1934 BTA LEXIS 1326">*1326 Where petitioner, pursuant to a plan, exchanged substantially all of its assets for stock in another corporation and thereafter dissolved and distributed such stock among its stockholders, held, there was a statutory reorganization within section 112(i)(1)(A) of the Revenue Act of 1928, and the exchange constituted a nontaxable transaction within the meaning of section 112(b)(4) of that act.
30 B.T.A. 455">*455 The respondent has asserted a deficiency in income taxes for the year 1929 of $22,330.
Petitioner alleges that the respondent erred in including in the net income of the taxpayer the sum of $200,000 alleged to have been received from the Ross Industries Corporation. This the respondent denies. It is agreed that the Harrison Co. did not receive any cash from the Ross Co. and that the Commissioner erroneously included $100,000 cash in the Harrison Co.'s taxable income for 1929.
The facts are stipulated and are found by us as so stipulated.
FINDINGS OF FACT.
J. M. Harrison, Inc., was an Ohio corporation organized July 11, 1927, for the purpose of1934 BTA LEXIS 1326">*1327 developing a market for drying equipment and processes employed in baking enamel used extensively in the automobile industry and for other drying operations under patents owned by James M. Harrison. Prior to March 1929 the Harrison Co. had entered into several contracts for the manufacture and sale of this equipment. These contracts consist of:
(a) A license from James M. Harrison to J. M. Harrison, Inc., for exclusive manufacture, use, and sale of drying equipment under J. M. Harrison's patents. Copy of license is attached hereto as Exhibit "A", and made a part hereof.
30 B.T.A. 455">*456 (b) Contract with McCann-Harrison Corporation for manufacture of drying equipment. Copy of contract is attached as Exhibit "B", and made a part hereof.
(c) Contract with Clarage Fan Company for sale of Drying equipment. Copy of contract is attached as Exhibit "C", and made a part hereof.
(d) Contract with Nichols Products Corporation for the sale of drying equipment. Copy of contract is attached as Exhibit "D", and made a part hereof.
Purchase and sale under the foregoing license and contracts furnished the only source of revenue to the Harrison Co.
During the year ending December 31, 1928, the1934 BTA LEXIS 1326">*1328 net profits of the Harrison Co. (exclusive of Federal income tax) amounted to $33,804.24, and during the period from January 1 to March 15, 1929, amounted to $10,195.87. All of the stock of the Nichols Products Corporation was owned by the Ross Industries Corporation from and after the organization of the latter company, January 10, 1929.
The license and contracts above listed were acquired by the Harrison Co. without capital expense, and were never entered on its books as assets.
During the latter part of February or the early part of March 1929 the Harrison Co., through its president, James M. Harrison, negotiated with the Ross Industries Corporation of New York, hereinafter referred to as the Ross Co., a competitor of the Harrison Co., for the acquisition of the license and contracts of the Harrison Co. in exchange for stock of the Ross Co. After preliminary negotiations had been carried on for a brief time, the matter became the subject of action by the board of directors of the Harrison Co. on March 15, 1929, at which meeting a resolution, a copy of which is included herein by reference, was adopted approving the proposal of the Ross Co. for the transfer to it from the1934 BTA LEXIS 1326">*1329 Harrison Co. of the contracts in question and the license held by the Harrison Co. in exchange for 1,000 shares of the preferred stock of the Ross Co., and the president of the Harrison Co. was authorized to enter into such agreements with the Ross Co. as were necessary to effectuate the purpose of the resolution, to which action the stockholders consented.
The minutes of this meeting, among other things, recite as follows:
In view of the fact that this company will receive from Ross Industries Corporation, in pursuance of the plan of reorganization, stock in Ross Industries Corporation, the following resolution was on motion duly made, seconded, put and unanimously carried, adopted:
RESOLVED: That in event the merger of this company with Ross Industries Corporation is completed, along the lines authorized in the foregoing resolution, such stock of Ross Industries Corporation as may be received by this company, in effectuating the said merger, shall as soon after the transaction is completed as is convenient, be distributed among the various stockholders of this company, in proportion to the stock holdings of each stockholder.
30 B.T.A. 455">*457 At the same meeting the directors1934 BTA LEXIS 1326">*1330 of the Harrison Co. authorized the immediate sale of its furniture and fixtures and accounts receivable to James M. Harrison upon payment by him to the company of the book value of said property and the assumption by him of the liabilities of the company existing at the close of business on March 15, 1929, and declared a cash dividend of $10,000, payable March 18, 1929, thereby reducing its capital and surplus to $2,159.24, of which $750 was capital and the balance was reserved for taxes and contingencies pending dissolution.
The taxes and contingencies against which $2,159.24 was reserved by the Harrison Co. include the following:
| Auditors' fees | $225.00 |
| Attorneys' fees | 1,750.00 |
| Income tax | 477.70 |
| Total | 2,452.70 |
These contingencies were paid by the corporation and by contribution from the stockholders subsequent to March 21, 1929.
On March 21, 1929, agreements were entered into between the Harrison Co. and the Ross Co., in which the Harrison Co. agreed to, and did, transfer to the Ross Co. its several contracts and license referred to above, and the Ross Co. agreed to, and did, issue its preferred stock in a total par value of $100,000 to the Harrison1934 BTA LEXIS 1326">*1331 Co.
The amount of Ross stock so received by the Harrison Co. did not constitute control of the Ross Co.
On March 20, 1929, J. M. Harrison owned 130 of the 150 outstanding shares of stock of J. M. Harrison, Inc.; Gertrude A. Harrison, his wife, owned the remaining 20 shares. On that date J. M. Harrison transferred 17 1/2 shares to his wife and 37 1/2 shares each to their two children, James A. and Helen M. Harrison, all without consideration. This resulted on March 20, 1929, in the ownership of 37 1/2 shares by each of the four persons mentioned.
The transfer by Harrison on March 20, 1929, of a portion of his Harrison Co. stock, as set forth in the foregoing paragraph of this stipulation, was an actual and bona fide gift.
The 1,000 shares of preferred stock of the Ross Co. which had been received by the Harrison Co. were distributed to the stockholders of the Harrison Co. in proportion to their relative stockholdings in accordance with the resolution of the board of directors of the Harrison Co. passed March 15, 1929, without the surrender of their Harrison Co. stock.
J. M. Harrison, Inc., agreed to dissolve on August 24, 1929.The only assets appearing on the books1934 BTA LEXIS 1326">*1332 of the Harrison Co. on March 15, 1929, were the properties sold to J. M. Harrison at the book value of $12,159.24. The only asset appearing on the books 30 B.T.A. 455">*458 of the Harrison Co. on March 21, 1929, was the balance of $2,159.24 in the company's treasury.
By agreements of March 21, 1929, J. M. Harrison agreed to, and did assign to the Ross Co. certain patents and agreed to refrain from competition with the Ross Co., for a consideration of $100,000 in cash, which was paid to him on March 21, 1929, and returned by him in the joint income tax return filed by taxpayer for himself and his wife for 1929.
Upon acquiring the patents from J. M. Harrison, the Ross Co. set them up on its books as assets costing $200,100 and in its 1929 return claimed depreciation on them as follows:
| 1929 | |||
| Cost | Rate | Depreciation | |
| Patents | $200,100.00 | 11.111% | $22,222.00 |
Prior to March 20, 1929, Gertrude A. Harrison, the wife of J. M. Harrison, owned 20 shares of the capital stock of the Harrison Co., this stock having been owned from the time of the incorporation of the company, and J. M. Harrison had been the owner of the balance of the Harrison Co.'s stock, 1934 BTA LEXIS 1326">*1333 to wit, 130 shares.
The 1,000 shares of preferred stock of the Ross Co. received by the Harrison Co. on March 21, 1929, were distributed in accordance with a resolution of the board of directors of the Harrison Co. adopted March 15, 1929, without the surrender of their Harrison Co. stock, to the shareholders of the Harrison Co. as follows:
| J. M. Harrison | 250 shares |
| Gertrude A. Harrison | 250 shares |
| James A. Harrison | 250 shares |
| Helen M. Harrison | 250 shares |
OPINION.
ADAMS: The petitioner, J. M. Harrison, Inc., in its income tax return reported the transaction between it and the Ross Industries Corporation as a tax-free exchange, and here contends that it constituted a reorganization and exchange of property by one corporation solely for stock in another corporation a party to the reorganization within the meaning of section 112(i)(1)(A) and section 112(b)(4) of the Revenue Act of 1928. (The pertinent paragraphs of the act are set out in the margin. 1)
1934 BTA LEXIS 1326">*1334 The respondent contends that it was a sale upon which gain or loss shall be recognized.
30 B.T.A. 455">*459 The respondent urges that the transaction did not result in the acquisition by Ross Industries Corporation of actual property of petitioner as contemplated by section 112(i)(1) of the Revenue Act of 1928, and therefore fails to constitute a reorganization. He further urges that "it does not appear that a plan of reorganization existed."
Counsel for the respondent argues that the only things of value involved in the transactions by which the Ross Industries Corporation acquired the Harrison patents and the contracts to manufacture under them were the patents themselves, and that the petitioner on its books never assigned any value whatever to the contracts, which had cost it nothing. We are not impressed with this argument. In 1928 petitioner had been granted the exclusive license to manufacture, use, and sell within the United States and Canada, all the articles covered by these patents. Under the terms of the contract the license would expire March 1, 1930, but petitioner was given the option to renew it for a further period of three years upon notice to J. M. Harrison. The1934 BTA LEXIS 1326">*1335 Ross Industries Corporation could not, therefore, use the patents for approximately four years after it acquired them, unless it also acquired the exclusive license held by petitioner. The fact that petitioner did not set up on its books as assets the license and contracts here in question is not controlling. They constituted its sole source of revenue, which in 1928 exceeded $33,000, and from January 1 to March 15, 1929, was more than $10,000. They were valuable assets at the time they were acquired by the Ross Industries Corporation, and constituted property as that term is used in the statute.
The facts bring this case clearly within the provisions of section 112(b)(4), provided there was a statutory reorganization to which J. M. Harrison, Inc., and the Ross Industries Corporation were parties, and provided further that such reorganization was accomplished in pursuance of a plan of reorganization.
A proper solution of the questions presented requires that we should determine first whether the facts show a statutory reorganization. 30 B.T.A. 455">*460 Section 112(i)(1) defines reorganization as being a merger or consolidation, and includes within the meaning of these terms the1934 BTA LEXIS 1326">*1336 acquisition by one corporation of substantially all the properties of another corporation.The facts as found here do not bring this transaction within the definition of a consolidation as that term is used in the statute. We believe, however, that they show a merger as that term is defined in section 112(i)(1)(A), and a statutory reorganization was thereby effected. If they do not show a true merger, certainly they come within the holding of the Supreme Court in , wherein the Court said that the statute undertook to expand the meaning of merger or consolidation so as to include some things which partake of the nature of a merger or consolidation, but rather beyond the ordinary and commonly accepted meanings of these words, so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation.
We think this was such a merger as the Supreme Court had in mind in the opinion in the above cited case. A statutory reorganization was effected and both J. M. Harrison, Inc., and the Ross Industries Corporation were parties to such reorganization. 1934 BTA LEXIS 1326">*1337 As such, they are entitled to the benefits of the exemption provisions of section 112 of the Revenue Act, provided, however, that such reorganization was accomplished in pursuance of a plan of reorganization.
In our opinion, the statute requires that although the facts show an actual merger or consolidation, yet, if the parties did not intend to merge or consolidate and their dealings were not in pursuance of a plan having a merger or consolidation for its purpose, then, and in that event, a statutory reorganization was not accomplished.
This renders it necessary for us to examine as to whether what the parties actually did was done in pursuance of a plan to merge or consolidate as these terms are used in the statute.
On March 15, 1929, the president of J. M. Harrison, Inc., presented to that company's directors a proposal on the part of the Ross Industries Corporation to purchase a part of the assets of J. M. Harrison, Inc. The directors passed a resolution on that date looking to the acceptance of this proposal, in which they referred to the transaction as a merger with the Ross Industries Corporation. The language which they used in this resolution is not controlling1934 BTA LEXIS 1326">*1338 as to the legal effect of what they did, but this must be determined from an examination of all the facts incident to the transaction. Following this action, on March 21, J. M. Harrison, Inc., and the Ross Industries Corporation entered into a contract providing for the exchange by J. M. Harrison, Inc., of substantially all of its properties for 1,000 shares of the preferred stock of the Ross Industries Corporation, and it was agreed in that contract that J. M. Harrison, Inc., 30 B.T.A. 455">*461 would immediately dissolve, and this contract was executed by the parties. These transactions between the parties constituted a reorganization in pursuance of a plan to reorganize, and both J. M. Harrison, Inc., and the Ross Industries Corporation were parties to that plan. These facts meet the requirements of the statute that a reorganization, in order to bring it under the exemption provision of section 112, must be accomplished in pursuance of a plan of reorganization.
The situation presented here is very similar to that in the case of 1934 BTA LEXIS 1326">*1339 .
It is distinguishable from , in that in that case the Minnesota Tea Co. did not agree to dissolve and continued as a going concern, and there was not such a merger as to constitute a statutory reorganization.
We find for petitioner on this issue.
Reviewed by the Board.
Decision will be entered under Rule 50.
ARUNDELL and LEECH concur in the result.
Footnotes
1. SEC. 22. GROSS INCOME.
(a) General Definition. - "Gross income" includes gains, profits and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) General Rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
* * *
(b) * * * (4) * * * No gain or loss shall be 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.
* * *
(i) Definition of reorganization. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *. ↩