Opinion ID: 1491046
Heading Depth: 1
Heading Rank: 1

Heading: Bonds of Virginian Power Company and of Electric Company of New Jersey.

Text: If amortization is not allowed in respect to the bonds of Virginian and of Electric Company of New Jersey, there will be a loss by reason of discount and expenses connected with the issuance of these bonds which no one can take. Had there been no transfer, such a loss would be allowed to the company issuing the bonds and under the decision of Helvering v. Union Pacific R. Co., 293 U.S. 282, 55 S.Ct. 165, 79 L.Ed. 363, might be amortized by pro rata deductions from income. Where, however, there is a transfer in a reorganization, the loss is likewise that of the issuing corporation, for the reason that, because of the discount and expenses, it had subjected itself to an obligation larger than the amount it received from the bonds. Because of this increased obligation, the transferor necessarily obtained a less valuable consideration from the transferee at the time of the transfer in reorganization than it would otherwise have received. Nevertheless, under section 203 (b) (4) of the Revenue Acts of 1924 and 1926, no gain or loss is to be recognized upon the transfer. Consequently, where there has been only a partial amortization of discount and expenses and a transfer in reorganization occurs, no further loss will be recognized, and that part of the loss which could not be taken prior to the transfer cannot be taken thereafter. While it might be more satisfactory to carry forward through the successor corporation actual unamortized losses incurred by the predecessor, we can find no warrant for this in the statute, regulations, or decisions of the courts. Judge Groner, writing for the Circuit Court of Appeals for the District of Columbia in Turner-Farber-Love Co. v. Helvering, 62 App.D.C. 369, 68 F.(2d) 416, expressly disallowed such deductions as are sought by the petitioner, and in New Colonial Ice Co. v. Helvering, 292 U.S. 435, at page 442, 54 S.Ct. 788, 78 L.Ed. 1348, the Supreme Court referred to that case with approval. Moreover, the Supreme Court in New Colonial Ice Co. v. Helvering, supra, and the Circuit Court of Appeals for the First Circuit in Athol Mfg. Co. v. Commissioner, 54 F.(2d) 230, held that transferees in reorganizations were not necessarily to be regarded as identical with the transferors for tax purposes and that they could not claim as deductions losses incurred by the transferors under a general theory that the corporations were so closely connected that separate identity might be disregarded. The situation in New York Central R. Co. v. Commissioner, 79 F.(2d) 247 (C.C. A.2), and Western Maryland R. Co. v. Commissioner, 33 F.(2d) 695 (C.C.A.4), was different. In each of those cases there was a consolidation of the corporations, and amortization was allowed for the life of the bonds on the ground that the consolidated corporation succeeded to the rights and liabilities of the constituent companies, not as a purchaser, but by operation of law. A merger will in general preserve corporate identity and continue the obligations against a successor company, which is treated as identical with the former obligor. Cortland Specialty Co. v. Commissioner, 60 F.(2d) 937, 939 (C.C.A. 2). The foregoing considerations seem to require a disallowance of the deductions claimed for amortization of discount and expenses in the case of the bonds of Virginian. The same line of reasoning requires a disallowance of deductions in the case of the bonds of the Electric Company of New Jersey.