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Commissioner of Internal Revenue v. Gilmore's Estate and Six Other Cases .

August 28, 1942


On Petitions for Review of the Decisions of the United States Board of Tax Appeals.

Author: Goodrich

Before BIGGS, MARIS, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

Under ยง 112(b)(3) of the Revenue Act of 1934,*fn1 under which this litigation arises, no gain or loss is 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." One of the given definitions of a "reorganization" is a "statutory merger or consolidation".*fn2 This appeal presents two questions: first, whether the transaction, hereinafter described, between a holding company and operating company constituted a "statutory merger or consolidation" and secondly, if it did, whether it was, nevertheless, of such a character that the exchange of stock incident thereto was a taxable event.

The respondents were shareholdrs in the Webster Finance and Investment Company, a New Jersey holding company. They had received their shares from Warren Webster, Sr., who, upon the organization of the holding company in 1927 obtained all its shares for a bare majority of the stock of the operating company, Warren Webster and Company, incorporated in New Jersey in 1895. There is evidence in the record, although no express finding of fact by the Board, that the device of a holding company was chosen by Mr. Webster to insure that the control of the operating company remain in the hands of those active in its management and at the same time enable him to distribute non-controlling beneficial interests, the non-voting stock of the holding company which constituted half of its shares, to the members of his family and employees who at the time did not participate in its mangement or whose future relationship thereto was uncertain.

On October 28, 1935, the directors of the two corporations executed an "Agreement of Merger and Consolidation". The agreement provided that the operating company was to be the surviving corporation. All "rights, privileges, powers and franchises" of the holding company and "all [its] property, * * * except as otherwise provided in Article X" were to vest in the survivor. Under the latter Article, all of the assets, with the exception of the shares of the operating company, were to be distributed as a dividend to the shareholders of the holding company which was to transfer the shares it held in the operating company to the surviving corporation. There was an additional article which enumerated the powers of the surviving company.

After approval by the respective shareholders, the agreement was filed with the Secretary of State of New Jersey. The respondents, in accordance with a provision of the agreement of merger, surrendered their holdign company stock to the surviving corporation and received its shares in return. The holding company stock was thereupon cancelled. The Commissioner asserted that the respondents were taxable upon the gain resulting from this exchange. The Board of Tax Appeals, two members dissenting, did not sustain his position*fn3 and he took this appeal.

Was There a Statutory Merger?

We reject without hesitation the Commissioner's firat argument that there was no merger. Admonished by the argument that we should apply Congressional language in the ordinary sense we think that the term used by Congress "statutory merger or consolidation" means, as Treasury Regulation 86, Art. 112(g)-2 states "a merger or cosolidation effected in pursuance of the corporation lwas of a State or Territory or the District of Columbia." The Commissioner's argument, based upon the dissenting opinion of the Board contends that all of the definitions of the term "merger" require that there be a transfer of property. There was no transfer of property, so it was argued, in the surrender by the holding company to the operating company of the shares of the latter corporation.

One may question whether this argument is now open to the Commissioner. A stipulation between the parties states that the "Agreement of Merger and Consolidation" was approved by the stockholders of the two companies in conformity with the general corporation law of the State of New Jersey and that the appropriate officers of the companies, following the requirements of the New Jersey statute filed the certificates with the appropriate official.*fn4 However, this point need not be stressed to conclusion. Possibly all that was meant to be admitted was that certain of the statutory procedures was in fact followed. The conclusion that there was a statutory merger can stand upon other bases.

The Board's finding of fact states that the officers of the companies followed the requirements of the statutes of New Jersey in filing their documents relative to the merger and that "The filing of those documents effected the merger of the two corporations." The New Jersey statutes provide for a certification by the Secretary of State of a copy of the agreement filed and that such certification "shall be evidence of the existence of such new or consolidated corporation." N.J.S.A. 14:12-3. Such certification is part of the record in this case.*fn5

Furthermore, we can find no provision under the New Jersey Statutes on "Merger or Consolidation", N.J.S.A. 14:12-1 et seq., which makes it a prerequisite to a merger that there be a transfer of property as contended by the Commissioner. Section 14:12-5 does provide that when a merger or consolidation is effected "all the rights, privileges, powers and franchises * * * privileges, powers and franchises * * * all * * * property [etc.] shall vest in the consolidated corporation as effectually as they were vested in the several and respective former corporations." However, this falls far short of saying that if the absorbed corporation owned no property, it could not participate in a merger. Were the Commissioner's contention valid, then it would follow that a "pure" holding company could not become a party to a merger in New Jersey. No statute or decision of that State standing for this proposition has been cited to us; nor have we been able to find any to this effect.

We see no basis on which it can be held that the transaction here questioned was not a merger under the New Jersey statutes and, therefore, not a literal compliance with the Act of Congress within the definitions of the New Jersey statutes and within the ...

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