*871 1. Pursuant to a contract entered into with National Steel Corporation on or about December 22, 1930, petitioner transferred all its assets to a subsidiary of National in consideration of stock, debentures, and cash of the latter. Held, National was not a "party to a reorganization" and the entire gain to petitioner is recognizable. Following Groman v. Commissioner,302 U.S. 82">302 U.S. 82; Helvering v. Bashford,302 U.S. 454">302 U.S. 454; and A. W. Mellon,36 B.T.A. 977">36 B.T.A. 977.
2. The contract provided that petitioner would not be obligated to consummate the sale until it received its certificate of dissolution. Petitioner received such certificate on January 16, 1931, and shortly thereafter transferred its assets to the subsidiary of National and the latter paid the consideration agreed upon. Held, the sale was consummated in 1931.
*435 This proceeding involves a deficiency in income tax in the amount of $798,960.80 for the year 1931. Two issues are presented: First, *872 whether the transaction whereby petitioner transferred all its assets to a subsidiary of the National Steel Corporation in exchange for stock, debentures, and cash of the latter constituted a reorganization within the meaning of the statute, and, second, whether the transaction was consummated in 1930 or 1931.
FINDINGS OF FACT.
The petitioner, Michigan Steel Corporation of New Jersey, was organized in 1922 for the purpose of manufacturing and dealing in sheet steel, steel bars, and steel products. Upon its organization it constructed a sheet steel plant in the village of Ecorse, Michigan, a suburb of Detroit. Its principal product was automobile body sheets, which it sold to the automobile trade in and near Detroit. It manufactured no steel of its own but purchased its bars from other steel plants, which it made into sheets suitable for use by the automobile trade. A large part of its raw material was obtained from the Great Lakes Steel *436 Corporation, a whooly owned subsidiary of the National Steel Corporation. The Great Lakes Steel Corporation had a plant adjacent to that of petitioner.
The National Steel Corporation, hereinafter referred to as National, was*873 organized in 1929 under the laws of the State of Delaware, with authorized capital stock of 3,000,000 shares of common, without par value, of which 2,260,000 shares were outstanding on January 3, 1931. It was incorporated as a holding company to acquire all the stock of the Great Lakes Steel Corporation, the Weirton Steel Co., and other corporations owning plants for the manufacture of iron and steel products and operating iron mines in the Lake Superior District in Minnesota and Michigan. All together the properties of the National subsidiaries constituted a complete integrated steel business, including ore deposits, blast furnaces, coke plants, vessels for transportation, coal lands, and plants for the manufacture of steel products. National itself did not own any operating properties in 1930 and 1931.
In the fall of 1930 National sought to round out the properties of the group by acquiring petitioner's sheet steel mill at Ecorse. Preliminary negotiations for such acquisition began about the middle of November 1930 and were carried on for National by Ernest T. Weir, chairman of National's board of directors, and for petitioner by George D. Bailey of Detroit, a partner in the*874 firm of Ernst & Ernst, certified public accountants. In the early negotiations Weir suggested a deal on the basis of approximately $12,000,000 for petitioner's assets, the consideration therefor to be paid half in debentures of National and half in cash. Believing that petitioner's stockholders would prefer to have part of the consideration in the form of National stock, Bailey suggested that the consideration consist one-half of National stock and one-half of other securities. The result of the negotiations was a tentative agreement on the part of National to acquire the assets of petitioner on the basis of $50 of consideration for each outstanding share of petitioner, one-half to be paid in high grade "senior securities", such as bonds or debentures, one-fourth in stock, and one-fourth in cash. In the course of the negotiations, the terms of the deal were changed to give petitioner's stockholders an option to take cash in lieu of National stock. This change came about through Weir's dissatisfaction at having to pay so much of the consideration in stock. Although Bailey felt that very few stockholders would exercise an option to take cash in lieu of stock, he suggested that*875 National might save the issuance of a few shares if such an option were given. The parties agreed that the exact terms of the debentures should be left for counsel to work out, but it was tentatively agreed that they were to be "first rate, marketable securities", bearing interest at the rate of 5 or 6 percent and maturing 10 years after date of *437 issuance, and would contain provisions for a sinking fund and call premiums. It was also agreed that National would be precluded from the further issuance of securities of equal rank with the debentures.
The plan for the acquisition of petitioner's assets was submitted to National's board of directors at a meeting held on November 20, 1930, at which a resolution was adopted providing "that all the property and assets of the Michigan Steel Corporation be acquired by the National Steel Corporation and that the National Steel Corporation assume and agree to pay all of its indebtedness * * * as of September 30th, 1930 * * *." The resolution further provided that National should pay petitioner for its properties the following:
(1) $6,062,525 in notes, bonds or debentures to be issued by National under such terms and conditions*876 as should be deemed proper by the Chairman of the Board of National and as should be approved by the Board of Directors of Michigan;
(2) $3,031,275 in cash; and
(3) 60,625 shares of National stock, or, at the option of Michigan, such lesser number of shares as it shall elect to take and $50.00 in cash for each share not taken.
The chariman of the board of National was authorized to enter into a contract with petitioner for the acquisition of its properties upon the above terms and "to acquire for the National Steel Corporation said property and pay said price or consideration therefor." The following day Weir, acting on behalf of National, wrote to George R. Fink, president of petitioner, offering to purchase its assets for the consideration stated above. The letter stated that the offer was subject to prompt acceptance, it being understood that immediate acceptance might be made subject to submission to petitioner's stockholders, which submission should be made not later than December 24, 1930.
Petitioner's directors held a meeting on November 20, 1930, for the purpose of considering the proposed sale and thereupon adopted resolutions recommending that the stockholders*877 consent to the sale and to the immediate distribution to the stockholders of the proceeds thereof. Resolutions were adopted calling a special meeting of the stockholders for December 22, 1930, to take action upon the proposed sale, and the officers were directed to advise the stockholders that, if any of them desired to take cash in lieu of National stock, notice of their election should be given on or before December 22, 1930.
On November 29, 1930, petitioner's president directed a letter to all the stockholders, advising them that National had made a firm offer to purchase all of petitioner's assets and to assume all its liabilities and that a special meeting of the stockholders was called for December 22 to consider the proposal. They were advised that the directors *438 unanimously recommended the acceptance of the offer and that under its terms petitioner would distribute to its stockholders, for each share of common stock outstanding, the following:
(a) Twenty-five ($25.00) Dollars in National Steel Corporation Notes; Bonds, or Debentures at par; and
(b) Twelve and 50/100 ($12.50) Dollars in cash; and
(c) One-Fourth (1/4) of One (1) Shares, without par value, *878 of the common capital stock of National Steel Corporation, less any necessary adjustments in connection with final consummation of the sale, distribution and dissolution of the corporation.
It was explained that any stockholder might at his option elect to take cash in lieu of his distributive share of National stock at the rate of $50 per share, provided written notice of such election was given on or before December 22, 1930.
The original proposal for the acquisition of petitioner's properties had provided that $6,062,525 was to be paid in "notes, bonds or debentures" of National. By December 8, 1930, a tentative agreement had been reached with respect to the terms of the debentures and at a meeting of petitioner's directors on that date the president reported this agreement and a resolution was adopted approving the acceptance of 10-year 5 percent sinking fund gold debentures, to be dated on or about December 31, 1930, and "to be callable as a whole or in part on any interest payment date at 102 and accrued interest." The resolution recited that the debentures should be issued under a trust indenture requiring sinking fund payments of $400,000 annually, that the debentures*879 were to contain such other provisions as are usual in issue of corporate debentures, and should include a provision granting the holders the privilege of converting them into other notes, bonds, or debentures that might subsequently be issued by National. It was also recited that such debentures were to be the direct obligation of National and were to "constitute its only funded indebtedness", excepting certain long term liabilities and funded debts of its subsidiary companies already outstanding; provided, however, that National and its subsidiaries might make "short term borrowings of not to exceed one year" and might purchase property subject to existing liens or purchase money mortgages.
By letter dated December 10, 1930, petitioner's president notified the stockholders of the tentative agreement relating to that part of the consideration which was to be paid in debentures, and informed them that the agreement had been approved by the board of directors.
Upon learning of the terms of the debentures tentatively agreed upon, Weir raised an objection to the requirements that the debentures should constitute the only funded indebtedness of National. He pointed out that National*880 had, or expected to have, substantial bank *439 borrowings and it might be necessary for it to issue securities in the form of three-year or five-year notes to take care of such obligations, and he did not want to be forced to retire the proposed debentures in the event he funded the bank obligations by the issuance of such notes. He also objected to the provisions that the debentures should be callable at 102, stating that he felt the debentures should not have a call premium.
At the time of these negotiations National was engaged in a construction program at the plant of one of its subsidiaries, the Great Lakes Steel Corporation, and the officers of National believed they would need approximately $15,000,000 to complete that program. This, together with the maximum amount of cash which might be needed in connection with the acquisition of petitioner's assets, namely, about $6,000,000, made total cash requirements of approximately $21,000,000. National had made arrangements for bank credit in this amount up until July 1931, after which time the banks agreed to carry about $15,000,000 until some time in 1932. The National officials felt, however, that they might be called*881 upon to fund part of the bank loans by the issuance of notes or debentures. The business of National had been developed through making bank loans, carrying such loans for a period of a few years, paying them off, and then expanding again in the same way. It was the intention of the officers of National to handle the $21,000,000 of bank loans in that fashion, but at the same time they wished to be left free to refinance or fund the bank loans, if necessary. They also wished to be free to redeem, if necessary, the debentures which they proposed to issue to petitioner, so that every door would be left open to cover any future transaction.
After some negotiation the differences between the parties as to the terms of the debentures were finally settled so as to permit National to issue securities ranking equally with the debentures, but in the event it became necessary to issue obligations ranking ahead of the debentures, it was agreed that the latter would be redeemed and the holders would be given an opportunity to exchange the debentures for such other securities on a par for par basis. As to the call premium, a compromise was reached whereby National was to pay no premium in*882 the event it redeemed the debentures before the end of the first interest date, namely, July 1, 1931, but was to pay a premium of $2 for each $100 face amount in the event the debentures were redeemed at any date thereafter. The provision in the debentures permitting a call at par on or before July 1, 1931, was insisted upon by National; petitioner receded in order to effect a compromise.
*440 On December 22, 1930, petitioner's stockholders met for the purpose of considering the proposed sale. The minutes of that meeting show that petitioner's secretary explained to the stockholders the changes in the terms of the debentures which had been agreed upon by the officers of the two corporations. The stockholders thereupon adopted resolutions authorizing and empowering petitioner to sell all its property and assets, including its good will and its business as a going concern, to the National Steel Corporation, a Delaware corporation, at the price and upon the terms and conditions herein-above set forth. Petitioner's board of directors and officers were directed to take such proceedings and to do all things that might be necessary to consummate the sale and to effect the dissolution*883 of petitioner and the distribution of the proceeds to the stockholders, all in accordance with the law of the State of New Jersey and at the earliest possible date. The directors were also authorized and empowered to negotiate and agree upon the form and language of the debentures and the trust indenture.
At the time of the stockholders' meeting on December 22, 1930, petitioner had outstanding 242,501 shares of common capital stock of a total authorized issue of 500,000 shares. There were represented at the stockholders' meeting either in person or by proxy more than 400 stockholders owning 209,578 shares, or 86.4 percent of the outstanding stock. Stockholders and proxies voting in favor of the above resolutions represented 208,968 shares, or more than 86 percent of the outstanding stock.
Following the stockholders' meeting and on the same day, the petitioner's directors met and adopted resolutions approving the changes in the terms of the debentures as discussed at the stockholders' meeting and extended until January 15, 1931, the time within which the stockholders might elect to take cash in lieu of National stock. A resolution was also adopted declaring it advisable that*884 petitioner be dissolved and calling a meeting of the stockholders for January 15, 1931, to take action upon the question of dissolution. The laws of the State of New Jersey, under which petitioner was incorporated, did not specifically authorize a corporation to sell all its assets without the consent of all its stockholders. Petitioner's certificate of incorporation provided, however, that the board of directors might sell its assets with the consent of a majority of the stockholders. The directors also voted to "finally and permanently" close the stock transfer books of the corporation on January 15, 1931, provided the stockholders at the meeting held on that date voted to dissolve the corporation.
By letter dated December 23, 1930, petitioner's president advised the stockholders that the sale proposed and outlined in his letter of November 29 had been approved and consented to by the holders *441 of more than 85 percent of all the stock of the company outstanding. The stockholders were advised of the changes in the terms of the debentures as finally agreed to by the board of directors to the effect that they would bear interest at the rate of 5 percent from January 1, 1931, payable*885 in equal semiannual installments on January 1 and July 1, and would be callable on or before July 1, 1931, at par and accrued interest, and after July 1, 1931, at 102 and accrued interest, with a provision that if they were called in connection with the issuance of other National notes, bonds, or debentures, the holders would have the privilege of converting them at par into such other securities in lieu of accepting the call price. The stockholders were advised that the only changes in the terms of the debentures from those previously announced were the elimination of the call premium if they were redeemed on or before the first interest date, and the removal of the restriction against other borrowings equally secured with these debentures. They were advised that the board of directors was of the opinion that these changes would be of advantage to the holders of these debentures and might encourage National to make an early call, which would be of material advantage to those stockholders who desired to realize cash upon the said debentures. There was enclosed with the letter a notice of a special meeting of the stockholders to be held on January 15, 1931, "to take action upon the*886 question of the dissolution" of the corporation.
The formal contract of sale between petitioner and National was signed by the officers of the two corporations on or about December 22, 1930. Although the contract is dated as of November 21, 1930, it contained the terms of the debentures as agreed to by the officers of National and petitioner and as approved by the stockholders of petitioner at the meeting on December 22, 1930. This contract provided in part as follows:
AGREEMENT
Made this 21st day of November, 1930, between MICHIGAN STEEL CORPORATION, a corporation organized and existing under the laws of the State of New Jersey, party of the first part, and NATIONAL STEEL CORPORATION, a corporation organized and existing under the laws of the State of Delaware, party of the second part.
WHEREAS Michigan Steel Corporation owns and operates a manufacturing plant located in the Village of Ecorse, Wayne County, Michigan, and is engaged in the business of manufacturing and selling sheet steel.
AND WHEREAS National Steel Corporation desires to acquire all the plant, property and assets of said Michigan Steel Corporation, including its good will and its business as a going*887 concern, and to pay therefor partly in securities and partly in cash.
NOW THIS AGREEMENT WITNESSETH: That said Michigan Steel Corporation agrees to sell and said National Steel Corporation agrees to purchase all the *442 property and assets of said Michigan Steel Corporation, including its good will and business as a going concern, in the manner, for the price or consideration, and on the terms and conditions hereinafter set forth, to-wit:
First. Michigan Steel Corporation shall and will convey, assign, transfer and deliver to National Steel Corporation, or to its nominee, all the property and assets of said Michigan Steel Corporation, real, personal and mixed and wheresoever situated, including its manufacturing plant, good will and business, its cash, securities, accounts and bills receivable, its claims and demands, and all and every estate, right, title and interest which it has, or can, or may have. All real estate shall be conveyed, in fee simple, by a good and marketable title and by a good and sufficient deed with covenant of general warranty.
Second. Said National Steel Corporation will at the time of said conveyance, assignment, transfer and delivery, assume*888 and agree to pay and discharge all of the indebtedness and liabilities of Michigan Steel Corporation, and to indemnify, save and keep said Michigan Steel Corporation and/or its Directors and Trustees, free and harmless from and against the same and in addition thereto will pay and deliver to said Michigan Steel Corporation for said property and assets the following securities and cash:
(1) Six Million Sixty-two Thousand Five Hundred ($6,062,500.00) Dollars in principal amount of Ten year Five Per Cent Sinking Fund Gold Debentures, to be issued by said National Steel Corporation. Said debentures shall be dated as of January 1, 1931, and shall become due and payable on January 1, 1941 and shall bear interest from and after January 1, 1931 at the rate of 5% per annum, payable semi-annually, on the first day of January and on the first day of July in each year, such interest payments until the maturity of said debentures to be evidenced by coupons to be thereto attached, and both principal and interest shall be payable in gold coin of the United States of America of or equal to the standard of weight and fineness existing January 1, 1931 and shall be redeemable at the option of said*889 National Steel Corporation at any time on or before July 1, 1931, at par and accrued interest and at any time after July 1, 1931 or any interest payment date prior to maturity on payment of $102.00 for each $100.00 of face value and accrued interest, and shall be issued in pursuance of a Trust Indenture which Trust Indenture shall provide for the payment of $400,000.00 per annum into a sinking fund to be used for the payment and redemption of a part of said debentures prior to maturity, the first of said annual sinking fund payments to be made on or before January 1, 1932; all payments of principal and interest on said debentures to be made without deduction for or on account of any tax or taxes except inheritance or succession taxes which said National Steel Corporation, its successors or assigns, the Trustee or any Paying Agent may be required to pay thereon or to deduct or retain therefrom under any present or future law or laws of the United States of America, or of any state or county or municipality therein, and said debentures and the Trust Indenture, in pursuance of which the same shall be issued, shall contain such other provisions as are usual in issues of corporate trust*890 debentures and as are satisfactory to and approved by the Board of Directors of said Michigan Steel Corporation and E. T. Weir, Chairman of the Board of said National Steel Corporation.
(2) Sixty Thousand Six Hundred Twenty-five (60,625) Shares, without par value, of the capital stock of said National Steel Corporation, or at the option of said Michigan Steel Corporation, such lesser number of such shares as it shall elect to take and an amount in cash equal to Fifty ($50.00) Dollars per share for each of said shares not taken. Said stock of said National Steel Corporation shall be a part of its present authorized and unissued capital *443 stock and the option of said Michigan Steel Corporation to take all of said Sixty Thousand Six Hundred Twenty-five (60,625) Shares or only a part thereof and cash at the rate of Fifty ($50.00) Dollars per share for each share not taken shall be exercised in accordance with the written election filed with said Michigan Steel Corporation on or before the close of business on January 15, 1931, by its several stockholders.
(3) Three Million Thirty-one Thousand Three Hundred ($3,031,300.00) Dollars in cash.
* * *
Fifth. It is understood*891 and agreed that Michigan Steel Corporation shall not be obligated to consummate the sale herein agreed to until the Secretary of State of New Jersey has issued his certificate of its dissolution pursuant to the consent and authority of its holders, and said Michigan Steel Corporation agrees to promptly submit this contract to its stockholders for their approval and to take proper action looking to its dissolution.
Among petitioner's liabilities, as disclosed by its balance sheet as of September 30, 1930, which was attached to the foregoing agreement, was a funded debt of 6 percent sinking fund gold debentures, series A and B, in the total amount of $2,172,500.
At a meeting of the directors of National on January 3, 1931, the chairman stated that it was desirable to organize a Delaware corporation to take over the property and assets of the Michigan Steel Corporation, and the board thereupon adopted the following resolution:
RESOLVED that a corporation be organized under the laws of Delaware by the name of "MICHIGAN STEEL CORPORATION," with the general powers of a steel manufacturing company and with an authorized capital stock to consist of one thousand (1,000) shares of no*892 par value.
AND RESOLVED that this corporation subscribe for said capital stock and pay $100 per share therefor.
At that meeting the chairman stated that in connection with the purchase of the property and assets of petitioner it was necessary to pass certain resolutions with respect to the debentures and stock to be issued by the corporation as part of the purchase price. The directors thereupon adopted appropriate resolutions approving the proposed form of debentures and the trust indenture between National and the Union Guardian Trust Co. of Detroit, under which the debentures were to be issued. They authorized the issuance of the new debentures and empowered the chairman of the board to deliver them or cause them to be delivered to petitioner "upon the conveyance by the Michigan Steel Corporation to the National Steel Corporation of said property and assets." They also authorized the issuance of the maximum number of shares which might be required in order to pay for the Michigan assets (60,625 shares) and empowered the chairman of the board to deliver them or cause them to be delivered to Michigan "upon the conveyance to this corporation *444 [National] of the*893 property and assets of the Michigan Steel Corporation." The chairman then stated that it was necessary to apply for a listing of the new debentures and the additional stock on the New York Stock Exchange, and appropriate resolutions were adopted authorizing the officers to make application for such listing and to enter into any agreements relative thereto which might be necessary to conform with the requirements. The directors also adopted a resolution providing that, upon the conveyance by petitioner of its property and assets, National would assume all the indebtedness of petitioner, including an issue of 6 percent sinking fund gold debentures. The resolution recited that the said debentures so outstanding amounted to $2,208,000. The chairman of the board was authorized and empowered to execute and deliver to the trustee a supplemental indenture and any and all other written instruments necessary or proper to expressly assume the due and punctual payment of said debentures.
National caused the organization of the Michigan Steel Corporation of Delaware, hereinafter referred to as Michigan of Delaware, on January 9, 1931. It was organized in order to protect and preserve the*894 name of "Michigan Steel Corporation" and for the purpose of taking over the operating properties of petitioner. This procedure was in keeping with National's policy of operating through subsidiary corporations. Upon its organization Michigan of Delaware had an authorized capital stock of 1,000 shares of no par value, all of which were acquired and continued to be held by National.
In order to facilitate the distribution among petitioner's stockholders of the proceeds of the sale of its properties, petitioner's president sent a letter to each stockholder on or about January 9, 1931, setting forth a statement of the propertions of debentures, stock, and cash that he would receive in the distribution in respect of each share standing in his name as of the close of business on January 15, 1931. Each stockholder was advised that the distribution of the proceeds of the sale would be made to the stockholders of record as of January 15, 1931, on which date the stock transfer books would be closed, and that it was expected that the sale would be completed and the transfer agents would begin the distribution on or about January 20, 1931. The stockholders were also advised that, since*895 National had decided to prepare the debentures in form suitable for listing on the New York Stock Exchange, the definitive coupon debentures would not be available at once, but in their place there would be issued temporary debentures without coupons which would be exchangeable for the permanent debentures when they were ready.
On January 15, 1931, petitioner's stockholders held a meeting and formally approved the contract of sale and voted in favor of the dissolution of the corporation. They executed a formal written consent *445 that the corporation be dissolved and authorized the officers to file such consent with the proper authorities in New Jersey and to obtain a certificate of the dissolution of the corporation and to do all things necessary to effect its dissolution, wind up its business, and dispose of its property. This formal written consent to dissolution was filed with the Department of State of New Jersey on January 16, 1931, and on that day the Secretary of State of New Jersey issued the certificate of dissolution, which was published in accordance with New Jersey law.
Following the filing of the certificate of dissolution, the directors of petitioner*896 met on January 19, 1931, and, acting as trustees in dissolution, adopted a resolution approving the agreement dated November 21, 1930, between petitioner and National. They also adopted a resolution reading as follows:
BE IT FURTHER RESOLVED, that all of the property and assets of Michigan Steel Corporation be sold and conveyed to said National Steel Corporation, a Delaware corporation, or to such person, firm or corporation as it may designate as its nominee, for the consideration and upon the terms and conditions specified in said agreement dated November 21, 1930, and that said agreement shall be carried out and fulfilled for the account and on the part of Michigan Steel Corporation by its Trustees upon performance of said contract by said National Steel Corporation.
They authorized the execution of such deeds and bills of sale as were necessary to convey petitioner's properties to National "or such person, firm or corporation designated by it as its nominee", and authorized the officers to deliver such deeds and bills of sale upon the payment of the purchase price of the properties. At the same meeting, the directors approved the terms of the trust indenture securing the*897 National debentures and authorized the acceptance of the debentures in part payment for petitioner's assets. Provision was also made for the distribution to petitioner's stockholders of the cash, debentures, and stock to be received from National.
On or about January 22, 1931, the officers of petitioner received from National the following:
(1) Ten-year 5-percent sinking fund gold debentures, dated January 1, 1931, and due January 1, 1941, aggregating $6,062,500, face value.
(2) 7,098 shares of National's common capital stock, without par value.
(3) Cash and certificates of deposit totaling $5,707,650.
The proceeds of the sale were delivered to the Union Guardian Trust Co. of Detroit, with directions as to their distribution.
In the contract of November 21, 1930, petitioner had agreed to deliver its properties "to National Steel Corporation, or its nominee." Pursuant to that provision, National, under date of January 22, 1931, sent a letter to the directors and trustees of petitioner which stated that the former had organized Michigan of Delaware for the purpose of taking title to and operating the property and business of *446 petitioner, and that all of its*898 stock was owned by National, and directed and requested petitioner "to make conveyance of all of the property and business of said Michigan Steel Corporation, a New Jersey corporation, to said Michigan Steel Corporation, a Delaware corporation, in fulfillment on your part of the contract and agreement heretofore entered into between yourself and the undersigned, National Steel Corporation." There was endorsed on this letter a statement, addressed to National and signed by the president of petitioner, reciting that "we have on this day conveyed and delivered to Michigan Steel Corporation, a Delaware corporation, all of the property and business of the undersigned, Michigan Steel Corporation, a New Jersey corporation, in fulfillment of the contract made and entered into between you and said Michigan Steel Corporation, a New Jersey corporation, under date of November 21, 1930."
All of the deeds to petitioner's properties ran to Michigan of Delaware, as grantee, and with two exceptions were delivered to National. National treated the transaction on its books as an exchange of petitioner's properties for all of the stock of Michigan of Delaware. The investment in Michigan of Delaware*899 was set up on the National books at the cost to it of the properties which it purchased from petitioner. This figure was represented on the National books by the net cost to it of petitioner's assets, or approximately $12,000,000.
On January 23, 1931, petitioner's president sent a letter to each stockholder advising him that petitioner had been dissolved, that the sale of all its properties to National had been completed, and that his share of the proceeds, less $1 for each share held, was being forwarded therewith by the company's transfer agent. It was explained that the amount of cash not distributed was to provide for the payment of expenses of the sale and to set aside $160,000 in order to protect National against any "unentered liabilities" of petitioner, and that if on January 19, 1932, there were no valid claims pending against petitioner, the surplus would be distributed to the stockholders upon presentation and surrender of the certificates of beneficial interest which were issued to the stockholders to evidence the amount withheld.
In August 1932 the Union Guardian Trust Co. distributed to petitioner's stockholders an amount equal to 43 cents per share on each share*900 of petitioner's outstanding stock on January 15, 1931. There was endorsed on the certificates of beneficial interest the amount of the payment, and the certificates were returned to the holders. The trust company closed its doors some time in 1933 and has never resumed business.
Pursuant to the authority obtained from the National directors, an application for listing of the National debentures was filed with the New York Stock Exchange on January 26, 1931, and the listing was *447 approved February 11, 1931. The debentures actually listed on the exchange were temporary debentures, but the stock exchange granted authority to the corporation to substitute permanent engraved debentures. The permanent engraved debentures with coupons attached were obtained by the National officers for distribution to petitioner's stockholders. Preparation of the application for listing the debentures and the other expenses incident to the printing of the temporary debentures and the engraving of the definitive debentures cost National between $15,000 and $20,000.
Prior to the listing of the National debentures on the New York Stock Exchange they were traded in over the counter in New*901 York and Pittsburgh at prices below par. The over the counter bid and asked prices between January 24 and February 9, 1931, ranged from a bid price of 90 1/2 and an asked price of 92 on January 29, 1931, to a bid price of 95 1/4 and an asked price of 95 3/4 on February 9, 1931. Sales of the National debentures on the New York Stock Exchange ranged from a low of 96 on February 13 to a high of 99 1/2 on April 7, 1931. Following the notice of redemption which was issued on April 8, 1931, the debentures sold at par and above until about the redemption date, May 11, 1931.
The National debentures were in the form of the usual corporate securities of this type. They had coupons attached and were issued in denominations of $100, $500, and $1,000. They were negotiable in form and title passed on delivery. They contained a provision for registration and for the reissuance of unregistered debentures in negotiable form and carried the usual tax-free clause and the customary gold clause. Prior to the issuance of these debentures National had no long term liabilities or funded debt of its own. Some of its subsidiaries, however, had bonds and equipment notes outstanding.
In the trust*902 indentures National covenanted that "so long as any of said debentures shall be outstanding and unpaid, it will not create nor will it permit any subsidiary company, directly or indirectly controlled by it, to create any mortgage indebtedness or other lien upon its properties or the properties of any of its subsidiary companies, and that it will not create nor suffer nor permit to be incurred or to accrue any indebtedness or obligation on its part or on the part of any subsidiary company, directly or indirectly controlled by it, having priority over such debentures issued in pursuance of this indenture." It was provided, however, that purchase money mortgages might be issued on newly acquired properties, provided such mortgages should not exceed 75 percent of the cost or value of such additional properties. Further National covenanted to "maintain assets, exclusive of goodwill and other similar intangible assets, equal to at least twice the face principal amount of the debentures", with the provision that no dividends should be paid which would impair such ratio. The indenture *448 provided that if the company should make default (1) in the payment of any interest installment*903 or any sinking fund payment and such default should continue for 30 days, or (2) in the performance of any of the covenants made and such default should continue for 60 days after written notice from the trustee specifying the nature of the default, or (3) in case a receiver or trustee for creditors should be appointed and 25 percent of the debenture holders should make request to the trustee, the principal of the debentures then outstanding should "be forthwith due and payable", with accrued interest.
The indenture also made provision for redemption of the debentures prior to maturity. It was provided that National should have the right "at its election" on or before July 1, 1931, to redeem and retire all of the debentures at par and accrued interest, and should have the right at its election on any interest date after July 1, 1931, to pay off and retire all or from time to time any part of the said debentures at $102 for each $100 par value. It was provided that if the corporation exercised its right to call such debentures prior to maturity "in connection with the issuance by the corporation of other notes, bonds or debentures", the corporation should state in its redemption*904 notice the general character and terms of the other notes, bonds, or debentures to be issued by it and the holders of the debentures of this issue who desired to do so would have the right of exchanging such debentures for a like aggregate face principal amount of such other notes, bonds, or debentures so issued or to be issued.
At no time during December 1930 or January 1931 did the officers of National have any intention of redeeming in the immediate future the debentures which had been issued to petitioner as part of the consideration for the acquisition of the petitioner's properties.
Although National had made arrangements with its bankers for them to carry its bank loans until some time in 1932, the increasing intensity of the depression and the rapid changes which were going on in the financial world during 1931 caused National, in the early spring of that year, to refinance its indebtedness and fund its bank loans. Some time late in February the officers of National discussed these loans with the bankers and between the middle of February and the middle of March of that year a plan was worked out for a refinancing of these loans. The plan first contemplated was the*905 financing of the bank loans by the issuance of 10-year debentures. Due to changing conditions in the market, however, the National officers were finally advised by the persons who were to market the debentures that the market would not take a security of this type and that a first mortgage obligation would have to be issued. The change from the contemplated debenture to a bond issue occurred some time in March 1931, and took the form of first collateral mortgage sinking fund gold bonds in the face amount of $40,000,000. *449 The issuance of such bonds was authorized by the National directors at a meeting held on April 17, 1931, when a contract for the purchase of the bonds by the bankers was approved. The issuance of the bonds involved the refunding of all of the debts of National.
Since the new bonds constituted a first charge upon the assets of National and ranked ahead of the debentures issued in connection with the acquisition of petitioner's assets, it became necessary to redeem such debentures or permit the holders to exchange them for the new bonds. Accordingly, on April 8, 1931, National issued and published in the newspapers a notice of redemption of the debentures*906 issued to petitioner. Such debentures were to be redeemed on May 11, 1931, at par, plus accrued interest to the date of redemption. The holders were given the option of exchanging such debentures for the new first collateral gold bonds of National. The action of the officers of National in giving notice of the redemption was approved at a meeting of its board of directors on April 17, 1931. Holders of the debentures representing $1,346,100 face value exercised the privilege of converting the debentures into the new National bonds.
The parties have stipulated that "for the purpose of this proceeding, the cost to Michigan Steel Corporation of its assets (less the liabilities) in this transaction is $5,467,043.36."
In the letter of deficiency respondent determined that the transaction hereinabove described "was a sale of the properties resulting in wholly recognizable gain to the Michigan Steel Corporation of New Jersey", and held that the difference between its cost of the properties and the sale price received, or $6,658,006.64, was recognizable profit. The sale price used in that computation was based on par values for the National debentures and stock. The parties have*907 now stipulated that the fair market value of the National debentures at the time of receipt was $93.50 for each $100 face value thereof, and the fair market value of the National stock was $45.6875 per share. On the basis of those values the respondent's computation of petitioner's profit is as follows:
| Selling price: | |
| Cash | $5,707,650.00 |
| Debentures, National Steel Corporation, 60,625 at $93.50 per debenture | 5,668,437.50 |
| Common stock, National Steel Corporation, 7,098 shares at $45.6875 per share | 324,289.88 |
| Total consideration received * | $11,700,377.38 |
| Cost | 5,467,043.36 |
| Profit | $6,233,334.02 |
*450 Petitioner expended $49,118.88 for attorney fees, audit fees, and miscellaneous fees in connection with the sale of its assets to National. A deduction claimed for those expenditures by petitioner on its 1930 return was disallowed by the respondent on the ground that they constituted capital expenditures rather than ordinary and necessary business expenses. *908 Petitioner now claims that if there be any taxable gain in the year 1931 resulting from the transaction hereinbefore described, it is entitled to deduct from the gross consideration received from National the expenditures heretofore mentioned. This issue is conceded by the respondent.
Petitioner kept is records and filed its income tax returns on the accrual method of accounting. Its 1931 return was filed with the collector of internal revenue for the district of Michigan on February 27, 1934, showing no income, no deductions, and no tax due. The notice of deficiency for the year 1931 did not propose any penalty on account of the filing of the 1931 return on February 27, 1934, and at the hearing counsel for respondent waived any claim for a delinquency penalty.
OPINION.
TURNER: The petitioner contends that the transaction whereby it transferred all its assets to the Michigan Steel Corporation of Delaware, a subsidiary of the National Steel Corporation, in exchange for stock, debentures, and cash of the latter constituted a reorganization within the meaning of section 112(i)(1)(a) of the Revenue Act of 1928 and that the gain is not recognizable under the statute. Respondent*909 contends that the transaction was an outright sale, that the debentures of National were not securities within the meaning of the reorganization provisions of the act, and that the gain must be recognized in its entirety.
The petitioner receives support for its claim that the debentures were "securities" from , and , but in the view we take of the issue here presented it is not necessary to consider or rule on that question.
In support of its claim that the transaction whereby it disposed of its assets for stock and debentures of National and for cash was a statutory reorganization and that National was a "party to the reorganization", petitioner seeks to distinguish this case from ; Helvering v. Bashford,U.S. 454, and . As to the Groman case petitioner states on brief that "Glidden received nothing from Indiana stockholders and transferred nothing to them", whereas in the instant case National "constructively" received the petitioner's assets and issued and delivered its own*910 stock, debentures and cash directly to petitioner. With respect to whether National received anything from *451 the petitioner in the present case, and whether Glidden received anything from the Indiana stockholders in the Groman case, the facts are indistinguishable. National and Glidden were the contracting parties in each case and directed that the assets acquired be transferred to their wholly owned subsidiaries, Michigan of Delaware and Ohio, respectively. In , the taxpayer tried to distinguish the Groman case by pointing out that Atlas, the parent corporation, "was a party to all the exchange", but the Supreme Court said:
Any direct ownership by Atlas of Peerless, Black Diamond, and Union 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. Hence, under the rule stated, the above distinctions are not of legal significance. The difference in the degree of stock control by the parent company of its subsidiary and the difference in the method or means by which*911 that control was secured was not material. The participation of Atlas in the reorganization of its competitors into a new company which became a subsidiary did not make Atlas "a party to the reorganization." The continuity of interest required by the rule is lacking. [Italics ours.]
The alleged distinction between the Groman case and the present case, to the effect that Glidden transferred nothing to the Indiana stockholders, whereas National transfered its own stock, debentures, and cash directly to petitioner, is of no significance inasmuch as the Supreme Court on December 6, 1937, deleted from the Groman opinion the sentence "Glidden transferred nothing to them [Indiana stockholders]", and at the same time denied a motion for a rehearing. (.) We think that fact shows that the Supreme Court was wholly disinterested in the question of whether the securities were transferred directly from the contracting parent corporation or indirectly through a wholly owned subsidiary. This point was also presented to the Court in the Bashford case and was disposed of as already shown.
We are unable to satisfactorily distinguish the present case from*912 the Groman and Bashford case and we think those cases hold that a parent corporation may not be regarded as a "party to a reorganization", where as part of the plan it was contemplated that the purchased assets would be and in fact were transferred to a subsidiary. That was the situation in the present case. It was never contemplated that National would hold and operate the properties purchased from the petitioner. We therefore hold that the transaction comes within the general rule of section 112(a) of the Revenue Act of 1928 and the entire amount of petitioner's gain is recognized. , and .
Petitioner contends that if the transaction in question is held to be a sale, it was a closed transaction in 1930 and the gain, if any, accrued *452 and was taxable in that year. The respondent contends that the transaction was not consummated until January 19, 1931, at which time the petitioner's directors and trustees in dissolution approved the contract of sale previously entered into.
As to the effective date of the contract between petitioner and National, the parties agreed specifically*913 as follows:
Fifth. It is understood and agreed that Michigan Steel Corporation shall not be obligated to consummate the sale herein agreed to until the Secretary of State of New Jersey has issued his certificate of its dissolution pursuant to the consent and authority of its stockholders, and said Michigan Steel Corporation agrees to promptly submit this contract to its stockholders for their approval and to take proper action looking to its dissolution.
The meaning of the language quoted is in our opinion too obvious to require extended discussion. The parties, in so many words, agreed that the petitioner should "not be obligated to consummate the sale" until the happening of a certain event, namely, the delivery of the certificate of dissolution, and the facts show that that event occurred in January 1931. The respondent is accordingly sustained on this issue.
Decision will be entered under Rule 50.
Footnotes
*. The value received by reason of the assumption of the liabilities has been excluded for the reason that the cost figure of $5,467,043.36 represents the net amount after deducting liabilities. ↩