*1291 Under an agreement entered into between Corporation A (the petitioner) and Corporation B, Corporation A caused to be organized Corporation C to which it transferred a part of its assets, approximately 29 percent, in exchange for all of Corporation C's capital stock. Thereupon, Corporation A transferred all of such capital stock to Corporation B in exchange for a part, approximately 18 percent, of its capital stock, which it distributed as a dividend to its sole stockholder. Held, that the exchange by Corporation A of the stock of Corporation C for shares of stock of Corporation B did not constitute a reorganization and that the petitioner is taxable upon the gain resulting from the exchange.
*645 This proceeding involves a deficiency in petitioner's income tax for 1929 in the amount of $41,026.91. The only question at issue is whether an exchange by the petitioner of the capital stock of another corporation for capital stock of a third corporation was in connection with a nontaxable reorganization or whether it resulted in a taxable profit to*1292 the petitioner. The parties have filed a written stipulation setting forth most of the material facts.
FINDINGS OF FACT.
The petitioner is a corporation, organized in 1911 under the laws of the State of New Jersey. It was engaged in 1929 in the pipe flanging, threading, and bending business at Clifton, New Jersey.
The petitioner in 1929 had issued and outstanding 945 shares of nonvoting preferred stock of a par value of $100 each and 1,055 shares of voting common stock of a par value of $100 each. The preferred stock was retired on March 30, 1929, at $105 per share. All of the common stock, except two qualifying shares, was owned by Edward J. Hughes, president of the company. On February 19, 1929, the petitioner, by its president, Edward J. Hughes, wrote a letter to the Midwest Piping & Supply Co., Inc., of St. LouisMissouri, hereinafter referred to as the Midwest Co., proposing a plan for an exchange of securities between the companies. The letter provides in part as follows:
MIDWEST PIPING AND SUPPLY COMPANY, INC.
1450 South Second Street, St. Louis, Missouri.
GENTLEMEN: The Ballwood Company (hereinafter called "Ballwood") hereby submits to your Company*1293 (hereinafter called "Midwest") its proposal for an exchange of securities under a reorganization plan, of which the following is a part:
REORGANIZATION PLAN
1. A new corporation to be formed under the name "BALLWOOD PIPE FABRICATING CORPORATION" (hereinafter called the "new company"), with a capital stock of 5,000 shares without nominal or par value.
2. Ballwood to sell, convey, assign and transfer to the New Company, free from liens and encumbrances, the following described property and rights:
(a) The real estate and the plant located thereon at Clifton, New Jersey, now being operated by Ballwood, all machine tools and equipment now contained therein and such patterns and drawings as pertain to the pipe fabricating business.
(b) The good will of Ballwood insofar as it relates to the pipe fabricating business, including the right to use the name "Ballwood" in connection therewith, Ballwood to bind itself that it will not engage in the pipe fabricating *646 business in the United States of America for a period of twenty-one (21) years and that Edward J. Hughes, its President, will not engage in said business in the United States within said period, except as an*1294 officer or agent of the New Company or of a corporation owning a majority of its capital stock.
(c) All unfilled orders for fabricating pipe which Ballwood may have on its books on April 1st, 1929, except for work in process.
The New Company to issue and deliver to Ballwood as consideration for the above described property and rights, 5,000 shares of its No Par Value Stock.
* * *
5. On April 1st, 1929, or as soon thereafter as the details required under the reorganization plan have been completed, Ballwood and Midwest to exchange securities upon the following basis:
Ballwood to exchange 5,000 shares of the No Par Value Stock of the New Company for 1,000 shares of the Common Stock, and 3,500 shares of the Preferred Stock of the par value of $100.00 each, of the Midwest Piping and Supply Co., Inc.
Midwest to agree that no bonds or stock having rights prior or equal to its Preferred Stock shall be issued without the affirmative vote or written consent of the holders of record of all of its Preferred Stock issued and outstanding.
* * *
The foregoing to be deemed a proposal on the part of the Ballwood Company for an exchange or securities with your corporation under*1295 a reorganization plan of which the foregoing is a part, subject, however, to the approval of the stockholders of this corporation and subject also to withdrawal unless accepted by your corporation within twenty days from the date hereof.
The proposals contained in the letter of February 19, 1929, referred to above, were accepted by the Midwest Co., subject to the approval of the stockholders of the Midwest Co., which was obtained at a stockholders' meeting held on February 25, 1929.
The assets referred to in the above agreement comprised the petitioner's entire pipe fabricating business which it had been operating in competition with the Midwest Co.
The new corporation, the Ballwood Pipe Fabricating Corporation, hereinafter referred to as the Fabricating Co., was organized on March 28, 1929, under the laws of the State of New Jersey, with an authorized capital stock of 5,000 shares of no par value. On April 1, 1929, the petitioner transferred its pipe fabricating assets and business to the Fabricating Co. Such assets amounted to approximately 29 percent of the petitioner's total assets and had a net depreciated cost to the petitioner of $130,028.02 allocated as follows: *1296
| Real estate and buildings | $41,257.33 |
| Equipment | 88,020.69 |
| Patterns | 500.00 |
| Drawings | 250.00 |
| Total | 130,028.02 |
In exchange for the above assets the petitioner received all of the capital stock, 5,000 shares, of the Fabricating Co. The receipt of *647 the stock was recorded in petitionerhs books at a net cost of $130,028.02, the depreciated net cost of the assets transferred in exchange therefor.
On the same date, April 1, 1929, the petitioner transferred the 5,000 shares of the Fabricating Co. stock to the Midwest Co. in exchange for 1,000 shares of the latter company's voting common stock of no par value and 3,500 shares of nonvoting preferred stock of a par value of $100 per share. The Midwest Co. then had outstanding 19,998 shares of voting common stock and 5,320 shares of nonvoting preferred stock. The petitioner's holdings in the Midwest Co. amounted to approximately 5 percent of the outstanding common stock and 65 percent of the outstanding preferred stock, a total of approximately 18 percent of the entire outstanding capital stock.
The common stock of the Midwest Co. had a market value at April 1, 1929, of $150 per share and the preferred*1297 stock a market value of $100 per share.
After the above described transfers between the petitioner and the Midwest Co., the pipe fabricating business, formerly conducted by the petitioner in competition with the Midwest Co., was conducted by the Midwest Co. as a branch of its St. Louis office and in its name. Its plant is known as the "Ballwood Division, Midwest Piping and Supply Co." Edward J. Hughes, principal stockholder and president of the petitioner, became eastern manager for the Midwest Co. in charge of operations of the "Ballwood Division" of that company. The Fabricating Co. was not dissolved, but has continued in existence up to the present time merely as a holding company for the assets transferred to it by the petitioner.
Since its acquisition by the Midwest Co., all operations of the Fabricating Co. have been conducted by the Midwest Co. as a part of its business. All orders have been taken, bills collected, employees paid, and bank accounts kept by it and in its name. The "Ballwood Division" plant was shown in the Midwest Co.'s advertising as the "Passaic Plant."
OPINION.
SMITH: The respondent has determined that the exchange by the petitioner of all the*1298 capital stock of the Fabricating Co. for a portion of the capital stock of the Midwest Co. resulted in a taxable gain to the petitioner, measured by the difference between the cost to it of the Fabricating Co. stock and the fair market value of the shares of the Midwest Co. stock received in exchange therefor. The petitioner contends that the exchange in question was a nontaxable exchange made pursuant to a plan of reorganization under section 112(b)(3) of the Revenue Act of 1928.
*648 The pertinent provisions of the statute read as follows:
SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) General rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, 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.
(4) SAME - GAIN OF CORPORATION. *1299 - No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
* * *
(i) Definition of reorganization. - As used in this section and sections 113 and 115 -
(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, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(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*1300 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.
(j) Definition of control. - As used in this section the term "control" means the ownership 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 the corporation.
We are in accord with the respondent's contention that the several transactions which took place in the performance of the agreement between the petitioner and the Midwest Co. must be viewed separately for the purpose of determining whether the exchanges made in such transactions are taxable under the quoted provisions of the statute. For instance, the first step in carrying out the agreement was the exchange by the petitioner of a part of its assets for all of the capital stock of the Fabricating Co. Unquestionably this transaction viewed separately constituted a reorganization within the meaning of section 112(b)(4) and (i)(1)(B) and (i)(2) resulting in no taxable gain to the petitioner. This is admitted by the respondent and we understand that the respondent has not sought to tax the petitioner*1301 upon any gain resulting from the exchange. The *649 second step was the exchange by the petitioner of all the capital stock of the Fabricating Co. for a portion of the stock of the Midwest Co. It is this exchange upon which the respondent has determined that the petitioner realized a taxable gain, measured by the difference between the cost of the Fabricating Co.'s stock and the value of the Midwest Co.'s stock received in exchange. The respondent contends that this exchange was not in itself a statutory reorganization or an exchange made in pursuance of any plan of reorganization.
While the exchange in question, the so-called second step, was made pursuant to the original agreement, the terms of which are stated in the letter of February 19, 1929, we do not think that the agreement as a whole must be considered "a plan of reorganization" merely because it was so designated by the parties. Conceivably an agreement entitled "a plan of reorganization" might be drawn up that would involve a series of statutory reorganizations, each taxable or nontaxable in its execution according to its own conditions. Or there might be an agreement involving a plan of reorganization as*1302 only a minor feature. Certainly we would not say that every separate transaction taking place under such an agreement was made "in pursuance of the plan of reorganization." See . The reorganization contemplated by the statute, or the plan of reorganization, is the one of which the exchange sought to be taxed formed a necessary or vital part. In , we said:
As above indicated, the statute does not, as a general proposition, require that whenever a reorganization is found to have at some time occurred, all transactions in the shares before and after shall be embraced within the reorganization, so that losses and gains may not be recognized. * * *
In its usage in the statute under consideration we think that the term "in pursuance of the plan of reorganization" should not be construed to mean following merely in point of time (see ), but in the sense of the definition quoted, that is, in consequence or prosecution of some definite plan.
Our question then is whether the second step, that is, the exchange by petitioner of the shares*1303 of the Fabricating Co. for shares of the Midwest Co. constituted in itself a statutory reorganization. If so, it was a reorganization under subdivision (A) of section 112(i)(1):
* * * 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) * * *.
We have held in several cases, following , and ; certiorari denied, , *650 that mere acquisition by one corporation of a majority of the stock, or all the assets, of another corporation does not constitute a reorganization where such acquisition takes the form of a purchase and sale and does not result in or bear some material resemblance to a merger or consolidation. See *1304 ; ; ; . In , it was stated:
The paragraph in question directs: "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)." The words within the parenthesis may not be disregarded. They expand the meaning of "merger" or "consolidation" so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words - so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. But the mere purchase for money of the assets of one company by another is beyond the evident purpose of the provision, and*1305 has no real semblance to a merger or consolidation. Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes. This general view is adopted and well sustained in . It harmonizes with the underlying purpose of the provisions in respect of exemptions and gives some effect to all the words employed.
Although the facts in the instant case show a situation well outside of that described in the Pinellas Ice & Cold Storage Co. case, said not to come within the statute, where there was a "mere purchase for money of the assets of one company by another" and where the selling corporation acquired no interest "in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes," we are, nevertheless, of the opinion that the transaction did not constitute a "reorganization" within the contemplation of section 112(i)(1) of the taxing statute. The history of the reorganization*1306 provisions of the income tax acts is stated by the Circuit Court of Appeals in , as follows:
* * * It [the section] first appeared in the Act of 1924, (section 203, (h)(1)(B)), and as the committee reports show, (Senate Report 398), was intended as supplementary to section 112(g), (then section 203(c)); both in combination changed the law as laid down in , and . In the House Report, (No. 179, 68th Congress 1st Sess.), and in the Senate Report, (No. 398), the purpose was stated to be to exempt "from tax the gain from exchanges made in connection with a reorganization in order that ordinary business transactions will not be prevented." * * *
The *651 facts in the instant case show that the petitioner desired to sell or exchange a portion of its assets constituting only 29 percent of its total assets to the Midwest Co. for certain shares of stock in that company. It was apparently appreciated that if the exchange had been made directly with the Midwest Co. the petitioner would be under a large income tax liability. *1307 Apparently also to minimize such tax liability the Ballwood Pipe Fabricating Corporation was created, to which the petitioner transferred these assets in exchange for all of the capital stock of that corporation. Upon the receipt of such shares the petitioner transferred them to the Midwest Co. for shares of stock of that company which had a fair market value of $500,000. The shares of stock of the Midwest Co. received were only about 18 percent of the total number of shares of that company. The petitioner was not then in control of the Midwest Co. Shortly thereafter the petitioner distributed the Midwest Co. shares received to its sole stockholder as a dividend. We are not concerned with this latter transaction.
The proceeding before us bears a close resemblance to that of , in which we held that the acquisition by one corporation of all of the stock of another was not of itself sufficient to constitute a "reorganization" if the transaction was not "of the nature of a merger or consolidation." We think that our opinion in that case is dispositive of the proceeding at bar.
*1308 The facts in this proceeding also bear a close resemblance to those involved in The court there held that no reorganization was effected by the transfer by an existing corporation to a newly formed corporation of certain investment shares of stock which the old corporation owned under an agreement whereby the new corporation issued all of its shares to the sole stockholder of the old corporation. In that case it was admitted that the new corporation was formed for the purpose of minimizing the income tax of the stockholder who wished to acquire the investment shares of stock held by the corporation without paying the surtax on the distribution of such shares. The new corporation was liquidated three days after its formation and upon surrender of its shares the stockholder received the investment stock. Although the transfer between the corporations came under the wording of section 112(i)(1)(B) of the 1928 Act defining a reorganization as "a transfer by a corporation of * * * a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to*1309 which the assets are transferred," the court held that it was not the purpose of Congress to recognize as a reorganization a transaction which was no part of the conduct of the business, but was an added gesture *652 made in an effort to save taxes. While sanctioning the legitimate minimizing of taxes, the court declared that "To dodge the shareholders' taxes is not one of the transactions contemplated as corporate 'reorganizations.'" Although there are points of difference between the instant proceeding and the Gregory case in that the record contains no admission on the part of the petitioner that the creation of the Fabricating Co. was for the purpose of minimizing taxes, and the Fabricating Co. still remains in existence, we think that the points of difference are not material. The Fabricating Co. was an inactive corporation from the time of its organization and never transacted any business. It simply held the legal title to the assets transferred to it for the benefit of the Midwest Co.
We sustain the respondent's contention that the transaction in question was not a reorganization within the contemplation of the statute and that the petitioner is liable to income*1310 tax in respect of the difference between the cost basis of the assets transferred to the Fabricating Co. and the fair market value of the shares of the Midwest Co. received in exchange.
Reviewed by the Board.
Judgment will be entered for the respondent.
STERNHAGEN concurs in the result only.
BLACK concurs in the result.
TRAMMELL and LEECH dissent.
ADAMS, concurring: While concurring in the result reached in the opinion in this case, I do not think the transactions here must be considered as two separate transactions. The offer to the Midwest Co. which was submitted by Edward J. Hughes, who was the president and the owner of all the common stock of petitioner, clearly indicates the purpose of the transaction to be as follows:
The Ballwood Company (hereinafter called "Ballwood") hereby submits to your Company (hereinafter called "Midwest") its proposal for an exchange of securities under a reorganization plan, of which the following is a part.
This purpose was accomplished by the circuitous route defined in the so-called "Reorganization Plan." The organization of the "Ballwood Pipe Fabricating Corporation", the exchange of certain assets of*1311 petitioner for all its stock and the exchange of this stock for stock of the Midwest Co. were but steps in a single transaction - the exchange by petitioner of a part of its assets for stock of the Midwest Co.
In my opinion, the transaction must be viewed as a whole and when so viewed it results in a transaction on which gain or loss may be realized.