*862 The petitioner corporation's affiliated subsidiary, R, transferred part of its assets, consisting of common stock in two public utility corporations, to 11 newly organized corporations in exchange for all their stock, and immediately thereafter R transferred all its stock in the 11 newly organized corporations to A in exchange for common stock of A. Held, that the foregoing transfers were interdependent steps in an integral plan which, for income tax purposes, must be treated as a single transaction, and do not constitute a reorganization within the meaning of section 112, Revenue Act of 1928, since upon the consummation of the transaction the element of statutory control and the continuity of interest necessary to make A a party to a reorganization were lacking; following Groman v. Commissioner,302 U.S. 82">302 U.S. 82; Helvering v. Bashford,302 U.S. 454">302 U.S. 454; A. W. Mellon,36 B.T.A. 977">36 B.T.A. 977; Gilbert D. Hedden,37 B.T.A. 1082">37 B.T.A. 1082, and Whitney Corporation,38 B.T.A. 224">38 B.T.A. 224, hence the A stock received by R is "other property" and the gain therefrom constitutes taxable income.
*477 The Commissioner determined a deficiency of $1,564,884.54 in income taxes for 1928 of the affiliated group of which the petitioner was parent. The only issue is whether the conceded gains of the United Light & Railways Co. from the disposition of stock of the Detroit Edison Co. and Brooklyn Borough Gas Co. in exchange for stock of the American Light & Traction Co. were properly recognized for income tax purposes by the Commissioner or whether those gains escape recognition under section 112 of the Revenue Act of 1928. The parties have settled all of the other differences by a stipulation, which is made a part hereof by this reference.
FINDINGS OF FACT.
The petitioner (hereinafter called United) filed a consolidated income tax return for the calendar year 1928 with the collector of internal revenue at Chicago, Illinois. The return was for the petitioner, as the parent corporation, and a large number of subsidiaries, including the United Light & Railways Co. (hereinafter called Railways).
United was the top holding company*864 of a large group of corporations engaged principally in supplying electrical energy to the public. United owned all of the common stock of Railways, which was *478 also a holding company. William Chamberlain was president and the principal executive officer of United and also of Railways.
The American Light & Traction Co. (hereinafter called American) was the top holding company of a large group of corporations engaged principally in supplying artificial gas to the public. Its president and principal executive officer was R. B. Brown.
The Koppers Co. (hereinafter called Koppers) was the top holding company of a large group of corporations engaged principally in the business of constructing, owning, and operating byproduct coke ovens. One of its principal subsidiaries was the Koppers Gas & Coke Co. (hereinafter called Koppers Gas). The group also owned and operated bituminous coal mines, manufactured certain chemical byproducts arising out of their coke operations, manufactured and sold gas making equipment, held stocks in utility companies, and had some steamship and other transportation facilities in connection with their coal business. Koppers had two stockholders, *865 H. B. Rust and the McClintic-Marshall Corporation. The latter owned five-sixths of the Koppers stock and was in trun owned by A. W. Mellon, R. B. Mellon, H. H. McClintic, and C. D. Marshall. The president of Koppers and Koppers Gas was H. B. Rust.
The securities which formed the subject matter of the transactions hereinafter described, were held in the following manner:
(a) Railways owned 75,000 shares of common stock of the Detroit Edison Co., which had cost it $11,490,432.32. These shares represented much less than 50 percent of the outstanding common stock of the Detroit Edison Co.
(b) Railways owned the equitable interest in 39,582 shares of the common stock of the Brooklyn Borough Gas Co. The total cost of the Brooklyn Borough stock to Railways was $4,424,707.53. This stock, of which there were 40,000 shares outstanding, had been acquired in 1925 by Frank Hulswit, the then president of Railways, who purchased the stock with the funds of Railways without the knowledge or authority of the board of directors of that company. When the purchase was brought to the attention of the board of directors, it was decided that Hulswit should retain the legal title to the stock*866 so that the provisions of the New York Public Service Commission Law, which prohibited a stock corporation from acquiring more than 10 percent of the capital stock of a gas or electric company operating in the former First Public Service Commission District of the State of New York, might not be violated. The Brooklyn Borough Gas Co. was a gas company operating in that district. Thereupon, Hulswit signed and delivered a declaration of trust to Railways, acknowledging that he held title to the stock for the benefit of Railways. The legal title to the stock was transferred *479 in March 1926 to Richard Schaddelee, Hulswit's successor as president of Railways, who executed a similar trust in favor of Railways.
(c) Railways owned 101,771 common shares and 31,233 preferred shares of the stock of American. Both the common and preferred stock had voting privileges. The shares woned by Railways represented approximately 20 percent of America's voting stock.
(d) Koppers Gas owned 101,444 common shares and 19,399 preferred shares of American, or slightly less than 20 percent of American's voting stock.
(e) Koppers Gas owned all the common stock (35,000 shares) of the Milwaukee*867 Coke & Gas Co. The latter company was under contract to supply gas, a byproduct of its coke operations, to the Milwaukee Gas Light Co., a subsidiary of American.
(f) American owned the entire capital stock (except directors' qualifying shares) of four New Jersey corporations known as Mutual, Waverly, Bexley, and Provident. These four corporations together owned 153,200 shares of the common stock of the Brooklyn Union Gas Co. No one of the four New Jersey corporations owned more than 10 percent of the outstanding Brooklyn Union common stock. American held the Brooklyn Union stock in this way, on the advice of counsel, to comply with the New York Public Service Commission Law.
The Koppers interests had adopted the policy of acquiring coke producing properties at strategic points along the Atlantic Seaboard for the purpose of establishing a monopoly of that business in that area. They acquired such properties in Boston, New Haven, and other eastern cities. The sale of byproduct gas to public utilities under long term contracts was an important consideration in the operation of those properties. The Koppers interests, through H. B. Rust, entered into negotiations in the fall*868 of 1927 with the Brooklyn Union Gas Co. for the purchase of its byproduct coke plant and the execution of a long term contract for the supply of gas from that plant by the Koppers interests to the Brooklyn Union Gas Co. H. B. Rust, at that time was also chairman of the executive committee of American. Koppers and American each had a minority interest in the Brooklyn Union Gas Co. American's interest represented an investment of over $16,000,000. When Brown, the then president of American, learned of the negotiations between the Koppers interests and the Brooklyn Union Gas Co., he took immediate steps to forestall their consummation. Brown was of the opinion that gas utilities should own and control their source of gas supply in order to insure a constant and efficient service to the public. Rust had a contrany view, believing that gas utilities undertaking this type of business would seriously jeopardize the stability of their *480 earnings. Chamberlain, the then president of United, agreed with Brown, and together they prevailed upon Brooklyn Union not to sell the coke oven plant to Koppers. This difference of opinion between Brown and Rust, the two principal officers*869 of American, as to a major question of policy pertaining to the company's operations, together with the personal friction which arose betwwen those two officers, seriously disrupted the organization and administrative operation of the company.
Numerous conferences were held between the conflicting interests during the succeeding months up to July 1928, in an effort to reach a satisfactory adjustment of their differences. The negotiations which took place at these meetings may be summarized as follows: Brown proposed to Rust that Koppers Gas dispose of its entire holdings in American and that American transfer to the Koppers group its interest in the Brooklyn Union Gas Co., thus enabling Koppers to continue without interference its negotiations for the purchase of the byproduct coke oven plant from the Brooklyn Union Gas Co., and leaving American free to pursue Brown's policy of acquiring gas producing properties for its operating subsidiaries. It was also proposed that American acquire the Milwaukee Coke & Gas Co. stock owned by Koppers Gas and that the Koppers group acquire the Brooklyn Borough Gas Co. stock in which Railways had the equitable interest. Rust agreed to this solution*870 of their difficulties. But the question then arose as to how Koppers would dispose of its American stock. Koppers could not conveniently sell the stock on the open market, for the reason that the market probably could not absorb such a large quantity of the stock. It was then proposed that United purchase the American stock owned by Koppers. United agreed to purchase the American stock owned by Koppers on the condition that it, or Railways, would be allowed to acquire additional American stock sufficient to give it, or Railways, directly or indirectly, the majority voting control of American. Since neither United nor Railways possessed sufficient cash to pay for the American stock to be purchased from Koppers, an obligation in favor of Koppers had to be created as part payment for the stock, and the United group was unwilling to assume such an obligation without control over the dividend policy of American. The following general plan was agreed upon to accomplish all of the results desired:
(a) Railways was to transfer 75,000 shares of Detroit Edison common, owned by it, to the American group in exchange for 75,000 shares of American common stock.
(b) Railways was to transfer*871 its equitable interest in 39,582 shares of Brooklyn Borough Gas Co. common to the American group in *481 exchange for 56,248 shares of American common. The Koppers interests were then to acquire control of the Brooklyn Borough stock from the American group.
(c) Koppers Gas was to transfer the entire capital stock of the Milwaukee Coke & Gas Co. owned by it to American (thereby giving American's Milwaukee Gas Light Co. control of its gas supply), in exchange for 38,272 shares of American common. The latter block of stock was then to be transferred by Koppers Gas to the United group (together with the American common and preferred stock already held by Koppers Gas).
The foregoing transfers were made the subject of written contracts between the respective corporate parties, duly approved by the boards of directors of each. Most of the contracts were dated July 6, 1928. The contracts were carried out in the latter part of the month of July 1928, through the following transactions:
(a) Railways on July 25, 1928, transferred to Dexter Co. 75,000 shares of common stock of the Detroit Edison Co., in exchange for the entire capital stock of Dexter Co. The Dexter Co. had*872 been organized on July 3, 1928.
(b) Railways on July 25, 1928, transferred all of the Dexter Co. stock to American in exchange for 75,000 shares of American common stock. The fair market value of the American stock so received was $15,000,000.
(c) Railways on July 25, 1928, transferred its interest in 39,582 shares of Brooklyn Borough Gas Co. common stock to ten New Jersey companies (hereinafter referred to as the ten A to J New Jersey companies), as follows:
| Shares | |
| To Aden Co. | 3,959 |
| Burma Co | 3,959 |
| Canton Co | 3,958 |
| Dover Co | 3,958 |
| Etna Co | 3,958 |
| To Falcon Co | 3,958 |
| Gordon Co | 3,958 |
| Hector Co | 3,958 |
| Irving Co | 3,958 |
| Java Co | 3,958 |
Railways received all of the stock of the ten A to J New Jersey companies in exchange for the Brooklyn Borough stock so transferred. 1 The ten A to J New Jersey corporations had been organized on July 11, 1928.
(d) Railways on July 25, 1928, transferred all of the stock of the ten A to J New Jersey companies to American in exchange for 56,248 shares of American common. The fair market value of the American stock so received*873 was $11,249,600.
(e) The ten A to J New Jersey companies, which were then owned by American, on July 27, 1928, transferred their assets, consisting of *482 a total of 39,582 shares of the common stock of Brooklyn Borough, to ten Delaware corporations which were owned by the five individuals who were, either directly or indirectly, the owners of the stock of Koppers, the parent corporation of the Koppers group. The ten Delaware companies, in exchange for the assets so transferred, delivered to the ten A to J New Jersey companies their 20-year 5 1/2 percent gold debentures in the total amount of $11,249,600, the payment of which was secured by a pledge with a trustee, as collateral, of the Brooklyn Borough stock. The debentures were guaranteed as to principal and interest by Koppers.
(f) The four New Jersey companies, Mutual, Waverly, Bexley, and Provident, the stock of which was owned by American, on July 27, 1928, transferred their assets, consisting of 153,200 shares of common stock and certain debentures of the Brooklyn Union Gas Co., to four Delaware companies owned by the five individuals who owned, directly or indirectly, the stock of Koppers. The four New Jersey*874 companies received, in exchange for the assets so transferred, 20-year 5 1/2 percent gold debentures of the four Delaware companies in the total amount of $21,321,900, the payment of which was guaranteed by Koppers and secured by a pledge with a trustee, as collateral, of the Brooklyn Union Gas Co. stock and debentures.
(g) Koppers Gas between July 6 and July 27, 1928, transferred to American all the stock of the Milwaukee Coke & Gas Co. in exchange for 38,272 shares of American common stock. Upon receipt of this block of American stock, Koppers Gas then owned a total of 139,716 shares of American common stock.
(h) Koppers Gas on or about July 27, 1928, transferred all its holdings in American (139,716 shares of common and 19,399 shares of preferred stock) to a newly organized Delaware corporation, the United American Co., in exchange for all the latter company's capital stock and its 20-year 5 1/2 percent gold debentures in the total amount of $26,872,970, secured by the American stock transferred.
(i) Koppers Gas on or about July 27, 1928, transferred all the United American Co. stock to United in exchange for 150,000 shares of class A common stock of United and an option*875 to acquire an additional block of 180,000 shares of the same stock at $20 per share. The $26,872,970 of United American Co. debentures transferred to Koppers Gas were guaranteed as to principal and interest by Railways. United transferred all the stock of the United American Co. to Railways shortly after July 27, 1928, and received in exchange therefor 32,500 shares of Railways common stock. The transfer of the American stock to Railways through the medium of United American Co. and Railways' guarantee of the United American debentures was essential to the completion of the transaction. Railways *483 could not transfer its own stock to Koppers Gas in exchange for the American stock without United losing its 100 percent control of Railways, which was considered undesirable. Nor could Railways issue debentures entirely secured by the American stock to Koppers. Railways at that time had outstanding an issue of unsecured debentures in the amount of $25,000,000. The provisions of the trust indenture under which those debentures had been issued entitled the holders of the unsecured debentures to participate equally with the holders of any secured debentures, thereafter issued, *876 in the security for the secured debentures.
Immediately following the above described transactions, Railways owned or controlled over 50 percent, but not more than 52 percent, of the voting stock of American.
The value of the property transferred in each of the transactions was equivalent to the value of the property received in exchange therefor. Each transaction was dependent upon the completion of the other transactions. No one of the transactions would have been agreed to and concluded without a concurrent agreement for and conclusion of the others.
The Dexter Co. was organized in order to comply with American's policy of holding its investments in wholly owned subsidiaries. The ten A to J New Jersey corporations were formed for the same reason and for the additional purpose of complying with the New York Public Service Commission Law, which prohibited the acquisition by any corporation of more than 10 percent of the stock of gas utilities operating under the laws of that state.
The Dexter Co. continued in existence until 1936, when it was dissolved. During its existence it purchased for $3,000,000 additional common stock of the Detroit Edison Co. with funds borrowed*877 from American. The ten A to J New Jersey corporations existed at least until the fall of 1930, when American sold the stock of those companies.
The Commissioner, in determining the deficiency, held that Railways realized a profit from the disposition of the 75,000 shares of Detroit Edison Co. stock, equal to the difference between the cost of those shares and the fair market value of the 75,000 shares of American stock ultimately received in exchange, which profit was taxable income for 1928. He likewise held that Railways realized a profit from the disposition of the 39,582 shares of Brooklyn Borough Gas Co. stock, equal to the difference between the cost of those shares and the fair market value of the 56,248 shares of American stock ultimately received in exchange, which profit was taxable income for 1928.
*484 OPINION.
MURDOCK: The parties are now in agreement as to all figures. The gain, if any is to be recognized, is $3,509,567.68 in the Detroit Edison Co. stock transactions and $6,824,892.47 in the Brooklyn Borough Gas Co. stock transactions. The petitioner contends that the transfer of the Detroit Edison shares to Dexter was a separate complete transaction; *878 the transfer of the Dexter stock was another separate complete transaction; and the first was a nontaxable reorganization under the provisions of section 112(i)(1)(B), 2 (b)(4), 3 and (b)(5) 4 of the Revenue Act of 1928, while the second was a nontaxable reorganization under the provisions of section 112(i)(1)(A) 5 and (b)(3). 6 It makes simiar contentions in regard to the transactions relating to the disposition of the Brooklyn Borough Gas stock. The soundness of these arguments depends upon whether Railways ever had "control" 7 of Dexter, or of American, and upon whether the stock of American received by Railways was stock of a corporation, a party to a reorganization, or was "other property" as that term is used in section 112. These questions, in turn, depend largely upon whether the transactions are to be regarded as independent exchanges or as interdependent steps in one integral plan or transaction.
*879 The Commissioner first contends that these transactions were not separate and complete in themselves for income tax purposes, but were mere interdependent steps in carrying out an integral plan. *485 He insists that the plan must be viewed as a whole. If it is so viewed, then Railways never had control of the Dexter stock because Railways received the stock subject to a preexisting binding contractual obligation to transfer that stock to American, and, furthermore, Railways had not the necessary continuity of interest in the Detroit Edison Co. stock. That stock went to Dexter, in which Railways, upon final consummation, had no direct interest, but only an indirect interest through the ownership of the stock in American. The result is that American was not a party to a reorganization and its stock received by Railways was "other property", the receipt of which was a recognized gain. The most recent court and Board decisions support this contention of the Commissioner.
The decision of this case need not depend upon whether the use of Dexter and the ten A to J corporations had some real business purpose, as the petitioner contends, or whether the use of those corporations*880 was merely to avoid the tax consequences of more direct transfers. The former alternative may be assumed to be the correct one. Furthermore, the facts, which the Board deems material to a proper decision, are not subject to any serious dispute between the parties. The ownership of the Dexter stock by Railways was transitory and incident to a plan which required its immediate transfer. That ransfer was not an independent transaction but was an essential part of the plan. This circumstance distinguishes the present case from some others cited by the petitioner in which there was control immediately after the integral plan had been completed, but that control was then dissipated by a separate subsequent contract and transfer. Control is determined as of the completion of the integral plan. Railways did not have control of Dexter when the interdependent transfers were completed, since it did not own a share of Dexter stock. Nor did it control American. The transfer of property (Detroit Edison Co. stock) by Railways to the American group must be viewed as a whole. "For income tax purposes the component steps of a single transaction can not be treated separately", *881 ; certiorari denied, , affirming ; Prairie Oil & Gas Co; v. ; , affirming on this point, ; ; certiorari denied, ; , affirming , on this point; ; affd., ; ; ; . Railways parted with some of its property and came out with *486 some American stock, while American received all of the stock of Dexter and Dexter received the property. American received none of the property originally owned by Railways. Although Railways owned some American stock, American owned all of the*882 Dexter stock and Dexter owned the property formerly owned by Railways, nevertheless Railways did not maintain a sufficient continuity of interest in the property (Detroit Edison Co. stock). Railways and American did not merge or consolidate. Neither acquired a majority of the voting stock or substantially all of the assets of the other. Neither was in control of the other. American was not a party to any reorganization material to the decision of this case, and its stock received by Railways was "other property." Thus the entire gain of Railways is recognized under section 112(a), since none of the exceptions apply. ;; ; ; .
The petitioner argues strenuously that the above cited cases are distinguishable on their facts and are not in point in principle. It also argues that the Whitney case was incorrectly decided and was not like the Bashford and Groman cases. These arguments might be difficult to answer were we not*883 obliged to look at these transactions as all a part of one plan. Although the parent company in the Bashford and Groman cases received the stock of its subsidiary from the subsidiary, while here American received the stock of its new subsidiaries from Railways, still in the end the result was the same in all three cases in that the transferor had no direct interest in the corporation receiving the property which was transferred. If the continuity of interest test is to be applied upon the consummation of the integral plan, then the cited cases are in point.
The petitioner cites and relies upon , and . Those cases were decided prior to the decisions of the Supreme Court in the Bashford and Groman cases and, in case of conflict, the latter are, of course, controlling. But it is not necessary to overrule the Independent Oil Co. case or to say that we will not follow the Ballwood case, since there are important differences between the facts in those cases and the facts here which may serve to distinguish the cases. *884 No general principle is stated in either of those cases which is contrary to the reasoning of this opinion.
The transactions whereby Railways disposed of Brooklyn Borough Gas Co. stock and ultimately received American stock are not more favorable to the petitioner but, if different, are less favorable to the petitioner. Under the principles and authorities above discussed, the full gain of Railways from those transactions was subject to tax. The difference is that here, when the plan was complete, *487 Railways had a much less direct interest in the Brooklyn Borough stock (which went through the ten A to J New Jersey companies to ten Delaware companies owned by Koppers) than it had in the Detroit Edison stock. Since the full gain of Railways from both dispositions was subject to tax, the other arguments of the respondent need not be discussed.
Decision will be entered under Rule 50.
Footnotes
1. Three shares of each corporation were issued at qualifying directors' shares. ↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(i) Definition of reorganization. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or * * *. ↩
3. (b) Exchanges solely in kind. -
(4) SAME - GAIN OF CORPORATION. - No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization. ↩
4. (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - 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. ↩
5. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(i) Definition of reorganization. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or * * *. ↩
6. (b) EXCHANGES SOLELY IN KIND. -
(3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩
7. "Control" is defined in section 112(j) as the ownership of at least 80 per centum of voting stock and at least 80 per centum of all other classes of stock of a corporation. ↩