## Facts

- American Austin Car Co. went through bankruptcy; a group of associates purchased its operating assets, including an automobile manufacturing plant.
- The associates organized American Bantam Car Company in June 1936.
- On June 3, 1936, the associates transferred the acquired assets (subject to liabilities) and $500 cash to American Bantam solely in exchange for 300,000 shares of American Bantam common stock.
- Immediately after the exchange, the associates held all outstanding common stock and thus had voting control.
- There was an informal pre-incorporation plan to market preferred stock to the public through underwriters who would receive common stock as compensation, but no binding underwriting agreement existed on June 3.
- A written underwriting agreement was executed five days later; underwriters’ receipt of common stock was contingent on selling specified amounts of preferred stock (“when, as and if” sold), with shares placed in escrow.
- Over roughly 15 months, underwriters sold substantial preferred stock and ultimately received common stock; control shifted away from the associates over time.
- For fiscal years through June 30, 1941, American Bantam used a low basis (transferors’ basis) for depreciation; for fiscal years ending June 30, 1942 and 1943, it claimed a much higher fair-market-value basis and larger depreciation deductions.
- The Commissioner disallowed the higher basis and determined deficiencies (and addressed claimed refunds) for 1942 and 1943.

## Issues

1. Whether the June 3, 1936 formation transfer qualified as a nonrecognition exchange under § 112(b)(5) of the Revenue Act of 1936, requiring transferors’ “control” immediately after the exchange.
2. Whether later underwriting arrangements and resulting stock dispositions should be treated as part of a single transaction so that the associates lacked “control” immediately after the exchange.
3. If § 112(b)(5) applied, whether American Bantam’s basis in the transferred assets was a carryover basis under § 113(a)(8), limiting depreciation.

## Decision

- The Tax Court held the June 3, 1936 transfer was a § 112(b)(5) nonrecognition exchange and that American Bantam took the transferors’ basis under § 113(a)(8), sustaining the Commissioner’s lower depreciation allowances and related deficiencies (subject to computations).
- The Third Circuit affirmed per curiam, adopting the Tax Court’s reasoning that the transaction qualified under § 112(b)(5) and that § 113(a)(8)(A) required carryover basis.

## Legal Principles

- For § 112(b)(5) (now generally reflected in I.R.C. § 351), “control immediately after the exchange” is tested at the time of the transfer, based on then-existing legal rights.
- Subsequent dilution or stock dispositions do not defeat “control immediately after” unless a binding pre-exchange obligation effectively required the transferors to relinquish control as part of the exchange.
- A later underwriting arrangement does not integrate with the initial exchange for control purposes where, at the exchange date, there is no binding commitment and any later right to stock is conditional.
- If the transfer qualifies for nonrecognition, the corporation’s basis in the transferred property is the transferors’ basis under § 113(a)(8), and depreciation must be computed using that carryover basis rather than asserted fair market value.

## Conclusion

The courts treated the June 3, 1936 incorporation transfer as a qualifying nonrecognition exchange because the associates controlled the corporation immediately after the transfer and were not bound at that time to dispose of their stock; as a result, the corporation’s basis and depreciation were limited to the transferors’ carryover basis despite subsequent underwriting-related stock issuances.


American Bantam Car Co. v. Commissioner, 177 F.2d 513 (3d Cir. 1949)