Court Opinion

ID: 4627165
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:00:44.5563+00
Date Added: 2024-06-11T07:57:00.260939
License: Public Domain

MARK KLEEDEN, COMMERCE EXCHANGE BUILDING, OKLAHOMA CITY, OKLAHOMA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  R. A. MCARTHUR, 3918 BRANDT STREET, HOUSTON, TEXAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kleeden v. CommissionerDocket Nos. 88730, 88731.United States Board of Tax Appeals38 B.T.A. 821; 1938 BTA LEXIS 824; October 11, 1938, Promulgated *824  The minutes of a stockholders' meeting of each of three corporations showed presentation of a proposition to transfer all assets to a new corporation as a consolidation and merger, and that the stock of each corporation should be assigned back to the company as treasury stock in consideration of such transfer of assets.  A resolution was passed at the stockholders' meeting of each corporation providing for transfer of all assets to a certain stockholder (common to all three corporations) who should, in turn, transfer same to the new corporation, and that in consideration thereof the stock in the old corporations should be transferred to the treasury of the company.  The resolution further provided that the transaction was for the purpose of merging and consolidating the properties and assets with the new corporation.  The assets were transferred to the stockholder, who on the same day transferred them to the new corporation, in consideration of issuance of its stock to the old stockholders, the stock in the old corporations was assigned to the old companies and canceled and though not dissolved, the old corporations were allowed to lapse and have their charters canceled for nonpayment*825  of tax.  Held, that the whole transaction was pursuant to a plan of reorganization under section 112(i)(1)(A) of the Revenue Act of 1932 and that there was no distribution in liquidation under section 115(c) of the same act.  A. E. Hill, Esq., and J. Forrest McCutcheon, Esq., for the petitioners.  S. B. Anderson, Esq., for the respondent.  DISNEY*822  The above proceedings were consolidated at time of hearing.  They involve income tax liability for the taxable year 1933.  Respondent determined a deficiency of $10,017.17 as to petitioner Mark Kleeden, and of $10,182.91 as to petitioner R. A. McArthur.  The entire amount in both cases is in issue.  The single question presented is whether petitioners had taxable income because of a distribution in liquidation, under section 115(c) of the Revenue Act of 1932, or whether there was a nontaxable reorganization.  FINDINGS OF FACT.  The petitioners owned all of the stock (except qualifying shares) in each of three corporations, Rio Neches, Inc., McArthur-Pruitt, Inc., and R. A. McArthur, Inc.  Each of the corporations owned approximately a half interest in certain oil and gas properties in*826 Oklahoma and Texas, the other approximate one-half interest being owned by large numbers of interest holders to whom certificates of interest had been issued by petitioners upon sale of such undivided interests to the public.  The various properties had been acquired by petitioners, who had sold undivided interests to the public and then had incorporated their own approximate interests by the three corporations hereinabove named.  Petitioner R. A. McArthur held the other approximate one-half interest as agent for the purchasers of interests, by virtue of power of attorney.  During June and July 1933 petitioners wrote various letters to the interest holders with reference to the consolidation of the various properties into a new company, to be known as the Black Gold Petroleum Co. (hereinafter referred to as Black Gold).  One of such letters was written *823  June 8, 1933, and therein was enclosed a form of vote requested to be made by each interest holder as to his favoring or opposing combination of all the properties into one corporation.  On July 1, 1933, each of the old corporations, Rio Neches, Inc., R. A. McArthur, Inc., and McArthur-Pruitt, Inc., held stockholders' meetings. *827  The minutes of these meetings were kept and prepared by J. Forrest McCutcheon, petitioners' attorney, and were prepared not more than three days thereafter.  The minutes of each stockholders' meeting were in part as follows (except as to name of corporation), the minutes being identical in case of each corporation: Mr. McArthur, President of the company, presented to the meeting the matter of transferring the assets of the company, along with the assets of other corporations in which the stockholders of this company are interested, to a new corporation to be organized as a consolidation and merger with the proposition that all of the capital stock of the company owned by its stockholders be assigned and transferred back to the company as treasury stock as a consideration of such transfer of said assets and properties of the company and after a thorough discussion had been had of the matter it was unanimously RESOLVED, that the Directors of the corporation be authorized and directed to assign and transfer all of the assets of the corporation to R. A. McArthur, who, in turn, should transfer the same to a new corporation to be organized under the laws of the State of Arizona, to*828  be known as the Black Gold Petroleum Company and that all of the stock now owned by the stockholders of the company be assigned and transferred to the treasury of the company in consideration thereof, excepting three shares, one to be held by each of the three stockholders of the company for voting purposes, it being further understood and agreed between the stockholders that no profit or earnings are to be made out of said transaction but that the same is to be an even exchange and for the purpose of merging and consolidating the properties and assets of the company with other corporations and other holdings of R. A. McArthur as attorney-in fact for various persons into the said new corporation to be known as Black Gold Petroleum Company, said new company to assume all accounts payable and liabilities of this company.  It was further ordered that R. A. McArthur, as President, execute the aforementioned assignment attested to by the secretary of the corporation.  There being no further business before the meeting, upon motion, the meeting adjourned.  Another letter was written by petitioners on July 3, 1933, in which the interest holders were advised that 96 percent of the interest*829  holders favored consolidating and uniting the properties of the corporations and the other properties, held by the interest holders, in the new corporation, Black Gold Petroleum Co., and that such consolidation would be made.  On July 5, 1933, the Black Gold Petroleum Co. was organized.  On July 8, 1933, R. A. McArthur made a written proposition to the board of directors of the Black Gold Petroleum Co., wherein R. A. McArthur, individually and as trustee, offered to assign to the Black Gold Petroleum Co. the properties owned by the three old *824  corporations and the interest holders, plus certain minor properties owned by Kleeden and McArthur in their individual capacities, the conveyance to be in consideration of issuance of stock in the Black Gold Petroleum Co. to the interest holders, the beneficiaries of R. A. McArthur, to McArthur personally, and to petitioner Mark Kleeden, according to a schedule attached to the written proposition, and in proportion to ownership of previous holdings.  The schedule listed certain net liabilities of $47,427.36 to be deducted from stock issued to McArthur.  Acceptance of the offer was asked for thereon, and it was accepted in writing*830  by the Black Gold Petroleum Co., by Mark Kleeden, vice president, and by the secretary-treasurer of the company.  This proposition was supplemented on July 8, 1933, by a letter from R. A. McArthur to the Black Gold Petroleum Co. wherein he refers to the proposition as being made by him individually and as attorney in fact for certain beneficiaries, and stating that, if any interest holders are not agreeable to the exchange of their interests for stock in Black Gold Petroleum Co., such interest is to be reassigned to him on demand, to be returned by him to such interest holders.  On July 12, 1933, the three old corporations conveyed their respective interests in the properties to R. A. McArthur, who on the same day conveyed said interests received by him from the corporations to the Black Gold Petroleum Co., and on the same day he also transferred to that company the interests held by him as agent for the interest holders.  After a check-up was made of the number of interest holders (approximately 1 or 2 percent of the total number) who had not agreed to the exchange into Black Gold Petroleum Co. stock, the proportionate part of each of the properties was conveyed by the Black Gold*831  Petroleum Co. to R. A. McArthur, who now holds same as agent for said interest holders pursuant to his power of attorney.  A certificate of validation was sent by Mark Kleeden to each interest holder for his signature.  It acknowledged receipt of certificates of stock in the Black Gold Petroleum Co., attached to the certificate, and stated acceptance thereof in lieu of certificates of interest in the McArthur enterprises, and set forth an assignment to Black Gold Petroleum Co. of all interest in the properties in consideration of the stock in the Black Gold Petroleum Co.  All of the stock in Rio Neches, Inc., R. A. McArthur, Inc., and McArthur-Pruitt, Inc., was shortly after June 30, 1933, turned back to each of said corporations and was canceled.  The old corporations were never dissolved, but their charters were revoked for nonpayment of tax, and no business was done by any of the old corporations after the Black Gold Petroleum Co. began operations.  The reason that the assets of the old corporations were transferred to R. A. McArthur instead of directly to the Black Gold Petroleum Co. was *825  because an attorney advised them as to Oklahoma law on the subject.  Petitioners*832  together owned about 40 percent of the stock of the Black Gold Petroleum Co.  OPINION.  DISNEY: The question here is simply as to whether there was a liquidation of three corporations, resulting in gain to petitioners as stockholders, measured by the difference between the value of assets distributed to stockholders and original cost of the stock, as determined by respondent, or whether there was no gain or loss by reason of the facts constituting a nontaxable reorganization.  The respondent on brief contends that there were two separate and distinct transactions: First, the transfer by the old corporations of all their assets to McArthur, for himself, and Kleeden, in exchange for their stock, and, second, the transfer by McArthur of the assets to the new corporation in exchange for its capital stock; and that the first transaction was a distribution in liquidation taxable under section 115(c) of the Revenue Act of 1932, while the second was a nontaxable transaction under section 112(b)(5) of the same act.  The letters written to the interest holders owning a portion of the properties and the minutes of the stockholders' meetings of the three old corporations (stating that*833  the transaction is to be "an even exchange and for the purpose of merging and consolidating the properties and assets of the company with other corporations * * * into the said new corporation to be known as Black Gold Petroleum Company * * *") plainly show a plan for a consolidation and merger of the old entities, business and properties into a new corporation.  That such was the plan in general can not, we think, be gainsaid, and under section 112(i)(1)(a), Revenue Act of 1932, this was a plan of reorganization.  Any difficulty arises from examination of what was done.  The corporate minutes of the old corporations show that their stock was to be assigned back to the corporations as treasury stock as a consideration of the transfer of assets of the corporations, and respondent contends that the consideration was transfer of the assets to R. A. McArthur for himself and Kleeden, the other stockholder, and therefore that a distribution in liquidation resulted, despite the fact that McArthur, on the same day he received the assets, transferred them to the new corporation in consideration of issuance of its stock to the stockholders of the old corporations.  Are the transactions herein*834  involved to be considered separately or together?  Does what was actually done overcome the intent to consolidate or merge the old organfizations into a new one?  Did McArthur, in temporarily holding the assets of the old corporations, *826  hold them for himself and Kleeden, the stockholders, or as agent to transfer them on to the Black Gold Petroleum Co. pursuant to a plan of reorganization?  Respondent is in essential error, we think, in his contention and assumption that the assignment of stock back to the old corporations, and cancellation of such stock, was in consideration of transfer of assets to McArthur. The record convinces us not only that the cancellation of the stock of the old corporation was in consideration of the transfer of their assets to the new corporation, but that R. A. McArthur in receiving the assets and holding them temporarily, did so not as a stockholder, but as an agent for transfer to the new corporation.  The language of the minutes which contain the resolution relied upon for respondent's view adds to and explains the resolution, and we think respondent has not sufficiently considered all of the language explaining the situation. *835  The minutes of each company (identical as to each corporation), immediately prior to the resolution, provide in part that McArthur, president of the company, presented to the meeting "the matter of transferring the assets of the company * * * to a new corporation * * * with the proposition that all of the capital stock * * * be assigned and transferred back to the company as treasury stock as a consideration of such transfer of said assets and properties * * *." (Italics supplied.) Indubitably, in the above language nothing appears as to transfer to R. A. McArthur or the stockholders of the old corporation; but the transfer of assets is to be to the new corporation, and the consideration for assignment to the treasury of stock is not transfer of assets to R. A. McArthur or stockholders, but transfer of assets to the new corporation. With this preface we next examine the resolution immediately following the above minutes.  There we find provided not a plain transfer of corporate assets to McArthur in consideration of assignment of the corporate stock to the treasury, as contended by respondent; carefully examined, the language is seen to provide an assignment*836  of the corporate assets "to R. A. McArthur, who, in turn, should transfer the same to the new corporation * * * and that all of the stock now owned by the stockholders of the company be assigned and transferred to the treasury of the company in consideration thereof * * *." (Italics supplied.) "Thereof", we think, plainly refers not to assignment of assets to McArthur, but to assignment to the new corporation through him.  To conclude otherwise would be to refuse to read the language with the context of the minutes, just preceding, which say nothing of transfer to R. A. McArthur or to stockholders.  It is important that there is no statement that the transfer of corporate assets was to the stockholders as such. It was to one only, with an immediate provision *827  that he should retransfer to the new corporation.  He did so on the same day he received the assets.  Petitioners explain that the reason for transfer, not directly to Black Gold but to McArthur, who should transfer to Black Gold, was because of certain Oklahoma statutes as to corporations holding property of competitors.  Regardless as to whether such reason was sound, it tends to explain what was*837  actually done, but it is not, we think, so explanatory as the corporate minutes, which, as above seen, clearly show that the purpose of the whole matter was a merger or consolidation and shows the consideration for cancellation of the old stock to be transfer of assets to the new corporation and not merely to the old stockholders.  We should not, we think, divide this transaction as desired by respondent, but look at it as a whole.  Respondent argues that there was no showing of assumption of liabilities by the new corporation, though the resolution of the stockholders' meeting provided for such assumption.  Though not definitely stated, we think such an assumption of debts is apparent from the catalogue or schedule of properties, to which is appended a list of liabilities assumed.  By the written acceptance of the offer by Black Gold, such liabilities were assumed.  The fair inference from this instrument is that the liabilities were intended as those against all the properties, including those of the old corporations.  Such assumption of liabilities is consonant with the merger or reorganization planned.  Nothing indicates that McArthur or Kleeden assumed the liabilities of the old*838  corporations.  Though , involved stockholders receiving corporate assets, who executed a definite acknowledgment of their trusteeship for the corporation, and plainly is stronger in that sense than the present proceeding, yet it does indicate that reorganization does not require transfer of assets directly from old corporation to new, but that it can be through stockholders as trustees.Herein McArthur could not successfully have denied his trusteeship, in the face of the language in the minutes showing the agreed purpose of the transfer, the ban against any personal profit or earnings, and the provision for "even exchange" for the purpose of merger.  He was as much a trustee as in the cited case.  The certificate of validation by the former interest holders of the exchange shows on its face that the interest holders, at least, took stock in Black Gold in lieu of their former holdings.  The fact that R. A McArthur acted at the same time as agent for the interest holders and for the assets which had belonged to the three old corporations tends to place the interest holders and old corporations in the same class, and to indicate that*839  in fact, through McArthur, all received stock in the new corporation for their old interests, of whatever *828  nature.  The new corporation accepted the proposition made to it, thereby becoming a party to the contract, and a party to a reorganization.  The old corporations were a party thereto and transferred, through R. A. McArthur, their assets, in pursuance of a plan of reorganization, solely for stock in the new corporation, a party to such reorganization, under section 112(b)(4) and section 112(i)(1) of the Revenue Act of 1932.  We conclude that McArthur received the corporate assets not as stockholder, but as agent for transfer thereof in turn to the new corporation, and that the consideration for assignment of the stock to the treasury was the transfer of assets not to McArthur, but to the new corporation.  In , the court holds that there was reorganization with a new company though a certain bondholders' committee purchased the property and caused its transfer to the new corporation, saying: * * * It makes no difference that the transaction was effected by the bondholders' committee, *840  for that committee acted for and represented the bondholders in the old corporation, who became bondholders and stockholders in the reorganized corporation.  * * * There is no essential difference, we think, from the situation here at hand and that considered in the cited case.  Mere agency intervening between old corporation and new does not prevent reorganization.  See also ; affd., ; certiorari denied, . We therefore hold that the transfers herein involved were in connection with a reorganization and did not constitute a taxable distribution in liquidation, and that the respondent was in error in his determination of deficiency as to both petitioners.  Decision of no deficiency will be entered in both proceedings.