L. & E. STIRN, INC. v. Commissioner of Internal Rev.

• Decision Date: 06 November 1939
• Docket Number: No. 27.,27.
• Citation: 107 F.2d 390
• Parties: L. & E. STIRN, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

107 F.2d 390 (1939)

L. & E. STIRN, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 27.

Circuit Court of Appeals, Second Circuit.

November 6, 1939.

Andrew B. Trudgian, of New York City, for petitioner L. & E. Stirn, Inc.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Maurice J. Mahoney, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

On December 1, 1929, L. & E. Stirn, a partnership, acquired 4,636 shares of 7% cumulative preferred stock of Concordia-Gallia Corporation at a cost of $327,319.69. These shares of preferred stock represented 55.08% out of a total of 8,417 of such preferred shares issued and outstanding. On December 1, 1931, Concordia-Gallia issued to the partnership its 6% debenture bonds, having a par and fair market value of $463,600, in exchange for the 4,636 shares of 7% preferred stock and on the same date also issued to the partnership additional 6% debenture bonds of the par value of $36,400 upon payment in cash to that amount. As a result of the foregoing transactions the partnership received $500,000 debenture bonds. One-fifth of the aggregate total of these bonds was to become payable one year from the date of issuance and each successive fifth was to mature yearly thereafter until the bonded indebtedness should be paid in full.

The issue of 6% debenture bonds was authorized by a resolution adopted on December 1, 1931, at a meeting of the preferred and common stockholders of Concordia-Gallia, that such bonds should be issued "upon the payment of the par value thereof to the corporation, or in the alternative upon the exchange for the seven per cent preferred stock owned by L. & E. Stirn, such exchange to be made at the par value of such stock at the rate of one hundred ($100) dollars per share". At the same meeting of the stockholders of Concordia-Gallia the preferred stock was reduced by vote of all classes of stock from 10,000 to 4,000 shares, and its dividend rate was reduced from seven to six per cent. A certificate of such reduction was filed with the Secretary of State of New York. The 4,636 shares of 7% preferred stock surrendered by L. & E. Stirn in exchange for the debentures of the same par value were accordingly retired by Concordia-Gallia.

It is evident from what we have already said that the retirement of the 4,636 shares of preferred stock was not a retirement pro rata of the holdings of all the preferred stockholders, but only of the holdings of preferred stock of the partnership.

On June 3, 1932, L. & E. Stirn, Inc., was incorporated under the laws of the State of New York. The partnership of L. & E. Stirn subsequently transferred to this corporation various assets including the $500,000 debenture bonds which it had received on or about December 1, 1931 and received the stock of the corporation in exchange. Under Section 112(b)(5) of the Revenue Act of 1928, 26 U.S.C.A. § 112(b)(5), this transfer was a non-taxable exchange.

On September 30, 1932, all the debentures held by L. & E. Stirn, Inc., which then had a fair market value as well as a par value of $500,000, were retired under an agreement between Concordia-Gallia, the obligor, and the taxpayer L. & E. Stirn, Inc., the holder, by applying them against an indebtedness of the latter to Concordia-Gallia which was then in excess of that amount.

The question before us is whether the basis for computing gain or loss to the taxpayer on the $463,600 of debentures, surrendered for retirement on September 30, 1932, was the value of these bonds (that is to say, $463,600) when acquired by the partnership on December 1, 1931, or was the cost of the 4,636 shares of 7% preferred stock, purchased at $327,319.69, for which the debentures had been exchanged. If the latter sum was the proper basis, a taxable profit of $136,280.31 was realized by the taxpayer on September 30, 1932, out of the proceeds of the debentures then redeemed. The Commissioner held that the cost of the 4,636 shares of 7% preferred stock to the transferor was the proper basis and accordingly assessed income taxes on the profit thus computed. The Board of Tax Appeals affirmed the Commissioner and determined a tax deficiency of $13,352.21 under his assessment, whereupon the taxpayer filed a petition to review the order of the Board.

We hold that the deficiency order of the Board should be reversed because the $463,600 of debentures issued to the partnership of L. & E. Stirn on December 1, 1931, in exchange for the preferred stock were not "securities" within the meaning of that word as used in Sections 112(b)(3) of the Revenue Acts of 1928 and 1932, 26 U.S.C.A. § 112(b)(3). A portion of the income for the fiscal year of the partnership beginning December 1, 1931, and ending November 30, 1932, is governed by the Act of 1928 and the remaining portion by the Act of 1932, but as each act contains like provisions relating to the issues before us we shall only refer to the provisions of the Act of 1928.

Section 112(b)(3) of the Act of 1928 reads as follows:

"(3) Stock for stock on reorganization. No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization,...