Muskegon Motor Specialties Co. v. Commissioner , 35 B.T.A. 851 ( 1937 )

MUSKEGON MOTOR SPECIALTIES COMPANY, A DELAWARE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Muskegon Motor Specialties Co. v. Commissioner

Docket Nos. 68783, 75475.

United States Board of Tax Appeals

35 B.T.A. 851; 1937 BTA LEXIS 829;

April 6, 1937, Promulgated

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Where a Delaware corporation, organized November 24, 1928, to effect a combination of the businesses of two Michigan corporations, acquired all the stock of such corporations on December 6, 1928, and such corporations were dissolved and their assets formally transferred on January 23, 1929, to the Delaware corporation, the latter corporation having taken over and operated the businesses of the two Michigan corporations as of January 1, 1929, held, upon all the evidence, that the acquisition of the stock of the Michigan corporations by the Delaware corporation and the dissolution of the Michigan corporations and the transfer of their assets to the Delaware corporation constituted parts of an entire plan and not separate transactions; that the period January 1 to January 23, 1929, was not a consolidated return period and the basis for depreciation of assets acquired by the Delaware corporation is not limited to the basis in the hands of the Michigan corporations.

Laurence A. Masselink, Esq., for the petitioner.

E. C. Algire, Esq., and Joseph P. McMahon, Esq., for the respondent.

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ARUNDELL

These consolidated proceedings involve deficiencies for the calendar years 1930 and 1931 in the amounts of $8,097.48 and $10,958.14, respectively.

The only question in controversy is whether cost of properties to the transferors or their fair market value at date of acquisition by the petitioner is the proper basis to be used for the purpose of computing the amount of depreciation allowable to the petitioner for the respective years involved. A stipulation of facts was supplemented by certain oral testimony.

FINDINGS OF FACT.

In 1928 the Muskegon Motor Specialties Co., hereinafter called the Muskegon Co., and the L. O. Gordon Manufacturing Co., hereinafter called the Gordon Co., both Michigan corporations, were engaged in the business of manufacturing automobile cam shafts at Muskegon, Michigan. In that year the officers and directors of the two companies formulated a plan to combine the businesses of the two companies in a new corporation. In November 1928 all or substantially all of the stock of the two Michigan corporations was deposited by the stockholders in escrow for the purpose of carrying out the plan.

On November 24, 1928, the petitioner was organized as a Delaware corporation with an authorized capital stock of 62,500 shares of class A convertible preference stock and 187,500 shares of common stock, both classes being no par stock. On November 27, 1928, the petitioner entered into an agreement with a group of bankers whereby the bankers agreed to buy all of petitioner's class A stock and 15,000 shares of its common stock for a total cash consideration of $1,385,000. The petitioner agreed therein to issue 110,000 shares of its common stock and to pay $1,445,004.17 to the holders of all of the capital stock of the Muskegon Co. and Gordon Co. The difference of $60,004.17 between the amount to be received from the bankers and the amount to be paid to the old stockholders was to be recouped by means of a dividend to be paid to petitioner by the Gordon Co. It was further agreed that the petitioner might at any time after acquiring the stock of the Muskegon Co. and Gordon Co. acquire their assets upon surrender of the stock.

At the time the petitioner was organized it was contemplated by the organizers and by the bankers who financed it that it would as soon as practicable acquire the assets of the Muskegon Co. and Gordon Co.

At about the time of the financing agreement with the bankers the petitioner organized two subsidiary holding companies which are only incidentally involved here. On December 6, 1928, the financing agreement was closed and the petitioner sold to the bankers its stock as agreed upon for $1,385,000. On the same date petitioner acquired all the stock of the Muskegon Co. and all of the stock of the Gordon Co., paying therefor part cash, part stock of its subsidiary holding companies, and part in its own stock. In the meantime, the Muskegon Co. had changed its name to the Cam Shaft Manufacturing Co.

Upon acquisition by petitioner of the stock of the old companies preparations were made for the transfer of assets of the old companies and for their dissolution and liquidation. There were differences of opinion among several attorneys who were working on the transaction and one of the attorneys was out of the city and had to be consulted by mail. By reason of this situation formal resolutions and transfers were not made until January 23, 1929. On that date formal resolutions were adopted authorizing the conveyance of the properties of both companies to the petitioner and on the following day certificates of dissolution were filed.

Both of the old companies continued operations in their respective plants through 1928 and until the time of their dissolution, but under the management of the petitioner. Their operations were recorded on their separate books; at least some of the books were maintained as separate books throughout the year 1929.

Separate income tax returns for 1929 were filed by each of the old companies and by the petitioner. In each of those three returns it was stated that it was not a consolidated return. The returns of the old companies were marked "Final Return" and both carried the following notation: "Merged into Muskegon Motor Specialties Company of Delaware as at January 1, 1929." The return of the petitioner for 1929 covered the entire calendar year and included the income from the operation of the two plants of the old companies from January 1 to January 23, 1929, inclusive. The petitioner's return contained the following statement:

Merger January 1, 1929, of Muskegon Motor Specialties Company, L. O. Gordon Manufacturing Company, and Cam Shaft Manufacturing Company. The Balance Sheet at the beginning of the year is a consolidated balance sheet of the two companies before the merger.

The fair market value of the depreciable assets acquired by petitioner from the old companies was at the time of acquisition $855,580.98 and the fair market value of the land acquired was $66,963.75.

OPINION.

ARUNDELL: In computing depreciation allowances on the properties acquired by the petitioner from the two Michigan corporations, the respondent has used as a basis the cost of the properties to those two corporations. The petitioner says that the proper basis is the cost to it. The respondent originally had alternative theories for his position: First, that the assets were acquired in a nontaxable reorganization, and, second, that they were acquired through liquidation of subsidiaries during a consolidated return period. He has abandoned the frst one.

The law and regulations cited by the respondent to sustain his position are section 113(a)(12) of the Revenue Act of 1928 and sections related thereto by cross-reference and article 38 of Regulations 75. The statute and regulations, in so far as material here, provide that during a consolidated return period the basis for depreciation shall be the same as if the corporations were not affiliated and that such basis shall not be affected by reason of a transfer of property during the consolidated return period. The supposed fact situation underlying the respondent's view is that the period January 1 to January 23, 1929, was a "consolidated return period" within the meaning of the regulations. It is on this point that the parties differ.

The filing of a consolidated return is a matter of election by affiliated corporations. . The regulations lay down detailed instructions as to the formalities to be complied with by corporations seeking the privilege of making a consolidated return. Among other things, the consolidated return must be made by the parent for the group. The parent must prepare and file form 851 and the subsidiaries must prepare and file form 1122 consenting to the regulations and authorizing the parent to file for them. These formalities were not met. Each corporation filed its own return and neither form 851 nor form 1122 was filed. What is more important is that according to the evidence these matters were considered and a deliberate election was made not to file a consolidated return and not to meet the conditions which were necessary to the filing of such a return. On the contrary, it was intended that separate returns be filed and that was done. Consequently, it can not be held that a consolidated return was filed.

The remainder of the argument rests largely on the assumption that there was a consolidated return period for which a consolidated return was filed. It is in substance that the petitioner's acquisition of stock of the two Michigan corporations was separate and distinct from the acquisition of the assets and that until the liquidation of the Michigan corporations they were separate and taxable entities. The original plan of consolidation devised and adopted by the officers and directors of the two Michigan corporations was not, as far as the record shows, reduced and outlined in detail in any one writing. What such plan was must be gathered from all the agreements, minutes, transactions and testimony of the parties who assisted in formulating and in carrying out the plan. Considering all the evidence, it is our opinion that the dissolution of the two companies and the acquisition of their assets by the petitioner were all a part of the original plan of consolidation which was made effective as of January 1, 1929. That the acquisition of the assets of the two companies and their dissolution were not specified in the agreements and other writings as absolutely necessary to the plan of consolidation is not decisive. The writings disclose that such action was within the scope of the plan and the companies were in fact dissolved and their assets were transferred to the petitioner and the petitioner assumed the responsibility of operating and carrying on the combined businesses of the two companies. It appears from the evidence that the formalities incident to the transfer of the properties and the dissolu-tion of the companies were delayed through the absence of counsel, which necessitated the submission of such matters to him by mail for his approval. However, as conceded on brief by the respondent, the element of time elapsing between the date the stock was acquired and the date of dissolution is not so important. The plan of consolidation, though not completed in form, was put into practical effect as of January 1, 1929. Although the two companies were, until January 23, 1929, legally existent, they were inactive; mere form without substance.

In view of the above, we hold that petitioner does not come within section 113 (a)(12) of the statute and article 38 of Regulations 75. It is, therefore, entitled to use as its basis the cost to it of the depreciable properties. Cost in this case is agreed to be the value of the properties when acquired. The parties have also agreed upon the subsequent additions. Rates are not in dispute except as to one group of buildings and on that point there is no evidence to show error in the respondent's computation.

Reviewed by the Board.

Decision will be entered under Rule 50.