New Jersey Mortg. & Title Co. v. Commissioner ( 1944 )

New Jersey Mortgage and Title Co., Petitioner, v. Commissioner of Internal Revenue, Respondent

New Jersey Mortg. & Title Co. v. Commissioner

Docket No. 109011

United States Tax Court

3 T.C. 1277; 1944 U.S. Tax Ct. LEXIS 63;

August 28, 1944, Promulgated

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Decision will be entered under Rule 50.

In 1935 the X corporation, engaged in the business of making and guaranteeing mortgage loans and insuring titles, was unable to meet its obligations as they came due. It filed proceedings under the New Jersey laws for reorganization and rehabilitation. There was filed with the court a plan of reorganization calling for the formation of a new corporation, the petitioner herein, to which the assets of X should be transferred and which should issue its bonds in substitution for X's bonds, but paying less interest and having a longer term, should issue preferred stock to X's bondholders in a face amount equal to the unpaid interest due on X's bonds, and should issue its common stock to the common stockholders of X. The plan also called for the payment by the new corporation, out of the assets to be received by it from X, of X's current accounts payable, including taxes and the expenses of the reorganization proceedings. Petitioner was accordingly organized and the transactions called for by the plan were carried out. Held, these transactions constituted a reorganization under section 112 (g) (1) (B), Revenue Act of 1934, as amended, the gain or loss resulting therefrom is nontaxable under section 112 (b) (4) or section 112 (b) (3) of that act, and petitioner's basis as to the property so acquired is the same as that of its predecessor.

Charles P. Swindler, Esq., and Sydney A. Gutkin, Esq., for the petitioner.

Robert S. Garnett, Esq., for the respondent.

Kern, Judge.

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KERN

The respondent has found a deficiency of $ 8,277.76 in income tax for petitioner's fiscal year ended February 28, 1938, and of $ 414.26 for the year 1939, a total of $ 8,692.02. The pleadings in the case present several questions; but by respondent's motion and our order of March 17, 1943, severing other issues in the case, we have left for determination here only the question of whether the reorganization of petitioner's predecessor corporation, Guarantee Mortgage & Title Insurance Co., and its subsidiary corporation, constituted a nontaxable exchange under section 112, Revenue Act of 1936.

This issue is presented by the pleadings in the following manner: The determination of deficiency indicated that respondent considered the petitioner as having acquired its property from its predecessor corporation as a result of a nontaxable reorganization. Petitioner alleged in its petition that respondent erred by reason of "his failure to construe petitioner as a new and separate taxpayer from its predecessor * * * whereby petitioner is entitled to establish cost of its assets * * * irrespective and independently of the proper basis therefor on the books of said predecessor company." This allegation was denied by respondent's answer. Thereupon, after the publication of certain opinions of the Supreme Court, including Helvering v. Southwest Consolidated Corporation, 315 U.S. 286">315 U.S. 286, the petitioner filed an amended petition which did not contain the allegation of error above quoted and the respondent filed an answer thereto which affirmatively alleged that petitioner is not entitled to use as its basis for determining depreciation and gain or loss the basis of its predecessor, but must use as such basis for its property the fair market value thereof at the date of its acquisition by petitioner. To this answer petitioner filed a reply equivalent to a general denial. Thus, both parties have changed their positions during the course of the pleadings with regard to the issue before us.

A stipulation of facts was filed by the parties and, in addition, oral evidence was adduced at the hearing herein.

FINDINGS OF FACT.

We find the facts to be as stipulated. The facts so stipulated may be summarized as follows:

The petitioner, New Jersey Mortgage & Title Co., hereinafter called New Jersey, is a corporation with its principal office at 15 Broadway, Passaic, New Jersey. Its income tax returns for the taxable period of ten months ended February 28, 1938, and the taxable year ended February 28, 1939, were filed with the collector of internal revenue for the fifth district of New Jersey.

The Guarantee Mortgage & Title Insurance Co., hereinafter referred to as the Mortgage Co., was a corporation organized on May 21, 1905, under the laws of the State of New Jersey, for the purpose of engaging in the mortgage loan and title insurance business, as more fully described in the chancery court's decree, incorporated herein by reference. At all times material herein, the Mortgage Co. fully owned a corporation organized under the laws of the State of New Jersey and known as Standard Properties, Inc. This subsidiary corporation was a real estate holding company used by the Mortgage Co. for the purpose of taking and holding title to land acquired by foreclosure, or, in lieu of foreclosure, the managing and servicing of such property. At all times material herein, the Mortgage Co. had outstanding 5,000 shares of common capital stock, par value of $ 100 per share. This was the only class of its stock outstanding.

On June 12, 1935, the directors of the Mortgage Co. adopted a resolution which read as follows:

Resolved. That the proper officers of this Company be authorized to file a petition to the Chancellor under the provisions of Chapter 3 of the Laws of 1934, and to have the Commissioner of Banking and Insurance appointed as Trustee, and to take such other steps as they may deem proper or advisable for the protection of the rights of security holders.

On June 17, 1935, the Mortgage Co., by Arthur S. Corbin, president, filed a petition with the Chancery Court of the State of New Jersey, entitled "In the Matter of Proceedings Under the Mortgage Guaranty Corporations Rehabilitation Act Affecting The Guarantee Mortgage and Title Insurance Company, No. 109/351," incorporated herein by reference, and containing, inter alia , the following allegations:

The said Mortgage Company has issued and has outstanding guaranteed mortgages and bonds in the aggregate sum of $ 4,825,443.38. Prior to the adoption of Chapter 71 of the Laws of 1933, and the promulgation of the Commissioner of Banking and Insurance of General Order No. 1 on March 21, 1933, the said Mortgage Company had, like many other companies engaged in similar business, due to the general shrinkage of real estate values and to the general inability of mortgagors to pay interest, taxes and principal when due, been having difficulty in meeting its obligations, and since the promulgation of Order No. 1 and its amendments (which required said Mortgage Company to suspend payments of principal and interest except to the extent collected and available, after deducting such amounts as prescribed by said General Order No. 1 as amended), the Mortgage Company has had considerable difficulty in operating its business and meeting its obligations to the extent directed and permitted by the said General Order No. 1 and its amendments.

* * * *

The total assets of the Mortgage Company, with its subsidiary as of May 31, 1935, have a book value in excess of $ 7,834,826.77.

The total liabilities of the Mortgage Company and its subsidiary, as of May 31, 1935, exclusive of capital stock and surplus, amounted to $ 7,273,150.23, and the situation has not materially changed from May 31, 1935, to the date of this petition.

* * * *

The Mortgage Company is not able to pay all of its obligations as they mature due to the conditions hereinabove described.

Your petitioner has believed, and now believes, however, that it is possible to continue the business of said Mortgage Company, and that it is to the best advantage of all its investors that it continue its business; but conditions are such that unless the assets and business of the Mortgage Company are conserved and the business reorganized and rehabilitated as provided by Chapter 3 of the Laws of 1934, great loss and injury will be occasioned to all concerned.

Your petitioner further shows that the interests of the creditors absolute and contingent, of the public and of the stockholders, and the conservation of the assets and of the business of the Mortgage Company require the intervention of this court under the provisions of the act aforesaid to the end that the business of the Mortgage Company may be reorganized and rehabilitated.

The Commissioner of Banking and Insurance duly approved the petition and consented to the making of an order pursuant to the terms of chapter 3 of the Laws of 1934 of New Jersey upon the foregoing petition. On June 17, 1935, an order was entered by the Chancery Court of New Jersey approving the petition of the Mortgage Co., the order being incorporated herein by reference. On May 12, 1937, the Chancery Court promulgated a decree and approved a plan for the Mortgage Co. and its subsidiary, Standard Properties, Inc., which plan was effective as of May 1, 1937. The decree is incorporated herein by reference. It found that "A conventional sale of the property and assets of the Mortgage Company, its subsidiary and the Trustee, is not practicable and no reasonable amount could be realized on such a sale or other method of liquidation, the cost of administration would be greatly enhanced, all causing great loss to the bondholders, other creditors and stockholders; it is for the best advantage and interest of all parties in interest that a transfer of all the assets as herein provided be made to a corporation which shall issue the securities provided in the plan and otherwise carry out the provisions of the plan, and the issuance of the securities by the new company and the undertaking assumed by the new company as herein provided, constitute sufficient consideration for the transfer of the said assets by the Mortgage Company its subsidiary and the Trustee to the new company." The decree ordered the Commissioner of Banking and Insurance (who was trustee in the rehabilitation proceeding), the Guarantee Mortgage & Title Insurance Co., Standard Properties, Inc., and the Peoples Bank & Trust Co. (which held as trustee or depository certain assets of the Mortgage Co.) to convey by proper documents to petitioner "all the assets owned by or in possession of the Mortgage Co., Standard Properties, Inc., or of the Trustee."

The material provisions of the plan approved are as follows:

* * * *

With a view to making the most equitable provision possible under existing circumstances for all classes for the ultimate payment of the principal thereof in full with interest thereon, as herein provided, this plan is submitted.

The Company has two principal types of investments:

(1) First mortgage Collateral Trust Bonds secured by groups of mortgages.

(2) Individual guaranteed mortgages.

FIRST MORTGAGE COLLATERAL TRUST BONDS

There are at the present time outstanding 23 series of bonds in the principal amount of $ 2,348,893. The assets of the company are shown on the pro forma balance sheet attached hereto.

A careful analysis of the attached balance sheet shows that upon the adoption of the plan there will be assets sufficient to insure investors the return of the principal of their investments in full, provided time is allowed to dispose of the real estate holdings of the company at fair prices, and the assets of the company are not sacrificed by liquidation in an unfavorable market.

It is, therefore, proposed that the present bondholders exchange their bonds for new bonds of one series, in a corporation to be organized under the General Corporation Act of New Jersey, to take over all of the assets of The Guarantee Mortgage and Title Insurance Company and its subsidiary Standard Properties, Inc., said new bonds to be dated as of July 1st, 1936, and to mature ten years later than the bonds for which they are to be exchanged. These bonds will be callable wholly or in part, on any interest date, in the order of their maturity, and will be paid interest out of the net earnings of the new company after proper reserves for the amortization of taxes payable, a minimum rate of 2% per annum and a maximum rate of 5% per annum. The first six months interest on the new bonds will be paid as soon as the plan is approved by the Court, and the transfer of assets has been made to the new company.

The new collateral trust bonds will be secured by the same collateral which secures the present bonds at the time the plan is approved by the Court. Such collateral will be deposited with a corporate trustee under a trust indenture, which said trust indenture shall be approved by the Court.

* * * *

While the first payment of interest under the plan will be at the minimum rate of 2% per annum, it is believed that by reason of increased revenues from real estate from higher rents, and from new income from the properties as taxes thereon are paid in full, the rate will be increased within a short time.

In addition to the income bonds, preferred stock will be issued to the bondholders in full settlement of the interest owing on their bonds. Such preferred stock will have a par value of $ 1 per share, and will be issued at the rate of one share for each full dollar of interest at the rate of 5 1/2% per annum, owing up to June 17, 1935, the date of the appointment of the Trustee. Fractional parts of a dollar of interest to be paid in cash. Preferred stockholders will have the right to elect a majority of the total number of directors. The preferred stock will be retired out of the net earnings of the company after the payment of the interest on the income bonds. No stock shall be issued by the new company that shall have preference over the preferred stock to be issued for interest on the present bonds.

CLAIMS OF CREDITORS

Inasmuch as the accounts payable amount to less than 2% of the total obligations, it is proposed to pay or otherwise provide for them upon the consummation of the plan.

Application will be made to the court for an order limiting creditors, by the terms of which all claimants, contingent or otherwise, secured or unsecured, shall be required to file with the court or with the trustee, within a reasonable time, a statement of the indebtedness due them from the Company and what, if any, security they hold for said indebtedness. By this order all contingent claims will be provided for or barred.

* * * *

STOCKHOLDERS

The common capital stock of the new company will consist of 5,000 shares having a par value of $ 25 a share, and will be exchanged share for share for the stock of the present Company, which now consists of 5,000 shares having a par value of $ 100 a share.

No dividends will be paid on the common stock of the new Company until the principal of the bonds and the preferred stock of the said company issued under this plan have been retired.

GENERAL PROVISIONS

* * * *

The directors of the new company will be fifteen in number and will be elected as follows: eight by the Preferred Stockholders (the present bondholders) and seven by the Common stockholders.

The plan shall become effective and operative when not less than two-thirds in interest of the persons interested therein, and two-thirds of the stockholders, shall consent in writing thereto, and the Court of Chancery shall have approved such plan.

* * * *

The balance sheet attached to the plan is as follows:

ASSETS
Bonds and Mtgs. secured by Real Estate		$ 1,284,896.03
Real Estate Owned securing Betty Ross Bonds	$ 207,252.89
Less Reserve for Depreciation	15,707.12
Less Bonds Payable	149,500.00
Equity of Company		42,045.77
Other Real Estate Owned	1,941,681.59
Less Reserve for depreciation	241,334.97
Less Mtgs. Payable	33,700.00
Equity of Company		1,666,646.62
Securities Owned		9,471.04
Accrued Interest on Mtgs. owned		13,113.97
Accounts Receivable		1,696.98
Cash		216,348.47
Total Assets		$ 3,234,218.88
LIABILITIES
First Mtg. Collateral Income Bonds payable (all series)		$ 2,348,893.00
Int. accrued on Mtgs. Payable		7,112.90
Int. accrued on Betty Ross bonds		32,582.33
Taxes Payable on Real Estate owned		92,496.72
Accounts Payable		47,496.69
Reserve for Unpaid Checks		1,077.77
Total Liabilities		$ 2,529,659.41
Capital Stock -- Common, par value $ 25 per share		$ 125,000.00
Capital Stock -- Preferred, par value $ 1 per share		237,641.63
Surplus		341,917.84
Total Capital Stock, Surplus and liabilities		$ 3,234,218.88
Note: In addition to the above assets the Company will own the following
Non-Ledger Assets, a considerable part of which should be realized as
Guaranteed Mortgages are withdrawn:
Int. advanced Prior to March 21, 1933 on Guaranteed Mtgs		$ 12,672.42
Equity of Standard Properties, Inc. in Properties Securing
Guaranteed Mtgs		57,496.67
		$ 70,169.09
Accrued Interest on Mortgages Owned, now considerably in
Arrears and Written Off		76,560.95
Total Non-ledger Assets		$ 146,730.04

New Jersey was organized on May 20, 1936, under the laws of the State of New Jersey, for the purpose of acquiring the assets of the Guarantee Mortgage & Title Insurance Co. and its subsidiary, Standard Properties, Inc. The plan of rehabilitation was consummated in accordance with its terms and those of the decree mentioned above. Pursuant to the plan, the bondholders of all series of bonds of the Mortgage Co., on or about May 1937, exchanged their bonds in the principal amount of $ 2,348,893 for bonds of New Jersey, dated October 1, 1936, bearing interest from that date, and in one series of equal face value maturing in ten years from the maturity date of the old bonds. The bondholders of the Mortgage Co. received for arrears of bond interest owed by it to June 17, 1935, preferred voting stock of New Jersey, $ 1 par value, in the total amount of $ 236,878. In addition the bondholders of the Mortgage Co. received, as bondholders of New Jersey, cash in the aggregate sum of $ 24,017.48 representing payment of interest of one percent for the six months ended March 31, 1937, on the new bonds.

The owners of the common capital stock of the Mortgage Co. all received, pursuant to the plan, an equal number of shares of common voting stock of New Jersey having a par value of $ 25 per share.

Pursuant to the provisions of the plan and the order of the court approving the same, New Jersey assumed, as provided in the Chancery Court's decree, the accounts payable of the Mortgage Co. and its subsidiary, Standard Properties, Inc., in the amount of $ 38,598.94, and paid the accounts in full on or about June 1937. The accounts so paid represented general obligations of the Mortgage Co. and Standard Properties, Inc., incurred as a result of the operation of the business prior to June 17, 1935. The accounts payable so assumed and paid by New Jersey did not include taxes payable by the Mortgage Co. or Standard Properties, Inc., prior to June 17, 1935, which were also paid by New Jersey pursuant to the decree, nor did they represent the expenses of the rehabilitation proceedings, which were also paid by New Jersey pursuant to the decree.

After the approval of the plan of rehabilitation by the Chancery Court and the consummation of the same, the old bondholders of the Mortgage Co. had approximately 98 percent of the voting control of New Jersey. The consolidated balance sheet as of June 17, 1935, of the Mortgage Co. and Standard Properties, Inc., which we incorporate herein by reference, shows current assets in the sum of $ 268,965.76, other unpledged assets in the sum of $ 3,092,809.74, and pledged assets in the sum of $ 2,710,014.45, the total for all assets being the sum of $ 6,071,789.95; and current liabilities in the sum of $ 585,592.81, other liabilities unsecured by pledge in the sum of $ 2,615,701.38, and liabilities secured by pledge in the sum of $ 2,348,893, the total of liabilities except capital and surplus being $ 5,550,187.19.

The consolidated balance sheet of the Mortgage Co. and Standard Properties, Inc., as of April 30, 1937, and a balance sheet of New Jersey as of May 1, 1937, are as follows:

		G. M. & TI. Co.	N. J. M. & T. Co.,
		and Std. Prop.,	5/1/37
		4/30/37
ASSETS
Cash in banks and on hand		$ 266,641.94	$ 266,641.94
Accounts receivable		1,520.27	1,520.27
Securities -- Government		1,006.85	1,006.85
	Stocks	2,639.00	2,639.00
Balance mortgage loans		1,239,522.11	1,239,522.11
Advances for mortgagors		18,828.15	18,827.15
Tax sale certificate		-5,440.19	-5,440.19
Mortgage settlements		3,755.21	3,755.21
Guaranteed interest advanced		10,564.18	10,564.18
	Total	1,270,598.42	1,270,598.42
Real estate -- buildings		1,535,733.49	1,535,733.49
	Land	616,849.28	616,849.28
	Total real estate	2,152,582.77	2,152,582.77
Interest receivable		87,574.75	87,574.75
Rents receivable		4,065.41	4,065.41
Prepaid taxes		2,824.87	2,824.87
Prepaid insurance		7,604.04	7,604.04
	Total assets	3,797,058.32	3,797,058.32
LIABILITIES
Accounts payable		51,874.08	51,874.08
Bonds payable		2,348,893.00	2,348,893.00
Mortgages payable		434,550.00	434,550.00
	Total	2,783,443.00	2,783,443.00
Interest due and accrued:
	Bonds	1 23,991.80
	First mortgage bonds	34,385.00	34,385.00
	Mortgages payable	9,589.84	8,228.46
	Mortgages sold guaranteed	56,337.82	56,337.82
	Total	570,079.91	122,943.08
Taxes payable:
	Company real estate	90,809.67	90,809.67
	Encumbered real estate	1,105.50	1,105.50
	Guaranteed real estate	16,791.94	16,791.94
	Total	108,707.11	108,707.11
Funds held in trust:		2,248.51	2,248.51
	Rent accounts	8,993.32	8,993.32
	Reserve for social sec. taxes	558.16	558.16
	Reserve for holders gtd. mtgs	2 1,394.64
		24,820.69	13,194.63
	Reserve for bondholders	2 8,464.58
		33,285.27
Capital stock -- common		500,000.00	125,000.00
	Preferred		1 236,878.00
Surplus or deficit		-250,331.05	355,018.72
	Total liabilities	3,797,058.32	3,797,058.32

From the oral testimony at the trial we find the following additional facts:

The Mortgage Co. filed a petition in the Chancery Court of New Jersey because it was unable to meet the demands made on it for payment of bonds, interest on guaranteed mortgages, taxes, and other charges. It had over $ 200,000 interest due on bonds, over $ 500,000 principal of bonds matured, and over $ 100,000 of guaranteed mortgages, interest on such mortgages, and taxes; and it was being pressed for payment by creditors who threatened litigation. Corbin, the old company's president, consulted counsel, who advised that the only alternative to liquidation for the company was application to the Court of Chancery under chapter 3, Laws of New Jersey for 1934, for reorganization and rehabilitation of insurance companies, section 77-B of the Federal Bankruptcy Act not being available to insurance companies. The Mortgage Co. fell within the category of insurance companies, since it insured the titles of real estate and guaranteed the payment of principal and interest of bonds secured by mortgages on real estate. Before application by the company to the Chancery Court, however, it had sought to meet its creditors' demands by borrowing from the banks, and then from the Reconstruction Finance Corporation, but was unsuccessful. The liabilities of the Mortgage Co. as set out in the decree of the Chancery Court approving the plan of reorganization and in the plan of reorganization itself (the latter set out under the stipulation above) were paid solely from assets received by petitioner from the old company and its subsidiary; and other than these assets petitioner received and paid out no money or anything of value to consummate the exchange contemplated by the plan, nor did any interested person in either of the three companies, parties to the plan or outside them, pay or advance anything to effectuate the plan. Corbin was president of the old company for 15 years and was a stockholder in both the old and the new company.

OPINION.

The critical question now before us in this case is whether the reorganization or exchange between the Mortgage Co. and petitioner comes within the provisions of the statute providing that gain or loss resulting therefrom should not be recognized for tax purposes. Respondent now says it does not. This question was raised by respondent affirmatively, after the deficiency was determined, by his answer to the amended petition. Petitioner now contends that it does. If petitioner's contention is correct, its basis as to the property acquired by the reorganization will be the same as that of its predecessor corporation. See sec. 113 (a) (6), Revenue Act of 1934. ^{*82 The Guarantee Mortgage & Title Co. (herinafter called "the old corporation") was in default on due and unpaid interest on its guaranteed mortgages and bonds and on those of its wholly owned subsidiary on May 31, 1935, in the sum of $ 315,815; and it had cash on hand of only $ 80,699.53, as alleged in the petition which it filed in the Chancery Court of New Jersey on June 17, 1935, for its reorganization or rehabilitation as an insurance company. This petition was filed by the corporation upon authorization of its board of directors. No proceeding was instituted by its bondholders. The court, having taken jurisdiction of the action filed by the corporation, issued a decree on May 12, 1937, approving a plan of reorganization, pursuant to which the assets of the old corporation were conveyed to the petitioner corporation by the old corporation, its subsidiary corporation, the trustee in the rehabilitation proceedings, and the trustee or depository of certain of its assets. The old corporation's bondholders of all kinds exchanged their bonds in the principal amount of $ 2,348,893 for bonds of the New Jersey Mortgage & Title Co., the petitioner, which had been organized on May 20, 1936. These bonds bore interest from October 1, 1936, and were of equal face value with the old bonds. In addition, the old bondholders received preferred voting stock of petitioner, $ 1 par value, in the sum of $ 236,878, for arrears of interest on the old bonds to the date in 1935 when the reorganization proceedings were begun; and also received as bondholders of petitioner cash in the sum of $ 24,017.48 in payment of interest of one percent on petitioner's bonds for the 6-month period from the date of issuance to March 31, 1937. The stockholders of the old corporation received shares of petitioner's voting common stock, par value of $ 25, equal in number to those held in the old corporation, which had had, however, a par value of $ 100.}

The reorganization provisions of the Revenue Acts of 1934, 1936, and 1938, as amended by section 213 (g) (1), Revenue Act of 1939, *84 "solely" added to the effect that "the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability" shall be disregarded. In the instant case petitioner acquired all of the property of the old corporation from the old corporation or persons acting on its behalf.

It becomes pertinent to inquire in the instant case, therefore, whether there was any payment by the new corporation which would take it out of the strictly limited category of reorganization exchanges allowable by the statute of property "solely for * * * stock." As the Supreme Court said in the Southwest Consolidated Corporation case, supra, "'solely' leaves no leeway."

Respondent argues that the exchange was not "solely for * * * stock" since under the plan petitioner took the assets of its predecessor subject to unsecured debts and assumed to pay all accounts payable of the old company which were unpaid on June 17, 1935, when the petition in the Chancery Court was filed, and actually did pay these unsecured creditors of the old corporation $ 38,598.94 under the plan approved by the decree. It is obvious, however, that payment of such obligations of the predecessor corporation is only a discharge of a liability antedating the plan, and that these obligations were not changed in nature and amount by the plan or by any court decree. It is clearly distinguishable from the indebtedness of old bondholders paid in cash in the Southwest Consolidated Corporation case, supra . In that case the lien of the bonds was removed from the debtor's property by the decree of the Court ordering a judicial sale as a step in the reorganization and the rights of the nonparticipating bondholders who received the cash payment were limited and defined by the same decree. In this case the obligations assumed and paid by petitioner were the obligations of the old corporation and were assumed and paid by it as such without any change as to nature or amount.

Respondent also argues in like tenor that the payment of one percent interest to the new bondholders on the new bonds of petitioner arose out of the reorganization plan and was an inducement to the exchange. Whatever effect it may have had as an inducement, it was not an obligation of the old corporation liquidated by cash nor did it represent any part of the quid pro quo the property of the old corporation was transferred. It was a payment on the obligations of the new corporation, and might as well have been made at the end of the first six months or later. Nor need the payment of taxes and expenses of the reorganization be considered as any bar. Claridge Apartments Co., 163">1 T. C. 163; reversed on another issue, 138 Fed. (2d) 962.

More serious is the contention that the issuance of the new bonds, although identical in principal amount with the old, did not constitute an assumption of the old corporation's debt within the rule of the Southwest Consolidated Corporation case, supra, since they were not payable in the same terms and were, in effect, "income bonds" since interest on them was payable in excess of 2 percent only when it could be justified by the corporation's earnings. The new bonds were of a single issue, bore 5 percent interest, but payable in excess of 2 percent only on the conditions just stated, ran for 10 years from the maturity date of the old bonds, and replaced 23 separate issues of the old corporation, which, no doubt, varied in term and possibly also in interest rate. The record does not show their precise tenor, but we may assume differences between the new and the old, and must assume a difference of term of 10 years in favor of the old bonds on the facts stipulated. We are of the opinion that this mollification of the terms of the bonded indebtedness as to interest rate and maturity is immaterial, and that the controlling fact is that the bonds of the new corporation were substituted for the bonds of the old corporation in the exact amount of the principal of the indebtedness. See Harden F. Taylor, 43 B. T. A. 563; affd., 128 Fed. (2d) 885 (C. C. A., 2d Cir.); Louis E. Stoddard, Jr., 47 B. T. A. 584, reversed on another issue, 141 Fed. (2d) 76. We conclude that the issuance of the new bonds constituted an assumption of the old corporation's debt.

Since the petitioner acquired from the old corporation substantially all of the latter's property in exchange solely for its voting stock, we conclude that the transfer to petitioner constituted a reorganization within the letter of the first clause of section 112 (9) (B) (1), as amended.

Having decided that the reorganization between petitioner and the old corporation comes within the letter of the first clause of section 112 (g) (1) (B) of the Revenue Act of 1934, as amended, it is now necessary for us to consider the question of whether there is such continuity of interest between the old corporation and petitioner as would justify our conclusion that there was here a nontaxable reorganization.

We are of the opinion that there is such a continuity of interest. The financial situation of the old corporation at the time of the reorganization was one of equitable insolvency, not of insolvency in the bankruptcy sense. While its assets, if liquidated at forced sale, would probably have been less than its liabilities, as appears from the court decree quoted in our findings, the same assets, if remaining, as they did remain, in the hands of a going concern would, and did, have a value in excess of its liabilities. This is apparent from the plan of rehabilitation approved by the court by the same decree. At the same time its current assets were so depleted prior to the rehabilitation proceedings that it was unable to meet its obligations as they matured and became payable. Under this view of the old corporation's financial condition, the capital structure of petitioner effected by the reorganization seems justified by business considerations. The bondholders of the old corporation were at all times merely its secured creditors and as such became bondholders of the new corporation. However they were given temporary control over it, through their ownership of voting preferred stock, to be assured of a management favorable to their interests until any immediate danger of bankruptcy had passed. The common stockholders of the old corporation were its owners and as such became common stockholders of the petitioner, this common stock representing ownership equity which was considered by the parties to the plan of reorganization and by the court approving it to be of sufficient value to warrant the issuance of petitioner's common stock having a par value of one-fourth the par value of the old corporation's common stock. Thus, the proprietary interest of the common stockholders of the old corporation was continued in the common stockholders of petitioner, although their control of petitioner was in abeyance until the retirement out of income of petitioner's voting preferred stock. However, the requirement of continuity of interest does not, in the absence of statutory specification, carry with it a requirement of continuity of control. John A. Nelson Co. v. Helvering, 296 U.S. 374">296 U.S. 374; Schweitzer & Conrad, Inc., 41 B. T. A. 533;Muskegon Motor Syndicate v. Commissioner, 134 Fed. (2d) 904.

It is not enough for a decision of this case to conclude that the exchange between the mortgage company and petitioner was a reorganization as defined by section 112 (g) (1) (B) of the Revenue Act of 1934, as amended by section 213 of the Revenue Act of 1939. In order to have the same basis as its predecessor corporation pursuant to the provisions of section 113 (a) (6) of the Revenue Act of 1934, petitioner must show that it acquired its property "upon an exchange described in section 112 (b) to (e) inclusive."

We are of the opinion that petitioner acquired its property upon an exchange described in section 112 (b) (4). ^{*92 company." The stock and securities were not issued by petitioner to the old corporation and then distributed by the latter to its own stockholders and bondholders. Here the parties to the reorganization took a short cut and, instead of issuing its stock and securities to the old corporation from which it had acquired its property, petitioner issued its stock and securities directly to the stockholders and bondholders of the old corporation. These latter, instead of surrendering their stock and bonds of the old corporation to the old corporation in exchange for the stock and securities of the new corporation, surrendered them directly to the new corporation, the petitioner herein. Regardless of this short cut, we are of the opinion that the old corporation exchanged its property in pursuance of the plan of reorganization solely for stock or securities in another corporation a party to the reorganization (the petitioner) and, therefore, the exchange is one described in section 112 (b) (4). It follows that petitioner's basis as to the property acquired from the mortgage company was the same as that of its predecessor corporation, under section 113 (a) (6).}

On the issue presented, our decision is in favor of petitioner.

Decision will be entered under Rule 50.

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Footnotes

• 1. Preferred stock of $ 236,878.00 issued for interest accrued to June 17, 1935, on bonds of the Guarantee Mortgage & Title Ins. Co. Int. of $ 210,258.83 accrued from June 17, 1935, to April 30, 1937, eliminated.↩

• 2. Moneys retained and transferred to New Jersey pursuant to decree (Ex. C) particularly paragraph 18.↩

• 1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.

  (a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --

  * * * *

  (6) Tax-free exchanges generally. -- If the property was acquired, after February 28, 1913, upon an exchange described in section 112 (b) to (e), inclusive, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by section 112 (b)↩ to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.

• 2. SEC. 213. ASSUMPTION OF INDEBTEDNESS.

  * * * *

  (g) Definition of Reorganization Under Prior Acts. --

  (1) Section 112 (g) (1) of the Revenue Acts of 1938, 1936, and 1934 are amended to read as follows:

  "(1) The term 'reorganization' means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all the properties of another corporation, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded; or the acquisition by one corporation in exchange solely for all or a part of its voting stock of at least 80 percentum of the voting stock and at least 80 percentum of the total number of shares of all other classes of stock of another corporation, or (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 assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected."↩

• 3. SEC. 112 * * *

  (b) * * *

  (4) Same. -- Gain of Corporation. -- No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.↩