position that the claims constituted administrative expenses of the arrangement proceeding and therefore took priority over the claims of general creditors. By the end of fiscal year 1963 these claims exceeded $1,800,000 and by the end of fiscal year 1964 they exceeded $3,500,000.
On April 18, 1963, Samuel Marx, Esquire, counsel for the receiver, filed a petition with the Bankruptcy Court for leave to retain the law firm of Dechert, Price & Rhoads as co-counsel due to its skill in defending negligence cases. On April 23, 1963, this petition was granted.
On May 14, 1963, pursuant to a voluntary consent filed on its behalf, Realty was adjudicated a bankrupt. In the superseding bankruptcy proceedings the receiver, Francis Shunk Brown, was elected trustee in bankruptcy. On August 23, 1963, he, as trustee, was authorized to retain Samuel Marx, Esquire and Dechert, Price & Rhoads as counsel.
From the time they were filed to the present all the fire damage claims have been contested. In resulting litigation the fire damage claimants' position that their claims were entitled to a priority over general creditor's claims as administrative expenses of the Chapter XI arrangement proceedings was upheld by the Supreme Court. See Reading Company v. Brown, 391 U.S. 471, 88 S. Ct. 1759, 20 L. Ed. 2d 751 (1968). To date approximately 190 claimants have filed proofs of claim totalling nearly $4,400,000. The total assets marshalled by the trustee have a present value of approximately $650,000.
When Realty was adjudicated a bankrupt on May 14, 1963, its assets consisted of: (1) insurance claims against Lloyd's, London, Southwest Casualty Company, and Annapolis Fire and Marine Insurance Company in the gross amount of $1,440,000, (2) the land on which the Fretz Building once stood, and (3) cash amounting to $2,030.11. On September 26, 1963 the City of Philadelphia instituted condemnation proceedings against all the land owned by Realty. The Trustee was subsequently awarded $130,000 plus interest for this land. On November 7, 1963, the Referee in Bankruptcy approved a settlement of Realty's claim against Lloyd's, London for $800,000. Later, in fiscal year 1966, the Trustee compromised Realty's claims against the remaining two fire insurance companies for $56,250. Consequently, the fair market value of Realty's assets on May 14, 1963 was $988,280.11, i.e., $856,250.00 in insurance claims, $130,000.00 in land, and $2,030.11 in cash.
On March 3, 1964 the Trustee was authorized to pay $162,789.45 out of the insurance proceeds to satisfy an outstanding mortgage on the Fretz Building that was held by the Presbyterian Ministers Fund. On March 25, 1964 he was authorized to deposit at least $500,000.00 of the insurance proceeds in interest-bearing accounts and to increase those deposits without further court order. Pursuant to this authorization, he deposited $500,000 in such accounts in fiscal year 1964, and $65,000 in fiscal year 1966.
On February 15, 1967 counsel for the Trustee first filed with the District Director the Trustee's federal income tax returns for the fiscal years 1963, 1964, 1965 and 1966. Each return was filed on a corporate income tax return Form 1120. Each return specified each item of income and each deduction for the fiscal year in question. Except for the gain or loss on the involuntary conversion of the Fretz Building, all of these items were computed to indicate the Trustee's taxable income or loss for the particular fiscal year. Based on the figures available to the Trustee, each return showed no taxable income after net operating loss carry-overs and, hence, no federal income tax due.
Each of the returns also carried the following notation to the Internal Revenue Service (hereinafter "IRS") explaining why certain figures could not be shown on the return:
"The Corporation is in a pending bankruptcy proceeding (Docket 27540) in the United States District Court for the Eastern District of Pennsylvania. Proofs of Claims have been filed on behalf of the Internal Revenue Service and numerous items making up prior returns are in dispute. Since correct figures have not been agreed upon and await resolution of these claims it is impossible to furnish the balance sheet, net operating loss deduction, etc. Upon resolution of the claims, more complete returns will be filed."
The covering letter from the Trustee's counsel, dated February 15, 1967 and filed with these returns, also pointed out that Realty's returns for fiscal years 1958-1962 were under audit before the Internal Revenue Service Appellate Division in Philadelphia. The covering letter requested that the enclosed returns be forwarded to the Appellate Division for disposition along with the prior years' returns.
The Trustee's return for fiscal year 1963 showed rental income of $7,628.85, miscellaneous income of $370.89 and various expenses aggregating $20,396.07, producing a loss from operations of $12,396.83. In addition, the return claimed a Section 461(f) deduction of $3,000,000 for "Damage Claims Asserted," producing a total net operating loss of $3,012,396.83.
In his return for fiscal year 1964 the Trustee reported the interest income of $6,815.79 earned on the deposits, as well as various deductions aggregating $78,575.64. The receipt of $800,000.00 in insurance proceeds was noted as follows in Part I of Schedule D, entitled "Gain from Disposition of Depreciable Property under Section 1245:"
"Fire insurance proceeds during year amounted to $800,000.00. Gain or loss on fire cannot be computed at this time. This return is under examination by the I.R.S."