*656 1. REORGANIZATION. - Upon the exchange of assets by a corporation for stock of another, the determination of whether the assets exchanged constituted substantially all of the properties of the transferor depends upon the facts and circumstances rather than on any particular percentage. The assets retained in this case were but little more than sufficient to discharge the transferor's liabilities; they were retained for that purpose and were so used within the year. Held, that the assets transferred were substantially all of the properties of the transferor and the exchange was nontaxable under the reorganization provisions.
2. DISTRIBUTION OF STOCK ON REORGANIZATION. - Where the basic contract between the transferor and the transferee corporations provided that the stock to be issued for assets should be issued to the transferor "and/or" its stockholders, the issuance to the stockholders is held to be in pursuance of the plan of reorganization.
*703 These proceedings, which were consolidated for hearing, involve redeterminations of*657 deficiencies for the calendar year 1930, as follows:
| Smith Transportation Co | $9,793.23 |
| Milton Smith | 7,037.73 |
| C. A. Smith | 7,024.97 |
| Sarah Avis Smith | 124.44 |
The chief issue is whether a certain transaction constituted a nontaxable reorganization within the meaning of section 112 of the Revenue Act of 1928.
FINDINGS OF FACT.
The Smith Transportation Co., hereinafter referred to as the Smith Co., was an Oregon corporation, organized in 1926 for the purpose of engaging in water transportation on the Columbia River and its tributaries. Milton Smith, C. A. Smith, and Sarah Avis Smith were the sole stockholders of the Smith Co. The Shaver Transportation Co., hereinafter referred to as the Shaver Co., is also an Oregon corporation, and prior to 1930 was a competitor of the Smith Co. Its five stockholders were all members of the Shaver family.
On January 9, 1930, the Smith Co. and the Shaver Co. and all the stockholders of each entered into an agreement "to merge the businesses" of the two companies. The substance of the agreement, which was not as skillfully drawn as might be desired, was that the Smiths were to pay in, and they did pay, to the Shaver Co. *658 $50,000, which was distributed to the Shaver stockholders, who thereupon turned in to the Shaver Co. $100,000 par value of the stock, reducing the outstanding stock from $350,000 to $250,000 par value. Thereafter, the Shaver Co. increased its authorized stock to $500,000. The old stockholders continued to hold $250,000 par value of the stock. The other $250,000 was to be issued to the Smith Co. "and/or" its stockholders in exchange for the business and properties of the Smith Co. except cash, securities, receivables, and real estate. Resolutions were adopted by the Smith Co. stockholders and directors authorizing the transfer of assets and the proportionate distribution of the Shaver stock to the Smiths and further providing for the dissolution of the Smith Co. On February 13, 1930, the Smith Co. executed a bill of sale transferring to the Shaver Co. title to the assets covered by the contract of January 9, 1930. On February 27, 1930, a certificate of dissolution of the Smith Co. was issued by the Corporation Commissioner of the State of Oregon.
At the time of the above transfer, the Smith Co.'s total assets were valued at $185,456.67. The assets transferred to the Shaver*659 *704 Co. were worth $133,374.08, leaving $52,082.59 in the hands of the Smith Co. The assets retained by the Smith Co. were as follows:
| Cash | $15,197.83 |
| Accounts and notes receivable | 25,848.63 |
| Real estate | 3,481.00 |
| Buildings | 5,232.94 |
| Automobiles | 2,322.19 |
The Smith Co.'s liabilities, none of which were assumed by the Shaver Co., amounted to $45,956.98 and consisted of unpaid salaries owing to its stockholders. These salaries, although unpaid, had been returned by the individuals as income in the years in which they were earned. The assets retained by the Smith Co. were retained for the purpose of paying off these liabilities. Almost all of the receivables retained were collected. All the debts of the Smith Co. were paid in 1930 and the assets remaining were distributed to the stockholders.
The cost to the Smith Co. of the assets transferred to the Shaver Co. was $117,743.32. The cost to the three Smith stockholders of their stock in the Smith Co. was $85,369.24. The value of the Shaver Co. stock received on the exchange was $68 per share, or a total of $17,000 for the entire block having a par value of $250,000.
OPINION.
ARUNDELL: The*660 chief issue for decision is whether the transaction referred to above constitutes a nontaxable reorganization within the meaning of section 112(i)(1) of the Revenue Act of 1928. 2
The petitioners do not contend that there was a strict statutory merger, but rather that the requirements of the parenthetical part of clause "(A)" have been met in that the Shaver Co. acquired "substantially all the properties" of the Smith Co. for stock. Following the transfer of properties the Smith Co. dissolved and the Shaver Co. operated the two steamship lines as one enterprise. The parties characterized the amalgamation of their interests as a merger, and it is evident that the transaction meets the test of , as at least partaking "of the nature of a merger", and it also comes within*661 the requirement laid down in , in that "the seller acquired a definite and substantial interest in the purchaser."
So there is left only the question of whether the assets taken over by the Shaver Co. constituted "substantially all of the properties" of the Smith Co. If so, decision must be for the petitioners. Assets *705 of the Smith Co. having a book value of $133,374.08, a cost of $117,743.32, and a selling price bases on stock value of $170,000 were acquired by the Shaver Co. The Smith Co. retained assets of the value of $52,082.59 with which to liquidate liabilities of $45,956.98. Of the assets retained, only $41,046.46 represented cash and receivables. The remainder was made up of land, buildings, and automobiles. There is some doubt as to whether land and buildings valued at $5,232.94 and carried on the books as "buildings" were the property of the Smith Co. or of the Smiths personally, but we regard this as an unimportant detail.
The respondent contends that the phrase "substantially all the properties" refers to the gross assets, rather than net, and that the 71 percent of gross assets transferred*662 in this case was not "substantially all." We think it unnecessary to decide whether the quoted phrase refers to the gross value of the assets or such value less liabilities. Whether the properties transferred constitute "substantially all" is a matter to be determined from the facts and circumstances in each case rather than by the application of any particular percentage. It might well be, as said by the respondent, that if a corporation having gross assets of $1,000,000 and liabilities of $900,000 transferred only the net assets of $100,000 the result would not come within the intent of Congress in its use of the words "substantially all." Any number of further suppositions might be made concerning the case put by the respondent. The transferor corporation might continue in business; it might not discharge its liabilities; it might use the retained assets in various ways such as the inauguration of a different line of business; the assets might be distributed to the stockholders. A concrete case is that of , where a corporate transferor retained gross assets of $236,394.03 and had liabilities of only $57,505.70. *663 The net assets retained amounted to about 20 percent of the total assets before the transfer. We held that under the facts there the 80 percent transferred did not constitute "substantially all." In that case the transferor after discharging its liabilities had left nearly $180,000 in assets as against assets of $747,890 transferred. In , the transferor transferred all of its assets, but immediately received back about 32 percent thereof, resulting in a transfer of about 68 percent. There was no finding in that case as to what disposition was made of the retransferred 32 percent of assets. In , all of the transferor's liabilities were assumed by the transferee corporation. The transferor received from the transferee $467,947.74, which it used to buy stock of the transferee. The transferor retained assets of the value of $148,125, which it distributed to its stockholders. In , assets having a cost to the transferor of $60,536.06 were transferred *706 for cash, notes and stock in the amount of $94,691.50. *664 The transferor retained assets worth $45,294.52 and there was no showing of what disposition was made of them. All of these cases are distinguishable from the one before us. In each of them there was retained a substantial amount of assets in proportion to the assets transferred and in none was the retention for the sole purpose of liquidating liabilities. In this case, as above pointed out, assets having a book value, in round figures, of $133,000 were transferred for stock worth $170,000; assets worth $52,000 (including the doubtful real estate) were retained for the purpose of meeting liabilities of $46,000. After discharging its liabilities - and this was done within the year - the outside figure of assets remaining with the petitioner would be $6,000, which is certainly not an excessive margin to allow for the collection of receivables with which to meet its liabilities. No assets were retained for the purpose of engaging in any business or for distribution to stockholders. In these circumstances, we are of the opinion that the assets worth $133,374.08 transferred to the Shaver Co. constituted "substantially all" the assets of the Smith Co. within the meaning of that statutory*665 phrase and the transaction is nontaxable under section 112(i)(1)(A). Cf. , where assets of a book value of $479,835.79 were transferred for a consideration of cash, notes and stock worth $1,123,537.26, the retained assets were worth $302,225.52, which was $194,575.09 in excess of the liabilities of $107,650.43, and it was held by the Court of Appeals for the District of Columbia that the assets transferred constituted "substantially all."
The respondent further contends that even though there was a reorganization the Shaver Co. stock was not distributed to the Smiths "in pursuance of a plan of reorganization" (sec. 112(g)), and that, therefore, the distribution is taxable under section 115. His argument is that a plan by the Smith Co. to distribute the stock is not sufficient to meet the provisions of section 112(g), but that the plan must have been part of the agreement between the Smith Co. and Shaver Co. We doubt whether this view is sound, but we do not find it necessary to pass upon it. The contract of January 9, 1930, between the Smith Co. and Shaver Co. and the stockholders thereof provides that the*666 Shaver Co. stock "shall be issued to the party of the second part [Smith Co.] and/or the parties of the fourth part [Smith stockholders] * * *." Resolutions of the Smith Co. directors and stockholders provided for the proportionate distribution of the Shaver Co. stock to the Smiths. This in our opinion is sufficient to establish that the Shaver Co. stock went to the Smiths in pursuance of the plan of reorganization.
*707 We are satisfied, upon consideration of all the evidence, that the value of the Shaver Co. stock received in the exchange was not in excess of $68 per share, which figure we have found as a fact represents its value.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK, LEECH, TURNER, and TYSON dissent.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Sarah Avis Smith; C. A. Smith; Milton Smith, Sarah Avis Smith, and C. A. Smith, in behalf of Smith Transportation Co.↩
2. 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) * * *. ↩