No. 174.
Respondent, a Minnesota corporation with three stockholders, assailed a deficiency assessment for 1928 income tax, and prevailed below. The Commissioner seeks reversal. He claims the transaction out of which the assessment arose was not a reorganization within section 112, par. (i)(1)(A), Revenue Act, 1928, c. 852, 45 Stat. 791, 816, (26 U.S.C.A. § 112 note). 'The term 'reorganization' means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation.' The Circuit Court of Appeals held otherwise, and remanded the cause for determination by the Board whether the whole of the cash received by the Minnesota Tea Company was in fact distributed as required by the act. We granted certiorari because of alleged conflicting opinions.
The petition also stated that, as the taxpayer made an earlier conveyance of certain assets, the later one, here in question, of what remained to the Grand Union Company did not result in acquisition by one corporation of substantially all property of another. This point was not raised prior to the petition for certiorari, and, in the circumstances, we do not consider it.
Statutory provisions presently helpful are in the margin.
July 14, 1928, respondent caused Peterson Investment Company to be organized, and transferred to the latter real estate, investments, and miscellaneous assets in exchange for the transferee's entire capital stock. The shares thus obtained were immediately distributed among the three stockholders. August 23, 1928, it transferred all remaining assets to Grand Union Company in exchange for voting trust certificates, representing 18,000 shares of the transferee's common stock, and $426,842.52 cash. It retained the certificates; but immediately distributed the money among the stockholders, who agreed to pay $106,471.73 of its outstanding debts. Although of opinion that there had been been reorganization, the Commissioner treated as taxable gain the amount of the assumed debts upon the view that this amount of the cash received by the company was really appropriated to the payment of its debts.
The matter went before the Board of Tax Appeals upon the question whether the Commissioner ruled rightly in respect of this taxable gain. Both parties proceeded upon the view that there had been reorganization. Of its own motion, the Board questioned and denied the existence of one. It then ruled that the corporation had realized taxable gain amounting to the difference between cost of the property transferred and the cash received, plus the value of the 18,000 shares; $712,195.90.
The Circuit Court of Appeals found there was reorganization within the statute, and reversed the Board. It concluded that the words, 'the acquisition by one corporation of * * * substantially all the properties of another corporation,' plainly include the transaction under consideration. Also, that clause (B), § 112(i)(1), first introduced by Revenue Act of 1924, and continued in later statutes, did not narrow the scope of clause (A). Further, that reorganization was not dependent upon dissolution by the conveying corporation. And, finally, that its conclusions find support in treasury regulations long in force.
These conclusions we think are correct.
The Commissioner maintains that the statute presents two definitions of reorganization by transfer of assets. One, clause (B), requires that the transferor obtain control of the transferee. The other, clause (A), is part of the definition of merger or consolidation, and must be narrowly interpreted so as to necessitate something nearly akin to technical merger or consolidation. These clauses have separate legislative histories, and were intended to be mutually exclusive. Consequently, he says, clause (A) must be restricted to prevent overlapping and negation of the condition in clause (B). Also, the transaction here involved substantially changed the relation of the taxpayer to its assets; a large amount of cash passed between the parties; there are many attributes of a sale; what was done did not sufficiently resemble merger or consolidation, as commonly understood.