Western Maryland Railway Company v. United States

• Decision Date: 18 May 1955
• Docket Number: 6704,Civ. No. 6631,7549.
• Citation: 131 F. Supp. 873
• Parties: WESTERN MARYLAND RAILWAY COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Maryland

131 F. Supp. 873

WESTERN MARYLAND RAILWAY COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. Nos. 6631, 6704, 7549.

United States District Court D. Maryland, Civil Division.

May 18, 1955.

COPYRIGHT MATERIAL OMITTED

James C. Herndon, Akron, Ohio, Richard G. Herndon, Wheeling, W. Va., and William C. Purnell, Baltimore, Md., for plaintiff.

George Cochran Doub, U. S. Atty., and Robert R. Bair, Asst. U. S. Atty., Baltimore, Md., and Philip R. Miller, Sp. Asst. to the Atty. Gen., H. Brian Holland, Asst. Atty. Gen., and Andrew D. Sharpe, Sp. Asst. to the Atty. Gen., for defendant.

THOMSEN, District Judge.

These three actions for refund of corporate excess profits taxes and interest paid by plaintiff for the years 1943, 1944 and 1945, following assessment of additional taxes by the Commissioner of Internal Revenue, have been consolidated for trial. In arriving at profits subject to excess profits tax during those years, the law allowed certain alternative credits to taxpayers. I.R.C. of 1939, 26 U.S. C.A. § 710 et seq. Plaintiff elected to base its credit on stated percentages of its "invested capital", which included "equity invested capital" and "borrowed invested capital".

Plaintiff Western Maryland Railway Company (herein called plaintiff) was formed in 1917 as a result of the consolidation of a parent company with several wholly owned subsidiaries. The parent company was The Western Maryland Railway Company, a corporation organized in December, 1909, in connection with the reorganization of the Western Maryland Rail Road Company (herein called the Old Company). Since these cases involve the 1909-1910 reorganization, The Western Maryland Railway Company will be called the New Company.

In computing plaintiff's equity invested capital, the Commissioner of Internal Revenue allowed plaintiff the sum of $19,518,870.10 as invested capital paid in to the New Company for (a) 100,000 shares of preferred stock (par $100), which he found to have a fair market value of $70 per share ($7,000,000) at the time of issuance, January 1, 1910, and (b) 239,595.6 shares of common stock (par $100) which he found to have a market value of $52.25 per share ($12,518,870.10). The basic issue in these cases is whether plaintiff is entitled to a larger allowance for "equity invested capital" as a result of the 1909-1910 transactions than the amount which the Commissioner allowed.

Findings of Fact

The Old Company was chartered by a special act of the Maryland General Assembly in 1852, amended in 1853.

As of March 5, 1908, the Old Company had outstanding:

$48,718,000 First Mortgage and Divisional Bonds.

$2,233,950 Underlying or Leased Line Bonds and Guaranteed Stocks.

$10,000,000 General Lien and Convertible 4% Mortgage Bonds (herein referred to as General Lien Bonds), secured by the same properties as the First Mortgage Bonds but subject thereto.

$15,685,400 par value Common Stock (par $50)

It also owed substantial sums which were not funded.

On March 5, 1908, Bowling Green Trust Company of New York, as trustee under the mortgage securing the General Lien Bonds, filed suit in the United States Circuit Court for the District of Maryland. The bill recited that the Old Company would be unable to meet the semi-annual interest to become due April 1, 1908, in the amount of $749,620 on its First Mortgage Bonds and $200,000 on its General Lien Bonds, certain debts for materials and supplies then due in excess of $300,000, and certain notes totaling $3,776,750 which would become due April 1, 1908. The bill prayed for the appointment of a receiver for the Old Company and the foreclosure of the mortgage securing the General Lien Bonds.

The defendant consented to the appointment of a receiver and on the same day, March 5, 1908, the Court appointed Benjamin F. Bush, president of the Old Company, receiver of the properties covered by the General Lien mortgage.

Ancillary proceedings were filed in other districts where the Old Company owned property.

On March 10, 1908, an Agreement was entered into between a "Committee" and such holders of the General Lien Bonds as might become parties to the Agreement by depositing their bonds with the Equitable Trust Company of New York or the City Trust Company of Boston as depositories thereunder. The Agreement provided that the Committee act as trustee, with legal title to all bonds deposited, and with full power and authority to take such steps as might be required to protect the depositing bondholders, including: the power to institute and become parties to legal proceedings; to cause the mortgage to be foreclosed; to purchase or join in purchasing at foreclosure or other sale the property covered by said mortgage and to apply towards payment therefor the General Lien Bonds and coupons deposited; to purchase any other property of the Old Company; to borrow money; to formulate a plan for the reorganization of the affairs of the Old Company for the benefit of the depositing bondholders; in its discretion, to recognize and make provision in the plan of reorganization for any or all of the creditors of the Old Company, secured and unsecured, and for the stockholders of the Old Company; and to organize such corporation or corporations as might be necessary to carry out the plan of reorganization.

On April 8, 1908, the Certificates of Deposit issued to depositors of General Lien Bonds pursuant to the Agreement were listed on the New York Stock Exchange. At the time of the application, March 31, 1908, $6,833,000 of the bonds had been deposited, and by January 1, 1910, $9,930,000 of the bonds had been deposited.

The Receiver issued a number of receiver's certificates, of which $4,492,846 were outstanding on July 1, 1909. On that date there were also outstanding $2,269,451.30 other obligations having priority over the General Lien Bonds, and $1,714,091 claims which the Committee called "disputed or forecloseable".

On July 26, 1909, the Committee submitted to the General Lien bondholders a Reorganization Plan, stating:

"It is proposed to effect the reorganization of the Old Company by the organization of a new company which shall take the property of the old company subject to its First Mortgage and its underlying and divisional bonds as specified in the foregoing financial statement.

"The new company will issue in acquisition of the property of the old company:

"$10,000,000 Four Per Cent. Non-Cumulative Preferred Stock (par value $100), preferred * * *, convertible * * *, redeemable * * *, and

"$23,959,560 Common Stock (par value $100) of an authorized issue of $50,000,000.

"The holders of certificates of deposit for General Lien and Convertible 4% Bonds will receive:

"(a) For principal, 100%, viz: $10,000,000, in new 4% preferred stock.

"(b) For unpaid overdue coupons * * * $836,000 (par value) in new common stock.

"The required $8,274,160 cash will be raised by sale of $20,685,400 of common stock to a Banker's Syndicate under the management of Blair & Co. who will offer the same as follows:

"(a) To the holders of certificates of deposit for $10,000,000 Western Maryland General Lien and Convertible Bonds 50% of their holdings, i. e.: $5,000,000 new stock, for 40% of its par value, or . . . . . . . $2,000,000

"(b) To the holders of $15,685,400 Western Maryland stock, in exchange for their old stock and on payment of 40% of the par value thereof in cash, 100% of their holdings i. e.: $15,685,400 new common stock for . . . $6,274,160 __________ $8,274,160"

In addition, the Plan contemplated that the New Company would issue $2,438,160 par value Common Stock "for expenses of reorganization, compensations, underwriting and other commissions and for reserve".

The Plan contemplated that of the $8,274,160 raised by the sale of the Common Stock at $40 per share, $6,762,297 would be used to pay obligations incurred by the Receiver between March, 1908, and July, 1909, for interest on the First Mortgage Bonds, for Equipment and Car Trust Certificates and other secured obligations, and the remaining $1,511,863 would be used for "Improvements and for Current and Miscellaneous Requirements in Reorganization".

The Plan made no provision for the $1,714,091 of creditors' claims which it characterized as "disputed or forecloseable claims".

On the same day that the Plan was submitted to the General Lien bondholders, the Committee entered into an agreement with Blair & Co., as managers for a Bankers' Stock Purchase Syndicate, providing for the sale to the Syndicate, for $8,274,160 in cash, of $20,685,400 par value common stock of the proposed New Company "to be issued as and for the purposes contemplated in the Plan". The agreement also provided that the Syndicate should receive $827,416 par value common stock "as a commission or compensation to the Syndicate" and $200,000 par value common stock "as compensation to the Bankers individually for the services to be rendered by them hereunder", plus reimbursement for all other expenses of the individual bankers. The Syndicate agreed to offer the stock to the General Lien bondholders and to the stockholders of the Old Company, as provided in the Plan. The Syndicate members were not obligated to take or pay for any of the stock until the subscription and payment period to be offered to the stockholders and bondholders of the Old Company had expired.

On the same day, July 26, 1909, Blair & Co., the Syndicate managers, gave notice of the Plan to the holders of Certificates of Deposit for General Lien Bonds and to the common stockholders of the Old Company, and offered to sell to them pursuant to the Plan common stock in the proposed New Company, par value $100, at $40 per share, to be paid in four equal monthly instalments on the first days of September, October, November and December, 1909. An original September 1, 1909, deadline for acceptance was later extended to September 27, 1909.

On September 22, 1909, the deposit receipts issued to the stockholders...