Bunker Hill & Sullivan Mining & Concentrating Co. v. Commissioner

Hill, J.,

dissenting: At December 8,1937, all the creditors of Treadwell Yukon had been paid in full except petitioner, Treadwell, Mexican, and the Bradley Mining Co. At that time the aggregate indebtedness owing to these creditors was $8,415,000, without interest. Including interest, the indebtedness aggregated approximately $12,000,000. The indebtedness to petitioner was $3,776,000 principal plus $1,968,932 of accrued interest. Also, on that date it appears that the total value of Treadwell Yukon’s assets did not exceed $2,108,004. It was admittedly insolvent. Under date of November 18, 1937, Treadwell Yukon sent to its stockholders a plan of reorganization. On December 8, 1937, the creditors named above, all of whom except the Bradley Mining Co. were also stockholders, entered into a written agreement with Treadwell Yukon accepting such plan of reorganization. The basic reason for the reorganization, as stated in the plan therefor and the agreement accepting and adopting the plan, was Treadwell Yukon’s inability to pay its indebtedness. The insolvency of Treadwell Yukon was not only obvious from the evidence in the record, but its inability to pay its debts was a stipulated fact in the written agreement.

That the sole reason for such reorganization was the insolvency of Treadwell Yukon is manifested by the following paragraph of the preamble to the reorganization agreement:

Whereas, all parties hereto wish to avoid the loss and disadvantage which would result from a voluntary or involuntary liquidation of Second Party and to that end said creditors are willing, except as hereinafter set forth, to each ratably compromise and accept in full payment of the indebtedness owed to each an amount or other property in lieu thereof less than the principal amount of such indebtedness; * * *

Since Treadwell Yukon and all parties Raving a beneficial interest in its assets, namely, the creditors, were in agreement as to the plan of reorganization, they were in a position to carry out such plan without resort to court procedure.

Where the fact of insolvency conclusively appears from the evidence and is also stipulated by all parties concerned, as in this proceeding, and because of such insolvency a voluntary corporate reorganization follows to avoid loss and other disadvantageous consequences by liquidation through bankruptcy or other insolvency proceedings, the fact of insolvency thus established is, in my opinion, effective to step up the creditors to the status of stockholders.

In such situation only the creditors had a beneficial interest in the corporate assets, the equity of the stockholders having become nonexistent. The creditors’ interest was therefore a proprietary interest, the continuity of which was carried into the new corporation. The principle upon which statutory reorganization was held to have been effected in Commissioner v. Kitselmans 89 Fed. (2d) 458; Helvering v. Alabama Asphaltic Limestone Co., 315 U. S. 179; and Palm Springs Holding Corporation v. Commissioner, 315 U. S. 185, is, in my opinion, applicable to the facts here to effect a statutory reorganization in respect of the proprietary interests of the creditors of Treadwell Yukon.

Under the plan of reorganization all of the assets of Treadwell Yukon were conveyed to the new corporation in exchange for 1,522,504 shares of the latter’s capital stock at the par value of $1 per share. The fact that about 11 percent of this stock was distributed to the stockholders of Treadwell Yukon instead of all of such stock being distributed to the latter’s creditors was either a matter of grace on the part of the creditors or was a compensating consideration to the stockholder-creditors in the compromise arrangement whereby the Bradley Mining Co.’s debt was given priority to the extent of $500,000, to be paid by the new corporation in addition to the distribution to the Bradley Co. of stock in the new corporation. In this connection it will be borne in mind that all of the creditors of Treadwell Yukon except the Bradley Mining Co. were also the majority stockholders of that company. But, regardless of the reason for the distribution of a small percentage of the new corporation’s stock to the stockholders of Treadwell Yukon, the fact remains that the creditors were the owners of the proprietary interests in Treadwell Yukon’s assets to the exclusion of the latter’s stockholders.

Hence, it is my opinion that there was a statutory reorganization, in which the continuity of interest from the old to the new corporation was the proprietary interests of Treadwell Yukon’s creditors rather than, and not in addition to, the interests of Treadwell Yukon’s stockholders.

Assuming that there was a statutory reorganization on the basis above indicated, it appears to me evident that when Treadwell Yukon’s creditors’ claims were stepped up to proprietary interests by reason of Treadwell Yukon’s insolvency, such claims acquired the status of securities or stock since they constituted proprietary interests which were the equivalent of interests represented by certificates of stock. Therefore, when, under the plan of reorganization, such creditors’ claims were exchanged for stock in the new corporation, there was in legal effect an exchange of stock or securities by such creditors for stock in the new corporation within the meaning of section 112 (b) (3), with the result that gain or loss to the creditors under such exchange can not be recognized.

It appears from the record that petitioner’s entire debt, both principal and interest, was satisfied in consideration of the stock received by it under the plan of reorganization and that its proportionate amount of the stock of the new corporation was determined partly on the basis of its entire debt and partly on the, basis of stock held in Treadwell Yukon. Simultaneously- petitioner charged off part of the debt as worthless and claims a deduction therefor.

Clearly, petitioner is here seeking to participate in a statutory reorganization under the provisions of a statute which denies to it for tax purposes the recognition of loss sustained and at the same time is seeking the benefit of a deduction for tax purposes under another statute which would be available to it only under circumstances dissociated from a statutory reorganization involving the application of section 112 (b) (3).

Accordingly, it is my opinion that the deduction for bad debt sought by petitioner should be disallowed and that respondent’s determination of deficiency should be approved.

Furthermore, if it should be held that petitioner is not debarred from claiming a deduction for bad debt, provided the evidence established the amount thereof, it has not, in my opinion, met the burden of proof as to the amount of such deduction. By a compromise arrangement in which petitioner participated in the adjustment of the interests of all parties concerned in respect of their relationship as creditors and stockholders of Treadwell Yukon, petitioner accepted a settlement of its debt for a consideration less than the proportionate amount of Treadwell Yukon’s total assets ratably allocable as a payment on such debt. Hence, even if by such arrangement petitioner did not foreclose its right to a deduction for partial worthlessness of the debt by accepting in satisfaction thereof the considerations both express and implicit in the reorganization plan compromise, it does not appear from the record what proportion of such debt would have remained uncollectible had all of Treadwell Yukon’s assets been subjected to the payment of its debts.

For this additional reason it is my view that petitioner’s claim of deduction herein should not be approved.

Disney and Haeeon, JJ., agree with this dissent.