The opinion
UNIVERSAL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DUQUESNE SALES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Universal Corp. v. Commissioner
Docket Nos. 28419, 36276.
United States Board of Tax Appeals
18 B.T.A. 319 ; 1929 BTA LEXIS 2074 ;
November 22, 1929 , Promulgated
*2074 Sale by a corporation of stock of another corporation affiliated with it, to outside interests, terminating the affiliation, may result in taxable gain or loss.
S. Leo Ruslander, Esq., for the petitioners.
Harry LeRoy Jones, Esq., for the respondent.
VAN FOSSAN
*319 These proceedings, duly consolidated for hearing and decision, were brought to redetermine deficiencies in income tax of the petitioners, *320 Universal Corporation, and its subsidiary, Duquesne Sales Co., for the year 1923 in the asserted amounts of $2,819.49 and $13,694.49, respectively. The cases were tried solely with reference to the liability of petitioner, Universal Corporation, for alleged profit arising from the sale by it of the stock of the West Penn Body Co., an affiliated company. No explanation was made or protest offered as to the balance of the deficiency against the petitioner, Duquesne Sales Co.
FINDINGS OF FACT.
The following facts, paragraphs one to sixteen, were stipulated:
1. The petitioner is a corporation organized under and existing by virtue of the laws of the State of Pennsylvania.
2. The tax in controversy is income tax for the calendar *2075 year 1923. The respondent has included in petitioner's consolidated income for the calendar year 1923 the sum of $13,345.04, which sum represents the difference between $55,000 ($110 a share), the cost of the West Penn Body Co. stock, and $68,345.04 ($136.69 a share), the sales price of said stock.
3. This $13,345.04 does not exceed the taxable income of the West Penn Body Co. for the year 1922, accounted for in the income-tax return filed for that year, and on which the respondent assessed a tax against the petitioner on a consolidated basis.
4. This $13,345.04 is equivalent to the undistributed profits of the West Penn Body Co. accruing from January 1, 1922, up to December 31, 1922, during which period the petitioner owned all of the stock of the West Penn Body Co.
5. At various dates from March 31, 1921, to February 10, 1922, the petitioner acquired all of the stock of the West Penn Body Co., a corporation, said corporation having capital stock of the total par value of $50,000. Said stock was acquired in exchange for petitioner's own stock with a par value of $100 a share, one share of the petitioner's stock being given in exchange for each share of stock of the West *2076 Penn Body Co. of the par value of $100 a share. By December 31, 1921, the petitioner owned 95 per cent of the capital stock of the West Penn Body Co.
6. The petitioner in this manner acquired all of the capital stock of the West Penn Body Co. upon the basis and exchange of its stock for the West Penn Body Co. stock, and in this way acquired all of the stock of the West Penn Body Co. at its book value, as of the date of acquisition.
7. The West Penn Body Co. was a corporation organized under and existing by virtue of the laws of the State of Pennsylvania.
*321 8. The value of the petitioner's stock as of December 31, 1921, and on the other dates of acquisition, was $110 a share, which made the cost of each share of West Penn Body Co. stock $110 a share.
9. The separate tax return filed by the West Penn Body Co. for the calendar year 1922 discloses earnings of $17,112.08.
10. Making the necessary adjustment for dividends, taxes, and other like items, the West Penn Body Co. had, as of December 31, 1922, earned surplus of $18,345.04.
11. By agreement dated February 19, 1923, the petitioner sold to the Martin-Parry Corporation - outside interests with which *2077 it had no connection whatsoever - all of its stock in the West Penn Body Co. for the book value of said stock as of December 31, 1922, which gives a total for said $50,000 par value of stock of the West Penn Body Co. the sum of $68,345.04, as per copy of contract filed and marked "Exhibit 1-A."
12. It was agreed that this sale should, as between the parties, for the purposes of adjustments, be considered as if made on December 31, 1922, and that the new owners of the stock should account for any profits from January 1, 1923, in the tax return which it would file, either on a separate return basis, or by reason of the consolidation of the purchaser itself, the purchaser being the Martin-Parry Corporation; and the Commissioner acquiesced in this arrangement.
13. The petitioner has never accounted in any way whatsoever for any income received by the West Penn Body Co. for the period of January 1, 1923, to February 19, 1923.
14. The petitioner, on June 4, 1923, filed with the collector for the twenty-third district of Pennsylvania, a consolidated incometax return for the calendar year 1922 for itself and its subsidiary, the Duquesne Sales Co.; and for the calendar year 1923 *2078 it filed a consolidated return for itself and its subsidiary, the Duquesne Sales Co., in which consolidated return it accounted for the so-called profit on the sale of the stock of the West Penn Body Co., in the amount of $18,345.04.
15. The West Penn Body Co. on March 15, 1923, filed with the collector for the first district of Pennsylvania a separate income-tax return on Form 1120 for the calendar year 1922.
16. When the respondent audited these returns for the years 1922 and 1923 he held that, by reason of the ownership of the West Penn Body Co. stock during 1922, a consolidated return should have been filed for the year 1922, and calculated the tax on that basis; but now contends that this was error. For the calendar year 1922 the respondent held that the correct profit on the sale of the West Penn Body Co. stock was $13,345.04, and that the petitioner was wrong *322 in eliminating that profit - any profit whatsoever, in the amended return prepared and not filed, but submitted with the protest then being considered in the Unit. It is the tax on this $13,345.04 which is the issue in this appeal.
The letter from petitioner, Universal Corporation, to Martin-Parry *2079 Manufacturing Co. dated February 19, 1923, which accomplished the sale of the stock of West Penn Body Co. was as follows:
As the owner of the entire outstanding issue of the capital stock of the West Penn Body Company, we hereby accept the offer of your Mr. J. J. Giltinan to purchase said stock consisting of 500 shares of a par value of $100.00 per share, at book value of $136.69 per share. Said book value is taken from the report of Main & Company, certified Public Accountants, rendered as of January 1st, 1923.
It is our understanding that the physical inventory taken by your representative, as of February 16, 1923, has not as yet been completed, but in the event that said inventory proves to be less than the inventory shown by the books of the West Penn Body Company on February 16, 1923, we will reimburse you for the difference. On the other hand, it is mutually agreed that should the physical inventory as of February 16, 1923, prove greater than that shown by the books of the West Penn Body Company you will reimburse the Universal Corporation for the difference.
OPINION.
VAN FOSSAN: The stipulation of facts in this case is far from clear but from a careful study thereof *2080 and from the letter from the Universal Corporation to the purchaser of the stock we come to the following conclusions.
The sale by petitioner, Universal Corporation, of the capital stock of West Penn Body Co. terminated the affiliation between those companies and gave rise to a gain of $13,345.04 to petitioner. ; certiorari denied, A. This sale took place February 19, 1923, when the offer was accepted. The retroactive collateral agreement indicated in paragraph 12 of the stipulated facts that "as between the parties for the purposes of adjustment" the sale should "be considered as if made on December 31, 1922 and that the new owners of the stock should account for any profits from January 1, 1923 in the tax return it would file," did not alter the fact that the actual sale took place February 19, 1923, nor does it control the date of the accrual of the tax liability of the parent corporation from the profit on the sale of the stock of the subsidiary. Obviously, the operating profits which might accrue were to be the subject matter of the adjustments and accounting by the new owners. *2081 The profit on the sale of the stock accrued to the petitioner, Universal Corporation, the old owner, and should be accounted for by it.
The sale which resulted in a profit of $13,345.04 to the Universal Corporation having taken place in February, 1923, the tax liability *323 to account for the same arose at that time. The correct amount of the profit is as indicated above.
Under the facts we deem it unnecessary to discuss the legal effect of the filing by petitioner of a consolidated return for 1922 from which it omitted the West Penn Body Co. and the subsequent action of respondent relative thereto. In connection with this question, however, it may be pointed out that the facts stated in paragraph 16 of the stipulated facts as to respondent's action are difficult of reconciliation with the fact of the finding by him of the deficiency for 1923.
Reviewed by the Board.
Decision will be entered under Rule 50.