Appeal from the Board of Tax Appeals.
Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.
The petitioner owned 1,029 shares of the common stock of the Kimberly-Clark Company, a paper manufacturer of Neenah, Wis. In 1920 it organized a corporation, later called the Kotex Company, to which it transferred its cellucotton absorbent wadding business owning 89 per cent. of the capital stock, and the officers and employees of the latter company owned 11 per cent. Until 1927, the business of both was carried on at the plant at Neenah, Wis., with joint management, manufacturing, and office facilities.
The Kimberly Company manufactured and sold the absorbent wadding to the Kotex Company, and the latter fabricated the material into specialties which it sold under trade-names. The Kotex business grew rapidly, so that it became the Kimberly Company's best customer, and this gave rise to problems of management, advertising, and distribution. Selling its articles on a national scale to thousands of distributors, business judgment dictated the need of changing the main office of the Kotex Company to Chicago, where it might obtain more extensive credits and collection facilities than were possible at Neenah, Wis. It was considered necessary for business reasons to separate the operations of the two companies by a reorganization. A new corporation was organized, and there was an exchange of stock of the Kotex Company and the acquisition of its assets by the new corporation; also the distribution of 11 per cent. of the new company's stock to the minority stockholders of the Kotex Company and 89 per cent. to the stockholders of the Kimberly Company. To accomplish this, a deposit agreement dated November 1, 1926, was signed by the Kimberly Company and other stockholders of the Kotex Company; also by all the stockholders of the Kimberly Company and by a deposit committee of five members, who were the principal directors and stockholders of the Kimberly Company. The agreement vested absolute power in the committee to carry through the contemplated reorganization, and it was empowered to do anything it deemed expedient effectively to carry out the general plan. The owners of the Kotex Company stock obligated themselves to deposit their stock with the committee to be "held by the sole direction of the committee" with power to act as "the absolute owner of the shares so deposited." It provided that the Kimberly Company might distribute its stock in the Kotex Company, in which event the shares so distributed would be issued to the deposit committee and would be bound by the deposit agreement.
The reorganization plan of the Kotex Company was executed December 1, 1926, by Kotex Company, Kimberly Company, and the deposit committee and certain stockholders of both companies. It contained a concise statement of the plan agreed upon, and provided "that it is the understanding of the parties hereto that each and every of the steps as herein above outlined and of the provisions of this contract are part of a plan of reorganization of the Kotex Company (Wisc.) and its business."
The deposit committee organized, on December 8, 1926, under the laws of Delaware, a corporation named International Cellucotton Products Company. On January 3, 1927, the Kimberly Company delivered all of its stock in the Kotex Company directly to the committee and adopted a resolution reciting that the company had become a party to the plan and provided that "for the purpose of carrying out and effectuating the reorganization plan as contemplated in the deposit agreement * * * and as agreed upon in the reorganization plan * * * a dividend be declared in the form of 44,749 shares of no par capital stock of the Kotex Company," and that the dividend be paid by distributing to the holders of the common stock of the Kimberly Company these shares pro rata in proportion to their stock holdings of the Kimberly Company as of that date. The shares were to be delivered to the deposit committee to the extent that the stockholders signed the deposit agreement or the reorganization agreement and that the request received from the deposit committee addressed to the Kimberly Company be complied with and stock certificates issued in accordance therewith. On the same day, Kimberly Company indorsed in blank the certificates representing 89 per cent. stock interest in the Kotex Company and delivered them to the Kotex Company. It thereupon issued new certificates pro rata in the names of the Kimberly Company stockholders and delivered the same to the deposit committee. Upon the receipt of these certificates in this form, the deposit committee indorsed them in blank, delivered them to the Kotex Company, and received in exchange one certificate in the name of the deposit committee. The following day, the deposit committee exchanged this certificate representing all the stock of the Kotex Company for all the stock of the International Cellucotton Products Company which was issued in the name of the deposit committee. Thereupon the International Cellucotton Products Company and its newly organized subsidiaries took over substantially all the assets of the Kotex Company.
In completing the organization of the International Cellucotton Products Company and its subsidiaries, the deposit committee selected as officers and directors individuals who were officers and directors of the Kimberly Company and who were officers and directors of the Kotex Company. The deposit committee, on February 2, 1927, thereupon notified the depositors of the Kotex Company stock that they were entitled to receive shares of preferred and common stock in the new International Cellucotton Products Company in proportion to the stock of the Kotex Company deposited by them.
The petitioner received 1,847 shares of common and 336 shares of preferred stock of the International Cellucotton Products Company by reason of his ownership of 1,029 shares of Kimberly Company.
Because of the resolution of January 3, 1927, and the delivery by the Kimberly Company of its Kotex Company stock to the Kotex Company and making out a certificate in the name of the Kimberly Company stockholders pro rata and the delivery of such certificates to the deposit committee, it was ruled by the Commissioner that the petitioner, as a stockholder of the Kimberly Company, received a distribution of the Kotex Company stock within the meaning of section 201 (a) of the Revenue Act of 1926 (44 Stat. 10), and such distribution was taxable as a dividend to the extent of the value of the stock. The Board of Tax Appeals held that the receipt by petitioner of the International Cellucotton Products Company stock, pursuant to the plan of reorganization, was a tax-free distribution under section 203 (b) (4) of the Revenue Act of 1926 (44 Stat. 12), but that intermediate in the execution of the unified plan petitioner constructively received from the Kimberly Company a taxable dividend of the Kotex Company stock.
By signing the deposit agreement, each stockholder agreed that his pro rata share of the Kotex Company stock should be delivered to the deposit committee as his "agent, attorney and representative"; the deposit committee thereafter to have full authority to bind and act for each depositor as fully as he might do as the absolute owner of the shares. Thus the Kimberly Company effectively divested itself of the ownership of the Kotex Company stock on January 3, 1923, and it follows that the petitioner is taxable under sections 201, 213 (a) of the Revenue Act of 1926 (44 Stat. 10, 23) upon his pro rata share of that dividend, unless some provision of the act grants him exemption.
The petitioner argues that there was no taxable gain to him within the statute. The Revenue Act 1926 provides, section 203 (c), 44 Stat. 12: "If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized." See Regulations 69, art. 1576.
The distribution to Kimberly Company's shareholders was avowedly pursuant to a plan of reorganization. The Board found that Kotex Company business needed a great amount of advertising and that Kimberly Company's biggest customers were publishers who forced Kotex to place its advertising with them, regardless of the fitness of their publications. Thus, independence for the Kotex Company seems a bona fide aim of the reorganization. The distribution accomplished this.
No securities in the Kimberly Company were surrendered by the petitioner. The stock distributed and taxed was the Kotex Company, a party to the reorganization. The petitioner was a shareholder in the Kimberly Company. Was that corporation a party to the reorganization? Section 203 (h) (2), Revenue Act 1926 (44 Stat. 12) reads: "The term 'a party to a reorganization' includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a ...