Court Opinion

ID: 9459103
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:10:42.147823+00
Date Added: 2024-06-11T17:36:01.109681
License: Public Domain

HILL, Circuit Judge
(dissenting).
I am compelled to respectfully dissent from the majority opinion. My colleagues, in rejecting certain cases, in my opinion have done so on the basis of a rule of law gleaned entirely out of context when viewed with other cases in which this same problem is confronted.
The majority reject Erie Lackawanna Railroad Company v. United States, 422 F.2d 425, 190 Ct.Cl. 682 (1970), and Missouri Pacific Railroad Company v. United States, 427 F.2d 727, 192 Ct.Cl. 318 (1970), modified, 433 F.2d 1324, 193 Ct.Cl. 257 (1970), cert. denied, 402 U.S. 944, 91 S.Ct. 1618, 29 L.Ed.2d 112, on the basis that those eases “are based on an erroneous premise, namely, that the question is not whether there was a debenture discount which served the purpose of stated interest, but whether there was a loss suffered.” I agree with the majority to the extent that loss is not synonymous with discount, but rather that discount “serves ‘the same function as stated interest’ and ‘represents a part of the cost of the borrowed capital.’ ” I must conclude, however, the concept of loss as used in those cases is correct when read in context with other cases.
In St. Louis-San Francisco Railway v. United States, 444 F.2d 1102, 1106, 195 Ct.Cl. 343 (1971), cert. denied, 404 U.S. 1017, 92 S.Ct. 678, 30 L.Ed.2d 665, the court there rejected any discount in either of two exchanges on the basis “that there was an exchange of equals.” In analyzing its decision in Erie Lackawanna, the court stated discount was not allowed in that case because “equivalents had been exchanged and no discount could be said to arise.” When loss is thus analyzed in the context of whether there was a disparity in values in an exchange, those cases rejected by the majority are clearly authoritative.
A further example of application of this “equivalency of exchange” formula is provided in Cities Service Company v. United States, 316 F.Supp. 61 (S.D.N. Y.1970). In that case there was a disparity in values in an exchange of de*808bentures for preferred stock due to the higher value of the debentures being offered in exchange. The court there allowed discount measured by the amount of that disparity. That excess represented the true additional consideration which the company was required to pay in retiring its outstanding preferred stock.
The cases cited applying the equivalency of exchange formula have uniformly held that where the corporation is retiring its own outstanding bonds or stock in an exchange transaction, the value to be ascribed those outstanding bonds or stock shares is the value originally received by the corporation in exchange for that outstanding obligation. I am not persuaded that the cases cited in the majority opinion require fair market value to be ascribed the outstanding obligations, as those cases are distinguishable. Both Atchison, Topeka and Sante Fe Railway Co. v. United States, 448 F.2d 147 (10th Cir. 1971), and American Smelting & Refining Co. v. United States, 130 F.2d 883 (3d Cir. 1942), involved corporations exchanging their debt obligations for the outstanding obligations of another corporation. In both cases, the corporation assuming the outstanding obligations was not the corporation which had originally received the consideration for those obligations. This distinction was noted in Erie Lackawanna, supra, and remains viable today, although apparently modified to the extent that the value of outstanding obligations of a subsidiary, when assumed by the parent corporation, is the consideration originally received by the subsidiary rather than the market value of the outstanding obligation.1 Market value is therefore relevant only when the assuming corporation is other than the corporation which originally issued the obligation.
I would note also that Southern Fertilizer & Chemical Co. v. Edwards, 167 F.Supp. 879 (M.D.Ga.1955), and Industrial Development Corp. v. United States in 51 A.F.T.R. 1514, 56-2 U.S.T.C. ¶ 10,066, on which the majority rely, contain only findings of fact and conclusions of law with no detailed discussion of the question. I therefore, as did the court in Erie Lackawanna, reject those cases as authoritative. I likewise distinguish Montana Power Company v. United States, 232 F.2d 541 (3d Cir. 1955), cert. denied, 352 U.S. 843, 77 S.Ct. 51, 1 L.Ed.2d 59, on the facts, as the issue presented there related to proof of value of property originally exchanged for the corporate obligation. We are here confronted with an exchange of a subsequent corporate obligation for a prior obligation.
My close reading of the cases reveals a formula to be followed when a corporation issues its debt obligation in exchange for its own prior outstanding obligation. In applying this formula, the value assigned the outstanding obligation is the consideration received by the corporation when originally issued. Any discount, therefore, is dependent on a showing of disparity in values reflected by the higher value of corporate debt obligation given in exchange. If there is no disparity in value, that is, if there is an equivalency in the exchange, no discount arises. The facts here clearly show only equivalent exchanges. I would, therefore, affirm the decision of the Tax Court.

. See Missouri Pac. R.R. Co. v. United States, 427 F.2d 727, 192 Ct.Cl. 318 (1970), modified, 433 F.2d 1324, 193 Ct.Cl. 257 (1970), cert. denied, 402 U.S. 944, 91 S.Ct. 1618, 29 L.Ed.2d 112.