Transport Products Corp. v. Commissioner , 25 T.C. 853 ( 1956 )

Transport Products Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent

Transport Products Corp. v. Commissioner

Docket Nos. 52892, 55892

United States Tax Court

25 T.C. 853; 1956 U.S. Tax Ct. LEXIS 289;

January 24, 1956, Filed

---

Decision will be entered for the respondent.

Upon the facts, held, that in 1946 petitioner acquired assets from another corporation in a tax-free reorganization within the scope of section 112 (b) (4) of the 1939 Code, and, therefore, petitioner's basis for the acquired assets is the same as the basis thereof in the hands of the transferor corporation.

Charles Speed Gray, Esq., and A. Robert Doll, Esq., for the petitioner.

Charles R. Hembree, Esq., for the respondent.

Harron, Judge.

---

HARRON

The Commissioner determined deficiencies in income tax for the taxable years ended June 30, 1948, 1949, 1951, 1952, and 1953, as follows:

Taxable year	Deficiency
1948	$ 991.06
1949	180.00
1951	227.48
1952	834.76
1953	358.99

The deficiencies result from the respondent's determination that the transaction in 1946, whereby petitioner acquired certain assets from another corporation in exchange for petitioner's stock, constituted a nontaxable reorganization within the scope of sections 112 (b) (4) and 112 (g) of the 1939 Code, so that petitioner's basis is the same as the basis in the hands of the transferor corporation as provided by section 113 (a) (7). Under this determination the respondent made adjustments in the annual allowances for depreciation, in cost of sales, in capital gains, and in a net operating loss deduction arising out of carryover and carryback of net operating losses.

The issue is whether the transaction in 1946 in which petitioner acquired substantially all of the assets of the corporation, Power Gates, constituted a nontaxable reorganization within the purview of sections 112 (b) (4) and 112 (g) (1) (C) of the 1939 Code.

FINDINGS OF FACT.

The stipulated facts are found as stipulated. The stipulation and the attached exhibits are incorporated herein by this reference.

The petitioner is a Kentucky corporation, having its principal place of business in Louisville. It filed its returns for the taxable years with the collector of internal revenue for the district of Kentucky.

The petitioner manufactures and sells railroad crossing gates and railroad signal equipment. Petitioner was organized on May 3, 1946. It is still in existence and in business. The officers of petitioner, hereinafter caller Transport, are as follows: T. F. Going, president; M. M. Dilley, vice president; and B. H. Barnett, secretary. All of the above-named officers are stockholders of Transport.

The authorized capital stock of petitioner is 20,000 shares having a par value of $ 5 per share, i. e., $ 100,000.

Power Gates Company was a Kentucky corporation which was organized on December 7, 1937. Its place of business was in Louisville. It was engaged in the business of manufacturing and selling railroad crossing gates. Power Gates was liquidated in 1946 under circumstances which are set forth hereinafter. The capital stock of Power Gates was owned as follows:

	Shares
M. M. Dilley	1,170
Milton Smith, Jr. (president)	910
Mrs. Milton Smith	260
H. C. Beirbaum, Jr.	50
Amy A. Taylor	50
	2,440

Peerless Manufacturing Corporation, hereinafter called Peerless, has a place of business in Louisville. One division of the operations of Peerless is the Signal Division which manufactures electric railroad signals and various other electrical apparatus. F. W. Carter was president of Peerless in 1946.

Prior to the organization of Transport, Milton Smith, president of Power Gates, M. M. Dilley, a stockholder of Power Gates, together with H. R. Wilson and T. F. Going, began negotiations with a view toward forming a new corporation to acquire the assets of Power Gates and purchase certain assets of Peerless for which Wilson held an option. As a result of these negotiations, articles of incorporation of petitioner were prepared.

In March or April 1946, other individuals were approached and became interested in the plan to bring together the assets of Power Gates and the assets to be purchased from Peerless, and all of the interested parties agreed to carry forward the plan. The general plan was to form a new corporation which would carry on a business of manufacturing and selling railroad signal equipment and crossing gates. Accordingly, Going, Wilson, and Dilley proceeded to incorporate Transport, the petitioner.

On May 15, 1946, petitioner made an offer to Peerless to purchase its Signal Division for $ 21,000, i. e., to purchase all of the inventory on hand of Signal Division, machine shop tools, dies, jigs, fixtures, molds, and dies of all kinds necessary to make signal parts, and other assets, patents, goodwill, and equipment in use. On May 16, 1946, Peerless accepted the offer.

In June 1946, Transport sold 9,000 shares of its stock for $ 45,000, out of which Transport made payment to Peerless under its agreement to purchase Signal Division, and Peerless thereupon transferred the assets involved under that agreement to Transport.

In June 1946, Transport acquired substantially all of the assets of Power Gates. The acquisition of the assets of Power Gates was pursuant to a written agreement dated May 22, 1946, which is set forth hereinafter. The agreement was executed by T. F. Going for Transport, and by Milton Smith, Jr., for Power Gates. The entire agreement is as follows:

May 22, 1946

Power Gates Company

116 South Campbell Street

Louisville, Ky.

Gentlemen:

We hereby accept your subscription for 4,920 shares of fully paid, nonassessable capital stock in our corporation at a par value of $ 5.00 per share, the total amount being $ 24,600, and based upon the following terms and conditions.

1. For 4,000 shares of the above stock at $ 5.00 par value, you agree to exchange all machinery, tools, dies, equipment of all kinds, patterns, patents, good will and inventory as payment therefor, based upon conditions in paragraph 3.

2. You agree to exchange your equity in the real estate and property known as 116-118-120 South Campbell Street, Louisville, Ky., for the balance of the above stock, in the amount of 920 shares, based upon the conditions outlined in paragraph 3.

3. Transport Products Corporation agrees to assume the obligation and pay the mortgage on the real estate, now held by the Portland Federal Savings & Loan Association, the balance of June 1, 1946, in the amount of $ 2,836.89 and to assume the obligation and pay the chattel mortgage now held by the Morris Plan Industrial Bank, balance of June 1, 1946, in the sum of $ 2,586.90.

4. On the effective date of this agreement, Transport Products Corporation agrees to deliver to Power Gates Company the 4,920 shares of stock as described above and in a manner as agreed upon by the present stockholders of Power Gates Company. There being a difference of $ 23.79 between the even number of shares subscribed for and the total payment Power Gates Company agrees to give their check to cover this difference.

5. It is understood and agreed that Power Gates Company will retain 920 shares of this stock in their treasury until total liquidation is effected.

6. Power Gates Company is to retain full ownership of all accounts receivable, all cash items and credits in banks, goods delivered or billed prior to the effective date of this contract.

7. This offer shall become binding upon both parties upon your acceptance thereof as evidenced by the signature of your authorized officer and the effective date thereof shall be June 1, 1946, at which time appropriate conveyance of your property shall be made to us and we will perform as outlined in paragraph 4.

Transport Products Corporation

Under the agreement of May 22, 1946, 4,920 shares of petitioner's stock was issued to Power Gates in exchange for substantially all of the assets of Power Gates.

Milton Smith, Jr., president of Power Gates, became a director of petitioner.

After petitioner acquired the assets of Signal Division of Peerless and the assets of Power Gates, petitioner carried on a business of manufacturing and selling electrical railroad crossing gates, signal, and other equipment for railroad crossings.

It was intended that Power Gates would be liquidated after the transfer of substantially all of its assets to Transport, the petitioner. Power Gates retained only accounts receivable for billed and delivered orders. It was liquidated and the stock of Transport was distributed in the liquidation to the stockholders of Power Gates.

On May 24, 1946, Power Gates entered into a written agreement with Wilson, Going, and Dilley as follows:

May 24, 1946

Power Gates Company

116 South Campbell

Louisville 6, Kentucky

Gentlemen:

The undersigned hereby agree to purchase severally 920 shares Transport Products Corporation Stock, at $ 5.00 per share, any time during a period of six months from the effective date of this agreement.

Power Gates Company during this period does not have the right to sell or dispose of these shares to any other parties other than their present stock holders, in which latter event they are to release the undersigned from their obligation to purchase during the six months period from June 1, 1946.

This agreement shall become binding upon both parties by the acceptance thereof as evidenced by the signatures attached hereto and the signature of your authorized officer in acceptance hereof.

The effective date shall be June 1, 1946, to include six months from this date.

Very truly yours,

(Signed) Holman R. Wilson

(Signed) T. F. Going

(Signed) M. M. Dilley

Accepted:

Power Gates Company

By (Signed) Milton Smith, Jr.

President

There was no sale of stock of Transport by Power Gates under the above agreement dated May 24, 1946, to Wilson, Going, and Dilley.

The petitioner, Transport, was not a party to the above agreement of May 24, 1946, which was executed by Wilson, Going, and Dilley. Petitioner was not obligated to purchase 920 shares of its own stock from Power Gates. The above agreement of May 24, 1946, was not any part of the agreement of May 22, 1946, between Power Gates and Transport, or of the consideration which passed from petitioner to Power Gates for the latter's assets. The sole consideration received by Power Gates for the transfer of its assets to Transport under the agreement of May 22, 1946, was 4,920 shares of the voting stock of Transport.

The parties have stipulated that the fair market value of the assets of Power Gates which were acquired by petitioner in 1946 amounted to $ 30,000 at the time of the exchange; and, also, that the basis of the assets in the hands of Power Gates was $ 18,602.93.

Power Gates, in its return for 1946, reported the transaction with Transport in the following way:

During the year the taxpayer [Power Gates] exchanged substantially all of its assets for stock of the Transport Products Corporation. This exchange was made as provided in section 112 (g) (1) (C) of the Internal Revenue Code.

Petitioner acquired substantially all of Power Gates' assets in exchange solely for its voting stock pursuant to a plan of reorganization, and the transaction was a nontaxable exchange under section 112 (b) (4) of the 1939 Code. Therefore, under section 113 (a) (7), petitioner's basis for the assets acquired from Power Gates is $ 18,602.19.

OPINION.

The issue arises because the respondent determined that the transaction in which the assets in question were acquired by petitioner was a tax-free reorganization under sections 112 (b) (4) and 112 (g) (1) (C), and that under section 113 (a) (7) the basis to petitioner of the assets was $ 18,602.19, which was the basis of the assets in the hands of Power Gates.

Under section 112 (b) (4) of the 1939 Code, no gain is recognized "if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization"; and, under section 112 (g) (1) (C), there is a reorganization if there is an acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all of the assets of another corporation.

Petitioner contends that there was no plan of reorganization and that the provisions of section 112 (b) (4) do not apply. Petitioner cites United States v. Arcade Co., 203 F. 2d 230. Upon consideration of petitioner's argument, which it is unnecessary to set forth, little merit can be found in this contention. The evidence leaves us with no doubt that in the early part of 1946, Going, Wilson, and Dilley, the organizers of Transport, and Smith, the president of Power Gates, discussed a plan to acquire Signal Division of Peerless. Wilson obtained an option to purchase Signal Division from Peerless, and in due course, Power Gates was willing to give up its assets to a new corporation. The discussions clearly contemplated combining the assets of both Signal Division and Power Gates in the hands of a new corporation which would carry on the operations which were being conducted by Signal Division and Power Gates. Although the plan is to be found in the discussions and negotiations, no formal written plan having been drawn up and executed, it is sufficient for the purposes of the statute if the various steps leading up to the transactions which are consummated evidence a plan. William H. Redfield, 34 B. T. A. 967, Hortense A. Menefee, 46 B. T. A. 865. First, petitioner was organized; next, petitioner purchased the assets of Signal Division of Peerless. Finally, petitioner acquired substantially all of the assets of Power Gates in exchange for petitioner's stock. The evidence shows that what was done constituted exact technical compliance with the provisions of sections 112 (b) (4) and 112 (g) (1) (C). Cf. Robert Campbell, 15 T. C. 312, 320. At best, petitioner's argument is weak; it is rejected. It is held that petitioner acquired the assets of Power Gates in pursuance of a plan of reorganization.

Petitioner's chief contention is, however, that the assets of Power Gates were not acquired by petitioner solely for 4,920 shares of petitioner's voting stock, that, therefore, there was no reorganization within the provisions of section 112 (g) (1) (C), and that it follows that the basis to petitioner of the assets acquired from Power Gates is $ 30,000, their fair market value at the time of acquisition. The petitioner advances a theory which is, briefly, as follows: The petitioner argues that it made an agreement through Wilson, Going, and Dilley on May 24, 1946, to repurchase 920 shares of its stock at the option of Power Gates; that the alleged agreement to repurchase 920 shares represented the equivalent tof cash to Power Gates; and, therefore, that the assets in question were not acquired solely for stock of the petitioner but were transferred by Power Gates for stock and other consideration, money. The petitioner argues that it makes no difference that Power Gates did not call upon petitioner to repurchase any of its stock under the agreement executed by Wilson, Going, and Dilley on May 24, 1946; and that without the agreement made on May 24, 1946, by Wilson, Going, and Dilley, Power Gates was not willing to make the exchange.

Careful consideration has been given to petitioner's theory, but we are unable to conclude that the evidence before us supports it. The written agreement of May 22, 1946, under which the exchange was made for 4,920 shares of petitioner's stock, is controlling. The question must be decided upon the basis of what the parties to that agreement actually did. We are unable to find, upon the record before us, that the subsequent agreement of May 24, 1946, constituted an agreement of the petitioner. The respondent points out that if it could be found that the agreement of May 24, 1946, was one to which petitioner was a party, it would have been in violation of section 271.120, Kentucky Revised Statutes, which provides that no corporation shall be the purchaser of any part of its own stock unless the purchase is necessary to prevent loss upon a debt previously contracted or unless the purchase is required by law. However that may be, and if, perhaps, the agreement of May 24, 1946, executed by the three individuals, had some effect in inducing Power Gates to make the exchange, the agreement did not create an obligation in the petitioner, and it did not represent any part of the quid pro quo. We are unable to accept the petitioner's theory.

It is held that the agreement of May 24, 1946, was made by the three individuals who signed the agreement, and that they made the agreement in their individual capacities. There is nothing in the record which overcomes the plain inference to be drawn from the terms of the agreement of May 24, 1946, that the three individuals who signed the agreement were obligated, severally, to purchase from Power Gates 920 shares of Transport stock within 6 months if Power Gates called upon them to do so. Under this agreement, consideration for such proposed purchase, at the option of Power Gates, would have passed from the three individuals, or from any one of them, rather than from the petitioner. The evidence doesn't show any reason why Wilson, Going, and Dilley could not, or would not, individually purchase stock of Transport from Power Gates. We are compelled to conclude that the May 24 agreement was exactly what it is by its terms, namely, an entirely separate agreement of the individuals to buy all or some of 920 shares of petitioner's stock from Power Gates. Cf. New Jersey Mortgage & Title Co., 3 T. C. 1277, 1288; Stockton Harbor Industrial Co. v. Commissioner, 216 F. 2d 638, certiorari denied 349 U.S. 904">349 U.S. 904.

The determination of the respondent is sustained, and his several adjustments are approved.

Decision will be entered for the respondent.