San Antonio Transit Co. v. Comm'r of Internal Revenue
| Decision Date | 11 September 1958 |
| Docket Number | 41321.,Docket Nos. 15411 |
| Citation | 30 T.C. 1215 |
| Parties | SAN ANTONIO TRANSIT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Robert F. Ritchie, Esq., and Leslie Byrd, Esq., for the petitioner.
Nelson P. Rose, Esq., for the respondent.
1. The phrase ‘property of a corporation’ as used in section 112(b)(10), I.R.C. 1939, construed as not requiring that ‘all’ or ‘substantially all’ of transferor's property be included in order to qualify for nonrecognition provisions of statute and, because of a statutory change, the doctrine of collateral estoppel held not applicable to this and other issues presented.
2. Held, on facts, that property was acquired by petitioner ‘solely in exchange for its stock or securities' within the intendment of said section 112(b)(10).
3. Requisite continuity of interest under said section 112(b)(10) was preserved despite divisive character of reorganization.
The facts of the instant case have been fully stipulated and the case has been submitted pursuant to Rule 30 of our Rules of Practice. All but one of the issues raised by the pleadings have been settled. The parties have submitted a supplemental stipulation reflecting their concessions in respect of the settled issues. The stipulations and the exhibits attached thereto are adopted and by this reference made a part hereof.
The Commissioner has determined deficiencies and overassessments in income tax, deficiencies in declared value excess-profits tax, and deficiencies in excess profits tax liability for the years and in the amounts as follows:
+---------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦
+----+------------------------------+------------+--------------¦
¦Year¦Tax ¦Deficiency ¦Overassessment¦
+----+------------------------------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦(Income ¦ ¦$85,943.04 ¦
+----+------------------------------+------------+--------------¦
¦1944¦(Declared value excess-profits¦$127,640.31 ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦(Excess profits ¦1,166,258.73¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦(Income ¦ ¦35,087.82 ¦
+----+------------------------------+------------+--------------¦
¦1945¦(Excess profits ¦71,812.70 ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦(Income ¦ ¦17,713.14 ¦
+----+------------------------------+------------+--------------¦
¦1946¦(Excess profits ¦42,634.66 ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+----+------------------------------+------------+--------------¦
¦1947¦Income ¦48,743.85 ¦ ¦
+----+------------------------------+------------+--------------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------------------------------+
The deficiencies result principally from the respondent's determination that the petitioner's tax basis for determining depreciation, gain or less, with gain or loss, and equity invested capital with respect to the Smith-Young Tower building (hereinafter referred to as the Tower building) for its taxable year ended May 31, 1944, and equity invested capital for the other taxable years, is the cost of the property to the petitioner. The petitioner contends that the proper basis of the property is the basis it had in the hands of petitioner's predecessor, the Smith Brothers Properties Company.
Stated more succinctly the issue is whether basis is to be determined under the provisions of section 113(a) or 113(a)(22) of the Internal Revenue Code of 1939. This in turn is dependent upon whether or not the petitioner acquired the Tower building in a tax-free corporate reorganization pursuant to section 112(b)(10) of the Internal Revenue Code of 1939. The material parts of these statutory provisions are set out in the margin.1
Before proceeding to a statement of the material facts, it should be mentioned that the petitioner has previously litigated the question of whether or not it acquired the Tower building in a nontaxable reorganization. In Scofield v. San Antonio Transit Company, 219 F.2d 149 (C.A. 5, 1954), certiorari denied 350 U.S. 823, the Court of Appeals for the Fifth Circuit held that the taxpayer did not acquire the Tower building in a nontaxable reorganization. As a consequence thereof petitioner was required to use as a basis its cost in computing depreciation and equity invested capital. The taxable year involved in that case began on June 1, 1942, and ended on May 31, 1943.
The doctrine of collateral estoppel does not preclude us from considering this issue for we can reexamine a prior litigated issue where there has been ‘a change or development in the controlling legal principles.’ Cf. Commissioner v. Sunnen, 333 U.S. 591, at 599. It is petitioner's contention that sections 112(b)(10) and 113(a)(22) represent a change in the controlling legal principles, that these sections were not available to it with respect to its earlier taxable year, and that their application renders necessary a contrary holding.
Sections 112(b)(10) and 113(a)(22) were added to the Internal Revenue Code of 1939 by sections 121(a) and 121(c)(3) of the Revenue Act of 1943. By the terms of section 121(e) of the same Revenue Act these sections were ‘deemed to be included in the revenue laws respectively applicable to taxable years beginning after December 31, 1933.’ Their inclusion was limited, however, in that it was not to ‘affect any tax liability for any taxable year beginning prior to January 1, 1943.’
Quite clearly sections 112(b)(10) and 113(a)(22) were not available to petitioner with respect to its earlier litigation since the taxable year involved therein began on June 1, 1942. Our problem is to determine whether or not their inclusion within the Internal Revenue Code represents a change in the controlling legal principles as to the years involved in this case and, as demonstrated by our holding, our answer if affirmative.
Petitioner is a Delaware place of business in the city of San Antonio, maintaining its principal place of business in the city of San Antonio, Texas. It filed its income and excess profits tax returns for the fiscal years ended May 31, 1944, 1945, 1946, and 1947 with the collector of internal revenue at Austin, Texas.
The material facts of the corporate reorganization have been so adeptly summarized by Judge Dawkins in his opinion in the earlier San Antonio Transit Company case, supra, that a restatement of these facts in their entirety seems unnecessary. Instead, with one exception to be noted later, we will quote freely from the opinion of the earlier case and add thereto (in brackets) only those facts which we regard as helpful in obtaining a clearer picture of the whole transaction. The jurisdictional and other facts having to do with the taxable year herein but not therein involved will also be included.
The pertinent facts * * * are as follows: Smith Brothers Properties Company, a Texas corporation (hereinafter called the old corporation) owned certain realty in San Antonio upon which it constructed buildings for its own use and for lease to others. Among the buildings it owned as the Smith-Young Tower building (hereinafter called Tower building) which it built in 1928 at a cost of $2,070,709.09, financed by first mortgage bonds in the amount of $1,900,000. A first mortgage deed of trust was executed to secure the payment of the bonds and interest coupons, whereby the property was conveyed to trustees.
By the end of 1930, the old corporation owned seven or eight business properties in San Antonio, and owed considerable debts secured by various other indentures against its realty. For the purposes of this * * * (proceeding) the entire indebtedness may be categorized into two groups of debts: (1) the bonded indebtedness on the Tower building, and (2) the bonded and otherwise secured debts relating to other properties, taxes and unsecured claims.
A protective committee was formed by the Tower building bondholders and was vested with legal title to the bonds through the use of certificates of deposit. In November, 1931, the trustees named in the Tower building deed of trust declared all the bonds secured thereby due and payable; and in January, 1931, these trustees filed suit against the old corporation, seeking recovery of the entire debt due on the bonds, foreclosure of the bond lien and the appointment of a receiver. A receiver was appointed; but this did not vest him with title to the Tower building, which was still in the old corporation. Answer was filed by the latter with a cross-claim alleging usury.
In the latter part of 1932, or early 1933, the old corporation defaulted on its other secured debts, and all of its other properties were taken over by one Gill, agent for Massachusetts Mutual Life Insurance Company (hereinafter called Massachusetts), the holder of second and third mortgage notes against some of the properties. Gill was not...
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