*776 Petitioner owned approximately one-third of the stock of A corporation and approximately one-third of the stock of B corporation. A corporation owned the balance of the shares of stock of B corporation. A corporation was desirous of purchasing C corporation which was engaged in a related business. It entered into an agreement with some bankers which provided for the acquisition of all of the stock of B as a preliminary step in the recapitalization of A, and for the sale by A to the bankers of 85,000 shares of newly issued stock. Petitioner exchanged his stock in B company for stock in the recapitalized A company. Held, the exchange was made pursuant to a plan of reorganization and under the provisions of section 112(b)(3) of the Revenue Act of 1928 no gain is to be recognized.
*97 The Commissioner determined a deficiency in petitioner's income tax for the year 1929 in the amount of $125,534.97. The issue submitted for our determination is whether an exchange by petitioner of stock in the Salisbury Axle Co. for stock in the Spicer Manufacturing*777 Corporation was made pursuant to a plan of reorganization or not. If it was, then any gain realized upon such exchange is not to be recognized; but if not, it will be necessary to determine the amount thereof, in connection with which it will be necessary to determine the fair market value of the stock at the time it was received by petitioner.
FINDINGS OF FACT.
The petitioner is an individual who, for the year 1929 and during all times material herein, kept his books and rendered his income tax returns on a cash basis. He was the president of the Spicer Manufacturing Corporation (hereinafter called Spicer) and of the Salisbury Axle Co. (hereinafter called Salisbury).
Spicer was organized under the laws of the State of Virginia in October 1916, had a plant located at South Plainfield, New Jersey, and was engaged in manufacturing universal joints and propeller shafts for motor vehicles. Salisbury was organized under the laws of Delaware in 1919, had a plant located at Jamestown, New York, and was engaged in the business of manufacturing axles for motor vehicles.
*98 The capital structure of Salisbury and Spicer prior to December 24, 1928, was as follows:
| Salisbury | ||||
| Authorized | Issued | Owned by petitioner | Owned by Spicer | |
| No par value common | 20,000 | 20,000 | 6,666 | 13,334 |
| $100 par value preferred | 30,000 | 27,500 | 10,000 | 17,500 |
| Spicer | ||||
| Authorized | Issued | Owned by petitioner or his nominees | Owned by others | |
| No par value common | 600,000 | 313,750 | 118,125 | 195,625 |
| $100 par value 8% preferred (redeemed prior to August 1928) | 100,000 |
The 6,666 shares of common and 10,000 shares of preferred stock of Salisbury owned by petitioner were purchased by him for a cash consideration of $1,000,000 on January 2, 1925, and remained in his name until surrendered and exchanged for stock of Spicer as hereinafter set out.
In the latter part of 1927 petitioner, as president of Spicer, determined to transfer operation of that company to Toledo. This was deemed advisable because of the concentration of the automobile manufacturing industry within the area more or less contiguous to Toledo, and also because of the availability of raw material. At the same time petitioner conceived the idea of moving the Salisbury plant to Toledo, and merging the operations of the two companies. While no formal action by the directors of the two corporations was shown in evidence, plans for the erection of a building at Toledo were drawn and as soon as ground could be broken in the spring of 1928 construction*779 was started. The first section of the building was completed early in the fall of 1928 and Spicer then commenced the removal of its machinery, equipment and a part of its personnel, completing such removal in the first half of 1929.
In the fall of 1928, Brown-Lipe Gear Co., a corporation engaged in manufacturing automobile gears, was offered for sale for $3,900,000. Spicer determined that it would be advantageous to purchase this company, and such purchase was ultimately made under the circumstances and by the means hereinafter related.
A written agreement was entered into on December 24, 1928, between Spicer and two groups of bankers. This agreement provided, *99 among other things, (1) for the acquisition by Spicer of all of the outstanding shares of the preferred and common stock of Salisbury not then owned by it; (2) for the recapitalization of Spicer by reducing its authorized capital stock through the elimination of the 100,000 shares of its preferred stock, par value $100 each, and increasing and reclassifying its capital stock, to the end that its authorized capital stock should consist of 150,000 shares of preferred and 600,000 shares of common, both without*780 par value; (3) for the acquisition by Spicer of the entire issued and outstanding preferred and common stock of the Brown-Lipe Gear Co. for $3,900,000 in accordance with an existing contract; (4) that Spicer should procure and deliver to the bankers "a consolidated statement of the assets and liabilities of the corporation [Spicer] and its wholly owned subsidiary companies" (Salisbury and Brown-Lipe); and (5) that it should sell to the bankers 85,000 shares of the new issue of Spicer preferred stock for $3,846,250, being at the rate of $45.25 per share.
The date for closing the transaction with the bankers was fixed at not earlier than January 15, 1929, nor later than January 31, 1929, although provision was made for extending the time or for fixing a different date if the exigencies should require it.
On the same date that the agreement was made between Spicer and the bankers, December 24, 1928, petitioner wrote Spicer, offering to exchange his stock in Salisbury for 40,000 shares of the common stock of Spicer. The letter read in part as follows:
I hereby offer to sell, assign, transfer and deliver to you [my Salisbury stock] in consideration of the issuance and delivery*781 by you to me of 40,000 shares, without par value, of your common stock.
The board of directors of Spicer on December 27, 1928, adopted a resolution providing:
WHEREAS, in the opinion of this Board, it is deemed advisable and for the best interests of this corporation that it acquire the remaining outstanding preferred and common stock of said Salisbury Axle Company in order that this corporation may derive the benefit and advantage from all of the earnings of said Salisbury Axle Company and consolidate the assets and liabilities of said Salisbury Axle Company upon the balance sheet of this corporation; and
WHEREAS, in the opinion of this Board the said 10,000 shares of preferred stock, and 6,666 shares of common stock of said Salisbury Axle Company are worth at least the sum of $1,600,000 - now, therefore, be it
RESOLVED, that the offer of Mr. Charles A. Dana * * * be and the same is hereby accepted * * *.
Under date of January 15, 1929, Spicer issued to petitioner 40,000 shares of its common stock in exchange for his shares of stock in *100 Salisbury. The following journal entry was made on Spicer's books covering the issuance of the 40,000 shares of stock:
| Investment Salisbury Axle Co | $1,600,000.00 |
| Capital Stock | $200,000.00 |
| Surplus | 1,400,000.00 |
*782 Spicer's directors and stockholders approved the agreement with the bankers, and pursuant to that agreement, in order to effect the necessary recapitalization, the certificate of incorporation of Spicer was amended on January 15, 1929. On or about the same date the transaction with the bankers was closed.
In accordance with the petitioner's original plan, the construction of an extention to the building at Toledo was begun early in 1929 to accommodate the Salisbury machinery and equipment. The extension was completed in the fall of that year. In August 1929, the removal of Salisbury machinery and equipment was begun and by the end of that year such removal was substantially completed and the machinery and equipment were lodged in the extension.
On January 31, 1929, Spicer surrendered to Salisbury its 27,500 shares of preferred stock, par value, $2,750,000, including the 10,000 shares secured from the petitioner and being all of the outstanding preferred stock of Salisbury. The stock was then canceled and the capital and surplus account of Salisbury was credited in the amount of $2,750,000. The balance in this account after such entry amounted to $849,639.24 on December 31, 1929, and*783 represented the book value of the outstanding 20,000 shares of no par value common stock.
On December 31, 1929, substantially all of the usable assets of Salisbury, consisting of inventory, machinery, equipment, receivables, and cash in the bank, had been moved to Toledo, and had been taken over by Spicer onto its ledgers and entered onto its books at the same figures that they had previously appeared on the Salisbury books. These assets totaled $1,755,061.90. Since December 31, 1929, the Salisbury plant at Jamestown, New York, has been idle and Salisbury has carried on no manufacturing operations and has engaged in no activities other than disposing of obsolete inventory, building equipment, etc., as scrap. All of Salisbury's customers were notified on December 31, 1929, that it would transact no further business and that all of its manufacturing operations would thereafter be conducted by Spicer.
During 1930 and 1931, additional assets of Salisbury, having a book value of $123,109.91, were gradually transferred to Spicer, making a total of transferred assets amounting to $1,878,171.81. The assets not transferred had a book value of $215,436.71, and consisted *101 *784 largely of obsolete materials, machinery, and equipment. In the ensuing two years a large part of the investment in obsolete assets was written off as valueless, while a portion of such assets was sold as scrap. The amount realized from such sales was $15,780.24. The only assets then remaining were Liberty bonds aggregating $9,176.38, deposited with the New York State Industrial Commissioner, and land and buildings located at Jamestown, New York, having a book value of $60,023.69. The Liberty bonds could not be transferred to Spicer since, under the laws of the State of New York, they were to be held by the State Industrial Commissioner pending the termination of Salisbury's liability on account of compensation insurance. The land and buildings comprising the discarded plant, were not transferred to Spicer because they could not be used in its operations, and Spicer did not desire, by obtaining title to them, to subject itself to the New York State franchise tax.
In June 1932, the common stock of Salisbury then outstanding, all of which was owned by Spicer, was reduced to 1,000 shares, par value $25 per share. This par value of $25,000 was thereupon debited to the "Capital*785 and Surplus Account" and set up by a credit to a new account termed "Capital Stock." The balance of the account formerly carried on the books as "Capital and Surplus" was transferred to a new account called "Surplus." The charter of Salisbury was amended to reflect this revised capitalization.
Petitioner did not included in his Federal income tax return for 1929 any part of the gain realized by him upon the exchange of his Salisbury stock for stock of Spicer. Respondent determined that the 40,000 shares of Spicer stock received by him in the exchange had a fair market value of $50.125 per share or $2,005,000 at the time that they were received by him and, the cost of his Salisbury stock being $1,000,000, the respondent determined that the difference between such cost and the fair market value of the Spicer stock, or $1,005,000 represented taxable gain to the petitioner and should have been included by him in his return of income for that year.
OPINION.
MELLOTT: Petitioner contends (1) that any gain upon the exchange is not to be recognized since it was an exchange of stock of one corporation for stock of another corporation made pursuant to a plan of reorganization, both*786 corporations being parties thereto; and (2) that if it be held that he realized a taxable gain on the exchange, then the gain should be measured by the fair market value of Spicer stock received by him, which value he contends is not in excess of $30 per share.
*102 The pertinent provisions of the Revenue Act of 1928 are shown in the margin. 1
*787 Under section 112(b)(3) no gain or loss is to 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. It is not disputed that petitioner exchanged his stock in Salisbury solely for stock in Spicer. The question for determination therefore is simply whether such exchange was made in pursuance of a plan of reorganization and whether or not Salisbury and Spicer were parties thereto.
The respondent contends that the exchange was not made pursuant to a plan of reorganization. He argues (1) that prior to the exchange Spicer was the owner of more than a majority of the stock of Salisbury and that it did not acquire a 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 Salisbury through the exchange in question; (2) that it acquired by purchase a monority interest in the Salisbury stock owned by petitioner; (3) that the petitioner's Salisbury stock was not acquired pursuant to the plan for the transfer by Salisbury of all*788 or part of its assets to Spicer; and (4) that if *103 there ever was a statutory reorganization to which Spicer and Salisbury were parties, such reorganization had been consummated prior to 1929.
Petitioner argues that there was a statutory reorganization by reason of (a) the acquisition by Spicer of at least a majority of the stock of Salisbury; (b) the acquisition by Spicer of substantially all the properties of Salisbury; (c) a recapitalization of Spicer; or (d) a recapitalization of Salisbury. He further argues that all of the requisites of the statute have been met; that there was a plan of reorganization, and exchange pursuant thereto of stock in one corporation for stock in another, and that both corporations were parties to the reorganization.
The record discloses that there was two plans, (1) the plan of petitioner to move Spicer and Salisbury to Toledo and consolidate and merge their physical assets and businesses; and (2) the plan set forth in the agreement with the bankers, which included the acquisition by Spicer of all of the outstanding stock of Salisbury and the recapitalization of Spicer. *789 We are satisfied that the exchange was made pursuant to the plan contained in the agreement between Spicer and the bankers. While we deem it unnecessary to give any consideration to the first mentioned plan, petitioner's argument to the effect that it was a plan of reorganization is not without substantial merit. ; ; ; .
The agreement between Spicer and the bankers provided that Spicer should acquire all of the stock of Salisbury not then owned by it; that it should reduce its authorized capital stock by the elimination of the 100,000 shares of preferred stock; that, subject to obtaining the approval of its stockholders, it should increase and reclassify its capital stock so that it should consist of 150,000 shares of preferred and 600,000 of common; that it should acquire all of the capital stock of the Brown-Lipe Gear Co., procure and deliver to the bankers a consolidated statement of the assets and liabilities of the corporation*790 (Spicer) and its wholly owned subsidiary companies (Salisbury and Brown-Lipe) and that it should sell to the bankers 85,000 shares of the new preferred stock.
The agreement constituted a plan of reorganization if any of the acts to be performed by Spicer fall within the meaning of the term reorganization as defined by section 112(i)(1), supra. This section defines a reorganization to mean, inter alia, 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 *104 number of shares of all other classes of stock of another corporation), or a recapitalization. As heretofore pointed out, the agreement provided that Spicer should acquire all of the Salisbury stock and that Spicer should be recapitalized.
The respondent urges us to hold that there was no statutory reorganization because Spicer owned a majority of the stock of Salisbury prior to the exchange. Such a construction of subdivision (A) of section 112(i)(1), supra, would not, in our opinion, give effect to the purpose with Congress had in mind in enacting the reorganization provisions of the statute. That purpose*791 was to facilitate readjustments of corporate businesses by permitting the postponement of gain or loss on exchanges made in pursuance thereof where the transferor retained a continuing interest in the reorganized corporation or corporations. ; . And "the terms 'merger' and 'consolidation' are to be given a liberal interpretation to effectuate the purposes" which Congress had in mind in enacting the statute.
In providing that a reorganization means 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 Congress intended to cover not only a strict merger or consolidation but also transactions which have a real resemblance thereto. In , the Supreme Court, in discussing the same provision of the 1926 Act, said:
The words within the parenthesis*792 may not be disregarded. They expand the meaning of "merger" and "consolidation" so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of these words - so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either a merger or consolidation.
As the Supreme Court pointed out, the acquisition by one corporation of at least a majority of the stock of another is a reorganization because it "partakes of the nature of a merger or consolidation." If the acquisition by one corporation of a bare majority of the stock of another constitutes a reorganization, we are of the opinion that the acquisition by one corporation of all the outstanding stock of another, thus enabling the acquiring corporation, at its pleasure, to consolidate or merge the two corporations, falls within the same category. At the time Spicer acquired petitioner's Salisbury stock, there was in existence a plan, which was subsequently executed, for Spicer to take over the assets of Salisbury and to merge and consolidate *105 the businesses theretofore conducted by the two corporations. *793 Moreover, the agreement between Spicer and the bankers tends to indicate that at the time it was entered into, a merger or consolidation was contemplated by the parties; for by it Spicer was obligated to procure and deliver to the bankers a statement of the assets and liabilities of itself and "its wholly owned subsidiary companies", Salisbury and Brown-Lipe. In view of the foregoing we hold that the acquisition of petitioner's stock by Spicer was pursuant to a plan of reorganization within the meaning of subdivision (A) of section 112(i)(1), supra, and that Salisbury and Spicer were parties thereto.
It follows therefore that the respondent erred in determining the above deficiency. The conclusion reached renders it unnecessary to determine the fair market value of the Spicer stock received by petitioner.
Reviewed by the Board.
Judgment will be entered for the petitioner.
Footnotes
1. SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
(a) Computation of gain or loss. - Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized.
SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) General rule. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(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.
* * *
(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 (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.
* * *
SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, 1913.↩ - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * *