The opinion of the court was delivered by: Robson, District Judge.
These two suits for refund of corporate income taxes involve
different tax periods of the same taxpayer and concern the same
legal issue. Plaintiff claims the right, under Section 113(a)
(22) of the Internal Revenue Code of 1939,*fn1 to use its
corporate predecessor's basis for depreciation of its hotel
property rather than the fair market value of said property at
the time of its acquisition on foreclosure sale. This issue is in
turn resolved by a determination of whether plaintiff acquired
the property pursuant to a tax-free, court-approved plan of
reorganization within the meaning of section 112(b) (10)*fn2 of
the Internal Revenue Code of 1939.
Detailed stipulations of fact have been entered into by the
parties in the respective cases, and able, consolidated trial
briefs filed. On an examination of the facts and law as submitted
by the plaintiff and the defendant, we conclude that the
plaintiff's contentions are well founded.
Plaintiff's claim for refund in cause 54 C 1952 is for
$2,763.84 (plus interest from December 15, 1950) for the tax
period beginning June 1, 1950, through September 30, 1950. The
taxes actually paid were $9,704.50 ($8,566.07 initially, and
$1,138.43 later) and the tax plaintiff asserts
to have been paid was $6,940.66. Plaintiff's depreciation figure
was $7,130.48 for the four months covered by the return on an
annual rate of $21,391.44.
The claim for refund in No. 56 C 2062 concerns the fiscal years
ending September 30, 1951, 1952 and 1953, for the sums $9,936.58,
$10,822.51 and $15,026.41, respectively, plus interest. As in the
other suit, plaintiff asserts an annual depreciation deduction
allowance of $21,391.44.
Plaintiff's predecessor corporation, Pearson Hotel Corporation,
was organized in 1922, with preferred and common stock and a
$1,250,000 six and one-half per cent bond issue which became in
default in 1929 when $982,000 thereof was still outstanding. In
January, 1930, a Bondholders Protective Committee was organized.
The Committee called for deposit of the outstanding bonds with
depositaries under a deposit agreement dated December 12, 1929,
which named the Chicago Title & Trust Company, and others, as
depositary. The Committee caused foreclosure proceedings to be
instituted in August, 1930, and the Chicago Title & Trust Company
was appointed receiver. A final decree of foreclosure was entered
in November, 1931. In July, 1933, the Committee adopted a "Plan"
pursuant to Article IV of the Deposit Agreement and named a
nominee to purchase the property subject to the first mortgage
and prior liens. The Committee had purchased subordinate liens.
The nominee of the Committee, Harlan Cooley, in August, 1934, bid
$78,600 for the real estate foreclosed but the bid was refused as
inadequate, and it was increased to $268,000 for the realty,
which bid was approved by the Judge of the Circuit Court in July,
1935. The Bondholders' Committee's pleading stated the Committee
had $954,244.12 of the $979,344.12 outstanding bonds (all but
$25,100). The agreement of July 15, 1935, was captioned, "Pearson
Hotel Liquidation Trust Agreement" and named Chicago Title &
Trust Company as trustee and James B. McCahey, George S. Lurie
and W.J. Zucker trust managers. By order of the Circuit Court, on
December 31, 1935, the Chicago Title & Trust Company was directed
to deliver the property to itself as trustee under the Agreement.
It is the nature of this transfer which poses the problem here.
Plaintiff claims the transfer was the final step in the
long-prior, court-approved plan of reorganization and entitles
plaintiff to use its corporate predecessor's basis for
depreciation purposes in calculating its income tax liability. It
is the Government's contention that the Agreement was, precisely
as it was called, a "Liquidation" agreement, not a statutory plan
of reorganization, and plaintiff's basis of depreciation is the
fair market value of the property.
The Agreement recites, inter alia, the deposit of bonds with
the Committee, pursuant to a deposit agreement, to procure the
property for them upon foreclosure. The object of the trust is
said to be the sale or liquidation of the property and the
distribution of the net proceeds, and in the meantime, the
maintenance and management of the property. Article II grants
power to the trustee to sell the property to another trust or
corporation in exchange for stocks, bonds or other securities,
and grants many other powers to the trustee. In case of a
disagreement between the trust managers and the trustee as to
compensation of agents, the conflict was to be settled by the
judge having charge of the foreclosure proceedings, as also was a
conflict in the appointment of a successor trust manager. It
further provided for the issuance of certificates of interest. No
change in the Agreement which materially affected the rights of
the certificate holders was to be made by the trust managers
without prior notice to the holders and if one-third or more
objected the proposed change would not be effective.
It is plaintiff's contention that the sale to it, pursuant to
the alternate provision of Article XV of the Agreement, in
exchange for all its stock, was the culmination of a plan of
reorganization approved by the order of Judge Benjamin Epstein of
the Circuit Court of Cook County back in July, 1935, effective as
of the preceding May 16 when the foreclosure proceedings were
pending before him. They discount the nomenclature of the
instrument as a Liquidation Agreement and hold irrelevant the
lapse of fifteen years between the approval of the plan and the
sale here involved (citing Standard Coal, Inc., 20 T.C. 208).
Plaintiff also points out that in this case there can be no doubt
that the requirement of "continuity of interest" is present
(Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462,
53 S.Ct. 257, 77 L.Ed. 428; Northern Pacific Ry. Co. v. Boyd,
228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931; Mascot Stove Co. v.
Commissioner of Internal Revenue, 120 F.2d 153 (C.C.A. 6, 1941);
Western Mass. Theatres, Inc. v. Commissioner of Internal Revenue,
236 F.2d 186 (C.A. 1, 1956)) where the bondholders, as creditors,
succeeded to ownership.
Plaintiff states it is here only claiming the benefit of the
underlying Congressional purpose of postponing tax consequences
when there has been a change in form only. (Scofield v. San
Antonio Transit Company, 219 F.2d 149 (C.A. 5, 1954)).
Plaintiff further cites Treasury Regulations 118, 39.112(b)
(10)-1*fn4 which provides that "It is unnecessary that the
transfer be a direct transfer from the insolvent corporation; it
is sufficient if the transfer is an integral step in the
consummation of the reorganization plan approved by the court."
It further relies on Helvering v. Alabama Asphaltic Limestone
Co., 315 U.S. 179, 62 S.Ct. 540, 86 L.Ed. 775, where the Supreme
Court talked of "steps" in a reorganization and intermediate
procedural devices utilized to enable the new corporation to
acquire all the assets of the old one pursuant to a single
reorganization plan, the determinative and controlling factors
being the debtor's insolvency and an effective command by the
creditors over the property. Plaintiff also relies on the case of
Palm Springs Holding Corporation v. Commissioner of Internal
Revenue, 315 U.S. 185, 62 S.Ct. 544, 546, 86 L.Ed. 785, where the
court said, "The legal procedure employed by the creditors is not
material. The critical facts are that the old corporation was
insolvent and that its creditors took steps to obtain effective
command over its property." Plaintiff cites a four-year interval
in the formulation of a plan in the case of Roosevelt Hotel Co.,
13 T.C. 399. The Court said, "There is no statutory requirement
that a plan be immediately adopted and to require this would
disqualify as reorganizations many of the financial readjustments
Congress intended to have included. It is inevitable that there
be some delay in arriving at a solution satisfactory to the great
majority of interested bondholders or creditors. * * *"
The Government contends that there was no bona fide plan of
reorganization nor was the property transferred from the old to
the new corporation pursuant to court order. It stresses the
nomenclature of the Agreement as a Liquidation Trust Agreement,
and the fact that liquidation was the primary aim of the parties,
and the sale to plaintiff, the new corporation, at the end of the
long fifteen-year interval was but an alternative choice solely
within the discretion of the trust managers and not the choice of
The Government's contention that the property of the insolvent
corporation to plaintiff corporation was not pursuant to a
specific order of court seems but a variation of its other
contention. There was of course no approval of this specific
transfer to plaintiff, but there was authority granted in future
by the Circuit Court order to make that transfer. A reading of
the order would indicate that the Judge deemed the Liquidation
Agreement as an implementation of the Plan of ...