
    Alice V. St. Onge, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70364, 70470-70473, 70815, 70816, 71263, 71342, 72530, 72664, 72701, 72930.
    Promulgated October 12, 1934.
    
      J. Robert Sherrod, Esq., and O. H. Ghmillon, Esq., for the. petitioners.
    
      Frederick R. Shearer, Esq., Wilford Pcm/ne, Esq., and Dean P. Kimball, Esq., for the respondent.
    
      
       Proceedings of the following petitioners are consolidated and decided herewith: George E. Harris ; Ivory C. Eaton; Ered D. Cross, Executor, Estate of Harry W. Kams-dell; Fred D. Cross; Lucy E. Shea; John R. Burnett; George N. Andrews; George A. Sylvester; George F. Thurber; Lester F. Thurber; Elizabeth J. Flanders; Walter Burnett.
    
   OPINION.

Muedock :

The petitioners in these cases contend in the first place that the transaction between the National Bank and the State Bank was a “ reorganization ” within the definition of that term given in section 112 (i) of the Eevenue Act of 1928. The words of the definition upon which they rely are as follows:

The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *.

The Supreme Court said, in Pinellas Ice & Gold Storage Co. v. Commissioner, 287 U. S. 462:

The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness can not be designated as either merger or consolidation.

In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, the court said:

A merger ordinarily is an absorption by one corporation of the properties and franchise of another whose stock it has acquired. The merged corporation ceases to exist, and the merging corporation alone survives. A consolidation involves a dissolution of the companies consolidating and a transfer of corporate assets and franchise to a new company.

If a given transaction in strictness can be designated as either a merger or a consolidation, it is a reorganization within the meaning of the definition, and the words in parenthesis are unimportant. If, however, a particular transaction, which in strictness cannot be designated as either a .merger or consolidation, nevertheless partakes of the nature of a merger or consolidation, it must be tested by the words in the parenthesis to see whether or not it is a reorganization within the meaning of the statute.

The National Bank did not acquire “substantially all the properties ” of the State Bank. Assets of the State Bank having a substantial value as compared to the value of all of the assets of that bank were not acquired by the National Bank. We refer to 1,000 shares of Pullman, Inc., stock and 1,000 shares of Nashua Manufacturing Co. preferred stock which had a value of $148,125 at the time of the transaction in question. These assets were distributed to the stockholders of the State Bank as an essential part of the very transaction in question. The distribution of the Pullman, Inc., and Nashua Manufacturing Co. stock was a part of the plan which was to result in the dissolution of the State Bank. That distribution was not an ordinary dividend, but was a distribution in liquidation. Sec. 115 (c). It cannot be disregarded in determining whether or not the National Bank acquired substantially all of the assets of the State Bank within the meaning of. section 112 (i). The cash distribution, although in a fractional amount to correspond to the usual dividend rate, was likewise a liquidating dividend. Since the National Bank did not acquire substantially all of the properties of the State Bank, the transaction was not a “ reorganization ” within the meaning of the parenthetical part of the definition. The case of Howard v. Commissioner, 56 Fed. (2d) 781, affirming 20 B.T.A. 207, is not in point, since in that case substantially all the properties were acquired.

However, the fact that the National Bank did not acquire substantially all of the properties of the State Bank would be immaterial if the transaction was one which in strictness could be designated as either a merger or a consolidation. Mergers and consolidations are inherently statutory. 7 Fletcher Cyclopedia Corporations, § 4670; First State Bank v. Lock, 113 Okla. 30; 237 Pac. 606; Knapp v. Supreme Commandery, 121 Tenn. 212; 118 S. W. 390; Jones v. Rhea, 107 S. E. (Va.) 814. Cf. Grange National Bank, 22 B. T. A. 1209; R. D. Musser, 2 B. T. A. 1031. If statutory provision has been made for mergers and consolidations and the necessary steps have been taken, a merger or consolidation occurs by operation of law. The enfranchisement of the resulting corporation is dependent upon some prior legislative enactment. The petitioners here contend that a consolidation or merger occurred under a Federal statute providing for the consolidation or merger of a state and national bank under the charter of the national banking association. See Act of November 7, 1918, 40 Stat. 1043, sec. 3, as added by Act of February 25, 1927, 44 Stat. 1224. The Federal statute provides for the consolidation of a state bank with a national bank after certain required steps have been taken to accomplish that result. A majority of the board of directors of each bank proposing to consolidate must lawfully agree upon terms and conditions upon which they desire to consolidate under the charter of the national banking association. The directors must call a meeting of the stockholders of each bank and publish notice of the time, place, and object of the meeting as provided in the Federal statute, and the agreement of the directors must be ratified and confirmed by the affirmative vote of at least two thirds of the shareholders at the meeting. The various steps must then be carried out and the Comptroller of the Currency must certify his approval of the consolidation. If these things are all clone in the proper manner, a consolidation of the two or more banks under the charter of. the national bank results. But if any essential step is omitted, there is no consolidation or merger under this act. Cf. City National Bank of Huron v. Fuller, 52 Fed. (2d) 870, affirming 52 Fed. (2d) 865.

The Commissioner has held that there was no reorganization. Thus the petitioners must establish by the evidence that there was a reorganization. Since the alleged reorganization depends upon a merger or consolidation under the Federal statute cited, the petitioners must show affirmatively that a consolidation or merger took place under that statute. This they have failed to do, for they have not shown that the provisions of the act were complied with. There is no showing that the directors of either bank ever agreed upon terms and conditions of consolidation. They agreed upon terms and conditions of a sale. There is no showing that the requirements of the act in regard to publication of the notice to the stockholders of these two banks were ever complied with or that the stockholders ever approved of a plan of reorganization. They approved of a plan of sale. Nor is there any showing that the Comptroller of the Currency in fact approved this transaction as a consolidation under this provision of the Federal statutes or issued any certificate of approval of the transaction as a consolidation under the law. There is in evidence a certificate from the Comptroller of the Currency authorizing the increase in the capitalization of the National Bank, but that can not possibly be construed as an approval by the Comptroller of a consolidation under the Federal statute.

The original plan evolved by the officers and directors of the two banks might have resulted in a consolidation or .merger, and, therefore, a reorganization, if that plan had been carried out, but it was never carried out. Instead, a different plan was followed, for reasons satisfactory to the parties, under which the assets and business of the State Bank were purchased by the National Bank for cash and the stock of the National Bank was purchased by the stockholders of the State Bank for cash. A trust fund was set up to guarantee the general depositors in the State Bank until they came in and transferred their accounts to the National Bank. The notices and resolutions referred to this plan of sale rather than to any plan for a consolidation or merger of the two banks under the Federal statute. Cf. City National Bank of Huron v. Fuller, supra; Drovers & Mechanics National Bank v. First National Bank, 260 Fed. 9; Central National Bank of Lincoln, Nebraska, 29 B. T. A. 719.

Since the transaction between the two banks was not a merger or a consolidation and the National Bank did not acquire substantially all of the properties of the State Bank, there was no reorganization within the definition of that term! contained in section 112 (i) of the Revenue Act of 1928, and we are unable to follow the petitioners in the very first step of their argument. The general rule provided in section 112 for the recognition of gain or loss is that upon the sale or exchange of property the entire amount of the gain determined under section 111 shall be recognized. The parties are agreed upon the basis for gain to these taxpayers on the State Bank stock. Section 111(c) provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property other than money received. The amount realized by these taxpayers from the disposition of their State Bank stock is therefore the total fair market value of the Pullman stock, the Nashua Manufacturing Co. stock, and the Second National Bank stock received by each, plus $1.33 per share received in cash. These total amounts were distributed in complete liquidation of a corporation and, therefore, under section 115(c) are to be treated as in full payment in exchange for the stock.

Reviewed by the Board.

Decision will be entered under Buie 50.

YaN FossaN dissents.

Black,

dissenting: It seems to me that the substance of the transactions involved in this proceeding is this: The stockholders of two banks, one a state bank and the other a national bank, were anxious to merge them. Certain difficulties were encountered and the final agreement or plan was that a certain amount of cash and the stock in Pullman, Inc., and the Nashua Manufacturing Co. owned by the Old Guaranty Savings Bank of Nashua should be distributed to the stockholders of that bank, and the remainder of its assets should be exchanged with the Second National Bank of Nashua for 1,500 shares of its capital stock, these shares to be ratably distributed to the shareholders of the state bank in exchange for their shares in the proportion of three shares of the national bank for each four shares owned in the state bank.

If my interpretation of these transactions is correct, then I think the provisions of section 112 (b) (3) and section 112 (c) (1) of the Revenue Act of 1928 apply, and the gain is to be recognized only to the extent of the cash and the stock in Pullman, Inc., and the Nashua Manufacturing Co., which were distributed to the stockholders of the state bank.

It is true that the form of a sale of the remaining assets of the state bank to the national bank for $461,947.74 was carried out, and this $467,947.74 was immediately used to purchase 1,500 shares of stock in the national bank, and these shares were ratably distributed to the stockholders of the state bank, and it was dissolved. Was not this at least akin to a merger? Was the form of a sale of the assets and the immediate purchase of stock with the check so as to comply with the national banking laws substantially different from that which we had before us in Harry C. Howard, 20 B. T. A. 207?

The Circuit Court, in affirming our decision in the Howard case, 56 Fed. (2d) 781 (certiorari denied, 287 U. S. 619), among other things, said:

The section of the 1921 act just cited provides that: “ When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization,” no gain or loss shall be recognized. The word “ reorganization ” is defined by the section itself as including merger and consolidation (including the acquisition by one corporation of substantially all the properties of another corporation). Had the substance of what was contemplated and done been a disposition of the assets of the Michigan corporation for the sum of $625,000, paid or to bo paid in cash, whether such sum was in fact temporarily paid by a ninety day note or by other evidences of indebtedness in amounts certain, and whether such other evidences of indebtedness were held by the vendor company, or were then or subsequently distributed among the preferred stockholders, we do not doubt that the petitioner would be entitled to deduct the loss claimed; but we cannot see in the transaction disclosed by the present record aught but a financial reorganization of the Michigan corporation wherein and whereby the preferred stockholders were to acquire a proportionate interest in common stock of the Illinois or purchasing corporation.
The evidence discloses that there was some doubt whether the Michigan corporation law permitted a corporation to sell its assets for anything but cash. The note was given to allay such misgivings, but it would.seem clear that the course pursued was merely a subterfuge whereby assets could be purchased with stock. There was, it would seem, no intention to pay the note in cash. The giving of the note with the accompanying option was merely the means whereby the preferred stockholders were to acquire an interest of diminished value in the new corporation in exchange for and in lieu of their stock in the old: The present case falls within the letter of. section 202 (e) (2) of the Revenue Act of 1921, and, we think, also within its spirit. The transaction would therefore not be closed until the petitioner eventually disposed of his stock in the Illinois corporation or until its value finally became extinct within the meaning of the Royal Packing Company and De Loss cases above cited.

Of course it seems clear that whatever gain resulted to petitioners from the distribution to them of the cash and the stock in Pullman, Inc., and stock in the Nashua Manufacturing Co. was taxable to them under section 112 (c) (1), but, in my judgment, the transfer to the national bank of all the remaining assets of the state bank after the foregoing distribution to its stockholders, and the receipt therefor by the state bank of 1,500 shares of stock of the national bank and the distribution thereof to the stockholders of the state bank, three shares for four, and the subsequent dissolution of the state bank, ivas a reorganization within the provisions of section 112 (i) of the Revenue Act of 1928, and the exchange of stock for stock by petitioners is, under section 112 (b) (3), nontaxable. As said in the Howard case, supra, the transaction would not be closed until the petitioners eventually disposed of their stock.

AeuNdeix and Adams agree with this dissent.  