1963 U.S. Tax Ct. LEXIS 113">*113
All the stock of M corporation was owned by individuals A, B, C, and D. In 1955, petitioner issued some of its voting stock and, pursuant to written contract with A, B, C, and D, exchanged it for all of their stock of M.
40 T.C. 436">*436 OPINION
Respondent has determined a deficiency in income tax of petitioner for the taxable year 1957 in the amount of $ 12,185.68. Petitioner has agreed to certain adjustments, and the issue remaining is whether petitioner's basis in certain stock was its cost to petitioner or its basis in the hands of its former holders. Wholly dependent on the resolution of this issue is the determination of the amount of a net operating loss carryover to the year before us.
Most of the facts have been stipulated and are so found.
Petitioner is an Indiana corporation with principal offices located at Michigan City, Ind. It is engaged in the manufacture of precision instruments. It filed its Federal income tax returns for the calendar years 1956 and 1957 with the district director of internal revenue at Indianapolis, Ind.
In the early part of 1955, petitioner began negotiations with George E. Foster, Lucille A. Foster, Edgar M. Corson, Jr., and Effie G. Armstrong, 40 T.C. 436">*437 the then owners of all of the issued1963 U.S. Tax Ct. LEXIS 113">*116 and outstanding common stock of Metrotype Corp., hereinafter referred to as Metrotype, an Illinois corporation with principal offices located in Chicago, Ill.
Metrotype was engaged in the manufacture of data recordation metering devices, a business complementary to and allied with the business conducted by petitioner.
These negotiations culminated in an agreement dated May 14, 1955, which provided in part:
CONTRACT FOR EXCHANGE OF CORPORATE STOCK
This Agreement is made and entered into in multiple counterparts, each of which shall be deemed an original, at Michigan City, Indiana, on the 14th day of May, 1955, by and between THE HAYS CORPORATION, an Indiana corporation with principal offices at Michigan City, Indiana, hereinafter referred to as "HAYS", and GEORGE E. FOSTER, LUCILLE A. FOSTER, EDGAR M. CORSON, JR. and EFFIE G. ARMSTRONG, all of Chicago, Illinois, hereinafter referred to as "Stockholders",
WITNESSETH:
In that, at the effective date of this contract, all of the Stockholders presently are owners of one or more shares of common capital stock issued by Hays, and also are owners of all of the issued and outstanding capital stock of Metrotype Corporation and are desirous of1963 U.S. Tax Ct. LEXIS 113">*117 exchanging shares of the common capital stock of Metrotype Corporation, an Illinois corporation with principal offices at Chicago, Illinois (and hereinafter referred to as "Metrotype") now owned by them for additional shares of common capital stock of The Hays Corporation upon the basis hereinafter set forth; and
In that Hays presently has treasury stock, together with authorized but unissued common capital stock, sufficient to provide the requisite shares of common stock to be issued by The Hays Corporation upon the basis of exchange hereinafter set forth; and
In that Metrotype is engaged in a business complementary to and allied with the business conducted by Hays, and it is considered by all parties hereto that the acquisition of all Metrotype stock by Hays will result in economies and enhanced business potential for both corporations; and
In that the parties have determined by negotiation and investigation that the value of Hays common stock is in the sum of Eight Dollars ($ 8.00) per share and that the value of each share of Metrotype common stock is in the sum of Twenty and 26/100 Dollars ($ 20.26) and, therefore, that Five thousand eight hundred (5,800) shares of common capital1963 U.S. Tax Ct. LEXIS 113">*118 stock of The Hays Corporation should be exchanged for the Two thousand two hundred ninety (2,290) shares of common stock issued by Metrotype, being a ratio of 2.53 1/4 shares of The Hays Corporation stock for each one share of Metrotype Corporation common stock; and in that a plan of statutory reorganization within the meaning of the Internal Revenue Code of 1954 has been promulgated and adopted by Hays and is agreeable to Stockholders whereby such exchange should be accomplished under and pursuant to
* * * *
40 T.C. 436">*438 SECTION C: HAYS AGREES:
1. Upon the closing date, to issue and deliver to Stockholders the number of shares of Hays common capital stock hereinafter immediately set opposite the name of each Stockholder:
| George E. Foster | 3,351 shares |
| Lucille A. Foster | 557 shares |
| Edgar M. Corson, Jr. | 1,740 shares |
| Effie G. Armstrong | 152 shares |
in exchange for the shares of common capital stock of Metrotype to be delivered to Hays in accord with the undertaking of Stockholders made at Paragraph 1 of Section D hereof. All documentary stamps requisite to the transfer of Hays shares shall be procured1963 U.S. Tax Ct. LEXIS 113">*119 and properly affixed at the expense of Hays.
* * * *
SECTION D: STOCKHOLDERS AGREE:
1. Upon the closing date, to issue and deliver to Hays all issued and outstanding shares of Metrotype, being two thousand two hundred ninety (2,290) shares in total, duly endorsed with bank guaranteed signature in form sufficient to invest Hays with title thereto in exchange for common capital stock of Hays delivered to Stockholders in accord with the undertaking of Hays set forth at Paragraph 1 of Section C. All documentary stamp taxes in connection with the issuance or delivery of stock under this Paragraph 1 shall be at the expense of Stockholders.
* * * *
3. Upon or at any time after the closing date, Stockholders, at the written request of Hays, shall tender the written resignations to Hays of all of the present officers and directors of Metrotype. The effective date of such resignations shall be as requested by Hays.
* * * *
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the date and at the place hereinabove first mentioned.
THE HAYS CORPORATION
By /s/ Phil Sprague Jr.
Its Executive Vice President
Attest:
/s/ Otto Ziegler
Its Secretary-Treas.
/s/ Edgar M. Corson, 1963 U.S. Tax Ct. LEXIS 113">*120 Jr. (seal)
/s/ Effie G. Armstrong (seal)
/s/ George E. Foster (seal)
/s/ Lucille A. Foster (seal)
Pursuant to this agreement petitioner transferred 5,800 shares of its previously authorized, but unissued, shares of voting common stock to the stockholders of Metrotype and in turn the stockholders of Metrotype transferred 2,290 shares of stock in Metrotype to petitioner. The aforementioned 2,290 shares of Metrotype stock was all of the issued and outstanding stock of Metrotype.
The petitioner and the stockholders of Metrotype were unrelated independent parties dealing at arm's length.
On May 14, 1955, George E. Foster, Edgar M. Corson, Jr., and Lucille A. Foster were president, vice president, and secretary-treasurer, respectively, of Metrotype.
40 T.C. 436">*439 On or about December 26, 1956, Metrotype was formally dissolved and liquidated under the laws of the State of Illinois. At the time of the dissolution and liquidation, the Metrotype stock was worthless.
On its income tax return for the year 1956, petitioner deducted $ 294,788.23 as "Losses on investment in and liquidation of subsidiary." This sum consisted of certain amounts claimed as bad debt losses, plus $ 46,400 claimed to be1963 U.S. Tax Ct. LEXIS 113">*121 petitioner's loss on the worthless Metrotype stock. Petitioner's total deductions exceeded its total income returned for the year 1956, and thus no income tax was reported as due for that year.
On its income tax return for the year 1957, petitioner deducted $ 26,852.33 as a net operating loss carried over from 1956. This amount represented the excess of the net operating loss shown on petitioner's 1956 return over the amounts thereof carried back to the 1954 and 1955 taxable years.
Respondent determined that the amount of net operating loss petitioner was entitled to deduct in 1957 as a carryover from 1956 was only $ 990.58. This determination was based in large part upon a determination that petitioner's adjusted basis in the Metrotype stock was $ 22,966, rather than the $ 46,400 claimed by petitioner on its 1956 return in connection with the deduction taken in that year in respect of losses upon the liquidation of Metrotype. The propriety of the latter determination is the only question put in issue herein by petitioner.
Respondent contends that the basis of the Metrotype stock in the hands of that company's four former shareholders was $ 22,966; 1 that the exchange made by1963 U.S. Tax Ct. LEXIS 113">*122 petitioner for the Metrotype stock, pursuant to the agreement of May 14, 1955, was a reorganization within the meaning of
Petitioner contends that its basis in the Metrotype stock was not limited by
1963 U.S. Tax Ct. LEXIS 113">*124 Petitioner's argument hinges on its contention that Metrotype corporation was not "a party to the reorganization" as that term is used in
Petitioner relies heavily on
Respondent contends that as a matter of law Metrotype was "a party to the reorganization" by virtue of
(b) Party To a Reorganization. -- For purposes of this part, the term "a party to a reorganization" includes -- 40 T.C. 436">*441 (1) a corporation resulting from a reorganization, and (2) both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another. * * *
The term "party to a reorganization" was neither used nor defined statutorily prior to the Revenue Act of 1924. That statute 8 added a new section 203(h)(2) which read as follows:
Sec. 203(h) As used in this section and sections 201 and 204 --
* * * *
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations1963 U.S. Tax Ct. LEXIS 113">*126 in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
The congressional committees' explanation for this section said (H. Rept. No. 179, to accompany H.R. 6715 (Pub. L. 176), 68th Cong., 1st Sess., p. 53 (1924); S. Rept. No. 398, to accompany H.R. 6715 (Pub. L. 176), 68th Cong., 1st Sess., p. 17 (1924)):
(2) There is no provision of the existing law which corresponds to subdivision (h)(2) of the bill. This definition is inserted to remove any doubt as to whether a corporation, all of the stock of which is acquired in connection with the reorganization, is a party to the reorganization.
We conclude that the congressional intent (now in
1963 U.S. Tax Ct. LEXIS 113">*127 The regulations promulgated pursuant to this statutory provision have always treated the acquired corporation as a party to the reorganization when the acquiring corporation gets a controlling stock interest in such acquired corporation from a third corporation which happens to own such stock. See sec. 29.112(g)-2, Regs. 111, sec. 39.112(g)-2(f), Regs. 118, and
(f) The term "a party to a reorganization" includes a corporation resulting from a reorganization, and both corporations, in a transaction qualifying as a reorganization where one corporation acquires stock or properties of another corporation. * * * Both Corporation O and Corporation P, but not Corporation S, are parties to the reorganization if Corporation O acquires stock of Corporation P from Corporation S in exchange solely for a part of the voting stock of Corporation O, if (1) the stock of Corporation P does not constitute substantially all of the assets of Corporation S, (2) Corporation S is not in control of Corporation O immediately after the acquisition, and (3) Corporation O is in control1963 U.S. Tax Ct. LEXIS 113">*128 of Corporation P immediately after the acquisition.
40 T.C. 436">*442 We can see no valid reason for a different result if Corporation S were an individual or a group of individuals. The regulations promulgated under the Internal Revenue Code of 1939 strongly suggest this conclusion. 10 Thus, for decades the regulations under this statute have treated the acquired corporation as a party to a reorganization whenever its stock is acquired by another corporation (if the transaction otherwise satisfies
1963 U.S. Tax Ct. LEXIS 113">*129 In light of the legislative history and a literal reading of
The congressional purpose was to remove any doubt that the acquired corporation is to be considered a party to the reorganization as a matter of Federal income tax law, and obviously there would be no such doubt in those cases petitioner argues are the only ones encompassed by the statute. We perceive no reason to suppose that Congress intended only those "(B)" reorganizations in which some stock is acquired from the acquired corporation to qualify for nonrecognition of1963 U.S. Tax Ct. LEXIS 113">*130 gain or loss.
We hold, therefore, that the 1955 transaction was a reorganization on which the four former shareholders of Metrotype recognized no gain, pursuant to
Petitioner argues that such a result would be inequitable as to it. Such an argument cannot be considered by us, however, as we do not 40 T.C. 436">*443 have the jurisdiction of a court of equity.
Petitioner pleads and argues further that, insofar as
Because of concessions,
1. This has not been disputed by petitioner.↩
2.
(a) Reorganization. -- (1) In general. -- For purposes of parts I and II and this part, the term "reorganization" means -- * * * * (B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);↩
3. Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954.↩
4.
(a) General Rule. -- (1) In general. -- 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.↩
5.
(b) Transfers to Corporations. -- If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. This subsection shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.↩
6. Petitioner is not sure whether, if the exchange did not come within
7. Petitioner does not deny that, if Metrotype was "a party to a reorganization," that reorganization was a nontaxable "(B)" reorganization and resulted in petitioner's basis in the Metrotype stock being the aggregate of the bases of the four former shareholders of Metrotype, by virtue of
8. 43 Stat. 253.↩
9. It is noted that a new corporation resulting from a reorganization is a party thereto.
10. They provide:
Sec. 39.112(g)-2 [Regs. 118] Definition of terms.
(f) * * * Only Corporations H and J are parties to the reorganization if it consists of the acquisition by Corporation H in exchange solely for all or a part of its voting stock of at least 80 percent of the voting stock and at least 80 percent of the total number of shares of all other classes of stock of Corporation J,
11.
12.
