Menefee v. Commissioner , 46 B.T.A. 865 ( 1942 )

HORTENSE A. MENEFEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Menefee v. Commissioner

Docket No. 103431.

United States Board of Tax Appeals

46 B.T.A. 865; 1942 BTA LEXIS 803;

April 7, 1942, Promulgated

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Pursuant to an integrated but unwritten plan of reorganization, corporation A increased and issued most of its shares to corporation B for most of B's assets; B distributed the A shares among its shareholders, and a month later reduced its capital stock, canceling its old shares and issuing one new in place of ten old ones. The A shares distributed, held, exchanged for stock in the course of a reorganization and no gain is recognizable on their receipt by a shareholder of B. Sec. 112(b)(3), Revenue Act of 1936.

Charles E. McCulloch, Esq., and Thomas B. Stoel, Jr., Esq., for the petitioner.

John H. Pigg, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined a deficiency of $13,752.92 in petitioner's individual income tax for 1936, holding taxable a profit in the receipt of shares of stock. Many of the facts are presented in a stipulation which is hereby made part of the findings.

FINDINGS OF FACT.

Petitioner is a resident of Portland, Oregon, and there filed her income tax return for 1936. In 1936 she was the owner of 49 shares of the West Coast Logging Co. and of 83,998 shares of the La Dee Logging Co.

Both companies were Oregon corporations and were engaged in the logging business. La Dee was organized in 1918 with an authorized capital stock of 250,000 common shares, $1 par, of which 150,000 were issued and outstanding. West Coast was organized in 1933 with an authorized capital stock of 100 no par common shares, all of which were issued and outstanding. The shares of both companies were held by members of the Menefee family; both companies had the same office and the same bookkeeper; and their officers and managers were chosen from the same group. Early in 1936 La Dee's business was suffering from the effects of a forest fire; suits were pending against it for substantial amounts; and its manager was disabled by accident. I. D. Wood, a certified public accountant engaged by both companies, suggested to C. L. Reynolds, secretary-treasurer of both, that La Dee transfer its operating assets and accounts receivable to West Coast for unified operation and other advantages; that West Coast issue stock to La Dee in payment; that La Dee distribute this stock among its shareholders in exchange for their shares in it; and reduce its capital stock, retaining merely equipment having salvage value and accounts diffcult of collection. The active shareholders favored the plan only if it could be carried out without disadvantageous tax consequences. Wood, thereupon, sought the opinion of Commerce Clearing House, describing the contemplated plan as follows:

The company plans to transfer all of its assets, with the exception of a few assets of doubtful value, to a newly organized company in exchange for the stock of the latter company. The stock received by the old company will be issued to its stockholders as a liquidating dividend. The old company contemplates filing supplementary articles to reduce its stock to a somewhat nominal amount to offset the questionable assets retained. There will be no cash involved in the transfer of the assets to the new company or in the liquidation dividend consisting of the new company's stock. Any cash will be distributed prior to this transfer of stock as a liquidation dividend in that the company shows a deficit on its books.

In its reply of June 17, 1936, Commerce Clearing House discussed sections of the act under which no gain would be recognized, adding:

The above is predicated, of course, upon the supposition that there has been an exchange by the stockholders of the transferor corporation of a corresponding part of its stock, which is then to be cancelled by such corporation, for stock of the new corporation. * * *

Wood showed this letter to Reynolds and the companies' other officers and attorney, who discussed it many times, and, using it as a basis, worked out the details of their plan to amalgamate the business and operations of both companies in West Coast, leaving La Dee inactive. Within ten days the shareholders turned their La Dee shares over to Reynolds to facilitate execution of the plan.

On July 2, 1936, the shareholders of West Coast resolved to increase its capital stock of 100 no par shares to 150,000 shares, $1 par, and on the same date West Coast, through its president, L. B. Menefee, offered 127,400 of its new shares to La Dee for La Dee's properties and outstanding accounts as specified. .la Dee accepted the offer on July 10, 1936; the increase in West Coast's capital stock was authorized on July 24; West Coast issued one certificate for 127,400 shares to La Dee on August 7, and La Dee transferred to it on August 11 the following operating assets at book values as of July 1, 1936:

Accounts and notes receivable	$71,547.14
Equipment	33,266.28
Investment in Dutch Canyon Logging Co	15,070.72
Inventories	7,516.35
Total	127,400.49

The distribution was recorded on La Dee's books in an account styled "Exchange of Stock." The value of assets and accounts remaining in La Dee's hands was very small. On August 11 La Dee's shareholders considered a suggestion to distribute West Coast shares and other assets and to dissolve or to reduce capital to $25,000, the alleged value of other assets.

After a general discussion of the last proposal, it appeared to be the sense of the meeting that the stock of the West Coast Logging Co. should be distributed among the stockholders at this time and that the matter of reducing the capitalization be deferred until a later meeting of the stockholders.

It was then resolved that the 127,400 West Coast shares be distributed pro rata among shareholders. On the following day the pro rata distribution was made, and petitioner received 71,216 shares, having a fair market value of $69,998.33.

On September 9, 1936, La Dee stockholders reconvened "pursuant to adjournment of a special stockholders' meeting of La Dee Logging Company held August 11, 1936," and resolved that the company's capital stock

be decreased from $250,000.00 divided into 250,000 shares of the par value of $1.00 each, to $25,000.00 divided into 25,000 shares of the par value of $1.00 each, * * *

On the same day the appropriate certificate was issued by the Corporation Department of Oregon, and on September 14 La Dee's outstanding stock was canceled and 25,000 shares were reissued and distributed among shareholders in proportion to prior holdings. Petitioner received 13,998 shares.

Petitioner received the 71,216 West Coast shares and the 13,998 new La Dee shares solely in exchange for 83,998 old La Dee shares in pursuance of a plan of reorganization to which West Coast and La Dee were parties.

OPINION.

STERNHAGEN: The petitioner contends that as to her no gain may be recognized in the receipt of the West Coast shares from the La Dee corporation, Revenue Act of 1936, sec. 112(b)(3). ¹ The respondent treats section 112(b)(3) as irrelevant because petitioner's shares in La Dee were not "exchanged * * * in pursuance of a plan of reorganization."

The transaction whereby the two corporations exchanged property and shares was a statutory reorganization as defined in section 112(g)(1), and each of the two corporations was a party to such reorganization as defined in section 112(g)(2). This is not in dispute. Respondent says that the distribution by La Dee of the West Coast shares was not pursuant to the plan of reorganization but was separate; also that such distribution was not an exchange but was a dividend or a liquidation.

The respondent's conception of what was done is of separate and unrelated acts, and he fortifies this conception by a fine regard for the intervals of time between them and by a disregard for the testimony of the witnesses that in truth all of the acts were related as parts of a single plan, that the consummation of all was contemplated when the first was commenced, and that none would have been permitted to occur if assurance had been lacking that as a whold the plan could be perfected without tax liability. The evidence is not doubtful that from the beginning a reorganization was contemplated which would amalgamate the business and operations of the two corporations and that the operations should thenceforth be conducted by the West Coast; La Dee should become inactive and should ultimately be dissolved. There was no thought of giving the shareholders a distribution of assets either in a dividend or in liquidation. Their part was merely to continue as the same shareholders of a newly arranged business. The entire plan was integrated and what was done was a series of steps in it to achieve the reorganization. It is not important whether the plan was written, so long as the evidence is clear that it existed, ; , and it is not important that its fulfillment was spread over two months instead of being accomplished simultaneously, so long as the steps were a consistent performance of the reorganization plan and purpose. ; ; ; .

Respondent emphasizes the fact that the La Dee shares were not turned back to the corporation contemporaneously with the distribution. He says that the distribution was therefore a dividend and not an exchange. The plan, however, from the time it was first considered, contemplated the reduction of La Dee's capitalization to a small amount to cover the remaining assets after the transfer of the principal assets to West Coast, and the distribution of the West Coast shares to La Dee shareholders. The La Dee shares were deposited in accordance with the plan. Even if the distribution were expressly in liquidation, it would be required by section 115(c) ² to be treated as an exchange and gain or loss would be recognized only as provided in section 112. This depends on whether the actual or constructive exchange is in pursuance of the plan of reorganization. From the evidence there is no escape from the finding that it was, and the nonrecognition of gain is therefore imperative. The determination is reversed.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 112. RECOGNITION OF GAIN OR LOSS.

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  (b) EXCHANGES SOLELY IN KIND. -

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  (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩

• 2. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

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  (c) DISTRIBUTIONS IN LIQUIDATION. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * * ↩