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Roebling v. Commissioner of Internal Revenue.

July 1, 1944

ROEBLING
v.
COMMISSIONER OF INTERNAL REVENUE.



On petition to Review Decision of the Tax Court of the United States.

Author: Kalodner

Before JONES and McLAUGHLIN, Circuit Judges, and KALODNER, District Judge.

KALODNER, District Judge.

This appeal presents three questions: (1) Whether the transaction hereafter stated between a lessor corporation and a lessee corporation constituted a "statutory merger", within the meaning of Sec. 112(g)(1)(A) of the Revenue Act of 1938, 26 U.S.C.A. Int. Rev. Code, ยง 112(g)(1)(A);*fn1 (2) whether the doctrine of "continuity of interest" as enunciated in LeTulle v. Scofield, 308 U.S. 415, 60 S. Ct. 313, 84 L. Ed. 355, applies to a "statutory merger", and (3) whether under the facts a "continuity of interest" actually existed.

Taxability on gain resulting to the petitioner on the exchange of stock in the lessor corporation for bonds of the lessee corporation under the provisions of Sec. 112(b)(3) of the Revenue Act of 1938*fn2 depends on the disposition of the issues above stated.

The facts are all stipulated. Summarized they are as follows:

Petitioner, an individual residing in Trenton, New Jersey, filed a Federal income tax return for the calendar year 1938 with the Collector of Internal Revenue for the First District of New Jersey.

On December 5, 1935, petitioner acquired by gift 166 shares of the stock of South Jersey Gas, Electric and Traction Co. (hereinafter referred to as South Jersey). This stock had been acquired by petitioner's donor on March 12, 1914, at a cost of $16,600.

South Jersey was a corporation organized on August 31, 1900, under the laws of the State of New Jersey, for the purpose of furnishing electricity and gas for public and private use in that state.

In June, 1903, South Jersey had leased all its franchises, plants and operating equipment to Public Service Corporation of New Jersey for 900 years. The lessee was to pay rent which beginning December 1, 1908, amounted to $480,000 per annum. In addition the lessee agreed to pay the interest charges on the lessor's bonded indebtedness, all taxes, insurance and such sums as were necessary to maintain, repair, improve and extend the leased properties. All replacements and additions became the property of South Jersey subject to the terms of the lease.

The lease further provided that upon default of the terms of the lease for a period of 30 days, after notice, South Jersey could terminate the lease, reenter and reacquire the property and additions and extensions thereto.

Under the terms of the lease South Jersey could enter upon the leased property for the purpose of inspecting it and determining its condition and the character of the management and whether the covenants of the lease were being complied with.

In July, 1924, this lease was assigned by Public Service Corporation of New Jersey to Public Service Electric and Gas Company which assumed the obligations thereof.

From December 1, 1908, to June 1, 1937, the net rentals received by South Jersey, the lessor company, were distributed to its stockholders at the rate of 8% per annum on the par value of its stock. South Jersey had outstanding 60,000 shares of capital stock of $100 par value, of which Public Service Electric and Gas Company, the assignee of the lease, held 1,705 shares, and Public Service Corporation of New Jersey, the original lessee, held 15,773 shares. The remaining 42,521 shares were held by other ...


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