Court Opinion

ID: 9636765
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:42:17.879868+00
Date Added: 2024-06-11T18:09:49.150363
License: Public Domain

CHASE, Circuit Judge
(dissenting in part).
I am unable to agree entirely with my brothers. That there was an exchange of securities which resulted in a gain that would be recognizable under Sec. 112(a) provided Secs. 112(b) (3) and 112(g) (1) (E) are inapplicable seems clear enough. But I think those sections do apply. What was done concededly would have amounted to a “recapitalization” within Sec. 112(g) (1) (E) had the bonds exchanged been those of a private corporation. Commissioner v. Neustadt’s Trust, 2 Cir., 131 F. 2d 528; United Gas Improvement Co. v. Commissioner, 3 Cir., 142 F.2d 216. But it is now held otherwise as regards municipal bonds, somewhat in reliance upon what was said in Speedway Water Co. v. United States, 7 Cir., 100 F.2d 636. That case, however, was different. There a municipal corporation bought a water plant and paid for it by issuing secured bonds. The seller then distributed those bonds to its stockholders who surrendered almost all their stock and the corporation thereafter remained only nominally in existence, having no business activities. The decision turned on the fact that there was a sale of property for bonds, and any construction of Sec. 112(g) (1) excluding municipal corporations from its scope was unnecessary.
One may fairly assume that Congress intended to give municipal corporations as much leeway taxwise in dealing with the refunding of their securities as it did private corporations. To some extent the securities of municipal corporations have to compete in the market with those of private corporations and it is impossible for me to believe that the language in the statute, as applicable on its face to one as to the other, was not intended to apply to both. Had Sec. 112(g) (1) contained only two subdivisions, such as those which are now subdivisions (A) and (E), my brothers’ principal position would be considerably weakened. That Congress put other subdivisions in this section which could apply only to private corporations seems but to show that where it had to be more explicit in respect to private corporations it knew how to be. Far from being any intimation that municipal corporations may not effect a “recapitalization” within Sec. 112(g) (1) (E), it would appear to indicate that in this one subdivision in which the term used did clearly cover the operations of both it was intended to include both: Congress did not expressly confine it to private corporations to conform it to the inherent limitations of the other clauses.
No reason for differentiating bondholders of a municipal corporation from those of a private corporation for present purposes has been suggested. Both are creditors. Under similar refunding operations, the interests of the former as creditors remain as much the same as do those of the latter. From the standpoint of the individual bondholder the attractiveness of municipal corporate bonds would be altered by any discrimination taxwise in favor of private corporate bonds.1 But not only would such a discrimination3 ordinarily be reflected in the marketability of each, it might frequently tend to make municipal bondholders refuse to consent to a refunding that might be highly desirable economically from the standpoint of the corporation. Such a result, I think, was not within the intention of Congress. To construe the statute so as to make it have this effect seems to me both to do violence to its lan*32guage and to frustrate the legislative purpose.
I would reverse the decision and allow the refund.

 This irrespective of the fact that interest from municipal bonds is not now .includible in the gross income of the bondholder under I.R.C. Sec. 22(b) (4), 26 U.S.C.A. Int.Rev.Code, § 22(b) (4).

 Of course non-recognition cuts both ways, since Sec. 112 applies to losses as well as gains. Thus to the extent that the disadvantage of having gains taxable immediately upon the completion of the refunding operations may be offset by the advantage of being able to deduct losses immediately, the discrimination diminishes.