text:
    John W. Beall, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas P. Kearns, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas M. Gregory, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90893, 90894, 90895.
    Promulgated January 24, 1939.

      Herbert 8. Duffy, Esq., and Eugene Garlm, Esq., for the petitioners.

      Joe D. Hughes, Esq., and George W. Huntington, Esq., for the respondent.
   OPINION.

Van Fossan:

The question in the present cases is whether petitioners’ salaries are constitutionally immune from Federal taxation by reason of the burden which such taxation would cast upon the State of Ohio.

After careful review of the pertinent decisions, we believe the recent opinion of the Supreme Court of the United States in Helvering v. Gerhardt, 804 U. S. 405, is controlling here. That opinion, after a rationalization and discussion of prior decisions on this implied limitation on the taxing power of the Federal Government, sets up as tests in considering such cases (1) whether the immunity attaches by reason of the function being essential to the preservation of the state government, and (2) whether the tax imposed is a real and actual burden to the state itself.

Upon close consideration of the facts in the instant cases, we are of the opinion that administration of the Industrial Commission is not indispensable or essential to the preservation of the State Government of Ohio. So far as we are advised, the state performed full well its essential functions prior to the time of the enactment of the laws in question. There would seem no basis for distinguishing these cases from that of Maurice S. Avidan, 88 B. T. A. 951, wherein we held that the salaries of employees of the Workmen’s Compensation Commission of New Jersey were not immune from Federal tax.

Nor on the record can we hold that the tax in question imposes a real and actual burden upon the State of Ohio. The burden is too remote and too conjectural and is “so speculative and uncertain that if allowed it would restrict the Federal taxing power without affording any corresponding tangible protection to the State government.” Helvering v. Gerhardt, supra.

It is true, as petitioners point out, the Workmen’s Compensation Act here in question has been held to be constitutional, State of Ohio v. Chattanooga Boiler & Tank Co., 289 U. S. 439, but for present purposes that is beside the point. Obviously, a state function may be constitutional but not “essential” within the meaning of Helvering v. Gerhardt, supra.

Petitioners urge that the commission has the quasi-judicial power to hear and determine claims and controversies arising under the Workmen’s Compensation law. Such a judicial power, however, is not comparable, historically or otherwise, with that under consideration in Collector v. Bay, 11 Wall. 113. The judicial power, if it may be termed such, here exercised by petitioners as members of the commission, is an appendage to the established function of the commission, rather than to the judicial power of the state.

Concededly, petitioners are officers of the State of Ohio within the definition of that term by the Supreme Court in Metcalf & Eddy v. Mitchell, 269 U. S. 514. Such a classification per se is not sufficient to grant petitioners immunity from Federal tax. Helvering v. Gerhardt, supra Helvering v. Powers, 293 U. S. 214.

Brush v. Commissioner, 300 U. S. 352, relied upon by petitioners, has been modified by Helvering v. Gerhardt, supra, and the present issues must be determined in the light of the latter opinion.

It may be pertinent to observe that in large part the functions of the Industrial Commission performed by petitioners Gregory and Beall were concerned with the maintenance and operation of a state industrial insurance fund. This, it would seem, constitutes an entrance into trade or business on the part of the state. The record shows that prior to the enactment of the laws in question private insurance companies wrote coverage for employers along the line now preempted by the state. It should be noted that the state law is both compulsory and exclusive. It gives a monopoly to the state and prohibits such business on the part of private companies. Considering the cases from this approach, we believe them to be governed also by that line of Supreme Court cases which refuses immunity when the function in question is proprietary in nature. Helvering v. Powers, 293 U. S. 214; Ohio v. Helvering, 292 U. S. 360; South Carolina v. United States, 199 U. S. 437.

The above discussion and disposition primarily directed to the cases of Beall and Gregory, makes unnecessary a separate consideration of the status of petitioner Kearns. His case falls within the same category.

We hold that the salaries of the several petitioners were not immune from Federal taxation and that respondent did not err.

Decisions will he entered for the resfondent.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    R. C. Love, Petitioner, v. Commissioner of Internal Revenue, Respondent. Myra Love Hermann, Petitioner, v. Commissioner of Internal Revenue, Respondent. F. S. Love Estate, The Union Trust Company of Pittsburgh, Rebecca Ludwick Love and George Hutchinson Love, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61768, 61770, 61771.
    Promulgated January 24, 1939.

      Floyd Toomey, Esq., and W. A. Seifert, Esq., for the petitioners.

      Arthur Garnduff, Esq., for the respondent.
   OPINION.

Hill:

The questions presented in these proceedings are whether the amounts included in gross income by respondent represent (a) nontaxable liquidating distributions, or (b) liquidating distributions taxable in whole as ordinary gains, or (c) distributions in liquidation having the effect m toto of taxable dividends, or (d) distributions having the effect in part of taxable dividends, and to that extent so taxable, and the remainder taxable as ordinary gain.

Petitioners contend that the cash distribution of June 14,1927, was not received by them in the exchange of stock of the Bessemer Co. for stock in the Bessemer Corporation, but was a distribution in partial liquidation of the Bessemer Co., and since the amount distributed was less than the cost basis of the stock, no taxable gain was realized. Petitioners further contend that they did not derive any taxable gain on the liquidation of the Bessemer Co., since they exchanged stock in a corporation a party to a reorganization, in pursuance of the plan of reorganization, solely for stock in another corporation a party to the reorganization, and under section 203 (b) (2), Revenue Act of 1926, neither gain nor loss in such circumstances is recognizable for tax purposes.

Respondent takes the position that the reorganization was a single transaction, carried out step by step, pursuant to the plan of reorganization, so that the four stockholders of the old company would get cash and stock in the new corporation, of a greater value than the cost basis of the old stock; or as may be otherwise stated, that the stockholders of the company received in full payment in exchange for their stock in the company, pursuant to the plan of reorganization, stock in the corporation and cash, having a combined value in excess of the cost basis of the company’s stock, and hence, under subdivision (d) (1) of section 203, supra, the gain realized is taxable to the extent of the cash so received. Respondent’s contentions, we think, must be sustained.

There was a reorganization of the Bessemer Co. and the Bessemer Corporation under section 203 (h) (1) (B) of the Revenue Act of 1926, for the reason that the Bessemer Co. transferred all of its assets, except cash, to the Bessemer Corporation and immediately after the transfer the Bessemer Co., or its stockholders, or both were in control of the Bessemer Corporation. Both the Bessemer Co. and the Bessemer Corporation were parties to the reorganization. It is axiomatic that when a corporation is reorganized it is a party to the reorganization. In the instant proceeding both the petitioners and respondent concede that there was a statutory reorganization involving as parties thereto both the Bessemer Co. and the Bessemer Corporation. We think there can be no question of the correctness of that concession, and therefore hold that there was a reorganization of the Bessemer Co. and the Bessemer Corporation, to which both were parties. Cf. Groman v. Commissioner, 302 U. S. 82; Helvering v. Bashford, 302 U. S. 454; Claude Neon Lights, Inc., 35 B. T. A. 424, at pages 433, 435, and 437; Fifth Avenue Bank of New York, Executor, 31 B. T. A. 945, 949; affd., 84 Fed. (2d) 787. In the latter case we said at page 949:

We are further of the opinion that, in so far as it concerns Lederle and Laboratories, Inc., there was a statutory reorganization to which both were parties. Laboratories, Inc., acquired all the assets of Lederle, and the stock of Lederle was turned in and it liquidated and dissolved. This acquisition was for stock, a part of which went to Lederle’s stockholders * * * Under circumstances very similar to those present here we held, in First National Banlc of Champlain, N. Y., 21 B. T. A. 415, that the term “party to the reorganization” includes the corporation which was reorganized and whose securities were surrendered as well as the corporation resulting from the reorganization. We said in part (p. 423) :
* * * Any other interpretation would stultify the statute.

Tlie plan of reorganization embraced (1) the incorporation of the Bessemer Corporation to take over or purchase and acquire all the assets, franchises, and property of the Bessemer Co. except cash, and of the Harmar Co. and Indianola Co.; (2) the merger of the Bessemer Co. in the Bessemer Corporation by a transfer of its franchise and all of its assets other than cash to the latter in exchange for all of the latter’s capital stock; the distribution of such capital stock and of cash to Bessemer Co. stockholders in exchange for their stock in the company; and the dissolution of the Bessemer Co.; and (3) the liquidation of the Bessemer Co. by a series of two distributions to its stockholders in complete cancellation or redemption of its outstanding-capital stock as follows: (a) Cash in the amount of $1,150,157.95, and (b) capital stock of the Bessemer Corporation. The reorganization was effected in accordance with this plan.

It is contended by petitioners that the cash distribution was in partial liquidation of the Bessemer Co. and was a part of the plan of liquidation of that company, but that it was not a part of the plan of reorganization. We agree with the first part of petitioners’ contention, but do not agree that the cash distribution was not a part of the plan of reorganization.

The first step in the plan of reorganization was taken on April 7, 1927, when the Bessemer Corporation was organized for the purpose of taking over all the assets, franchises, and property of the Bessemer Co. and the two subsidiary corporations. The reorgánization, according to the plan thereof, was completed on July 21, 1927, upon the issuance on that date of 21,758 shares of the common capital stock of the Bessemer Corporation direct to the stockholders of the Bessemer Co. in proportion to their respective shares of the stock of that company. The intermediate steps were as set out in our findings of fact. The plan of reorganization contemplated and required the complete liquidation and dissolution of the Bessemer Co. Neither of the two distributions in liquidation, standing alone, constituted a distribution either in partial or complete liquidation, since neither of them in itself was in complete cancellation or redemption of either a part or all of the capital stock. Sec. 201 (c) and (h), Revenue Act of 1926. The cash distribution was a distribution in partial liquidation because it was one of a series of two distributions in complete cancellation or redemption of the stock of the Bessemer Co., the other of such distributions being the distribution of the stock of the Bessemer Corporation. The two distributions were inseparably connected as interdependent steps in effecting such liquidation, and the liquidation could only be completed through the execution of the plan' of reorganization. Likewise, the execution of the plan of reorganization required the complete liquidation of the Bessemer Co. Hence, the cash distribution, being one of a series of interdependent steps in the liquidation, was a part of the plan of reorganization.

Under the plan of reorganization the stock of the Bessemer Corporation and cash in the amount of $1,150,157.95 were to be distributed to Bessemer Co. stockholders in full liquidation of their stock holdings in the latter company, and the board of directors of the Bessemer Co. directed that notice be given to the stockholders to surrender their stock in that company. The record is silent as to what, if anything, was done pursuant to that direction. It may reasonably be assumed that the direction of the board of directors was carried out and the stock surrendered, since such action was inherent in the plan of reorganization. But whether or not the certificates evidencing such stock were actually surrendered, the stock became nonexistent as an asset or thing of value upon the liquidation and dissolution of the Bessemer Oo. and in lieu thereof the petitioners had their proportionate shares of the liquidating distributions of cash and stock. The petitioners as stockholders gave formal approval to the transactions under the plan of reorganization, which rendered their Bessemer Co. stock valueless, and thereby surrendered it in exchange for the liquidating distributions. Moreover, under section 201 (c) and (h), supra, the liquidation operated as full payment in exchange for the Bessemer Co. stock and as a complete cancellation or redemption thereof.

We hold, therefore, that petitioners, in pursuance of the plan of reorganization, exchanged and surrendered their stock in the Bessemer Co., a party to the reorganization, for cash and stock in the Bessemer Corporation, a party to the reorganization.

Such exchange would be within the provisions of section 203 (b) (2) of the Eevenue Act of 1926, but for the fact that the exchange was for stock and cash and not solely for stock. The exchange, therefore, falls within the provisions of section 203 (d) (1).

Eespondent has determined that the entire amount of the cash distribution of June 14, 1927, had the effect of the distribution of a taxable dividend, and on brief asserts that such dividend, to the extent of the accumulated earnings or 57.2113 percent of the total cash distributed, consisted of profits accumulated since February 28, 1913, and to the extent of the balance of the cash distribution represented gain from the exchange of stock. We do not agree with the determination by respondent that the entire cash distribution is taxable as a dividend. We do agree that such distribution, under the plan of reorganization, had the effect of a distribution of a taxable dividend to the extent of the accumulated earnings of the company at the time the distribution was made and should be taxed as such. But we do not agree that that part of the cash distribution in excess of such earnings was a taxable dividend or had the effect of a taxable dividend. It might properly have been taxed as a gain from the exchange of property at ordinary tax rates, since the petitioners did not elect to have such gain taxed at the capital gains rate. However, respondent in determining the deficiencies computed a surtax only on the entire cash distributions and has not asked for increased deficiencies.

Eespondent further contends that the cash distribution was not a liquidating dividend, and argues that by such distribution there was no partial liquidation of the Bessemer Co. This view, we think, is erroneous. In support of Ms contention, respondent cites, among other similar decisions, Edison Securities Corporation, 29 B. T. A. 483; affd., 78 Fed. (2d) 85. The cited case is distinguishable on the facts. There the distributions made were not in excess of the accumulated earnings, and at that time no dissolution or winding up had been decided upon or definitely planned, although a later determination to liquidate and dissolve was carried out. In the instant case, the liquidation of the Bessemer Go. had been definitely planned prior to the cash distribution on June 14,1927; the distribution made was far in excess of the accumulated earnings available for distribution as ordinary dividends; the resolution of the directors declared it was in partial liquidation of the company, and shortly thereafter a distribution in final liquidation was made and the company was dissolved.

The fact that a distribution is called a “dividend” and is made in part from earnings and profits and before liquidation or dissolution proceedings are commenced, is not controlling. Hellmich, v. Hellman, 276 U. S. 233; Canal-Commercial Trust & Sevings Bank v. Commissioner, 63 Fed. (2d) 619, 620; Gossett v. Commissioner, 59 Fed. (2d) 365, 367; Tootle v. Commissioner, 58 Fed. (2d) 576, 580. “The determining element is whether the distributions were made in the ordinary course of business and with intent to maintain the corporation as a going concern, or after deciding to quit and with intent -to liquidate the business.” Holmby Corporation v. Commissioner, 83 Fed. (2d) 548, 549; affirming 28 B. T. A. 1092. See also Rollestone Corporation, 38 B. T. A. 1093.

In support of their contention that they realized no taxable income from the reorganization here involved, petitioners cite and rely upon our decision in Georgia Savings Bank & Trust Co., Executor, 28 B. T. A. 1153. That case is distinguishable on the facts from the present proceedings, and in our opinion is not controlling here. There A corporation sold its real estate and part of its personal property for $200,000 cash and declared and paid a dividend out of surplus in that amount. The stockholders of A then exchanged their stock in that corporation for stock only in B corporation, pursuant to the plan of reorganization. We held there were two separate transactions, and that the gain derived from the exchange of stock for stock was not recognizable for tax purposes. It is to be noted that there was no liquidation of A corporation, and the cash distribution was taxed to the stockholders of A as an ordinary dividend. The cited case affords no support for petitioners’ contention that they should not be taxed upon the cash distribution in question either as an ordinary dividend or as gain derived from an exchange of property.

It is our opinion, and we so hold on the facts disclosed in toe instant case, that petitioners received as liquidating dividends in full payment in exchange for their stock in the Bessemer Co., pursuant to the plan of reorganization, (1) their proportionate parts of the cash distribution of June 14, 1927, and (2) stock in the Bessemer Corporation distributed to them on July 21,1927.

The gain derived has been determined by respondent to be in excess of the cash distributed, and such determination is not questioned by petitioners. The gain is, therefore, taxable under section 203 (d) (1), supra, to the extent of the cash received. Since the cash distribution was made in pursuance of the plan of reorganization and included undistributed earnings and profits accumulated after February 28,1913, to the extent of such accumulated earnings and profits it clearly had the effect of the distribution of a taxable dividend. George Woodward, 23 B. T. A. 1259; John S. Woodward, 30 B. T. A. 1216, dismissed on appeal. It follows that the cash distribution is taxable as dividends to the distributees in the amounts of their ratable shares of the accumulated earnings, and the remainder of the cash distribution is taxable as gain from the exchange of property.

The deficiencies determined by respondent are approved.

Decisions will he entered for the respondent.

       Sec. 203 (b) (2). No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       Sec. 203 (d) (1). If an exchange would be within the provisions of paragraph 1, 2, or 4 of subdivision (b) 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.

       Sec. 203 (h). As used in this section and sections 201 and 204—
      (1) The term “reorganization” means * * * (B) a transfer by a corporation of aU 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. » * *

       Sec. 201. (c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * *
      *******
      (h) As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

       See footnote 2, supra.

         See footnote 3, supra.

       Sec. 201. (a) The term “dividend” when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings accumulated after February 28, 1018.

       Sec. 203 (d) (2). If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1918. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as gain from the exchange of property. [See paragraph (1) under footnote 3, supra.]


author: Smith:

text:
    Inter-State Grocery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88729.
    Promulgated January 24, 1939.

      George B. Lang, Esq., and Milo A. Lang, Esq., for the petitioner.

      James C. Maddox, Esq., for the respondent.
   OPINION.

Smith:

This proceeding involves a deficiency of $1,502.46 in petitioner’s income tax for 1934. The only question in issue is whether a loss which the petitioner sustained in 1984 on the liquidation of a subsidiary company is deductible in full, as petitioner contends, or whether it is subject to the limitation on the deduction of capital losses provided for in section 117 (d) of the Eevenue Act of 1934, as respondent has determined.

There is no dispute as to the facts. The petitioner is a Missouri corporation engaged in the wholesale grocery business. About the year 1929 it organized a new company, the Inter-State Grocery Co., of Oklahoma, which began doing business at Perry, Oklahoma. The new company was incorporated under the laws of Oklahoma and petitioner subscribed and paid cash for $21,300 of its $25,000 of capital stock.

In 1934 the Oklahoma company was completely liquidated and petitioner sustained a loss on its stock of $12,059.74. In its income tax return for 1934 petitioner claimed the deduction of the full amount of the loss. The respondent has disallowed the deduction of all but $2,000 of the amount claimed on the ground that the loss is a capital loss on which the deduction is limited by section 117 of the Eevenue Act of 1934.

The applicable provisions of the Eevenue Act of 1934 are as follows:

SEC. 23. DEDUCTIONS EROM GROSS INCOME.

In computing net income títere shall be allowed as deductions:
*******
(f) Losses by Corpobations. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
* * * * * * *
(j) Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117 (d).
SEO. 117. CAPITAL GAINS AND LOSSES.
(a) General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
100 per centum if the capital asset has been held for not more than 1 year;
80 per centum if the capital asset has been held for more than 1 year but not for more than 2 years;
60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years;
40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years;
30 per centum if the capital asset has been held for more than 10 years.
* * sjs S& * * ♦
(d) Limitation on capital losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the United States or of any State or Territory, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (inelud-ing one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale (except such portion of the loss as does not exceed the amount, if any, by which the adjusted basis of such instrument exceeds the par or face value thereof) shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses.

In White v. United States, 305 U. S. 281; affirming White v. United States, 21 Fed. Supp. 361; and Helvering v. Chester N. Weaver Co., 305 U. S. 293; reversing Chester N. Weaver Co. v. Commissioner (C. C. A., 9th Cir.), 97 Fed. (2d) 31, the Supreme Court held that the limitation imposed by section 101 of the Eevenue Act of 1928 and section 23 (r) of the Eevenue Act of 1932, which in all material respects correspond to section 117 (d) of the Eevenue Act of 1934, applies to losses sustained by a stockholder on the liquidation of a corporation.

Petitioner makes the contention that corporations are excluded from the limitation on capital losses imposed by section 117 (d) and that under section 23 (f) corporations are entitled to the deduction of the full amount of all losses sustained in operations not compensated for by insurance or otherwise. It refers to subdivision (a) of section 117, which provides that in the case of a taxpayer “other than a corporation” certain percentages only of the gain or loss recognized on the sale of a capital asset, depending upon the number of years held, shall be taken into account in computing net income. From this it argues that section 117 was never intended to apply to corporations; that, since corporations are taxable upon the full amount of gain realized from the sale of capital assets regardless of the period for which the assets have been held, it must follow that the full amount of the loss is likewise deductible regardless of the length of time held.

It is quite apparent, however, that subdivisions (a) and (d) are entirely independent of each other. The second sentence of subdivision (d), “Limitation on Capital Losses”, clearly shows that that subdivision is applicable to losses sustained by a corporation upon the sale of capital assets. If this were not so there would be no point in Congress specifically providing that in the case of certain banks or trust companies the limitation is not to be applied in respect of losses arising from the sale of bonds. We think it clear that subdivision (d) applies to all taxpayers, including corporations. The statute has been so construed by the respondent in article 117-2 of Eegulations 86 and we think correctly so construed.

The determination of the respondent is sustained.

Judgment will be entered for the respondent.


author: Leech :

text:
    Charles T. Carlson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87564.
    Promulgated January 24, 1939.

      H. A. Mihills, C. P. A., for the petitioner.

      Henderson A. Melville, E'sq., for the respondent.
   OPINION.

Leech :

The first two issues will be considered together. Is petitioner entitled to deduct any loss for 1934 on his stock in the Bank or because of his payment of $5,000 as the owner of such stock? Revenue Act of 1934, sec. 23 (e) (2) - Petitioner contends Re is so entitled on the ground that the stock became worthless and was relinquished by him during that year.

Assuming the stock did become worthless during the tax year, it was not worthless at the close of that year. The Bank was not liquidated but resumed business December 31,1934. If, at that time, petitioner still retained the right to repossess the stock — and we are not convinced that he does not yet have that 'right — of course he sustained no deductible loss on the stock during that year. On the other hand, if he actually relinquished his stock in June 1934, when he gave it to the Bank, endorsed in blank with the comment “This stock is of no value to me — do whatever you want with it”, or on December 31 of that year, when he refused to accept his 50 shares in the resuming Bank, it is unquestionably true that such relinquishment was wholly voluntary and not compulsory. Cf. Commissioner v. Wright, 47 Fed. (2d) 871; Peabody Coal Co. v. United States, 8 Fed. Supp. 845. Petitioner was dissatisfied with the management and operation of the Bank. That he considered the stock worthless is beside the point. Deliberately and entirely of his own volition, he severed, or at least attempted to sever, all his connection with the Bank as a stockholder. If successful, he thus gave up any rights he might have had to the return of his stock without any further payment on his part if and when, under the plan, the obligations the stock was deposited to secure were paid. Cf. Estate of C. T. Grant, 36 B. T. A. 1233. But, petitioner had more than that right. Although no stock assessment was made, he had, likewise voluntarily, paid $5,000 to the Bank, in trust, “* * * as a payment of $100.00 per share on said Charles T. Carlson’s stock in said bank under said reopening plan hereinbefore referred to * * *” with the understanding that if the Bank failed to resume, then the $5,000 thus paid was to be returned to the petitioner.

We pass the obvious difficulty to petitioner that this money was not actually transferred from the trust to the Bank, as such, until 1935. We assume that the conditions of the trust, under which this transfer was to be made, existed prior to the close of the year 1934, and that petitioner thereafter had no right to this money. This payment, therefore, became an additional cost to petitioner of his stock in the Bank. In re Park Estate, 58 Fed. (2d) 965; certiorari denied, 287 U. S. 646; First National Bank in Wichita v. Commissioner, 46 Fed. (2d) 283.

Thus, at the end of 1934, except for the possible effect of his voluntary action, during that year, in relinquishing or attempting to relinquish his stock in the Bank, the petitioner would have owned stock in the same Bank of the reduced par value. Such stock was then worth approximately that reduced par. But, unless the stock became worthless during 1934 and was so when the petitioner’s alleged relinquishment thereof occurred, no deductible loss was sustained in that year. See Bair v. United States, 20 Fed. Supp. 191; Walter W. Moyer, 35 B. T. A. 1155. Assuming the doubtful conclusion from this record that the stock became worthless in 1934, it certainly is not established that it was so either when petitioner endorsed it in blank and turned it in to the Bank, or when the stock was offered to him in December at the time the Bank reopened and he refused it. The stock was worth its then par at the latter date, as has been found as a fact, and it is little less clear, from the evidence, that the stock was not worthless on the earlier occasion, since, at that time, the plan to reopen the Bank, which had been promulgated in April, was apparently progressing favorably, and, only a month or two thereafter, its license to resume business was issued.

The conclusion is inescapable from this record that, if petitioner possessed no valuable rights in his stock in the Bank at the end of 1934, it was solely because he had made a complete gift of that stock during that year at a time when the stock was valuable or at least not shown to have been worthless. That gift does not support a deductible loss. Robinson v. Commissioner, 53 Fed. (2d) 810; Western Maryland Dairy Corporation, 32 B. T. A. 769; Mrs. R. B. Lawler, Executrix, 17 B. T. A. 1083. Respondent is, therefore, sustained on the first two issues.

The last issue is whether petitioner may deduct, as a bad debt, the difference between the face amount and the actual value of the note received by him in lieu of the unpaid portion of his deposit in the Bank. Respondent has limited the deductibility of the admitted loss here, under the provisions of the Revenue Act of 1934, section 117 (a). The propriety of this action is determined by whether the acceptance of this note by petitioner in lieu of the balance on his deposit constituted the “sale or exchange of a capital asset.”

Respondent supports his action only on the ground that the transaction constituted an “exchange of a capital asset.” Upon further consideration of the authorities, particularly that of the case of James R. Stewart, 39 B. T. A. 87, we disagree. [What happened here was not the transfer of any asset from the petitioner to the Bank in exchange for the note of the subsidiary (cf. Harry Payne Bingham, 38 B. T. A. 913; Betty Rogers, 37 B. T. A. 897), but was simply a satisfaction of the Bank’s debt to him by means of the note. Neither the Bank nor its subsidiary received any asset from the taxpayer. There was, therefore, no “exchange of a capital asset” within the statute. I Hale v. Helvering, 85 Fed. (2d) 819; affirming 32 B. T. A. 356. Accordingly, we hold petitioner is entitled to deduct as a bad debt the full amount of the difference between the face value and the actual value of the note given him by the Bank in satisfaction of his deposit.

Decision will he entered under Rude 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      ***** a *
      (e) Losses bx Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      *******
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      *******
      80 per centum If the capital asset has been held for more than 1 year but not for more than 2


author: SteRnuaoen :

text:
    Malden Trust Company and Malden Trust Investment Corporation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87462.
    Promulgated January 24, 1939.

      Charles M. Rogerson, Esq., Roger W. Hardy, Esq., and Howard C. Connor, Esq., for the petitioners.

      Bernard D. Daniels, Esq., and John E. Mahoney, Esq., for the respondent.
   OPINION.

SteRnuaoen :

In disallowing the deduction taken by the petitioner in 1933 of $53,515.75, the Commissioner stated in the notice of deficiency: “Bad debts claimed in the amount of $53,515.75 have been disallowed as a deduction for the year 1933 for the reason that they were determined to have been worthless in 1932 and in accordance with section 23 (j) of the Revenue Act of 1932 should have been charged off within the taxable year 1932.” The petitioner assails this determination.

The evidence does not, we think, establish that this determination was incorrect, but, on the contrary, supports it. Both the bank examiner and the executive committee of the petitioner were clearly of the opinion in 1932 that the debts aggregating $103,938.30 should be charged off. Instead, however, the charge-off at that time was limited to $50,422.55. Why it was thus limited does not clearly appear, although the suggestion is made — and not unreasonably — that this was the extent to which a tax deduction would be useful in 1932. When the later charge-off was made on January 20, 1933, nothing more had happened to demonstrate worthlessness beyond what was known at the end of 1932. As against this considered and expressed judgment of the executive committee recorded in 1932 and approved fully at the board meeting of January 9, 1933, the testimony of the assistant treasurer as to his appraisal of the worth of the individual items making up the $53,515.75 is not persuasive.

It has, therefore, been found as a fact, upon a consideration of all the evidence, that the debts aggregating $53,515.75 which were charged off on January 20, 1933, had in 1932 been ascertained by the petitioner to be worthless. They reasonably should have been charged off in that year as were those aggregating $50,422.55. The Commissioner allowed the deduction of the latter amount and it may be assumed that he would not have disallowed the deduction of the entire amount which the Commissioner of Banks directed (see T. D. 4633, XV-1 C. B. 118) and which the executive committee voted. The circumstance that such a deduction in the full amount might have availed the taxpayer nothing of tax advantage is adventitious and may not influence the decision. The determination as to this item is sustained.

The petitioner now claims a deduction, not taken on its return, for losses aggregating $87,690.32, said to have resulted from the foreclosure of the mortgages as set forth in the findings. The statutory deductions allowed for bad debts and those allowed for losses are mutually exclusive, Spring City Foundry Co. v. Commissioner, 292 U. S. 182. Petitioner, however, in its petition, at the trial, and in its brief, has made no claim for deduction under the bad debt provision; and this, despite the fact that the respondent has argued that the deduction must be tested entirely by the standards of the bad debt provision. Since deductions are entirely statutory and their allowance may not go beyond the statutory conditions upon which they are made to depend, Burnet v. Thompson Oil & Gas Co., 283 U. S. 301; Helvering v. Independent Life Insurance Co., 292 U. S. 371, it is important that a taxpayer bring himself within the correct statutory category.

Assuming arguendo that the petitioner after the foreclosure was really worse off than before, and that the measure of its worsening is the difference between the amount of its loans plus foreclosure expenses and the actual value of the properties now held, it seems clear that the worsening is not in the acquisition of the foreclosed property, but in the worthlessness of the mortgage loan. No matter what the value or the bid price or the total cost of the real estate acquired on foreclosure, its acquisition could not be a loss. Hadley Falls Trust Co. v. United States, 22 Fed. Supp. 346. Quite the contrary, its only effect could be to salvage something from a worthless loan.

The bad debt provision of the statute requires not only that the asset consisting of the credit side of the loan be ascertained by the taxpayer within the taxable year to be worthless, but also that it be charged off within the taxable year. This is where the petitioner has failed. It has continued to carry on its books the full amount of the outstanding loans, the only change being that the amounts have been transferred from an asset account called loans on real estate to an asset account called foreclosed real estate. This is not a charge-off within the meaning of the statute.

It must, therefore, be held that the petitioner upon its return correctly omitted any deduction in respect of the several mortgage loans shown by the findings. It may not, however, be amiss to add that, even if the deduction were to be considered under the loss provision of the statute, there would be doubt whether the petitioner’s evidence is adequate to establish that notwithstanding its own accounting it had sustained a loss.

Decision will he entered under Rule 50.


author: MuRdock :

text:
    Estate of Henry N. Brinsmade, Deceased, Paul S. Brinsmade, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86046, 86047.
    Promulgated January 24, 1939.

      Percy W. Crane, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent,
   opinion.

MuRdock :

The Commissioner determined deficiencies in income tax as follows:

The sole issue for decision by the Board is whether all of the rent from property on Fulton Street in New York City was taxable to the decedent or whether only one-half of that rent was taxable to him. The facts have been stipulated and the Board hereby adopts the stipulation as its findings of fact.

Frances N. Brinsmade died in 1928, while residing in the State of New York. She was survived by her husband, hereinafter called the taxpayer, and by their two sons, Paul S. and James B. Brins-made. She had no other heirs at law or next of kin. She provided in her will that the residue of her property should descend in accordance with the statutes of the State of New York in force at the time of her death governing the descent and distribution of the estates of persons dying intestate. A piece of real estate on Fulton Street in New York City was a part of the residue of her estate. The premises were then under lease to Edward E. White under a lease made by her in 1908 for a term of years beginning May 1, 1909, and ending May 1, 1980. The lessee had erected a restaurant building on the premises and the lease provided that in case the lessee was refused a renewal, he was entitled to receive from the lessor the sum of $10,000 on the termination of the lease. The lease provided for a net rental and required the tenant to pay all taxes, insurance, repairs, and costs of maintenance. The taxpayer acquired an estate by curtesy in the above mentioned premises at the time of the death of Ms wife, and the two sons became seized of a vested remainder interest therein, subject only to their father’s intermediate life estate.

The father, the taxpayer here, executed two separate written instruments on January 28, 1928, whereby he assigned to each of his two sons “one-fourth of the net rents, from and after January 31, 1928, derived from the property” on Fulton Street during the term of the life of the father. After the taxpayer made the assignments of rent to his sons, the lessee paid the rent by three separate checks. One for one-half of the rent was drawn to the order of the taxpayer; one for one-fourth of the rent was drawn to the order of each of the sons. The checks were mailed or delivered to one of the sons who distributed them to the parties entitled to them. The taxpayer and his two sons thereafter decided not to renew the lease and instead they leased the premises to the Savarins, Inc., for a term of twenty-one years beginning May 1,1930. The lease was dated January 30,1929, and was executed by the taxpayer, his two sons, and the wives of the sons, as lessors. The former tenant assigned the unexpired portion of the first lease to the Savarins, Inc., on February 21, 1929, with the consent of the taxpayer and his two sons. The matter of the $10,000 was also adjusted by mutual consent of all parties concerned without the payment by anyone of any money.

The question arose late in 1934 or early in 1935 between the taxpayer and Government representatives as to whether the rents were, still all taxable to the taxpayer, whereupon the taxpayer, in confirmation of his previous assignments to the sons, made new assignments dated February 27, 1935, whereby he granted and released to the.sons an undivided one-half part in all his right, title, and interest in the plot of land, together with the improvements, and stated in that instrument that it had been his intent in the previous instrument to convey just such an undivided one-half interest to the sons.

No figures are in dispute. The Commissioner contends that there should be included in the taxpayer’s taxable income for each of the years the total rent for that year, less the expenses attributable to that year and less depreciation of $2,150 for each year, whereas it is contended on behalf of the taxpayer that only one-half of the rents, less one-half of the expenses and depreciation, should be included in his income. The Commissioner’s argument is that the taxpayer assigned originally less than an undivided one-half interest in that which he acquired under the will of his wife, since he assigned only a portion of the net rents, whereas he had a legal life estate in the property. The petitioner cites a number of cases to show that in New York the assignment of income is equivalent to the assignment of the property from wMch the income springs. He also argues that the taxpayer here obviously intended to convey to his sons one-half of Ms entire interest in the property, as evidenced by tbe conduct of the parties, by the confirmatory assignment, and by the testimony of the attorney who drew all of the assignments. Cf. Yolande V. Perkins, 38 B. T. A. 189.

The petitioner relies principally upon Lowery v. Helvering, 70 Fed. (2d) 713, reversing 27 B. T. A. 137. That was a decision of the United States Circuit Court of Appeals for the Second Circuit. Judge Learned Hand, in the opinion in that case, reviewed some of the authorities, including a number of the cases cited by the respondent here, dealing with the taxation of income after assignments thereof. The same arguments were presented there that are presented here. The taxpayer in that case had received a legal life estate in personal property under the will of her husband. Although she had not taken possession of the property, nevertheless, the court assumed that she had a right to possession. The argument that “the deed of gift conveyed less than the whole complex of her rights; she transferred only the income and omitted the right to possession” was considered. The court said it was not to be supposed that she meant to continue her right of possession after parting with the substance of the bequest. Although the court recognized some conflict in the cases, it held that the income was not taxable to the assignor. The Government did not apply for certiorari in that case. The present case is not distinguishable, and upon authority of the Lowery case we hold for the petitioner. Cf. Blair v. Commissioner, 300 U. S. 5; Byrnes v. Commissioner, 89 Fed. (2d) 243; Ellen S. Booth, 36 B. T. A. 141.

Reviewed by the Board.

Decision will he entered under Rule 50.


author: TorneR :

text:
    Chester A. Souther and Mrs. Chester A. Souther, Petitioners, v. Commissioner of Internal Revenue, Respondent. John Brook Jackson and Alice F. Jackson, Petitioners, v. Commissioner of Internal Revenue, Respondent. Richard H. Grant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 80485, 91700, 91701.
    Promulgated January 25, 1939.

      Joseph B. Coolidge, Esq., and Prewitt Semmes, Esq., for the petitioners.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

TorneR :

The major issue herein, common to all three proceedings, is whether the Motors Securities class A stock acquired by the petitioners on December 29,1930, upon surrender of their Managers stock in liquidation was acquired pursuant to a plan of reorganization within the meaning of section 112 of the Revenue Act of 1928 so that the basis to the petitioners for determining gain or loss upon its subsequent disposition was the same as the basis of the stock in Managers exchanged therefor. Sec. 113 (a) (6), Revenue Acts of 1932 and 1934.

Prior to the transaction on December 29, 1930, counsel for Managers submitted to the Commissioner of Internal Revenue a proposed plan whereby Managers would transfer to Motors Securities all of its assets, receiving therefor all of a special class of stock to be authorized by Motors Securities, which said stock would be distributed to tbe stockholders of Managers and Managers would thereupon be dissolved. It was further proposed that Motors Securities should offer to retire the whole or any part of the special issue of stock by exchanging therefor a corresponding amount of the common stock of General Motors. A ruling was requested as to whether or not the execution of the proposed plan would result in a reorganization within the meaning of the income tax statute. Under date of November 28, 1930, the ruling of the Bureau of Internal Bevenue was transmitted to counsel for Managers, holding that the proposed transaction would “fall within the scope of section 112 (b) (8), (4) and (i) of the Bevenue Act of 1928, concerning exchanges in connection with corporate reorganizations” and that no gain or loss would be recognized for income tax purposes. It was further stated, however, that any subsequent exchange, by the former stockholders of Managers, of the Motors Securities stock so acquired for General Motors common stock would result in gain or loss for income tax purposes, measured by the difference between the basis of the General Motors Securities Co. stock in the hands of the former stockholders of the Managers Securities Co. and the fair market value of the General Motors Corporation common stock as of the date of the exchange. The plan as proposed and ruled upon, subject to minor changes not here important, was carried out on December 29, 1930, and the petitioners in exchange for their stock in Managers received Motors Securities class A stock as follows: Grant, 80,567 shares; Jackson, 13,527 shares; and Souther, 19,228 shares.

In one or more of the taxable years under consideration each petitioner surrendered to Motors Securities shares of its class A stock, acquired as indicated above, and received shares of General Motors common stock. In making their returns the petitioners treated the exchange between Managers and Motors Securities on December 29, 1930, as a reorganization, in accordance with the ruling of the Bureau of Internal Bevenue, and for the taxable years herein used an aliquot portion of the cost of Managers stock as the basis for determining the gain realized upon the surrender of the said class A stock for General Motors common stock. The petitioners now claim that the treatment of the transaction of December 29, 1930, as a statutory reorganization resulted from a mutual mistake of law and that for the purpose of determining the basis to petitioners for the class A stock acquired in that transaction the ruling and subsequent treatment of the transaction as a reorganization should now be disregarded. They contend that the distribution of the Motors Securities class A stock to them as stockholders of Managers was not pursuant to a plan of reorganization but was in liquidation of Managers, nothing more, the gain from which was recognizable when the distribution was made in 1930, and that the basis of the Motors Securities class A stock in their hands was $34.25 per share, its fair market value when distributed, and not the cost to them of their stock in Managers.

The respondent, on the other hand, contends that the exchange between Managers and Motors Securities on December 29, 1930, was a statutory reorganization and that the said class A stock, having been distributed pursuant to the plan of reorganization, took the same basis for gain or loss purposes as the Managers stock surrendered therefor. He further claims and has pleaded in his answers that, since petitioners in past years have joined with him in treating the exchange of December 29, 1930, as having been made pursuant to a plan of reorganization, they may not now change their position and claim that it was otherwise for the purpose of procuring a stepped-up basis for their Motors Securities class A stock.

With respect to the issue above stated it is stipulated that, if the Motors Securities class A stock received by the petitioners in 1930 was acquired pursuant to a plan of reorganization, the basis for determining the gain realized upon the exchange of the class A stock for General Motors common stock is as follows: Richard H. Grant, 46.545 cents per share; John Brook Jackson, 55.662 cents per share; and Chester A. Souther, approximately 26 cents per share, the exact amount being that used by him in making his return and by the respondent in determining the deficiency against him. It is also stipulated that if the petitioners are entitled to a stepped-up basis, as contended by them, the basis for the Motors Securities class A stock is $34.25 per share, its fair market value at the time of distribution on December 29, 1930, and further that if Jackson and Grant are entitled to use the basis of $34.25 there are no deficiencies in their income tax for the years in controversy.

Under section 113 (a) (6) of the Revenue Act of 1928 the basis for determining the gain or loss from the exchange of property is the same as that of the property exchanged if the property acquired “was acquired upon an exchange described in section 112 (b) to (e).” To the same effect and in substantially the same language are the corresponding sections of the Revenue Acts of 1932 and 1934. Section 112 (b) (3) of the Revenue Act of 1928 provides that “No gain or loss shall be recognized if stock or securities of 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.”

Certainly there can be no question that the exchange by the petitioners on December 29, 1930, of their Managers stock for Motors Securities class A stock was pursuant to a plan which was regarded, and up to the time of these proceedings had been treated, as a plan of reorganization within the meaning of section 112 (i) (1) of the above act, which reads as follows:

SEC. 112. RECOGNITION OP GAIN OR LOSS.
*******
(i) Definition of reorganization. — As used in this section and sections 113 and 115—
(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 change in identity, form, or place of organization, however effected.

Our first question then is whether the plan under which the transaction of December 29,1930, between Managers and Motors Securities was executed was a reorganization within the meaning of the statute. Both the petitioners and the respondent direct their arguments exclusively to the applicability of the definition contained in clause (A). The petitioners claim that the transaction did not “genuinely partake of the nature of a merger or consolidation” as the terms merger and consolidation, appearing in clause (A) above, were construed by the Supreme Court in Pinellas Ice & Gold Storage Co. v. Commissioner, 287 U. S. 462, and Helvering v. Minnesota Tea Co., 296 U. S. 378, and further that Motors Securities did not acquire substantially all of the assets of Managers. Finally the petitioners contend that the transaction served no business purpose whatever, tax avoidance being the, sole concern of the parties, and for that reason the transaction may not under Gregory v. Helvering, 293 U. S. 465, be treated as a reorganization within the meaning of the statute.

After quoting from Helvering v. Minnesota Tea Co., supra, to the effect that the “seller” must acquire an interest in the affairs of the “purchasing company” more definite than the interest incident to the ownership of its short term purchase money notes and that the interest so acquired must represent a substantial part of the value of the thing transferred, it is argued that Managers acquired “no interest in the affairs of Motors Securities.” The reasoning seems to be that the “interest” of Managers was the same before and after the exchange and therefore it acquired no “interest” in Motor Securities by reason of the exchange of the 290,310 shares of General Motors common stock and 148,509 shares of Motors Securities common stock for 4,509,060 shares of Motors Securities class A stock. In considering the effect of the exchange petitioners say they are ignoring the 290,310 shares of General Motors common stock for the reason that they amounted 'to less than 6 percent of Managers assets transferred to Motors Securities and could in no wise affect the principles involved.

Although the petitioners make no contention that the 148,509 shares of Motors Securities common stock and the 290,810 shares of General Motors common stock did not constitute substantially all of the assets of Managers, and even though, according to stipulation, the said shares were in fact transferred to Motors Securities on December 29, 1930, in exchange for 4,509,060 shares of Motors Securities class A stock, petitioners claim, citing Arctic Ice Machine, Co., 23 B. T. A. 1223, that Motors Securities did not acquire substantially all of Managers assets but “merely took with one hand certain stock certificates and with the other handed back certain certificates the exact equivalent of those delivered to it”, which at best was a reclassification by Motors Securities of its 148,509 shares of common stock. The petitioners’ argument on each and every point seems to spring from the fact that the major portion of assets transferred to Motors Securities for its class A stock was likewise the stock of Motors Securities, even though the stock so transferred was common stock as distinguished from the class A stock acquired and the rights of Managers as a stockholder of Motors Securities was changed thereby. The essence of the argument seems to be that no corporation the principal asset of which was the stock of another corporation can merge with the latter corporation, and further, that the latter corporation can not be said to have acquired substantially all of the assets of the former corporation within the meaning of clause (A) above if it issues in exchange its own stock, even though the stock so issued is of a different class and the rights of the holders are materially changed.

In H. B. Leary, Sr., 34 B. T. A. 1206, involving a transaction substantially similar to the transaction in the instant case, the respondent advanced the same arguments as those advanced here by the petitioners. In that case it was decided to eliminate a corporation the sole function of which was the holding of a majority of the common stock of another corporation. The stock so held, which was no par value voting stock, and some cash were transferred to the second corporation for $5 par value common stock, with added voting rights, and bonds of the latter. The new stock and bonds so acquired were distributed to the stockholders of the holding corporation and the holding corporation was dissolved. We held that the transaction was a reorganization within the meaning of clause (A) above, and upon review we were affirmed by the United States Circuit Court of Appeals for the Fourth Circuit, 93 Fed. (2d) 826. The court said:

The New York company undoubtedly acquired substantially all the properties of the Maryland corporation and immediately reissued its own stock in exchange therefor. The interest of the stockholders of the Maryland corporation in the business owned by the New York company and the Maryland corporation, the. holding company, remained, with but slight change, in the property owned by the New York company after the plan was carried out. It seems clear that such a situation results, in its legal effect, in a reorganization within not only the letter but the spirit of the taxing statute and brings the transaction within that class which Congress plainly intended not to tax until the stockholder finally disposed of his stock and his profit was definitely ascertainable. There was no change in the taxpayer’s position with respect to the ownership of the property but merely a change in the form of the stock certificates held by him.
There was, in substance, a merger of the two companies. “A merger ordinarily is an absorption by one corporation of the properties and franchises of another whose stock it has acquired. The merger corporation ceases to exist, and the merging corporation alone survives.” Cortland Specialty Company et al. v. Commissioner of Internal Revenue, 60 F. (2d) 937.
It would be hard to more accurately describe what happened in the instant case.
* * * * * * *
The continuity of interest frequently held by the courts to be necessary in a reorganization (Cortland Specialty Company v. Commissioner, supra; C. S. Mead Coal Co. v. Commissioner, supra), was present here. The taxpayer held practically the same interest in the property after the plan was carried out that he held before.

In Helvering v. Schoellkopf, 100 Fed. (2d) 415, affirming the opinion of the Board reported at 35 B. T. A. 855, the United States Circuit Court of Appeals for the Second Circuit considered the same transaction that was involved in H. B. Leary, Sr., supra. The court, contrary to the conclusion reached by the Board and the United States Circuit Court of Appeals for the Fourth Circuit, took the position that the New York corporation, when it acquired its own shares of no par value common stock in exchange for its $5 par value common stock with added voting rights, did not acquire substantially all of the properties of the Maryland corporation within the meaning of clause (A) of the statutory definition of a reorganization, stating as a reason for the conclusion reached that the shakes of stock so acquired “are merely extinguished” and “cannot properly be regarded as property acquired”, and further, that the two issues of stock were so much alike as to be substantially the same so that the New York corporation was in effect under com tract to return the shares to the Maryland corporation and therefore “did not acquire them.” The court did hold, however, that the transaction was a reorganization, under clause (B) of the definition above, and that the liquidation of the Maryland corporation, the holding corporation, was pursuant to the plan of reorganization and its stockholders did not realize taxable gain thereby. To the same effect is Commissioner v. Kolb, 100 Fed. (2d) 920, decided by the United States Circuit Court of Appeals for the Ninth Circuit.

In the instant case the difference in the rights under the Motors Securities common stock and the Motors Securities class A stock was more definite and pronounced than the difference between the two issues of common stock in H. B. Leary, Sr., supra, and Helvering v. Schoellkopf, supra. As we read the opinion of the court in the latter case, however, the added difference between the two issues of stock in the instant case would not be sufficient, in the opinion of that court, to bring the exchange on December 29, 1930, between Managers and Motors Securities within the provisions of clause (A) of the definition of reorganization. Since the decision in Helvering v. Schoellkopf, supra, was rendered we have carefully reconsidered the applicability of clause (A) to transactions such as we have before us and with due deference to the views of the court expressed in its opinion therein, we adhere to the ruling in H. B. Leary, Sr., supra, in which we were affirmed, as stated above, by the United States Circuit Court of Appeals for the Fourth Circuit, and hold that the exchange on December 29, 1930, between Managers and Motors Securities falls within the scope of clause (A) of the statutory definition.

Eegardless, however, of the applicability of clause (A) to the exchange between Managers and Motors Securities, we are of the opinion that clause (C) of the statutory definition, which defines the term “reorganization” as a recapitalization is applicable and the exchange was a reorganization thereunder. In Mead Coal Co. v. Commissioner, 72 Fed. (2d) 22, the court said: “It will thus be seen that the general purpose of all these reorganizations provisions was the same, not merely to remove the impediment to corporate readjustments, but also to prevent the recognition of purely fictitious gains or losses in the administration of the income tax law.” As the petitioners suggest in their brief, the exchange of the Motors Securities common stock for class A stock at the best resulted in a reclassification of Motors Securities stock. Managers did not by that exchange actually liquidate its holdings but, as the court further suggested in Mead Coal Co. v. Commissioner, supra, continued “to be a participant in the enterprise without actual realization of profit.” Such a reclassification must, in our opinion, be regarded as “a recapitalization” and therefore a reorganization under clause (C). Kistler v. Burnet, 58 Fed. (2d) 687; H. E. Muchnic, Administrator, 29 B. T. A. 163; Walter F. Haass, 29 B. T. A. 900; H. Y. McCord, 31 B. T. A. 342; and Lelia S. Kirby, 35 B. T. A. 578.

The remaining contention of the petitioners with respect to the transaction of December 29,1930, is that it served no business purpose, tax avoidance being the sole concern of the parties, and even though it was a reorganization in form it was not, under Gregory v. Helvering, 293 U. S. 465, a reorganization within the meaning and intent of the statute. If the rule laid down in Gregory v. Helvering is to be strictly applied, numerous distinctions between that case and the instant case immediately suggest themselves, but in our opinion, the distinction here need not be drawn on a restricted or narrow basis. It is true that avoidance of tax was a major concern of the parties in interest, but, as the Supreme Court pointed out, tax avoidance “will not alter the result or make unlawful what the statute allows.” The claim that tax avoidance was the sole or only purpose served is, in our opinion, definitely refuted by the facts of record.

It is to be noted at the outset that, while Managers when it was organized was endowed with broad and general powers customary in the organization of modern corporations, it was in fact organized for the single purpose of acquiring and holding directly or indirectly stock of General Motors and of distributing the profits therefrom to its stockholders, who were to be selected by the General Motors Corporation from among its officials. By this plan General Motors hoped to arouse added interest in its affairs in the executives who had been responsible for its success and through their ownership of stock in Managers to insure continued successful management in the future. To furnish the means for acquiring the General Motors stock to be owned and held by Managers directly or indirectly, General Motors entered into a contract with Managers whereby it agreed to pay to the latter a percentage of its earnings over a period of approximately seven years. For approximately the same period General Motors, through an irrevocable option to repurchase the stock in Managers allotted to and acquired by its officials, retained the power to limit participation in the plan to the officials selected by it. Pursuant to the plan Managers immediately after its organization paid cash and its entire issue of preferred stock for 30 percent of the common stock of Motors Securities, a second holding company, the sole assets of which consisted of General Motors common stock.

By April 1927 all of the preferred stock used in the purchase of the Motors Securities stock had been retired and on December 31,1929, the agreement by General Motors to pay over a part of its earnings to Managers was terminated. There being no further direct participation in the earnings of General Motors and Managers being almost wholly dependent for profit on the General Motors common stock held and owned by Motors Securities, the continued existence of Managers separate and apart from Motors Securities was to an obvious extent no longer essential or expedient, unless it should be decided that its activities should be enlarged and extended. A questionnaire was accordingly submitted by Managers to its stockholders in its efforts to determine the course to be followed. Of the 74 stockholders owning the 40,000 shares of class B stock outstanding, 50, representing a majority of the stock, expressed a desire to expand the activities of Managers hito an investment trust; 12 desired to continue the company as it was; others expressed no preference; and 11 indicated a possible desire to liquidate their holdings so that they might acquire and own directly their ratable portion of General Motors common stock.

After careful study, the suggestion that Managers be extended into an investment trust was abandoned. Under those circumstances the continued existence of Managers served no useful business purpose, but as it was then constituted its dissolution would force upon some stockholders an undesired liquidation and at the same time would not enable those who might desire to liquidate to acquire and own directly their ratable portions of General Motors common stock. It is thus apparent that the plan devised and executed was prompted not only by a motive of tax avoidance, but for the purpose of providing a means whereby those stockholders who preferred to maintain their investments in a holding company might do so, while others might liquidate and acquire the direct ownership of General Motors common stock if they so desired. In this connection it is noted that more than two million of the class A shares were still outstanding on December 31,1935. Certainly on these facts it can not be said, as it was in Gregory v. Helvering, supra, that “the whole undertaking * * * was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization and nothing else.” To again utilize the thought expressed by the court in Mead Coal Co. v. Commissioner, supra, the stockholders of Managers did “not actually liquidate” their holdings upon the exchange of their Managers stock for Motors Securities class A stock, but continued “to be a participant in the enterprise without actual realization of profit.” Under the circumstances here the liquidation actually occurred when in subsequent years the petitioners surrendered their Motors Securities class A stock for General Motors common stock and withdrew from the enterprises of the respective holding companies.

It is, of course, true that the organization and maintenance of a pure holding company do not ordinarily serve a business purpose comparable to the purposes of commercial, industrial, trading, or financial organizations and similarly a difference in business purpose exists in the reorganization of a holding company. But where the purposes which prompt the organization of a holding company in the first instance are inherent in the reorganization of such company and the plan followed is within the wording of the statute, there is, in our opinion, no basis or ground for applying the doctrine of Gregory v. Helvering, supra, to such a reorganization and to hold, as the petitioners here contend, that it was solely a device to avoid tax. To so conclude would be to imply that a holding company has no standing under the income tax statutes separate and apart from its stockholders. In our opinion the statute applicable here is not susceptible of any such construction.

Having determined that the exchange between Managers and Motors Securities on December 29, 1930, was a reorganization within the meaning of the income tax act and the exchange by the petitioners of their stock in Managers for Motors Securities class A stock was pursuant to the plan of reorganization, it becomes unnecessary to consider the issue raised by the respondent in his answers to the effect that the petitioners, having joined with him in treating the transaction of December 29, 1930, as a reorganization, may not now change their position and claim that it was otherwise for the purpose of procuring a stepped-up basis for their Motors Securities class A stock. The respondent is accordingly sustained in his determination that the basis of the Motors Securities class A stock in the hands of the petitioner was the cost to them of their stock in Managers exchanged therefor.

Petitioners Jackson and Grant contend in the alternative that the gain realized by them in 1934 and 1935 upon the surrender of Motors Securities class A stock for General Motors common stock is to be recognized only to the extent prescribed by section 117 of the Revenue Act of 1934 and is not to be recognized in full under the provisions of section 115 (c) as gain resulting from a distribution in partial liquidation of Motors Securities. The parties have stipulated that if petitioner Jackson is entitled to the benefit of the capital gains provisions of section 117, supra, there is no deficiency in his income tax for that year and if the petitioner Grant is entitled to such benefits for 1934 and 1935, there is no deficiency in his income tax for 1935 and no deficiency for 1934 except that resulting from the disallowance of a deduction as interest paid in the amount of $2,581.94.

The contention of the petitioners that the General Motors common stock acquired upon surrender to Motors Securities of shares of its class A stock was not acquired as a distribution by Motors Securities in partial liquidation within the meaning of section 115 (c), supra, seems to rest upon the fact that under the terms of issue the holders of Motors Securities class A stock had the right on 90 days’ notice and during the period prior to January 1, 1934, to surrender up to 80 percent of their holdings of the class A stock and receive therefor an equal number of shares of General Motors common stock from Motors Securities class A asset account, and had the further right at any time after January 1,1934, to similarly surrender the remaining 20 percent of their class A stock for General Motors common stock. The petitioners argue that such distributions of General Motors common stock for the said class A stock were in satisfaction of contractual obligations and not distributions in partial liquidation of Motors Securities.

Section 115 (i) of the Revenue Act of 1934 defines a partial liquidation as follows:

(i) Definition of Paktiai, Liquidation. As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

We are unable to find any merit in the petitioners’ contentions. They attempt to draw a comparison between the retirement of corporate bonds at maturity and the distribution here of General Motors common stock upon surrender of class A stock. The fundamental distinction between the rights of the holder of a bond and that of a stockholder, even though the stock held might be preferred or of a special class, is too well known to require discussion. The relationship is contractual in both cases, but in the case of a bond there is an obligation to pay in any event. In the case of a shareholder there is no such obligation and so long as the stockholder relationship exists the investment of the individual stockholder is subject to the hazards of the business and his rights, even though they may be preferred with respect to the rights of the holders of another class of stock, are secondary in so far as the rights of creditors are concerned. It is true that the holders of the class A stock could, as between them and the corporation, on 90 days’ notice surrender the class A stock and demand an equal number of shares of General Motors common stock, but the presence of that option made them none the less stockholders up to the time the option was actually exercised. The presence of an option on the part of a corporation to retire preferred or special issues of stock is a very common thing, but the presence of such an option does not change the relationship between the corporation and the owners of the special issue of stock from a relation of corporation and stockholders to that of debtor and creditor. We see no basis whatever for any conclusion that the situation is any different where according to the terms of the issue the stockholders likewise have the option of surrendering the said stock hi exchange for a pro rata share of the corporate assets. According to the statute, “amounts distributed in partial liquidation” means amounts distributed by a corporation in “complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.” Here the distribution of General Motors common stock by Motors Securities in redemption and cancellation of its class A stock falls so obviously within the definition that further or extended discussion is, in our opinion, needless. On this point the respondent is sustained and the gain realized upon the acquisition of General Motors common stock through the surrender to Motors Securities of its class A stock is to be recognized in full in accordance with the provisions of section 115 (c), supra.

Grant and Jackson in their petitions allege that the application of the provisions of section 115 (c) of the Revenue Act of 1934 to gains realized through the acquisition of General Motors common stock upon the surrender of Motors Securities class A stock during the year 1934, but prior to May 10, 1934, when the Eevenue Act of 1934 was signed by the President, was in violation of their rights under the Fifth Amendment to the Constitution. On brief the petitioners make no point and cite no authorities to support their claim of error so alleged. In any event, however, there is no merit in the claim. By the terms of the act, section 115 (c) became effective as of January 1, 1934. The respondent was merely applying the terms of the act as enacted by Congress and it is well established that an income tax statute is not unconstitutional merely because it is retroactive. Brushaber v. Union Pacific Railroad Co., 240 U. S. 1; Phipps v. Bowers, 49 Fed. (2d) 996; certiorari denied, 284 U. S. 641; Edgar Stanton et al., Executors, 34 B. T. A. 451; affd., 98 Fed. (2d) 739.

A similar argument is made on brief with respect to the application of section 23 (r) of the Revenue Act of 1932 to losses sustained by petitioner Souther on the sale of General Motors common stock in 1932 but prior to the date of enactment of the Revenue Act of 1932. No such claim was made by Souther in his petition but, as we have pointed out with reference to a comparable claim with respect to the provisions of the Revenue Act of 1934, there is no merit in the contention.

In the case of Chester A. Souther the petition contains some further allegations of error, the full purport of which is not entirely clear, and, inasmuch as no explanation or argument was offered in connection therewith, they will be regarded as abandoned.

Reviewed by the Board.

Decision will be entered wider Buie 50.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      100 per centum if the capital asset has been held for not more than 1 year;
      80 per centum if the capital asset has been held for more than 1 year but not for more than 2 years;
      60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years;
      40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years;
      80 per centum if the capital asset has been held for more than 10 years.

      (c) Determination op Period por Which Held. — Por the purpose of subsection (a)—
      (1) In determining the period for which the taxpayer has held property received on ar. exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 113, the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      *******
      (c) Distributions in Liquidation. — -Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * * Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income. * * *