Huitt v. Mealey , 42 N.Y.S.2d 585 ( 1943 )

Memorandum by the Court.

This is a proceeding under article 78 of the Civil Practice Act to review a determination of the State Tax Commission, made upon an application of Finley J. Shepard for revision of an assessment of $3,106.23 income tax for 1933 on account of disallowance from normal tax calculation of $100,000 “ loss of investment in Pierre Hotel Inc. Debenture Bonds.”

The financing of this hotel involved, besides taxes and the ground rental, two bond issues aggregating $9,750,000. The first mortgage bonds totaled $6,500,000 and were disposed of through S. W. Straus & Co., Inc., and bore six and one-quarter per cent interest. The junior issue, known as the ‘ ‘ debentures, ’ ’ totaled $3,250,000 and bore coupons of six per cent interest semi-annually, payable out of net earnings. The taxpayers investment was in the debentures.

Construction of the hotel was commenced in June, 1929, and completed in September, 1930. During the first six months of 1931 the hotel’s income was in excess of its operating costs but not sufficient to pay the taxes and ground rent. The interest payments on the Straus bonds were paid up to June 1, 1931, from sources outside of operating revenue of the hotel. The petitioner and other debenture holders never received any interest payment. On May 29, 1931, the debenture holders received a notice of a special meeting and about the same time a bondholders’ committee of the Straus bonds was organized.

In September, 1931, a foreclosure or equity receivership was commenced on behalf of the Straus bondholders. On March 7, 1932, the Hotel Pierre, Inc., filed a voluntary petition in bankruptcy. On June 1, 1932, the bondholders’ committee for the Straus bonds agreed upon a plan of reorganization which was communicated to the Straus bondholders by that committee on June 8, 1932, and about the same time the debenture holders were notified of it by a letter from one Parsons, chairman of their committee. As to the petitioner and the other debenture holders the plan was for cash subscriptions to bonds of a new company at the rate of $100 for each $1,000 worth of debentures held and subscriptions were not accepted after September 7,1932.

The petitioner had been notified that unless he and the other debenture holders subscribed and paid for bonds in the new company they would receive nothing under the new reorganization plan. The petitioner did not subscribe or pay for bonds in the new company and therefore after September 7, 1932, there was no value as the record shows in his debenture bonds.

There was an item of $1,458 which the petitioner has deducted for charitable contributions which had been allowed by the Bureau of Internal Bevenue. This item was not allowed by the State Tax Commission but upon the oral argument they conceded that the taxpayer was entitled to it.

Determination of the State Tax Commission modified so as to allow petitioner a deduction for charitable contributions amounting to $1,458, thereby reducing the assessment in controversy from $3,106.23 to $3,018.75 and determination of the State Tax Commission as modified confirmed, with fifty dollars costs and disbursements.

Crapser, Bliss and Heeeeruan, JJ., concur; Scheptck, J., dissents, in an opinion in which Hill, P. J., concurs.