*212 Decision will be entered under Rule 50.
Three, four, and five-year notes held by petitioner and exchanged in a reorganization of the debtor corporation under section 112 (g) (1) of the Revenue Act of 1936 for debentures and stock of the reorganized corporation, held not to constitute "securities" within section 112 (b) (3) of that act, and petitioner is taxable upon any gain accruing from that transaction. Further held, that petitioner, having received in such transaction, in place of the notes, a new promise by the debtor to pay the same amount with interest, in the form of debentures having a fair market value equal to petitioner's cost of the notes and, in addition certain stock of the debtor corporation of a determinable market value, has realized a gain in the amount of the fair market value of such stock.
*114 Respondent has determined deficiencies and a penalty for the calendar year 1936 as follows:
| Income tax | $ 36,202.91 |
| Excess profits tax | 290.89 |
| Personal holding company surtax | 6,835.74 |
| Penalty for failure to file personal holding company return | 1,708.94 |
*213 The issue is whether petitioner realized a taxable gain when, as a creditor of a corporation reorganized under section 77B of the Bankruptcy Act, it exchanged certain short term notes, which it held, for debentures and stock of the debtor as provided under the plan of reorganization. The parties have filed a stipulation of facts, which we include by reference in our findings of fact. Additional facts were established at the hearing by testimony and exhibits. Such facts set out in our findings as do not appear in the stipulation are found upon this evidence.
FINDINGS OF FACT.
The petitioner is a Delaware corporation. Its income and excess profits tax return for 1936 was filed with the collector of internal revenue at Pittsburgh, Pennsylvania.
The Hillman Coal & Coke Co. (hereinafter called the Hillman Co.) is a Pennsylvania corporation with principal office at Pittsburgh, Pennsylvania, and operates coal mines in western Pennsylvania. W. J. Rainey, Inc. (hereinafter called the Rainey Co.), is a Delaware corporation with principal office in New York City and operates coal mines in western Pennsylvania.
The Davison Coke & Iron Co. (hereinafter called the debtor corporation) was a*214 Pennsylvania corporation. During 1936 its corporate name was changed to Pittsburgh Coke & Iron Co. During the years pertinent to the issues here involved the debtor corporation had its office and principal place of business at Pittsburgh, Pennsylvania, and operated a byproduct coke plant and blast furnace nearby upon Neville Island. In its byproduct coke plant it consumed approximately 1,650 tons of bituminous coal per day in the production of coke, gas, and chemicals. This coal it purchased principally from the Rainey Co. and the Hillman Co.
Prior to 1932 the debtor corporation, in the course of operations, became largely indebted to the Hillman Co. and the Rainey Co. for coal purchased and advances made and also to other creditors from whom it purchased iron ore and coke. In that year it experienced difficulty in meeting the interest upon its obligations and its reorganization by recapitalization was determined upon by agreement between its creditors and stockholders.
In 1933 the Hillman Co. and the Rainey Co. caused the petitioner corporation to be organized in order to center in it the ownership of *115 their interests in, and indebtedness due from, the debtor corporation*215 and thus facilitate their action in securing the contemplated reorganization of the latter.
On July 7, 1933, the Hillman Co. and the Rainey Co. transferred to petitioner the following assets:
| Cost to | |||
| Face amount | transferors | ||
| Preferred accounts receivable due from Davison | |||
| Coke & Iron Co | $ 67,884.60 | $ 67,884.60 | |
| First mortgage bonds of Davison Coke & Iron Co | 500,000.00 | 450,000.00 | |
| Accounts receivable (not preferred) due from | |||
| Davison Coke & Iron Co | 86,550.00 | 86,550.00 | |
| Notes of Davison Coke & Iron Co. due in three, | |||
| four, and five years, without interest | 1,129,000.00 | 1,129,000.00 | |
| Stock of Davison Coke & Iron Co.: | Shares | ||
| Prior preferred | 15,694 | ||
| Preferred | 2,500 | 250,000.00 | |
| Common | 14,701 | 8,622.18 | |
| Total | $ 1,992,056.78 |
As consideration for those assets petitioner gave the following:
| To Hillman | To Rainey | |||
| Co. | Co. | Total | ||
| Preferred stock of petitioner | (shares) | 21,264 | 13,726 | 34,990 |
| Common stock of petitioner | (shares) | 16,640 | 25,060 | 41,700 |
| Notes due in five years | (face amount) | $ 14,908.11 | $ 52,976.49 | $ 67,884.60 |
The above stock and notes were each issued to the Rainey Co. and Hillman Co. in proportion to the*216 assets transferred to petitioner. The preferred stock and common stock of petitioner had equal voting rights. Immediately after the transfer, the transferors owned all the outstanding capital stock of petitioner.
On October 31, 1935, the debtor corporation filed a proceeding in bankruptcy, under section 77B, to effect a plan of reorganization, and on November 25, 1935, the proposed plan was duly approved by the court and on January 31, 1936, the court entered its final decree witnessing the fact that the plan had been fully and completely executed and consummated.
The plan of reorganization effected a readjustment of the debtor corporation's indebtedness and capitalization by funding its obligations presently payable, reducing its fixed charges, and readjusting its capital structure. Under this plan the debtor corporation issued new common stock and debenture bonds. Its old preferred and common stock was exchanged in certain proportions for new common stock. Its bonds were exchanged for new debentures, and the holders of its three, four, and five-year notes and other secured and unsecured indebtedness received in exchange new debentures in face amount equal to their claims and, *217 in addition, certain amounts of the new common stock. Neither the new debentures nor the new stock issued *116 by the debtor corporation, pursuant to the plan of reorganization, and delivered to petitioner and others at or about January 31, 1936, was listed on any stock exchange during the year 1936.
The total amount of three, four, and five-year notes of the debtor corporation outstanding at the time of the reorganization was $ 1,910,700. These were exchanged for new interest-bearing debentures of the same face amount plus 38,214 shares of new common stock. Of the total of three, four, and five-year notes outstanding, the petitioner owned $ 1,129,000, which were exchanged for $ 1,129,000 in new debentures and 22,580 shares of new common stock.
On July 1, 1936, the board of directors of petitioner, by resolution, declared that in their opinion the fair market value of each $ 1,000 new debenture received by it in exchange for three, four, and five-year notes, as heretofore detailed, was $ 850 and that the value of the new common stock received on such exchange was $ 5 per share, and such values were entered upon petitioner's books.
The Koppers Co., one of the large creditors*218 and stockholders of the debtor corporation, had received under the plan of reorganization 50,547 shares of the new common stock of the debtor corporation. Within a few days after the receipt of this stock by the Koppers Co. the petitioner approached that company with a view toward acquiring this stock for the purpose of increasing its stockholdings to such extent as to give it management control of the reorganized corporation. Its offer of $ 4 per share for this stock was refused by Koppers, as was a second offer of $ 4.50 per share. Koppers, in return, offered to sell its stockholdings at $ 5 per share, but this offer was refused by petitioner. Several months later the Koppers Co. offered this stock to another large stockholder at a price of $ 5 per share, but after consideration this offer was refused. Subsequent to this, negotiations by petitioner with Koppers to acquire its stockholdings were resumed and as a result, on July 3, 1936, petitioner purchased this stock from Koppers at $ 5.94 per share.
In 1937, in a second reorganization of the debtor corporation, the new debentures issued under the first plan of reorganization, as hereinbefore detailed, were paid to the holders*219 thereof at face value.
In determining the deficiencies here involved respondent treated the new debentures of the debtor corporation, received in the reorganization by petitioner, as having a fair market value equal to their face value, and the new common stock received as having a value of $ 5.94 per share, as of the date received.
The new debentures of the debtor corporation received by petitioner under the plan of reorganization had a fair market value on that date equal to their face value and the new common stock received had a value on that date of $ 5 per share.
*117 OPINION.
The only issue here is with respect to the exchange by petitioner of its three, four, and five-year notes for debentures and stock of the debtor corporation in the 1935-1936 reorganization. No question is raised as to the tax consequence of petitioner's exchange in that reorganization of its bonds, stock, and indebtedness other than that evidenced by these notes.
Petitioner contends that the three, four, and five-year notes which it exchanged for new debentures under the plan of reorganization constituted securities within the meaning of section 112 (b) (3) of the Revenue Act of 1936, and that, since*220 the reorganization in which these were exchanged was within section 112 (g) (1) of that act, the receipt of the new debentures and stock in the exchange is not taxable. Although this argument is advanced by petitioner as an alternative contention, to sustain it would be to decide the general issue here presented. Consequently we pass upon it first.
This situation is, we think, similar on this point to that we considered in Sisto Financial Corporation, 47 B. T. A. 425, in which we said:
* * * The six-month promissory note of $ 50,000 secured by a second mortgage and other collateral, as well as the demand notes of Barium owned by petitioner, were evidences only of current financing for operating expenses. The loans evidenced by these notes gave petitioner no proprietary interest in Barium. By virtue of such loans petitioner became a mere creditor of Barium and the evidencing notes are not "securities" within the meaning of section 112 (b) (3), supra. * * *
Our decision upon this point in the Sisto case was affirmed by the Second Circuit, 139 Fed. (2d) 253.
The notes here in question were acquired by petitioner*221 from the Hillman Co. and the Rainey Co. at the time of its incorporation by those companies. They were large creditors of the debtor corporations as suppliers of the coal needed by it in its operations. Because of the advantageous business arrangement with a valuable customer, they had made advances to assist it in carrying on its operations. There is no indication that this indebtedness represented an investment in the businsss of the debtor corporation. We think the relationship between petitioner and the debtor corporation as evidenced by these notes was that of debtor and creditor. We therefore hold that the notes in question were not securities within the purview of section 112 (b) (3), supra. Worcester Salt Co. v. Commissioner, 75 Fed. (2d) 251; Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462">287 U.S. 462; L. & E. Stirn, Inc., 107 Fed. (2d) 390.
Petitioner further contends that, even if the transaction in which the notes were exchanged for debentures and stock were taxable in character, since the debentures and stock were received in satisfaction *118 of the note *222 indebtedness, the transaction must be treated as a purchase of the debentures and stock for the amount of the indebtedness and not as a taxable exchange of property. As a basis for this contention petitioner relies wholly upon our decision in Sisto Financial Corpoartion, supra. We held there that the taxpayer, as a creditor, in accepting stock of a debtor in satisfaction of the debt, did not exchange the indebtedness for the stock but merely purchased the stock for the amount of the indebtedness and that, in reality, the transaction was one in which the indebtedness had been paid in cash and the cash had been thereupon used to purchase the stock.
It is noted that upon this point our decision in the Sisto case was reversed by the recent decision of the Second Circuit in Commissioner v. Sisto Financial Corporation, supra. But, aside from any question of the correctness of our conclusion on this issue in that case, we do not agree with petitioner that the situation here is identical with the one there. In the Sisto case a creditor was paid in full. The result of the transaction was that it ceased to be a creditor and became a stockholder of the debtor corporation. *223 In the present case the transaction did not eliminate indebtedness on the part of the debtor corporation to petitioner. Such indebtedness remained in identically the same amount, being represented by a promise to pay evidenced by debentures, whereas the same amount of indebtedness had theretofore been represented by notes. Here the creditor is still a creditor in the same amount. And in addition to the debentures which we have found had a value equal to its cost of the surrendered notes, the creditor has received stock in the debtor corporation of a definite and determined value. Certainly, looking at such situation realistically, it can not soundly be held that a debt due the creditor was paid and the proceeds used by the creditor to purchase debentures and stock. See Eckert v. Burnet, 283 U.S. 140">283 U.S. 140. We think that petitioner realized a gain represented by the value of the stock received. Cf. Commissioner v. National Bank of Commerce of San Antonio, 112 Fed. (2d) 946; Bingham v. Commissioner, 105 Fed. (2d) 971; Commissioner v. Spreckels, 120 Fed. (2d) 517.*224
Peitioner argues further that, in any event, respondent in computing the deficiency has ascribed an excessive value to the debentures and the stock. Respondent determined the debentures to be worth their face value and the stock $ 5.94 a share.
Our finding of a value of par for the debentures when received and $ 5 per share for the stock disposes of this issue. We think this finding is amply justified by the evidence. There is no doubt but that the reorganization placed the debtor corporation in a very much stronger financial position than before. The debentures appear to have been amply secured. They bore interest. We think, in the light *119 of these facts and others disclosed at the time of their receipt by petitioner, they had a fair market value equal to their face value. The correctness of this conclusion appears to be borne out by the fact that they were paid in full in the year following their receipt.
As to the stock received, we can not agree that it had a fair market value at the time of its receipt of $ 5.94 per share. The unsuccessful attempts made to sell this stock at a price of $ 5 per share shortly after its receipt convince us that it was not worth in*225 excess of this amount. Respondent has taken as a value the price at which it sold in July 1936. We think, however, this determination overlooks the conditions existing as of the time of the receipt of the stock and the result of efforts made to purchase or to sell it at about that time. In July of 1936, when the stock sold at $ 5.94 per share, the situation with respect to the corporation was distinctly different. As of that date it had realized a substantial profit upon its operations for the first six months of the year, whereas its record of operations for several years prior to that time had been one of large operating losses.
With respect to the deficiency in personal holding company surtax and the penalty thereon, the parties agree that the recomputation under Rule 50 of such deficiency in income tax as may be found will determine whether petitioner is subject to tax as a personal holding company.
Decision will be entered under Rule 50.