Petitions for Review from the United States Board of Tax Appeals.
Before MARIS, BIDDLE, and BUFFINGTON, Circuit Judges.
These are petitions for review of a decision of the Board of Tax Appeals sustaining a deficiency in the income tax for the year 1931 of the Hedden Iron Construction Company (hereinafter called Hedden), assessed against the petitioners as transferees of the assets of Hedden.
Bethlehem Steel Corporation (hereinafter called Bethlehem) was given an option to acquire the assets of Hedden. In accordance with a prearranged plan and at the direction of Bethlehem Hedden transferred all its New Jersey real estate to Union Iron Works Company (hereinafter called Union) and all its remaining assets to McClintic-Marshall Company (hereinafter called McClintic), both being wholly owned subsidiaries of Bethlehem. Bethlehem gave its own bonds having a cash value of $1,250,000 and $16,400 in cash to Hedden and set upon its books inter-company accounts receivable and notes receivable from Union and McClintic. Hedden sold some of the bonds and thereafter distributed cash and the remaining bonds to its stockholders, the four petitioners herein.Thereafter Hedden was dissolved. The gain to Hedden from the transaction was $421,193.23, and the deficiency in tax in respect thereof was assessed by the Commissioner against the petitioners as transferees.
The question is whether the gain realized by Hedden is recognizable for tax purposes. The Commissioner concedes that if the transaction amounted to a statutory reorganization under Section 112(i)(1)(A) and if Bethlehem was a party to the reorganization within the meaning of Section 112(i)(2) of the Revenue Act of 1928, 26 U.S.C.A. § 112 note, the gain is not taxable. We set out in the margin the applicable portions of the Act.*fn1
The petitioners do not claim that there was a statutory reorganization as between Hedden and the two transferee corporations, Union and McClintic. Their claim is that the transaction between Hedden and Bethlehem constituted a non-taxable reorganization. Had Hedden transferred its assets to Bethlehem and received in exchange a continuing interest in those assets by reason of its receipt of the securities of the transferee corporation, a statutory reorganization would have resulted. Helvering v. Minnesota Tea Co., 296 U.S. 378, 56 S. Ct. 269, 80 L. Ed. 284. The petitioners claim that Bethlehem was in fact the acquiring corporation; that it contracted for the right to have the assets of Hedden transferred to itself or its nominees; that it gave its own bonds to effect the reorganization; that a transfer to its wholly owned subsidiaries was in reality a transfer to itself.
In our opinion the question involved is indistinguishable from that raised in Groman v. Commissioner, 302 U.S. 82, 58 S. Ct. 108, 112, 82 L. Ed. 63, where the Supreme Court was called upon to determine the meaning and scope of the phrase "a party to a reorganization" as used in Sec. 112 of the Revenue Act of 1928. In that case the Glidden Company in furtherance of an agreement with the shareholders of Metals Refining Company, an Indiana corporation, referred to as Indiana, organized an Ohio corporation, referred to as Ohio, and became the owner of all its common stock. The shareholders of Indiana transferred their stock to Ohio and received in exchange Glidden prior preference stock, shares of the preferred stock of Ohio and cash. Indiana thereupon transferred its assets to Ohio and was dissolved. In his income tax return the petitioner, a shareholder of Indiana, included the cash received by him for his Indiana stock but ignored the shares of Glidden and of Ohio as stock received in exchange in a reorganization. The Commissioner agreed that inasmuch as the Ohio stock had been received in part payment for that of Indiana the exchange did not give rise to income but ruled that as to the Glidden shares the transaction resulted in a taxable exchange since Glidden was not a party to the reorganization. This ruling was sustained by the Supreme Court. In determining that Glidden was not a party to the reorganization the Supreme Court said:
"Glidden received nothing from the shareholders of Indiana. The exchange was between Indiana's shareholders and Ohio. Do the facts that Glidden contracted for the exchange and made it possible by subscribing and paying for Ohio's common stock in cash so that Ohio could consummate the exchange, render Glidden a party to the reorganization?No more so than if a banking corporation had made the agreement with Indiana's shareholders and had organized the new corporation, and, by subscription to its stock and payment therefor in money and the banking company's stock put the new company in position to complete the exchange. Not every corporate broker, promoter, or agent which enters into a written agreement effectuating a reorganization, as defined in the Revenue Act, thereby becomes a party to the reorganization. And, if it is not a party, its stock received in exchange, pursuant to the plan, is 'other property' mentioned in section 112(c)(1) and must be reckoned in computing gain or loss to the recipient. Glidden was, in the transaction in question, no more than the efficient agent in bringing about a reorganization. It was not, in the natural meaning of the term, a party to the reorganization. * * *
"If cash or 'other property', that is, property other than stock or securities of the reorganized corporations, is received, present gain or loss must be recognized. Was not Glidden's prior preference stock 'other property' in the sense that its ownership represented a participation in assets in which Ohio, and its shareholders through it, had no proprietorship? Was it not 'other property' in the sense that qua that stock the shareholders of Indiana assumed a relation toward the conveyed assets not measured by a continued substantial interest in those assets in the ownership of Ohio, but an interest in the assets of Glidden a part of which was the common stock of Ohio? These questions we think must be answered in the affirmative. To reject the plain meaning of the term 'party,' and to attribute that relation to Glidden, would be not only to disregard the letter but also to violate the spirit of the Revenue Act."
We have quoted thus extensively from the opinion of the Supreme Court in the Groman case in order to emphasize how aptly its reasoning applies to the facts in the instant case. The taxable consideration in the Groman case moved from the parent corporation Glidden, and not directly from the transferees. Glidden was held not to be a party to the reorganization. In the instant case, the consideration moved from Bethlehem rather than from Union and McClintic, the transferees. In order not to be taxable the consideration must come from a party to the reorganization. Bethlehem was not such a party.
Nor did Hedden by reason of its acquisition of the Bethlehem bonds receive a definite and material interest in the affairs of the transferee companies, Union and McClintic, representing a substantial part of the value of the assets transferred which is an essential element of a nontaxable transfer. Helvering v. Bashford, 302 U.S. 454, 58 S. Ct. 307, 82 L. Ed. 367. As we said in Commissioner of Internal Revenue v. Freund, 3 Cir., 98 F.2d 201, 205: "To come within the exemption of the statute one who transfers property to a corporation must acquire an interest in the affairs of the transferee corporation or continue to retain an interest in the properties transferred, * * * and this interest must be definite and material; it must represent a substantial part of the value of the thing transferred."
Petitioners argue taht Bethlehem rather than its subsidiaries must be considered as the real party in interest and therefore, the acquisition of its bonds by Hedden assured to the latter the necessary continuing interest in its assets. The Supreme Court in Groman v. Commissioner, supra, denied the validity of a similar argument. Justice Roberts said (302 U.S. at page 89, 58 S. Ct. at page 112, 82 L. Ed. 63): "It is argued, however, that Ohio was the alter ego of Glidden; that in truth Glidden was the principal and Ohio its agent; that we should look at the realities of the situation, disregard the corporate entity of Ohio, and treat it as Glidden. But to do so would be to ignore the purpose of the reorganization sections of the statute, which, as we have said, is that where, pursuant to a plan, the interest of the stockholders of a corporation continues to be definitely represented in substantial measure in a new or different one, then to the extent, but only to the extent, of that continuity of interest, the exchange is to be treated as one not giving rise to present gain or loss."
In the instant case after the transfer Union and McClintic had Hedden's assets but the latter no longer ahd an equivalent continuing interest in the assets, for what it obtained in exchnage were not securities in Union and McClintic, but in Bethlehem, a company whose corporate existence was separate and distinct from that of its subsidiaries.The fact that Union and McClintic were wholly owned subsidiaries of Bethlehem is, as we have seen, immaterial since they were separate corporations with distinct assets and liabilities whose existence we are not authorized by the Revenue Act to ignore. It is clear that they were not nominees in the sense of being straw parties or trustees solely for the purpose of holding title for Bethlehem to ...