*1 Sidney LUTKINS, Davidson W. S. Clinton Company of Trust and United States Executors, York, etc. New as UNITED
The STATES.
No. 279-60. Court of
United States Claims. 6, 1963. Feb. Clark, City, Ben R. York New April Rehearing Denied Sidney plaintiffs. Davidson, W. Clark,
Davidson, New Dawson & York City, on briefs. Cynthia Holcomb, Washington, D. G. Oberdorfer,
C., with whom was Louis F. Atty. Gen., Asst. for defendant. Edward Philip Washing- Miller, S. Smith ton, R. C.,D. on brief.
LARAMORE, Judge. recovery
Plaintiffs sue for of income reported gains paid capital taxes sulting from of stock in one corporation for stock in another. question The to be determined in this transaction, whether case is later outlined, was a non-taxable un- 112(b) (3) der section of the Internal Whitaker, Judge, dissented. Codeof Revenue U.S.C. § (3) (1952). 1912 the In American Machine &
Foundry Company (hereinafter called Jersey American), a New exchange solely acquired in 11,000 (which of its common stock shares only having voting rights) 65,375 capital shares stock of In- Cigar Machinery Company ternational (hereinafter International). called exchange, same American also ac- quired other items not several material capital The this case. Inter- was its national voting its sole 65,375 repre- shares sented 65.375 International’s 100,000 capital issued total shares of American offered of shareholders an ex- one and one-third shares of its capi- each share of the common stock of International. Consummat- tal ing offer, acceptance Ameri- 235,918% shares of its com- can issued *2 of Inter- Section 26 U.S.C. shareholders mon stock to exchange (I.R.C.1939), 112(g) (1) (B) (1952), 176,939 shares § national in defining reorganization company. toDue as in sec- capital used of that of stock 112(b) provides: (3), Inter- capital tion stock the fact that the in split three-for-one national had been “(1) ‘reorganization’ The term * * * 176,- 1930, 1927, in these and two-for-one (B) acquisition means by to 29.489 939 shares amounted exchange one in sole- outstanding There- issued its total fore, ly voting stock, all a of its American owned 94.864 in per of at least 80 centum of the vot- International stock cent ing per stock and at least 80 centum exchange solely in it had obtained which of the total number shares of all On of its own for shares other classes of another cor- * * and separate between occasions poration, purchased on had 1951 American plaintiffs In essence the contend that 16,150 adjusted shares total of market an exchange of stock increased comprised stock of International holdings of American’s International’s company’s out- 2.691% percent requirement stock over the 80 standing stock. 112(g) (1) solely by (B) of section changing ex- George 1952, Lena Arents and its own stock for respectively of owners Arents International, of exchange and therefore this 1952 capital 18,000 stock and 100 shares tax was a free upon acceptance of (3). 112(b) The Govern- they in ex- offer received American’s ment not a contends was tax free re- 24,000 these shares 133% organization two reasons: respectively common shares acquire American did not joint tax In their income American. single of International’s stock in one George year 1952, Arents return reported transaction; (2) American did not ac- gain $283,164.65 a capital quire International stock for its gain reported capital Arents and Lena own stock but for cash. also resulting from aforesaid of $766.67 However, for reasons which will be- exchanges. Arents died in Lena apparent, come we will at the outset dis- George 1960. The Arents died in urged by cuss second contention pursuing a their estates executors of defendant; e., i. did the contending 1954, in for refund filed claim stock for cash between 1929 and 1951 $48,- taxpayers erroneously_paid that the exchange prevent 1952stock for gains capital ""the 268.34 in taxes on being from under the resulting ported changes from the stock ex- 112(g) (1) (B). of section terms They in 1952. contend made in The Seventh Circuit the case of exchange that the 943, Howard 238 F.2d within acquiring corporation wherein ob- 112(b) (3) provisions of section 80.19 tained 1939, supra, Code Internal Revenue resulting company in for its recognized in no or loss. same own transaction Code, 112(b) remaining purchased provides: supra, held that due of stock to the “ * gain or payment No shall loss the transaction failed to recognized “solely” requirement if stock or securities in meet the party reorgani- (B) 112(g) (1) and, to a of the 1939 Code are, reorganiza- pursuance therefore, was not a tax free zation (3). under This de- holding corpo- stock or similar securities followed a cision ration or Court in v. South- reorganization.” party Corporation, Consolidated west U.S. 789, remembered that constru- 86 L.Ed. 62 S.Ct. statutory purposes exemptions for tax 112(g) (1) Revenue legislative grace, and are matter In that 48 Stat. Act of strictly view must be opinion, 62 S.Ct. construed. case, page 198 of the .language *3 112(g) the un- of section plain and in page the Court at plain (B) prior this language and the constructions equivocal stated: language in Southwest v. “ * * * Congress provided has Corporation, supra, and Consolidated the transferor the that corporation assets supra,, Commissioner, hold. we Howard ex- be that prevent transactions the 1929 1951 cash ‘voting change ‘solely’ stock’ of being exchange 1952 the from ‘Solely’ no leaves transferee. the therefore,, reorganization and, tax free Voting leeway. plus oth- some receiving plaintiffs bar vantages arising tax ad from the meet the not does er consideration out of section statutory requirement.” (3). however, alternative, plaintiffs, As an The facts in the case bar show at Commissioner, relying on Howard v. purchases were cash involved that there supra, 1952 contend that even if the acquisition prior plaintiffs’ stock exchange under was not a the 1952 stock for stock transaction. therefore, and, 112(g) (B) section light Consequently, two above recognition gain exempt from un- not only cases, 1952 we can that the 112(b) (3) pri- der section because exchange instant case did not meet in the transactions, part their or cash statutory requirement the section exchange being only of stock for and, (1) (B) therefore, (g) was not gain recognizable is not for tax reorganization thereunder. according 112(c) (1) purposes to section Although plaintiffs contend that the 1939 Code. not were cash transactions provides: 112(c) (1) exchange pre- therefore do not exchange “(1) If would be an exchange being from con- vent the provisions subsection within exchange “solely” of stock sidered an * * * (5), (3), (b) (1), (2), stock, must borne in it mind that not for if were of this section exchange by was not itself property received in that fact exchange exchange of the stock of only prop- consists not and therefore by paragraph erty permitted requirement of section meet did not * received without Although (1) (B). we do not gain, recognition but also of other necessary question to consider the find it gain, money, property then the exchange of stock of whether recog- recipient any, shall be exchange “solely” the 1952 for stock and nized, not in excess in an amount in order to meet the 80 be combined can money and the of the sum requirement of such other value market fair plain- do not see how the we property.” advantage of take the unrelated can tiffs exchange in order to meet In Howard v. requirement supra, noted opinion, the same earlier in disregard similarly found that unrelated court time no tax view, plain- purchases. because our free 80.19 must stand fall on claim the ac- tiffs’ cor exchange obtained in which occurred and the transactions tual pick choose cash. The plaintiffs cannot for con- on, however, which, went to find court those con- sideration by themselves, taxpayers in that case would make the entitled sidered non-recognition exchange their result- by plaintiffs), under section ed from the and therefore only they 112(c) (1) 112(b) (3) had because does not into enter picture. being so, for their ceived stock in This section 112 (c) entirely and did in the also irrelevant to any involved case. receive of the cash decision We think this transaction. This does not mean that erroneous, as the Seventh Circuit was (c) (1) apply can never to section 112 Turn- the bow, Court so indicated (b) (3) type proper- transactions when ap- only 112(c) infra. Section ty other than stocks or securities are 112(b) (3), supra, re- plies if a section opin- involved in the This transaction. organization because is not tax free ion apply determines that it does not *4 property stock or securities other than claiming taxpayer when the who is Thus, exchange. was involved in 112(g) (1) (B) (C) a section or reor- (3) 112(b) a there must reorganization section first ganization require- fails to meet 112(c) (1) section before ments of either of those sections because 112(b) operative. Section can become exchange solely not for stock. any (3) reorganizations one of can be might instance’, taxpayer For a a in types defined and are six different 112(g) (1) (A) section 112(g) (1) 112(g) (1). section Section (a merger) in which both stock some entirety provides: in its given exchange. property other are in ‘reorganization’ “(1) The term This transaction would not a tax (A) statutory merger means a or free under section consolidation, (B) acquisi- (3) or property because other than by corporation, exchange However, tion one in or securities was involved. part voting (1) event, 112(c) for all or a of its in that stock, per taxpayers of at least 80 centum of in those received stock who report stock and at least the transaction have to would not per centum the total taxpayers number re- a while those who property of shares of all other classes of stock a ceived the other would have corporation, (C) recognized gain property. another of acquisition or other on this by corporation, one in We believe this must have been the exchange solely part or for all the Tax in M. view of Court Richard voting stock, substantially all plaintiffs Mills, where the No. 39 T.C. properties corpora- another the tion, reorganization under section claimed determining in whether the 368(a) (B) of the Internal is comparable Code, Revenue by assumption (B) of the 1939 In liability other, poration of a case, Revenue In that close ternal Code. property acquired the fact that or subject stock and a minimal liability, shall be disre- for stock cash were garded, by (D) a or transfer a cor- corporation. Tax in the part of all or a of its assets mentioning held, the How without Court coi'poration immediate- another case, supra, tax that there was no ard ly the transfer the after transferor reorganization and that section 356 free both shareholders or are in or its Code, (a) (1) com which is to which control of 112(c) (1) parable to section transferred, (E) the assets Code, apply. its deci based did not (F) recapitalization, a mere solely upon of the Su the decision sion identity, form, place of Turn preme case Court in the recent organization, effected.” however 368 U.S. bow 326. L.Ed.2d S.Ct. reorganiza- there was no In this case Turnbow, 112(g) (1) (B) held defined Court as sec- tion 112(c) apply only kind of contend- tion did not (the because the corpora- one of stock or securities in such involved par- stock, thus or in another cent cash and ty reorganization.” meeting basic 80 112(g) (1) quirement of section defining part as fol- case Turnbow reads We also believe the issue lows: be determinative the alternative here, case, in this inasmuch as ‘reorganization’ means “The term * * * case, there was no section Turnbow (B) one (g) (1) (B) exchange solely corporation, plaintiffs’ reasons, peti- For the above all or a of its per vot- tion must be dismissed. centum of the at least 80 per centum stock and at least of all JONES, Judge, of the total number of shares Chief and DAVIS DURFEE, Judges, classes concur. Judge (dissenting). WHITAKER, acquired 65.37 when American cases, prior any I do not think of Interna- neither tional, *5 v. Southwest Consol- no been there seems to have 194, Corporation, reorganization. thought idated 546, 62 315 U.S. S.Ct. in mind aof 789, Com- L.Ed. nor Howard v. of apparently desired control American missioner, Cir., F.2d have International, they to not do seem but reorganization dealt with with we the situation which of the mind a had in presented they Certainly are in this cáse. did companies. two what one. was not to effect sufficient I think a we hold that where should corporation, owning percent later, years about 68 of Then in some another, which, except reason, the stock of American, all of for some undisclosed solely percent, acquired percent for acquired has been of 1.291% stock, already in adopts stock, for its own had. it to what in addition reorganization plan acquired years later, of an additional it Two corporations pursuance stock, two and in there- percent of International .326 Nothing of percent. offers to its years later .507 three solely along for the remainder of the outstand- line for seven done more was years. other, acquired is stock of the and the offer ac- ad- in 1951 it Then reorganization cepted, percent. under section These .567 ditional of amount 112(g) effected, (1) (B) gave be- has been of a total American cause, counting acquired the stock both of percent slightly over plan before and after reorganization, of of International. percent than of more to have seems Up to this time corporation the stock of the latter has part Ameri- intention on the no been solely been reorganization Inter- with to effect a can former, and the sought although national, had American percentage of 2.69 the small International. control of being percent, wholly unrelated to April Then, in American seems plan is to be disre- first conceived to have ing the idea of effect- garded. with a consolidation International. plain- (3), upon things to have Three seemed induced it rely, tiffs reads: (1) decision: arrive at this It to wanted recog- a derivative stockholders’ shall to settle suit “No or loss be itself; against International and it nized if stock or securities a cor- include party be able to Internation- wanted to to a statements, are, pursuance plan its financial al in consolidated of re- among things, purpose, organization, for the borrowing increasing power prospectus April under its American’s agreement; reorganiza- It plan to enable certain credit was then that before, it its con- tion was include International bom. All that went me, disregarded it return.1 solidated Federal income tax seems to should be except case, consideration of this clearly stipulation facts Thus the purpose adding to the stock that time indicates that this .any the first is plan after the formation reorganization was con- idea aof previously ac- ceived. quired solely own its So, applica- we are confronted with Therefore, obliged we construe (1) (B) 112(g) section 112(g) (1) (B) I indicat- as have to a 1939 Internal Revenue Code situa- above, say compelled ed or be that owning about tion where one owning corporation, already percent corpo- the stock of another, possibly the stock of cannot ration, effect desires to qualify 112(g) obviously impossible for with it. Can it be must that in case we comply with such a inquire per- it how had (1) (B), if that section terms of cent, stock, whether own require for its that 80 construed partly it then ac- cent of the stock quired comes within pursuant to a acquired solely already it Since not, own if a was ac- owns 68 quired me for cash ? This would acquire seem to obviously poration, not could illogical, where had its stock. an additional 80 acquired pursuant to “a of re- been in such a situa- *6 Does this mean that organization.” preceded adop- What the impossible to for American it tion was bring plan tion of the of seems terms itself within the immaterial, except to me to for the (B)? inquiring purpose of whether both before situation, is it not reasonable adoption plan and organization the the re- after of of 112(g) (1) (B) to to construe section percent of of the stock acquiring corporation quire ac- the that corporation had ac- the transferor been quire in the additional stock sufficient voting solely quired of the holdings bring corporation to its other was after transferee. what done was requirement? percent up in it to the plan the determining the that counts of the stock of the permissible whether If this construction is only acquired “only” 112(g) (1) (B), the for the transferor was other acquiring corpo- requirement stock of the transferee. is that the acquire to this additional ration had suppose us that the But let statute voting its own of stock amount concerned, not the behind with reason did, concededly. American This stock. stock, acquisition the but the quite itself, acquisition I sure from the statement feel whatever with the “plan Then, may that never was facts been the reason it. have reorganization” me, inquiry the is, until issuance our was it seems paragraph stipula paragraph the 1. The eleventh twelfth states: The Prospectus, April 21, reads: of facts dated “In April Foundry “In American & Machine Machine & American the Foundry Company purposes Company an offer made to the stated that of this Cigar stockholders International Ma- above].” set out [those were: offer chinery Company paragraph shares in the thirteenth Then 1% Foundx-y Compa- says stipulation of American Machine & that “Pursuant to this ny acquired many common stock for each share of the offer” the American so capital Cigar stock of International Ma- shares of chinery Company.” American, voting ly” in- stock Only of the stock percent was"- voting two acquired 2.69 transactions. separate' was, cash, it in several poration? If find that we may it be* Can and unrelated transactions. immaterial that it to me seems percent- acquisition percentage of that the of this small additional age, times, the: cash, in- at different unrelated in the stock for at intervals plan pursuant the* tervening forty years, so tainted and acquisition as to com- to a pletely I can its character? see Commissioner, supra, In Howard v. why no reason it should. More than ac- transferee offered required was “sole- quire the stock of 80.19 voting ly” for This American’s voting stock, transferor for its required. seems me to be all that remaining acquisition times and held done. Circuit The Seventh unrelated small addi- part for cash that logically tional amount for cash cannot pursuant of reor- percent, affect the other two transactions where ganization, in addition to the sole consideration was the 112(g) (1) took the case out stock of American. thought they They apparently were compelled to so This case differs from Howard v. Com- opinion in v. South- Court’s missioner, supra, in in the Howard supra. Corp., west Consolidated in- case there was but one transaction volved, acquir- in which the offer óf the Corpo- In the Southwest Consolidated ing corporation contemplated pay- single transaction ration case there was a part ment of a the consideration the assets of the trans- under which all acquired, feror the transferee. While 90+ cash, partly partly consideration acquired, of the transferor was partly war- in stock said that it was not it could be facts, applied Su- rants. As “solely” for the stock of the trans- rightly that the trans- preme held Court sepa- two feree. the case at bar in requirement not meet action did *7 percent 94 stock rate transactions the “solely” acquisition the vot- be the acquired “solely” was of International ing The consid- transferee. stock of the The stock of American. for the (most of which stock eration was acquired percent for cash additional stockholders, creditors, not to was issued transactions, acquired in a series of were corporation), transferor of the period years, ten which had no over a liability transfer- assumption of the of a plan of re- whatever connection organization with (which held be the corporation to the other transaction cash), stock warrants equivalent “solely” acquired which stock was for the equivalent (which held not to be I can American. see no stock of reason “voting stock”). more than one For why unrelated these held the trans- Court reason of the two transactions character qualify 112 under section did not action percent 94 the stock where of Inter- (B). confronted (g) It was not “solely” acquired national was Amer- percent of the where with a situation ican’s corporation had the transferor “solely” been In Turnbow 368 U.S. addition, transferee, and, in stock 7 L.Ed.2d 82 S.Ct. there transactions, to unrelated in a series was no because consid- reorganization, addition- plan the transfer of eration acquired for cash. percentage was al $1,235,625 Turnbow was worth of stock transferee, $3,000,000 bar, per- case more than 94 cash. was no Since there of International “sole- was- cent 112(b) (3), supple- held that sections more than 50 of the stock of the by 112(c) (1), applic- and, mented were not adoption plan, after acquired enough able. These in a sections set out up more to make percent. note This is all this case held. below.2 any It does not seem to me to bear- right do un- this is not so clear ing question of on the whether there was Code, prohibit- der the 1939 it is of American and In- way corporation ed and it is the ternational. owning more of the stock I bring think we should that where of another can itself within n terms corporation owning (B). of section It Congress plan suppose of another decides on a meant unreasonable organization deny pursuant companies two and to such benefit acquires an additional this section. corporation cent solely the stock of the other acquisi- Since I cannot believe that the corpora- its own tion of 2.69 of International’s go entitled back transac- reorgani- long “plan before the prior tions out zation” takes the case reorganization and, to make order respectfully I dis- up up required percent, pick addi- sent. tional stock the other acquired solely had been own stock. than more
American had I think its own 50CCPA was a Application of Alexander WEBER. (g) (D Appeal No. 6859. Patent permissible under the 1954 would States Court Customs United last hold- add to stock Code to Appeals. and Patent acquisition. ings the last before Feb. requires 368(a) (1) (B) that after acquiring corporation “(whether or not of the other control had control acquisition)”, immediately before (c) subparagraph defines “control” combined vot- to mean classes power of all *8 classes other
percent of all where, embrace a case This seems reorgan-
before corporation owned ization, the * (5), reads: if it of this section Section property No for stock for the fact were not “Stock recognized if stock consists not loss shall received party paragraph property permitted in a or securities * * (cid:127) are, pursuance of without be received the rec- ognition gain, prop- but also erty money, gain, any, in such or securities then the for stock par- recipient recognized, shall or in reorganization.” ty not in an amount excess the sum of money 112(c) reads: fair market value of property.” would be within such other “If (3), (b) (1), (2), provisions of subsection