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Tax laws cannot successfully be administered upon any such basis.

Effect of the receipt of cash (or property other than cash) by former owners.—When the former owner of securities exchanges them for securities of a reorganized corporation there must be taken into account the entire consideration received in exchange. When the owner of stock having a par value of $100,000 exchanges it for $100,000 in cash and 10,000 shares (or any number) of no par value stock of a new corporation, under a proper interpretation of the law no tax can be imposed, because the former owner has not received securities of a greater aggregate par or face value.

But if the former owner were to receive $200,000 in cash and 10,000 new shares (or any other number) of no par value, it could not be said that he received in exchange securities of no greater aggregate par value.

It is true that a definition of the word "securities” usually does not include cash or currency, but there is a very definite “face value” attributable to "cash" and the courts undoubtedly would so hold.

New securities “of no greater par value” must cover the same property as the old securities.—The author's attention has been called to a letter from one of the internal revenue collectors in which the statement was made that “in the case of a transfer of stock, the par value of which is equivalent to the par value of the stock received in exchange, no return or report will be necessary.” The point involved was the exchange of marketable securities of various corporations for the stock of an entirely different corporation. The owners of the marketable securities had purchased them for far less than their present market value and the claim was made that the exchange could be made without the imposition of any tax. The collector probably misunderstood the question put to him. Section 202 (b), which was the one relied on, in its application to the case in question refers only to the "reorganization, merger or consolidation" of a corporation. It does not imply that the stock of a different corporation may be brought within the temporary freedom from tax.

Exchange of securities for new securities of foreign corporation of no greater par value and subsequent sale of latter at profit.-It has been suggested that one way of avoiding the immediate imposition of a tax, when securities are in effect exchanged for securities of greater par value, is to exchange the old stock for a like amount of par value stock of a foreign corporation (Cuban, for illustration) doing no business and having no office or agent in the United States. Under section 202 it is not likely that any tax could be imposed upon such exchange.

The way is then open for the foreign corporation to exchange or sell the stock so acquired, or to sell the property represented by the stock. The sale or exchange may be for cash or securities of unlimited par value. The profit, if any, will be taxable only to the foreign corporation. The United States corporation retains its ownership of the shares of the foreign corporation, but unless and until the foreign corporation pays a dividend or makes a distribution no taxable income will be realized. If it were possible to pass a law requiring the stockholders of the foreign corporation who are citizens of or residing in the United States to cause the foreign corporation to pay a dividend or make a distribution the realized profit might be reached. Perhaps section 220 may be invoked. It provides that “if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders,” the stockholders shall be subject to taxation in the same way as individuals.

When securities received are of less aggregate par value.The law provides that no profit accrues through the exchange

of securities so long as the aggregate par value of the new securities (received in a reorganization, merger or consolidation) is no greater than that of the securities exchanged. But when the new securities have smaller aggregate par value than the old securities no loss can be claimed unless an actual loss is established. The new securities may be worth far more than par. If a loss is claimed it will have to be shown that the actual fair market value of the new securities is less than the cost (or fair market value March 1, 1913) of the old securities.

Sale of capital assets by a corporation.-When a corporation sells its assets for an amount in excess of their book value the corporation will be taxed on the excess. In turn the stockholders, when distribution is made, will be taxed on the same amount, less the tax paid by the corporation. In order to avoid this double taxation the individual stockholders of the selling corporation should sell their stock to the new owner. When the purchaser acquires all the stock he or it may cause all the assets of the corporation to be turned over for a nominal consideration. Thus the books of the corporation will not show any profit on the sale.17

17[Former Procedure]

REGULATION. "In a case wherein a carporation acquires from stockholders the stock of another corporation, giving in exchange therefor its own stock, it is held that the transaction is one by which the corporation acquiring the stock becomes the sole stockholder of the other corporation. As a result of this transaction no income accrues to the corporation whose stock is thus acquired. Neither will any income accrue to this corporation if later the holding corporation should cause the assets of the underlying company to be transferred to it for mere nominal consideration." (Reg. 33. 1918, Art. 124.)

Although this regulation does not discuss the case of the individual shareholders who receive the stock of the purchasing company, it apparently holds that they are taxable on the basis of the "fair cash value" of the securities received. This situation is altered by the 1918 act in case the exchange is made "in connection with the reorganization, merger, or consolidation of a corporation,” and in case the new stock is "of no greater aggregate par or face value” than the old. [Section 202 (b), quoted on page 387.]

Exchanges Which Are Not Taxable as Closed

Transactions Law. Section 202. (b).... but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.18

REGULATIONS. .... (6) On the other hand, if the property received in exchange is substantially the same property or has no market value, then no gain or loss is realized, but the new property is to be regarded as substituted for the old and upon a sale of the new property the amount of income derived is the excess of the amount so received over the cost or fair market value as of March 1, 1913, of the old. (Art. 1564.)

.... If no fair apportionment is practicable, no profit on any subsequent sale of any part of the bonds or stock is realized until out of the proceeds of sales shall have been recovered the entire cost or fair market value as of March 1, 1913, of the original property. (Art. 1565.)

(a) Where property is transferred to a corporation in exchange for its stock, if the previous owner of the property receives 50 per cent or more of the stock of the corporation, so that an interest of 50 per cent or more in such property remains in him, then no gain or loss is realized by such owner from the transaction. For the purpose of ascertaining the gain or loss from the subsequent sale by the stockholder of any stock so received for such property the stock is to be considered as substituted for the property, and the cost of the property or (if acquired prior thereto) its fair market value as of March 1, 1913, is the basis for determining the amount of such gain or loss. For the purpose of ascertaining the gain or loss from the subsequent sale by the corporation of any such property the cost of the property to the former owner or (if acquired prior thereto by him) its fair market value as of March 1, 1913, is the basis for determining the amount of such gain or loss. .... "Owner" includes "owners." This article applies to the incorporation of a business previously conducted by an individual or by a partnership. .... (Art. 1566, as it appeared in the April 17, 1919, edition of Regulations 45.)

As explained on page 375, the foregoing regulation was amended by T. D. 2924 (September 26, 1919), but the regula

"This is an entirely new section of the law added in 1918.

tion cannot change the basic question involved, viz.: Does the exchange actually constitute a closed transaction and does the former owner realize any taxable income ?19

Part of article 1567 (as amended September 26, 1919) is repeated here to emphasize the point that no income is deemed to accrue so long as the aggregate par value of the securities received does not exceed the aggregate par value of the old securities.

REGULATION. In general, where two (or more) corporations unite their properties by either (a) the dissolution of corporation B and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction by A or B or the stockholders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c) and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggregate par or face value than the old stock and securities surrendered. .... (T. D. 2924, September 26, 1919, amending Art. 1567.)

It is also important to recall the general principles laid down in article 1563, which have not yet been amended.

REGULATION. .... (a) a change in substance and not merely in form, and (b) a change into the equivalent of cash, are required to complete or close a transaction from which income may be realized. .... if he exchanges his stock for stock in a small, closely held corporation, no income is realized if the new stock has no market value, although the conversion is more than formal; .... (Art. 1563.)

Determination of gain or loss from subsequent sale.When it has been determined that no income accrues from an exchange of securities it is important to note that upon any subsequent sale or realization the computation of the taxable income (if any) is based on the original cost of the old securities, or value March 1, 1913, and not on the value of the securities at the date of the exchange.

"See page 361.

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