*765 A new corporation which bid $450,000 at foreclosure for property mortgaged by its predecessor, payment being made in the defaulted bonds of the predecessor, for which the new corporation issued its shares to the bondholders, held to have a depreciation basis for the property amounting to the value of the bonds, such value being held upon the evidence to be equal to the bid.
*329 The Commissioner determined a deficiency of $1,040.02 in petitioner's income tax for the fiscal period from May 6, 1931, when petitioner was organized, to August 31, 1931. The only question *330 is the proper basis for petitioner's admitted deduction, at a 2 percent rate, for depreciation on an apartment building it acquired upon a foreclosure of a mortgage of its predecessor.
FINDINGS OF FACT.
The petitioner, a Massachusetts corporation, was organized May 6, 1931, as a means of refinancing the Pelham Hall apartment building in Brookline, Massachusetts. Prior thereto the building had been constructed and owned by another*766 corporation of somewhat similar name, which we shall call the predecessor. The 6 1/2 percent first mortgage bonds of the predecessor, amounting to $1,200,000, of which $1,172,000 was outstanding, were in default. There was an outstanding construction lien. A committee for the mortgage bondholders was organized to acquire the mortgaged property. Approximately 95 percent of the bonds were deposited with the committed, and the committee was empowered to bid for the property at foreclosure. Four hundred and fifty thousand dollars was determined by the committee to be a necessary minimum bid, and $1,000,000 as the maximum. At the sale no other bids were made, and the property was struck down to a nominal bidder acting for the committee or any corporation to be organized by the committee, for $450,000. Payment was permitted to be made with the old bonds and matured coupons. The lien was transferred from the property to the proceeds of sale. A few days after the foreclosure sale the property was conveyed to the petitioner. Petitioner's no par common shares were issued to the depositing bondholders for their bonds, in the ratio of one share for each $10 of bond principal and interest. *767 The value of the bonds received by petitioner was no more than $450,000. The assessed value of the property was then $806,000. The cost of the property to the petitioner was $450,000.
A reasonable allowance for exhaustion, wear and tear, and obsolescence of the building was at the rate of 2 percent a year of the aforesaid cost of $450,000.
OPINION.
STERNHAGEN: The Commissioner's determination that the correct depreciation base for the petitioner is $450,000, the price bid and paid by it at the foreclosure sale, is assailed by the petitioner, which demands the use of $809,500, which it claims to have proven as the fair market value. Its only supporting argument is a reliance upon , which petitioner regards as upon all fours.
While the Suncrest case involves a similarity of principle, it is not upon the generality of purpose and plan that its decision rests, *331 but upon the details of method of effectuating the purpose and carrying out the plan and the detailed evidence of valuation. The new Suncrest corporation exchanged its new bonds for the bonds of the old Champion corporation, and then exchanged the*768 old bonds of a proven and found value for the property. Thus the property was held to have a cost to the new Suncrest corporation amounting to the actual value of the old Champion bonds, and it was held that such actual value of old bonds was equal to the actual value of the property, which latter value was found as a fact. The bid alone was held to be not conclusive of actual cost. In the present case, the new corporation issued its no par common shares to the old bondholders in the ratio of one share for each $10 of bond principal and accrued interest. Thus the old bondholders must be regarded as liquidating their old bonds and realizing gain or loss in the exchange measured by the cost to them of their old bonds and the value of the shares received. Correlatively, the cost to the new corporation of the old bonds received and the value of the new shares issued are likewise measured by the value of the old bonds.
These old bonds were in default and were worth no more than what the property mortgaged to secure them would bring upon foreclosure. This property, although it had been assessed at $806,000, was in 1930 earning a net income of less than $50,000 a year, and the estimated*769 net income for 1931 was $25,000, before depreciation and income taxes, and after interest at 6 percent on a prospective new mortgage of $400,000. Although an experienced real estate dealer gave his opinion that the property was worth $809,500, his opinion is not conclusive upon the Board, , 1 and we are unable to give it full weight. It was arrived at by a formula of capitalizing earnings which was predicated upon figures at variance with the earning figures appearing on petitioner's Exhibit No. 2 and read into evidence also by petitioner's counsel. The correct figures seem to us to substantiate the bid price of $450,000 as reasonably approximating the performance and prospects of the property and representing its fair market value at the time of acquisition. The cost has therefore been found as a fact to have been $450,000.
The theory involved is that the depreciation base is actual cost to the taxpayer of the depreciable property and not the value of the property when acquired, for it is the*770 taxpayer's investment which is being preserved by depreciation. Were the property acquired by the issuance of the taxpayer's shares, the cost would be the value of the shares issued. ; . The property here was not *332 acquired for shares, but for cash and the old bonds, which bonds were property in the hands of the taxpayer corporation. Thus the cost of the depreciable property acquired is the value of the property (bonds) and cash given up for it. Although the bid itself does not conclusively establish the amount of the price actually paid, the evidence does not establish that the price was in fact more than the bid. Cf. .
There is no unfairness in computing the taxpayer's annual deductions for exhaustion upon a capital base of $450,000, because the whole plan was to bring the capital investment in the building and the interests of the old bondholders down to a level of value consonant with earnings. Presumably both the old corporation and the old bondholders took their proper loss deductions. The*771 new corporation started upon a new basis and its depreciation is measurable accordingly.
Judgment will be entered for the respondent.
Footnotes
1. See Law of Federal Income Taxation, Paul and Mertens, vol. 5, § 52.04, Opinion Evidence.↩