*706 1. X corporation became insolvent. Pursuant to a plan of reorganization a majority of its bondholders deposited their first mortage bonds with a bondholders' committee, which foreclosed the mortgage on X's assets, and bought them in at the foreclosure sale for $100,000, represented by the deposited bonds plus a small amount of cash. Y, the committee's nominee, paid the nondepositing bondholders cash for their bonds as the result of a roundabout but planned serives of transactions. The taxpayer corporation was formed, pursuant to a plan, to take over X's assets from the committee and continue the business. In exchange for a transfer of the assets from the committee, the taxpayer corporation issued new bonds and voting stock to the depositing bondholders; and also issued paid-up capital stock to be held in escrow for the benefit of the old corporation's stockholders. (The old corporation had turned in to the committee certain of its own bonds and certain cash not subject to any existing liens.) In addition to the above mentioned securities, the taxpayer issued certain bonds to Y; Y turned them in to the committee and received therefor, inter alia, reimbursement for the cash*707 paid by Y to the nondepositing bondholders of X. The committee then turned these new bonds in to the taxpayer; received nothing in exchange therefor and the taxpayer retired the bonds. All this was done pursuant to a plan. Held, that the taxpayer corporation did not acquire X's assets as the result of a tax-free reorganization, as that term is defined in section 112(g) of the Revenue Act of 1934. Commissioner v. Southwest Consolidated Corporation,315 U.S. 194">315 U.S. 194.
2. The bondholders' committee purchased X's land and building at the foreclosure sale for $100,000. At that time the fair market value of the land was $80,000 and the fair market value of the building was $220,000. The committee transferred these properties and certain cash immediately thereafter to the taxpayer corporation in exchange for bonds having a face value of $400,000 and capital stock. Certain of these bonds having a face value of $38,300 were immediately turned back without payment, pursuant to a preexisting agreement. Held, that that the basis of such property to petitioner was its cost, which was an amount equivalent to the face amount of its bonds actually issued for such*708 property, and this cost on the evidence may be allocated to the several items of property.
3. Upon the facts stated, held, petitioner's bonds were not issued at a discount.
4. In the fiscal years 1936, 1937, and 1938 taxpayer corporation bought in its bonds at less than face value and retired them. Held, that the taxpayer thereby realized taxable income.
*316 The respondent has determined deficiencies in income and excess profits taxes for the fiscal years ended October 31, 1936, 1937, and 1938, in the following amounts (all of which are in controversy):
| Fiscal year ended | Income tax | Excess profits tax |
| 10/31/36 | $1,945.53 | $531.20 |
| 10/31/37 | 1,278.60 | 981.80 |
| 10/31/38 | 804.06 |
In addition to contesting respondent's determination, petitioner claims overpayments for each of the years involved.
The main issue as presented for our determination is whether the petitioner acquired certain land and an office building thereon in Sacramento, *317 California, as the result of a reorganization, *709 as that term is defined in section 112(g) of the Revenue Act of 1934, thereby entitling petitioner to use as the basis for depreciation on the building (and the equipment, furniture, and fixtures therein) the basis in the hands of the transferor corporation. Two alternative issues are raised in the event we determine that there was no reorganization: first, whether petitioner is entitled to amortize, as discount, the excess of the aggregate face amount of bonds issued by petitioner over the value of the property received by petitioner; and, second, whether petitioner, in the event its basis as to the property acquired is held to be that determined by respondent and it can not amortize any discount, realized any gain on the purchase and retirement of its bonds.
FINDINGS OF FACT.
Petitioner (sometimes hereinafter referred to as "the new corporation") is a California corporation, incorporated on November 8, 1934, with its principal place of business in San Francisco. At all times since incorporation petitioner has kept its books of account and filed its income tax returns on a fiscal year basis (November 1, to October 31) and has computed its income on the accrual basis. For*710 the years involved petitioner filed its income tax returns with the collector's office at San Francisco, California.
From 1927 until October 30, 1934, the Sacramento Medico Dental Building, Inc. (hereinafter referred to as the old corporation), was the owner of certain realty in Sacramento, California, upon which was situated an office building known as the Sacramento Medico Dental Building. This property was owned subject to a trust indenture, dated May 1, 1927, by which the property was made security for the payment of an issue of 6 1/2 percent first mortgage bonds of the old corporation in the principal amount of $450,000.
On May 1, 1933, the old corporation defaulted in the payment of interest and in the performance of certain other acts required by said trust indenture to be performed by it, which default was never cured. By virtue of the default the trustee under the trust indenture accelerated the maturity of such of the bonds as had not by their terms matured on May 1, 1933. At the date of the default $416,500 in principal amount of bonds of the old company were outstanding.
In May 1933 a bondholders' protective committee (hereinafter referred to simply as the committee) *711 was formed to act for the holders of bonds of the old corporation. By virtue of a written deposit agreement, holders of $361,700 in principal amount of bonds of the old corporation deposited their bonds with the committee and vested in the committee broad powers to effectuate a plan for the reorganization of the old corporation.
*318 Subsequent to the formation of this committee, negotiations were entered into by the old corporation, the committee, and the Santa Inez Co. for the purpose of formulating a plan under which the Sacramento Medico Dental Building might continue to be operated. The Santa, Inez Co. had commenced purchasing the old corporation's bonds shortly after Santa Inez's incorporation in 1932, and as of March 5, 1934, owned $64,900 face value of the old company's bonds. Thereafter Santa Inez acquired additional bonds or certificates of deposit, so that as of October 31, 1934, Santa Inez owned $86,900 principal amount of the old company's bonds.
These negotiations culminated, on March 6, 1934, in the adoption of a written agreement and plan of reorganization, to which the old corporation, the committee, and Santa Inez were parties. We incorporate this*712 plan of reorganization into our findings by reference. The following is a brief analysis of its material provisions:
The plan recited that, when the trustee should offer the property for sale pursuant to the provision in trust indenture, the committee, in the absence of other satisfactory bids, intended to purchase the property for the benefit of the deposition bondholders.
Title was to be conveyed to a new corporation to be organized, which was to be authorized to issue 5 percent bonds in the principal amount of $400,000 to mature in 15 years. The common stock of the new corporation was to be issued to voting trustees and provisions with regard to the issuance of voting trust certificates were as follows:
Voting trust certificates representing 45% of the common stock shall be distributed to the depositing first mortgage bondholders who approve of the plan of reorganization. * * * Voting trust certificates representing 55% of the common stock shall be issued to stockholders of said undersigned [the old corporation]. Said stock shall be issued as fully paid and shall be and remain non-assessable.
* * *
The voting trust agreement shall endure for a period of seven years, *713 unless terminated by four of the voting trustees; provided, however, that if at the expiration of said period of seven (7) years the principal amount of the new bond issue shall not have been reduced to $250,000, then said voting trust agreement shall continue until the principal amount of said new bond issue shall have been reduced to $250,000. * * *
The voting trust certificates issued to such stockholders of said undersigned [the old corporation] shall be deposited under an escrow agreement with a bank or trust company designated by the Committee. Said escrow agreement shall provide that in the event that any default shall occur in the observance or performance of any covenants, terms, provisions and conditions contained in said new Trust Indenture, or in the New Bonds secured thereby, and said defaults are not cured before the expiration of 30 days after written notice thereof by the Trustee to said stockholders, and notice thereof is given in writing to said bank or trust company by the trustee under said new Trust Indenture, or in the even that on or before May 1, 1941, there shall not have been made available, either from available surplus cash receipts from the property*714 of the new corporation or from *319 private funds supplied by the undersigned, Sacramento Medico Dental Building, Inc., or its stockholders, the sum of at least $35,000 for the retirement and cancellation of the new bonds, then said voting trust certificates so deposited shall become null and void and the voting trustees shall cancel such voting trust certificates and the stock represented thereby.
No dividends were to be paid upon any of the new stock until such time as the new bond issue should be reduced to $200,000 in principal amount.
The old corporation agreed deposit with the committee, immediately upon acceptance of the plan, bonds of the old corporation having a par value of $16,500, with coupons of May 1, 1933, and all subsequent coupons attached. These bonds were to be used by the committee in purchasing the property at the trustee's sale and were to be immediately canceled by the trustee after the sale and the owners of the bonds were not to participate in any of the benefits resulting from the sale by reason of their ownership of the bonds.
The old corporation further agreed that, on the date of mailing of the notice and summary of the plan to the bondholders*715 ("provided upon such date the preliminary approval thereof by the Commissioner of Corporations of the State of California and the Federal Trade Commission shall have been obtained"), it would turn over to be the committee accumulated funds in its possession amounting to not less than $33,779.72; which sum should be applied by the committee, first, to pay expenses in connection with the trustee's sale, the reorganization, and the payment of other requirements in connection with the reorganization and, second, to distribute any balance as a cash distribution to the bondholders approving the plan.
An estimate of reorganization expenses was to be prepared by the committee, but the total amount thereof should not exceed $10,000.
Depositing first mortgage bondholders, that is to say, holders of certificates of deposit issued by your depository in exchange for the outstanding bonds, and who assent to this plan, shall receive (a) new bonds in a face amount equal to the face amount of the deposited bonds; (b) voting trust certificates representing ten shares of stock of the new corporation for each $1000 bond, voting trust certificates representing five shares of stock of each $500 bond, *716 and a voting trust certificate representing one share of stock for each $100 bond; (c) their pro rata share of any cash distribution made of the balance of the funds referred to in paragraph VI hereof.
The plan was conditioned upon the acquisition of the property by the committee, its representatives, or nominee.
This plan of reorganization shall be subject to the approval of any public authorities having jurisdiction over the same. In the event the approval of this plan of reorganization by any such public authorities shall be conditioned upon the modification of this plan of reorganization or any of the terms or provisions thereof, then and in such case this plan of reorganization shall be deemed to be modified in such respects and such modification shall be binding on all bondholders who shall theretofore have approved of this plan of reorganization.
*320 If Santa Inez should be the purchaser on behalf of the committee at the foreclosure sale, the deposited bonds should be applied on the purchase price, and only the balance payable in cash under the provisions of the existing trust indenture should be paid by Santa Inez. In return for the cash payment, Santa Inez*717 would:
* * * be entitled to receive such securities of the new corporation as the nondepositing bondholders would have received had their bonds been deposited under said deposit agreement and this plan, and Santa Inez Company shall further be entitled to receive its pro rata share of cash as in paragraph VI hereof provided. * * *
The foregoing provisions constituted in outline the original plan. The parties to the agreement had decided that the value of the property of the old corporation was less than the amount due on the outstanding bonds. Since the old corporation had some $16,500 par value of the old 6 1/2 percent first mortgage bonds, which it owned, and also the $33,779.72 in cash not subject to any lien since it had been taken in by the old corporation before the trustee under the indenture took possession, at the suggestion of the bondholders' committee and Santa Inez the old corporation agreed to cancel the $16,500 of bonds which it (or its stockholders) held and turn over the cash to the committee, provided the plan made provision for issuance to the old corporation or its stockholders of the voting trust certificates for 55 percent of the stock to be issued by the*718 new corporation. The reason for requiring cancellation of the bonds held by the old corporation in the amount of $16,500 was that Santa Inez and the committee felt that $400,000 was the outside amount of new bonds that should be issued by the new corporation.
As provided in the plan and agreement, the old corporation turned over to the committee the $16,500 in bonds and the $33,779.72 in cash sometime prior to the date of the trustee's sale on October 30, 1934. On that date the property was sold by the trustee at the request of the committee and it was bid in by one of the committee's members on behalf of the committee for $100,000. The exact amount of this bid was arrived at after consultation by the various attorneys for the interested parties with a title company which was to issue the title insurance policy. The title company advised that the bid had to be one-fourth of the face amount of the bond issue outstanding. On account of the agreed cancellation of $16,500 of bonds, the outstanding bonds were considered by the title company and all parties to be only $400,000 ($416,500-$16,500), and one-fourth of this figure, or $100,000 was the minimum bid to secure passage of*719 title according to the title company.
At the date of the trustee's sale bonds in the face value of $378,200, including the bonds in the amount of $16,500 which had been transferred for cancellation, were on deposit with the committee. Bonds *321 in the principal amount of $38,300 had not been placed on deposit. The bid price at the sale was paid by application of all the bonds on deposit and a cash balance furnished by Santa Inez to the committee, which, in turn, handed it over to the trustee. Immediately after the sale the bonds in the fact amount of $16,500 were canceled as per the agreement and no one participated in any subsequent distribution by virtur of a claim of ownership of these bonds.
Shortly after the sale the purchaser on behalf of the committee deeded the property just purchased over to the new corporation (the petitioner herein), which was incorporated November 8, 1934, but, pending the new corporation's acquisition of authority for issuance of securities, took back a declaration of trust from the new corporation on November 23, 1934, wherein the new corporation acknowledged that it was holding the property in trust for the bondholders' committee.
*720 On December 27, 1934, the committee made an offer in writing to the new corporation wherein the committee stated that it would convey on certain conditions to the new corporation all the beneficial right, title, and interest which it had in the properties held by the new corporation under the November 23 declaration of trust. The conditions, set forth as consideration for the conveyance were as follows: (a) execution and delivery to the committee of the $400,000 issue of 5 percent first mortgage bonds dated May 1, 1934, and to mature May 1, 1949, to be secured by a trust indenture, and to comply in all respects with the terms and provisions of the March 6 plan of reorganization, subject to approval of counsel for the committee; (b) execution and delivery to and in the name of the trustees of the voting trust agreement provided for in the March 6 plan of certificates for 8,889 no par shares of common stock of the new corporation "in respect of which the depositors of Sacramento Medico Dental Building 6 1/2 percent First Mortgage Gold Bonds and certain other persons and/or corporations are entitled to receive participating or voting trust certificates under the terms and provisions*721 of the plan of reorganization * * *"; (c) execution and delivery of an indemnity agreement to Leigh M. Battson, as successor trustee under the trust indenture securing the bonds of the old corporation, in which agreement the new corporation would agree to save him harmless from any losses, costs, liabilities, and expenses which he had or should thereafter incur from operation of the properties from November 1933 to the date of the trustee's sale; and would agree to pay and perform all contracts and obligations of Battson executed or incurred by him in connection with operating the property; (d) execution and delivery of an agreement to pay all taxes levied or to be levied or assessed against the committee in connection with the reorganization plan and its consummation, including the issuance of *322 securities under the plan; (e) execution and delivery of an agreement to pay any unpaid costs and expenses incurred by the committee in the negotiation for and consummation of the plan of reorganization; and (f) to do all things and take all action to be taken by the "new corporation" under the March 6 plan.
It was specifically provided that the offer was conditioned on the issuance*722 by the Commissioner of Corporations of the State of California of permits authorizing the issuance by the new corporation of the stocks and bonds or trust certificates provided for by the parties.
This offer was accepted by the petitioner and petitioner agreed to perform all conditions set forth therein.
Thereafter, on January 19, 1935, petitioner filed an application with the Commissioner of Corporations of the State of California for a permit authorizing the issuance of 8,889 shares of capital stock and $400,000 in bonds. The proposed plan for distribution was in accordance with the March 6, 1934, plan of reorganization, by virtue of which Santa Inez would receive 383 shares of stock, representing the stock which would have been distributable to the nondepositing bondholders had they deposited their bonds with the committee; 4,889 shares were to be issued to the old corporation or its stockholders, subject to the terms of an escrow agreement, and the remainder was to go to the depositing bondholders, including Santa Inez. The depositing bondholders were to receive new bonds in an amount equal to the face amount of the bonds deposited, and the additional $38,300 in bonds was*723 to be issued to Santa Inez.
The application was denied because of the following objections by the corporation commissioner's office: (1) The proposal to issue stock to stockholders of the old corporation was deemed unfair; (2) the proposal to issue the $38,300 additional bonds to Santa Inez with Santa Inez proposing to pay the nondepositing bondholders only $9,185.38 was deemed unfair; (3) the voting trust was considered both unnecessary and unfair in the light of the first two objections; and (4) there was a suit pending instituted by a nondepositing holder of $3,000 in face value of the bonds of the old corporation to determine the rights of nondepositing bondholders under any new arrangement.
After this denial there were a number of conferences held to agree upon what the corporation commissioner's office would permit and a hearing thereon was held on February 14, 1935. As a result it was agreed that 8,037 shares of capital stock might be issued to voting trustees, but the commissioner ordered the following changes in the original plan: Santa Inez should waive all rights to receive bonds and/or stock which it was to receive pursuant to the plan over and *323 above*724 the amounts receivable in return for its own deposited bonds; but that the additional $38,300 in bonds be issued to Santa Inez and be immediately canceled upon payment to Santa Inez of $16,950 to compensate Santa Inez for the moneys advanced to Leigh M. Battson, the trustee under the old trust indenture, to pay the nondepositing bondholders ($9,185.35) with interest thereon, and for the services rendered in connection with the plan of reorganization ($7,500). This amount was to be paid out of the $33,779.72 which was received by the committee from the old corporation, and actually was paid from this source. An amended application was filed on June 4 and the permit was issued accordingly on June 24, 1935, together with an additional permit allowing the voting trustees to issue the voting trust certificates representing the 8,037 shares under the conditions set forth in the plan.
The petitioner's application as to issuance of stock, which was permitted, changed the permissible issue from 8,889 to 8,037. This difference is accounted for by reason of the corporation commissioner's unwillingness to allow Santa Inez to receive the 383 shares representing those shares which would under*725 the plan have been issued to the nondepositing bondholders had they deposited their bonds with the committee. In order to maintain the 45-55 ratio provided for in the plan, the number of shares issuable to stockholders of the old corporation was therefore correspondingly reduced.
Subsequent to the issuance of these permits and prior to July 24, 1935, petitioner issued first mortgage bonds in an aggregage principal amount of $400,000 and 8,037 shares of capital stock. The bonds in the amount of $38,300 which were to be canceled were, in fact, delivered as per the directions of the corporation commissioner, to Santa Inez, sold to the committee for $16,950, and immediately surrendered by the committee to petitioner for cancellation, without the payment to the committee of any consideration therefor. The remaining bonds, in the face amount of $361,700, and the 8,037 shares of stock were also issued as agreed above. The voting trustees, in turn, issued the voting trust certificates representing 3,617 shares to the depositing bondholders of the old corporation equally in proportion to their bondholdings on deposit; and 4,420 to the stockholders of the old corporation. The certificates*726 representing the 4,420 shares were not physically delivered to the old stockholders but were deposited in escrow under a written escrow agreement.
The agreement was executed on September 18, 1935, as of May 1, 1934, by all the old stockholders and the Anglo californiaNational Bank of San Francisco. It provided, inter alia, that, after the termination of the voting trust agreement and the transfer to the bank of the actual shares, the old stockholders should have the right *324 to vote the shares just as though the shares were not subject to the agreement. The bonds were dated as of May 1, 1934, and were to mature on May 1, 1949.
Prior to July 24, 1935, petitioner complied with conditions (c), (d), and (e) contained in the offer of December 27, 1934, supra.
On July 24, 1935, the committee, the new corporation, and Santa Inez entered into a written agreement, reciting and ratifying seven changes in the plan of reorganization which had been required by the commissioner of corporations, including, in addition to those mentioned above, a provision for accumulation of unpaid interest on the bonds and a provision for annual application of two-thirds of net income*727 to retirement of bonds after the outstanding issue should be reduced to $200,000.
The total cash received by petitioner from the bondholders' committee was $20,837.55, of which amount $20,200 was received on July 31, 1935, and the remainder on December 31, 1935. Petitioner distributed $9,042.50 on August 31, 1935, in payment of interest on the bonds for the period from May 1 to November 1, 1934, and used $7,719.20 further for payment of 1934-1935 property taxes, leaving a balance of $4,075.85 available to the petitioner corporation.
It is stipulated by the parties that the committee made a conveyance to the petitioner of its equitable title to the old corporation's property. This conveyance was made in July 1935, at or about the time the title policy was given in connection with the bond issue.
The original cost of the building here involved to the old corporation was $478,819.97, which amount was supplemented by a further expenditure for furnishings and equipment in the amount of $13,963.02. Depreciation on the building was taken by the old corporation up to and including October 30, 1934, in the amount of $81,664.34. Depreciation on the furniture and equipment to and*728 including the same date, based upon a shorter useful life, was taken in the amount of $5,360.91 by the old corporation. The total adjusted cost of the building and furniture and equipment as of October 31, 1934, was $405,757.74.
As of October 30, 1934, the fair market value of the building and land was $300,000, the value of the building and fixtures alone constituting $220,000 of the total value. The total amount of capital expenditures incurred in connection with the building from October 30, 1934, to October 31, 1938, was $9,063.95.
During the fiscal year ended October 31, 1936, petitioner purchased and retired its 5 percent bonds in the principal amount of $38,200, paying therefor $35,675.70. In its Federal income tax return for that fiscal year petitioner deducted $8,891.40 representing unamortized discount on the $38,200 of bonds purchased and retired within the year, and further deducted $5,577.63 representing amortization of *325 discount on the remaining $323,500 principal amount of its outstanding bonds. petitioner reported the $2,524.30 gain on the purchase as income. Respondent disallowed both deductions and considered the $2,524.30 as correctly reported.
*729 During the fiscal year ended October 31, 1937, petitioner purchased and retired its 5 percent bonds in the principal amount of $27,800, paying therefor $27,258.50. In its Federal income tax return for that fiscal year petitioner deducted $5,991.38 representing unamortized discount on the $27,800 of bonds purchased and retired within the fiscal year, and further deducted $5,098.27 representing amortization of discount on the remaining $295,700 principal amount of its outstanding bonds. Petitioner reported the $541.50 gain on the purchase as income. Respondent disallowed both deductions and considered the $541.50 as correctly reported.
During the fiscal year ended October 31, 1938, petitioner purchased and retired all the remaining outstanding bonds in the aggregate face amount of $295,700, paying therefor $295,210. Petitioner in this year took no deductions representative of unamortized discount on these bonds.
Petitioner paid, in regular quarterly installments, corporate income come taxes for the fiscal years ended October 31, 1936, 1937, and 1938 the amounts of $772.83, $1,526.26, and $2,406.39, respectively.
The fair market value of the building and fixtures acquired*730 by it was $220,000 at the time of such acquisition and at the time of the foreclosure sale.
The fair market value of the land acquired by it was $80,000 at the time of such acquisition and at the time of the foreclosure sale.
The stock of the petitioner at the time of issuance was of no value.
OPINION.
KERN: The first issue for our determination is whether the petitioner corporation acquired the land and building pursuant to a plan of reorganization as that term is defined in section 112(g) of the Revenue Act of 1934, thereby entitling petitioner to use as its basis for depreciation on the building, and fixtures the adjusted cost basis thereof to the old corporation.
Since the parties to this proceeding filed their briefs the Supreme Court has handed down five important opinions concerning "reorganizations." Those opinions are to be found in ; ; commissioner v. *731 ; and ; and .
*326 Many of the contentions made by both parties to the instant controversy are considered in those cases and finally disposed of, and therefore it is unnecessary for us to consider them in this opinion.
It is obvious that if the transaction here in question is to be treated as a reorganization within the meaning of the statute, it must be by virtue of section 112(g)(1)(b) of the Revenue Act of 1934. 1
*732 The transaction can not be gonsidered a reorganization within the meaning of this section under the rule enunciated by the Supreme Court in the Southwest Consolidated Corporation case, supra. In addition to the voting stock (see ), an amount of cash and bonds were also exchanged by the petitioner in return for the property acquired by it. The plan recognized the probability that there would be nondepositing bondholders. In fact, there were. According to the plan they were to be paid off by Santa Inez, which was to be repaid by petitioner. While this is the effect of what happened, the plan called for a series of intricate steps to bring about both the payment and repayment. Santa Inez paid the money to the committee, which paid it to Battson, the trustee under the original bond indenture, as part of the purchase price and he, in turn, paid it to the nondepositors. The repayment to Santa Inez was accomplished by the issuance of certain bonds by the new corporation in the face amount of $38,300 which Santa Inez was required to turn over immediately to the committee, the committee being required to pay Santa Inez therefor*733 the sum of $16,950 ($9,185.38 of which represented the cash advanced by Santa Inez to pay off the nondepositors). The committee was then required to turn in these special bonds to the petitioner; they were to be immediately canceled; and the committee was to receive nothing in exchange therefor. In the Southwest Consolidated Corporation case certain security holders of the old corporation were paid off in cash, which was raised during the reorganization on a loan assumed by the respondent. The Court said:
* * * in substance the transaction was precisely the same as if respondent had paid cash plus voting stock for the properties. * * * The rights of security holders against the old corporation were drastically altered by the sale made pursuant to the plan. The sale not only removed the lien from the property and altered the rights of the security holders in it; it also limited and defined the rights of the individual creditors if they elected to take cash rather than participate in the plan. * * *
*327 Although Santa Inez was actually paid by the committee, the committee was acting as the agent of the petitioner and the petitioner stood behind the committee's obligation. *734 The several steps were mere "intermediate procedural devices utilized to enable the new corporation to acquire all the assets of the old one pursuant to a single reorganization plan." The fact that Santa Inez was one of the depositing bondholders rather than an outsider is immaterial. It can not be said that the assets of the old corporation were exchanged solely for voting stock, as required under clause B, and, therefore, we must conclude that the assets in question were not acquired under a tax free "reorganization" as that term is defined in section 112(g).
It is, therefore, unnecessary to discuss the other contentions of respondent with regard to the same question.
Having concluded that petitioner did not acquire the assets in question as the result of a "reorganization" as that term is defined in section 112(g) of the Revenue Act of 1934, we are now faced with the further issue of what basis to apply to the newly acquired property for depreciation or for gain or loss in the hands of the petitioner. The adjusted cost basis of the old corporation, which would have been the permissible basis only*735 if we had concluded that the transaction was a "reorganization", may not be used by petitioner. Petitioner must be considered as having acquired the property from the bondholders' committee, which, in turn, had acquired it upon foreclosure. Upon the transfer of this property to petitioner by the committee, the depositing bondholders represented by the committee became entitled to voting trust certificates representing only 45 percent of the common stock of petitioner. The other 55 percent of the beneficial interest in the common stock was represented by voting trust certificates issued to the stockholders of the old corporation which had been placed in escrow and were subject to cancellation in the event defaults occurred under the deed of trust securing the bonds of the new corporation. Therefore, the transfer by the committee to petitioner was not one covered by section 112(b)(5) of the Revenue Act of 1934, 2 since, by reason of section 112(h), 3 the *328 transferors were not in control of the transferee corporation immediately after the exchange.
*736 Since no provision of section 112 is applicable, the basis of the property in the hands of petitioner corporation is the cost of such property to petitioner. Sec. 113(a), Revenue Act of 1934. In return for the property acquired petitioner issued its promises to pay certain amounts, in the form of bonds. The face amount of the bonds issued by petitioner for the property in question must be considered as the cost of the property, since it represented the sum which petitioner was obligated to pay therefor. Cf. .
Although petitioner actually issued bonds in the amount of $400,000, the "plan" under which they were issued never contemplated that there would be more than $361,700 in bonds outstanding, and specific provision was made for the purchase by the committee from Santa Inez of $38,300 face amount of bonds and for their immediate retirement by petitioner without compensation. Consequently, we treat the transaction as one in which petitioner acquired certain assets in return for its bonds calling for the payment of the principal sum of $361,700.
Among the assets so acquired was certain cash. From*737 petitioner's financial statement in evidence, it appears that the committee turned over to the petitioner $20,837.55, the balance of the cash in its hands. The portion of that $20,837,55 which was not used to pay current taxes already a liability at the time of the exchange must be considered as value received by petitioner in addition to the realty in exchange for the new bond issue. Real estate taxes in the amount of $7,719.20 for 1934-1935 were paid by the petitioner out of this $20,837.55. This amount appears to have been a tax lien against the property at the time of the exchange, and, therefore, the $7,719.20 will not be considered when computing the assets acquired in return for the bonds. Thus computed, petitioner, in return for its bonds in the face amount of $361,700, received cash in the sum of $13,118.35 and certain property. This property must therefore be considered as having been acquired at a cost of $348,581.65.
In allocating this cost between the depreciable building and fixtures on the one hand, and the land on the other, we shall use the only helpful figures on the matter which appear in the record - those having to do with fair market values as of 1934. *738 Expert testimony was given that the fair market value of all of the property was $300,000, and that the value of the building and fixtures was $220,000. Applying the ratio of 220,000/300,000 established by this testimony to the total cost, we conclude that the cost which should be allocated to the building and fixtures was $255,626.54 and the cost to be allocated to the land was $92,955.11.
*329 Since the facts indicate that a different rate is used in calculating the depreciation on the fixtures than that used in calculating the depreciation on the building, it becomes necessary to go one more step in allocating the cost - this time between the building and the fixtures. In determining a proper ratio to be used in this allocation, we resort to the figures showing cost to the old corporation. The depreciated cost of the building in the hands of the old corporation was $397,155.63, and the depreciated cost of the fixtures was $8,602.11. Applying the ratio of these figures to the sum of $255,626.54 (the cost we have allocated to both building and fixtures), we arrive at an allocation of $250,207.27 to petitioner's cost of the building and $5,419.27 to petitioner's cost*739 of the fixtures. See .
Having determined that the basis to petitioner of the property acquired by it in return for its bonds was the face amount of such bonds less an amount equivalent to the cash received by it, there is no reason which seems to us persuasive to allow petitioner any amortization on account of discount. As we stated in , "The promise to pay a greater sum than the value of the property does not establish ipso facto the presence of discount in the transaction." As petitioner points out, if the basis for determining gain or loss upon the disposition of this property by petitioner had been held by us to be a sum considerably less than the face amount of the bonds issued by it in return for the property, as, for example, the amount bid for the property at the foreclosure sale or its fair market value at the time of such sale, then a strong argument might be made that inequities would result from the disallowance of discount amortization, since, upon a later disposition of the property for a sum equivalent to the face amount of the bonds, a fictitious profit*740 would arise, which could only be offset by a previously allowed deduction on account of discount. However, in view of our decision that the basis of this property to petitioner is equivalent to the face amount of the bonds issued by it in return therefore, we do not have that question before us, and therefore, do not decide it. The basis of the property being as we have decided it to be, we conclude that, under the facts presented by the instant proceeding, petitioner did not issue its bonds at a discount and is, therefore, not entitled to any deduction on account of discount amortization.
Petitioner's contention that it realized no gain on the purchase and retirement of its bonds is conditioned upon our decision on the first two issues that (a) the basis of the property acquired by petitioner in 1934 was its then fair market value, or $300,000, and (b), petitioner is not entitled to deductions on account of a discount in the issuance of its bonds.
*330 Our decision on the first issue, to the effect that the basis of the property acquired by petitioner is an amount equivalent to the face amount of the bonds issued by it for such property, makes this alternative contention*741 of petitioner untenable. Therefore, we decide this issue for respondent.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -
(1) The term "reorganization" means (a) a statutory merger or consolidation, or (b) the acquisition by one corporation in exchange soley for all or a part of its voting stock: of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation; * * * ↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(b) EXCHANGES SOLELY IN KIND. -
* * *
(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩
3. (h) DEFINITION OF CONTROL. - As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩