*123 Decisions will be entered under Rule 50.
Truax-Traer acquired 80.19 per cent of the only outstanding class of stock of Binkley for a part of its own voting stock and also acquired the remainder of the stock of Binkley and the stock of Pyramid, a subsidiary of Binkley, other than that owned by Binkley, for cash in a single transaction. Held, that the transaction did not constitute a nontaxable exchange under section 12 (b) (3), 1939 Code, to the extent that stock was exchanged for stock, since it did not qualify as a "reorganization" within the meaning of section 112 (g) (1) (B) which requires that such acquisition be solely for stock.
*793 The respondent determined deficiencies in the Federal income taxes of petitioners for the taxable year 1950 as follows:
| Hubert E. and Helen B. Howard | $ 145,732.93 |
| John A. Howard | 1,119.28 |
| William A. Ruschke and Edna M. Ruschke | 120.28 |
| George A. Merchant and Maude A. Merchant | 9,084.46 |
| Gregory S. Devine and Ursula B. Devine | 484.44 |
| Rantz E. Snoberger and Elizabeth Snoberger | 20,340.25 |
| Clyde W. Woosley and Lois Jane Woosley | 683.24 |
| Estate of E. J. Coffey, Dec'd, et al., and Blanche B. | |
| Coffey | 3,026.94 |
The single issue presented for our consideration is whether the acquisition by Truax-Traer Coal Company in 1950 of the stock of Binkley Coal Company and Pyramid Coal Corporation, a subsidiary of Binkley, from their stockholders constituted a nontaxable exchange pursuant to a plan of reorganization within the purview of sections 112 (b) (3) and 112 (g) (1) (B) of the Internal Revenue Code.
FINDINGS OF FACT.
All of the pertinent facts have been stipulated and are incorporated herein by reference.
Hubert E. and Helen B. Howard, William A. and Edna M. Ruschke, Gregory S. and Ursula B. Devine, Rantz E. and Elizabeth Snoberger are all residents *125 of Chicago, Illinois, and for the calendar year 1950 filed their respective joint Federal income tax returns with the then collector of internal revenue for the first Illinois district. E. J. Coffey, now deceased, and Blanche B. Coffey were husband and wife, and in 1950 resided in East St. Louis, Illinois, filing a joint Federal income tax return for that year with the then collector of internal revenue for the eighth Illinois district. John A. Howard is a resident of Rolling Hills, California, and for the calendar year 1950 filed a Federal income tax return with the then collector of internal revenue in Los Angeles, California. George A. and Maude A. Merchant are residents of River Forest, Illinois, and for the calendar year 1950 filed a joint Federal income tax return with the then collector of internal revenue for the first Illinois district.
During 1950, Binkley Coal Company (hereinafter called Binkley), an Illinois corporation, was engaged principally in the wholesale purchase and sale of coal. In June 1950, the total outstanding stock of Binkley consisted of 4,614 shares of $ 100 par value common stock.
*794 During 1950, Pyramid Coal Corporation (hereinafter called Pyramid), *126 an Illinois corporation, was engaged principally in the production and sale of coal. In June 1950, the total outstanding stock of Pyramid consisted of 20,000 shares of $ 100 par value common stock, of which Binkley owned 12,285 shares and various individuals owned 7,715 shares.
During 1950, Truax-Traer Coal Company (hereinafter called Truax-Traer), a Delaware corporation, was engaged principally in the production, distribution, and sale of coal. In June 1950, the total outstanding stock of Truax-Traer consisted of 985,104 shares of $ 5 par value voting common stock. The total authorized stock of the company consisted of 30,000 shares of $ 100 par value preferred stock, none of which was outstanding, and 2,000,000 shares of $ 5 par value common stock.
After certain negotiations between A. H. Truax, on behalf of Truax-Traer, and Hubert Howard, on behalf of Binkley, the board of directors of Truax-Traer, on May 24, 1950, held a special meeting, recorded and reported in the minutes by the secretary of Truax-Traer, in pertinent part, as follows:
The Chairman stated that Mr. Truax and he had carried on negotiations for some time with Mr. Hubert Howard, the principal stockholder of Binkley*127 Coal Company, for the acquisition of all of the outstanding shares of that company and of its subsidiary, Pyramid Coal Corporation; that there were outstanding 4,615 shares of Binkley Coal Company and 20,000 shares of Pyramid Coal Corporation, of which 12,285 shares are held by Binkley Coal Company and 7,715 shares by others; that it appears that the outstanding shares of Binkley Coal Company can be acquired at a value of $ 400 per share and the outstanding shares of Pyramid Coal Corporation (except those held by Binkley Coal Company) can be acquired at a value of $ 50 per share; that 3,700 shares of Binkley Coal Company can be acquired in exchange for shares of Common Stock of this Company to be issued at the rate of 32 to one and the remaining shares of Binkley Coal Company and Pyramid Coal Corporation can be purchased for cash; and that if the 3,700 shares of Binkley Coal Company were acquired in exchange this company would issue 118,400 shares of its authorized but unissued Common Stock and would be called upon to pay $ 366,000 cash for the remaining shares of Binkley Coal Company and $ 385,750 in cash for the shares of Pyramid Coal Corporation.
The Chairman further stated that*128 the shares proposed to be acquired by this company were reasonably worth the consideration asked by Mr. Howard for the following reasons:
The total consideration to be paid by Truax-Traer Coal Company, assuming the entire outstanding stocks of the Binkley and Pyramid Coal Companies are acquired as outlined above, would be as follows:
| CASH | $ 751,750.00 |
| 118,400 Shares of Truax-Traer Coal Company Common Stock | |
| at 12 1/2 | 1,480,000.00 |
| $ 2,231,750.00 | |
| Outstanding long term indebtedness of Binkley and Pyramid as | |
| of February 28, 1950, was | $ 1,553,000.00 |
| $ 3,784,750.00 | |
| The consolidated net book value of the stocks of both companies | |
| as of that date was | 4,643,000.00 |
*795 A summary of a reasonable depreciated value of the major items of assets that would be useful in connection with the consolidated operations of Truax-Traer and Binkley, as estimated by Mr. Truax and his assistants, are as follows:
| A -- Net current assets, in excess of | $ 750,000 | |
| B -- Machinery and Equipment | ||
| 1. Shovels, Machinery, Equipment & Buildings at | ||
| Pyramid Mine | $ 2,500,000 | |
| 2. Victory Mine salvage value | 750,000 | |
| 3. Stripping shovel leased to Shasta Coal Co. at | ||
| $ 61,200 per year, depreciated value | 380,000 | |
| Total buildings, machinery & equipment | 3,630,000 | |
| C -- Coal Reserves | ||
| 1. Jamestown (Perry County) 17,500,000 tons under | ||
| 60 feet overburden at 10 cents | $ 1,750,000 | |
| 2. Sparta (Randolph County) 11,000,000 tons under | ||
| 55 feet at 12 1/2 cents | 1,375,000 | |
| 3. St. Louis Underground 10,500,000 tons cost | 100,000 | 3,225,000 |
| $ 7,605,000 | ||
| D -- Other assets, including West Virginia Coal and | ||
| Transportation Company securities, deferred | ||
| receivables from Shasta Coal Co., prepaid items, | ||
| etc., having possible potential value in excess of | ||
| 1,000,000 | $ 1 |
*129 It is to be noted that the Binkley and Pyramid Coal Companies' fiscal year ended March 31, 1950, and that an audited report by Frazer & Torbet will be available in a matter of a few days; as well as an appraisal of the above enumerated tangible assets by Paul Weir Company.
| Audited reports show average earnings for the last | |
| three fiscal years ended March 31, 1949 | $ 711,070 |
Thereupon, after further discussion of the proposed acquisition, the president or a vice president of Truax-Traer was authorized to make a written offer to acquire for Truax-Traer all of the outstanding stock of Binkley and all of the outstanding stock of Pyramid other than that owned by Binkley. The terms of the offer, including the consideration to be given for the outstanding stock of Binkley and of Pyramid, were set forth in a resolution adopted by the board of directors of Truax-Traer, in pertinent part, as follows:
Resolved, That the President or a Vice-President of this Company be and he hereby is, authorized to make written offer to Mr. Hubert Howard to acquire in the name and on behalf of this Company 4,615 shares of Binkley Coal Company, an Illinois corporation, for a consideration of $ 400*130 per share, and 7,715 shares of Pyramid Coal Corporation, an Illinois corporation, for a consideration of $ 50 per share, payable as follows: for 3,700 shares of Binkley Coal Company *796 by the issuance by this Company in exchange therefor of full paid and non-assessable shares of the authorized but unissued Common Stock of this Company at a rate of 32 shares of Common Stock for each share of Binkley Coal Company, and for all remaining shares of Binkley Coal Company and all of the shares of Pyramid Coal Corporation, by payment in cash to or upon the order of Mr. Howard. * * *
On June 6, 1950, Truax-Traer, by A. H. Truax, its president, transmitted to Hubert E. Howard, one of the petitioners herein and the then president of Binkley, by letter, a written proposal for the acquisition by Truax-Traer of the entire outstanding stock of Binkley and of Pyramid, exclusive of that owned by Binkley. The offer as contained therein, in pertinent part, is set out below.
The undersigned Truax-Traer Coal Company, a Delaware corporation (hereinafter referred to as "Truax-Traer"), offers to acquire from you the following described shares of Binkley Coal Company and Pyramid Coal Corporation: *131
(i) 3,700 shares of Binkley Coal Company, an Illinois corporation, in exchange for the issuance to you or upon your order of 118,400 full paid and nonassessable shares of Common Stock of this Company of the par value of $ 5 per share, or at the rate of 32 shares of such Common Stock for each such share of Binkley Coal Company;
(ii) 915 shares of said Binkley Coal Company, at a price of $ 400 per share, payable in cash; and
(iii) 7,715 shares of Pyramid Coal Corporation, an Illinois corporation, at a price of $ 50 per share, payable in cash.
This offer is made upon the following terms and conditions:
(1) Truax-Traer represents and warrants to you:
* * * *
(b) That its authorized capital stock concists [sic] 30,000 shares of Preferred Stock of the par value of $ 100 per share, none of which is now outstanding, and 2,000,000 shares of Common Stock of the par value of $ 5 per share, of which 985,104 shares are now outstanding; and
(c) That all shares of its Common Stock issued in exchange for outstanding shares of Binkley Coal Company pursuant to this offer will be duly authorized, issued, full paid and non-assessable at the time of delivery of the certificates therefor*132 on the Closing Date as hereinafter provided.
(2) By accepting this offer in the manner hereinafter provided, you represent and warrant to Truax-Traer as folloys:
* * * *
(b) That the authorized shares of Binkley consist of 5,000 shares of the par value of $ 100.00 per share, that all of such shares have been duly issued, that 385 of such shares have been reacquired by Binkley and are now held in its treasury, and that 4,615 of such shares are now outstanding and held by you and others are are [sic] full paid and nonassessable;
* * * *
(d) That the authorized shares of Pyramid consist of 20,000 shares of the par value of $ 100.00 per share, that all of such shares have been duly issued, are now outstanding and are full paid and nonassessable, that 12,285 of such outstanding shares are now owned and held by Binkley, and that 7,715 of such outstanding shares are held by you and others;
* * * *
*797 (1) That on the Closing Date the shares of Binkley and Pyramid delivered to Truax-Traer pursuant hereto will constitute all of the issued and outstanding shares of Binkley and Pyramid, except the shares of each such corporation held by Binkley, that Binkley will continue to be*133 the owner and holder at the Closing Date of 385 shares of its own capital stock and 12,285 shares of Pyramid, and that all shares so delivered to Truax-Traer will be free and clear of all liens, encumbrances, defects in title, and restraints against the transfer and sale thereof.
(3) Truax-Traer's obligation to acquire and pay for the shares of Binkley and Pyramid covered by this offer is conditioned upon:
(a) Your acceptance of this offer by endorsement on a duplicate original hereof and return thereof to Truax-Traer within thirty (30) days after the date hereof; and
* * * *
(6) By your acceptance of this offer, you agree to pay to Truax-Traer upon demand all deficiencies in Federal income and excess profits taxes, and interest and penalties thereon, lawfully assessed against Universal Coal Washing Company (a subsidiary of Binkley) or its successors in interest in excess of $ 10,000 in the aggregate for all years and periods prior to the Closing Date, and all deficiencies of similar taxes, interest and penalties in excess of $ 10,000 in the aggregate lawfully assessed against Pyramid or its successors in interest for all years and periods prior to the Closing Date; and Truax-Traer, *134 in turn, agrees to pay to you or upon your order all cash refunds of Federal income and excess profits taxes, and interest thereon, in excess of $ 10,000 in the aggregate received by Universal Coal Washing Company or its successors in interest, or in excess of $ 10,000 in the aggregate received by Pyramid or its successors in interest, for all years and periods prior to the Closing Date.
(7) This offer, when accepted by you by endorsement on a duplicate original hereof and upon return thereof to Truax-Traer, shall constitute an agreement between you and Truax-Traer, but shall not be assignable by either of us without the prior written consent of the other.
The offer by Truax-Traer to acquire any stock of Binkley and of Pyramid, other than that owned by Binkley, was conditioned upon the acquisition by it of all the outstanding stock of Binkley and of Pyramid (other than that owned by Binkley).
On June 8, 1950, Hubert Howard, by prearrangement with all of the other stockholders of Binkley and Pyramid, acting for himself and informally acting for them, as he had in the negotiations resulting in the offer made by Truax-Traer in the letter dated June 6, 1950, endorsed that letter as *135 accepted.
At a special meeting of the board of directors of Truax-Traer held on June 16, 1950, the chairman reported that the offer for the acquisition of the outstanding stocks of Binkley Coal Company and Pyramid Coal Corporation from Hubert E. Howard, as authorized at the meeting of the board of directors on May 24, 1950, was made on June 5, 1950, and accepted on June 8, 1950, and that it would be in order at that time to authorize the various steps and transactions necessary for the acquisition.
*798 The chairman also reported that since the meeting of the board of directors on May 24, 1950, and prior to making the offer to Howard, Truax-Traer had received the auditor's report of Binkley and subsidiaries for the year ended March 31, 1950, prepared by Frazer and Torbet and dated June 5, 1950. The consolidated balance sheet as of March 31, 1950, contained in the report, showed a consolidated net worth of $ 3,510,780.07, after eliminating $ 1,111,526.99 on account of the outstanding minority interest in Pyramid. Inasmuch as the minority interest was also to be acquired by Truax-Traer, the consolidated net worth of the stocks of Binkley and Pyramid to be acquired, on the basis*136 of the auditor's report, was $ 3,510,780.07 plus $ 1,111,526.99 or a total of $ 4,622,307.06, as of March 31, 1950.
The chairman further reported that Truax-Traer had received a valuation report of Paul Weir Company (hereinafter called Paul Weir) dated June 12, 1950, of the personal and real property of Binkley and its affiliates and subsidiaries. In the opinion of Paul Weir, the sound values of the principal properties, consisting of the Pyramid Mine (near Pinckneyville), owned by Pyramid, and Universal Coal Washing Company (hereinafter called Universal), a subsidiary of Binkley, and the Victory Mine (near Terre Haute), owned by Pyramid, were as follows:
| Pyramid Mine | Victory Mine | Total | |
| Plant and equipment | $ 3,796,850 | $ 659,560 | $ 4,456,410 |
| Lands and coal reserves and leaseholds | 2,494,595 | 2,494,595 | |
| Lands and coal rights | 21,000 | 21,000 | |
| $ 6,291,445 | $ 680,560 | $ 6,972,005 |
These values alone exceeded the net book value of $ 4,341,081.69 for coal and surface lands and plant and equipment, shown on the consolidated balance sheet in the auditor's report under the heading "Property Accounts," by more than $ 2,630,000, and if such sound values were substituted*137 for such net book values, the consolidated net worth would be increased to $ 7,253,230.06 without regard to certain minor subsidiaries and to any increase in the value of Binkley's interest in West Virginia Coal & Transportation Company then carried at $ 50,000.
In addition, the chairman stated that the offer to Howard provided for the issuance of 118,400 shares of the common stock of Truax-Traer for 3,700 shares of Binkley common stock, and for the payment of $ 751,750 in cash for 915 additional shares of Binkley and the 7,715 shares of Pyramid not now owned by Binkley; that the entire consideration was $ 2,231,750, based upon a price of $ 400 per share for the Binkley stock and $ 50 per share for the Pyramid stock; that the consideration for the entire 4,615 shares of Binkley was $ 1,846,000, of which $ 366,000 was payable in cash and $ 1,480,000 by the issuance of *799 said 118,400 shares of the Truax-Traer common stock at $ 12.50 per share, and the consideration for the 7,715 shares of Pyramid was $ 385,750, payable in cash; that the consolidated net worth of Binkley and subsidiaries as shown by the auditor's report was $ 3,510,780.07, without giving effect to the Paul Weir*138 valuation of the underlying properties of Pyramid in which Binkley held 12,285 shares, as compared with the consideration of $ 1,846,000 to be paid therefor; that the minority interest of Pyramid as shown by the report was $ 1,111,526.99 without giving effect to the Paul Weir valuation of its properties as compared with the $ 385,750 to be paid therefor; that by making such purchase Truax-Traer could avoid the expenditure of approximately $ 2,000,000 for additional mining equipment by utilizing equipment already owned by Binkley and subsidiaries; and that the various values referred to amply supported the consideration to be paid for such stocks, without considering the net earnings of the companies to be acquired which were only $ 52,142.29 in the year ended March 31, 1950, due to strikes and other business interruptions, but which were $ 1,379,322.68 in the year ended March 31, 1949.
Accordingly, the board of directors of Truax-Traer voted to authorize the issuance of 118,400 shares of authorized but unissued voting stock, thereby increasing the total outstanding voting common stock of Truax-Traer to 1,003,504 shares. On the date of issuance of said stock, its fair market value*139 was $ 12.50 per share. In addition to the authorization for the issuance of the above-described common stock, Truax-Traer was also authorized to pay to Hubert Howard, or upon the order of Hubert Howard, $ 751,750.
The resolutions of the board specifically outlining the consideration for the acquisitions to be made in accordance with the agreement of June 8, are as follows:
Resolved, that, in consideration of the acquisition by this Company of 3,700 shares of the outstanding capital stock of Binkley Coal Company, an Illinois corporation, and in accordance with and upon the conditions set forth in the letter agreement between this Company and Hubert E. Howard, dated June 8, 1950, this Company issue 118,400 shares of its authorized but unissued Common Stock and cause appropriate Common Stock certificates therefor to be issued and delivered to or upon the order of said Hubert E. Howard; and
Resolved, Further, that this Board of Directors hereby determines the value of such consideration to be $ 1,480,000; that receipt of such consideration shall constitute full payment for the 118,400 shares of Common Stock of this Company to be issued therefor, at the rate of $ 12.50 per share; and *140 that of such consideration an amount equal to the par value of $ 5.00 per share aggregaring [sic] $ 592,000 for the 118,400 shares, shall be, and hereby is, allocated to the capital of this Company, and the remainder, representing the excess of the consideration over the par value of such shares, or $ 7.50 per share and aggregating $ 888,000 for the 118,400 shares, shall be, and hereby is, allocated to the capital surplus of this Company; and
* * * *
*800 Resolved, That concurrently with the acquisition of 3,700 shares of the capital stock of Binkley Coal Company in consideration of the issuance of 118,400 shares of the authorized but unissued Common Stock of this Company, as previously authorized at this meeting of the Board of Directors, the proper officers of this Company be, and they hereby are, authorized and directed, in the name and on behalf of this Company, to pay to or upon the order of Hubert E. Howard the sum of $ 751,750 in cash in consideration of the acquisition by this Company of 915 additional shares of the outstanding capital stock of Binkley Coal Company, an Illinois Corporation, at a price of $ 400 per share, and 7,715 shares of the outstanding capital *141 stock of Pyramid Coal Corporation, also an Illinois corporation, at a price of $ 50 per share, all in accordance with and upon the conditions set forth in the letter agreement between this Company and Hubert E. Howard, dated June 8, 1950; * * *
In accordance with the terms of the letter agreement of June 8, 1950, all of the stockholders of Binkley and Pyramid, acting on their own behalf through Hubert Howard, delivered all of their shares in said companies to Truax-Traer and received the agreed-upon consideration therefor. The Binkley and Pyramid stock was delivered to Truax-Traer by June 23, 1950.
All of the terms and conditions of the letter agreement were complied with in the acquisition by Truax-Traer of the outstanding stock of Binkley and Pyramid, except that on the day of consummation Binkley had outstanding 4,614 shares of common stock rather than 4,615, one share having been reacquired by Binkley prior to the consummation. As a result, only 4,614 shares of Binkley stock were acquired by Truax-Traer. The total cash outlay by Truax-Traer was accordingly reduced by $ 400 to $ 751,350.
The 3,700 shares of Binkley common stock acquired in exchange for common stock of Truax-Traer*142 constituted 80.19 per cent of the total outstanding stock of Binkley, i. e., 4,614 shares.
All of the stockholders of Binkley received either all cash or all stock from Truax-Traer for their respective holdings, except Parsons College which delivered 100 shares of Binkley stock to Hubert E. Howard and received therefor 544 shares of Truax-Traer stock and $ 33,200 on the basis of 17 shares of common stock of Binkley for 544 shares of Truax-Traer and 83 shares of Binkley common stock for cash, at a price of $ 400 per share.
All of the petitioners treated the exchange of their Binkley common stock as solely for Truax-Traer common stock and therefore as nontaxable, resulting in neither recognized gain nor loss.
Subsequently, on August 28, 1950, petitioners Hubert E. Howard and Helen B. Howard sold 23,400 shares of Truax-Traer common stock out of the 79,744 shares acquired by them in exchange for their Binkley common stock. These shares were sold for a gross sales price of $ 295,425. Petitioners reported this sale and included in their joint income tax return for 1950 a long-term capital gain of $ 237,393, the *801 difference between the net selling price and the portion of petitioners' *143 basis for the Binkley stock properly allocable to the number of Truax-Traer shares sold.
OPINION.
Respondent determined that the exchange here in issue is taxable under section 112 (a) of the Internal Revenue Code. Accordingly, he increased the various petitioners' long-term capital gain for 1950 by the difference between their respective bases for the Binkley stock transferred and the fair market value of the Truax-Traer stock received. Shortly after the exchange, petitioners Hubert and Helen Howard sold a portion of the Truax-Traer stock they received in exchange for their Binkley stock. On the basis of his determination that the exchange was a taxable transaction, the respondent computed a new holding period for the Truax-Traer stock sold by the Howards, beginning with the effective date of the exchange, and treated the gain on sale as short-term capital gain. Petitioners contend that their receipt of Truax-Traer stock was upon an exchange of Binkley stock solely for Truax-Traer stock and that such transaction constituted a nontaxable exchange in accordance with section 112 (b) (3).
Section 112 (a) sets forth the general rule that gain realized on the exchange of property is*144 recognized, except as otherwise provided. Section 112 (b) (3) provides that no gain or loss shall be recognized in the case of an exchange of stock or securities in a corporation a party to a reorganization, in pursuance of a plan of reorganization, solely for stock or securities in such corporation or in another corporation a party to the reorganization. For the purposes of this section (as well as certain others) the several types of statutory "reorganizations" are defined in section 112 (g), including in subsection (1) (B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of at least 80 per cent of the voting stock and at least 80 per cent of the total number of shares of all other classes of stock of another corporation. (Subsection (1) (C) defining as a reorganization the acquisition by one corporation of substantially all the properties of another corporation also requires that such acquisition be in exchange solely for stock.)
We will first consider petitioners' argument to the effect that the transaction in question was in fact and should be treated as a nontaxable exchange of some Binkley shares for stock of Truax-Traer and a*145 separate sale of other Binkley shares and of Pyramid stock for cash.
Contrary to petitioners' view, we think that the singleness and unity of the transaction in which Truax-Traer acquired Binkley and Pyramid is apparent. The negotiations carried on by Hubert Howard *802 were obviously so carried on in his capacity as president of Binkley and on behalf of all of the stockholders of Binkley and Pyramid. The one objective of the negotiations was to find a mutually satisfactory formula for the complete acquisition by Truax-Traer of Binkley and Pyramid. Once the terms of consideration were agreed upon they were incorporated into a formal letter of offer, acceptance of every part of which was contemplated by Truax-Traer as a condition of performance. We think it clear that each element and term of the plan and agreement as originated, outlined, and consummated was inseparably interrelated, and designed to accomplish but one purpose, the acquisition by Truax-Traer of both Binkley and Pyramid. Accordingly, there can be no doubt that petitioners did not take part in an exchange of some Binkley stock for stock of Truax-Traer and a separate and unrelated sale of other shares of Binkley*146 stock and of Pyramid stock to Truax-Traer. See First Seattle Dexter Horton Nat. Bank v. Commissioner, (C. A. 9, 1935) 77 F. 2d 45; Starr v. Commissioner, (C. A. 4, 1936) 82 F.2d 964">82 F. 2d 964, reversing 31 B. T. A. 671 -- but cited with approval in Rena B. Farr, 24 T. C. 350, and James G. Murrin, 24 T.C. 502">24 T. C. 502, followed in principle in Miller v. Commissioner, (C. A. 6, 1939) 103 F. 2d 58, affirming a Memorandum Opinion of this Court.
Petitioners rely upon several earlier cases, none of which is, in our opinion, here controlling.
The question presented in Weiss v. Stearn, 265 U.S. 242">265 U.S. 242 (1924), where, upon reincorporation of Acme National Manufacturing Co., the stockholders of the old company received half of the stock of the new corporation plus cash derived from certain new investors, was whether each old stockholder had sold his entire interest in the old corporation or had sold only half of that interest for cash while exchanging the other half for stock and thereby*147 retaining the same proportionate interest in the transferred corporate business. The Court viewed the transaction not as an exchange of stock and cash for the old stock but as a sale of half of the old stock and an exchange of the remainder. The Court held that to the extent that there was an exchange of stock for stock, the economic position of the shareholders was unchanged and therefore that no gain arose from the exchange. It needs only to be pointed out that the question there before the Court did not arise under any such specific statutory provisions defining and limiting tax-free exchanges pursuant to a plan of reorganization as are presently before us. In the taxable years there involved, the statute did not contain any provisions regarding reorganizations. The case therefore has little bearing on the issue presented in these proceedings and is clearly not controlling with respect to the factual question of whether petitioners here separately sold and exchanged portions of their holdings in Binkley and Pyramid.
*803 In Daisy M. Ward, 29 B. T. A. 1251, 1254 (1934), affd. (C. A. 8, 1935) 79 F.2d 381">79 F. 2d 381, the transferor*148 exchanged all of his stock for new stock, reserving an option to require the repurchase of part of the new stock for cash. Taxpayer exercised the option 5 days later. We held that the transactions involved were separate transactions (1) of an exchange of stock and (2) of an option to sell, and not a single transaction consisting of an exchange of stock for stock and cash. We think that the circumstances involved in the Ward case are different from those involved in the instant case where there was a concurrent transfer of cash and stock for all of the stock of Binkley and all of the stock of Pyramid, other than that owned by Binkley. In the Ward case the exchange of stock for stock was independent of the subsequent exercise of the option, a right which might never have been exercised, as distinguished from the closely interrelated and interdependent transfers here involved.
We have considered the following cases relied upon by petitioners, but since it is evident from the opinions that they are readily distinguishable upon their facts from the instant case, an extended discussion appears unnecessary: Commissioner v. Harris, (C. A. 3, 1937) 92 F.2d 374">92 F. 2d 374,*149 affirming a Memorandum Opinion of this Court; United States v. Rodgers, (C. A. 3, 1939) 102 F. 2d 335; Bruce v. Helvering, (C. A., D. C., 1935) 76 F. 2d 442, reversing 30 B. T. A. 80 (1934); and Helvering v. Tex-Penn Oil Co., 300 U.S. 481">300 U.S. 481 (1937).
We now turn to petitioners' main contention which is, in effect, that the acquisition by one corporation of at least 80 per cent of the only class of stock outstanding of another corporation for stock is an acquisition "solely" for stock within the meaning of the definition of a reorganization under section 112 (g) (1) (B) and qualifies as a tax-free exchange to that extent under section 112 (b) (3), regardless of other consideration given by the transferee corporation for additional stock in excess of the minimum requirement of 80 per cent. Petitioners argue that, in order for the exchange to constitute a nontaxable exchange, only (a minimum of) 80 per cent of the stock of Binkley need be acquired solely for stock, and that Truax-Traer acquired 80.19 per cent of the outstanding Binkley stock solely for stock*150 within the meaning of sections 112 (b) (3) and 112 (g) (1) (B). Petitioners consider the acquisition of any additional stock, in excess of 80 per cent, solely for stock, as having merely undertaken more than the statute requires, and therefore of no effect in respect to the taxability or nontaxability of the transaction. Likewise, they consider the acquisition of additional stock in excess of the required 80 per cent for a consideration other than stock (other property or money) of no effect, since the minimal statutory standards have been met.
On the other hand, respondent contends that the entire transaction should be treated as a single exchange in which the acquiring corporation *804 gave both stock and cash for the stock(s) acquired, thereby failing to comply with the requirement of a nontaxable exchange under section 112 that the exchange be solely for stock. Respondent further contends that the statute requires the stockholders of at least 80 per cent of the stock of Binkley to receive in exchange for their stock only voting stock of Truax-Traer. Such a requirement was not met in the instant case. However, in view of our holding below, it is unnecessary to consider*151 such further contention.
Basically the question before us is whether the statute requires all of the Binkley stock acquired by Truax-Traer in the transaction of June 23, 1950, to have been acquired only ("solely") for stock, or whether it is sufficient if a minimum of ("at least") 80 per cent of the outstanding Binkley stock was acquired for an appropriate amount of Truax-Traer stock, even though the remainder acquired in excess thereof was so acquired for a consideration other than stock. The transaction in question would clearly qualify as a nontaxable exchange (to the extent of the exchange of stock for stock) on the latter theory, but would obviously not so qualify under the former. We recognize that there is force to petitioners' argument that the practical objectives of the statute might well be satisfied if we were to adopt the construction urged. We think, however, that the authorities have clearly established the applicable rule of law to be that the consideration for whatever stock is acquired by the transferee corporation in a transaction such as that before us must be solely the transferee's voting stock, and nothing else. Helvering v. Southwest Corp., 315 U.S. 194">315 U.S. 194 (1942);*152 Commissioner v. Air Reduction Co., (C. A. 2, 1942) 130 F. 2d 145 (certiorari denied 317 U.S. 681">317 U.S. 681) reversing a Memorandum Opinion of this Court on another point; Pressed Steel Car Co. v. Commissioner, (C. A. 3, 1945) 152 F.2d 280">152 F. 2d 280, affirming a Memorandum Opinion of this Court; Central Kansas T. Co. v. Commissioner, (C. A. 10, 1944) 141 F. 2d 213, affirming a Memorandum Opinion of this Court.
In the Southwest case a plan of reorganization called for the formation of a new company to acquire the assets of the old corporation in exchange for voting common stock and class A and class B stock purchase warrants. The precise issue was whether or not the transaction qualified as a "reorganization" under the then section 112 (g) (1) (B), in all pertinent respects substantially the same as subsections (B) and (C) of section 112 (g) (1) of the 1939 Code 2 here applicable. The Supreme Court, in holding that the transaction did not constitute a reorganization within the meaning of section 112 (g) (1) (B), stated the applicable principle of law as follows:
*153 *805 the 1934 Act effects an important change as respects transactions whereby one corporation acquires substantially all of the assets of another. See S. Rep. No. 558, 73d Cong., 2d Sess., Committee Reports, Revenue Acts 1913-1938, pp. 598-599. The continuity of interest test is made much stricter. See Paul, Studies in Federal Taxation (3rd Series), pp. 36-41. Congress has provided that the assets of the transferor corporation must be acquired in exchange "solely" for "voting stock" of the transferee. "Solely" leaves no leeway. Voting stock plus some other consideration does not meet the statutory requirement. See Hendricks, Developments in the Taxation of Reorganizations, 34 Col. L. Rev. 1198, 1202-1203. * * * the requirements of § 112 (g) (1) (B) are not met if properties are acquired in exchange for a consideration other than, or in addition to, voting stock. Under that test this transaction fails to qualify as a "reorganization" under clause (B).
*154 In the Central Kansas Telephone case the taxpayer (new company), pursuant to a plan of reorganization, acquired the assets of the Kansas Telephone Company (old company) from a bondholders' committee for voting stock of the new company, cash, and the assumption of certain liabilities. In affirming this Court's holding that the exchange did not constitute a nontaxable reorganization or a nontaxable exchange, the Court of Appeals concluded that the assets of the old company were acquired by the new company in exchange for the latter's stock and cash, and, therefore, that they were not acquired solely in exchange for voting stock in accordance with the terms of the statute.
Similarly, in the Pressed Steel Car Co. case the assets of an old corporation then in the hands of a receiver were, in accordance with a court-approved plan of reorganization, acquired for voting stock and certain stock warrants of the new corporation, organized to take over the business of the old company. The Court of Appeals affirmed our decision to the effect that, if the rights or warrants were valuable, the transfer was not solely for voting stock and, therefore, that the transaction failed to meet *155 the requirements of a reorganization under 112 (g) (1) (B).
The rule has been specifically applied in Air Reduction in the case of an acquisition of stock rather than assets. There Air Reduction Co. began acquiring stock of Pure Carbonic Company of America in 1929. Up to January 1, 1935, it had acquired 87,275 shares of Pure Carbonic stock in exchange for its own stock and 7,906 shares of Pure Carbonic stock for cash. The shares thus acquired constituted 73 per cent of Pure Carbonic's 130,099 shares then outstanding.
In 1935, Pure Carbonic increased the number of its shares outstanding to 132,299, and Air Reduction Co. acquired 100 per cent ownership by a purchase of 14,771 shares of Pure Carbonic for cash, and an exchange of 5,258 shares of its own stock for the remaining 22,347 shares of Pure Carbonic. At this point, 82 per cent of the Pure Carbonic stock had been acquired by Air Reduction Co. in a series of exchanges *806 for its own stock, and the remaining 18 per cent had been acquired for cash. The 5,258 shares of stock used in the 1935 exchange consisted of Air Reduction Co. treasury stock which had been issued and later repurchased for cash in the amount of $ *156 182,536.73. In the same year, 1935, Air Reduction Co. sold some of its treasury stock for cash.
The Commissioner treated both the exchange of Air Reduction treasury stock for stock of Pure Carbonic and the sale of Air Reduction treasury stock as taxable. We held that neither transaction gave rise to income, largely on the theory that a corporation could not realize taxable gain on dealings in its own stock. On appeal, the Court of Appeals for the Second Circuit reversed, and found that both the exchange of Air Reduction treasury stock for stock of Pure Carbonic and the sale of Air Reduction treasury stock did result in realization of gain. The Court of Appeals then considered the taxpayer's alternative contention, with respect to the exchange transaction, that such gain was not to be recognized since it was realized upon a nontaxable exchange, and in this respect said:
Finally the taxpayer urges that, in the exchange by which the Pure Carbonic Company stock was acquired, no taxable gain could result because that was a non-taxable reorganization. But this theory is not tenable because the definition of reorganization in § 112 (g) (1) (B) of the 1934 Act, 26 U. S. C. A. Int. Rev. *157 Acts, page 695, contemplates only situations where the exchange is made "solely" for voting stock. Here over 17% of the Pure Carbonic stock was purchased for cash. Cf. Helvering v. Southwest Consolidated Corp., 315 U.S. 194">315 U.S. 194, 62 S. Ct. 546">62 S. Ct. 546, 86 L. Ed. 789">86 L. Ed. 789.
See also Elizabeth Bruce, 30 B. T. A. 80, 82-83 (1934), reversed on another point (C. A., D. C., 1935) 76 F.2d 442">76 F. 2d 442, supra; Robert A. Pulfer, 43 B. T. A. 677 (1941).
We think the foregoing authorities dispose of the problem in the instant case, in which, as part of a single transaction, Truax-Traer acquired all of the stock of Binkley for both its own stock and cash. We hold that such an acquisition is not "solely for stock" within the intendment of sections 112 (g) (1) (B) and 112 (b) (3).
Southland Ice Co., 5 T. C. 842 (1945) relied on by petitioners, involved an entirely different issue than that presently before the Court, and is distinguishable. There a reorganization was worked out in foreclosure proceedings whereby a committee bought the*158 assets of the old company. The participating bondholders received all the stock of the new company and new income bonds. The nonassenting bondholders were paid in cash by the receiver "an amount which represented the corresponding portion of the bid price for the properties." We found that the cash was actually available out of operating income accumulated during the receivership, "so that in fact it constituted *807 a part of the assets belonging to the old corporation, or to its owner creditors as a group," and held accordingly that the cash paid to the nonassenters was never transferred to the new company. No such circumstance is present in the instant case where the cash transferred in the acquisition of Binkley and Pyramid stock was at all times that of Truax-Traer, the transferee corporation.
Some of our language in Southland, set out below, indicates clearly that the case was decided in full recognition of the principles here expressed.
Fundamentally, the question of interpreting the statutory language reduces to this: Does "solely for voting stock" mean that whatever property is acquired must be paid for by the transferee in its voting stock, and nothing else, *159 * * * In the former case the present transaction would qualify, since the cash paid to the nonassenters was never transferred to the new company; * * *
This approach seems to us to find support in the language of Helvering v. Southwest Consolidated Corporation, 315 U.S. 194">315 U.S. 194, that "the requirements of section 112 (g) (1) (B) are not met if properties are acquired in exchange for a consideration other than, or in addition to, voting stock." * * *
* * * *
The Supreme Court in * * * [the Southwest] case resorted not so much to the words employed in the statute as to the concept that the procedure there followed was but an indirect method of accomplishing what the statute was designed to forbid, namely, payment by the transferee to the transferor or its owners of cash as part consideration for the transfer. * * *
* * * *
Hence, only in such a situation as this, where an inconsiderable minority interest needs to be paid off in cash, and the corporate business and "substantially all" the corporation's property is continued in the control of a correspondingly complete group of the transferor's owners, can there be found*160 the requisite fulfillment of the statutory requirements. So limited, it is difficult to see the possibility that any can qualify save true reorganizations in the economic sense.
The consequence would seem to be that this was not, on the one hand, a transfer of properties "in exchange for a consideration other than, or in addition to, voting stock," within the Southwest principle, but that it was, on the other, the acquisition of substantially all, but not quite all, of a corporation's property solely in exchange for the transferee's voting stock, within the express terms of section 112 (g) (1) (B), even though the small fraction of the property not so transferred was used in its entirety to pay off in cash the dissenting property owners.
See also Roosevelt Hotel Co., 13 T. C. 399 (1949); Westfir Lumber Co., 7 T. C. 1014 (1946); Peabody Hotel Co., 7 T. C. 600 (1946).
At the time of the hearing herein, respondent offered into evidence two documents to which objection was lodged by petitioners. The documents were conditionally received subject to further consideration. Inasmuch as our*161 determination hereinbefore has been reached without consideration of the exhibits proffered by respondent, we think it is unnecessary to consider whether they are properly admissible.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: John A. Howard, Docket No. 51710; William A. Ruschke and Edna M. Ruschke, Docket No. 51711; George A. Merchant and Maude A. Merchant, Docket No. 51712; Gregory S. Devine and Ursula B. Devine, Docket No. 51713; Rantz E. Snoberger and Elizabeth Snoberger, Docket No. 51714; Clyde W. Woosley and Lois Jane Woosley, Docket No. 51830; Estate of E. J. Coffey, Deceased, Blanche B. Coffey, Edward W. Coffey and William G. Coffey, Co-Executors, and Blanche B. Coffey, Surviving Spouse of E. J. Coffey, Individually, Docket No. 52869.↩
2. Essentially, section 112 (g) (1) (B) of the Revenue Act of 1934 contained in a single provision the separate provisions of section 112 (g) (1) (B) and (C)↩ of the 1939 Code.