*928 Pursuant to a plan to place certain chattels owned by DeWitt Clinton Co., and used by it in the operation of the DeWitt Clinton Hotel, beyond the reach of a realty mortgagee, the chattels were permitted to go to default under a chattel mortgage held upon them by a finance company and were purchased by petitioner at a public auction sale, conducted by the finance company, for the sum of the unpaid balance due under the chattel mortgage and the expenses of the finance company in connection therewith. In pursuance of the plan, all of the capital stock of petitioner was issued to a "dry" trust for the stockholders of the DeWitt Clinton Co. Held, the chattels were acquired by petitioner pursuant to a plan of reorganization and the basis for their depreciation in the hands of petitioner is their original cost to the transferor, DeWitt Clinton Co., adjusted under section 113(b)(1)(B). Sec. 113(a)(7), Revenue Acts of 1932 and 1934.
*1147 This is a proceeding to redetermine deficiencies in income taxes for the fiscal years*929 ended June 30, 1933, and June 30, 1934, in the respective amounts of $4,243.46 and $3,791. The issue is the proper basis for depreciation of certain assets to the petitioner.
FINDINGS OF FACT.
Petitioner was organized as a corporation under the laws of the State of New York on April 29, 1932. Its principal office and place of business is in Albany, New York, where it operates the DeWitt Clinton Hotel as a lessee of the DeWitt Clinton Co., hereinafter called DeWitt. During the year 1928, Dewitt owned and operated the DeWitt Clinton Hotel and, on November 15 of that year, it purchased furniture and fixtures at a cost of $260,173.94, for its use in the hotel. These chattels were subject to conditional bills of sale running to Nathan Straus & Sons, Inc., conditional vendor, and the Albany Metropolitan Corporation, conditional vendee. The bills of sale therfor, together with accompanying promissory notes, had been assigned and endorsed to the Commercial Investment Trust, Inc., while DeWitt had assumed the obligation of the Albany Metropolitan Corporation under the bills of sale and the notes and renewals and extensions thereof. From November 1928 to June 30, 1932, DeWitt, by*930 periodical payments to Commercial Investment Trust, Inc., reduced the principal amount due under the bills of sale and notes to the sum of $20,887.71.
*1148 On or about June 30, 1932, the DeWitt Clinton Hotel was subject to a mortgage of approximately $1,562,000. DeWitt was apprehensive that a default would occur when the interest on this mortgage became due on December 1, 1932, and feared further that, upon such default, there would be a foreclosure of the mortgage resulting in a deficiency judgment, and a consequent levy and execution upon the above mentioned furniture and fixtures. In order to avoid such judgment and execution, at the instance of DeWitt, a plan was adopted, which was accepted by the Commercial Investment Trust, Inc., and the petitioner. In pursuance of that plan, the following transactions occurred: Petitioner, which had been organized by DeWitt, had conducted no business since its organization, and DeWitt, at a meeting of their respective directorates, June 29, 1932, adopted appropriate resolutions proposing to the holders of the vendor's lien or chattel mortgage on the furniture and fixtures, that these might be permitted to go to default thereunder*931 and that petitioner, at a public auction sale thereof, would bid the amount of the unpaid balance due under the lien or chattel mortgage, plus expenses. The offer of Walter W. Lee, the president of DeWitt, who had organized petitioner, to buy the total authorized capital stock of petitioner, amounting to 100 shares, at a stated value of $1 per share, or a total of $100, was accepted and this transaction consummated. The consideration of $100 there mentioned was paid by Walter W. Lee endorsing back a check of petitioner of him in the sum of $100 for services in organizing the petitioner. At the same time, petitioner resolved to borrow $22,500 from the Realty Foundation, Inc., the owner of 75 percent of the stock of DeWitt, with which to finance the purchase of the furniture and fixtures at the public sale, and to deliver a chattel mortgage thereon to that lender when, if, and after the purchase occurred. Finally, and at the same time, DeWitt decided to lease and petitioner resolved to be the lessee of the hotel premises for a renewable term of two years. This lease was later executed on July 15, 1932.
On the day following the directors' meetings, June 30, DeWitt wrote the Commercial*932 Investment Trust, Inc., and acknowledged that it was in default on the notes covering the unpaid purchase price of the furniture and fixtures. The letter also stated:
* * * You have notified us that you propose to obtain possession of and to sell the said furniture and other chattels, which are presently located in the DeWitt Clinton Hotel, Albany, New York, at public sale as provided by law and we have advised you that in order to save ourselves the additional cost which would be involved if you were required to replevy or otherwise obtain possession of and remove the same and in order that we may have the benefit of uninterrupted use thereof until such sale, we will deliver the possession of the said furniture and chattels to J. J. Hyland as your custodian to hold the same for your account but at our sole risk and expense pending such sale. We agree that such sale may be held in the said Hotel * * *.
*1149 John J. Hyland acknowledged delivery of the possession of the chattels to him on the above mentioned terms in a letter to the Commercial Investment Trust, Inc., dated June 30, 1932.
On the same day, petitioner wrote the Commercial Investment Trust, Inc., a letter, *933 the material portions of which are as follows:
In consideration of your refraining from instituting replevin proceedings and of your proceeding as outlined in said letter, [referring to DeWitt's letter to Commercial Investment Trust, supra ] we hereby agree with you as follows:
1. We will bid at the public sale of said furniture and chattels up to the amount of your investment in the said furniture and chattels, to wit, the sum of $20,887.71 plus accrued interest to the date of said sale, your expenses and attorney's fees as provided below, and if no higher bid is made and accepted, we will accept delivery of such of the furniture and chattels described in the conditional bill of sale referred to above as may at the time of such sale be in the possession of DeWitt Clinton Co. Inc. in the Hotel premises at Albany, New York, and will upon the acceptance of our bid and * * * in consideration of your agreement not to bid against us above the sum of $20,887.71, pay you in cash the amount of your said investment plus accrued interest and the actual expenses incurred by you in attending and holding the sale and an additional sum of $500.00 for attorney's fees.
*934 2. We agree to accept delivery without expense to you of the furniture and chattels on the terms outlined above at the Hotel premises in Albany, New York, to accept an Auctioneer's Bill of Sale and a bill of sale from Commercial Investment Trust Incorporated in the forms of the bills of sale hereto annexed, * * *.
3. * * * subject to warranty of title to be made by you in the bill of sale to such of said property as comes into our possession, we agree to indemnify and hold you harmless from any loss, cost or expense which you may incur * * *.
By a writing endorsed on the bottom of this letter, the Commercial Investment Trust, Inc., signified its acceptance of the agreement therein set forth. The Realty Foundation, Inc., signed a statement addressed to the Commercial Investment Trust, Inc., and also written at the foot of the letter to the effect that it would purchase the property on the terms therein set forth if petitioner failed to do so.
The Commercial Investment Trust, Inc., issued a notice of sale on June 30, 1932, addressed to DeWitt and to the Albany Metropolitan Corporation, which, after reciting the history of the bill of sale and the promissory notes as set*935 forth above, stated as follows:
There is at this time due under the terms of said conditional bills of sale and notes the principal sum of $20,887.71, plus accrued interest and the said furniture and other chattels have been retaken for default and will be sold at public auction as provided by law on the 11th day of July, 1932, at 2 o'clock P.M. in the office of the Manager of the DeWitt Clinton Hotel * * * unless the aforesaid principal sum plus accrued interest to the date of sale and expenses of retaking, keeping and storage are sooner paid to the undersigned.
The addressees acknowledged receipt of this notice as of the day of its issuance by writings endorsed on the bottom thereof.
*1150 The public auction sale, properly advertised, was held at the hotel in Albany on July 11, 1932. Petitioner bid in the furniture and fixtures for the unpaid balance due the Commercial Investment Trust, Inc., plus fees and expenses, the total amount being $22,500. The auctioneer's bill of sale, dated the same day, recited the sale of all of the Commercial Investment Trust's interest in the property to petitioner without warranties as to quantity or condition.
On July 11, 1932, Walter*936 W. Lee, the purchaser of petitioner's stock, executed the following instruments:
I, WALTER W. LEE, do hereby certify that the 100 shares of the capital stock of HOWARD HOTEL CORPORATION, evidenced by certificate No. 1, is held by me as Trustee for the benefit of all the stockholders of DeWitt Clinton Co. Inc., in proportion to their holdings of stock in said DeWitt Clinton Co. Inc.
I have executed simultaneously herewith Assignment of the said certificate of stock in blank, and the holders of the majority of the stock of the DeWitt Clinton Co. Inc. may at any time withdraw the stock from my name, and substitute any other name or names as the holders of the said stock.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my seal this 11th day of July, 1932.
WALTER W. LEE.
FOR VALUE RECEIVED, I hereto sell, assign and transfer unto one hundred (100) shares of the capital stock of HOWARD HOTEL CORPORATION, represented by Certificate No. 1, and do hereby irrevocably constitute and appoint attorney to transfer the said stock on the books of the HOWARD HOTEL CORPORATION, with full power of substitution in the premises.
Dated, New York, July 11th, 1932.
[Signed] *937 WALTER W. LEE.
On the 3d day of August 1932, Walter W. Lee properly acknowledged the foregoing assignment.
In its income tax return for the fiscal year ended June 30, 1933, petitioner deducted the amount of $32,233.80 for depreciation on the furniture and fixtures sustained during that year, which was based upon the cost of these fixtures to DeWitt, which was $260.173.94. In its return for the fiscal year ended July 30, 1934, petitioner deducted depreciation for that year in the amount of $38,368.83, computed upon the same basis. In his audit of both returns, respondent disallowed the depreciation deduction there claimed and limited the same to depreciation computed upon a basis for the furniture and fixtures of $22,500, which was the price at which these chattels were bid in by the petitioner at the auction sale thereof.
The undepreciated balance of the original cost and fair market value of the furniture and fixtures to DeWitt was $132,448.20. This was not shown as a loss on its return for the calendar year 1932, but was taken up by it in adjustment to surplus under schedule L of its return, which reflected an operating loss.
*1151 OPINION.
LEECH: Respondent*938 admits that petitioner is entitled to a deduction for depreciation on its furniture and fixtures for each of the years involved. The basis for the computation of that depreciation is the subject of our only inquiry.
The respondent contends that petitioner purchased this equipment from the Commercial Investment Trust, Inc., for $22,500 and that this amount therefore constitutes petitioner's basis for depreciation of the equipment. The petitioner argues that such basis is the cost of the furniture and fixtures to DeWitt.
The Revenue Acts of 1932 and 1934 apply. The pertinent sections of those acts are identical. The basis for depreciation there provided, is the cost of the furniture and fixtures to petitioner (sees. 114(a), 113(a) and (b)), unless they were acquired by petitioner "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," and no gain or loss was recognized to the transferor in their transfer to petitioner. Sec. 113(a)(7). 1
*939 Since the Revenue Act of 1932 was in effect when the transfer to petitioner occurred, whether gain or loss was recognized to petitioner as a result of that transaction is answered by applying section 112(b)(4) and section 112(g) of that act. These sections follow:
SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(b) EXCHANGES SOLELY IN KIND. -
* * *
(4) SAME - GAIN OF CORPORATION. - No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
* * *
(g) DISTRIBUTION OF STOCK ON REORGANIZATION. - If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder *1152 of stock of securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.
In section 112(i)(1)(B) of that act, a statutory reorganization is defined as "a transfer*940 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."
Obviously, there was a plan here. But to apply section 112(b)(4), the plan as adopted and executed must have included a statutory reorganization under section 112(i)(1)(B), supra. . The determination of the existence of that condition depends upon whether the several steps in the plan are to be considered separately or as a single transaction here. That is the ultimate question, upon the answer to which the decision of the issue rests.
To sustain the theory of respondent, the steps in the plan must be viewed as isolated and separate transactions, from which it would necessarily follow that Walter W. Lee bought all the issued stock of petitioner for $100 which was paid by merely endorsing and returning to petitioner its check in that amount just given to Lee for services in organizing he petitioner. It would likewise then follow that DeWitt deliberately gave away, without consideration, its equity*941 in the furniture and fixtures admittedly then worth $132,448.20.
Neither reason nor authority supports either such conclusion. ; .
"Taxation is an intensely practical matter * * *." . The underlying purpose of the reorganization provisions of the revenue acts has never been changed. That purpose was and is merely to maintain the status quo in tax matters where such a "transfer is primarily a matter of form and not of substance * * *." .
It can not be denied that the events described in the findings of fact were "in pursuance of a plan" which culminated in the transfer of the furniture and fixtures to petitioner. The performance of each step in the plan, following its adoption, was obligatory upon the parties thereto. See That plan, as adopted, to which petitioner, DeWitt, and the Commercial Investment Trust, Inc., were parties, was executed. See *942 ; affd., .
The nomenclature and designation given by the parties to any of the transactions involved in the several steps in the plan, is not controlling. . And, it may be observed, DeWitt treated this entire series of transactions as without tax consequence to it.
*1153 The fact that the idea prompting the transfer here was to prevent creditors from taking the property did not proscribe the transfer as a statutory reorganization. ; certiorari denied, ; ; ;. And those cases, except the last, hold that the interposition of a conveyance by a trustee in bankruptcy or in foreclosure of a mortgage does not condemn the transfer as a reorganization. A fortiori, the conveyance here by the Commercial Investment Trust, Inc., to petitioner does not do so. That company acquired possession*943 of the furniture and fixtures from DeWitt, solely upon its promise to so convey if no bids were received therefor higher than that which petitioner contracted to and did make. See
The datailed steps in the execution of the plan as adopted and carried out here must be viewed as an entirety. ;; . When so considered, we think, DeWitt, in accordance with its agreement with petitioner, transferred a part of its assets, i.e., its equity in the furniture and fixtures, to petitioner for all of petitioner's stock, which was then distributed to the stockholders of DeWitt in proportion to their holdings of DeWitt's stock, without the surrender of their DeWitt stock.
Since the "trust" in petitioner's stock declared by Walter W. Lee, president of DeWitt, at least when supplemented by his assignment of that stock, was clearly only dry and passive, it must be considered executed here and the shareholders of DeWitt as the legal and equitable owners of all of petitioner's stock. *944 ; : See .
Those facts, literally and actually, constituted a reorganization within the quoted definition (supra), and fit, exactly, the provisions of section 112(b)(4) and 112(g). And, aside from the apparent fact that no gain or loss was then realized by DeWitt, the transferor (sec. 111(a) and (b)), cf. , no gain or loss was recognized to DeWitt.
The shareholders of petitioner thus then owned the same 100 percent interest or control in the same equity in the furniture and fixtures after the transfer to petitioner, as they did before, as stockholders of DeWitt.
We conclude that the contested basis for depreciation by petitioner on the furniture and fixtures here involved was DeWitt's original cost thereof, which was $260,173.94, adjusted under section 113(b)(1)(B). Sec. 113(a)(7).
Decision will be entered for the petitioner.
Footnotes
1. 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 poration 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. ↩