387 F.2d 515 (5th Cir. 1967), 24115, Hegra Note Corp. v. C.I.R.

Docket Nº:24115.
Citation:387 F.2d 515
Case Date:December 21, 1967
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 515

387 F.2d 515 (5th Cir. 1967)




No. 24115.

United States Court of Appeals, Fifth Circuit.

December 21, 1967

E. Michael Masinter, Atlanta, Ga., for petitioner.

Lester R. Uretz, Chief Counsel, Aaron D. Trub, Atty., IRS, Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Harry Marselli, Crombie J. D. Garrett, Robert J. Campbell, Attys., Dept. of Justice, Washington, D.C., for respondent.

Before TUTTLE, GEWIN and AINSWORTH, Circuit Judges.

Page 516

TUTTLE, Circuit Judge:

This is an appeal from a decision of the Tax Court determining a deficiency in the taxpayers 1961 income tax. It draws in question the correctness of the Tax Court's holding that taxpayer's transfer of seven installment notes of the hotel corporation which it had acquired to an insurance company in exchange for certain rights in 154,000 shares of stock of the insurance company was such a disposition of the notes as to necessitate the recognition as long term capital gain under Section 453(d)(1) of the Internal Revenue Code of 1854, measured by the difference between taxpayer's basis in the installment notes and their fair market value, and whether the court was correct in finding the value of the said notes to equal 66% Of their face.

The facts leading up to the transaction here in issue are complicated and involved. However, it is not necessary that they be recited because they have no bearing on the precise issue which was decided by the Tax Court and presented to us for review.

On June 29, 1960, the then holders of these seven installment notes of the Henry Grady Hotel Corporation, incorporated Hegra Note Corporation. Upon incorporation the seven installment notes, with an aggregate face value of $385,000, and an adjusted basis of $64,593.10 were the taxpayer's sole assets. They were transferred to Hegra in return for its entire capital stock. Prior to this incorporation, the incorporators had been in negotiations with Kennesaw Life and Accident Insurance Company, and an agreement had been tentatively worked out under which the seven notes (the first was to become due and payable on January 15, 1961 and was for the principal amount of $30,000; the latter six were for $59,166.66 each, due successfully one year thereafter, all bearing interest at 5% From date) would be exchanged for 154,000 shares of the common stock of Kennesaw, provided the insurance commissioner of the state of Georgia would permit Kennesaw to carry these notes as 'admitted assets,' thus enabling the insurance company to increase the amount of insurance it could write.

In order to obtain this approval, the president of Kennesaw wrote the insurance commissioner expressing his opinion of the worth of the notes in the following language:

'The Henry Grady Hotel Corporation operates the well known Henry Grady Hotel at the Corner of Peachtree and Cain Streets in Atlanta. This has been for thirty years one of the City of Atlanta's best known and successful hotels. Except for a period during the depth of the depression, it has been a highly successful and profitable operation.

'These notes represent approximately 40% Of the purchase price for all of the stock of the Henry Grady Hotel Company, the balance having been previously paid in cash. Since the purchasers invested over $500,000 in the Henry Grady stock and the purchasers are men of substance and I think there is...

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