*1009 1. Corporation A, desiring to liquidate, transferred approximately 95 percent of its assets to B for cash and the debentures of X, which owned all of B. The debentures matured in about six and one-half years, but were called the following year. Held, not a reorganization under section 112(i)(1)(A) of the Revenue Act of 1932, there being no plan of reorganization and no such continuing interest in B as required by the statute.
2. Corporation A transferred the remaining 5 percent of its assets to C, a corporation created to liquidate the assets, for all of C's stock. Held, not a reorganization under section 112(i)(1)(A) or (B) of the Revenue Act of 1932.
*623 The taxes in controversy are income taxes for the year 1932. The Commissioner determined a deficiency against George D. Graham, Docket No. 87570, in the amount of $2,928.69, and Neva B. Graham, Docket No. 87571, in the amount of $90.52. The proceedings were consolidated for hearing.
*624 At the hearing the respondent moved to amend his answers to conform to the proof as set*1010 out in the stipulations and for increased deficiencies. He asked that the net income as determined in the notices of deficiency be increased by $4,160.46 in the case of George D. Graham, Docket No. 87570, and $300.37 in the case of Neva B. Graham, Docket No. 87571, and that the deficiencies be increased accordingly; said sums being the respective amounts of loss allowed on common stock held by the petitioners in determining the amounts set out in the deficiency letters.
FINDINGS OF FACT.
The petitioner, George D. Graham, is an individual, with his principal business address at 545 Sansome Street, San Francisco, California. The petitioner, Neva B. Graham, is an individual residing at 170 Sea Cliff Avenue, San Francisco, California.
The petitioner, George D. Graham, was the owner of 500 shares of common and 500 shares of preferred stock of the Illinois Pacific Coast Co., a Delaware corporation, from a date on or about the time of the commencement of that corporation in business in October 1930 until May 31, 1932; and petitioner Neva B. Graham was the owner of 50 shares of common and 50 shares of preferred stock of the same corporation, to wit, Illinois Pacific Coast Co., continuously*1011 from a date on or about the time of the organization of the corporation in October 1930 until May 31, 1932.
The cost basis to petitioner George D. Graham of said 500 shares of the common stock of the Illinois Pacific Coast Co. was $5,210.45, and the cost to him of 500 shares of the preferred stock of the company was $32,064.55. The cost basis to petitioner Neva B. Graham of 50 shares of common stock of the Illinois Pacific Coast Co. was $405.37, and the cost basis to her of 50 shares of preferred stock of the company was $2,494.63.
On May 31, 1932, the Illinois Pacific Coast Co., hereinafter called the Coast Co., disposed of all of its business and assets, excepting certain designated sundry assets, to the Owens Illinois Pacific Coast Co., a California corporation, hereinafter called the Owens Co., a wholly owned subsidiary of the Owens-Illinois Glass Co., an Ohio corporation, for the sum of $5,625,000, payable as follows:
| Cash | $1,500,000 |
| Owens-Illinois Glass Co. 10-year 5% sinking fund gold debentures, due 1-1-39, at par | 1,625,000 |
| Assumption of 15-year 6% gold bonds of the Illinois Pacific Coast Co. (by the Owens Illinois Pacific Coast Co.) (par value) | 2,500,000 |
| Total | 5,625,000 |
*1012 The disposition by the Coast Co. of its aforementioned assets to the Owens Co. was duly authorized by the board of directors of the Coast *625 Co. at a special meeting held March 15, 1932, and their disposition was duly approved by the stockholders of the Coast Co. at a special meeting held on March 29, 1932.
Certain remaining assets of the Coast Co., consisting of accounts, notes, mortgages, stocks, etc., carried on the books of the Coast Co. at a valuation of $302,000, more or less, were not included in the disposition of its assets to the Ownes Co. These remaining assets were transferred to a newly organized company, the Container Securities Co., a California corporation, hereinafter called the Container Co., in exchange for all the authorized capital stock of that company, consisting of 95,647 shares of no par value (subsequently changed to a par value of 50 cents per share). The number of authorized shares of capital stock of the Container Co. was identical with the number of preferred shares of the Coast Co.'s capital stock outstanding at the date of the transfer of assets, to wit, 95,647 shares.
All of the assets of the Coast Co., consisting of the proceeds*1013 resulting from the disposition of assets to the Owens Co. (being cash and debentures of the Owens-Illinois Glass Co.), together with the stock of the Container Co., were delivered on May 31, 1932, to an agent, the Wells Fargo Bank & Union Trust Co., to be delivered to the stockholders of the Coast Co., and thereafter the Coast Co. was dissolved. The dissolution was duly authorized by the board of directors of the Coast Co. at a special meeting held March 29, 1932, and by its stockholders at a special stockholders' meeting held May 20, 1932.
The stockholders of the Coast Co. received on May 31, 1932, from the agent the following distribution in liquidation of their stock:
| (a) Preferred stockholders: | |
| Cash | $10 per share held |
| Owens-Illinois Glass Co. debentures at par | $10 per share held |
| Container Securities Co. stock | 1 share per share held |
| (b) Common stockholders: | |
| Owens-Illinois Glass Co. debentures at par | $3 per share held |
Petitioner George D. Graham received, in exchange for the 500 shares of common stock of the Coast Co. held by him at the time of liquidation in 1932, $1,500 par value of Owens-Illinois Glass Co. debentures having an aggregate*1014 market value of $1,050 ( $70 for each $100); petitioner George D. Graham received, in exchange for the 500 shares of Coast Co. preferred stock held by him, the following:
| Cash | $5,000 |
| Owens-Illinois Glass Co. debentures, $5,000 par value (fair market value $70 per $100 of par value) | 3,500 |
| Container Securities Co. stock, 1 share per share held (fair market value 27 cents per share) | 135 |
| Total | 8,635 |
*626 Petitioner Neva B. Graham received, in exchange for the 150 shares of common stock of Coast Co. held by her at the time of liquidation in 1932, $150 par value of Owens-Illinois Glass Co. debentures having an aggregate market value of $105 ( $70 for each $100); and, in exchange for the 50 shares of preferred stock of that company held by her, received the following:
| Cash | $500.00 |
| Owens-Illinois Glass Co. debentures at par of $500, market value $70 per $100 of par value | 350.00 |
| Container Securities Co. stock, 1 share per share held, market value 27 cents per share | 13.50 |
| Total | 863.50 |
The Commissioner allowed petitioner George D. Graham a loss in 1932 of $4,160.45 on the liquidation in that year of the 500 shares of Coast Co. common stock*1015 owned by him, said loss being the difference between the cost basis to petitioner of the 500 shares in the amount of $5,210.45 and the market value of the Owens-Illinois Glass Co. debentures received in liquidation of the shares, amounting to $1,050. At the hearing counsel for the respondent moved to amend the answer to include the amount of $4,160.45 in income for the year 1932, and increase the deficiency accordingly, on the ground that he erred in allowing this amount as a loss in that year.
The Commissioner allowed petitioner Neva B. Graham a loss in 1932 of $300.37 on the liquidation in that year of 50 shares of the common stock of the Coast Co. owned by her, the loss being the difference between the cost basis to petitioner of the 50 shares in the amount of $405.37 and the market value of the Owens-Illinois Glass Co. debentures received in liquidation, amounting to $105. At the hearing counsel for the respondent moved to amend the answer to include the amount of $405.37 in income for the year 1932, and increase the deficiency accordingly, on the ground that he erred in allowing this amount as a loss in that year.
The Commissioner disallowed at a deductible loss for the*1016 year 1932 the loss claimed by petitioner George D. Graham of $23,429.55 on the liquidation in 1932 of 500 shares of preferred stock of the Coast Co. owned by him, said loss being the difference between the cost basis for the preferred shares of $32,064.55 and the amount received by him in liquidation of the preferred shares, consisting of cash in the amount of $5,000, $5,000 par value of Owens-Illinois Glass Co. debentures having a fair market value of $3,500, and 500 shares of Container Securities Co. stock having a fair market value of $135.
The Commissioner disallowed as a deductible loss to petitioner Neva B. Graham the loss of $1,631.13 claimed by her in 1932 upon the liquidation in that year of 50 shares of Coast Co. preferred stock *627 owned by her, the loss being the difference between the cost basis to petitioner of the 50 shares of preferred stock, amounting to $2,494.63, and the amount received in liquidation thereof, consisting of cash in the amount of $500, $500 par value of Owens-Illinois Glass Co. debentures having a fair market value of $350, and 50 shares of Container Securities Co. stock having a fair market value of $13.50.
All of the debentures of*1017 the Owens-Illinois Glass Co., an Ohio corporation, received by petitioners George D. Graham and Neva B. Graham in 1932 in connection with the liquidation of the common and preferred shares of Coast Co. stock owned by them were redeemed by the Owens-Illinois Glass Co. during the year 1933.
The Container Co. proceeded to liquidate the remaining assets acquired from the Coast Co., having a book value of $302,000, more or less, referred to above, and distributed in liquidation a total of $99,951.11 to its stockholders, as follows:
| In 1934, at 25 cents per share | $23,911.75 |
| In 1935, at 30 cents per share | 28,694.10 |
| In 1936, at 49 1/2 cents per share | 47,345.26 |
| Total 104 1/2 cents per share | 99,951.11 |
On July 13, 1936, the shareholders of the Container Co. adopted resolutions authorizing the winding up of the affairs of that company and its voluntary dissolution. the total of the liquidating dividends received by petitioner George D. Graham from the Container Co. was $522.50, and the total of the liquidating dividends received by petitioner Neva B. Graham from the Container Co. was $52.25.
OPINION.
HARRON: Two questions for decision are presented - (1) whether*1018 the transaction in which the Illinois Pacific Coast Co. (the Coast Co.) disposed of approximately 95 percent of its assets to the Owens Illinois Pacific Co. (the Owens Co.) was a sale giving rise to gain or loss, or a reorganization under the statute; (2) whether the transaction in which the Illinois Pacific Coast Co. transferred all its remaining assets in the amount of $302,000 to the Container Securities Co. (the Container Co.) in exchange for all the capital stock of the Container Co. was a reorganization under section 112(i)(1)(A) or (B) of the Revenue Act of 1932.
In his original determination of the deficiency here in question the respondent treated the transaction between the Coast Co. and the Owens Co. as a sale and allowed a loss assignable to common stock in the amount of $4,160.45 to petitioner George D. Graham and $300.37 to petitioner Neva B. Graham, citing Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed.(2d) 188. At the hearing *628 the respondent changed his position as to this transaction, and he now contends that since a substantial part of the property received by the Coast Co. for its assets and distributed to its stockholders*1019 consisted of debentures of the Owens-Illinois Glass Co., there was a continuity of interest, and the transaction was a reorganization and no loss from the exchange can be recognized under the Revenue Act of 1932.
The petitioners contend that both transactions taken as a whole constituted a sale of the major portion of the corporate assets and the subsequent distribution of the properties in liquidation and therefore the loss should be recognized under section 115(c) of the Revenue Act of 1932.
The Coast Co. disposed of approximately 95 percent of its assets to the Owens Co. for $1,500,000 in cash, $1,625,000 in Owens-Illinois Glass Co.'s 10-year debentures, and the assumption by the Owens Co. of its bonded indebtedness in the amount of $2,500,000.
The Owens-Illinois Glass Co. was not a party to the transaction, but the Owens Co. was its wholly owned subsidiary. The debentures in question matured January 1, 1939, but were called in 1933, within a year from the time they were distributed by the Coast Co. to its stockholders in dissolution.
The Commissioner relies on *1020 Lucien H. Tyng,36 B.T.A. 21">36 B.T.A. 21. We think that case may be distinguished from the case before us on the facts. In the Tyng case A acquired all the voting stock and a majority of the shares of all other classes of stock of B and C in exchange for cash and its long term debentures. We there held, following Kaspare Cohn Co., Ltd.,35 B.T.A. 646">35 B.T.A. 646, that there was a plan of reorganization; that the long term debentures gave a sufficient continuity of interest; and that the transaction resulted in a reorganization under section 112(i)(1)(A) of the Revenue Act of 1928. Here, the debentures received were not the evidences of indebtedness of the Owens Co., the party which acquired the assets, but of the Owens-Illinois Glass Co. Moreover, it does not appear that the parties intended the stockholders of the Pacific Co. would retain a continuing interest. In the Tyng case, on the other hand, there was an intention expressed in the agreement that a part of the consideration for the transfer of the stock would be long term debentures which would permit a continuing interest.
The transaction here comes within the language of section 112(i)(1)(A) of the*1021 Revenue Act of 1932. 1 The Owens Co. acquired *629 substantially all the properties of the Pacific Co. While this may appear to be a merger of the two corporations within the literal definition of the reorganization provisions of the statute, it is not necessarily so, and the transaction must be further examined to determine whether it is a reorganization within the meaning of the statute, Gregory v. Helvering,293 U.S. 465">293 U.S. 465, or whether it was in reality a sale in which the securities must be regarded as cash. Pinellas Ice & Cold Storage Co. v. Commissioner,287 U.S. 462">287 U.S. 462.
When we examine the record before us there does not appear to have been a plan of reorganization, but rather a plan to sell and liquidate the assets*1022 of the Coast Co. The transfer of a large portion of its assets to the Owens Co. for cash and debentures of the Owens-Illinois Glass Co. was a part of that plan. The transaction was referred to by the board of directors of the Coast Co. in their resolution of March 15, 1932, as a sale of the assets and business of the corporation, and the acts of the parties are thoroughly consistent with their expressed intention of a sale of the assets and a distribution of the proceeds in liquidation. It can hardly be said the plan contemplated that the Coast Co. or its stockholders would retain a "continuing interest" in the assets transferred for cash and debentures which matured in the short term of about six and one-half years and were in fact called within a year. Moreover, the debentures were not the securities of the Owens Co., a California corporation, which acquired the assets, but of the Owens-Illinois Glass Co., an Ohio corporation which, although undoubtedly interested in the transaction through its stock ownership of the Owens Co., was, nevertheless, not a "party to a reorganization" within the ordinary meaning of that term or the statutory definition in section 112(i)(2) of the*1023 Revenue Act of 1932. Groman v. Commissioner,302 U.S. 82">302 U.S. 82; Helvering v. Bashford,302 U.S. 454">302 U.S. 454. Considering all the facts and circumstances of the case, we are of the opinion that the transaction was not a merger and a reorganization according to a plan of reorganization within the meaning of the statute, but must be considered a sale for a definite sum of money and certain debentures. These debentures must be treated as cash to the extent of their fair market value when distributed in liquidation and applied in payment in exchange for petitioners' common stock. The resulting gain or loss must be determined as provided in section 115(c) of the Revenue Act of 1932. Cf. Pinellas Ice & Cold Storage Co. v. Commissioner, supra.
The second question in issue is whether the transfer by the Coast Co. of the remainder of its assets of the value of $302,000 in exchange for all the stock of the Container Co. was a reorganization within the intendment of the statute. Clearly it was not a reorganization under section 112(i)(1)(A), as contended by the respondent. The *630 transaction was neither a merger nor a consolidation as therein*1024 defined. It can not be seriously contended that $302,000 was "substantially all the properties" of the Coast Co. Nor do we think it was a reorganization within section 112(i)(1)(B). The Container Co. was organized to liquidate the remaining assets of the Coast Co. and not to carry on any business enterprise. It was only a means used by the Coast Co. to this end. It was not created pursuant to a plan to reorganize any corporate business, but pursuant to a plan to facilitate the liquidation of a corporation. We think that the statute was not intended to include such a transaction under section 112(i)(1)(B), even though it may come within the definition of the statute, and that the question must be answered in the negative. Gregory v. Helvering, supra;Helvering v. Elkhorn Coal Co., 95 Fed.(2d) 732; A. W. Mellon,36 B.T.A. 977">36 B.T.A. 977, 1070.
In Gregory v. Helvering, supra, the Supreme Court said:
When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made "in pursuance of a plan of reorganization" (section 112(g)) of corporate business; and not a transfer*1025 of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. * * *
Under the facts before us, we hold for the petitioners on both issues. This disposition of the case makes it unnecessary to discuss petitioners' contention that the additional deficiency claimed by respondent at the hearing was not sufficiently definite to comply with section 272(e) of the Revenue Act of 1926. It will suffice to say that we think it was sufficiently definite to fix the amount of the deficiency determined.
Decision will be entered for the petitioners.
Footnotes
1. (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). ↩