The opinion of the court was delivered by: LEVET
Opinion, Findings of Fact and Conclusions of Law
After Remand from Court of Appeals.
My original Opinion, Findings of Fact and Conclusions of Law were dated and filed April 16, 1964. That opinion is in 273 F. Supp. 449, 13 A.F.T.R. 2d 1439. By decision of the United States Court of Appeals, Second Circuit, handed down July 26, 1966, 364 F.2d 525, the case was remanded for further proceedings as hereinafter set forth.
The net effect of the decision of the Court of Appeals was to affirm the District Court's decision as to the River Construction Corporation and to remand for further testimony, findings of fact, and conclusions of law, issues with respect to the tax transactions of the two corporate plaintiffs in relation to a "reorganization" involved in the above-entitled suit. (See Findings 25-37 and Conclusions of Law 4-7 in the previous District Court opinion)
Pursuant to the suggestion of the Court of Appeals (p. 538), the government interposed no objection, and this court thereupon granted plaintiffs leave to amend their complaint and, likewise, allowed defendant to amend its answer. These amendments were as follows:
(a) The second cause of action of the complaint was amended by adding to Paragraph 25 the following sentence:
"The deficiency and interest were further unlawfully imposed upon said plaintiff for the reason that if its sale of plant and equipment to Plaintiff Spencer, White & Prentis, Inc. is determined to be a nontaxable transaction, then all taxes and interest paid on such transaction should be credited or refunded to said taxpayer."
(b) The answer to the second cause of action was amended to read as follows:
"Denies the allegation of Paragraph 25 of the complaint, as amended, and further alleges that this Court is without jurisdiction to grant the relief sought in Paragraph 25 of the complaint, as amended, in that the claim for credit or refund sought, is barred by the statute of limitations."
(See Pretrial Order filed March 3, 1967, p. 1)
Pursuant to the opinion of the Court of Appeals, 364 F.2d 525, and with the consent of the parties, the issues were defined by pretrial order as follows:
(a) When was the plan of reorganization finally consummated?
(b) What assets (other than those as to which the parties have stipulated) were transferred to New Spencer as part of the plan of reorganization? Specifically, were stock in Drilled-In-Caisson Corp. and goodwill as identified by the defendant, or the corporate name, as identified by the plaintiffs, transferred by Old Spencer to New Spencer as part of the plan of reorganization?
(c) Were the assets transferred by Old Spencer to New Spencer solely in exchange for stock and securities? Specifically, did any of the consideration received by Old Spencer as part of the reorganization constitute "other property" within the meaning of the Internal Revenue Code?
(d) In the event that any or all of the consideration transferred by New Spencer to Old Spencer constituted "other property," have plaintiffs proved that Old Spencer recognized gain on the transfer? Specifically, did the value of all the consideration received by Old Spencer from New Spencer exceed the adjusted cost basis of the property transferred by it to New Spencer as part of the reorganization?
(e) In the event that the Court finds that Old Spencer received "other property" as part of the reorganization, and that Old Spencer was entitled to recognize gain (to the extent of the value of the "other property"), how shall the amount equal to that gain be apportioned for the purpose of determining their basis, among the assets other than cash and the equivalent of cash which were received by New Spencer as part of the reorganization?
(f) In the event that the court finds that New Spencer is entitled to less than all of the step-up in basis on the transferred assets which it claimed for purposes of depreciation on its tax return for the year ended June 30, 1953, then may Old Spencer recover any part of the tax paid by or charged to it which was attributable to gain which was reported by Old Spencer in respect of the sale of those assets on its tax return for the year ended June 30, 1952?
(See Pretrial Order, March 3, 1967, item 8, pp. 7, 8, 9)
After hearing the evidence submitted by the parties, examining the exhibits, the pleadings, the briefs and Proposed Findings of Fact and Conclusions of Law submitted by counsel, and after oral argument, this court makes the following Findings of Fact1a and Conclusions of Law
with respect to the issues concerned in this remand.
A. Were The Transactions of June 1952 Properly Viewed As Steps in a Unified Plan?
When Was the Plan of Reorganization Consummated?
1. (25) In 1919, Edmund A. Prentis, Lazarus White and Charles B. Spencer organized Spencer, White & Prentis, Inc. to engage in construction work and civil engineering with emphasis on foundation and underpinning projects. The business was successful and by 1952 the founders were getting along in years and decided to allow younger associates to acquire their construction business.
(15, 16, 76-77, 108-11) The younger group was to have a smaller stake to lose in the risky construction business than the Old Company, but they, in the New Company, were to have the benefit of the name, Spencer, White & Prentis, which had become well known. (77)
2. (26) In June 1952, the old corporation determined to reorganize. (77) It changed its name to Edmund A. Prentis, Lazarus White and Charles B. Spencer, Inc. ("Old Spencer") and simultaneously formed a new corporation called Spencer, White & Prentis, Inc. ("New Spencer"), organized under the laws of New York to engage in construction work.
3. (2) In June 1952 Old Spencer changed its name to Edmund A. Prentis, Lazarus White, Charles B. Spencer, Inc. Thereafter a certificate of incorporation was filed with the Secretary of State of New York forming a new corporation named Spencer, White & Prentis, Inc. ("New Spencer"). (Ex. 1, p. 15)
4. (33) Prior to June 1952, Old Spencer had a staff of about 30 employees in the office and a staff in the field whose number would depend upon the number of contracts in progress. When New Spencer was formed it took over the entire office and field staff of Old Spencer. Since 1952 Old Spencer has not performed any construction or engineering business and has not retained any employees. All it has is investments. (257-58, 261)
5. (35) The key officers of New Spencer were substantially the same persons as the officers of Old Spencer immediately after New Spencer took over the business and for several years thereafter. (149, 203, 255) The present President, Vice President and Secretary-Treasurer of the New Spencer are the sons of founders of Old Spencer. (253)
6. (27) New Spencer was organized with the following authorized capital structure:
Class A common stock -
300 shares par value $ 100.00 $ 30,000.00
Class B common stock -
700 shares par value at $ 100.00 70,000.00
4% cumulative participating (to the
extent of 15% of net profits after
income taxes) preferred stock -
100,000 shares par value $ 10.00 1,000,000.00
Total authorized capital $ 1,100,000.00
(See Ex. 37, pp. 5, 6)
7. On June 16, 1952, the Board of Directors of Old Spencer voted to purchase $ 160,200 par value of $ 10.00 preferred stock and $ 30,000 par value of Class A common stock of New Spencer for
Cash $ 175,002.18
Furniture and Fixtures 5,800.00
Prepaid Insurance Premiums 9,397.82
(Ex. 31, Directors Minutes, p. 4)
8. (28) Subsequent to the organization of New Spencer, on June 18, 1952 Old Spencer transferred to New Spencer $ 5,800 in furniture and fixtures, $ 9,397.82 in prepaid insurance premiums and $ 175,002.18 in cash. Old Spencer, in fact, also transferred its name, goodwill and prestige (112, 246-47) in addition to the jobs in progress (Pretrial Order 3(b)). In return for these transfers totalling $ 190,200, exclusive of goodwill and jobs in progress, Old Spencer received 16,020 shares of preferred stock and 300 shares of Class A common stock of New Spencer (Ex. 31). New Spencer is entitled, upon notice, to redeem the preferred stock at par and the preferred stockholders are entitled to priority upon liquidation (see Certificate of Incorporation, Ex. AT). "Each share of preferred stock and Class A common stock and Class B common stock shall have one vote in all elections and in all proceedings which authorizes any action by the vote or written consent of stockholders of this corporation." (Certificate of Incorporation, Ex. AT)
9. On June 25, 1952, the Board of Directors of Old Spencer voted to "sell" to New Spencer its plant and equipment for $ 381,112.83, to be paid as follows:
Cash $ 50,000.00
Promissory note and conditional bill
of sale due in six months $ 331,112.83
(Ex. 31, Directors Minutes, p. 6)
10. (29) On June 26, 1952, as part of the transfer of its assets, Old Spencer transferred to New Spencer its construction equipment and machinery and took back in exchange $ 50,000 cash and a six-months note for $ 331,112.83 due December 26, 1952, bearing interest at the rate of 3% per annum (Ex. 31). The machinery and equipment was largely special equipment which was essential to the plaintiff's construction business (241, 242).
11. (30) In connection with the transfer of equipment and machinery, a conditional sales contract was entered into between the parties under the terms of which Old Spencer was entitled to repossess the equipment and machinery and retain the sum of $ 50,000 as liquidated damages upon default by New Spencer in payment of the note in the amount of $ 331,112.83 payable on December 26, 1952 with interest at the rate of 3% per annum.
12. (37) Although certain formalities were observed, the transfer of the machinery and equipment on June 26, 1952 was not an arm's length sale. The transfer of the machinery and equipment was a step in a plan of reorganization, the primary purpose of which was to attempt to acquire (for New Spencer) a stepped-up basis of the depreciable assets equal to their market value at the time of the transfer.
12A. The basic plan of reorganization designed by the parties projected the transfer of Old Spencer's construction business with all assets essential to its operation to New Spencer. The plan also included,
(1) Ownership of 30% of the common stock of New Spencer by Old Spencer;
(2) Ownership by 10 employees of 70% of the common stock (93, 245);
(3) Receipt by Old Spencer of preferred stock;
(4) 80% or more control of New Spencer by Old Spencer;
(5) Acquisition by New Spencer of the benefit of the name, "Spencer, White & Prentis." (511)
13. In addition to continuing jobs of Old Spencer in progress,
New Spencer executed construction contracts which had been initiated by Old Spencer, with no indication that the owners were told that the "Spencer, White & Prentis, Inc." which executed the contract was not the same corporation which made the proposal (Ex. BC, 585-86; Ex. BE-BF, 592-95). Similarly, New Spencer performed contracts which had been entered into by Old Spencer (although performance had not commenced) with no indication that the owner was told that the corporation performing the contract was different from the one which entered into the contract
(Ex. BG, 596-97).
14. As of January 7, 1953, Old Spencer owned 51,020 shares of preferred stock in New Spencer and 300 shares of Class A common stock (which was 100% of the issued stock of that date). Thus, Old Spencer clearly controlled New Spencer within the meaning of the statutes in January 1953 (Ex. 26).
During the period from January 8, 1953 through December 31, 1953, New Spencer issued only 650 shares of Class B common stock to individuals, which comprised only 1.2% of New Spencer's issued stock (see Ex. C), so that control under the statute remained in Old Spencer during 1953 since Old Spencer retained at least 98.8% of New Spencer's stock.
The parties also stipulated that Old Spencer was in control of New Spencer until the plan of reorganization was consummated (Pretrial Order of March 3, 1967, p. 2). Thus, the criteria of Section 112(g)(1)(D) were fulfilled. (See Finding 39)
15. I find that the transactions set forth in Part I, Findings 1-14, and in Part IV, Findings 28-42, are properly viewed as steps in a unified plan, designed and effectuated as therein particularized.
I find that the plan of reorganization was consummated by January 8, 1953 (see Part IV).
As subsequently enunciated, however, the sale of the Drilled-In-Caisson stock by the Old Spencer to New Spencer was not a part of the plan of reorganization (see Part II).
B (1) Was the Stock of Drilled-In-Caisson Corp. Transferred by Old Spencer to New Spencer as Part of the Plan of Reorganization?
16. Drilled-in-Caisson Corp. ("Caisson") was a corporation engaged in installation of caissons in heavy, large-diameter casings driven into rock, the rock being then excavated and steel core put in (485, 486). In June 1952, 50% of its outstanding shares (650 shares) was owned by Old Spencer and 50% by Western Foundation Company (362). Old Spencer and Western Foundation Company each had representatives on the Board of Directors of Caisson (462). Old Spencer had engaged in joint ventures with Caisson, as had Western Foundation Company (362).
17. On June 25, 1952, the Board of Directors of Old Spencer, by resolution, sold to New Spencer 250 shares of stock of Caisson for $ 101,750 upon terms expressed in an agreement thereafter set forth, said stock to be deposited in escrow subject to payment of $ 25,000 and a promissory note for $ 76,750 (Ex. 31, Directors Minutes, p. 6). Aside from the fact that this resolution was passed on June 25, ...