Bedford's Estate v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 08 August 1944 |
| Docket Number | No. 93.,93. |
| Citation | 144 F.2d 272 |
| Parties | BEDFORD'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Second Circuit |
Holt S. McKinney, of New York City (Erwin R. Griswold and Holt S. McKinney, both of New York City, of counsel), for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen Goodner, Sp. Assts. to Atty. Gen., for respondent.
Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
This appeal involves income taxes of the Estate of Edward T. Bedford, deceased, for 1937, in the amount of $13,887.24 and is taken from a decision of the United States Tax Court sustaining the assessment of the Commissioner of Internal Revenue. We think the decision of the Tax Court adjudging a deficiency of $13,887.24 should be reversed.
Edward T. Bedford died on May 21, 1931, and Title Guarantee and Trust Company is the executor of his estate and the taxpayer in this proceeding. Among his assets were 3,000 shares of 7% cumulative preferred stock of Abercrombie and Fitch Company (par value $100 per share) having a fair market value at the date of his death of $210,000. Because of business conditions prevailing in the years following Bedford's death Abercrombie and Fitch Company incurred losses, with the result that its surplus account showed a cumulative deficit of $399,771.87 on January 31, 1936. Included in charges against its surplus were amounts aggregating $844,100 which had been capitalized by three stock dividends issued in 1920, 1928 and 1930. Because of the deficit occasioned in the surplus account the Company had been unable for over five years to pay dividends on either its preferred or common stock. Accordingly a plan of recapitalization was proposed and submitted to the stockholders for their consideration and approval and was adopted by them at a meeting held on December 8, 1936, and thereafter put into effect.
In accordance with this plan, the executor of Bedford received in January, 1937, in exchange for its 3,000 shares of 7% cumulative perferred stock ($100 par value), the following:
Fair
Market
Value
3,500 shares new Cumulative
Perferred Stock of the Abercrombie
and Fitch Company
of a par value of $75
per share and an annual
dividend of $6. per share $288,750
1,500 shares of the Common
Stock of the Abercrombie
and Fitch Company of a
par value of $1. per share 15,750
Cash of $15.08 per share ................ 45,240
_________
Total Fair Market Value ............. $349,740
Abercrombie and Fitch Company had net earnings after taxes during the taxable year ended January 31, 1937 of $309,073.70.
The stock received by the executor of Bedford in exchange for his former holdings was not subject to taxation because it was received through a reorganization and under the provisions of Section 112(b) (3) of the Revenue Act of 1936:
"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, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." 26 U.S.C.A. Int. Rev.Acts, page 855.
There concededly was a recognizable gain to the recipient to the extent of the cash distribution of $45,240 in so far as this cash and the securities received together exceeded the fair value of the share the decedent held at the time of his death. This is so because of the provisions of Section 112(c) (1) that in the case of money so distributed "gain * * * to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property."
It appears from the facts we have stated that the value of the stock Bedford held at the time of his death was $210,000 and the fair value of the securities and cash received through the reorganization was $349,740. Accordingly the gain amounted to $139,740 and the $45,240 of cash was taxable as a part of such gain if Section 112(b) (3) be applied. This, as we understand it, all parties concede....
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