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Commissioner of Internal Revenue v. Tyng

August 3, 1939


Appeals from the Board of Tax Appeals.

Author: Hand

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

Both the Commissioner of Internal Revenue and the taxpayers Tyng and Buchsbaum appeal from orders of the Board of Tax Appeals redetermining the income of the taxpayers for 1929.

Two questions are involved in the appeals. The first is whether the transaction about to be described was a "reorganization" within Section 112(i)(1) of the Revenue Act of 1928, 26 U.S.C.A. § 112 note. If it was such a "reorganization" (and that it was one the Board found), then by virtue of Section 112(b)(3) and (c)(1), 26 U.S.C.A. § 112(b)(3), and (c)(1), no gain should be recognized upon the property received in exchange other than the cash.

Subdivision (i)(1) of Section 112 defines reorganization thus:

"(i) Definition of Reorganization. As used in this section and sections 113 and 115 -

"(1) The term 'reorganization' means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected."

The other provisions of Section 112 which are relevant read as follows:

"(b) Exchanges solely in kind - * * *

"(3) Stock for stock on reorganization. No gain or loss shall be 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.

"(c) Gain from exchanges not solely in kind -

"(1) If an exchange would be within the provisions of subsection (b) * * * (3) * * * of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property."

W. S. Barstow & Co. of Delaware (hereinafter referred to as Barstow & Co.) owned about 55 1/2% of the voting stock of General Gas & Electric Corporation. Barstow Securities Corporation of Delaware (hereinafter called Securities) owned 94,005 shares of the common stock of Barstow & Co. that was issued and outstanding, William Buchsbaum owned 1,800 shares, and others the remaining 9,960 shares. There were also 6,981 shares of preferred stock of Barstow & Co.

Of the stock of Securities outstanding the taxpayers Tyng and Buchsbaum owned 21,665 and 7,540 shares respectively and their associates owned the remainder. The Associated Gas & Electric Co. (hereinafter called Associated) sought control of General Gas & Electric Corporation and finally gained it by buying up stock control of Securities and Barstow & Co.

On February 5, 1929, the owners of the stock of Securities and of Barstow & Co. signed a contract for the sale of their stock to Associated Gas & Electric Company for the sum of $50,000,000 in cash, but three of the twenty-three stockholders of Securities, namely, Tyng, Buchsbaum and W. S. Barstow signed the contract subject to an oral agreement simultaneously entered into that the written contract should be modified by providing for payment of part of the consideration, to be furnished by Associated, in obligations of the latter, rather than wholly in cash. One of the reasons for demanding that the payment be made in part in such obligations was the desire of the three stockholders to lessen their income taxes, and they advised one Daly, who represented Associated in the negotiations, that the transaction would not be made on a cash basis.

On February 11, 1929, an agreement was made, supplementary to that of February 5, by the terms of which the transferors could, in payment for their stock, demand certain obligations of Associated for all or any part of the purchase price above the $10,000,000 cash already deposited by it in escrow.

Under this agreement the transferors elected to receive and actually were paid cash in the sum of $34,699,528.54 and the following securities in Associated valued at $15,208,021.60:

4 1/2% convertible gold debentures, dated January 15,

1929, due January 15, 1949, face value

$11,776,000 at 93 $10,951,680.00

Accrued interest ...

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