Commissioner of Internal Revenue v. Cement Investors
| Decision Date | 24 July 1941 |
| Docket Number | No. 2270.,2270. |
| Citation | 122 F.2d 380 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. CEMENT INVESTORS, Inc. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Arthur A. Armstrong, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Samuel H. Levy, Sp. Assts. to the Atty. Gen., on the brief), for petitioner.
James B. Grant, of Denver, Colo. (Lewis & Grant, and Stephen H. Hart, all of Denver, Colo., on the brief), for respondent.
Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.
The Colorado Industrial Company1 was a corporation organized under the laws of Colorado. On August 1, 1904, Industrial issued its five per cent first mortgage bonds2 due August 1, 1934, and secured by a deed of trust on its property. The total face value of Industrial's bonds held by the public on August 1, 1934, was $27,633,000.
The Colorado Fuel and Iron Company3 was a corporation organized under the laws of Colorado. It was engaged in the manufacture and sale of iron and steel products. It owned all the capital stock of Industrial consisting of 200 shares, and had unconditionally guaranteed both the principal and interest of Industrial's bonds. On August 1, 1933, Industrial was not engaged in any active business and had no assets of any substantial value, having transferred substantially all of its assets to the Colorado Company in 1913.
On August 1, 1933, Industrial and the Colorado Company defaulted in the payment of the annual interest due on Industrial's bonds.
On August 1, 1933, the stock and securities of the Colorado Company outstanding in the hands of the public were its general mortgage five per cent bonds4 of the face value of $4,500,000, secured by a mortgage on its property, 20,000 shares of eight per cent cumulative preferred stock, each of the par value of $100, and 340,505 shares of common stock, of no par value. Dividends were not paid on the preferred stock after November 25, 1931. On August 1, 1933, the Colorado Company defaulted in the payment of the semiannual interest due on the general bonds. On that date, a receiver for the property of the Colorado Company was appointed by the District Courts of the United States for the Districts of Colorado and Wyoming.
On August 1, 1934, Industrial and the Colorado Company, both being in default in the payment of the principal and interest due on Industrial's bonds, filed petitions for reorganization in the District Court of the United States for the District of Colorado under § 77B of the Bankruptcy Act, 11 U. S.C.A. § 207. The petitions were approved and Arthur Roeder was appointed trustee.
On August 1, 1936, Cement Investors, Inc.,5 a corporation organized under the laws of Delaware, owned Industrial's bonds of the face value of $44,000.
On March 12, 1935, a plan of reorganization was filed in the bankruptcy proceedings. It provided for the organization of the Colorado Fuel and Iron Corporation,6 authorized to issue 1,000,000 shares of stock without par value and five per cent income mortgage bonds7 of the face value of $11,053,200. It further provided that the Colorado Corporation should assume the payment of the general bonds which were not disturbed in the reorganization;8 that all of the income bonds and 552,660 shares of the capital stock of the Colorado Corporation should be issued in exchange for the defaulted Industrial's bonds in the ratio of $400 face value of income bonds and 20 shares of stock for each $1,000 face value of Industrial's bonds. The plan declared that it gave the entire ownership and control of the Colorado Corporation to the Industrial bondholders. It recognized no present equity in the stockholders. However, it made provision for them to regain an equity by providing that warrants should be issued to the holders of preferred and common stock of the Colorado Company entitling them to purchase, on or before February 1, 1950, common stock in the Colorado Corporation at $35 per share in the following ratios: For each share of Colorado Company preferred three shares of Colorado Corporation and for each share of Colorado Company common three-fourths of one share of Colorado Corporation. The subscription price was considerably higher than the open market price for the shares of the Colorado Corporation at the date of the consummation of the plan. The plan was duly accepted by the bondholders and shareholders of Industrial and the Colorado Company. On April 25, 1936, the court entered its order confirming the plan of reorganization. In the order the court found that Industrial and the Colorado Company had been in default on Industrial's bonds since August 1, 1934, and since that date had been unable to meet their debts as they matured, and that the plan was fair and equitable and did not discriminate unfairly in favor of any class of creditors or stockholders.
The Colorado Corporation was organized pursuant to the plan and on June 20, 1936, the court entered its order directing that on July 1, 1936, the Colorado Company, Industrial, the reorganization trustee of both, and the New York Trust Company, as trustee under Industrial's mortgage, should convey all their right, title, and interest in all of the assets of the Colorado Company and Industrial to the Colorado Corporation, and that the income bonds and 552,660 shares of the Colorado Corporation should be distributed to the holders of Industrial's bonds in exchange therefor. All of such assets were transferred to the Colorado Corporation and its bonds and stock were issued to the holders of Industrial's bonds in exchange therefor. The taxpayer surrendered Industrial's bonds of the face value of $44,000 in exchange for $17,600 face value income bonds and 880 shares of the Colorado Corporation.
The 552,660 shares of the Colorado Corporation were issued to holders of Industrial's bonds in exchange therefor. No stock was issued to parties other than holders of Industrial's bonds until October 23, 1936, and by June 30, 1938, only 465 shares had been issued to holders of warrants.
The capital stock of Industrial was cancelled and the mortgage securing the Industrial bonds was satisfied and discharged.
The warrants provided that the holders thereof should have no voting rights or other rights whatsoever as stockholders of the Colorado Corporation.
The fair market value of new securities received by the taxpayer was $37,884, exceeding the cost basis of its Industrial's bonds by $22,990.75.
The Commissioner determined deficiencies aggregating $16,985.03. The taxpayer admitted liability for $2,559.02. On petition for redetermination, the Board found a deficiency in the latter amount and entered its order accordingly.
This is a petition to review the order of the Board.
The pertinent statutes are set out in the margin.9
The elements which constitute a nontaxable exchange under § 112(b) (5) are that
(a) Property
(b) Be transferred to a corporation
(c) Solely in exchange for stock or securities in such corporation, and that
(d) The transferors immediately after the exchange be in control of the corporation, through ownership of 80 per cent of all voting stock and at least 80 per cent of all other classes of stock of the corporation.
Under § 112(b) (5), a reorganization is not an essential element.10
Both Industrial and the Colorado Company, as guarantor, had defaulted in the payment of the interest and principal of Industrial's bonds. The defaults had not been cured, and neither Industrial nor the Colorado Company was able to cure them. There was no equity in the properties over and above the bonded debts secured by Industrial's mortgage and the Colorado Company's mortgage. The holders of Industrial's bonds were entitled to a satisfaction of their indebtedness from the mortgaged property, or a statutory substitute therefor under § 77B. They had acquired equitable rights in the property and were entitled to have it disposed of under a plan, fair and equitable to them. On the approval of the petitions under § 77B, the property of Industrial and the Colorado Company came under the jurisdiction of the bankruptcy court and private rights in respect to the res became subject to the superior dominion of the court and were to be adjudicated pursuant to the standards prescribed in § 77B.11 Since no equity remained in the properties for the preferred and common stockholders, the properties passed under the jurisdiction of the court empowered to make fair and equitable disposition thereof for the benefit of the bondholders. In the exercise of that jurisdiction the bankruptcy court ordered the equitable rights and interests of the bondholders in the properties to be transferred to the Colorado Corporation in exchange for stock and bonds of that corporation. Pursuant to the order, all of the assets of Industrial and the Colorado Company were transferred to the Colorado Corporation. In substance, Industrial's bondholders were the transferors.
Furthermore, the bonds of Industrial were property in the hands of the holders thereof12 and they were transferred to the Colorado Corporation in exchange for all of the voting stock thereof, and under the plan no additional stock was to be presently issued. The warrants gave no rights to the holders thereof to vote or otherwise exercise the rights of stockholders.
Hence, property was transferred to the Colorado Corporation solely in exchange for stock and securities of such corporation and immediately after the transfer the bondholders, the transferors, were in control of the Colorado Corporation, owning all of its stock, and no gain or loss should be recognized by reason of the provisions of § 112(b) (5).
Moreover, we think, as the Board held, there was a reorganization within the meaning of § 112(g) (1), and hence, under § 112(b) (3) no gain or loss should be recognized.
The elements required by § 112(g) (1) (C) are: (1) that there be a transfer by a corporation of all or a part of its assets to...
To continue reading
Request your trial
-
Simpson Co v. Commissioner of Internal Revenue, 1
...denied 308 U.S. 627, 60 S.Ct. 386, 84 L.Ed. 523, certiorari granted 309 U.S. 692, 60 S.Ct. 708, 84 L.Ed. 1034; Helvering v. Cement Investors, Inc., 10 Cir., 122 F.2d 380, certiorari denied 315 U.S. 802, 62 S.Ct. 630, 86 L.Ed. 1203, certiorari granted 315 U.S. 825, 62 S.Ct. 802, 86 L.Ed. 122......
-
Helvering v. Southwest Consol Corporation
...the war- rants allocated to stockholders had been issued and exercised. The contrary conclusion was reached in Commissioner v. Cement Investors, Inc., 10 Cir., 122 F.2d 380, 384, on the theory that the bondholders of the insolvent predecessor company could be regarded as its 'stockholders' ......
-
Helvering v. Cement Investors Same v. James Newton Trust Same v. Newton 8212 646
...held for the taxpayers. See Newton Trust v. Commissioner, 42 B.T.A. 473. The Circuit Court of Appeals affirmed (Commissioner v. Cement Investors, 10 Cir., 122 F.2d 380, Commissioner v. Newton, 10 Cir., 122 F.2d 416) holding, inter alia, that the exchange met the requirements of § 112(b)(5).......
-
Commissioner of Internal Revenue v. Newton, 2267
...Judge. The ultimate questions here presented are identical with those considered by the court in Commissioner of Internal Revenue v. Cement Investors, Inc., 10 Cir., 122 F.2d 380, this day decided, the facts being substantially the same, except as to the amount of bonds involved and the cos......