Commissioner of Internal Revenue v. Walter L. And Helen Morgan

*681 HASTIE, Circuit Judge

(dissenting).

The question here is whether the gain element in the sum of $214,150.99 received by the taxpayer in 1952 in exchange for his stock in Wellington Corp., upon total liquidation of that corporation, is taxable as long term capital gain under Section 115(c) of the Internal Revenue Code of 1939 or whether it may be taxed as ordinary income in the nature of a dividend received in the course of a reorganization under Section 112(c) (2).

This court now holds that the taxpayer’s gain is taxable as ordinary income. In so doing it recognizes that the result it reaches can be achieved only by fitting the transactions in this case within the situation described in Section 112(b) (3) and (c) (1) — i. e., where “stock or securities in a corporation a party to a reorganization are * * * exchanged * * * for stock or securities * * * in another corporation a party to the reorganization” and, in addition to stock thus received, the stockholder also receives “other property or money”. In the words of the majority opinion, “it must be shown that (1) there was a distribution of property or money (‘boot’) in addition to an exchange of stock all made in pursuance of a plan of reorganization, and (2) that such boot has the effect of a taxable dividend * * I agree that the plain language of the statute requires that there be an exchange of stock. Trianon Hotel Co., 1958, 30 T.C. 156 ; Emma Cramer, 1953, 20 T.C. 679 ; 3 Mertens, Federal Income Taxation, 1957, § 20.147.

Having thus stated what the statute requires, the court also recognizes that the series of transactions in this case involved no actual acquisition of stock by the taxpayer either through an ordinary exchange or, as in Liddon v. Commissioner, 6 Cir., 1956, 230 F.2d 304 , upon which the court relies, through the creation of a new corporation during a reorganization with the taxpayer as an original stockholder. It is argued, however, that in this ease no transfer of stock of a corporation to the taxpayer is the legal equivalent of an actual stock transfer merely because the taxpayer already was and long had been sole stockholder of that corporation. I can see no logical basis for thus finding an exchange of stock within the statutory requirement without any demonstration that something happened in this case which was equivalent to a transfer of stock to the taxpayer.

There may be one situation in which it is properly arguable that the equivalent of a stock transfer has occurred pursuant to a reorganization though technically there was no transfer. Assume a case which is like the present one in that an individual owns all the stock of both a liquidating corporation and a second corporation which assumes the functions of the liquidating corporation, but with the additional fact that the worth of the second corporation is substantially increased in a reorganization by an inter-corporate transfer of valuable assets of the liquidating corporation. The reorganization deprives the individual of his stock in the first corporation and in return enhances the value of his ownership of the transferee corporation. Such added. worth of the second corporation might be the basis for the issuance of new certificates, but it would be pointless to issue new certificates to one who already is the sole stockholder. Therefore, for purposes of Section 112(c) it is arguable that such a case should be treated as one in which there has been an exchange of stock for stock without requiring the formality of a new stock issue.

But on the record here there was no substantial increase in the worth of the second corporation through any transfer of assets by the liquidating corporation. The only intercorporate transfers of assets in this case are described as follows in the unchallenged findings of the Tax Court:

“Subsequent to the adoption of the liquidating resolution, the Corporation sold its office furniture and equipment to the Company for a price set by the Company’s firm of accountants as the fair market value thereof. We have no issue as to- *682 gain or loss on this sale. The Corporation also transferred to the Company possession of, access to, and the right to make use of certain investment statistical and research material, if not title thereto, without consideration of any kind.”

As a sale for fair value, the transfer of office furniture and equipment did not enrich the transferee corporation. While statistical and research data may have substantial utility, it is not claimed that in the circumstances of this case the transfer of data substantially increased the worth of the transferee corporation. Of course, the reemployment of employees of the liquidating company by the transferee company, which the majority emphasizes, is not a transfer of assets and does not increase corporate worth.

One other item deserves mention in this connection. It is the contract long held by the liquidating corporation to render investment advisory services to Wellington Fund, Inc. Its duration paralleled that of the present transferee corporation’s separate contract with the Fund for promotional services. The Tax Court found that the Fund made a business decision to attempt to reduce its costs and gain other advantages by contracting with a single corporation for both advisory and promotional services. Accordingly, the Fund cancelled its contract with its longtime adviser and two days later entered into a similar contract with the company which theretofore had done only promotional work for it.

This action of the Fund ruined the business of the original advisory corporation and caused its liquidation. It also conferred a very substantial economic advantage on the transferee corporation. But that is not enough to make the Fund’s action significant for present purposes. Our concern is with property transfers between a liquidating corporation and a transferee corporation within and pursuant to a plan of reorganization. There was here no assignment of contract rights between such corporations. Nor is it found as a fact that they or their sole stockholder either could or did use the Fund as an instrumentality to do their bidding. True, their sole stockholder was also President and Chairman of the Board of the Fund. But the Tax Court found that he, his family and his close business associates owned only .003 percent of the stock of the Fund. It has already been pointed out that the Fund derived a business advantage of its own from shifting its contractual arrangement for advisory services. Moreover, under the Tax Court’s findings, the decision to liquidate was not made until after the shifting of the Fund’s contract and only after a search for other business to replace the cancelled contract had proved unsuccessful. It seems worthwhile to spell this matter out in some detail because in my view it involves the only doubtful point in this case, even though •on this point I do not disagree with the majority opinion which apparently concedes that the conduct of the Fund in cancelling one contract and entering into another did not constitute a transfer of assets between the two service companies and was not a step in a reorganization.

In these circumstances, I do not see how it can be said in any meaningful way that there was in this case even a conceptual exchange of stock, and, of course, there was not a real one. 1 Therefore, Section 112(c) is inapplicable and the decision of the Tax Court should be affirmed.

. Although I can find no Section 112 exchange of stock here to prevent treatment of the present distribution as one made in liquidation under Section 115(c), I recognize that the taxpayer is accomplishing a type of “bail-out” of accumulated corporate earnings while the same business continues in another corporation under his ownership and control. If this discloses a “loophole” in the statutory taxing scheme which should be closed, resort should be to Congress for appropriate action. In this connection see the discussion of a proposed amendment to Section 356(a) (2) (B) (ii) in Revised Report on Corporate Distributions and Adjustments, transmitted to the House Committee on Ways and Means by the Advisory Group on Sub-chapter C, at 66-67 (1958).