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Prairie Du Chien-Marquette Bridge Co. v. Commissioner of Internal Revenue.

May 1, 1944


On Petition for Review of Decision of the Tax Court of the United States.

Author: Mclaughlin

Before BIGGS, GOODRICH, and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge.

The question here involved is whether the taxpayer's basis for computing depreciation upon its bridge property is the same that the property would have had in the hands of the predecessor company or whether it should be the market value of the property at the time the taxpayer acquired it. The answer to this depends on whether the original bridge corporation was reorganized in accordance with Section 112(g)(1) of the Revenue Act of 1934, 26 U.S.C.A. Int. Rev. Acts page 695, which defines a reorganization as:

"(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 shareholders or both are in control of the corporation to which the assets are transferred."

Where there is such reorganization within the contemplation of the Act, Section 113(a)(7) of the Act, 26 U.S.C.A. Int. Rev. Acts, page 698, provides:

" * * * the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. * * * "

Section 112(h) of the Act reads:

"(h) Definition of Control. As used in this section the term 'control' means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation."

In September 1931, Prairie du Chien Bridge Company was constructing a bridge across the Mississippi River. Pittsburgh-Des Moines Steel Company was supplying the necessary steel. Because of financial difficulties of the bridge corporation, the steel company became its sole stockholder. The main reason for it taking control of the company was the necessity of furnishing a surety bond so as to permit the sale of first mortgage 6 1/2% sinking fund gold bonds of the old bridge company and make possible the completion of the contract. The bridge was finished in March of 1932. Thereafter the bridge company defaulted in the payment of its bond interest. Following this, the bridge company filed a voluntary petition in bankruptcy and was declared a bankrupt January 18, 1933. The bridge property was then purchased by the steel company at a bankruptcy sale. The agreed purchase price was proportionate endorsed payment on the bonds of the old bridge company owned by Pittsburgh-Des Moines Steel Company and cash to be advanced by the latter. The plan was to organize the petitioner corporation, with the bridge property and a particular group of bonds in the old bridge corporation (owned by bondholders who were represented by the investment house of Bartlett & Gordon, Inc.) to be transferred to the new corporation in exchange for its first mortgage 6 1/2% bonds, its 6 1/2% preferred stock and its common stock, in direct proportion to the total bonds of the old bridge company owned by the parties to the agreement. This plan was followed, with the Pittsburgh-Des Moines Steel Company acquiring $153,600, 6 1/2% first mortgage bonds of the new corporation, who is the petitioner here, and more than 80% of all classes of that corporation's authorized capital stock.

As is seen, the steel company, or its nominees, held all the stock of the original bridge company. It holds more than 80% of the stock of the new company; with control of the latter following as a matter of course. So the stockholders of the old company have control of the new company and the only problem presented is whether that control must have been retained by the old stockholders because they were such stockholders or whether it is enough that the persons having contol of the new company were former stockholders although they received the stock in the present corporation in their capacity as creditors of the old company. The Tax Court opinion conceded that the sole stockholder of the original bridge company was in "control" of petitioner immediately after its acquisition of the bridge property but because the stock ownership constituting that control was acquired by virtue of ownership of the bonds of the bridge company - not its stock, that court excluded the transaction as a reorganization under Section 112(g)(1)(C). It did this specifically upon the authority of Thatcher v. Commissioner, 46 B.T.A. 869, pet. for rev. dismsd. The Thatcher case has now been reversed by the Tenth Circuit Court of Appeals in 137 F.2d 128, at page 129, where the court said:

"The language of Subsection (h) is clear and free from ambiguity. It states in language too clear for doubt that if, after the transfer of the assets of the old corporation to the new, the old stockholders own at least eighty per cent of the voting stock and eighty per cent of all stock, they are in control as defined by Clause (C). Under Section 112(b)(3), no gain or loss is recognized if stock or securities are exchanged solely for stock or securities in the new corporation. All the stockholders of the defunct corporation exchanged for their stock in the new company was their interest in the old corporation."

"Congress did not say that in determining the question of control by the old stockholders you must separate stock they received for securities from that which they received for their stock, and in the absence of such an expression from Congress, we may not make such an addition to the law. All that Congress said was that to constitute control the old stockholders must own eighty per cent of the voting stock and eighty per cent of all outstanding stock in the corporation, and this they do in this case."

Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 62 S. Ct. 540, 86 L. Ed. 775, and Helvering v. Southwest Consolidated Corporation, 315 U.S. 194, 62 S. Ct. 546, 86 L. Ed. 789, are urged as supporting the respondent's position that the situation here presented is not a reorganization under the Act. In the Limestone case the Tax Court recognized as a proper Revenue Act reorganization, a situation where the property of a bankrupt concern was acquired by a bondholders committee, then transferred to the committee's new corporation in exchange for its securities issued to the creditors of the old corporation. If anything, that case supports the taxpayer's position here where the transition from the original bridge company to the present petitioner corporation was all ...

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