Roosevelt Hotel Co. v. Comm'r of Internal Revenue
| Citation | 13 T.C. 399 |
| Decision Date | 28 September 1949 |
| Docket Number | Docket No. 13030. |
| Parties | ROOSEVELT HOTEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Hotel Holding Co. defaulted on its bonds and the indenture trustee took possession in 1931 for the bondholders. In 1935 the bondholders, pursuant to a plan of reorganization, organized petitioner and bought in the property for the petitioner at foreclosure sale. Stock in petitioner was issued to the bondholders in proportion to their holdings. Cash held by the trustee and money borrowed by petitioner were placed in escrow to pay accrued taxes, other debts, and claims of nondepositing bondholders. Over 98 per cent in value of the bonds was exchanged for stock, the remainder being surrendered for a pro rata payment in cash from the escrow. Under the facts, held, petitioner acquired substantially all the property of Hotel Holding Co. pursuant to a plan or reorganization and solely for voting stock, within the meaning of section 112 (g), Internal Revenue Code, and is entitled to use its predecessor's basis. Dana Latham, Esq., and Austin H. Peck, Jr., Esq., for the petitioner.
E. A. Tonjes, Esq., for the respondent.
The respondent determined deficiencies for the years 1940 to 1943, as follows:
+-------------------------------------------+
¦ ¦ ¦Declared ¦ ¦
+----+----------+------------+--------------¦
¦Year¦Income tax¦value excess¦Excess profits¦
+----+----------+------------+--------------¦
¦ ¦ ¦profits tax ¦ ¦
+----+----------+------------+--------------¦
¦1940¦$5,564.26 ¦ ¦$624.95 ¦
+----+----------+------------+--------------¦
¦1941¦9,093.63 ¦ ¦5,789.79 ¦
+----+----------+------------+--------------¦
¦1942¦5,364.37 ¦$86.15 ¦25,647.52 ¦
+----+----------+------------+--------------¦
¦1943¦ ¦598.75 ¦78,381.81 ¦
+-------------------------------------------+
The controversy concerns the basis petitioner is entitled to use for determining depreciation and equity invested capital: (1) Whether this is the basis of a preceding owner, or the fair market value on acquisition, and, (2) if the latter, what that fair market value was.
The stipulated facts are found as stipulated and are here summarized to the extent necessary for the purpose of this opinion. Other facts here stated are determined from the evidence submitted.
Petitioner is a corporation, incorporated under the laws of California on June 10, 1935, with an authorized capitalization of 10,360 shares of common stock without par value. Its principal place of business is in Los Angeles County, California.
Petitioner filed timely income and excess profits tax returns for the calendar years 1940 to 1943, inclusive, with the collector of internal revenue at Los Angeles, California. Petitioner's accounting records were kept and returns were prepared on the accrual basis.
The Hotel Holding Co. of Hollywood, Ltd., (hereinafter sometimes referred to as the Holding Co.) was a corporation organized under the laws of California on August 27, 1925.
On April 1, 1926, the Holding Co. executed a trust indenture to the Citizens Trust & Savings Bank, a corporation, as trustee, for the purpose of securing the repayment of $1,100,000 par value of ‘The Roosevelt In Hollywood First Mortgage Six and One-half Per Cent Gold Bonds.‘ Such trust indenture covered certain described real property and any and all buildings or other improvements which at any time might be erected on such property or any part thereof. The Holding Co. covenanted to erect a 12-story and basement hotel and store building upon the property. The trust indenture provided that, in case of default in the payment of interest continuing for 30 days, or default in the payment of principal, or certain other defaults, the trustee, in its discretion and upon the written request of the holders of 25 per cent in the amount of the bonds then outstanding, should enter into and upon and take and hold possession of the trust estate and use, operate, manage, and control the trust estate - and conduct business of the corporation to the best advantage of the holders of the bonds secured by the indenture. It further provided that in the event of default the trustee, with or without entry, in its discretion and upon the written request of the holders of 25 per cent in amount of the bonds, might proceed to sell to the highest and best bidder the trust estate and all rights, title, interest, claims and demands of the corporation therein and thereto.
The Citizens Trust & Savings Bank subsequently became through merger, the Citizens National Trust & Saving Bank of Los Angeles.
The proceeds of the bond issue were used, with other funds, to erect a hotel building.
During the year 1930 the Holding Co. defaulted on its bonds, as the result of which a ‘Bondholders' Protective Committee‘ was formed by written agreement dated March 20, 1931, for the purpose of protecting the bondholders' interests. At the time of the formation of such committee there were outstanding bonds aggregating $1,036,000 in face value. Of these bonds, bonds aggregating $961,000 in face value were deposited with the committee prior to June 13, 1935.
The bondholders' protective agreement provided for deposit of bonds with the Citizens National Trust & Savings Bank of Los Angeles and that legal title to such bonds should be vested in the committee, and it authorized the committee in its discretion to purchase any or all of the property constituting the security for the bonds; to apply the bonds in satisfaction of any bid or purchase price in the event of the foreclosure or trustee's sale of the secured property; to pledge or assign any of the bonds or property for the purpose of raising funds necessary to carry out the trusts assumed; to take possession or control of, or operate all or any of the mortgaged property; to cause such property to be conveyed to any bank or trust company in trust for the bondholders; to organize a corporation for the purpose of taking title to the property; and to issue to the depositing bondholders such securities representing their interests as the committee might deem advisable. It further provided that the committee should have power, before any sale of the trust property was had, to make, enter into, or become a party to any plan or agreement of reorganization or readjustment of the property or affairs of the Holding Co. containing such terms and conditions as the committee might deem proper or advisable. Such plan or agreement might be effected by sale of the trust property or other property of the Holding Co. to a corporation or trust, or without any such sale.
On or about May 1, 1931, pursuant to the provisions of the trust indenture and at the written request of the holders of bonds aggregating more than 25 per cent of the amount outstanding, the trustee took possession of the trust estate, consisting of land and a hotel building. The trustee also took possession of all the furnishings located in such hotel building although these were not a part of the trust estate. The trustee operated the hotel until May 1, 1934, at which time the trustee entered into an operating agreement with Thomas E. Hull, which agreement was later, on August 1, 1934, assigned by Hull to the Hollywood Roosevelt Hotel Co., a California corporation. Under the terms of this operating agreement the trustee received income in the form of rent, being a percentage of the gross amount received from room rentals, plus a percentage of other revenue, or a percentage of the net profits, whichever calculation produced the higher rental. The agreement was for a term of 15 years from May 1, 1934. The operator was to pay property taxes and insurance premiums and to expend at least 5 per cent of the gross room rents for repairs and replacements.
The action of the trustee in taking possession of the furnishings was validated by the Holding Co. by a bill of sale dated April 22, 1935, to the trustee.
The operation of the property by the trustee had realized insufficient profits to meet the current taxes on the property. The trustee advanced funds to finance the operation. The operations by Hull showed an improvement in the first year.
The bondholders' committee had considered selling the property, leasing it, or forming a new corporation to take title to it. The committee considered that foreclosure for the benefit of the bondholders could not be completed without payment of delinquent taxes, trustee's advances and fees, and legal expenses, and that money could not be procured to meet these expenses until operation appeared profitable. In 1935, when Hull's operation of the property showed progress and it was found that a loan on the property could be obtained, the committee adopted a plan of reorganization and organized petitioner to take title to the property. The members of the committee became the first board of directors of the petitioner. The plan called for the sale of the property to petitioner, which would be authorized to issue 10,360 shares of common stock without par value. Bondholders would receive one share for each $100 face value of bonds held. Bondholders who had not deposited their bonds could receive stock or receive their pro rata share in cash.
The trustee, pursuant to the provisions of the trust indenture, held a public sale of the assets of the Holding Co. on June 13, 1935. The committee submitted a bid at such sale in the amount of $300,000. There were no other bids and the properties were declared sold to the committee for that amount. The bid price was paid by means of credit allowed for deposited bonds, and no cash was paid. The bondholders' committee assigned its bid to the petitioner and directed conveyance of the assets to it.
On June 13, 1935, the trustee, by means of a trustee's deed and bill of sale, transferred the land,...
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