American Mfg. Co. v. Commissioner

Stekeett, J.,

concurring in part and dissenting in part. I concur in the majority view that a D reorganization occurred as the result of the transfer of assets by Pintsch to ISI with Pintsch’s sole shareholder remaining in control of the transferee — ISI.

Normally in such transactions the assets are exchanged for stock to meet the statutory requirement that “the transferor, or one or more of its shareholders” be in control of the transferee. Here, the majority, quite properly I believe, looks at the realities of the situation wherein Pintsch’s sole shareholder is also the sole shareholder of ISI and finds that a transfer of stock would be superfluous under such circumstances.

In my judgment, however, a realistic appraisal of the transaction requires a conclusion different from that reached by the majority insofar as the treatment of the $286,060.94 ostensibly paid by ISI to Pintsch’s for its operating assets is concerned.

There is ample evidence with respect to the business purpose behind the transfer by Pintsch of its operating assets to ISI and subsequent liquidation. However, there is no evidence to support a comparable conclusion concerning ithe business purpose of the exchange being made for cash. It is difficult to conceive of the business necessity for using cash as the consideration for the transfer. Absent an explanation as to why the exchange was not made in the usual manner, a realistic conclusion to be reached is that Safety, as the sole shareholder of both Pintsch and ISI, availed itself of the opportunity to siphon' off the excess cash from ISI by running it through Pintsch and lumping it with the latter’s liquidating distribution.

It would seem difficult to conclude from the facts in this case that the cash transfer was in any sense an integral, or even appropriate, part of the reorganization. Having accepted the fact of a reorganization we are under no compulsion to permit the parties to sweep all other exchanges under the same protective umbrella merely because they were made to occur at the same time. To do so would be to allow the statutory scheme to be subverted. See Davant v. Commissioner, 866 F. 2d 874 (C.A. 5, 1966); Reef Corporation v. Commissioner, 368 F. 2d 125 (C.A.5, 1966).

The majority would tax the $286,060.94 as “boot” under section 356 (a) (2). In my judgment this is inappropriate for that paragraph is designed to tax cash (or other nonqualifying property) which is received in addition to stock. Here the cash paid represents the fair market value of the assets transferred and hence cannot be said to have been paid in addition to stock. Our conclusion that a reorganization took place was premised on the fact that at all times the shareholder of the transferor was in control of the transferee and hence an actual transfer of stock was unnecessary for section 368 (a) (1) (D) to apply. This determination does not preclude us from citing the fact that the cash represented the fair market value of the assets transferred as a basis for the further conclusion that under these circumstances such cash cannot be treated as mere “boot” but rather must be treated outside the reorganization provisions which deal with the effects on shareholders; section 356(a) (2) to be specific.

I would tax the entire $286,060.94 as a dividend to Safety under section 301 of the Code.