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Publication v. Commissioner of Internal Revenue.

decided: February 8, 1960.


Author: Kalodner

Before GOODRICH and KALODNER, Circuit Judges and WOOD, District Judge.

KALODNER, Circuit Judge.

Is the sale of stock of a corporation pursuant to a state "deadlock" statute providing for its dissolution in the event of a stalemate between equally divided directors and stockholders, a "requisition" or "condemnation" within the meaning of Section 112(f) of the Internal Revenue Code of 1939, as amended?*fn1

The question, of first impression, is presented by this petition for review of the Decision of the Tax Court of the United States which answered it in the negative.

The facts pertinent to the issue may be summarized as follows:

At the times critical here, petitioner, Dear Publication & Radio, Inc.,*fn2 a New Jersey corporation ("taxpayer") and Post-Standard Company,*fn3 a New York corporation ("Post-Standard") each owned 50 per cent of the capital stock of The Evening Journal Association, a New Jersey corporation ("Association") which published The Jersey Journal, a daily newspaper in Jersey City, New Jersey.Association had four directors, two chosen by taxpayer and two by PostStandard. They were unable to agree with respect to the management of Association and a stalemate resulted.In 1948, Post-Standard brought suit in the Superior Court of New Jersey to dissolve and liquidate Association under the New Jersey "deadlock" dissolution statute, (New Jersey General Corporation Law, Title 14, Revised Statutes 14:1315, N.J.S.A.). After prolonged litigation the Superior Court of New Jersey in July, 1951,*fn4 rendered its opinion in which it held that Association's petition for dissolution should be granted, and that a receiver be appointed by the court to sell its assets.

Prior to the entry of the court's judgment, taxpayer and Post-Standard entered into a competitive bidding agreement whereby each agreed to bid for the other's 50 per cent stock interest in Association. At an auction which followed in October, 1951, taxpayer's stock interest was bid in by Post-Standard for $2,310,000. Payment was made several days later, and the stock assigned. Subsequently, the action in the Superior Court of New Jersey was dismissed on application of the parties. Thereafter, taxpayer used the proceeds of the sale of its stock to purchase other newspaper properties and in its income tax for the fiscal year in question (1952) did not report its gain from the sale of its stock in Association. It so acted on its theory that such sale, under the circumstances recited, was an "involuntary conversion" within the meaning of Section 112(f) of the 1939 Code. The Commissioner, however, disagreed. He determined that there was a net long-term capital gain on the sale in 1952 of $1,546,719.98*fn5 and assessed a deficiency of income tax in the amount of $402,155.94. The Tax Court agreed with the Commissioner.*fn6 In doing so it specifically rejected taxpayer's contention that the sale of its stock was an "involuntary conversion" and held it was not made "under threat or imminence of requisition or condemnation" within the meaning of Section 112 (f) of the 1939 Code.*fn7 In doing so it stated:

"Under the New Jersey statute, the court is merely empowered to decree the dissolution of a corporation where the management and ownership is equally divided and in disagreement. In such a situation, there is no taking by governmental authority, much less a taking for public purposes. There was no threat or imminence of a requisition in the instant case."

The sum of taxpayer's contention here is that the Tax Court erred in holding that there was no "requisition" or "condemnation" of its property by virtue of a dissolution under the New Jersey "deadlock" statute because there did not result a "taking" for "public purposes", since, it says (1) a "requisition", within the meaning of Section 112(f), does not require a taking for "public use", and, (2) the judgment of the New Jersey court dissolving Association would have resulted in the "condemnation" of its stock interest and "hence the threat of such condemnation brings this case within the provisions of Section 112(f)."

We cannot subscribe to taxpayer's contention.

The New Jersey "deadlock" statute*fn8 provides for a dissolution of a corporation by judicial decree where its evenly divided directors and voting stockholders "are equally divided respecting the management of its affairs."

In RKO Theatres, Inc. v. Trenton-New Brunswick Theatres Co., Ch. Div. 1950, 9 N.J. Super. 401, at page 409, 74 A. 2d 914, at page 918 it was said:

"* * * Succinctly defined, a deadlocked corporation is one which, because of decision or indecision of stockholders, cannot perform its corporate powers. * * *" and at page 410 of 9 N.J. Super., at page 918 of 74 A. 2d:

"From the point of view of the public interest, the incapacity of the corporation to function transcends in importance the suspicions, apprehensions, and animosities which divide and motivate the stockholders. * * * If this corporation is unable to function in the manner ordained by ...

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