Petition for Review of Decision of the United States Board of Tax Appeals.
Before EVANS, Circuit Judge, and LINDLEY and BRIGGLE, District Judges.
The Commissioner appeals from a ruling of the Board which held that the stock under consideration, received by respondent, was not taxable to him as gain because received in the course of a reorganization.
The Facts. Respondent was a stockholder in the Metals Refining Company, an Indiana corporation. The Glidden Company is an Ohio corporation. On January 29, 1929, the Glidden Company and all the stockholders of Metals Company entered into an agreement whereby all the stock of the Metals Company was to be transferred to a third company (Metals Refining Co. of Ohio), an Ohio corporation, to be formed by the Glidden Company. The consideration to the stockholders of Metals Company for the transfer was $153,036.66 cash; 5276 shares of 7% prior preferred stock of the Glidden Company at $105 per share; and 5000 shares of 6% cumulative preferred stock of the new company.
Each shareholder of the Indiana corporation, of which respondent was one, received the percentage of this total consideration that his stock holdings bore to the total outstanding stock of said Indiana company. Glidden Company paid cash for the common stock of the new Ohio Company. It did not receive any of the preferred stock of this company. The Indiana company was dissolved. Its assets were valued at $1,207,046.66. It is admitted that the cash received by stockholders was taxable and also that respondent's proportion of the 5000 shares of the preferred stock of the new Ohio Company by him received was not taxable. The issue is limited to respondent's proportion of 5276 shares of preferred stock of Glidden Company.
Did the Board of Tax Appeals correctly hold that the Glidden Company was a party to a reorganization within the meaning of section 112 (i)(2) of the Revenue Act of 1928?
The pertinent reorganization sections are:
"§ 112. (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) * * * (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 another corporation a party to the reorganization.
"(4) Same -- Gain of corporation. No gain or loss shall be recognized if a corporation a party to a reorganization exchanges propetty, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization. * * *
"(5) (c) Gain from exchanges not solely in kind. -- (1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
"(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The ...