Before BUFFINGTON, DAVIS, and BIGGS, Circuit Judges.
This is an appeal from an order of redetermination, entered by the Board of Tax Appeals, holding that the petitioner is liable for deficiencies of $21,620.55 and $78,620.55 in its income tax returns for 1927 and 1928, respectively.
In determining these deficiencies, the Board upheld the contention of the commissioner that certain deductions claimed by the petitioner for the years in question were not allowable. There were other issues involved before the Board which were determined in favor of the petitioner (35 B.T.A. 1110) but as the commissioner did not appeal, we are not concerned with them here.
In 1927 and 1928 after having absorbed certain of its subsidiaries, the petitioner redeemed for cash bonds previously issued by them and in its income tax returns for those years deducted the unamortized discount and expenses connected with the issuance of these bonds. The question is whether or not the petitioner had the right to make these deductions.
If the transactions by which the petitioner absorbed these subsidiaries constituted a true merger under the law of Pennsylvania, then the petitioner was entitled to the deductions claimed, but if they were sales and not mergers, then the Board correctly disallowed them.
The facts upon which the petitioner bases its claims for deductions are similar for both years, but we think that the opinion will be clearer if we take up those for 1928 first.
In or prior to 1928 the petitioner absorbed four of its subsidiary corporations, the Cumberland Valley Light & Power Co., the York Haven Water & Power Co., the Hanover Power Co., and the Pennsylvania Edison Co. These companies transferred all of their franchises and assets to the petitioner, which thereupon assumed all of their debts and returned to them for cancellation all of their capital stock. This was done in accordance with the provisions of the "short form merger statute", Purdon's Pennsylvania Statutes, Title 15, Section 595, under whose provisions the subsidiaries ceased to exist. The petitioner then, in 1928, redeemed for cash the bonds which these companies had previously issued totalling $11,142,900 and also paid premiums on them amounting to $645,251.34. When these bonds were redeemed there remained unamortized discount and issuing expenses amounting to $769,864.54. In its income tax return for that year, 1928, the petitioner claimed deductions for the premiums paid and the unamortized discount and expenses. The commissioner disallowed both deductions. On appeal to the Board, the deduction for premiums was allowed, but the deduction for unamortized discount and expenses was not allowed.
It is clear that the deduction would have been allowed if the petitioner itself, had issued the bonds, Article 545 of Regulations 69; Article 68 of Regulations 74; Helvering v. Union Pacific R. Co., 293 U.S. 282, 55 S. Ct. 165, 79 L. Ed. 363; point I of the Board's opinion in this case, 35 B.T.A. 1117, or if it had advanced the money to the subsidiaries to redeem the bonds, and had thereafter filed a consolidated income tax return with them.Point II of the Board's opinion in this case, 35 B.T.A. 1117, 1118.
The "short form merger statute", which the petitioner followed in absorbing these subsidiaries, provides, in part, that any corporation, with the consent of its stock holders, is entitled to "sell, assign, dispose of and convey to any corporation created under or accepting the provisions of this act, its franchises, and all its property, real, personal and mixed, and thereafter such corporation shall cease to exist, and the said property and franchises not inconsistent with this act, shall thereafter be vested in the corporation so purchasing * * * ".
In disallowing the deduction, the Board placed great stress on the words "sell" and "purchasing" contained in the statute, and also upon the use of similar words in the agreements attending the transactions, but these particular words are not decisive of the issue, for "whether a particular transaction is in reality a sale, conversion, consolidation or merger, to a great extent depends upon the circumstances surrounding each particular case; and in determining the question all elements of the transaction must be considered. There is no magic in the words applied to the transaction. Calling it a consolidation does not make it so, and giving it another name does not prevent it from being a consolidation." 14(a) C.J. 1056; 15 Fletcher Cyclopedia Corporations, Sec. 7043.
The transactions by which the companies mentioned above were absorbed contained the following elements: (1) The subsidiary corporations transferred all of their franchises and assets to the petitioner in consideration for the assumption of their debts and return and cancellation of all their capital stock; (2) the subsidiaries, by operation of law, thereupon ceased to exist; (3) the petitioner, an existing corporation before the alleged merger, continued to exist thereafter; and (4) the petitioner became liable for the debts of the absorbed subsidiaries both under the contract and by operation of law. 14(a) C.J. 1056 and 1072; 15 Fletcher Cyclopedia Corporations, Sec. 7121; 15 A.L.R. 1112; 30 A.L.R. 558; 39 A.L.R. 143; Montgomery Web Co. v. Dienelt, 133 Pa. 585, 19 A. 428, 19 Am.St.Rep. 663; Maxler v. Freeport Bank, 275 Pa. 510, 119 A. 592; In re Buist's Estate, 297 Pa. 537, 147 A. 606; Kulka v. Nemirovsky, 321 Pa. 234, 182 A. 692; Commonwealth v. Merchants National Bank of Allentown, 323 Pa. 145, 185 A. 823; In re Harr, 323 Pa. 380, 186 A. 120.
These elements comprise all of the essential characteristics of a true merger, which is defined as the union "of two or more corporations by the transfer of property of all to one of them, which continues in existence, the others being swallowed up to merged therein. In regard to the survivorship of one of the constituent corporations, it differs from a 'consolidation' wherein all of the consolidating companies surrender their separate existence and become parts of a new corporation." Black's Law Dictionary, 2d Ed.; 5 Words and Phrases, First Series, p. ...