1936 BTA LEXIS 786">*786 1. REVENUE ACT OF 1926, SEC. 203(h)(1). - Held, no corporate reorganization, within the intendment of that provision, occurred. Gregory v. Helvering,293 U.S. 465">293 U.S. 465, followed.
2. REVENUE ACT OF 1926, SEC. 201(a) and (b). - But, even in the absence of such a reorganization, the corporate acts of the several corporate entities involved were valid, and effect must be given thereto. Petitioners or their decedents received ordinary dividends, taxable as such, during 1925. 293 U.S. 465">Gregory v. Helvering, supra; Royal Marcher,32 B.T.A. 76">32 B.T.A. 76; Handbird Holding Corporation,32 B.T.A. 238">32 B.T.A. 238, followed.
33 B.T.A. 1046">*1046 These consolidated proceedings involve income tax deficiencies for the year 1925. By amended answers, filed before and at the hearing, respondent affirmatively pleads that the deficiencies be increased, so that the taxes in controversy are as follows:
| Proposed by deficiency | Proposed in affirmative | |
| notice | pleadings | |
| Estate of Katherine M. McCormick | $73,607.68 | $185,653.65 |
| Amelia Elizabeth White | 5,535.77 | 9,440.05 |
| Sarah F. C. Stewart | 5,086.06 | 11,288.92 |
| Alfred Cowles | 7,754.16 | 18,270.68 |
| Estate of Elinor M. Patterson | 78,792.26 | 185,653.65 |
1936 BTA LEXIS 786">*787 33 B.T.A. 1046">*1047 The sole error assigned by each petitioner involves the method of apportionment (between the stock of the Tribune Co. and the stock of the Dearborn & Madison Building Corporation) used by respondent in determining the basis, pursuant to section 204(a)(9) of the 1926 Revenue Act, in computing the gain realized by each petitioner from the sale of Dearborn & Madison Building Corporation stock, received by them pursuant to an alleged reorganization. At the time the deficiency notices were mailed, respondent had raised no question as to the validity of such alleged reorganization.
Respondent's amended answers and petitioners' replies thereto now raise the issue, in each proceeding, as to whether there was a reorganization within the intendment of section 203(h)(1) of the 1926 Revenue Act, under the facts hereinafter appearing.
The voluminous record consists of a stipulation of facts, oral testimony, and documentary evidence.
FINDINGS OF FACT.
Both Katherine M. McCormick, deceased, and Elinor M. Patterson, deceased, died subsequent to the tax year here in controversy.
On November 14, 1925, the duly appointed and acting trustees under the last will and testament1936 BTA LEXIS 786">*788 of Joseph Medill, deceased, owned and held of record, in their names as such trustees, 1,050 shares of stock of the Tribune Co., all of which shares had been acquired by such trustees prior to March 1, 1913, by bequest, devise, or inheritance. Katherine M. McCormick and Elinor M. Patterson, both now deceased, were at all times beneficiaries of the Joseph Medill Trust.
On November 14, 1925, Alfred Cowles and Sarah F. C. Stewart owned and held of record in his or her own name, respectively, 51 2/3 shares and 33 8/9 shares of the stock of the Tribune Co., such shares having been acquired by each of them prior to March 1, 1913, by bequest, devise, or inheritance.
On November 14, 1925, Amelia Elizabeth White owned and held of record in her name, 33 1/3 shares of stock of the Tribune Co. acquired by her by bequest, devise, or inheritance on March 1, 1916.
The Tribune Co. had always been a close corporation, its original stockholders having passed their shares on directly to or in trust for members of their respective families, and the stockholdings of such families, during the years pertinent hereto, had direct representation on the board of directors, to the extent of approximately1936 BTA LEXIS 786">*789 92 percent of the outstanding stock of that company. The remaining stockholders considered as their direct representative, Colonel Robert R. McCormick, who was president of the Tribune Co. He and Captain J. M. Patterson, who was chairman of the board of directors, were the coeditors of the Chicago Tribune, the newspaper published by the company.
33 B.T.A. 1046">*1048 Incorporated under a special act of the General Assembly of the State of Illinois on February 18, 1861, with perpetual succession, the Tribune Co. was chartered to engage, mainly, in the printing, publishing, and binding business in Chicago but could also manufacture paper and other articles used in such business. Its authorized, issued, and outstanding capital stock, at all times since incorporation, consisted of 2,000 shares of common stock of the par value of $100 per share. It was given the power "to purchase and hold so much real estate and lots, not exceeding two hundred (200) feet front on any street in the city of Chicago, and to erect suitable buildings thereon; the same to be used, mainly, in the printing, publishing, binding and manufacturing business as aforesaid", and also, to sell and convey any real estate1936 BTA LEXIS 786">*790 it might own. Further, the company was empowered to lease such real estate as might be necessary and to sublet or lease to others such space in its buildings as might not be needed in its business.
In or about 1880 and shortly subsequent thereto, the Tribune Co. acquired certain leaseholds, by direct lease and mesne assignments of leases, from the board of education of the city of Chicago. These leaseholds embraced several abutting lots forming a tract of land 100 feet on South Dearborn Street and 100 feet on Madison Street in the "Loop" or downtown business district of Chicago, and were leased for a term expiring May 8, 1985, at a rental and upon the terms and conditions set out in the various leases demising those estates and supplemental indentures modifying the same. The Tribune Co. owned the 17-story building (hereinafter sometimes referred to as the Tribune Building) erected on those premises, known as No. 7 South Dearborn Street, which for many years, until 1915, housed all of its activities in the publication of its newspaper.
The circulation of the Chicago Tribune increased rapidly - from approximately 400,000 on March 1, 1913, to 750,000 in 1924, as a result of which1936 BTA LEXIS 786">*791 the Tribune Co. was greatly hampered by its cramped quarters suitable for printing presses and other heavy machinery. It had originated a color section, as a part of its newspaper, which later became the rotogravure section. It became impossible to print this section in the Tribune Building and in 1915 the color presses were installed in a press plant built for that purpose on the North Side of Chicago. Shortly thereafter, additional black presses were required and because of insufficient space in the Tribune Building such presses were also installed in the building on the North Side. Heavy traffic in the "Loop" district and inadequate loading and truck parking space greatly hampered delivery facilities. In 1919 it was determined that the Tribune Co. had to move to larger quarters. 33 B.T.A. 1046">*1049 Accordingly, in that year it purchased property fronting 200 feet on North Michigan Avenue on the North Side of Chicago (hereinafter referred to as the North Side property) adjacent to its color press plant and began the construction of a six-story plant or manufacturing building 200 feet by 100 feet at the rear of that property. Upon completion of the building in 1920, the mechanical, 1936 BTA LEXIS 786">*792 circulation, and editorial departments of the Tribune Co.'s business were installed therein. Its advertising, auditing, and business departments and its Want Ad office remained in the Tribune Building.
During the construction of the plant on the North Side property, the Tribune Co. had under consideration the erection of a monumental office building, adjoining and in front of the plant, as a permanent home for the Chicago Tribune. Such plans crystallized in 1923 with the holding of an international architectural competition for which a substantial cash prize was awarded for the design selected. The construction of the building, of 36 stories and known as the Tribune Tower, was begun in 1924 and completed in March 1925, when the Tribune Co.'s business departments moved in. After March 28, 1925, only the small Want Ad and Public Service office remained in the old Tribune Building for the convenience of customers.
For many years prior to 1923, the Tribune Co.'s largest tenant in the Tribune Building was the Union Trust Co., a banking institution. Upon removal of the Tribune Co.'s manufacturing machinery from the basements of that building, the bank immediately requested that1936 BTA LEXIS 786">*793 its lessor construct safety deposit vaults in the basement and make certain other very expensive improvements in the property for the bank's use under a long-term lease. The Tribune Co. refused to accede to that request for several reasons, namely, it knew that within a very short time it would no longer need the building in the operation of its business; that it did not desire to engage in the real estate business of maintaining and operating an office building solely for subletting to numerous tenants; that its officers and directors were of the opinion that its continued ownership of the premises at No. 7 South Dearborn Street, after acquisition of the North Side property, was contrary to its charter powers; and, further, as one of the important considerations from the viewpoint of the welfare of the Tribune Co., that it should dispose of the so-called school board leases. For many years, whenever the Chicago Tribune opposed the city and state political party in power, the Tribune Co. was subjected to attacks and charges that the leaseholds had been obtained by fraud and collusion, despite the fact that their validity had been sustained by the Supreme Court of the State of Illinois. 1936 BTA LEXIS 786">*794 The leaseholds 33 B.T.A. 1046">*1050 had become a political football. In 1919 and 1920 threats of condemnation of the leaseholds for the use of the board of education were made and culminated in the filing of a suit for such purpose.
The negotiations between the Tribune Co. and the Union Trust Co. resulted in the execution of a contract dated December 15, 1923, wherein the Tribune Co. is designated as the vendor and the Union Trust Co. as the vendee. The relevant portions of the contract provided that the vendor agreed to sell to the vendee, as of May 1, 1926, the leasehold estates and building at No. 7 South Dearborn Street and to execute assignments and deeds of conveyance of title thereto upon the payment of the purchase price in the principal amount of $4,853,650, payable in the amount of $25,149.10, monthly, beginning May 1, 1926, and ending on May 1, 1982, together with interest at the rate of 6 percent per annum. The vendor reserved all rights under the leaseholds and to the building, until May 1, 1926. The reason therefor was that the Tribune Co. was to occupy a large portion of the office space in the building until the completion of its new Tower Building on the North Side. 1936 BTA LEXIS 786">*795 The vendee convenanted that from May 1, 1926, to May 1, 1982, the vendor should retain the use of the space then occupied by it in the northwest corner of the first floor and basement for a monthly rental of $5,527.23 and that the vendor might lease, at a stated rental, such office space as it might need. The contract and all rights thereunder were assignable by either the vendor or vendee under certain terms and conditions. Upon the execution of that contract the Union Trust Co. took over the management of the building and the officers and directors of the Tribune Co. were of the opinion that the leaseholds and building had been definitely disposed of, except for the holding of the bare legal title until the consideration was paid in the installments, the first of which was due on May 1, 1926. At that time a cash sale had not been consideed. When the terms of the contract became public, new attacks were made upon the Tribune Co. It was then charged with making large profits at the expense of the school children.
Subsequent to the purchase of the North Side property and prior to the execution of the contract of December 15, 1923, Colonel McCormick conceived the idea of transferring1936 BTA LEXIS 786">*796 the leaseholds and the building thereon to the stockholders of the Tribune Co., but the idea was indefinite and did not materialize because of the question of the maintenance and operation of the property. Subsequent to the execution of the contract of December 15, 1923, the idea of transferring the Tribune Co.'s interest therein to its stockholders was discussed at directors' meetings and with the stockholders. In January 1924 such idea took definite form and Colonel McCormick 33 B.T.A. 1046">*1051 sought legal advice as to the proper means, involving the minimum tax liability, of appropriating the contract to the sole benefit of the Tribune Co.'s stockholders. The attorneys advised against any action until after the passage of the then pending revenue bill (Act of 1924) for the reason that if the bill passed in its proposed form, they suggested a reorganization could be effected by adherence to the letter of the statute, which would avoid tax liability upon such transaction.
No further action was taken, as to the disposition of the contract of December 15, 1923, until June 1925 when a banker suggested to Colonel McCormick the possibility of discounting the contract for cash. The latter1936 BTA LEXIS 786">*797 thought it would be better for the Tribune Co.'s stockholders to receive cash rather than the contract providing for installment payments extending over 55 years. An intensive investigation was made by one of the Tribune Co.'s officers, with the result that in August 1925 the company received a cash offer from certain brokers for the company's interest in the properties subject to the contract of December 15, 1923. Thereupon Colonel McCormick insisted that, due to the Union Trust Co.'s interest in the premises, it should be given an opportunity to match such cash offer. Negotiations between the Tribune Co. and the Union Trust Co. resulted in an agreement that the latter would purchase the leaseholds and building for a cash consideration of $4,060,000. The Trust Co. further agreed that the transaction and/or transfers be carried out pursuant to the plan of the Tribune Co. whereby the proceeds of the sale should be distributed pro rata to its stockholders.
Thereupon the Tribune Co. resumed conferences with its attorneys as to ways and means of carrying out the transaction for the sole benefit of its stockholders without incurring income tax liability. On September 24, 1925, those1936 BTA LEXIS 786">*798 attorneys proposed such a plan which, briefly, was to incorporate a building company to which the Tribune Co. would transfer its leaseholds and buildings, subject to the contract of December 15, 1923, in exchange for that new company's stock. The Tribune Co. would then distribute such stock to its stockholders (without surrender of any of their Tribune Co. shares), who would thereupon sell all of such stock to the Union Trust Co. for the agreed cash consideration. A synopsis of the plan was mailed to each of the stockholders of the Tribune Co. on or about September 24, 1925. At or about the same time or shortly prior thereto, Colonel McCormick and Captain Patterson secured from several stockholders who traveled extensively, powers of attorney to act on their behalf on all matters pertaining to the proposed transaction.
33 B.T.A. 1046">*1052 The directors of the Union Trust Co. voted on September 8, 1925, to approve the purchase of the leaseholds and building from the Tribune Co. for cash. In subsequent meetings in October and November the president of that company informed its board of directors of the status of the negotiations with the Tribune Co. and the details of the transactions1936 BTA LEXIS 786">*799 involving the transfer of the title to the property from the Tribune Co. to the Union Trust Co. He also informed the directors as to the issuance and sale of bonds as a partial means of financing the purchase.
About October 15, 1925, the Union Trust Co.'s attorneys advised it that a purchase of the stock of the building company to be organized would be illegal and that it would be necessary for it to purchase the leaseholds and buildings direct. This necessitated a modification of the proposed plan by requiring that the building corporation to be organized should have two classes of stock, one class redeemable by conveyance of the leaseholds and buildings or payment of cash to holders of such stock.
On November 3, 1925, the Dearborn & Madison Building Corporation (hereinafter referred to as the Building Corporation) was organized under the laws of Illinois for the purpose, as stated in its certificate of incorporation, "to acquire, own, erect, lease, or operate only one building and the site therefor", namely, the leaseholds and building at No. 7 South Dearborn Street. The capital stock of the Building Corporation consisted of 40,600 shares of Class A and 10 shares of Class1936 BTA LEXIS 786">*800 B, both common stock of no par value having the same relative rights and interests except that the Class A stock could be retired by the corporation at any time upon a vote of a majority of the directors and at least two thirds of the stockholders, upon payment to the holders of Class A stock of the sum of $100 per share or by conveying to such stockholders all the corporation's title in the leaseholds and building described in its statement of incorporation. The sum of $1,000 cash was paid in for the 10 shares of Class B stock to comply with the Illinois statutes.
At a meeting of the board of directors of the Tribune Co. on October 19, 1925, there was discussed "the proposed plan of reorganization with respect to the properties of this corporation located at No. 7 South Dearborn Street" and it was resolved to call a special meeting of the stockholders for the purpose of submitting to their vote the question of the disposition of those premises and of "distributing the proceeds * * * among the stockholders of the Company." At the special meeting held on November 3, 1925, the stockholders, representing 2,000 shares in person or by proxy, gave their approval to the plan of reorganization1936 BTA LEXIS 786">*801 and to the transfer by the Tribune Co. of the leaseholds and building at their fair cash value of $4,060,000, 33 B.T.A. 1046">*1053 together with an assignment of the contract of December 15, 1923, to the Dearborn & Madison Building Corporation in consideration for 40,600 shares of the latter's Class A stock redeemable at $100 per share at any time, or by conveyance of title to the Tribune leaseholds and building. At the same meeting the stockholders further resolved that upon consummation of such conveyance and assignment, and receipt of the 40,600 shares of Class A stock of the Building Corporation, the president and secretary shall "deliver to each said stockholder of The Tribune Company, his, her or their pro-rata share of said building corporation stock as a dividend, which the directors shall declare to the stockholders of The Tribune Company of record on the date of said distribution, out of the last accumulated earnings of this corporation." The stockholders further resolved that the adopted plan of reorganization might be altered in whole or in part within the discretion of the board of directors, "provided said new or altered plan provides for the disposition of said leaseholds and1936 BTA LEXIS 786">*802 building for a consideration of not less value than $4,060,000 payable either in money, stock or other securities and further provides for the distribution of said consideration among the stockholders of The Tribune Company pro rata, according to their respective holdings of The Tribune Company stock."
Later on the same day, November 3, 1925, at a meeting of the board of directors of the Tribune Co., the above mentioned resolutions adopted at the stockholders' meeting were read and it was resolved that the planned reorganization be carried out, that deeds and other necessary instruments be executed to convey and assign the premises and the contract of December 15, 1923, to the Building Corporation for 40,600 shares of its Class A stock, which upon receipt "be reissued in the names of the stockholders of The Tribune Company, pro rata * * * as a dividend, which is hereby declared to the stockholders of The Tribune Company of record on the date of said distribution, out of the last accumulated earnings of this corporation." Further, Colonel McCormick reported that negotiations were pending on behalf of the stockholders of the Tribune Co. for the sale of the Building Corporation stock, 1936 BTA LEXIS 786">*803 at $100 per share, to be delivered to them pursuant to the reorganization plan. It was resolved, "That the Board of Directors of The Tribune Company hereby approve of each stockholder of The Tribune Company selling his or her Class A stock in the Dearborn and Madison Building Corporation, * * * to John Stone and W. A. Keplinger, both of Chicago, Illinois, as joint tenants and not as tenants in common, at a price of $100 per share, payable in cash, provided said sale is consummated within 60 days from and after the date hereof."
33 B.T.A. 1046">*1054 In accordance with such resolutions, the Tribune Co. by written instrument offered to convey and assign the leaseholds and building and the contract of December 15, 1923, to the Building Corporation for all of the latter's Class A stock. The Building Corporation's board of directors, at a meeting held on November 3, 1925, adopted resolutions accepting such offer
Under date of November 3, 1925, the Tribune Co. by warranty deed and assignment, transferred and conveyed the leaseholds and building located at No. 7 South Dearborn Street, and the contract of December 15, 1923, to the Building Corporation. At the same time those two corporations1936 BTA LEXIS 786">*804 executed a lease demising to the Tribune Co. the space which it was then occupying in the building, upon the terms and conditions therein set forth. Due notice of such conveyance and assignment was given by the Tribune Co. to the Chicago Board of Education and also to the Union Trust Co.
On November 3, 1925, the Building Corporation recorded the purchase on its books by debiting the leaseholds and building account with $4,060,000 and crediting a like amount to capital stock account Class A.
On November 14, 1925, the Building Corporation issued to the Tribune Co., its stock certificate No. 51, representing 40,600 shares of its Class A stock. The issuance of such stock for the conveyances above mentioned at a value of $4,060,000, or $100 per share, was reported to the Illinois Secretary of State as required by law. Such certificate No. 51 was the first certificate issued representing the Class A stock and certificates Nos. 1 to 50, inclusive, were never issued.
Upon receipt of such stock certificate No. 51, and pursuant to the above-mentioned resolutions and the declaration of a dividend of such stock, the Tribune Co., on November 14, 1925, surrendered that stock certificate1936 BTA LEXIS 786">*805 to the Building Corporation with directions to reissue and deliver such shares to the stockholders of the Tribune Co., pro rata. On November 14, 1925, the Building Corporation reissued certificates for all of its Class A stock, as per instructions, and delivered the same to the persons entitled thereto or their attorneys in fact, including, among others, the follows:
| Stockholders | Certificate number | Number of shares |
| Trustees of the estate of Joseph Medill | 78 | 21,315 |
| Amelia Elizabeth White | 60 | 676 2/3 |
| Sarah F. C. Stewart | 72 | 687 17/18 |
| Alfred Cowles | 69 | 1,048 5/6 |
Due to the fact that the Union Trust Co. could not legally purchase the stock of the Building Corporation and, also, the many 33 B.T.A. 1046">*1055 difficulties which would have been encountered in transferring legal title to the premises by the numerous stockholders of the Building Corporation, following redemption of their Class A certificates, the general plan of transferring title to the Union Trust Co., or its nominee, had been further modified. The syndicate of Stone & Keplinger, composed of the Tribune Co.'s attorneys, was organized on November 16, 1925, with a paid-in capital of $1,000. It borrowed1936 BTA LEXIS 786">*806 $4,060,000 on notes from the Union Trust Co. and, on the same day, November 16, 1925, purchased from the Tribune Co. shareholders, the 40,600 outstanding shares of the Building Corporation's Class A stock, for which it paid the sum of $4,060,000. The transaction was effected through the Chicago Title & Trust Co., escrow agent, which, after delivering the stock to and receiving the purchase price from Stone & Keplinger, mailed its checks to the stockholders of the Tribune Co. for their pro rata shares of such sale price of the Class A stock. New certificates for all of the Class A shares were issued to the syndicate on November 16, 1925. On or about November 30, 1925, in accordance with the prescribed plan and pursuant to the resolutions of its stockholders and directors, theBuilding Corporation redeemed and retired all of its Class A stock by conveying to Stone & Keplinger the leaseholds and building at No. 7 South Dearborn Street and the contract of December 15, 1923. At or about the same date, Stone & Keplinger conveyed such leaseholds, building, and contract of December 15, 1923, to the Madison & Dearborn Safe Deposit Co. (the subsidiary and nominee of the Union Trust Co.) for1936 BTA LEXIS 786">*807 the sum of $4,060,000, which which they paid their notes due the Union Trust Co. This transaction constituted the only business conducted by either the Building Corporation or the syndicate, and all of the expenses incurred therein were borne by the Tribune Co. On the same date, November 30, 1925, the Tribune Co., the Union Trust Co. and the Building Corporation executed a written agreement by which they mutually covenanted that the contract of December 15, 1923, be canceled and terminated and the parties thereto and their assignees be released from all claims thereunder.
At or about the time of the retirement and cancellation of its Class A stock, the Building Corporation, by formal action, decreased its capital stock to 10 shares, the then outstanding Class B stock held by attorneys for the Tribune Co. On December 30, 1925, the Building Corporation's stockholders (who, also, as directors had theretofore voted to same effect) voted to dissolve the corporation and to publish the required notice. On the same date the corporation was liquidated, its 10 shares of Class B stock retired, and its books closed. On May 22, 1926, the Illinois Secretary of State issued a certificate1936 BTA LEXIS 786">*808 33 B.T.A. 1046">*1056 that the Building Corporation had legally dissolved. The Building Corporation filed a Federal income tax return for the calendar year 1925.
During the period from March 1,1913, to November 16, 1925, the Tribune Co.'s assets, both tangible and intangible, increased greatly in value. The leaseholds and building at No. 7 South Dearborn Street were worth no more than their actual physical value in the hands of the Tribune Co. or of the Building Corporation after the transfer to the latter. The Tribune Co.'s books disclose that as of November 14, 1925, its accumulated earnings, earned subsequent to February 28, 1913, were in excess of $4,060,000 aside from any gains that company may have realized on the exchange with the Building Corporation. Its books of account, also, disclose that in 1925 its surplus account was increased by the sum of $2,486,857.15, as representing the excess of the par value of the Building Corporation stock received, over the book value of the leaseholds and building conveyed to the Building Corporation and, further, that its surplus account was decreased by the sum of $4,060,000 as a dividend paid by distribution to its stockholders of the shares1936 BTA LEXIS 786">*809 of stock of the Building Corporation "according to plan of reorganization, under sec. 203(c) of Revenue Acts 1924 and 1926."
On its income tax return for the year 1925, the Tribune Co. reported no taxable profit on the transaction involving the transfer of the leaseholds and building of the Building Corporation in exchange for the latter's Class A stock.
By various letters, Colonel McCormick advised the stockholders of the Tribune Co. as to the nature of the transaction "handled under advice of our attorneys and accountants so that the Tribune stockholders holders would not be subjected to undue Federal income taxes on the amounts received"; as to the number of shares of the Building Corporation's stock received and sold by each of them; and that the Tribune Co.'s attorneys would advise them as to how their individual profit on the transaction should be reported on their tax returns for the year 1925.
From the above described sale on November 16, 1925, of their Building Corporation Class A shares, the following persons received the following sums:
| Trustees of the estate of Joseph Medill | $2,131,500.00 |
| Amelia Elizabeth White | 67,666.67Sarah F. C. Stewart |
| 68,794.44 | |
| Alfred Cowles | 104,883.33 |
1936 BTA LEXIS 786">*810 The trustees of the estate of Joseph Medill distributed one half of such $2,131,500 so received by them, or the sum of $1,065,750, to each of the beneficiaries of the trust, namely, Katherine M. McCormick and Elinor M. Patterson, both now deceased.
33 B.T.A. 1046">*1057 In filing their individual income tax returns for the year 1925, petitioners and petitioners' decedents reported as taxable capital net gain from the sale of the Class A stock, their pro rata share of the difference between the March 1, 1913, value of the leaseholds and building (as found by certain appraisals) and the selling price of all such stock, $4,060,000. The respondent, agreeing at that time that there had been a nontaxable reorganization (which would result in no tax liability accruing upon any phase of the transaction until the sale of the Class A stock for cash), determined that the basis for computing the capital net gain must be determined pursuant to section 204(a)(9) of the Revenue Act of 1926 and article 1599(2), Regulations 69. This required apportionment of the basis applicable to the Tribune stock, between the Tribune and the Building Corporation Class A stock. The amount of capital net gain as1936 BTA LEXIS 786">*811 reported by petitioners and as determined by respondent is as follows:
| By petitioner | By respondent | |
| Katherine M. McCormick | $219,970.80 | $850,308,85 |
| Elinor M. Patterson | 219,970.80 | 850,308.85 |
| Amelia Elizabeth White | 13,949.49 | 58,180.48 |
| Sarah F. C. Stewart | 14,199.17 | 54,887.66 |
| Alfred Cowles | 21,647.92 | 83,681.19 |
OPINION.
LEECH: The respondent's method of apportionment in computing the original deficiency was to divide the basis, applicable to the Tribune stock, between the old stock (Tribune) and the new stock (Building Corporation) in proportion to their respective values at the time the new shares were distributed, November 14, 1925. Petitioners assign error in the respondent's application of the method prescribed in article 1599(2) of Regulations 69. They assert there, since the new (Class A) stock represented solely the leaseholds and building, the only fair apportionment, for a basis for the Class A stock, is to apportion the basis of the Tribune stock between the value of those premises at No. 7 South Dearborn Street and the remainder of the Tribune Co.'s assets as of March 1, 1913.
The respondent now affirmatively pleads that the transaction1936 BTA LEXIS 786">*812 involved did not effect a nontaxable reorganization and that the distributions made on November 14, 1925, were in the nature of ordinary dividends paid by the Tribune Co. to its stockholders. Respondent, therefore, seeks a redetermination sustaining the increased deficiencies now proposed on that basis.
33 B.T.A. 1046">*1058 The first question presented is whether a nontaxable reorganization was consummated, within the intendment of the pertinent provisions of the Revenue Act of 1926, set out in the margin. 2
1936 BTA LEXIS 786">*813 Briefly, the detailed facts show that for many years the Tribune Co., a close corporation, operated its principal business of publishing the Chicago Tribune newspaper, in the 17-story building it had erected at No. 7 South Dearborn Street on land demised under long-term school board leases. Upon outgrowing those quarters, it purchased land on the North Side and erected a new plant in 1920. In 1923, with the adoption of plans to build, at the same location, an office building as its permanent home, the Tribune Co. knew that within a short time it would have to dispose of the premises at No. 7 South Dearborn Street. The disposition of that property was not only relevant but necessary to the conduct of its business for three reasons, namely, (1) it had no further use for the building in the conduct of its newspaper business; (2) its charter limited its business activities and the amount of real estate it could own or hold; and (3) it desired to end the attacks made against it by the local and state political parties, due to its ownership of such leaseholds.
On December 15, 1923, the Tribune Co. entered into a contract to sell the premises to the Union Trust Co. as of May 1, 1926, for1936 BTA LEXIS 786">*814 a total consideration of $4,853,650, to be paid over a term of about 55 years. In January 1924, the Tribune Co. sought legal advice as to how its 33 B.T.A. 1046">*1059 interests under such contract could be transferred for the sole benefit of its stockholders, without incurring corporate income tax liability, and with a minimum of tax liability upon the receipt by such stockholders of the proceeds from that contract. Upon advice of counsel the plan of making such transfer was held in adeyance, pending the passage of the then proposed revenue bill (Act of 1924) containing provisions as to nontaxable corporate reorganizations. However, no definite plan to accomplish that purpose was evolved until August or September 1925, at or about the time the Tribune Co. entered into a contract to sell the premises to the Union Trust Co. for $4,060,000 cash, the latter agreeing to take title pursuant to the contemplated plan of reorganization. The proposed plan of reorganization did not pertain to the disposition of the premises at No. 7 South Dearborn Street, except as a means by which its transfer to the Union Trust Co. could pass through the Tribune Co.'s stockholders for the sole purpose of placing1936 BTA LEXIS 786">*815 them in a position to receive the proceeds of the sale theretofore contracted by those two companies.
Pursuant to the preconceived plan (later modified in certain aspects as necessitated by circumstances and in order to accomplish a legal transfer of title to the Union Trust Co. or its nominee) the Tribune Co., at its expense, caused the Building Corporation to be organized, to which it transferred title to the Tribune Building and leaseholds, subject to the contract of sale, in exchange for that corporation's 40,600 shares of Class A stock redeemable at $100 per share in cash or by transfer of title to the Tribune Building and leaseholds. Immediately the Tribune Co. passed such shares on to its stockholders, pro rata, as a dividend theretofore declared out of its last accumulated earnings. In further pursuance of the plan, the stockholders then sold such Class A stock to a syndicate organized and financed by the Tribune Co., for $4,060,000 cash, borrowed by the syndicate from the Union Trust Co., which syndicate, upon receipt of the Tribune Building and leaseholds, in liquidation of their Building Corporation stock, transferred them to the nominee of the Union Trust Co., for1936 BTA LEXIS 786">*816 the same amount, with which the loan from that company was paid, and the Building Corporation was then dissolved.
No reorganization of any portion of the Tribune Co.'s business or properties for the purpose of actually operating them as the regular business of the building Corporation was intended. Instead, that corporation was organized for the sole purpose of acting as a corporate conduit through which title to the premises could be passed pursuant to the preconceived plan designed to meet the technical requirements of the provisions of the revenue acts defining nontaxable reorganizations and to effect a distribution of the proceeds from the sale (already agreed upon as $4,060,000) to the stockholders of 33 B.T.A. 1046">*1060 the Tribune Co. The Building Corporation was brought into being for no other purpose and, as was intended from its creation, it performed no other function, after fulfilling which, it was immediately put to death.
For all practical purposes, these facts parallel those in . In that case section 112(g) of the Revenue Act of 1928 was controlling, which is substantially similar to section 203(c) of the Revenue1936 BTA LEXIS 786">*817 Act of 1926, presently applicable. The Supreme Court there said:
When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made "in pursuance of a plan of reorganization" [§ 112(g)] of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose - a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the1936 BTA LEXIS 786">*818 beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.
Upon authority of , we hold that the transactions here in controversy did not effect a reorganization within the intent of section 203(h)(1), supra. Cf. ; .
So, neither the Tribune Co. nor its stockholders were parties to a corporate reorganization.
The transfer of the South Dearborn Street premises by the Tribune Co. to the Building Corporation, in exchange for all the latter's Class A stock, resulted in a realized gain to the Tribune Co. Revenue Act of 1926, sec. 202. That gain was not "recognized" and thus was not taxable to the Tribune Co. under section 203(b)(4) of the Revenue Act of 1926. 3 But the Tribune Co. is not a petitioner here. The petitioners are shareholders or represent the interests of shareholders of the Tribune Co. That company declared a dividend out of its last accumulated earnings. Aside from the gain it realized on the 33 B.T.A. 1046">*1061 exchange with the Building Corporation, 1936 BTA LEXIS 786">*819 the Tribune Co. then had earned surplus in excess of $4,060,000, earned since February 28, 1913. 4
We conclude that each petitioner or petitioner's decedent, herein, received in November 1925 an ordinary dividend, under section 201(a) and (b) of the 1926 Act, 5 taxable as such upon a basis of $100 for each share of Class A stock so received. Their subsequent sale of such Class A stock, during 1925, for $100 per share resulted in neither gain nor loss.
1936 BTA LEXIS 786">*820 This determination obviates the necessity of finding all of the facts relevant to and deciding the issue presented by petitioners' assignment of error.
Reviewed by the Board.
Decision will be entered pursuant to Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Amelia Elizabeth White; Sarah F. C. Stewart; Alfred Cowles; Joseph Medill Patterson, Executor of the Estate of Elinor M. Patterson, deceased. ↩
2. Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * *
(b) (3) 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.
* * *
(c) If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.
* * *
(h) As used in this section and sections 201 and 204 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least 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.
(i) As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩
3. Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩
4. The tax result here would apparently be the same had the earned surplus of the Tribune Co. then been less than $4,060,000. See . ↩
5. Sec. 201. (a) The term "dividend" when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
(b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. ↩