Court Opinion

ID: 6912110
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:26:41.716946+00
Date Added: 2024-06-11T16:06:32.332569
License: Public Domain

On Petition for Rehearing
Before SANBORN, JOHNSEN, and VOGEL, Circuit Judges.
JOHNSEN, Circuit Judge.
Some contentions were made in the Government’s original brief, which we felt were without merit, and which, in the interest of brevity, we disposed of with a statement, in relation to the views we had expressed, that “These conclusions leave no substance in the Government’s other contentions, sufficient to call for any lengthening of this opinion.”
On petition for rehearing, it appears that the Government earnestly believes that we either misunderstood or mis-evaluated one, in particular, of these contentions, and that, had we engaged in a discussion of it, we would have been compelled to reach a different result in the case.
The contention was to the effect that no tax-free basis for property acquired by a corporation in connection with a reorganization could possibly have been intended' to be established by -the Revenue Act of 1918, 40 Stat. 1057, because there was no provision in the Act allowing a non-recognition of gain or loss to the transferor; that, in the absence of such a provision, the old .corporation in the situation here involved necessarily had — so the Government’s brief said— “sustained a loss equal to the difference between its adjusted cost basis for the properties ($2,354,008.98) and the $225,-000 its noteholders received”; and that the latter amount (which was paid by the Contributors Committee to the Note-holders Committee for an assignment of the collateral trust notes) therefore would in any event have had to constitute the new corporation’s basis for the property.
We were of the view, as our opinion indicated, that Congress had intended, in the Revenue Act of 1918, to open the door to a corporation’s use, for property acquired by it in connection with a reorganization, of the same basis which the property had in the hands of its trans-feror. The Act was not as perfect or complete as it might have been, in that it left a number of things to implication instead of making them the subject of direct expression. Thus, as we observed, there was no definition of the term “reorganization”, such as Congress specifically engaged in as to later Revenue Acts, but it' was our conclusion that, in not having included a special definition, Con-gréss had “left the term, for purposes of recognizing the status (under the 1918 Act), as a matter of general legal concept, in due relationship to the fact of a tax privilege being involved and to the need for a continuity of proprietary interest to exist, such as has judicially been held * * * to be a general requisite in any such situation.”
We could appropriately have added in the opinion that it seemed to us that Treasury Regulations 45, Articles 1567 and 1568, promulgated under the Revenue Act of 1918, had, at least in some measure, accepted such an underlying concept for the Act. And we might perhaps also relevantly have said that, in reaching the view that we did, we felt that it was not without significance that Congress had continuously since 1924, in according such a tax privilege as is involved to any reorganizations which should occur under the current Revenue Act which it was enacting, seen fit to make the privilege granted under each Act bear reference or relationship to the commencement of such a privilege by the 1918 Act, in its use and repeating in each Act .of the language, “property * * * acquired after December 31, 1917, by a corporation in connection with a reorganization”.
Any reading of the 1918 Act revealed, of course, that, in its pioneer according of this reorganization tax-privilege, Congress had not assumed to include a requirement, such as it has done in all Revenue Acts since 1924, that the trans-feror’s basis for property acquired by a corporation in connection with a reorganization should, in the hands of the transferee, be “increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer”. 26 U.S.C.A. § 113(a) (7). It seemed obvious to us that Congress might, if it chose, and could proper*917ly be regarded as having so done in not making that requirement in the 1918 Act, permit a transferee to take over a transferor’s basis for reorganization property, as of the time the transfer occurred, without regard to whether or not any loss would thereby result to or be entitled to be claimed by the transferor (here an insolvent railroad corporation, which presumably was thereafter dissolved) for its own tax purposes. In fact, it appeared to us that the Treasury Department had itself, from the implication of some of the language used in Treasury Regulations 45, Article 1568, at that time held this very view.
We stated in our opinion that we believed that “if Congress had intended the definition of ‘reorganization’ adopted in any subsequent Revenue Act to have application other than as a standard for reorganizations occurring under that particular Act, it would have so stated, or in some other manner have given compelling indication of such an intent * * Thus, Congress appeared to have in this manner done that very thing, we thought, when, among other things, it reached out, for the first time, by section 113(a) (12) and (16) of the Internal Revenue Code of 1939, 26 U.S.C.A., to extend to any property acquired in reorganization, back as far as February 28, 1913, (that date being before the Revenue Act of 1918 had application, and there having been no tax-free basis for such property, as a matter of reorganization, established by the preceding Revenue Acts 'of 1913, 1916 and 1917) a reorganization tax-basis, if it was able to qualify under the standards laid down by either of those sections, although such property had previously been without the right to an established basis of this nature under the standards or the lack of privilege in such Revenue Act as was in force at the time the reorganization occurred.
But beyond all this, and apart from it, we were unable to see how there could at all be any merit in or basis for the Government to argue, as a segment of its contention and as a composite of the result which it was seeking to have us reach on the general question, that the price paid to the holders of the collateral trust notes by the Contributors Committee, for a purchase and assignment of their securities and the rights incident thereto, would legally provide the basis for a loss deduction by the old corporation, after it lost its property by the foreclosure had upon the securities. The sale of their securities by the holders to the Contributors Committee could of course give rise to a deductible loss to the security holders personally, but we felt that it was hardly necessary to make any answer to a contention that a loss sustained by the holders of securities or stock in a corporation on a sale thereof would, if the purchasers thereafter made use of the securities to effect a reorganization of the corporation and a transfer of its property, give rise also to a right of deduction in favor of the corporation for any loss which the previous holder may have had from the sale made by them of their securities.
The rest of the Government’s petition for rehearing is a reargument of or disagreement with the conclusions reached by us in our opinion — principally upon the question of continuity of proprietary interest. This we feel there is no occasion for us further to discuss.
The petition for rehearing is denied.