author: Aeundell:

text:
    John D. Roney, Petitioner, v. Commissioner of Internal Revenue, Respondent. Morris Schapiro, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52337, 52338.
    Promulgated October 18, 1932.

      W. H. Wallace, Esq., and J. 0. MeGcerraghy, Esq., for the petitioners.

      J. A. Lyons, Esq., for the respondent.
   OPINION.

Aeundell:

These proceedings were consolidated for hearing and report, and involve the redetermination of deficiencies of $35,373.07 and $17,712.04 in income taxes proposed for assessment against the respective petitioners for 1928.

Since 1910 each of the petitioners has owned a one-half interest in the Boston Iron & Metal Company, a partnership engaged in the scrap iron business. During the course of operation of such business, the partnership acquired the lands, buildings and equipment of a number of whiskey distilleries located in the States of Kentucky, Pennsylvania and Maryland, for the purpose of dismantling the property and salvaging the material. One of the properties acquired was the Gwynnbrook Distillery Company, located in Baltimore, Maryland, which was purchased at public auction in the fall of 1919. The plant was not in operation at the time of the sale.

After partially dismantling the Gwynnbrook Distilling Company plant the petitioners decided to use the facilities to manufacture whiskey for medicinal purposes. Whiskey-distilling operations were conducted at the plant from the fall of 1920 until the spring of 1921 and from the fall of that year until January, 1922, under a Government permit obtained in 1920, good for one year, and a renewal thereof granted in 1921. The former superintendent of the Gwynn-brook Distilling Company had charge of the manufacture of the product. The distilling business of the petitioners was carried on as a partnership under the firm name of the Gwynnbrook Company. The petitioners made no attempt to renew the permit and they have not been engaged in distilling operations since 1922.

After the whiskey had been manufactured it was stored at the plant of the Gwynnbrook Distilling Company. Certificates for the whiskey issued by the Gwynnbrook Distilling Company were delivered to the petitioners in equal numbers. In 1924, at the request of the Federal Government, the whiskey was removed to a concentration warehouse in Baltimore. In 1925 the property was placed in storage in warehouses of the Baltimore Distilling Company. With each transfer of location of the whiskey new certificates were issued for the property. The certificates issued by the Baltimore Distilling Company were sixty in number and subject to the order of the Gwynnbrook Company.

In 1925 the partnership sold all of the whiskey to one purchaser for delivery in specified quantities annually from 1927 to 1932, inclusive. The whiskey represented by the first nine certificates was delivered and paid for in 1927. The whiskey evidenced by certificates numbered ten to sixty, inclusive, was delivered in 1928.

The plant in which the whiskey was manufactured was dismantled in 1927 or 1928.

It has been stipulated that the gain realized in 1928 on the deliveries made in that year was $630,027.29 and that one-half thereof is taxable to each petitioner. Whether these sums are taxable as capital gains, as reported by the petitioners, or as ordinary income, as determined by the respondent in his audit of the returns, is the sole question in dispute.

A capital asset is defined in section 101 (c) (8) of the 1928 Act to mean:

* * * property held by the taxpayer for more than two- years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *

It is established that the property was held by the taxpayers for more than two years; hence it comes within the first provision of the quoted section. Thus the question is narrowed to that of determining whether the respondent erred in treating the property as coming within one of the classes described in the later provisions of the statute as not comprehended within the term “ capital assets.” If the property comes within any one of the excluded classes the respondent’s determination must be sustained. The plan of the taxing statute is to subject the net income of all individuals to the normal taxes and surtaxes therein levied, with certain exceptions, one of which is the capital net gain provision here involved, and any taxpayer seeking the benefit of the lower rate permitted by the exception must show clearly that he is entitled to it.

One of the classes of property which does not come within the term “ capital assets ” is property held primarily for sale in the course of the taxpayer’s trade or business. The evidence and argument are directed principally toward establishing that the trade or business of petitioners was that of dealers in scrap iron rather than whiskey or whiskey certificates. But a person may have more than one trade or business; he may have a principal business and at the same time engage in side ventures which, though occupying less of his time and attention, may constitute a business if entered into for profit. Ignaz Schwinn, 9 B. T. A. 1304. In such cases the statutory term “ trade or business ” applies to the lesser as well as the principal occupation. See James R. Deering, 5 B. T. A. 1055; aff'd., 23 Fed. (2d) 975.

Petitioners’ operation of the distillery extended over two distillery seasons, 1920-1921 and 1921-1922. According to their petitions, they manufactured 518,141.79 gallons of whiskey. Operations as extensive as these, conducted for profit, we think may properly be said to constitute a business. Certainly, from the viewpoint of time and magnitude of the operations they can not be considered as a single, isolated transaction. The production involved the use of a fully equipped whiskey-distilling plant and the employment of men. The petitioners carried on their distilling operations under the firm name of the Gwynnbrook Company and gave their product the name of “ Gwynnbrook Pure Bye Whiskey. ” The whiskey was stored prior to sale, and was sold, under the firm name. While the whiskey was in storage it was held primarily for sale, the time to depend upon market conditions. The time must have appeared to be ripe in 1925, for the whole lot was then sold by the partnership for future deliveries. The manufacture, storage, and sale of the whiskey was all in accordance with the plan adopted before distilling operations were commenced.

Another class of property excluded from capital assets is inven-toriable stock in trade. Whiskey was the stock in trade of the petitioners, operating as the Gwynnbrook Company, and is property which would properly be included in the inventory of the partnership if on hand at the close of the taxable year. Renmehcmsen v. Lucas, 280 U. S. 387.

One of the petitioners testified that he regarded the distillery venture as an investment. The application of that term to manufacturing operations is, on its face, a very strained and unnatural use of it.

Petitioners have failed to establish to our satisfaction that the whiskey represented by the certificates sold in 1928 does not come within the classifications of property described in the statute as excluded from “ capital assets,” as found by the respondent.

Decision toill Toe entered for the respondent.


source: Caselaw Access Project

author: Arundell :

license: Public Domain

text:
    Henry W. Austin and Moses L. Purvin, Administrators (Substituted for Frederick C. Austin, Executor, Deceased) of the Estate of Anna B. Austin, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11705.
    Promulgated October 18, 1932.

      Isaac B. Lipson, Esq., for the petitioners.

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

Arundell :

The respondent determined a deficiency in estate tax under the Revenue Act of 1921 in the amount of $144,923.15, and this proceeding is brought for the redetermination thereof.

A stipulation of facts was filed, which we adopt as our findings of fact. Only those facts necessary to an understanding of the two issues will be set forth in this opinion.

The first issue involves the inclusion in the estate of decedent of the value of property which was placed in trust in 1903 by the decedent. The trust, by its terms, was irrevocable. The income was to be paid to the grantor (decedent) during her life, and thereafter income to the extent of $6,000 annually was to be paid to her husband. Upon the death of the grantor the trustee was to pay over to designated persons and institutions various sums aggregating $100,000, of which counsel for respondent concedes that $70,000 should be excluded from the gross estate. Aside from the payments directed to be made upon the grantor’s death, the trust was to continue until the death of the grantor’s husband or until one of the grantor’s two children reached thirty years of age, whichever occurred later, whereupon the trust was to terminate and the corpus to be paid over to the children or their heirs. Mrs. Austin, the grantor, died on June 30, 1922.

The parties agree that the trust deed and the property therein mentioned were delivered to the trustee; that the trust has remained in full force and effect; and that the trust was not made in contemplation of death.

The respondent has included the value of the trust property in decedent’s gross estate on the ground that the trust was intended to take effect in possession or enjoyment at or after death, within the meaning of section 402 (c) of the Revenue Act of 1921.

We do not see wherein this case is distinguishable from a long line of cases heretofore decided, in which it is held that, under section 402 (c) of the Revenue Act of 1918 and corresponding provisions of later acts, property placed irrevocably in trust may not be included in the gross estate. See Shukert v. Allen, 273 U. S. 545; May v. Heiner, 281 U. S. 238; Cover v. Burnet, 53 Fed. (2d) 915 (reversing 17 B. T. A. 1177); Stephen Peabody, 24 B. T. A. 787; Charles H. W. Foster, 26 B. T. A. 708.

The case of Klein v. United States, 283 U. S. 231, cited by respondent is not in point. In that case the grantor conveyed a life estate with an express reservation of the fee in the event the grantee predeceased him, and the grantee was to take the fee only in the event she survived the grantor. In the present case we have no such reservation. The case of Sargent v. White, 50 Fed. (2d) 410, also relied on by respondent is distinguishable on the same ground as the Klein case, and indeed is decided on authority of that case. In the Sargent case the decedent created a trust under which the corpus was to go to his wife if she survived him, and if she did not, then the property was to revest in the grantor. The opinion of the court says that, “ It was clearly the intent of the decedent that the trust funds should not become absolutely vested during his life * *

On authority of the cases above cited, we hold that respondent erred in including in the estate the value of the trust property.

The second issue is whether promissory notes containing a provision for cancellation of the obligation in the event of the death of the payee (decedent) prior to maturity, should be included in the gross estate.

From the stipulation and the documents attached thereto it appears that prior to 1917 decedent’s daughter, Marion Ogden Richardson, and the daughter’s husband, Harold A. Richardson, became indebted to various persons for substantial sums and as security for the debts they assigned to the creditors (1) an annuity of $12,000 in favor of Marion O. Richardson under a trust created by John H. Barker and (2) Marion O. Richardson’s interest in the trust described under the first issue herein. The claims of the several creditors and the assignments as security therefor were acquired by James B. Forgan for the benefit of decedent. By codicils to her will, one dated February 6, 1917, and the other September 18, 1919, the decedent, after reciting the above facts, directed that upon her death the assignments of interests under the trusts be canceled “ and the debts and obligations secured thereby be released without any payment on the part o.f my said daughter.” On November 17, 1920, the several interested parties, namely, Marion O. Richardson, Harold A. Richardson, Anna B. Austin (the decedent), and James B Forgan, entered into an agreement in which, after reciting that Marion O. Richardson was indebted to decedent in the sum of $175,-921.92 and that the assignments of interests in the trusts made by the daughter and her husband to secure their indebtedness had been acquired by Forgan for the benefit of decedent, the parties agreed, as far as material here: (1) That Marion O. Richardson would execute and deliver to decedent fifteen nonnegotiable promissory notes, payable in from one to fifteen years respectively, without interest, each of said notes to be in the sum of $12,000, except the last note was to be in the amount of $7,921.92; each of said notes to contain a provision to the effect that if decedent should die before maturity all obligation of the maker should cease; and that the daughter would not encumber her interest in or annuity from the Barker trust above mentioned; (2) that Forgan would assign to decedent and her daughter the interests in the Barker trust theretofore assigned by the daughter to various creditors and acquired by Forgan, so that all future annuity payments under the Barker trust would he paid to decedent during her life as security .for the notes executed by the daughter and that upon the death .of the decedent the annuities would be paid to the daughter; (3) that decedent would accept the notes and receive payment as therein provided; that she would release the daughter from all personal liability except as provided in the notes; that she would insert in her will or some codicil “ such provision in regard to this transaction as may be deemed by any of the parties hereto requisite or proper to make the same effectual”; and that she would reassign to the daughter all her interest in the Barker annuity when the notes were paid in full.

On the same date, November 17, 1920, the daughter executed the notes as agreed, which, except as to date of maturity and as to the amount of the last note, were in form and figures as follows:

$12,000.00 Chicago, Illinois, November 17, 1920
Two years after date, for value received, I promise to pay to Anna B. Austin the sum of Twelve Thousand Dollars at the First National Bank of Chicago, without interest, if said Anna B. Austin is alive on November 17, 1922. If said Anna B. Austin should die before November 17, 1922, then all obligation on my part hereunder shall cease. This note is secured by assignment of my annuity of twelve thousand dollars a year created by trust agreements between John H. Barker and the First Trust and Savings Bank dated December 1, 1920.
(Signed) Makion O. Kichakdson.

At the time of decedent’s death on June 30, 1922, she was in possession of fourteen of the notes, of an aggregate face amount of $163,921.92. It is stipulated that the notes had a total value at the date of decedent’s death of $119,827.80, at which figure the respondent included them in the gross estate. This stipulated value, according to the deficiency notice, is the present worth of the notes as of the date of death, and, as we understand the stipulation, is to be taken as the value only in the event it is held as a matter of law that the notes constituted part of the gross estate for tax purposes.

The respondent’s theory, as we understand it, is that the cancellation provision in the notes amounted only to an agreement to make a gift, and not a completed gift inter vivos, and hence the decedent died possessed of property (the money demand evidenced by the notes) which should be included in her estate. It is argued by the respondent that an endorsement by the payee of a note that at his death it shall become null and void does not constitute a gift and does not relieve the maker from payment after the payee’s death. This seems to be the established rule. Dimon v. Keery, 64 N. Y. S. 1091; aff'd. 66 N. Y. S. 817; Leask v. Dew, 92 N. Y. S. 891. Even where a stipulation was inserted by the maker of a note payable one day after date, providing that it should become null and void upon the death of the payee, it has been held that there was no completed gift inter vivos. Rodemer v. Rettig, 114 Ky. 634; 71 S. W. 869. In that case the court pointed out that the note was payable one day after date and contained no restrictions to prevent the payee from compelling payment at any time. But the facts here readily distinguish this case from those cited. The forgiveness provision in the notes here was inserted by the maker, the notes were accepted by the payee subject to that condition, and those held by decedent at her death were not then due and payable. At no time during her life could the decedent have enforced payment. At her death, by virtue of the terms of the notes, all obligation on the part of the maker ceased. When the obligation of the maker thus terminated there was nothing which could be subjected to payment of charges against the estate and expenses of administration and which was subject to distribution as a part of the estate. All of these elements must exist with respect to property that may be included in the gross estate. Crooks v. Harrelson, 282 U. S. 55. It is not enough that at the moment of death there may be property in which the decedent technically has an interest. The situation here is somewhat like that of an interest or estate limited for the life of the decedent. Such an interest is not includable in the gross estate. Art. 11, Regulations 63.

In addition to the notes themselves, we think it not only proper but necessary to take into consideration the contract executed by all the interested- parties simultaneously with the notes. In that contract, the substance of which is set out above, the decedent agreed:

(1) to accept said notes and to receive payment of said sum of $175,921.92 according to the terms of said notes; (2) to release said Marion 0. Richardson from all personal liability upon said indebtedness, except as expressed in said notes.

In Farwell v. Commissioner, 38 Fed. (2d) 191, the guardian of the decedent during her life paid over portions of her surplus income to persons who in the natural course of events would be her heirs. For the payments so made the recipients executed demand notes and at the same time entered into agreements in writing that such notes were enforceable only in case any of the signers contested the right of the guardian to credit himself with the payments made in settling his account. The court held (reversing the Board, 13 B. T. A. 823) that the notes so given could not be included in the gross estate of decedent, saying in part:

Since each of these notes was part of a special written agreement made by tbe parties at the time they were given, the estate of Lizzie W. Langdon [the decedent], which was named as one of the payees, could not collect them except in accordance with the provisions of the special agreement. * * * the conditions upon which a note is delivered may defeat the express promise to pay. * * * Indeed, these notes are only so called herein for convenience to distinguish them from the remainder of the written contracts of which they are but a part.

In the present case the terms of the contract entered into by the interested parties, as well as the terms of the notes themselves, would preclude recovery of any of the unmatured notes held by decedent at her death, and we are of the opinion that respondent erred in including the notes in the estate.

Reviewed by the Board.

Decision will be entered wider Rule 50.

Seawell dissents.


author: Akundell :

text:
    Piedmont Financial Company, Inc. (Formerly Piedmont Finance Company), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45951, 50068, 60240.
    Promulgated October 19, 1932.

      Walter 8. Orr, E<sq., and A. O. Newlin, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OPINION.

Akundell :

These proceedings, duly consolidated for hearing and report, are brought for the redetermination of deficiencies in the amounts of $67,508.96, $19,407.41 and $6,808.58 for the fiscal years ended June 80 of each of the years 1926, 1927 and 1929, respectively. An issue in Docket No. 60240 involving a deduction on account of improvements to leased premises has been settled by stipulation. The remaining issue, common to all three of the cases, is whether certain securities, some of which were sold in each of the taxable years, were acquired in connection with a reorganization so as to require petitioner to use cost to its transferor as a basis for computing gain or loss, or whether the basis is the value of the securities at the time of acquisition.

We adopt as our findings of fact the stipulation filed by the parties. From this, and the documents filed therewith, it appears that petitioner was incorporated under the laws of Delaware on December 22,1925, with an authorized capital stock of 100,000 shares of no par value. At a meeting of its directors held on the day following incorporation, two individuals, H. S. Richardson and L. Richardson, owning together 1,764 shares of the Piedmont Finance and Realty Company, hereinafter called the Realty Company, and a third person, H. D. Blendinger, owning certain stock of the Yick Chemical Company, offered to exchange their holdings in the Realty and Yick Chemical Companies for all the stock of the petitioner in the proportion of 35,000 shares to H. S. Richardson, 25,000 shares to L. Richardson, and 40,000 shares to Blendinger. Petitioner’s directors voted to accept the offer.

The Realty Company had an authorized capital stock of 5,000 shares of no par value, of which 3,174 shares were issued and outstanding. The stipulation filed does not show definitely when the Realty Company stock was transferred to petitioner. At the hearing, however, counsel for the parties agreed that the petitioner acquired all the stock of the Realty Company on April 1, 1926, in exchange for its stock having a value of $4,627,617.05, and its notes in the principal amount of $1,200,000. The “ fair actual value ” of the Realty Company stock thus acquired is stipulated to be $5,827,617.05, this being the net value of its assets.

On April 12, 1926, the directors of the Realty Company adopted a resolution to dissolve it, to which the stockholders consented on April 20, 1926, and a certificate of dissolution was filed with the Secretary of State of the State of Delaware on April 26, 1926. The Realty Company was liquidated on April 30, 1926, and its assets, subject to its liabilities, were distributed in kind to its sole stockholder, the petitioner in these proceedings.

The fair value of the Realty Company’s assets, in excess of its liabilities, at the time of distribution to petitioner was $5,902,791.39, which was $75,174.34 in excess of the value of the Realty Company’s assets at the time its stock was acquired by petitioner on April 1, 1926.

Petitioner has always filed its returns on the basis of a fiscal year ending June 30, and the Realty Company during its existence filed returns on the same basis. The two companies never filed a consolidated return. It its original return for the year ended June 30, 1926, petitioner reported no gain or loss as the result of the liquidation of the Realty Company. In an amended return for that year filed in April, 1928, it reported a profit on the liquidation in the amount of $75,228.30.

Among the assets taken over by petitioner on the liquidation of the Realty Company were a number of bonds of corporations, states, and municipalities, 79,547 shares of stock of the Vick Chemical Company, and an undisclosed number of shares of the Peerless Chemical Company. After the liquidation of the Realty Company, but prior to June 30, 1926, petitioner sold some of the bonds so acquired, and within that period the Peerless Chemical Company was liquidated, and as a result thereof petitioner received cash for its stock in that company. Also within that period and in each of the fiscal years 1927 and 1929, petitioner sold a part of the Vick Chemical Company stock acquired from the Realty Company. In reporting gain or loss on each of these transactions petitioner used as a basis the value of the property at the time of liquidation of the Realty Company, with one exception, namely, the sale of the Vick Chemical Company stock in the fiscal year 1927. As to that transaction the basic figure used was much lower than that in the other sales of the same stock, but the difference is not explained. However, there appears to be no controversy as to this figure. On each sale, and on the liquidation of the Peerless Chemical Company, the respondent computed a profit by using as a basis the cost of the property to the Realty Company.

In determining the deficiency for the period December 22, 1925, to June 30, 1926, the respondent eliminated from income the amount of $75,228.39 reported by petitioner in its amended return as profit realized on the liquidation of the Realty Company.

Upon the facts above outlined petitioner contends that its acquisition of the Realty Company stock and its subsequent acquisition of the Realty Company’s assets on the liquidation of the stock must be considered as separate transactions. It further contends that the liquidation of the Realty Company was a closed transaction on which it realized taxable income and that upon sale of the assets acquired in liquidation its basis for gain or loss is the value thereof at the time of acquisition. The respondent’s position is that the liquidation of the Realty Company was a part of a merger plan constituting a reorganization as defined by the Revenue Act of 1926, and gave rise to no gain or loss, and that upon the disposition of the property acquired in liquidation petitioner’s basis is cost to the transferor.

The primary basis for redetermining gain or loss under the Revenue Act of 1926 is laid down in section 204 (a) as being the cost of the property, but this is followed by eleven enumerated exceptions. These exceptions, stated broadly, deal with property acquired through various means other than by purchase for cash. The subsection which the respondent contends is applicable is (a) (7) reading as follows:

If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December SI, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Petitioner argues that this subsection does not apply here, because at the outset it excepts from its operation “ stock or securities in a corporation a party to the reorganization.” This argument is based on the fact that in the reorganization to which it and the Realty Company were parties it acquired the stock of the Realty Company as distinguished from its assets. We may say here that the parties are agreed that petitioner’s acquisition of the Realty Company’s stock April 1,1926, constituted a “ reorganization ” within the meaning of section 203 (a) (h) of the Revenue Act of 1926.

The answer to petitioner’s argument is that section 204 (a) (7) is not limited to property acquired in a tax-free reorganization, but includes property “ acquired in connection with a reorganization.” In many cases a liquidation may give rise to gain or loss and hence establish a new basis, but where the liquidation is in connection with a reorganization, and the other factors set out in the quoted section are applicable, the distributee of the property is required to use the same basis as the transferor. See Mente & Co., 24 B. T. A. 401, and Flushing Nurseries Co., 25 B. T. A. 938.

The respondent has found that the liquidation took place in connection with a reorganization. Petitioner points to the fact that the reorganization took place on April 1, 1926, and that thirty, days elapsed between that date and the liquidation. The stipulation filed, however, shows that on April 12, 1926, the directors voted to dissolve the Realty Company. While the element of time may not be decisive of whether the dissolution and liquidation are in connection with a reorganization, in this case the comparatively short interval of time between the transactions, with no showing by the petitioner of any contrary intent, tends to support the respondent’s view. Certainly there is nothing in the record to overcome the presumptive correctness of the respondent’s finding.

In our opinion the petitioner’s acquisition of the Realty Company’s assets was an acquisition such as is described in section 204 (a) (7) of the Revenue Act of 1926 and the respondent was correct in computing gain on the basis of cost to the Realty Company. Holding as we do, there is no occasion to pass upon respondent’s alternative claim for an increased deficiency for the period ended June 30, 1926, in the event we hold that the liquidation was a taxable transaction.

Reviewed by the Board.

Decision will be entered under Rule 50.


text:
    Warner Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53039, 53040, 59190.
    Promulgated October 19, 1932.

      William S. Rammers, Esq., for the petitioner.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Aeundell:

These proceedings were consolidated for hearing and report and involve the redetermination of deficiencies of $2,789.30, $986.91 and $7,990.53 in income taxes of the Charles Warner Company for the respective years 1925, 1927 and 1928, which deficiencies have been asserted against petitioner as transferee of the assets of the Charles Warner Company.

The assets of the Charles Warner Company were transferred to petitioner in 1929 and petitioner concedes transferee liability, contesting only the amount. The single issue is the basis to be used for depreciation and depletion of assets acquired in 1924 by petitioner’s transferor. The facts were stipulated and we adopt the stipulation as our findings of fact, setting forth here only those facts necessary to an understanding of the question presented.

In 1920 the Charles Warner Company, hereinafter called the taxpayer, acquired one-third of the stock of the Manor Sand and Gravel Company, at a cost of $24,243.71. The other two-thirds of the stock of said Manor Company was owned and controlled by the Penn Sand and Gravel Company and one J. A. Mundy.

The taxpayer was desirous of obtaining an adequate source of supply for its gravel and sand requirements, and with this object in view it entered into a contract dated March 29, 1924, with Mundy and with the holder of 73.27 per cent of the stock of the Penn Sand and Gravel Company, hereinafter called the Penn Company. Pursuant to this contract the taxpayer in July, 1924, purchased the 7,327 shares of Penn Company stock owned by the majority stockholder for $290,000 cash and $300,000 par value of the taxpayer’s first preferred stock. It also purchased during the same month the balance of the Penn Company stock, 2,673 shares, from the minority holders, paying $49,500 cash therefor. The agreement with the majority^. stockholder provided that the taxpayer would repurchase at par and for cash the $300,000 preferred stock issued as above set out at the rate of at least $50,000 per year, and it was further provided that the taxpayer might accelerate the repurchase of the stock at any time. As a matter of fact the taxpayer did repurchase all the preferred stock for cash at par during September, October and November, 1924.

On December 31, 1924, the taxpayer, as sole stockholder of the Manor and Penn Companies, caused the transfer to it of all the assets of those companies in complete liquidation of its stockholdings in the companies and on the same day both the Manor and Penn Companies were formally dissolved.

— In computing depletion and depreciation on the properties acquired by the taxpayer in liquidation of its stock in the Manor and Penn Companies the respondent used as a basis the cost of the properties to the Manor and Penn Companies, on the theory that the liquidation effected a reorganization within the meaning of section 203 (h) (1) of the Revenue Act of 1926.

Under the Revenue Acts of 1926 and 1928 the basis for depletion and depreciation is the same as that for the computation of gain or loss, which, under section 204 (a) of the 1926 Act and section 113 (a) of the 1928 Act, is as follows:

The basis for determining gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that- — [and there are listed eleven exceptions under the 1926 Act and twelve under the 1928 Act],

The parties confine their discussion to the applicability of the provisions of the 1926 Act and we shall do likewise, inasmuch as the pertinent sections of the two acts are the same. The petitioner contends that none of the exceptions listed in the statute are applicable and that under the provision just quoted the basis in its hands is the cost of the stock to the taxpayer. We may say here that there is no issue as to the value of the assets received in liquidation being equal to the cost of the stock. The respondent’s position is that the acquisition of the properties in liquidation brings the case under the exception in subsection (7) which, as far as material here, is as follows:

If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation (in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor.

The part of the quoted subsection upon which the controversy here turns is the phrase “ in connection with a reorganization.” The statutory definition of reorganization appears in section 203 (h) (1). and as far as it is material Rere, reads:

Tlie term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of * * * 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.

The meaning of “ reorganization ” as used in the statute has been judicially declared in Pinellas Ice & Gold Storage Co. v. Commissioner, 57 Fed. (2d) 188, and Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. In the Pinellas case it is said that a statutory reorganization occurs only where there is a “ merger ” or “ consolidation ” as those words are understood in law, and: “ In either event, the resulting corporation acquires all the property, rights, and franchises of the dissolved corporations, and their stockholders become its stockholders.” (Italics supplied.)

In this case it can hardly be said that the stockholders of the ' dissolved Penn and Manor Companies became the stockholders of the taxpayer, as the taxpayer itself was the sole stockholder of those companies. The Cortland Specialty Co. case, supra, holds that, in order for a transaction to come within the intended meaning of reorganization,” there must be some continuity of interest on the part of the transferor corporation or its stockholders.” While it may be argued that there was a continuity of interest, inasmuch as the taxpayer owned all the stock of the two companies and after liquidation it owned all the assets, we think that the statute, as construed in the cited cases, was not intended to apply to cases of mere liquidation, but was meant rather to comprehend those situations where there is a merger or consolidation and the stockholders of the J old corporation receive for their holdings a substantially similar! interest in the new or merged corporation. In construing the sections of the statute applicable to reorganizations it must be remembered that the fundamental purpose of the statute with respect to recognition of gain or loss from sales and exchanges is expressed in section 203 (a) as follows: “ Upon the sale or exchange of property the entire amount of gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.”

Under this provision of the statute it is necessary that the given " transaction must come clearly within the exceptions set out in the statute if the gain realized is to escape tax. See Arctic Ice Machine Co.. 23 B. T. A. 1223.

So far we have considered the question from the viewpoint urged by the respondent, namely, that the acquisition of stock and the liquidation of the two companies should be considered as separate transactions. It is our opinion, however, that the phrase “ in connection with a reorganization ” permits, if it does not require, an examination of the several steps taken which culminated in the taxpayer’s acquisition of the Penn and Manor Companies’ assets. It appears from the contract under which the taxpayer acquired the stock that the primary purpose of the transaction was to insure to the taxpayer an adequate supply of sand and gravel. Obviously, the most direct method of accomplishing this end would be to purchase sand and gravel deposits. Presumably this direct method was not feasible and so it adopted the plan set forth at the outset of this opinion. That plan, as carried out, was in substance and effect a purchase of stock for cash, followed by a cancellation of the stock and liquidation and dissolution of the companies owning the properties that the taxpayer wanted. The taxpayer issued some preferred stock temporarily as a part of the purchase price, but within the year that was taken up and redeemed at par. When the transaction was consummated within the year 1924 the taxpayer had paid, out cash for its newly acquired properties, and the old stockholders of the Penn and Manor Companies disappeared from the picture. This, in our opinion, was not a reorganiaztion within the purview of the statute, but rather is analogous to the situations present in the Pinellas Ice and Cortland Specialty Co. cases, supra, which were held to be sales rather than nontaxable reorganizations.

We think little need be said to distinguish these cases from Mente <& Co., 24 B. T. A. 401, cited by respondent. In that case there was an exchange of stock of the old company for stock and bonds of the new company, followed by a transfer of assets and dissolution of the old company. When the several steps in the transaction were completed the several stockholders of the old company were stockholders in the new one. That case did not involve a purchase for cash and the elimination of the old stockholders which are significant factors in the present cases.

We conclude that the transactions in 1924 whereby the taxpayer acquired the assets of the Penn and Manor Companies did not constitute a reorganization, but that the liquidation of the companies following the acquisition of their stock was a transaction on which gain or loss is recognized by the statute, and the taxpayer is entitled to use cost of the assets to it as a basis for depreciation and depletion.

Reviewed by the Board.

Decision will be entered under Rule SO.

Van Fossan dissents.