[112]*112■ OPINION'.
Love:
Regarding the first issue, we have consistently held that the net loss of a predecessor corporation was not deductible, under the “ net loss ” provisions of the statute, by the successor corporation, on the ground that the two corporations were separate and distinct “ taxpayers ” whose separate entities could not be disregarded. See Maytag Co., 17 B. T. A. 182; Plumber's Supply Co., 20 B. T. A. [113]*113459; Standard Silica Co., 22 B. T. A. 97; Athol Mfg. Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230; Industrial Cotton Mills Co., 22 B. T. A. 648; aff'd., 61 Fed. (2d) 291; Clark Dredging Co., 23 B. T. A. 503 (on appeal to C. C. A., 5th Cir.); Overbrook Nat. Bank of Philadelphia, 23 B. T. A. 1390; and New Colonial Ice Co., 24 B. T. A. 886 (on appeal to C. C. A., 2d Cir.). In the Athol case, supra, the Circuit Court of Appeals said:
We fail to see how we can add anything to what was stated by the Board of Tax Appeals in its opinion. We are in full accord with its ruling and finding that the petitioner was an independent entity from the old corporation whose assets and business it took over; that the losses sustained by the old company in conducting its business during 1922 and a part of 1923 were not the petitioner’s losses; and that it was not entitled to deduct the same in its tax return.
Petitioner, however, attempts to distinguish the instant proceeding from the above cases, on the ground that in each of those cases the change from predecessor to successor corporation occurred prior to the enactment of the Kevenue Act of 1924; that in the case of changes which took place prior to the 1924 Act, the successor company took a new basis for subsequent determination of gain or loss and depreciation; that petitioner was a reorganization of the Farmers Oil & Fertilizer Company within the provisions of section 203 (h) (1) (A), (B) and (D) of the Kevenue Act of 1924; that under the 1924 and later revenue acts the reorganized company takes the same basis for subsequent determination of gain or loss and depreciation as was available to its predecessor; and that petitioner should, therefore, be permitted to take the place of the old corporation for the purpose of obtaining the benefit of the net loss deduction provided for in section 206 (b) of the Kevenue Act of 1926, which reads in part as follows:
If, for any taxable year, it appears * * * that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year * * *.
The fact which petitioner contends distinguishes the instant proceeding from the above cited cases, namely, whether the reorganization occurred prior or subsequent to the enactment of the Kevenue Act of 1924, was present in the recent case of Elliott-Granite Linen Corp., 26 B. T. A. 936, promulgated August 31, 1932. In the last mentioned case there was a reorganization, which took place under the Revenue Act of 1926. Nevertheless, we continued to hold that the new corporation was not the same taxpayer as the old corporation and, hence, not entitled to deduct from its net income the net loss of the old.
[114]*114In the instant proceeding, as will appear in our discussion of the second issue, we are of the opinion that there was, in 1924, no “ reorganization ” as that term is all-inclusively defined in section 203 (h) (1) of the Revenue Act of 1924. But in view of our holding in Elliott-Granite Linen Corp., supra, we do not regard it necessary to decide this point in connection with the first issue, for the reason that even if there were a reorganization, as petitioner contends, that conclusion would not entitle petitioner to the benefit of the net loss of the predecessor taxpayer, namely, the Farmers Oil & Fertilizer Company. The respondent’s determination on this issue is approved.
The second issue is whether petitioner is entitled to a basis greater than $100,000 for determining depreciation and gain or loss from the sale or other disposition of the property acquired at the time of its organization.
The salient facts are that on July Y, 1924, 19 of the old stockholders, owning 66.2 per cent of the capital stock of the old company, agreed to form a new corporation, to subscribe and pay for stock therein in the total amount of $100,000, and to “ appoint W. T. Murphy as Trustee to act for them and to purchase for them ” all the properties of the old company; that on July 12, 1924, Murphy, as trustee, purchased the assets of the old company at public auction for $100,000 in cash; that on July 19, 1924, petitioner was incorporated ; that on August 1,1924, petitioner, as the primary obligor, executed new notes for the remaining indebtedness of the old company in the amount of $139,522.33; and that on August 4, 1924, Murphy, as trustee, directed the liquidating agent of the old company to convey the property of the old company directly to petitioner “ instead of to the said W. T. Murphy, said property having been put into said corporation by us, and for which we have received stock of said corporation * *
Section 204 (a) of the Revenue Act of 1926, provides that 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 ” subject, however, to 11 exceptions, none of which apply here unless it be (Y) thereof. Whether exception (Y) applies depends upon whether petitioner acquired the properties “ in connection with a reorganization * * The properties were acquired in 1924 while the Revenue Act of 1924 was in effect. Section 203 (h) (1) of that Act provides:
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 [115]*115to 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.
Petitioner contends that it comes within the provisions of (A), (B) and (D) of the above definition. In so contending, it entirely disregards the sale which took place on Jnly 12, 1924. Petitioner did not acquire the properties of another corporation; it acquired the properties of 19 individuals for whom Murphy was acting as trustee. The properties that were transferred to petitioner were the properties of the 19 individuals, and not the properties of the old corporation. Both in substance and in form, the transaction was a sale by the old corporation of its properties to 19 individuals, and a transfer by them of such properties to petitioner in exchange for the latter’s stock and the assumption by petitioner of certain indebtedness for which the individuals were themselves liable. What thus occurred was more than “ a mere change in identity, form, or place of organization * * See Pinellas Ice & Cold Storage Co., 21 B. T. A. 425; affd. 57 Fed (2d) 188; and Cortland Specialty Co., 22 B. T. A. 808; affd.
Free access — add to your briefcase to read the full text and ask questions with AI
[112]*112■ OPINION'.
Love:
Regarding the first issue, we have consistently held that the net loss of a predecessor corporation was not deductible, under the “ net loss ” provisions of the statute, by the successor corporation, on the ground that the two corporations were separate and distinct “ taxpayers ” whose separate entities could not be disregarded. See Maytag Co., 17 B. T. A. 182; Plumber's Supply Co., 20 B. T. A. [113]*113459; Standard Silica Co., 22 B. T. A. 97; Athol Mfg. Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230; Industrial Cotton Mills Co., 22 B. T. A. 648; aff'd., 61 Fed. (2d) 291; Clark Dredging Co., 23 B. T. A. 503 (on appeal to C. C. A., 5th Cir.); Overbrook Nat. Bank of Philadelphia, 23 B. T. A. 1390; and New Colonial Ice Co., 24 B. T. A. 886 (on appeal to C. C. A., 2d Cir.). In the Athol case, supra, the Circuit Court of Appeals said:
We fail to see how we can add anything to what was stated by the Board of Tax Appeals in its opinion. We are in full accord with its ruling and finding that the petitioner was an independent entity from the old corporation whose assets and business it took over; that the losses sustained by the old company in conducting its business during 1922 and a part of 1923 were not the petitioner’s losses; and that it was not entitled to deduct the same in its tax return.
Petitioner, however, attempts to distinguish the instant proceeding from the above cases, on the ground that in each of those cases the change from predecessor to successor corporation occurred prior to the enactment of the Kevenue Act of 1924; that in the case of changes which took place prior to the 1924 Act, the successor company took a new basis for subsequent determination of gain or loss and depreciation; that petitioner was a reorganization of the Farmers Oil & Fertilizer Company within the provisions of section 203 (h) (1) (A), (B) and (D) of the Kevenue Act of 1924; that under the 1924 and later revenue acts the reorganized company takes the same basis for subsequent determination of gain or loss and depreciation as was available to its predecessor; and that petitioner should, therefore, be permitted to take the place of the old corporation for the purpose of obtaining the benefit of the net loss deduction provided for in section 206 (b) of the Kevenue Act of 1926, which reads in part as follows:
If, for any taxable year, it appears * * * that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year * * *.
The fact which petitioner contends distinguishes the instant proceeding from the above cited cases, namely, whether the reorganization occurred prior or subsequent to the enactment of the Kevenue Act of 1924, was present in the recent case of Elliott-Granite Linen Corp., 26 B. T. A. 936, promulgated August 31, 1932. In the last mentioned case there was a reorganization, which took place under the Revenue Act of 1926. Nevertheless, we continued to hold that the new corporation was not the same taxpayer as the old corporation and, hence, not entitled to deduct from its net income the net loss of the old.
[114]*114In the instant proceeding, as will appear in our discussion of the second issue, we are of the opinion that there was, in 1924, no “ reorganization ” as that term is all-inclusively defined in section 203 (h) (1) of the Revenue Act of 1924. But in view of our holding in Elliott-Granite Linen Corp., supra, we do not regard it necessary to decide this point in connection with the first issue, for the reason that even if there were a reorganization, as petitioner contends, that conclusion would not entitle petitioner to the benefit of the net loss of the predecessor taxpayer, namely, the Farmers Oil & Fertilizer Company. The respondent’s determination on this issue is approved.
The second issue is whether petitioner is entitled to a basis greater than $100,000 for determining depreciation and gain or loss from the sale or other disposition of the property acquired at the time of its organization.
The salient facts are that on July Y, 1924, 19 of the old stockholders, owning 66.2 per cent of the capital stock of the old company, agreed to form a new corporation, to subscribe and pay for stock therein in the total amount of $100,000, and to “ appoint W. T. Murphy as Trustee to act for them and to purchase for them ” all the properties of the old company; that on July 12, 1924, Murphy, as trustee, purchased the assets of the old company at public auction for $100,000 in cash; that on July 19, 1924, petitioner was incorporated ; that on August 1,1924, petitioner, as the primary obligor, executed new notes for the remaining indebtedness of the old company in the amount of $139,522.33; and that on August 4, 1924, Murphy, as trustee, directed the liquidating agent of the old company to convey the property of the old company directly to petitioner “ instead of to the said W. T. Murphy, said property having been put into said corporation by us, and for which we have received stock of said corporation * *
Section 204 (a) of the Revenue Act of 1926, provides that 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 ” subject, however, to 11 exceptions, none of which apply here unless it be (Y) thereof. Whether exception (Y) applies depends upon whether petitioner acquired the properties “ in connection with a reorganization * * The properties were acquired in 1924 while the Revenue Act of 1924 was in effect. Section 203 (h) (1) of that Act provides:
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 [115]*115to 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.
Petitioner contends that it comes within the provisions of (A), (B) and (D) of the above definition. In so contending, it entirely disregards the sale which took place on Jnly 12, 1924. Petitioner did not acquire the properties of another corporation; it acquired the properties of 19 individuals for whom Murphy was acting as trustee. The properties that were transferred to petitioner were the properties of the 19 individuals, and not the properties of the old corporation. Both in substance and in form, the transaction was a sale by the old corporation of its properties to 19 individuals, and a transfer by them of such properties to petitioner in exchange for the latter’s stock and the assumption by petitioner of certain indebtedness for which the individuals were themselves liable. What thus occurred was more than “ a mere change in identity, form, or place of organization * * See Pinellas Ice & Cold Storage Co., 21 B. T. A. 425; affd. 57 Fed (2d) 188; and Cortland Specialty Co., 22 B. T. A. 808; affd. 60 Fed. (2d) 937.
Section 204 (c) of the Revenue Act of 1926 provides that the basis upon which depreciation is to be allowed “ in respect of any property shall be the same as is provided in subdivision (a) * * * for the purpose of determining the gain or loss * * Since we have found that none of the exceptions under subdivision (a) were applicable, the basis to petitioner for determining depreciation and gain or loss from the sale or other disposition of the properties acquired at the time of its organization is the cost of such properties to petitioner. Cf. Olean Sand & Gravel Corp., 24 B. T. A. 324.
What, therefore, was the cost to petitioner of the properties it acquired at the time of its organization? This depends upon what it gave in return for such properties. One thing is certain, it assumed an indebtedness of $139,522.33, which was later reduced to $124,522.33 by reason of recoveries in suits against certain of the old stockholders of at least $15,000. What did petitioner give in addition to the indebtedness assumed? Did it give its capital stock, or did it give $100,000 in cash ? If it were the former, we must determine the value, if any, of the stock; if it were the latter, the cost of the properties to petitioner would clearly be $224,522.33.
The opening journal entry on petitioner’s books records the transactions as if the 19 individuals paid in to petitioner $100,000 in exchange for all of petitioner’s capital stock, and that petitioner later paid out the $100,000 in part payment for the properties. But this is not in accord with what actually happened. What actually [116]*116took place was that on July 12, 1924, which was a week before petitioner was incorporated, the 19 individuals purchased the properties at public auction for $100,000; that the $100,000 was never paid in to petitioner for its stock, but was deposited in a bank to the credit of Bradshaw, the liquidating agent for the old company; and that Bradshaw, on August 4,1924, acting under direction of Murphy as trustee for the 19 individuals, Murphy having stated “ said property having been put into said corporation [meaning petitioner] by us, and for which we received stock of said corporation,” conveyed the properties direct to petitioner. We, therefore, find that in payment for the properties petitioner gave its capital stock in addition to the indebtedness assumed.
What, then, was the fair market value of petitioner’s capital stock? Since the assets received by petitioner were worth considerably less than the amount of the indebtedness assumed by petitioner, we can not find that the stock had any value. Finding, as we do, that the stock of petitioner had no value, it follows that the cost to petitioner of the properties it acquired at the time of its organization was limited to the amount of the indebtedness which it assumed.
The respondent argues that, because of the notation in petitioner’s journal that the liabilities of the old company were assumed “ only upon subrogation to F. C. O. Co. of contracts and rights of recovery against stockholders,” the indebtedness could not be considered as a part of the consideration paid for the properties. Notwithstanding this notation, petitioner actually issued its promissory notes in the amount of $139,522.33 and thereby became primarily liable to that extent, and, so far as the record shows, petitioner was not reimbursed in any amount greater than the amount recovered in the suits against certain of the old stockholders.
The deficiencies should be computed upon a basis of $124,522.33 for determining depreciation and gain or loss from the sale or other disposition of the properties acquired by petitioner at the time of its organization. This basis should be allocated among the separate assets in accordance with the same method used by the respondent in allocating the basis of $100,000 in his deficiency notice. In this connection, see Seymour Mfg. Co. v. Burnet, 56 Fed. (2d) 494.
Reviewed by the Board.
Judgment toill he entered wnder Bule 50.