Helvering v. Alabama Asphaltic Limestone Co

• Decision Date: 02 February 1942
• Docket Number: No. 328,328
• Citation: 62 S.Ct. 540,86 L.Ed. 775,315 U.S. 179
• Parties: HELVERING, Com'r of Internal Revenue, v. ALABAMA ASPHALTIC LIMESTONE CO
• Court: U.S. Supreme Court

315 U.S. 179

62 S.Ct. 540

86 L.Ed. 775

HELVERING, Com'r of Internal Revenue,

v ALABAMA ASPHALTIC LIMESTONE CO.

No. 328.

Argued Jan. 15, 1942.

Decided Feb. 2, 1942.

Messrs. Francis Biddle, Atty. Gen., and Samuel O. Clark, Jr., Asst. Atty. Gen., for petitioner.

Mr. J.A. O'Callaghan, of Chicago, Ill., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Respondent in 1931 acquired all the assets of Alabama Rock Asphalt, Inc., pursuant to a reorganization plan consummated with the aid of the bankruptcy court. In computing its depreciation and depletion allowances for the year 1934, respondent treated its assets as having the same basis which they had in the hands of the old corporation. The Commissioner determined a deficiency, computed on the price paid at the bankruptcy sale.¹ The Board of Tax Appeals rejected the position of the Commissioner. 41 B.T.A. 324. The Circuit Court of Appeals affirmed. 5 Cir., 119 F.2d 819. We granted the petition for certiorari, 314 U.S. 598, 62 S.Ct. 101, 86 L.Ed. —-, be- cause of the conflict between that decision² and Commissioner v. Palm Springs Holding Corp., 119 F.2d 846, decided by the Circuit Court of Appeals for the Ninth Circuit and Helvering v. New President Corp., 122 F.2d 92, decided by the Circuit Court of Appeals for the Eighth Circuit.

The answer to the question³ turns on the meaning of that part of § 112(i) (1) of the Revenue Act of 1928, 45 Stat. 791, 818, 26 U.S.C.A. Int.Rev.Acts, page 379, which provides: 'The term 'reorganization' means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *.'

The essential facts can be stated briefly. The old corporation was a subsidiary of a corporation which was in receivership in 1929. Stockholders of the parent had financed the old corporation taking unsecured notes for their advances. Maturity of the notes was approaching and not all of the noteholders would agree to take stock for their claims. Accordingly a creditors' committee was formed late in 1929 and a plan of reorganization was proposed to which all the noteholders, except two, assented. The plan provided that a new corporation would be formed which would acquire all the assets of the old corporation. The stock of the new corporation, preferred and common, would be issued to the creditors in satisfaction of their claims. Pursuant to the plan involuntary bankruptcy proceedings were instituted in 1930. The appraised value of the bankrupt corporation's assets was about $155,000. Its obligations were about $838,000, the unsecured notes with accrued interest aggregating somewhat over $793,000. The bankruptcy trustee offered the assets for sale at public auction. They were bid in by the creditors' committee for $150,000. The price was paid by $15,000 in cash, by agreements of creditors to accept stock of a new corporation in full discharge of their claims, and by an offer of the committee to meet the various costs of administration, etc. Thereafter respondent was formed and acquired all the assets of the bankrupt corporation. It does not appear whether the acquisition was directly from the old corporation on assignment of the bid or from the committee. Pursuant to the plan respondent issued its stock to the creditors of the old corporation—over 95% to the noteholders and the balance to small creditors. Nonassenting creditors were paid in cash. Operations were not interrupted by the reorganization and were carried on subsequently by substantially the same persons as before.

From the Pinellas case, Pinellas Ice & Cold Storage Co. v. Commissioner of Internal Revenue, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428 to the Le Tulle case, Le Tulle v, Scofield, 308 U.S. 415, 60 S.Ct. 313, 84 L.Ed. 355 it has been recognized that a transaction may not qualify as a 'reorganization' under the various revenue acts though the literal language of the statute is satisfied. See Paul, Studies in Federal Taxation (3d Series) p. 91 et seq. The Pinellas case introduced the continuity of interest theory to eliminate those transactions which had 'no real semblance to a merger or consolidation' (287 U.S. page 470, 53 S.Ct. page 260, 77 L.Ed. 428) and to avoid a construction which 'would make evasion of taxation very easy.' Id., 287 U.S. page 469, 53 S.Ct. page 260, 77 L.Ed. 428. In that case the transferor received in exchange for its property cash and short term notes. This Court said (Id., 287 U.S. page 470, 53 S.Ct. page 260, 77 L.Ed. 428), 'Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes.' In the Le Tulle case, we held that the term of the obligation received by the seller was immaterial. 'Where the consideration is wholly in the transferee's bonds, or part cash and part such bonds, we think it cannot be said that the transferor retains any proprietary interest in the enterprise.' 308 U.S. pages 420, 421, 60 S.Ct. page 316, 84 L.Ed. 355. On the basis of the continuity of interest theory as explained in the Le Tulle case it is now earnestly contended that a substantial ownership interest in the transferee company must be retained by the holders of the ownership interest in the transferor. That view has been followed by some courts. Commissioner v. Palm Springs Holding Corp., supra; Helvering v. New President Corp., supra. Under that test there was 'no reorganization' in this case since the old stockholders were eliminated by the plan, no portion whatever of their proprietary interest being preserved for them in the new corporation. And it is clear that the fact that the creditors were for the most part stockholders of the parent company does not bridge the gap. The equity interest in the parent is one step removed from the equity interest in the subsidiary. In any event, the stockholders of the parent were not granted participation in the plan qua stockholders.

We conclude, however, that it is immaterial that the transfer shifted the ownership of the equity in the property from the stockholders to the creditors of the old corporation. Plainly the old continuity of interest was broken. Technically that did not...