Anheuser-Busch, Inc. v. Commissioner , 40 B.T.A. 1100 ( 1939 )

ANHEUSER-BUSCH, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MELROSE ICE CREAM CORPORATION, A DISSOLVED CORPORATION, ADOLPHUS BUSCH III, CHARLES D. RUSSELL, GUS G. KINDERVATER, AND WILLIAM J. LANDES, SURVIVING MEMBERS OF THE LAST BOARD OF DIRECTORS, AND TRUSTEES FOR THE CREDITORS AND STOCKHOLDERS OF SAID MELROSE ICE CREAM CORPORATION, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Anheuser-Busch, Inc. v. Commissioner

Docket Nos. 86450, 86453.

United States Board of Tax Appeals

40 B.T.A. 1100; 1939 BTA LEXIS 750;

December 14, 1939, Promulgated

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1. Where corporation A agreed with B to transfer all the assets of A's subsidiary M to B, with the privilege on the part of B to organize a subsidiary to hold the transferred property, held, since B availed itself of the privilege it was not a party to the reorganization and its securities, delivered to M or A were "other property" and resulted in recognizable gain under section 112, Revenue Act of 1928. Groman v. Commissioner,302 U.S. 82">302 U.S. 82.

2. Payment of transferor's indebtedness made as part of consideration for transfer of assets, held, recognizable in computing gain. United States v. Hendler,303 U.S. 564">303 U.S. 564.

3. Section 213(f), Revenue Act of 1939, restricting operation of rule in United Statesv. Hendler, being limited to situations where some part of gain is free from recognition by the reorganization provisions, held, inapplicable to the present circumstances.

4. The Board having of its own motion raised a question of jurisdiction, where one notice of deficiency was sent to parent and subsidiary addressed only to the former, held, since the notice proposed a deficiency as to the subsidiary, which had joined in the filing of a consolidated return, jurisdiction to consider the appeal of the subsidiary exists.

Daniel N. Kirby, Esq., Allen C. Orrick, Esq., and Harry W. Kroeger, Esq., for the petitioners.

W. H. Schwatka, Esq., R. E. Maiden, Jr., Esq., and Edward L. Updike, Esq., for the respondent.

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OPPER

By these proceedings petitioners seek a redetermination of a deficiency in income tax of $60,948.18 for the year 1930. Notice of deficiency was given the petitioner, Anheuser-Busch, Inc., the letter stating "you are advised that the determination of your income tax liability and of your affiliated companies for the year 1930 * * *." The petitioner, Melrose Ice Cream Corporation, is a dissolved corporation of the State of New York which seeks a redetermination of the same taxes on the ground that prior to its dissolution it was affiliated with Anheuser-Busch, Inc.

The issues left outstanding by the pleadings are (1) whether the Borden Co. on acquiring all the business and assets of a New York subsidiary of the petitioner, Anheuser-Busch, Inc., in exchange for shares of the Borden Co.'s stock, was a party to a reorganization, so that no gain or loss is to be recognized on the exchange, notwithstanding an immediate transfer by the Borden Co. of the assets to its own subsidiary, and (2) whether in such a transaction gain or loss is to be recognized to the extent of the cash in a payment by the Borden Co. to the petitioner, Anheuser-Busch, Inc. of $500,000 owed Anheuser-Busch, Inc., by its New York subsidiary on a cash advance to it.

The stipulated facts are found and may be summarized, together with such additional facts as are found from the evidence, as follows:

FINDINGS OF FACT.

The Anheuser-Busch Ice & Cold Storage Co., Inc. (hereinafter referred to as Melrose), previously bore the corporate name "Anheuser-Busch Agency," and on September 20, 1930, changed its name to "Melrose Ice Cream Corporation." The business of Melrose until September 26, 1930, was the manufacture and sale of ice cream products and the operation of a cold storage business. All of its capital stock was beneficially owned by Anheuser-Busch, Inc. (hereinafter referred to as petitioner).

In December 1928 a loan was made by petitioner to Melrose in the sum of $650,000, which indebtedness was evidenced by promissory notes for that amount payable to the order of petitioner with interest at the rate of 5 1/2 percent. The loan was made for the purpose of permitting Melrose to increase its facilities for manufacturing and delivering ice cream by the construction of new buildings and for the acquisition of new equipment. On August 6 and September 26, 1930, the principal amount of $500,000 remained unpaid. The indebtedness was carried in the general ledger account of petitioner as "Bills receivable."

In August 1930 an agreement was entered into by petitioner with the Borden Co. (hereinafter called Borden). The agreement was evidenced by a proposal letter dated August 6, 1930, addressed to petitioner and signed by Borden, and a written acceptance thereof on the same date. In the proposal letter it is stated:

Second: We [Borden] hereby make you [petitioner] the following proposition:

A. You shall, through your ownership and control of its outstanding capital stock, effect a reorganization of the New York Company [Melrose] which shall be authorized by all necessary and proper action of the directors and stockholders thereof, in pursuance whereof the New York company shall convey, assign and transfer to us all and every its assets and property of every kind and description and wheresoever situate and its business as a going concern subject to all the liabilities thereof except the liabilities described in clauses "(a)" to "(e)", both inclusive, of subparagraph 2, paragraph B of this Section SECOND.

B. Pursuant to the plan of reorganization evidenced hereby and in consideration of and in exchange for the conveyance, assignment and transfer to us of the said assets, properties and business of the New York company as above provided, we will:

1. Issue and deliver to the New York company or, upon its proper written order, to its stockholders in proportion to their respective interests, 35,000 shares of our full paid and non-assessable capital stock of the par value of $25 per share.

2. Assume and agree to pay all the liabilities of the New York company as the same shall exist at closing of title hereunder, except (a) its capital stock liability, (b) tax liabilities, if any, arising by reason of the conveyance to us of the said assets, properties and business of the New York company, (c) tax liabilities arising by reason of any business transacted by and/or income accrued to the New York company subsequent to closing of title to us, (d) tax liabilities, whether heretofore or hereafter assessed, in respect of business transacted by and/or income accrued to the New York company prior to January 1, 1930 (but including, however, the undischarged portion of the United States income tax liability of the New York company in respect of its profits and income for the calendar year 1929 not exceeding the reserve therefor amounting to $20,865.74 shown on the balance sheet of the New York company of March 31, 1930), and (e) any counsel fees or other expense incurred by the New York company in connection with the negotiation and performance of the agreement between us. All of the said excepted liabilities shall be borne by you without the use or application thereto of any of the assets of the New York company to be conveyed to us pursuant hereto.

In assuming the liabilities of the New York company as above set forth, it is understood and agreed that the principal of the said notes of the New York company now held by you in the aggregate principal sum of $500,000., as described in paragraph B of section FIRST hereof, shall be paid, as to the sum of $300,000. in cash, and as to the sum of $200,000. by the issuance and delivery to you or upon your proper order of 2,500 shares of our said full paid and nonassessable capital stock of par value of $25 per share, such payment to be made at the time of the closing hereunder.

C. All shares of our capital stock issued pursuant to sub-paragraph "1" and "2" of paragraph B of this Section SECOND shall, at the time of the issuance thereof, be duly listed on the New York Stock Exchange, shall be of the same character and tenor as the shares of our said stock now listed on said Exchange and shall constitute a part of the presently authorized capital stock of our Company amounting to $200,000,000.00, divided into 8,000,000 shares of the par value of $25 each, all of one class.

As used herein, the phrase "closing of title," means the time at which the New York company shall make conveyance to us of its said assets, properties and business and we shall make the payments of cash and issue the shares of our capital stock called for hereby.

Other provisions of the proposal letter related to certain warranties as to the correctness of financial statements, valuations, tax liabilities, and comparable matters, together with an agreement not to compete in business.

The proposal letter further provided that the corporate name of Melrose should be changed, and recited:

It is the intent and purpose of this provision that we shall be at liberty to organize a new corporation under the laws of such jurisdiction as we may select under a name including the words "Anheuser-Busch" for the purpose of taking over and continuing the business now owned and/or operated by the New York company and you and/or the New York company shall cooperate with us as we may reasonably request to permit the organization and/or qualification of such new corporation in all jurisdictions where the New York company owns property and/or does business, provided, however, that such new Subsidiary shall not be called "Anheuser-Busch, Inc." and that the corporate title of such new subsidiary shall be approved by you. * * *

The transaction was to be closed on September 16, 1930, as of March 31, 1930, from which time the business was to be carried on for the account of Borden. After closing of the transaction Melrose was to be dissolved and completely liquidated.

Prior to the date of the execution, delivery, and acceptance of the proposal letter of August 6, 1930, the board of directors of petitioner at a meeting held on July 29, 1930, had authorized an agreement with Borden for the reorganization of Melrose, whereby Borden was to acquire all of the property of Melrose, subject to its liabilities, in exchange for 35,000 shares of the capital stock of Borden, and Borden, in assuming such liabilities, was to liquidate the $500,000 indebtedness previously referred to by the payment of $300,000 in cash and by issuing and delivering to petitioner 2,500 shares of stock of Borden. The reorganization transaction was also duly authorized by the board of directors and stockholders of Melrose at meetings convened on September 10, 1930, and adjourned and reconvened on September 16, 1930, and by the board of directors of Borden at a meeting held August 5, 1930.

On September 26, 1930, Melrose executed and delivered to Borden a document styled "Bill of Sale and Assumption of Liabilities," whereby for a recited consideration, including 35,000 shares of the capital stock of Borden, Melrose granted, assigned, and transferred to Borden as of March 31, 1930, all of its property and assets and its business as a going concern. The bill of sale recites that it is the intention of the parties that separate deeds should be executed and delivered for the real estate conveyed, and should be delivered by Melrose to Borden and that assignments of trade-marks, patents, copyrights, and leases should likewise be executed and delivered by Melrose to Borden.

As a further part of the closing, Melrose executed and delivered to Borden two deeds conveying to Borden the real estate constituting the manufacturing plants of Melrose located in different parts of New York City.

Petitioner at the same time executed and delivered to Borden the various guaranties and agreements called for by the proposal letter relative to the deficiencies and assets, tax liabilities, competing in business, etc. Melrose made a trade-mark assignment to Borden and made an assignment of its interests as lessee in two leases having a combined rental of $1,400 per year on properties used as distributing points, to a Delaware corporation created a short time previous by Borden, as hereinafter mentioned. At the same time it entered into an agreement for the substitution of the Delaware corporation for itself in a contract for the purveyance of ice.

In carrying out its part of the closing Borden issued and delivered to petitioner 35,000 shares of Borden's capital stock. This stock was issued and delivered directly to petitioner instead of to Melrose, pursuant to an authority from Melrose dated September 22, 1930.

Borden on the closing date, September 26, 1930, in satisfaction of the previously mentioned $500,000 indebtedness of Melrose to petitioner, also issued and delivered to petitioner 2,500 shares of Borden's capital stock and paid it the sum of $300,000. Petitioner canceled and delivered to Borden the promissory notes of Melrose evidencing the above mentioned indebtedness.

On September 9, 1930, Borden had caused to be organized the Delaware corporation referred to above. It was styled "Anheuser-Busch Ice Cream Co., Inc." (hereinafter referred to as Delaware). On September 16, 1930, petitioner filed with the Secretary of State of the State of New York its written consent to the use by Delaware of the corporate name "Anheuser-Busch Ice Cream Co., Inc."

On September 19, 1930, Delaware received and accepted an offer from Borden of all of the assets, business, and good will which it had contracted to acquire from Melrose in consideration of the issuance to the Borden's Ice Cream & Milk Co., a wholly owned subsidiary of Borden, of 25,000 shares of the capital stock of Delaware, being all of the then outstanding stock of Delaware.

On September 26, 1930, subsequent to the acquisition by Borden of the property and assets of Melrose, Borden executed and delivered to Delaware for the above recited consideration, a bill of sale transferring to it all of the assets, business, and good will acquired by Borden from Melrose as they existed on September 26, 1930. The bill of sale was in substantially the same form as that used in the Borden-Melrose transaction, but in addition recited that Borden had caused Delaware to be organized for the purpose of having it acquire from Borden the assets and business of Melrose. It also contained a clause whereby, in consideration of the conveyance and transfer made, Delaware assumed and agreed to pay all taxes payable by Borden in respect of the business acquired by it from Melrose, pursuant to the agreement of August 6, 1930, and all other indebtedness and liabilities whatsoever of Borden in connection with the assets and business transferred, as such indebtedness and liabilities should exist at the date of the bill of sale.

Entries were made in the general ledger account books of Borden in an account styled "Anheuser-Busch Ice and Cold Storage Co. purchase account", wherein the following entry appears as of September 25, 1930: "37,500 Shares B. Co. Stock at $25.00 Per Each."

Petitioner was in no way consulted by Borden as to the desirability or advisability of the organization of Delaware by Borden as the subsidiary for the purpose of conducting the business. Nor was petitioner consulted as to the desirability of the proposed conveyance by Borden to Delaware of the assets of Melrose, which were to be conveyed to Borden. Petitioner has had no direct interest in the disposition of the assets of Melrose by Borden since their transfer to Borden.

OPINION.

OPPER: It is assumed by the parties that the agreement between Anheuser-Busch (petitioner) and Borden contained a "plan of reorganization" organization" within the meaning of section 112(i)(1)(A) of the Revenue Act of 1928. ; see ; but cf. . There remains to be considered the issue actually litigated in this proceeding, namely, whether Borden was a "party to a reorganization" within the meaning of section 112(g) so that its securities, when distributed to petitioner, are free from the recognition of gain; and under section 112(b)(4) so that no gain is to be recognized to Melrose upon receipt by it of the Borden shares or their equivalent.

From the controlling authorities bearing upon this question, three principles emerge which appear to dispose of the present issue. It seems evident that the first principle, enunciated in , that the securities of a parent corporation are not those of a party to a reorganization where the property transferred is received by a subsidiary, would be unquestionably applicable here were it not for the two facts, first, that the transfer was made to the subsidiary indirectly through the parent (Borden), and, second, that the agreement embodying the plan did not specifically require the organization of or transfer to the subsidiary but made it optional with the parent.

The first distinction is disposed of by the second principle, established by , in the following language:

Any direct ownership by Atlas [the parent] of Peerless, Black Diamond, and Union [the subject of the transfer] was transitory and without real substance; it was part of a plan which contemplated the immediate transfer of the stock or the assets or both of the three reorganized companies to the new Atlas subsidiary. If, as part of the plan, the assets of Melrose were transferred through Borden to Delaware, Borden's ownership was equally transitory and without real substance, and its status as a party to the reorganization equally without foundation.

The second distinction is similarly met and refuted by the third principle exemplified by et seq., and ; affd., (C.C.A., 3d Cir.); certiorari denied, . In each of these cases the transfer was actually made to a subsidiary nominee of the parent. There was no provision of the plan which required the participation of the subsidiary. In each case it was the privilege of the parent, the party to the contract of reorganization, to determine whether it or its subsidiary would receive the transferred property. In each case we may assume that, if the parent itself had elected to receive and hold the property, the rule of the Groman and Bashford cases would have been inapplicable. In each case, however, the parent chose to avail itself of the optional provision and to have the property conveyed to its subsidiary. The transferor in those cases was not entitled to be consulted, and for all that appears was not. The conclusion to be gathered from these decisions is therefore that the intervention of a subsidiary will be treated as a part of the plan, if it is a contemplated possibility under the plan and actually eventuates.

Applying those principles to the present situation it follows that Borden's election to organize Delaware and utilize it for the receipt of the transferred property has the same legal effect as though the plan provided no other alternative, ;; that the transfer of the assets to Delaware through the temporary medium of Borden has the same legal effect as though the assets were transferred directly from Melrose to Delaware, ; and that the transfer of property to Delaware, the subsidiary corporation, pursuant to the plan of reorganization, in exchange for securities of the parent, Borden, results in the taxable receipt by the transferor, Melrose, or its stockholders of "other property", ¹ since Borden was not a party to the reorganization,

It is true petitioner had no voice in the decision that the property was to be received and held by Delaware rather than by Borden. Neither did those contracting on behalf of the transferors in the Mellon and Hedden cases. It may also be true that through the exercise of volition by a third person petitioner and Melrose were placed in the position of having entered into a taxable transaction in lieu of one that would have been tax-free. But that is no more than to say that by their own act they put it within the power of another so to control the essential character of that transaction that the taxing provisions of the revenue act became operative. That is no justification for concluding that they did not become operative, nor for relieving petitioner and Melrose of the tax consequences of the transaction which actually eventuated. To hold otherwise would be tantamount to applying the tax law on the basis of what was hoped for rather than of what occurred.

We need not decide whether the result would be different if the transfer to Borden's subsidiary had occurred after a significant interval. The question might then arise as an issue of fact whether the subsequent transfer was part of the effectuation of the plan of reorganization or independent of it. Here there can be no question. Delaware was organized before the closing of title. It was created for the express purpose of acquiring the property and with the cooperation, as was required by the contract, of petitioner and Melrose. It was entitled by the terms of a specific agreement with Borden to receive all of the assets transferred and did in fact immediately receive them. Some of the assets were actually transferred directly to the subsidiary without even the intervention of Borden. This would have been a technical noncompliance with the reorganization agreement except on the assumption that upon the exercise of Borden's option both parties contemplated that the subsidiary and not Borden was the true party to the transfer. The step is characterized in petitioner's brief as "confirmatory short-cuts for record purposes", a statement consistent with the view that all of the transfers through Borden were merely the longer path to the contemplated result that the subsidiary was to be the recipient of all the transferred assets. . And, if more were needed, the contract shows that it was intended that the subsidiary, if organized at all, would be created before the transfer of the assets, because the help of Melrose in its organization is stipulated for, and Melrose was to be dissolved immediately after the closing.

These considerations we believe to be unnecessary to reach the result that under the contract as it was actually carried out the Borden Co. was not a party to the reorganization within the meaning of section 112. But they furnish conclusive evidence, if that were required, that coincident with the consummation of the plan of reorganization it was definitely contemplated by the parties that the subsidiary and not the parent should be the transferee; and accordingly that under the doctrine of the Groman and Bashford cases the subsidiary and not the parent was a party to the reorganization.

The second issue involves the gain, if any, to be recognized as to Melrose by Borden's payment to petitioner of Melrose's $500,000 debt. On this point it has been held that the assumption and discharge of a transferor's debt as part of the consideration for the transfer of its assets is taxable to it as "other property" received. ; see also . The indebtedness was paid by the delivery of $300,000 in cash and 2,500 shares of Borden's stock having a stipulated value of $184,687.50. Respondent has chosen to determine the deficiency on the basis of these combined amounts. It may be that the correct amount would have been $500,000, since that is the measure of the benefit to Melrose accruing from the discharge of its obligation. Since, however, respondent has elected to proceed upon a theory involving a smaller deficiency, we find it unnecessary to decide that point. At least to the extent of the figures stated, Melrose received a taxable consideration.

After the Board heard these proceedings and received the principal briefs the Revenue Act of 1939 became law. Section 213(f) ² of that Act contains provisions obviously designed ³ to limit the scope of the Hendler decision. The language of the section, however, and if more were necessary its legislative history, ⁴ demonstrate that it was not intended to apply to such a case as this. Its operation is confined to a situation "where upon an exchange * * * the taxpayer received as part of the consideration property which would be permitted * * * to be received without the recognition of gain if it were the sole consideration * * *." Since we have already determined that no part of the present consideration may be so treated, nothing in this legislation need qualify the conclusion reached. So much is conceded by petitioner's counsel.

Finally, as it may if necessary, ⁵ the Board on its own motion questioned its jurisdiction to consider the proceeding in Docket No. 86453 brought on behalf of petitioner Melrose Ice Cream Corporation. This action was taken, not on the theory that that petitioner was a dissolved corporation, ⁶ for it appears affirmatively from the pleadings that it is its surviving board of directors which brings the proceeding as trustee in liquidation, for which purpose the corporation retains a nominal existence; ⁷ but rather to enable us to satisfy ourselves that there has been determined against that petitioner a deficiency from which it can appeal.

After further consideration, we are of the opinion that jurisdiction exists. Although the deficiency letter was addressed to its parent, it may nonetheless be regarded as sent to petitioner Melrose. . Since the corporations had joined in a consolidated return, "notice to either was notice to both." american (App. D.C.). The letter proposed a deficiency in the parent's "income tax liability and that of your affiliated companies." And unlike the situation in , it went further and stated: "The deficiency will be assessed severally against each corporation." Since there is no doubt of the liability of a subsidiary for a tax asserted against its parent under such circumstances, , and since the notice unequivocally asserted a deficiency as to the subsidiary and proposed assessment against it, we see no reason why the letter should not be regarded as a notice of deficiency as to the petitioner, Melrose Ice Cream Corporation. That being so, it is entitled to prosecute an appeal to this Board. Revenue Act of 1928, sec. 272.

Reviewed by the Board.

Decision will be entered under Rule 50.

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Footnotes

• 1. Sec. 112(d), Revenue Act of 1928. ↩

• 2. SEC. 213. ASSUMPTION OF INDEBTEDNESS.

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  (f) ASSUMPTION OF LIABILITY NOT RECOGNIZED UNDER PRIOR ACTS. -

  (1) Where upon an exchange occurring in a taxable year ending after December 31, 1923, and beginning before January 1, 1939, the taxpayer received as part of the consideration property which would be permitted by subsection (b)(4) or (5) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, to be received without the recognition of gain if it were the sole consideration, and as part of the consideration another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition shall not be considered as "other property or money" received by the taxpayer within the meaning of subsection (c), (d), or (e) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, and shall not prevent the exchange from being within the provisions of subsection (b)(4) or (5) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts; * * * ↩

• 3. 76th Cong., 1st sess., House Rept. No. 855, p. 5. ↩

• 4. Ibid,↩ pp. 18-20.

• 5. . ↩

• 6. Cf. ↩

• 7. New York General Corporation Law, sec. 29. ↩