upon said De La Vergne Company, unless De La Vergne Company shall hereafter waive this provision.  (b) That at a special meeting of the stockholders of the Ice Corporation to be called, there shall be a vote of not less than two1931 BTA LEXIS 1573">*1579  thirds of all the stockholders in favor of carrying through said scheme of reorganization.  (c) That all profits from the operation of said plant and all receipts from the sale of stock or other property of the corporation or otherwise shall be used for payment of the corporation's indebtedness as rapidly as said profits or receipts may be received having due regard for leaving in the treasury of said Company funds reasonably sufficient for the carrying on of its then business.  (d) That control of the management of said Company through a voting trust agreement of all of its common stock shall be vested in De La Vergne Company until the entire indebtedness of the Company shall have been paid or sufficiently paid so as in the sole judgment of the De La Vergne Machine Company to warrant it in giving up said control, it being understood and agreed that the stockholders shall be entitled to be represented on the Board of Directors of said Company by three out of the seven members of the Board, who shall be designated by the preferred stockholders.  (e) That as part of the consideration to De La Vergne Machine Company to go forward with the completion of the plant and to extend the1931 BTA LEXIS 1573">*1580  time of payment of said indebtedness, the New Colonial Ice Co. Inc. shall issue and deliver to De La Vergne Machine Co. the entire amount of its common stock in order that, and De La Vergne Machine Co. so agrees, said common stock may then be placed in a voting trust to terminate after five years or at such earlier date as the said indebtedness may be paid and in order further that said common stock, or voting trust certificates therefor, may be returned into the treasury of the Company as full paid stock.  (f) That interest shall accrue and be paid upon said indebtedness at the rate of 6% per annum from March 1st, 1922.  4.  A further provision in the agreement follows: Fourth: De La Vergne Machine Company agrees that so long as it is in control of the management of said Company there shall be no salaries paid to officers of the Company, except to the Manager thereof; that no commission shall be paid for the sale of the stock of the Company; that no bonus stock shall be issued except along with the sale of the preferred stock; that no common stock shall be sold by the Company, except as herein provided, except with an equivalent number of shares of preferred stock unless1931 BTA LEXIS 1573">*1581  with its consent and 24 B.T.A. 886">*889  with the consent of a majority vote of the preferred stockholders of said Company at a special meeting called for that purpose, a provision to this effect to be endorsed upon the common stock certificates, and further covenants and agrees that it will terminate or cause to be terminated the voting trust agreement and will turn over the management of the Company to the stockholders without conditions of any kind as soon as payment of all the Company's indebtedness shall have been made, and, if the preferred stockholders shall at any time devise a plan whereby sufficient monies may be raised to pay in full the indebtedness then due to the creditors, the voting trustees and directors will take such formal actions and give such assents as may be necessary and proper to effectuate such plan, under advice of counsel and proper safe-guards to ensure the position of the creditors until such time as the indebtedness may be paid.  The stipulation as agreed upon by the parties then continues: (H) Pursuant to the agreement dated April 13, 1922, the petitioner, New Colonial Ice Company, Inc., was incorporated under the Laws of the State of New York, with a capitalization1931 BTA LEXIS 1573">*1582  of $700,000, consisting of 6,000 shares of preferred stock of the par value of $100.00 per share, and 20,000 shares of common stock, of the par value of $5.00 per share, (as is evidenced by the attached Certificate of Incorporation, which is made a part hereof as "Exhibit B").  As of the date of the incorporation of the new company, the assets and liabilities of the old company were and became the assets and liabilities of the new company.  (I) At the time when this transaction was consummated, there were outstanding 3,385 shares of preferred stock and a like amount of common stock of the old company.  Accordingly, the issued stock of the new company was, as follows: 3,385 shares of preferred stock and 3,385 shares of common stock.  The preferred stock was issued to the old company, which corporation thereupon reassigned and redelivered said certificate for 3,385 shares of preferred stock to the new company, with directions that it should cancel said certificate and issue and deliver certificates for such preferred stock to such persons, firms or corporations as the old company might direct.  The 3,385 shares of common stock of the new company were issued to Louis Baron, Fred1931 BTA LEXIS 1573">*1583  Nolte, and Robert D. Eggleston, as Voting Trustees, pursuant to said agreement.  Said Voting Trustees thereupon issued voting trustees' certificates for 3,385 shares to the old company, which company thereupon endorsed and redelivered said certificate of 3,385 shares to the said Voting Trustees, with directions that they should cancel said certificate and issue Voting trustees' certificates to such persons, firms or corporations as the old company might thereafter direct.  That thereafter, the stockholders of the old company, with the exception of stockholders owning 247 shares of each class of stock, surrendered their stock to the old company and received from the new company, on direction from the old company share for share of preferred stock of the new company for preferred stock in the old company, and received from said voting trustees, voting trustees' certificates of common stock in the new company, share per share, for the common stock so surrendered, and the old company immediately retired and cancelled the preferred and common stock surrendered.  (J) The new company held 247 shares of preferred stock and the Trustees held 247 shares of the voting trustees' certificates1931 BTA LEXIS 1573">*1584  in the new company available to those stockholders of the old company who had not as yet turned in their shares in the old company for surrender and exchange, pursuant to the 24 B.T.A. 886">*890  terms of the agreement referred to in paragraphs "G" and "H" herein.  Up to and including December 31, 1922, these shares of preferred stock and voting trust certificates were still held unexchanged.  Subject to objection on the part of the respondent as to its relevancy and materiality, it is further stipulated, that in years subsequent to 1922 the stockholders holding 247 shares of preferred stock, and a like amount of common stock in the old company ultimately exchanged this stock for a like amount of preferred stock and voting trust certificates in the new company.  (K) The old company's corporate existence continued throughout 1922 and 1923.  It transacted no business and had no assets.  (L) The agreement of April 13, 1922, continued until April 9th, 1927, at which date the voting trust terminated and the common stock of the new company was exchanged in place of voting trust certificates theretofore held by stockholders.  With the termination of the voting trust, the creditors relinquished1931 BTA LEXIS 1573">*1585  such management and control as they might theretofore have had under the aforementioned agreement.  (M) The assets and liabilities of the old company become the assets and liabilities of the new company as at the date of incorporation of the latter.  (N) It is further stipulated and agreed that the statutory net losses of the old company for the calendar year 1921 was the sum of $36,093.19.  (O) It is further stipulated and agreed that for the period commencing January 1, 1922, and ending April 13, 1922, the old company sustained a statutory net loss in the sum of $10,338.90.  (P) It is further stipulated and agreed that for the period commencing April 14, 1922, up to and including December 31, 1922, the net income of the new company was the sum of $48,763.43.  (Q) It is further stipulated and agreed that the net income of the new company for the calendar year 1923 was in the amount of $56,242.55.  OPINION.  SEAWELL: In contesting the deficiencies proposed by the Commissioner it is the contention of the petitioner that in determining its tax liability for the period April 14, 1922, to December 31, 1922, it should have the benefit of the net losses sustained by the Colonial1931 BTA LEXIS 1573">*1586  Ice Corporation (herein referred to as the "old company") for the calendar year 1921 and the period January 1, 1922, to April 13, 1922, under the provisions of section 204 of the Revenue Act of 1921.  In the first place, it is urged that the petitioner and the old company were affiliated and therefore under the principle laid down in , the petitioner would receive the benefit of the old company's net losses in determining consolidated net income for the period April 14, 1922, to December 31, 1922.  We, however, fail to see any basis for affiliation of the two companies.  What occurred was that the petitioner's preferred stock was issued to the old company and its common stock to voting trustees, who in turn issued voting trustees' certificates to the old company.  The old company thereupon redelivered the preferred stock and voting trustees' certificates so received to the 24 B.T.A. 886">*891  new company, with directions to deliver the preferred stock and voting trustees' certificates for common stock to such persons as it (the old company) might direct.  Thereafter, the stockholders of the old company, with the exception1931 BTA LEXIS 1573">*1587  of those owning 247 shares of each class of stock, surrendered their stock to the old company and received from the new company, on direction from the old company, share for share of preferred stock of the new company for preferred stock of the old company and voting trustees' certificates of common stock in the new company, share for share, for the common stock of the old company.  The old company thereupon canceled and retired the old stock so surrendered.  The old company then had outstanding only 247 shares of stock and these old stockholders were in no sense stockholders of the new company.  And, further, the preferred stock and trustees' voting certificates for common stock of the new company, which were held available for exchange when the minority saw fit to turn in its stock, were not held by the old company, but by the new.  Manifestly, we have here neither the semblance of ownership or control by one corporation of substantially all the stock of another corporation nor substantially all the stock of the two corporations owned or controlled by the same interests, as required by section 240 of the Revenue Act of 1921 in order to permit an affiliated status.  In the next1931 BTA LEXIS 1573">*1588  place, as an alternative, it is contended that for the purpose of granting the relief sought the separate legal entities should be disregarded and the new company considered as if it were the "taxpayer" which sustained the "net losses." We are convinced that this can not be done.  The mere fact that the new corporation was incorporated under the laws of the same State as the old corporation does not necessarily mean that each corporation has the same rights, franchises, powers, privileges and immunities.  In fact, one of the very apparent purposes of the formation of the new corporation was to create a corporation which was separate and distinct from the old corporation.  In addition to the financial difficulties which faced the old corporation, it was found that a large number of shares of stock had been issued without consideration and that much of this stock had not been recorded on the books of the company.  In this situation it was important from the point of view of both the creditors and the bona fide stockholders that the new corporation to which the assets would be transferred would be something entirely different from the old corporation, spurious stock of which might1931 BTA LEXIS 1573">*1589  still be in existence.  The certificate of incorporation of the petitioner was submitted in evidence, but not that of the old company, and therefore we are unable to make proper comparison of their likenesses and/or differences.  However, we are 24 B.T.A. 886">*892  unwilling to say that because the assets and liabilities of the old company became those of the new and that the stockholders of the old company to whom stock was issued received stock of a like character and amount in the new company, the changes from the old to the new company were mere changes of form which would permit us to say that the petitioner is to all intents and purposes the same "taxpayer" as its predecessor.  We are accordingly of the opinion that the petitioner may not have the benefit of the net losses sustained by its predecessor for 1921 and the period January 1, 1922, to April 13, 1922.  ; ; ; and . The parties have stipulated the net income of the petitioner for the period April 14, 1922, to December 31, 1922, and1931 BTA LEXIS 1573">*1590  for the year 1923, and the deficiencies should be computed upon that basis.  Judgment will be entered under Rule 50.