Page 287 U. S. 463
2. To constitute a "reorganization" within the meaning of §
203(b)(3)(h)(A) of the Revenue Act of 1926, it is not essential
that there be a merger or consolidation in the technical sense. P.
287 U. S.
469.
57 F.2d 188 affirmed.
Certiorari to review the affirmance of a decision of the Board
of Tax Appeals, 21 B.T.A. 425, upholding an added assessment of
income tax.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
Petitioner, a Florida corporation, made and sold ice at St.
Petersburg. Substantially the same stockholders owned the Citizens'
Ice & Cold Storage Company, engaged in like business at the
same place. In February, 1926, Lewis, general manager of both
companies, began negotiations for the sale of their properties to
the National Public Service Corporation. Their directors and
stockholders were anxious to sell, distribute the assets, and
dissolve the corporations. The prospective vendee desired to
acquire the properties of both companies, but not of one without
the other.
In October, 1926, agreement was reached and the vendor's
directors again approved the plan for distribution and dissolution.
In November, 1926, petitioner and the National Corporation entered
into a formal written contract conditioned upon a like one by the
Citizens' Company. This referred to petitioner as "vendor" and the
National Corporation as "purchaser." The former agreed to sell,
Page 287 U. S. 464
the latter to purchase, the physical property, plants, etc.,
"together with the goodwill of the business, free and clear of
all defects, liens, encumbrances, taxes and assessments for the sum
of $1,400,000, payable as hereinafter provided."
The specified date and place for consummation were 11 a.m.,
December 15, 1926, and 165 Broadway, New York City, when
"the vendor shall deliver to the purchaser instruments of
conveyance and transfer by general warranty in form satisfactory to
the purchaser of the property set forth. . . . The purchaser shall
pay to the vendor the sum of $400,000.00 in cash."
The balance of the purchase price ($1,000,000) shall be paid
$500,000 on or before January 31, 1927; $250,000 on or before March
1, 1927; $250,000 on or before April 1, 1927. Also, the deferred
installments of the purchase price shall be evidenced by the
purchaser's 6 percent notes, secured either by notes or bonds of
the Florida West Coast Ice Company, thereafter to be organized to
take title, or other satisfactory collateral; or by 6 percent notes
of such Florida company secured by first lien on the property
conveyed, or other satisfactory collateral.
The vendor agreed to procure undertakings by E. T. Lewis and
Leon D. Lewis not to engage in manufacturing or selling ice in
Pinellas county, Fla., for ten years.
The $400,000 cash payment was necessary for discharge of debts,
liens, incumbrances, etc. The Florida Company, incorporated
December 6, 1926, took title to the property and executed the
purchase notes secured as agreed. These were paid at or before
maturity except the one for $100,000, held until November, 1927,
because of flaw in a title. As the notes were paid petitioner
immediately distributed the proceeds to its stockholders according
to the plan.
The property conveyed to the Florida Company included all of
petitioner's assets except a few vacant lots worth not more than
$10,000, some accounts -- $3,000 face value -- also, a small amount
of cash. Assets, not exceeding
Page 287 U. S. 465
1% of the whole, were transferred to the Citizens' Holding
Corporation as trustee for petitioner's stockholders -- 99% of all
vendor's property went to the Florida Company. The plan of the
whole arrangement as carried out was accepted by petitioner's
officers and stockholders prior to November 4, 1926.
The Commissioner of Internal Revenue determined that the
petitioner derived taxable gain exceeding $500,000, and assessed it
accordingly under the Revenue Act of 1926. The Board of Tax Appeals
and the Circuit Court of Appeals approved this action.
The facts are not in controversy. The gain is admitted, but it
is said this was definitely exempted from taxation by § 203,
Revenue Act of 1926.
The Act approved February 26, 1926, c. 27, 44 Stat. 9, 11, 12
(§§ 202, 203):
"Sec. 202. (a) Except as hereinafter provided in this section,
the gain from the sale or other disposition of property shall be
the excess of the amount realized therefrom over the basis provided
in subdivision (a) or (b) of § 935 (204), . . . and the loss shall
be the excess of such basis over the amount realized."
"(b) . . ."
"(c) The amount realized from the sale or other disposition of
property shall be the sum of any money received plus the fair
market value of the property (other than money) received."
"(d) In the case of a sale or exchange, the extent to which the
gain or loss determined under this section shall be recognized for
the purposes of this chapter shall be determined under the
provisions of § 934 (203)."
"(e) . . ."
"Sec. 203. (a) Upon the sale or exchange of property, the entire
amount of the gain or loss, determined under § 202 shall be
recognized, except as hereinafter provided in this section. "
Page 287 U. S. 466
"(b)(1) . . . and (2). . . ."
"(3) No gain or loss shall be recognized if a corporation a
party to a reorganization exchanges property, in pursuance of the
plan of reorganization, solely for stock or securities in another
corporation a party to the reorganization."
"(4) . . . and (5). . . ."
"(c) . . . and (d). . . ."
"(e) If an exchange would be within the provisions of paragraph
(3) of subdivision (b) if it were not for the fact that the
property received in exchange consists not only of stock or
securities permitted by such paragraph to be received without the
recognition of gain, but also of other property or money, then
--"
"(1) If the corporation receiving such other property or money
distributes it in pursuance of the plan of reorganization, no gain
to the corporation shall be recognized from the exchange, but"
"(2) If the corporation receiving such other property or money
does not distribute it in pursuance of the plan of reorganization,
the gain, if any, to the corporation 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 so received, which is not so
distributed."
"
* * * *"
"(h) As used in this § and §§ 201 and 204 --"
"(1) The term 'reorganization' means (A) a merger or
consolidation (including the acquisition by one corporation of at
least a majority of the voting stock and at least a majority of the
total number of shares of all other classes of stock of another
corporation, or substantially all the properties of another
corporation), or (B) a transfer by a corporation of all or a part
of its assets to another
Page 287 U. S. 467
corporation if, immediately after the transfer, the transferor
or its stockholders or both are in control of the corporation to
which the assets are transferred, or (C) a recapitalization, or (D)
a mere change in identity, form, or place of organization, however
effected."
"(2) The term 'a party to a reorganization' includes a
corporation resulting from a reorganization, and includes both
corporations in the case of an acquisition by one corporation of at
least a majority of the voting stock and at least a majority of the
total number of shares of all other classes of stock of another
corporation."
All of § 203(b)is in the margin.
*
Counsel for the petitioner maintain --
The record discloses a "reorganization" to which petitioner was
party and a preliminary plan strictly pursued.
Page 287 U. S. 468
The Florida West Coast Ice Company acquired substantially all of
petitioner's property in exchange for cash and securities which
were promptly distributed to the latter's stockholders.
Consequently, under § 203, the admitted gain was not taxable.
The Board of Tax Appeals held that the transaction in question
amounted to a sale of petitioner's property for money, and not an
exchange for securities, within the true meaning of the statute. It
accordingly, and, as we think, properly upheld the Commissioner's
action.
The "vendor" agreed "to sell," and "the purchaser" agreed "to
purchase," certain described property for a definite sum of money.
Part of this sum was paid in cash; for the balance, the purchaser
executed three promissory notes, secured by the deposit of mortgage
bonds, payable, with interest, in about forty-five, seventy-five,
and one hundred and five days, respectively. These notes -- mere
evidence of obligation to pay the purchase price -- were not
securities within the intendment of the
Page 287 U. S. 469
act and were properly regarded as the equivalent of cash. It
would require clear language to lead us to conclude that Congress
intended to grant exemption to one who sells property and for the
purchase price accepts well secured, short-term notes (all payable
within four months), when another who makes a like sale and
receives cash certainly would be taxed. We can discover no good
basis in reason for the contrary view, and its acceptance would
make evasion of taxation very easy. In substance, the petitioner
sold for the equivalent of cash; the gain must be recognized.
The court below held that the facts disclosed failed to show a
"reorganization" within the statutory definition. And, in the
circumstances, we approve that conclusion. But the construction
which the court seems to have placed upon clause A, paragraph
(h)(1), § 203, we think is too narrow. It conflicts with
established practice of the tax officers and, if passed without
comment, may produce perplexity.
The court said:
"It must be assumed that, in adopting paragraph (h), Congress
intended to use the words 'merger' and 'consolidation' in their
ordinary and accepted meanings. Giving the matter in parenthesis
the most liberal construction, it is only when there is an
acquisition of substantially all the property of another
corporation in connection with a merger or consolidation that a
reorganization takes place. Clause(B) of the paragraph removes any
doubt as to the intention of Congress on this point."
The paragraph in question directs:
"The term 'reorganization' means (A) a merger or consolidation
(including the acquisition by one corporation of at least a
majority of the voting stock and at least a majority of the total
number of shares of all other classes of stock of another
corporation, or substantially all the properties of another
corporation)."
The words within the parenthesis may
Page 287 U. S. 470
not be disregarded. They expand the meaning of "merger" or
"consolidation" so as to include some things which partake of the
nature of a merger or consolidation but are beyond the ordinary and
commonly accepted meaning of those words -- so as to embrace
circumstances difficult to delimit but which in strictness cannot
be designated as either merger or consolidation. But the mere
purchase for money of the assets of one company by another is
beyond the evident purpose of the provision, and has no real
semblance to a merger or consolidation. Certainly, we think that,
to be within the exemption, the seller must acquire an interest in
the affairs of the purchasing company more definite than that
incident to ownership of its short-term purchase-money notes. This
general view is adopted and well sustained in
Cortland
Specialty Co. v. Commissioner, 60 F.2d 937, 939, 940. It
harmonizes with the underlying purpose of the provisions in respect
of exemptions and gives some effect to all the words employed.
The judgment of the court below is
Affirmed.
*
"Sec. 203. (a) Upon the sale or exchange of property, the entire
amount of the gain or loss, determined under section 202 . . .
shall be recognized, except as hereinafter provided in this
section."
"(b)(1) No gain or loss shall be recognized if property held for
productive use in trade or business or for investment (not
including stock in trade or other property held primarily for sale,
nor stocks, bonds, notes, choses in action, certificates of trust
or beneficial interest, or other securities or evidences of
indebtedness or interest) is exchanged solely for property of a
like kind to be held either for productive use in trade or business
or for investment, or if common stock in a corporation is exchanged
solely for common stock in the same corporation, or if preferred
stock in a corporation is exchanged solely for preferred stock in
the same corporation."
"(2) 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."
"(3) No gain or loss shall be recognized if a corporation a
party to a reorganization exchanges property, in pursuance of the
plan of reorganization, solely for stock or securities in another
corporation a party to the reorganization."
"(4) No gain or loss shall be recognized if property is
transferred to a corporation by one or more persons solely in
exchange for stock or securities in such corporation, and
immediately after the exchange such person or persons are in
control of the corporation; but in the case of an exchange by two
or more persons this paragraph shall apply only if the amount of
the stock and securities received by each is substantially in
proportion to his interest in the property prior to the
exchange."
"(5) If property (as a result of its destruction in whole or in
part, theft or seizure, or an exercise of the power of requisition
or condemnation, or the threat or imminence thereof) is
compulsorily or involuntarily converted into property similar or
related in service or use to the property so converted, or into
money which is forthwith in good faith, under regulations
prescribed by the commissioner with the approval of the Secretary,
expended in the acquisition of other property similar or related in
service or use to the property so converted, or in the acquisition
of control of a corporation owning such other property, or in the
establishment of a replacement fund, no gain or loss shall be
recognized. If any part of the money is not so expended, the gain,
if any, shall be recognized, but in an amount not in excess of the
money which is not so expended."