Court Opinion

ID: 4589979
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:02:42.459506+00
Date Added: 2024-06-11T07:50:23.117402
License: Public Domain

Fifth Street Store, Petitioner, v. Commissioner of Internal Revenue, RespondentFifth Street Store v. CommissionerDocket No. 3661United States Tax Court6 T.C. 664; 1946 U.S. Tax Ct. LEXIS 239; April 9, 1946, Promulgated *239 Decision will be entered under Rule 50.  Payment of accrual-basis petititoner's rent claim in debtor's assets, held, taxable as ordinary income in year of receipt and approval by bankruptcy court, notwithstanding that simultaneously therewith, in what may have been a tax-free reorganization, petitioner acquired debtor's remaining assets in exchange for its stock and assumption of the debtor's liabilities.  C. J. Milliron, Esq., for the petitioner.Arthur L. Murray, Esq., for the respondent.  Opper, Judge.  OPPER*665  By this proceeding petitioner, formerly known as Fifth Street Building, challenges respondent's determination of deficiencies in income tax for the calendar years 1937 and 1939, as follows:Deficiency perRevisedYeardeficiencydeficiencynotice1937$ 68,281.37$ 68,715.7919393,512.813,919.64*241  The "revised deficiencies" resulted from admissions made by petitioner in an amendment to its petition filed at the hearing that petitioner erroneously deducted as expenses in 1937 the sum of $ 2,896.13 and in 1939, the sum of $ 2,465.63.  In his answer to this amendment, respondent prayed that the deductions be disallowed and that the deficiencies shown in the deficiency notice be increased accordingly.Two principal issues are raised:(1) Whether petitioner realized taxable income of $ 427,236.77 in 1937 in connection with its consent to accept disallowance of claims for rent damages against Walker's, Inc., bankrupt, upon transfer to it of the bankrupt's assets.(2) The proper basis, in the hands of petitioner, of the various assets it acquired from Walker's, Inc., in August 1937.Certain other issues raised by petitioner, it is agreed by the parties, can be resolved under Rule 50 recomputation, by the decision of these issues.Some of the facts have been stipulated; others have been presented by documentary evidence.FINDINGS OF FACT.The stipulated facts are hereby found accordingly.Petitioner is a California corporation.  Its tax returns were filed with the collector of internal*242  revenue for the sixth district, at Los Angeles, California.  Its returns were filed for all years herein material on the accrual method.Petitioner has owned, since sometime prior to 1935, two buildings, joined, used, and treated as one, which were erected on two parcels of leased land located at the southwest corner of Fifth Street and Broadway, Los Angeles, California.  For some years prior to 1935 the buildings were occupied by Walker's, Inc., which operated therein a department *666  store under two concurrent long term leases from petitioner, one dated March 1, 1922, and the other dated April 1, 1922, both expiring in 1952.On December 31, 1934, Walker's, Inc., filed a voluntary petition in bankruptcy in the United States District Court for the Southern District of California, Central Division, No. 24756C, and on the same day was adjudicated a bankrupt. Walker's, Inc., bankrupt (hereinafter referred to either as Walker's, Inc., or the bankrupt), was not insolvent at the time.Wm. H. Moore (hereinafter referred to as trustee) was on that date appointed receiver of the bankrupt and duly qualified as such.  On or about January 14, 1935, he was duly elected trustee in bankruptcy*243  and operated Walker's, Inc., as a going concern.On January 17, 1935, the trustee was authorized by order of the referee in bankruptcy to disaffirm and reject the leases, and pursuant to the order he did so.On April 24, 1935, petitioner by its president, Clark J. Milliron, and its secretary, Carl P. Smith, directed a letter to the trustee, which stated in part that petitioner:* * * desires and intends to purchase from you, as Trustee of said estate, all of the assets of Walker's, Inc., including the going business now being operated by you, for a sum (taken in connection with any moneys which Mr. Walker may be required to deposit with you as hereinafter provided), equivalent to:(a) All claims finally allowed and approved in the bankruptcy proceeding of Walker's, Inc.(b) All expenses and indebtedness incurred by you as Trustee in the conduct of the business of said estate, and remaining unpaid at the date of transfer of said property to the undersigned.(c) All expenses of the administration in bankruptcy as allowed by the Court.* * * *The trustee accepted this offer, and on April 30, 1935, petitioner, identified as "Building," entered into a written agreement entitled "Memorandum*244  Agreement" with R. M. Walker, an individual, and Walker's, Inc. (referred to therein as the corporation), pertaining to the intended purchase by petitioner of the assets and business of Walker's, Inc., based generally upon the offer in the letter to the trustee.  The agreement provided, among other things, the following:* * * Walker further agrees that if the assets of the bankrupt are sold to the Building as hereinafter provided for he will eliminate or cause to be eliminated any Palmer claim, in consideration of which the Building, in the event it purchases said assets, agrees to assign to Walker all claims which said Corporation at the time it went into bankruptcy might legally or equitably have asserted against its stockholders or any one or more of them and which the Building may acquire upon the purchase of said assets.* * * **667  6. Said Building asserts that it has provable claims against said Corporation and its estate in bankruptcy as follows: (a) Claims for damages based on the rejection of said leases by the Trustee; * * *7. In order to consummate the purchase of said assets by the Building it will be necessary for said Building to borrow the sum of approximately*245  $ 500,000.00.  In so doing it is anticipated that the lender will require some satisfactory refinancing or deferment in the due date of the bonds and preferred stock hereinafter mentioned, which the Building agrees forthwith to attempt to secure, having at all times in mind so arranging with the lender such refinancing or deferment as to best safeguard the interests of said bondholders and said preferred stockholders. The bonds so outstanding aggregate $ 580,000.00, bearing interest at 6% per annum, payable semi-annually, and maturing, according to the recorded trust indenture, serially until 1947.  The outstanding preferred stock amounts to 1219 shares of the par value of $ 100.00 per share, carries dividend rights on the basis of 7% per annum, payable quarterly, and is retirable as follows: 219 shares in 1935, 500 shares in 1936, and 500 shares in 1937.  The Building warrants that it is not in default under either said bond or said preferred stock issue, except the last quarterly dividend installment falling due under said preferred stock issue.8. The Corporation and Walker hereby consent to the Building and the Trustee making and entering into the arrangement outlined in the *246  letter from the Building to the Trustee dated April 24, 1935. * * *9. It is agreed that upon the order confirming the sale of said assets to the Building becoming final, the instruments constituting said leases shall be delivered up and cancelled.  At the same time mutual releases shall be given by Building and by the Corporation to each other by which each corporation shall release the other and its respective officers, directors, and stockholders from every now existing liability, claim, or demand of every nature whatsoever; * * *10. The assets of the Corporation in bankruptcy shall be purchased at private sale by the Building from the Trustee for a price sufficient (when added to any deposit herein required of said Walker and after the elimination of the Palmer claim) to pay all administrative expenses, Trustee's debts, and creditors' claims finally approved, exclusive of any claim or claims of the Building.11. Any claims filed by the Building in said bankruptcy proceeding shall not, if said sale is made to the Building, participate in any dividends in the bankrupt estate, otherwise such claims shall participate, if finally allowed.12. All administrative expenses of said bankruptcy*247  proceeding shall be paid in full, together with the indebtedness of the Trustee, from the purchase price of the assets.13. All claims finally allowed in said bankruptcy proceeding (except as otherwise above provided), shall be paid in full from the purchase [sic] of the assets.14. If a sale of the assets is made to the Building and if a permit can be obtained therefor from the Commissioner of Corporations, the Building agrees to issue to the Corporation 2877 shares of its then unissued capital stock, as additional consideration for the sale of said assets to the Building, and the bid of the Building for such assets shall include an offer to issue to said Corporation said number of shares on condition that said permit can be obtained.In June 1935 petitioner filed in the bankruptcy proceeding of Walker's, Inc., "Proof Of Claim No. 1 For Breach Of Lease," referring to the lease dated March 1, 1922, and "Proof Of Claim No. 2 For Breach *668  Of Lease," referring to the lease dated April 1, 1922, being respectively numbered in the files of the Referee in Bankruptcy, Nos. 434 and 435.The trustee sometime later calculated the gross amount of petitioner's claim No. 1 to be not*248  in excess of $ 248,364.33 and the gross amount of petitioner's claim No. 2 to be not in excess of $ 178,872.44.  These claims, aggregating $ 427,236.77, were duly registered in their respective amounts in the files of the referee.On October 1, 1935, the trustee filed objections to each of petitioner's claims.  On June 26, 1936, petitioner filed in the bankruptcy proceedings of Walker's, Inc., a petition for the liquidation of its two claims against Walker's, Inc., for rent damages.  Said petition was signed by Milliron.Respondent and petitioner have each valued the claims at $ 427,236.77, which was the amount collectible thereon.In arranging for finances necessary to effectuate its proposed purchase of the assets of Walker's, Inc., petitioner on or about February 27, 1936, filed a petition for reorganization under section 77-B of the National Bankruptcy Act, in the District Court of the United States, Southern District of California, Central Division, No. 27452-S.  As notes to its balance sheet appended to the 77-B petition, petitioner stated:Note -- This corporation has filed two claims against Walker's, Inc., in Bankruptcy for an aggregate amount of over $ 416,000.00, including*249  the $ 72,365.24 listed as "Other Receivables." Liability is disputed by the Trustee in Bankruptcy.  An agreement was entered into with Walker's, Inc. for the purchase of the assets and the payment of the liabilities of Walker's, Inc., which agreement provides that in event the purchase is carried out the above claims will be waived and 2,877 shares of Common Stock will be issued to Walker's, Inc.* * * *It is doubtful whether there is any income tax due for 1935 by reason of the controversy with the Trustee in Bankruptcy for Walker's, Inc.An order approving said petition was duly entered by the judge of the District Court on February 27, 1936.The final revised plan of reorganization of petitioner filed with the District Court provided for, inter alia:(1) Certain adjustments in connection with outstanding bonds of petitioner;(2) Certain adjustments as to the 1,219 outstanding shares of $ 100 par value preferred stock of petitioner, preferred 105 percent as to distributions, by reducing the rate of cumulative preferred dividends and the conditions of redemption at 105 percent of par value;(3) Procuring a bank loan by petitioner in the sum of $ 500,000 to be used in consummation*250  of the plan of reorganization;(4) Purchase of the assets and business of Walker's, Inc., it being stated therein:*669  Walker's, Inc., up to December 31, 1934, occupied and operated the department store on the aforesaid two leasehold properties at and adjoining the southwest corner of Fifth Street and Broadway, Los Angeles, under two subleases from the Company [petitioner herein].  Rent from the lessee ceased when it went into bankruptcy on said date, and since then its trustee, who has continued the operation of the store, has been paying the Company a monthly sum for his use of the premises.  The rent payable by the lessee was the only revenue of the Company for paying its ground rents, principal and interest on its bonds, taxes, and other commitments, and was sufficient for that purpose; but the monthly sum paid by the lessee's trustee in bankruptcy has been and is insufficient.  The Company has filed a claim against said lessee's bankrupt estate for damages and deficiency of rent on account of the rejection of said subleases by the trustee in bankruptcy, and the trustee under the bond indenture has likewise filed a claim on the same account in reference to the sublease covering*251  the leasehold securing the bonds; and the trustee in bankruptcy has filed objections to the allowance of said claims and any part thereof.  Under the plan of reorganization, the following will be done:(A) The Company will submit, in the bankrupt estate of Walker's, Inc., a bid for the purchase at private sale of the assets of said estate as a whole, together with the going business operated by the trustee of said estate and the good-will thereof, and if, upon the taking and completion of the necessary proceedings in said estate for a private sale in accordance with law, said bid shall be finally accepted and approved, the Company will effectuate said purchase on the terms of its bid, to wit: (1) the Company will pay in cash a sum which shall equal the amount of all unpaid claims finally allowed in said bankruptcy proceedings, all unpaid expenses and indebtedness incurred by said trustee in the conduct of the business of said estate, and all unpaid expenses of the administration in bankruptcy as allowed by the bankruptcy court, and will, subject to obtaining the necessary permit from the Corporation Commissioner, issue to said trustee 2877 shares of the Company's common stock, as *252  additional consideration for said assets, business and good-will, to the end that said shares shall revert to Walker's, Inc. upon the payment in full of the aforesaid claims, expenses, and indebtedness; (2) the Company will enter into an agreement with said trustee, in terms satisfactory to him, to pay, and to hold said trustee harmless against, all taxes, assessments, and obligations of every kind, contingent or otherwise, for which said trustee may individually or otherwise be or become liable by virtue of his office as trustee of said estate, whether then accrued or thereafter accruing, and whether then known or thereafter discovered; (3) the Company and the trustee under its bond indenture, upon order of the judge in these reorganization proceedings duly made, and, upon the final acceptance of the Company's bid and the final confirmation by the bankruptcy court of the sale to the Company, will concede the objections heretofore filed by the trustee in bankruptcy to their claims filed against said bankrupt estate for damages and deficiency of rent on account of the rejection by the trustee in bankruptcy of the subleases from the Company to Walker's, Inc., and will consent that said*253  claims be disallowed by the bankruptcy court, whereupon an order of disallowance will be made accordingly; said concession, consent, and disallowance, and the aforesaid offer in those respects, to be of no effect in case the Company's bid shall not be finally accepted and approved; and (4) the Company will include in its bid or any supplement to or amendment thereof such other or modified terms as may be approved by the judge in these reorganization proceedings, as reasonably proper, feasible, and necessary.*670  (B) If and when the bid of the Company shall have been finally accepted and approved in accordance with law in said bankruptcy proceedings, and the Company shall have received the assets, business, and good-will so purchased, the Company will: (a) assign to the estate of R. M. Walker, deceased, or its duly entitled distributee, without recourse, all claims acquired by the Company by said purchase, which Walker's, Inc., at the time it went into bankruptcy might legally or equitably have asserted against its stockholders or any one or more of them, including claims on notes executed by any of them, and including the claim filed by said trustee in bankruptcy in the estate*254  of R. M. Walker, deceased, on a note executed by him in favor of Walker's, Inc.; (b) declare and admit that the store property and business at 411 Pine Street, Long Beach, California, owned by Walker-Palmer Co., are not assets of the bankrupt estate of Walker's, Inc. and not acquired by the Company; (c) release all claims of the Company then existing against Walker's, Inc., and its officers, directors, and stockholders, and against R. M. Walker and his estate, (excluding claims acquired and assigned as expressed in (a) above), upon a like release by Walker's, Inc., in favor of the Company, its officers, directors, and stockholders; and (d) cancel the aforesaid subleases from the Company to Walker's, Inc., upon a like cancellation of the same by Walker's, Inc.(C) On the acquisition of the aforesaid assets, business, and good-will, the Company will operate the business of the aforesaid department store.* * * *On February 23, 1937, the District Court made an "Order Confirming Plan of Reorganization (As Revised) * * *," and directed consummation of the plan.  The court found that there were then outstanding only two executory contracts of petitioner, they being the contract of April*255  24, 1935, and the contract of April 30, 1935, and that it had confirmed them, and that petitioner's plan of reorganization was in consummation and effectuation thereof.  The court directed petitioner to submit in the Walker's, Inc., proceeding a bid for the purchase at private sale of Walker's, Inc., assets, together with the going business operated by the trustee and the good will thereof, on the following terms:(1) The Debtor will pay, in cash, a sum which shall equal the amount of all unpaid claims finally allowed in said bankruptcy proceedings, all unpaid expenses and indebtedness incurred by said Trustee in the conduct of the business of said estate, and all unpaid expenses of the administration in bankruptcy as allowed by the bankruptcy court, and will issue to said Trustee 2877 shares of the Debtor's common stock, as additional consideration for said assets, business and good-will, to the end that said shares shall revert to Walker's, Inc. upon the payment in full of the aforesaid claims, expenses and indebtedness;(2) The Debtor will enter into an agreement with said Trustee in Bankruptcy, in terms satisfactory to him, to pay, and to hold said Trustee harmless against, all*256  taxes, assessments, and obligations of every kind, contingent or otherwise, for which said Trustee may individually or otherwise be or become liable by virtue of his office as Trustee of said estate, whether then accrued or thereafter accruing, and whether then known or thereafter discovered;(3) The Debtor and the Security-First National Bank of Los Angeles, as successor in trust, under said Trust Indenture, dated as of March 1, 1922, upon the final acceptance of the Debtor's bid, and the final confirmation by the Bankruptcy *671  Court, of the sale to Debtor, will concede the objections filed by the Trustee in Bankruptcy to the claims filed by said Debtor and said Trustee against said bankrupt estate for damages and deficiency of rent on account of rejection by the Trustee in Bankruptcy of the subleases from the Debtor to Walker's, Inc., and will consent that said claims be disallowed by said Bankruptcy Court, and will consent that an order of disallowance be made accordingly.On June 30, 1937, there was filed in the bankruptcy proceedings of Walker's, Inc., a stipulation entered into by and between the bankruptcy trustee and petitioner and the trustee under petitioner's bond*257  issue, reciting that petitioner had presented its bid to the trustee for the purchase of the assets and going business of the bankrupt and that the bid provided, in part, as follows:(g) The purchaser (Fifth Street Building) will, upon the final acceptance of this offer, and immediately upon the confirmation by the Bankruptcy Court of the sale contemplated by this offer becoming final, concede the objections heretofore filed by the Trustee to its claims filed against said bankrupt estate for damages and deficiency of rent on account of the rejection by the Trustee of certain sub-leases from the purchaser to Walker's, Inc. and will deliver to said Trustee its written consent that said claims be disallowed by the Bankruptcy Court, such claims being claims No. 434 and No. 435 on the Referee's Docket, and will at the same time procure from the Security First National Bank of Los Angeles, as Trustee, the written concession of the objections heretofore filed by the Trustee in Bankruptcy to the claim of said Security-First National Bank as Trustee, filed against said bankrupt estate for damages and deficiency of rent on account of the rejection by the Trustee in Bankruptcy of a certain sublease*258  from the Fifth Street Building, a corporation, to Walker's, Inc. and will at the same time deliver the same to the Trustee together with the written consent of said Bank as Trustee that such claim may be disallowed by the Bankruptcy Court, such claim being claim No. 426 on the Referee's Docket; such written concessions and consents to be in form and content satisfactory to and as agreed upon by the Trustee, the Purchaser and the said Security-First National Bank of Los Angeles.It was stipulated, inter alia:(1) Fifth Street Building does hereby concede the objections heretofore filed by the Trustee in Bankruptcy of the above entitled estate to its claims filed against said bankrupt estate for damages and deficiency of rent on account of the rejection by the Trustee in Bankruptcy of certain subleases from said Fifth Street Building to Walker's, Inc., and does hereby consent that said claims, being claims numbered 434 and 435 on the Referee's Docket, be disallowed, such concession and consent, however, to be and become effective without further order of the above entitled court, only when and as the assets of said bankrupt estate as a whole, together with the going business operated*259  by the Trustee of said estate and the good will thereof are actually transferred to and vested in Fifth Street Building.On July 15, 1937, the referee in bankruptcy in the Walker's, Inc., proceeding issued an order approving petitioner's offer to purchase all of the bankrupt's assets and the trustee was authorized and directed to accept the same and to sell the assets at private sale to petitioner.  There was declared and ordered paid thereafter a first and final dividend of 100 percent upon all unsecured claims finally allowed against the bankrupt estate.*672  The stipulation of June 30, 1937, was approved by the referee in bankruptcy in an order of July 27, 1937, "Order Approving Stipulation and Disallowing Claims Numbered 426, 434, and 435," which further ordered:It Is Further Ordered that the said objections be and they are hereby sustained and said claims be, and each of them is, hereby disallowed, said concession and disallowance to be contingent upon and to be and become effective, however, without further order of this court, only upon the actual transfer of said assets and going business of the above entitled bankrupt estate to Fifth Street Building, in accordance with*260  its bid heretofore filed herein and the order of this court confirming said sale; andIt Is Further Ordered that the first and final dividend of one hundred per cent (100%), together with interest thereon at the rate of seven per cent (7%) per annum from December 31st, 1934, heretofore declared on all general unsecured claims filed and allowed herein, aggregating $ 92,634.66, may be paid by the Trustee herein in the event the transfer of the assets of said estate to said Fifth Street Building is not [sic] effectuated within the purview of said bid so accepted by the Trustee and confirmed by this court, at such time as the Trustee may have funds available therefor and without the concurrent payment of such dividend, or any dividend, to the Fifth Street Building and the Security-First National Bank of Los Angeles, as Trustee, on their respective claims herein referred to.Subsequent to the entry of the order of July 15, petitioner served notice on the trustee that it had completed its financing and had funds available, and was ready to pay the cash and other consideration as provided for in its offer on August 31, 1937, which date was established as the date of transfer.  The assets*261  of Walker's, Inc., were transferred on that date to petitioner.On May 31, 1939, an order was entered by the District Court in petitioner's 77-B proceeding, finding that petitioner's plan of reorganization, as revised, had been put into effect and consummated in conformity with the provisions of sections 77-A and 77-B of the Bankruptcy Act; that the effective date of the reorganization of petitioner was August 31, 1937; that:* * * it will not be practicable to apply the provisions of Chapter X of Public Law No. 696 Seventy-Fifth Congress, approved June 22, 1938, to these proceedings, and the said Public Law, except sections 268 and 270 thereof, to the extent provided in section 276c (3) thereof, is deemed inapplicable to these proceedings, and these proceedings shall be conducted under the provisions of Sections 77A and 77B of Chapter VIII, as amended, of the Act entitled "An Act to establish a Uniform System of Bankruptcy Throughout the United States," approved July 1, 1898.The court reserved full and complete jurisdiction with respect to the operation of petitioner's business, and from time to time to make appropriate orders and to render a final decree, which decree was entered*262  May 28, 1941.*673  In the trustee's "Third General Report and Accounting * * * for the Calendar Year 1937 * * *" he reported in part with reference to the rent claims of petitioner:Your Trustee, deeming each of said claims as objectionable and not subject to allowance as a claim against said estate, promptly filed herein his written objections to the allowance of each and all of said three claims.  That said objections were made in good faith and with the earnest belief on the part of the Trustee that under the law, as it stood at the time of the filing of said claims, they did not constitute valid and lawful claims against the estate and could not be allowed.  Thereafter, however, and prior to the sale of the assets herein on the written offer of the Fifth Street Building, certain decisions by the Supreme Court of the United States, touching upon the allowability of claims of the nature of those presented by the Fifth Street Building and the Security-First National Bank of Los Angeles, may have changed the law applicable thereto and it is possible that said claims became allowable against said estate.* * * *Your petitioner respectfully shows that throughout the administration*263  of said estate and during the many negotiations with the Fifth Street Building and its attorneys, leading up to the submission of the final offer to purchase the assets of said estate, your Trustee requested the consent of the said respective claimants to the disallowance of said claims, apart from the sale of the assets of the estate to the Fifth Street Building, but at all times said Fifth Street Building and said Bank and their respective attorneys refused to concede the objections of the Trustee to said claims, or either of them, except in accordance with the terms of a stipulation dated June 30th, 1937, by and between your Trustee, the Fifth Street Building, a corporation, and the Security-First National Bank of Los Angeles, as filed herein, and which stipulation was by an Order of your Honor, dated July 28th, 1937, duly approved.  Under the terms of said stipulation and of said Order the objections of your Trustee to said claims, and each of them, were sustained and the concession of the objections and the disallowance of said claims were made contingent upon and to become effective only upon the actual transfer of the assets and the going business of the bankrupt estate to *264  the Fifth Street Building.  Your Trustee believes, therefore, that except for the approval of the terms of sale to the Fifth Street Building, which provided for the conceding of the objections of the Trustee to said claims, it would have been necessary for your Trustee to have litigated said claims, possibly through the Court of last resort, and with the possibility, if not the probability, that said claims would ultimately be allowed.Your Trustee therefore believes that the disallowance of the two claims of the Fifth Street Building, aggregating $ 427,236.77, and the claim of the Security-First National Bank of Los Angeles, as Trustee, for $ 159,995.00 (duplicating Proof of Claim No. 1 of the Fifth Street Building) may have constituted satisfaction or payment thereof within the purview of Section 40 of the Bankruptcy Statutes, and that this estate may be indebted to the Referees for 1% of the amount of assets paid over to said creditor, Fifth Street Building, to satisfy and extinguish its two claims aforesaid, aggregating $ 427,236.77.  Your Trustee submits such question to the Court for determination.Under the date of December 9, 1937, the referee in bankruptcy, in an "Order Determining*265  Referee's Commissions on Claims of Fifth Street Building," found in part as follows, over objections of petitioner:*674  It further appearing to the Referee that the settlement of the litigation on the Proofs of Claims No. 1 and No. 2 constituted a very material part of the consideration paid the Trustee for the assets of the bankrupt estate, as a going business, and that the assets of the bankrupt estate, without such settlement of said litigated claims, would have been worth greatly in excess of the other considerations paid to the Trustee for said assets, and that without the settlement of said Proofs of Claims No. 1 and No. 2 of the Fifth Street Building, no sale would have been made to it by the Trustee for the other considerations contained in said proposal, andIt further appearing to the Referee that Proofs of Claim No. 1 and No. 2 of the Fifth Street Building were filed by it in good faith, as debts provable under the provisions of Section 63-a of the Bankruptcy Act of the United States, and that the objections filed by the Trustee thereto were likewise filed in good faith under the provisions of Section 57-f and Section 57-k of the Bankruptcy Act of the United States, *266  and were undetermined at the time of the sale of said assets, and that said Fifth Street Building at the date of the sale of said assets occupied the status of a creditor as defined under the provisions of Section 1, Subdivision 9 of the Bankruptcy Act of the United States, and that the consent of said Fifth Street Building to an Order Disallowing said Claims as a part of the consideration for the sale and transfer to it by the Trustee of the assets of the bankrupt estate, constituted payment to it out of said bankrupt estate in merchandise, real property, and other assets of the bankrupt estate on the same basis and percentage as the payments made to the other creditors of the bankrupt in cash, and that said settlement of said controversy existing regarding said claims aforesaid constituted the payment of said claims in full, andIt further appearing to the Referee that at all times throughout the administration of this bankrupt estate said Fifth Street Building exercised the privileges and prerogatives of a creditor on more than one occasion, having petitioned the Court as a creditor for affirmative relief in connection with the administration of the estate, notably in filing a *267  petition on or about the 18th day of June, 1936, as a creditor of the bankrupt, for an Order authorizing continuance of the bankrupt's business for a further limited period, which said Petition was duly granted, and also another similar petition on February 3rd, 1937, andIt further appearing that on October 25th, 1935, said Fifth Street Building filed a Petition for an Order designating the method of liquidation of their claims, and on the 28th day of December, 1935, obtained an Order to Show Cause on the Trustee, requiring him to show cause why said claims should not be liquidated and determined, andIt further appearing to the Referee that the question of liquidation of said claims was pending and undetermined at the date of entry into the stipulation on the part of the Trustee and the Fifth Street Building for disallowance of said claims, and that the stipulation for the sustaining of the Trustee's objections, entered into by the Trustee and the Fifth Street Building, was contingent only upon the actual transfer of the assets and going business of the bankrupt to said Fifth Street Building in accordance with its bid filed in this Court, and that said stipulation would not have *268  been effective and said objections of the Trustee to the allowance of said claims would not have been sustained had there been a failure of the transfer and delivery of all of the assets of the bankrupt estate to said Fifth Street Building, andIt further appearing to the Referee that the sale of said assets by consent of all the parties was had at a private sale instead of a public auction, and that had said sale been made at public auction any competitive bidder, other than *675  the Fifth Street Building, would have been obliged to have paid in cash an amount equal in value to all of the consideration flowing from the Fifth Street Building to the Trustee, in exchange for said assets in order to procure a confirmation thereof, which said sum in cash would have been deposited by the Trustee and by him disbursed to said Fifth Street Building in payment of its claims, if and when said claims were allowed, andIt further appearing from the Comparative Balance Sheets attached to Trustee's Third General Report and Accounting of Receipts and Disbursements for the Calendar Year 1937, and Petition for Determination of Expenses of Administration, that the total assets transferred to the*269  Fifth Street Building amounted to $ 1,331,321.56, and after giving effect to the liabilities there was a net worth of $ 910,121.34, all of which was transferred to the Fifth Street Building upon the sale of the assets, and which sum was ample to pay the claims filed by the Fifth Street Building, and each of them, in full, with a large margin of equity going back to the bankrupt, represented by shares of stock in the Fifth Street Building issued to the bankrupt.He thereupon ordered that the commissions of the referee be, and they were, fixed and allowed on the basis of 1 percent of $ 427,236.77, the amount involved in claims of petitioner.Petitioner shortly thereafter filed in the Walker's, Inc., proceeding a petition for review of the referee's order, seeking reversal thereof.  In this petition petitioner alleged error in the order of the referee in the following particulars, inter alia:That Petitioner's said claims for damages for breach of leases were, and each of them was, at the time of their disallowance on, to-wit, July 27, 1937, wholly unliquidated.  That the aggregate amount of damages therein claimed was at the time of their disallowance wholly uncertain and indefinite. *270  That no evidence whatever was offered or adduced at said hearing, or at any other time, in support of the amount of damages claimed in said claims, and the same were at all times until their disallowance, as aforesaid, wholly uncertain and unliquidated. * * *On January 12, 1938, the referee in bankruptcy, in his "Certificate of Review," stated in part:Petitioner did receive payment of these claims No. 1 and No. 2, for it used these claims as part of the purchase price of the bankrupt estate, and without these claims being so used, it would have been compelled to pay correspondingly more for the assets, and it will be noted that the concession for the disallowance of said claims was made contingent upon and to be effected only upon the actual transfer of the assets and going business of the above entitled estate.The Trustee accepted the proposal made by the Fifth Street Building, and thereafter a sale of all of the assets of the bankrupt estate was made to the Fifth Street Building for the considerations aforesaid, and each and every one of them, and said sale of said assets was thereafter duly confirmed by the Referee. * * ** * * *The consent to the disallowance of these claims*271  amounting to $ 427,236.77 held by the Fifth Street Building which amounted to nothing more or less than a withdrawal of these claims, constituted a very material part of the consideration passing to the Trustee for the transfer to the Fifth Street Building of a business *676  with a net worth of $ 910,121.34, if said claims were withdrawn or their disallowance consented to, and without said withdrawal said sale to the Fifth Street Building would not have been confirmed by the Referee for the reason that the consideration, exclusive of the withdrawal or consent to the disallowance of said Proofs of Claim, would have been grossly inadequate and unjust to the bankrupt corporation which would have been entitled to said surplus.  The withdrawal of said claims, in effect, by consenting to their disallowance, was permitted as a consideration for said sale solely as a convenience to the Fifth Street Building by permitting it to consent to the disallowance of its claims rather than requiring it to pay over to the Trustee, in cash, the sum of $ 427,236.77, to be run through the Trustee's bank account and paid back to the Fifth Street Building in dividends.The proposition for handling the*272  sale in this way was that of the Fifth Street Building, as disclosed by its bid.The disallowance of said claims was accomplished by a stipulation and was contingent upon the actual transfer of the assets and going business of the bankrupt to said Fifth Street Building, in accordance with the bid which it had voluntarily submitted to the Trustee.On March 14, 1938, Judge Cosgrave of the United States District Court considered, upon the exceptions filed by petitioner, the question "whether or not the referee is entitled to one per cent commission, as provided by Section 40 of the Bankruptcy Act * * *, on $ 427,236.77, the amount of the claims that have been disallowed." In his "Memorandum of Decision," he upheld the exceptions of petitioner.On October 29, 1937, Milliron who had been president, sole stockholder, and tax counsel of petitioner for some years prior to 1935, who was tax counsel and substantial stockholder of petitioner during the negotiations for the acquisition of the assets of Walker's, Inc., and who now is petitioner's president, majority stockholder, and tax counsel, filed in petitioner's 77-B proceeding a "Petition And Affidavit Of Tax Counsel For Debtor, For Compensation," *273  in which the following appears:In the preparation of the contracts with the Trustee in Bankruptcy and the agreements for disallowance of the claim filed by the debtor in the Estate of Walker's, Inc. Bankrupt, the Trustee in Bankruptcy attempted to alter the contracts theretofore made and to vary the Plan of Reorganization by providing that the contract should state that the aforesaid claim was to be allowed and paid as a part of the agreement to purchase the assets of Walker's, Inc. from the Trustee.  The various discussions in connection with this matter involved an enormous amount of work and required the preparation of written opinions by your petitioner for the use of the debtor and its attorneys in the various conferences, and in the preparation of the several documents.  Had these agreements been altered as requested by the Trustee in Bankruptcy it might have resulted in the creation of a tax liability on a sum in excess of $ 417,000.00, and might have created a possible liability for taxes in excess of $ 135,000.00.The agreed fair market value of the assets purchased by petitioner from Walker's, Inc., on August 31, 1937, was $ 1,233,138.62, apportioned as follows: *677 *274 Adjustments (valuationValuationreserves)Assetsas perAdjustedappraisalvalueDr.Cr.Cash$ 15,000.00$ 15,000.00Accts. receivable256,634.26$ 15,000.00271,634.26Vendor's debit balance2,221.022,221.02Merchandise inventory:On hand522,292.909,575.00531,867.90In transit28,935.0128,935.01Stock:Down Town Shopping News200,000.00200,000.00Other domesticcorporations2,202.002,202.00Fifth Street Bldg. bonds1,650.001,650.00Sundry other assets4,863.354,863.35Deferred charges16,240.0816,240.08Furniture and fixtures141,500.00141,500.00Real estate not used in business:Glendale property:Land6,100.006,100.00Building3,900.005,375.009,275.00Larchmont Heights3,500.003,500.00Lot 10, tract 22802,500.002,500.00Lot 12, tract 5138350.00350.00Lot 81, tract 5629250.00250.00Big Bear Valley property:Land6,632.456,632.45Building18,367.5513,159.6331,527.18Furniture andfixtures4,455.274,455.27Total1,233,138.621,280,703.52Less valuation reserves:Reserve for bad debts$ 15,000.0015,000.00Reserve for tradediscounts9,575.009,575.00Reserve for depreciation:Glendale Building5,375.005,375.00Big Bear Building13,159.6313,159.63Big Bear Furniture4,455.274,455.27Total reserves47,564.9047,564.9047,564.90Balance net appraised value1,233,138.62*275  Prior to August 31, 1937, petitioner had outstanding 1,219 shares of preferred stock of a par value of $ 100 and of a redemption value of $ 105, and 6,713 shares of common stock. In connection with the acquisition of the assets of Walker's, Inc., it received authorization to issue 2,877 additional shares of common stock which it did issue to Walker's, Inc.  No additional shares of preferred stock have been issued.Petitioner's balance sheet prior to the acquisition of the assets of Walker's, Inc., was as follows:AssetsCash$ 505,622.51Sundry accounts and notes receivable1,231.02Claims against Walker's, Inc427,236.77Merchandise in transit168,826.28Prepaid taxes and expenses84,832.11Leasehold640,000.00Building1,223,070.67Building improvements145,816.89Machinery and equipment378,980.68Los Feliz property -- land24,028.27Organization expense49,411.30Total assets3,649,056.50LiabilitiesAccounts payable$ 171,718.30Reorganization fees payable52,722.04Bonds payable580,000.00Accrued interest on bonds payable34,434.60Notes payable to banks500,000.00Accrued interest on notes payable4,375.00Accrued taxes payable75,324.00Reserves for depreciation:Leasehold (amortization)107,744.16Building365,839.31Building improvements70,914.20Machinery and equipment378,980.68Total liabilities2,342,052.29CapitalPreferred stock$ 121,900.00Common stock671,300.00Capital surplus480,178.37Earned surplus33,625.84Total capital1,307,004.213,649,056.50*276 *678  On its books as of August 31, 1937, after the acquisition of the assets of Walker's, Inc., petitioner made an entry called "Paid-in surplus or excess value of assets transferred over par value of stock" of $ 431,336.11.In the year 1937 petitioner sold a capital asset consisting of a parcel of real property, referred to as the Larchmont property, for the sum of $ 4,376.40, and there was incurred in the sale of said property expense in the sum of $ 137.50.In the year 1939 petitioner sold a capital asset, referred to as "Land at Big Bear Lake" for the sum of $ 7,088, and there was incurred in the sale of said property expense in the sum of $ 586.18.In 1939 the petitioner sold a capital asset, referred to as "Land in Glendale, California," for the sum of $ 4,270, and there was incurred in the sale of said property expense in the sum of $ 39.65.In the year 1939 petitioner sold certain noncapital assets consisting of a frame building as part of the sale of the aforesaid land at Big Bear Lake for a total sale price of said building of $ 11,312, and there were expenses in connection with the sale in the amount of $ 935.50.In connection with the sale of property at Big Bear *277  Lake, in the year 1939, the petitioner sold certain noncapital assets consisting of furniture and fixtures for the price of $ 1,600, and there were expenses incurred in connection with the sale of said furniture and fixtures in the amount of $ 132.32.*679  In the year 1939 petitioner sold a noncapital asset consisting of a stucco building in connection with the sale of the aforesaid land in Glendale, California, for the total price of $ 2,730, and there were expenses incurred in connection with the said sale in the amount of $ 25.35.The value of the 2,877 shares of common stock of petitioner issued in connection with the acquisition of assets from Walker's, Inc., is $ 176.64 per share, computed as follows:Petitioner's net assets$ 1,307,004.21Net assets acquired514,995.10Total1,821,999.31Less preferred stock at redemption price ($ 105 per share)127,995.00Total value of common stock -- 9,590 shares1,694,004.31Value per share176.64The cost to petitioner of the assets acquired from Walker's, Inc., was $ 1,226,336.80, computed as follows:Rent claims$ 427,236.77Liabilities assumed290,906.75Common stock (2,877 shares valued at $ 176.64 per share)508,193.281,226,336.80*278  OPINION.Petitioner's agreement with the trustee in bankruptcy to accept a transfer of the debtor's assets in discharge of its rent claim, and in addition to pay all other claims against the debtor, is urged as having called for accrual of the resulting income at the time of the arrangement, several years prior to the one now before us.  But in order for a claim to be accruable, both the liability and the amount must be certain at the time or sufficiently ascertainable.  ; ; . Although the amount of the claim is now accepted by all concerned, the contemporaneous documentary record refers to it repeatedly as unliquidated.  Neither the claim nor its amount had been submitted to the referee or the court for approval.  In fact, it seems to be conceded that the liability itself was doubtful until the question was set at rest by ,*279  decided in 1937.  We are accordingly unable to perceive that "the right to receive" any amount whatever became fixed until the year in issue when the settlement of the law and the consummation of the transaction both occurred.  Jamaica Water Supply Co. v. Commissioner (C. C. A., 2d Cir.); ; certiorari denied, .*680  Assuming that the item in dispute constituted income, which petitioner apparently concedes, and that it properly falls within the present tax year, petitioner urges further that the item is not subject to recognition for tax purposes, categorically asserting that the transaction was a tax-free reorganization under section 112.  But if there was a reorganization exchange, tax-free or otherwise, it was limited to that part of the transaction in which there was a transfer of assets of the debtor in return for petitioner's payment of stock and assumption of its liabilities.  Section 112 in terms deals only with sales or exchanges, section 112 (a), and speaks of "gain or loss" on such sales or exchanges in its remaining provisions.  The transfer of other assets of the debtor to petitioner*280  in payment of the debtor's obligation for rental damage was not a sale or exchange in any sense of the term.  . It accordingly never reached the type of situation to which section 112 was designed to apply.The lack of essential relationship between the payment of petitioner's claim and the exchange of the remaining assets for petitioner's stock seems easily discernible when we consider that the debtor was admittedly solvent.  Had petitioner failed to reach an agreement with the trustee for the taking over the debtor's entire business, the payment of its claim would not have been jeopardized, and it could and doubtless would have taken place irrespective of the reorganization. Similarly, as is pointed out in the referee's report, the result would have been identical had the assets been sold to petitioner or someone else for cash and the proceeds used in turn to discharge petitioner's claim.  Neither the liquidation of the rent claim nor the method by which it was accomplished was accordingly to any degree related to or dependent upon the reorganization.Payment of petitioner's claim under the lease*281  was ordinary income taxable to its full extent. . It was made in property having a fair market value equivalent to the claim instead of in cash, but that does not alter the situation. ; affd. (C. C. A., 8th Cir.), ; ; see ; affd. (C. C. A., 9th Cir.), . And its recognition as a taxable event would be totally unaffected by the existence of a simultaneous tax-free reorganization. ; affd. (C. C. A., 3d Cir.), . The result is that without determining whether the exchange of stock for assets was a reorganization and, if so, whether it was tax-free, we conclude that petitioner received taxable income in the year 1937 in the full amount of the agreed figure of $ 427,236.77, constituting*282  the collected claim against its lessee for rental damage.*681  There remains the question of petitioner's basis for the property acquired.  Respondent concedes that the determination of the first issue entitles petitioner to have the amount of the rent claim added to the fair market value of its stock and the assumption of the debtor's liabilities in computing its cost.  It is not apparent that petitioner contends otherwise, except that it claims to be entitled to its transferor's basis for some of the assets acquired where that is higher than cost, under the provisions of section 270 of the Chandler Act.  1 This provision applies to reorganizations where the taxpayer or its predecessor achieved, by means of the reorganization, a debt reduction for which it would ordinarily be taxable.  In such a situation, the carry-over basis of the transferor is to be reduced by the amount of the indebtedness canceled.  But in order to prevent too drastic reductions, the provision limits the decrease in basis to fair market value at the time of acquisition.*283 Section 270, however, contains no language "requiring an increase of basis * * * because of a reduction or cancellation of indebtedness, and we are confident that Congress did not intend such an increase to result from the statute before us." . It is apparent that the present situation would not be appropriate for the application of section 270, even though it be assumed, for purposes of argument only, that there was a cancellation of indebtedness involved in the circumstances before us.  No attempt is being made to reduce petitioner's basis on account of any such cancellation and hence no occasion arises for application of the limitation in section 270 which would prevent reduction on that basis.  It follows that the only alternatives are to adopt the transferor's basis or cost.  Since respondent contends that cost is the proper basis and it appears from figures submitted by petitioner in its petition and on brief that the transferor's basis would be substantially lower, no reason appears for committing petitioner to the lower figures in the face of respondent's acceptance of the higher ones.  We conclude that basis*284  may be determined by ascertaining the cost of the assets at the time petitioner acquired them.  Sec. 113 (a).The amount of this calls for a brief discussion.  There is no dispute between the parties as to the figures for the rent claim or for the debtor's obligations which petitioner assumed.  As to the valuation of the stock, however, on the strength of which petitioner's total cost *682  must be computed, the parties are somewhat apart.  We think petitioner is correct in contending that, since the stock it gave represents not only the assets already in its possession but those it was about to acquire by the transfer of the stock itself, the fair market value of the transferred assets should be included in arriving at the value of the stock. See ; affd. (C. C. A., 2d Cir.), ; certiorari denied, . Neither party suggests the use of figures other than book value of assets and it is by use of this figure that we have arrived at the valuation set forth in our findings of fact for the stock issued by petitioner and for the *285  consequent total consideration paid by it for all of the assets.  We do not understand that there will be any difficulty in the application of the total figures for the purpose of computing petitioner's basis for the individual assets involved.Decision will be entered under Rule 50.  Footnotes1. Sec. 270. In determining the basis of property for any purposes of any law of the United States or of a State imposing a tax upon income, the basis of the debtor's property (other than money) or of such property (other than money) as is transferred to any person required to use the debtor's basis in whole or in part shall be decreased by an amount equal to the amount by which the indebtedness of the debtor, not including accrued interest unpaid and not resulting in a tax benefit on any income tax return, has been canceled or reduced in a proceeding under this chapter, but the basis of any particular property shall not be decreased to an amount less than the fair market value of such property as of the date of entry of the order confirming the plan. * * *↩