1942 BTA LEXIS 810">*810 Petitioner acquired all the assets of its predecessor, the A corporation, pursuant to a plan for reorganization under section 77B of the Bankruptcy Act, but there was no "reorganization" within the definition in section 112(g)(1)(C) and (E) of the Revenue Act of 1934. The creditors of A were not "stockholders" within the meaning of (C). Helvering v. Southwest Consolidated Corporation,315 U.S. 194">315 U.S. 194. For purposes of computing gain or loss and depreciation, the basis of the assets to the petitioner was cost to petitioner. Part of cost is represented by preferred and common stock issued by petitioner. Held, that the measure of the part of the cost represented by the shares of stock was the fair market value of the stock at the time of issue. Amerex Holding Corporation,37 B.T.A. 1169">37 B.T.A. 1169; affd., 117 Fed.(2d) 1009; certiorari denied, 314 U.S. 620">314 U.S. 620. Fair market value of all of the assets determined under the facts.
46 B.T.A. 788">*788 Respondent determined deficiencies of $6,218.931942 BTA LEXIS 810">*811 in income tax and $2,466.19 in excess profits tax for the fiscal year ended September 30, 1936. Petitioner claims an overpayment of $2,129.93 in income tax for the taxable year. The main question is the correct basis for computing gain or loss on the disposition of inventories and on the realization of accounts and notes receivable and for computing depreciation on depreciable assets all of which were acquired by petitioner from its predecessor in connection with a reorganization under section 77B of the Bankruptcy Act.
FINDINGS OF FACT.
Petitioner is an Ohio corporation and has its principal place of business at Toledo, Ohio. It keeps its books of account and makes its income and excess profits tax returns on the accrual basis and on the basis of a fiscal year ending September 30. It filed its return for the fiscal year ended September 30, 1936, the taxable year, with the collector of internal revenue for the tenth district of Ohio.
Petitioner is engaged in the wholesale and retail hardware business at Toledo. It was organized on September 24, 1935, to acquire all the assets of the Stollberg Hardware & Paint Co., an Ohio corporation hereinafter referred to as the old1942 BTA LEXIS 810">*812 company. Petitioner acquired all the assets of the old company on October 21, 1935.
In the early spring of 1934 the old company was much in need of 46 B.T.A. 788">*789 the services of a manager. During the spring and summer of 1934 A. S. Butler, the old company's vice president, performed the services of a manager. The old company agreed with Butler to amend its articles of incorporation to authorize the issuance of 100 shares of management stock and to issue such stock to Butler.
Prior to September 11, 1934, the old company's authorized and outstanding capital stock consisted of 1,750 shares of common stock having a par value of $30 per share. On September 11, 1934, the articles of incorporation of the old company were amended to provide for an authorized capital stock consisting of 1,750 shares of class A stock having a par value of $30 per share and 100 shares of class B stock having no par value. The class A stock was to be the then outstanding common stock. The class B stock was a new issue of stock which was to be used in securing managerial services for the old company.
On or about September 11, 1934, Butler, on behalf of the old company, employed G. S. Wilson to serve1942 BTA LEXIS 810">*813 as manager of the old company. At that time Butler agreed orally to sell 50 shares of class B stock to Wilson at $1 per share. On January 21, 1935, Butler entered into a written agreement with Wilson under which Butler agreed to sell Wilson 50 shares of class B stock forthwith at $1 per share, 25 shares of class B stock on March 1, 1936, at $1 per share if Wilson's services were found satisfactory, and 25 shares of class B stock within 6 months after Butler's death at the book value of the stock. The agreement was approved by the board of directors of the old company on February 15, 1935. However, the agreement was never carried out. Although Butler acquired 50 shares of class B stock from the old company, Wilson never acquired any shares of class B stock. The only shares of class B stock which were ever outstanding were the 50 shares acquired by Butler. Wilson was never a stockholder of the old company.
In March of 1935 the old company filed a voluntary petition for reorganization under section 77B in the United States District Court for the Northern District of Ohio. A plan for the reorganization of the old company was filed by it on April 15, 1935, and amendments to the1942 BTA LEXIS 810">*814 plan were filed by one of its creditors on September 5, 1935. On or about October 21, 1935, the amended plan was confirmed by the court. During the proceedings under section 77B Wilson served as the trustee of the old company.
In accordance with the amended plan petitioner was organized to acquire all the assets of the old company. Petitioner had the following authorized capital stock: 1,000 shares of 6 percent cumulative preferred stock having a par value of $100 per share, 2,000 shares of common stock having no par value, and 100 shares of management stock having no par value. The holders of shares of preferred stock had 46 B.T.A. 788">*790 no voting rights except in certain specified situations. The board of directors was to include two directors meeting the approval of the holders of a majority in amount of the preferred stock. Each share of management stock was entitled to voting power equivalent to 20 shares of common stock except in the election of directors, when each share of management stock was entitled to voting power equivalent to 21 shares of common stock. Dividends were to be declared and paid in an equal aggregate amount on the common stock as a class and on the management1942 BTA LEXIS 810">*815 stock as a class, but no dividends were to be paid on either the common stock or the management stock as long as any preferred stock was outstanding. Upon dissolution the holders of preferred stock were to be paid the par value of their shares together with accrued dividends before any payment in respect to the other stock; after such payment in full to the holders of preferred stock, the holders of the common stock were to be paid $10 per share before any payment in respect to the management stock; after such prior distribution in respect to preferred and common stock, the holders of the common stock and the holders of the management stock were entitled to the remaining assets in proportion of one-half to the holders of the common stock as a class and one-half to the holders of the management stock as a class. No share of management stock was to be sold or transferred by any holder thereof until the same had been offered to the company at the price at which the same could be sold for cash upon a bona fide offer from a third party.
Under the amended plan petitioner was to purchase the assets of the old company by settling and discharging claims against the old company and its1942 BTA LEXIS 810">*816 trustee for cash or capital stock. Claims against the trustee for expenditures incurred by him in the conduct of the business of the old company and in connection with its reorganization were to be paid in full. Secured claims totaling $39,700 were to be settled at the option of the holders thereof for cash for 60 percent of the principal amount of the claims or for one share of preferred stock and one share of common stock for each $100 of the principal amount of the claims. Unsecured claims totaling $80,922.47 were to be settled at the option of the holders thereof for cash for 25 percent of the principal amount of the claims or for one share of preferred stock and one share of common stock for each $100 of 85 percent of the principal amount of the claims.
Under the amended plan petitioner was to issue 1,000 shares of common stock pro rata to the holders of the class A and class B stock of the old company. New capital was to be raised by the sale of preferred and common stock at the price of $100 for one share of preferred stock and one share of common stock.
46 B.T.A. 788">*791 Under the amended plan Wilson was to make a contract with petitioner to serve as its manager for five1942 BTA LEXIS 810">*817 years and petitioner was to issue 100 shares of management stock to him for $100.
Shortly prior to October 21, 1935, petitioner sold 185 units consisting of one share of preferred stock and one share of common stock at a price of $100 per unit. It sold 16 shares of preferred and 16 shares of common to stockholders of the old company, 105 shares of preferred and 105 shares of common to creditors of the old company, and 64 shares of preferred and 64 shares of common to persons who were neither stockholders nor creditors of the old company. Petitioner also issued 100 shares of management stock to G. S. Wilson for $100 as agreed.
On October 21, 1935, petitioner acquired the assets of the old company in accordance with the amended plan. To assenting creditors holding claims totaling $71,364.23 who elected to receive stock in settlement of their claims, petitioner issued 617 shares of preferred and 617 shares of common stock and paid a net amount of $443.17 for fractional shares. As one of this class of creditors, G. S. Wilson received 100 shares of preferred and 100 shares of common stock. To nonassenting creditors holding claims totaling $46,179.70 who elected to receive cash1942 BTA LEXIS 810">*818 in settlement of their claims, petitioner paid $23,278.63. In addition thereto, liabilities owing by the old company or by the trustee totaling about $44,544.11 were assumed by petitioner. Petitioner issued 1,000 shares of common stock pro rata to the holders of the 1,750 shares of class A stock and 50 shares of class B stock of the old company outstanding.
Immediately after petitioner's acquisition of the assets of the old company on October 21, 1935, the ownership any voting power of the stock of petitioner were distributed among its stockholders as follows:
| Ownership | Preferred stock | Common stock | Management stock | Voting power |
| Shares | Shares | Shares | ||
| Authorized | 1,000 | 2,000 | 100 | |
| Stockholders of old company for stock of old company | 1,000 | 1,000 | ||
| Stockholders of old company for cash | 16 | 16 | 16 | |
| Creditors of old company for claims | 617 | 617 | 617 | |
| Creditors of old company for cash | 105 | 105 | 105 | |
| G. S. Wilson for managerial services and nominal amount of cash | 100 | 2,000 | ||
| Persons who were neither stockholders nor creditors of old company for cash | 64 | 64 | 64 | |
| Total | 802 | 1,802 | 100 | 3,802 |
46 B.T.A. 788">*792 The assets1942 BTA LEXIS 810">*819 acquired by petitioner from the old company on October 21, 1935, were entered on the books of the old company as of that date, after deduction of reserves for depreciation and for doubtful accounts and notes receivable, at the following values:
| Assets | Values 1 |
| Cash and cash items | $1,473.64 |
| Accounts and notes receivable | 65,588.76 |
| Inventories | 112,966.27 |
| Investment | 574.00 |
| Real estate | 600.00 |
| Furniture and fixtures | $10,556.14 |
| Automobiles | 925.00 |
| Prepaid items | 3,226.82 |
| 195,910.63 |
As of October 21, 1935, the total fair market value of all assets acquired by petitioner was $195,910.63; the fair market value of the inventories was $112,966.27; of the accounts and notes receivable, $65,588.76; and of the depreciable assets, consisting of furniture and fixtures and automobiles, $11,481.14.
The total cost to petitioner of all the assets acquired from the old company was $195,910.63. The total cost was allocable to inventories, accounts and notes receivable, and depreciable assets as follows: $112,966.27 to inventories; $65,588.76 to accounts and notes receivable; 1942 BTA LEXIS 810">*820 and $11,481.14 to depreciable assets.
Petitioner's original income tax return for the taxable year showed an income tax of $2,708.10 due. Petitioner paid $2,708.10 in income tax between December 18, 1936, and April 9, 1937. Petitioner filed a claim for the refund of $2,129.93 in income tax for the taxable year on April 15, 1937. Petitioner paid $2,708.10 in income tax for the taxable year within three years of filing its claim for the refund of $2,129.93 in income tax for the taxable year.
OPINION.
HARRON: In making its income and excess profits tax return for the fiscal year ended September 30, 1936, the taxable year, petitioner computed gain or loss on the disposition of the inventories and on the realization of the accounts and notes receivable, and depreciation on the depreciable assets, all of which it had acquired from the old company, by using the basis of those assets in the hands of that company. In the hands of the old company the basis of the inventories was $112,966.27 and of the accounts and notes receivable was $65,588.76; and the basis of the depreciable assets after adjustment for depreciation was $11,481.14.
Respondent determined that petitioner was1942 BTA LEXIS 810">*821 not entitled to use the basis of the assets in question in the hands of the old company and that the correct basis of the assets in question was the cost thereof to petitioner. He determined that all of the assets acquired by petitioner 46 B.T.A. 788">*793 had a total cost to it of $129,965.91 1 and that the cost to it of the assets in question was as follows: inventories, $74,006.36; accounts and notes receivable, $42,968.45; and depreciable assets, $7,521.53.
Petitioner bases its claim that the correct basis of the assets in question was the same as in the hands of the old company on section 113(a)(7) of the Revenue Act of 1934, the pertinent provisions of which1942 BTA LEXIS 810">*822 are set forth in the margin. 2 The first requisite for the application of section 113(a)(7) is that the assets in question be acquired by petitioner "in connection with a reorganization." The definition of the term "reorganization" as used in section 113(a)(7) is provided by section 112(g)(1), the provisions of which are set forth in the margin. 3 Petitioner argues that the transaction in which it acquired the assets of the old company was a reorganization within the meaning of both subdivisions (C) and (E), but especially within the meaning of subdivision (C), of section 112(g)(1).
1942 BTA LEXIS 810">*823 The transaction in which petitioner acquired the assets of the old company was not a reorganization within the meaning of subdivision (C) of section 112(g)(1). Subdivision (C) requires that "immediately after the transfer the transferor or its stockholders or both" be in "control" of the transferee. "Control" is defined in section 112(h) 4 as "the ownership of at least 80 per centum of the voting 46 B.T.A. 788">*794 stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation." In this case it is clear that immediately after the transfer "control" of petitioner was neither in the old company nor in its "stockholders." . Contrary to petitioner's contention, the creditors of the old company could not be regarded as its "stockholders" within the meaning of subdivision (C). ; cf. . The stockholders of the old, transferor corporation did not own 80 percent of the voting stock or 80 percent of the shares of all1942 BTA LEXIS 810">*824 other classes of stock of the new corporation, petitioner.
Nor was the transaction a reorganization within the meaning of subdivision (E) of section 112(g)(1). In , the Supreme Court made the very pertinent observation that "a transaction which shifts the ownership of the proprietary interest in a corporation is hardly 'a mere change in identity, form, or place of organization' within the meaning of clause E."
It follows that section 113(a)(7) is not applicable.
The correct basis of the assets in question was thus the cost of such assets to petitioner. Sec. 113(a). 5 Petitioner acquired the assets of the old company by paying cash in the amount of $23,721.80, by assuming liabilities in the amount of $44,544.11, and by issuing 617 shares of preferred stock and 1,617 shares of common stock. Part of1942 BTA LEXIS 810">*825 the cost was represented by a total of $68,265.91 in cash paid and in liabilities assumed. The balance of the cost was represented by the 617 shares of preferred stock and 1,617 shares of common stock issued. The measure of the part of the cost represented by the shares of stock was the fair market value thereof at the time of issue. ; affd., ; certiorari denied, . Petitioner contends that the fair market value of the shares of stock at the time of issue should be measured in turn by the fair market value of the assets of the old company at that time less the total of $68,265.91 in cash paid and in liabilities assumed. See
In our opinion the fair market value of the shares of stock at the time of issue should be measured by the fair market value of the assets of the old company less $68,265.91. 1942 BTA LEXIS 810">*826 In this case the fair market value 46 B.T.A. 788">*795 of the assets (less $68,265.91) is the best evidence of the fair market value of the shares of stock issued therefor. See The use of the 617 shares of preferred stock and 1,617 shares of common stock, issued for the assets of the old company, was fixed and determined by the amended plan of reorganization prior to their authorization, and was limited and restricted by that plan to the very use to which they were put. See It is true that 185 units consisting of one share of preferred stock and one share of common stock were sold for $100 per unit in connection with the organization of petitioner. However, the number of shares of stock so sold was relatively small in comparison with the number of shares of stock issued for the assets of the old company; and about two-thirds of the number of shares so sold were sold to parties who already had an interest in the old company either as creditors or as stockholders. Under the circumstances the sale of the 185 units of stock at $100 per unit does not provide the best evidence of the fair1942 BTA LEXIS 810">*827 market value of the shares of stock issued for the assets of the old company. ; cf. , with , and . In view of the limitations and restrictions on the use of the shares of stock issued for the assets of the old company, the best evidence of the fair market value of such shares is provided by the fair market value of the assets (less $68,265.91).
The record satisfies us that the assets acquired by petitioner from the old company had a total fair market value at the time of acquisition of $195,910.63; and that the fair market value of the inventories was $112,966.27; of the accounts and notes receivable, $65,588.76; and of the depreciable assets, $11,481.14. Thus the fair market value of the shares of stock issued for the assets was $195,910.63 less $68,265.91, or $127,644.72; and the total cost of the assets to petitioner was $195,910.63. The total cost of $195,910.63 was allocable in part as1942 BTA LEXIS 810">*828 follows: $112,966.27 to inventories, $65,588.76 to accounts and notes receivable, and $11,481.14 to depreciable assets. 6 See ; Regulations 94, art. 23 (1)-4.
Petitioner concedes that respondent correctly disallowed two deductions totaling $271.10. Respondent allowed three deductions totaling $16,733.20 which were not taken on petitioner's original return. Therefore, there is no deficiency and there is an overpayment in income tax for the taxable year. The amount of the overpayment 46 B.T.A. 788">*796 will be determined on computation under Rule 50. It has been found as a fact that petitioner paid $2,708.10 in income tax for the taxable year within three years before filing a claim for the refund of $2,129.93 in income tax for such year.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK concurs only in the result.
Footnotes
1. These values reflect minor adjustments made by petitioner subsequent to Oct. 21, 1935. ↩
1. The amount of $129,965.91 appears to be the total of the following amounts: $61,700, the total par value of the 617 shares of preferred stock issued by petitioner to the assenting creditors of the old company; $443.17, the net amount paid by petitioner to assenting creditors of the old company for fractional shares; $23,278.63, the total amount paid by petitioner to nonassenting creditors of the old company; and $44,544.11, the total amount of the liabilities of the old company or of the trustee assumed by petitioner. ↩
2. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) BASIS (UNADJUSTED) OF PROPERTY. - The basis of property shall be the cost of such property; except that -
* * *
(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. - If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. * * * ↩
3. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113.
(1) The term "reorganization" means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock; of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substnatially all the properties of another corporation, or (C) 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 (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected. ↩
4. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(h) DEFINITION OF CONTROL. - As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩
5. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) BASIS (UNADJUSTED) OF PROPERTY. - The basis of property shall be the cost of such property; * * * ↩
6. It so happens that the basis of the assets in question to petitioner is approximately the same as the basis thereof to the old company at the time of the transfer of assets. ↩