*1220 Where the petitioner corporation owned all the capital stock of three corporations and wxchanged such stock in 1923 for all the capital stock of a newly organized corporation, which thereupon surrendered the stock of the three respective corporations for cancellation and took over all of their assets in liquidation, held, the basis for computing depreciation in 1927 on the assets in the hands of the transferee corporation is the same as it would be in the hands of the transferors, under the provisions of section 204(a)(7) and (c) of the Revenue Act of 1926.
*929 This is a proceeding for the redetermination of a deficiency in income tax for the year 1927 in the amount of $8,947.34. The issue is whether the basis for computing depreciation deductions for the taxable year is the cost to the petitioner of the stock of three subsidiaries acquired by the petitioner on or prior to July 1, 1923, or the cost of the assets of the subsidiaries taken over in liquidation on October 31, 1923, by another subsidiary of the petitioner, which latter corporation*1221 acquired the stock on October 15, 1923, in exchange for its own stock.
FINDINGS OF FACT.
The parties filed at the hearing an "Agreed Statement of Facts," which by reference, is here adopted in full and made a part hereof. The material facts so stipulated by the parties are as follows:
The petitioner, Michigan Limestone & Chemical Company, a Michigan corporation organized in 1910, has been at all times engaged in the quarrying and sale of limestone, with quarries located adjacent to Lake Huron, its products being transported by steamers to various points on the Great Lakes, and the vessels owned or operated by petitioner or its subsidiaries have at all times been used exclusively for this purpose, and have not been used in the general transportation business. Transportation of limestone in the average bulk freight vessel was impractical and instead a special type of self-unloading vessel, of which there were during the years 1912 to 1915 only two or three operating on the Great Lakes, was required by petitioner for transporting its product. Accordingly the petitioner on June 15, 1912, chartered for a term of ten years one of these self-unloading vessels known as the steamer*1222 Calcite and owned by the Calcite Transportation Company hereinafter called the Calcite Company, a corporation in which the petitioner as of that date owned none of the stock.
The petitioner required an additional vessel of the self-unloading type and in 1915 was instrumental in organizing the Limestone Transportation Company, an Ohio corporation, hereinafter called the Limestone Company, for which the steamer W. F. White was built in 1915, and which steamer was chartered by petitioner on March 20, 1916, for a period of ten years. The Limestone Company financed the construction of the steamer through the issuance and sale of common and preferred stock, and mortgage bonds.
In 1916 another self-unloader vessel was required and the Bradley Transportation Company, hereinafter called the Bradley (Ohio) Company was organized under the laws of Ohio, which company constructed the Steamer, Carl D. Bradley, later called and hereinafter referred to as the S. S. Munson. This company was at all times a subsidiary of petitioner which owned all of its stock.
*930 The petitioner, being desirous of securing more complete control of the Calcite and White steamers, *1223 owned by the Calcite and Limestone companies, respectively, purchased all of the Calcite Company common stock, and the remaining shares outstanding of Limestone Company common stock, the preferred stock of Limestone Company having been previously retired. The respondent determined that the petitioner became affiliated with the Calcite Company on March 1, 1922, and with the Limestone Company on July 1, 1923, and as above stated, the petitioner had been affiliated with the Bradley (Ohio) Company from the date of its organization in 1917.
The petitioner, on the dates indicated, in acquiring the respective companies' stock, invested cash as follows:
| The Limestone Company: | ||
| June 30, 1915 | $1.00 | |
| December 30, 1916 | 999.00 | |
| December 31, 1917 | 44,126.64 | |
| June 30, 1923 | 133,380.00 | |
| $178,506.64 | ||
| The Calcite Company: | ||
| October 1, 1919 | $245,294.12 | |
| December 9, 1920 | 4,025.00 | |
| February 28, 1922 | 366,750.00 | |
| $616,069.12 | ||
| Less: Stock retired February 28, 1922 | 53,000.00 | |
| $563,069.12 | ||
| The Bradley Company (Ohio): | ||
| August 31, 1917 | $500,169.21 | |
| September 20, 1917 | 804.06 | |
| October 31, 1917 | 9,619.63 | |
| November 20, 1917 | 22.56 | |
| December 31, 1917 | 1,486.71 | |
| $512,102.17 | ||
| Plus: Mtg. bonds assumed | 140,000.00 | |
| $652,102.17 | ||
| Total | $1,393,677.93 |
*1224 Prior to July 1, 1923, the date on which the petitioner and Limestone Company became affiliated, the petitioner loaned to the Limestone Company certain sums with which to take care of betterments, and to take care of repairs to the S. S. White caused by accidents, and for which the Limestone Company could not be reimbursed by the insurance companies insuring against such accidents until the repairs had actually been made. The amounts so advanced to and so expended by Limestone Company prior to December 31, 1922, and which had not been repaid to petitioner by Limestone Company as of July 1, 1923, were as follows:
| 1917 | $20,788.09 | |
| 1918 | 1,889.98 | |
| 1919 | 13,871.14 | |
| 1920 | 20,857.46 | |
| 1921 | 5,550.89 | |
| 1922 | 5,962.41 | |
| $68,919.97 |
*931 On December 31, 1922, which was also prior to the date of the affiliation of the Limestone Company with the petitioner, the petitioner paid to the Cleveland Trust Company cash in the amount of $131,029.05 with which to retire the Limestone Company mortgage bonds then outstanding against the S.S. White,the Cleveland Trust Company being the trustee for the payment of the bonds, and the bonds were redeemed by the Trust*1225 Company as of January 1, 1923.
The two items just indicated, namely, $68,919.97 and $131,029.05, total $199,949.03 were included by petitioner on its books in the cost of acquiring the shares of stock of the Limestone Company. Accordingly, the petitioner computed the cost of the stock of the various companies as follows:
| The Limestone Company | ||
| Cash invested directly in stock | $178,506.64 | |
| Advances to Limestone Company 1917 to 1922 | $68,919.97 | |
| Payments to Trust Company to retire S. S. | ||
| White mortgage bonds, Dec. 31, 1922 | 131,029.05 | |
| 199,949.03 | ||
| Total | $378,455.67 | |
| The Calcite Company | 563,069.12 | |
| The Bradley Company | 652,102.17 | |
| Total | $1,593,626.96 |
Since the companies had no fixed assets other than the steamers, White, Calcite, and Munson, respectively owned by each, but did have certain liquid liabilities and liquid assets, the petitioner computed the cost of the steamers, as measured by the cost of the stock acquired, as follows:
| Stock cost as above | Deduct Liquid | Add Liquid | Steamer | |
| Assets | Liabilities | Cost | ||
| Limestone Co. | $378,455.67 | $2,056.04 | $380,511.71 | |
| Calcite Co. | 563,069.12 | 56,356.44 | 506,712.68 | |
| Bradley Co. | 652,102.17 | 11,029.97 | 641,072.20 | |
| $1,593,626.96 | $67,386.41 | $2,056.04 | $1,528,296.59 |
*1226 On July 1, 1923, the petitioner owned all of the outstanding stock of the Limestone, Calcite, and Bradley companies. Direct ownership of the vessels White, Calcite, and Munson was not considered practical by the petitioner for the reason that petitioner's general mortgage attached to after acquired property such as vessels, but did not become a lien on stocks owned by petitioner. Accordingly, the petitioner on September 28, 1923, organized the Bradley Transportation Company under the laws of West Virginia, hereinafter referred to as the Bradley (W.Va.) Company to distinguish it from the Bradley (Ohio) Company.
On October 15, 1923, the Bradley (W. Va.) Company issued to the petitioner, in exchange for the Limestone, Calcite, and Bradley (Ohio) stock then owned by petitioner, its Bradley (W. Va.) stock in an amount equal to the cost of such stock as carried on the books of the petitioner, namely, $378,455.67 plus $563,069.12, plus $659,102.17, total $1,593,626.96. As a part of this transaction or exchange, the petitioner cancelled on its books the credits representing the $68,919.97 and $131,029.05 indebtedness then owing to it by the Limestone Company, as set forth above.
*1227 *932 On October 31, 1923, the Bradley (W. Va.) Company, then owning all of the stock of the Limestone, Calcite, and Bradley (Ohio) Companies, surrendered the stock of said companies to the respective companies, and received in exchange therefor all of the assets of the companies, including the three vessels, and liquid assets, and assumed their liabilities. The respondent determined that the Bradley (W. Va.) Company and the petitioner became affiliated as of October 31, 1923.
Certificates of dissolution were filed as follows. The Limestone and Bradley (Ohio) companies on July 1, 1925, and the Calcite Company on August 27, 1925. None of the three old companies conducted any business or owned any property after October 31, 1923, but were kept in existence until the dates indicated on account of pending insurance claims. The Bradley (W. Va.) entered on its books as cost the following:
| steamer white | $380,511.71 |
| Steamer Calcite | 506,712.68 |
| Steamer Munson | 641,072.20 |
| Total | $1,528,296.59 |
Since the stock of the Limestone, Calcite, and Bradley (Ohio) companies had been purchased at different times, and since the steamers had been constructed at*1228 costs out of proportion to their respective stock cost values as of date of acquisition by the Bradley (W. Va.) Company, the Bradley (W. Va.) Company authorized an appraisal by an experienced engineer considered as being competent to make such an appraisal. Although the Engineer appraised the steamers at amounts in excess of their costs, as measured by the stock costs to the petitioner, no appreciation was set up on the books of the Bradley (W. Va.) Company, but instead a reapportionment of cost to be used in arriving at depreciation basis, was made by the engineer as follows:
| Steamer | Appraisal Value | Apportioned Value |
| White | $932,000.00 | $547,827.15 |
| Calcite | 588,000.00 | 351,963.78 |
| Munson | 1,056,000.00 | 628,505.66 |
| $2,576,000.00 | $1,528,296.59 |
* * *
Consolidated returns were filed by the petitioner and the respective companies from the following dates:
| Bradley (Ohio) Company | From 1917 to 1923, inclusive. |
| Calcite Company | From March 1, 1922 to Dec. 31/23. |
| Limestone Company | From July 1/23 to Dec. 31/23. |
| Bradley (W. Va.) Company | From Oct. 31/23 to Dec. 31/27. |
In addition to the foregoing facts, the parties also stipulated*1229 substantially that the actual cost of the three steamers, as shown on the books of the Limestone, Calcite and Bradley (Ohio) companies on October 31, 1923, the date of acquisition by the Bradley (W. Va.) Company, with necessary adjustments to December 31, 1923, used by respondent as the basis for computing depreciation for the taxable year, was asfollows:
| S.S. White | $378,026.01 |
| S.S. Calcite | 350,442.26 |
| S.S. Munson | 625,678.88 |
| Total | 1,354,147.18 |
*933 Also, at the hearing, a witness for the petitioner testified that on October 31, 1923, the steamer White was worth the sum of $380,511.71; that on the same date the steamer Calcite was worth $506,712.68; and that on the same date the steamer afterwards known as the Munson was worth the sum of $641,072.20.
OPINION.
TRAMMELL: The issue raised by the pleadings in this case concerns the proper basis for computing depreciation deductions for the year 1927 on three steamers acquired by the petitioner's subsidiary in 1923 under the circumstances set out in our findings of fact above. The petitioner is the parent corporation, and throughout the taxable year was affiliated with the Bradley*1230 (W. Va.) Company, all of whose stock it owned. The subsidiary is not directly a party to this proceeding, but the petitioner has assumed the payment of the tax due, if any, and the controversy arises in connection with the computation of the consolidated net income for that year.
On July 1, 1923, the petitioner owned all of the outstanding stock of the Limestone, Calcite and Bradley (Ohio) companies, each of which owned a steamer used exclusively in transporting the petitioner's products. On September 28, 1923, the petitioner organized the Bradley (W. Va.) Company, and on October 15, 1923, the latter company issued to the petitioner its own stock at par in exchange for the stock of the Limestone, Calcite, and Bradley (Ohio) companies, in an amount equal to the cost of said stock as carried on the books of the petitioner. On October 31, 1923, the Bradley (W. Va.) Company, then owning all of the stock of the Limestone, Calcite and Bradley (Ohio) companies, surrendered that stock to the respective companies for cancellation and took over their assets in final liquidation, thereafter causing said companies to be dissolved.
The petitioner contends that the transaction by which*1231 its subsidiary acquired the assets of the three companies was one giving rise to recognizable gain or loss for tax purposes, and that the proper basis for computing depreciation deductions from consolidated income for the taxable year is an amount equal to the cost to the petitioner of the stock of the Limestone, Calcite and Bradley (Ohio) companies, since that amount represents the cost to its subsidiary of the three steamers taken over in liquidation. The respondent contends that the basis for computing allowable deductions for depreciation, under the stipulated facts, is the same as it would be if the assets had remained in the hands of the transferors.
*934 The applicable statute is section 204(a)(7) and (c) of the Revenue Act of 1926, set out in the footnote. 1
*1232 It will be noted that the statute provides that the basis upon which depreciation deductions are to be allowed in respect of property acquired by a corporation shall be the same as it would be in the hands of the transferor, under certain specific conditions. Such basis is mandatory where it appears that (a) the property was acquired after December 31, 1917, (b) by a corporation in connection with a reorganization, and (c) immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them.
The facts of the present case fully meet every condition specified in the statute. The property in respect of which depreciation deductions are claimed was acquired by the petitioner's subsidiary corporation on October 31, 1923, which was after December 31, 1917; the said property was acquired in connection with a reorganization, and prior to and immediately after the transfer the petitioner owned 100 per centum of the stock of the corporations which held legal title to the property. Thus, an interest or control in such property of more than 80 per centum remained in the same corporate person.
That the transaction*1233 by which the petitioner's subsidiary acquired the property constituted a reorganization within the meaning of the statute is not only admitted by the petitioner in its brief, but clearly appears from the facts.
Section 203(h)(1) of the Revenue Act of 1926 defines the term "reorganization" as meaning, inter alia, 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, and in subdivision (i) of said section the term "control" is defined as meaning the ownership of at least 80 per centum of the voting and all other classes of stock of the corporation. In such a case neither gain nor loss is recognized for tax purposes.
*935 In , the court in its opinion, construing the above cited statute, said:
Reorganization, merger and consolidation are words indicating corporate readjustments of existing interests. They all differ fundamentally from a sale where the vendor corporation parts with its interest for cash and receives*1234 nothing more. * * * While the term [reorganization] includes financial readjustments in ways other than by judicial sale it does not properly embrace mere purchases by one company of the assets of another. * * *
Section 203 of the Revenue Act of 1926 must be interpreted in this setting. Its purpose was to relieve those interested in corporations from profits taxes in cases where there was only a change in the corporate form in which business was conducted without an actual realization of any gain from an exchange of properties. When describing the kind of change in corporate structure that permits exemption from these taxes, Section 203 does not disregard the necessity of continuity of interests under modified corporate forms. Such is the purpose of the word "reorganization" in Sec. 203(d)(3) where a corporation exchanges its property "solely for stock or securities." Such also is * * * the nature of the "reorganization" described in (h)(1)(b) where a corporation transfers assets to another corporation and the transferor, or its stockholders, immediately thereafter are in control of the transferee.
In the instant case, as before pointed out, the petitioner was the sole*1235 stockholder of the transferor corporations, and immediately after the transfer of the assets was in complete control of the transferee corporation through ownership of all of its stock. No gain or loss would, therefore, be recognized under the 1926 Act if the transfer had occurred under that act. However, the assets in question were transferred in 1923, under the Revenue Act of 1921, and section 204(a)(7) of the 1926 Act, supra, provides that in such case "the basis shall be the same that it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made." But the Revenue Act of 1921, which is the lae applicable to the year in which the transfer in question was made, contains no provision for the recognition of gain or loss to a corporation upon the transfer of its assets to its stockholders in final liquidation.
It follows that the basis for the allowance of depreciation upon the assets in question, in the process of computing consolidated net income of the petitioner and its subsidiaries for the taxable year*1236 1927, is the same as it would be in the hands of the transferors, which is the basis used by the respondent in determining the deficiency.
In support of its contention the petitioner cites ; certiorari denied, ; and our decisions in the following cases where we applied the principle of , namely, ; affd., ; ; *936 . The petitioner contends that its case should be governed by application of the same principle.
The cases cited, we think, are not in point. In each of them one corporation purchased all of the stock of another corporation and subsequently took over the assets in liquidation of the stock so purchased. Such a transaction did not constitute a "reorganization" within the meaning of the statute, as we have shown, since there was no continuity of interests in the transferred assets. On the contrary, a full and complete change of ownership*1237 was effected. Prior to the purchase of the stock and transfer of the assets in liquidation the transferee corporation had no interest therein. Likewise, the stockholders of the transferor corporations retained no interest in the assets after transfer. In each case the transaction was held to give rise to recognizable gain or loss to the transferee corporation and, hence, established a new basis for depreciation. A wholly different situation is presented in the case at bar, as we have pointed out hereinabove.
The determination of the respondent is approved.
Judgment will be entered for the respondent
Footnotes
1. SEC. 204. (a) The basis for determining gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;
* * *
(c) The basis upon which depreciation, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) * * * for the purpose of determining the gain or loss upon the sale or other disposition of such property * * *. ↩