1. Section 112(i)(2) of the Revenue Act of 1928 declaring that
the term party to a reorganization "includes" a corporation
resulting from a reorganization, and both corporations when one
acquires specified proportions of stock of another, is not an
exclusive definition, but rather is intended to enlarge the meaning
of the term beyond its ordinary connotation. P.
302 U. S.
85.
2. Pursuant to an agreement between a corporation (G) and
shareholders of another corporation (I): -- G formed a new
corporation (O), subscribing for its common stock and paying for it
with cash and G's own preference shares; I's shareholders sold
their shares to O and received from O a consideration made up of
preference shares of G, and of O and cash; I then transferred its
assets to O, and was dissolved.
Held that G was not "a
party" to the reorganization, and that the shares of G's preference
stock received by I shareholders from O were a basis for computing
taxable gain. Revenue Act of 1928, § 112. P.
302 U. S.
88.
86 F.2d 670 affirmed.
Certiorari, 301 U.S. 677, to review a judgment overruling an
order of the Board of Tax Appeals and sustaining an income tax
deficiency assessment.
Page 302 U. S. 83
MR. JUSTICE ROBERTS delivered the opinion of the Court.
This case involves the meaning and scope of the phrase "a party
to a reorganization" as used in § 112 of the Revenue Act of 1928.
[
Footnote 1]
January 29, 1929, the petitioner, and all other shareholders of
Metals Refining Company, an Indiana corporation, hereinafter
designated Indiana, entered into a contract with the Glidden
Company, an Ohio corporation, reciting that the shareholders of
Indiana were desirous of merging and consolidating the properties
of their company with Glidden and with a corporation Gildden was to
organize under the laws of Ohio, which corporation we shall call
Ohio. The shareholders covenanted that they would assign their
shares to Ohio, which was to have a specified capital structure
divided into preferred and common shares, and Gildden covenanted
that it would issue and deliver, or cause to be issued and
delivered, to the shareholders a stated number of shares of its own
prior preference stock at an agreed valuation, a stated number of
shares of the preferred stock of Ohio, also at an agreed valuation,
and sufficient cash to equal the appraised value of Indiana's
assets as of March 1, 1929, and that, after the exchange of stock,
Gildden would cause Indiana to transfer its assets to Ohio.
Glidden organized Ohio and became the owner of all its common
stock, but none of its preferred stock. Pursuant to the contract,
the shareholders of Indiana transferred their stock to Ohio and
received therefor a total consideration of $1,207,016, consisting
of Glidden prior preference stock valued at $533,980, shares of the
preferred
Page 302 U. S. 84
stock of Ohio valued at $500,000, and $153,036 in cash. Indiana
then transferred its assets to Ohio, and was dissolved.
As a result of the reorganization, petitioner received shares of
Glidden stock, shares of Ohio stock, and $17,293 in cash. In his
return for 1929, he included the $17,293 as income received, but
ignored the shares of Glidden and of Ohio as stock received in
exchange in a reorganization. The respondent ruled that Glidden was
not a party to a reorganization within the meaning of the Revenue
Act, treated the transaction as a taxable exchange to the extent of
the cash and shares of Glidden, and determined a deficiency of
$7,420. Upon receipt of notice to this effect, the petitioner
appealed to the Board of Tax Appeals, which reversed the
Commissioner, holding that Glidden was a party to a reorganization.
The Circuit Court of Appeals reversed the Board. [
Footnote 2] We granted the writ of certiorari
because of an alleged conflict of decision. [
Footnote 3]
Section 112(b)(3) of the Revenue Act of 1928 declares that
"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."
If the transaction involves the receipt of such stock or
securities and "also of other property or money," then the gain, if
any, is to be recognized in an amount not in excess of the sum of
such money and the fair market value of such other property.
Section 112(c)(1).
Section 112(i)(1) declares:
"The term 'reorganization' means (A) a merger or consolidation
(including the acquisition by one corporation of at least a
majority of the
Page 302 U. S. 85
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
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."
Subsection (2) is:
"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."
It is agreed that, under the plain terms of the statute, the
cash received by the petitioner was income, and that, as the stock
of Ohio was obtained in part payment for that of Indiana, the
exchange, to that extent, did not give rise to income to be
included in the computation of petitioner's tax.
The question is whether that portion of the consideration
consisting of prior preference shares of Glidden should be
recognized in determining petitioner's taxable gain. The decision
of this question depends upon whether Glidden's stock was that of a
party to the reorganization, for, if so, the statute declares gain
or loss due to its receipt shall not be included in the taxpayer's
computation of income for the year in which the exchange was
made.
If § 112(i)(2) is a definition of a party to a reorganization
and excludes corporations not therein described, Glidden was not a
party, since its relation to the transaction is not within the
terms of the definition. It was not a corporation resulting from
the reorganization, and
Page 302 U. S. 86
it did not acquire a majority of the shares of voting stock and
a majority of the shares of all other classes of stock of any other
corporation in the reorganization. The Circuit Court of Appeals
thought the section was intended as a definition of the term party
as used in the act, and excluded all corporations not specifically
described. It therefore held Glidden could not be considered a
party to the reorganization.
The petitioner contends, we think correctly, that the section is
not a definition, but rather is intended to enlarge the connotation
of the term "a party to a reorganization" to embrace corporations
whose relation to the transaction would not in common usage be so
denominated, or as to whose status doubt might otherwise arise.
This conclusion is fortified by the fact that, when an exclusive
definition is intended, the word "means" is employed, as in the
section we have quoted defining reorganization and in § 112(j),
defining the term "control," whereas here the word used is
"includes." If more were needed § 701(b) declares:
"The terms 'includes' and 'including,' when used in a definition
contained in this Act, shall not be deemed to exclude other things
otherwise within the meaning of the term defined."
The Treasury, in its regulations, has construed the section as
not embodying an exclusive definition. [
Footnote 4] The administrative construction of an
identical section in the Revenue Acts of 1924 and 1926 has been the
same. [
Footnote 5]
Page 302 U. S. 87
If the shareholders of A and those of B should agree to convey
their stock to a new corporation C in exchange for C's stock, a
reorganization, as defined in § 112(i)(1), would be effected. But
it might well be contended, were it not for § 112(i)(2), that the
shareholders of the old corporations had not received stock in a
nontaxable exchange, as specified in § 112(b)(3), since the new
corporation C was not a party to the exchange. In the present
instance, Indiana had no part in the transaction. The shareholders
agreed to transfer their stock to Ohio in exchange for securities.
Indiana, as such, was not a party to any agreement, and took no
corporate action. If the plan had contemplated the continued
existence of Indiana, and part payment of its shareholders in bonds
or preferred stock of that company, and part in shares of Ohio,
while this would clearly have constituted a reorganization as
defined by the act, it might with reason be urged that, as respects
the bonds or preferred stock of Indiana, the exchange was taxable,
since Indiana was not a party to the reorganization. Section
112(i)(2) precludes the contention. [
Footnote 6]
Plainly, however, there may be corporate parties to
reorganizations, within the meaning of the statute, other than
those enumerated in § 112(i)(2). Thus, if corporations A and B
transfer all their assets to C, a new corporation, in exchange for
all C's stock, the stock received is not a basis for calculation of
gain on the exchange. [
Footnote
7] A and B are so evidently parties to the reorganization that
we do not need § 112(i)(2) to inform us of the fact.
Again, if company A transfers all its assets to company B, a
going concern, upon the agreement of B to issue to A's shareholders
its stock in such amount that they
Page 302 U. S. 88
will own 80 percent of every class of B's outstanding stock, the
consummation of the agreement will be a reorganization under the
act. [
Footnote 8]
Unquestionably the gain ensuing upon the exchange of stock by A's
shareholders will not be taxable, since the stock received by them
is that of B, a party to the reorganization, though B is not
described as such in § 112(i)(2). We must, therefore, irrespective
of Glidden's failure to qualify as a party under that section,
determine whether its relation to the reorganization is that of a
party within the ordinary connotation of the term.
Glidden was a party to an agreement with the shareholders of
Indiana, and the agreement envisaged a reorganization as defined by
§ 112(i)(1)(A), for it contemplated that Ohio should acquire all of
the stock of Indiana. The agreement was fulfilled. But the crucial
question is whether Glidden was a party to the reorganization thus
effected. Glidden received nothing from the shareholders of
Indiana. The exchange was between Indiana's shareholders and Ohio.
Do the facts that Glidden contracted for the exchange and made it
possible, by subscribing and paying for Ohio's common stock in
cash, so that Ohio could consummate the exchange, render Glidden a
party to the reorganization? No more so than if a banking
corporation had made the agreement with Indiana's shareholders and
had organized the new corporation, and, by subscription to its
stock and payment therefor in money and the banking company's
stock, put the new company in position to complete the exchange.
Not every corporate broker, promoter, or agent which enters into a
written agreement effectuating a reorganization, as defined in the
Revenue Act, thereby becomes a party to the reorganization. And, if
it is not a party, its stock received in exchange, pursuant to the
plan, is
Page 302 U. S. 89
"other property" mentioned in § 112(c)(1), and must be reckoned
in computing gain or loss to the recipient. Glidden was, in the
transaction in question, no more than the efficient agent in
bringing about a reorganization. It was not, in the natural meaning
of the term, a party to the reorganization.
It is argued, however, that Ohio was the
alter ego of
Glidden; that, in truth, Glidden was the principal, and Ohio its
agent; that we should look at the realities of the situation,
disregard the corporate entity of Ohio, and treat it as Glidden.
But to do so would be to ignore the purpose of the reorganization
sections of the statute, which, as we have said, is that, where,
pursuant to a plan, the interest of the stockholders of a
corporation continues to be definitely represented in substantial
measure in a new or different one, then to the extent, but only to
the extent, of that continuity of interest, the exchange is to be
treated as one not giving rise to present gain or loss. [
Footnote 9] If cash or "other property"
-- that is, property other than stock or securities of the
reorganized corporations -- is received, present gain of loss must
be recognized. Was not Glidden's prior preference stock "other
property" in the sense that its ownership represented a
participation in assets in which Ohio, and its shareholders through
it, had no proprietorship? Was it not "other property" in the sense
that,
qua that stock, the shareholders of Indiana assumed
a relation toward the conveyed assets not measured by a continued
substantial interest in those assets in the ownership of Ohio, but
an interest in the assets of Glidden a part of which was the common
stock of Ohio? These questions, we think, must be answered in the
affirmative. To reject the plain meaning of the term "party,"
Page 302 U. S. 90
and to attribute that relation to Glidden, would be not only to
disregard the letter, but also to violate the spirit, of the
Revenue Act.
We hold that Glidden was not a party to the reorganization, and
the receipt of its stock by Indiana's shareholders in exchange, in
part, for their stock was the basis for computation of taxable gain
to them in the year 1929.
The judgment is
Affirmed.
MR. JUSTICE BLACK took no part in the consideration or decision
of this case.
[
Footnote 1]
Ch. 852, 45 Stat. 791, 816.
[
Footnote 2]
86 F.2d 670.
[
Footnote 3]
See Sage v. Commissioner, 83 F.2d 221;
Commissioner
v. Fifth Avenue Bank, 84 F.2d 787;
Commissioner v.
Bashford, 87 F.2d 827.
[
Footnote 4]
Treasury Regulations 74, promulgated under the Revenue Act of
1928, Art. 577:
"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. This definition is not an all-inclusive one, but
simply enumerates certain cases with respect to which doubt might
arise."
[
Footnote 5]
Regulations 65, art. 1577, applicable to § 203(h)(2) of the
Revenue Act of 1924; Regulations 69, art. 1577, applicable to §
203(h)(2) of the Revenue Act of 1926.
[
Footnote 6]
Compare Helvering v. Watts, 296 U.
S. 387.
[
Footnote 7]
Compare Helvering v. Minnesota Tea Co., 296 U.
S. 378;
G. & K. Manufacturing Co. v.
Helvering, 296 U. S. 389.
[
Footnote 8]
Section 112, subsections (i)(1)(B) and (j).
[
Footnote 9]
Pinellas Ice Co. v. Commissioner, 287 U.
S. 462,
287 U. S. 470;
Nelson Co. v. Helvering, 296 U. S. 374,
296 U. S. 377;
Helvering v. Minnesota Tea Co., 296 U.
S. 378,
296 U. S. 385;
G. & K. Manufacturing Co. v. Helvering, 296 U.
S. 389,
296 U. S. 391.