Bessemer Limestone & Cement Co. v. Comm'r of Internal Revenue, Docket No. 21667.

• Decision Date: 14 May 1954
• Docket Number: Docket No. 21667.
• Citation: 22 T.C. 303
• Parties: THE BESSEMER LIMESTONE AND CEMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

22 T.C. 303

THE BESSEMER LIMESTONE AND CEMENT COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 21667.

Tax Court of the United States.

Filed May 14, 1954.

Aaron Holman, Esq., and I. Newton Brozan, Esq., for the petitioner.

Stanley W. Ozark, Esq., for the respondent.

Held, the reorganization here in question meets the requirement of section 112(b)(5) of the Revenue Act of 1934 that the stock and securities received by each transferor be substantially in proportion to his interest in the property prior to the exchange.

The pleadings upon which this proceeding is based involve deficiencies determined by respondent in income, excess profits, and declared value excess-profits taxes of the petitioner, as follows:

+---------------------------------------------+
                ¦Year¦Tax                          ¦Deficiency¦
                +----+-----------------------------+----------¦
                ¦1941¦Income                       ¦$4,800.03 ¦
                +----+-----------------------------+----------¦
                ¦1941¦Excess profits               ¦30,251.38 ¦
                +----+-----------------------------+----------¦
                ¦1941¦Declared value excess-profits¦3,231.77  ¦
                +----+-----------------------------+----------¦
                ¦1942¦Excess profits               ¦97,703.45 ¦
                +---------------------------------------------+
                

Those issues raised in the petition filed herein pertaining principally to petitioner's invested capital credit for the purpose of computing its excess profits taxes in the 2 years here involved and to petitioner's basis of certain assets received in a reorganization, were, upon motion of petitioner, severed and hearing thereon postponed pending a hearing and a ruling by this Court upon the question of whether petitioner acquired such assets through a nontaxable reorganization or exchange.

FINDINGS OF FACT.

All facts contained in the stipulation filed by the parties are so found and made a part hereof. Additional facts were adduced from exhibits received at the hearing.

The petitioner is a corporation organized under the laws of the State of Ohio on July 15, 1919, with its principal office at Youngstown, Ohio. The taxable years here involved are 1941 and 1942. Petitioner's returns for such years were filed with the collector of internal revenue for the eighteenth district of Ohio. Petitioner kept its books and filed its income and excess profits tax returns on the accrual basis for the calendar years 1941 and 1942.

From the date of its organization in 1919 until February 1, 1927, petitioner engaged in the limestone and cement business. On or about that date, petitioner disposed of all its assets. Thereafter, it did not dissolve but remained dormant and inactive until the reorganization here in controversy was effected on July 1, 1935, at which time petitioner was revived for the purpose of taking over the assets and succeeding to the business of The Bessemer Limestone and Cement Company, a Delaware corporation (hereinafter called Delaware).

On January 27, 1927, the Delaware corporation, having the same name as petitioner, was organized with an authorized capital of 50,000 shares of class ‘A’ no-par-value stock, 100,000 shares of class ‘B’ no-par-value stock, and $2,500,000 first mortgage 20-year 6 1/2 per cent sinking fund gold bonds.

On the same day that petitioner disposed of all of its assets, i.e., on or about February 1, 1927, a brokerage firm which had acquired such assets transferred them to the newly organized Delaware. Thereupon Delaware proceeded to engage in the limestone and cement business which the petitioner had formerly conducted. During the depression years Delaware experienced financial difficulties. On or about June 25, 1932, it defaulted on the sinking fund payment then due under the terms of the mortgage securing its outstanding bonds aggregating $2,152,400. It defaulted on the installment of interest on such bonds which became due on or about August 1, 1932, as well as on all subsequent installments of interest and of sinking fund payments. A bondholders' protective committee, representing the owners of more than three-fourths of Delaware's outstanding bonds, was organized in August 1932. The trustee under the mortgage indenture declared the principal of the bonds to be due and payable on or about April 30, 1934, and then filed foreclosure actions against Delaware on June 6, 1934, in the United States District Court, Northern District of Ohio, Eastern Division, and in the United States District Court, Western District of Pennsylvania. The board of directors of Delaware thereupon adopted a resolution on December 8, 1934, directing the filing of a petition for reorganization under section 77B of the National Bankruptcy Act in the United States District Court.

On December 10, 1934, Delaware filed a petition in the United States District Court for the Northern District of Ohio, Eastern Division, for reorganization under section 77B of the Bankruptcy Act, alleging that it was unable to meet its debts as they matured. On the same day the District Court entered an order approving such petition and on December 24, 1934, entered an order calling for the proposal of a plan of reorganization and a hearing thereon. A plan of reorganization having been filed with the District Court by Delaware, the court entered an order on January 8, 1935, continuing Delaware in possession and ordering the distribution to all interested parties of copies of the plan, together with a notice directing that a hearing on the plan be held before a special master on February 5, 1935.

The plan of reorganization so filed was formulated by the bondholders' protective committee in collaboration with Delaware's officers and directors, and, as announced by the District Court, was accepted in writing by the following numbers of shareholders, creditors, and bondholders of Delaware:

(a) By note creditors owning notes in the principal amount of $251,684.86, being 100% of the claims of creditors in this class which were proved and allowed.

(b) By a Creditor by reason of endorsement of the Debtor in the amount of $350,000.00, being 100% of the claims of this class which were proved and allowed.

(c) By holders of 43,711 ‘A’ shares, being 87.5% of the issued and outstanding ‘A’ shares of the Debtor.

(d) By holders of 100,000 ‘B’ shares, being 100% of the issued and outstanding ‘B’ shares of the Debtor.

(e) By holders of bonds in the principal amount of $1,833,200.00 which constitute 95% of the bonds on which proofs of claim were filed and allowed and 85.1% of the total amount of outstanding bonds.

The bondholders' protective committee and the committee for the ‘A’ stockholders, each of which was represented by counsel who participated in the District Court proceedings, recommended the acceptance of the plan.

Copies of the plan of reorganization and of the notice of hearing were duly sent to all interested parties, and hearings on the plan were then held before the special master at which appraisals of the assets of Delaware were submitted, testimony was introduced, and objections to the plan were filed by certain interested parties. The special master then filed a report and a supplemental report recommending the approval of the plan, to both of which exceptions were taken by these objecting parties. Thereupon, after a hearing on the reports of the special master and the exceptions filed thereto, the United States District Court overruled all objections and entered a decree dated April 29, 1935, confirming the plan of reorganization. In its decree of April 29, 1935, the court found that:

(1) Although Delaware had been unable to meet its obligations as they matured, the reasonable sound value of its assets exceeded its liabilities;

(2) The proposed Plan of Reorganization was fair and equitable, did not discriminate in favor of or against any class of creditors or stockholders, and was feasible; and that

(3) The Plan of Reorganization complied with all of the provisions of Section 77B of the Bankruptcy Act.

In addition, the decree contained the following finding:

(10) The detailed appraisal of all of the assets of the corporation which was filed by the Debtor was competently, carefully and honestly made. Said appraisal was originally completed in December, 1933 for the use of the Bondholders' Protective Committee in connection with their efforts to formulate a plan of reorganization and has thereafter been brought down to date and checked and rechecked by the Debtor's department heads in the light of their own experience as to values supplemented by estimates, appraisals and quotation by building contractors, construction engineers, machinery builders and equipment supply firms. A further appraisal by an independent company is unnecessary and would not justify the expense entailed.

An action to foreclose the mortgage securing the bond issue is now pending. By reason of the existing economic situation in the country in general and in the Cleveland, Youngstown, Pittsburgh District in particular, and the consequent certain absence of competition in bidding for the Debtor's assets, a very low return to bondholders or note creditors would necessarily result if the Debtor were liquidated and its assets sold for cash, either as a unit or otherwise.

The sound value of the Debtor's current assets, however, on the date of the filing of the Petition was, and today is, substantially that at which said assets were carried on its books. The probable sound value of the manufacturing plant, quarries owned in fee, manufacturing equipment and other real estate, exclusive of the Debtor's ‘Prepaid Royalties and Advance Stripping’ accounts on said date, so far as can be reasonably determined, is equal to and perhaps slightly greater than the amount of the Debtor's outstanding bonds, exclusive of any value to be attributed to good will, organization expense, or other real elements of value inherent in the existence of the enterprise as a growing concern. Such a valuation of its plant...