*1373 Pursuant to an informal agreement with the executive officers of a trust company, which was not authorized by the board of directors of that company and which was never ratified or adopted by them, a third corporation acquired during the taxable year shares of stock in a national bank in exchange for small amounts of money and shares of stock owned by the third corporation in the trust company. In the following year the trust company purchased all the assets of the bank for cash and an assumption of its liabilities. The bank thereupon dissolved and its asset, cash, was distributed in liquidation and paid over to the third corporation. Held, that the third corporation in acquiring the stock of the bank was not acting an agent of the trust company, that the transactions in controversy did not result in a reorganization, and that the profit realized by the petitioners in the exchange of their stock in the bank for money and stock in the trust company is subject to tax.
*89 These proceedings, *1374 which were consolidated for hearing, are for the redetermination of deficiencies in income tax for 1930, as follows:
| Docket No. | Deficiency | |
| Michael W. Thompson | 71905 | $257.86 |
| Thomas H. Sankey | 71943 | 438.91 |
| Charles F. Beech | 72722 | 5,405.43 |
The only matter in controversy is the correctness of the respondent's action in determining that the petitioners realized taxable profit from the exchange of certain shares of stock in a bank for shares of stock in a trust company and certain amounts of money.
FINDINGS OF FACT.
During 1930 and up until January 19, 1931, the date of its liquidation, the First National Bank of Birmingham, a corporation organized under the laws of the United States and hereinafter referred to *90 as the Birmingham Bank, was engaged in the banking business upon the South Side of Pittsburgh, Pennsylvania. Its authorized and outstanding capital stock during 1930 and to the date of dissolution consisted of 1,000 shares of a par value of $100 each.
During 1930 and 1931 the Peoples-Pittsburgh Trust Co., a Pennsylvania corporation, hereinafter referred to as the Trust Co., was engaged in the banking business in Pittsburgh. Some*1375 time prior to June 20, 1930, the Trust Co., through its president, vice president and the chairman of its board of directors, began negotiations with petitioners Sankey and Beech, president and cashier, respectively, of the Birmingham Bank, with a view to the Trust Co. "taking an interest" in the bank. During the time the negotiations were taking place it was the intention of the Trust Co. to take over and absorb the Birmingham Bank by acquiring its stock and liquidating it. The negotiations resulted in the holders of 770 shares of the capital stock of the Birmingham Bank submitting under date of June 20, 1930, the following offer to the Trust Co.:
We the undersigned stockholders of the First National Bank of Birmingham submit the following offer to the Peoples-Pittsburgh Trust Company:
We will sell the number of shares of the First National Bank of Birmingham set opposite our names, and take in exchange therefor three and one-third (3 1/3) shares of the stock of the Peoples-Pittsburgh Trust Company for each one share of stock of the First National Bank of Birmingham.
We also agree, in the event that this offer is accepted, to arrange for representation on the Board of Directors*1376 of the First National Bank of Birmingham such persons as Peoples-Pittsburgh Trust Company may select, the number to be so selected to be not less than two.
We also agree, in the event of the acceptance of this offer, that the stock set opposite our names will be deposited with Mr. Charles Beech, who is to act as our agent in making the exchange of stock under this offer. Stock so delivered in exchange shall be registered in the names of the holders of the First National Bank of Birmingham stock unless otherwise directed.
This offer shall remain open for your acceptance for a period of thirty (30) days from the date hereof.
In making this offer, it is understood and agreed by the undersigned stockholders, that in the event of exchange of stock made in accordance with the above proposition each stockholder desiring to dispose of his stock of Peoples-Pittsburgh Trust Company received in exchange for stock of the First National Bank of Birmingham will have the opportunity to sell the same in the Hillman Investment Company at a price equivalent to $550 per share cash for each share of First National Bank of Birmingham. The opportunity to dispose of his stock for cash in the manner*1377 above mentioned shall be open to the undersigned stockholders for a period of fifteen (15) days from the date of your acceptance of our offer.
After the foregoing offer had been submitted to the Trust Co. its officials began to consider all the legal phases that would be involved in an acceptance of the offer by the Trust Co. The Trust Co. was subject to the rules of the Federal Reserve Board and at that time *91 a rule of that board provided that one bank could not absorb another bank without first obtaining the specific written permission of the board. On acquiring stock of other banks in previous transactions the Trust Co. had been criticized by the Federal Reserve Board, apparently for not complying with this rule. The officers of the Trust Co. decided that while they probably could get the consent of the board for acquiring the stock of the Birmingham Bank, compliance with the rule would result in considerable delay. Negotiations were also being carried on by the Trust Co. with respect to the acquisition of another bank. As a result of these and other considerations the directors of the Trust Co. took no formal action respecting the acceptance of the offer submitted*1378 by the stockholders of the Birmingham Bank, because to have done so would have resulted in a commitment of the Trust Co. in direct violation of the rules of the Federal Reserve Board. The executive officers of the Trust Co., without disclosing the situation to the stockholders of the Birmingham Bank and without disclosing that the directors had taken no action binding on the Trust Co. with respect to the acceptance of the offer, arranged with J. H. Hillman, Jr., chairman of the board of directors and a participant in what had transpired theretofore, to make compliance with the offer through the Hillman Investment Co. and the Allegheny Bankshares, Inc., two corporations of which he was president. The arrangement with Hillman contemplated that the Hillman Investment Co., hereinafter referred to as the Hillman Co., would acquire the 1,000 shares of the capital stock of the Birmingham Bank at $550 per share for the account of the Trust Co. but in the name of the Allegheny Bankshares, Inc., hereinafter referred to as Bankshares, Inc.; that 850 of the shares of the Birmingham Bank would be acquired for cash at $550 per share or a total of $467,500, of which amount Bankshares, Inc., would*1379 borrow on four of its notes $233,750 from the Trust Co. and $233,750 from the First National Bank at Pittsburgh; that 150 shares of the stock of the Birmingham Bank would be acquired by giving the owners thereof stock in the Trust Co. at $165 per share, such stock to be delivered from Trust Co. stock owned by the Hillman Co.; and that the Trust Co., when it had obtained permission from the Federal Reserve Board, would issue to the Hillman Co. shares of its stock equal in number to that given by the Hillman Co. in acquiring the stock of the Birmingham Bank.
At various dates between July 25, 1930, and August 9, 1930, all of the stockholders in the Birmingham Bank (except directors who retained 70 shares for qualification purposes) assigned their stock certificates in blank and delivered them to either the Hillman Co. or Bankshares, Inc., from whom they received either cash or certificates for shares of the capital stock in the Trust Co. During the *92 period November 1930 to January 1931 the shares held by the directors in the Birmingham Bank were delivered for cash. The holders of 763 of the 1,000 outstanding shares of the Birmingham Bank took cash for their stock in the*1380 total amount of $419,795.50, while the holders of the remaining 237 shares took stock in the Trust Co. in the total amount of 786 shares and small amounts of money totaling $660. The 786 shares of stock in the Trust Co. which were given to the stockholders of the Birmingham Bank upon delivery of their stock had cost the Hillman Co. $122,039.12. The total of the cash paid to the stockholders of the Birmingham Bank and the cost to the Hillman Co. of the shares of the stock in the Trust Co. given the stockholders of the bank for their shares was $542,494.62. the stockholders of the bank for their shares was $542,494.62.
During the period from June 11 to July 18, 1930, the Hillman Co. purchased from the Trust Co. for cash, 886 shares of its capital stock. These purchases were made at the prevailing market price on the day of purchase and were as follows:
| Date | Number of shares | Cost per share | Total |
| June 11 | 148 | $155.25 | $22,977.00 |
| June 12 | 10 | 160.25 | 1,602.50 |
| June 13 | 57 | 160.25 | 9,134.25 |
| June 16 | 46 | 154.20 | 7,093.20 |
| June 21 | 20 | 155.25 | 3,105.00 |
| June 21 | 12 | 160.25 | 1,923.00 |
| June 23 | 25 | 160.25 | 4,006.25 |
| June 24 | 8 | 159.25 | 1,274.00 |
| June 24 | 10 | 160.25 | 1,602.50 |
| June 24 | 10 | 160.00 | 1,600.00 |
| June 26 | 50 | 150.00 | 7,500.00 |
| June 27 | 50 | $150.00 | $7,500.00 |
| June 27 | 3 | 155.33 | 466.00 |
| June 28 | 100 | 150.00 | 15,000.00 |
| July 1 | 100 | 150.00 | 15,000.00 |
| July 18 | 15 | 155.00 | 2,325.00 |
| July 18 | 37 | 156.25 | 5,781.25 |
| July 18 | 45 | 160.00 | 7,200.00 |
| July 18 | 140 | 160.25 | 22,435.00 |
| Total | 886 | 137,524.95 |
*1381 The certificates of the Trust Co. stock exchanged for stock of the Birmingham Bank included some that had been acquired by the Hillman Co. before the transaction involved herein was under consideration.
The total number of shares of the Trust Co. stock outstanding at all times here material was approximately 260,000 shares. The holdings of the Hillman Co. in the Trust Co. stock at various times during 1930 were as follows:
| June 1 | 9,168 shares |
| July 1 | 8,829 shares |
| December 31 | 9,960 shares |
At a meeting of the executive committee of the board of directors of the Trust Co. held on January 13, 1931, a resolution was adopted authorizing the proper officers of the company to make an offer to the Birmingham Bank to purchase that bank's assets and property for the sum of $550,000, the Trust Co. to assume the obligations and liabilities of the bank and transfer and delivery to be made on or before January 19, 1931. At a meeting of the directors of the *93 Birmingham Bank on January 15, 1931, a resolution was adopted accepting the offer of the Trust Co.
On January 19, 1931, the Trust Co. took over the assets and assumed all of the liabilities of the Birmingham*1382 Bank. The name of the Birmingham Bank was taken down from the banking rooms on the South Side in the city of Pittsburgh and was replaced by the name of Peoples-Pittsburgh Trust Co., South Side Branch. The banking business of the Birmingham Bank was continued as a branch of the Trust Co., and so continues at the present time. Petitioner Beech, who had been cashier of the Birmingham Bank, continued in charge of the bank as an officer of the Trust Co.
On January 19, 1931, the Birmingham Bank was liquidated. Its shares of stock were called for retirement and canceled, and its charter was surrendered. In this connection the sum of $550,000 was credited in a deposit account in the Trust Co. to the credit of the Birmingham Bank. Against this deposit, the Birmingham Bank issued its check for $550,000 to A. B. Sheets, vice president and a director of the Hillman Co. and of Bankshares, Inc., a director of the Trust Co. and the record holder of the stock, who thereupon caused the same to be conceled. Sheets turned over the $550,000 to Bankshares, Inc.
The amount of cash and the cost of the Trust Co. stock given by the Hillman Co. and/or Bankshares, Inc., for the 1,000 shares of stock*1383 of the Birmingham Bank was $542,494.62 and the amount received therefor was $550,000. The difference, or $7,505.38, was returned as profit in the year 1931 by Bankshares, Inc., in its income tax return for that year.
There are no minutes within the records of the Hillman Co. and/or Bankshares, Inc., in relation to the transactions here under discussion.
On June 20, 1930, Beech, Sankey, and Thompson owned 119 shares. 10 shares, and 20 shares, respectively, of stock in the Birmingham Bank. On July 25, 1930, they delivered the foregoing shares of stock to the Hillman Co. Beech received for his shares 396 shares of of the capital stock of the Trust Co. and $110 in cash. Sankey received 33 shares of the capital stock of the Trust Co. and $55 in cash and Thompson received 66 shares of stock of the Trust Co. and $110 in cash. The amounts of cash thus received by the petitioners represented fractional shares of stock and were paid in cash because the Trust Co. did not wish to issue fractional shares of its stock.
In determining the deficiencies in controversy the respondent determined that the petitioners realized a taxable profit from the transaction whereby they exchanged*1384 their stock in the Birmingham Bank for stock in the Trust Co. and cash.
*94 OPINION.
TRAMMELL: The petitioners contend that the Hillman Co. acted as the fiscal agent of the Trust Co. in exchanging shares of stock in the Trust Co. for shares of stock in the Birmingham Bank; that as the Trust Co. acquired a majority of all the shares of stock in the Birmingham Bank pursuant to the offer made by the stockholders of the bank under date of June 20, 1930, both the Trust Co. and the bank were "parties to a reorganization" as that term is used in the Revenue Act of 1928; and that the exchange of their stock in the Birmingham Bank for stock in the Trust Co. was a nontaxable transaction under the provisions of the act. The respondent denies that the Hillman Co. was acting as the agent of the Trust Co. in the acquisition of shares of stock in the bank, and contends that, if it be conceded that the Hillman Co. was acting as agent of the Trust Co., there was no reorganization within the meaning of the statute, since the holders of 76.3 percent of the stock in the bank were paid cash for their stock, while only the holders of the remaining 23.7 percent exchanged their stock for stock*1385 in the Trust Co. and small amounts of cash to provide for fractional shares.
With respect to the contentions of the parties as to whether the Hillman Co. was acting as agent for the Trust Co. in paying cash for 76.3 percent of the stock in the Birmingham Bank and exchanging stock in the Trust Co. and paying small amounts of money for the remaining 23.7 percent, the evidence shows that prior to June 20, 1930, and during the time the negotiations were being carried on between the officers of the bank and of the Trust Co. it was intended that the Trust Co. would absorb the bank by acquiring its stock and liquidating it. After the negotiations had resulted in the stockholders of the bank submitting under date of June 20, 1930, to the Trust Co. the proposal set out in our findings, the officials of the Trust Co. began a consideration of the legal phases that would be involved in an acceptance of the proposal by the Trust Co. Due to a requirement of the Federal Reserve Board that its permission was necessary before one bank could absorb another and also due to the fact that the Trust Co. was negotiating with respect to the acquisition of another bank, as well as other considerations, *1386 the directors took no final action respecting the acceptance of the proposal submitted by the stockholders of the Birmingham Bank. Such acceptance of the proposal would have resulted in a commitment of the Trust Co. which would have been in direct violation of the rule of the Federal Reserve Board, a matter that they sought to avoid. The executive officers of the Trust Co., without disclosing to the stockholders of the bank the position in which they found themselves, *95 arranged with Hillman, chairman of the board of directors of the Trust Co. and a participant in the negotiations, to carry out through the Hillman Co. and Bankshares, Inc., of both of which he was president, a compliance with the proposal submitted by the stockholders of the bank. Among other things the arrangement contemplated that the Hillman Co. would acquire the stock in the bank for the account of the Trust Co., but in the name of Bankshares, Inc., and that that corporation, in order to finance the transaction, would borrow from the Trust Co. $180,000 on its collateral note and $53,750 on its note endorsed by another corporation known as Pennsylvania Bankshares, and would borrow from the First National*1387 Bank at Pittsburgh, an affiliate of the Trust Co., $180,000 on its collateral note and $53,750 on its note endorsed by Pennsylvania Bankshares. So far as the record discloses the directors of the Trust Co. prior to January 13, 1931, took no formal action binding upon the Trust Co. or otherwise respecting the acquisition either of the stock or of the assets of the Birmingham Bank. Such evidence as there is in the record bearing on the point indicates that prior to January 13, 1931, it was the intention at least of the executive officers of the Trust Co. that that company would acquire the business of the bank through an acquisition of its stock and a distribution in liquidation of its assets and business. However, instead of carrying through that plan the Trust Co., pursuant to a resolution of the executive committee of its board of directors adopted January 13, 1931, purchased the property and assets of the Birmingham Bank for $550,000 in cash and an assumption of its liabilities. The amount of $550,000 was credited to the Birmingham Bank in a deposit account on the books of the Trust Co. Against this deposit the Birmingham Bank, upon liquidation, issued its check for the full*1388 amount to A. B. Sheets, vice president of Bankshares, Inc., and the record holder of the stock of the Birmingham Bank. Sheets thereupon caused the stock to be canceled and turned over the $550,000 to Bankshares, Inc.
There is some testimony by two of the officials of the Trust Co. to the effect that, in acquiring the stock of the Birmingham Bank, the Hillman Co. and Bankshares, Inc., were acting as the agent of the Trust Co. and that it was not intended that those companies should acquire an interest therein antagonistic to the Trust Co. On the other hand we find that the directors of the Trust Co. specifically refrained from authorizing the purchase of the stock by the Trust Co. and when the assets and business of the Birmingham Bank were finally acquired it was not as a result of the Trust Co. acquiring the stock of the Birmingham Bank and liquidating the bank, but was by a direct purchase for cash and an assumption of liabilities. *96 When it came to financing the acquisition of the stock of the bank by the Hillman Co. and Bankshares, Inc., the arrangement, instead of providing for the Trust Co. to advance the money to those corporations and take over the stock when*1389 it had been acquired, provided for Bankshares, Inc., borrowing the money from the Trust Co. and its affiliates. For such borrowings Bankshares, Inc., was to give four notes, the larger two of which were to be secured by collateral and the smaller two were to be secured by the endorsement of another corporation, which, so far as the record shows, was otherwise a stranger to the parties and to the transaction. From a consideration of the record it is clear that prior to January 13, 1931, the directors of the Trust Co. did not intend to nor did they take any action binding on the Trust Co. respecting the acquisition of the stock or the assets of the Birmingham Bank. The most that can be said of the arrangement between the executive officers of the Trust Co. and Hillman is that it was a gentleman's agreement, entered into by the officers in their individual capacity. So far as the record shows it was never ratified or adopted either by the directors of the Trust Co. or by its stockholders. In fact, so far as the record shows the agreement as made was never carried out, for instead of the Trust Co. taking over the stock of the Birmingham Bank from Bankshares, Inc., after its acquisition, *1390 it purchased the assets of the Birmingham Bank, which upon dissolution issued its check to the stockholder of record, who paid the amount thereof over to Bankshares, Inc. Giving due consideration to all the evidence in the case, we are unable to find that either the Hillman Co. or Bankshares, Inc., or both, were acting as the agent of the Trust Co. in acquiring the stock of the Birmingham Bank. In order to constitute the agency relationship it must appear that these corporations or at least one of them was acting upon authority from the Trust Co. or that the Trust Co. ratified the action taken. Clearly the Trust Co. did not authorize the action to be taken in its bahalf, nor did it expressly or impliedly ratify it. Accordingly the contention of the petitioner on this point is denied.
The Trust Co. not having been, either by authorization or by ratification, a party to the arrangement whereby the Hillman Co. and Bankshares, Inc., acquired the stock of the Birmingham Bank, we fail to see how such acquisition constituted a reorganization of the Birmingham Bank and the Trust Co. or constituted them parties to a reorganization. So far as the record discloses the Trust Co. never*1391 at any time acquired any stock in the Birmingham Bank. It was not until after January 13, 1931, that it acquired the assets of the bank, and then for cash and an assumption of liabilities. A transaction of that character does not constitute a reorganization, ; affd., ; *97 ; affd., ; certiorari denied, , and of course the parties thereto are not parties to a reorganization. The petitioners, however, had disposed of their stock in the Birmingham Bank several months before and in the year preceding this transaction.
As the acquisition by the Hillman Co. of the stock of the petitioners in the Birmingham Bank did not constitute a reorganization of the bank and the Trust Co., nor make them parties to a reorganization, we think the respondent properly included in the taxable income of the petitioners for the year in controversy the profit resulting to them from the disposition of their stock in the Birmingham Bank.
Reviewed by the Board.
Judgment will be entered for the respondent.*1392