Court Opinion

ID: 4497918
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:40.753632+00
Date Added: 2024-06-11T14:54:10.755272
License: Public Domain

Murdock,
dissenting: The only question considered .in the prevailing opinion is whether or not there was a reorganization. The opinion holds that there was a reorganization and then allows a deduction for depreciation computed upon the same basis as the predecessor corporation was entitled to use. The Commissioner allowed a deduction for depreciation based upon the cost of the properties to the petitioner and his determination can not be reversed unless, first, there was a reorganization and, second, no gain or loss to the predecessor corporation ’was recognized in the transaction whereby the assets passed out of its hands. That is, even if there was a statutory reorganization, the new corporation can not use the same basis which the old corporation was entitled to use unless there is some provision of section 113 which gives the new corporation the right to use that old basis. The prevailing opinion does not attempt to point out any such provision of section 113 but relies upon the stipulation of the parties. The parties, however, can not stipulate a matter of law. Here, all of the facts are revealed and a decision must be made as to whether the new corporation has a right to use the old basis.
The special provisions are contained in section 113 (b). Most of those provisions need no consideration. Paragraph 6 does not apply because this new corporation acquired the property by the issuance of its stock. Paragraph 8 has no application because it relates only to nontaxable exchanges under section 112 (b) (5) and there is no contention that there was a nontaxable exchange within section 112 (b) (5). Paragraph 7 is the only one which requires any particu*337lar consideration. It provides that the basis in the hands of the transferee shall be the same as it was in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon the transfer, provided that immediately after the transfer an interest or control in such property of 80 percentum or more remained in the same persons or any of them. If the reasoning of the prevailing opinion, that the creditors were in control of the old corporation prior to the transfer, is sound then the control required by this provision would exist, but if the stockholders of the old corporation were in control at that time, then this provision of the statute would not apply because the control did not remain in the same persons or any of them.
Even though the control existed, still, it is necessary to determine whether or not and to what extent the loss of the old corporation upon the assets was recognized for income tax purposes. This depends upon section 112, which provides in general that the entire gain or loss upon the disposition of .property is recognized and then makes certain exceptions. None of the exceptions applies to deny the old corporation its right to deduct its entire loss upon the disposition of its assets. Section 112 (b) (3), frequently mentioned in the majority opinion, has nothing whatever to do with the case. The only exception relating to corporations is that contained in section 112 (b) (4). It is that no gain or loss shall be recognized if a corporation, a party to a reorganization, exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation a party to the reorganization. Obviously that provision does not apply here because the old corporation did not exchange its property solely or partially for stock or securities in the new corporation. Its property was taken from it through a bankruptcy proceeding. Consequently, the entire loss of the old corporation upon the disposition of its properties was recognized. Finally, even if the new corporation were entitled to use the same basis as the old corporation, nevertheless that basis would have to be reduced by the loss of the old corporation upon the disposition of the property. The basis thus computed would be less than the basis used by the Commissioner in determining the deficiency. I am unable to find in the statute any justification for allowing this petitioner to use as its basis for depletion the same basis as the old corporation was entitled to use or any greater basis than the cost of the assets to it.
The foregoing discussion makes unnecessary a decision of whether or not there was a reorganization. However, I have serious doubts whether, in the light of the recent decision of the Supreme Court in Le Tulle v. Scofield, 308 U. S. 415, there was a reorganization within the following definition contained in section 112 (i) *338(1) (A) : “A merger or consolidation, (including the acquisition by one corporation of * * * substantially all the properties of another corporation).” A transaction, to constitute a reorganization under this provision, must resemble a merger or consolidation. Pinellas Ice & Cold Storage Co., 287 U. S. 462; Bus & Transport Securities Co. v. Helvering, 296 U. S. 391. The prevailing opinion fails to point out any resemblance. Only the stockholders of the old corporation had a proprietary interest or stake in the old corporation as a corporation. ' The creditors had no such interest. Le Tulle v. Scofield, supra. The creditors had to look to the assets alone for satisfaction of the debts due them. The prevailing opinion, relying upon the Kitselman case, reasons that those creditors, by reason of the bankruptcy, acquired “a status with respect to such assets comparable to that of a common stockholder” of the old corporation; they were akin to stockholders of the old corporation; they became stockholders of the new corporation; therefore, a continuing interest essential to a statutory reorganization existed in them. The Kitselman case was decided prior to the Le Tulle case. The Supreme Court, considering the same definition of a reorganization, pointed out in Le Tulle v. Scofield, supra, that the statute is not satisfied unless the transferor retains a substantial stake in the enterprise, and where the transferor receives only cash and bonds of the transferee, no' proprietary interest in the enterprise is retained because all bondholders are mere creditors, and creditors have no proprietary interest or stake in a corporar tion. If bonds of the transferee do not give to the holders any proprietary interest in the enterprise or proprietary stake within the purview of the statute, it is difficult to see how unsecured creditors of the transferor might be considered as having any proprietary interest or stake in the enterprise within the purview of the statute so that the essential continuing interest might be traced through them.
Steenhagen and Oppee agree with this dissent.