1939 BTA LEXIS 874">*874 1. NONRECOGNITION OF GAIN - CONTROL. - Where a plan is indivisible and forms a single transaction, control is determined as of the completion of the integral plan, not at the completion of any intermediate step. (Sec. 112(b)(5), Revenue Act of 1928.)
2. Id. - REORGANIZATION (SEC. 112(i)(1)) - (a) BUSINESS PURPOSE. - Transfers involving the use of corporations having no business purpose are not statutory reorganizations.
(b) CONTINUITY OF INTEREST. - Transfers resulting in no continuity of interest by the transferor or its stockholders in the transferred assets are not statutory reorganizations.
40 B.T.A. 258">*258 The Commissioner determined a deficiency of $18,300.11 in the petitioner's income tax for the year 1931. The only question for decision is whether the gain of $145,200 realized by the petitioner from the disposition of 300 shares of WKRC stock is or is not recognized for tax purposes.
FINDINGS OF FACT.
The petitioner, an individual, resides in New York City, New York. He filed his1939 BTA LEXIS 874">*875 income tax return for the year 1931 with the collector of internal revenue for the third district of New York.
Radio Station WKRC, Inc. (hereinafer called Station), was an Ohio corporation with outstanding capital stock consisting of 500 shares. The petitioner during the month of September 1929 acquired 300 shares of its stock at a cost of $30,000. The remaining 200 shares of its stock were owned on October 14, 1931, by John S. Boyd and Eugene S. Mittendorf.
The petitioner was a vice president of the Columbia Broadcasting System, Inc. (hereinafter called Columbia). He and the other two stockholders of Station entered into an agreement with Columbia on October 14, 1931, whereby they agreed to sell all of their Station stock to Columbia for $292,000. The material provisions of the agreement are as follows:
FIRST - The Vendors hereby agree to sell, assign, transfer and deliver, and/or cause to be sold, assigned, transferred and delivered to Columbia and/or its nominee or nominees, certificates for five hundred (500) shares of the capital stock of the Corporation, duly endorsed and stamped for transfer, which Columbia hereby agrees to purchase or cause to be purchased, and1939 BTA LEXIS 874">*876 for which it agrees to pay or cause to be paid the sum of two hundred and ninety-two thousand dollars ($292,000) in cash or by certified check. The obligation of the Vendors or any 40 B.T.A. 258">*259 of them under this clause FIRST will be performed pro tanto by the sale, assignment, transfer and delivery to Columbia and/or its nominee or nominees of all of the outstanding capital stock of any Corporation or Corportions which may own or control any or all of the said five hundred (500) shares of the capital stock of the Corporation.
* * *
THIRD. - The aforesaid purchase price of two hundred and ninety-two thousand dollars ($292,000) shall be paid by Columbia as follows:
| To Sam Pickard | $175,200. |
| To John S. Boyd | 87,600. |
| To Eugene S. Mittendorf | 29,200. |
* * *
SIXTH - The closing hereunder shall take place at the office of Columbia Broadcasting System, Inc., 485 Madison Avenue, New York City, New York, on the 20th day of November, 1931, at 10:30 o'clock, A.M.
* * *
NINTH. - It is recognized by all of the parties hereto that Columbia desires to acquire all of the capital stock of the Corporation, and, accordingly, in the event that any one or more, but not all, 1939 BTA LEXIS 874">*877 of the Vendors shall refuse or fail to sell, assign, transfer or deliver to Columbia any or all of the shares of the Corporation owned by him and contracted to be sold hereunder, Columbia may in its discretion elect to be relieved from any and all of its obligations hereunder to all of the Vendors.
Boyd and Mittendorf sold their Station shares to Columbia for cash on November 1, 1931, in accordance with the provisions of the foregoing agreement.
The petitioner desired to avoid the payment of income tax on the profit he would realize from the sale of his 300 shares of Station stock to Columbia. He sought the advise of an attorney, who suggested to him a plan whereby, in his opinion, income taxes might be lawfully avoided. Columbia was interested only in acquiring control of Station at the price agreed upon and deemed immaterial the method of payment provided by the petitioner. The plan suggested by the attorney was carried out as follows:
1. Station Holding Corporation (hereinafter called Holding) was formed on November 5, 1931, under the laws of the State of Delaware, with authorized capital stock of 500 shares of $5 par value.
2. The petitioner transferred his 3001939 BTA LEXIS 874">*878 shares of Station stock to Holding on November 7, 1931, and received in exchange therefor 200 shares of Holding's capital stock and became the sole stockholder of Holding.
3. Holding borrowed $175,200 from a bank on November 9, 1931. The proceeds of this loan, after deducting the discount, amounted to $174,470. Holding used most of this money to purchase $170,000 face value of United States Treasury notes for $171,448.31.
4. The Sampick and Esspick corporations (hereinafter called Sampick and Esspick), were organized on November 2, 1931, under the laws of the State of Delaware.
40 B.T.A. 258">*260 5. Holding transferred $100,000 face value of its United States Treasury notes to Sampick and $70,000 face value thereof to Esspick, in exchange for 100 shares of the stock of each transferee. It then distributed the Sampick and Esspick stock to its sole stockholder, the petitioner, without requiring him to surrender any of his Holding stock. These transactions were all completed on November 10, 1931, pursuant to resolutions of a stockholders' meeting held on that same day, in which these transactions were referred to as a "plan of reorganization."
6. Holding, on November 11, 1931, issued1939 BTA LEXIS 874">*879 200 shares of its stock to Columbia for $172,000 in cash. Holding used this money and part of the cash in its bank account to pay off the $175,200 loan. Holding thereafter had a credit balance in its bank account of $507.89.
7. The petitioner transferred his 200 shares of Holding stock to Columbia on November 13, 1931, and received $3,700 from Columbia. Columbia, as sole stockholder of Holding, dissolved Holding on January 26, 1932, and received the 300 shares of Station and the remaining cash, amounting to $507.89.
Sampick and Esspick bought and sold stocks and bonds in the years from 1931 to the present time. They paid dividends in the year 1932 and in each of the years 1934 to 1937, inclusive. They have filed income tax returns for each of the years 1931 to 1937. The stock of Sampick is still owned by the petitioner. The stock of Esspick is now owned by the petitioner's wife.
Holding was not formed for any business purpose. It engaged in no transaction except as outlined above. It has never filed an income tax return.
The Commissioner, in determining the deficiency, included $145,200 in the petitioner's income for 1931 as gain realized from the disposition1939 BTA LEXIS 874">*880 of the 300 shares of Station stock. He gave the following explanation in the notice of deficiency:
This office holds that the transactions here involved constitute no real reorganization incident to the business of either or both of the corporations involved as contemplated by the statute, and accordingly, the distribution of shares of stock of The Sampick Corporation and The Esspick Corporation do not constitute distributions, in pursuance of a plan of reorganization under section 112(g), but represent ordinary dividends under section 115. However, since the Station Holding Corporation had only been in existence a few days at the time of the distribution of the stock of The Sampick Corporation and The Esspick Corporation, it would not have any earnings available for dividends, the distributions would first be applied to reduce the basis of the stock of the Station Holding Corporation, and the excess would be taxable in the same manner as gain from the sale of property, as outlined in section 115(d) of the Revenue Act of 1928.
The substance of the transactions establishes that the Station Holding Corporation, the Sampick Corporation, and The Esspick Corporation were acting in1939 BTA LEXIS 874">*881 your behalf, forming the necessary conduit for the passing of title to the 40 B.T.A. 258">*261 stock which you had previously agreed to sell to the Columbia Broadcasting System, Incorporated; and that you were the real owner of the property, and not the entities of your creation which were but instrumentalities for passing title and receiving the proceeds for you.
OPINION.
MURDOCK: The petitioner held 300 shares of stock of Station. The other 200 shares outstanding were owned by Boyd and Mittendorf. Columbia desired to acquire Station and agreed with the owners of the stock to buy that stock for $292,000, $175,200 of which was to be paid to the petitioner. That agreement was entered into on October 14, 1931. It permitted the transfer to Columbia to be made through the medium of a holding company. Boyd and Mittendorf sold their Station shares to Columbia directly for cash in accordance with the agreement. The only reason that the petitioner did not transfer his shares to Columbia for cash, in accordance with that agreement, was his desire to avoid tax. Columbia was willing to buy the stock directly for cash. The scheme which was actually followed was not designed at the request1939 BTA LEXIS 874">*882 of or to benefit Columbia. It was designed wholly for the benefit of the petitioner in order to avoid taxes. His purpose to avoid tax is material only as indicating a nonbusiness purpose in organizing Holding. .
The first step in the petitioner's plan was the exchange of his 300 shares of Station stock for 200 shares of Holding stock. That exchange, he says, comes under section 112(b)(5) of the Revenue Act of 1928, since "immediately after the exchange" he was "in control of the corporation" and his gain is not recognized. However, this was not an independent transaction, but was a mere component step, an integral part of a single plan. "Control" is determined, for the purpose of section 112 and similar provisions of prior acts, as of the completion of the entire plan, not as of the completion of an interdependent step. ; affd., , under the title Bassick v. Commissioner; certiorari denied, ; 1939 BTA LEXIS 874">*883 ; ; . The "control" of Holding by the petitioner was, as was intended, transitory only. The plan required that he immediately surrender his Holding shares to Columbia so that it could acquire that which it sought, the Station shares. The exchange of the Station shares for the Holding shares is not within section 112(b)(5). The profit from that exchange would be $145,200 (Holding shares worth $175,200 received for Station shares which had cost $30,000). But, as has been said above, that was only a step.
The next steps were to organize Sampick and Esspick, to transfer 40 B.T.A. 258">*262 to them property about equal in value to the value of the 300 Station shares, and to distribute their stock to the petitioner without the surrender by him of his Holding shares. These transactions gave the petitioner property worth about $171,000 while the 200 Holding shares were losing a like amount of value. His thought was that these transactions would be tax-free from his standpoint under section1939 BTA LEXIS 874">*884 112(g), since stock of a corporation, a party to a reorganization, would be distributed to him pursuant to a plan of reorganization without the surrender by him of his Holding shares.
He was in error in believing that section 112(g) would apply. These transactions were but component parts of the single transaction of transferring the Station shares to Columbia for $175,200. Holding had no business purpose. It served merely as a conduit for transferring the Station shares to Columbia and for conveying the $175,200 consideration from Columbia. There can be no statutory reorganization under such circumstances. There was no continuity of interest in any direction. Holding retained no interest in Sampick or Esspick and they retained none in Holding. Furthermore, the petitioner retained no interest in Holding. Three days later, pursuant to the single and inseparable plan, he transferred his Holding shares to Columbia. Thus he disposed of his Station shares and received finally property (cash and Sampick and Esspick shares) which derived none of its value directly or indirectly from any of the property transferred. Some continuity1939 BTA LEXIS 874">*885 of interest in the property transferred is essential if a transaction is to be classed as a reorganization under section 112(i)(1). ; ; ; ;
Several additional steps were necessary to complete the plan. Columbia purchased 200 shares of newly issued stock from Holding for $172,000 in cash and, two days later, purchased 200 shares of the same stock from the petitioner for $3,700. The unity of the plan is clearly demonstrated by this discrepancy in price. Obviously petitioner never controlled Holding, since he was always required to sell its stock for a nominal balancing amount. Had he failed to do so the purpose of the entire plan would have been defeated. Columbia, having no business purpose for Holding, soon dissolved it and finally got that which it had always desired, the 300 shares of Statioon stock. The plan was then complete. It constituted a single1939 BTA LEXIS 874">*886 taxable transaction of exchange. Columbia received the Station stock. The petitioner received $3,700 in cash and stocks worth approximately $171,500, a total amount realized of $175,200. That was the amount 40 B.T.A. 258">*263 for which he had agreed to sell. The consideration was all furnished directly or indirectly by Columbia in 1931.
The acquisition by Holding of a majority of the stock of Station was not a reorganization within section 112(i)(1), since Holding had no business purpose and a continuity of interest was lacking when the entire plan was completed. This point is not urged by the petitioner, but is mentioned merely to show it has not been overlooked in the decision of this case.
The elaborate scheme devised to avoid tax did not serve that purpose, since it did not bring the gain within any of the nonrecognition provisions but left it under the general rule of section 112(a). The amount of the gain is not disputed. The Commissioner did not err in taxing that gain as a part of the petitioner's income for 1931. See 1939 BTA LEXIS 874">*887 , involving facts similar in all important respects.
Reviewed by the Board.
Decision will be entered for the respondent.
VAN FOSSAN dissents.