1930 BTA LEXIS 2268">*2268 1. GAIN OR LOSS - CAPITAL TRANSACTIONS. - The stockholders of petitioner, under an agreement having as its object the acquisition of control of petitioner by a foreign corporation, caused to be distributed to themselves certain of petitioner's assets, and received in place of their voting common and nonvoting preferred stock, which was surrendered and canceled, an amount in cash and new nonvoting preferred stock of petitioner in a larger amount, issued under authority of an amendment of its charter increasing in amount its authorized common and preferred stock, all of the new voting common stock of petitioner issued being to nominees of the foreign corporation, who were thereby placed in control. Held that as to petitioner the transaction resulted in no realization of gain or loss, it having disposed of no assets except by distribution to stockholders.
2. Id. - REORGANIZATION. - Six weeks after the conclusion of the transaction above detailed, representatives of the foreign corporation caused to be organized a new corporation, to which petitioner conveyed all of its assets, the consideration for the conveyance being stock of such new corporation issued to petitioner's stockholders1930 BTA LEXIS 2268">*2269 in place of their stockholdings in petitioner and in the same amounts and par value as the stock of petitioner held by them. Held that such transfer was one in reorganization as defined by section 203 of the Revenue Act of 1926, from which no gain or loss to petitioner is recognized.
19 B.T.A. 1074">*1074 This proceeding results from the determination of a deficiency in income tax for the fiscal year ended March 31, 1925, amounting to $15,052.64.
Petitioner charges error in respondent's determination that it realized a taxable gain from a transfer of its assets to another corporation, the Cosby-Wirth Manifold Book Co.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation with its principal office at Minneapolis. It was organized in 1915, under the name of Cosby-Wirth Co., and was engaged in the business of printing and bookbinding, specializing in the manufacture and sale of duplicating sales and record books. Philip W. Wirth, hereinafter referred to as Wirth, was one of its organizers and its principal stockholder.
1930 BTA LEXIS 2268">*2270 The business was operated from 1915 to the fall of 1924, under the name of Cosby-Wirth Co. In the fall of 1924, Wirth was approached 19 B.T.A. 1074">*1075 by representatives of the American Sales Book Co., Ltd., a Canadian corporation, with a proposition to purchase the business of the petitioner. At this time the outstanding capital stock of the petitioner, $100,000 par value common and $50,000 par value preferred, was all held by a group of 13 individuals. As a result of the negotiations the following contract was entered into:
THIS AGREEMENT, Made this 2nd day of October, 1924, between the American Sales Book Company, Limited, incorporated under the laws of the Province of Ontario, Canada, party of the first part, and Philip W. Wirth, of the County of Hennepin, State of Minnesota, party of the second part,
WHEREAS, The American Sales Book Company, Limited, party of the first part, desires to purchase the entire business, plant, presses, machinery, equipment, unfilled orders, office records, and merchandise on hand of the sound inventory value of said merchandise of Thirty-five Thousand Dollars ($35,000.00), also all interest owned by Cosby-Wirth Company in any patents of any nature1930 BTA LEXIS 2268">*2271 and description used in and about said business, and also all fixtures of every nature and description used in and about the business of Cosby-Wirth Company, a Minnesota corporation, doing business at 422 Washington Avenue North, Minnespolis, Minnesota, and more especially the Good-will of said business of Cosby-Wirth Company, and in which said corporation of Cosby-Wirth Company said Philip W. Wirth, party of the second part, owns or controls a majority of all stock issued or authorized to be issued; and,
WHEREAS, The party of the first part agress to buy and pay to Philip W. Wirth and his associates, for the entire assets of said Cosby-Wirth Company, except cash securities and book accounts on hand and accrued up to November 1, 1924, the sum of Two Hundred and Fifty Thousand Dollars (250,000.00), in manner following: Fifty Thousand Dollars ($50,000.00) cash November 1, 1924, and Two Hundred Thousand Dollars ($200,000.00) in seven percent cumulative Preferred Stock, par value One Hundred Dollars ($100.00), in a corporation to be incorporated to take over the assets and conduct the business of said Cosby-Wirth Company, or of the said Cosby-Wirth Company after amendment of1930 BTA LEXIS 2268">*2272 its present Articles of Incorporation to provide two thousand (2,000) shares of seven percent cumulative Preferred Stock of the par value of One Hundred Dollars ($100.00), and three thousand (3,000) shares of Common Stock with no par value named;
NOW, THEREFORE, In consideration of the premises, and of the sum of One Dollar ($1.00) in hand paid by party of the first part to party of the section part, and of the mutual agreements hereinafter made, the parties hereto agree as follows:
First: The party of the first part agrees to buy the entire assets of the Cosby-Wirth Company, a Minnesota corporation, including the good-will of said business, as above set forth, except cash securities and books accounts accumulated up to November 1, 1924, for the sum of Two Hundred and Fifty Thousand Dollars ($250,000.00), payable in the following manner: Fifty Thousand Dollars ($50,000.00) cash November 1, 1924, and Two Hundred Thousand Dollars ($200,000.00) in seven percent cumulative Preferred Stock, par value One Hundred Dollars ($100.00) per share, in a new corporation which will take over the assets and business of Cosby-Wirth Company, or in the Cosby-Wirth Company under amended Articles1930 BTA LEXIS 2268">*2273 of Incorporation that will permit of the carrying out of this plan of payment. The party of the first part guarantees the payment of the Two Hundred Thousand Dollars ($200,000.00) seven percent cumulative Preferred Stock and semiannual dividend in 19 B.T.A. 1074">*1076 the new corporation above mentioned, or in the present Cosby-Wirth Company under amended Articles of Incorporation, and agrees to purchase said stock at par, one-tenth on the first day of November, 1925, and one-tenth of said Preferred Stock on the first day of November in each and every year thereafter until the entire issue of Two Hundred Thousand Dollars ($200,000.00) above mentioned has been taken up by party of the first part.
Second: The party of the second part, Philip W. Wirth, for himself and as agent and under power of attorney in behalf of Sarah E. Wirth. Alma J. Lathrop and Anna H. Jarret, and other stockholders, agrees to deliver, free and clear of all encumbrance, the entire assets of said Cosby-Wirth Company, except cash on hand, securities and book accounts accrued prior to November 1, 1924, to American Sales Book Company, Limited.
Third: Said Philip W. Wirth, party of the second part, for himself, 1930 BTA LEXIS 2268">*2274 Sarah E. Wirth, Alma J. Lathrop and Anna G. Jarret, agrees with party of the first part not to engage in the sales book business, in any manner, except with the written consent of the American Sales Book Company, Limited, in any part of the United States, excepting the States of Wyoming, Nevada and New Mexico, for a period of ten (10) years.
Fourth: Philip W. Wirth, party of the second part, for himself, Sarah E. Wirth, Alma J. Lathrop and Anna G. Jarret, agrees to dispose of all of their holdings in the Wirth Sales Book Company of Chicago, Illinois, Craft Sales Book Company of Philadelphia, Pennsylvania, and the Cooper Carbon Coated Paper Company of Chicago, Illinois, prior to January 1, 1925; and if any part of their interest in any of said competitive companies remains unsold on and after January 1, 1925, the American Sales Book Company, Limited, party of the first part, is hereby authorized to buy such interest or holdings in said competitive company or companies at their sound book value of the stock of the respective companies as of January 1, 1925.
IN WITNESS WHEREOF, The American Sales Book Company, Limited, has caused this instrument to be executed by its Treasurer, 1930 BTA LEXIS 2268">*2275 and General Manager, thereunto duly authorized to sign its name, and by Philip W. Wirth, President of the Cosby-Wirth Company, for himself and under power of attorney, for Sarah E. Wirth, Alma J. Lathrop and Anna G. Jarret.
The American Sales Book Co., Ltd., notified Wirth that it desired to proceed under the second alternative of the contract, i.e., to utilize a change of the authorized capitalization of the petitioner, and to issue preferred stock in lieu of the previous issue of common and preferred stock. The agreement was presented by Wirth to the other stockholders who thereupon agreed to participate and gave to Wirth powers of attorney authorizing him to sell and convey their stock in petitioner to the American Sales Book Co., Ltd.
Pursuant to the contract the name of the petitioner was changed to Cosby-Wirth Sales Book Co., and its articles of incorporation were amended to authorize 3,000 shares, par value $100 per share, of common capital stock entitled to vote, and $2,000 shares, par value $100 per share, of nonvoting preferred stock. All of the outstanding common and preferred stock was turned in and canceled. All of the newly authorized nonvoting preferred stock1930 BTA LEXIS 2268">*2276 was issued and delivered to the 13 stockholders above mentioned, in proportion to their former individual holdings of common and preferred stock. Of the newly 19 B.T.A. 1074">*1077 authorized voting common stock, three shares were issued; one each to C. W. Crofoot, W. C. Metzger, and C. L. Moore, the representatives of the American Sales Book Co., Ltd. Thereupon, on November 1, 1924, the old officers and directors resigned, new officers and directors were elected by the holders of the new common stock and the operation and control of the business was taken over by the representatives of the American Sales Book Co., Ltd.
Cash in the amount of $70,000 was supplied by the American Sales Book Co., Ltd., and was placed on deposit in bank to the credit of the petitioner. A check of the petitioner dated November 1, 1924, signed by C. W. Crofoot, president and treasurer, and A. G. Jarret, manager, in the amount of $44,015,69, payable to Wirth, was handed to the latter in discharge of the $50,000 cash payment provided for in the contract, the amount being so reduced by agreement of the parties in recognition of the fact that the inventory of merchandise amounted to $29,015.69 instead of the expected1930 BTA LEXIS 2268">*2277 value of $35,000 mentioned in the contract. This payment of $44,015.69 was distributed by Wirth to the former holders of the common and preferred stock of Cosby-Wirth Co. in proportion to their stock holdings.
The current assets of the petitioner which were not included in the assets provided in the contract to be taken over by the American Sales Book Co., Ltd., were turned over to Wirth, and he proceeded to realize upon them, and to pay off the current liabilities of the petitioner as they existed on November 1, 1924. These assets were as follows: cash on hand, $1,951.23; cash in bank, $4,250.20; accounts receivable, $42,450.12; notes receivable, $2,050.65; or an aggregate book value of $50,702.20. The current liabilities discharged by Wirth out of the proceeds of these assets were as follows: accounts payable, $3,241.47; notes payable, $3,432.66; or an aggregate of $6,674.13. The remainder available was distributed to the former holders of the Cosby-Wirth Co. stock.
The assets retained in the business by the petitioner were as follows: merchandise inventory, $29,015.69; plant and fixtures according to the books, $73,907.04; patent right and good will according to the books, 1930 BTA LEXIS 2268">*2278 $23,546.04; or an aggregate book value of $126,468.77.
The business of the petitioner was operated by the new officers and directors during the period beginning November 1, 1924, and ended December 18, 1924.
A new corporation was organized by the representatives of the American Sales Book Co., Ltd., on December 16, 1924, under the name of Cosby-Wirth Manifold Book Co. to which all of the assets of the petitioner were transferred on December 18, 1924. All of the outstanding preferred and common stock of the petitioner was turned in and canceled, and in lieu thereof the preferred and common 19 B.T.A. 1074">*1078 stock of the said new corporation was issued to the several stockholders in the same amount and par value as previously held in the petitioner.
None of the capital stock of the petitioner has since been issued or reissued and none is outstanding.
For the purpose of computing the deficiency the respondent has determined the net income of the petitioner as follows:
| Net income reported | $14,501.97 | |
| Add: | ||
| (a) Profit sale assets | 117,228.85 | |
| Net income as adjusted | 131,730.82 | |
| Explanation (a): | ||
| Sale price November 1, 1924, 2,000 shares, 7% cumulative preferred stock of Cosby-Wirth Manifold Book Co | 200,000.00 | |
| Cash | 44,015.69 | |
| Total selling price | 244,015.69 | |
| Cost of assets sold, merchandise as per inventory November 1, 1924 | $29,015.69 | |
| Equipment, depreciated value to November 1, 1924 | 74,220.11 | |
| Patents acquired from February 1, 1915, to date | 23,551.04 | |
| Total cost | 126,786.84 | |
| Net profit | 117,228.85 |
1930 BTA LEXIS 2268">*2279 OPINION.
TRUSSELL: The record shows two separate and distinct transactions in respect to the assets and business of petitioner. The first is in performance of an agreement by Philip W. Wirth and other stockholders of petitioner to secure the sale and transfer to the American Sales Book Co., Ltd., a Canadian corporation, of all the assets and business of petitioner with the exception of certain specified liquid assets, the consideration provided to be paid these stockholders being an amount in cash and certain preferred nonvoting stock in a new corporation organized to take over the business, or, in the event the purchasers wished to use the existing corporation for the carrying on of future business, then the stock consideration was to be paid in nonvoting preferred stock of petitioner upon amendment of its charter to authorize the issuance of new preferred and common stock in place of and in larger amounts than the then outstanding preferred and common stock.
In performing this agreement the Canadian corporation elected to take over petitioner instead of organizing a new corporation to take over the assets and the agreement was carried out by amendment of petitioner's charter1930 BTA LEXIS 2268">*2280 to authorize $200,000 par value preferred and $300,000 par value common stock in place of the $100,000 common 19 B.T.A. 1074">*1079 and $50,000 preferred stock heretofore authorized and outstanding in the hands of Wirth and his associates, and petitioner distributed to these stockholders the excepted liquid assets, constituting accumulated surplus of petitioner, represented by cash, accounts receivable and notes receivable in the amount of $50,702.20, against which aggregate current liabilities of $6,674.13 were assumed and paid by these stockholders. The $100,000 of common and $50,000 preferred stock outstanding in the hands of Wirth and his associates was surrendered and canceled and in its place the $200,000 of authorized preferred stock was issued to them. Three shares of the newly authorized common stock were issued to nominees of the Canadian corporation, thus placing in it full voting control of petitioner and a new directorate of the Canadian corporation's selection was elected. The cash agreed by the contract to be paid Wirth and his associates was deposited by the Canadian corporation to the credit of petitioner whose check for that amount was delivered to Wirth and distributed1930 BTA LEXIS 2268">*2281 among the stockholders.
We are not concerned with the question of gain realized by the individual stockholders and it is quite evident that by this transaction no gain accrued to petitioner. It parted with no assets except by distribution of a portion of its surplus to stockholders. At the conclusion of the transaction it held the same assets as before, with exception of those distributed to its stockholders, and the only other change as to it, was that it had then outstanding $200,000 of preferred and $300,000 of common stock in place of the former $100,000 of common and $50,000 preferred stock and these are merely capital changes.
By the contract in question the contemplated transaction is referred to as a sale of the assets of petitioner, but an examination of the conditions of the agreement shows it to be one providing for either a sale of certain corporate assets or a sale of the control of the corporate petitioner, whichever the purchaser might prefer, and we are concerned only with the agreement as carried out, which was, under the election of the purchaser, merely the acquisition by it of the control of petitioner. The cash paid by the Canadian corporation to the stockholders1930 BTA LEXIS 2268">*2282 through petitioner was not received by it for corporate assets conveyed, but was paid it for the stockholders and represented the price paid by the Canadian corporation for the control of petitioner through the exchange of these stockholders of voting for nonvoting stock and this was something belonging to the stockholders as an incident of their then stock ownership and not an asset of petitioner.
After this transaction was completed, the Canadian corporation, as owner of the issued voting stock, was in full control, and after operating the petitioner for a month and a half, determined to 19 B.T.A. 1074">*1080 organize a new corporation to take over the business. This new corporation was organized, having the same stock issue as petitioner, and all assets then owned by petitioner were conveyed to it, all of petitioner's stock being turned in and canceled, stock of the new corporation of the same class and in similar amounts being issued in its place to the several stockholders.
It is clear to us that this second transaction constituted a reorganization under the definition of section 203(h)(1) of the Revenue Act of 1926 as:
* * * (A) A merger or consolidation (including the acquisition1930 BTA LEXIS 2268">*2283 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), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
The section cited further provides:
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(3) 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.
In view of these provisions we are of the opinion that, in effecting1930 BTA LEXIS 2268">*2284 such reorganization, the transfer of petitioner's assets to the new corporation did not, as to petitioner, give rise to taxable gain.
Reviewed by the Board.
Judgment will be entered for the petitioner.