*959 Where petitioner acquired all of the property of the Rex Manufacturing Co. by a bankruptcy sale, even though the acquisition was pursuant to a reorganization within the meaning of section 112(i)(1) of the Act of 1928, it appearing that only 47.65 percent of the stockholders of the Rex Manufacturing Co. were stockholders of petitioner, held, that the basis of such property for depreciation in the hands of petitioner was not the same as it was in the hands of the Rex Manufacturing Co., since section 113(a)(7) of the Act of 1932 did not apply.
*984 This proceeding involves a deficiency in petitioner's income tax asserted by respondent for the calendar year 1932 in the sum of $338.33, which arises by reason of respondent's failure to use, as the basis for computing depreciation on assets of petitioner, the basis which such assets had in the hands of the Rex Manufacturing Co., feom which petitioner had acquired them.
FINDINGS OF FACT.
The facts in this case, which are partially set out in the stipulation of the*960 parties and are partially contained in oral evidence submitted at the hearing had in this proceeding, are as follows:
The petitioner is a corporation organized and existing under and by virtue of the laws of the State of Indiana, with its offices and principal place of business at Connersville, Indiana.
*985 The petitioner was incorporated on July 12, 1930, for the purpose of acquiring the assets and assuming the liabilities of the Rex Manufacturing Co., an Indiana corporation, then in bankruptcy. It is engaged in the business of manufacturing cabinets.
The authorized capital stock of the petitioner consists of 5,000 shares of common stock of no par value, and the bylaws provide authority for an issue of $250,000 face value of 6 percent first mortgage bonds.
The Rex Manufacturing Co. was incorporated in the year 1898 under the laws of the State of Indiana, and it had at the beginning of the year 1930 an authorized capital consisting of 10,000 shares of preferred stock having a par value of $50 per share and 10,000 shares of common stock with a par value of $50 per share.
The Rex Manufacturing Co. was organized for the purpose of manufacturing buggies. Its offices*961 and principal place of business were at Connersville, Indiana. As the buggy business became obsolete about 1914, the company's business was changed to that of manufacturing closed tops for open automobiles. In 1924 or 1925 the latter became obsolete because most manufacturers quit making open models. In 1926 the company cast about for some new product to manufacture and went into the business on manufacturing cabinets for electric refrigerators, a rather new industry.
In January 1930 the Rex Manufacturing Co. was confronted with serious financial difficulties, as it had not yet been able to make a success of the refrigeration cabinet business, and its officers consulted their attorney, Raymond S. Springer of Connersville, Indiana. He advised consultation with Frank C. Olive, an attorney of Indianapolis, Indiana, who had had considerable experience with reorganizations.
At that time the company's balance sheet showed assets of $600,000 or $700,000, and liabilities of less than $200,000, but its cash had been depleted so that it was unable to pay its creditors in full, and some of them were threatening suits and the officers feared that a receiver might be appointed. The officers*962 made efforts to get funds from bankers and brokers but were unsuccessful.
The officers and stockholders of the company were desirous of effecting some arrangement by which they would be able to refinance the corporation without stopping the business, provide for payment in full of the creditors, and at the same time preserve the assets and business for the benefit of the stockholders and for the benefit of the community.
Olive advised the officers that their purpose could be accomplished in one of several ways. First, by having a trustee for the creditors appointed outside of court, but this plan was not feasible because *986 there were so many creditors scattered all over the United States. Second, Olive suggested having a receiver appointed on the equity side of the Federal court, which plan was abandoned after it was found to be impossible to obtain a creditor who resided outside of the State of Indiana with a claim of more than $3,000 to file such a suit.
Olive then advised that the reorganization proceeding could be had through bankruptcy proceedings; one method was by using section 12, the composition section in bankruptcy, and the other would be to go through*963 the process of having a sale in bankruptcy; that the proceedings under section 12 were very complicated and that it would be more practical to have a trustee appointed and let the property be sold under order of court, continue the management under a trustee, form a new corporation, and buy in the property; the title to the property would then be clear and the creditors could be satisfied. This plan was adopted.
A petition in bankruptcy was thereupon prepared and filed on January 24, 1930. Springer was appointed receiver in bankruptcy and afterward elected trustee, and the business was operated until sold in bankruptcy.
In the meantime various schemes were discussed whereby the creditors could be satisfied and the business saved. One Huffman presented a plan whereby he would be able to finance the corporation sufficiently to supply operating capital and thought that he could bring in new business of $750,000 per annum.
After numerous conferences between attorneys and stockholders and creditors, a plan was agreed upon along the ideas presented by Huffman, and reduced to writing, which represented the first written attempt to complete the details and mechanics of the plan*964 of reorganization.
A meeting of creditors and stockholders was held on May 7, 1930, at Connersville and the Huffman plan was agreed to in principle.
It developed, however, that Huffman could not raise the funds and bring in the new business that he thought he would be able to bring in, and his plan could not be followed completely. The plan therein set forth was verbally modified from time to time as the practical necessities arose.
The plan of reorganization, which was broadly agreed to by the officers of the Rex Manufacturing Co. before the petitioner in bankruptcy was filed and was first reduced to writing on April 10, 1930, in elaborated form but was subsequently changed and modified as the necessities required, was duly carried out. It provided for the following:
(a) A new corporation was to be formed to take over the assets and assume any liabilities of the old corporation that might remain unsatisfied after the bankruptcy proceeding.
*987 (b) The capital structure of the new corporation was to be as follows: (1) No par value stock was to be issued to stockholders of the old corporation electing to have their stock interest continued into the new company; *965 (2) the new corporation was to issue its 6 percent first mortgage bonds, so that the creditors would receive 25 percent of their claims in cash and 75 percent thereof in such bonds; and (3) new capital was to be advanced by stockholders of the old corporation, for which they were to receive bonds of the new corporation.
The owners of record of the capital stock of the Rex Manufacturing Co. at January 24, 1930, and at all times thereafter material to this proceeding, and of the petitioner corporation at July 30, 1930, were as follows:
| Shares of stock | |||
| Stockholder | Rex Mfg. Co. | ||
| Common | Preferred | Petitioner | |
| C. C. Hull | 2,165.83 | 3,165.83 | 1,892 |
| Geo. W. Ansted | 1,552.78 | 612.78 | 928 |
| Matthew R. Hull | 602.50 | 652.50 | 414 |
| Catherine Ansted | 666.68 | 666.68 | |
| Nellie Ansted Huston | 444.44 | 444.44 | 266 |
| R. Winter Hull | 80 | 20 | |
| Helen F. Hull | 10 | 20 | |
| M. Lair Hull | 200 | ||
| Ruth Hull Barrows | 200 | ||
| Rozzie F. Hull | 200 | ||
| Nellie S. Ansted | 100 | 240 | |
| Rachel B. Hull | 200 | ||
| Charles H. Hull | 200 | ||
| Edw. G. Ansted | 60 | ||
| James M. Heron | 2,900 | 2,900 | |
| Ellis W. Ryan | 300 | 200 | |
| Raymond H. Crawford | 33.33 | 33.33 | |
| Frank H. Thomas | 33.33 | 33.33 | |
| Fayette Bank & Trust Co | 111.11 | ||
| Katherine Heron | 111.11 | ||
| Joseph E. Huston | 100 | ||
| Hyatt L. Frost | 107 | ||
| Robert L. Huston | 60 | ||
| William P. Heron | 100 | ||
| Dora A. Frost | 173 | ||
| Helen N. Shively | 100 | ||
| Hyatt L. Frost, Agent | 200 | ||
| R. N. Huffman | 1,000 | ||
| Total | 10,000.00 | 10,000.00 | 4,500 |
*966 In the year 1930, at the time of the Transaction here in question, the stockholders of record were the owners of the stock, except that the stocks standing in the names of Catherine Ansted, Joseph Huston, and Robert Huston were owned by their respective estates. George Ansted was administrator of the estate of his mother, Catherine Ansted. Nothing was paid in for the common stock of the new company, the petitioner, except the equity applicable to the capital stock in Rex Manufacturing Co.
*988 Certain stockholders of the Rex Manufacturing Co. paid in cash in the amount of $40,000 on July 11, 1930, for which they received first mortgage bonds of petitioner as follows:
| C. C. Hull | $16,219.80 |
| Geo. W. Ansted | 7,955.40 |
| Matthew R. Hull | 3,547.80 |
| Nellie Ansted Huston | 2,277.00 |
| James M. Heron | 10,000.00 |
| Total | 40,000.00 |
In carrying out the details of the plan and in order to perfect the title to real estate and personal property in the new corporation, it was considered advisable to have a sale in the bankruptcy proceeding.
A reorganization committee was named, which sent out a letter to all creditors outlining the plan. In carrying out the plan of reorganization, *967 all of the creditors of the old corporation assigned their claims in writing to Raymond S. Springer, as trustee. This instrument provided that Springer, as trustee, was to receive a dividend of 100 percent which was to be paid by him as trustee in bankruptcy, and he, as trustee, by assignment of the claims of creditors was to use 75 percent of the dividend for the purpose of purchasing bonds for the creditors and remit them the 25 percent balance in cash, all of which was done, and the records of the bankruptcy court show that the creditors received 100 cents on the dollar in cash.
The sale of real estate and personal property was held by the trustee in bankruptcy on July 10, 1930, and the new corporation was incorporated on July 12, 1930.
C. C. Hull, who had been president of the Rex Manufacturing Co. ever since its organization, was, by mutual consent of all of the stockholders, designated as the person to whom the trustee in bankruptcy was to make the conveyance of real estate and bill of sale for the personal property, to hold the same until the new corporation was duly organized and until the details of the reorganization could be worked out. The mechanics of carrying*968 out the plan of reorganization after the sale had been made by the trustee in bankruptcy were quite complicated and required several weeks to be worked out. The deed and bill of sale to Hull were withheld by the trustee in bankruptcy until all these mechanics were worked out, and they were finally delivered to him and recorded on July 31, 1930. Hull in turn, on the same day, conveyed and transferred all of the property to the new corporation, the taxpayer herein.
As a result of all these proceedings, the creditors of the Rex Manufacturing Co. were all paid and satisfied with cash and first mortgage bonds, the expenses of administration were paid, and the business *989 continued to operate all through the bankruptcy proceedings and was saved to the stockholders and the community.
It has been stipulated by the parties as follows:
Certain collateral was pledged on July 12, 1930, as additional security on certain bank indebtedness of said Rex Manufacturing Co., by certain stockholders of said corporation, as follows:
| Stockholder | Collateral Pledged |
| C. C. Hull | $24,329.70 |
| Geo. W. Ansted | 11,933.10 |
| Matthew R. Hull | 5,321.70 |
| Nellie Ansted Huston | 3,415.50 |
| Total | $45,000.00 |
*969 If the assets of Rex Manufacturing Co. were acquired by the petitioner in a reorganization under which the basis of the assets in the hands of the petitioner must be the same for tax purposes as they were in the hands of Rex Manufacturing Co., then the adjusted basis of the assets at the beginning of the taxable year 1932 was as follows:
| Assets | Cost | Depreciation | Adjusted Basis |
| Buildings | $187,762.54 | $89,751.74 | $98,010.80 |
| Sprinkler system | 10,946.70 | 6,948.06 | 3,998.64 |
| Power plant | 30,319.47 | 18,638.29 | 11,681.18 |
| Power plant equipment | 27,262.73 | 26,770.23 | 492.50 |
| Machinery | 72,012.48 | 49,383.20 | 22,629.28 |
| Plant equipment | 90,304.71 | 60,647.28 | 29,657.43 |
| Tools, dies and patterns | 16,137.77 | 3,196.60 | 12,941.17 |
| Furniture and fixtures | 10,193.09 | 8,667.15 | 1,525.94 |
| Autos and trucks | 625.00 | 208.34 | 416.66 |
| Totals | $445,564.49 | $264,210.89 | $181,353.60 |
If the assets of Rex Manufacturing Co. were acquired by the petitioner in connection with a transaction by which the petitioner is not entitled to use as the adjusted basis of such assets, the adjusted basis which the assets had in the hands of said Rex Manufacturing Co., then the adjusted basis of*970 the assets at the beginning of the taxable year 1932 was as follows:
| Allocation at June 30, 1930 | Additions to Dec. 31, 1930 | Total | |
| Buildings | $33,991.27 | $356.25 | $34,347.52 |
| Machinery | 10,331.91 | 12,395.59 | 22,727.50 |
| Furniture | 886.40 | 223.03 | 1,109.43 |
| Delivery equipment | 55.10 | 55.10 | |
| Power plant and equipment | 491.21 | 491.21 | |
| Plant and equipment | 12,720.09 | 12,720.09 | |
| Dies and patterns | 3,721.67 | 3,721.67 | |
| Automobile | 625.00 | 625.00 | |
| Total | $45,264.68 | $30,532.84 | $75,797.52 |
If the basis of the assets in the hands of the petitioner is $181,353.60, then the depreciation deduction for the year 1932 is $13,903.77. If the basis of the assets in the hands of the petitioner is $75,797.52, then the depreciation deduction for the year 1932 is $6,182.69.
*990 OPINION.
KERN: This case presents the question of whether the basis for ascertaining the amount of depreciation of the property of the petitioner should be the value of these assets while they were held by the Rex Manufacturing Co., or their value at the date of their acquisition by petitioner. It is the contention of petitioner that it acquired these assets as a result of a reorganization*971 within the meaning of the Revenue Act of 1928, and that immediately after the transfer to it an interest or control in such property of 50 percent or more remained in the same persons.
The provisions of the statute which are pertinent are section 112(i)(1) of the Revenue Act of 1928, and sections 113(a)(7) and 114(a) of the Revenue Act of 1932, which are set forth in the margin. 1
*972 Since we are of the opinion that immediately after the transfer of the assets here involved from the Rex Manufacturing Co. to petitioner an interest or control in such property of 50 percent or more did not remain in the same persons or any of them within the meaning of section 113(a)(7) of the Revenue Act of 1932, we do not consider it necessary to decide whether a reorganization took place within the meaning of section 112(i)(1) of the Act of 1928, *991 but shall merely assume that it did for the purpose of this discussion. We are aware that counsel for petitioner has asked for our decision on this question, regardless of our decision as to the construction of section 113(a)(7) of the Act of 1932, but we refrain from so doing because of the fact that this phase of the case was not considered in respondent's brief.
Petitioner contends that, since an interest or control in petitioner of more than 50 percent was in former stockholders of the Rex Manufacturing Co., the basis should be the same as it was in the hands of that company, even though these stockholders owned less than 50 percent of the stock of the Rex Manufacturing Co. Petitioner rests this contention on language*973 used by the Circuit Court of Appeals for the Seventh Circuit in the case of . However, that case as well as the case of , also cited by petitioner, involves a different question from that presented here, as petitioner frankly recognizes by his statement that the precise point urged by the respondent in this case does not appear to have been presented in any decided case. Therefore, we feel it necessary to consider the language of the statute itself as applicable to the present case. The words of the statute are: "If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 percent or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was*974 made." We take this to mean that after the transfer an interest or control in such property of 50 percent or more must remain in the same persons or any of them who collectively, but not necessarily in the same individual proportion, held at least 50 percent of interest or control in the property of the transferor corporation. This seems to us to be the plain meaning of the statute and should not be affected by any surmise as to legislative intent contained in the opinion of the court in
Out of 4,500 shares of the stock of the petitioner which were outstanding, 3,500 were owned by former stockholders of the Rex Manufacturing Co. These stockholders were C. C. Hull, George W. Ansted, Matthew R. Hull, and Nellie Ansted Huston, and collectively they owned 4,875.55 shares of the 10,000 shares of preferred stock and 4,765.55 shares of the 10,000 shares of the common stock of the Rex Manufacturing Co. Reduced to percentages, these stockholders owned 48.75 percent of the preferred stock and 47.65 percent of the common *992 stock of the Rex Manufacturing Co., or 48.20 percent of all of its outstanding*975 stock.
Petitioner contends that if the above construction of the statute is made by us, nevertheless, it should be considered that more than 50 percent of the interest or control in the property of petitioner remained in persons who collectively held more than 50 percent of the interest or control in the property of the Rex Manufacturing Co., and bases this contention on the fact that George W. Ansted, who held stock in both the petitioner and the Rex Manufacturing Co., was administrator of the estate of his mother, Catherine Ansted, who held 666.68 shares of Rex Manufacturing Co. stock, and the fact that James M. Heron, who owned 2,900 shares of the stock of that company, owned, after the transfer of its property to petitioner, first mortgage bonds of the petitioner in the amount of $10,000.
Petitioner, in its brief, takes the position that, since George W. Ansted was administrator of the estate of Catherine Ansted, either he must be considered as owning her stock in the Rex Manufacturing Co., or he and his sister, Nellie Ansted Huston, as heirs of Catherine Ansted. The obvious difficulty of this position is that the stock of Catherine Ansted belonged during the taxable year*976 to her estate, and George W. Ansted held the stock not individually, but in a purely representative capacity, while the ultimate beneficial interest in such stock, which might be in George W. Ansted and Nellie Ansted Huston, would depend upon whether there other heirs at law, whether there was a will (he might have been administrator c.t.a.), and whether the other assets of the estate, if any, were sufficient to pay the obligation of the estate, if any. There is no evidence in the record on these questions and, therefore, no proof of such beneficial interest in the stock of Catherine Ansted in the Rex Manufacturing Co. being in George W. Ansted and Nellie Ansted Huston.
Petitioner's contention that James M. Heron had an interest or control in the property of the petitioner by virtue of his ownership of first mortgage bonds of petitioner is answered in petitioner's own brief, in which it is stated that "the phrase 'interest or control' as used in the reorganization provisions of the Revenue Acts means the per cent of stock owned." Petitioner then cites *977 , and .
We must, therefore, conclude that the former stockholders of the Rex Manufacturing Co. who held 77.8 percent of the stock of petitioner immediately after the acquisition by petitioner of the property formerly owned by the Rex Manufacturing Co., held before the transfer only 47.65 percent of the common stock and 48.75 percent of the preferred stock of the Rex Manufacturing Co., and, therefore, the provisions of section 113(a)(7) of the Revenue Act of 1932 do not *993 apply to the situation presented by this case, and, as covered by the stipulation of the parties, in the event of such finding, the proper depreciation deduction for the year 1932 is $6,182.69.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(i) DEFINITION OF REORGANIZATION. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) 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 stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
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 -
* * *
(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. - If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(a) BASIS FOR DEPRECIATION. - The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113(b) for the purpose of determining the gain or loss upon the sale or other disposition of such property. ↩