Cobb v. Callan Court Company
| Decision Date | 29 January 1960 |
| Docket Number | No. 17648.,17648. |
| Parties | Paul COBB, Former District Director of Internal Revenue, Appellant, v. CALLAN COURT COMPANY, Appellee. UNITED STATES of America, Appellant, v. W. H. CHAMBERS and Mrs. Rena C. Chambers, Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
COPYRIGHT MATERIAL OMITTED
Grant W. Wiprud, Jerome S. Hertz, Harry Baum, Attys., Dept. of Justice, Washington, D. C., Charles D. Read, Jr., U. S. Atty., Atlanta, Ga., Lee A. Jackson, Atty., Dept. of Justice, Charles K. Rice, Asst. Atty. Gen., D. of J., Washington, D. C., Slaton Clemmons, Asst. U. S. Atty., Atlanta, Ga., for appellant.
M. E. Kilpatrick, Atlanta, Ga. (Smith, Kilpatrick, Cody, Rogers & McClatchey, Atlanta, Ga., of counsel), for appellees.
Before HUTCHESON, CAMERON and JONES, Circuit Judges.
The controversies here presented arise out of the somewhat complex corporate history of the Atlanta Biltmore Hotel Company, herein usually called the Old Company, and its successor, the Atlanta Biltmore Hotel Corporation, which will be referred to as the New Company. The primary question in the case of Cobb v. Callan Court Company is whether distributions to Callan in 1950 from the New Company in redemption of its preferred stock were in partial liquidation and not subject to Federal income taxation as ordinary income to Callan as is provided by Section 115(c) of the Internal Revenue Code of 1939,1 as was held by the district court, or as being essentially equivalent to the distribution of a taxable dividend under Section 115 (g) of the Internal Revenue Code of 1939,2 and hence to be treated as ordinary income, as is contended by the Government. If it be decided that the payments were not essentially equivalent to dividends, then a determination of Callan's cost basis of the redeemed stock becomes necessary. The Chambers case involves the character of the distributions received by Callan's stockholders of the funds paid to Callan by the New Company, and the decision will follow that of the Callan case.
The sequence of facts extends over a somewhat extended period. The factual transactions were considerable in number and not wholly free from complexity but, so far as is necessary for our purpose to state them, they may be summarized in reasonable compass. In 1921, William H. Candler, Sr., owned an entire block of real estate in the City of Atlanta, Georgia, upon which was situate an apartment building under construction. He organized Callan Court Company in April of that year and transferred to it the Atlanta real property, a block of stock, and his note payable to Callan in the amount of $5,843.43. For these transfers Candler received from Callan 10,000 shares of its common stock having a par value of $100 per share. 7,500 shares of the stock were issued to Candler and, at his request, 2,000 shares were issued to his wife, who is now Mrs. Bennie T. Hanson, 250 shares were issued to a trust for his son, William H. Candler, Jr., and the remaining 250 shares were issued to a trust for his daughter, Rena Candler, who is now Rena C. Chambers, an appellee in one of the cases we here decide. In 1923 the Old Company, the Atlanta Biltmore Hotel Company, was organized and the Atlanta block was transferred to it by Callan. Callan received all of the original issue of common and preferred stock of the Old Company which it received at a cost basis of $2,000,000. The Old Company put out a $3,000,000 issue of bonds which were sold to the public. Candler guaranteed the payment of some of the bonds. The proceeds of the bond issue were used to complete the construction of the apartment and to erect the Atlanta Biltmore Hotel on the property. Candler advanced about $750,000 for acquiring furnishings for the hotel.
The Old Company, operating the hotel and apartment property, sustained substantial losses from the opening of the hotel and apartment house in April, 1924, until 1937. Candler, to keep the Old Company going, made advances to it and transferred its obligations thereby created to Callan as contributions to Callan's capital or for additional Callan stock. From time to time Callan bought in bonds which the Old Company had issued and ultimately it had purchased these bonds of the face value of $1,766,800, for which it had paid $1,781,868. These bonds were surrendered and cremated during the two-year period between December, 1928, and December, 1930, in order to improve the credit standing and balance sheet of the Old Company, to eliminate the need for Callan to advance funds for payment of interest on these bonds which would come back to it as taxable income, and to relieve Candler, pro tanto, from his guaranty of the bonds. In 1927 Candler revamped the capital structure of the Old Company, halved the par value of the preferred stock held by Callan and moved its preferences behind a new First Preferred stock which Candler hoped to sell to the public. This recapitalization changed the par value of the common stock from $100 to $5 per share without increasing the number of shares outstanding. These maneuvers worked an improvement in Old Company's balance sheet by reducing the par value of outstanding stock by a million dollars.
Candler was disappointed in his hopes of finding financing by the sale of the new First Preferred stock issue. He then planned to borrow from an insurance company funds for the retirement of the outstanding bonds and, to this end, he again changed the capitalization by eliminating the preferred stock issues. The Second Preferred and the common were exchanged for a new common stock which was then the only stock authorized. A mortgage commitment was procured and withdrawn. Callan purchased additional common stock. It made disposition of 425,000 shares of Old Company's common by surrendering a part to Old Company as a capital contribution and transferring the rest to Callan's stockholders in exchange for stock of Callan. In 1932 the Old Company defaulted in its mortgage bond obligations and the trustee for the bondholders instituted foreclosure proceedings in the Superior Court of Fulton County, Georgia. Candler and Callan intervened, asserting preference claims for advances made to the Old Company for the payment of taxes, bond interest and other items, and making a claim for a parity with bondholders for the amount of bonds which had been purchased and cremated. During the pendency of these proceedings the stockholders of the Old Company adopted a resolution reciting that the bonds of Callan in the amount of $1,766,800, which had been cremated, represented an unsatisfied obligation of the Old Company, and providing for their reissue. By the same resolution the Old Company recognized an obligation to Callan Court for its advances in the amount of $1,058,621.81 which were made and used for the purposes of paying taxes, bond interest, insurance and bond sinking fund. Callan tendered common stock of the Old Company as an incident to the reissue of the bonds. The bonds were reissued by the Old Company but the bond trustees declined to certify them and held them undelivered. The Superior Court decided against Candler and Callan. On appeal, the Supreme Court of Georgia handed down an opinion affirming the Superior Court. Callan Court Co. v. Citizens & Southern National Bank, 184 Ga. 87, 190 S.E. 831. The state court judgment never became final or effective because of an intervening bankruptcy reorganization.
The Old Company filed a petition under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207,* and its reorganization was ultimately approved. The proceedings in the state court were stayed. Callan filed a claim as a preferred creditor in the amount of $3,000,000. A new corporation, Atlanta-Biltmore Hotel Corporation, herein called the New Company, was organized as the medium for the accomplishment of the reorganization. The original plan provided that bondholders other than Callan would be given new first mortgage bonds of the same amounts as those held, that Callan would receive second mortgage income bonds in the amount of $3,000,000, and the holders of the common stock of the Old Company would receive for each 100 shares held, one share of the common stock of the New Company. In order to improve the fiscal position of the New Company and reduce the amount of the fixed interest charge, an amended plan was adopted which gave Callan preferred stock instead of the second mortgage bonds. Callan had agreed with two law firms which represented it in the reorganization proceedings that each firm should receive ten per cent. of whatever securities Callan should be entitled to in the reorganization. In changing the plan so as to provide for preferred stock rather than second mortgage bonds the law firms were told by the Secretary of the New Company The amended plan was approved and the New Company issued its securities.
The New Company, in its operations from June, 1937, through December, 1947, had an accumulated deficit of $240,279.11. During the next four years the after-tax income totaled $650,885.74 with an average of $162,721.43. In 1944 the New Company borrowed funds to pay off its then outstanding bonds and in 1948 it completed paying the obligation incurred in 1944. Callan owned 24,000 shares of the $100 par value preferred stock of the New Company. During the 1948-1951 period the New Company called and redeemed at par on the following dates stock in the following amounts:
December 31, 1948 1500 sh. $150,000
January 3, 1949 1500 150,000
December 30, 1949 2000 200,000
May 3, 1950 1000 100,000
December 29, 1950 250 25,000
December 29, 1951 250 25,000
_____ ________
6,500 $650,000
With funds received...
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