*1850 Held that the petitioner sold its assets for cash paid and to be paid in the future and the transaction does not come within the reorganization provisions of the Revenue Act of 1926 relating to exchanges.
*425 This is a proceeding for a redetermination of a deficiency in income tax for 1926 in the amount of $74,673.50. The sole question is whether any taxable gain was realized by petitioner from the transfer of its property to the Florida West Coast Ice Co. in 1926. If there was taxable gain there is no controversy as to the amount.
FINDINGS OF FACT.
Petitioner was incorporated under the laws of Florida in January, 1925, and was thereafter engaged in the busienss of the manufacture and sale of ice in and around St. Petersburg, Fla. Substantially the same stockholders owned and controlled the Citizens Ice & Cold Storage Co., hereinafter called Citizens Co., a corporation engaged in the same business in the same locality.
In February, 1926, negotiations were begun by Leon D. Lewis, the general manager of both of*1851 the above companies, for the disposition of the business and property of the two companies to the National Public Service Corporation, which was a holding company for certain interests of A. E. Fitkin of New York. These negotiations continued through the summer of 1926. The Fitkin interests desired to acquire the business of both companies, but were unwilling to consider the acquisition of one without the other. All the directors and stockholders of both companies were anxious to dispose of all the properties of the two companies, and upon the disposal of the properties to discontinue business, dissolve the corporations, and distribute the proceeds. The progress of the negotiations with the National Public Service Corporation was reported by Leon D. Lewis from time to time to the directors and stockholders of petitioner and the Citizens Co., and was discussed by the stockholders and directors of these companies. Of the fifteen stockholders of petitioner, ten of them, owning over 80 per cent of its stock, were also directors. All lived in St. Petersburg or the immediate vicinity, and Lewis was in constant touch with them during all of the negotiations with the Fitkin interests. *1852 It was definitely *426 understood and agreed by all of the stockholders and directors that upon the making of the transfer of the properties, the affairs of the two corporations would be wound up, the assets distributed to the stockholders in liquidation, and the corporations dissolved. In October, 1926, the representative of the National Public Service Corporation and the representatives of petitioner and of the Citizens Co. reached an agreement as to the consideration and the terms of the transfer of the properties of the two companies. In October, 1926, the directors of petitioner and the Citizens Co. met and unanimously approved the terms of the agreement with the National Corporation, and at that time confirmed their prior agreements and undersandings that the proceeds of the transfer would be distributed and the corporations dissolved.
On November 4, 1926, a written agreement was entered into between petitioner and the National Public Service Corporation relating to the terms of the transfer of petitioner's property and conditioned upon the transfer of the property of Citizens Co. as follows:
AGREEMENT made this 4th day of November, 1926, by and between PINELLAS*1853 ICE & COLD STORAGE COMPANY, a Florida corporation, hereinafter sometimes called the "Vendor," party of the first part, and NATIONAL PUBLIC SERVICE CORPORATION, a Virginia corporation, hereinafter sometimes called the "Purchaser," party of the second part,
WITNESSETH:
* * *
FIRST: The Vendor agrees to sell and the Purchaser agrees to purchase all of the real estate set forth in Schedule A hereto annexed, together with all physical property, plants, buildings, equipment, generators, machinery, distribution systems, supplies, rights, easements and privileges, and all other property, other than real estate not described in Schedule A, cash on hand, accounts and bills receivable, and books of account, now owned or used by the Vendor in connection with its ice or cold storage business or which may hereafter be acquired prior to the closing of this contract, together with the good will of the business, free and clear of all defects, liens, encumbrances, taxes and assessments for the sum of $1,400,000, payable as hereinafter provided.
SECOND: The Vendor further agrees to assign to the Purchaser (1) its contract with Wright Brothers in connection with the latter's ice business at Dunodin; *1854 (2) its lease with Pinellas County Power Company of the building in Clearwater in which the old ice plant is located; and (3) its power contract with Pinellas County Power Company.
THIRD: The date and place of closing and terms of settlement are as follows:
(a) The date of closing shall be at eleven o'clock A.M. on December 15, 1926, and the place of closing at the office of A. E. Fitkin & Company, 165 Broadway, New York City.
(b) At said time and place the Vendor shall deliver to the Purchaser instruments of conveyance and transfer by general warranty in form satisfactory to the Purchaser of the property set forth in paragraphs FIRST and SECOND hereof.
*427 (c) At said time and place the Purchaser shall pay to the Vendor the sum of $400,000.00 in cash. The balance of the purchase price, to-wit: $1,000,000.00 shall be paid by the Purchaser to the Vendor as follows:
$500,000.00 on or before the 31st day of January, 1927;
$25,000.00 on or before the 1st day of March, 1927; and
$250,000.00 on or before the 1st day of April, 1927.
The deferred installments of the purchase price above mentioned shall be evidenced either:
(a) By 6% notes of the Purchaser payable*1855 on or before the dates above specified and secured by the deposit thereunder as collateral of either (1) notes and/or mortgage bonds of the proposed Florida corporation referred to in article FOURTEENTH hereof not less in aggregate principal amount than the notes of the Purchaser given to the Vendor; or (2) other collateral satisfactory to the Vendor; or
(b) By 6% notes of the proposed Florida corporation referred to in article FOURTEENTH hereof, payable on or before the dates above specified, and secured by the deposit thereunder as collateral of either (1) mortgage bonds of such Florida corporation not less in aggregate principal amount than the notes of the Florida corporation given to the Vendor; or (2) other collateral satisfactory to the Vendor.
In case mortgage bonds of such proposed Florida corporation are deposited as collateral to notes as above provided for, such mortgage bonds shall have a first lien on the property and assets covered by this agreement.
* * *
TENTH: The Vendor agrees that it will procure for the Purchaser an agreement to be signed by E. T. Lewis and Leon D. Lewis to the effect that they will not engage, directly or indirectly, in the manufacture*1856 or sale of ice or refrigeration in Pinellas County, Florida, for a period of ten years from the date of closing of this agreement.
* * *
THIRTEENTH: In the event that Citizens Ice & Cold Storage Company is unable for any reason to fulfill its covenants and agreements under a contract between it and the Purchaser, bearing even date herewith, then the Purchaser, at its option, shall be released from its covenants and agreements herein set forth without claim of any sort on the part of the Vendor for damages or otherwise. If Citizens Ice & Cold Storage Company is able to fulfill its covenants and agreements under said contract of even date herewith but the Purchaser fails to fulfill or perform the covenants and agreements on its part contained in said contract with Citizens Ice & Cold Storage Company of even date herewith, then the Vendor shall be released from its covenants and agreements herein set forth without claim of any sort on the part of the purchaser for damages, or otherwise.
FOURTEENTH: Unless the Purchaser determines to cancel this agreement and not to purchase the property and assets covered hereby as hereinbefore provided, the Purchaser agrees to cause the formation*1857 of a corporation under the laws of the State of Florida and to cause such corporation to take title to the property and assets covered hereby and assume the covenants and agreements on the part of the Purchaser contained herein, but in such event the Purchaser shall remain liable for the performance by such Florida corporation of the covenants and agreements herein contained.
Schedule A of the agreement listed the tracts of real estate upon which petitioner's plants and buildings were located, and Schedules *428 B and C listed the liens and encumbrances upon the real estate, plants, and equipment.
The $400,000 cash payment provided for in the agreement was determined as the amount necessary to discharge all debts and liens and encumbrances on the property of petitioner.
On the same date, November 4, 1926, an agreement of similar import with respect to the property of Citizens Co. was entered into between that company and the National Public Service Corporation. Paragraph Sixteenth thereof was similar to paragraph thirteenth of the agreement with petitioner and provided that the consummation of the transfer would depend upon the corresponding transfer of petitioner's*1858 property.
At the request of the National Public Service Corporation, the stockholders and directors of petitioner and the Citizens Co. approved the two agreements. This was done at the same time and place on December 7, 1926, and for the purpose of effectively passing title to the properties of the two companies.
Early in December, 1926, $33,000 was advanced on behalf of the National Public Service Corporation to petitioner for the purpose of retiring a like amount of outstanding bonds of petitioner. These bonds were part of an issue of $300,000, of which only $33,000 were outstanding. Petitioner paid over this amount to the trustee under the bond issue and subsequently the entire amount of bonds of this issue was canceled and destroyed.
Pursuant to the agreement, National Public Service Corporation caused to be incorporated the Florida West Coast Ice Co., and a charter to the latter company was granted on December 6, 1926.
On December 17, 1926, Lewis on behalf of petitioner and the Citizens Co. met with the representatives of National Public Service Corporation and the Fitkin interests in New York City for the purpose of closing the transactions. There were also present*1859 representatives of creditors of petitioner, whose claims were to be satisfied out of the cash payment provided for in the agreement of November 4, 1926. At this meeting deeds and other instruments of conveyance to the property of petitioner and Citizens Co., respectively, were delivered to the Fitkin representatives. These instruments were made out to Florida West Coast Ice Co. Checks of the Fitkin interests were made out and delivered to the respective creditors of petitioner and Citizens Co. Approximately $91,000 was thus paid to take up the deferred payment notes of Arctic Ice Machine Co. and $135,000 to take up the mortgage notes held by Central National Bank & Trust Co. of St. Petersburg. A cash payment of approximately $137,000 was also made to petitioner. These payments to petitioner and its creditors, together with the *429 advance of $33,000 previously made to take up outstanding bonds of petitioner, made up the cash payment of $400,000 provided for in the agreement of November 4, 1926. Petitioner also received at this time, pursuant to the agreement, four notes of Florida West Coast Ice Co., in the respective amounts of $500,000, $250,000, $150,000, and $100,000, *1860 maturing serially from January 31, 1927, to April 1, 1927. The note of $100,000 was conditioned as to payment upon petitioner removing a cloud upon the title to one of its plants. As collateral security for these notes there were deposited bonds of the Florida West Coast Ice Co. which were secured by the properties thus acquired by that company from petitioner and the Citizens Co. The agreement of November 4, 1926, made by the Citizens Co. was likewise carried out according to its terms at the same time.
The cash payment received by petitioner on December 17, 1926, amounting to approximately $137,000, was immediately used by petitioner to take up notes at banks and to pay off other liabilities, and virtually all of this sum was thus paid out by petitioner before January 20, 1927.
On January 20, 1927, pursuant to the plan theretofore made by the stockholders and directors of petitioner, formal resolutions were passed providing for the winding up of the affairs of the corporation, distribution of the assets, and the dissolution of the corporation. As stated, similar action was taken by the Citizens Co. at the same time.
The notes of Florida West Coast Ice Co. were paid on*1861 or before the respective due dates, thereof, except the $100,000 note, which was paid in November, 1927, after the flaw in title to one of petitioner's plants had been cleared up. Upon receiving payment of these notes, petitioner immediately distributed the proceeds to its stockholders as liquidating dividends. The outstanding certificates of shares of stock of petitioner had been surrendered prior to the distributions in liquidation and remained in the custody of the company thereafter. Endorsements of the payment of liquidating dividends were made upon the several certificates. Pursuant to the resolution of January 20, a small amount of cash was retained as a contingent fund for possible expenses.
The property conveyed to the Florida West Coast Ice Co. pursuant to the contract of November 4, 1926, covered all of the assets of petitioner except a few scattered vacant lots which were worth not in excess of $10,000, some accounts receivable from customers which did not exceed $3,000 in face value, and a small amount of cash on hand. The original plan of the directors and stockholders of petitioner provided that any miscellaneous items of assets of the company *430 which*1862 would not be disposed of to the Fitkin interests would be turned over to a new holding company to be organized for that purpose. In pursuance of this plan the Citizens Holding Corporation was organized early in 1927, and all of the remaining assets of petitioner, except what was to be retained to meet debts and contingent liabilities, were thereupon turned over to Citizens Holding Corporation as trustee for petitioner's stockholders. The value of the assets so retained and conveyed to the Citizens Holding Corporation was less than 1 per cent of the value of the entire assets of petitioner. In other words, more than 99 per cent of the value of the total property was transferred to the Florida West Coast Ice Co.
The transfer of the assets of petitioner to the Florida West Coast Ice Co. in exchange for cash and notes, the distribution in liquidation of the proceeds thereof to the stockholders of petitioner, and the dissolution of petitioner were made in accordance with and pursuant to a plan of the officers and stockholders of petitioner, which plan was formulated prior to the execution of the agreements of November 4, 1926, between petitioner and the National Public Service Corporation, *1863 and between the Citizens Ice & Cold Storage Co. and the National Public Service Corporation.
The respondent, in determining the deficiency set forth in the notice of deficiency to petitioner, held that petitioner had realized a taxable profit of $552,144.12 from the transaction.
The income-tax return of petitioner for the year 1926 was filed with the collector of internal revenue at Jacksonville, Fla.
OPINION.
TRAMMELL: It is the contention of the petitioner that the transaction here involved comes within the reorganization provisions of the Revenue Act of 1926 and that, the proceeds of the sale or transfer having been distributed pursuant to a plan of reorganization, there was no taxable gain.
The pertinent provisions of the statute are:
SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
and the following subdivisions of section 203: (b)(3); (d)(1); (e)(1) and (2); (f); (g); and (h)(1) and (2).
Section 203(a) provides that when there is a sale or exchange of property the entire amount of the gain or loss shall be recognized, *1864 with certain exceptions mentioned in the other subdivisions of that section. The question for decision is whether the transaction here comes within any of those exceptions.
*431 Generally, upon the sale or exchange of property taxable gain or loss is recognized. This is true unless the transaction comes within an exception contained in the statute. So far as the provisions of the statute pertinent here are concerned, section 203(b)(3) and 203(e), the exception relates to exchanges and not to sales. Section 203(b)(3) provides that no gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, under the circumstances therein provided, and section 203(e) provides that if an exchange would be within the provision of paragraph (3) subdivision (b) if it were not for the fact that money or other property were included in the transaction as a consideration. In other words, in order to come within the exception to the general provisions contained in section 203(e) there must in the first place clearly be an exchange. This essential requirement must be met in any event, regardless of whether otherwise there might be a reorganization within*1865 the meaning of the statute or whether the other provisions of the statute have been met. We think it is clear that if property is sold the transaction would not come within the exchange provisions. A sale does not come within either the words or the reason of section 203(b)(3) or 203(e). There is a clear legal distinction between a sale and an exchange, and section 203(b)(3) and 203(e) relate only to exchanges, and not to sales.
The United States Supreme Court has laid down a rule long recognized and well established in law as to what constitutes a sale. That court in the case of , stated as follows:
* * * We remark that sale is a word of precise legal import, both at law and in equity. It means at all times, a contract between parties, to give and to pass rights of property for money, - which the buyer pays or promises to pay to the seller for the thing bought. Noy's Max., ch. 42; Shep. Touch., 244.
Congress should be presumed to have had a knowledge of the law as laid down by the Supreme Court and long recognized as to what constitutes a sale, and we must assume that the language used in section 203*1866 was used with that import, especially since the section of the statute involved used both the words "sale" and "exchange" and did not include sales in the exceptions.
Here the transaction was a sale for money. The consideration was to be paid only in money. A portion of the consideration was to be paid in cash and the balance to be paid in the future in money. This to our mind constitutes a real sae of assets rather than an exchange as provided in section 203(b)(3), 203(e), or 203(e)(1).
The notes, although secured by a mortgage, were merely evidences of the payments to be made in the future. It is well recognized that, *432 even in the absence of a definite agreement, promissory notes are not to be considered as payments, but merely as evidences of agreement to pay in the future. But in this case we have not only the presumption of law, but the actual agreement of the parties, that the deferred payments were evidenced by notes. ; ; *1867 ; ; ; ; ; ; .
It may well be true that promissory notes secured by the property to be acquired in the transaction may be considered as securities, but the other provisions in the statute must first be met; in other words, there must be an exchange, and when we consider the import to be given to that word, it must necessarily limit the word "securities" as well. When we consider that the statute makes no exception from the general rule as to the taxation of gain derived from sales, but only makes exception as to exchanges in section 203(b)(3) and 203(e), we think that the word "securities" does not mean promises of purchase price payments to be made in the future evidenced by notes, although secured by mortgages. The statute clearly contemplated something else than purchase price obligations in these provisions of the statute.
There is no exception to the general rule*1868 of taxation where a corporation, although a party to a reorganization, sells its property for money paid in cash or to be paid in cash, although the deferred payments are evidenced by purchase price promissory notes secured by mortgages. Even if we should hold that there was a reorganization in every sense of the word, the petitioner has not brought itself within the exceptions contained in the statute. Considering for the sake of argument that there was a reorganization and that the petitioner involved here was a party to that reorganization, still the petitioner did not exchange property as provided in section 203(b)(3) or 203(e). The petitioner simply sold its property for money paid in cash or to be paid in cash.
In view of the foregoing, the transaction not being an exchange, it is unnecessary for us here to discuss or to decide whether there was a reorganization, whether the petitioner here was a party to the reorganization, or whether the petitioner made a distribution in pursuance to a plan of reorganization.
Reviewed by the Board.
Judgment will be entered under Rule 50.