Mutual Loan & Savings Co. v. Commissioner of Int. Rev.

• Citation: 184 F.2d 161
• Decision Date: 05 August 1950
• Docket Number: No. 12919.,12919.
• Parties: MUTUAL LOAN & SAVINGS CO. OF WEST PALM BEACH, FLA. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

184 F.2d 161 (1950)

MUTUAL LOAN & SAVINGS CO. OF WEST PALM BEACH, FLA. v. COMMISSIONER OF INTERNAL REVENUE.

No. 12919.

United States Court of Appeals Fifth Circuit.

August 5, 1950.

Lucius A. Buck, Jacksonville, Fla., Robert J. Pleus, Orlando, Fla., William H. Cook, West Palm Beach, Fla., for petitioner.

Howard P. Locke, Sp. Asst. to Atty. Gen., Theron L. Caudle, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst. to Atty. Gen., Charles Oliphant, Chief Counsel, Bur. of Int. Rev., and Claude R. Marshall, Sp. Atty., Bur. of Int. Rev., Helen Goodner, Sp. Asst. to Atty. Gen., Virginia H. Adams, Sp. Asst. to Atty. Gen., Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and McCORD and RUSSELL, Circuit Judges.

RUSSELL, Circuit Judge.

The question presented by this petition for review of a determination of the Tax Court is whether transactions, by which the taxpayer, as a party to a petition by two Florida municipal corporations for relief under Chapter IX of the Bankruptcy Act,¹ and pursuant to a plan of composition in such proceeding, surrendered defaulted municipal bonds and detached interest coupons for refunding bonds of the municipalities, constituted the "sale or exchange of property" and the realization of taxable gain within the terms of sections 111, 112(a) of the Internal Revenue Code, 26 U.S.C.A. §§ 111, 112(a), and Treasury Regulation No. 111, § 29.111-1.

The evidences of indebtedness involved are those of the municipalities of the City of Fort Pierce and the City of Vero Beach, both municipal corporations of Florida. As to what we will denominate the Fort Pierce transaction, in December, 1937, the taxpayer purchased a group of Fort Pierce municipal bonds and detached interest coupons, all of which were in default. The bonds bore interest at six percent. We omit any statement of par value and cost for no question of the amount of gain is involved, the issue here being whether the taxpayer realized, under the statute and regulations, any taxable gain in the transaction. Under the City's plan of composition, and as approved by the United States District Court for the Southern District of Florida, upon the surrender of the defaulted bonds and interest coupons, they were redeemable par for par, subject to a two percent exchange fee. Cash and refunding credits and interest accruals were likewise received, but these items are not now involved. The refunding bonds, received by the taxpayer bore a different date of issuance and a different maturity date, but could be called upon any interest payment date prior to maturity. The rate of interest differed from the original bonds, the refunding bonds promising a lesser rate of interest beginning at one and one-half percent per annum, but progressively increasing during specified yearly periods to five percent per annum. The City's plan of composition provided for the creation of a sinking fund to care for the principal and interest payments on the bonds.

As to the Vero Beach transaction: On the same day the taxpayer purchased the Fort Pierce bonds, it acquired a large block of Vero Beach six percent and seven percent municipal bonds and interest coupons detached therefrom, all of which were in default. By its plan the City of Vero Beach proposed to refund its defaulted bonds par for par but the holders of accrued interest coupons were required to waive thirty percent of the face value of such obligations. The payment of a four percent exchange fee was required, and provision made for the creation of a sinking fund to cover principal and interest payments. In accordance with the plan, the taxpayer exchanged the defaulted bonds for refunding bonds, and also deposited with an escrow agent interest coupons for which it received a certificate of deposit representing seventy percent of the face value of the coupons deposited. As a result of the plan of composition, and as approved by the Court, the taxpayer received upon the surrender of its evidences of indebtedness, par for par, City of Vero Beach refunding bonds, plus cash. These bonds, which were subject to call on any interest date prior to maturity, bore interest at a lesser amount than the original bonds, beginning at two percent per annum, but progressively increasing during specified yearly periods to five percent per annum. Thereafter the taxpayer also surrendered other detached coupons, waiving the thirty percent of face value in accordance with the plan of composition, and received refunding bonds, plus cash. Both the Fort Pierce and Vero Beach bonds were declared by their terms to be "issued in exchange for, and as a continuation, extension, merger, and renewal of valid subsisting bonded indebtedness of said City incurred prior to November 6, 1934." This evidenced recognition of the subjection of all property, including homestead property, within the city limits to the levy of taxes, and indeed by their terms the full faith, credit and tax power of the City were pledged to the payment of the refunding bonds to the same extent and with like force and effect as the same were pledged for the payment of the indebtedness refunded.

In both the Fort Pierce and Vero Beach transactions the fair market value of the defaulted bonds and refunding bonds secured in lieu thereof was identical except for the difference arising from the payment of the respective exchange fees provided by the plans of composition.

The Tax Court, finding the facts in detail, of which the above is a summary of those now material, while not expressly overruling the contention of the taxpayer that since under the laws of Florida the refunding transactions created no new indebtedness, but merely continued the old with changes consisting of deductions in the interest rates, extensions of time for payment, and waiver of portions of the principal of certain detached interest coupons, no exchange occurred, thought the Florida law immaterial in determination of what was an exchange of property "as this term is used in the Federal taxing acts," relying upon the cited case of Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110, 46 S.Ct. 48, 70 L.Ed. 183, and Berry Bros. Trust, 9 T.C. 71. The Court stated: "The test uniformly applied in determining whether a transaction does constitute an exchange within the purview of section 112, supra, is whether the material conditions of the refunding bonds differed substantially from the conditions of the old securities exchanged therefor," and applying this test, held that the terms of the refunding bonds extending the times of payment, reducing the rate of interest, together with the waiver of a part of the face value of interest coupons were "very material" differences. The Court likewise deemed that "non-interest bearing-coupons were exchanged for new interest-bearing refunding bonds." Accordingly, the Court...