Source: https://law.justia.com/cases/federal/appellate-courts/F2/522/1281/184294/
Timestamp: 2019-05-23 15:03:16
Document Index: 256803792

Matched Legal Cases: ['§ 79', '§ 79', '§ 165', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 39', '§ 6511', '§ 6511', '§ 1', '§ 7422', '§ 7422', '§ 1']

Cities Service Company, Plaintiff-appellee-appellant, v. United States of America, Defendant-appellant-appellee, 522 F.2d 1281 (2d Cir. 1975) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1975 › Cities Service Company, Plaintiff-appellee-appellant, v. United States of America, Defendant-appella...
Cities Service Company, Plaintiff-appellee-appellant, v. United States of America, Defendant-appellant-appellee, 522 F.2d 1281 (2d Cir. 1975)
US Court of Appeals for the Second Circuit - 522 F.2d 1281 (2d Cir. 1975)
Argued Oct. 7, 1974. Decided Dec. 13, 1974. Certiorari Denied Oct. 6, 1975. See 96 S. Ct. 43
On these cross-appeals from a judgment entered November 20, 1973 in a tax refund action after a bench trial in the Southern District of New York, Charles H. Tenney, District Judge, 362 F. Supp. 830,1 awarding the taxpayer, Cities Service Company (Cities), recovery of federal corporate income taxes and interest for the calendar years 1953 and 1954 in the amount of $1,371,397.91 claimed to have been erroneously assessed and collected, the essential questions are:
(1) Whether the district court correctly determined that Cities' exchange of its debentures for its outstanding preferred stock resulted in a deductible debt discount.2 (2) Whether the district court correctly determined the appropriate measure of that debt discount.
In 1941, Cities Service Company, a Delaware corporation, became a registered holding company under the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79 et seq. (1970). Pursuant to Section 11(e) of the Holding Company Act, 15 U.S.C. § 79k(e),3 Cities was required to simplify its corporate and capital structures. It submitted a plan which in due course was approved by the SEC as amended after hearings as to its fairness. The plan ultimately was enforced by the court. In re Cities Service Co., 71 F. Supp. 1003 (D. Del. 1947).
"The first theory holds simply that a deductible loss was realized upon repurchase of debentures at a price higher than the price realized upon their issuance (Int.Rev.Code of 1954, § 165(a)). The second theory, based on Reg. § 1.61-12 (now Treas.Reg. § 1.163-3(c) (1) (1968)), holds that issuance of the debentures at less than face in 1947 gave rise to bond 'discount' within the meaning of that Regulation, entitling plaintiff to prorate or amortize the discount over the life of the bonds and to deduct both the amortization thereof for the taxable years in question and the unamortized portion of the discount attributable to the debentures retired in those years. Each theory produces two figures for the proposed deduction, depending on which of the two measures of the issue price of the debentures in 1947 is employed ($45,323,846 or $86,313,600). . . ." 316 F. Supp. at 65 (Mansfield, J.).
On the first round in the district court--on cross-motions for summary judgment--Judge Mansfield rejected the government's claim that the transaction was a redemption and concluded that, no matter what value was assigned to the consideration given up by the preferred shareholders and received by Cities in the exchange, "there is every indication that it was substantially less than the face amount of the debentures they received." 316 F. Supp. at 69. The court went on to reject the analogous theory that to permit a deduction would allow Cities to convert nondeductible into deductible expenditures by issuing debentures instead of paying cash to extinguish matured obligations, i. e. calling the preferred by issuing bonds instead of paying cash. Id. at 71.
On the second round in the district court--on the government's second motion for summary judgment--Judge Wyatt reaffirmed Judge Mansfield's determination and denied the motion. 330 F. Supp. 421.
The third round in the district court was a bench trial before Judge Tenney on the issue previously ordered by Judge Mansfield to be tried. On that issue, Cities claimed the value it received on the exchange was the original consideration paid in for the preferred, $45,323,846; the government claimed that the value was the aggregate face amount of the debentures, $115,246,950. Judge Tenney held that the value to Cities of the preferred and preference stock received on the exchange was its fair market value, $86,313,600.9 362 F. Supp. at 838. Judgment was entered for Cities based on the discount theory.10
Although no provision of the Internal Revenue Code in so many words allows a deduction for debt discount, it is settled that such discount is amortizable and deductible over the life of the indebtedness if the debt obligation was issued for cash. National Alfalfa, supra, 417 U.S. at 143-46; Chock Full O'Nuts Corp. v. United States, 453 F.2d 300, 301-02 (2 Cir. 1971); Treas.Reg. § 1.163-3(a) (1) (1968). The Supreme Court has not decided the general question whether deductible debt discount results when bonds have been issued for property other than cash. National Alfalfa, supra, 417 U.S. at 146. The decisions of other courts on this issue are split. See cases cited id. at 146-47. Our Court, however, has held that such a deduction is allowable at least where the bonds were issued for tangible property. Nassau Lens Co. v. Commissioner, 308 F.2d 39 (2 Cir. 1962).
As we read National Alfalfa, the original consideration is the minimum value to be assigned to the preferred received in exchange for the debentures. 417 U.S. at 141-42. See Erie Lackawanna R.R. Co. v. United States, 422 F.2d 425, 430 (Ct. Cl. 1970); Missouri Pacific R.R. Co. v. United States, 427 F.2d 727, 734 (Ct. Cl.), modified, 433 F.2d 1324, 1325-26 (Ct. Cl. 1970), cert. denied, 402 U.S. 944 (1971). In short, where the original consideration equals the face amount of the debentures, no discount can arise since their issue price equals their face amount.
In the instant case, Cities argues that its exchange was quite different from that in National Alfalfa. Here the exchange was not insulated from the market since the preferred shares were widely held and actively traded on the Boston Stock Exchange and the New York Curb Exchange. Moreover, the instant exchange took place only after hearings and scrutiny by the SEC and after bargaining with the preferred shareholders. Cities points out that the aggregate fair market value of the preferred at the time of the exchange, $86,313,600--as arrived at by its expert and accepted by the court below, 362 F. Supp. at 835-38 (Tenney, J.)--is the product of an evaluation of those factors outlined by the Court in National Alfalfa. 417 U.S. at 151.
For the guidance of the district court, we wish briefly to comment on certain evidence in the instant record relevant to the issue to be determined on remand. Unlike the situation in National Alfalfa, the issue to be determined here is not a matter of speculation.16 Here both the preferred and debentures were being traded at the time of the exchange. On May 27, 1947, the day prior to the exchange, the aggregate closing market price of the preferred was $104,827,450. Contrary to the implication of the district court that this market price is irrelevant because it was dependent on the value of the consideration to be received in exchange for the stock, 362 F. Supp. at 837, we suggest that for this very reason it is relevant to the determination of the market value of the debentures at issuance. The closing price of the debentures on the date of their issuance was 91 7/8,17 or an aggregate market price of $105,883,135. We suggest that both of these figures may be relevant to the determination of the market value of the debentures at the time of their issuance. Which of these two measures (or what combination of them) is more appropriate presumably will depend in part on which market was less thin. That determination, among others, is for the district court.
Judge Tenney's opinion incorporated the findings of fact and conclusions of law set forth in two prior district court opinions in this refund action: one filed July 23, 1970 by Walter R. Mansfield, then District Judge, 316 F. Supp. 61, and the other filed June 21, 1971 by Inzer B. Wyatt, District Judge, 330 F. Supp. 421
See 316 F. Supp. at 64-65 (Mansfield, J.).
Although Cities alleged in its complaint that this value was $84,459,215.52, before us it has adopted the district court's figure of $86,313,600. 362 F. Supp. at 835-38 (Tenney, J.)
Judge Tenney noted that Cities apparently had abandoned its theory of loss through retirement of its debentures. Id. at 835. His judgment computation is based only on a debt discount amortization theory. See Treas.Reg. § 1.163-3(a), (c) (1) (1968). On appeal, Cities claims that it did not abandon its loss theory
This figure, apparently through a printer's error, is stated to the "71 7/8" in the published district court opinion. 316 F. Supp. at 66. The figure appears correctly as "91 7/8" in the original filed opinion
Treasury Regulation § 1.163-3 first appeared in substantially this form in 1968. T.D. 6984, 33 Fed.Reg. 19175 (Dec. 24, 1968). Prior thereto, debt discount was dealt with in Treasury Regulation § 1.61-12(c) (3), 26 C.F.R. § 1.61-12(c) (3) (1958 rev.), adopted in 1957. T.D. 6272, 22 Fed.Reg. 9424 (Nov. 26, 1957).
Treas.Reg. § 1.461-1(a) (3) (i) (1957), formerly Treasury Regulations 118, § 39.43-2, under the Internal Revenue Code of 1939
Cities' remedy was to file a claim within the applicable period of limitation, see Int.Rev.Code of 1954, §§ 6511, 6532, 26 U.S.C. §§ 6511, 6532 (1970), for credit or refund of any overpayment of tax for those years, rather than for 1953 and 1954. Treas.Reg. § 1.461-1(a) (3) (i) (1957). See also Int.Rev.Code of 1954, § 7422, 26 U.S.C. § 7422 (1970).
See the Act, Title I § 1(b) (1): "when such securities are issued on the basis of fictitious or unsound asset values having no fair relation to the sums invested in or the earning capacities of the properties. . . ."