Neville Coke & Chem. Co. v. Comm'r of Internal Revenue
| Decision Date | 25 January 1944 |
| Docket Number | Docket No. 109575. |
| Citation | 3 T.C. 113 |
| Parties | NEVILLE COKE & CHEMICAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Three, four, and five-year notes held by petitioner and exchanged in a reorganization of the debtor corporation under section 112(g)(1) of the Revenue Act of 1936 for debentures and stock of the reorganized corporation, held not to constitute ‘securities‘ within section 112(b)(3) of that act, and petitioner is taxable upon any gain accruing from that transaction. Further held, that petitioner, having received in such transaction, in place of the notes, a new promise by the debtor to pay the same amount with interest, in the form of debentures having a fair market value equal to petitioner's cost of the notes and, in addition certain stock of the debtor corporation of a determinable market value, has realized a gain in the amount of the fair market value of such stock. Thomas Watson, Esq., and D. G. Sisterson, C.P.A., for the petitioner.
William A. Schmitt, Esq., for the respondent.
Respondent has determined deficiencies and a penalty for the calendar year 1936 as follows:
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¦Income tax ¦$36,202.91¦
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¦Excess profits tax ¦290.89 ¦
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¦Personal holding company surtax ¦6,835.74 ¦
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¦Penalty for failure to file personal holding company return¦1,708.94 ¦
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The issue is whether petitioner realized a taxable gain when, as a creditor of a corporation reorganized under section 77B of the Bankruptcy Act, it exchanged certain short term notes, which it held, for debentures and stock of the debtor as provided under the plan of reorganization. The parties have filed a stipulation of facts, which we include by reference in our findings of fact. Additional facts were established at the hearing by testimony and exhibits. Such facts set out in our findings as do not appear in the stipulation are found upon this evidence.
The petitioner is a Delaware corporation. Its income and excess profits tax return for 1936 was filed with the collector of internal revenue at Pittsburgh, Pennsylvania.
The Hillman Coal & Coke Co. (hereinafter called the Hillman Co.) is a Pennsylvania corporation with principal office at Pittsburgh, Pennsylvania, and operates coal mines is western Pennsylvania. W. J. Rainey, Inc. (hereinafter called the Rainey Co.), is a Delaware corporation with principal office in New York City and operates coal mines in western Pennsylvania.
The Davison Coke & Iron Co. (hereinafter called the debtor corporation) was a Pennsylvania corporation. During 1936 its corporate name was changed to Pittsburgh Coke & Iron Co. During the years pertinent to the issues here involved the debtor corporation had its office and principal place of business at Pittsburgh, Pennsylvania, and operated a byproduct coke plant and blast furnace nearby upon Neville Island. In its byproduct coke plant it consumed approximately 1,650 tons of bituminous coal per day in the production of coke, gas, and chemicals. This coal it purchased principally from the Rainey Co. and the Hillman Co.
Prior to 1932 the debtor corporation, in the course of operations, became largely indebted to the Hillman Co. and the Rainey Co. for coal purchased and advances made and also to other creditors from whom it purchased iron ore and coke. In that year it experienced difficulty in meeting the interest upon its obligations and its reorganization by recapitalization was determined upon by agreement between its creditors and stockholders.
In 1933 the Hillman Co. and the Rainey Co. caused the petitioner corporation to be organized in order to center in it the ownership of their interests in, and indebtedness due from the debtor corporation and thus facilitate their action in securing the contemplated reorganization of the latter.
On July 7, 1933, the Hillman Co. and the Rainey Co. transferred to petitioner the following assets:
As consideration for those assets petitioner gave the following:
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¦ ¦ ¦To Hillman¦To Rainey ¦ ¦
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¦ ¦ ¦Co. ¦Co. ¦Total ¦
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¦Preferred stock of ¦(shares)-- ¦21,264 ¦13,726 ¦34,990 ¦
¦petitioner ¦ ¦ ¦ ¦ ¦
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¦Common stock of petitioner ¦(shares)-- ¦16,640 ¦25,060 ¦41,700 ¦
+----------------------------+---------------+----------+----------+----------¦
¦Notes due in five years ¦(face amount)--¦$14,908.11¦$52,976.49¦$67,884.60¦
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The above stock and notes were each issued to the Rainey Co. and Hillman Co. in proportion to the assets transferred to petitioner. The preferred stock and common stock of petitioner had equal voting rights. Immediately after the transfer, the transferors owned all the outstanding capital stock of petitioner.
On October 31, 1935, the debtor corporation filed a proceeding in bankruptcy, under section 77B, to effect a plan or reorganization, and on November 25, 1935, the proposed plan was duly approved by the court and on January 31, 1936, the court entered its final decree witnessing the fact that the plan had been fully and completely executed and consummated.
The plan of reorganization effected a readjustment of the debtor corporation's indebtedness and capitalization by funding its obligations presently payable, reducing its fixed charges, and readjusting its capital structure. Under this plan the debtor corporation issued new common stock and debenture bonds. Its old preferred and common stock was exchanged in certain proportions for new common stock. Its bonds were exchanged for new debentures, and the holders of its three, four, and five-year notes and other secured and unsecured indebtedness received in exchange new debentures in face amount equal to their claims and, in addition, certain amounts of the new common stock. Neither the new debentures nor the new stock issued by the debtor corporation, pursuant to the plan or reorganization, and delivered to petitioner and others, at or about January 31, 1936, was listed on any stock exchange during the year 1936.
The total amount of three, four, and five-year notes of the debtor corporation outstanding at the time of the reorganization was $1,910,700. These were exchanged for new interest-bearing debentures of the same face amount plus 38,214 shares of new common stock. Of the total of three, four, and five-year notes outstanding, the petitioner owned $1,129,000, which were exchanged for $1,129,000 in new debentures and 22,580 shares of new common stock.
On July 1, 1936, the board of directors of petitioner, by resolution, declared that in their opinion the fair market value of each $1,000 new debenture received by it in exchange for three, four, and five-year notes, as heretofore detailed, was $850 and...
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