*1465 Petitioner, the owner of 200 shares of stock of the A corporation, entered into an agreement with the B corporation, which already owned 1,220 shares of A corporation's stock, whereby petitioner and two other individuals would exchange 556 shares of A stock for 3,336 shares of B stock. By virtue of the exchange B became owner of all the outstanding stock of A, with the exception of the qualifying shares. No proof was offered to show that B's acquisition of its original holding of 1,220 shares of A stock was solely in exchange for its voting stock. Held, the exchange of petitioner's A corporation stock for B corporation's shares was not a tax-free reorganization within the meaning of section 112(g)(1)(B) of the Revenue Act of 1934; held, further, that the exchange occurred in the year 1935.
*677 The respondent determined a deficiency of $1,094.38 in income tax for the year 1935. He also has determined an overassessment of $48.70 for 1936. Taxpayer attempts by his petition to bring both years within the scope of this proceeding.
*1466 The single issue before the Board is whether or not petitioner realized a recognizable gain upon an exchange of stock.
*678 FINDINGS OF FACT.
Petitioner is an individual and resides in Detroit, Michigan. He has been employed by the Dibble Color Co., hereinafter referred to as Dibble, for 20 years in the capacity of secretary and treasurer of the company. At the date of the hearing petitioner was still treasurer and secretary of Dibble. The company was organized by petitioner, Fred T. Dibble, and E. A. Dreves.
On December 1, 1935, the shares of Dibble were held as follows:
| Shares | |
| R. W. Lindsey | 1 |
| F. W. Robinson | 2 |
| H. E. Webster | 1 |
| Fred T. Dibble | 300 |
| E. A. Dreves | 56 |
| R. A. Pulfer | 200 |
| Pratt & Lambert, Inc | 1,220 |
| Total | 1,780 |
Of the shares of Dibble owned by petitioner, 190 were pledged with the receiver of the First National Bank, Detroit, as collateral for a loan. The remaining 10 shares were in petitioner's own possession.
Pratt & Lambert, Inc., of Buffalo, New York, sometimes hereinafter referred to as Pratt, first acquired an interest in Dibble in 1921. Almost all of Pratt's holding of Dibble stock was acquired at that time. *1467 Pratt acquired a few additional shares of Dibble at a later date. The stock was originally held in the name of the then president of Pratt, as nominee. Later the stock was transferred to the name of the succeeding president of Pratt, A. D. Graves. After the death of Graves, 1,220 shares of Dibble stock were transferred to the name of Pratt on December 18, 1930. In the year 1930 there was no plan in existence for the acquisition of all the stock of Dibble by Pratt.
For some time prior to December 1935, petitioner had attempted to sell his Dibble stock in order to pay off the loan at the bank for which the stock was pledged as collateral. On or about December 1, 1935, petitioner began negotiations with Harold E. Webster, president of Pratt, with regard to an exchange of the Dibble stock held by petitioner, Dibble, and Dreves.
The board of directors of Pratt, at a meeting called and held on December 3, 1935, passed the following resolution:
RESOLVED, that authority be and the same hereby is given for the acquisition by Pratt & Lambert, Inc., of all or any part of the 556 shares of outstanding capital stock of Dibble Color Company of the par value of $100.00 each, not already*1468 owned by Pratt & Lambert, Inc., by the exchange therefor of common stock of Pratt & Lambert, Inc. now held as treasury stock, on the basis of six (6) shares of such treasury stock for each share of said stock of Dibble Color Company, the shares of stock of Pratt & Lambert, Inc. so to be exchanged to be those represented by or included in certificates Nos. * * * now held in its treasury; and be it further
*679 RESOLVED, that the officers of this company are hereby authorized and empowered to take any and all action which may be necessary or advisable to acquired the said shares of stock of Dibble Color Company on the basis above mentioned and to obtain the approval or consent thereto of any public authorities if any such is required.
Petitioner, Dibble, and Dreves were agreeable to making the exchange and by letter dated December 12, 1935, petitioner notified Webster that they accepted the proposal for exchange authorized by the resolution of the board of directors of Pratt dated December 3, 1935. In the middle of December 1935 petitioner, by letter, instructed the receiver of the First National Bank-Detroit to send his stock to Buffalo, New York, for the exchange. Petitioner*1469 sent the 10 shares of Dibble stock which he had in his possession to the Marine Trust Co. of Buffalo, New York, and on December 31, 1935, received 60 shares of Pratt stock in exchange for these shares.
The receiver of the First National Bank-Detroit sent petitioner's 190 shares of Dibble stock to the Marine Trust Co., Buffalo, New York, with the following letter of transmittal:
Enclosed please find the following stock certificates of Dibble color Company, Capital Stock, endorsed in blank, registered in the name of R. A. Pulfer, Certificate No. 35, 55 shares, No. 36, 55 shares, No. 60, 80 shares, together with check of R. A. Pulfer in the amount of $13,30 for revenue stamps.
These certificates are being forwarded to you for exchange into 1,140 shares of Pratt & Lambert, Inc., Common stock, we understand the Certificates of Pratt & Lambert, Inc., will be in negotiable form and in the name of Knack & Co., properly endorsed by them with the endorsement guaranteed by Schoelkopf, Hutton & Pomeroy, and by the Marine Trust Company, Buffalo, New York.
It is our understanding that the details of the exchange have been worked out by Mr. H. E. Webster, President of Pratt & Lambert, *1470 Inc., and it will be appreciated if you will contact him inasmuch as it is desired that the exchange will be completed on or before December 31, 1935.
Upon completion of the exchange will you kindly forward the new certificates representing 1,140 shares of Pratt & Lambert, Inc., stock, to this Bank, for the attention of the Bond Department.
Kindly acknowledge receipt by signing and returning the copy of our letter enclosed.
The letter of transmittal, signed by an assistant secretary of the Marine Trust Co. and dated December 30, 1935, was received back by the receiver of the First National Bank-Detroit on December 31, 1935.
By registered mail on January 2, 1936, the receiver of the First National Bank-Detroit received the 1,140 shares of Pratt stock which were in exchange for petitioner's 190 shares of Dibble stock pledged as collateral. As a result of the exchange Pratt became the owner of all the outstanding stock of Dibble, with the exception of qualifying shares. Dibble has never been dissolved or liquidated nor have its assets been taken over by Pratt. It has continued to operate in Detroit as a subsidiary of Pratt.
*680 The exchange of Dibble stock for*1471 stock of Pratt & Lambert, Inc., occurred in 1935.
The cost to petitioner of the 200 shares of Dibble stock was $10,000. The fair market value of the 1,200 shares of Pratt stock received in exchange for the Dibble stock, at $36.25 a share, was $43,500. Respondent determined a gain on the exchange in the sum of $33,500, representing the difference between the cost of Dibble stock and the fair market value of the Pratt stock. He included in petitioner's gross income for the year 1935 that gain, as limited by section 117 of the Revenue Act of 1934, so that petitioner's gross income for 1935 was increased by the amount of $10,500 (30 percent of $33,500).
OPINION.
VAN FOSSAN: The Board had no jurisdiction of the year 1936, as to which respondent determined an overassessment. Cornelius Cotton Mills,4 B.TA. 255. Consequently, the only issue for our consideration is whether or not petitioner realized recognizable gain in the year 1935 upon an exchange of stock.
Petitioner contends that he exchanged his stock in the Dibble Color Co. for stock in Pratt & Lambert, Inc., pursuant to a plan of reorganization, and that no gain is recognizable on the exchange. In*1472 the alternative, he contends that even if gain is recognized, the exchange occurred in 1936.
Respondent argues that no tax-free reorganization was effected by the exchange because Pratt did not acquire "in exchange solely for all or a part of its voting stock * * * at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares" of Dibble stock. He urges that gain is recognized on the transaction in 1935 since the exchange for which petitioner transferred his holdings in Dibble for stock in Pratt occurred in that year.
The applicable provisions of the statute are section 112(b)(3) and (g)(1)(B) of the revenue Act of 1934. 1
*1473 *681 Petitioner relies heavily on Commissioner v. Dana, 103 Fed.(2d) 359, in his argument that the "80 per centum" requirements of section 112(g)(1)(B) are fulfilled by the "tacking" of Pratt & Lambert's prior ownership of 1,220 shares of Dibble stock to the stock acquired by exchange with petitioner. See also Rawco, Inc., Ltd.,37 B.T.A. 128">37 B.T.A. 128. Assuming, but not deciding, that Pratt acquired at least 80 percent of the voting stock and at least 80 percent of all other classes of shares of Dibble, we are yet of the opinion that there was no reorganization within the meaning of the statute. Section 112 plainly states that the acquisition must be solely in exchange for all or a part of its voting stock. The acquisition by Pratt was not of the category stipulated by the statute. Petitioner, upon cross-examination at the hearing, stated that he believed Pratt's original holding of Dibble stock had been purchased for cash. No proof was presented which would indicate otherwise. Petitioner failed to sustain the burden of proving that the acquisition of the Dibble stock by Pratt was in exchange solely for all or a part of its voting stock. *1474 Petitioner, therefore, did not receive the shares of Pratt stock in the course of a tax-free reorganization.
Thus it becomes necessary that we determine the year in which the exchange occurred. Petitioner contends that title to the shares could not pass until delivery of the Pratt stock and that since those shares were not received by the Detroit bank until January 2, 1936, the exchange was not effective until that date. he cites the Uniform Sales Act, section 19, rule 5, enacted as section 9458 of the Michigan Compiled Laws of 1929, 2 and the Uniform Stock Transfer Act, section 1(a), (b), enacted as section 9520, 3 of the Michigan Compiled Laws of 1929, as his authority for this contention. The Uniform Acts have also been adopted in New York. 4
*1475 *682 Respondent maintains that the exchange in question was a sale within the meaning of the Uniform Sales Act and asserts that title passed at the time the parties intended, i.e., in 1935. Uniform Sales Act, section 18 (section 9457, 5Mich. C.L., 1929; N.Y. Personal Property Law, section 99). He urges that the provisions of the Uniform Stock Transfer Act requiring delivery as a prerequisite to passage of title do not preclude the application of the Uniform Sales Act to determine the effective date of the exchange. He relies upon Dee Furey Mott,35 B.T.A. 195">35 B.T.A. 195; affd., 103 Fed.(2d) 1009.
In the Mott case the owner of shares which were held in a safety deposit box, *1476 on December 30, 1930, directed her broker to sell those shares. The broker sold the stock on December 30 but petitioner did not deliver the shares until January 2, 1931. We held that the sale was completed for purposes of realization of loss in the year 1930. In the course of our opinion there we considered the Uniform Sales Act and the Uniform Stock Transfer Act as enacted in the Michigan statutes and said:
From a consideration of the above cases it seems to us sound to conclude that the Uniform Stock Transfer Act is not intended to prescribe an exclusive method for transferring property in shares of stock and that the question of when the property passes may be determined under the provisions of the Uniform Sales Act (Sale of Goods Act). The courts of Michigan do not appear to have passed on this question, although it has been held in that State that corporate stock is "goods" within the statute of frauds. Sprague v. Hosie,155 Mich. 30">155 Mich. 30; 118 N.W. 497">118 N.W. 497. Under the provisions of the Uniform Sales Act quoted above it is not necessary that the goods be actually delivered in order to have a completed sale. The time of passing of title, and completion*1477 of sale, of specific or ascertained goods depends on the intent of the parties to the contract. * * *
Further, it was held that the Federal statute was controlling, the Board stating:
Our conclusion here need not rest on our interpretation of the Uniform Acts. These acts can not control the matter of deductions under a Federal revenue act. Deductions for losses, like those for depletion, Palmer v. Bender,287 U.S. 551">287 U.S. 551, and depreciation, Weiss v. Wiener,279 U.S. 333">279 U.S. 333, are determinable by the Federal statute. "State law may control only when the operation of the Federal taxing act by express language or necessary implication makes its own operation dependent on state law." Burnet v. Harmel,287 U.S. 103">287 U.S. 103.
In the Mott proceeding we made an extensive examination of the Michigan law on this point and the pertinent cases. We regard that case as controlling here. The New York law in regard to the applicability *683 of the Uniform Sales Act to the determination of passage of title in stock transactions is similar to that of Michigan. *1478 Agar v. Orda,144 Misc. 149">144 Misc. 149; 258 N.Y.S. 274">258 N.Y.S. 274; affd., 264 N.Y. 248">264 N.Y. 248; 190 N.E. 479">190 N.E. 479. See Francis S. Appleby,31 B.T.A. 533">31 B.T.A. 533.
In Ruml v. Commissioner, 83 Fed.(2d) 257, the Circuit Court of Appeals for the Second Circuit considered the case of a taxpayer who, like petitioner here, had shares of stock pledged as collateral for a loan. He directed his broker to sell the pledged shares but informed the broker that he could not deliver the shares immediately. The broker accordingly sold the shares in the year in which he was directed to sell them. The shares were not delivered to the broker until after the year in which the direction to sell had occurred. The court held that the taxpayer sustained a deductible loss in the year of sale, regardless of the fact that the taxpayer was unable to make delivery in that year. A like holding in regard to realization of gain was made by the Circuit Court of Appeals for the Sixth Circuit in Huntington National Bank v. Commissioner, 90 Fed.(2d) 876.
We are of the opinion that the intent of petitioner and Pratt & Lambert, Inc., was*1479 that the exchange should take place in the year 1935. The letter of transmittal sent to Buffalo by the receiver of the First National Bank-Detroit plainly indicated that the parties desired the exchange to take place in the year 1935. In any event, for all purposes of the provisions of the revenue act regarding recognition of gain or loss, the exchange was effective in 1935. Dee Furey Mott, supra.We hold that petitioner received the shares of Pratt & Lambert, Inc., in a taxable exchange in the year 1935. Respondent's determination is sustained.
Decision will be entered for the respondent.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(b) EXCHANGES SOLELY IN KIND. -
* * *
(3) STOCK FOR STOCK ON REORGANIZATION. - 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.
* * *
(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -
(1) The term "reorganization" means * * * (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock: of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation * * *. ↩
2. 9458. SEC. 19. Rules for ascertaining intention. Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer:
* * *
Rule 5. If the contract to sell requires the seller to deliver the goods to the buyer, or at a particular place, or to pay the freight or cost of transportation to the buyer, or to a particular place, the property does not pass until the goods have been delivered to the buyer or reached the place agreed upon. ↩
3. 9520. SECTION 1. (How title to certificates and shares may be transferred. ) Title to a certificate and to the shares represented thereby can be transferred only,
(a) By delivery of the certificate indorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby, or
(b) By delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign, or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby. * * * ↩
4. Sections of the New York law comparable to the Michigan statutes cited by petitioner are New York Personal Property Law, section 100 (the same as section 9458, Michigan C.L., 1929) and New York Personal Property Law, section 162 (same as section 9520↩, Michigan C.L. 1929).
5. 9457. SEC. 18. Property in specific goods passes when parties so intend.
(1) Where there is a contract to sell specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, usages of trade and the circumstances of the case. ↩