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Commissioner of Internal Revenue v. Dana.

March 28, 1939

COMMISSIONER OF INTERNAL REVENUE
v.
DANA.



Petition for Review from United States Board of Tax Appeals.

Author: Davis

Before DAVIS, MARIS, and BUFFINGTON, Circuit Judges.

DAVIS, Circuit Judge.

The commissioner determined that there was a deficiency of $125,534.97 in the income taxes of Charles A. Dana, taxpayer, for the year 1929. The taxpayer thereupon filed a petition for review with the Board of Tax Appeals which, on June 11, 1937, filed its opinion (36 B.T.A. 97) in which it found that the commissioner had "erred in determining the above deficiency". From the order of redetermination entered thereon, the commissioner appealed to this court.

The question involved is whether or not the Spicer Manufacturing Company, hereinafter called spicer, and the Salisbury Axle Company, hereinafter called Salisbury, were parties to a reorganization within the meaning of section 112(i) of the Revenue Act of 1928, 26 U.S.C.A. § 112 note.*fn1

If they were, any "gain" realized by the taxpayer when he exchanged stock in Salisbury for stock in Spicer is not to be "recognized" in computing his taxable income and there was no deficiency, for section 112(b)(3) of the Act, 26 U.S.C.A. § 112(b)(3), provides that: "(3) Stock for stock on reorganization. No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of a plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization."

Whether or not they were parties, depends upon either of two subsidiary questions. The first is whether or not the acquisition by Spicer, which owned approximately two-thirds of all of the outstanding stock of Salisbury, of the remaining one-third outstanding stock constituted a merger or consolidation within the meaning of section 112(i)(1)(A) of the Act. The second question is whether or not the acquisition by Spicer of "substantially all the properties" of Salisbury constituted a merger or consolidation within the meaning of that section.

If either of the above questions are answered in the affirmative, the order of the Board must be affirmed.

Prior to 1927, Spicer was a corporation which was engaged in the manufacture of universal joints and propellor shafts for motor vehicles in its plant at Plainfield, New Jersey. Its outstanding stock consisted of 313,750, out of an authorized 600,000 shares of no par common stock of which the taxpayer owned 118,125 shares. Of the 100,000 shares of $100 par preferred stock authorized, none were outstanding. Salisbury was a corporation engaged in the manufacture of automobile axles at Jamestown, New York. Its outstanding stock consisted of the entire authorized 20,000 shares of no par common, and 27,500 out of an authorized 30,000 shares of $100 par preferred. Approximately two-thirds of both types of stock issued by Salisbury was owned by Spicer, and the remaining one-third was owned by the taxpayer who was president of both corporations.

In 1927, it was determined to move both Spicer and Salisbury to Toledo, Ohio, so that they would be nearer to the automobile industry, and also to merge the operation of both corporations in one plant.

In furtherance of this plan, property was purchased in Toledo and, in the spring of 1928, construction of the plant was started.By the fall of 1928 Spicer commenced the removal of its machinery, equipment and a part of its personnel to the new plant, completing such removal in the first half of 1929. The section of the plant intended for Salisbury was begun early in 1929, and in August of that year the removal of its machinery and equipment to the new plant was begun. By fall the building was completed and by the end of the year substantially all of the machinery and equipment of Salisbury, except obsolete equipment, had been moved.

In the fall of 1928, while the above activities were taking place, the Brown-Lipe Gear Company, hereinafter called Gear Company, which manufactured gears for motor vehicles, was offered for sale for the sum of $3,900,000.

After discussion with certain bankers, a plan was evolved which called for the acquisition by Spicer of all of the outstanding stock of Salisbury and gear Company, making them wholly owned subsidiaries of Spicer.

In effecting this purpose, the number of authorized shares of preferred stock of Spicer was increased from 100,000 to 150,000 shares, 85,000 of which were sold to the bankers for the sum of $3,846,250. With this money, Spicer purchased all of the outstanding stock of Gear Company. Spicer also issued 40,000 additional shares of no par common ...


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