*1149 The petitioner entered into a contract for the sale of substantially all its tangible and intangible assets for a stated consideration in cash. At the same time it was a party to a second agreement in which it agreed to accept bonds and stock of the purchaser from a third party and to assign to such third corporation its right to receive cash from the purchaser in the amount of the par value of such securities. In accepting such securities the petitioner agreed to sell the entire amount thereof to the third corporation at stated intervals and in fixed amounts for cash. Held, that the petitioner sold its assets and is taxable on the gain resulting therefrom in the amount determined by the respondent.
*322 The respondent has determined a deficiency in income tax for the year 1928 in the amount of $63,424.58, which is based on his holding that on a certain date within the taxable year the petitioner, by sale of its assets, realized profit in the amount of $525,538.12. The petitioner contends that the transaction in which it disposed of substantially*1150 all its tangible and intangible assets was not a sale but in fact and in law a reorganization under the provisions of section 112 of the Revenue Act of 1928, and that its immediate distribution to its stockholders of the entire amount received brings it clearly within (d)(1) of such section.
FINDINGS OF FACT.
The petitioner is a Kentucky corporation, with its principal office at Newport, Kentucky. At all times material here its entire capital stock was owned by its president, Mrs. R. W. Nelson, who resides at Newport. It was engaged in the distribution of electric current, water and artificial gas to consumers in and about Georgetown.
The Lexington Utilities Co., a Kentucky corporation, hereinafter called Utilities, has its principal place of business at Lexington, where it is engaged in distributing electric light and power to consumers in Lexington and surrounding territory. At the date of the transaction here in question, all its common capital stock was owned by the Kentucky Securities Corporation, of which all the common stock was owned by the International Utilities Corporation, hereinafter called Corporation, which was incorporated under the laws of Maryland.
*1151 On May 9, 1928, as a result of negotiations prior thereto, petitioner and Utilities entered into an agreement which, so far as material here, is as follows:
THIS AGREEMENT, made and entered into this the 9th day of May, 1928, by and between GEORGETOWN WATER, GAS AND ELECTRIC COMPANY, a corporation of the State of Kentucky (hereinafter called "SELLER") and LEXINGTON UTILITIES COMPANY, a corporation of the State of Kentucky, (hereinafter called "PURCHASER")
WITNESSETH:
WHEREAS, Seller has a franchise granted by the City of Georgetown, Kentucky, giving to Seller the right to construct, maintain and operate an electric light and power plant, a gas plant and a water plant in said City of Georgetown for a term beginning July 1, 1926, and ending July 1, 1945; and
WHEREAS, Seller is the owner of the premises and property used by it pursuant to such franchise, which said premises and property are hereafter briefly described; and
*323 WHEREAS, Purchaser desires to purchase from Seller all of its property of every name, nature and description, except cash on hand and in bank and accounts and bills receivable,
NOW, THEREFORE, in consideration of the sum of One ($1.00) Dollar*1152 paid by Purchaser to Seller and of the mutualities of this agreement, the parties hereto covenant and agree to and with each other in the manner following:
1. Seller agrees to sell to Purchaser all of its property, real, personal and mixed, of every name, nature and description and wheresoever situate, included the franchise above referred to, and all other franchises and permits and its good will, except cash on hand or in bank and bills and accounts receivable, said property and premises being the following:
* * *
2. Purchaser agrees to pay to Seller for the foregoing the sum of Seven Hundred and Fifty Thousand ($750,000) Dollars in cash, payable at the date of settlement, upon the deliveries, hereinafter provided for.
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6. Seller agrees that if this contract is performed according to the terms thereof, it will not engage in the business in which it is now engaged, either in the City of Georgetown or at any other place, and that it will within a reasonable time dissolve in due form of law and distribute its assets, and in the meantime Seller agrees that if Purchaser performs its contract and acquires the said premises and property, Purchaser may, pending the dissolution*1153 of Seller, do business in the City of Georgetown under the name of Georgetown Water, Gas and Electric Company, or any similar name that Purchaser may desire to use, without let or hindrance, from Seller.
On May 9, 1928, petitioner, Mary W. Nelson, Corporation and Utilities entered into an agreement which so far as material here is as follows:
THIS AGREEMENT, made and entered into this the 9th day of May, 1928, by and between GEORGETOWN WATER, GAS AND ELECTRIC COMPANY, a Kentucky corporation (hereinafter called "Company"); MARY W. NELSON, of Newport, Kentucky, (hereinafter called "Nelson"); INTERNATIONAL UTILITIES CORPORATION, a corporation of the State of Maryland, (hereinafter called "Corporation") and LEXINGTON UTILITIES COMPANY, a corporation of the State of Kentucky, (hereinafter called "Utilities").
WITNESSETH:
WHEREAS, Company and Utilities have entered into a contract, bearing even date herewith, providing for the sale by Company to Utilities of certain premises and property of Company, and for the payment by Utilities to Company in consideration therefor of the sum of Seven Hundred and Fifty Thousand ($750,000) Dollars; and
WHEREAS, Nelson owns or controls all of*1154 the capital stock of Company; and
WHEREAS, Corporation controls through stock ownership the business and management of Utilities; and
WHEREAS, Corporation has caused Utilities to make with Company the contract above referred to in consideration of and in reliance upon the agreements of Company and Nelson, hereinafter contained; and
WHEREAS, Nelson has caused Company to make said contract in consideration of and in relying upon the covenants and agreements of Corporation and Utilities, hereinafter contained,
*324 NOW, THEREFORE, THIS AGREEMENT WITNESSETH: That in consideration of the premises and of the mutual promises herein contained and hereby made, the parties above named have agreed, and do hereby agree to and with each other in the manner following:
1. Company agrees that, if and when the contract between it and Utilities is performed, it will accept from Corporation One Hundred and Fifty Thousand ($150,000) Dollars par value of the 5% First and Refunding Mortgage Gold Bonds, 1952 Series, (hereinafter called Bonds) and Two Hundred and Fifty Thousand ($250,000) Dollars par value of the 6 1/2% Cumulative Preferred stock (hereinafter called Stock) of Utilities, *1155 and will, upon receipt of such Bonds and Certificates for such stock, assign to Corporation Company's right to receive Four Hundred Thousand ($400,000) Dollars of the purchase price otherwise payable to it by Utilities under said contract above referred to. Said Bonds shall be delivered with the Coupon due August 1, 1928, attached and Company will refund to Corporation coupon interest to June 20th, 1928, but all subsequently maturing coupons shall be attached thereto. When and as dividends are paid upon said Stock to Company, Company will repay to Corporation such proportion of such dividends accruing up to June 20th, 1928.
2. Corporation agrees to purchase said Bonds and said Certificates of Stock, or subsequent transfers thereof, from Company or from Nelson, in the event of the transfer thereof by Company to Nelson, in the installments hereinafter set forth and at the price of the par value thereof plus accrued interest on the Bonds and accrued dividends on the Stock to the date of the several purchases thereof. The several dates upon which such purchases are to be made and the par value of the Bonds and Stock to be purchased on each of said dates are as follows, provided*1156 that if any one or more of said dates falls upon a legal holiday then the date upon which Corporation shall purchase shall be the next succeeding date which is not a legal holiday.
| Date | Par Value of Bonds | Par Value of Stock |
| May 20, 1930 | $10,000 | $15,000 |
| May 20, 1931 | 10,000 | 15,000 |
| May 20, 1932 | 10,000 | 15,000 |
| May 20, 1933 | 10,000 | 15,000 |
| May 20, 1934 | 10,000 | 15,000 |
| May 20, 1935 | 10,000 | 15,000 |
| May 20, 1936 | 10,000 | 15,000 |
| May 20, 1937 | 10,000 | 15,000 |
| May 20, 1938 | 10,000 | 15,000 |
| May 20, 1939 | $10,000 | $15,000 |
| May 20, 1939 | $10,000 | $15,000 |
| May 20, 1941 | 10,000 | 15,000 |
| May 20, 1942 | 10,000 | 15,000 |
| May 20, 1943 | 10,000 | 15,000 |
| May 20, 1944 | 10,000 | 15,000 |
| $150,000 | $250,000 |
Corporation, however, shall have the right to purchase all or any part of said Bonds and said Stock at any time, or from time to time, in advance of the dates hereinbefore set forth, provided that each purchase shall be of Bonds and Stock in the proportion of $1,000 par value of Bonds to $1,500 par value of Stock, except that the proportion may vary if the last purchase is a purchase of all of the remaining Bonds and Stock in the hands of Company or Nelson. In such event, *1157 Corporation shall pay, in lieu of the prices above set forth, the respective call price of the Bonds and of the Stock in force at the time the particular purchase is made. On each installment date Company, or Nelson, shall lodge the Bonds and Stock to be purchased on such date by Corporation at any bank or trust company in the City of Lexington, Ky., giving to Corporation five days written notice of the particular bank or trust company where the same are so lodged and such action by Company, or Nelson, shall be a sufficient tender of the Bonds and Stock. Corporation hereby agrees to make *325 payment of the amount due by it on such date at the place where such Stock and such Bonds are so lodged, and upon such payment at such place of such amount by Corporation to or for the account of Company, or Nelson, Corporation shall be entitled to receive delivery of the Bonds and Stock then purchased by it.
3. In the event that Corporation fails to purchase on any installment date the Bonds and Stock required to be purchased by it on such date, then Corporation shall be forthwith obligated to purchase all of the Bonds and Stock not theretofore purchased by it, anything in this agreement*1158 to the contrary notwithstanding, and Corporation shall immediately purchase from Company or Nelson, all of said Bonds or Stock, not theretofore purchased by it, and pay for same at the prices first above provided for. In the event that Corporation fails to make such purchase Company, or Nelson, shall have the right to sell all of the said Bonds and all of the said Stock at public sale in the City of Lexington, at any place selected by Company, or Nelson, and shall give five days notice of its, or her, intention to sell the same and of the time and place where the said sale is to be made. Such Bonds and such Stock may be sold at such time and place to the highest bidder and Company and Nelson shall have the right to bid at such sale and to purchase said Bonds and such Stock. Corporation agrees to pay to Company, or Nelson, on demand, the difference between the purchased price realized at such sale, after deducting therefrom the necessary costs and expenses of the sale, and in the event that Corporation fails to make immediate payment of the amount so due to Company, or Nelson, then Utilities shall, and hereby it covenants and agrees to forthwith, pay the same to Company, or Nelson, *1159 as though such amount had been originally due by Utilities to it or to her.
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5. Nelson agrees that she will cause Company to take such corporate action as may be necessary to have the agreement, bearing even date herewith, between Company and Utilities approved by Company and its stockholders, and thereafter performed according to the terms thereof. Nelson further agrees that if and when said contract is performed, and so long as this present contract is being performed by Corporation and/or Utilities, she will not either individually or as a member of any firm or co-partnership, or as officer, director or stockholder of any corporation, engage in the electric light power, gas or ice business in the City of Georgetown and within a radius of fifty (50) miles of the City of Georgetown for and during a period of fifteen (15) years from the 20th day of May, 1928. The performance of this covenant may be specifically enforced by Utilities.
The material terms and conditions of the two agreements were duly accomplished. On the date thereof the petitioner received $300,000 cash, $150,000 par value of the bonds and $250,000 par value of the cumulative preferred stock of Utilities*1160 and transferred its assets as specified as of noon on June 28, 1928.
OPINION.
LANSDON: Upon facts that are not in dispute the petitioner contends that as a matter of law the disposition of its assets was a reorganization under the provisions of section 112 of the Revenue Act of *326 1928 1 and was a transaction in which no gain should be recognized. The respondent has determined that the transaction was a sale and that profit realized should be computed under section 113(b) of the same act. Petitioner raises no question as to the amount of the profit if the transaction was a sale, and through its counsel at the hearing stated that the retained accounts receivable amounted to about $1,200, and that the cash in bank consisted of an overdraft for $1,200.
*1161 Some evidence was introduced by deposition and oral testimony for the purpose of showing the intention of the parties. In a controversy of this nature what was actually done is much more important than post facto testimony to show intention not evidenced by the terms of the governing agreements. ; . In our opinion the answer to the question here must be determined by study of the two agreements through which the transaction was effected.
It is obvious that at the date thereof none of the parties in interest regarded the transaction as a reorganization. The first agreement is a plain contract to sell for a cash consideration of $750,000 in which the petitioner and Utilities are several times designated as seller and purchaser, respectively. It is in no sense an option as argued by petitioner. It is not in any way conditioned upon the execution or accomplishment of the second agreement and could have been completed in all respects in the absence thereof. The second agreement merely sets up a method through which a part of the cash payment provided in the sales contract could*1162 be postponed to suit the convenience of the purchasers. In effect it provided that out of the $750,000 due the petitioner under the sale contract, $400,000 should be advanced to Corporation for stock and bonds which petitioner was obligated to resell at dates and in amounts carefully specified. Even in default of Utilities to perform its obligation to buy, petitioner *327 could take no title to the stock except through proceedings commonly employed to reduce collateral to possession. In our opinion the disposal of the petitioner's assets to Utilities was a sale for $750,000; the second agreement was no more than a supplementary contract in which petitioner agreed to receive a part of the purchase money in deferred installments. Having reached this conclusion from careful consideration of the facts of record, it is not necessary to discuss petitioner's allegation and argument that the transaction was a reorganization. The tax on the gain resulting from the sale should be computed under the provisions of section 113 of the Revenue Act of 1928.
Reviewed by the Board.
Decision will be entered for the respondent.
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.
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(b) (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.
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(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
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