*699 In a statutory "merger and consolidation" of petitioner and its subsidiary, petitioner received all the assets of the subsidiary in exchange for all its stock and the assumption of the liabilities of the subsidiary, the stock in the latter being canceled. Held, petitioner was thus in receipt of a distribution in liquidation and so taxable under section 115(c) of the Revenue Act of 1934, since it was not relieved by any of the nonrecognition provisions of section 112 of that act.
*374 The Commissioner determined a deficiency in petitioner's taxes for the taxable year ending September 30, 1936, as follows:
| Income tax | $87,384.55 |
| Excess profits tax | 55,276.73 |
| Personal holding company surtax | 142,879.11 |
| Total | 285,540.39 |
The issues are whether petitioner received taxable gain as a result of a consolidation or merger in 1936 under a New Jersey statute and, if so, what is the basis for computing that gain. This case was submitted upon oral testimony, exhibits, and stipulations, and upon these*700 we make the following findings of fact.
*375 FINDINGS OF FACT.
The petitioner is a personal holding corporation organized under the laws of the State of New Jersey, on October 23, 1931, under the name of Hutner Holding Co. Its books are kept and returns filed on the accrual basis of accounting. Its return for the fiscal year ending September 30, 1936, was filed with the collector for the third district of New York.
Prior to 1929 Simon and Saul Gutner operated a jobbing rayon business in New York as equal partners. They incorporated the business in that year under the name of S. Gutner & Bros., Inc. This name was changed to Barberry Corporation (hereinafter called "Barberry") on October 24, 1931, by authority of the Secretary of State of New York. On that date Barberry's capital stock consisted of 4,470 shares of preferred, with a basis of $447,000 to the Gutners, and 1,000 shares of common, with a basis to the Gutners of $5,000. The stock was owned by the Gutners in equal amounts. By 1931 Barberry had accumulated a considerable amount of investments in addition to the rayon business.
The Gutbro Realty Corporation (hereinafter called "Gutbro") was another company, *701 the stock of which was owned by the Gutners equally. It was organized under New York laws in 1921, with authorized capital stock of 5,000 shares issued to the Gutners in equal amounts for $500,000 in cash. Its business in 1931 was limited to investments.
In 1931 Simon and Saul Gutner decided to reorganize their holdings so that the operating assets of the rayon business would be entirely separated from the investment assets. It was decided that any investment companies to be formed should be incorporated in New Jersey because of the lower franchise taxes in that state. Accordingly, on October 23, 1931, the Hutner Holding Co. (hereinafter called "Hutner") was organized under the New Jersey laws with an authorized capital stock of 2,000 shares of no par value. The Hutner stock was issued to the Gutners in equal amounts for their stock of Barberry and Gutbro.
On October 24, 1931, an agreement was entered between Hutner, Gutbro, and Barberry which provided for the formation of two new corporations, and the transfer of the assets of Barberry and Gutbro to them.
Pursuant to this agreement the "Gutbro Holding Company, Inc." (hereinafter called "Holding"), was formed under the*702 laws of New Jersey with an authorized capital stock of 30,000 shares of no par value. The nonoperating assets of Barberry and the assets of Gutbro with a cost and book value of $844,649.87 and $591,403.50, respectively, were transferred to it. The liabilities of Gutbro were also assumed *376 by it. S. Gutner & Bros., Inc. (hereinafter called "Gutner"), was formed under the laws of New York with an authorized capital stock of 5,000 shares of $100 par value. The operating assets and cash of Barberry in the cost and book value net amount of $441,300.26 were transferred to it. The liabilities of Barberry were also assumed by it. In exchange for these assets, Holding issued 8,000 shares of its capital stock to Hutner. Gutner issued all of its 5,000 shares of stock to Hutner for the assets it received. Hutner then transferred the 5,000 shares of Gutbro stock it had received from the Gutners when organized to Holding for an additional 5,000 shares of that company's stock. Hutner therefore owned 13,000 shares of Holding, which was all that was outstanding.
Barberry and Gutbro were dissolved after the above described transfers, which relieved them of all assets and liabilities.
*703 These transfers were treated by the corporations involved as nontaxable. The Commissioner acquiesced in this treatment.
Hutner was the owner of all the outstanding stock of Gutner and Holding between October 29, 1931, and September 30, 1936. The only change was that the stock of Holding was reduced to 130 shares in 1934.
Hutner and Holding and their directors on September 29, 1936, entered an agreement entitled "Agreement of Merger and Consolidation Pursuant to Section 105 of the General Corporation Act." It recited that Hutner was the sole stockholder of Holding and that it was deemed advisable to merge and consolidate these corporations so that greater efficiency and economy of management could be effected. It stated further in part:
Article I: The name of the consolidated corporation is and shall be and remain GUTBRO HOLDING COMPANY, the same being hereafter called the "Consolidated Corporation".
* * *
Article III: The capital stock of said corporation is and shall be 2,000 shares without nominal or par value, all of which are and shall be common stock. The rights, terms and conditions of the said shares of the said stock to be issued shall be the same as those*704 of the shares of the common stock of the present Hutner Holding Company, as set forth in the certificate of incorporation filed in the office of the Secretary of the State of New Jersey on or about the 23rd day of October, 1931.
Article IV: The manner of converting the capital stock of the corporations, parties hereto, into the capital stock of the consolidated corporation, shall be as follows:
All the present holders of stock of Hutner Holding Company shall continue to hold the same certificates of stock which they now hold, and such certificates shall represent a like number of shares of the common stock of the consolidated corporation.
Each and every of the outstanding shares of stock of the Gutbro Holding Company shall be forthwith surrendered by the stockholders and retired and *377 cancelled, Hutner Holding Company being the only stockholder of the Gutbro Holding Company.
Article V: Except insofar as hereinafter otherwise specifically set forth, or as provided by statute, the corporate names, franchises, rights and organization of said Hutner Holding Company shall remain intact and said consolidated corporation shall possess the powers, privileges and rights*705 granted by and shall be governed by and be subject to the certificate of incorporation of Hutner Holding Company.
The corporate name and organization of Gutbro Holding Company, except insofar as the same shall continue by statute or may be required for carrying on the purposes of this agreement, shall cease upon the filing in the office of the Secretary of the State of New Jersey of this agreement, when adopted by the stockholders as hereinafter provided.
* * *
Article VII: Upon the consumation of the act of merger and consolidation herein provided for, all and singular the rights, privileges, powers and franchises of each of said corporations and all property, real, personal and mixed and all debts due on whatever accounts, as well as for stock subscriptions as all other things in action or belonging to each of said corporations, shall be vested in the consolidated corporation; and all property, rights, privileges, powers and franchises, and all and every other interest of the two corporations, parties hereto, shall hereafter be as effectually the property of the said consolidated corporation as they were of the several and respective corporations, parties hereto, and the*706 title to any and all real estate, whether by deed or otherwise vested in any of said corporations, shall not revert or be in any way impaired by reason of the said merger and consolidation, provided that all rights of creditors and all liens upon the property of any and all of said corporations, parties hereto, shall be preserved unimpaired, and the respective corporations, parties hereto, may be deemed to continue in existence in order to preserve the same; and all debts, liabilities and duties of either of said corporations, parties hereto, shall forthwith attach to said consolidated corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it, it being expressly provided that the merger and consolidation of the corporations, parties hereto, shall not in any manner impair the rights of any creditor or creditors of any of said corporations.
* * *
* * *
Article X: This agreement shall be submitted to the stockholders of each of the corporations, parties hereto, as provided by law, and shall take effect and be deemed and taken to be the agreement and act of merger and consolidation of said corporations*707 upon the adoption thereof by the votes of the holders of two-thirds of all the shares of the capital stock of each of said corporations and upon the doing of such other acts and things as shall be required by said "Act Concerning Corporations (Revision of 1896)", and the several supplements thereto and acts amendatory thereof.
This agreement was carried out according to its terms. The name of the merged corporations became "Gutbro Holding Company." The assets, subject to the liabilities of the old Gutbro Holding Co. were taken on the books of Hutner as of September 30, 1936. The book value of the assets taken over on that date was $1,484,511.51. The market value of these net assets was $1,433,170.71.
*378 The old Gutbro Holding Co. filed its "Final Return" for income tax purposes and for excess profits tax on December 15, 1936.
The income tax return of petitioner for the year ending September 30, 1936, contained the following notation:
As of September 30, 1936, this company merged with Gutbro Holding Co., a New Jersey corporation taking over its assets subject to its liabilities. It then changed its name to present name.
The Commissioner determined that the*708 petitioner received a taxable gain in 1936 as a result of these transfers. The taxable gain was computed as follows:
| Market value of net assets received | $1,433,170.71 |
| Cost or other basis of stock | 796,886.71 |
| Taxable gain | 636,284.00 |
The cost or other basis of the stock was arrived at as follows:
| Cost or other basis of 5,000 shares of Gutbro Holding Co. issued to "Hutner" October 24, 1931, in exchange for 5,000 shares (all the stock) of Gutbro Realty Corporation | 500,000.00 |
| Cost or other basis of 8,000 shares of Gutbro Holding Co. issued to "Hutner" October 24, 1931, in exchange for part of the assets of Barberry Corporation, cost $844,649.87, out of total assets of $1,285,950.13, the remainder of which ($441,300.26) went to S. Gutner & Bros., Inc., as hereinbefore set out - | |
| 844,649.87/1,285,950.13 of 452,000 (cost of Barberry Stock) | 296,886.71 |
| Total basis | 796,886.71 |
OPINION.
LEECH: The principal issue is whether the receipt of the assets of a wholly owned subsidiary, taken over by the petitioner pursuant to an "Agreement of Merger and Consolidation", resulted in taxable gain to the petitioner in that year. The petitioner contends that*709 the transaction was a statutory merger or consolidation under the New Jersey statutes (New Jersey St. Ann., title 14, ch. 12) and falls within the nonrecognition provisions of section 112 of the Revenue Act of 1934. The respondent answers that the transfer did not come within that section and that petitioner is taxable on the receipt of a distribution in liquidation of a corporation, under section 115(c) of that act.
We agree with petitioner that the present transaction was a statutory merger or consolidation under the laws of New Jersey, but we do not think that it fell within the nonrecognition provisions of section 112. Section 112(a) requires that gain from a sale or exchange be recognized unless excluded by one or more of the other provisions of section 112. Section 112(g) defines a reorganization. A "statutory merger or consolidation" is there included as such. But other transactions *379 were also contained in that definition. And, that it was a reorganization within that definition does not alone render the transaction nontaxable under section 112. See *710 ; affd., . Obviously Congress would not have included statutory mergers or consolidations within the definition of a reorganization without qualification if it had not meant that, as with other forms of reorganizations, the transaction pursuant thereto should be nontaxable only when it otherwise fell within one or more of the nonrecognition provisions of section 112.
The petitioner, however, relies on sections 112(b)(3) and (4) as those within one or both of which the instant transaction falls, thus characterizing it as nontaxable. Section 112(b)(3) requires that there be an exchange of stock for stock pursuant to a plan of reorganization, and section 112(b)(4), that there be an exchange of assets of one corporation for stock of another pursuant to a plan of reorganization. Here the assets of the subsidiary corporation were received by petitioner pursuant to a plan of reorganization and the stock of the former was thereupon canceled. Obviously, the requirements of neither of these subsections were met and its argument therefore falls. As stated in *711 ,
* * * the immunity from the recognition of gain is limited to the transactions which the statute expressly describes, and this is not such a transaction. * * * The care with which section 112 was drafted admonishes us to be no less careful in applying it according to its terms.
The petitioner cites (on appeal, C.C.A., 3d Cir.), and ; affd., . True there were tax-free statutory mergers in both these cases, but, in addition, the exchanges involved in both cases fell within one of the nonrecognition provisions of section 112. They are therefore not controlling here.
The petitioner also contends that it is within section 112(b)(3) and (4) on another ground. It argues "that as a result of the agreement of merger and consolidation a new corporation was created which in effect issued its stock to the subsidiary corporation and which stock was turned back to it as the owner of all of the stock of the subsidiary and which stock was then exchanged by the consolidated corporation with the*712 stockholders of the old parent company." [Emphasis supplied.] We can not subscribe to this reasoning. Tax liabilities must be determined on the basis of what was actually done, not the effect of what was done. ; .
We conclude that petitioner is not relieved from taxation of gain under section 112. ; affd., .
*380 Was petitioner in receipt of a distribution in liquidation within the intendment of section 115(c) of the Revenue Act of 1934, upon the basis of which premise the contested deficiency was determined?
Petitioner insists that, since the assets of the subsidiary became those of the parent, petitioner, pursuant to a statutory merger or consolidation, there was no liquidation. It is said the terms are contradictory. We disagree. As the Board said in , in its discussion of a transaction involving a statutory merger, "The practical effect of many cases of a merger or consolidation of corporations*713 is the liquidation of one or all of them."
It is true that, where a statutory merger or consolidation occurs, it has been held that the assets, rights, and liabilities of the merged or consolidated companies pass by operation of law to the survivor. See ; . But the application of that rule, as we have seen, does not affect the recognition of gain or loss on the transaction under section 112. Nor does it contradict the fact of liquidation. . Liquidation is a status. See . No reason is apparent why it can not result from the operation of law as well as otherwise. All of the assets of the subsidiary corporation did pass to the parent, petitioner, together with all its contractual rights and liabilities, in exchange for petitioner's stock in the parent. The stock was canceled. It filed its "Final Return" for Federal income and excess profits tax purposes. Petitioner took its name. The agreement of merger or consolidation which was*714 carried out provided that the existence of the subsidiary should cease except in so far as its continued life was made necessary by statute or for the purposes of that agreement. Neither its continued existence nor any reason therefor is established. The record does not show that it was not dissolved. We think it was in fact liquidated. See ; affd., ; certiorari denied, ;
Moreover, whether the acquisition of the assets of its subsidiary by the petitioner was taxable is not controlled by the law of New Jersey, under the jurisdiction of which the statutory merger or consolidation occurred. This must be resolved under the Federal law. Section 115(c) of the Revenue Act of 1934 is determinative. That section, without qualification or limitation, requires that the recognized gain or loss to the distributee from a distribution in liquidation shall be computed under section 112. That section, we repeat, similarly categorically includes "a statutory merger or consolidation" *715 within the definition of reorganization. In our opinion Congress thus clearly indicated that for Federal income tax purposes the present acquisition of the assets of its subsidiary by *381 petitioner in a statutory merger or consolidation was a distribution in liquidation under section 115(c). Cf. The fact that petitioner received the assets of its subsidiary in connection with the statutory merger or consolidation is of no more significance in construing this section than it was in construing section 112. It follows under section 115(c), supra, that, since petitioner is not relieved from tax by any of the nonrecognition provisions of section 112, it was taxable, as determined by respondent, under section 115(c), supra. 1
*716 The petitioner also assigned error in respondent's determination of the cost or other basis of the assets transferred in the reorganization. No argument, however, appears on this point in its brief and there is no evidence in the record from which we might conclude error in this determination. We therefore affirm respondent on this issue also.
Decision will be entered for the respondent.
Footnotes
1. This conclusion may be supported by the amendment of section 110 of the Revenue Act of 1935 amending section 112(b) of the Revenue Act of 1934 by "adding after paragraph (5) a new↩ paragraph * * *" entitled "Exchange in Liquidation" which clearly relieved a taxpayer in the situation of the petitioner from the recognition of taxable gain. [Emphasis supplied.]