*11 Decisions will be entered under Rule 50.
1. Basis of Property Acquired FromAnother Corporation. -- The receipt of all of the assets of another corporation in a statutory merger held to be a receipt in complete liquidation under section 112 (b) (6) of the Internal Revenue Code of 1939, and the basis is the same as in the hands of the merged corporation under section 113 (a) (15).
2. Collateral Estoppel. -- The decision of this Court in a prior case that for invested capital purposes for a prior year the stock of the corporation merged into the petitioner had a cost basis is not a bar to consideration and decision of an issue as to the basis of assets acquired in the merger.
*635 The *12 respondent determined deficiencies for the years and in the amounts as follows: *636
| Docket No. 43193 | |||
| Deficiency | |||
| Declared value | |||
| Year | Income tax | excess-profits tax | Excess profits tax |
| 1943 | $ 16,741.61 | $ 5,075.62 | $ 72,036.18 |
| 1944 | 17,215.37 | ||
| 1945 | 2,484.08 | 346.37 | |
| Docket No. 44789 | |||
| 1946 | $ 29,985.35 | ||
| 1947 | 421.52 | ||
| 1948 | 1,672.91 | ||
| 1949 | 1,756.12 |
The petitioner contests the excess profits tax and declared value excess-profits tax deficiencies for the years 1943 and 1944, and the income tax deficiencies for the years 1945 to 1949, inclusive. It claims that there are overpayments of excess profits tax for the years 1943 and 1945.
The principal issues concern the basis for depreciation and gain or loss of properties acquired by the petitioner from a predecessor corporation in 1942 at the time of the petitioner's creation. The petitioner claims that it is entitled to use its predecessor's basis, but if not, then the respondent erred in his allocation of the cost among the properties acquired. The respondent also alleges that the question of basis is res judicata by reason of our decision in a proceeding brought by this petitioner which involved equity *13 invested capital for the period that the petitioner was in existence in the year 1942.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
The petitioner is a New Jersey corporation, with its principal office in Newark. Its returns were made upon the calendar year basis and on an accrual method of accounting, and filed with the collector of internal revenue for the fifth district of New Jersey. It was incorporated on October 13, 1942.
John Simmons Company, hereinafter called the New York company, a corporation, was organized under the laws of New York in 1891. It was engaged in the business of jobbing of pipe, valves, fittings, and plumbing supplies, and pipe bending, threading, cutting, and lining. About 1934 the New York company's bank became concerned as to its financial condition and, at the instance of the bank, it employed an accountant to investigate its operations. The accountant became a director of the company, and later its president. At his suggestion changes were made in the company's operations. Its office was moved from New York City to Newark, New Jersey, which resulted in decreased operating expenses. Real estate in Long Island*14 City was sold in 1937. In the period from 1935 to 1941, the New York *637 company realized profits in the years 1937 and 1941. In the other years in that period it sustained losses. No dividends were paid on the company's stock in the years 1934-1941.
On August 1, 1942, there were 27 holders of stock of the New York company, which consisted of 12,243 shares. Some were fiduciaries of trusts and estates. The individual holders (with the exception of William B. Franke) and the beneficiaries of the trusts and estates were all related to the founder of the business, John Simmons, either by blood or marriage.
Beginning about June 1942, William B. Franke, president of the New York company, began to consider the possible acquisition of all of its shares. This was at the suggestion of Charles Simmons, chairman of the board of directors of the company. At that time the founder of the business, John Simmons, had died, three of his sons had died, only one son had any connection with the business, and two grandsons had minor positions. There were no young members of the Simmons family to assume the responsibility of carrying on the business. The business was being conducted by Franke, *15 president, and Harry N. Hill, vice president and general manager. By reason of the fact that the stock was closely held, it could not be listed on a stock exchange and some difficulty had been experienced in valuing the stock for estate tax purposes in the case of stockholders who had died. On October 8 and 9, 1942, Franke and Hill acquired from the 27 stockholders of the New York company options to purchase their 12,243 shares of stock at $ 20 per share. The consideration for the options was $ 135, being at the rate of $ 5 paid to each stockholder, regardless of the number of shares held. The optionees affixed documentary stamps which cost them $ 673.28. The total cost of the options to the optionees was $ 808.28. The optionees did not at any time negotiate for the acquisition of the assets of the New York company.
In acquiring the stock options Franke and Hill were acting for themselves and on behalf of their wives, Bertha R. Franke and Margaret A. Hill, and Maurice Rothschild. Rothschild was a director of the company and an adviser of the company's creditor bank. None of these optionees owned any stock in the company, except Franke, who owned 10 shares out of the 12,243*16 shares outstanding.
The optionees intended to continue the operation of the business of the New York company and the name of the John Simmons Company if they could raise the money to purchase the stock and to meet the financial problems then facing the company. The company's building which housed its office and warehouse was in such bad physical condition that condemnation was possible. The railroad siding over which supplies were obtained was owned by others, and there was a possibility of losing the use of the siding. Because of wartime restrictions on steel there was concern as to whether supplies could be obtained to carry on the business.
*638 The optionees discussed their financial problems with the New York Trust Company which had previously made loans to the New York company. The Trust Company agreed to finance the acquisition of the stock upon certain conditions, which included a requirement that a New Jersey corporation be set up, that the loan be made to it, that the stock of the New Jersey corporation be pledged as security for the loan, that the options be transferred to the New Jersey corporation, that the stock of the New York company, as acquired, be also *17 pledged as collateral for the loan, and that upon acquisition of sufficient stock of the New York company, and in any event not later than November 25, 1942, the New Jersey corporation and the New York company be consolidated or merged. The Trust Company agreed to exchange or surrender the stock of the New York company held as collateral in accordance with the terms of the merger or consolidation, but was to continue to hold as collateral the stock of the corporation resulting from the merger or consolidation.
Carrying out the arrangement with the New York Trust Company, the optionees on October 13, 1942, organized the petitioner, the John Simmons Company, under the laws of the State of New Jersey with an authorized capital stock of 2,500 shares of a par value of $ 1 each. The optionees turned in to petitioner their options on the New York company stock and paid in $ 1,191.72 cash. There were issued to them 2,000 shares of stock in the ratios of their costs of the options and the amounts of cash paid in as follows:
| Transferred to John Simmons Company | |||
| Cost of | Number of | ||
| options | Cash | shares of | |
| stock issued | |||
| William B. Franke | $ 165.70 | $ 244.30 | 410 |
| Bertha R. Franke | 165.70 | 244.30 | 410 |
| Harry N. Hill | 198.03 | 291.97 | 490 |
| Margaret A. Hill | 198.03 | 291.97 | 490 |
| Thomas J. Coyle (nominee for | |||
| Maurice Rothschild | 80.82 | 119.18 | 200 |
| $ 808.28 | $ 1,191.72 | 2,000 |
*18 On or about October 19, 1942, the New York Trust Company loaned to the petitioner the sum of $ 245,000 which was evidenced by notes of the petitioner. The notes were endorsed by Franke and Hill and their wives. As collateral security for the loan, the five stockholders of the petitioner deposited with the Trust Company the certificates for all of their shares of stock.
Between October 20 and November 24, 1942, the petitioner, through the exercise of the stock options, acquired all of the 12,243 shares of the New York company at a cost of $ 20 per share, a total of $ 244,860.
*639 On November 30, 1942, there was filed with the secretary of state of the State of New Jersey an agreement of merger and consolidation, and with the secretary of state of the State of New York a certificate of consolidation. On the same date the certificates for the 12,243 shares of stock of the New York company were surrendered for cancellation and redemption. Under the agreements of consolidation the petitioner was the surviving corporation. The assets of the New York company became part of the assets of the petitioner.
On November 30, 1942, the assets of the New York company (excluding post-war*19 refund credits) at their adjusted bases were as follows:
| Cash | $ 284,149.31 |
| Notes and accounts receivable | 213,736.14 |
| Inventories | 162,622.74 |
| Stocks and bonds of domestic corporations | 48,283.82 |
| Depreciable assets -- less reserve for depreciation | 20,128.54 |
| Land | 172,801.00 |
| Deferred charges | 4,906.66 |
| $ 906,628.21 |
The fair market value of the stocks and bonds of domestic corporations did not exceed $ 4,964.35.
The fair market value of a parcel of land in Long Island City, included in the item "Land" in the above tabulation, and having a book value of $ 135,298.50, did not exceed $ 70,000.
The liabilities, excluding contingent liabilities, were as follows:
| Accounts payable | $ 83,380.81 |
| Accrued expenses | 127,092.07 |
| Net liability on renegotiation | 2,156.69 |
| $ 212,629.57 |
Since November 30, 1942, the petitioner has continued in the same business in which the New York company was engaged. The employees of the New York company became employees of the petitioner.
Of the notes and accounts receivable in the amount of $ 213,736.14 which were a part of the New York company's assets, the petitioner collected $ 211,244.81 during 1942 and 1943, and all but $ 325 of the remainder*20 in the years 1944 through 1950.
Payments on the $ 245,000 loan obtained by the petitioner from the New York Trust Company in October 1942, were made as follows:
| Dec. 1, 1942 | $ 125,000.00 |
| Dec. 15, 1942 | 14,933.29 |
| Dec. 30, 1942 | 20,000.00 |
| Jan. 15, 1943 | 19,772.57 |
| Feb. 15, 1943 | 15,294.14 |
| Feb. 26, 1943 | 50,000.00 |
| Total | $ 245,000.00 |
*640 The petitioner was enabled to make the payments of December 15, 1942, and January 15 and February 15, 1943, by deferring payments for supplies received from one of its regular suppliers. Such deferment had been arranged for with the supplier.
The petitioner filed its first New York franchise tax return in 1943, and included therein the income of the New York company for the period January 1 to November 30, 1942, and its own income for December 1942. During the calendar year 1943 the petitioner paid the New York franchise tax for 1942 in two installments, one in the amount of $ 1,953.80 and the other in the amount of $ 1,954.01.
The notice of deficiency in which the respondent notified the petitioner of the determination of deficiencies for the years 1943, 1944, and 1945 was mailed by the respondent on May 12, 1952. On June 18, 1952, *21 the petitioner paid to the collector $ 50,000 in respect of excess profits tax for the year 1943, which amount was deposited by the collector in a suspense account. On June 3, 1954, the petitioner executed Treasury Department Form 870 with respect to a $ 50,000 deficiency in excess profits tax for the year 1943, which form was duly filed. Pursuant to the waiver and consent provisions of that form, a deficiency of $ 50,000 in the petitioner's 1943 excess profits tax liability was assessed on June 24, 1954, on the assessment list for the fifth district of New Jersey. On June 14, 1954, the petitioner executed and filed Treasury Department Form 843 in which it claimed a refund of the $ 50,000.
In determining the deficiencies in controversy, the respondent determined the basis of the petitioner's assets by reference to the amount paid by the petitioner for the stock of the New York company, rather than using the basis of such assets in the hands of the New York company. The cost basis thus determined was used in computing gain or loss on the sale of the predecessor's inventory and other assets, and on the collection of receivables, as well as in the determination of the allowable depreciation.
*22 OPINION.
The principal question presented relates to the proper basis for gain or loss and depreciation with respect to assets acquired by the petitioner in 1942 from the New York company that was merged into it. The petitioner contends that the basis is the same as that in the hands of the New York company whereas the respondent has determined that the assets have a new basis, measured by the amount paid by the petitioner for the stock of the New York company.
The primary position of the petitioner is that it acquired the assets of the New York company in complete liquidation of that corporation, within the meaning of section 112 (b) (6) of the Internal Revenue *641 Code of 1939, and the regulations thereunder, 1*23 and that, therefore, it is entitled to use its transferor's basis by reason of the provisions of section 113 (a) (15). 2 The same result, it is argued, is to be reached by regarding the acquisition of New York's assets as being in connection with a reorganization and applying the provisions of section 113 (a) (7).
There can be no question that the form of the transaction was as contended for by the petitioner and literally satisfies the provisions of section 112 (b) (6). Under the agreements of consolidation and merger the stock of the New York company, wholly owned by the petitioner, was turned in for cancellation and redemption and by operation of law the assets of the New York corporation became the assets of the petitioner. This, in the language of section 112 (b) (6), was "the receipt by a corporation [the petitioner] of property distributed in complete liquidation of another corporation [the New York company]." *24 Consequently, the provisions of that section will apply to and be decisive of the question as to basis unless prevented by judicial interpretation, which the respondent says has been enunciated in similar cases.
Counsel for the respondent argues that under decided cases involving similar circumstances there was here in substance a purchase by the petitioner of the assets of the New York company. He cites the cases of Commissioner v. Ashland Oil & Refining Co., 99 F.2d 588">99 F. 2d 588; Koppers Coal Co., 6 T. C. 1209; Kimbell-Diamond Milling Co., 14 T. C. 74, affirmed per curiam 187 F.2d 718">187 F. 2d 718; and Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685">214 F. 2d 685.
Our examination of the cases cited by the respondent convinces us that the principle enunciated therein was intended to be and should be limited to the peculiar situations disclosed by the facts in each of those cases and should not be extended to a case such as this, where the evidence establishes a wholly different origin and reason for the pattern of the transactions. In each of those*25 cases it appeared that an existing *642 corporation had as its primary purpose or indeed its sole purpose, the purchase of a particular asset or a group of assets of another corporation, but was forced by circumstances beyond its control to effect the acquisition through the channels of first acquiring stock and then liquidating the subsidiary. In those cases the acquiring corporation had no purpose of continuing the business of the old corporation in a new corporate form.
Here the testimony shows that it was the desire of the individuals who were then in active conduct of the business of the New York company to continue that business in corporate form. Neither they nor the petitioner had as their sole or primary motive the acquisition of particular assets. Neither the individuals nor the petitioner at any time negotiated for the acquisition of any of the assets of the New York company. Rather, the purpose and the negotiations were to acquire stock and thereby acquire control of the company and its business. The uncontroverted evidence, including testimony, is that the new company was set up and the transaction carried out as it was because of the requirement imposed by *26 the Trust Company which loaned the money for the purchase of the stock.
It is our conclusion that under the circumstances of this case section 112 (b) (6) applies and that the basis of the assets of the New York company in the hands of the petitioner is the basis in the hands of the old company in accordance with the provisions of section 113 (a) (15).
The respondent says that our prior decision in the case of this petitioner operates as an estoppel to the trial and decision in this case of the issue of the basis to be ascribed to the assets acquired by the petitioner from the New York company. The decision in the prior case concerned the excess profits tax of this petitioner for the portion of the year 1942 that it was in existence. Our report in that case appears at 14 T. C. 29. The decision therein was appealed by the petitioner and the appeal was dismissed by the United States Court of Appeals for the Third Circuit on agreement of the parties.
In the prior case we had before us for decision only the narrow question of whether for invested capital purposes, under the excess profits tax statutes, the stock of the New York company had a "cost basis" or*27 a "basis other than cost" as those terms were used in section 761 of the Internal Revenue Code of 1939. We held that everything that occurred was in reality a single transaction constituting a purchase, and that there was no justification for attributing to the stock of the New York company any basis other than its cost. From that holding it followed that the stock had a statutory "cost basis." We did not have before us in that case the question of whether the liquidation of the New York company qualified under section 112(b)(6) with a consequent carryover of basis of assets. Consequently, in the language *643 of Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, the issue in this proceeding was not a matter which was "actually presented and determined in the first case" and, therefore, the prior case does not estop the trial and consideration of the basis issue that is presented in these proceedings.
In view of this conclusion it becomes unnecessary to consider alternative questions raised by the parties relating to the allocation of cost to some of the assets acquired from the New York corporation.
Several items not directly related to the main issues*28 have been stipulated and will be given effect in the recomputation under Rule 50. One of these concerns an increase in inventory consumed during December 1942, and the correct inventory at December 31, 1942. In another stipulation the parties set forth the material facts as to the petitioner's purchase and sale of shares of Tennessee Corporation and North American Company, and they agree that the gain of $ 2,000.19 realized on the sale of those shares in 1945 was erroneously considered by the respondent to be a short-term capital gain. The parties also agree that correct deductions for franchise taxes paid or accrued shall be allowed in recomputations for the years 1943 through 1946.
At the hearing a controversy developed as to the effect of the payment by the petitioner of $ 50,000 on account of excess profits tax for the year 1943 and the collector's deposit thereof in a suspense account. Facts subsequently occurring as to waiver, assessment, and refund claim were established by amendments of the pleadings. Whatever effect that payment has on the petitioner's liability will also be determined in the recomputation.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(b) Exchanges Solely in Kind. --
* * * *
(6) Property received by corporation on complete liquidation of another. -- No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. * * *
Sec. 29.112 (b) (6)-1 of Regulations 111 provides:
If a transaction constitutes a distribution in complete liquidation within the meaning of the Internal Revenue Code and satisfies the requirements of Section 112 (b) (6)↩, it is not material that it is otherwise described under the local law.
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
* * * *
(15) Property received by a corporation on complete liquidation of another. -- If the property was received by a corporation upon a distribution in complete liquidation of another corporation within the meaning of section 112 (b) (6)↩, then the basis shall be the same as it would be in the hands of the transferor.