17 T.C. 1253">*1253 Respondent determined deficiencies in income tax, declared value excess-profits tax, and excess profits tax, as follows:

Petitioner claims refunds of overpayments as below set forth:

Respondent also claims an additional deficiency in income tax for 1941 under the provisions of section 272 (e) of the Internal Revenue Code in the event the amount of petitioner's excess profits credit for the year 1941 is held to be larger than that determined in the deficiency notice.

1952 U.S. Tax Ct. LEXIS 282">*284 The issue for decision is whether the basis to petitioner of certain assets which it acquired from its predecessor corporation on December 30, 1936, is the cost of the properties to petitioner, or, whether the basis is the same as the basis of the assets in the hands of the transferor. 17 T.C. 1253">*1254 The determination of the proper basis is necessary in the computation of depreciation deductions, the amounts of capital gains and losses, and the excess profits credit based on the equity invested capital to which petitioner was entitled for the years 1941 through 1945. The proper basis depends upon whether or not petitioner acquired the assets from its predecessor corporation as the result of a tax free reorganization within the meaning of section 112 (g) of the Revenue Act of 1936. If the reorganization was not tax free, as contended by petitioner, the basis is the amount which petitioner paid for the assets. If the reorganization was tax free, as determined by respondent, the basis to petitioner is the same as the basis of the assets in the hands of the transferor.

FINDINGS OF FACT.

Some of the facts have been stipulated and are so found.

Petitioner, Scientific Instrument Company1952 U.S. Tax Ct. LEXIS 282">*285 (hereinafter sometimes called the new corporation), is a Michigan corporation having its principal place of business in Detroit, Michigan. It filed its income, declared value excess-profits, and excess profits tax returns for the years in question with the collector of internal revenue at Detroit, Michigan.

Scientific Instrument Company (the old corporation), was incorporated in Michigan on October 23, 1907, for a term of 30 years. Its principal stockholder was Mr. Papendell, Sr. He died in January 1936 and his interest passed to his son, his daughter, and his son-in-law who, from the first of August 1936 to December 31, 1936, were the only stockholders. Their holdings were as follows:

Following the death of Papendell, Sr., Robert who was in ill health and his fellow stockholders agreed in writing on August 4, 1936, to sell all their stock in the old corporation for $ 90,000.

This sale was not concluded and the agreement therefor was replaced by an agreement dated December 22, 1936, between Securities Investment Corporation, dealers in stocks and bonds, and Robert H. Papendell, president, 1952 U.S. Tax Ct. LEXIS 282">*286 and Howard L. Emhoff, secretary, of the old corporation, which provided, in substance, as follows:

(1) A new Michigan corporation with a total authorized capital of $ 300,000 was to be organized to which all the assets of the old corporation, with the exception of an investment account and cash totaling a little over $ 10,000, were to be conveyed for 75,000 shares of stock in the new corporation and warrants to purchase 25,000 shares at $ 1 per share.

17 T.C. 1253">*1255 (2) The new corporation was to make application to the Michigan Corporation and Securities Commission to have 75,000 shares of its stock validated for sale to the public to provide working capital. This stock was to be sold at a price to net the new corporation working capital in the amount of $ 63,750.

(3) The stockholders of the old corporation were to sell to Securities Investment Corporation 37,500 of their shares in the new corporation within "30 days after the Michigan Corporation and Securities Commission has approved for sale the 75,000 shares to be delivered to" the old stockholders. The old stockholders further agreed to sell to Securities Investment Corporation, if they so desired, their remaining 37,500 shares1952 U.S. Tax Ct. LEXIS 282">*287 within 90 days from that date. (So far as this record discloses neither Securities Investment Corporation nor its assignee ever purchased any of the 75,000 shares issued to the old corporation.)

(4) Papendell and Emhoff agreed to serve as directors of the new corporation under certain conditions and agreed to enter into a contract to work for the new corporation for 5 years from the date of its incorporation at salaries of not less than $ 5,200 per annum, which employment could be terminated by the new corporation upon six months notice.

(5) The new corporation was to pay its organization expenses including the cost of audit and appraisal of the assets of the old corporation as well as expenses in connection with the application to the Michigan Corporation and Securities Commission.

(6) The new corporation agreed to assume the liabilities of the old corporation as shown on its balance sheet at the date of the agreement.

On January 4, 1937, Securities Investment Corporation assigned all its rights under this agreement to one John E. Hogan.

In connection with the proposed sale and for use in applying to the Michigan Corporation and Securities Commission an appraisal of the assets was1952 U.S. Tax Ct. LEXIS 282">*288 made by the American Appraisal Company at the request of the bankers and promoters who paid for the appraisal. This appraisal put a value of $ 71,621.78 on the assets of the old corporation as of December 31, 1936.

The $ 71,621.78 figure shown by the appraisal mentioned above to be the value of the assets of the old corporation was accepted by the Michigan Corporation and Securities Commission when it issued the orders described below and was used as the basis for depreciation for determination of gain or loss and the determination of equity invested capital in petitioner's: amended income and declared value excess-profits tax returns for the years 1941, 1942, and 1943; amended excess profits tax returns for the years 1941, 1942, and 1943; income and declared value excess-profits tax returns for the years 1944 and 1945; income tax return for the year 1946; excess profits tax returns for the 17 T.C. 1253">*1256 years 1944 and 1945; and several claims for refund here involved.

Pursuant to the agreement of December 22, 1936, the old corporation was dissolved December 31, 1936, and a new corporation was duly organized on the same date.

This new corporation had authorized capital stock of 300,0001952 U.S. Tax Ct. LEXIS 282">*289 shares of $ 1 par value and the original incorporator was Conrad E. Thornquist, the attorney for Securities Investment Corporation.

The first corporate meeting of the new corporation was held on December 30, 1936, and James F. Duffy, Robert H. Papendell, Howard L. Emhoff, and John E. Hogan became respectively, president, vice president, secretary, and treasurer, and directors. At the first meeting of the board of directors on that date the offer of the old corporation to exchange its assets, subject to liabilities, for 75,000 shares of common stock of the new corporation and certain warrants was accepted. The officers of the new corporation were authorized and directed to issue the 75,000 shares common stock to the old corporation, or its nominees. On the same day, a bill of sale was executed by the old corporation transferring all the assets of said corporation to the new corporation. On December 31, 1936, the stockholders of the old corporation held a meeting at which the agreement between the old corporation and the new corporation was recited and accepted. As of that date the old corporation became the owner of 75,000 shares of stock in the new corporation which constituted1952 U.S. Tax Ct. LEXIS 282">*290 more than 80 per cent of the total combined voting power of all classes of stock entitled to vote and at least 80 per cent of the total number of all other classes of stock of the new corporation.

A journal entry dated December 31, 1936, shows that 75,000 shares of capital stock of the new corporation were issued to the old corporation. No certificate for these shares was issued to the old corporation, however, until March 2, 1937. This certificate was thereafter, on March 4, 1937, split so that Robert Papendell took on that date 20,000 shares; Louise Papendell (his wife), 17,000 shares; Anna P. Emhoff, 20,000 shares; and Howard L. Emhoff, 17,000 shares. The attorney for the old corporation also received 1,000 shares.

The total number of warrants issued is not shown by the record, but no warrants were ever exchanged for stock.

The execution of the agreement of December 22, 1936, proceeded with an expedition consistent with orderly procedure.

On February 1, 1937, the Michigan Corporation and Securities Commission issued an order accepting for filing (validating for sale to the public) 50,000 shares of stock of the new corporation and validating the issuance of 75,000 shares and 1952 U.S. Tax Ct. LEXIS 282">*291 warrants to purchase 67,500 shares, to the old corporation in consideration for the net assets of that corporation.

17 T.C. 1253">*1257 The sale of stock to the public commenced on February 17, 1937.

On July 15, 1937, the Michigan Corporation and Securities Commission entered an order validating for sale 37,500 shares of stock in the new corporation.

On March 2, 1937, when the certificate for 75,000 shares was issued to to the old corporation, approximately 29,000 shares of stock had been issued to the public. On that date, the stock interest of the old stockholders was less than 80 per cent of the total, to-wit, 72.115 per cent, and on April 14, 1937, when the total number of shares authorized by the Michigan Corporation and Securities Commission in its order of February 1 had been issued, the old stockholders owned a 60 per cent interest in the new corporation. At no time thereafter did the interest of the old stockholders increase. It remained constant until the old stockholders sold all of their interests in 1943 and resigned as officers and directors of petitioner.

The old corporation in filing its income tax return for 1936 did not show any gain or loss in the sale of its assets. 1952 U.S. Tax Ct. LEXIS 282">*292 The new corporation in its original income and declared value excess-profits tax returns for the years 1937 to 1943, both inclusive, and its original excess profits tax returns for 1941 to 1943, both inclusive, used as a basis of the assets acquired from its predecessor for purposes of depreciation, determination of capital gain or loss and equity invested capital an amount which it believed to represent the cost of said assets to the old corporation. ^*

In his notice of deficiency respondent explained that

It is held that the transaction by which you acquired, in December 1936, the assets of your predecessor organization, Scientific Instrument Company, was a nontaxable exchange within the purview of sections 112 (b) and 112 (g) of the Revenue Act of 1936, as amended by section 213 (g) of the Revenue Act of 1939;

OPINION.

The question to be1952 U.S. Tax Ct. LEXIS 282">*293 decided is whether or not respondent was correct in determining that petitioner acquired the assets here involved as the result of a tax free reorganization within the meaning of section 112 (g) of the Revenue Act of 1936. Respondent's position, on brief, is that the transaction in which petitioner acquired the assets qualifies as a tax free reorganization under either clause (B) or clause (C) of section 112 (g) (1) of that Act. ¹

1952 U.S. Tax Ct. LEXIS 282">*294 17 T.C. 1253">*1258 Because we think the transaction is governed by clause (C) we will make no disposition of respondent's contention with respect to clause (B), which would require an answer to the question whether the inclusion of warrants to purchase voting stock as well as stock in the exchange kept the exchange from being one "solely" for voting stock.

With reference to clause (C) respondent's summarized argument is that the stockholders of the old corporation acquired ownership of 75,000 shares of petitioner's stock on December 30, 1936, simultaneously with the transfer by bill of sale of the old corporation's assets to petitioner. This ownership constituted at that time 100 per cent control of petitioner and it was not until late in February 1937 that this control became less than 80 per cent because of dilution resulting from sale of stock to the public. Thus, in the words of the statute, "immediately after the transfer" the requisite control of the petitioner was in the hands of the "transferor or its stockholders" and so remained for almost two months.

Petitioner attacks this position on two fronts: First, petitioner argues that neither the old corporation nor its stockholders1952 U.S. Tax Ct. LEXIS 282">*295 ever had the requisite control as a matter of fact, because neither had "ownership" of the 75,000 shares until a stock certificate was issued on March 2, 1937, and at that time the 75,000 shares did not represent 80 per cent control, 29,000 shares, in the meantime, having been issued to the public; and Second, the argument is made that the correct date for measuring control, in any event, is April 14, 1937, the date by which 50,000 shares had been sold to the public as contemplated by the integrated plan of reorganization and the "plan" thus consummated. If this argument is accepted, then the old corporation's control had been diluted to less than the required 80 per cent on the decisive date.

We cannot agree with petitioner's first position. Ownership by the old corporation and its stockholders of stock in the new corporation does not depend on the formality of registering and delivering stock certificates. The new corporation was organized on December 31, 1936. (There is some confusion in the record as to whether this took place on December 30, 1936, or December 31, 1936, but it is clear that the organization meeting and acceptance of the old corporation's offer of transfer1952 U.S. Tax Ct. LEXIS 282">*296 took place on December 30. The difference in dates appears immaterial.) At the first meeting of the new corporation's 17 T.C. 1253">*1259 board the offer of the old corporation to transfer its assets to the new was accepted in full payment for 75,000 shares of stock of the new corporation and certain warrants, and it was thereupon resolved to transfer the 75,000 shares to the old and the corporate officers were directed so to do. The bill of sale of the assets was dated December 30, 1936, confirmed by the old corporation, and the assets effectively transferred to the new corporation on that date. We think these transactions had the immediate effect of making the old corporation the owner of 75,000 shares of the new stock regardless of the fact that no stock certificate was actually issued until March 2, 1937. W. F. Marsh, 12 T.C. 1083. See also Carel Robinson, 19 B. T. A. 751; Federal Grain Corporation, 18 B. T. A. 242.

It thus appears that "immediately after the transfer" the old corporation had the requisite ownership of stock to constitute control of the new corporation within the meaning of1952 U.S. Tax Ct. LEXIS 282">*297 the statute. The 75,000 shares owned by the old corporation were the only outstanding shares until the sale of additional stock to the public commenced on February 17, 1937.

This conclusion answers petitioner's first contention. It would dispose of the case unless all of the "steps" provided for in the agreement of December 22, 1936, are to be treated as a single indivisible transaction. Our study of the cases and articles on this subject has revealed no readily applicable general principle leading to solution of the problem. We gather that the answer can be found if we give consideration to the mutual interdependence of the steps, the time element, the intent of the parties, and the ultimate result. See Paul, Selected Studies in Federal Taxation, 2d Series, p. 200; New York University Eighth Annual Institute on Federal Taxation, 129; ibid Ninth Annual, 1219; American Bantam Car Co., 11 T.C. 397, affd. 177 F.2d 513; and cases analyzed therein. We must do the best we can with the materials present in the record at hand.

To be sure, the agreement of December 22, 1936, contemplated raising additional capital by the1952 U.S. Tax Ct. LEXIS 282">*298 sale of stock to the public and this eventually took place. But we are not convinced that this was a step necessarily governing the date on which "control" of the transferee is to be determined. The core steps of the plan, as we view it, were the formation of the new corporation and the transfer to it of the assets of the old, thus insuring continuity of operations, remembering that the charter of the old corporation would expire in 1937 -- the end of its 30-year charter period. These steps, so far as we can see, could stand alone. Their effectiveness did not depend on new capital. Granted that additional capital was desirable, were the steps by which it was to be raised a sine qua non to the plan simply because encompassed in the written agreement? 17 T.C. 1253">*1260 We think not. The plan may or may not have been successful without new capital. The agreement carried no guarantee that additional shares would be purchased by the public. There was no assurance or requirement in this plan that the old corporation or its stockholders would ever relinquish control. Nor was there any provision in the contract that the proposed transfer of assets would be undone if the public was 1952 U.S. Tax Ct. LEXIS 282">*299 not responsive to the public share offering. These steps, i. e., the organization of the new corporation, the transfer of assets to it, the issuance of shares to the old corporation, and the sale of stock to the public, were not mutually interdependent. If we were required under these facts to wait until the public shares were finally sold before determining whether or not the transferor corporation had 80 per cent control of the new corporation we might never be able to determine that question. The only requirement in this respect was that the shares be offered at an indefinite date if, as, and when approved by the Michigan Corporation and Securities Commission. Prospective purchasers of the public shares were, of course, not parties to the plan and there was no party to the agreement obligated to take enough new shares to reduce the old corporation's holding below the 80 per cent necessary to constitute control.

In this latter respect, it might have been argued by petitioner that the provisions of the plan calling for purchase by Securities Investment Company of 37,500 shares of the stock held by the old corporation's shareholders was an integral step in the plan which would 1952 U.S. Tax Ct. LEXIS 282">*300 effectively require divestiture by the old interests of the requisite statutory control of the new corporation and thus bring the case in line with such decisions as S. Klein on the Square, Inc., 14 T.C. 786. Petitioner does not press this point, however, presumably because the parties themselves did not carry out that part of the agreement. We attach no more importance to it than did the parties.

For the purposes of this proceeding we hold that the steps relating to the sale of shares to the public are to be treated separately from the formation of petitioner and the transfer to it of the assets of the old corporation as consideration for 75,000 shares of petitioner's stock. Accordingly, we sustain respondent in his determination that petitioner acquired the assets in question as the result of a tax free reorganization within the meaning of section 112 (g) of the Revenue Act of 1936.

Our decision makes it unnecessary to consider respondent's alternative contention, that petitioner has not adequately proven the cost to it of the assets acquired.

Decision will be entered1952 U.S. Tax Ct. LEXIS 282">*301 under Rule 50.