William Liddon v. Commissioner of Internal Revenue, Maria Prothro Liddon v. Commissioner of Internal Revenue

McALLISTER, Circuit Judge

(dissenting.

I am of the opinion that the transaction whereby the new corporation acquired the assets of the old company was not a reorganization under Section 112(g) of the Internal Revenue Code, Title 26 U.S.C.A. § 112 (g).

The old corporation, Liddon Motors, Inc., because of the retirement of General Manager Davis, lost its most important business asset — its franchise dealer contract with the Pontiac Division of General Motors Corporation. There was nothing false, suspicious, or contrived about this situation. The company had originally, in 1936, commenced business as a corporation with William Lid-don, Maria Liddon, his wife, and R. II. Davis as the stockholders. Some time later, the business was changed to a partnership with the three stockholders carrying on as partners. Then, in 1946, upon the return of Mr. Liddon from service with the armed forces, the partnership was changed to a corporation with the three partners as stockholders.

The company had started in 1936 with a franchise dealer contract with Pontiac Division of General Motors Corporation. Whenever there was a change from the corporate form to a partnership and then back to a corporation, the officers or part *310 ners of the company would be obliged to apply to General Motors for consent to an assignment of the franchise to the succeeding organization, even though the partners were the same persons as the stockholders in the corporation. Moreover, each year, General Motors would call for the surrender of the dealer’s contract and issue a new one.

The dealer’s franchise contract with General Motors provided:

“ * * * this agreement constitutes a personal contract having been entered into in reliance upon and recognition of W. M. Liddon, R. H. Davis, jointly, the dealer or partners in the dealership or representatives of the- dealer who actively and substantially participate in the ownership and/or operation of the dealership, dealer shall not transfer nor assign this agreement or any part thereof nor make nor suffer to be made any substantial change in the ownership, financial interest, or active management of the dealer.”

R. H. Davis was General Manager of the corporation. He was the man upon whom General Motors relied during the four years’ absence of Mr. Liddon while on service with the Army.

The dealer’s franchise agreement provided :

“[General Motors Corporation] may terminate this agreement immediately by delivering to dealer or his representative written notice of such termination in the event of the happening of any of the following:

“(a) Death, incapacity or the removal, elimination or resignation from the dealership for any reason of the dealer or any person named in paragraph third of this agreement.”

In April of 1948, Mr. Davis had a heart attack. On the urgent advice of his physicians, he was obliged to give up all business connections. On April 26, 1948, he tendered his resignation as General Manager of the company by letters addressed to Mr. Liddon, the President, and to the Pontiac Division of General Motors. Upon receipt of the notice of his resignation, General Motors, in accordance with the contract provisions, immediately cancelled the dealer’s franchise contract.

The Liddon Company, on April 26, 1948, the day of Mr. Davis’ resignation, held a meeting of the Board of Directors for the purpose of liquidating the company and surrendering its charter. At that time, Mr. Davis offered his stock for sale, but a price could not be agreed upon.

On May 1, 1948, after the liquidation of the old corporation had been determined upon and while it was under way, but before it became completely consummated, a new corporation, Liddon Motors, Inc., was formed, in which William Liddon owned 1,250 shares, Maria Lid-don, his wife, owned 1,250 shares, and Oscar Sanders owned one share. This new corporation was formed with $3,000 in cash from Mr. Liddon, $2,000 in cash from Mrs. Liddon, and $10 from Mr. Sanders. It was immediately chartered and undertook to commence business. It had received no assets of any kind from the old company then in process of liquidation. When the new corporation was formed on May 1, 1948, General Motors Corporation issued a dealer’s franchise contract to William Liddon, the sole designated individual in the agreement. Later on, May 21, 1948, Mr. and Mrs. Liddon contributed an additional $20,000 of their own money to the new corporation. At that time, none of the assets of the old company had been received by the new company or by Mr. and Mrs. Lid-don through sale, transfer, or otherwise. All of the capital in the new corporation — aggregating more than $25,000— was new and had no connection or relationship, directly or indirectly, with the old company.

Prior to the contribution of the last $20,000 to the new corporation by Mr. and Mrs. Liddon, the Board of Directors of the old corporation directed sale of its operating assets to the new corporation at book value, and agreed to permit *311 the new corporation to use the remaining physical assets without charge, pending negotiation for their sale, as well as directing the transfer of its employees’ retirement fund to the new corporation.

The government emphasizes the above directions of the old corporation as to the sale of its assets and the transfer of the employees’ retirement fund, but I fail to perceive how this affects the case. The old corporation certainly was able to receive more for its assets from the new corporation than it could from anyone else, as a considerable amount of it was concerned with such a dealership; and the transfer of the employees’ retirement fund might result in some security for the old employees and be an inducement to them to work for the new company, but beyond that consideration, I fail to see that this is a factor to be considered in arriving at the conclusion that the transaction amounted to a reorganization within the meaning of the statute.

The new corporation, on June 4, 1948, purchased a quantity of the assets of the old company. It was an outright sale. Mr. Davis never recovered his health and never resumed any business association. The old corporation finally paid him Sll per share for his stock, which was the same value it would have had upon final liquidation. It also paid off its bills and liquidated its accounts receivable during the first three months that the new corporation was operated, and, finally, it was completely liquidated.

It appears to me that the Commissioner has failed to establish that there was a reorganization within the intendment of the statute.

The new corporation was an entirely different entity. The stockholders were different, although the difference in shares between the stockholders in the old corporation and in the new company would not, in itself, prevent the transaction from being found to be a reorganization. But the new company was formed with new money. It had a new dealer’s franchise contract. It bought out the assets of the old corporation, paying cash to that company.

There was no way in which the old company could transfer its most important asset to the new company, since the dealer’s franchise contract depended entirely upon the action of General Motors Corporation; and, according to its terms, the franchise of the old company had come to an end with the retirement of Mr. Davis. The testimony in the record shows that the new franchise was issued by General Motors because Mr. Liddon, as an individual, was able to fulfill the financial and other requirements exacted. There was no way that he could have secured such a contract except by complying with the requirements prescribed by General Motors and justifying the faith that that company had in his personal ability and integrity. It might be said that General Motors would have, in any event, awarded the dealership to Mr. Liddon, if he desired it, and qualified for it, and continued to engage in the busi - ness of selling cars. That may be so. But the choice was theirs, and not his, and it was a valuable asset, and the> might have, as has happened in similai situations, awarded it to someone else. When General Motors issued the new and different dealer’s franchise contract, it was an asset that could not have been secured from the old company on any terms.

If General Motors had refused the new corporation the dealer’s franchise contract, or if the new corporation had secured a dealer’s franchise contract from a company other than General Motors, it is admitted that the claim that the new company was merely a reorganized corporation could not be maintained. I am unable to see any difference in the situation where the contract with the old company had been cancelled and the sole power to grant such a contract to the new company lay entirely in the discretion of General Motors Corporation. For that seems clearly to disclose that the new company was not a mere continuation of the old one; and the fact that the new company bought the assets of the old company with new capital does not, in my view, lead to the conclusion that *312 the transaction was only a transfer of property from the one corporation to a newly organized company, which, in effect, was the same. In my opinion, the decision of the Tax Court should be reversed.