Com'r of Int. Rev. v. Alabama Asphaltic Limestone Co.
| Decision Date | 05 May 1941 |
| Docket Number | No. 9569.,9569. |
| Citation | 119 F.2d 819 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. ALABAMA ASPHALTIC LIMESTONE CO. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Maurice J. Mahoney and Sewall Key, Sp. Assts. to the Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Claude R. Marshall, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.
James A. O'Callaghan, of Chicago, Ill., for respondent.
Before SIBLEY, HOLMES, and McCORD, Circuit Judges.
Touching income taxes for the year 1934, the taxpayer, Alabama Asphaltic Limestone Company, called herein the new corporation, claimed depreciation and depletion deductions based on the cost of its property to Alabama Rock Asphalt Company, its predecessor in title, called the old corporation. The Commissioner held the proper basis to be the price bid in 1931 on a sale in bankruptcy by a creditors' committee which had the property conveyed to the taxpayer. The Board of Tax Appeals upheld the basis claimed by the taxpayer, thinking there was a reorganization of the old corporation into the new by the acquisition of substantially all of the former's properties by the latter, under Revenue Act of 1928, § 112 (i) (1) (A), 26 U.S.C.A. Int.Rev.Acts, page 379, which entitled the new corporation to the cost basis of the old. Alabama Asphaltic Limestone Co. v. Commissioner, 41 B.T.A. 324. Of the facts there found, the most important are that the old corporation was a wholly owned subsidiary of Deep Water Coal & Iron Corporation, organized in 1927 by the parent company deeding to its subsidiary mineral properties which cost $208,901, for the entire capital stock. The subsidiary had no working capital, and it borrowed some money on the indorsement of the parent company, secured by pledge of the subsidiary's capital stock; but that not being enough, the parent company's stockholders furnished $733,687, on seven percent notes due Feb. 1, 1930, but on an understanding among them all that the notes would be funded into stock or other permanent securities of the subsidiary. Two of the note holders transferred their notes to others who claimed not to be bound by the understanding, refused stock and demanded pay in money. Unwilling to pay them, for the purpose of getting rid of them, the other note holders and creditors had an involuntary bankruptcy started Sept. 11, 1930, in which the subsidiary was adjudged insolvent. It was insolvent according to the books which showed $755,879, besides interest, owing on the notes to the stockholders, besides $8,386 on open account for a similar advancement, and $36,915 due sundry creditors. The book value of assets was about $500,000, but the appraisal put them at $155,876. The parent corporation was itself in an equity receivership. The subsidiary's president was appointed receiver in bankruptcy for the subsidiary, and he was later elected trustee. The bankrupt's business was continued. A plan was formed, in which all creditors joined except the two above referred to, by which a creditors' committee would buy in all the property and business of the bankrupt, and transfer it to a new company, the taxpayer, for its preferred and common stock, to be distributed pro rata to the creditors. The sale occurred accordingly at a price of $150,000. The trustee reported all the circumstances to the court, and that the price was to be paid by the agreement of the creditors to take stock in the new company, except that $15,000 was to be paid in cash to pay expenses of administration, preferred claims and the dividend due non-assenting creditors, with an agreement to supplement the cash if necessary. The plan of reorganization with its acceptances was filed in court. The sale was approved, its terms carried out, the new corporation formed...
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