Claridge Apartments Co. v. Comm'r of Internal Revenue

• Decision Date: 04 December 1942
• Docket Number: Docket No. 106868.
• Citation: 1 T.C. 163
• Parties: CLARIDGE APARTMENTS COMPANY, AN ILLINOIS CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

1 T.C. 163

CLARIDGE APARTMENTS COMPANY, AN ILLINOIS CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 106868.

Tax Court of the United States.

Promulgated December 4, 1942.

1. Neither expenses incident to 77B reorganization assumed by transferee nor nominal stock interest in reorganized company accorded to stockholders of predecessor held to disqualify transaction as a ‘reorganization‘ under Revenue Act of 1934, section 112. Helvering v. Southwest Consolidated Corporation, 315 U.S. 194, distinguished. Held, further, on facts exchange of property was solely for petitioner's stock.

2. Provisions of the Chandler Act relating to taxation of income resulting from reduction of indebtedness in reorganizations, held applicable to the entire calendar year 1938, and to interest forgiven, but held, further, not applicable in the case of substitution of common stock for outstanding principal of bonds. Walter Hamilton, Esq., for the petitioner.

David Altman, Esq., and George E. Gibson, Esq., for the respondent.

By this proceeding petitioner charges that respondent erred in determining deficiencies in the amounts and for the years indicated as follows:

+---------------------------------------+
                ¦    ¦Year¦Income tax¦Excess profits tax¦
                +----+----+----------+------------------¦
                ¦1935¦    ¦$844.39   ¦$57.05            ¦
                +----+----+----------+------------------¦
                ¦1936¦    ¦706.92    ¦-----             ¦
                +----+----+----------+------------------¦
                ¦1937¦    ¦752.76    ¦-----             ¦
                +----+----+----------+------------------¦
                ¦1938¦    ¦985.67    ¦10.80             ¦
                +---------------------------------------+
                

The contested issues relate to petitioner's basis for depreciation of its apartment house property and deduction of items for painting and repairing.

FINDINGS OF FACT.

Petitioner is a corporation, organized May 28, 1935, under the laws of the State of Illinois pursuant to a proceeding under 77B of the National Bankruptcy Act. It filed its income and excess profits tax returns for the years 1935 to 1938, inclusive, with the collector of internal revenue for the first district of Illinois.

The Claridge Building Corporation, also an Illinois corporation, and hereinafter for convenience referred to as the Building Corporation, acquired the lot at 4501 Malden Street, Chicago, Illinois, from Charles F. Henry in 1924. The acquisition was pursuant to a contract whereby the Building Corporation agreed to issue and did issue its entire authorized capital stock to Charles F. Henry in consideration of the transfer of the lot by Henry. During the spring and summer of 1924 the Building Corporation caused an apartment building to be erected on the lot at a cost of $385,326.37. By August 1, 1935, $139,253.71 depreciation had been taken, on a ‘cost‘ of $424,609.19 which included a contractor's commission to Henry.

Up to 1932 the stock of the Building Corporation, with the exception of two qualifying shares, was owned by Charles F. Henry. In 1932 and thereafter it was stated to be held as follows: Minnie H. Case, sister of Charles F. Henry, 198 shares; Howard D. Henry and Albert A. Henry, brothers of Charles F. Henry, one share each.

On March 25, 1924, the Building Corporation issued its 6 1/2 percent first mortgage bonds in the principal amount of $340,000. The bond issue was secured by trust deed and chattel mortgage covering the property located at 4501 Malden Street, executed March 25, 1924, to Melvin L. Straus, as trustee. On October 1, 1931, the bonds were outstanding and unpaid in the principal amount of $277,000. Defaults having therefore occurred in the payments of principal and interest, the trustee filed a bill of foreclosure on October 1, 1931, and all of the bonds were declared immediately due and payable. A decree of foreclosure was entered on February 19, 1932, but there was no sale of the mortgaged property under the decree and the foreclosure proceeding was never consummated. The trustee took possession of the property and collected the rents after October 1, 1931.

On September 9, 1931, a bondholders' committee was organized under a deposit agreement of that date with the American National Bank & Trust Co. of Chicago. As of November 27, 1934, the committee had on deposit with the bank $258,600 of the bonds, or approximately 93 percent of the total amount of the bonds outstanding.

On June 16, 1934, the Building Corporation filed a voluntary petition in the District Court of the United States for the Northern District of Illinois, Eastern Division, under section 77B of the National Bankruptcy Act as amended.

On November 27, 1934, the bondholders' committee, the Building Corporation, and Minnie H. Case agreed on a reorganization plan. The plan recited that Minnie H. Case was the record holder of the title to the property in question, but that she held title for the benefit of the Building Corporation, and that she owned the furnishings of some of the apartments.

The plan provided, inter alia, as follows:

1-A new corporation shall be organized under the laws of the State of Illinois with an authorized capital stock consisting of 3,080 shares of common stock without par value, or with such par value as may be agreed upon by the parties hereto. Upon completion of the reorganization, Minnie H. Case shall convey title to the property to said new corporation and the (Building) corporation shall execute a confirmatory quit-claim deed to the neu corporation. 2,770 shares of the common stock of the new corporation shall be issued to three Trustees to be selected by the Committee subject to the approval of the court. Trust certificates shall be issued to the holders of the first mortgage bonds and each first mortgage bondholder shall receive a trust certificate representing one share of sock for each $100.00 in face amount of bonds owned by him. The stock so issued to said Trustees shall constitute 90% of the outstanding stock of the new corporation. 10% of the outstanding stock of the new corporation shall be issued to or upon the order of the Owner (the stockholders of the Building corporation).

4-The new corporation shall by written agreement indemnify the present Trustee under the bond issue against any and all liability which he may suffer or incur by reason of his operation of the property (other than for wrongful acts of the Trustee) and against any and all taxes, assessments or other governmental charges which may be levied or assessed against him covering the period of his possession of the property. The new corporation shall also by written agreement indemnify the Committee against any and all taxes, assessments or against any and all liability which may be suffered or incurred by the Committee by virtue of the reorganization plan, including the expenses and reasonable attorneys' fees in the event that litigation is instituted against the Committee or any member thereof.

The new corporation shall assume and agree to pay the reorganization expenses hereinafter referred to and these expenses shall be paid in full before any dividends shall be declared or paid upon the stock of the new corporation. Subject to the approval of the court, the following reorganization expenses shall be allowed: a) To cover the general expenses and compensation of the Committee including the charge of Securities Service Corporation, 1 1/2% of the face amount of deposited bonds plus out-of-pocket expenses;

(b) Charge of the Depositary on the basis of three-fourths of 1% of the face amount of deposited bonds plus out-of-pocket expenses;

(c) Compensation of counsel for the Committee;

(d) Compensation of counsel for the owner.

In addition there shall be allowed the expenses and charges in the foreclosure proceeding, including the Trustee's fee, the fee of Trustee's counsel, court costs and Master's fees. There shall also be allowed and paid the actual expenses to be incurred in connection with the organization of a new corporation, printing of the trust agreement and the new securities, stamp taxes, title guaranty expense, court costs in the bankruptcy proceeding and other similar items.

Upon consummation of the reorganization, the present Trustee shall surrender possession to the new corporation and all net assets of the Trustee over and above the liabilities of the Trustee in connection with the operation of the property shall be applied towards the payment of the reorganization expenses.

The plan also provided that Minnie H. Case was to execute and deliver to the new corporation a bill of sale covering all of the personal property owned by her which was located in the apartments, for which she should be paid the sum of $1,400. The new corporation was to enter into a management contract with Minnie H. Case and she was to be one of the three directors of the new corporation. The plan, after amendment not material here, was confirmed and approved by the court in an order dated May 14, 1935.

The court order provided for the release of the trust deed and chattel mortgage of March 25, 1924, and stated that the bonds and interest coupons were satisfied and of no further force and effect and authorized the issuance of the new securities.

The final decree in the 77B proceeding entered March 1, 1937, provided in part as follows:

1: The plan of reorganization theretofore confirmed by this court is hereby declared to be in all respects fully executed, carried out and accomplished.

4: That all of the first mortgage bonds in the principal amount of $277,000.00 and interest coupons thereto attached, secured by trust deed and chattel mortgage to Melvin L. Straus, dated March 25, 1924, recorded in the office of the Recorder of Deeds of Cook County, Illinois, as document No. 8340617, and said trust deed and chattel mortgage, are hereby declared to be of no further force and effect as against the Debtor or its property, and the holders thereof shall be entitled to receive only the new securities provided for in...