*836 Under a plan previously agreed upon, substantially all the stockholders of an insolvent corporation in 1937 purchased, through a trustee, the outstanding bonds of the corporation at a discount of 50 percent, foreclosed on the bonds, acquired the corporation's assets at a public sale, and transferred the assets to a new corporation in exchange for its stock. The stock of the new corporation was issued to them in proportion to the cash with they contributed to the purchase of the assets. Held, that the petitioners did not exchange their shares of stock of the old corporation for shares of the new in a statutory reorganization, and that they sustained a deductible loss in 1937 of their investment in the old shares.
*673 These proceedings, consolidated for hearing, involve income tax deficiencies as follows:
| Petitioner | Docket No. | Year | Deficiency |
| E. M. Wilson | 103909 | 1937 | $1,794.39 |
| Mrs. E. M. Wilson | 103910 | 1937 | 1,794.39 |
| D. E. Japhet & Co | 103968 | Fiscal year ended June 30, 1938 | 379.50 |
The only question in*837 issue is whether the petitioners are entitled to a loss deduction on account of the worthlessness of stock in a corporation whose assets were acquired at a foreclosure sale by the bondholders, most of whom were also stockholders, and transferred to another corporation in exchange for stock.
FINDINGS OF FACT.
1. The petitioners are residents of Houston, Texas. They filed their income tax returns for 1937 with the collector at Austin.
2. Each petitioner was the owner during 1937 of stock in the Terminal Compress & Warehouse Co., a Texas corporation engaged in the business of handling, compressing, and storing cotton at Houston, *674 Texas. Petitioners had acquired the stock in 1929, and the amount held by each and the cost thereof to each were as follows:
| Name | Shares | Cost |
| E. M. Wilson | 100 | $10,000 |
| Mrs. E. M. Wilson | 100 | 10,000 |
| D. E. Japhet & Co. | 34 1/2 | 3,450 |
The stock shown as belonging to Wilson and wife was their community property, and the whole 200 shares stood in the name of E. M. Wilson & Co., a sole proprietorship owned by the community.
3. The Terminal Compress & Warehouse Co. (hereinafter sometimes referred to as Terminal) *838 was a Texas corporation formed in 1929 with a capital of $200,000, consisting of 2,000 shares with a par value of $100 each. Thereafter, it operated a public cotton warehouse and provided a general service of handling, compressing, and storing cotton.
4. Terminal operated profitably for several years but started losing money at some time during its fiscal year ended June 30, 1935, and sustained a loss for that year of $5,090.04. Conditions became worse and for the next year it lost $59,219.82. The company then discontinued active operations but it nevertheless sustained a loss for the fiscal year ended in 1937 in the amount of $55,388.94.
5. In the fall of 1937 Terminal had outstanding bonds in the face amount of $362,500, which were secured by a mortgage covering all of its assets, except a comparatively small amount of cash. The mortgaged assets consisted of a number of sheds and buildings, of different types of construction (frame, brick, concrete), some of which were constructed prior to 1900. The principal structure was a fivestory brick and concrete warehouse, built in 1912. These properties were located in Houston, Texas, on the Ship Channel, a waterway to the*839 Gulf of Mexico.
6. Terminal defaulted in the payment of interest on its bonds in June 1936, and in December of that year defaulted also in the payment of interest and principal, the bonds becoming due on that date. It also failed to pay its taxes for 1936. In the latter part of 1937 Terminal's bonds were selling in the open market at approximately 50 cents on the dollar.
7. During 1937 a group of individuals and concerns constituting 15 out of 19 of the stockholders of Terminal agreed among themselves to acquire the outstanding bonds of Terminal, to foreclose on the mortgage and acquire Terminal's assets at the foreclosure sale, and then to transfer the assets to a new corporation in exchange for its capital stock. This group of persons appointed John H. Freeman, an attorney at Houston, Texas, as agent and trustee to carry out the plan. *675 On September 13, 1937, Freeman entered into a contract with certain brokers in St. Louis, Missouri, whereby the brokers agreed to endeavor to purchase Terminal's bonds for Freeman at a flat price of 50 percent of face value. Freeman thereafter acquired, principally through the brokers and also by direct purchase, $304,500 face*840 amount of Terminal's outstanding bonds at a cost, including expenses, of $160,007.05. Prior to this time none of the stockholders of Terminal owned any of its bonds, and all of the bonds purchased by Freeman, either direct or through the brokers, were acquired from strangers in the open market.
8. On November 4, 1937, being the owner of the required amount of bonds, Freeman made demand on the St. Louis Union Trust Co., the trustee under the mortgage securing the bonds, to foreclose the mortgage. The necessary steps having been taken in accordance with the law and the terms of the mortgage, on December 7, 1937, the trustee sold the mortgaged property at public sale in Houston, Texas, to Freeman, who made the only bid on the property, for $170,000, which was satisfied by payment of $25,526.93 in cash, contributed by the persons previously referred to and by two or three persons who were permitted to take the place of some of the stockholders of the corporation, and by the credit of $144,473.07 on $304,500 of bonds which had been purchased by Freeman, such credit being at the rate of $474.46 for each $1,000 bond.
9. Immediately after the sale the trustee conveyed the mortgaged*841 assets to Freeman, and Terminal was then left with the sum of $16,822.26 in cash as its sole remaining asset and this amount was thereupon distributed ratably to unsecured creditors and to the bondholders to apply ratably on their deficiency.
10. On December 9, 1937, a new corporation, Terminal Warehouse Co., was organized, and on December 20, 1937, Freeman conveyed to it the assets of Terminal (old company) acquired at the foreclosure sale. In addition, the persons who had participated in the plan paid in on a pro rata basis $30,501.70 to the capital of the new corporation. The 2,250 shares of stock of the new corporation were distributed to the participants in the pool in accordance with their payments of cash into the pool, which were also in accordance with their ownership of stock in Terminal (old company). One of the stockholders of the old company, owning 15 1/2 shares out of 2,000, failed to make any contribution to the pool, and he, consequently, received no shares of stock in the new corporation. Three stockholders of the old corporation owning 119 shares waived their rights in favor of other individuals, who made their contributions and received shares of stock in*842 the new corporation accordingly. One of the old stockholders owning 22 shares of stock contributed his pro rata share to the pool, namely, $2,702.57, but before certificates for new shares were issued he sold his right to receive a certificate for shares in the new corporation *676 and, accordingly, a certificate for 24.9433 shares of stock of the new company was issued to the person who acquired his rights.
11. The shares of stock of Terminal (old company) became worthless in 1937. Shares of the new corporation were issued to old stockholders not by reason of their ownership of shares of stock in the old corporation but solely by reason of their contributions to the pool.
12. Terminal was dissolved on April 29, 1938.
OPINION.
SMITH: The petitioners contend that their shares of stock in Terminal (the old company) became worthless during the taxable year 1937 by reason of the foreclosure sale of the corporation's assets, giving rise to a deductible loss under section 23(e) of the Revenue Act of 1936. The respondent's position is that the claimed losses, in any event, are nonrecognizable for tax purposes, under the reorganization provisions of the statute, section*843 112(b)(3) and 112(g) and (h) of the 1936 Act, and, further, that the stock of Terminal did not become worthless in 1937.
The provisions of the Revenue Act of 1936 referred to above are as follows:
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(e) LOSSES BY INDIVIDUALS. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(b) EXCHANGES SOLELY IN KIND. -
* * *
(3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock of securities in such corporation or in another corporation a party to the reorganization.
* * *
(g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -
(1) The term "reorganization" means (A) a statutory merger or consolidation, *844 or (B) the acquisition by one corporation in exchange solely 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, or (C) 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 *677 which the assets are transfered, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however affected.
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.
(h) EDFINITION OF CONTROL. - As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 percentum of the total number of shares of*845 all other classes of stock of the corporation.
Considerable portions of the briefs filed in this proceeding are directed to the question whether under the facts above set forth there was a reorganization of Terminal in 1937 when the bondholders, who were likewise the principal stockholders of Terminal, acquired its assets at foreclosure sale and transferred them to the new corporation in exchange for its shares of stock. Since these briefs were filed, the United States Supreme Court on February 2, 1942, handed down opinions in ; ; ; and . All of those cases involved questions of reorganization, either under the 1928, 1932, or 1934 Acts, on facts similar in some respects to the facts in the instant case.
We do not think, however, that the issue presented in this proceeding requires a determination of the reorganization question. Petitioners claim a loss deduction*846 on account of their stock in the Terminal Compress & Warehouse Co. becoming worthless in the taxable year 1937. The respondent has determined that the claimed loss, if sustained, is nonrecognizable under section 112(b)(3) because petitioners exchanged their stock in the old corporation for stock in the new corporation in a reorganization. For section 112(b)(3) to apply, obviously, there must first be an exchange of stock for stock. There was no such exchange in the instant case. The stockholders of the old company did not exchange their old shares for shares of the new company, or for anything else. The old shares had become utterly worthless before the new corporation was formed and carried no exchange value or other rights of participation in the new company. It was only the bondholders who had that right. While it is true that a majority of those bondholders were also former stockholders of the old corporation, it was not as such stockholders, but rather as bondholders, that they participated in the new venture and received stock of the new corporation. In *847 , the Court said:
* * * And it is clear that the fact that the creditors were for the most part stockholders of the parent company does not bridge the gap. The equity *678 interest in the parent is one step removed from the equity interest in the subsidiary. In any event, the stockholders of the parent were not granted participation in the plan qua stockholders.
The interests of the stockholders of the old company in the assets of the company and their investments in the stock were lost when the assets were sold at foreclosure sale for the benefit of creditors.
We have found as a fact on the evidence of record that the stock of the Terminal Compress & Warehouse Co. (the old corporation) became worthless in 1937, the year in which the foreclosure proceedings were commenced and all of its assets were sold for the benefit of creditors. We think that petitioners sustained deductible losses of their investments in the stock in that year.
Decisions will be entered under Rule 50.