author: Black

text:
    Louis G. Raegner, Jr., David A. Davies and Johanna Raegner, as Executors under the Last Will and Testament of Louis C. Raegner, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49078.
    Promulgated February 27, 1934.

      Ethan R. Kayes, Esq., for the petitioners.

      R. F. Staubly, Esq., for the respondent.
   OPINION.

Black

: This proceeding is for the redetermination of a deficiency in Federal estate tax in the amount of $10,968.91. The amount of the deficiency protested is $2,933.01, and is based on the following assignment of error:

The taxing by the Commissioner of the principal amounting to $33,330.00 of a certain trust deed and the income thereof, dated December 9th, 1925, made by the Decedent for the benefit of his son, Louis C. Raegner, Jr., as beneficiary.

At the hearing the respondent filed an amended answer in which he made claim for an additional deficiency based upon the following affirmative allegation:

The respondent avers that ⅛ redetermining the deficiency there should be included in the gross estate, pursuant to the provisions of Section 302 (a) and/or 302 (c) of the Revenue Act of 1926, the amount of the value of the corpus of the trusts executed by the decedent during his lifetime, as follows:
Trust of Dec. 29, 1922 — Johanna Raegner, primary beneficiary;
Trust of Apr. 30, 1923 — Dorothy Raegner Matty, primary beneficiary;
Trust of Apr. 30, 1923 — Marion Mitchell Henry, primary beneficiary;
Trust of Apr. 30, 1923 — Louis 0. Raegner, primary beneficiary;
Trust of Nov. 26, 1924 — Dorothy Raegner Matty, primary beneficiary;
Trust of Nov. 26, 1924 — Marion Mitchell Henry, primary beneficiary;
Trust of Jan. 2, 1925 — Dorothy Raegner Matty, primary beneficiary;
Trust of Jan. 2, 1925 — Marion Mitchell Henry, primary beneficiary; and
Trust of Dec. 9, 1925 — Louis 0. Raegner, primary beneficiary, to the extent of the fee interest therein, as property of which the decedent died possessed, and/or as transfers intended to take effect in possession or enjoyment at or after the decedent’s death.

The last named trust of December 9, 1925, Louis 0. Eaegner, primary beneficiary, included in above amended answer of respondent, is the same trust, property of which the Commissioner included as a part of decedent’s gross estate in the deficiency determined in the deficiency notice.

The effect of respondent’s amended answer as to this particular trust is to include it under section 302 (a) (c), Revenue Act of 1926, along with the property conveyed to the other eight trusts named, whereas in his deficiency notice this particular trust was included under the provisions of section 302 (d), Revenue Act of 1926.

Petitioners later were permitted to file an amended petition alleging that the respondent had also erred in including in the decedent’s gross estate the amount of the value in excess of $5,000 of 22 shares of stock of the Corn Exchange Bank transferred to Louis C. Raegner, Jr., on April 11, 1928, which allegation of error was admitted by the respondent in his answer to the amended petition, and should, therefore, be corrected in the recomputation of the deficiency to be made under Rule 50.

The proceeding was submitted upon the following stipulation of facts:

1. That the decedent, Louis C. Raegner, died testate, a resident of New York City, on July 3,1928.
2. That the petitioners, Louis C. Raegner, Jr., David A. Davies and Johanna Raegner, are the duly qualified and acting executors of the will of the decedent.
3. That under dates of December 29, 1922, April 30, 1923, November 26, 1924, January 2, 1925, and December 9, 1925, the decedent executed nine trust agreements and/or indentures, naming his wife, Johanna Raegner, and his children, Dorothy Raegner Matty, Marion Mitchell-Henry and Louis O. Raegner, Jr., as primary beneficiaries thereunder, copies of which said trust indentures are hereto attached as Exhibits 1 to 9, inclusive.
4. That the dates of birth of the aforesaid primary beneficiaries of said trust indentures were as follows:
Name Date of Birth
Johanna Raegner_August 4, 1863
Dorothy Raegner Matty-December 3. 1881
Marion Mitchell-Henry_August 13, 1885
Louis O. Raegner, Jr_April 11, 1897
5. That the decedent left him surviving his widow, Johanna Raegner, his daughter, Marion Mitchell-Henry, and his son, Louis O. Raegner, Jr. The decedent’s daughter, Dorothy Raegner Matty, died April 17, 1925, leaving her surviving one child, John R. Matty, who was born September 20, 1905.
6. That the corpus of said indentures consisted of first preferred and first preferred Glass B stock of the Roy Realty Company, par value $5.00 per share. The value, as of the date of the decedent’s death, of the first preferred stock of the said Company was $4.00, and the value as of said date of the first preferred Class B stock was $4.00 per share.

The nine exhibits referred to in paragraph 3 of the stipulation are copies,' in the respective order mentioned, of the nine trust indentures referred to in the above quoted portion of the respondent’s amended answer, and are incorporated herein by reference.

Exhibit 1 is dated December 29, 1922. By this indenture the decedent appointed his wife, Johanna Raegner, his son, Louis C. Raegner, Jr., and his friend, David A. Davies, as trustees of 20,010 shares of first preferred 5 percent cumulative stock of the Roy Realty Co. The trust was to continue during the life of his said wife and the life of his said son. The net income from these shares was to be paid to the decedent’s wife for her life, and upon her death to each of the decedent’s children share and share alike, and “ to the issue of a deceased child, such issue to take share and share alike its parent’s share, per stirpes and not per capita.” Upon the termination of the trust (i.e., upon the death of both Johanna Raegner and Louis C. Raegner, Jr.) the corpus was to be divided “ share and share alike among the then living children, and the then living issue of any deceased child or children ” of the grantor, “ the issue of any deceased child or children to take, share and share alike the parent’s share per stirpes and not per capita.”

Exhibit 2 is dated April 30, 1923. By this indenture the decedent appointed his wife, Johanna Raegner, his son, Louis C. Raegner, Jr., and his friend, David A. Davies, as trustees of 53,330 shares of first preferred cumulative stock of the Roy Realty Co. The trust was to continue during the life of his son and the life of his grandson, John R. Matty. The net income from these shares was to be paid to the decedent’s daughter, Dorothy R. Matty, for her life, and upon her death “ during the continuance of this trust, share and share alike to her issue her surviving, such issue to receive per stirpes and not per capita, but upon the death of all the issue of my daughter, DoROthy, at any time during the continuance of this Trust, then and thenceforth the share of the net income to which the deceased child, his or her issue, if then living -would have been entitled, shall be divided per stirpes and not per capita into as many shares as there shall be then living children of mine and any lawful issue of any deceased child and one share of such income shall be paid to each of my children then living and one share thereof shall be paid share and share alike to the lawful issue per stirpes and not per capita, of any deceased child.” Upon the termination of the trust (i.e., upon the death of both Louis C. Raegner, Jr., and John R. Matty) the corpus “shall be payable to my daughter, Doeothy, if she be then living, and if she be then deceased, share and share alike to the lawful issue her sui-viving, per stirpes and not per capita, and in case my daughter shall have died without leaving lawful issue then living, the principal of said trust estate shall be divided per stirpes and not per capita into as many shares as there shall be then living children of mine and the lawful issue of any deceased child, and one share of said trust fund shall be paid to each of my children then living and one share shall be paid share and share alike to such lawful issue, per stirpes and not per capita.”

Exhibits 3 and 4 are identical in every respect with Exhibit 2, except that the trust in Exhibit 3 was created primarily for the decedent’s daughter Marion and her issue, if any, and the trust in Exhibit 4 was created primarily for the decedent’s son Louis and his issue, if any.

Exhibit 5 is dated November 26, 1924. The trustees, duration of the trust, life beneficiary, and remaindermen are identically the same as in Exhibit 2. The corpus of the trust is 5,000 shares of first preferred class B stock of the Roy Realty Co.

Exhibit 6 is dated November 26, 1924. The trustees, duration of the trust, life beneficiary, and remaindermen are identically the same as in Exhibit 3. The corpus of the trust is 5,000 shares of first preferred class B stock of the Roy Realty Co.

Exhibit 7 is dated January 2, 1925. The trustees, duration of the trust, life beneficiary, and remaindermen are identically the same as in Exhibit 2. The corpus of the trust is 1,667 shares of first preferred class B stock of the Roy Realty Co.

Exhibit 8 is dated January 2, 1925. The trustees, duration of the trust, life beneficiary, and remaindermen are identically the same as in Exhibit 3. The corpus of the trust is 1,667 shares of first preferred class B stock of the Roy Realty Co.

Exhibit 9 is dated December 9, 1925. The trustees and duration of the trust are identically the same as in Exhibits 2 to 8, inclusive. The corpus oí the trust is 6,666 shares of first preferred class B stock of the Roy Realty Co. The net income from the shares was to be paid “to the Settlor’s said son, Louis C. Raegner, Jr., and upon his death to pay over the income and any accumulations of income to such person or persons and in such shares and lawful estates as the said son Louis C. Raegner, Jr., may nominate and appoint by his last will and testament, or other written instrument and, in default of the same, upon his death during the continuance of this trust, to pay the income, share and share alike to his issue him surviving, such issue to receive per stirpes and not per capita, but upon the death of all the issue of the said son, Louis C. Raegner, Jr., at any time during the continuance of this trust, then and thenceforth the share of the net income to which the deceased child, his or her issue, if then living, would have been entitled, shall be paid over to the Board of Managers of the Presbyterian Hospital of the City of New York to constitute a fund for charitable purposes tó be known as The Meta RaegneR Memorial Fund.” Upon the termination of the trust (i.e., upon the death of both Louis C. Raegner, Jr., and John R. Matty) the corpus “ shall be payable to such person or persons and in such shares and lawful .estates as the said son, Louis C. Raegner, Jr., may nominate and appoint by his last will and testament, and, in default of the same, share and share alike to the lawful issue of the Settlor’s said son, Louis C. Raeg-ner, Jr., him surviving, per stirpes and not per capita, and in case the Settlor’s said son shall have died without leaving lawful issue then living, the principal of said trust estate shall be payable to the Board of Managers of the Presbyterian Hospital of the City of New York to constitute a fund for charitable purposes to be known as The Meta Raegner Memorial Fund.” The trust in Exhibit 9 was specifically different from the eight other trusts in that it contained a provision for revocation, as follows:

Sixth : Anything herein to the contrary notwithstanding the Settlor reserves the right and privilege of terminating and revoking this agreement upon obtaining the consent in writing of the Settlor’s said son, Loots O. Raegner, Jr.

The several trust indentures contained provisions common to all for the appointment of successive trustees, and the payment to the trustees of lawful commissions for their services.

The respondent contends in his amended.answer that the interests of the remaindermen under all nine of the above named trusts did not vest during the decedent’s lifetime, and that the decedent, therefore, died possessed of a reversionary interest in the several trusts, the value of which should be included in the decedent’s gross estate under the provisions of either subdivision (a) or (c), or both, of section 302 of the Revenue Act of 1926. Regarding the lagt named trust, dated December 9, 1925, the respondent contends that the decedent retained the right in conjunction with the life beneficiary to revoke the trust, and, that, therefore, the entire value of the corpus of this trust should be included in the decedent’s gross estate under the provisions of subdivision (d) of the same section and act. The respondent does not contend that any of the trusts were created in contemplation of the grantor’s death.

The petitioners, on the other hand, contend that no part of the value of any of the trust property in question is includable in the decedent’s gross estate, under any provision of the statute.

Since the respondent does not contend that any of the instruments involved herein were executed in contemplation of death, it is only necessary to consider the application of that part of section 802 of the Revenue Act of 1926 which reads as follows:

Seo. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
* * * * # * *
(e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, * * * or intended to take effect in possession or enjoyment at or after his death, except ⅜ * * ;
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke * * *.

The respondent’s contentions relative to the application to all nine of the trusts of either subdivision (a) or (c), or both, of the above quoted statute will be considered together. These contentions are substantially the same as were made by the respondent and denied by us in the case of Elizabeth B. Wallace, Executrix, 27 B.T.A. 902. It would serve no useful purpose to go again into the same contentions which we disposed of in the Wallace case. Suffice it to say that the New York law is involved in both cases; that in the instant proceeding there was at all times a remainderman ready to take the very moment that the life estate might terminate; that the remainder interests involved here were vested and not contingent; that with the exception of the trust dated December 9, 1925 (which exception will be discussed later in this opinion), the decedent retained no power to alter, amend or revoke any of the instruments; that death of the grantor in 1928 was not the generating source of any acquisitions of property by any of the remaindermen; and that there was no transfer of property from the dead to the living upon which an estate tax could be levied. It follows that the contentions of the respondent relative to the application of either subdivision (a) or (c) of the statute must be denied. See also McCaughn v. Carnill, 43 Fed. (2d) 69; Commissioner v. Duke, 62 Fed. (2d) 1057; affirmed per curiam by the Supreme Court, 290 U.S. 591; H. Seldon Taylor, Jr., et al., Executors, 27 B.T.A. 220; Luis James Phelps et al., Executors, 27 B.T.A. 1224; and Flora M. Bonney et al., Executrices, 29 B.T.A. 45.

We shall now consider the question whether the value of the corpus of the trust created on December 9, 1925, the one included by respondent in his deficiency notice, was correctly included under the provisions of section 302 (d), supra. The decedent could not alter, amend or revoke this trust except “upon obtaining the consent in writing of the Settlor’s said son,” the life beneficiary. To the extent of the life estate, at least, the decedent’s son was an adverse interest, and under such circumstances, the value of the life estate is no part of the decedent’s gross estate. David J. Lit et al., Executors, 28 B.T.A. 853; Edna T. Stevens et al., Executors, 29 B.T.A. 641.

It remains to be determined whether the remainder interest in the trust dated December 9, 1925, was revocable and, consequently, in-cludable in decedent’s gross estate. In the Lit case we held that the remainder interest in the trust there involved was revocable without securing the consent of an adverse interest and should be included in the grantor’s gross estate. The only difference in fact between the trust involved in the instant proceeding and the trust involved in the Lit case is that Bose L. Lit had only a life estate in the income of the trust, whereas the grantor’s son, in the instant proceeding, had not only a life estate in the income of the trust, but was granted a general power of appointment of the remainder. The question now before us is whether this difference in fact between the two cases requires a different answer in deciding whether such remainder interest is includable in decedent’s gross estate under section 302 (d) quoted above. In deciding the Lit case we held that since Congress, in separate Committee reports of the House and Senate, stated “This provision [sec. 302 (d)] is in accord with the principle of section 219 (g) of the bill which taxes to the grantor the income of a revocable trust,” the two sections should be read together; and that the term “ any pers'on ” in section 302 (d) should be interpreted as meaning “ any person not a beneficiary of the trust. * * * ” Under that interpretation we held that since Rose L. Lit was a beneficiary to the extent that she was granted a life estate in the income of the trust, the life estate should not be included in the grantor’s gross estate; and that since she was not a beneficiary as to the remainder, she was not an adverse interest as to it and the remainder interest was revocable by the grantor “ in conjunction with any person not a beneficiary ” and, therefore, in-cludable in the grantor’s gross estate.-

The income from the trust dated December 9, 1925, was to be paid to decedent’s son for life and upon his death “to such person or persons and in such shares and lawful estates as the said son Louis 0. Raegner, Jr. may nominate and appoint by his last will and testament, or other written instrument,” with other provisions in case of default.

Did decedent’s son have an adverse interest as to the remainder? The son was one of the trustees of the trust. But, as held in Reinecke v. Smith, 289 U.S. 172, “A trustee is not subsumed under the designation beneficiary.” In Smith v. Commissioner, 59 Fed. (2d) 56, the United States Circuit Court of Appeals, First Circuit, said:

It would seem that Congress did not intend, by the use of the term “ beneficiary ” in section 219 (g) only a beneficiary having a present vested interest, but intended to include within that term a beneficiary or beneficiaries having contingent interests as well as those having present or vested ones.
Undoubtedly Congress could have drawn a line between beneficiaries holding vested and contingent interests, or between those having contingent interests based on their respective degrees of remoteness, but it has done neither of these things. It is therefore far more reasonable to conclude that by the word “ beneficiary ” Congress intended to include persons or classes of persons designated, in the particular trust under consideration, entitled to take present or contingent interests thereunder.

See also Bessie R. Jones, 27 B.T.A. 171; Iola Wise Stetson, 27 B.T.A. 173.

In view of these decisions we must enlarge our inquiry and ask whether the son was an adverse interest within the meaning of the law, as to the remainder. It is clear that if the son had exercised the general power of appointment granted him by his father in the trust indenture and had died, the corpus of the trust would have been included as a part of the son’s estate. See section 302 (f), Revenue Act of 1926; also J. Gilmore Fletcher, Executor, 29 B.T.A. 503.

We think it is clear, therefore, that one who has been granted a general power of appointment over the corpus of the trust property has an adverse interest in such property from that of the settlor of the trust and, where his consent must be secured before the settlor can revoke the trust, such trust instrument is irrevocable within the meaning of the authorities which we have already cited and discussed.

On this issue, we hold for petitioner.

Reviewed by the Board.

Decision will he entered wider Bule 50.


source: Caselaw Access Project

author: GooDRicii:

license: Public Domain

text:
    Daisy M. Ward, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62644-62649.
    Promulgated February 27, 1934.

      Joseph N. Moonan, Esq., Bay G. Moonrn, Esq., and Charles Brnin, Esq., for the petitioners.

      John D. Kiley, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Chris M. Peterson ; Earl W. Ward; Daisy M. Ward and Emerson C. Ward, as Executors of the Last Will and Testament of R. P. Ward, Deceased; Emerson C. Ward; and Charles H. Watson.

   OPINION.

GooDRicii:

In these proceedings, which were consolidated for hearing, petitioners assail the following deficiencies in income tax for 1929:

Daisy M. Ward_ $107.35
Chris M. Peterson- 346. 57
Earl W. Ward_1, 319. 41
Estate of K. P. Ward_J_ 7,224. 73
Emerson C. Ward_ 124. 89
Charles H. Watson_4, 314. 60

Broadly, the issue relates to the amount of taxable gain derived by petitioners upon the disposition of their stock of the Ward Dry Milk Go., a corporation of Waseca, Minnesota. The facts clearly appear in the various written exhibits in evidence and from, short additional testimony. Since they are not in dispute, they need not be fully recited for the purposes of this report.

All the petitioners (including R. P. Ward, deceased, whose estate is here represented by his executors) were stockholders of the Ward Co., which had outstanding 2,000 shares of common and 1,010 shares of its preferred stock. The common stock had been issued for patents, or as dividends, and, as conceded by petitioners, had no cost basis. Of the preferred stock, 844 shares had been issued by the company for cash at par, which was $100 a share. The remaining 166 shares had been purchased for cash at par by the company from the estate of a deceased stockholder, Winship, and thereafter distributed pro rata to the common stockholders.

Under date of June 1, 1929, the Ward stockholders agreed to exchange all their stock for 18,750 shares of the common stock of the Kraft-Phenix Cheese Corporation, on the basis of 16,225 shares of Kraft stock for the 2,000 shares of Ward common, and 2,525 shares of Kraft stock for the 1,010 shares of Ward preferred.

The agreement also provided (and this is the arrangement which gives rise to the controversy) that the Kraft corporation, after it had delivered its stock, if so requested, would repurchase from the Ward stockholders the 2,525 shares of Kraft stock “ delivered to said stockholders as consideration for the [Ward] preferred stock ” and, in addition, 2,475 shares of the Kraft stock “issued and delivered to [Ward stockholders] as part of the consideration for the [Ward] common stock,” both repurchases to be made at $40 a share. Moreover, Kraft agreed to pay the Ward stockholders 6 percent interest on $200,000 (the repurchase price of the 5,000 shares) from June 1 until date of delivery of the Kraft stock, and to pay during the same period, 12½ cents a month on the other 13,750 shares of Kraft stock to be delivered to the Ward stockholders.

At that time, Kraft was under agreement not to purchase any new properties for cash without the approval of its bankers, although it was free to acquire properties for its stock. The agreement between Kraft and the Ward stockholders was carried out in all respects. About June 5.Emerson 0. Ward, who represented the Ward stockholders in the transaction, notified Kraft that it would be required to repurchase 5,000 shares according to the contract. Kraft immediately, through a broker, sold that amount short on the Exchange. On June 27 the Kraft corporation delivered 18,750 shares of its stock to Emerson C. Ward, of which 5,000 shares were issued in his name and the balance issued in the names of the several Ward stockholders according to their interests, the certificates being in such amounts as they had requested. Two days later, on June 29, Emerson C. Ward delivered to Kraft the certificates, endorsed by him, rejoresenting the 5,000 shares issued in his name, and then received from Kraft its check totaling $202,628.13, of which $2,628.13 represented the interest and payments provided by the contract. The 5,000 shares thus acquired from the Ward stockholders Kraft turned in to its broker to cover its short sales, realizing a substantial profit on that transaction. Of the funds received from Kraft, Emerson 0. Ward distributed $101,000 to the Ward preferred stockholders; paid the expenses incident to the transaction, and distributed the balance of $89,382.78 pro rata to the Ward common stockholders.

Concerning the tax liabilities of the Ward stockholders arising under that transaction, the parties are at variance on two points. First, petitioners contend that their deal with Kraft was an exchange of stock for stock (both corporations being parties to a reorganization), on which no gain or loss is recognized under section 112 (b) (3) of the 1928 Act, followed by a sale of some of the stock so received by them. As to this respondent,. while conceding that a reorganization is involved, maintains that there was but one transaction, falling under paragraph (c)(1) of the same section — an exchange of stock for stock and money, giving rise to recognizable gain, and on that basis he has determined the deficiencies.

So it falls on us to decide whether the deal, as agreed to and consummated, was an exchange by the Ward stockholders of their stock for 13,750 shares of Kraft stock plus $200,000 in cash, as respondent views it, or whether there were two separate transactions, as petitioners contend, first an exchange of stock for stock, and later a sale of 5,000 shares of the stock so received by the Ward stockholders.

The parties agree that the exchange was effected in connection with a reorganization within the meaning of section 112. Since the record contains nothing to indicate that their conclusion is erroneous, we are satisfied to accept it and confine our inquiry to the specific issue presented.

The second point of controversy concerns the cost basis of the Ward preferred stock. A cost of $84,400 is conceded, but petitioners contend that $16,600 should be added thereto, being the amount paid for Winship’s stock which was bought by the company and distributed to the common stockholders, thus making the total cost basis $101,000. Respondent refused to allow the increased basis claimed, holding the cost to be $84,400. As petitioners concede that the common stock had no cost basis, they concede also that the entire amount received on sale of the Kraft stock exchanged therefor was profit, and they have so reported.

On the first point we sustain petitioners, for we are convinced that, both in form and substance, the agreements and acts of the Ward stockholders and the Kraft corporation effected two separate transactions; first, an exchange of stock for stock upon which gain or loss is not to be recognized, and, second, a sale of part of the stock so received. True, as respondent argues, taken together the transactions had the effect of an exchange of stock for stock plus cash, but our decision must be based not upon the effect finally resulting, but upon what was done. W. A. Hoult, 23 B.T.A. 804; Anna M. Harkness, 1 B.T.A. 127; William H. Mullins, 14 B.T.A. 426; Minnie C. Brackett, 19 B.T.A. 1154; James E. Wells, 29 B.T.A. 222. The contract plainly provided for an exchange of both preferred and common Ward stocks for amounts certain of Kraft stock. Those exchanges were made. It also provided that Kraft should repurchase 5,000 shares of its stock upon request of the Ward stockholders, who had an option in the matter and were not bound to sell. They did so demand, however, and Kraft repurchased, but after the exchanges had been completed. The delivery of the stocks discharged the bilateral obligations of the contract; there is nothing in it binding the Ward stockholders to resell to Kraft, even after they had given notice to Kraft to be prepared to buy, and, conceivably, they might have changed their minds at any time and decided to keep all their Kraft stock or seek another market for any amount of it. We conclude that the transactions were separate and must be so treated.

Petitioners’ second contention we deny. They argue that the distribution to them of the preferred stock purchased from the Winship estate by the Ward Co. with a part of its surplus funds was not a true stock dividend, since the interests of the common stockholders were substantially changed by the acquisition of new preferential rights. Assuming, arguendo, that to be so — see Tillotson Mfg. Co., 27 B.T.A. 913; Peabody v. Eisner, 247 U.S. 347; Rockefeller v. United States, 257 U.S. 176 — it does not follow, as petitioners urge, that the cost of the distributed preferred stock to the corporation should be added to the amount previously paid by the individuals for their holdings of preferred stock. Assuming further, as petitioners would have us, that the distribution was taxable when made, then upon the subsequent disposition of the stock received thereby the cost basis would be its fair market value when distributed. Estate of Edwin D. Metcalf, 13 B.T.A. 236; affd., 32 Fed. (2d) 192. As to what that value may have been we have no evidence, and on that matter we can make no assumption. Consequently, we must sustain respondent’s denial of a cost basis for the preferred stock in excess of $84,400.

In the view we take of the case it follows that the separate cost bases of the preferred and common Ward stocks carry over to the separate lots of Kraft stock received in exchange therefor, and are to be used in computing gain upon the subsequent sale of the latter.

Reviewed by the Board.

Judgment will be entered under Bule 50.

       (3) Stock for stock on reorganization. — No gain or loss shall be recognized i£ 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.

       (1) If an exchange would he within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient 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.


author: Tkammell :

text:
    Estate of Harry E. R. Hall, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70004-70010, 71592-71598.
    Promulgated February 27, 1934.

      Robert N. Anderson, Esq., for the petitioners.

      Mason B. Lenvmg, Esq., and Bernard D. Hatheock, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Marius A. Charavay ; Byam K. Stevens ; Justus Laube ; Harry Price ; William D. Stevens; John W. Walters.

   OPINION.

Tkammell :

The,se are consolidated proceedings for the redeter-mination of deficiencies in income tax as follows:

All issues raised by the pleadings, except one, were settled by a written stipulation signed by the parties and filed at the hearing, which stipulation is by reference adopted as a part hereof and will be given effect in redetermination of the deficiencies under Bule 50. The sole issue submitted for decision is whether or not the partnership of Stevens & Legg, hereinafter referred to as the partnership, of which the petitioners were members, was entitled to inventory at market its unsold securities on hand at the end of the calendar years 1929 and 1930 in computing net income for those years.

The Revenue Act of 1928 'provides in pertinent part as follows:

Seo. 22. (c) Inventories. — -Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Respondent’s Regulations 74, promulgated under the Revenue Act of 1928, contain the following pertinent provisions:

Aar. 105. Inventories 6y dealers in seewities. — A dealer in securities, who in his hooks of account regularly inventories unsold securities * * * may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. * * * Taxpayers who buy and sell securities for investment or speculation and not in the course of an established business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.

We have held that the above quoted regulation is reasonable and designed fairly to carry out the terms and intent of the statute. Northeastern Surety Co., 29 B.T.A. 297.

The partnership in computing net income as reported in its returns for the taxable years inventoried at market the unsold securities on hand at the end of each year. Respondent determined that the partnership was not “ a dealer in securities ” and therefore was not entitled to use inventories in computing net income for tax purposes. Thus, the issue resolves itself into the question of whether or not the partnership was a dealer in securities within the purview of respondent’s regulation, since this is the only particular in respect of which respondent contends that the partnership failed to meet the requirements prescribed.

The evidence shows that the partnership of Stevens & Legg maintained an established place of business. Prior to 1929 its place of business was at 49 Wall Street, and thereafter at 25 Broad Street, New York City. During the taxable years the firm had between twenty and thirty employees, and between four and seven partners. All of the partners, except one, were members of the New York Stock Exchange.

The business carried on by the partnership was that of a dealer in securities, and it also acted as a broker for third persons on a commission basis. It held itself out generally as a dealer in securities, and it was regularly and consistently engaged in the purchase and resale of securities.

During the taxable years the partnership bought and sold the common and/or preferred stocks of 14 different corporations, and had a large position in the stocks of the New York Dock Co. The firm purchased securities for the purpose of reselling them to its customers at a profit.

On occasion the partnership would purchase New York Dock stocks to maintain the dealer position which it had established, and as far as possible tried to prevent wide fluctuation in the securities. These stocks were not purchased by the partnership either for investment or speculation, but for future resale to customers at a profit. The firm was regarded as a predominant factor in securities of the New York Dock Co., and no one else was known in the trade as a dealer in those securities.

During the taxable years the partnership had regular and repeated dealings with the persons to whom it sold New York Dock Co. stocks. They were mostly members of the New York Stock Exchange and were dealt with as principals and customers. Every member of the Exchange was a potential customer. There was never a reasonable demand for the New York Dock stocks which Stevens & Legg was unable to fill, nor did the firm ever refuse to sell to any customer provided the price represented a reasonable profit and was a satisfactory price in the market. In addition to selling common and preferred stocks of the New York Dock Co. which it had bought and owned, the partnership also acted as broker in the purchase and sale of the securities of this company for third persons on a commission basis. Clearances of the purchases and sales of securities owned by the firm were during the taxable years made through its office.

During the year 1929 there were purchased and sold on the floor of the New York Stock Exchange by all persons a total of 99,000 shares of common and 9,300 shares of preferred stock of the New York Dock Co., and during 1930 the total purchases and sales of the same stocks aggregated 34,600 shares of common and 6,100 shares of preferred. Of the amounts stated, the partnership during 1929 purchased and sold, in its capacity as a dealer in securities owned by it, as distinguished from that of broker on a commission basis, 68,100 shares of common and 4,700 shares of preferred. During 1930 the firm in the same capacity purchased and sold 24,100 shares of common and 1,100 shares of preferred stock of the New York Dock Co.

The partnership had on hand the following number of shares of New York Dock Co. stocks at the dates indicated:

December 31, 1928: December 31, 1929: December 31, 1930:
5,500 common 12,000 common 13,500 common
3,200 preferred 2,300 preferred 2,600 preferred

During the taxable years the partnership had 101 different customers who purchased New York Dock common stock owned by it, and 268 separate sales transactions, which usually involved lots of 100 and 200 shares. The firm had 11 customers during 1929 and 1930 for the preferred stock owned by it, and 21 separate sales transactions, which usually involved 100 shares. Seven of the customers who purchased preferred stock also purchased common stock. The total number of customers purchasing both common and preferred stock was 105. The sales were well distributed over the weeks and months of the two years.

During the taxable years there were 2 sales transactions involving 1,000 shares of common stock, 17 transactions involving 500 shares, 2 transactions involving 400 shares, 9 transactions involving 300 shares, 42 transactions involving 200 shares, and 197 transactions involving 100 ¡shares each. In the preferred stock during said years there were 1 transaction involving 400 shares, 3 transactions involving 300 shares, 2 transactions involving 200 shares, and 15 transactions involving 100 shares each. The largest number of separate sales transactions with any one customer was 22.

The partnership’s income during the taxable years 1929 and 1930 consisted of the profits derived from the sales of its own securities to customers, the commissions that it received in cases where it acted as broker, dividends received from any securities which it owned, and interest or credit balances.

The partnership’s books of account were kept on an accrual basis and all of its unsold securities on hand at the end of each year, including 1931, were regularly and consistently inventoried at market, which inventory entered into the computation of profit and loss for the particular year, and also entered into the computation of net income of the partnership as shown on its Federal income tax returns for the taxable years.

It was customary in the trade or business of dealers in securities to inventory securities on hand at the end of each year at the market price. This method conformed to the best accounting practice in that trade or business. Dealers in securities follow this method because their transactions occur on the market basis. Securities used as collateral in connection with loans from banks are also valued at market, and reports made to the New York Stock Exchange are on the basis of market value, as well as cost. The method of inventorying securities on hand at market would he used in the best accounting practice in a financial balance sheet.

The foregoing facts, we think, are clearly sufficient to bring the partnership within all essential requirements of the respondent’s regulation, and to establish its right to make its returns and to have its net income for 1929 and 1930 computed upon the same basis as that upon which its accounts were kept, that is, by inventorying unsold securities. The evidence is uncontroverted that in its books of account the partnership regularly inventoried at market unsold securities on hand at the end of each year, not only in the taxable years but in years both prior and subsequent thereto, and computed net income for tax purposes on the same basis.

We think also the proof shows that the partnership was a dealer in securities, as defined in respondent’s regulation. It had an established place of business, and was a merchant regularly engaged in the purchase of securities and their resale to purchasers with a view to the gains and profits which might be derived therefrom.

Respondent does not seriously contend otherwise, except on one point. He argues that the partnership did not make sales of its securities to customers, because one who deals on a stock exchange is not a merchant in securities, selling to customers. The partnership purchased securities and kept them in stock for resale at a reasonable profit, in much the same way that a merchant buys and sells goods, wares, and merchandise. It purchased securities, according to the uncontradicted evidence, not for purposes of speculation or investment, but solely to resell to customers at a profit.

Most, but not all, of its resales were made to brokers who operated on the Stock Exchange. We see no reason why a broker, in such circumstances, may not properly be regarded as a customer of the partnership.

Webster’s New International Dictionary defines customer as “ one who regularly or repeatedly makes purchases of, or has business dealings with, a tradesman or business house; one who customarily has dealings with a business establishment; a buyer or purchaser; a patron.” This definition, in substance, has received judicial approval. Weinhouse v. Cronin (Conn.), 36 Atl. 45.

The record discloses that the partnership in question had regular and repeated dealings with the same persons. During the taxable years it made 268 separate sales to 105 purchasers, involving the stocks of the New York Dock Co., and during the same years made 22 separate sales of that stock to one person. Such persons, we think, were customers of the partnership.

Donander Co., 29 B.T.A. 312, and Oil Shares, Inc., 29 B.T.A. 664, are distinguishable on the facts from the present proceeding. In each of the cited cases we found that the petitioner was not a dealer, but was engaged primarily in investing or speculating as opposed to merchandizing securities. An entirely different situation is presented in the case at bar. The partnership with which we are concerned here is clearly shown by the evidence to have dealt in the stocks involved primarily as a merchant. While it purchased through brokers who were members of the stock exchange and sold to brokers as principals or customers, it held itself out as a merchant of securities and the transactions were cleared through its own office, not those of the brokers. It also purchased from and sold to others than brokers. We know of no good reason why a broker, even though acting for an undisclosed client, should not properly be regarded as a customer in the making of repeated purchases of securities owned and held for resale by the partnership.

In our opinion, however, the controlling factor here is not the method by which the partnership obtained customers or made sales. It is the fact that the partnership purchased securities and held them not for investment or speculation, but for resale at a profit to anyone who desired to buy.

A grocery merchant might, and as a matter of common knowledge often does, purchase goods through a broker, and he might resell through a broker or agent or clerk to whom he pays a commission. But such method of carrying on his business would not change the fact that he was a merchant in groceries, if he purchased and carried groceries in stock for resale at a profit to customers.

What we have said hereinabove applies particularly to. the stocks of the New York Dock Co. In respect of those stocks we hold, for the reasons indicated, that the partnership was a dealer and entitled to compute net income by the use of inventories.

As to the other securities which petitioners contend the partnership had a right to inventory, the evidence is not so satisfactory. The number and volume of sales during the taxable years, and other detailed facts, are not shown. However, a preponderance of the undisputed evidence supports the conclusion that all of the securities in question were held for resale to customers and not for speculation or investment, and that the partnership would at any time sell at a reasonable profit any of the securities which it had on hand.

It is true that the partnership in some instances acted as a broker for third persons in the purchase or sale of securities on a commission basis, and it also derived some income from interest on credit balances, but these transactions did not involve the stocks here in dispute, and such activities were only incidental to its principal business of dealing as a merchant in securities.

Respondent’s determination on this issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 60.

Sternhagen and Arundell concur only in the result.

Adams dissents.


author: Van Fossan :

text:
    Barton T. Bean, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61293, 61294.
    Promulgated February 27, 1934.

      A. W. Helvern, Esq., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Van Fossan :

These proceedings were brought to redetermine deficiencies in the income taxes of the petitioner for the years 1928 and 1929 in the sums of $918.63 and $1,051.91, respectively.

The petitioner alleges that the respondent erred in including in his taxable income the moiety or community share, properly taxable to his wife, of certain payments received by him from Lybrand, Ross Bros. & Montgomery, in addition to his regular salary.

The facts, presented by stipulation and exhibits, are substantially as follows:

The petitioner is a married man and was so married and resident in California during the years 1928 and 1929. Separate income tax returns were filed by the petitioner and his wife, Mabelle M. Bean, for the years 1928 and 1929, in which separate returns there was equally divided between them on the community income theory the following item, which was designated by them on the returns filed as follows:

In addition to this item, there was divided between them the following item:

The deficiencies in issue in these proceedings arise in part by reason of the fact that the Commissioner of Internal Revenue in the deficiency letters increased the income reported by the petitioner in his returns for the years 1928 and 1929 by the respective amounts o± $7,952.71 and $13,282.55. The increases of the petitioner’s income used in part as the basis for the deficiencies result from the transfer by the respondent of the income reported by the petitioner’s wife under item 4 of her returns to the petitioner’s return.

As of December 31, 1923, and prior thereto, the petitioner was a stockholder of Klink, Bean & Co., a corporation. On January 1, 1924, an agreement was made between the three principal stockholders of Klink, Bean & Co. and Lybrand, Ross Bros. & Montgomery, a partnership engaged in the business of auditing and accounting. That agreement has and is being carried out by the parties thereto. The pertinent provisions of the agreement are as follows:

That the accounting business heretofore carried on by first parties either through the medium of said corporation known as Klink, Bean & Company or as individuals, shall be merged with the accounting business of the second parties upon the following terms and conditions:
(1) From the date hereof all accounting business of either first or second parties in the State of California shall be carried on in the name of Klink, Bean*& Company and Lybrand, Boss Bros. & Montgomery or in the name of Lybrand, Boss Bros. & Montgomery and Klink, Bean & Company, as occasion may require, such business being hereinafter referred to as the California business, and shall belong to the second parties subject to first parties’ participation as hereinafter set forth.
(2) The first parties shall continue to be interested, but only as special partners entitled to profits or a share thereof and without liability for losses, in said California business for a period of five years and nine months from the date hereof. At the end of that time, to wit, on September 30,1929, the interest of first parties in said business shall cease and determine in every respect, subject only to an accounting in respect of business theretofore transacted or in progress. During said period of five years and nine months the profits to which first parties shall be entitled from said business shall be as follows:
(a) During the first two years of said period the first parties shall be entitled to profits of said California business to an aggregate of one hundred eight thousand (108,000) dollars and the second parties guarantee that such profits will be earned and will be paid to the parties of the first part in the following amounts, upon the following dates: Fifty thousand (50,000) dollars on July 31, 1924, twenty-five thousand (25,000) dollars on January 31, 1925, and thirty-three thousand (33,000) dollars on July 31, 1925. The profits in excess of one hundred eight thousand (108,000) dollars, if any, for the said period of two years shall be payable to the second parties.
(b) For the remainder of said period of five years and nine months the first parties shall be entitled to fifty (50) percent of the profits of said business earned during the whole of the remainder of said period, the said last three years and nine months being considered as a single accounting period, no year standing by itself, but rights to profits being determined by the result of the entire period of three years and nine months. * * *
The profits to which the parties of the first part shall be entitled during said period of five years and nine months shall be distributed to them quarterly as earned, in the following proportions: To George T. Klink three eighths (%), to B. T. Bean three eighths (⅜), to Clarence S. Black two eighths (⅜). Any overpayment to the parties of the first part resulting from subsequently incurred losses during the latter three years and nine months of said period shall be adjusted either from profits subsequently earned or at the end of said period. The right of the first parties to said profits shall be an absolute right running to each of them, his heirs, or personal representatives in case of his death, and dependent only on a compliance by said party with paragraphs numbered (8) and (9) hereof.
* ⅜ ⅜ * * * *
(3) The said California business shall be in charge of a resident partner of the second parties, who shall have the general management and control of the same. The first parties agree to give, during said period of five years and nine months, their time and attention to said California business and to its maintenance and extension to the following extent and upon the following terms: Said Bean shall devote Ms entire time to said business at a salary of twelve thousand (12,000) dollars a year provided, however, that he may devote a reasonable amount of time to consolidations, mergers and financing, any compensation received therefor by him to be retained by him individually. * * * The resident partner of the second parties shall have the right to discontinue at any time the services and compensation of any of the parties of the first part as just hereinbefore set out, and shall also have authority, by agreement with any one of the first parties, to change the terms upon which such one of the first parties shall devote his time and attention to said business.
(4) The profits of the California business in which the parties of the first part are to share as above shall be the actual gross fees thereof less the following expenses incident to the same:
(a) The salary or salaries of the resident partner or partners of the second parties and the salaries of the first parties;
* ⅜ * ⅜ * ⅜ *
(5) The second parties shall take over and there shall be transferred to them by the first parties all furniture and office equipment of the accounting offices of the first parties at the fair value of the same, such value to be determined by agreement, or, if an agreement cannot be had, by an appraisement of a disinterested and competent appraiser. Such value shall be paid to the first parties as soon as the same can be determined. The first parties shall also turn over to the second parties all files, books, records, working papers, and other data necessary for the continuation of said business of the first parties.
(6) The second parties shall acquire no interest in said corporation known as Klink, Bean & Company and the first parties shall have the right to continue the existence of the same, but said corporation shall not engage in the accounting business * * ⅜.
(7) The necessary working capital of said California business from and after January 1, 1924, shall be furnished by the second parties.
(8) The first parties jointly and severally covenant and agree to do and perform all acts necessary, fully and completely, both in law and in equity, to transfer and secure to second parties the accounting business heretofore carried on by first parties and as far as' possible to secure the continuance of all existing clients, to the end that said accounting business shall pass to second parties subject only to the interest of first parties in the profits thereof as herein provided and to the performance by second parties of their obligations hereunder.
(9) The first parties covenant and agree, each for himself, that he will not, during said period of five years and nine months, or within five years thereafter, engage directly or indirectly in the accounting business or in business competitive therewith.

On August 17, 1925, the signatories of the agreement executed a certificate of copartnership which was duly acknowledged.

' During the year 1928 the petitioner received from Lybrand, Eoss Bros. & Montgomery $12,000 as salary, pursuant to the provisions of clause 3 of the agreement of January 1, 1924. He also received in that year from Lybrand, Eoss Bros. & Montgomery $15,905.53, pursuant to the remaining provisions of said agreement. That amount was reported under item 4 in the income tax returns of the taxpayer and his wife for the year 1928, one half by each.

During the year 1929 the petitioner received from Lybrand, Boss Bros. & Montgomery $10,875 as salary, pursuant to the provisions of clause 3 of said agreement. In addition he received in that year from Lybrand, Boss Bros. & Montgomery $26,565.10, pursuant to the remaining provisions of the agreement. That amount was reported under item 4 in the income tax returns of the petitioner and his wife for the year 1929, one half by each.

The petitioner contends that payments made to him in 1928 and 1929, pursuant to clause (2) (d) of the contract of January 1, 1924, represent compensation for services rendered and that as such they are community income and should be so taxed to the petitioner and his wife, while the respondent asserts that such payments constitute installments on the sale price of the petitioner’s interest in Klinlr, Bean & Co., that the property from which the income was derived was acquired prior to July 29, 1927, and that, therefore, such income is not subject to division between the husband and wife.

The parties have agreed that the contract of January 1, 1924, has been duly carried out to date. Therefore, our decision must rest upon a proper construction of that contract. We are struck instantly by its peculiar yet comprehensive character. It provides for a merger, the sale of assets, tangible and intangible, the formation of a limited partnership, a unique management control of the business and the payment of specified salaries, and it also contains an inconsistent covenant to refrain from engaging in the accounting business. Its effect is to dispose of the accounting business of Klink, Bean & Co., a corporation, to deprive that corporation of its function as an accounting enterprise, and to substitute therefor a partnership as a vehicle for carrying on the activities of both the corporation and the individual stockholders. The corporate entity of Klink, Bean & Co. is ignored in the execution of the agreement.

Taken as a whole, the contract is primarily one of purchase and sale. It is obvious that the underlying purpose was to eliminate a prominent and active competitor from the accounting field. This purpose is clearly suggested in clause (8) of the contract, which provides that:

The first parties jointly and severally covenant and' agree * * * to transfer and secure to second parties the accounting business heretofore carried on by first parties and as far as possible to secure the continuance of all existing clients, to the end that said accounting business shall pass to second parties subject only to the interest of first parties in the profits thereof as herein provided and to the performance by second parties of their obligations, hereunder.

The term of the contract ⅛ unusual — five years and nine months. No explanation for the specific term is given, but it is a reasonable presumption that it bears some ascertained relationship to the character, condition, and amount of the corporation’s business, including its contracts with others.

The corporation and its principal stockholders undertook to transfer to Lybrand, Ross Bros. & Montgomery all of the existing business and assets of the corporation. The monetary consideration was a definite sum of $108,000 payable within two years and an undetermined amount, measured by the partnership’s earnings, to be paid during the remaining three years and nine months. The entire purchase price was to be paid out of current profits, but the $108,000 payment was guaranteed by the partnership. The name of the corporation was to continue for a time, undoubtedly on account of its existing contracts, but it was calculated that it would gradually disappear and eventually the firm of Lybrand, Ross Bros. & Montgomery, under its own name, would acquire the business and good will formerly possessed by the corporation.

As a further consideration, the partnership agreed to admit Klink, Bean, and Black as special partners only, with no liability for losses. They were to be paid certain salaries for their actual services, but the resident managing partner had the absolute power under paragraph 3 to dispense with such services at any time he saw fit. In this connection it is important to note that the total amounts payable under paragraph 2 (b) were in no wise dependent on the continued employment of petitioner and his associates by the partnership during the period of five years and nine months named in the contract. The percentage of profits was payable irrespective of such employment or dismissal.

The salaries named may properly be considered to represent the reasonable value of personal current services agreed on by the parties to the contract. The continuing division of profits was part of the consideration for the acquisition of the name, good will, and accounting business of Klink, Bean & Co.

Furthermore, the contract specifically provides that:

* * * The right 0f the first parties to said profits shall be an absolute right running to each of them, his heirs, or personal representatives in case of his death, and dependent only on a compliance by said party with paragraphs numbered (8) and (9) hereof.

These provisions indicate that the payment of profits bore no relation to personal services to be rendered by the petitioner and his former associates.

Thus, the provisions governing the personal activities of the petitioner which resulted in his salary payments and, hence, his earned income, are readily distinguishable from those controlling the transfer of the business. In the latter category is paragraph (2) (b). The fact that a portion of the purchase price of the corporation’s accounting business was measured by the earnings of the partnership can not transform it into earned income.

The legislation in California, passed on July 29, 1927, relating to community property, has no application to profits derived from property acquired prior to that date. Helen N. Winchester, Administratrix, 27 B.T.A. 798; Hirsch v. United States, 62 Fed. (2d) 128; certiorari denied, 288 U.S. 735. We see no merit in the petitioner’s position and sustain the action of the respondent.

Decision will he entered for the respondent.


author: Teammell :

text:
    Edward H. Wright, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69968.
    Promulgated February 27, 1934.

      John A. Oonlin, O.P.A., for the petitioner.

      G. A. Bay, Esq., for the respondent.
   OPINION.

Teammell :

Since neither of the parties has submitted a brief, their respective positions are determinable only from the pleadings. The only error assigned by the petitioner in the petition is the “ improper inclusion for Federal income tax purposes of State receivership fees received in the sum of $35,000.” This assignment of error is denied by the respondent in his answer. Among the facts relied on by the petitioner as the basis of the proceeding as stated in the petition is the following: “There is no provision under the Federal Statute by which State receivership fees are subject to Federal income tax.” This also is denied by the respondent in his answer. The petitioner’s prayer for relief is as follows:

Wherefore, the petitioner prays that this Board may hear this proceeding and determine that petitioner is not subject to Federal income tax upon:
State receivership fees received August 8, 1930 in the sum of $35,000.00
Reference: David K. Cochrane, 26 B.T.A. 1167.

The Eevenue Act of 1928 provides as follows:

SEC. 22. GROSS INCOME.
(a) General definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid ⅜ ⅜ * and income derived from any source whatever.

The language of the act is broad and comprehensive and since there is no governing statutory provision in the income tax laws relating to the exemption or exclusion of the income of a state officer or employee for 1930 or for any year subsequent to 1924 (see sec. 1211, Eevenue Act of 1926), any exclusion or exemption of the fees in controversy must rest upon constitutional grounds.

The General Corporation Law of New Jersey, Eevision of 1896, with supplements and subsequent acts, provides as follows:

53. Continuance of corporate existence for settling up "business. — All corporations, whether they expire by their own limitation or be annulled by the legislature or otherwise dissolved, shall be continued bodies corporate for the purpose of prosecuting and defending suits by or against them and of enabling them to settle and close their affairs, to dispose of and convey their property and to divide their capital, but not for the purpose of continuing the business for which they were established.
54. Directors to be trustees on dissolution; powers a/nd duties; filling vacancies on board. — Upon the dissolution in any manner of any corporation, the directors shall be trustees thereof, with full power to settle the affairs, collect the outstanding debts, sell and; convey the property and divide the moneys and other property among the stockholders, after paying its debts, as far as such moneys and property shall enable them. * * ⅜
56. Receiver; appointment; application; powers and duties. — When any corporation shall be dissolved in any manner whatever, the court of chancery, on application of any creditor or stockholder at any time, may either continue the directors trustees as aforesaid, or appoint one or more persons to be receivers of such corporation, to take charge of the estate and effects thereof, and to collect the debts and property due and belonging to' the corporation, with power to prosecute and defend, in the name of the corporation or otherwise, all suits necessary or proper for the purposes aforesaid, and to appoint an agent or agents under them, and to' do all other acts which might be done by such corporation, if in being, that may be necessary for the final settlement of its unfinished business; and the powers of such trustees or receivers may be continued as long as the court shall think necessary for such purposes.
57. Receiver; jurisdiction of court of chancery. — The court of chancery shall have jurisdiction of said application and of all questions arising in the proceedings thereon, and may make such orders and decrees therein as justice and equity shall require.
58. Receiver; duties. — The said trustees or receivers shall pay ratably, as far as its moneys and property shall enable them, all the creditors of the corporation who prove their debts in the manner directed by the court; and if any balance remain after the payment of such debts and necessary expenses, the same shall be distributed among the stockholders.
67. Receiver; bond, oath; filing. — Every receiver shall before acting enter into' such bond and comply with such terms as the court may prescribe, and take and subscribe tbe following oatb or affirmation: “ I,-, do swear (or affirm) that I will faithfully, honestly and impartially execute the powers and trusts reposed in me as receiver, for the creditors and stockholders of the-, and that without favor or affection, * ⅜

We will first consider the question of whether the petitioner was an officer of the State of New Jersey. With respect to the terms “ office ” and “ officer ” the Supreme Court in Metcalf & Eddy v. Mitchell, 269 U.S. 514, said:

An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. United States v. Hartwell, 6 Wall, 385, 18 L.Ed. 830; Hall v. Wisconsin, 103 U.S. 5, 26 L.Ed. 302. The term “ officer ” is one inseparably connected with an office.

With respect to the status of the plaintiffs in that case the Court said:

There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law.

Considering the situation with respect to the petitioner in the light of the foregoing statements of the Supreme Court, we must conclude that he was not an officer of the State of New Jersey. The New Jersey statute relating to the appointment of receivers does not purport to create the office of receiver nor does it designate as an officer one performing the work of a receiver. It prescribes no particular period of time with respect to the duration of the work of a receiver nor does it fix the amount of compensation to be paid him for his services. His duties are prescribed only in the most general manner. While it provides that every receiver before acting in that capacity shall take a certain oath, there is nothing to indicate that such oath is intended as an “ oath of office ”, as that term implies that there is an office and that the oath relates to it. Although the petitioner’s services appear to have been rendered over a period of several years, they were temporary and indefinite in character and were dependent upon the nature and size of the particular receivership involved. As an appointee of the court, he was subject to its orders with respect to his length of service. The statute conferred upon him as receiver broad powers to be used in his discretion, subject however to the approval of the court. His authority was restricted to specific matters. He served only as an aid or assistant to the court in the discharge of its judicial duties. Fleming v. Bowers, 11 Fed. (2d) 789; aff'd., 27 Fed. (2d) 128. The amount of the petitioner’s compensation was wholly indefinite and depended upon the character and magnitude of the case and was subject to the orders of the court. While the petitioner’s fees as receiver were paid out of the funds of tbe New Jersey Kefrigerating Co., a private corporation, this fact alone is not conclusive that the petitioner was not an officer of the state, David, K. Cochrane, 26 B.T.A. 1167, yet under the circumstances here involved, it is persuasive. Miller v. McCaughn, 22 Fed. (2d) 165; affd., 27 Fed. (2d) 128. While the petitioner has relied on the Cochrane case in support of his position here the facts in that case are readily distinguishable from those involved in the instant proceeding.

Nor do we think the petitioner was an employee of the State of New Jersey. The statute providing for the appointment of receivers discloses no intention of making them employees of the state.. It merely accorded legal recognition to such assistants as the court might designate to aid it in the discharge of its duties in the particular class of cases with respect to which the petitioner’s services were rendered. Although the petitioner, under the supervision of the court, undoubtedly exercised broad powers, his exercise of such powers was not in the capacity of one in the employ of the state, but of one who had been designated by the court to aid it in carrying on its work. A receiver appointed by a Federal court has been held not to be an employee of the Federal Government, Fleming v. Bowers, supra. Similarly, we find nothing in the situation here presented that warrants the reaching of a different conclusion with respect to a receiver appointed by the Court of Chancery of New Jersey being an employee of the State of New Jersey.

The administration of the law through court procedure is, unquestionably, an essential governmental function and the courts are an agency or instrumentality of the sovereign under which they function. They are an agency or instrumentality through which such sovereign immediately and directly exercises its sovereign powers. As was pointed out in Metcalf & Eddy v. Mitchell, supra, state agencies of this character are immune from taxation by the Federal Government. In their administration of the law the courts may require as an aid in the discharge of their duties the services of many persons such as guardians, administrators, custodians, special commissioners, special accountants, engineers, and attorneys who are neither officers nor employees of the state under which the court functions. Unless under the terms of the appropriate controlling statutes those persons can be deemed to be an agency through which the state immediately and directly exercises its sovereign powers, they are not entitled to exemption from Federal income tax. Metcalf & Eddy v. Mitchell, supra; Lucas v. Howard, 280 U.S. 526; Lucas v. Reed, 281 U.S. 699; Miller v. McCaughn, supra; New York Trust Co. v. United States, 63 Ct. Cls. 100; certiorari denied, 274 U.S. 756. In the instant case the services rendered by the petitioner, while in the furtherance of the administration of justice, were not such as to make his position an integral part of the judicial system of New Jersey. The immediate and direct functioning of the judicial system of that state was in the hands of another or others and not in the hands of the petitioner. The part he played in the functioning of that system was indirect and somewhat removed from it. In view of the foregoing we conclude that the services rendered by the petitioner were not of such a character as to render the compensation received therefor immune from the Federal income tax.

The petitioner being neither an officer nor an employee of the State of New Jersey, nor an agency or instrumentality through which the state immediately and directly exercised its sovereign powers, we do not perceive the imposition of any burden upon the state in the exercise of its sovereign powers by the subjection to the Federal income tax of the amount of the fees involved herein. Clearly, under the taxing act the income received by directors of a corporation, who were trustees in dissolution of the corporation but not serving under court appointment, for services rendered in the liquidation of the corporation’s affairs would be subject to the income tax. This being true, we are unable to see where the subjection to income tax of the compensation of a receiver under the circumstances presented in the instant case would work any hindrance or interference upon the state in obtaining the services of competent persons as receivers.

In view of the foregoing the action of the respondent in including the fees in question in the petitioner’s taxable income is sustained.

Judgment will be entered for the respondent.


text:
    Thomas W. White, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63228, 63234-63238, 63451, 64127, 66886, 66887, 66902, 67832.
    Promulgated February 27, 1934.

      Abraham Lowenhaupt, Esq., for the petitioners.

      Dean P. Kimball, Esq., and Edward G. Adams, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: H. C. Miller; Allen B. Williams; Samuel W. Fordyce; Ruth E. williams; Harriet Fordyce; T. E. Temm; John H. Holliday; William R. Hayes; Ethel J. Hayes; Thomas A. Reid; and Wiley Franklin Corl.

   OPINION.

AeuNdell : The respondent has determined deficiencies in income for the year 1929 as follows:

Each of the proceedings raises the issue of whether a transaction whereby the United Gas Improvement Co. acquired stock of the Commonwealth Utilities Corporation was a reorganization which would limit the gain realized by Commonwealth stockholders to the amount of cash received on the exchange. In the event of an adverse holding on that issue, petitioners allege that respondent used the wrong date for valuing the stock received by them.

An additional question in the case of John H. Holliday, Docket No. 64127, has to do with rights issued in connection with stock of the American Telephone & Telegraph Co.

We adopt as our findings of fact the agreed statement of facts filed at the hearing and set out here only those necessary to an understanding of the questions presented.

All of the petitioners were owners of class B common stock of the Commonwealth Utilities Corporation, hereinafter called Commonwealth. At November 12,1929, the several kinds of Commonwealth stock were as follows:

In addition to shares of class B common stock outstanding, 63,000 shares thereof were reserved for conversion of debentures, and 14,508 shares were reserved for subscription on warrants attached to the series C preferred stock. The preferred stock was preferred as to dividends and as to assets in case of liquidation. The preferred stock had no voting rights except in the event that six quarterly dividends were defaulted, in which case the holders of such stock were entitled to vote until all defaults in preferred dividends were made good.

On October 15, 1929, the United Gas Improvement Co., hereinafter called United, made an offer to the owners of Commonwealth class A and class B common stock to acquire their stock. The first portion of the written offer was addressed to the class B stockholders, and in it United offered to purchase class B stock up to 300,000 shares and to give in payment for each share thereof one share of its common stock and $11 in cash. The part of the offer addressed to the Commonwealth class A stockholders was conditioned upon the purchase of the class B stock. The offer was that if United purchased the class B stock, it would also purchase class A stock up to 43,079 shares, giving in payment for each share one share of its own common stock.

Under the above offer, United acquired 2,986 shares of class A Commonwealth stock and 267,585 shares of class B stock during the month of November 1929. In December it acquired an additional 10 shares of class A and 1,948 shares of class B. Between November 12 and December 31, 1929, the outstanding class B common stock of Commonwealth had been increased, partly through exercise of warrants on series C preferred stock and conversion of debentures, and at December 31, 1929, the outstanding class B common stock amounted to 277,672 shares. By that date, pursuant to the offer of October 15, United had acquired 2,996 shares of class A common and 269,533 shares of class B common.

All of the petitioners accepted the United offer and at some undisclosed time between November 26 and December 31, 1929, received for each share of Commonwealth class B common one share of United common and $11 in cash, and those who owned Commonwealth class A common received for each share thereof one share of United common. It is stipulated that respondent has correctly determined the number of shares of Commonwealth exchanged in each case and the date of acquisition and cost thereof.

United acquired none of the Commonwealth preferred stock. Commonwealth has continued in business and is still in existence. At a meeting of directors of Commonwealth on December 16, 1929, all of the directors, officers, and members of the executive committee, except Wiley F. Corl, president, resigned, and at the same meeting there were elected in their stead directors, officers, and members of the executive committee men who were officials of United.

The completion of the offer of October 15, 1929, by United was subject to the condition that two thirds of the class B common stock be deposited for exchange on or before November 22, 1929, subject to an extension of not more than five days, but in the event the full two thirds were not deposited United could nevertheless declare the offer effective by written notice to the depositary prior to November 22, 1929, or prior to November 27 in the event of extension of time. Under the offer, «J. P. Morgan & Co. was designated as the depositary for the Commonwealth stock. By the close of business November 12, 1929, there had been deposited 202,885 shares of class B common and 1,989 shares of class A common stock of Commonwealth.

All of the petitioners except Allen B. Williams and Buth E. Williams had deposited their Commonwealth class B common stock with the depositary on or before November 12, 1929. The two named petitioners, Allen B. Williams and Buth E. Williams, had deposited part of their stock prior to November 13, and as to the balance, which was being held for them by brokers in St. Louis, they instructed the brokers on October 24 and again on November 4 to send the certificates to the depositary, which instructions the broker sent to their New York correspondents on or about November 5, 1929.

On November 13,1929, the president of United publicly announced that the exchange offer had become effective, the offer having been accepted by the owners of the requisite number of class B shares of Commonwealth. He further announced that in order to take advantage of the exchange offer, owners of class B and class A stock who had not already deposited their shares should do so on or before November 22, 1929. On November 15, 1929, the depositary issued a form letter announcing that the exchange plan had become effective and that under the terms of the offer United stock and cash were to be delivered to the depositary not later than November 27, and requesting holders of certificates of deposit to forward them to the depositary as soon as convenient.

In the exchange offer of October 15 it was provided that if the offer became effective by acceptance of the owners of the requisite amount of Commonwealth stock, or by declaration, United would, “ prior to November 27, 1929, (or if the time for depositing stock is extended as above, prior to December 2, 1929)” deliver to the depositary the United stock “ and the cash required for the purpose of effecting the exchange * * * and the Depositary will then make delivery ” of such stock and cash. Further, if the exchange offer did not become effective the Commonwealth stock was to be returned to the depositors thereof, “provided that no such return need be made prior to December 2, 1929.”

The deposit agreement attached to the exchange offer contained the following provisions:

(a) Tlie Depositary assumes no obligation to distribute any stock or to pay any money to any Depositor unless and until, and only to tlie extent, that the same shall be delivered or paid to it for such purpose.
* * * * * # *
(h) The Depositary shall not, by the deposit of stock hereunder, obtain any title to such stock so deposited, nor any interest therein or obligation in respect thereof other than the custody and disposition thereof in accordance with the terms of this Agreement.

Petitioner John H. Holliday owned 109 shares of stock of the American Telephone & Telegraph Co. during 1929, and received thereon 109 rights to subscribe to that company’s 10-year convertible 4y2 percent gold debenture bonds dated July 1, 1929, which rights he exercised. The respondent has held that the rights constituted a dividend to petitioner.

In each of these proceedings the respondent has held that the exchange of Commonwealth class B common stock for United stock and cash was a closed transaction giving rise to taxable gain, measured by the value of the United stock on November 26, 1929, plus the cash of $11 per share.

The question of whether petitioners realized taxable gain on the exchange depends upon whether or not the acquisition of Commonwealth stock by United constituted a “ reorganization ” within the meaning of section 112 (i) (1) of the Bevenue Act of 1928. Petitioners contend that the acquisition of the stock by United effected a consolidation of the corporations, hence a reorganization, and consequently under section 112 (c) (1) their taxable gain on the exchange of Commonwealth class B stock for United stock and cash is limited to the cash received. The statutory provisions are set out in the margin.

The outstanding stock of Commonwealth at December 31, 1929, and the portion thereof acquired by United between November 26 and December 31 pursuant to the exchange offer are shown by the following tabulation:

Thus United acquired more than a majority of the voting but less than a majority of the nonvoting stock.

The general rule laid down in section 112 of the Revenue Act of 1928 is that “upon the sale or exchange of property, the entire amount of gain or loss * * * shall be recognized ”. This is followed by a number of exceptions which limit the recognition of gain or loss in specified cases. Taxpayers seeking the benefit of these excepting provisions must bring the facts of their cases clearly within them. Tex-Penn Oil Co., 28 B.T.A. 917, 954. The task of petitioners here is to establish that the acquisition of Commonwealth stock by United comes within the statutory definition of reorganization. Sec. 112 (i) (1). If they can do so it is not questioned that as to Commonwealth stockholders the limitation of gain provisions of section 112 (c) (1) apply.

Petitioners disclaim any intention of attempting to bring the transaction within the parenthetical clause of the definition section. They start with quotations from court decisions and text books to the effect that the word “ consolidation ” means any conjunction or union of stock or property of two or more corporations, whereby operation is brought under one management, no matter how effected, and regardless of whether dissolution of any of the corporations takes place. This they concede, is too broad a definition for use here, because the taxing statute is concerned only with those consolidation's which are effected through an exchange of stock. Thus restricting the broad definition, the argument, as we understand it, is that a unified management brought about through an exchange of stock constitutes a consolidation. The statute says that “ the term 4 reorganization ’ means (A) a merger or consolidation ”, and this wording, they say, precludes any search for an expansion of or addition to the word “ reorganization ”. In other words, once we find a consolidation, as petitioners define it, we need go no further into the statute to decide whether the case comes within its terms. The parenthetical clause in the statutory definitions, it is urged, is not exclusive, and only serves to bring in certain cases of incomplete consolidation, or, as petitioners phrase it, 44 of lower quality ” than a consolidation as they define it.

Petitioners’ definition, in our opinion, is broader than is warranted by the wording of the statute. Had Congress meant the word “ consolidation ” to cover so wide a field there would have been no occasion for inserting the parenthetical clause. The situations designated in that clause are comprehended within the definition built up by petitioners, and there would be no need for their special enumeration if the word “ consolidation ” embraced them. We are authoritatively told that “ the words within the parenthesis * * * expand the meaning of 4 merger ’ or 4 consolidation.’ ” Pinellas Ice & Cold Storage Co., v. Commissioner, 287 U.S. 462. Under petitioners’ theory there would be no room for expansion, the word consolidation itself being all-embracing.

Our view is that if the transaction is to come within the statutory definition at all it must be by way of the parenthetical clause. The premise of the statutory definition of reorganization is that it means 44 a merger or consolidation.” The technical meaning of these words has often been given. Central R.R. Co. v. Georgia, 98 U.S. 359; Lee v. Atlantic Coast Line, 150 Fed. 775; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. The statute then goes on and by the words in parentheses brings in 44 some things which partake of the nature of a merger or consolidation but are beyond the ordinary and accepted meaning of those words.” Pinellas Ice & Cold Storage Co., supra. It is to be noted that the parenthetical clause does not include dll transactions which might loosely be spoken of as mergers or consolidations, but only some which partake of the nature of a merger or consolidation. The words in parentheses expand or enlarge the commonly accepted meaning of the basic words in the definition, but only to a degree measurable by the enlarging words themselves. They mark the outside limits of the cases which would otherwise not ordinarily be considered mergers or consolidations. We may not enlarge them still more by grafting on situations which are beyond the scope of the words used. We are concerned here with that part of the definition which says that merger or consolidation includes 44 the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total numbers of shares of all other classes of stock or another corporation.” These are irreducibly minimum requirements, and the transaction here does not meet them. As set out above, the United Co. acquired none of the nonvoting preferred stock of Commonwealth. We therefore hold that the exchange was not a statutory reorganization upon which the recognition of gain or loss is limited.

Petitioners urge that the construction placed upon the statute by respondent leads to absurd results. For instance, had there been a default in dividends on the preferred stock it would have become voting stock, and there would have been no need to acquire it as the class B common acquired would constitute the required majority. We recognize that where there is room for construction a statute should be construed so as to avoid unjust or absurd results, but where it is unambiguous as it is here in laying down minimum requirements we have no choice but to follow it and any claim of absurd effect should be addressed to the law-making branch of the Government.

Losing on the first issue, petitioners plead in the alternative that the basic date for valuing the United stock received is November 13, 1929, instead of November 26, 1929, the date taken by respondent. On the earlier da te the fair market value, stipulated, was $24.62 per share, while on the later date it was $29.94.

It is argued for petitioners that the announcement of the president of the United Co. on November 13,1929, declaring the exchange offer effective, created a binding contract between the petitioners who had deposited their stock and the United Co.; that as a result of such contract title to the deposited shares passed to the United Co.; and that on that date petitioners became irrevocably entitled to United stock and cash.

There are several steps leading up to the actual consummation of the exchange to be considered. First, the offer by United to acquire Commonwealth stock. Clearly there was no closed transaction then. Next, the deposit of Commonwealth stock with the depositary. That gave the depositors no right to demand their consideration, as the deposit agreement specifically provided that the depositary should not obtain title to any of the stock, and further that:

The Depositary assumes no obligation to distribute any stock or to pay any money to any Depositor unless and until, and only to the extent, that the same shall be delivered or paid to it [by United] for such purposes.

Under this quoted provision it wa,s necessary that United deposit stock and cash before Commonwealth stockholders could make any rightful demand on the depositary for their stock and cash. Under the offer to Commonwealth stockholders it was provided that if the offer became effective “ by acceptance or declaration ” the United company “ agrees that prior to November 27, 1929 * * * it will deliver to the Depositary * * * the Common stock of The United Gas Improvement Company and the cash required * * * and the Depositary will then make delivery of such Common stock and cash * ’ * Under these provisions United had up to and including November 26, 1929, to make delivery of its stock and cash to the depositary, regardless of any declaration of effectiveness. It is difficult to see upon what ground the petitioners had any right to demand their stock and cash before the date that United wa,s required to make delivery. We need not go into the question of what the situation would have been in the event of an earlier delivery by United, as the stipulation does not disclose when delivery was made.

Under the doctrine of constructive receipt, taxpayers on the cash basis may at times be held to realize income before the actual receipt of the money or property representing the income, but this occurs only where they have it in their power to reduce ,such income to possession and elect to forego it. We have no such situation here. The petitioners were not entitled to receive United cash and stock prior to delivery by the United Go., and this is not shown to have taken place prior to November 26,1929.

The respondent has used the same date, November 26, 1929, in respect of all the petitioners, in which action we find no error, and it is, therefore, unnecessary to go into the question of whether the stock of two of the petitioners, Allen B. Williams and Ruth E. Williams, was delivered to the depositary prior to that date.

The one other question, presented in the case of John H. Holli-day, Docket No. 64127, is whether the petitioner, owning stock in the American Telephone & Telegraph Co., realized income upon the receipt of rights to subscribe to bonds of that company. This is the same question we had in T. I. Hare Powel, 27 B.T.A. 55; dismissed by the Circuit Court of Appeals for the First Circuit, and on authority of that case we decide this issue for petitioner.

Decision will be entered wider Bule 50.

       Sec. 112 (b) (3). Stock fob stock on reorganization. — No gain or loss shall he recognized if stock or securities in a coz-poration 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.
      Sec. 112 (c) (1). If an exchange -would be within the provisions of subsection (b) (1), (2), (3) or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other; property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum' of such money and the fair market value of other property.
      Sec. 112 (i) (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 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 c-hange in identity, form or place of organization, however effected.