Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Evan A. Evans, Judge.
Before SPARKS, MAJOR, and KERNER, Circuit Judges.
This appeal was taken from an order of the District Court, entered in a reorganization proceeding under Section 77B of the Bankruptcy Act as amended, 11 U.S.C.A. § 207, which overruled the trustee's objections to the tax claim of the county collector of Cook County. The trustee objected to the tax claim on the theory that the assessments were so excessive as to be fraudulent. The collector moved to strike these objections on the ground that the court had no power to review the assessor's valuation in the absence of fraud. The court overruled the objections and allowed the claim.
The debtor is an Illinois corporation organized for the purpose of owning and operating a building in the Loop district of Chicago. The building, situated at 168 W. Adams street, is a modern 22-story structure with stores and shops on the ground floor, space designed for club purposes on the first six floors, and space designed for office purposes on the remining floors. Since 1934 the club portions of the building have been leased for hotel and office purposes.
Because the debtor had never earned sufficient income to meet operating expenses plus taxes, section 77B proceedings were started and a plan of reorganization finally approved, under which a new corporation, the "Midland Building Corporation," was organized to succeed the debtor.Under the plan approved by the court the bondholders and creditors of the debtor surrendered their claims and became stockholders in the successor corporation. Then the assets of the debtor were transferred to the successor, which took subject to the tax liability consisting of accrued and unpaid taxes from 1928 through 1937. The plan also provided that the court was to retain jurisdiction over the new corporation and its property until delinquent taxes were paid.
This appeal involves the validity of claims filed for general taxes from 1928 through 1937. The trustee objected to the claims on the ground that the tax assessments were grossly excessive and amounted to fraud, contending that the cash value of the debtor's property at a fair voluntary sale did not exceed $750,000. In particular, the objector maintained that the value "should be determined when no actual sales are available by capitalizing the net income," especially in the instant case where the operating income has never been sufficient to meet taxe and depreciation charges, and that this method of valuation would indicate a value not exceeding $750,000.
We note at this time that the capitalization of income method is usually given paramount consideration in utility cases. City of Detroit v. Detroit & Canada Tunnel Co., 6 Cir., 92 F.2d 833, 837; Parsons v. Detroit & Canada Tunnel Co., D.C., 15 F.Supp. 986, 997. However, in the assessment of real property, Parsons case, supra, 15 F.Supp. page 998, especially real property in the Loop district of Chicago, accepted standards of valuation proceed primarily on the basis that value cannot be determined by the income circumstance alone. In this connection it might be added that, since the property in question has operated at a loss since 1928, there are in fact no earnings to capitalize.
In addition, the objector reasoned that the assessor and Board of Appeals have continually refused "to fix a valuation based upon income," and that they have intentionally used a "fundamentally erroneous method," namely, the depreciated cost reporduction method. This procedure by the assessor and the Board of Appeals, so the objector states, has produced grossly excessive valuations in effect amounting to fraud. In this connection, the record, consisting of the objections and the motion to strike (which in effect admits the facts alleged in the objections), reveals some interesting data.
In 1928, 1929, and 1930 the assessor valued the debtor's property, which had just been built, around $3,220,000. In 1931 he reduced this value to around $2,400,000, while in 1932, 1933, and 1934 he decreased the value again and set it around $1,800,000 which, to use the language of the objector, represented "a general cut in the valuation of all properties." As we already know, in 1934, the debtor came within the jurisdiction of the court, and, in 1935, 1936, and 1937 the sum of $57,807.59 in taxes was saved, when complaints filed with the Board of Appeals received consideration.
Se we find that in 1935 and 1936 the value was reduced to $1,530,000 and in 1937 to $1,380,000, which means that from 1928 through 1937 continual adjustments in the value cut it from $3,220,000 to $1,380,000. In other words, during these years the assessor and the Board of Appeals in their discretion reduced the value of the debtor's property $1,840,000, a reduction of 42 percent. This 42 percent reduction would seem to indicate that the assessor considered among other things the changed business conditions of that period. In fact, the complaints filed with, and favorably considered by, the Board of appeals were premised on the logic that "income and expenses were not considered in determining the fair cash market value for tax purposes."
Section 64a provides that the court shall pass on the validity of taxes for the purpose of allowing or disallowing tax claims against the estate of the bankrupt. 11 U.S.C.A. § 104(a). In particular, this section authorizes the court to order the payment of "all taxes legally due and owing," and empowers it to determine the "amount or legality" of any tax which might be questioned.
We are convinced from our study of the matter, and the District Court so decided, that the court either operates under Section 64a by implication, 11 U.S.C.A. § 207(k), Cf. City of Springfield v. Hotel Charles Co., 1 cir., 84 F.2d 589, 591, or exercises the same power to pass upon similar tax claims from necessity. Settling the validity of tax claims in proceedings to reorganize corporate debtors is as necessary as in proceedings to liquidate corporate debtors, 11 U.S.C.A. § 207(k), or to liquidate individual bankrupts, 11 U.S.C.A. § 104(a).
Much uncertainty exists in the cases as to the nature and extent of the power thus conferred upon the courts by the Bankruptcy Act. Dickinson v. Riley, 8 Cir., 86 F.2d 385, 387; In re Gould Mfg. Co., D.C., 11 F.Supp. 644. But of one conclusion we are confident. We believe, as did the District Court, that the court does not have the power to revise taxes "legally due and owing," by reassessing the value of the property. We can not conceive, nor do we see the necessity for, a construction of the present ...