Appendix — Meyer v. United States

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APPENDIX.

IN THE UNITED STATES COURT OF CLAIMS

(Decided June 8, 1954)

No. 49739

LEON R. MEYER v. THE UNITED STATES

No. 49740

LUCILE H. MEYER v. THE UNITED STATES

No. 49741

LEON R. MEYER, TRANSFEREE OF MEYER

JEWELRY COMPANY, v. THE UNITED STATES

Mr. Temple W. Seay for plaintiffs. Messrs. David L.

Sheffrey, Joseph A. Hoskins, and Harlow B. King, were on

the briefs.

Mr. J. W. Hussey, with whom was Mr. Assistant Attor-

ney General H. Brian Holland, for the defendant. Messrs.

Andrew D. Sharpe and Ellis N. Slack, were on the brief.

OPINION

Lirtieton, Judge, delivered the opinion of the court:

Plaintiffs sue for a refund of income and excess profits

taxes. In these actions Leon R. Meyer, plaintiff in case

No. 49739, claims recovery of individual income taxes paid

for the year 1943 in the amount of $14,281.84, plus statutory

interest; Lucile H. Meyer, plaintiff in case No. 49740, seeks

recovery of individual income taxes paid for the year 1943

in the amount of $7,860.77, plus statutory interest; and

Leon R. Meyer, as transferee of Meyer J ewelry Company,

plaintiff in case No. 49741, claims recovery of corporation

excess profits taxes exacted from the Meyer Jewelry Com-

pany for the fiscal year ending January 31, 1943, and the

taxable period beginning February 1, 1943, and ending July

31, 1943, in the respective amounts of $449.34 and $3,395.63,

plus statutory interest thereon. These cases were consoli-

dated because all three turn on the single issue of whether

the Meyer Jewelry Company underwent a ‘‘nontaxable re-

organization’’ within the meaning of those terms in section

112 of the Revenue Act of 1928, 45 Stat. 791, 816-818.

The facts show that in 1931 the assets of the Meyer

Jewelry Company (hereinafter referred to as the old cor-

poration) were transferred through a receivership proceed-

ing, wherein the creditors received 25 cents on the dollar,

to the new Meyer Jewelry Company (hereinafter referred

to as the new corporation) with the stock of the old cor-

poration being cancelled and the stock of the new corpo-

ration being issued to the stockholders of the old corpora-

tion. The primary issue presented in cases No. 49739, and

No. 49740 is whether or not the stockholders of the new

corporation were entitled to carry over as a part of the

basis of their stock the basis of the stock in the hands of

the stockholders of the old corporation for purposes of

determining gain or loss on the sale thereof,

The primary issue presented in case No. 49741 is whether

or not the new corporation is entitled to use the book value

of the ‘‘capital surplus’’ account of the old corporation in

computing the equity invested capital of the new corpora-

tion. The salient facts with reference to this follow.

The Meyer Jewelry Company (old corporation) was in-

corporated in 1890 under the laws of the State of Missouri

with authorized capital stock of $2,000, all of which was

benficially owned by Lewis Meyer, father of Leon R. Meyer.

The old corporation encountered financial difficulties on

several occasions and in 1921 a composition settlement was

made with its creditors for 40 cents on a dollar. Mrs.

Rika R. Meyer, mother of Leon R. Meyer, frequently loaned

money to the old corporation. On March 4, 1925, Lewis

Meyer sold and transferred all of the stock of the old cor-

poration to Mrs. Rika R. Meyer for a consideration of

$30,570.15. The capital stock of the old corporation was

subsequently increased several times and on March 1, 1928,

Mrs. Rika Meyer beneficially owned all the outstanding

stock, which was 500 shares of common and 450 shares of

preferred, for which she had paid $45,000 additional con-

sideration. Sometime prior to 1931 she gave 50 shares of

this stock to Leon Meyer.

Again, at the beginning of 1931, the old corporation was

in financial difficulty and unable to pay its debts, and once

more it undertook to make a composition settlement with

its creditors, but, on March 19, 1931, while negotiations

were being carried on, certain creditors with note claims

in excess of $3,100 filed receivership proceedings against

the corporation in the United States District Court for the

Western District of Missouri. On the same day the old

corporation joined in the request for the appointment of a

receiver and Leo H. Ludwig was appointed receiver on

that day. The assets of the old corporation were accord-

ingly turned over to the receiver and he operated the busi-

ness until it was subsequently sold. Although the mer-

chandise inventory alone had a book value of $107,651.97,

three independent appraisers appointed by the court, in

their report submitted on July 3, 1931, appraised all of the

assets of the old corporation at $50,211. This was a fair ap-

praisal. This appraisal of $50,211, when compared with

the existing liabilities of the old corporation of approxi-

mately $88,000, showed that the old corporation was in-

solvent in the bankruptcy sense.

Shortly after the receiver was appointed the stockholders

of the old corporation, Mrs. Rika Meyer, who owned 900

shares, and Leon Meyer, who owned 50 shares, adopted a

“plan of reorganization’’ which is set forth in finding 17.

Pursuant to the stockholders’ desire, Louis Oppenstein,

acting as their agent, undertook negotiations with the re-

ceiver to purchase the assets of the old corporation. The

creditors were aware of the fact that the stockholders

wanted to purchase the assets of the old corporation

through Mr. Oppenstein. On July 6, 1931, the receiver

submitted his report to the court showing Oppenstein’s

offer to purchase free and clear of all liens, claims or in-

cumbrances of any kind, all the assets of the old corpo-

ration for an amount sufficient to pay 25 percent of all law-

ful claims of the old corporation’s creditors; plus all taxes

required to be paid by the receiver; plus all preferred

claims, plus the court costs of the receivership; plus the

receiver’s fees, and plus all costs and legal expenses in-

curred by the Manufacturing Jewelers Board of Trade

which had been acting as representative of various credi-

tors of the old corporation. On July 9, 1931, the court

authorized and directed the receiver to sell, at a private

sale, the assets of the old corporation to Oppenstein pur-

suant to his offer, and on July 17, 1931, the receiver sub-

mitted his report showing the sale to Oppenstein of all the

assets of the old corporation. The total cost of the assets

of the old corporation to Oppenstein was $28,515. Mrs.

Rika Meyer furnished the money for this transaction. The

stockholders organized the new corporation under the laws

of the State of Missouri on July 17, 1931, with the author-

ized capital stock of 300 shares of $100 par value common

stock going to them in about the same ratio that they held

in the old corporation, 285 to Rika and 15 to Leon. The

stock of the old corporation was turned in and cancelled

with no money being paid for the new stock. On July 20,

1931, at a combined meeting of the stockholders and direc-

tors, the same plan of reorganization, which is set forth

in finding 17, was adopted by the new corporation. This

plan is not contained in, or referred to by, the record of

the District Court of the insolvency receivership proceed-

ings. The new corporation took over the business and

operated it continuously until July 31, 1943. The net re-

sult of the receivership proceedings was the elimination of

an $88,000 liability for $22,000 plus incidental expenses.

The new corporation assumed a note for $25,000, which rep-

resented the money furnished by Mrs. Rika Meyer for Op-

penstein to purchase the assets of the old corporation. This

note was subsequently paid. On July 20, 1931, the new cor-

poration wrote down the assets to a fairer value for a go-

ing concern. As indicated in the balance sheet, which is set

forth in finding 18, the going concern value of the assets

purchased from the old corporation was $87,616.01, still less

than the liabilities of the old corporation.

Leon Meyer made cash contributions to surplus in the

amount of $11,500, $1,500 on March 31, 1937, and $10,000 on

January 30, 1940. On December 29, 1941, Mrs. Rika Meyer

made a gift to Leon Meyer of all of her shares, 284 120/

945ths, and reported the same for federal gift tax pur-

poses, thus making Leon Meyer the beneficial owner of all

of the outstanding stock of the new corporation. On July

27, 1943, Leon Meyer made a gift of half of the shares (150)

to his wife, Lucile Meyer, and reported the same for fed-

eral gift tax purposes. On the same day a plan of liquida-

tion of the new corporation was adopted and the assets

were transferred to Leon and Lucile Meyer equally on

July 31, 1943, in exchange for their stock. The value of

the assets thus distributed is stipulated to have been $94,-

887.61 and this is the sum to be used in ascertaining the

profit derived from the liquidation. Leon Meyer was ap-

pointed as Liquidating Agent.

The Commissioner of Internal Revenue treated the trans-

fer of the old corporation’s assets to the new corporation,

with the cancellation of the old stock and issuance of the

new stock, as a taxable exchange and determined the basis

of the stock held by Leon and Lucile Meyer to be $11,500,

which represented the cash contributions made by Leon

Meyer subsequent to the 1931 transfer.

The $11,500 basis was allocated by the Commissioner of

Internal Revenue 13/15ths, or $9,966.67 to Lucile, and

2/15ths, or $1,533.33 to Leon Meyer. This allocation was

made upon the grounds first, that the $11,500 became the

cost of the 15 shares Leon then held, secondly, that the

oldest 15 shares outstanding at the time of liquidation car-

ried the basis of $11,500 and, thirdly, that the oldest shares

outstanding were two qualifying shares owned beneficially

by Leon and 150 shares owned by Lucile Meyer. If the

basis used by the Commissioner of Internal Revenue and

the allocation thereof are correct, the capital gain to Lucile

Meyer was $37,477.13 and to Leon Meyer was $45,910.48.

The Commissioner determined and collected the taxes

computed on these bases. If the Meyer Jewelry Company

experienced a ‘‘non-taxable reorganization”’ in 1931 within

the meaning of those terms as used and intended in sec-

tions 112 and 113 of the Revenue Act of 1928, the aggregate

gain to plaintiffs Leon and Lucile Meyer, upon the liquida-

tion of the new corporation in 1943, would be $7,817.46.

This would be the aggregate gain because Leon and Lucile

Meyer would be entitled not only to their cost basis, but

also to the cost basis of the stock in the hands of the stock-

holders of the old corporation. Thus computed, the basis

of their stock would be $87,070.15, which is the aggregate

of the $30,570.15 paid by Mrs. Rika Meyer for the original

stock of the new corporation, the $45,000 paid by Mrs. Rika

Meyer when the capital stock was increased, and the $11,500

eash contributions made by Leon Meyer.

The Commissioner of Internal Revenue determined and

collected excess profits taxes for the fiscal year ending Jan-

uary 31, 1943, and the taxable period beginning February 1,

1943, and ending July 31, 1943, in the respective amounts

of $449.34 and $3,395.63, using an equity invested capital of

$77,232.83 and $86,867.31 respectively.

Plaintiff in case No. 49741, contends that the equity in-

vested capital for the fiscal year ended January 31, 1943,

and the taxable period beginning February 1, 1943, and

ending July 31, 1943, should have been $130,100.55 and

$136,812.05, respectively. The principal part of this dif-

ferential is attributable to the desire of plaintiff to include

the book value of the ‘‘capital surplus’’ account of the

$62,810.31 of the old corporation in the computation of the

equity invested capital of the new corporation. Plaintiffs’

elaims for refunds were rejected on the ground that the

—

Meyer Jewelry Company did not undergo a ‘‘nontaxable

reorganization in 1931.’’

The plaintiffs contend that the Meyer Jewelry Company

experienced a reorganization in 1931; that this reorganiza-

tion was a ‘‘nontaxable reorganization’’ because it meets

the requirements of section 112 (b) (3) and (i) of the Reve-

nue Act of 1928; that they also meet the requirements of

1 Revenue Act of 1928, 45 Stat. 791, 816-820.

Sec. 112. RECOGNITION OF GAIN OR Loss. (a) General rule.—Upon

the sale or exchange of property the entire amount of the gain or

loss, determined under section 111, shall be recognized, except as

hereinafter provided in this section.

(b) Exchanges solely in kind—

* * * * * * * * * *

(3) Srock FoR STOCK ON REORGANIZATION.—No gain or loss shall

be recognized if stock or securities in a corporation a party to a

reorganization are, in pursuance of the plan of reorganization, ex-

changed solely for stock or securities in such corporation or in an-

other corporation a party to the reorganization.

« * * * * * * * * *

(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.—No

gain or loss shall be recognized if property is transferred to a cor-

poration by one or more persons solely in exchange for stock or

securities in such corporation, and immediately after the exchange

such person or persons are in control of the corporation ; but in the

ease of an exchange by two or more persons this paragraph shall

apply only if the amount of the stock and securities received by

each is substantially in proportion to his interest in the property

prior to the exchange.

(i) Definition of reorganization.—As used in this section and sec-

tions 113 and 115—

(1) The term ‘‘reorganization’’ means (A) a merger or con-

solidation (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 ail other classes of stock of another corpora-

tion, or substantially all the properties of another corporation), or

(B) a transfer by a corporation of all or a part of its assets to

another corporation if immediately after the transfer the transferor

or its stockholders or both are in control of the corporation to

which the assets are transferred. * * * .

(2) The term ‘‘a party to a reorganization’’ includes a corpora-

tion resulting from a reorganization and includes both corporations

Sela aad

section 112 (b) (5) of that Act; that having satisfied the

requirements of section 112 they are entitled, under sec-

tion 113 (a) (6) or (7) of that Act, to the carryover bases

of the stockholders of the old corporation in determining

the gain on the sale of their stock and to have the book

value of the ‘‘capital surplus’’ account of the old corpo-

ration included in the computation of equity invested capi-

tal. The pertinent portion of these sections is set forth in

footnote 1.

The defendant contends that the 1931 transfer of the

assets and stock of the old corporation to the new corpora-

tion was a taxable exchange and therefore the Commis-

sioner of Internal Revenue’s determinations are correct.

in the case of an acquisition by one corporation of at least a ma-

jority of the voting stock and at least a majority of the total num-

ber of shares of all other classes of stock of another corporation.

(j) Definition of control As used in this section the term ‘‘con-

trol’? means the ownership of at least 80 per centum of the voting

stock and at least 80 per centum of the total number of shares of

all other classes of stock of the corporation.

Sec. 113. Basis FOR DETERMINING GAIN OR LOSS. (a) Property

acquired after February 28, 1913.—The basis for determining the

gain or loss from the sale or other disposition of property acquired

after February 28, 1913, shall be the cost of such property ; except

that—

(6) TAX-FREE EXCHANGES GENERALLY.—If the property was ac-

quired upon an exchange described in section 112 (b) to (e), in-

clusive, the basis shall be the same as in the case of the property

exchanged, decreased in the amount of any money received by the

taxpayer and increased in the amount of gain or decreased in the

amount of loss to the taxpayer that was recognized upon such ex-

change under the law applicable to the year in which the exchange

was made. * * * This paragraph shall not apply to property ac-

quired by a corporation by the issuance of its stock or securities as

the consideration in whole or in part for the transfer of the prop-

erty to it;

(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY RE-

MAINS IN SAME PERSONS.—If the property was acquired after De-

eember 31, 1917, by a corperation in connection with a reorganiza-

tion, and immediately after the transfer an interest or control in

such property of 80 per centum or more remained in the same per-

The plaintiffs first claim that they fall within the literal

language of section 112 (b) (3) and (i) (1) (A) and (B).

The plaintiffs further claim that the transfer in 1931 was

for a business purpose and was brought about by a business

exigency and therefore this principle, established in Greg-

ory v. Helvering, 293 U.S. 465, is satisfied. The plaintiffs

also claim that there was a carefully defined written ‘‘plan

of reorganization’’; a retention of the firm name; the trans-

fer of all the assets of the old corporation by a private

sale to the new corporation; the issuance of all the stock of

the new corporation to the stockholders of the old corpora-

tion in the same ratio as their stockholdings were in the

old corporation; and the operation of the business without

interruption with the same assets and family stockholders

until 1943. With these points we agree and we also agree

that a transfer of the assets to a new corporation through

an agent does not prevent the application of this section if

the transfer is a part of an integrated plan. Helvering v.

Alabama Asphaltic Iiamestone Co., 315 U. S. 179, 184.

It is now settled that literal compliance with the language

of this section is not always determinative of nonrecogni-

sons or any of them, then the basis shall be the same as it would

be in the hands of the transferor, increased in the amount of gain

or decreased in the amount of loss recognized to the transferor upon

such transfer under the law applicable to the year in which the

transfer was made. This paragraph shall not apply if the property

acquired consists of stock or securities in a corporation a party to

the reorganization, unless acquired by the issuance of stock or

securities of the transferee as the consideration in whole or in part

for the transfer ;

(8) SAME—CORPORATION CONTROLLED BY TRANSFEROR.—If the

property was acquired after December 31, 1920, by a corporation

by the issuance of its stock or securities in connection with a trans-

action described in section 112 (b) (5) (including, also, cases where

part of the consideration for the transfer of such property to the

corporation was property or money, in addition to such stock or

securities), then the basis shall be the same as it would be in the

hands of the transferor, increased in the amount of gain or de-

creased in the amount of loss recognized to the transferor upon such

transfer under the law applicable to the year in which the transfer

was made; * * *

tion of gain or loss on the exchange. Pinellas Ice & Cold

Storage Co. v. Commissioner, 287 U. S. 462, and numerous

cases following that decision.

The 1931 transfer on the surface, seems to have met all

the requirements for a ‘‘nontaxable reorganization’’ under

section 112 of the 1928 Revenue Act, except for one, the

renowned and crucial ‘‘continuity of proprietary interest’’

requirement. This requirement, introduced in Cortland

Specialty Co. v. Commissioner, 60 F. 2d 937, (2nd Cir.) and

given prominence in Pinellas Ice & Cold Storage Co. v.

Commissioner, supra; Helvering v. Minnesota Tea Co., 296

U. S. 378; LeTulle v. Scofield, 308 U. S. 415; Helvering v.

Alabama Asphaltic Limestone Co., supra; and Detroit

Michigan Stove Company v. United States, — C. Cls. —

Docket No. 48600 (today decided), is dispositive of this

case. We believe that it is within the purview and spirit of

this requirement that there be a real proprietary interest

in the old corporation to continue in the new corporation.

Here lies plaintiffs’ insuperable barrier because the old

corporation was insolvent, in the bankruptcy sense, in that

the aggregate fair valuation of its assets was less than its

liabilities.

Planitiffs contend that the old corporation was not in-

solvent in the bankruptcy sense, but this position is clearly

not supported by the evidence. On the contrary, the three

independent appraisers, who were appointed by the court,

found the assets to have a value of only $50,211, when the

liabilities were $88,000. The creditors, who were desirous

of obtaining all they could on the sale of these assets, were

compelled to accept $22,000 in settlement of their claims. It

is true that these figures probably did not represent the

going concern value. Cf. New Jersey Mortgage and Title

Co. v. Commissioner, 3 T. C. 1277, 1289. The value placed

on these assets by the new corporation, which was closer to

the going concern value, was still less than the liabilities of

the old corporation. Under the facts of this case we are

of the opinion that even the going concern value of the old

corporation was not as much as $88,000. Therefore, since

ao ge SR RSS i ae ci

the old corporation was insolvent in the bankruptcy sense,

the creditors, under the full priority rule of Northern Pa-

cific Ry Co. v. Boyd, 228 U. 8S. 482, could have and in fact

did, as a matter of law, eliminate the interest of the stock-

holders in the old corporation. The insolvency of the old

corporation in the bankruptcy sense, gave the creditors an

effective command in fact and in law over the assets of

that corporation. Helvering v. Alabama Asphaltic Lime-

stone Co., supra. The creditors exercised this command

through the receivership proceedings by compelling the

liquidation of the old corporation and the sale of its assets

for the highest obtainable price under the circumstances.

The economic and equity interest, as such, of the stock-

holders of the old corporation was thus eliminated and the

stock if that corporation was absolutely worthless st the

time of the alleged reorganization.

Section 112 (b) (3) provides:

No gain or loss shall be recognized if stock or securi-

ties in a corporation a party to a reorganization are,

in pursuance of the plan of reorganization, exchanged

solely for stock or securities in such corporation or in

another corporation a party to the reorganization.

[Emphasis supplied. ] |

It is our opinion that the term ‘‘exchange’’ in this con-

text, connotes the transfer of stock in consideration of

stock, and not a transfer of valuable stock for absolutely

worthless stock, as was the case here. The stockholders

of the old corporation had no equity interest to continue or

to carry over to the new corporation in ‘‘exchange’’ for the

stock of that corporation. The ownership of the stock of the

new corporation was not dependent upon or by virtue of the

ownership of the stock of the old corporation, but rather

by virtue of the purchase of the assets at the receivership

sale. The assets were purchased at a bargain, but the dif-

ference between the purchase price and the value of the

assets was not attributable to ownership of stock in the old

corporation nor did it represent an equity in the old corpo-

Baas

ration. The stockholders of the old corporation stood in

the same position as any purchaser at the sale of the assets

insofar as having any legal or equitable interest in the as-

sets of the old corporation.

The nonrecognition provisions were enacted into the

revenue laws to prevent the taxation of transfers that in

the business sense did not really involve a gain or loss, but

only a reshuffling of the same interest. In the cases before

us there was a clearly defined business and economic loss,

the stock of the old corporation was absolutely worthless

and we see no reason why the loss should not have been

recognized.

The court in Mascot Stove Co. v. Commissioner, 120 F.

2d 153, cert. denied 315 U. S. 802; and Templeton’s Jewel-

ers, Inc. v. United States, 126 F. 2d 251, reached the same

result under similar circumstances for substantially the

same reasons. The plaintiffs contend, however, that these

cases are distinguishable because in those cases there was

a clear break in title to the assets between the old corpora-

tion and the new corporation. However, assuming, there

was no break in the legal title in the instant cases, we do

not believe that that factor is of any legal significance be-

cause it is undisputed that the entire business was con-

tinued by the same owners. It is also true that it was the

lack of this continuation of the business by the same owners

that gave birth to the ‘‘continuity of proprietary interest”’

rule. However, as we have stated earlier, we are of the

opinion that it is inherent in this rule of continuity of in-

terest that there be an equity interest to continue. We

therefore hold that the Meyer Jewelry Company did not

experience a ‘‘nontaxable reorganization”’ in 1931.

The plaintiffs also take the position that the transfer

of the properties of the old corporation to the new corpora-

tion qualifies for non-recognition of gain or loss under sec-

tion 112 (b) (5) of the Revenue Act of 1928. This section

provides :

No gain or loss shall be recognized if property is

transferred to a corporation by one or more persons

solely in exchange for stock or securities in such cor-

poration, * * * [Emphasis supplied. ]

In order for plaintiffs to come within this section they must

show that their stock was the ‘‘property’’ that was trans-

ferred to the new corporation in ‘‘exchange’’ for the stock

of that corporation. We do not believe that the 1931 trans-

fer involved an ‘‘exchange’’ within the purview of this

section. The term ‘‘exchange”’ in this context, clearly con-

notes the transfer of something of value for the stock, one

being given in consideration of the other. Here, the stock

of the old corporation was absolutely worthless at the time

of the sale of the assets and at the time of the transfer of

the stock and therefore could not be ‘‘exchanged’’ for the

stock of the new corporation within the meaning of the

statute.

Although not presented by counsel, there is some ques-

tion as to whether this transaction would have been tax-

able under section 112 (a) because section 112 (b) (5) may,

but not necessarily, only cover the exchange itself and not

the antecedent steps in connection with a plan of reorgani-

zation. Cf. Helvering v. Central Investors, Inc., 316 U. 8.

527, 534. However, in view of our holding we need not ex-

press an opinion on this question at this time.

We therefore conclude that plaintiffs have failed to show

that the 1931 transfer involved an exchange within the

meaning of section 112 (b) (3) or (5) and accordingly, the

defendant’s determinations are correct and the petitions

are dismissed.

It is so ordered.

Mappen, Judge; Wurtaker, Judge; and Jonss, Chief

Judge, concur.

Judge Laramore took no part in the consideration or de-

cision of these cases.

FINDING OF FACT

The court, having considered the evidence, the report of

Commissioner William E. Day, and the briefs and argu-

ment of counsel, makes findings of fact as follows:

1. Plaintiffs Leon R. Meyer and Lucile H. Meyer are

husband and wife residing in Kansas City, Missouri.

2. The original Meyer Jewelry Company was incorpo-

rated under the laws of the State of Missouri in 1890 by

Lewis Meyer, father of plaintiff Leon R. Meyer, with au-

thorized capital stock of $2,000 divided into 40 shares of

common of a par value of $50 each. The entire stock was

beneficially owned by Lewis Meyer. Hereinafter, for con-

venience, the Meyer Jewelry Company incorporated in 1890

will be referred to as the ‘‘old’’ corporation and the Meyer

Jewelry Company incorporated in 1931 will be referred to

as the ‘‘new”’’ corporation. Temporary changes of name

to Midwest Jewelry Company in 1931 and 1943 served only

to preserve the right to use the name Meyer Jewelry Com-

pany by successor businesses.

3. Meyer Jewelry Company (new) was incorporated un-

der the laws of the State of Missouri on July 20, 1931.. It

was dissolved on July 31, 1943, and its assets were dis-

tributed to its stockholders Leon R. and Lucile H. Meyer.

It was succeeded by a copartnership composed of Leon

and Lucile H. Meyer using the same business name. The

copartnership was succeeded after two years (about 1945)

by another Meyer Jewelry Company, incorporated in Mis-

souri, with the same stockholders.

4. The old company was originally a jewelry repair shop.

It added a wholesale department dealing in watch materials

shortly after 1900, and prior to 1922 tools and small jewelry

items were added to its line of merchandise. Sometime

after 1923, when Leon R. Meyer, Lewis Meyer’s son, joined

the business, its wholesale business was further expanded

to include small appliances, luggage and cameras.

—— manic wa rhanncsonbnt

5. The old company repeatedly experienced financial dif-

ficulties. Mrs. Rika M. Meyer, Lewis Meyer’s wife, from

time to time furnished funds with which company obliga-

tions were met. Such funds were credited to her upon the

books of account of the old corporation, in some instances

in her open account, and in others notes were issued as

security for the obligation, in which events the credit was

made to her notes payable account in such books.

Just prior to May 1921, the old company encountered a

general business depression with a consequent break in the

diamond and jewelry market. Its merchandise being of a

luxury nature, the business of the corporation was very

sensitive to market conditions. In May 1921, the old com-

pany made a composition settlement with its creditors for

40 cents on the dollar. In that settlement Mrs. Rika R.

Meyer, along with other creditors of the corporation, ac-

cepted 40 percent of her open account credit on the books

of the corporation. Her credit at the time was $8,187.97,

and 40 percent of that amount, or $3,275.19, remained as a

credit on the books of the old corporation due her after the

composition settlement. The difference, therefore, between

such two figures, $4,912.78, was the amount surrendered

by Mrs. Rika R. Meyer in such composition settlement.

6. At January 31, 1925, Mrs. Rika R. Meyer’s combined

note and open account showed credit balances due her from

the company of $38,381.75. On that same day the books

showed that Lewis Meyer was indebted to the company in

the sum of $30,570.15.

On March 4, 1925, Lewis Meyer borrowed from a friend

$30,570.15, and on the same date paid that amount to the

company in satisfaction of his debt to it. On the same day

the corporation paid the same amount to Mrs. Rika R.

Meyer by check, debiting her note account in such amount,

and she in turn by check on the same day paid the amount

borrowed by Lewis Meyer from his friend. The net result

of these transactions on March 4, 1925, was that Lewis

Meyer paid $30,570.15 of his indebtedness to the company,

Mrs. Rika R. Meyer was paid $30,570.15 of the amounts

owed to her by the company, and Lewis Meyer then was

personally indebted to Mrs. Rika R. Meyer in the sum of

$30,570.15.

7. At about March 4, 1925, Lewis Meyer transferred and

assigned all of the stock in the old company (40 shares at

$50 per share) of a par value of $2,000 to Mrs. Rika R.

Meyer in consideration of the payment of the indebtedness

of $30,570.15 referred to in the preceding finding, and for

other monies previously received, the amount of which is

not determinable.

8. On April 27, 1925, the authorized capital stock of the

old corporation was increased from $2,000 to $60,000, di-

vided into 500 shares of common stock and 100 shares of

preferred stock, all of a par value of $100 per share. On

April 30, 1925, a common stock dividend was authorized and

issued in the amount of $48,000. This amount was charged

to the old company’s surplus account on April 30, 1925,

and represents 480 shares of new common stock issued to

Mrs. Rika R. Meyer. The 40 shares of old common stock of

$50 par value was exchanged for 20 shares of the new com-

mon stock, whereby the entire 500 shares of new common

stock were issued to Mrs. Rika R. Meyer.

On the same day, the 100 shares of preferred stock were

issued to Mrs. Rika R. Meyer whereby the old company can-

celled its indebtedness to her by a charge of $10,000 to her

open account on its books April 30, 1925.

9. Lewis Meyer died on September 11, 1927, leaving no

estate to be probated. He had, however, insurance policies

on his life payable to Mrs. Rika R. Meyer in a net amount

of $70,000.

On October 5, 1927, the stockholders of the old company

voted to increase the preferred stock from 100 shares to

600 shares of the par value of $100. On the same day Mrs.

Rike R. Meyer turned over $35,000 in cash to her son, Leon

R. Meyer, for use of the old corporation, in payment for

350 shares of the new preferred stock of the corporation,

when issued.

10. On March 1, 1928, the authorized capitalization of the

old company was further increased in accordance with

the action by the stockholders described in the preceding

finding from $60,000 to $110,000, divided into 500 shares of

common and 600 shares of six percent preferred stock,

both of a par value of $100 per share. Of the additionally

authoried 500 shares, 350 shares were issued to Mrs. Rika

R. Meyer. By this time she had 500 shares of common and

450 shares of the preferred stock.

11. Sometime prior to 1931, Mrs. Rika M. Meyer gave

50 shares of stock to her son, Leon R. Meyer. This left

her holding 900 shares of the total shares then outstand-

ing.

12. Again, at the beginning of 1931, the old company was

in such financial difficulty that it was faced with bankruptcy.

It once more undertook to make a composition settlement

with creditors, but while negotiations were continuing, cer-

tain creditors with note claims in excess of $3,100 filed re-

ceivership proceedings against the corporation in the

United States District Court for the Western District of

Missouri. The action was styled, ‘‘Jacob Davis, David

Davis, Albert Davis, Maurice Davis, Bennett Davis and

Annie Davis, a co-partnership doing business as ‘Barnett

Davis,’ Plaintiffs, versus Meyer Jewelry Company, a cor-

poration, Defendant, Equity No. 1589.’’

13. The receivership proceedings were instituted on

March 19, 1931, and on the same day, upon the joint re-

quests of plaintiffs and defendant therein, the court en-

tered its order appointing one Leo H. Ludwig as receiver.

The court’s order turned over to the receiver all ‘‘of the

properties of the defendant, real, personal and mixed,

and of whatsoever kind and description, including all lands,

real estate, buildings, premises and appurtenances owned,

controlled, leased or operated by defendant, and all mate-

rials, supplies, merchandise, books of account, records and

other books, papers and accounts, cash on hand, in bank or

on deposit, things in action, credits, stocks, bonds, securi-

ties, leases, contracts, muniments of title, bills and accounts

receivable and the assets and property of all and every kind

or character and description whatsoever of said defendant

wheresoever situated.’’ The order of the District Court

appointing the receiver for the old corporation authorized

and directed the receiver to preserve, manage and operate

the business of the old corporation, to compromise and

settle out of any funds coming into his hands as receiver

all claims and demands against the defendant corporation,

and by order dated June 24, 1931, authorized the receiver

to sell all assets of the old corporation at public or private

sale, subject to the orders and approval of the court.

14. The receiver took over all assets of the old corpora-

tion and, among his other activities, operated the jewelry

business for a period of approximately four months.

Whereas the merchandise inventory alone, as carried on the

books of the old corporation at the time, showed a book

value of $107,651.97, independent appraisers appointed by

the court submitted their report on July 3, 1931, showing

the value of all items included in the receiver’s inventory

as follows:

Articles

Tools and materials $10,000.00

Stones and emblems 2,000.00

Machinery 1,000.00

Diamonds 8,511.00

Metals 3,500.00

Mountings 3,000.00

Book accounts and notes 14,000.00

Cash 8,200.00

Total $50,211.00

The foregoing represents the only appraisal of the old

corporation’s assets made under authority of the court

and the receiver. The appraisers stated in their report

‘‘that said appraisement has been based upon the present

cash market value of the goods and materials, and that the

Accounts Receivable are appraised at the amount of prob-

able recovery based upon the experience of the appraisers.’’

A comparison of the aforegoing appraisal of $50,211 with

the liabilities of approximately $88,000, indicates that the

old corporation was insolvent in the bankruptcy sense.

15. During the pendency of the receivership, Leon Meyer

contacted his friend, Louis Oppenstein, and caused him to

undertake to negotiate a purchase of the assets of the old

corporation from the receiver on terms which would be

satisfactory to the receiver and the court. Louis Oppen-

stein thereafter acted as an agent for the sole stockholders

of the old corporation, Leon Meyer and his mother, Mrs.

Rika R. Meyer, in all matters relating to the Meyer Jewelry

Company. The creditors were aware of this agency rela-

tionship.

16. On July 6, 1931, the receiver of the old corporation

submitted his report to the court showing that an offer had

been received from one Louis Oppenstein of Kansas City,

Missouri, to purchase free and clear of all liens, claims or

encumbrances of any kind all the property and assets of

every kind and character of the old corporation for an

amount sufficient to pay 25 percent of all lawful claims of

the old corporation’s creditors, plus all taxes required to be

paid by the receiver, plus all preferred claims, plus the

court costs of the receivership, plus the receiver’s fees,

plus all costs and legal expenses incurred by the Manufac-

turing Jewelers Board of Trade acting as representative

of various creditors of the old corporation. On July 9,

1931, the court authorized and directed the receiver to com-

plete the sale of all assets of the old company, including

any trade names and good will, to said Louis Oppenstein

upon the terms set forth in the offer. The court also noted

that the property of the old corporation had been appraised

by disinterested appraisers whose report to the court

showed a total valuation of the old corporation’s assets as

$50,211 but which sum the receiver reported he had been

unable to realize on the assets. On July 17, 1931, the re-

ceiver submitted his report to the court showing the sale to

Louis Oppenstein of all assets of every character belong-

ing to the old corporation under the terms of the original

offer. The report acknowledged receipt from Louis Op-

penstein of $22,000, which was sufficient to satisfy the

terms of the offer with respect to settling with creditors.

The total cost to Louis Oppenstein for all assets of the old

corporation, including the charges of receivership and the

court costs, aggregated $28,515. The receiver’s accounts

were approved, and the receiver was discharged on August

28, 193i.

17. After it became evident that Louis Oppenstein’s ne-

gotiations with the receiver for the purchase of the assets

of the old corporation would be successful, Leon R. Meyer

and his mother, Mrs. Rika R. Meyer, on July 17, 1931,

caused a new corporation to be organized under the name

of Meyer Jewelry Company. The authorized capital stock

of the new corporation was 300 shares of $100 par common

stock. The certificate of incorporation was issued by the

Secretary of State of Missouri on July 20, 1931. On that

same day a combined meeting of the stockholders and di-

rectors of the new corporation was held. The meeting was

notified of the receipt of the certificate of incorporation,

and by-laws were adopted.

The following resolution was adopted at such meeting:

WHeERrEas, a corporation known and designated as

Meyer Jewelry Company was incorporated under the

Laws of the State of Missouri on January 27, 1890, and,

Wuereas, subsequent thereto (and pursuant to the

plan of reorganization hereinafter mentioned), the cor-

poration name thereof was, in the manner provided by

Law, changed to Midwest Jewelry Company, which

company at the time of such change was in financial

difficulty, and,

Wuenreas, as the result of such difficulties a reorgan-

ization plan was evolved under which the assets of said

\ m1

company were to be taken over by this corporation

then in contemplation of organization, under and pur-

suant to, and in accordance with the provisions of the

said plan of reorganization, and,

Wuenreas, under said plan of reorganization it is

contemplated that the stockholders of the corporation

evolving from said reorganization shall be identically

the same as to actual ownership of stock as were those

in the said Midwest Jewelry Company, and,

Wuenreas, the stockholders in the Midwest Jewelry

Company are as follows:

Mrs. Rika R. Meyer 894 shares ?

Leon R. Muyer 50 shares

H. P. Pierce (held nominally by the said

Pierce but belonging to Rika R. Meyer)... 1 share

and the actual owners of the corporate stock of this

corporation at the time of incorporation were and are

as follows:

Mrs. Rika R. Meyer 284 shares

Leon R. Meyer 15 shares

Fred J. Wolfson (held nominally by the said

Fred J. Wolfson but by him held in trust

120/945 for Rika Meyer and 825/945 for

Leon Meyer), and 1 share

Wuereas, this corporation was formed for the pur-

pose of effectuating and carrying out said plan of cor-

porate reorganization and to relieve the said Midwest

Jewelry Company (formerly Meyer Jewelry Company

as aforesaid) from its said financial difficulties under a

settlement with its creditors, all as contemplated in

said corporation reorganization plan.

Now, THEREFORE, BE IT RESOLVED that this corporation

hereby ratifies, confirms, approves and adopts said re-

organization plan, and agrees to be bound thereby to

the extent therein provided, and

Be IT FURTHER RESOLVED that pursuant to said plan

this corporation shall and hereby does receive, accept

?The plan states that Mrs. Rika Meyer is the owner of 895

shares, whereas she actually owned 900 shares. This difference is

attributable to an oversight of the draftsman of the plan. The five

shares were qualifying shares held by a Mr. Fricke and were bene-

ficially owned by Mrs. Rika Meyer.

and take over all of the corporate assets of the said

Midwest Jewelry Company, as the same are shown and

described on its books and records, and at the values

shown upon its books and records as of the date hereof.

BE IT FURTHER RESOLVED, that the nominal incorpora-

tors of this company, viz:

Louis Oppenstein,

Leon R. Meyer, and

Fred J. Wolfson,

cause the shares of stock nominally by them described

(but in reality in trust for and as the agents of the

actual stockholders of this corporation, to-wit: Mrs.

Rika R. Meyer and Leon Meyer) to be transferred unto

the actual and beneficial stockholders of this corpora-

tion viz: Mrs. Rika R. Meyer and Leon Meyer, or their

nominees, so that the records of this corporation will

si the actual ownership of said stock to be as fol-

OWS:

a. Mrs. Rika R. Meyer 284120 /,,, shares

b. Leon R. Meyer 155/945 shares

and,

BE IT FURTHER RESOLVED, that pursuant to said plan

of reorganization this corporation receive and accept

of and from the said stockholders of the Midwest

Jewelry Company, all of the outstanding capital stock

thereof represented by the following holdings:

No. of

Name of owner shares

Mrs. Rika R. Meyer 894

Mrs. Rika R. Meyer (standing in the name of H. R.

Pierce and by him endorsed in blank and held and

owned by Mrs. Rika R. Meyer) 1

Leon R. Meyer 50

but that the said stock, being represented by new as-

sets (since this corporation has received, accepted and

taken over as a part of the reorganization plan, all of

the assets of the said Midwest Jewelry Company) be

not treated, listed or shown as an asset of this corpo-

ration, or as of any value.

BE IT FURTHER RESOLVED that the business heretofore

operated by the said Midwest Jewelry Company, and

taken over under said reorganization plan by this cor-

poration, be continued as a going concern under the

present name of this corporation viz: Meyer Jewelry

Company, and that its continuance be uninterrupted in

accordance with said plan of reorganization.

BE IT FURTHER RESOLVED that from and out of the as-

sets received and taken over from the said Midwest

Jewelry Company, and the additional assets con-

tributed to this corporation by its stockholders, or ob-

tained by this corporation as a loan, that the debts and

liabilities of the said Midwest Jewelry Company be, in

accordance with said plan of reorganization and to the

extent therein provided, satisfied and liquidated.

BE IT FURTHER RESOLVED, that in accordance with the

said plan of reorganization, this corporation shall, and

it hereby does, bind itself to acquire the assets of the

said Midwest Jewelry Company, for a sum equal to the

administrative expenses of receivership proceedings

heretofore instituted and pending against the said Mid-

west Jewelry Company (formerly Meyer Jewelry Com-

pany) plus preferred charges, plus a sum sufficient to

pay the creditors of the said Midwest Jewelry Com-

pany twenty-five (25¢) cents on the dollar, and that

upon the acquisition of said assets by this corporation

that this company proceed to settle the claims of said

creditors on said basis and to discharge and liquidate

the said administrative expense and preferred charges

in the manner provided in said plan.

BE IT FURTHER RESOLVED, that the Executive Officers

of this corporation be and they hereby are authorized,

directed and empowered to borrow such sums of money

as may be further required or necessary, and permit

this company to effectuate said plan and carry on its

current business, and that said additional sums may be

acquired by this company from its stockholders, di-

rectors, or otherwise, and that in such case and for

such sums so acquired this Company may issue its ob-

ligations either in direct form or as an account pay-

able upon its books, and to that end the Executive Of-

ficers of this corporation are further empowered and

authorized to execute as accommodation endorsers cor-

porate notes of this company for and in respect to any

such sums so advanced under or for this company by

any of its officers, directors, stockholders or others.

BE IT FURTHER RESOLVED that the officers and directors

of this corporation be and they hereby are authorized,

empowered and directed to use such sums or sums out

of the capital or assets of this corporation as may be

necessary to assume and discharge the said adminis-

trative expenses of said equity proceeding, plus all

preferred charges, plus a sum sufficient to pay said

creditors as aforesaid.

BE IT FURTHER RESOLVED that the signatures to the

Minutes shall evidence an agreement of reorganization

as herein set forth, the parties signing the Minutes

being all of the real parties in interest execpt those

acting in a representative capacity as herein recited.

The ‘‘Plan of Reorganization’’ referred to in the fore-

going minutes had previously been adopted by the stock-

holders of the old corporation (being the same individuals

as the stockholders of the new corporation) shortly after

the filing of the receivership proceedings. This plan is not

contained in, or referred to by, the record of the District

Court of the receivership proceedings.

18. At the time of the receivership proceedings, the old

Meyer Jewelry Company had outstanding at least 945

shares (see footnote in finding 17) of capital stock held by

the following:

Mrs. Rika R. Meyer 895 shares 94.71%

Leon R. Meyer 50 shares 5.29%

The new Meyer Jewelry Company issued 300 shares of

stock which were beneficially owned by the following:

Mrs. Rika R. Meyer ...............__ 284!29/9,,; shares 94.71%

Leon R. Meyer 155/45 shares 5.29%

Since all shares of stock referred to herein were of a par

value of $100 each, the ratios of ownership remained the

same or substantially the same in the new corporation as

had existed in the old. The stock of the old corporation was

turned in and cancelled and the new stock was issued to the

stockholders of the old corporation in the same ratio as

indicated above with no money being paid for the stock.

The new company received and owned the same assets as

the old corporation had held prior to receivership, and no

part thereof had been liquidated by the receiver. The

changes in the financial condition of the new company, as

compared with the old, were the assumption by the new

company of a note payable in the sum of $25,000 (which

sum was furnished by Mrs. Rika R. Meyer to Oppenstein

to purchase assets from the receiver and which was sub-

sequently repaid), and the relief of approximately $88,000

of other current notes and accounts payable which had been

settled by the receiver from the proceeds of the $25,000

note referred to above on the basis of 25 cents on the dollar

to creditors.

The net effect of the liquidation of accounts and notes of

the old corporation at 25 per cent of their book liability was

to increase the book equity of the stockholders by approxi-

mately $66,000, less the amount of receivership fees and

expenses which totalled $6,515.

In setting up the financial statement of the new corpora-

tion, inventories were written down $47,696.10, which was

about 50% ; other assets, consisting of hubs, dies, patterns,

machinery and shop equipment and furniture and fixtures,

were written down by the net sum of $15,055.21, making a

total writedown of $62,751.31. The reason for this write-

down was to bring the assets more in line with a fairer

value for a going concern. After this was done, the equity

of the stockholders had a book value of $51,161.68. The

balance sheet of the new corporation as of July 20, 1931,

was as follows:

The Meyer Jewelry Company Balance Sheet July 20, 1931

ASSETS

Commerce Trust Co.—Cash

Petty cash

Notes Receivable $ 1,537.18

Accounts Receivable—Trade 000... 26,877.86

Accounts Receivable—Mise. 400.00

F. E. Hoevel, Salesman—A/c Reev. .......... 100.00

Insurance Claims Receivable —......... 2,300.00

$31,215.04

Less Res. for Bad Debts ...................... 6,400.00

Inventory :

Mat’l Watches & C. J. $22,210.84

Diamonds 9,715.30

Mtgs. & Jlry. 14,091.31

Gold, Silver & Platinum 0 .. 3,981.15

Stationary and Printing 0... 500.00

Hubs, Dies & Patterns

Machinery and Shop Equipment

Furn. & Fixtures

Automobiles $ 707.75

Less Res. for Depr.—Autos.......... 307.75

Prepaid Insurance

Total Assets

LiaBiLities & Net Wortu

LIABILITIES

Notes Payable—Borrowed $28,976.56

Accounts Payable—Misc. 2,364.29

Reserve for Taxes 199.33

Reserve for Moving Expense WW... 2,000.00

Reserve for Legal Expense 2 ..ccccco.-- 2,914.15

Total Liabilities

NET WORTH

Capital Stock—Common $30,000.00

Surplus 21,161.68

Total Net Worth

Total Liabilities & Net Worth .....

$ 4,934.40

200.00

$24,815.04

$50,498.60

1,000.00

4,000.00

1,000.00

$ 400.00

767.97

$87,616.01

$36,454.33

$51,161.68

$87,616.01

19. In her income tax return for 1931, Mrs. Rika R.

Meyer claimed a loss of $89,400 representing the par value

of 894 shares of stock held by her in the old company.

Her net income for that year was approximately $3,500,

and she had a personal exemption of $1,500. There is no

evidence in the record as to whether or not the Commis-

sioner of Internal Revenue allowed such claimed loss.

20. Leon R. Meyer made cash contributions to the sur-

plus account of the new corporation of $1,500 on March 31,

1937, and $10,000 on January 30, 1940, aggregating $11,500,

which amount was a part of the value of the stock of the

new Meyer Jewelry Company in the liquidation in 1943,

when that company’s assets were distributed to Leon R.

Meyer and his wife, Lucile.

21. On December 29, 1941, Mrs. Rika R. Meyer made a

gift to her son, Leon R. Meyer, of all of her shares of

capital stock in the new Meyer Jewelry Company, and she

reported such gift for federal gift tax purposes in a return

filed by her for the calendar year 1941. Through inad-

vertence, her shares were reported as 284, instead of

284'*°/o1s, the difference due to her interest in one share

held by a member of the board of directors for qualifying

purposes. Immediately after the gift, Leon R. Meyer bene-

ficially owned all of the capital stock of the new Meyer

Jewelry Company, being 300 shares.

22. On July 27, 1943, Leon R. Meyer made a gift of 150

shares of the capital stock of the new Meyer Jewelry Com-

pany to his wife, Lucile H. Meyer, and reported such gift

for federal gift tax purposes in a return filed for the calen-

dar year 1943.

23. After the foregoing gift was made by Leon R. Meyer

to his wife, Lucile, each of them individually owned half

of the stock of the new Meyer Jewelry Company.

24. At a special combined meeting of the stockholders

and directors of the new Meyer Jewelry Company on July

27, 1943, a plan of liquidation of the Meyer Jewelry Com-

pany was adopted by which all of its assets were to be

transferred to the individual stockholders as of the close

of business July 31, 1943, in full payment of and in ex-

change for their capital stock in the corporation, said stock-

holders being Leon R. Meyer, owning 150 shares, and Lucile

H. Meyer, owning 150 shares, the liabilities of such liquidat-

ing corporation to be assumed by the stockholders. Leon

R. Meyer was appointed and acted as ‘‘Liquidating

Agent.”’

25. Contemporaneously with the dissolution of the new

Meyer Jewelry Company, Leon R. Meyer and his wife,

Lucile, entered into an agreement reciting the formation of

a copartnership under the firm name of Meyer Jewelry

Company and their assignment to the copartnership of all

of the assets transferred to them by the corporation. The

corporation was liquidated and dissolved as of July 31,

1943, and thereafter for about two years the business of

Meyer Jewelry Company was carried on as a copartner-

ship.

26. The value of the assets of the new Meyer Jewelry

Company received by Leon R. Meyer and his wife, Lucile

H. Meyer, on July 31, 1943 in liquidation was $94,887.61,

each receiving for his and her respective interest in the

corporation, $47,443.81 and $47,443.80, which is based on

their holding of an equal number of shares in the said new

Meyer Jewelry Company, the $94,887.61, as so divided, to

be used in the calculation of profit derived from such liqui-

dation in exchange and payment for their stock in the

corporation.

27. Plaintiff Leon R. Meyer, transferee in Case No.

49741, claims refund of excess profit assessments of $449.34

for the fiscal year ending January 31, 1943, and $3,395.63

for the period February 1 to July 31, 1943. These claims

for refund are based upon plaintiff’s adjustments of equity

invested capital at the beginning of the aforesaid periods.

The new Meyer Jewelry Company’s equity invested

capital at the beginning of the periods involved herein was

reported, and determined by the Commissioner of Internal

Revenue, as follows:

Beginning of periods

Feb.1,1942 Feb. 1, 1943

Reported by plaintiff on tax returns. $78,469.82 $87,326.92

Determined by the Commissioner :

Paid in surplus $11,500.00 $11,500.00

Property paid in for capital stock 30,000.00 30,000.00

Accumulated earnings and

surplus 35,732.83 45,367.31

Total $77,232.83 $86,867.31

Reduction in equity invested

capital $ 1,236.99 $ 459.61

The plaintiff now contends that its equity invested cap-

ital should be $130,100.55 at February 1, 1942, and $136,-

812.05 at February 1, 1943. In arriving at these amounts,

plaintiff included capital surplus at July 18, 1931, in the

receivership accounts of $62,810.31. The plaintiff contends

the equity invested capital of the new Meyer Jewelry Com-

pany for the periods in dispute should be computed as fol-

lows:

Capital surplus account at July 18, 1931... _. $ 62,810.31

Accumulated earnings 25,790.24

Capital stock 30,000.00

Paid-in surplus 11,500.00

Equity invested capital for fiscal year end-

ing January 31, 1942 $130,100.55

Accumulated earnings for 1943 period. 6,711.50

Equity invested capital at July 31, 1943... $136,812.05

Assuming the Meyer Jewelry Company went through a

‘nontaxable reorganization’’ in 1931 within the meaning

of those terms in section 112 of the Revenue Act of 1928,

the evidence is insufficient to conclude that plaintiff’s com-

putation of equity invested capital is correct.

28. Upon the liquidation and dissolution of the new

Meyer Jewelry Company on July 31, 1943, the Commis-

sioner of Internal Revenue assessed against and collected

income taxes from plaintiffs, Leon R. Meyer and Lucile H.

Meyer, individually, on their gains resulting from the liqui-

dation of the new Meyer Jewelry Company. The gains

were computed on the following bases:

Leon RB. Meyer Lucile H. Meyer

Liquidating dividends $47,443.81 $47,443.80

Basis of stock (150 shares each)... 1,533.33 9,966.67

Long term capital gain $45,910.48 $37,477.13

Taxable 50% 22,955.24 18,738.57

The resulting income taxes and interest thereon were the

amounts paid as shown in finding 29 herein.

The cost basis of $11,500 allowed by the Commissioner

represents only that sum paid in as surplus by Leon R.

Meyer (finding 20). It was allocated between the two own-

ers of equal shares of the corporation as ?/:sths to Leon R.

Meyer and “/:sths to Lucile H. Meyer. This allocation

was made upon the theory that when Leon R. Meyer paid

in $11,500 to the surplus account of the corporation, such

sum then became the cost of the 15 shares of stock he then

held.

The last two certificates were issued July 16, 1943, No. 4

to Lucile H. Meyer for 150 shares, and No. 5 to Leon R.

Meyer for 148 shares. Two older certificates, Nos. 2 and 3,

had been issued February 1, 1943, to qualifying stock-

holders, but Leon R. Meyer remained as beneficial owner

thereof.

The Commissioner adopted the theory that the oldest 15

shares outstanding at the time of liquidation carried the

cost basis of $11,500; and since certificate No. 4, issued to

Lucile H. Meyer, preceded certificate No. 5, issued to Leon

R. Meyer, even though issued the same day, the oldest 15

shares, other than the two qualifying shares, were there-

fore issued to her.

29. Payments of income tax were made to the Collector

of Internal Revenue, Sixth District of Missouri, Kansas

City, Missouri, on October 13, 1947, by check of Leon R.

Meyer, Meyer Jewelry Company, dated October 9, 1947, for

the account of Leon R. Meyer for the calendar year 1943,

$14,281.84, and for the account of Lucile H. Meyer for the

calendar year 1943, $7,860.77. For the account of Leon R.

Meyer, as transferee of the Meyer Jewelry Company, Dis-

solved, for its taxable year ended January 31, 1943, and its

taxable period ended July 31, 1943, excess profits taxes of

$3,844.97 were paid by Leon R. Meyer on the same date.

30. On October 11, 1948, plaintiffs filed claims for refund

with the Collector of Internal Revenue for the Sixth Dis-

trict of Missouri for the following periods and amounts:

Name Period Amount

Leon R. Meyer —.......... 1/1/43 to 12/31/43 $14,281.84

Lucile H. Meyer ..__._.... 1/1/48 to 12/31/48 7,860.77

Leon R. Meyer, transferee... 2/1/43 to 7/31/43 3,395.63

Leon R. Meyer, transferee... 2/1/42 to 1/31/43 449.34

31. The foregoing claims were recommended for rejec-

tion by letters of the Internal Revenue Agent in Charge,

St. Louis Division, dated April 1, 1949:

Name Taxable period Amount

Leon R. Meyer 1943 $14,281.84

Lucile H. Meyer 1943 7,860.77

Leon R. Meyer, transferee w—— (1/31/48) 449.34

Leon R. Meyer, transferee (7/31/48) 3,395.63

The reasons given for rejection, with respect to the first

two amounts are that the basis of the shares of Meyer

Jewelry Company had been determined to be only $11,500.

The letter with respect to the transferee liability stated

that rejection was because the corporation did not undergo

a non-taxable reorganization in 1931.

32. The said claims for refunds were finally rejected by

Notices of Disallowance under Section 3772 (a) (2), In-

ternal Revenue Code, by letters of E. I. McLarney, Deputy

Commissioner, dated October 26, 1949:

Name Taxable period Amount 3

Leon R. Meyer 1943 $14,281.84 -

Leon R. Meyer, transferee —._. 1943 449.43

Leon R. Meyer, transferee 1943 3,395.63

33. If the Meyer Jewelry Company experienced a ‘‘non- —

those terms in sections 112 and 113 of the Revenue Act of —

1928, plaintiffs, Leon R. Meyer and Lucile H. Meyer, de- —

rived an aggregate capital gain of $7,817.46 in the liquida- —

tion of the new Meyer Jewelry Company in 1943, computed —

as follows: 7

Value of assets received by Leon R. and Lucile H. 4

Meyer in liquidation of new corporation, 1943. $94,887.61 —

Cost of stock of new corporation surrendered by ;

Leon R. and Lucile H. Meyer, in liquidation in

1943 (same as cost of stock of old corporation) :

Common stock of Lewis Meyer

purchased by Rika R. Meyer... $30,570.15

Cost of preferred stock to Rika

R. Meyer 45,000.00

Paid in surplus by Leon R. %

Meyer 11,500.00 3

————_ $87,070.15 @

Capital gain to Leon R. and 4

CONCLUSION OF LAW

part of the judgment herein, the court concludes as a mat- —

ter of law the plaintiffs are not entitled to recover and

their petitions are dismissed. ;

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CITATIONS

Cases:

Davis v. Bankhead Hotel, 212 F. 2d 697..........

Helvering v. Limestone Co., 315 US. 179..

Klein, D. W., Co. v. Commissioner, 123 F. ad 871,

certiorari denied, 315 U.S. 819................

LeTulle v. Scofield, 308 U.S. 415.................

Mascot Stove Co. v. Commissioner, 120 F. 2d 153,

certiorari denied, 315 U.S. 802................

Pinellas Ice & Cold Storage Co. v. Commissioner,

ES ¢ adn w's vkVic’ ata ediks bdbeas oodeaae

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SCRE ere ae ie ee ee eee ee eee nee

Statute:

Revenue Act of 1928, c. 852, 45 Stat. 791, Sec. 112..

(1)

Sam uune

—

Guthe Supreme Court of the Wnited States

OcToBER TERM, 1954

No. 493

LEON R. MEYER, PETITIONER

Vv.

Unrtrep STATES OF AMERICA

Lucite H. MEYER, PETITIONER

Vv.

UnrITreD StTaTes OF AMERICA

Leon R. MEYER, TRANSFEREE OF MEYER JEWELRY

COMPANY, PETITIONER

Vv.

UnrtTep STATES oF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

OPINION BELOW

The opinion of the Court of Claims (Pet. App.

1-13) is reported at 121 F. Supp. 898.

(1)

JURISDICTION

The judgment of the Court of Claims was en-

tered on June 8, 1954, (Pet. App.1,13.) A timely

motion for rehearing was denied October 5, 1954.

The petition for a writ of certiorari was filed De-

cember 22, 1954. The jurisdiction of this Court

is invoked under 28 U.S.C., Section 1255.

QUESTION PRESENTED

Whether there was a tax-free reorganization

within the meaning of Section 112(b) (3) and (i) of

the Revenue Act of 1928 where the stockholders of

an insolvent corporation purchased the corpora-

tion’s assets at a receivership sale and formed a

new corporation to which those assets were trans-

ferred.

STATUTE INVOLVED

Revenue Act of 1928, c. 852, 45 Stat. 791, 816:

Sec. 112. REcoGNITION oF GAIN oR Loss.

(a) General rule—Upon the sale or ex-

change of property the entire amount of the

gain or loss, determined under section 111,

shall be recognized, except as hereinafter pro-

vided in this section.

(b) Exchanges solely in kind.—

* * * * *

(3) Stock for stock on reorganization.—

No gain or loss shall be recognized if stock

or securities in a corporation a party to a

reorganization are, in pursuance of the plan

of reorganization, exchanged solely for stock

or securities in such corporation or in an-

other corporation a party to the reorganiza-

tion.

* * 7 * *

(i) D-‘xstion of reorganization—As used

in this sec. and sections 113 and 115—

(1) 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 corpora-

tion, or substantially all the properties of

another corporation), or (B) a transfer by

a corporation of all or a part of its assets to

another corporation if immediately after the

transfer the transferor or its stockholders

or both are in control of the corporation to

which the assets are transferred, or (C) a

recapitalization, or (D) a mere change in

identity, form, or place of organization,

however effected.

(2) The term ‘‘a party to a reorganiza-

tion’’ includes a corporation resulting from

a reorganization and includes both corpora-

tions in the case of an 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.

STATEMENT

These consolidated cases were instituted in the

Court of Claims as suits for recovery of individual

income taxes paid for 1943 and of excess profits

taxes paid by the Meyer Jewelry Company for its

fiscal year ending January 31, 1943, and for the

taxable period February to July 31, 1943. (Pet.

App. 1-2.) On July 27, 1943, when taxpayers

equally owned all of the stock of Meyer Jewelry

Company, all of the assets of that corporation

(valued at $94,887.61) were distributed to them, in

pursuance of a plan of liquidation, in exchange for

their stock. (Pet. App. 27-28.) In the income tax

cases they claim that their gain on the liquidation

was less than the amount determined by the Com-

missioner of Internal Revenue and base that claim

on a contention that the old Meyer Jewelry Com-

pany experienced a nontaxable reorganization in

1931 which entitles taxpayers to add to their own

bases for their stock in the new Meyer Jewelry

Company the cost basis of the stock to the stock-

holders of the old corporation. (Pet. App. 5-6,

30-32.) The contention that the old Meyer Jewelry

Company experienced a nontaxable reorganization

in 1931 is also the basis of the claim of taxpayer

Leon R. Meyer, as transferee of the new Company,

to a refund of excess profits taxes paid by the latter.

(Pet. App. 6-8, 29, 31.) The Court of Claims held

that no nontaxable reorganization occurred in 1931

and accordingly dismissed taxpayers’ petitions for

refund of taxes. (Pet. App. 7-13.)

The court below made detailed findings of fact.

(Pet. App. 14-32.) Those facts which relate to

the alleged reorganization of Meyer Jewelry Com-

pany in 1931 may be summarized as follows:

The Meyer Jewelry Company, herein sometimes

called the ‘‘old corporation,’’ was incorporated in

1890 under the laws of the State of Missouri. Its

entire stock was originally owned by Lewis Meyer,

taxpayer Leon R. Meyer’s father. The corporation

repeatedly experienced financial difficulties, and

Mrs. Rika R. Meyer, taxpayer Leon R. Meyer’s

mother, from time to time furnished funds with

which the corporation’s obligations were met. As

the result of various transactions over the years,

in 1928 she became the owner of all the outstanding

stock of the corporation, which then consisted of

500 shares of common and 450 shares of preferred

stock, both of a par value of $100 a share. Some

time prior to 1931, she gave 50 shares to taxpayer

Leon R. Meyer. (Pet. App. 14-17.)

At the beginning of 1931 the corporation was

again in such financial difficulty that it was faced

with bankruptcy. As it had done on a previous

occasion, it undertook to make a composition set-

tlement with creditors. However, while negotia-

tions were continuing, certain creditors with note

claims in excess of $3,100 filed receivership proceed-

ings against the corporation in the United States

District Court for the Western District of Mis-

souri. In these proceedings, the court appointed a

receiver and turned over the old corporation’s as-

sets to him with directions to operate the business,

sell the assets, and compromise and settle all claims

and demands against the corporation. The receiver

operated the business for approximately four

months during which time, on July 3, 1931, inde-

pendent appraisers appointed by the court sub-

mitted their report to the court valuing the old

corporation’s assets at $50,211 (as against liabili-

ties of approximately $88,000). Louis Oppenstein,

acting as the agent of taxpayer Leon R. Meyer and

Mrs. Rika R. Meyer (who had been the sole stock-

holders of the old corporation), offered to purchase

the assets of the corporation for an amount suffi-

cient to pay 25 percent of all lawful claims of the

old corporation’s creditors, plus court costs, re-

ceiver’s fees, and certain additional amounts. On

July 9, 1931, the court authorized the sale to Oppen-

stein, noting that the receiver had reported that

he had been unable to realize from the old corpora-

tion’s assets the $50,211 at which the disinterested

appraisers had valued the old corporation’s assets. .

The receiver thereupon sold all the assets of the

old corporation to Oppenstein for $22,000, which

was sufficient to pay off the creditors at 25 percent,

plus receiver’s charges and court costs which made

the total cost to Oppenstein $28,515. The receiver

reported the sale to the court on July 17, 1931, and,

after approval of his accounts, he was discharged

on August 28, 1931. (Pet. App. 17-20.)

On July 17, 1931, after the sale ot the assets of

the old corporation to Oppenstein, taxpayer Leon

R. Meyer and Mrs. Rika R. Meyer, for whom Op-

penstein had acted as agent, caused a new corpora-

tion to be organized under the name of Meyer

Jewelry Company, with an authorized capital stock

of 300 shares of $100 par common stock. The cer-

tificate of incorporation was issued on July 20, 1931.

On the same day there was held a combined meet-

ing of the stockholders and directors of the new

corporation at which a resolution was adopted cov-

ering a purported plan of reorganization which

was neither contained in nor referred to by the

record in the District Court in the receivership

proceedings. Pursuant to this plan, the stock of

the old corporation was turned in and cancelled

and the stock of the new corporation was issued to

the former stockholders of the old corporation (tax-

payer Leon R. Meyer and Mrs. Rika R. Meyer) in

the same ratio, with no money being paid for the

stock of the new corporation, and the assets of the

old corporation were turned over to the new cor-

poration, which assumed and later paid a note in

the amount of $25,000 covering the sum Mrs. Rika

R. Meyer had furnished to Oppenstein to purchase

the assets of the old corporation from the receiver.

(Pet. App. 20-25.)

In setting up the financial statement of the new

corporation, assets were written down $62,751.31

to bring them in line with a fairer value for a going

eoncern. After this was done, the equity of the

stockholders had a book value of $51,161.68 as com-

pared with the liabilities of the old corporation in

the amount of approximately $88,000. (Pet. App.

25-26.)

ARGUMENT

The crux of the decision below is the settled

proposition that there can be no tax-free reorgani-

zation where there is no continuity of proprietary

interest between the owners of an old and a new

corporation. Le Tulle v. Scofield, 308 U.S. 415,

420-421; Pinellas Ice & Cold Storage Co. v. Com-

missioner, 287 U.S. 462. On the unquestioned find-

ings of the Court of Claims, this rule was properly

applied to this case. The result, which is clearly

correct and as to which there is no suggestion of

conflicting decisions, presents no occasion for re-

view by this Court.

As the court below found, contrary to taxpayers’

assertion (Pet. 7-8), the old corporation was insol-

vent in a bankruptcy sense and the shares its stock-

holders held were worthless. The old corporation

had current liabilities of approximately $88,000.

(Pet. App. 19.) Although its merchandise inven-

tory alone was carried on its books at $107,651.97,

this book figure was no indication of the true value

of the corporation’s assets. Independent apprais-

ers appointed by the court in the receivership pro-

ceeding appraised the assets at $50,211 (Pet. App.

18-19), and the new corporation itself, in setting up

its financial statement covering the same assets,

listed them at $51,161.68 (far less than the liabili-

ties of the old corporation) to assign to them a

fairer value for a going concern (Pet. App. 25).

Contrary to taxpayers’ statement (Pet. 8), the old

corporation never became solvent. Its assets were

sold by the receiver and the proceeds of the sale

were used to pay off creditors at 25 percent of book

liability.

In these circumstances, the court below properly

applied the rationale of the full priority rule in

determining that there had been no tax-free reor-

ganization. See Helvering v. Limestone Co., 315

U.S. 179. The taxpayers are correct, of course, in

stating (Pet. 6) that the rule is not a conclusive

_ test of a nontaxable reorganization. But the court

below did not apply it as such. The court simply

gave effect to the rule in demonstrating what the

facts of the receivership proceeding made clear be-

yond doubt—that the stock of the old corporation

was worthless and that there was lacking, therefore,

the continuity of proprietary interest requisite to

a tax-free reorganization.

The decisive point is that, as stockholders of the

old corporation, taxpayers Leon and Rika Meyer

had lost their proprietary interest by virtue of the

receivership proceeding pursuant to which the as-

sets of the old corporation were sold for cash to pay

off creditors. They had no equity interest in the

old corporation to carry over to the new one in ex-

change for the latter’s stock; as the court below

pointed out (Pet. App. 11), they acquired this stock

‘‘by virtue of the purchase of the assets [of the old

corporation] at the receivership sale.’’ They were

in a position like that in which third parties, stran-

gers to the old corporation, would have been had

they purchased the same assets and formed a new

corporation for their employment. These obvious

realities were not changed by the fact that the stock-

holders of the old corporation surrendered to the

new corporation their worthless stock in the old cor-

poration—a transaction which the court below

properly held was a meaningless formality.

NS SATS SSSA

In comparable cases, the courts have held that

no tax-free reorganization occurred. See Mascot

Stove Co. v. Commissioner, 120 F. 2d 153 (C.A. |

Co. v. Commissioner, 123 F. 2d 871 (C.A. 7th), cer-

tiorari denied, 315 U.S. 819; Templeton’s Jewelers

v. United States, 126 F. 2d 251 (C.A. 6th) ; Scofield

v. San Antonio Transit Co. (C.A. 5th), decided Au-

gust 5, 1954 (1954 P-H, par. 72,723) ; ef. Davis v.

Bankhead Hotel, 212 F. 2d 697 (C.A. 5th). Like

those cases, the decision below is clearly correct.

CONCLUSION

For the reasons stated, it is respectfully submit-

ted that the petition for a writ of certiorari should

be denied.

Simon E. SosBE.orr,

Solicitor General.

H. Brian Houuann,

Assistant Attorney General.

Exuis N. Siacx,

Metva M. GRANEY,

Special Assistants to the

Attorney General.

JANUARY, 1955.

XU. 5S. GOVERNWENT PRINTING OFFICE: 1955 327777 677

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.