1. Where property formerly owned by an insolvent corporation,
subject to a deed of trust securing bonds, but which it has
conveyed to another, is acquired through action of its bondholders
by a newly formed corporation, partly through foreclosure of the
mortgage and partly by purchase for cash from others to whom the
legal title has passed by mesne conveyances, there is no
"reorganization" within the meaning of § 112(i)(1)(A) and (B) of
the Revenue Act of 1932, as between the old and the new
corporations -- although, pursuant to the plan, all of the stock of
the new corporation is issued to the bondholders of the old --
since the property had ceased to be property of the old
corporation. P.
315 U. S.
192.
2. Section 113(a)(7) of the Revenue Act of 1932 authorizes a
carry-over of the basis of the properties in the hands of the
transferor, not their basis in the hands of one who may have
occupied an earlier position in the chain of ownership. P.
315 U. S.
192.
3. The reorganization provisions here in question cover only
intercorporate transactions. P.
315 U. S.
193.
Page 315 U. S. 190
4. Section 112(b)(5) of the Revenue Act,
supra,
includes transfers by individuals, but requires that the transferor
remain in control, it being inapplicable where the transferor is
bought out for cash. P.
315 U. S.
193.
5. The cost of assets bid in by a mortgage creditor on
foreclosure is to be determined by the fair market value of the
property. P.
315 U. S.
193.
118 F.2d 511 affirmed.
Certiorari, 314 U.S. 590, to review judgments which reversed
decisions of the Board of Tax Appeals, 40 B.T.A. 882, overruling
deficiency assessments.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
The primary question involved in these cases is whether the
transaction in question qualified as a "reorganization" under that
portion of § 112(i)(1) of the Revenue Act of 1932, 47 Stat. 169,
198, which provides:
"The term 'reorganization' means (A) a merger or consolidation
(including the acquisition by one corporation of . . .
substantially all the properties of another corporation). . .
."
In 1927, the Marlborough Investment Co. issued its bonds in the
principal amount of $500,000. They were secured by its apartment
building in Seattle, and the personal property therein. There was a
default in May, 1932. A bondholders' committee was formed, and
there were deposited with it more than 97% of the total of over
$450,000 face amount of the bonds than outstanding. In view of
Helvering v. Alabama Asphaltic Limestone Co.,
Page 315 U. S. 191
ante, p.
315 U. S. 179, the
precise mechanics whereby the reorganization was consummated are
not material. Suffice it to say that, pursuant to a plan of
reorganization formulated by the committee under the broad powers
accorded it in the deposit agreement, there was a foreclosure and
sale; the committee was the successful bidder at the price of
$340,425, which was paid by the surrender of deposited bonds plus
cash; Marlborough House, Inc. was formed by the bondholders; it
acquired the property from the committee and issued all of its
stock to the depositing bondholders, and nonassenting bondholders
were paid in cash their
pro rata share of the purchase
price. In determining the income tax liability of the committee
[
Footnote 1] for a part of
1933, and of the new corporation for a part of 1933 and for 1934
and 1935, the Commissioner used as the basis for computing
depreciation the price bid at the foreclosure sale. The Board of
Tax Appeals found that neither the fair market value of the
deposited bonds plus the cash expended in partial payment nor the
fair market value of the property was in excess of $340,425 at the
date of the foreclosure sale or when the committee took possession.
The Board held that, since the new corporation had acquired the
property in connection with a "reorganization," it was entitled to
use the basis in the hands of the old corporation, less
depreciation. 40 B.T.A. 882. The Circuit Court of Appeals reversed.
118 F.2d 511.
For the reasons stated in
Helvering v. Alabama Asphaltic
Limestone Co., supra, this transaction clearly would have been
a "reorganization" within the meaning of § 112(i)(1) but for one
fact. That fact is that the property
Page 315 U. S. 192
was not acquired by the committee or the new corporation from
Marlborough Investment Co. [
Footnote 2] In December, 1928, several years prior to the
insolvency reorganization, Marlborough Investment Co., the issuer
of the bonds, had transferred the property to another corporation.
As a result of mesne conveyances, the property was held in May,
1932, by State Developers, Inc. and one Cooley. While the
foreclosure proceedings were pending, that corporation and Cooley
executed and delivered a quitclaim deed to the property in
consideration of the payment of the cash sum of $10,025, which was
furnished by the committee.
In view of these circumstances, there was no "reorganization"
within the meaning of § 112(i)(1). The parenthetical part of clause
A which is relevant here covers "the acquisition by one
corporation" of substantially all of the properties "of another
corporation." Clause B covers certain transfers "by a corporation"
of all or a part of its assets "to another corporation" where the
transferor or its stockholders continue in control. These were not
"properties" of Marlborough Investment Co. It had long since ceased
to own them. It was not the "transferor." Furthermore, § 113(a)(7),
authorizes a carryover of the basis of the properties [
Footnote 3] in the hands of the
"transferor," not their basis in the hands of one who may have
occupied an earlier position in the chain of ownership. Hence, it
is immaterial
Page 315 U. S. 193
that, under the rule of
Helvering v. Alabama Asphaltic
Limestone Co., supra, the bondholders had succeeded to all of
the proprietary interest in Marlborough Investment Co. The property
whose basis is in controversy here was not acquired from it. Nor
was there a "reorganization" as between the committee or the new
corporation, on the one hand, and State Developers, Inc., and
Cooley, on the other. Cooley was an individual. The
"reorganization" provisions in question cover only intercorporate
transactions. Sec. 113(a)(8), provides for a carryover of the basis
of the properties in the hands of the "transferor" if the property
was acquired by a corporation after December 31, 1920, by the
issuance of its stock or securities "in connection with a
transaction" described in § 112(b)(5). Sec. 112(b)(5) includes
transfers by individuals, [
Footnote
4] but it requires that the transferor remain in control.
Cooley and State Developers, Inc. were bought out for cash.
It is argued that, if the committee's acquisition of the
properties is to be treated as a purchase, rather than a
"reorganization," the cost to the committee should be measured by
the amount of the cash advanced by the committee plus the face
value of the deposited bonds. There is no foundation for that
contention. The basis of assets bid in by a mortgage creditor on
foreclosure is to be determined by the fair market value of the
property.
See Art. 193, Treasury Regulations 77;
Helvering v. New President Corp., 122 F.2d 92, 96, 97.
Although the Commissioner used the bid price in ascertaining the
basis, the Board found that the market value of the assets did not
exceed that amount. Respondent therefore suggests that a remand
Page 315 U. S. 194
to the Board to ascertain the fair market value is not
necessary. Accordingly, the judgment below is
Affirmed.
MR. JUSTICE ROBERTS did not participate in the consideration or
decision of this case.
* Together with No. 129,
Marlborough House, Inc. v.
Commissioner of Internal Revenue, also on writ of certiorari,
314 U.S. 590, to the Circuit Court of Appeals for the Ninth
Circuit.
[
Footnote 1]
The committee took possession of the property and managed it for
a part of the year 1933 prior to the date when the new corporation
acquired it. The Board held that the committee was taxable as a
corporation on the income received during that period by it. The
committee did not petition for review of that determination by the
Circuit Court of Appeals.
[
Footnote 2]
Though respondent apparently did not urge this point before the
Board or the court below, it may, of course, support the judgment
here by any matter appearing in the record.
Le Tulle v.
Scofield, 308 U. S. 415,
308 U. S. 421,
and cases cited.
[
Footnote 3]
By § 114(a), the basis upon which depreciation is allowed is the
adjusted basis provided in § 113(b) for the purpose of determining
gain or loss. By § 113(b), such adjusted basis is the basis
determined under § 113(a). By § 113(a), the basis of property shall
be "cost," with enumerated exceptions., One of those exceptions is
contained in § 113(a)(7), set forth in
Palm Springs Holding
Corp. v. Commissioner, 315 U. S. 185,
note 1.
[
Footnote 4]
Sec. 112(b)(5) provides in part:
"No gain or loss shall be recognized if property is transferred
to a corporation by one or more persons solely in exchange for
stock or securities in such corporation, and, immediately after the
exchange, such person or persons are in control of the
corporation."