Houston Natural Gas Corp. v. Commissioner of Internal Revenue

173 F.2d 461, 37 A.F.T.R. (P-H) 1137, 1949 U.S. App. LEXIS 4413

• Court: Court of Appeals for the Fifth Circuit
• Decided: March 19, 1949
• Docket: 12274
• Status: Published

Opinions

HUTCHESON, Circuit Judge.

This petition for review of the decision and order of the Tax Court, holding petitioner liable as transferee of Houston Natural Gas Corporation of Delaware, hereafter called “Delaware”, presents the single, and on its face simple, question of law, whether, upon the liquidation of its subsidiaries in 1940, Delaware realized taxable income of $310,918.80, the admitted difference between the purchase price of the bonds of its subsidiaries and their face value.

The Tax Court, in an opinion¹ fully setting out the stipulated facts² and its reasons for so holding, upheld the commissioner’s determination.

Petitioner does not question the conclusion that the difference between the cost of acquisition of the bonds and their value would, if realized, have been taxable gain.³ Pointing, however, to the provision of Sec. 112(b) (6), I.R.C., 26 U.S.C.A. § 112(b) (6):

“Property received by corporation on complete liquidation of another. No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. * * * ” and to the fact that the liquidation in this case satisfied every requirement of the section, it insists that, contrary to the tax court’s view, the transfer of the assets of this subsidiary was a distribution in liquidation under the section, and, therefore, without recognizable gain or loss.

The commissioner agreeing, as the tax court did, that the liquidation was a 112(b) (6) liquidation, and that no recognizable gain arose from the liquidation as such, urges upon us that this is wholly beside the point. The point he argues is that the gain was realized not from the liquidation as such but from the assumption by Delaware, and the payment and discharge of the bonds. It is thus plain that however it may be argued otherwise, the case comes down to this: were the bonds in effect realized on when the taxpayer received the assets and surrendered the stock? If they were, the tax court was right for the receipt on a debt of more than was paid on it is taxable gain. If they were not, it was wrong, for no recognizable gain arises from the mere liquidation, as such, of the subsidiaries. Here is the battleground. Here are the forces marshalled.

For the reasons that it gave, we think the Tax Court was right. If the bonds had been paid off before, and not as part of, the liquidation, no one would doubt that there would have been a gain in the amount of the discount at which they were purchased, indeed petitioner would not contend differently. We are in no more doubt that the fact that they were paid off in connection with the liquidation in no manner changes the picture. In each case, though the form of the transaction would be different, the fact of it would be that bonds bought for less than their face were paid off at face, the net assets remaining were exchanged in liquidation for the stock. The fact of the intervention of the Texas corporation, transferee, and petitioner here, and the deferment for awhile of the cancellation of the bonds is without significance in law. Under the undisputed facts, what occurred here was that when Delaware assumed the payment of the bonds of its wholly owned subsidiaries, the transaction as to the bonds had come full circle,⁴ and Delaware then and there realized taxable gain in the amount of the difference between the amount it had paid for, and the face of, the bonds it assumed. Further, the transfer in liquidation by which the subsidiaries transferred their assets and received in return the cancellation and surrender of their stock, under Sec. 112(b) (6) was indeed tax free, but this transfer did not include transfer of the bonds. These were not assets, they were obligations of the subsidiaries owned and assumed by Delaware. The transfer in liquidation was not of them or of any other of their obligations.⁵ It was if the net assets, subject to any of the obligations which were not then paid.

The judgment was right. It is Affirmed.

1 9 T.O. 570.

2 As material here they are:

Delaware was organized 11-19-28, and, at all times material, was the owner of ail the issued and outstanding common stock of four Texas corporations, Houston Natural Gas Co., Texas Natural Gas Utilities, Gulf Cities Natural Gas Co., Tex-Mex Natural Gas Co., hereafter referred to as subsidiaries.

From 1928 to 1938, the subsidiaries in order to finance their operations had issued 15 year 6Vz% gold bonds, all of which were held by Delaware on July 31, 1940, having been acquired by it at a discount of $310,980.80. All of these stocks and bonds were pledged by Delaware with the Maryland Trust Co., trustee, as security for its own bonds issuod pursuant to a trust indenture executed on Dec, 1, 1928, with the understanding that Delaware was, under named conditions, to deposit with the tr'ustee as additional security bonds of the subsidiaries. All amounts paid by the subsidiaries on the principal of their bonds was to be received by the trustee and used to purchase Delaware bonds.

Early in 1940, Delaware, which had registered as a holding company, adopted, and the Securities and Exchange Commission approved, a comprehensive plan for the simplification of its corporate structure, including the elimination of itself as a holding company. This plan contemplated the .transfer of all the assets and properties of the subsidiaries to Delaware, subject to a contract and vendor’s lien in favor of tbe trust, tbe assumption by Delaware of tbe outstanding debts and liabilities of tbe subsidiaries and tbe delivery of the common and preferred stock to each subsidiary for cancellation, each subsidiary to be completely dissolved upon completion of tbis plan. Tbe plan was carried out, Delaware ass'umed payment of tbe debts and tbe liabilities of each subsidiary, including its bonds delivered tbe stock to tbe subsidiaries where they were cancelled, and on Sept. 10, 1940, tbe subsidiaries were dissolved. Their bonds were not, however, cancelled until Dec. 11, llüO, when they were cancelled by petitioner with consent of the trustee.

As of July 31, 1940, as part of tbe plan, Delaware, upon full assumption by petitioner of all taxpayer’s liabilities, sold and conveyed to petitioner all of its assets and properties, including those acquired from tbe subsidiaries, subject to tbe liens mentioned above.

Delaware exchanged petitioner’s stock with its stockholders, share and share of its own stock, and was formally dissolved on Nov. 27, 1949.

By indenture of ti'ust dated July 29, 1940, between petitioner and trustee, joined in by Delaware, petitioner recognized tbe obligation to pay tbe bonds of each subsidiary and, agreeing to perform all tbe covenants of tbe indenture of Dee. 1, 1928, recognized a lien in favor of tbe trustee on all tbe assets of tbe subsidiaries. Tbe petitioner then conveyed all of its property and assets to tbe trustee in trust.

When tbe subsidiaries transferred their assets to Delaware as of July 31, 1940, tbe fair market value of tbe assets of each was then in excess of its outstanding indebtedness.

In determining Delaware’s income tax for 1940, tbe commissioner added to its reported income a gain of $310,918.80, the amount of discount at which Delaware bad acquired tbe bonds.

3 United States v. Kirby Lbr. Co., 284 U.S. 1, 52 S.Ct. 476 L.Ed. 131; Helvering v. American Chicle Co., 291 U.S. 426, 54 S.Ct. 460, 78 L.Ed. 891; Com’r v. Jacobson, 69 S.Ct. 358.

4 Helvering v. American Chicle Co., 291 U.S. 426, 54 S.Ct. 460, 78 L.Ed. 891.

5 W. D. Haden Co. v. Com’r, 5 Cir., 165 F.2d 588; Bynum v. Com’r, 5 Cir., 113 F.2d 1; Snead v. Elmore, 5 Cir., 59 F.2d 312.