ing depreciation also determines the issue as to equity invested capital. Petitioner says in its brief: "The invested capital issue involved in this proceeding will be controlled by the decision of this Court as to petitioner's basis for the assets acquired by it upon the complete liquidation of Whaley Mill and Elevator Company." Having decided the depreciation issue in respondent's favor, the issue as to petitioner's equity invested capital is likewise decided in respondent's favor. The correctness of respondent's other adjustments having been conceded by petitioner,

Reviewed by the Court.

Decision will be entered for the respondent.

SOUTHWEST NATURAL GAS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 15243. Promulgated January 27, 1950.

REORGANIZATION-STATUTORY MERGER-SECTION 112 (g) (1) (A), I. R. C.—In a statutory merger pursuant to state law, corporation A acquired all the assets of corporation B in exchange for a total consideration of $663,393.01, consisting of 16.4 per cent of A's common stock having a market value of $5,592.50 and a certain amount of A's bonds, cash, and the assumption of B's liabilities.

(1) Held, on authority of Roebling v. Commissioner, 143 Fed. (2d) 810, that in addition to the statutory merger and to constitute a "reorganization" within the Federal income tax statutes, the transaction must meet the test of the "continuity of interest" doctrine enunciated by the courts.

(2) Held, further, on authority of Le Tulle v. Scofield, 308 U. S. 415, that the bonds involved in the exchange did not represent a retained proprietary interest and that for purposes of this opinion the bonds are to be considered as the equivalent of cash.

(3) Held, further, on authority of Helvering v. Minnesota Tea Co., 296 U. S. 378, that the shares of stock involved representing the retained proprietary interest having a value of only $5,592.50 did not constitute a substantial part of the value of the assets transferred by corporation B and that accordingly there was no statutory merger within the meaning of the term "reorganization" as defined by section 112 (g) (1) (A), I. R. C.

4. O. Dawson, Esq., and Paul Smith, Esq., for the petitioner. John W. Alexander, Esq., for the respondent.

This proceeding involves deficiencies for the years and in the

amounts as follows:

The only contested issue is whether respondent erred in his determination that a transaction alleged to have been a statutory merger, whereby the petitioner acquired all the assets and assumed all liabilities of the Peoples Gas & Fuel Corporation on December 28, 1940, did not constitute a "reorganization" within the meaning of section 112 (g) of the Internal Revenue Code.

The parties have stipulated the figures to be used for computing petitioner's depreciation deductions and equity invested capital for the years in question, dependent upon the decision herein on the above mentioned reorganization issue, and, further, certain other assignments of error have been settled by stipulation to be given effect in a recomputation under Rule 50.

The proceeding has been submitted upon the pleadings, testimony, and a stipulation of facts, with appended exhibits.

FINDINGS OF FACT.

The facts as stipulated are so found.

Petitioner is a corporation, duly organized and existing under the laws of the State of Delaware. It was incorporated on April 17, 1928, under the name of Southwest Gas Utilities Corporation of Oklahoma, and subsequently, on April 23, 1937, its name was changed to Southwest Natural Gas Co. Petitioner is engaged in business as a natural gas operating public utility, with its principal office at Shreveport, Louisiana. For the calendar years 1941 and 1942, respectively, petitioner duly filed its corporation income and declared value excess profits tax returns, on Form 1120, and its corporation excess profits tax returns, on Form 1121, with the collector of internal revenue at New Orleans for the district of Louisiana.

Prior and leading up to the December 28, 1940, transaction here in question, certain undisputed transactions occurred involving petitioner and three other similar utility companies. As subsidiaries of the same parent holding company, which owned 100 per cent of the stock of petitioner and two others and 80 per cent of the stock of another, those four operating utility companies occupied the same office space in Shreveport and their business affairs were conducted by the same group of persons serving in the capacities of directors, officers, attorneys, accountants, and engineers. On September 30, 1935, the parent holding company distributed pro rata to its own stockholders all of the shares of stock held in the four subsidiaries, which continued operations as theretofore conducted, and the new stockholders of the four companies gave consideration to merging or consolidating them into one company. On April 22, 1937, one of those companies, the Southwest Gas Co. of Oklahoma, was merged with petitioner, which continued doing business at the Shreveport office and operated properties located in Texas and Oklahoma. Due

to financial difficulties the other two companies, Northwest Louisiana Gas Co. and Peoples Gas & Fuel Co., were involved in proceedings under section 77-B of the Bankruptcy Act and, pursuant to an order of the court in such proceeding, were merged on November 30, 1938, into a new Delaware corporation duly organized in November, 1938, under the name of "Peoples Gas and Fuel Company, Inc." (hereinafter referred to as Peoples). The latter thereupon operated Louisiana properties from the Shreveport office.

At meetings held on December 5, 1940, the board of directors of petitioner and the board of directors of Peoples, respectively, unanimously adopted a resolution approving and authorizing the execution of a proposed agreement of merger, dated December 5, 1940, which provided the terms of a merger of Peoples with and into petitioner as the continuing corporation pursuant to chapter 65 of the Revised Code of Delaware. At the same meetings there were adopted resolutions calling for due notices of special meetings of the stockholders of the two corporations to vote thereon. Following those meetings and under date of December 5, 1940, the directors of petitioner and the directors of Peoples, respectively, made and entered into the agreement of merger. At special meetings of the stockholders of petitioner and of Peoples, held on December 28, 1940, respectively, more than two-thirds of the common and preferred stock of petitioner and of the common stock of Peoples, issued, outstanding, and entitled to vote, voted in favor of the agreement of merger and authorized the officers to do all acts necessary to consummate it.

On December 28, 1940, the agreement of merger between petitioner and Peoples was duly executed on behalf of each corporation by the proper officers and under the corporate seal thereof, together with certifications as to the adoption thereof by the stockholders of each corporation, and the agreement was filed in the office of the Secretary of State of Delaware and recorded in the office of the Recorder of the County of New Castle, Delaware, in which petitioner and Peoples had their original certificates of incorporation recorded. On February 3, 1941, such agreement of merger was filed in the office of the Secretary of State of Louisiana and recorded in the record of charters of that state.

Prior to the statutory merger of petitioner and Peoples pursuant to the laws of Delaware as above mentioned, petitioner was the larger of the two companies. Their respective balance sheets as of October 31, 1940, show total assets and liabilities in the amounts of $4,352,033.26 for petitioner and $1,682,008.91 for Peoples. The assets of both companies shown on those balance sheets consisted principally of tangible property, plant, equipment, etc. In the prior 77-B proceeding which resulted in the organization of Peoples, the holders of all types of stocks, bonds, and other securities of Peoples' predecessors received

shares of common stock of Peoples which remained free of any bonded indebtedness, and its liabilities shown on its balance sheet embraced, inter alia, an authorized 25,000 shares of common stock, par value $1 each, not all of which were issued and outstanding, and a paid-in and earned surplus of $1,438,020.69. Petitioner's liabilities as shown on its balance sheet embraced, inter alia, Southwest Gas Co. of Oklahoma 6 per cent first mortgage bonds due May 1, 1954, in the amount of $1,419,150, less treasury bonds amounting to $376,000, which bond issue had theretofore been assumed by petitioner; certain other long term debts; an authorized capital stock of 20,000 shares of $6 dividend cumulative preferred stock, series A, par value $10 each, and 1,200,000 shares of common stock, par value 10 cents each, not all of which preferred and common stock was issued and outstanding; and a paid-in and earned surplus of $324,243.50.

As of December 7, 1940, the petitioner had issued and outstanding in the hands of the public 9,590 shares of preferred stock which was $12.75 per share in arrears on dividends, and also 566,150 shares of common stock, which had a market value of 5 cents a share. As of the same date, Peoples had issued and outstanding in the hands of the public 17,769 shares of common stock which had a market value of $30 a share. Of such 566,150 shares of common stock of petitioner, 480.813 shares were held by persons who also owned 6,291 shares of common stock of Peoples, that is, the same group of people owned approximately 85 per cent of the common stock of petitioner and 35 per cent of the common stock of Peoples. There was no substantial change in the record of stockholders of either company between December 7 and December 28, 1940.

In connection with the drafting of the proposed agreement of merger, it was necessary to consider the difficulties presented by the variation in the capital structure and in the market value of the common stock of the two companies. An exchange of common stock for common stock was not feasible because on the basis of market value it would have required 600 shares of petitioner's to equal in value one of Peoples and, further, petitioner's common stock was subordinate to its long term debt and preferred stock outstanding. Accordingly, the plan devised and incorporated in the terms of the agreement of merger was that the common stockholders of Peoples would have the option to receive in exchange for each share of Peoples either (A) 10 shares of petitioner's common and $33 principal amount of petitioner's bonds, with a cash adjustment equivalent to 90 per cent of the principal amount of bonds of less than $50 denomination, or (B) cash in the amount of $30 per share. All shares of stock of petitioner outstanding at the time of the agreement were to remain outstanding; and no new securities were to be issued to the then holders thereof in connection with the merger. In addition the group of persons who

held substantial amounts of common stock in and exercised actual control over the operations of both companies agreed among themselves that they would exercise their respective options in such manner that the total exchanges consummated in the merger would come within the respective amounts of petitioner's common shares, bonds, and cash available therefor.

On December 28, 1940, there was a total of 18,875 shares of common stock of Peoples entitled to participate under the agreement of merger. The holders of 7,690 of such shares exercised option B of that agreement and received $30 in cash for each share, or a total of $230,700. The holders of 11,185 shares of Peoples' common stock (or 59.2 per cent of the total outstanding) exercised option A and received in exchange therefor under the agreement of merger, the following: $349,350 principal amount of petitioner's 6 per cent first mortgage bonds of the market value of 90 cents on the dollar, or a total value of $314,415; $17,779.50 cash for fractional bond interests; and 111,850 shares of petitioner's common stock having a market value of 5 cents per share, which shares represented 16.4 per cent of petitioner's outstanding common stock immediately after the merger transaction was consummated.

On December 28, 1940, all of Peoples' assets were transferred to petitioner and the liabilities of Peoples, amounting to $94,906.01, were assumed by petitioner in connection with the merger. On the same date all of Peoples' assets, depreciable and undepreciable, in its hands had an unadjusted basis of $1,724,468.62 and an adjusted basis of $938,912.68. The parties have stipulated the adjusted basis for depreciation in the hands of Peoples of its depreciable property on December 28, 1940, and they have further stipulated with respect to Peoples' property in the hands of petitioner, and, if the merger transaction on that date was a reorganization within the meaning of the Internal Revenue Code, the amounts of depreciation deductions allowable to petitioner for each of the years 1941 and 1942, and also the amounts, respectively, to be used in determining petitioner's equity invested capital for 1941 and 1942 and borrowed invested capital for 1941.

Prior to the transaction on December 28, 1940, petitioner and Peoples maintained a common principal place of business at Shreveport, had the same four men as their respective officers, had the same men as principal employees, and conducted their affairs as an integrated business, and those circumstances constituted the reasons for the statutory merger of the two companies, under the laws of Delaware, for the purpose of better integration and greater efficiency. Following the transaction, the petitioner conducted the business as it had been previously conducted, petitioner's officers and principal employees were the same persons as previously employed, and peti