A Delaware corporation, organized for the purpose, took over the
assets and continued the business of a New Jersey corporation,
assuming its liabilities, after an exchange of stock, as follows:
the New Jersey corporation had outstanding $15,000,000 of 7%
preferred and $15,000,000 common stock, all shares of the par value
of $100, and had accumulated a large surplus from profits,
Page 268 U. S. 537
the actual value of the common stock being $842.50 per share;
the Delaware corporation had an authorized capital of $20,000,000
in 6% nonvoting preferred stock and $82,600,000 in common, shares
all of the par value of $100, and exchanged five shares of its
common stock for every like share in the New Jersey corporation,
and one and one-third shares of its preferred stock for every like
share in the New Jersey corporation, making payments in cash to
avoid fractional certificates, and thus all the stock of the New
Jersey corporation was exchanged, except a few shares of preferred
stock redeemed in cash, and the Delaware corporation had $7,600,000
of authorized common stock remaining which was old or held for sale
for additional capital.
Held that the new securities thus
received by an old stockholder were not in effect a stock dividend,
and that their value above the cost of his exchanged securities,
bought by him prior to March 1, 1913, was taxable as income under
the Act of September 8, 1916, and within the power of Congress so
to tax, since the corporations were essentially different, being
organized in different states and with different rights and powers,
and since the shares exchanged represented different interests both
because of these differences in the corporations and because a 6%
nonvoting preferred stock differs essentially from a 7% voting
preferred stock, and common stock subject to the priority of
$20,000,000 preferred and a $1,200,000 annual dividend charge
differs essentially from a common stock subject only to $15,000,000
preferred and a $1,050,000 annual dividend charge.
Eisner v.
Macomber, 252 U. S. 159, and
Weis v. Stearn, 265 U. S. 242,
distinguished. P.
268 U. S.
539.
58 Ct.Cls. 658 affirmed.
Appeal from a judgment rendered by the Court of Claims for the
United States in a suit brought by the appellant to recover the
amount of an additional income tax paid under protest.
Page 268 U. S. 538
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
Prior to March 1, 1913, Marr and wife purchased 339 shares of
the preferred and 425 shares of the common stock of the General
Motors Company of New Jersey for $76,400. In 1916, they received in
exchange for this stock 451 shares of the preferred and 2,125
shares of the common stock of the General Motors Corporation of
Delaware which (including a small cash payment) had the aggregate
market value of $400,866.57. The difference between the cost of
their stock in the New Jersey corporation and the value of the
stock in the Delaware corporation was $324,466.57. The Treasury
Department ruled that this difference was gain or income under the
Act of September 8, 1916, c. 463, Title I, §§ 1 and 2, 39 Stat.
756, 757, and assessed, on that account, an additional income tax
for 1916 which amounted, with interest, to $24,944.12. That sum
Marr paid under protest. He then appealed to the Commissioner of
Internal Revenue by filing a claim for a refund; and, upon the
disallowance of that claim, brought this suit in the Court of
Claims to recover the amount. Judgment was entered for the United
States. 58 Ct.Cls. 658. The case is here on appeal under § 242 of
the Judicial Code.
The exchange of securities was effected in this way. The New
Jersey corporation had outstanding $15,000,000 of 7 percent
preferred stock and $15,000,000 of the common stock, all shares
being of the par value of $100. It had accumulated from profits a
large surplus. The actual value of the common stock was then
$842.50 a share. Its officers caused to be organized the Delaware
corporation, with an authorized capital of $20,000,000 in 6 percent
nonvoting preferred stock and $82,600,000 in common stock; all
shares being of the par value of $100. The Delaware corporation
made to stockholders in the New
Page 268 U. S. 539
Jersey corporation the following offer for exchange of
securities: for every share of common stock of the New Jersey
corporation, five shares of common stock of the Delaware
corporation. For every share of the preferred stock of the New
Jersey corporation, one and one-third shares of preferred stock of
the Delaware corporation. In lieu of a certificate for fractional
shares of stock in the Delaware corporation, payment was to be made
in cash at the rate of $100 a share for its preferred and at the
rate of $150 a share for its common stock. On this basis, all the
common stock of the New Jersey corporation was exchanged, and all
the preferred stock except a few shares. These few were redeemed in
cash. For acquiring the stock of the New Jersey corporation only
$75,000,000 of the common stock of the Delaware corporation was
needed. The remaining $7,600,000 of the authorized common stock was
either sold or held for sale as additional capital should be
desired. The Delaware corporation, having thus become the owner of
all the outstanding stock of the New Jersey corporation, took a
transfer of its assets and assumed its liabilities. The latter was
then dissolved.
It is clear that all new securities issued in excess of an
amount equal to the capitalization of the New Jersey corporation
represented income earned by it; that the new securities received
by the Marrs in excess of the cost of the securities of the New
Jersey corporation theretofore held were financially the equivalent
of $324,466.51 in cash, and that Congress intended to tax as income
of stockholders such gains when so distributed. The serious
question for decision is whether it had power to do so. Marr
contends that, since the new corporation was organized to take over
the assets and continue the business of the old, and his capital
remained invested in the same business enterprise, the additional
securities distributed were, in legal effect, a stock dividend, and
that, under the rule of
Eisner v. Macomber, 252 U.
S. 189, applied in
Page 268 U. S. 540
Weiss v. Stearn, 265 U. S. 242, he
was not taxable thereon as income, because he still held the whole
investment. The government insists that identity of the business
enterprise is not conclusive; that gain in value resulting from
profits is taxable as income, not only when it is represented by an
interest in a different business enterprise or property, but also
when it is represented by an essentially different interest in the
same business enterprise or property; that, in the case at bar, the
gain actually made is represented by securities with essentially
different characteristics in an essentially different corporation,
and that, consequently, the additional value of the new securities,
although they are still held by the Marrs, is income under the rule
applied in
United States v. Phellis, 257 U.
S. 156;
Rockefeller v. United States,
257 U. S. 176, and
Cullinan v. Walker, 262 U. S. 134. In
our opinion, the government is right.
In each of the five cases named, as in the case at bar, the
business enterprise actually conducted remained exactly the same.
In
United States v. Phellis, in
Rockefeller v. United
States, and in
Cullinan v. Walker, where the
additional value in new securities distributed was held to be
taxable as income, there had been changes of corporate identity.
That is, the corporate property, or a part thereof, was no longer
held and operated by the same corporation, and, after the
distribution, the stockholders no longer owned merely the same
proportional interest of the same character in the same
corporation. In
Eisner v. Macomber and in
Weiss v.
Stearn, where the additional value in new securities was held
not to be taxable, the identity was deemed to have been preserved.
In
Eisner v. Macomber, the identity was literally
maintained. There was no new corporate entity. The same interest in
the same corporation was represented after the distribution by more
shares of precisely the same character. It was as if the par value
of the stock had been
Page 268 U. S. 541
reduced, and three shares of reduced par value stock had been
issued in place of every two old shares. That is, there was an
exchange of certificates, but not of interests. In
Weiss v.
Stearn, a new corporation had in fact been organized to take
over the assets and business of the old. Technically there was a
new entity, but the corporate identity was deemed to have been
substantially maintained because the new corporation was organized
under the laws of the same state, with presumably the same powers
as the old. There was also no change in the character of securities
issued. By reason of these facts, the proportional interest of the
stockholder after the distribution of the new securities was deemed
to be exactly the same as if the par value of the stock in the old
corporation had been reduced, and five shares of reduced par value
stock had been issued in place of every two shares of the old
stock. Thus, in
Weiss v. Stearn, as in
Eisner v.
Macomber, the transaction was considered, in essence, an
exchange of certificates representing the same interest, not an
exchange of interests.
In the case at bar, the new corporation is essentially different
from the old. A corporation organized under the laws of Delaware
does not have the same rights and powers as one organized under the
laws of New Jersey. Because of these inherent differences in rights
and powers, both the preferred and the common stock of the old
corporation is an essentially different thing from stock of the
same general kind in the new. But there are also adventitious
differences, substantial in character. A 6 percent nonvoting
preferred stock is an essentially different thing from a 7 percent
voting preferred stock. A common stock subject to the priority of
$20,000,000 preferred and a $1,200,000 annual dividend charge is an
essentially different thing from a common stock subject only to
$15,000,000 preferred and a $1,050,000 annual dividend charge. The
case at bar is not one in which after the
Page 268 U. S. 542
distribution the stockholders have the same proportional
interest of the same kind in essentially the same corporation.
Affirmed.
The separate opinion of MR. JUSTICE VAN DEVANTER, MR. JUSTICE
McREYNOLDS, MR. JUSTICE SUTHERLAND, and MR. JUSTICE BUTLER.
We think this cause falls within the doctrine of
Weiss v.
Stearn, 265 U. S. 242, and
that the judgment below should be reversed. The practical result of
the things done was but the reorganization of a going concern. The
business and assets were not materially changed, and the
stockholder received nothing actually severed from his original
capital interest -- nothing differing in substance from what he
already had.
Weiss v. Stearn did not turn upon the relatively
unimportant circumstance that the new and old corporations were
organized under the laws of the same state, but upon the approved
definition of income from capital as something severed therefrom
and received by the taxpayer for his separate use and benefit.
Here, stockholders got nothing from the old business or assets
except new statements of their undivided interests, and this, as we
carefully pointed out, is not enough to create taxable income.