*1432 Where three old corporations are merged into a new corporation and all the stockholders of the old concerns, for their stocks therein, receive all the stocks and bonds of the new corporation and nothing additional in cash, the transaction is one in which neither gain nor loss is recognized as provided in section 112 of the Revenue Act of 1928.
*1096 The respondent has determined deficiencies in income tax for the year 1929 as follows:
| Milton M. McCabe | $14,952.30 |
| James McCabe | 8,844.14 |
| Estate of George H. McCabe | 10,602.91 |
| W. J. McCabe | 18,798.04 |
| J. R. McCabe | 806.84 |
| H. K. Chidlaw | 140.56 |
| Ben C. McCabe | 2,455.90 |
| W. J. McCabe, Jr | 2,335.75 |
| Cecil C. Blair | 3,085.63 |
Petitioners aver that the respondent has erroneously determined that a certain corporate reorganization or merger was a transaction in which gain is recognizable. In the alternative, they plead that in any event the basic value of the stock which they exchanged for the securities of the new corporation was much greater than the figure*1433 used by the Commissioner in his computation of the alleged gain. The several proceedings were consolidated for trial and report. The parties have filed a stipulation which the Board accepts and incorporates herein by reference. At the hearing oral and documentary evidence was adduced by each of the parties. Our findings of fact constitute a summary of all the evidence regarded as material to the settlement of the issues tried.
*1097 FINDINGS OF FACT.
Petitioners are individuals. At all times material here each was a resident of the State of Minnesota. After his appeal was filed and before the hearing, M. M. McCabe died. The administrator of his estate, Lester Follett McCabe, has been substituted as petitioner at Docket No. 69777. Likewise, W. J. McCabe, petitioner as executor of the estate of George H. McCabe, died prior to the hearing and has been succeeded by George H. McCabe as petitioner at Docket No. 69779.
The McCabe Elevator Co., Ltd., was a Manitoba corporation. The Victoria Elevator Co., Ltd., and the Crescent Elevator Co., Ltd., were Canadian corporations. All their principal offices were in the same building at Winnipeg, and hereinafter they will*1434 sometimes be referred to as the old companies. McCabe Brothers Grain Co., Ltd., is a Canadian corporation which the old companies caused to be organized about December 17, 1929. It will sometimes hereinafter be called the new corporation.
Some time during the year 1928 the stockholders of the old companies began to form plans to combine their respective interests into a single concern. After much discussion it was agreed that a new corporation, to be known as "The McCabe Brothers Grain Company, Ltd.", should be incorporated under the laws of the Dominion of Canada and that such new corporation should issue its common stock, preferred stock, and bonds to the several stockholders of the old companies in exchange for their stock therein. To this end the individual interests of such stockholders were valued in units of $200 each and each unit was exchangeable for one share of preferred stock, $100 par value of bonds, and five shares of the common stock of the new corporation. Any stockholder of an old corporation, the valuation of whose interest was not $200, or a multiple thereof, was requested to pay cash to the new corporation sufficient to establish such multiple or to adjust*1435 his holdings by exchange with other stockholders.
The following is a true and correct schedule of the number of shares of stock held by each of the stockholders in each of the old companies immediately before the transaction here in controversy, and a true and correct schedule of the number of shares of preferred and common stock and the face value of bonds of the new corporation *1098 held by each of the stockholders of the old companies immediately after such transactions:
| Number of shares held | Number of shares and amount of | |||||
| of bonds received from new | ||||||
| company in exchange for stock in | ||||||
| old companies | ||||||
| Name of | Crescent | Victoria | McCabe | Shares | Shares | Bonds - |
| Stockholder | common | preferred | par value | |||
| stock | stock | |||||
| W. J. McCabe | 170 | 610 | 126 | 4,876 | 1,219 | $121,900 |
| M. M. McCabe 1 | 550 | 207 | 3,876 | 969 | 96,900 | |
| Geo. H. McCabe | 550 | 276 | 4,120 | 1,030 | 103,000 | |
| Geo. H. McCabe, Jr | 50 | 45 | 4,500 | |||
| Morden McCabe | 50 | 45 | 4,500 | |||
| Donna McCabe | 50 | 45 | 4,500 | |||
| James McCabe | 300 | 316 | 2,840 | 710 | 71,000 | |
| C. E. Austin | 170 | 195 | 2,060 | 515 | 51,500 | |
| James R. McCabe | 112 | 640 | 160 | 16,000 | ||
| Ben C. McCabe | 50 | 200 | 1,001 | 250 | 25,100 | |
| W. J. McCabe, Jr | 50 | 200 | 1,002 | 250 | 25,100 | |
| Harold M. Thomas 2 | 30 | 256 | ||||
| Helen H. Thomas | 15 | 64 | 6,400 | |||
| H. K. Chidlaw | 25 | 11 | 181 | 46 | 4,500 | |
| Etta J. Irvine | 22 | 124 | 31 | 3,100 | ||
| James Irvine | 10 | 56 | 14 | 1,400 | ||
| Lawrence Brown, estate 3 | 20 | |||||
| Mrs. P. A. Brown (heir) | 32 | 8 | 800 | |||
| Miss P. N. Brown (heir) | 16 | 4 | 400 | |||
| Lou M. Larkin | 12 | 10 | 104 | 26 | 2,600 | |
| C. D. McCabe | 10 | 56 | 14 | 1,400 | ||
| Mildred K. Rowe | 2 | 12 | 3 | 300 | ||
| J. P. McClintock | 2 | 12 | 3 | 300 | ||
| Simon Clark, Jr | 2 | 8 | 2 | 200 | ||
| J. R. McCrea | 2 | 8 | 2 | 200 | ||
| C. C. Blair | 170 | 948 | 237 | 23,700 | ||
The transfer of the stock of the old companies to the new in exchange for the stock and bonds thereof was accomplished by a series of transactions in which a small Canadian corporation, the Tryton Investment Co., Ltd., was employed as an intermediary and was paid $500 for its services. As and when a stockholder of one of the old companies turned his stock*1437 in to the new corporation, that concern would cause to be written an unsigned check which was sent to the stockholder with an endorsement stamped thereon as follows: "Pay to the order of the Royal Bank of Canada for Deposit only." This unsigned check was accompanied by a letter of instructions directing the stockholder to endorse it and also to sign another check on the Royal Bank of Canada, payable to the intermediary, which was enclosed, and send both to the Royal Bank of Canada. The check to the order of the stockholder was in the amount of the value placed upon his stock for purposes of the merger; the check to the intermediary was for the same amount, plus or minus the adjustment necessary *1099 to avoid the issue of fractional shares. The check to the stockholder was signed by the officers of the new corporation after it was returned to the bank, along with the other check properly signed by the stockholders. The stockholders of the old companies had no account with the Royal Bank of Canada and the checks signed by them were run through what is known as the manager account. The checks to the several stockholders were credited to that account.
As the stockholders*1438 of the old companies turned in their certificates, the new company would cause to be drawn in the name of the intermediary common and preferred stock certificates representing the number of such shares to which such stockholders were entitled. At the same time it would cause to be drawn other certificates for the same numbers of preferred and common shares of stock. Such latter shares were in the names of the person or persons actually entitled to receive the stock under the merger plan. After both sets of certificates were signed those in the name of the intermediary were canceled and the others were delivered to the persons entitled to receive them.
On or about May 14, 1929, each stockholder of each of the old companies received the six percent bonds of the new company in the face amount to which he was entitled under the plan of reorganization.
In effecting the merger none of the stockholders of the old companies received any cash from the new corporation or from any other source in consideration for stock in any of the old companies, but each received common stock, preferred stock, and bonds of the new corporation in proportion to his stock in the old. After the merger*1439 the parties who had owned all the stock of the then old companies owned all the preferred stock, common stock, and bonds of the new corporation, except as noted above, and were in control thereof.
OPINION.
LANSDON: The respondent has determined that the transaction here involved was effected by the new corporation purchasing for cash the stock of the old companies. The petitioners contend that such merger was a tax-free reorganization under the provisions of section 112 of the Revenue Act of 1928. 1 The undisputed testimony shows that the plan of reorganization contemplated no cash payments by the new corporation to the stockholders of the old companies, *1100 and that on the completion of the merger none of such stockholders had received any cash or any consideration for their stock other than the stocks and bonds of the new corporation. Unless the use of checks in the process of transferring the old stock to the new corporation, as set out in our findings of fact, can be regarded as the payment of cash by such new corporation to the stockholders of the old concerns, it is obvious that under the facts and the law the petitioners have overcome the presumption of correctness*1440 that attaches to the determination of the respondent.
*1441 A careful study of the various steps through which the new corporation acquired the stock of the old companies by the issue of its securities convinces us that no cash was paid for such stock. The checks used were in the nature of tokens or counters. The only check received by any stockholder of any old company was unsigned and the only check that any such stockholder gave in the process of converting his old stock into the securities of the new corporation was drawn on a bank in which he had no account. The unsigned check could not have been cashed and the stockholder's own check on the Royal Bank of Canada, in which he had no account, was worthless except as a counter or token to be used only in connection with the conversion of the old stock into new securities. In our opinion the use of the checks in question did not evidence any cash payments and was merely one of the parts of a single transaction contemplated by the reorganization plans.
In support of his determination the respondent cites ; *1442 ; ; ; ; ; ; ; affd., . In the Hoult case, supra, the Board held that the stockholders of the old company actually sold their stock therein for cash and with the proceeds purchased preferred and *1101 common stock of the new company, but there is nowhere any showing that the stockholders of the old company acquired all the securities of the new concern and the facts disclose that other parties not interested in the old corporation held a controlling interest in the voting stock of the new concern. It is obvious, therefore, that upon the facts in that proceeding it has no bearing on the situation here.
In *1443 , also cited by the respondent, the merger agreement provided for the purchase of all the assets of the Home Savings Bank by the American Security & Trust Co. for $400,000 in cash, and that, upon the surrender of the stock owned by the stockholders of the vendor concern, each was to receive four shares of the stock of the vendee for every share so surrendered. The stockholders of the vendor did not acquire all the securities of the vendee. That transaction, which was based upon the sale of assets for cash and the subsequent use of such cash to acquire a minority of the stock of the purchasing company, is so essentially different in fact from the reorganization here under consideration that it is plain that no rule established in our decision therein has any bearing on the controversy. In , the old company sold for cash to a new concern and with such cash purchased shares of stock in the vendee, but there is no showing that after the transaction was completed the stockholders of the old concern ratably owned all the securities of the new company and there was an actual use of cash deposited*1444 in a bank for the purposes of the transactions.
In , the owners of all the stock of the petitioner, pursuant to a contract, sold all of its tangible and intangible assets for a recited consideration in cash, but for a part of the amount thereof agreed to take bonds of a third concern, with the provision that the purchasing company should have the right to take over such bonds at stated intervals and pay the petitioners cash in the amount of the par value thereof. This was plainly a sale of assets in which the stockholders of the old company acquired no securities of the purchasing concern. It has no bearing on the issue here. Careful consideration of the facts in the other cases cited by the respondent discloses that all are easily distinguishable from the instant proceeding.
The facts here do not indicate even the form of a transaction in which cash was received by the petitioners. There never was a time in the course of the negotiations for merger in which it was contemplated that any stockholder of an old company should receive cash for his interest therein. The plan of reorganization provided for no cash payments. *1445 In the process of transferring the *1102 stock of the old companies for the securities of the new concern, it was very carefully provided that none of the old stockholders could receive any cash. Petitioners who testified all swore that they never expected any cash and received none and that all they did receive was their ratable proportion of the securities of the new corporation. We are convinced that the petitioners have shown that the merger in question falls squarely within the statutory provisions upon which they rely.
Our conclusion above renders it unnecessary to decide the alternative plea of the petitioners relating to the basic cost of their shares in the old companies. All other issues have been abandoned.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: William John McCabe, Jr.; William John McCabe, as Executor of the Last Will and Testament of George H. McCabe, Deceased; Ben C. McCabe; James McCabe; James Roscoe McCabe; Milton Mathew McCabe; Cecil Charles Blair; and Harry K. Chidlaw. ↩
1. M. M. McCabe caused 900 shares of the preferred stock to which he was entitled to be issued in the name of Mary K. McCabe, his wife. ↩
2. Harold M. Thomas and Helen H. Thomas are husband and wife and caused all the common stock to which both were entitled to be issued to Harold M. Thomas and the preferred stock and bonds to be issued to Helen H. Thomas. ↩
3. At the time of the reorganization, Lawrence Brown was dead. He was survived by a widow and two children, one a minor. He was indebted on his stock in the sum of $1,600. The stock had been purchased from the company on an installment basis. When the reorganization was made, the indebtedness was deducted and stock and bonds issued to his widow and daughter. An adjustment was made so that the minor would not be compelled to take stock and bonds in the new company. ↩
1. SEC. 112. RECOGNITON OF GAIN OR LOSS.
(a) General rule. - Upon the sale or exchange of property the entire amount of the gain or loss * * * shall be recognized, except as hereinafter provided in this section.
(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.
* * *
(i) Definition of reorganization. - As used in this section * * *
(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), 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 * * *.
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an 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. ↩