Monarch Electric & Wire Co. v. Com'r of Internal Revenue

38 F.2d 417, 5 U.S. Tax Cas. (CCH) 1649, 8 A.F.T.R. (P-H) 10207, 1930 U.S. App. LEXIS 2313

• Court: Court of Appeals for the Seventh Circuit
• Decided: February 26, 1930
• Docket: 4202
• Status: Published

Opinions

SPARKS, Circuit Judge.

This is a petition by Monarch Electric & Wire Company to review an order of the Board of Tax Appeals entered August 14, 1928, and involves income and excess profits taxes for the year 1920, in the amount of $6,-104.03.

The uncontroverted facts relating to this issue are as follows:

In 1906, one Nathan Deutseh owned the entire capital stock of the Monarch Electric & Wire Company, an Illinois corporation organized in 1902 (not the petitioner herein). In the latter part of 1906, Deutseh sold a 16 per cent, interest in this company to each of the three Schwab brothers, L. S. Schwab, H. S. Schwab, and A. G. Schwab, and retained for himself the remaining 52 per cent, controlling interest. In the latter part of the year 1919, the Schwab brothers began negotiations for the purchase of Deutseh’s stock. Both parties dealt at arm’s length through their respective attorneys. An agreement, dated January 1, 1920, was finally perfected, by the terms of which the name of the company was changed to Schwab Electric Company; a new corporation, the petitioner herein, was organized and acquired all the assets subject to the liabilities of the Schwab Electric Company, with the exception of certain indebtedness of Deutseh which was canceled and $25,300 in Liberty Bonds which was paid directly to Deutseh. Besides the Liberty Bonds and the cancellation of his indebtedness, Deutseh received from petitioner $300,-000 par value of its preferred stock (being its total authorized preferred stock). This preferred stock had voting rights, and was entitled to cumulative dividends of 6 per cent, per annum, the payment of the dividends being guaranteed individually by the three Schwab brothers. The Schwab brothers further agreed that this preferred stock would be redeemed at a certain amount each year, the last maturity of which is to be April 1, 1937.

The Schwabs further agreed with Deutsch that, until $100,000 of the preferred stock was redeemed their aggregate annual salaries would not exceed $36,000, and until $150,000 par value of preferred stock was redeemed their aggregate annual salaries would not exceed $45,000, and until $200,000 par value of preferred stock was redeemed their aggregate annual salaries would not exceed $54,000.

The three Schwabs' received from petitioner all its common stock, which gave the Schwabs a 52 per cent, interest and voting control.-

The assets conveyed to petitioner by the Schwab Electric Company had a fair market value, in the amount agreed upon between Deutsch and the Schwabs and admitted by respondent, and were reflected as invested capital in the petitioner’s income tax returns as follows:

Leasehold ................... $ 75,000.00

Building .................... 300,000.00

Machinery................... 46,075.52

Good will.................... 75,000.00

These assets were taken over by the petitioner at the above figures. The Schwab Electric Company had carried the assets at a much lower valuation, and no good will was carried as an asset by it.

Respondent, in computing petitioner’s invested capital, valued the assets acquired by petitioner from the Schwab Electric Company on the same basis as they stood on the boobs of that company, instead of at their market value. Petitioner contends that for the year T920, it is entitled to have its invested capital computed on the actual cash value of the property paid in for its stock on January 1, 1920, and that the limitation of section 331 of the Revenue Act of 1918 is not applicable. The commissioner contends that the limitation of section 331 is applicable. This is the only issue involved.

The material portion of section 331 of the Revenue Act of 1918 (40 TJ. S. Stat. 1095) is as follows:

“See. 331. In the ease of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed .under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: » * *

Petitioner contends that inasmuch as Nathan Deutsch, on January 1, 1920, owned more than 50 per cent, of the stock of the Schwab Electric Company, and after the reorganization or change of ownership he owned less than 50 per cent, in the new corporation, such transaction does not come within the provisions of the statute. With this contention we cannot agree. In our judgment the wording of the statute is not ambiguous in this particular. It explicitly says that “if an interest or control of 50 per centum or more remains in the same persons, or awy of them,” (italics ours), then the statute applies. Before the reincorporation Deutsch, it is true, owned and controlled more than 50 per cent, of the stock; but it is also true that he, with either one or more of the Schwabs, at that time owned and controlled more than 50 per cent, of the stock. After the reincorporation we find the persons holding the stock in the new corporation are identical with the stockholders in the old, and that Deutsch, with either one or more of the Schwabs, still owns and controls more than 50 per cent, of the stock of the new corporation; and this brings the transaction squarely within the statute.

We are thoroughly convinced that the reorganization and transfer of stock was a bona fide transaction in every particular, and that there was no effort whatever on the part of petitioner or its stockholders to circumvent the government; but of course these facts are not sufficient to overcome the plain and unambiguous terms of the statute.

The order of the Board of Tax Appeals is' affirmed.