NORTHWESTERN TERRA COTTA CORPORATION v. CIR, 13252.

• Decision Date: 30 October 1961
• Docket Number: No. 13252.,13252.
• Citation: 295 F.2d 522
• Parties: NORTHWESTERN TERRA COTTA CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

295 F.2d 522 (1961)

NORTHWESTERN TERRA COTTA CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13252.

United States Court of Appeals Seventh Circuit.

October 30, 1961.

Walter Wm. Pearson, Chicago, Ill., Eugene Dooner Murphy, Chicago, Ill., of counsel, for petitioner.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Ronald C. Meteiver, Washington, D. C., for respondent.

Before DUFFY, CASTLE and KILEY, Circuit Judges.

KILEY, Circuit Judge.

This is a petition to review a decision of the Tax Court which determined income tax deficiencies adversely to Taxpayer's claim.

Taxpayer, an Illinois corporation, was organized by receivers for the Northwestern Terra Cotta Company, called "Company" here, under the direction of the District Court for the Northern District of Illinois in a creditor's bill proceeding. Pursuant to "The Plan for Liquidating * * *" the Company, the receivers exchanged for all of Taxpayer's stock the Company's cash, personalty and intangibles. The receivers also, under the Plan, leased to Taxpayer, with an option to purchase, a substantial part of the Company land and improvements in Chicago. In September, 1934, Taxpayer began operation of the Company's terra cotta business.

In 1940 the District Court terminated the receivership and its jurisdiction over the proceeding. At that time the trustee — under the Company's mortgage of its Chicago real estate securing bonds used in purchasing the real estate — held legal title to the real estate for the mortgage bondholders. His nominee, Properties I, an Illinois corporation created by him under the Plan, held the equity of redemption which had been conveyed to it by direction of the District Court with a provision against merger of legal and equitable titles. The trustee held also in excess of 51% of Taxpayer's stock given the mortgage bondholders upon their claim of a deficiency of the mortgaged real estate to secure their debts. He also held all the stock of Properties I; and of the Wrightwood Corporation, created by him to clear the real estate of a tax lien.

In July of 1942, the trustee filed suit in the Superior Court of Cook County seeking the aid of equity in administering the "express and implied" trusts. This proceeding eventuated in the Superior Court's approval of a "Plan for Reorganization of Properties I" proposed by the mortgage bondholders committee. Under this Plan, Properties II was created and to it were conveyed the interests of the trustee and of Properties I in the mortgaged real estate. The trustee transferred to it all the stock held by him of Properties I, Wrightwood Corporation and Taxpayer. Voting trustees were named under this Plan and the mortgage bonds were exchanged for participation certificates and cancelled. The lien of the mortgage was then released and the property freed of encumbrances.

The Taxpayer's business presumably prospered. And in 1946 Taxpayer learned that the voting trustees had a cash offer for land adjoining that subject to the lease and option. Taxpayer then proposed an exchange of its stock for the real estate leased to it and the adjoining piece for which the cash offer had been made. The proposal was accepted and the exchange made. The value attributed to the stock in this exchange exceeded the sum of the cash offer and the price set in Taxpayer's option to purchase.

Taxpayer sold parts of this property in 1952 and 1953. In its income tax returns for those years it reported capital gains on the sales. It computed the gains on the basis of the Company's purchase price in 1922. That price far exceeded the value Taxpayer attributed to the property in 1934, when its lease and option were acquired, and the Company basis would have given Taxpayer a substantial advantage. The Commissioner rejected Taxpayer's claim for the Company basis, and made deficiency assessments which the Tax Court subsequently upheld. This petition to review followed.

The question is whether the Superior Court proceeding was but a further step in the District Court Plan so as to bring the 1946 transaction within the terms of § 112(b) (10) in Taxpayer's favor. Section 112(b) (10) is a 1943 amendment to the Internal Revenue Code of 1939, 26 U.S.C.A. § 112(b) (10) and is an exception to the general rule¹ for capital gains basis. So far as pertinent, § 112(b) (10) provides:

"* * * No gain or loss shall be recognized if property of a corporation * * * is transferred * * * in pursuance of an order of the court having jurisdiction of such corporation —

"(A) in a receivership, foreclosure, or similar proceeding, * * * "to another corporation organized or made use of to effectuate a plan of reorganization approved by

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