dissenting :
I do not think any of the prior cases, neither Helvering v. Southwest Consolidated Corporation, 315 U.S. 194, nor Howard v. Commissioner, 238 F. 2d 943, have dealt with the situation with which we are presented in this case.
I think we should hold that where a corporation, owning about 68 percent of the stock of another, all of which, except for 2.69 percent, has been acquired solely in exchange for its own voting stock, adopts a plan of reorganization of the two corporations and in pursuance thereof offers to exchange its voting stock solely for the remainder of the outstanding stock of the other, and the offer is accepted, a reorganization under section 112(g) (1) (B) has been effected, because, counting the stock acquired both before and after adoption of the plan of reorganization, more than 80 percent of the stock of the latter corporation has been acquired solely for the voting stock of the former, and the acquisition for cash of the small percentage of 2.69 percent, being wholly unrelated to the plan of reorganization, is to be disregarded.
Section 112(b) (3), upon which plaintiffs rely, reads:
No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
Section 112(g) (1) (B), defining a reorganization, reads in. part as follows:
The term “reorganization” means * * * (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, * * *.
In 1912, when American acquired 65.37 percent of the voting stock of International, there seems to have been no thought in mind of a reorganization. American apparently desired control of International, but they do not seem to have had in mind a reorganization of the two companies. Certainly what they did was not sufficient to effect one.
*657Then in 1929, some 17 years later, American, for some undisclosed reason, acquired 1.291% percent of International stock, in addition to what it already had. Two years later, it acquired an additional .326 percent of International stock, and three years later .507 percent. Nothing more was done along this line for seven years. Then in 1951 it acquired an additional amount of .567 percent. These transactions gave American a total of slightly over 68 percent of the stock of International.
Up to this time there seems to have been no intention on the part of American to effect a reorganization with International, although American had sought control of International.
Then, in April 1952, American seems to have first conceived the idea of effecting a consolidation with International. Three things seemed to have induced it to arrive at this decision: (1) It wanted to settle a derivative stockholders’ suit against International and itself; (2) it wanted to be able to include International in its consolidated financial statements, for the purpose, among other things, of increasing its borrowing power under a certain credit agreement; (3) to enable it to include International in its consolidated Federal income tax return.1
Thus the stipulation of facts clearly indicates that this is the first time that any idea of a reorganization was conceived.
So, we are confronted with the application of section 112(g) (1) (B) of the 1939 Internal Kevenue Code to a situation where one corporation, owning about 68 percent of the stock of another corporation, desires to effect a reorganization with it. It is obviously impossible for such a corporation to comply with the terms of 112(g)(1)(B), if that section is to be construed to require that 80 percent of the stock of the corporation acquired must be acquired pursuant *658to a plan of reorganization. Since it already owns 68 percent of the stock of that corporation, it obviously could not acquire an additional 80 percent of its stock.
Does this mean that in such a situation it was impossible for American to bring itself within the terms of section 112(g) (1)(B)?
In such a situation, is it not reasonable to construe section 112(g) (1) (B) to require that the acquiring corporation acquire sufficient additional stock in the other corporation to bring its holdings in it up to the 80 percent requirement?
If this is a permissible construction of section 112(g) (1)(B), the only other requirement is that the acquiring corporation had to acquire this additional amount of stock solely for its own voting stock. This American did, concededly.
I feel quite sure from the statement of facts that there never was a “plan of reorganization” until the issuance of American’s prospectus on April 21, 1952. It was then that the plan of reorganization was bom. All that went before,, it seems to me, should be disregarded in the consideration of this case, except for the purpose of adding to the stock acquired after the formation of the plan of reorganization the stock previously acquired solely for its own voting stock. Therefore, we are obliged to construe section 112(g) (1) (B) as I have indicated above, or be compelled to say that a corporation, already owning 68 percent of the stock of another, cannot possibly qualify under section 112(g) (1) (B).
Can it be that in such case we must inquire how it had acquired the .68 percent, whether solely for its own stock, or partly for cash, and then hold that it comes within section 112(g) (1) (B), if the 68 percent was acquired solely for its own stock, but not, if a part was acquired for cash? This would seem to me illogical, where the 68 percent had not been, acquired pursuant to “a plan of reorganization.” What preceded the adoption of the plan of reorganization seems to me to be immaterial, except for the purpose of inquiring whether both before and after the adoption of the plan of reorganization 80 percent of the stock of the transferor corporation had been acquired solely for the voting stock of the transferee. It was what was done after the adoption of the plan *659that counts in determining whether the stock of the trans-feror was acquired “only” for the stock of the transferee..
But let us suppose that the statute is concerned, not with, the reason behind the acquisition of the stock, but only with, the acquisition itself, whatever may have been the reason for it. Then, it seems to me, our inquiry is, was 80 percent of* the stock acquired solely for the voting stock of the acquiring corporation ? If we find that it was, it seems to me immaterial that it may have acquired an additional percentage" of stock for cash, at intervals in the intervening forty years,, and not pursuant to a plan of reorganization.
In Howard v. Commissioner, supra, the transferee corporation offered to acquire 80.19 percent of the stock of the-transferor for its voting stock, and the remaining 19.81 percent for cash, and this was done. The Seventh Circuit held’, that the acquisition for cash of a part of the stock, pursuant to the plan of reorganization, in addition to the 80 percent,, took the case out of section 112 (g) (1) (B). They apparently-thought they were compelled to so hold by the Supreme Court’s opinion in Helvering v. Southwest Consolidated Corp., supra.
In the Southwest Consolidated Corporation case there was-a single transaction under which all the assets of the trans-feror corporation were acquired, but the consideration was-partly cash, partly in voting stock and partly in stock warrants. As applied to such facts, the Supreme Court rightly held that the transaction did not meet the requirement that the acquisition be “solely” for the voting stock of the transferee. The consideration was voting stock (most of which, was issued to creditors, not stockholders, of the transferor-corporation) , cash, the assumption of a liability of the trans-feror corporation (which was held to be the equivalent of cash), and stock warrants (which were held not to be the.equivalent of “voting stock”). For more than one reason the Supreme Court held the transaction did not qualify under-section 112(g) (1) (B). It was not confronted with a situation where 80 percent of the stock of the transferor corporation had been acquired “solely” for the voting stock of the-transferee, and, in addition, in a series of transactions, un*660related to the plan of reorganization, an additional percentage was acquired for cash.
In the case at bar, more than 94 percent of International was acquired “solely” for the voting stock of American, in two transactions. Only 2.69 percent was acquired for cash, in several separate and unrelated transactions. Can it be that the acquisition of this small percentage, at different times, unrelated to the plan of reorganization, so tainted the acquisition of the 94 percent as to completely change its •character ? I can see no reason why it should. More than the required 80 percent was acquired “solely” for American’s voting stock. This seems to me to be all that is required. 'The acquisition at other times and in unrelated transactions ■of a small additional amount for cash cannot logically affect the other two transactions where the sole consideration was .the voting stock of American.
This case differs from Howard v. Commissioner, supra, in that in the Howard case there was but one transaction involved, in which the offer of the acquiring corporation contemplated the payment of a part of the consideration in cash rand a part in the voting stock of the transferee. While 90+ •percent of the stock of the transferor was acquired, it could Ibe said that it was not acquired “solely” for the voting stock •of the transferee. In the case at bar in two separate transactions 94 percent of the stock of International was acquired “solely” for the voting stock of American. The additional •2.69 percent acquired for cash were acquired in a series of transactions, over a period of ten years, which had no connection whatever with the plan of reorganization or the other transaction in which stock was acquired “solely” for the ■stock of American. I can see no reason why these unrelated transactions change the character of the two transactions where 94 percent of the stock of International was acquired “solely” for American’s voting stock.
In Turnbow v. Commissioner, 368 U.S. 337, there was no reorganization because consideration for the transfer of stock by Turnbow was $1,235,625 worth of stock in the transferee, and $3,000,000 in cash. Since there was no reorganization, it was held that sections 112(b)(3), as supplemented by 112(c) (1), were not applicable. These sections are set out *661in a note below.2 This is all this case held. It does not seem to me to have any bearing on the question of'whether there was a reorganization of American and International.
■ I think we should hold that where a corporation owning 68 percent of the stock of another decides on a plan of reorganization of the two and pursuant to the plan acquires an additional 26 percent of the stock of the other corporation solely for its own stock, such a corporation is entitled to go back to transactions prior to the adoption of the plan of reorganization and, in order to make up the required 80 percent, pick up additional stock of the other corporation which had been acquired solely for its own stock.
■ American had acquired more than 94 percent of the stock of International solely for its own stock. I think there was a reorganization under section 112(g) (1) (B).
It would be permissible under the 1954 Code to add to stock last acquired holdings before the last acquisition. Section 368(a)(1)(B) requires that after the acquisition the acquiring corporation be in control of the other “(whether or not such acquiring corporation had control immediately before the acquisition) ”, and subparagraph (c) defines “control” to mean 80 percent of the combined voting power of all classes of stock and 80 percent of all other classes of stock.
This seems to embrace a case where, before adoption of the plan of reorganization, the acquiring corporation owned more than 50 percent of the stock of the other and, after adoption of the plan, acquired enough more to make up the 80 percent.
The right to do this is not so clear under the 1939 Code, but it is not prohibited and it is the only way a corporation owning 21 percent or more of the stock of ’another can bring *662itself within the terms of section 112(g) (1) (B). It is unreasonable to suppose Congress meant to deny to such companies the benefit of this section.
Since I cannot believe that the acquisition of 2.69 percent of International’s stock long before the “plan of reorganization” takes the case out of section 112(g) (1) (B), I must respectfully dissent.
FINDINGS OF FACT
The court, having considered the facts as stipulated by the parties, and the briefs and argument of counsel, makes findings of fact as follows:
1. George Arents and Lena B. Arents were husband and wife; citizens of the United States, and residents of the City, County and State of New York.
2. The American Machine & Foundry Company is a corporation organized under the laws of the State of New Jersey, and in 1952 Avas engaged in the manufacture of tobacco machinery including cigarette and cigarmakmg machines, bakery equipment, power tools and tool accessories, bicycles, velocipedes and other welded products, and in contract manufacturing under Government contract.
3. International Cigar Machinery Company is a corporation organized under the laws of the State of New Jersey and in 1952 was engaged in leasing to manufacturers of cigars both long filler and short filler cigar-making machines which had been manufactured by American Machine & Foundry Company and sold to International Cigar Machinery Company.
4. In June 1912 American Machine & Foundry Company acquired, in exchange solely for 11,000 shares of its common stock having a total par value of $1,100,000, from The American Tobacco Company, the following:
a; 65,375 shares of International Cigar Machinery Company capital stock and 16,971 shares of the stock of The Standard Tobacco Stemmer Company at, an aggre: gate price of $769,767.64;
, b. Various notes and - claims against International Cigar Machinery Company, American Machine & Foundry Company, Thé Standard, Tobacco Stemmer *663Company and Coffee Stemming Machine Company, for an aggregate price of $295,000; and
c. Cash in the amount of $35,232.36.
5. The above mentioned 65,375 shares of the capital stock of International Cigar Machinery Company were 65.375 percent of its total issued shares of 100,000.
6. The capital stock of International Cigar Machinery Company was its only stock and was its sole voting stock.
7. The common stock of American Machine & Foundry Company was its only stock having voting rights.
8. In 1927 each share of the capital stock of International Cigar Machinery Company having $100 par value was exchanged for three no par shares, resulting in a three-for-one split and increasing the number of shares acquired in 1912 by American Machine & Foundry Company from 65,375 shares to 196,125 shares.
9. In 1930 the International Cigar Machinery Company shares were split two-for-one, increasing the number of 'the shares acquired in 1912 by American Machine & Foundry Company to 392,250 shares.
10. From 1929 to and including 1951, the American Machine & Foundry Company, on 10 separate occasions, purchased on the market a total of 16,150 (adjusted for a three-for-one stock split-up in 1927 and a two-for-one stock split-up in 1930) common shares of International Cigar Machinery Company for a total aggregate cost of $554,608.50. These cash purchases, which constitute 2.691% per cent of the total outstanding stock of International Cigar Machinery Company, were made as follows:
Number of 7ear ' shares Cost Per cent of outstanding stock
1929 _ 7,750 $365, 750.00 1.291%%
1931_ 1,958 66,214. 00 .326
1934 _ 3,042 1951_ 3,400 75,348.30 47,296.20 .507 .567
Totals'_16,150 $554,608.50 2.691%%
11.In April 1952 American Machine & Foundry Company made an offer to the stockholders of International Cigar Machinery Company to exchange 1% shares of American Machine & Foundry Company common stock for each share *664of the capital stock of International Cigar Machinery Company.
12. In its Prospectus, dated April 21, 1952, the American Machine & Foundry Company stated that the purposes of this offer were:
a. To enable the American Machine & Foundry Company to acquire all of the shares of International Cigar Machinery Company not then owned by it;
b. To settle a derivative stockholders’ action brought by certain International Cigar Machinery Company stockholders against International Cigar Machinery Company and American Machine & Foundry Company;
c. To enable American Machine & Foundry Company' to include International Cigar Machinery Company statements in its consolidated financial statements;
d. To increase by $2,000,000 the borrowing power of American Machine & Foundry Company and its subsidiaries under a certain Credit Agreement;
e. To enable American Machine & Foundry Company to include International Cigar Machinery Company in a consolidated federal income tax return, should it so desire.
13. Pursuant to this offer the American Machine & Foundry Company issued, during the calendar year 1952, 235,918% shares of its common stock in exchange for 116,939 shares of the capital stock of International Cigar Machinery Company.
14; Both the 1912 and 1952 exchanges were made solely for the voting stock of American Machine & Foundry Company and in these exchanges it acquired not less than 94.864 percent of the voting stock of International Cigar Machinery Company.
15. In 1952 George Arents was the owner of 18,000 shares of the capital stock of International Cigar Machinery Company and he accepted the offer and received in exchange for these shares 24,000 shares of the common stock of American Machine & Foundry Company.
16. In 1952 Lena B. Areñts was the owner of 100 shares of the capital stock of International Cigar Machinery Company and she accepted the offer and received in exchange for these shares 133% shares of the common stock of American Machine & Foundry Company.
*66517. George Arents and Lena R. Arents duly filed a joint Federal income tax return for the calendar year 1952.
18. In their joint Federal income tax return for the calendar year 1952, George Arents reported a capital gain of $283,164.65 and Lena E. Arents reported a capital gain of $766.67 resulting from the aforesaid exchanges.
19. Lena E. Arents died on March 11,1954, leaving a last will and testament which was duly admitted to probate on March 25, 1954, by the Surrogate’s Court of the County of New York which on the same date issued letters testamentary to George Arents and United States Trust Company of New York.
20. On May 19, 1954, George Arents individually and George Arents and United States Trust Company of New York as executors of the last will and testament of Lena E. Arents, filed with the District Director of Internal Eevenue, Upper Manhattan District, New York, a claim for the refund of $48,268.34 alleged to have been erroneously paid by them on the capital gains reported as resulting from said exchanges made in 1952.
21. On July 14, 1958, the District Director, Manhattan District, mailed by registered mail to George Arents a notice that, in accordance with the provisions of section 6532 (a) (1) of the Internal Eevenue Code of 1954, the said claim had been disallowed in full.
22. George Arents died on December 13, 1960, leaving a last will and testament which was duly admitted to probate on December 21,1960, by the Surrogate’s Court of the County of New York which on the same date issued letters testamentary to Clinton S. Lutkins, Sidney W. Davidson and United States Trust Company of New York.
23. The only issue to be determined in this proceeding on the basis of the facts as hereinabove stated is whether the exchange of capital stock of International Cigar Machinery Company for common stock of American Machine & Foundry Company was an exchange of stock for stock on reorganization within the provisions of section 112(b)(3) of the Internal Eevenue Code of 1939, resulting in no recognized gain or loss.
*66624. If the court determines that the plaintiffs are entitled to recover, the parties may stipulate or otherwise agree upon a computation of the recovery under Kule 38(c).
CONCLTJSION OE LAW
Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are not entitled to recover and the petition is dismissed.
The eleventh paragraph of the stipulation of facts reads:
“In April 1952 American Machine & Foundry Company made an offer to the stockholders of International Cigar Machinery Company to exchange 1% shares of American Machine & Foundry Company common stock for each share of the capital stock of International Cigar Machinery Company.”
The twelfth paragraph states :
“In its Prospectus, dated April 21, 1952, the American Machine & Foundry Company stated that the purposes of this offer were: [those set out above].”
Then in the thirteenth paragraph the stipulation says that “Pursuant to this offer” the American acquired so many shares of International stock.
Section 112(b)(3) reads:
“Stock for stock on reorganization. No gain or loss shall he recognized if stock or securities in a corporation a party, to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.”
-Section 112(c)(1) reads:
“If ,an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5), * * * of this section, if it were not for the fact that the property received in exchange consists not only ’ of property permitted by such paragraph » * * to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.”