*775 Corporation A and its sole stockholder agreed with corporation B to sell all of its assets to corporation C, a new corporation organized by B, in exchange for common stock of B. A distributed B's stock to petitioner, its stockholder. Held that the gain realized by petitioner is taxable, B not being a party to the reorganization.
*1178 This proceeding involves the redetermination of a deficiency of $139,649.66 in income tax for 1929. Two of the issues raised by the petition were settled by stipulation of the parties and will be reflected in the recomputation to be filed under Rule 50. The remaining issues are whether the petitioner received shares of common stock of the Underwood Elliott Fisher Co. in a tax-free reorganization and whether the gain realized from a subsequent sale of a portion of the stock is taxable as ordinary gain or as capital gain.
FINDINGS OF FACT.
The Neidich Process Co., a New Jersey corporation, hereinafter referred to as the New Jersey*776 corporation, was engaged in the business of manufacturing carbon papers and carbon ribbons. On December 1, 1928, its outstanding capital consisted of common stock and was held as follows:
| Shares | |
| Samuel A. Neidich | 3,305 |
| John W. Davis | 440 |
| Ira J. Davis | 37 |
| G. A. Lance | 30 |
| S. S. Garwood | 7 |
| Total | 3,819 |
The petitioner was president of the New Jersey corporation during and prior to 1928. On or about December 26, 1928, he and P. D. Wagoner, president of the Underwood Elliott Fisher Co., a Delaware corporation engaged in the manufacture of typewriters, adding machines, and similar articles, hereinafter referred to as Underwood, representing their respective corporations, entered into a verbal agreement for the acquisition by Underwood of the business and assets of *1179 the New Jersey corporation, subject to certain liabilities of the New Jersey corporation, in exchange for 21,005 shares of common stock of Underwood. They had no understanding on whether the business of the New Jersey corporation would be acquired by a purchase of its assets for stock or by an exchange of stock, nor on the details to carry out the transaction. During the course of their*777 negotiations no mention was made of the use of a corporation other than Underwood and the New Jersey corporation to complete the transaction. Their understanding was to be made the subject of a written agreement, which would include conditions necessary to carry out the terms of the oral understanding. The final terms were agreed to by petitioner and Wagoner on January 3, 1929. Wagoner had no authority to bind Underwood, his understanding with petitioner being subject to the approval of the board of directors of Underwood.
During the course of a discussion of the transaction with counsel for Underwood it developed that Underwood was not qualified to transact business in New Jersey and did not desire to use its name there, since it contemplated using the name "Underwood Elliott Fisher Co. of New Jersey" as a selling company in that state; that the Underwood Typewriter Co., a subsidiary of Underwood, was qualified to do business in New Jersey; that, with one exception, all of Underwood's subsidiaries were Delaware corporations; that it would be desirable to preserve the name of the New Jersey corporation; and that to carry out the deal by a direct exchange of Underwood stock for*778 stock or assets of the New Jersey corporation would involve risk of undisclosed liabilities of the New Jersey corporation and possible conflict with provisions of the Clayton Act. For these reasons, counsel for Underwood suggested the use of a new corporation to participate in the transaction and carry on the business of the New Jersey corporation, and Wagoner accepted the proposal.
The contemplated written agreement was entered into between the two corporations and petitioner as of January 3, 1929. It provided, among other things, (a) for the organization by Underwood, under the laws of Delaware or elsewhere, of a corporation to be known as the Neidich Process Co., hereinafter referred to as the Delaware corporation, or such other name as it might designate, all of whose outstanding stock was to be owned by Underwood; (b) for the sale by the New Jersey corporation of all of its assets, except its franchise, to the new corporation, in full payment for which Underwood agreed that it and the new corporation would cause to be delivered to the New Jersey corporation 21,005 shares of no par common stock of Underwood; (c) for the assumption by the new corporation of all the liabilities*779 of the New Jersey corporation as of *1180 December 31, 1928, with certain exceptions; and (d) that by the date the transaction was closed petitioner would be the owner in his own right of all of the outstanding stock of the New Jersey corporation except directors' qualifying shares. The agreement was subject to approval by the directors of Underwood and the New Jersey corporation.
On December 31, 1928, the books of the New Jersey corporation reflected that petitioner was indebted to it in the sum of $152,012.87. On the same day the account was credited with $188,113, representing the purchase price of 1,300 shares of the corporation's stock from the petitioner.
On January 5, 1929, the minority stockholders of the New Jersey corporation sold their stock to the petitioner. In payment for the stock the petitioner agreed to deliver to them not later than April 1, 1929, 5 1/2 shares of Underwood for each share of New Jersey corporation stock sold to him. At the same time the petitioner gave the minority stockholders due bills, payable on or before April 1, 1929, the amounts, less such pro rata amount as the petitioner might be required to pay under a guaranty given by him*780 in the contract of January 3, 1929, being as follows:
| John W. Davis | $25,043.78 |
| G. A. Lance | 1,707.53 |
| S. S. Garwood | 398.42 |
| Ira J. Davis | 2,105.95 |
At special meetings held on January 5, 1929, the stockholders and directors of the New Jersey corporation authorized the execution of the agreement of January 3, 1929. The contract was approved by the board of directors of Underwood on January 10, 1929.
On January 14, 1929, Underwood caused the Delaware corporation to be organized with an authorized capital stock of 25,000 shares of no par value. Cash subscriptions for 30 shares of the corporation's stock at $30 per share were made by Underwood or its representatives. On the same day the New Jersey corporation, in accordance with a provision of the agreement of January 3, 1929, changed its name to Burlington Research Co.
On January 15, 1929, the board of directors of the Delaware corporation accepted a written offer of Underwood to cause the transfer to the Delaware corporation of the assets of the New Jersey corporation, except its franchise, for $300 cash, the delivery to Underwood or upon its order of 4,190 shares of stock of the Delaware corporation, and*781 an assumption of certain liabilities of the New Jersey corporation. The officers and members of the board of directors of the Delaware corporation at that time were nominees and agents of Underwood.
*1181 On January 17, 1929, Underwood gave to the New Jersey corporation a due bill for 21,005 shares of its stock and on the same day the New Jersey corporation executed instruments necessary to transfer its assets to the Delaware corporation.
On January 17, 1929, the directors and officers of the Delaware corporation resigned, and the petitioner, P. D. Wagoner, and C. S. Duncan were elected directors. The petitioner was also elected president.
On February 28, 1929, Underwood made the following entry in its journal:
INVESTMENT IN NEIDICH PROCESS CO 27M $525125 00
COMMON STOCK ISSUED 72E $525125 00
TO RECORD ON BOOKS OF U E F CO THE ISSUANCE OF 21005 SHARES IN EXCHANGE FOR THE ASSETS OF THE NEIDICH PROCESS CO IN ACCORDANCE WITH THE RESOLUTION OF THE BOARD OF DIRECTORS OF JAN 10 1929
THE STATED VALUE OF THE STOCK IS 25 00 PER SHARE
The Delaware corporation made the following entry as of January 1, 1929:
Net Assets Acquired $455,405.03
Underwood Elliott Fisher*782 Co. Vendor $455,405.03
To reflect the acquisition from Underwood Elliott Fisher Co. Vendor of the property formerly owned by Neidich Process Company (a New Jersey Corp.) and the assumption of certain liabilities in connection therewith as set forth in the minutes of the board of directors, January 15, 1929. This property less $300.00 in cash, is the consideration received for 4,190 shares of the capital stock of the company.
* * *
On March 1, 1929, Underwood transmitted to the New Jersey corporation certificates for 21,005 shares of its stock. At a meeting held on March 6, 1929, the board of directors of the New Jersey corporation authorized distribution of the 21,005 shares to the petitioner. In accordance therewith all of the stock was distributed to the petitioner, who retained 18,177 shares and, pursuant to his contracts of January 5, 1929, transferred the following shares to the minority stockholders:
| Shares | |
| John W. Davis | 2,420 |
| Ira J. Davis | 204 |
| G. A. Lance | 165 |
| S. S. Garwood | 39 |
| Total | 2,828 |
The New Jersey corporation, subsequent to March 6, 1929, had no assets, transacted no business and permitted its charter to be forfeited *1182 *783 by nonpayment of the franchise tax levied by the State of New Jersey. The Delaware corporation continued to be a wholly owned subsidiary of Underwood until 1936.
Of the 18,177 shares of Underwood stock retained by the petitioner, he sold 3,000 shares in 1929 for $436,555 and reported a capital gain thereon of $368,395. He reported no gain on account of the receipt of the Underwood stock. In his determination of the deficiency the respondent treated the receipt by petitioner of 18,177 shares of Underwood stock as resulting in capital gain of $1,224,704.66, and that the sale of the 3,000 shares resulted in ordinary gain of $142,555.
OPINION.
DISNEY: The petitioner contends that he received the Underwood stock in a nontaxable reorganization, to which Underwood was a party. He argues that the provisions of the agreement of January 3, 1929, among Underwood, the New Jersey corporation, and himself are consistent with the verbal agreement had with Wagoner in December 1928; that, interpreting the written agreement in the light of the previous undertaking, there were only two corporate parties to the plan, namely, Underwood and the New Jersey corporation. The effect of petitioner's*784 argument is to ask us to ignore the part the Delaware corporation played in the transaction, and consider the plan as one in which there was nothing more than a transfer of assets of the New Jersey corporation directly to Underwood for stock of Underwood. The contention of the respondent is that the intention of the parties is evidenced by the terms of the January 3, 1929, agreement and that the transaction as finally agreed upon and carried out did not make Underwood a party to a reorganization.
It was stipulated that at the December 26, 1928, meeting, Wagoner and petitioner entered into a verbal agreement for the acquisition by Underwood of "the business and assets of the New Jersey corporation" in exchange for 21,005 shares of common stock of Underwood, subject, however, to the understanding that the "verbal agreement would be made the subject of a written contract." Wagoner, testifying from notes made by him at the time the verbal understanding was reached, testified that the agreement was for Underwood to acquire the business of the New Jersey corporation by an exchange of Underwood stock for assets or stock of the New Jersey corporation, as payment might be recommended by*785 counsel for Underwood. Upon being consulted a few days later by Wagoner, counsel for Underwood suggested that the transaction take the form set out in the agreement executed as of January 3, 1929, and the proposal was accepted by Wagoner and petitioner, as representatives of their respective corporations. While the finance committee of Underwood *1183 was aware of the negotiations being carried on with the petitioner, Wagoner's actions were at all times subject to the approval of the board of directors of Underwood.
The method originally agreed upon by the individuals for acquiring control of the business of the New Jersey corporation was abandoned in favor of one calling for the transfer of the property of the New Jersey corporation directly to a new corporation, to be organized and wholly owned by Underwood, in exchange for Underwood common stock, delivered directly by Underwood to the New Jersey corporation. The new plan was made the subject of a written contract, as contemplated by the agreement previously entered into between the individuals, and thereafter, pursuant to authority granted by the boards of directors of the corporations concerned, an agreement embodying*786 the terms of the final understanding was duly executed. This agreement was the only one authorized by Underwood and the New Jersey corporation and to it we must look for the intention of the parties concerned. "The plan of reorganization was the contract made and performed." ; affd., .
The written agreement is inconsistent with the oral understanding. The original understanding did not provide for ownership of assets of the New Jersey corporation by a new corporation, whereas the only plan to which the corporations concerned ever became a party provided in unambiguous terms for the transfer of the assets directly to a new corporation for stock of Underwood. The point in , cited by the petitioner, was whether it was proper to look through the form of certain documents to determine the actual fact respecting the payment of certain consideration. The fact here is that Underwood and the New Jersey corporation, by the only binding contract ever entered into between them on the subject, agreed to the transfer of the assets of the latter*787 to a new corporation for stock of the former.
The conduct of the New Jersey corporation and Underwood was in accordance with the terms of the January 3, 1929, agreement. Upon the organization of the Delaware corporation by Underwood, the New Jersey corporation transferred its assets to the Delaware corporation, for which Underwood received from the Delaware corporation $300 cash, which had been acquired from Underwood or its representatives for stock, and 4,190 shares of Delaware corporation stock. The Delaware corporation also assumed certain liabilities of the New Jersey corporation. As consideration for the transfer by the New Jersey corporation to the Delaware corporation, Underwood, in accordance with the January 3, 1929, contract, delivered to the New Jersey corporation, 21,005 shares of its common stock, *1184 which stock was subsequently distributed to petitioner and in part by him to other stockholders of the New Jersey corporation. Upon the completion of the transaction, petitioner held stock of Underwood, Underwood held all of the stock of the Delaware corporation, and the Delaware corporation owned all of the assets of the New Jersey corporation.
*788 Petitioner seeks to distinguish the case from ; ; ; and . We fail to observe any material distinguishing features. In the Groman case, the Glidden Co. contracted with stockholders of an Indiana corporation for the organization of an Ohio corporation to be owned by the Glidden Co., and for the acquisition by the Ohio Corporation of all of the stock of the Indiana corporation in exchange for cash and preferred stock of the Ohio and Glidden companies. In the Bashford case the stock and assets of three corporations were transferred to a new corporation, in exchange for which the stockholders of the three corporations received cash, common stock of the new corporation, and common and preferred stock of Atlas. In the Mellon case, part of the assets of a corporation was, in pursuance of a contract with the Bethlehem Steel Corporation, transferred directly to subsidiaries of Bethlehem, in exchange for common stock and bonds of Bethlehem. It was held that the Glidden and Atlas*789 companies and the Bethlehem Steel Corporation were not parties to reorganizations and that the securities the respective petitioners received in those corporations were subject to tax. In the Hedden case, in accordance with a contract with the Bethlehem Steel Corporation, substantially all of the assets of the Hedden Iron Construction Co. were transferred to two subsidiaries of Bethlehem in exchange for cash and bonds of Bethlehem, delivered directly by Bethlehem to the Hedden Co. Following the Groman, Bashford, and Mellon cases, and refusing to follow , upon the ground that it could not be distinguished from the Groman and Bashford cases, we held that Hedden's gain should be recognized.
The petitioner emphasizes the fact that the Delaware corporation was a wholly owned subsidiary of Underwood and that, as a nominee or transferee of Underwood to receive the assets of the New Jersey corporation, the Delaware corporation should be disregarded in the transaction. He claims that under the circumstances Underwood was the purchaser. Like facts were present in the Mellon and Hedden cases, *790 and , and in the Bashford case the Court concluded that such circumstances were not enough to take the case out of the rule. The Court said:
*1185 Any direct ownership by Atlas of Peerless, Black Diamond, and Union was transitory and without real substance; it was part of a plan which contemplated the immediate transfer of the stock or the assets or both of the three reorganized companies to the new Atlas subsidiary. Hence under the rule stated, the above distinctions are not of legal significance. The difference in the degree of stock control by the parent company of its subsidiary and the difference in the method or means by which that control was secured are not material. The participation of Atlas in the reorganization of its competitors into a new company which became a subsidiary did not make Atlas "a party to the reorganization." The continuity of interest required by the rule is lacking.
The respondent's action in taxing petitioner on the gain derived from the receipt of 18,177 shares of common stock of Underwood is sustained. Having so concluded, we find, in accordance with a stipulation*791 of the parties, that petitioner in 1929 realized a taxable capital gain of $1,224,704.66 from the receipt of the Underwood stock and an ordinary gain of $142,555 upon the subsequent sale in 1929 of 3,000 shares of the stock.
Decision will be entered under Rule 50.