Opinion
Docket Nos. 107827 109010.
1943-01-5
BANKERS FARM MORTGAGE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John E. Hughes, Esq., for the petitioner. D. A. Taylor, Esq., for the respondent.
Petitioner corporation was organized by a group of bondholders of an insolvent joint stock land bank for the purpose of acquiring its assets from the receiver and continuing the liquidation of them. Some of the bonds of the insolvent were acquired by petitioner for its stock and some for cash, until finally it owned 98.7 percent of all outstanding bonds. Petitioner thereupon negotiated a sale in 1933 of the assets by the receiver at public sale at an upset price which was bid by petitioner, credit being given upon the amount bid for the proportion of the total of outstanding bonds held by petitioner. Held, that the transaction constituted a reorganization under section 112(i) of the Revenue Act of 1932 and that petitioner is entitled under section 113(a)(7) to the basis of the transferor as to the assets acquired in computing gain or loss on their disposition. Palm Springs Holding Corporation v. Commissioner, 315 U.S. 185, followed. John E. Hughes, Esq., for the petitioner. D. A. Taylor, Esq., for the respondent.
These consolidated proceedings involve deficiencies in income and excess profits determined by respondent for years and in amounts as follows:
+--------------------------------+ ¦ ¦ ¦Excess profits ¦ +----+-----------+---------------¦ ¦Year¦Income tax ¦tax ¦ +----+-----------+---------------¦ ¦1934¦$120,242.65¦$24,502.79 ¦ +----+-----------+---------------¦ ¦1935¦52,607.56 ¦ ¦ +----+-----------+---------------¦ ¦1937¦8,800.77 ¦ ¦ +----+-----------+---------------¦ ¦1938¦68,957.94 ¦47,858.92 ¦ +--------------------------------+
The issue for each year is the same, this being the correct basis for computing gain or loss upon disposition of assets. For each year petitioner has used as its basis the basis of the assets to its transferor, upon the theory that they were acquired in a nontaxable reorganization. Respondent, in determining the deficiencies, has used as a basis a lesser amount as the sum bid by petitioner for such assets at receiver's sale.
FINDINGS OF FACT.
Petitioner is a Wisconsin corporation, organized September 15, 1931. Its returns for the taxable years were filed with the collector of internal revenue for the district of Wisconsin. It was organized by a group of bondholders of the Bankers Joint Stock Land Bank of Milwaukee, a corporation then insolvent and in receivership, as part of a definite plan for the acquisition of the assets of that corporation by its bondholders.
The Bankers Joint Stock Land Bank of Milwaukee (hereinafter referred to as the bank) was organized in 1916 under the Federal Farm Loan Act. Under the provisions of that act its activities were under the general supervision of the Federal Farm Loan Board (hereinafter called the board). At all times its issued stock and bonds were owned wholly by private individuals. The bank operated until July 1, 1927, when it was declared insolvent by the board, which placed a receiver in charge of its property. At that time, and all times subsequent to the date of the acquisition of its assets by petitioner, the bank was insolvent. At that time the bank had outstanding $1,200,000 in stock and $15,771,600 in bonds.
Following the appointment of a receiver, several of the banking houses which had been active in the sale of the bonds of the bank to their customers proceeded to organize a bondholders' protective committee. Thereafter approximately 84 percent of the bonds of petitioner were deposited with the committee.
Several plans were proposed for acquisition of the assets of the bank which were not satisfactory to the board, which desired the participation of 95 percent of the bondholders. Finally, a group composed of the holders of a substantial amount of the bank's bonds devised a plan under which petitioner was organized and the bonds of this group were transferred to petitioner for stock. The plan proposed the acquisition of the outstanding bonds of the bank by issuing its stock of the par value of $100 in exchange for each $100 in outstanding bonds of the bank or the purchase of such bonds by petitioner at 40 percent of face value in cases where the holder did not desire to take stock. It was provided that the plan was not to become operative until 95 percent of the bank's bonds were secured, but if the 95 percent required did participate, then steps were to be taken to take over the assets of the bank. This plan was approved by the bondholders' protective committee and a circular setting out its terms as approved was circulated by the latter to the bondholders.
As a result of this plan petitioner acquired bonds of the bank, or receiver's certificates representing deposited bonds, of the par value of $4,526,200 in exchange for 45,262 shares of its stock and $11,021,000 par value of bonds for cash.
On November 18, 1931, the bondholders' protective committee issued a notice to all bondholders that 95.7 percent of all outstanding bonds had been acquired by petitioner and that the plan had become operative.
Prior to this time the receiver for the bank had been proceeding with the liquidation of its assets by sale of properties taken over under foreclosure and by collection of outstanding mortgage liabilities. It had been determined that the bank was insolvent to an extent much in excess of its outstanding stock. The receiver had called upon the stockholders for payment of their double liability and had collected substantial amounts from this source. Finally, however, his authority to enforce the liability of stockholders was questioned and it was judicially determined that such collection could only be made by an equity receiver and steps were taken to secure the appointment of one. Thereafter, this equity receiver enforced such liabilities and the receiver appointed by the board turned over to him amounts previously collected from this source. From time to time liquidating distributions on the bonds had been made in a total in excess of 20 percent prior to the time of the acquisition of the bank's assets by petitioner.
Upon petitioner's securing in excess of 95 percent of the bank's bonds, it began negotiation with the board for acquisition of the bank's assets. During the nine months occupied by these negotiations petitioner acquired additional bonds of the bank until, at the time of the transaction under which it acquired the assets, it owned 98.87 percent of all outstanding bonds. The remaining 1.13 percent of outstanding bonds were held by bondholders who could not be located.
As a result of the negotiations the board finally directed the sale by the receiver of the assets at a minimum upset price of $2,401,000 plus interest from February 29, 1932, at 3 percent. It was recognized that petitioner would be the only bidder. The amount of the upset price was suggested by petitioner's counsel and recommended by the receiver to the board. The conditions of the sale set by the board provided for the payment of the bid price in bonds of petitioner to the extent of the amount of the sale price distributable thereon.
In accordance with the requirements of the board with respect to the sale, petitioner made a deposit of $24,000 and bid the amount of the fixed upset price. The bid was accepted and the assets of the bank, consisting of mortgages and real estate and excepting cash and Government bonds, in which the proceeds of collections by the receiver had been invested, were transferred on August 5, 1932, to petitioner. The reason for the elimination of the cash and bonds from the assets sold was that it was decided to distribute these as a liquidating dividend on the bonds. The petitioner was given credit on its bid for the percentage of that bid that its bond holdings bore to the total of outstanding bonds. In his transfer of assets to petitioner, the receiver retained funds necessary to discharge receivership costs and other indebtedness of the bank, including the amount distributable to the holders of the remaining 1.13 percent of bonds in case these should ultimately be located.
Following the acquisition of the bank's assets petitioner continued the business in which the receiver had been engaged during the preceding years of conserving, managing, and liquidating them to the best advantage, which was the purpose for which petitioner had acquired them.
OPINION.
LEECH, Judge:
The facts here disclose a situation similar in all essential respects to that in the recent case of Palm Springs Holding Corporation v. Commissioner, 315 U.S. 185. There the Supreme Court held that a reorganization resulted under section 112(i) of the Revenue Act of 1932, which is here controlling, and that basis of the assets to the new company was the cost basis of the transferor under section 113(a)(7) of that act.
Respondent, however, contends that the present case may be distinguished and is not controlled by the cited decision. He calls attention to the fact that here the transferor was a joint stock land bank, that it must be considered as a Government instrumentality and thus precluded from being a party to a reorganization unless it be through transfer of its assets to another joint stock land bank. He cites as authority Speedway Water Co. v. United States, 100 Fed.(2d) 636.
The answer is that the bank was not a Government instrumentality, but a corporation wholly owned by private individuals who directed and operated its business. As was said by Chief Justice Stone in Federal Land Bank v. Priddy, 295 U.S. 229, in pointing out the differences between Federal land banks, which are governmental instrumentalities, and a bank such as the transferor here:
* * * Joint stock land banks are privately owned corporations, organized for profit to their stockholders through the business of making loans on farm mortgages. Sec. 16. There is nothing in their organization and powers to suggest that they are government instrumentalities. * * *
To the same effect is Higdon v. Lincoln Joint Stock Land Bank, 223 Iowa 57; 272 N.W. 93, and Dallas Joint Stock Land Bank v. State, 133 S.W.(2d) 827.
Joint stock land banks are subject to tax upon their earnings as other corporations. Speedway Water Co. v. United States, supra, cited by respondent, has no present application. There a corporation owning a water system sold its properties to a municipality for a consideration consisting of bonds of the municipality. Not only was the seller solvent (see LeTulle v. Scofield, 308 U.S. 415), but the purchaser was a governmental subdivision. No continuity of interest was maintained. The seller could not claim a continuing interest in the property conveyed merely as an owner of municipal bonds.
The argument of respondent that petitioner here could not be considered as the owner of the beneficial interest in the property at the time of the sale, as in the Palm Springs case, because petitioner had taken no steps here by judicial proceeding to enforce its liability, overlooks the fact that in the cited case no such steps had been taken as to the building acquired. The petitioner there acquired that property under a cash bid and from the trustee under the bond indenture. Nor can we agree with respondent's further contention that the 50 percent requirement of section 113(a)(7) is not met here. Prior to the transfer petitioner owned 98.87 percent of the outstanding bonds and consequently an equitable interest of that percentage in the property acquired. After the acquisition it owned an interest of 100 percent.
In the light of the recent decision in Magruder v. Realty Corporation, 316 U.S. 69, we think that petitioner must be considered as continuing in the business of liquidating the assets. That was the business for which it was organized and, as petitioner's counsel points out, it is substantially the business now being carried on by every joint stock land bank in the country under statute (U.S.C., title 12, sec. 810) forbidding their making any loans except those incidental to the business now on their books.
We hold that petitioner acquired the properties here in question in connection with a reorganization under conditions which entitle it to use the cost basis of the transferor as its basis therefor. Palm Springs Holding Corporation v. Commissioner, supra; Helvering v. Limestone Co., 315 U.S. 179; Commissioner v. Kitselman, 89 Fed.(2d) 458.
An alternative contention was originally made by petitioner. Our decision here, however, disposes of the proceeding and renders moot the question so raised.
Decisions will be entered under Rule 50.