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Claridge Apartments Co. v. Commissioner of Internal Revenue

December 1, 1943

CLARIDGE APARTMENTS CO.
v.
COMMISSIONER OF INTERNAL REVENUE; COMMISSIONER OF INTERNAL REVENUE V. CLARIDGE APARTMENTS CO.



Petitions for Review of Decision of the Tax Court of the United States.

Author: Evans

Before EVANS and MINTON, Circuit Judges, and LINDLEY, District Judge.

EVANS, Circuit Judge.

This is a Federal income tax case wherein the chief issue arises out of the disputed basis for the depreciation of a large apartment building, acquired by taxpayer in 1935 in a Sec. 77B bankruptcy reorganization proceeding. 11 U.S.C.A. § 207. Corollary issues are:

(1) The applicability of Sec. 270 of the Chandler amendment to the Bankruptcy Act, 11 U.S.C.A. § 670, providing for a decrease of the predecessor's depreciation basis proportionate to a cancellation or reduction of indebtedness through a 77B reorganization. In other words, and to be more specific, taxpayer challenges the soundness of the Commissioner's holding that an exchange of stock for bonds constitutes a "cancellation or reduction" of the debt within Section 270.

(2) The possible retroactive effect of Sec. 270 to prior tax years in which years the tax has already been paid.

(3) The decrease of the depreciation base by the amount of interest liability allegedly forgiven in the reorganization.

(4) The propriety of the Tax Court's exclusion, from the base, of a substantial sum claimed to have been paid as commission to the entrepreneur of the property.

(5) The refusal of the Tax Court to permit deduction of certain expenses of upkeep of the property.

(6) A separate and distinct issue, arising out of taxpayer's challenge of evidentiary support of the Tax Court's finding as to the value of the property in 1924, is also conditionally present.

The aforestated legal questions arise out of a rather simple fact statement, with factual dispute well nigh nil.

The property involved is a 106 apartment building in Chicago, which was erected upon a vacant lot owned by Charles F. Henry, a contractor and builder. In 1924, Henry erected this building at an alleged cost of $385,326.37. He conveyed the land to taxpayer's predecessor, taking in payment therefor, all of its $100,000 of par value stock. He asserted that he earned and took a commission of ten per cent of the building cost, i.e., $38,532.64, for services in supervising the construction of the building. This item was excluded by the United States Tax Court in its determination of the cost of the building.

The taxpayer's predecessor fixed its basis for depreciation by adding three items: first, the $385,326.37 cost of the building; second, $38,532.64, for contractor's services in supervising construction; and third, a miscellaneous item of $750.18. On this basis, taxpayer's predecessor each year, in its income tax return, made its depreciation deduction.Up to August 1, 1935, when the taxpayer acquired the property upon the completion of the reorganization proceedings, a total depreciation of $139,253.71 had been charged.This left (with minor other adjustments not here important) an adjusted depreciation basis of $239,377.33 Texpayer asserts this should be accepted as the depreciation basis for the years in dispute (1935-1938).

The Commissioner makes different computations and reaches a different conclusion. Factually, he challenged only the $38,532.64 item in the taxpayer's base, which item the U.S. Tax Court disallowed.*fn1

Commissioner's position is more nearly one of confession and avoidance.He asserts that the proper basis for depreciation was not $239,371.33, but rather a sum which was also the market value of the building on August 1, 1935, when the taxpayer acquired the property. The fair value was $164,450.

Commissioner reached his conclusion in this way: In March, 1924, taxpayer's predecessor floated a $340,000, 6 1/2% bond issue which was defaulted in October, 1931, at which time $277,000 of bonds were still outstanding. In February, 1932, there was a foreclosure decree, and in June, 1934, bankruptcy proceedings were instituted under Sec. 77B. A plan of reorganization was approved in May, 1935, and the final decree entered, March 1, 1937. The execution of that plan necessitated the exchange of ninety per cent of taxpayer's no par stock for the $277,000 of bonds - one share for each one hundred dollars face value of bonds - and the remaining ten per cent of stock going to predecessor's stockholders. The Court found the fair market value of this stock never exceeded $45 per share.

The Tax Court found that the fair market value of the building at the time of the confirmation of the plan was not in excess of $141,000 and the fair market value of the land was $16,000.*fn2

Whether we should accept taxpayer's base of $239,377.33 or the Commissioner's here-asserted base of $141,000 turns not so much upon the ascertainment of the facts (concerning which there is dispute as to one item only) as it does on the Commissioner's legal contention that in determining the basis of depreciation he was required to reduce the original basis by the amount of indebtedness of the predecessor which was ...


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