308

7 TAX COURT OF UNITED STATES REPORTS.

(287)

Hinds Honey & Almond Cream by Lehn & Fink (Canada) Ltd. for the actual cost of manufacture plus 10 per cent of such cost.

Notwithstanding the lack of a written contract, Lehn & Fink (Canada) Ltd. actually marketed the Hinds product in Canada. From 1926 to 1930 A. S. Hinds (Canada) Ltd. sold its entire output to Lehn & Fink (Canada) Ltd. at a specified price per dozen bottles. From 1931 to 1934 it paid to Lehn & Fink (Canada) Ltd. a selling commission of 20 per cent of the sales to the trade. In 1935 the selling commission was increased to 25 per cent because Lehn & Fink (Canada) Ltd. was suffering a loss on the 20 per cent commission. Lehn & Fink (Canada) Ltd. realized no profit under the 25 per cent commission, which no more than covered the selling expenses. The sales organization in Canada encountered more difficult problems than existed in the United States because of the greater territory in relation to the population. Jergen's and Campana were active competitors of Hinds Honey & Almond Cream in Canada, and Hinds was sold to dealers in Canada at a lower mark-up than its competitors were allowing. When the formula changes were made in the United States, corresponding changes were made in the Canadian formula. The Canadian market responded to radio and magazine advertising programs in the United States, from which the Canadian Hinds organization benefited to the extent of between 1 per cent and 2 per cent of the total advertising expenditures of A. S. Hinds Co. in the United States.

The comparative balance sheet of A. S. Hinds (Canada) Ltd. for the years 1927 to 1935, as taken from its books, is as follows:

1930

1931

1932

1933

1934

1935

1927

1928

1929

310

REPORTS.

(287)

LEHN & FINK PRODUCTS CORPORATION.

311 Dividends of $5,000 in 1931 and $35,000 in 1935 were paid by A. S. Hinds (Canada) Ltd.

After the dissolution of A. S. Hinds Co. in the United States, A. S. Hinds (Canada) Ltd. continued to operate as a wholly owned subsidiary of Lehn & Fink Products Co., and after the merger, of Lehn & Fink Products Corporation, petitioner herein.

The sales, cost of sales, advertising expense, and net profit or loss of A. S. Hinds (Canada) Ltd. for the years 1936, 1937, and 1938 were as follows:

The fair market value of the stock of A. S. Hinds (Canada) Ltd. on January 29, 1936, was $40,000.

A. S. Hinds, A. G. (Germany).-It has been stipulated, and we find, that the fair market value of the investment of A. S. Hinds Co. in its German wholly owned subsidiary on January 29, 1936, was zero. The fair market value as of January 29, 1936, of the account receivable owed by Lehn & Fink, Inc., to A. S Hinds Co. was $17,551.41. As of that date Lehn & Fink, Inc., was solvent and had the highest possible credit rating.

Early in January of 1936 the officers of the A. S. Hinds Co. and Lehn & Fink, Inc., discussed the proposition of dissolving A. S. Hinds Co. At meetings of the board of directors on January 24, 1936, a plan of liquidation was adopted, which provided that A. S. Hinds Co. should be dissolved under the laws of Maine, that its business be closed, its debts paid or otherwise provided for, and its assets distributed to Lehn & Fink Products Co. upon surrender and cancellation of the outstanding stock. The plan so adopted was submitted to a special meeting of stockholders of A. S. Hinds Co. on January 27, 1936, which approved the plan. The dissolution of Hinds was formally accomplished on January 29, 1936. Stock which had cost Lehn & Fink Products Co. $5,387,228.68 was surrendered in exchange for the assets of Hinds, which had a book value of $144,811.91, or, after payment of debts, $68,962.52.

At that time, under the provisions of the Revenue Act of 1934, as amended by section 110 of the Revenue Act of 1935, effective as of January 1, 1936, the tax basis of the Hinds assets in the hands of the Products Co. was the cost to the Products Co. of the stock surrendered for those assets, which was $5,387,228.68.

312

7 TAX COURT OF UNITED STATES REPORTS.

(287)

For some time prior to the liquidation of the Hinds Co. the management of the Lehn & Fink group had under general consideration the simplification of the organization, a plan which would have involved the liquidation of Hinds and Pebeco, Inc. At the meeting of the Board of Directors of Lehn & Fink Products Co. at which the liquidation of A. S. Hinds Co. was authorized, the officers of the corporation were instructed to make a further study of the possibilities of consolidating Lehn & Fink Products Co., Lehn & Fink, Inc., and Lysol, Inc. Further study was made and at the end of February 1936 a new plan for such a merger was formulated and on March 6 it was submitted to the board of directors. The consummation of the proposed merger required the approval of about 5,000 scattered stockholders of Lehn & Fink Products Co. A special stockholders' meeting was called for and held on April 8, 1936, at which the plan of merger was adopted. Pursuant thereto, Lehn & Fink Products Co., which owned all the stock of Lehn & Fink, Inc., and Lehn & Fink, Inc., which owned most of the stock of Lysol, Inc., were merged into Lysol, Inc., which then changed its name to Lehn & Fink Products Corporation. This surviving corporation is the petitioner in these proceedings.

On June 26, 1936, about two months after the merger was accomplished, the Revenue Act of 1936 was passed and made retroactive to January 1, 1936. Under section 113 (a) (15) thereof, the basis provisions applicable to property distributed in complete liquidation by a subsidiary to its parent were changed, and the new basis so prescribed was the cost of the assets to the subsidiary instead of the cost of the stock surrendered by the parent.

That this retroactive change of basis resulted in hardship to those corporations which had liquidated subsidiaries prior to the passage of the 1936 Act, in reliance on the provisions of the 1934 Act, as amended, was recognized by Congress in 1938, when it passed section 808 of the Revenue Act of 1938, which retroactively amended section 113 (a) (15) of the Revenue Act of 1936. Under section 808 it was provided that where a corporation, in a year beginning after December 31, 1935, had been completely liquidated within the meaning of section 112 (b) (6) of the 1934 Act, as amended, so that no gain or loss was recognized on the liquidation, and where all the distributions in liquidation were made after December 31, 1935, and before June 23, 1936, the basis of the property in the hands of the recipient corporation should be the basis provided by the Revenue Act of 1934, as amended, "if such corporation (within 180 days after the date of the enactment of the Revenue Act of 1938) elects, under regulations prescribed by the Commissioner, to have such basis apply."