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Commissioner of Internal Revenue v. First Nat. Bank of Altoona

June 17, 1939

COMMISSIONER OF INTERNAL REVENUE
v.
FIRST NAT. BANK OF ALTOONA, PA., ET AL., AND EIGHT OTHER CASES.



Petition for Review from United States Board of Tax Appeals.

Author: Davis

Before DAVIS and BUFFINGTON, Circuit Judges, and DICKINSON, District Judge.

DAVIS, Circuit Judge.

The basic issue, upon which depends to a large extent the decision in all of the cases here involved, is whether or not the Independent Oil Company (hereinafter called the old company), respondent in Appeal No. 6614, realized a taxable gain as a result of certain transactions which took place in the year 1930.

In that year, in accordance with the terms of a contract previously entered into, the old company transferred approximately 86% of its assets to a newly formed corporation, the Independent Oil Company, Inc. (hereinafter called the new company), in exchange for all of the stock of the latter. Thereafter, the old company transferred 75% of the stock of the new company, and gave an option on the remaining 25%, to the Vacuum Oil Company (hereinafter called Vacuum) in exchange for 22,978 shares of stock of Vacuum, 8,786 of which were placed in escrow subject to a guaranty or "obligation" of Vacuum that these shares would sell for at last $1,312,500 within five years, though their value at that time was only $812,500.

The old company was thereupon dissolved and its assets were distributed to its stockholders, respondents in Appeals Nos. 6615 to 6622, inclusive, as follows: The First National Bank of Altoona and the Benjamin Cohn Trust No. 10 (hereinafter called the Bank), respondent in appeal No. 6622, received the 8,786 shares of Vacuum stock in escrow together with the "obligation"; the other stockholders, respondents in appeals Nos. 6615 to 6621, inclusive, received, in proportion to their stock holdings in the old company, its remaining assets including the 14,192 shares of Vacuum stock and the 25% stock interest in the new company subject, of course, to the option in Vacuum to purchase it.

It appears from the record that the above transactions resulted in a gain or profit to the old company. The respondents contend that this gain was not taxable for the following reasons: That the old company, the new company and Vacuum were parties to a reorganization within the meaning of section 112(i), subsection (1) and (2) of the Reyenue Act of 1928, 26 U.S.C.A. § 112 note.*fn1 and therefore the gain or loss if any, realized by the old company upon the receipt of the stock of the new company and Vacuum was not "recognized" or taxable within the meaning of section 112(b), subsections (3), (4) and (5) of the Act, 26 U.S.C.A. § 112(b)(3-5)*fn2; that the "obligation" of Vacuum, though it constituted "other property" within the meaning of section 112(c) of the Act, 26 U.S.C.A. § 112(c)*fn3, did not have a determinable market value, and, therefore, no gain or loss could be recognized as having arisen out of its receipt. The respondents in appeals Nos. 6615 to 6622 further contend that the distribution to them of the stock of the new company and Vacuum by the old company upon its dissolution was "in prusuance of a plan of reorganization" to which the old company, the new company and Vacuum were parties, and, therefore, the receipt by them of such stock did not give rise to a "recognized" or taxable gain under the provisions of section 112(g) of the Act, 26 U.S.C.A. § 112 note.*fn4 The Bank also relies upon the contention that the "obligation" of Vacuum had no market value and that, therefore, its receipt was not taxable. For these reasons, none of the respondents reported any taxable gain in their 1930 income tax returns as arising out of the receipt of the stock of the new company and the stock "obligation" of Vacuum.

The commissioner, however, determined as follows: That the old company and the new company were parties to a reorganization but that Vacuum was not a party; that consequently the stock and "obligation" of Vacuum were "other property" within the meaning of section 112(c), supra, and that, therefore, the gain, if any, realized by the old company was taxable in an amount not in excess of the value of such "other property"; that the old company had relaized a gain which would be "recognized" to the extent of § 1,707,580.99, and that there was a deficiency in its income taxes for 1930 in the amount of $205,415.13; that the repondents in appeals Nos. 6615 to 6621, inclusive, as the transferees of the assets of the old company, were liable for deficiencies in like amount; that the Bank, respondent in appeal No. 6622, had realized a gain upon the receipt of the 8,786 shares of stock and the "obligation" of Vacuum, which was taxable as a liquidating dividend either in 1930 or 1931, and that there was a deficiency in its income taxes of either $170,125.31 in 1930 or of $168,518.63 in 1931.

All of the respondents thereupon appealed to the Board of Tax Appeals. While the cases were pending before the Board, the commissioner filed an amended answer in which he contended that the old company was not a party to any reorganization either with the new company or Vacuum, and, therefore, the gain, if any, realized by it was taxable in full; that the full amount of such gain was $2,299,639.29, and that the board should consequently determine an even greater deficiency than that originally set forth as against the old company and the respondents in Appeals Nos. 6615 to 6621, inclusive. No change of position, however, was taken with respect to the tax liability of the Bank, respondent in appeal No. 6622.

The Board filed an opinion in case No. 6614 (Independent Oil Co. v. Com'r, 35 B.T.A. 32) in which it held that the old company, the new company and Vacuum were parties to a reorganization; that the receipt by the old company of the stock of the new company and Vacuum did not give rise to a "recognized" or taxable gain; that the "obligation" of Vacuum had no determinable market value and that its receipt, therefore, was not taxable.

It also filed an opinion (unpublished) in case No. 6622, in which (relying upon its decision in case No. 6614 to the effect that the old company and Vacuum were parties to a "reorganization") it held that the distribution to the Trust of the stock and "obligation" of Vacuum did not give rise to a taxable gain under section 112(g) of the Act, supra. It found, therefore, that there was no deficiency in either of the years 1930 or 1931.

The commissioner appealed to this court from the orders of redetermination entered in each of the cases which were consolidated for the purpose of these appeals.

As stated above, the real issue is whether or not the old company realized a taxable gain as a result of the receipt by it of the stock of the new company and the stock and "obligation" of Vacuum. The answer to this question depends upon the following three questions: (1) Whether or not the old company and the new company were parties to the reorganization within the meaning of the Act; (2) whether or not Vacuum was a party to the reorganization; and (3) whether or not the Board correctly held that the "obligation" of Vacuum did not have a determinable market value.

If all of the above questions are answered in the affirmative, then the orders of redetermination of the Board must be affirmed in all of the cases. If, however, any one of them is answered in the negative it follows that the gain, if any, to the old company is taxable either to the extent of the "other property" under section 112(c), or, if there was no "reorganization" at all, then the gain, if any, is taxable under the general provisions of the Act, and the orders of the Board in cases 6614 to 6621, inclusive, must be reversed. If question (2) in the above paragraph is answered in the negative, if follows that the distribution of the stock and "obligation" of Vacuum to the respondent in case ...


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