*32 Decision will be entered under Rule 50.
As steps in the acquisition of the assets of two corporations, petitioner, in one instance, acquired all of the outstanding securities, and in the other, all of the outstanding stock, and pursuant to its predetermined plans immediately liquidated the said corporations, assuming their liabilities other than those represented by the stock and other securities purchased as stated. Held, that the liquidations were not liquidations under section 112 (b) (6) of the Internal Revenue Code of 1939, and section 113 (a) (15) is not applicable in arriving at the bases to petitioner of the various corporate properties acquired. Held, further, that the bases to petitioner of such properties were the cost to it of the stock and other securities, plus the corporate liabilities assumed upon liquidation of the corporations.
*408 Respondent determined deficiencies in income tax and excess profits tax against petitioner, as follows:
| Year | Tax | Deficiency |
| 1945 | Excess profits | $ 152,752.04 |
| 1946 | Income | 12,686.98 |
| 1947 | Income | 52,130.21 |
*33 The sole issue is the bases to petitioner of certain properties it acquired through the acquisition and liquidation of the Dakota Public Service Company and the Sheridan County Electric Company.
*409 FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioner is a Delaware corporation, organized March 14, 1924, with its principal office at Minneapolis, Minnesota. Its corporate returns for the period involved were filed with the collector of internal revenue for the district of Minnesota. It filed its returns on the calendar year basis and used an accrual method of accounting.
Prior to June 17, 1935, petitioner's name was Minnesota Northern Power Company. From December 1, 1935, to March 27, 1936, petitioner was a registered holding company under the Public Utility Holding Company Act of 1935.
Petitioner is a public utility operating company in the States of North Dakota, South Dakota, Montana, Wyoming, Minnesota, and to a very limited extent in Canada. It operates electric, gas, and steam utility properties. Since not later than March 27, 1936, it has been engaged as a public utility in supplying electricity and natural gas to consumers*34 in Montana, North Dakota, South Dakota, and Wyoming. Electricity has been supplied to consumers in Wyoming only since July 14, 1947.
United Public Utilities Corporation, herein referred to as United, was a New Jersey corporation organized in 1934 and became the successor of United Public Utilities Company, which was a New Jersey corporation organized in 1927. It was a registered holding company under the Public Utility Holding Company Act of 1935. It owned all the outstanding securities of thirteen other corporations which were public utility companies within the meaning of said Act. The holding company system of United consisted of two groups of companies, one of which was located in North Dakota and South Dakota and included Dakota Public Service Company, sometimes called Dakota, and the other of which was located in Ohio and Indiana. Dakota was a Delaware corporation organized September 1, 1925, and was engaged in supplying electricity and steam to consumers in North Dakota and South Dakota.
On July 2, 1945, petitioner's outstanding stock consisted solely of 100,000 shares, of the par value of $ 100 each, of 5 per cent series preferred stock and 676,648 1/3 shares, of the *35 par value of $ 10 each, of common stock. None of said shares were owned by United, and at no time have any of the latter's outstanding securities been owned by petitioner.
On July 2, 1945, Dakota had outstanding 8,370 shares of common stock without par value, $ 1,000,000 of first and refunding mortgage bonds due October 1, 1946, $ 2,500,000 of notes payable due July 1, 1949, and a $ 1,335,794 income note payable due July 1, 1949, all of which securities were owned by United.
*410 Petitioner and Dakota operated in contiguous territory and in some places, in the same areas. In 1944 petitioner learned that United was under investigation by the Securities and Exchange Commission and that it might be required to sell certain of its properties, and there was a likelihood that it would sell its Dakota properties. Petitioner became interested in acquiring the Dakota properties and negotiations were begun that resulted in the purchase by petitioner from United of the Dakota stock and securities. United would not agree to the sale of Dakota's assets or join in a merger with petitioner. Petitioner, having once had the experience of being a holding company, had determined to avoid being*36 subject to the Public Utility Holding Company Act again if at all possible. On July 2, 1945, it entered into an agreement to purchase the stock and securities of Dakota from United with the understanding that after such purchase Dakota would be liquidated. It was provided that petitioner's obligation to purchase was contingent upon the approval by the Securities and Exchange Commission, the Federal Power Commission, and the Public Service Commission of North Dakota of the various steps to be taken, including the immediate liquidation of Dakota.
Under this contract the parties agreed that the total price for all of the stock and securities of Dakota was a base price of $ 6,521,060.74, plus an amount equal to the net income of Dakota for the period from April 30, 1945, to the closing date, subject to the terms and conditions set out in the contract.
Petitioner, pursuant to the contract with United, filed its application with the Securities and Exchange Commission requesting the approval of the Commission under the holding company act for the registration of petitioner as a holding company, its purchase of the stock and securities of Dakota, its liquidation of Dakota, and then the *37 discharge of petitioner from registration as a holding company. Subsequently, petitioner withdrew its application because, in the circumstances, members of the Commission's staff were of the view that the matters involved could be covered in the order the Commission would issue authorizing United to sell the Dakota stock and securities. As a registered holding company, and pursuant to the contract, United had filed an application and declaration with the Securities and Exchange Commission for approval of its sale of all the outstanding stock and securities of Dakota to petitioner, and at a regular session of the Commission, held at its office in Philadelphia, Pennsylvania, on October 18, 1945, the Commission issued its order granting the application and the declaration, as amended. Petitioner's matters were covered in the order, as follows:
As heretofore noted, [petitioner] is not a registered holding company or a subsidiary of a registered holding company. Upon acquisition of the securities of Dakota, [petitioner] will become the parent company of Dakota, but proposes *411 immediately to acquire all of the properties and assets of Dakota, assume all its liabilities and cause*38 the company to be dissolved. [Petitioner] has stated that there will be no appreciable period of time during which a parent-subsidiary relationship will exist between Dakota and [petitioner].
Under these circumstances and since it appears that [petitioner] is not an affiliate of a public utility or holding company, the acquisition by [petitioner] of the securities and assets of Dakota does not require our approval under the Act.
In the application filed by petitioner on July 23, 1945, with the Federal Power Commission, under Part II of the Federal Power Act, the following statement was made:
The applicant has no intention of owning Dakota Public Service Company as a subsidiary company and will purchase said securities only if it has a prior authorization from all governmental agencies having jurisdiction in the matter to liquidate said Company immediately upon the purchase of its securities in order that its properties may be owned and operated as an integral part of the public utility system of the applicant.
On October 17, 1945, the Federal Power Commission entered its order authorizing petitioner to purchase the stock and securities of Dakota, to liquidate that company, and*39 to acquire its assets upon the terms and conditions set forth in the application.
The application filed by petitioner on July 18, 1945, with the Public Service Commission of North Dakota included, as an exhibit, a copy of the application it had filed with the Federal Power Commission. The North Dakota commission issued its order on August 21, 1945, authorizing petitioner to purchase the said stock and securities and thereafter to acquire the properties by immediate liquidation of Dakota.
On October 19, 1945, the agreement for the sale and purchase of the Dakota stock and securities was closed and petitioner paid to United a total price of $ 6,593,212.32 in cash, which included the base price of $ 6,521,060.74 and an amount equal to the net income of Dakota for the period from April 30, 1945, to October 19, 1945, as determined by independent public accountants, in accordance with the contract of July 2, 1945.
On the same date, October 19, 1945, petitioner, as sole stockholder, elected a new board of directors of Dakota, which board immediately liquidated Dakota and directed the transfer of all its assets to petitioner. The transfer was effected by a general conveyance on October *40 19, 1945. The said assets were received subject to liabilities of Dakota amounting in the aggregate to $ 423,377.51.
Sheridan County Electric Company, hereinafter called Sheridan County, was a New Jersey corporation organized August 19, 1910, and was engaged in supplying electricity to consumers in Wyoming. On May 1, 1947, it had outstanding 6,500 shares of common stock, of the par value of $ 100 each, all of which shares were then owned by *412 Gerald L. Schlessman, a resident of Denver, Colorado. It also had outstanding on that date, $ 750,000 in first mortgage 3 1/2 per cent bonds due October 1, 1966, which bonds were in the hands of the general public. Sheridan County owned all the outstanding stock of Sheridan Suburban Electric Company, sometimes called Sheridan Suburban, which owned certain rural electric lines serving two small communities south of Sheridan, Wyoming, and which lines were operated by Sheridan County under lease from Sheridan Suburban, with option to purchase.
In the fall of 1946, a representative of petitioner, with a view of acquiring the properties of Sheridan County, called on Schlessman in Denver and learned of his willingness seriously to discuss*41 the matter. During the later negotiations petitioner found that Schlessman wanted to sell his stock rather than the company properties and an agreement was reached on May 1, 1947, similar to the agreement made by petitioner with Dakota, whereby petitioner would purchase the Sheridan County stock from Schlessman, provided necessary approvals for such purchase, and the liquidation of Sheridan County and acquisition of its properties, could be obtained from the Federal Power Commission, the Public Service Commission of North Dakota, and the Public Service Commission of Wyoming. It was felt that it was not necessary to make application to the Securities and Exchange Commission in the light of petitioner's experience with that Commission in acquiring the securities of Dakota and since Schlessman, as an individual owner of the stock of Sheridan County, was not subject to the holding company act. The agreement provided for the sale and purchase of all the outstanding stock of Sheridan County at a total price equal to a base price of $ 773,000, plus an amount equal to interest on the base price at the rate of 4 per cent per annum for the period from June 1, 1947, to the closing date.
The*42 agreement included the following representation by petitioner as buyer:
That Buyer is purchasing the outstanding Common Stock of Sheridan for its own account with a view to the immediate liquidation of that Company and the acquisition of direct ownership of the properties of Sheridan by the Buyer, and not with a view to the resale of the Common Stock of Sheridan.
With respect to Sheridan Suburban the agreement provided as follows:
Seller agrees that if requested to do so by the Buyer Seller will cause Sheridan (after all approvals by regulatory commissions hereinbefore referred to shall have been secured by Buyer and prior to the closing date) to exercise its option to purchase the properties of Sheridan Suburban Electric Company and liquidate that Company. * * *
Among the specifically stated conditions precedent to petitioner's obligation to purchase, were the procuring of the approval of the *413 Federal Power Commission of the proposed immediate liquidation of Sheridan County and the assumption by petitioner of the $ 750,000 in mortgage bonds of Sheridan County outstanding; the approval of the Public Service Commission of North Dakota to the same effect; and the consent*43 of the Public Service Commission of Wyoming to the transfer by Sheridan County to petitioner of such certificates of convenience and necessity as were held by Sheridan County.
On May 5, 1947, petitioner filed its application with the Federal Power Commission, under Part II of the Federal Power Act, for authority to purchase from Schlessman the common stock of Sheridan County and to acquire immediately thereafter Sheridan County's properties by liquidation. The application included a statement similar to the one recited above in petitioner's application to the Commission in the case of Dakota. The Federal Power Commission entered its order on July 3, 1947, authorizing petitioner to purchase the stock of Sheridan County, to liquidate that company and to acquire its properties under the terms and conditions stated in the application.
A similar application was filed on May 1, 1947, by petitioner with the Public Service Commission of North Dakota, which, on the same date, entered its order granting the application.
On June 4, 1947, petitioner filed an application with the Public Service Commission of Wyoming requesting authority to acquire the properties of Sheridan County and Sheridan*44 Suburban as contemplated and for certificates of convenience to operate those properties, and on July 9, 1947, the Commission entered its authorizing order.
On July 14, 1947, petitioner completed the purchase of the Sheridan County stock and paid Schlessman $ 776,693.32 therefor in cash. On the same date it caused Sheridan County to purchase the assets of Sheridan Suburban pursuant to its purchase option, immediately liquidated Sheridan County and acquired by transfer all the assets of Sheridan County, subject to existing liabilities of $ 992,361.46.
Immediately after liquidation of Sheridan County, petitioner executed a supplemental indenture with the Irving Trust Company, trustee, whereunder petitioner became obligated to assume the $ 750,000 in principal amount of the outstanding first mortgage bonds of Sheridan County. The bonds were thereafter paid as soon as petitioner could make arrangements therefor. The liabilities assumed by petitioner in the liquidation of Sheridan County also included notes payable in the amount of $ 115,161.40. These notes were likewise paid by petitioner as soon as arrangements therefor could be made.
OPINION.
In determining the deficiencies herein, *45 respondent has allowed to petitioner, as a basis for computing depreciation with *414 respect to the properties of Dakota and Sheridan County, acquired as above shown, the same basis that such properties had in the hands of the predecessor corporations, thus treating the acquisition of the latter's stock and securities and the acquisition of the physical properties of those companies on their liquidation as separate and distinct transactions. It is his position that those transactions come within the ambit of sections 112 (b) (6)1*46 and 113 (a) (15) 2 of the Internal Revenue Code of 1939. He argues that though petitioner might have wanted the properties of the two corporations, the negotiations were for the purchase of stock and securities, that the stockholders of each corporation did not want to sell, and would not sell, the properties, and that on the sale of the stock by the stockholders the corporations cannot be said to have sold assets.
Petitioner's contention is that the question at issue concerns a "step transaction," that tax liability is not to be determined on each step viewed independently and in isolation, but rather, on the basis of the net effect of the entire transaction. It relies on the principles enunciated in Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179">315 U.S. 179;*47 Koppers Coal Co., 6 T.C. 1209">6 T. C. 1209; and Kimbell-Diamond Milling *415 ., 14 T. C. 74, affirmed per curiam 187 F.2d 718">187 F. 2d 718, certiorari denied 342 U.S. 827">342 U.S. 827.
It is quite clear from the record that, whether petitioner negotiated specifically for the assets of the two corporations or not, its primary, in fact its sole purpose, was to acquire the corporate assets through the purchase of the stock and the immediate liquidation of the corporations, to the end that it might integrate the properties into its directly owned operating system. We are of the opinion and hold that, insofar as this petitioner is concerned, the various steps, when taken as a whole, constituted the purchase of the properties of the said companies, and respondent's contention that section 112 (b) (6) is applicable cannot prevail. Kimbell-Diamond Milling Co., supra;Koppers Coal Co., supra;Commissioner v. Ashland Oil & Refining Co., 99 F.2d 588">99 F. 2d 588. And section 112 (b) (6) being inapplicable, it follows that section*48 113 (a) (15) does not apply.
Respondent contends further that if sections 112 (b) (6) and 113 (a) (15) do not apply to the transactions under consideration, then the amounts to be allocated as bases to the depreciable properties acquired by petitioner upon the liquidation of the two corporations consist only of allocable portions of the amounts paid for the stock and securities of the two liquidated corporations.
Although respondent agrees that petitioner acquired the properties of Dakota and Sheridan County subject to their liabilities, by liquidating the corporations, he argues that there is no evidence that the liabilities were ever paid by petitioner, and that Kimbell-Diamond Milling Co., supra, is to the effect that the liabilities of a corporation assumed upon liquidation of the corporation under a comparable plan were not considered as part of the cost of the assets acquired.
The argument of the respondent is, in our opinion, without merit. According to section 113 (a), the basis of property is cost, unless otherwise provided in some one of its subsections, and there is no claim of applicability of any such subsection other than section 113 (a)*49 (15), disposed of above. Treating the various steps taken in acquiring the properties as a whole, the cost of the properties of each corporation was the amount paid for the stock and securities plus the liabilities assumed, since in the case of a closed transaction the cost of property includes not only the payment made in cash but also the liabilities to which the property is subject or which are assumed by the purchaser. See Crane v. Commissioner, 331 U.S. 1">331 U.S. 1; Blackstone Theater Co., 12 T. C. 801; Consolidated Coke Co., 25 B. T. A. 345, affd. 70 F.2d 446">70 F. 2d 446; Athol Manufacturing Co., 22 B. T. A. 105, affd. 54 F.2d 230">54 F. 2d 230.
It is true that in Kimbell-Diamond Milling Co., supra, the facts indicate that the corporation, upon liquidation, did have liabilities *416 of $ 14,020.90, aside from capital liabilities, and that those liabilities were not included in the amount held to have been the cost of the corporate properties acquired. There is no indication, however, that the*50 taxpayer there made any claim that such liabilities, whether assumed, paid, or otherwise satisfied, constituted a part of the cost of the assets acquired, and it could have been that the parties, subject to the determination that section 113 (a) (9) was not the controlling section, had stipulated or agreed that the cost of the securities, adjusted for other factors as therein indicated, was the cost to the taxpayer of the assets. In any event, it does not appear that the question here was litigated or considered in Kimbell-Diamond Milling Co., supra.Accordingly, that case is not to be regarded as authority for the proposition for which the respondent contends.
Subject to the above determination that the liabilities assumed upon liquidation of Dakota and Sheridan County constituted a part of the cost of the corporate assets acquired, the parties have stipulated the basis of the properties to petitioner and the portions of the said basis attributable to each kind and class of such properties. In making that stipulation we assume that allowance was made for any cash received by petitioner upon liquidation of the two corporations. Effect will be given*51 to the stipulations in the Rule 50 computations herein.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(b) Exchanges Solely in Kind. --
* * * *
(6) Property received by corporation on complete liquidation of another. -- No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. For the purposes of this paragraph a distribution shall be considered to be in complete liquidation only if --
(A) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 per centum of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), and was at no time on or after the date of the adoption of the plan of liquidation and until the receipt of the property the owner of a greater percentage of any class of stock than the percentage of such class owned at the time of the receipt of the property; and
* * * *
(C) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock, shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; * * *↩
2. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --
* * * *
(15) Property received by a corporation on complete liquidation of another. -- If the property was received by a corporation upon a distribution in complete liquidation of another corporation within the meaning of section 112 (b) (6), then the basis shall be the same as it would be in the hands of the transferor. The basis of property with respect to which election has been made in pursuance of the last sentence of section 113 (a) (15)↩ of the Revenue Act of 1936, as amended, shall, in the hands of the corporation making such election, be the basis prescribed in the Revenue Act of 1934, as amended.