*771 1. The taxpayer exchanged substantially all its properties for stock of B corporation, which in turn assumed all the liabilities of the taxpayer and agreed to and did furnish the money to pay a certain particular debt of the taxpayer. Held:
(a) Such transaction resulted in a reorganization, within the meaning of section 112(i)(1)(A) of the Revenue Act of 1928.
(b) The cash furnished to pay the taxpayer's debt was money or other property, within the meaning of section 112(d) of the 1928 Act.
(c) The word "distributes" in section 112(d) means a distribution to the stockholders of the conveying corporation.
2. During petitioner's liquidation, petitioner transferred certain B stock it had received in the above exchange to three trustees, with which to liquidate petitioner's preferred stock. These trustees sold some of the stock and with the proceeds of those sales liquidated such preferred stock, the holders of which could and did demand a money redemption. Held:
(a) These sales, for tax purposes, were made by the petitioner. Article 71, Regulations 74; Taylor Oil & Gas Co. v. Commissioner, 47 Fed.(2d) 108; certiorari denied, 283 U.S. 862">283 U.S. 862.
*772 (b) Since petitioner's inquidation was not essential to consummate a statutory reorganization (Minnesota Tea Co. v. Commissioner, 76 Fed.(2d) 797; affd., 296 U.S. 378">296 U.S. 378; Watts v. Commissioner, 75 Fed.(2d) 981; affd., 296 U.S. 387">296 U.S. 387), such sales were not necessary to such a reorganization and gains resulting therefrom are taxable to petitioner.
3. Petitioner sold, direct, other B stock so received, to pay necessary expenses of its dissolution. Held, since petitioner's dissolution was likewise not essential to consummate a statutory reorganization (Minnesota Tea Co. v. Commissioner, supra; Watts v. Commissioner, supra), the gains on these sales are taxable to petitioner.
4. Commissions paid for the sale of taxpayer's stock are not deductible upon its dissolution or at any other time.
5. Upon dissolution the organization expenses of petitioner constitute a loss and, as such, are deductible in the year in which the corporation is dissolved and surrenders its charter.
*1173 The respondent has determined deficiencies in income tax for the fiscal years ended September 30, 1929, and 1930, in the respective amounts of $109,448.46 and $49,254.29. The petitioner assigns the following errors:
*1174 (a) The addition by the Commissioner to taxable income for the fiscal year ended September 30, 1929, of $873,995 representing alleged profit on disposal of assets pursuant to a plan of reorganization.
(b) The addition by the Commissioner to taxable income for the fiscal year ended September 30, 1929, of $395,641.50 representing alleged profit on sale of Borden stock.
(c) The addition by the Commissioner to taxable income for the fiscal year ended September 30, 1930, of $450,217.85 representing alleged profit on sale of Borden stock.
(d) The failure of the Commissioner to allow as a deduction from taxable income for the fiscal year ended September 30, 1929, $27,978.99 covering alleged commissions on the sale of capital stock.
(e) The failure of the Commissioner to allow as a deduction from taxable income for the fiscal year ended September 30, 1929, $139,188.35 covering organization expenses of the petitioner.
*774 In its returns the petitioner treated the transaction between it and the Borden Co. as a reorganization, within the meaning of section 112 of the Revenue Act of 1928, and the respondent, in arriving at his determination, treated it in the same way. In his amended answer, the respondent denies that the transaction between the petitioner and the Borden Co. was a reorganization, and denies that the transfer made by petitioner was pursuant to a plan of reorganization. He asks a redetermination of the resulting increased deficiencies.
FINDINGS OF FACT.
We find the facts to be as stipulated, and direct that adjustments be made in the pending deficiencies in accordance therewith, subject to this opinion, in the settlement under Rule 50.
Only the material facts necessary to an understanding of the issues presented are repeated here.
The petitioner corporation was organized August 8, 1927, under the laws of Delaware, as Standard Creameries, Inc., with the right to perpetual existence. That corporate name was changed to that of the petitioner on July 26, 1929. It had an authorized capital stock of 280,000 shares, without par value, of which 30,000 shares were preferred stock, *775 bearing cumulative annual dividends of $7 per share, and 250,000 shares of common stock. Under the provisions of a trust indenture, in which Wells Fargo Bank & Union Trust Co. was trustee, on September 1, 1927, it issued $1,300,000 10-year convertible debenture bonds, bearing interest at the rate of 6 1/2 percent, which were subject to redemption on any interest date, after 30 days' notice, at 105, and accrued interest. One million two hundred ninety-eight thousand dollars of these bonds were outstanding. These bonds were also convertible into shares of common stock of the petitioner, at *1175 prices fixed by the indenture of trust under which they were issued. The bylaws of the petitioner provided that it should appoint a trust company in good standing in San Francisco, as trustee or agent for its preferred stockholders, to enforce petitioner's obligations to them, in pursuance of which the petitioner in August 1927 appointed Wells Fargo Bank & Union Trust Co. of San Francisco trustee for the preferred stockholders. In the event of the voluntary dissolution of petitioner, its certificate of incorporation provided, among other things, that its preferred stockholders should*776 be entitled to receive $102 per share, and unpaid dividends.
The principal business of petitioner consisted of the manufacture and distribution of ice cream and milk products. Prior to its disposition of assets in the year 1929, from which the disputed deficiencies arose, petitioner conducted its business in California through certain subsidiaries with which it was affiliated.
For the fiscal year ended September 30, 1929, the petitioner filed a consolidated return for its affiliated group, consisting of petitioner, as parent, and the following subsidiaries:
Gloria Ice Cream Co., a Delaware corporation, San Francisco, California.
Benham Ice Cream Co., a Delaware corporation, San Francisco, California.
Enterprise Dairy Co., of Santa Barbara, a California corporation, San Francisco, California.
Central Dairy Co., a California corporation, San Francisco, California.
Respondent's determination for the year ended September 30, 1929, treated the petitioner and the four subsidiary companies as affiliated. For the fiscal year ended September 30, 1930, the petitioner filed a separate return. The respondent's determination for that year was based upon that separate return.
*777 The Borden Co., hereinafter called Borden, during the year 1929, was a New Jersey corporation, with an authorized capital stock of 8,000,000 shares of common stock with a par value $25of per share. The issued and outstanding stock of that company immediately following the acquisition of the assets of petitioner and its affiliated companies, herein mentioned, was approximately 3,600,000 shares. Under date of July 5, 1929, Borden made the following offer to petitioner, which was accepted by petitioner's directors July 12, and by its stockholders July 18, 1929, the substantially material parts of which follow:
SECOND: We hereby make you the following proposition:
A. You shall effect a reorganization of your company and your subsidiaries which shall be authorized by all necessary and proper action of your directors and stockholders and of the directors and stockholders of your subsidiaries, in pursuance whereof you shall convey, assign and transfer to us your entire property and assets (including the entire property and *1176 assets of your subsidiary companies) both tangible and intangible of every kind and description and wheresoever situated as well as your business*778 as a going concern, your trade names (including the exclusive right to do business under the present corporate names of your company and of your subsidiaries) your trademarks, patents, patent rights and good will but excluding unissued and/or repurchased stock of your Company; provided, however, that we may require you to transfer and deliver to us all of the outstanding capital stock of all or any of your subsidiaries in lieu of causing any such subsidiary to convey its assets and business to us, but only, as to Benham Ice Cream Company, if prior to closing of title to us you shall have acquired the outstanding minority interests therein.
B. In exchange for said conveyance, assignment nd transfer and in consideration thereof, we will:
1. Issue and deliver to you or upon your proper order, 57,500 shares of the full paid and non-assessable capital stock of our Company of the par value of $25 each and of the aggregate par value of $1,437,500;
2. Provide the funds necessary for the redemption on September 1, 1929 of your said $1,298,000 of Ten Year 6 1/2% Convertible Debenture Bonds or so many thereof as shall not before that time be converted into common stock of your company*779 as permitted by the terms of said debentures and of the trust indenture under which they were issued;
3. Issue and deliver to you or upon your proper order, 11 additional shares of our capital stock for each $1,000, expressed principal amount, of your said debentures which, subsequent to September 30, 1928 and on or before the date of the expiration of the conversion privilege have been or may be converted into shares of your common stock. It is understood that the privilege of conversion of said debentures expires ten days prior to the date fixed for the redemption thereof, so that if, as is contemplated hereby, said debentures be called for redemption on September 1, 1929, the conversion privilege will expire at the close of business on August 21, 1929.
4. Assume and agree to pay all indebtedness and liabilities whatsoever of your company and (except as otherwise provided in subdivision "M" of Section "Third" hereof) of your subsidiary companies as the same exists at closing of title to us hereunder, it being understood, however, that the liabilities so assumed by us do not and shall not include any liabilities for capital stock (including minority interests in subsidiary*780 companies) or any of the following, viz:
* * *
These exceptions consisted of certain tax liabilities of the petitioner.
C. Certificates for the 57,500 shares of our capital stock issued pursuant to clause 1 of sub-division "B" of this section "Second" shall be issued and delivered as therein provided at closing of title to us. The cash to be paid pursuant to clause 2 of said sub-division "B" shall be paid to Wells Fargo Bank & Union Trust Co., as trustee, and certificates for the additional shares of our capital stock to be issued pursuant to clause 3 of said sub-division "B" shall be delivered to you, at least two days prior to the date fixed for the redemption of your said debentures and we will, at closing of title to you, deliver to you our unconditional undertaking to that effect.THIRD:
* * *
K. At or before closing of title to us your company and each of your subsidiaries (except any of your subsidiaries whose capital stock shall be acquired *1177 by us) shall take all such proceedings of directors and stockholders and otherwise and shall file all such certificates and other papers as shall be necessary to change the corporate name of the respective corporation*781 to some other corporate name which shall be entirely dissimilar to the present corporate names of your company and of any of your subsidiaries; and such new corporate names shall be subject to our approval. It is the intent and purpose of this provision that, prior to closing of title to us, we shall be at liberty to organize, if we see fit, a corporation or corporations under the laws of such State as we may desire under the present names of your company and/or of your subsidiaries or any of them for the purpose of taking over and carrying on the businesses now conducted by your corporations under the same names as are now being used in connection therewith and you shall, at or prior to closing of title to us, take all such steps and proceedings as we may reasonably request and as may be necessary to enable us to organize and/or to qualify any such new corporation or corporations under such names or any of them in the State of Delaware, the State of California and in any other State or States where you or your subsidiaries are now licensed, own property or transact business.
Subdivision M of section Third above referred to reads:
M. For the purposes of the agreement evidenced*782 by this letter and your acceptance hereof, the property and business owned and/or operated by your subsidiaries and each of them shall be deemed to be your property and business and the representations, conditions, terms and provisions hereof shall apply to and cover your said subsidiaries except as in this agreement otherwise specified. If, in respect of any one or more of your subsidiaries, we shall elect to acquire its capital stock in lieu of its assets and business, you shall deliver to us certificates for all the issued and outstanding capital stock of such subsidiary, duly endorsed in blank and/or accompanied by all necessary and proper instruments of assignment and transfer with all necessary stock transfer stamps attached. As to any of your subsidiaries whose capital stock shall be acquired by us, we shall not be required to assume the liabilities thereof but shall nevertheless assume all your liability as a stockholder of such subsidiary under the laws of California.
* * *
SEVENTH. Closing of title to us having duly taken place pursuant to the foregoing provisions of this letter and our obligation with respect to the delivery of additional shares of our stock and/or*783 payments of cash pursuant to clauses "2" and "3" of subdivisioin "B" of section "Second" hereof having been performed, and all of your outstanding preferred stock having been liquidated or called for redemption, you shall thereupon, with all reasonable dispatch, cause to be taken all such steps as shall be necessary to complete the dissolution of your company and of such of your subsidiaries as have conveyed their property and business to us, and for the distribution to the stockholders of your company entitled thereto of the shares of the capital stock of our company issued by us pursuant hereto and then held in the treasury of your company.
Borden did not exercise its option thereunder to receive the stock of petitioner's subsidiary companies, but on July 24, 1929, pursuant *1178 to that agreement petitioner transferred or caused to be transferred to Borden substantially all of its assets (except the stock of its subsidiary companies) and all the assets of its subsidiaries. At a meeting of the directors of petitioner on July 18, 1929, dissolution was resolved, and that upon dissolution the preferred stockholders were to be offered the right until August 1, 1929, to exchange*784 their preferred stock for a like number of shares of Borden stock, together with an adjustment of dividends at the rate of exchange, in cash, and that those preferred stockholders who did not exercise that option should be paid $102 per share and accrued dividends. The stockholders of petitioner duly confirmed this action of the board of directors on July 18, 1929.
The Secretary of State of Delaware issued "certificates of dissolution" as to the petitioner, the Gloria Ice Cream Co., and the Benham Ice Cream Co., on the following dates, respectively: August 30, 1929, September 30, 1929, and October 4, 1929.
The affidavits of publication in reference to those certificates as required by section 39 of the General Corporation Law of California, as amended by the Act of 1929, effective March 22, 1929, were filed with the Secretary of State of Delaware, as follows: the Liquidating Co. (petitioner), September 3, 1929; the Gloria Ice Cream Co., October 3, 1929; and the Benham Ice Cream Co., October 7, 1929.
On November 5, 1929, the Superior Court of California, for the County of Stanislaus, decreed the dissolution of the Central Dairy Co., a California corporation, and that its directors, *785 at dissolution, be appointed trustees for the creditors and stockholders. On November 19, 1929, the Superior Court of California, for the County of Santa Barbara, entered a similar decree dissolving the Enterprise Dairy Co., also a California corporation.
In accordance with the terms of its agreement with Borden, petitioner called its outstanding debenture bonds for redemption on September 1, 1929. Prior to that date, those bonds in the face amount of $498,000 had been converted into common stock of the petitioner, leaving outstanding $800,000 of bonds, the holders of which were entitled to receive the following amounts in cash:
| Face value of bonds | $800,000 |
| Premium of five per cent | 40,000 |
| Accrued interest | 33,995 |
| Total | 873,995 |
Pursuant to the foregoing agreement with petitioner, on August 28, 1929, Borden transferred to Wells Fargo Bank & Union Trust Co., of San Francisco, trustee in the indenture of trust under which *1179 the debenture bonds were issued, the sum of $873,995, which was paid by that bank on September 1, 1929, to the holders of those outstanding bonds.
In his original determination of the pending deficiency, the respondent treated*786 this sum of money as cash received by petitioner, in determining the deficiency for the fiscal year 1929. In denying the status of statutory reorganization to the transaction in which this sum was paid, respondent now, in his affirmative pleading, denies that petitioner's gain on the transaction should be limited to the amount of that cash so received.
For the fiscal year 1929, the petitioner has claimed and the respondent has allowed as deductions from gross income:
| Premiums on Convertible Debenture Bonds redeemed Sept. 1, 1929 | $40,000.00 |
| Interest accrued September 1, 1929, on bonds redeemed | 33,995.00 |
| Retirement of bonded debt - bond discount nd expense | 122,629.95 |
The last amount represents the unamortized discount and expense applicable to the above debenture bonds as of the date of redemption.
In further pursuance of the above agreement between Borden and petitioner, in addition to assuming certain liabilities (consisting of notes, accounts payable, and accrued expenses) in the amount of $523,913.70, and providing the $873,995 for the redemption of the debentures, Borden issued and delivered to petitioner 62,978 shares of its common capital stock. This*787 Borden stock then had a fair market value of $92.25 per share.
On September 3, 1929, by virtue of a resolution of its board of directors, on August 18, 1929, petitioner entered into an agreement with Roy L. Shurtleff, Herbert A. Northon, and L. W. Wilson, as trustees, for the benefit of its preferred stockholders. Under this agreement, after reciting that the entire assets of petitioner consisted of 62,978 shares of Borden stock, that the designated trustees were the owners and holders of a large part of the preferred stock of the petitioner and had consented to represent those preferred stockholders, and that the parties desired to provide for the holders of that preferred stock by a transfer of sufficient shares of Borden stock to provide for liquidation of the preferred stock and satisfaction of the rights of its preferred stockholders, petitioner transferred to those trustees 22,000 shares of Borden stock, "in trust, nevertheless, for the following uses and purposes":
To hold the said capital stock of The Borden Company and to distribute the same among the preferred stockholders, or to sell, assign, transfer, exchange or otherwise dispose of the same in such manner and upon*788 such terms and for such consideration as the said Trustees may deem necessary or advisable for the best interests of the preferred stockholders and for and on behalf of said *1180 preferred stockholders in order to provide for the complete satisfaction and discharge of all rights, claims and liabilities of the preferred stockholders against The Liquidating Company arising out of the dissolution of said corporation.
In the event it shall become necessary for the said Trustees to pay to said preferred stockholders, or any of them, the amounts to which they may be entitled in cash, then said Trustees, acting as the agents of and for and on behalf of said preferred stockholders, shall sell such portion of the capital stock of The Borden Company as the preferred stockholders may direct. Upon the satisfaction of the claims of the preferred stockholders, the said certificates of preferred stock shall be delivered up to the party of the first part and cancelled.
In the event the holders of preferred stock, or any of them, shall not present the certificates held by them to the Trustees within sixty days from and after the time of the tender of the amount due said preferred stockholders, *789 then the Trustees are authorized and directed to deposit said amount with Wells Fargo Bank & Union Trust Co. to be held for the benefit of said preferred stockholders.
In the event the capital stock of The Borden Company hereby delivered to the parties of the second part shall be insufficient to provide for the satisfaction and discharge of the claims of the preferred stockholders, then the party of the first part shall deliver to the parties of the second part such additional stock of The Borden Company as may be necessary in order to effect said satisfaction and discharge.
In the event the capital stock of The Borden Company hereby transferred to the parties of the second part shall be more than sufficient to provide for the satisfaction and discharge of the claims of the preferred stockholders, then the remainder of said stock in excess of the amount required by the parties of the second part shall be returned to the party of the first part.
* * *
During the fiscal years 1929 and 1930, petitioner incurred expenses in connection with the transfer of its assets to Borden and the liquidation and winding up of its own affairs, which expenses aggregated $125,559.59. To provide*790 funds for the payment of those expenses, petitioner sold during the fiscal year 1930, 1,300 shares of the 62,978 shares of Borden stock theretofore received. The net sales price thereof was $100,975.
Respondent included in petitioner's income for the fiscal year 1929, the amount of $395,641.50, as constituting taxable gain realized by petitioner from the above mentioned sales of Borden stock, by the so-called trustees, during that fiscal year.
Respondent likewise included in petitioner's income for the fiscal year 1930 the amount of $450,217.85 as constituting taxable gain realized by petitioner from the above mentioned sales of Borden stock by the so-called trustees and the petitioner.
In computing the taxable gain to petitioner on these sales of Borden stock, respondent used a cost basis to petitioner of $42.46078 per share.
*1181 Subject only to such adjustments as may be necessary under this opinion, the cost basis to the petitioner, under the Revenue Act of 1928, of the 62,978 shares of Borden stock acquired by petitioner from Borden in the foregoing transaction is $42.46078.
On or about October 25, 1929, petitioner distributed to its common stockholders*791 38,478 shares of Borden stock at the rate of three sixteenths of a share of Borden stock for each share of common received stock dividends aggregating 66 shares more, so that after on each certificate of petitioner's common stock upon which such distribution occurred. In connection with this distribution of Borden stock, and the adjustment of fractional shares, petitioner acquired by purchase 68 additional shares of Borden stock. It also received stock dividends aggregating 66 shares more, so that after this distribution to its common stockholders, the sale of the 1,300 shares to which reference is made above, and the assignment of 22,000 shares to the so-called trustees, petitioner had on hand at the end of the fiscal year 1930, 1,825 shares of Borden stock.
Prior to the fiscal year 1929, two of petitioner's subsidiaries incurred and paid stock-selling expenses and commissions in the amount of $27,978.99 which was disallowed as a deduction for 1929, but was included by respondent as a part of the assets transferred to Borden.
Prior to the fiscal year 1929, petitioner incurred organization expenses in the amount of $59,041.76, and the Benham Ice Cream Co. and Gloria Ice Cream*792 Co., two of its subsidiaries, incurred and paid like expenses in the respective amounts of $1,872 and $8,274.51, totaling $69,188.27. The deduction of this amount on the consolidated return for 1929 was disallowed, and no part of it was included in computing the cost of the assets transferred to Borden.
Since petitioner's transfer of assets to Borden, petitioner has conducted no business other than that incident to its liquidation, for the purpose of completing which it still maintains its corporate existence.
Since the distribution of the above mentioned 38,478 shares of Borden stock to petitioner's stockholders, petitioner has made no other distribution to those stockholders.
After the foregoing acquisition, Borden, through a subsidiary, Standard Creameries Co., Ltd., operated the properties and business theretofore conducted by petitioner and its subsidiaries.
OPINION.
LEECH: The most important issue presented is whether petitioner's transaction with Borden constituted a reorganization within the *1182 meaning of section 112 of the Revenue Act of 1928, the pertinent parts of which are set out in the margin. 1
*793 In its contract with Borden, the petitioner agreed to transfer to the former all of its assets except its stock in its subsidiaries and all the assets of its subsidiaries, including, in each case, the business of the corporation as a going concern. The consideration to be received by the petitioner was the stock of Borden, its assumption of all the liabilities of the petitioner, and its agreement to provide funds to redeem, on September 1, 1929, all the then outstanding debenture bonds of the petitioner. Borden further agreed to transfer to the petitioner additional stock in case of the conversion of any of its debentures into its own common stock. The petitioner was required to retire its preferred stock (which in case of its dissolution became payable in cash), to distribute its remaining Borden stock to its stockholders, and then, with all reasonable dispatch, to dissolve itself and its subsidiaries. This contract was carried out. As the result of the transaction the petitioner became a stockholder in Borden and the rights of its creditors were retained as against that company or were paid off as agreed. The petitioner and its subsidiaries have been dissolved and are now*794 doing no business except that *1183 of liquidating. All this was done pursuant to the plan of reorganization set out in the agreement of July 5, 1929.
Under these circumstances, we think that such transaction between the petitioner and Borden was a reorganization, within the meaning of section 112(i)(1)(A) of the Revenue Act of 1928. ; ; ; affd., ; ; affd., . The fact that the petitioner may have received "other property or money" does not alter this conclusion. It merely limits the taxable gain to does not alter this conclusion. It merely limits the taxable gain to so received, which is not so distributed." Sec. 112(d)(2), quoted in the margin.
In his original computation of the pending deficiency, respondent determined that the amount of $873,995 with which the debentures were paid was "money" within the meaning of subdivision (d) of*795 section 112. He used that amount as a yardstick with which to measure the amount of the petitioner's taxable gain on the whole transaction. On his assignment of error to that determination, petitioner argues: (1) That this was but a method of discharging a debt already assumed by Borden; (2) that the petitioner was never in receipt of this sum; (3) that it was distributed, within the meaning of section 112(d)(1).
With respect to the first contention, it is pointed out that the respondent has not determined that the assumption of petitioner's liabilities by Borden constituted "other property or money" and so it is immaterial whether petitioner's obligation on its debenture bonds was assumed and afterwards paid, or a contract was made to furnish funds with which to pay that debt. The question whether an assumption of liabilities in such a case constitutes "other property" is not before us. We express no opinion with reference thereto, but confine ourselves to the issue presented by the pleadings. That issue is whether the money advanced to pay the debentures did or did not constitute "money" received by the petitioner and was not distributed within the meaning of section 112(d)(2), *796 supra. It is important to note that the obligation by which petitioner's liabilities were assumed appears in one paragraph and the agreement to provide the funds for the payment of the debentures, which is another and distinct obligation, is found in a separate paragraph of the contract. But, more significant is the fact that Borden was not in a position to assume the payment of the debentures for the one reason, if for no other, that these debentures contained an *1184 agreement for conversion into stock of the petitioner with which it would have been impossible for Borden to comply. The petitioner in its return for the fiscal year ending September 30, 1929, claimed and was allowed deductions of premiums, accrued interest, and unamortized discount on these very debenture bonds. However, considering what was actually done under the contract and not what might have been done or the purpose which might have actuated the parties (; ), we are of opinion that the cash advanced by Borden to pay the petitioner's debt, and so used, was received by the petitioner (*797 ) in payment of part of the agreed consideration. There is thus no merit in the first or second contention.
This brings us to petitioner's third argument.
Since it received the stock and cash, petitioner's gain was taxable to the extent of the cash received unless it distributed the cash, as provided in section 112(d)(1). Petitioner asserts that the cash was distributed. He contends that the word "distributes" as used in subsection (d)(1) should not be limited to distributions to stockholders. He apparently argues that the payment of the debt constituted a distribution.
The gain of a corporation incurred in a reorganization transaction is taxed only to the corporation or ultimately to its stockholders. There is nothing in section 112 or any of the related sections which indicates any purpose to transfer the tax due from a corporation to any other persons. Cf. .
In , the court had before it similar sections contained in the Revenue Act of 1926. The court there said: *798
Assuming, but not deciding, that the transaction was a reorganization within the meaning of section 203(b)(3), then the effect of section 203(e)(2) must be considered. Where there is a corporate reorganization and a transfer of the assets of the old corporation to the new corporation and an exchange of the interests of the stockholders in the old corporation for like or substantially like interests in the new corporation, there is in substance no closed transaction and no gain. But where a consideration has been paid for such transfer of assets and not distributed to the stockholders of the old corporation and hence not reflected in their individual tax returns, but paid to the old corporation and used by it to pay debts, unless the gain realized to the extent not distributed to the stockholders of the old corporation is made taxable, a realized gain would escape taxation; hence the provisions of section 203(e) (1 and 2).
Since the cash payment, not distributed to the stockholders of the West Texas Company, was more than the profit realized on the transaction, the whole profit was taxable as income to the West Texas Company under the provisions of section 203(e)(2).
*1185 *799 Such, it seems, was the concept of the Congress, 2 which enacted the Revenue Act of 1924, the provisions of which, on this subject, are similar to those before us for application. House Report No. 179, 68th Cong., 1st sess., p. 15.
*800 We hold that the cash received from Borden was not distributed, within the meaning of section 112(d)(1). ; mod., .
In reference to the transfer by petitioner of shares of Borden stock to Shurtleff, Northon, and Wilson as "trustees" for its preferred stockholders, petitioner takes two positions. They are: First, that, by that transfer the petitioner divested itself of all interest in the stock transferred with the result that sales made by the trustees were not sales made by the petitioner and therefore no taxable gain could accrue to the latter; and second, that, since the transaction occurring under the contract between the petitioner and Borden resulted in a reorganization, a necessary part of which was the redemption of the preferred stock, no taxable gain arose from the sales.
In answer to the first, it may be doubted that petitioner parted with all rights and title to the Borden stock transferred to the trustees. If the trustees received more than sufficient to liquidate petitioner's preferred stock, the excess was returnable to petitioner. In fact, the surplus money in the hands of*801 the trustees after liquidation of the preferred stock was so returned. The trustees distributed or sold all the stock they received.
Certainly the trustees did not receive this Borden stock as a liquidation in kind for the preferred stockholders. Petitioner's preferred shareholders were then creditors of petitioner. The trustees' receipt of Borden stock did not satisfy petitioner's obligation to those preferred stockholders. This record will sustain no other conclusion.
The petitioner, although dissolved, was continued as a body corporate for dissolution purposes. Section 40, General Corporation Law of the State of Delaware. One of these purposes was the liquidation of its outstanding stock including its preferred stock. *1186 This duty was performed in part by the three trustees as mere agents of petitioner for that purpose.
Article 71 of Regulations 74 reads:
ART. 71. Gross income of corporation in liquidation. - When a corporation is dissolved, its affairs are usually would up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand*802 in the stead of the corporation for such purposes. (See sections 274 and 298 and articles 1191 and 1192.) Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition. But see section 44(d) and article 355. (See further article 392.)
That regulation has been found reasonable. It is applicable here to characterize petitioner as the seller. ; certiorari denied, ; ; ; and ; certiorari denied, .
In applying the above regulation, it is immaterial whether a corporation attempts to vest trustees with title to all or only a part of its assets. *803 In either case the trustees are vested with a liquidating function, a duty which pertained to the corporation and not to the stockholders, who were entitled only to receive. They were distributing or selling stock which in fact belonged to the corporation.
Nor is it material that in following the course the petitioner pursued, it did not follow the ordinary methods of corporations in liquidation.
Therefore, these sales, for tax purposes, are to be treated as having been made by petitioner.
But the petitioner argues these sales, as well as those by it, direct, from the proceeds of which dissolution expenses were paid, were in pursuance of the plan of reorganization, and the profits therefrom consequently exempt. However, we are convinced that the controlling statutory provision does not exempt from immediate tax gain received by the taxpayer upon a sale not essential to the consummation of a statutory reorganization. Cf. *804 ; affirmed in part and reversed in part, . Obviously, any other conclusion would be, at least, highly unreasonable, because of its consequences.
It may well be true that the present plan of reorganization included not only the exchange of stock and cash for assets, but the *1187 liquidation of petitioner's preferred stock, and its dissolution. See ;; . But, aside from the question whether these sales of the Borden stock by petitioner on the market, from the proceeds of which petitioner's outstanding preferred stock was redeemed, were an essential part of that plan, neither the liquidation of the petitioner's preferred stock nor its dissolution was necessary to constitute the contemplated and executed transaction as a reorganization within the applicable state. *805 ;
We therefore sustain the respondent's determination of taxable gain to petitioner upon the sale of Borden stock by the trustees, Shurtleff, Northon, and Wilson, with the proceeds of which petitioner's outstanding preferred stock was redeemed.
The expenses, to pay which petitioner, itself, made the other disputed sales of Borden stock, were undoubtedly necessary to petitioner's dissolution. However, as stated, that dissolution was not essential to the completion of a statutory reorganization. ;And so, the gains on those sales, upon the same reasoning as applied to the sales last discussed, would also be taxable here to petitioner.
The petitioner contends that the items making up the total of the $27,978.99, which, it is stipulated, represents stock-selling expenses incurred and paid prior to the fiscal year 1929 by the petitioner's subsidiaries, the Benham Ice Cream Co. and Gloria Ice Cream Co., constitute capital expenditures which are deductible upon*806 the dissolution of these corporations in that year. It so treated them in its consolidated return. The respondent denied the deductions but included this amount as part of the cost of the assets transferred to Borden. The respondent does not attack his own determination on this point. In his answer to the petition, as amended, he asks that if we hold that this item or any part thereof is deductible from gross income for the year 1929, then the amount so allowed should be eliminated from the cost of assets transferred and the profit thereon increased accordingly. These presently disputed expenses were not capital expenditures and were not deductible, as contended. ; . Upon this record we go no further but leave the parties on this issue as we found them.
The petitioner seeks to deduct from gross income for the fiscal year 1929 the organization expenses of itself and of its affiliates, Benham Ice Cream Co. and Gloria Ice Cream Co.
The so-called certificates of dissolution were issued by the Secretary of State of Delaware in the case of the petitioner on August *1188 *807 3, 1929, in the case of Gloria Ice Cream Co. on September 30, 1929, and in the case of the Benham Ice Cream Co. on October 4, 1929. The affidavits of the publishers of the newspapers containing the advertisements required by section 39 of the General Corporation Law of Delaware, as amended by the Act of 1929, were filed with the Secretary of State of Delaware on the following dates: the Liquidating Co., September 3, 1929; the Gloria Ice Cream Co., October 3, 1929; and the Benham Ice Cream Co., October 7, 1929.
Section 39 of the General Corporation Law of Delaware of 1929, effective March 22, 1929, provides such affidavits
* * * shall be filed in the office of the Secretary of State, who upon being satisfied by due proof that the requirements aforesaid have been complied with, shall issue a certificate that such consent has been filed, and the Secretary of State shall cause such certificate to be published in one issue in a newspaper published in the county wherein the principal office of the dissolved corporation was situated. The Secretary of State shall ascertain the charge for publishing the certificate of dissolution as aforesaid, and collect the amount from the corporation*808 before the certificate of dissolution is issued; and upon the filing in the office of the Secretary of State of an affidavit of the manager or publisher of the said newspaper that said certificate has been published one time, in said newspaper, the corporation shall be dissolved.
Under the above provisions it is apparent that the petitioner was dissolved on September 3, 1929. It is equally clear that Benham Ice Cream Co. was not dissolved within the fiscal year ending September 30, 1929. While the so-called certificate of dissolution was issued to Gloria Ice Cream Co. on September 30, 1929, the affidavit of the publishers of the newspapers, as required by the above section, was not filed until October 3, 1929. Therefore, the Gloria Ice Cream Co. was not dissolved within the fiscal year ending September 30, 1929. Since the two affiliates are not before us for the succeeding fiscal year, no relief can be afforded them. The material part of section 40 of the General Corporation Law of Delaware provides:
All corporations, whether they expire by their own limitation, or are otherwise dissolved, shall nevertheless be continued for the term of three years from such expiration or*809 dissolution bodies corporate for the purpose of prosecuting and defending suits by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, and to divide their capital stock but not for the purpose of continuing the business for which said corporation shall have been established * * *.
When the petitioner was dissolved, it lost the right to continue the business for which it had been established. It retained its corporate life for the sole purpose of liquidation. It was not engaged in a business while liquidating. ; ; . In our opinion when the petitioner was dissolved on September 3, 1929, and thereby lost the right to *1189 transact its regular business, it surrendered its charter in reality then. For this reason the petitioner should be permitted to deduct organization expenses in the amount of $59,041.76. *810 ;. In reaching this conclusion we have not overlooked our decisions in , and . Neither of these decisions is in point for the reason in neither was the taxpayer corporation dissolved.
Judgment will be entered under Rule 50.
Footnotes
1. 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. -
(4) SAME - GAIN OF CORPORATION. - 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.
* * *
(d) Same - Gain of corporation. - If an exchange would be within the provisions of subsection (b)(4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then -
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
(2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed.
* * *
(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. Section 203(e): There is no provision of the existing law which corresponds to subdivision (e) of the bill, nor has the Treasury Department ever ruled officially on the type of case covered by that subdivision. The subdivision provides that if a corporation in connection with a reorganization transfers its assets to another corporation, a party to the reorganization, for stock and securities of the same corporation and cash, then no gain or loss to the transferor is recognized, if it distributes the cash to its stockholders. But if the selling corporation fails to distribute the cash to its stockholders then the gain or loss is to be recognized. In other words, if the corporation which sells its assets in connection with the reorganization acts merely as a conduit in passing the proceeds of the sale on to its stockholders,↩ no gain to the corporation is to be recognized, but if it retains all or any of the proceeds with the result that the transaction is in substance a real sale, then all or a part of the gain shall be recognized. [Emphasis supplied.]