Skouras v. Commissioner

GEORGE P. SKOURAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CHARLES P. SKOURAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SPYROS P. SKOURAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FLORENCE L. SKOURAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Skouras v. Commissioner Docket Nos. 103609, 103610, 103611, 103618. United States Board of Tax Appeals 45 B.T.A. 1024; 1941 BTA LEXIS 1035; December 17, 1941, Promulgated *1035 A transaction pursuant to a plan of reorganization under section 77-B of the Bankruptcy Act, whereby a corporation exchanged money for stock of a new or reorganized company and the noteholders exchanged convertible gold notes of the old company for stock and securities of the new company, held to constitute nontaxable exchanges within section 112(b)(5), Revenue Act of 1934. Louis M. Weber, Esq., for the petitioners. Henry C. Clark, Esq., for the respondent. HILL *1024 These proceedings were duly consolidated for hearing, and involve deficiencies in income tax determined by respondent as follows: Petitioner Docket No. Year Deficiency George P. Skouras 103609 [1935] $7,096.76 Charles P. Skouras 103610 [1935] 4,411.72 Spyros P. Skouras 103611 [1935] 14,866.19 Florence L. Skouras 103618 [1935] 3,391.14 The principal and basic issue for decision is whether or not the transaction described in our findings of fact constituted nontaxable transfers within section 112(b)(5), or a nontaxable reorganization within section 112(g)(1)(C) of the Revenue Act of 1934. 1 The *1025 facts were established by stipulation*1036 of the parties filed at the hearing, by oral testimony, and by documentary evidence. The stipulation is adopted in full as part of our findings of fact, and so much is set forth below as is deemed necessary to a discussion of the issues. *1037 FINDINGS OF FACT. Petitioner George P. Skouras is an individual residing at Rye, New York. Petitioner Spyros P. Skouras is an individual residing at Greenhaven, Mamaroneck, New York. Petitioner Charles P. Skouras is an individual residing at Beverly Hills, California. These three petitioners are members of the partnership of the Skouras Brothers Securities Co., formed January 1, 1929. George P. Skouras owns a 25 percent interest in the partnership, and each of the other two owns an interest of 37 1/2 percent. Petitioner Florence L. Skouras is not a member of the partnership, but is the wife of Charles P. Skouras and resides with her husband in California. Her interest in the within proceedings arises out of a community interest in her husband's property. The Skouras Brothers Securities Co. during the period from March 3, 1933, to February 24, 1934, acquired $600,000 principal amount of Fox Metropolitan Playhouses, Inc., 6 1/2 percent convertible gold notes maturing May 1, 1932, at an aggregate cost of $95,833.13. In a proceeding for the reorganization of Fox Metropolitan Playhouses, Inc., under section 77-B of the Bankruptcy Act, brought in the United States District*1038 Court for the Southern District of New York, a plan of reorganization dated as of February 1, 1935, was proposed and subsequently consummated, as a result of which the Skouras Brothers Securities Co. received, in exchange for each $1,000 principal amount of the convertible gold notes held by it, the following: (a) One 5 percent debenture in the principal amount of $550 of Metropolitan Playhouses, Inc., (b) four shares of class B stock of Metropolitan Playhouses, Inc., and (c) $200 in cash. These securities are still owned by the Skouras Brothers Securities Co. Fox Metropolitan Playhouses, Inc., was organized under the laws of New York on or about October 1, 1928, and all of its issued and outstanding stock was at all times owned by the Fox Theatres Corporation, a New York corporation organized in 1925 and engaged in owning and operating motion picture theatres. Fox Metropolitan Playhouses, Inc., acquired leaseholds and fee titles to approximately 146 theatre properties, of which 113 were located within a 60-mile radius of New York City. And in or about May 1929 this corporation issued $13,000,000 principal amount of 6 1/2 percent gold notes convertible into $13,000,000 6 1/2 percent*1039 sinking *1026 fund gold debentures maturing May 1, 1932, and secured by a mortgage covering the theatre properties acquired by it, above mentioned. About November 1931 Fox Metropolitan Playhouses defaulted in the payment of interest due on the convertible gold notes and debentures then outstanding in the principal amount of $12,460,700. A noteholders' protective committee was organized under an agreement dated as of October 29, 1931. On May 1, 1932, the issue of 6 1/2 percent convertible gold notes and debentures matured, and Fox Metropolitan Playhouses, Inc., defaulted in payment thereof. By order dated June 6, 1932, in a receivership action commenced in the United States District Court for the Southern District of New York, the Irving Trust Co. was appointed temporary receiver in equity for Fox Metropolitan Playhouses, Inc., and by order dated June 7, 1932, the same trust company was also appointed receiver in a certain foreclosure action against the same corporation and in the same court. The trust company was appointed permanent receiver by order dated July 18, 1932, and receivership was continued to on or about August 18, 1934, on which latter date the Irving Trust*1040 Co. was appointed temporary trustee in a bankruptcy proceeding instituted for the purpose of bringing Fox Metropolitan Playhouses, Inc., under the provisions of section 77-B of the Bankruptcy Act. By an order dated September 14, 1934, the trust company was appointed permanent trustee of the debtor corporation in the bankruptcy proceeding. In or about March 1935 Milton C. Weisman, as receiver in equity of the Fox Theatres Corporation (a creditor of Fox Metropolitan Playhouses, Inc.), presented for filing a petition to which was attached a plan of reorganization of Fox Metropolitan Playhouses, Inc. The plan of reorganization provided, among other things, that the plan should be submitted to the court for its confirmation under the provisions of section 77-B of the Bankruptcy Act and for supervision of the consummation of the plan; that upon confirmation a new company should be organized, with an authorized capital consisting of 282,444 shares of class A stock and 49,844 shares of class B stock, both of no par value, and the new company should issue secured 5 percent debentures due in 1945 in the amount of $6,853,385. The class A stock was to be issued one-half thereof to the receiver*1041 of the Fox Theatres Corporation and one-half to United Artists Theatre Circuit, Inc. (hereinafter called United Artists). All of the class B stock was to be issued to the noteholders of the old corporation. Upon consummation of the plan, the noteholders were to receive for each $1,000 principal amount of notes, together with accumulated interest: $200 in cash, $550 principal amount of new debentures, due 1945, and four shares of class B stock, each entitling the holder to *1027 receive a maximum of $62.50 per share, with interest at 5 percent per annum from February 1, 1935, out of any dividends paid by the new company on the class B stock. The class A and class B stocks were each entitled to cumulative voting, subject to the limitation that the holders of class B stock, voting as a class, should have the continuing right to elect three of the nine directors of the new company until 80 percent of the debentures had been retired, two directors thereafter until all the debentures had been paid, and one director thereafter until the class B stock had been extinguished. It was specifically provided that the class B stock should have no other voting power. The class B stock*1042 was to be subject to redemption at the option of the new company in whole at any time or in part from time to time at the price of $62.50 per share, with certain provisions as to interest. By an order of the court dated June 3, 1935, it was decreed that the debtor corporation was insolvent and acceptance of the plan of reorganization by its stockholders was not requisite to confirmation, and, after hearings, the plan was duly confirmed by order of July 2, 1935. On or about August 26, 1935, an order of the court was entered directing the carrying out of the plan of reorganization and providing, among other things, for the transfer of the property and assets of the old corporation (Fox Metropolitan Playhouses, Inc.) to the new corporation (Metropolitan Playhouses, Inc.) to be organized pursuant to such plan. Milton C. Weisman, as receiver in equity of Fox Theatres Corporation, entered into an agreement with United Artists dated March 25, 1935, whereby United Artists agreed to purchase 50 percent of the class A stock of the new corporation for $425,000 cash upon consummation of the plan of reorganization and to advance an additional $275,000 cash with an option granted to Weisman, *1043 as receiver of Fox Theatres Corporation, to repay to United Artists the $275,000 so advanced within 60 days and thereupon, as such receiver, to be entitled to the immediate possession and ownership of the remaining 50 percent of the class A stock, or, in the event he elected not to repay such advance, to require United Artists to pay $150,000 in addition to the $275,000 previously advanced as the purchase price to the latter of the remaining 50 percent of the class A stock. Attached to this agreement as Exhibit A thereof was an escrow agreement whereby it was provided that the second 50 percent of the class A stock should be held by the City Bank Farmers Trust Co. in escrow to insure that such portion of the stock would be disposed of as provided in the option agreement. Weisman agreed that in the event he did not require United Artists to purchase the escrowed stock, but acquired the stock himself by repayment of the $275,000 advance, then United Artists should have the *1028 privilege of purchasing the stock at a stipulated price before it might be sold or disposed of otherwise. The certificate representing the class A stock held in escrow bore upon its face the following*1044 legend: This stock is held subject to all of the limitations and restrictions upon sale, transfer, alienation, hypothecation, pledge or other disposal, conferring a preemptive right of purchase as contained in paragraph 10 of a certain agreement entered into by and between Milton C. Weisman, as Receiver in Equity of Fox Theatres Corporation, and United Artists Theatre Circuit, Inc., which agreement is dated the 25th day of March, 1935, as amended and modified by agreement dated June 14th, 1935. Weisman did not exercise his option to repay the $275,000 and therefore never came into possession or ownership of the escrowed stock. Metropolitan Playhouses, Inc., (the new corporation) was organized under the laws of the State of New York on August 28, 1935. Pursuant to the order of the court in the bankruptcy proceeding, dated August 26, 1935, all of the properties of Fox Metropolitan Playhouses, Inc., and the stock of its subsidiaries, were transferred to the new corporation. The bankruptcy proceeding was closed by final order dated June 15, 1936. The properties transferred to the new corporation, other than certain unmortgaged assets, were subject to the lien of a mortgage*1045 dated as of May 1, 1929, which was modified by supplemental mortgage dated as of February 1, 1935, as provided in the plan of reorganization, to secure the 5 percent debenture notes or bonds to be issued by the new corporation. Pursuant to the plan of reorganization, all of the class A stock of the new corporation was delivered to Milton C. Weisman, receiver of Fox Theatres Corporation, to be by him disposed of or held as provided in the contract of March 25, 1935, between Weisman and United Artists, and all of the class B stock and the 5 percent debentures of the new company were delivered to the noteholders. As the result of such distribution, the Skouras Brothers Securities Co. received (a) $330,000 principal amount of the 5 percent debentures, (b) 2,400 shares of class B stock, and (c) $120,000 in cash. September 3, 1935, was the closing date for carrying out the provisions of the plan of reorganization. On that date the new company acquired all the assets of the old corporation, and it commenced functioning immediately thereafter. At the closing, certificates for 141,222 shares of class A stock of the new company were issued in the name of United Artists and certificates*1046 for a like number of shares were issued in the name of Milton C. Weisman, as receiver of Fox Theatres Corporation, but because of the contract of March 25, 1935, above referred to, Weisman never at any time held unrestricted title to any class A stock. *1029 The 5 percent debentures and certificates for class B stock of the new company became available for distribution to the holders of the 6 1/2 percent convertible gold notes of the old company on and after September 25, 1935. On that date, the fair market value of the 5 percent debentures of the new company was 67 1/2, and the fair market value of the class B stock was 6 1/4. OPINION. HILL: Prior to 1935 the Skouras Brothers Securities Co., a partnership of which the first three petitioners herein were members, acquired $600,000 principal amount of 6 1/2 percent convertible gold notes of Fox Metropolitan Playhouses, Inc., at a cost of $95,833.13. During the taxable year 1935, as a result of the reorganization of the corporation under section 77-B of the Bankruptcy Act, the partnership realized a gain upon the exchange of its convertible gold notes for certain securities of the new corporation and $120,000 in cash. *1047 Petitioners reported in their income tax returns their respective distributable shares of such gain to the extent only of the cash received by the partnership pursuant to section 112(c) of the Revenue Act of 1934, on the theory that the 77-B reorganization resulted in nontaxable transfers within the meaning of section 112(b)(5), or was a nontaxable reorganization within the meaning of section 112(g)(1)(C) of the 1934 Act, quoted supra. Upon audit of petitioners' returns, respondent held that the transaction constituted neither nontaxable exchanges nor a reorganization within the statute and that the entire amount of gain realized was subject to tax, and he computed the deficiencies upon the basis of a value of 67 1/2 for the new notes exchanged for the old, and a value of 6 1/4 for the class B stock. These valuations were called in question by petitioners, but from a careful consideration of all the evidence, we are unable to conclude that respondent's bases do not reflect fair market value. We have, therefore, found as a fact that at the time of the exchange the securities had a fair market value in the amounts stated, and on this point we find for respondent. The principal*1048 issue for decision is whether or not, under the facts set out hereinabove, the transaction constituted nontaxable transfers or a reorganization, within the purview of the taxing statute. It is not necessary for a transaction to constitute a reorganization within section 112(g)(1) in order to be a nontaxable transfer within section 112(b)(5), but the same transaction may constitute both such transfer and reorganization. . To constitute a nontaxable transfer, it must appear that "property" was transferred to a corporation by one or more persons by prearrangement *1030 solely in exchange for stock or securities of the transferee corporation, and that immediately after such exchange the transferors collectively were in control of the corporation through ownership of not less than 80 percent of the voting and all other classes of stock (sec. 112(h)). Also, in the case of an exchange by two or more persons it must appear that the amount of stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. However, coownership of transferred property is not*1049 essential, and the several transfers need not be effected simultaneously if pursuant to a prior arrangement; nor is control of the new corporation required to be vested in the transferors in proportion to their interests in the property prior to the exchange; this latter requirement pertains only to the total value of stocks and securities received. ; cf. ; ; certiorari denied, , affirming . It is, furthermore, now well settled that money is "property" within the meaning of that term as used in section 112(b)(5). ; ; In the Halliburton case the court remarked: We think it is clear that the statute comprehends a situation such as presented in the instant case where certain persons transfer to a corporation certain property and property rights, other than money, while others transfer money*1050 only, and stock in the corporation is issued in exchange for such transfers. The facts of the present proceedings bring them squarely within the foregoing rules, which have been applied in many similar cases. Those facts, briefly summarized, show that Fox Metropolitan Playhouses, Inc., the old corporation, was insolvent and a reorganization proceeding under section 77-B of the Bankruptcy Act was duly instituted. A plan of reorganization was submitted to the court, and, in the order confirming the plan and directing that it be carried out, the court stated that the debtor corporation was insolvent and hence acceptance of the plan of reorganization by its stockholders was not requisite to confirmation. Pursuant to the plan as carried out, a new corporation, Metropolitan Playhouses, Inc., was organized, with an authorized capital stock consisting of class A and class B shares. The holders of the 6 1/2 percent convertible gold notes of the old corporation received, in exchange for each $1,000 principal amount of such notes, one 5 percent debenture in the principal amount of $550 and four shares of class B stock of the new corporation, plus $200 cash. The voting rights of the class*1051 A stock were subject only to the limited rights of the class B stockholders to elect not more than three of the nine directors of the new corporation. By direction of the bankruptcy court, the assets of the old corporation were transferred to the *1031 new, but neither the old corporation nor its sole stockholder, Fox Theatres Corporation, received any recognition in the reorganization. United Artists paid $425,000 cash for one-half of the class A stock and the other half of such stock was placed in escrow with the bank under an option agreement, which apparently finally resulted in the acquisition of the stock by United Artists. Thus, in any event, the noteholders of the old corporation transferred property (convertible gold notes) to the new corporation in exchange for stock and securities (all of the authorized and issued class B stock and 5 percent debentures), plus cash. The mortgaged assets of the old corporation were transferred by order of the court to the new corporation, and constituted the security behind the 5 percent debentures. United Artists transferred property (money) to the new corporation in exchange for 50 percent of the authorized class A stock, *1052 which was all of the issued and outstanding stock of that class. A certificate for the remainder of the authorized class A stock was from its incipiency in escrow under an option agreement which forestalled its delivery until and unless such option should be exercised. It appears, therefore, that immediately after consummation of the transaction, the transferors collectively were in control of the new corporation through ownership of 100 percent of its issued class A and class B stocks, which comprised the only two classes of stock authorized. The noteholders owned all of the equity in the properties of the old corporation, and it was those properties which gave the new corporation substance. Although the properties were not transferred to the new corporation directly by the bondholders, nevertheless they were transferred to the new corporation by order of the court solely for the benefit of the noteholders, and this circumstance, together with the fact that United Artists transferred money to the new corporation in exchange for stock, brings the transaction within section 112(b)(5), if the amounts of the securities received by the transferors were substantially in proportion*1053 to their respective interests in the properties prior to exchange, which latter point will be discussed below. In respect of the transfer of the mortgaged property of the old corporation to the new corporation under order of the court in the 77-B reorganization, the present proceedings are not distinguishable on the facts from . In that case it was held that the bondholders for whose benefit the transfer was ordered and made were transferors of the property within section 112(b)(5). The court in its opinion said: The holders of Industrial's bonds were entitled to a satisfaction of their indebtedness from the mortgaged property, or a statutory substitute therefor under § 77 B. They had acquired equitable rights in the property and were *1032 entitled to have it disposed of under a plan fair and equitable to them. * * * Since no equity remained in the properties for the preferred and common stockholders, the properties passed under the jurisdiction of the court empowered to make fair and equitable disposition thereof for the benefit of the bondholders. In the exercise of that jurisdiction the*1054 bankruptcy court ordered the equitable rights and interests of the bondholders in the properties to be transferred to the Colorado Corporation in exchange for stock and bonds of that corporation. Pursuant to the order, all of the assets of Industrial and the Colorado Company were transferred to the Colorado Corporation. In substance, Industrial's bondholders were the transferors. * * * Hence, the property was transferred to the Colorado Corporation solely in exchange for stock and securities of such corporation and immediately after the transfer the bondholders, the transferors, were in control of the Colorado Corporation, owning all of its stock, and no gain or loss should be recognized by reason of the provisions of § 112(b)(5). The only remaining question which merits consideration is whether or not the amount of securities received by each transferor was substantially in proportion to his interests in the property prior to the exchange. Petitioners on brief present an elaborate argument to demonstrate such proportionate interest, but their discussion involves analysis of a number of complex factors, including fair market values of stocks, securities, and assets extremely*1055 difficult to appraise. Without attempting a detailed analysis of such factors, we are convinced from the record that the statutory requirement on this point has been met. In respect of the money exchanged for class A stock by United Artists, corporation which theretofore had had no interest in the old company, it seems self-evident that the stock received in exchange eas substantially in proportion to the interest of United Artists in the money prior to such exchange. There is nothing in the record to suggest that the purchase of this stock by United Artists was at a price other than its fair value. In respect of the class B stock and 5 percent debentures received by the noteholders of the old corporation in exchange for the 6 1/2 percent convertible gold notes, it seems equally apparent that the new securities received in exchange were substantially in proportion to the interest of each in the old notes prior to the exchange, since each received, on the basis of $1,000 principal amount of the old notes, precisely the same amount of new securities and cash, and the mortgaged assets behind the old notes were transferred to the new company and constituted the security for the new*1056 debentures under the same mortgage lien. Furthermore, it appears that the plan of reorganization was worked out to the satisfaction of the various adverse and conflicting interests, each striving to drive the best possible bargain, and was consummated under the direction and with the approval of the bankruptcy court. *1033 We hold that the transaction in controversy constituted transfers within section 112(b)(5), supra, and hence did not give rise to gain recognizable for tax purposes in excess of the cash received by the transferor noteholders. The respective shares of such cash distributable to petitioners by the partnership were reported in their returns, and are not involved here. This conclusion renders it unnecessary to consider whether or not the transaction also was a nontaxable reorganization within the meaning of section 112(g)(1), supra. On the issue submitted for decision, respondent's determinations are disapproved. Decisions will be entered under Rule 50. Footnotes 1. SEC. 112. RECOGNITION OF GAIN OR LOSS. (a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of gain or loss * * * shall be recognized, except as hereinafter provided in this section. (b) EXCHANGES SOLELY IN KIND. - * * * (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. * * * (g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 - (1) The term "reorganization" means * * * (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. * * * ↩