Burnham v. COMMISSIONER OF INTERNAL REVENUE
Citation | 33 BTA 147 |
Decision Date | 03 October 1935 |
Docket Number | 68008.,Docket No. 67330 |
Parties | DANIEL H. BURNHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HUBERT BURNHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
Court | U.S. Board of Tax Appeals |
Arthur R. Foss, Esq., for the petitioners.
George D. Brabson, Esq., for the respondent.
The Commissioner determined deficiencies in income tax for the year 1929 as follows:
----------------------------------------------------------------- Name | Docket No. | Amount -----------------------------------------|------------|---------- Daniel H. Burnham ______________________ | 67330 | $7,294.20 Hubert Burnham _________________________ | 68008 | 11,432.27 -----------------------------------------------------------------
The Commissioner conceded at the hearing that each petitioner had erroneously reported certain interest and profits on his return. The only issue for decision in each case is whether the petitioner is entitled to deduct a loss from the exchange of notes of the Courts Building Corporation for stock of that corporation in pursuance of the plan of reorganization of that corporation. The cases have been consolidated and the facts have been stipulated.
The petitioners owned practically all of the stock of the Courts Building Corporation. They and their wives owned unsecured promissory notes of the corporation as shown in the following table:
---------------------------------------------------------------------------- | | Face Name of payee and owner | Date of note | amount --------------------------------------------------|---------------|--------- Daniel H. Burnham _______________________________ | Aug. 15, 1927 | $402,500 Do ____________________________________________ | Aug. 15, 1928 | 5,000 Helen D. Burnham (wife of Daniel) _______________ | Aug. 25, 1927 | 51,500 Hubert Burnham __________________________________ | Aug. 15, 1927 | 434,000 Do ____________________________________________ | Aug. 15, 1928 | 5,000 Vivian C. Burnham (wife of Hubert) ______________ | Aug. 15, 1927 | 20,000 | _____________ | ________ Total ______________________________________ | _____________ | 918,000 ----------------------------------------------------------------------------
Two hundred and fifty thousand dollars had been paid on the notes. The notes were due "on or before ten years after date." They contained powers of attorney to confess judgment. The notes were given originally in consideration of loans made to the corporation by the owners and prior owners of the notes. Other outstanding obligations of the corporation were a first mortgage 15-year note for $4,500,000, general mortgage bonds amounting to $425,000, and junior mortgage bonds amounting to $599,000. Refinancing became necessary in 1929 and the corporation was then recapitalized. The recapitalization was a reorganization within the definition of that term contained in section 112(i)(1) of the Revenue Act of 1928, as the parties agree. The holders of the promissory notes exchanged the notes and their rights to accrued interest for new stock of the corporation in pursuance of the plan of reorganization. The petitioners also exchanged their old stock for new in pursuance of the same plan. The bases of the notes has been stipulated, as has the fair market value of the stock received in exchange for them. The latter was less than the former. The petitioners and their wives were not in control of the corporation immediately after the exchange within the meaning of control as defined in section 112(j).
The petitioners contend that their losses upon the exchange of the notes are recognized under the general rule of section 112(a). The respondent's contention is that the exchange falls under either (3) or (5) of 112(b) and, therefore, no loss (or gain) can be recognized. Clearly (5) does not apply, since part of the stock necessary to give the petitioners and their wives control was not theirs at any time immediately after the exchange, but at that time belonged to others under the agreements which constituted the plan of reorganization. Cf. Wilbur F. Burns, 30 B. T. A. 163, and cases there cited. Section 112(b)(3) is 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, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
The question for decision narrows to this, Were these particular promissory notes which these petitioners exchanged for new stock of the corporation securities within the meaning of that term as used in the above quoted provision of the act? The word "securities" is not defined either in the act or in the regulations. The petitioners concede that the word, as generally used, might be broad enough to include such notes, since, when so used, it means something given to make certain the fulfillment of an obligation, the evidence of a debt or of property. But they argue that, as used in section 112(b)(3) it was not intended to include promissory notes, such as they exchanged, but was intended to include only more formal evidence of property, such as, long-term series notes designed for distribution among investors, bonds, stock, and the like. They cite Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, and Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, to show that not all promissory notes are securities within the intendment of section 203 (b) (3) and (e) of the...
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