Court Opinion

ID: 9651758
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:34:48.722609+00
Date Added: 2024-06-11T18:12:39.073939
License: Public Domain

BIGGS, Circuit Judge
(dissenting).
I dissent. In the case at bar the bondholders of the old company, who were also stockholders of the old company, are in control of the new corporation because they were bondholders and not because they were stockholders. I construe the provisions of clause (C) of Section 112 (g) (1) of the Revenue Act of 1934, 48 Stat. 705, 26 U.S.C.A. Int.Rev.Acts, page 695, to mean that the control required to be retained by the stockholders of the old company must be retained by them as stockholders.1 I think that Congress intended to grant tax exemptions because of the continuity of interest in the business of stockholders as stockholders. Had the congressional intention been otherwise the clause would not have used the word “stockholders”.
This view finds support in the dictum of the Supreme Court in Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 62 S.Ct. 540, 86 L.Ed. 775, and in its decision in Helvering v. Southwest Consol. Corp., 315 U.S. 194, 62 S.Ct. 546, 86 L.Ed. 789. In the case first cited it was held that the stockholders of a parent corporation who were creditors of a subsidiary corporation and under a plan of reorganization acquired the equity interest of the subsidiary did maintain continuity of proprietary interest within the purview of clause (A) of Section 112(i) (1) of the Revenue Act of 1928.2 The Court stated, however, 315 U.S. at page 183, 62 S.Ct. at page 543, 86 L.Ed. 775, that “* * * there was ‘no reorganization’ in this case, since the old stockholders were eliminated by the plan, no portion whatever of their *627proprietary interest being preserved for them in the new corporation. And it is clear that the fact that the creditors were for the most part stockholders of the parent company does not bridge the gap. The equity interest in the parent is one step removed from the equity interest in the subsidiary. In any event, the stockholders of the parent were not granted participation in the plan qua stockholders.”
In the second case cited, the Supreme Court dealt with transactions whereby, pursuant to a plan, an indenture securing the bonds of an insolvent corporation was foreclosed and the properties of the corporation transferred to a new corporation. The bondholders and other creditors received the stock of the new corporation. Warrants were delivered to the stockholders of the old corporation. The Court held that the transaction failed to qualify as a reorganization under clause (B) of Section 112(g) (1) of the Revenue Act of 19343 or under clause (C) of that section. The Supreme Court held that although the creditors might have acquired the equitable interest in the property and'have supplanted the stockholders, such a continuity of interest did not meet the requirements of clause (C). The Supreme Court stated, 315 U.S. at page 202, 62 S.Ct. at page 551, 86 L.Ed. 789: “But it is one thing to say that the bondholders ‘stepped into the shoes of the old stockholders’ so as to acquire the proprietary interest in the insolvent company. It is quite another to say that they were the ‘stockholders’ of the old company within the purview of clause (C). In the latter, Congress was describing an existing, specified class of security holders of the transferor corporation. * * * Indeed clause (C) contemplates that the old corporation or its stockholders, rather than its creditors, shall be in the dominant position of ‘control’ immediately after the transfer and not excluded or relegated to a minority position.”
The distinction between the proprietary interests of a stockholder and the interests of a creditor has been maintained in tax cases. The fact that the bondholder upon default has obtained the corporate assets does not serve to change “ * * * his status from that of a creditor to one having a proprietary stake, within the purview of the statute.” See LeTulle v. Scofield, 308 U.S. 415, 421, 60 S.Ct. 313, 316, 84 L.Ed. 355. In the case at bar the fortuity that the bondholders also held the stock of the old company is immaterial. The proprietary interest literally has passed from stockholders to bondholders. It follows that the transfer of properties from the old to the new corporation constituted a real change in ownership and takes the transactions out of the reorganization provisions of the Act.4 If the exemption provisions are made applicable to such transactions, the incidence of taxation is not postponed but lost.
For these reasons I must concur in the views expressed by the United States Board of Tax Appeals in Huntzinger v. Commissioner, 46 B.T.A. 869, despite the fact that this decision was overruled by that of the United States Circuit Court of Appeals for the Tenth Circuit in Commissioner v. Huntzinger, 137 F.2d 128.
Assuming that the acquisition of the bridge property by the petitioner was within the' purview of Section 112(b) (5) of the Act, 26 U.S.C.A. Int.Rev.Acts, page 692, I must conclude, as did the Board, that the record does not disclose the fair market value of the bridge property at the time the interest of the bondholders of the old company as such matured into equitable interests in the properties of the old company which were conveyed to the petitioner. There is in fact no evidence which would support a finding of fair market value for the bridge property. In view of this fact there can be no point in discussing other contentions made by the petitioner.

 See the letter of February 12, 1934, written by the Secretary of the Treasury to Chairman Doughton of the Ways and Means Committee of the House of Representatives in respect to the bill pending before Congress (Cong. Rec. Vol. 78, Part. 3, p. 2512) in which he stated: “The Treasury regards it as desirable that business readjustments be permitted without tax consequences in cases where the stockholders in the enterprise are retaining their interests without the receipt of cash and the essential of continuity of the business is being preserved.”

 Clause (A) of Section 112(i) (1) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Acts, page 379, reads as follows:
“(A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), * *

 Clause (B) of section 112(g) (1) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 695, reads as follows:
“(B) the acquisition by one corporation in exchange solely for all or a part of its voting stock: of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation, * *

 See Paul, Studies in Federal Taxation, Third Series, p. 5, “ * * * the legislative intent in the reorganization provisions is to permit nothing more than a postponement of tax incidence to some future time when there is more than a ‘mere change in the form of ownership.’ ”