1. A corporation transferred substantially all of its property
to another corporation in return for cash and the entire issue of
preferred stock of the transferee, the stock being without voting
rights except in case of default in payment of dividends; the
transferor used part of the cash received to retire its own
preferred stock, and distributed to its stockholders the remainder
of the cash and the preferred stock of the transferee; the
transferor corporation did
Page 296 U. S. 375
not dissolve, but retained its franchise and continued liable
for certain obligations.
Held, there was a
"reorganization" under § 203(h)(1)(A) of the Revenue Act of
1926, and no taxable gain upon the transaction was recognizable
under the Act. P.
296 U. S.
376.
2. Under § 203(h)(1)(A) of the Act, it is not essential to
a reorganization that the transferor acquire a controlling interest
in the transferee, nor that the transferor be entitled to
participate in the management of the transferee, nor that the
transferor be dissolved. P.
296 U. S.
377.
3. Paragraph(h)(1)(B) of § 203, under which control of the
transferee corporation by the transferor or its stockholders is
essential to a reorganization, was not intended to modify the
provisions of paragraph (h)(1)(A). P.
296 U. S.
377.
4. The owner of preferred stock, though without voting rights,
has a substantial interest in the affairs of the issuing
corporation. P.
296 U. S.
377.
75 F.2d 696 reversed.
Certiorari to review a judgment affirming a decision of the
Board of Tax Appeals (24 B.T.A. 1031; 28 B.T.A. 529) sustaining a
determination of a deficiency in income tax.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
The petitioner contests a deficiency income assessment made on
account of alleged gains during 1926. It claims that the
transaction out of which the assessment arose was reorganization
within the statute. Section 203, Revenue Act, 1926, c. 27, 44 Stat.
9, 11, is relied upon. The
Page 296 U. S. 376
pertinent parts are in the margin of the opinion in
Helvering v. Minnesota Tea Co., post, p.
296 U. S. 378.
In 1926, under an agreement with petitioner, the Elliott-Fisher
Corporation organized a new corporation with 12,500 shares
nonvoting preferred stock and 30,000 shares of common stock. It
purchased the latter for $2,000,000 cash. This new corporation then
acquired substantially all of petitioner's property, except
$100,000, in return for $2,000,000 cash and the entire issue of
preferred stock. Part of this cash was used to retire petitioner's
own preferred shares, and the remainder and the preferred stock of
the new company went to its stockholders. It retained its franchise
and $100,000, and continued to be liable for certain obligations.
The preferred stock so distributed, except in case of default, had
no voice in the control of the issuing corporation.
The Commissioner, Board of Tax Appeals, and the court all
concluded there was no reorganization. This, we think, was
error.
The court below thought the facts showed
"that the transaction essentially constituted a sale of the
greater part of petitioner's assets for cash and the preferred
stock in the new corporation, leaving the Elliott-Fisher Company in
entire control of the new corporation by virtue of its ownership of
the common stock."
"The controlling facts leading to this conclusion are that
petitioner continued its corporate existence and its franchise and
retained a portion of its assets; that it acquired no controlling
interest in the corporation to which it delivered the greater
portion of its assets; that there was no continuity of interest
from the old corporation to the new; that the control of the
property conveyed passed to a stranger, in the management of which
petitioner retained no voice. "
Page 296 U. S. 377
"It follows that the transaction was not part of a strict merger
or consolidation or part of something that partakes of the nature
of a merger or consolidation and has a real semblance to a merger
or consolidation involving a continuance of essentially the same
interests through a new modified corporate structure. Mere
acquisition by one corporation of a majority of the stock or all
the assets of another corporation does not, of itself, constitute a
reorganization where such acquisition takes the form of a purchase
and sale, and does not result in or bear some material resemblance
to a merger or consolidation."
True, the mere acquisition of the assets of one corporation by
another does not amount to reorganization within the statutory
definition.
Pinellas Ice & Cold Storage Co. v.
Commissioner, 287 U. S. 462, so
affirmed. But where, as here, the seller acquires a definite and
substantial interest in the affairs of the purchasing corporation,
a wholly different situation arises. The owner of preferred stock
is not without substantial interest in the affairs of the issuing
corporation although denied voting rights. The statute does not
require participation in the management of the purchaser; nor does
it demand that the conveying corporation be dissolved. A
controlling interest in the transferee corporation is not made a
requisite by § 203(h)(1)(A). This must not be confused with
par. (h)(2).
Finally, as has been pointed out in the
Minnesota Tea
case,
supra, par. (h)(1)(B) was not intended to modify the
provisions of paragraph (h)(1)(A). It describes a class. Whether
some overlapping is possible is not presently important.
The judgment below must be
Reversed.
