Standard Coal, Inc. v. Commissioner

Standard Coal, Incorporated, a Corporation, Petitioner, et al., 1 v. Commissioner of Internal Revenue, Respondent Standard Coal, Inc. v. Commissioner Docket No. 28323 United States Tax Court 20 T.C. 208; 1953 U.S. Tax Ct. LEXIS 179; April 29, 1953, Promulgated *179 Decision will be entered under Rule 50. Property of insolvent predecessor acquired at foreclosure sale by petitioner, the stockholders of which were majority of predecessor's bondholders, held, on facts, transferred "to effectuate a plan of reorganization approved by the court" within the meaning of section 112 (b) (10), Internal Revenue Code, so as to permit use of predecessor's basis for depreciation under section 113 (a) (22), Internal Revenue Code. Bayley Kohlmeier, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. Opper, Judge. OPPER *208 Respondent determined a deficiency of $ 11,206.17 in petitioner's income tax for the year 1946. Petitioner does not challenge the adjustments upon which respondent based his determination of deficiency, but alleges a right to an offsetting increase in depreciation allowance*180 for certain assets beyond the amount claimed in its 1946 return. The sole issue, as presented by petitioner, is: Whether the transaction in which Standard Coal, Incorporated, acquired the properties and business of Standard Coal Company complied with the provisions and requirements of Section 112 (b) (10) of the Internal Revenue Code * * * so that under the provisions of Section 113 (a) (22) of the Internal Revenue Code the basis of said properties in the hands of Standard Coal, Incorporated, is the same as it would be in the hands of Standard Coal Company. FINDINGS OF FACT. The facts have been stipulated and are found accordingly. Petitioner is a corporation organized under the laws of the State of Nevada. Its corporate income tax return for the year in controversy was filed on the accrual basis with the collector for the district of Utah in Salt Lake City, where it maintained its business office. A certificate of dissolution was filed on petitioner's behalf with the Secretary of State for the State of Nevada on November 1, 1949. Under the laws of Nevada, petitioner remains a body corporate for purposes of maintaining actions and winding up its affairs. Petitioner's directors*181 are its trustees under Nevada law with full power to maintain actions on its behalf. During the entire year 1946, petitioner was engaged in the business of mining and selling coal. The mining properties and most of the *209 improvements, fixtures, machinery, and equipment used in connection therewith had formerly belonged to Standard Coal Company, hereinafter called the Company, and were acquired by petitioner in November 1939 at a foreclosure sale held pursuant to the order of the United States District Court for the District of Utah, Southern Division, in a foreclosure proceeding instituted by the trustees of a trust indenture and chattel mortgage held as security for bonds issued by the Company. Most of the improvements, furniture, fixtures, machinery, and equipment acquired by petitioner in 1939 at the foreclosure sale was still owned and used by petitioner in 1946. The Company was a corporation organized under the laws of the State of Utah and during the year 1939 and prior thereto was engaged in the business of mining coal in Carbon County, Utah. On July 1, 1929, the Company executed and delivered a trust indenture whereby all of the property of the Company, including*182 trade names and good will, was transferred to Bank of America of California, a banking corporation, and H. H. Ashley as trustees to secure First Mortgage Sinking Fund, 6 1/2 per cent Gold Bonds in the amount of $ 600,000 issued by the Company. On November 30, 1930, Bank of America National Trust and Savings Association became a trustee under the above-described trust indenture as successor to Bank of America of California. On August 15, 1931, H. H. Ashley resigned as trustee under the trust indenture and W. R. Williams was appointed and became successor trustee on November 9, 1931. On April 28, 1934, the Company executed and delivered to the trustees a supplemental trust indenture as additional security for the bonds. On February 11, 1935, the Company executed and delivered to the trustees a chattel mortgage of all the personal property of the Company as additional security for the bonds. In 1939 the Company was in default in the payment of interest due on its outstanding bonds, was in default in the payment of taxes to the State of Utah and to the County of Carbon, and was in an insolvent condition. The Company had bonds outstanding in the amount of $ 421,500. During 1939 Spring*183 Canyon Coal Company, a corporation organized under the laws of Utah and the owner of bonds of the Company, requested the trustees to commence proceedings for the foreclosure of the trust indenture and chattel mortgage. The request for foreclosure contained the following: In this connection you are advised that the undersigned intends to bid at such foreclosure sale. Spring Canyon Coal Company does not desire or intend thereby to be adverse to such other bondholders as may desire to participate with Spring Canyon Coal Company in the making of such bid, and Spring Canyon Coal Company will allow such bondholders to join with it on condition that they transfer to Spring Canyon Coal Company their bonds for such purpose not less than five (5) days before the time fixed for the sale, and on the further condition that the *210 interest of such bondholder be subordinate to any claims of Spring Canyon Coal Company for reimbursement of funds bona fide and in good faith advanced by it for the care and preservation of the mortgaged property or in the discharge or payment of prior liens or encumbrances, including taxes, court costs, trustees' fees and attorneys' fees. On August 4, 1939, *184 the trustees filed a complaint against the Company in the District Court of the United States for the District of Utah for the foreclosure of the trust indenture and chattel mortgage. On or about August 14, 1939, the trustees mailed to each of the holders of bonds of the Company a notice of the request for foreclosure. In the notice to the bondholders the trustees advised them that an action to foreclose the trust indenture had been filed on August 4, 1939, and quoted in full all but the first sentence of the portion of the request for foreclosure set forth above. On or about September 5, 1939, the Company, the defendant in the action, filed its answer to the complaint wherein it admitted the allegations in the complaint and alleged that it was unable to remedy the defaults. In March or April of 1939, the Company stopped the operation in its mines. In order to protect and preserve the properties, it was necessary to provide watchmen to operate pumps and ventilation equipment. Upon the failure of the trustees and other bondholders to take steps to protect and preserve the property, Spring Canyon Coal Company made arrangements through the trustees under which it undertook to protect*185 and preserve the properties at its expense but with the right to reimbursement for these expenses prior to the claims of bondholders. During the period from June 1939 to September 1939, pursuant to the arrangement, Spring Canyon Coal Company made expenditures for the protection and preservation of the properties in the amount of $ 8,366.72. Early in 1939 two actions were commenced by creditors of the Company to repossess certain mining equipment subject to conditional sales contracts or chattel mortgages. Under an arrangement with the trustees, Spring Canyon Coal Company made payments to these creditors in the amount of $ 5,598.88. While the foreclosure proceeding was pending, negotiations were carried on with the representatives of the State of Utah and the County of Carbon, with regard to taxes assessed against Standard Coal Company and constituting a lien against its properties. An agreement was reached whereby the parties determined the amount of the taxes which constituted a lien against the properties, prior to the lien of the bondholders, and the State of Utah and the County of Carbon agreed to postpone action to enforce the immediate collection of taxes or the sale of the*186 properties and allow payment thereof in installments over an extended period of time if the purchaser of *211 the properties at the foreclosure sale assumed liability for the taxes. At the hearing before the United States District Court on September 26, 1939, the State of Utah and the County of Carbon filed complaints in intervention; the trustees filed answers thereto and the parties filed a stipulation setting forth the agreement with regard to the taxes and the manner and time for payment thereof. On September 26, 1939, a hearing in the foreclosure proceeding was held in the United States District Court. At the hearing the court was fully advised of the actions which had been taken theretofore by the trustees and by Spring Canyon Coal Company as the holder of the majority of the outstanding bonds. The court was advised of the negotiations with regard to the taxes and of the stipulation for the payment of the taxes over an extended period. The court was advised of the actions which had been taken to protect and preserve the properties involved. The court was advised that it was planned to organize a new corporation which would issue common stock for the bonds held by Spring*187 Canyon Coal Company and all other bondholders who wished to exchange their bonds for stock and that the new corporation would bid for the property at the foreclosure sale. The court was advised that all bondholders had been offered the right to join in the organization of the new company by depositing their bonds in exchange for stock of the new company. The court was requested to order the property sold without right of redemption and subject to the taxes and the agreement for the payment thereof. The court inquired into the value of the bonds and expressed concern for the protection of the interests of minority bondholders who had not joined in the proceeding. At the conclusion of the hearing, the court agreed to order the property sold as one parcel and without right of redemption, on condition that a minimum price for the property would guarantee to the minority bondholders at least 10 cents on the dollar of the principal amount of their bonds. On October 2, 1939, the District Court made and entered its findings, conclusions, and decree in the foreclosure proceeding. The court concluded that the trust indentures and chattel mortgage constituted a first lien upon all of the*188 property of the Company, subject only to the taxes and assessments enumerated in the findings and ordered the properties sold in one single lot or parcel as an entirety and without right of redemption. The court also ordered that, "The United States Marshal shall not accept any bid which does not equal $ 70,551.14, together with the expenses of sale, including cost of advertising, and in addition thereto, either (a) includes an additional amount equal to the taxes as set out in Article XXII hereof, or (b) contains an agreement to assume and pay the taxes in accordance *212 with the alternative provision contained in Article XXII hereof." The court then incorporated as article XXII of the decree the provisions for the payment of taxes which had been negotiated and stipulated by the trustees and the tax authorities. The minimum price fixed by the court was the amount necessary to pay the claim of Spring Canyon Coal Company for advances for the protection of the properties which were allowed in the amount of $ 13,965.60, the trustees' fees of $ 4,435.54, the attorneys' fees of $ 10,000, and leave $ 42,150 to be applied on the outstanding bonds having a face value of $ 421,500, *189 which amounted to 10 cents on the dollar of the face value of the bonds. On October 17, 1939, petitioner, Standard Coal, Incorporated, was organized under the laws of the State of Nevada to carry on the business of mining, preparation for market, transportation and sale of coal, coal products, and other minerals incidentally developed. On or about October 20, 1939, Spring Canyon Coal Company sent a letter to all the other bondholders of Standard Coal Company advising them of the organization of petitioner and further advising them that petitioner would issue its stock at par ($ 100) for bonds of Standard Coal Company at the ratio of 15 cents on the dollar or any higher distributive value fixed by the court. On October 31, 1939, Spring Canyon Coal Company assigned and delivered bonds of the Company having a face value of $ 50,000 to petitioner to be used by petitioner as a deposit in connection with its bid at the foreclosure sale. On November 3, 1939, pursuant to the decree of the United States District Court, all the properties of the Company were offered for sale by the United States marshal subject to the conditions set forth in the decree of the District Court. At the sale petitioner*190 made the highest and best bid for the property and the property was sold to petitioner for the upset price of $ 70,551.14, plus the costs of sale in the amount of $ 425.72. On November 6, 1939, the sale was confirmed by the District Court. On or about November 6, 1939, petitioner issued common stock having a par value of $ 95,000 to Spring Canyon Coal Company, in consideration of the payment of $ 18,425.78 in cash and the transfer and assignment to petitioner of bonds of the Company having a face value of $ 304,000, the judgment against the Company in the amount of $ 13,965.60 and claims for reimbursement of advances and loans to or for the benefit of the Company in the amount of $ 1,608.62. At the same time, petitioner issued common stock having a par value of $ 1,000 to other bondholders of the Company in exchange for bonds of the Company having a face value of $ 5,000. On or about November 6, 1939, petitioner delivered its promissory note in payment of the attorneys' fees in the amount of $ 10,000 and *213 paid the trustees' fees and expenses in the amount of $ 4,435.54 allowed by the United States District Court in the foreclosure proceeding. On or about November 6, 1939, *191 petitioner made payment of the bid price for the properties of Standard Coal Company by delivering to the United States marshal the following: Cash $ 11,450.00 First mortgage bonds having a face value of $ 307,000.00 at 10 cents on the dollar 30,700.00 Judgment claims of Spring Canyon Coal Company at face value 13,965.60 Receipt for payment of attorneys' fees 10,000.00 Receipt for payment of trustees' fees and expenses 4,435.54 Total $ 70,551.14 On or about November 6, 1939, all of the properties of the Company were transferred and delivered to petitioner by the United States marshal. Petitioner took immediate possession of the properties and continued to own and operate the properties at all times from and after November 6, 1939, to and including the entire year 1946. OPINION. The amount of petitioner's claimed depreciation deductions gives rise to the sole present controversy which is whether under section 113 (a) (22) petitioner's basis depends upon that of its predecessor because the property was acquired upon a transfer to which section 112 (b) (10), Internal Revenue Code, 2 applies. *192 That there existed a "plan," contrary to respondent's first contention, appears to us manifest from the history of the situation. Webster's second definition of the word is a "method or scheme of action, a way proposed to carry out a design * * *." Webster's International Dictionary, Second Edition. What was proposed to the trustee, to the supervising court, and to the bondholders was not only a foreclosure and sale but the expectation that the property would be *214 bid in by a majority of the bondholders in the name of the new corporation whose stock would be issued in exchange for the bonds. The "plan" was not required to be in writing, William H. Redfield, 34 B. T. A. 967, 973, and the fact that the original program was changed to conform to the court's requirements no more prevented it from being a plan than if any other procedural impediment had required the first plan to be subsequently altered. See C. T. Investment Co. v. Commissioner, (C. A. 8) 88 F. 2d 582; Jesse Lee Brown v. Heiner, (D. C. W. D. Penn.) 15 A. F. T. R. 899. Had the situation arisen while the Revenue*193 Act of 1932 was in effect, it would apparently have conformed to the then existing definition of a plan of "reorganization" under section 112 (g). Since the property was transferred on behalf of the bondholders of an insolvent corporation, and since their control had been effectively established by the institution of the foreclosure proceeding, the necessary continuity of interest was present. Palm Springs Holding Corp. v. Commissioner, 315 U.S. 185; cf. Coon Run Fuel Co., 20 T. C. 122; Harbor Building Trust, 16 T. C. 1321, 1331. There was, however, admittedly an absence of the "stock for stock" qualification of the 1934 Act. Helvering v. Southwest Consolidated Corp., 315 U.S. 194. And were it not for the provisions of section 112 (b) (10), that could prove fatal here as it did in that case. But the primary purpose of the amendments enacted in 1943 and incorporated in that section was to overcome the effects of the Supreme Court decisions in "the family of financial readjustments" intended to be included in the reorganization provisions. Southland Ice Co., 5 T. C. 842, 848.*194 It remains to be determined whether the technical requirements of section 112 (b) (10) have been complied with. We think they have. The program which we view as the "plan" was considered in its entirety by the court having jurisdiction in the foreclosure proceeding. These facts are uncontested and we have, of course, so found. Provision for the nonassenting bondholders in the original plan was unacceptable to the court and in order to obtain its approval, the plan was changed to meet its minimum requirements. The execution of the decree of foreclosure and sale resulting were at least the equivalent of the court's approval of the plan as modified. See Weiner, "Conflicting Functions of the Upset Price," 27 Col. L. Rev. 132, 151. And certainly no participant would have been free to violate the agreement to exchange the new corporation's stock for the insolvent company's bonds after the statement to the court had been made and the approval granted on that assumption. See In re Fuller Cleaning & Dyeing Co., (C. A. 6) 118 F. 2d 978. Nothing in the purpose of the legislation nor its legislative history seems to us *215 *195 to indicate that the proceedings, resulting in the submission and operation of the plan, fell short of that judicial supervision and approval which the legislature apparently substituted for the technical reorganization definitions previously contained within the exclusive scope of section 112 (g). It follows that on the present facts the substituted requirements of section 112 (b) (10) have been adequately satisfied. As to the final insistence on the part of respondent that any plan submitted to and approved by the court was violated by the actual events, it seems to us to suffice that like most other plans the possibility was envisaged that not all of the affected bondholders would elect to participate. Any deviation from the originally proposed amounts was neither substantial nor unequal. A smaller percentage of participants than that appearing here has been held to furnish an adequate continuity of interest, there being apparently no question that substantially all of the property of the defunct corporation was transferred to the new venture. Reilly Oil Co., 13 T. C. 919, affd. (C. A. 5) 189 F. 2d 332; see Southland Ice Co., supra.*196 This was not a situation like Mascot Stove Co. v. Commissioner, (C. A. 6) 120 F. 2d 153, Templeton's Jewelers, Inc. v. United States, (C. A. 6) 126 F. 2d 251, nor Chicago Stadium Corporation, 13 T. C. 889, the first two of which are expressly reaffirmed 3 notwithstanding provisions of section 112 (b) (10). As we said in Chicago Stadium Corporation, supra, the transfer to stockholders of a corporation in which all of the equity had been eliminated demonstrated that continuity of interest was lacking and that the situation was equivalent to a purchase for cash by those having no remaining interest in the old corporation. And for similar reasons, the provisions of section 112(b) (10) were held to be inapplicable in Chicago Stadium Corporation, supra. *197 Concluding as we do that here the bondholders of the old corporation had become the effective owners of its property, Palm Springs Holding Corp. v. Commissioner, supra; that under a plan of reorganization approved by the court having jurisdiction substantially all of the corporation's property was transferred to a new corporation of which a large majority of such bondholders were in complete control, we view the present situation as one in which the ameliorative provisions of section 112 (b) (10) were intended to apply and in which, as a consequence, under section 113 (a) (22) petitioner's basis is to be treated as derived from that of its insolvent predecessor. Decision will be entered under Rule 50. Footnotes 1. Fred C. Talbot, P. L. Shields, Frank J. Foran, Albert E. Schwabacher, William E. White, Ira S. Lillick, James H. Schwabacher, H. V. Alward, Mortimer Fleishhacker, Jr., Albert E. Schwabacher, Jr., trustees for Standard Coal, Incorporated, a corporation in dissolution, and Spring Canyon Coal Company, a corporation.↩ 2. SEC. 112. RECOGNITION OF GAIN OR LOSS. * * * * (b) Exchanges Solely in Kind. -- * * * * (10) Gain or loss not recognized on reorganization of corporations in certain receivership and bankruptcy proceedings. -- No gain or loss shall be recognized if property of a corporation (other than a railroad corporation, as defined in section 77m of the National Bankruptcy Act, as amended) is transferred, in a taxable year of such corporation beginning after December 31, 1933, in pursuance of an order of the court having jurisdiction of such corporation -- (A) in a receivership, foreclosure, or similar proceeding, * * * * to another corporation organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, in exchange solely for stock or securities in such other corporation.↩ 3. S. Rept. No. 627, 78th Cong., 1st Sess., pp. 49-53; H. Rept. No. 1079, 78th Cong., 2d Sess., pp. 45-49.↩