Central Paper Co. v. Commissioner of Internal Revenue
| Decision Date | 02 December 1946 |
| Docket Number | No. 10205.,10205. |
| Citation | 158 F.2d 131 |
| Parties | CENTRAL PAPER CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
W. A. Giffen, of Chicago, Ill. (Wilbur A. Giffen, of Chicago, Ill., on the brief; KixMiller, Baar & Morris, of Chicago, Ill., of counsel), for petitioner.
Harry Marselli, of Washington, D. C. (Douglas W. McGregor, Sewall Key, J. Louis Monarch, and Melva M. Graney, all of Washington, D. C., on the brief), for respondent.
Before HICKS, MARTIN, and MILLER, Circuit Judges.
The petitioner, Central Paper Company, Inc., seeks a review of the decision of The Tax Court of July 21, 1945, whereby The Tax Court determined that for the fiscal year ending June 30, 1940 there were deficiencies in income tax and declared-value excess profits tax in the respective amounts of $6,804.13 and $5,623.25, or a total of $12,427.38. The deficiency resulted from the failure of the taxpayer to include as income for the taxable year in question the sum of $42,529.98, representing the difference between the par value and the acquisition cost to the petitioner of certain Convertible Trustee's Certificates, issued under a plan of reorganization of the petitioner's predecessor, which certificates the petitioner purchased at a discount during the years 1937, 1938, 1939 and 1940. Of this amount, however, only $42,467.98 is involved in this review, the difference of $62 being conceded because the amount involved is too small to justify an issue.
The petitioner, a Michigan corporation, was incorporated on February 6, 1935 pursuant to a plan of reorganization under § 77B of the Bankruptcy Act, U.S.C.A. § 207. Its predecessor, the Central Paper Company, was dissolved immediately after February 6, 1935. Both corporations were engaged in the manufacture of pulp and paper at Muskegon, Michigan. The old company owned certain Canadian assets consisting of several timber licenses and 212 acres of adjoining Canadian freehold lands upon which there was a sawmill. Immediately prior to the reorganization of the old company it had outstanding an issue of First and General Mortgage 7% Sinking Fund Bonds in the then principal amount of $321,300, which were secured by a first lien on the Canadian assets and a second lien on the other or general assets of the old company. The old company was not insolvent under provisions of the Bankruptcy Act. The new company was in a solvent financial condition at all times material to the case.
Pursuant to the reorganization plan, the taxpayer acquired all the assets and liabilities of the old company and issued therefor to the holders of the outstanding shares and bonds and to unsecured creditors of the old company its own shares, bonds and notes. A trust arrangement took the place of the old company's First and General Mortgage 7% Sinking Fund Bonds. Under this trust agreement the taxpayer transferred to a trustee the Canadian assets and 32,130 shares of its 3%-6% cumulative non-convertible preferred stock, $10 par, or a par total of $321,300. The holders of the old 7% bonds then released their lien on the Canadian assets and also their claim against the other assets of the old company and accepted in lieu thereof Convertible Trustee's Certificates, dated February 1, 1935, and maturing October 1, 1948, having a face amount equal to the par amount of the old bonds. The certificates stated that the holder was the owner of an undivided share, to the extent of the principal sum stated in the certificate, in the properties held by the Trustee and that the holder was entitled to interest if and when the Trustee had sufficient funds for that purpose. They also contained this provision:
"No obligation shall be asserted or be enforcible against the Trustee or the Company, or either of them to pay this Certificate or any interest accrued thereon, and each original and successive holder of this Certificate accepts the same upon the express condition that the sole remedy of such holder shall be by recourse to the properties, securities and/or cash in the trust estate held by the Trustee as security for the Certificates of this issue under and subject to the terms of said Indenture and in the manner therein set forth."
The Certificate also provided that the holder at his option could surrender the certificate to the trustee and receive, in lieu thereof, shares of petitioner's preferred stock held by the trustee on a basis of par for par. The certificates so converted were to be cancelled. The taxpayer agreed to establish a "Sinking Fund B" for the payment of principal or interest on the certificates by the payment of a certain percentage of its net profits payable in cash or "in whole or in part by the delivery to the Trustee of any Certificates secured hereby, taken at their actual cost to the Company." It further agreed to assist the trustee and use its own best efforts to maintain and extend the Canadian timber licenses and to pay to the trustee all fees and governmental charges on such licenses and necessary expenses of protecting the same, and to pay to the trustee, in the event of the loss or termination of such licenses, $25,000 in five annual $5,000 installments, and to pay to the trustee compensation for services in the execution of the trust and all expenses of the administration. The taxpayer had the option at any time prior to October 1, 1948, to pay to the trust a sum sufficient to pay the then principal amount of all outstanding certificates, together with unpaid interest and trustee's fees and expenses, and to receive a reconveyance of all properties and securities remaining in the trust estate after certificate holders had been given an opportunity to exercise their rights of conversion into non-convertible preferred shares. If all certificates were paid in full or cancelled before October 1, 1948, all properties and securities and cash remaining in the trust estate were to be turned over to the taxpayer and the trust terminated. Unless sooner terminated by the cancellation of all outstanding certificates, the trust was to terminate as soon as practicable after October 1, 1948, by the distribution of the trust estate pro rata among the registered...
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