concurring: I concur in the result reached by the majority opinion in this proceeding, but I do not concur in some of the reasoning used therein.
I concur in the holding that the $3,776,000 claim for advances which petitioner held against Treadwell Yukon at the time of the reorganization which took place represented a bona fide indebtedness of Tread-well Yukon. I agree also that petitioner had not ascertained any part of this indebtedness to be worthless in any year prior to 1937.
It also seems plain to me that when petitioner exchanged its $3,776,-000 of indebtedness against Treadwell Yukon for 658,977 shares of stock in the new Delaware corporation in the reorganization which took place, petitioner suffered a loss of the $3,117,023 which it claims. That loss is deductible either as a bad debt deduction under the provisions of section 23 (k) of the Revenue Act of 1936, or as a corporation loss under section 23 (f) of the same act, unless such bad debt deduction or corporation loss deduction is prohibited by some one or more of the nonrecognition provisions of section 112 of the Revenue Act of 1936.
An examination of section 112 shows that the only two nonrecognition provisions of that section which could possibly have any application would be section 112 (b) (3) and section 112 (b) (5). The majority opinion holds that section 112 (b) (3) has no application and gives three reasons for so holding as follows: (1) Petitioner’s demand note against Treadwell Yukon was not a security within the meaning of section 112 (b) (3); (2) petitioner’s demand note was not' exchanged for stock but was canceled by a settlement made directly with the debtor; (3) the worthless portion of the debt was ascertained separately and independently before the note was canceled and surrendered to the debtor. The two latter reasons I think are not correct and I do not wish to appear as concurring in their soundness.
But under our decision in Sisto Financial Corporation, 47 B. T. A. 425 (now on review, C. C. A., 2d Cir.), a case cited in the majority opinion, the majority opinion’s reason (1), above stated, is well taken. Petitioner’s demand note against Treadwell Yukon was not a “security” within the meaning of section 112 (b) (3). Therefore, section 112 (b) (3) does not apply so far as it concerns petitioner’s exchange of its $3,776,000 debt against Treadwell Yukon for 658,977 shares of the stock of the new Delaware corporation. I think, however, that section does apply to the exchange by petitioner of the shares of stock which it owned in Treadwell Yukon for new shares in the Delaware corporation on the basis of one share in the new corporation for 8.718 shares in the old corporation. We do not have that part of the transaction before us and any further discussion of it would be unprofitable. Both parties seem to concede that that part of the transaction was a nontaxable exchange in a reorganization.
Now, it appearing that under our decision in Sisto Financial Corporation, supra, section 112 (b) (3) is not applicable to petitioner’s exchange of its $3,776,000 debt against Treadwell Yukon for 658,977 shares of stock in the new Delaware corporation, we turn to section 112 (b) (5) to see whether or not that provision is applicable and thus prevents the recognition of petitioner’s loss on the transaction. As the Supreme Court pointed out in Helvering v. Cement Investors, Inc., 316 U. S. 527, the two above named provisions overlap in some respects.
Petitioner in its brief urges three reasons why section 112 (b) (5) has no application, namely, (1) petitioner transferred no property to the new corporation; (2) if it can be said that petitioner became the owner of an equitable interest in the debtor corporation’s assets and hence a transferor to the new corporation, then petitioner’s receipt of such equitable interest constituted a final payment on the debt and entitled petitioner to deduct the remainder as a bad debt; and (3), finally, if petitioner, the other creditors, and the stockholders are to be regarded as the transferors of the debtor’s properties, nevertheless the amount of stock received by each in the new corporation was not substantially in proportion to the interests held in the properties prior to the transfer.
Petitioner’s grounds (1) and (2) stated above as reasons why section 112 (b) (5) does not apply are substantially the same arguments as were made by the taxpayer in Miller & Paine, 42 B. T. A. 586 (petition for review dismissed in the Eighth Circuit Dec. 18, 1942), and were rejected. In that case we rejected the argument that, where a creditor of an insolvent corporation exchanges his debt for stock in a newly organized corporation to carry on the business of the old corporation and thus maintain his continuing interest, it constitutes a mere payment of a debt by the debtor to the creditor and is to be treated in the same manner as such cases as Hale v. Helvering, 85 Fed. (2d) 819, affirming 32 B. T. A. 356; James R. Stewart, 39 B. T. A. 87; and Charles B. Bohn, 43 B. T. A. 953. We pointed out why we thought such cases were not applicable and we held that such a transaction, similar to the one we have here in the instant case, was not to be treated as a mere payment of a debt by a debtor to a creditor but was to be treated as an exchange coming within the framework of section 112 (b) (5), and that that section was applicable provided that the stock which all the transferors received in the new corporation was substantially in proportion to the value of the interests which they each owned in the property at the time it was transferred to the new corporation. In the Miller <& Paine case we further held that under the evidence which was before us we could not say that the interests in the new corporation which the parties received were not substantially in the same proportion as the interests which they transferred. We, therefore, held that section 112 (b) (5) was applicable and prevented any recognition of the loss which the taxpayer was claiming.
The only real substantial distinction that I see in the facts of the instant case from those present in the Miller db Paine case is that the proportional interests which the parties received in the new corporation do not appear to be in substantial proportion to the interests which they gave up. That, of course, is a vital distinction and is one of the main reasons which the majority opinion uses in support of its conclusion that section 112 (b) (5) does not apply. While I do not think the facts in evidence on that point are as clear as they might be, I accept the conclusion of the majority opinion on that point.
It is unnecessary, of course, to restate in this concurring opinion the facts upon which the majority opinion relies for reaching the conclusion that the interests received were not substantially proportional. . These facts are stated in some detail in the majority opinion. I simply want to point out that is the only distinction which I see in the present case from Miller & Paine, supra, and it is on that basis alone that I concur in the result reached by the majority opinion.
Mellott, J., concurs in the above.