1937 BTA LEXIS 606">*606 A state bank which was closed in 1933 was not permitted to reopen at the conclusion of the "bank holiday." Its liabilities greatly exceeded its assets and in June 1933 the state superintendent of banks took possession of such assets for the purpose of liquidation. In the same year an assessment of 100 percent was levied against stockholders of the closed bank. Bank was permitted to resume business in January, 1934, under a plan whereby its capital stock, reduced to $5 per share par value, was to be issued in the names of the old stockholders and delivered to the superintendent of banks, who paid for it with money borrowed from the Reconstruction Finance Corporation. Stockholders who consented to the plan were given three years within which to pay the 100 percent assessment, and the right to purchase stock of resuming bank at its par value after such assessment had been paid. Depositors in closed bank received approximately 36 percent of their deposits. Held:
(1) Depositors in closed bank were justified in determining in 1933 that they would recover only 40 percent of their deposits, and the deduction from gross income of the remaining 60 percent should have been allowed.
1937 BTA LEXIS 606">*607 (2) Stock of closed bank became worthless in 1933.
(3) Stockholders of closed bank did not exchange their stock in such bank solely for stock or securities of resuming bank. Section 112 of Revenue Act of 1932 is therefore not applicable, and losses sustained by reason of the worthlessness of the stock of the closed bank must be recognized.
(4) Stock of a corporation, whose only asset consisted of stock in closed bank, became worthless in 1933, and loss claimed by reason thereof should have been allowed as a deduction.
36 B.T.A. 1233">*1234 These proceedings involve deficiencies in income taxes for the year 1933 as follows:
| Name | Docket No. | Amount |
| Alnor K. Grant, administratrix | 82574 | $2,372.22 |
| Willis C. Behoteguy et ux | 83820 | 1,134.73 |
| Akron Coca-Cola Bottling Co | 84125 | 430.85 |
| Akron Standard Mold Co | 84126 | 1 1,176.61 |
In the proceeding instituted by Alnor K. Grant, administratrix, Docket No. 82574, the Commissioner disallowed a loss deduction1937 BTA LEXIS 606">*608 claimed in the return of income for the year 1933 in the amount of $23,852. It is agreed that the actual cost of the stock, the alleged worthlessness of which gave rise to the claimed loss, is $20,682.73, and the Commissioner's disallowance of the difference between that sum and the amount claimed in the return is not contested.
In Docket No. 83820 Willis C. Behoteguy and wife contest the disallowance by the Commissioner of a loss in the amount of $2,637, claimed in their joint return of income for the year 1933 as a loss arising out of their investment in the capital stock of the First-Central Trust Co. of Akron, Ohio. They also allege that the Commissioner erred in disallowing as a deduction from gross income, $4,319.15, said sum being 60 percent of the amount which they had on deposit in the First-Central Trust Co. when it was closed during the year 1933 and being the portion of the deposit which they claim they ascertained to be worthless and charged off during that year.
The proceedings instituted by the petitioning corporations, docketed as No. 84125 and No. 84126, contest the disallowance by the Commissioner of deductions claimed in their respective returns for the year1937 BTA LEXIS 606">*609 1933, in the amounts of $3,133.42 and $6,275.30, as losses sustained by reason of the stock in the Credit Corporation of Akron becoming worthless, the sole asset of that corporation being stock in the First-Central Trust Co. of Akron, which, it is alleged, became worthless during the year 1933. It is agreed that the cost to the Akron Standard Mold Co. of its stock in the Credit Corporation is $6,256.84 and the Commissioner's disallowance of the difference between that sum and the $6,275.30 claimed in its return is not contested.
The principal questions for decision are: (1) Did the stock of the First-Central Trust Co. of Akron, Ohio, become worthless during 1933? (2) Was there an exchange of stock for stock, in pursuance of a plan of reorganization as a result of which no gain or loss is to be recognized?
FINDINGS OF FACT.
Alnor K. Grant is the duly appointed, qualified, and acting administrix of the estate of C. T. Grant, deceased, who died December 22, 36 B.T.A. 1233">*1235 1933. At the time of his death C. T. Grant owned 199 shares of the capital stock of the First-Central Trust Co. of Akron, Ohio, (hereinafter referred to as First-Central Trust Co.) of the par value of $50 per1937 BTA LEXIS 606">*610 share, all of which he had acquired after March 1, 1913, at a cost of $20,682.73. She, as such administratrix, duly filed with the collector of internal revenue at Cleveland, Ohio, a return of income for the year 1933, deducting as a loss $23,852 claimed to have been sustained in connection with the decedent's investment in stock of the First-Central Trust Co. It is agreed that the correct amount of the deduction, if allowable, is $20,682.73.
Willis C. Behoteguy and his wife reside in Akron, Ohio. They filed a joint return of income for the year 1933 with the collector of internal revenue at Cleveland, Ohio, and paid the tax therein shown to be due. Behoteguy, in 1933, was the owner of 15 shares of the capital stock of the First-Central Trust Co. of the par value of $50 per share, all of which he had acquired after March 1, 1913, at a cost of $2,637. On June 21, 1933, he had on general deposit in said Trust Co. $7,198.60. In the return for said year they deducted from the gross income shown in the return, as a loss, $2,637 claimed to have been sustained by reason of the stock of the First-Central Trust Co. becoming worthless during the year 1933. They also deducted as "Bad1937 BTA LEXIS 606">*611 Debts" approximately 60 percent of their general deposit, or $4,319.15.
The Akron Coca-Cola Bottling Co. and the Akron Standard Mold Co. are corporations duly organized and existing under the laws of Ohio with their principal places of business in Akron, Ohio. The former owned one share of the capital stock of the Credit Corporation of Akron (hereinafter referred to as the Credit Corporation) and the latter owned two shares of the capital stock of said corporation. The one share had been acquired after March 1, 1913, at a cost of $3,133.42 and the two shares had been acquired after March 1, 1913, at a cost of $6,256.84.
Credit Corporation is a Delaware corporation with an authorized capital stock of 1,000 shares of no par value, 600 of which were issued and outstanding during the year 1933. The only assets of the Credit Corporation were 37,601 shares of the capital stock of the First-Central Trust Co., of the par value of $50 a share.
In about October 1931 the First City Trust & Savings Bank and the Central Deposit Savings & Trust Co. of Akron, Ohio, had been combined or consolidated under the name of the First-Central Trust Co. (hereinafter sometimes referred to simply1937 BTA LEXIS 606">*612 as the bank). It was empowered to conduct a general banking business at Akron, Ohio, and had an authorized capital of $7,500,000 consisting of 150,000 shares of stock of the par value of $50 a share. On June 21, 1933, 36 B.T.A. 1233">*1236 it had issued and outstanding 148,329 shares of a total par value of $7,416,450. It conducted its banking business in the Central Tower Building and was the only banking institution in downtown Akron.
Beginning March 2, 1933, the bank, by order of the Superintendent of Banks of Ohio, limited withdrawals by depositors to 1 percent. Under proclamation of the President of the United States the bank was closed on March 6, 1933. Its condition was such that it was not permitted to reopen and on April 8, 1933, the Superintendent of Banks of Ohio appointed a conservator, who took charge of the assets of the bank but did not carry on its business. On June 21, 1933, the Superintendent of Banks of Ohio took possession of the assets of the bank for the purpose of liquidation.
On July 14, 1933, the special deputy superintendent of banks, who on June 21, 1933, had been placed in charge of said bank by the superintendent, reported to his superior that the assets1937 BTA LEXIS 606">*613 of the bank did not, in his opinion, "have a liquidation value * * * sufficient to discharge and pay the liabilities of" the bank. At that time he filed with his superior a "Liquidation Statement" for the period ended June 21, 1933, showing total assets and liabilities of ended June 21, 1933, showing total assets and liabilities of $61,045,425.96. Subsequently he caused an appraisal of the assets to be made, which showed total assets of $60,883,293.36 classified as follows: Good, $12,049,593.17; Good but Slow, $30,649,348.66; Doubtful, $1,129,378.28; and Loss, $17,054,973.25. The total liabilities of the bank, exclusive of capital, surplus, and undivided profits, were $50,101,272.44 while the total of its "Good," "Good but Slow," and "Doubtful" assets was $43,828.320.11. This appraisal as such was never made public, but the information contained therein was made available to all who inquired.
Under date of July 15, 1933, the superintendent of banks ordered an assessment of 100 percent to be levied against the stockholders of the bank. An assessment letter calling for the payment of such assessment on or before September 1933 was mailed by the superintendent of banks to all1937 BTA LEXIS 606">*614 of the stockholders of the bank.
After the superintendent had taken possession of the bank a voluntary committee was formed for the purpose of devising a plan for the resumption of business by the bank. Efforts to raise capital for the organization of a new bank failed.
The committee above referred to requested the superintendent of banks to furnish the necessary capital to enable the bank to resume business and it was suggested that the stock of such a resuming bank be issued in his name. He, however, stated that as an officer of the State of Ohio he could not assume the superadded or double liability which would attach to such stock. It was also suggested that stock of a resuming bank be issued to the depositors of the closed bank, but 36 B.T.A. 1233">*1237 this was found to be impractical because of the large number of depositors. It was finally decided that the stock of a resuming bank should for convenience be issued in the names of the stockholders of the closed bank, about 2,200 in number, and following many discussions and conferences the plan hereinafter set out was devised and followed.
The plan was designated a "Plan for Resumption of Banking Business by the First-Central1937 BTA LEXIS 606">*615 Trust Company." It received the approval of the superintendent of banks, the state advisory banking committee, more than 85 percent in amount of the unsecured deposits and other liabilities of the bank except those entitled in law or under the plan to be paid in full, and more than 66 2/3 percent in interest of the stockholders of the bank. During December 1933 the plan was likewise approved by the Court of Common Pleas of Summit County, Ohio, the General Assembly having enacted, in March of 1933, a new statute providing, in substance, that a closed bank might resume business upon conditions approved by such court of the county in which the bank was located. The plan finally went into operation on January 15, 1934. The resuming bank operated under the charter of the bank, but was not subject to the liabilities of the closed bank except to the extent that such liabilities were assumed.
The closed bank was indebted to the Reconstruction Finance Corporation in the sum of approximately $18,000,000. There were other creditors who had part of its assets in pledge.
The plan, among other things, provided that the superintendent of banks would borrow from the Reconstruction Finance1937 BTA LEXIS 606">*616 Corporation $27,000,000 which would be sufficient: (1) To discharge the existing loan to the Reconstruction Finance Corporation; (2) to pay the preferred creditors and other creditors having secured claims, thus making all of the assets subject to all proper counterclaims and setoffs; and (3) to provide the necessary capital, surplus and undivided profits for the resuming bank to begin business.
Out of the proceeds of the loan above referred to, the superintendent was required to deliver to the resuming bank a sum of money equal to 25 percent of the deposit liability of those depositors who had proved up their claims. The resuming bank, according to the plan was to be liable to each depositor to the extent only of 25 percent of his deposit in the former bank, and for the remaining 75 percent the depositor was to accept a certificate of participation in the assets of the closed bank, all of which continued in the hands of the superintendent of banks for liquidation by him. The assets of the closed bank in the hands of the superintendent of banks were pledged to the Reconstruction Finance Corporation to secure the borrowing made by the superintendent of banks from that corporation1937 BTA LEXIS 606">*617 but as a result of 36 B.T.A. 1233">*1238 the carrying out of the plan the frozen deposits at the closed bank, to the extent of 25 percent thereof, were released and could be withdrawn at any time by the depositors. Thus the plan provided in essence that the resuming bank should begin business with cash and nothing but cash furnished to it by the superintendent of banks, with its deposit and other liabilities, instead of being the same as the closed bank, being but 25 percent thereof. All known creditors, except the Reconstruction Finance Corporation, were entitled to be paid 25 percent of the amount of their claims. The equity remaining in the securities and property pledged to the Reconstruction, Finance Corporation as security for the new loan, the assessed stockholders' liability, the capital debentures, hereinafter referred to, the dividends, if any, upon the capital stock of the resuming bank, and the capital stock issued as a matter of convenience in the names of the stockholders of the closed bank, was all to be set aside and remain in the hands of the superintendent of banks as security for the payment of the remaining 75 percent of the liabilities owing to depositors and for the1937 BTA LEXIS 606">*618 payment of the claims of the general creditors of the old bank.
It was further provided that the capital stock of the bank should be reduced from $7,416,450 to $741,645 by reducing each outstanding share from $50 to $5 a share, without in anywise changing or relieving the liability of the stockholders of the bank who had been assessed to the extent of $50 for each share held; that the resuming bank would issue $500,000 capital debentures, junior, however, to the claims of depositors and creditors; that the certificates of stock issued and outstanding should be void and of no effect after the resumption of business; that if within three years after the resumption of business the depositors and creditors had not been fully paid, the superintendent of banks should sell and dispose of such number of shares as might be required to complete full payment and should distribute any unsold shares pro rata among the persons entitled thereto; that upon any such sale, the stockholders in whose names the certificates had been issued, should have the first privilege and option of purchasing the same at $5 a share; that no certificate of stock or earnings upon stock should be available to the person1937 BTA LEXIS 606">*619 in whose name the stock had been issued unless and until the full stockholders' liability of $50 a share, plus $5 per share for each share of the resuming bank, had been paid in full; that the right to vote such stock, however, should be exercised by the persons in whose names the stock had been issued; that the payment and collection of the 100 percent assessment made by the superintendent of banks should be made as follows: (a) At least $5 (10 percent) by the delivery to the superintendent of banks of capital debentures of the resuming bank purchased and paid for 36 B.T.A. 1233">*1239 by the stockholders; and (b) the balance of the $50, i.e., $45 - or such part thereof as might be necessary, three years after the time of the resumption of business in the event that any sum then remained owing to the depositors and creditors of the bank; that stockholders who did not purchase debentures, could consent in writing to an immediate sale of the stock issued in their names by the superintendent of banks, who could thereupon sell and dispose of the same for the benefit of creditors and depositors of the bank; that collection of the assessment $50of from each stockholder so consenting, or so much1937 BTA LEXIS 606">*620 thereof as might be necessary, should be made three years after the resumption of business by the bank; that stockholders who did not purchase capital debentures to the extent of at least 10 percent of the amount of the par value of the stock held by them in the bank, or who did not consent to the sale by the superintendent of banks, should be immediately subject to all processes of law by which their liability, to the extent of $50 per share, could be enforced and collected; and that if, when all depositors and creditors of the bank had been fully paid, it was ascertained that any stockholder had paid more than his pro rata share, either in cash or by the purchase of debentures, the superintendent of banks should, out of any assets in his control, including the unsold stock of the resuming bank, make an adjustment thereof.
Provision was made in the plan for such persons as had been stockholders in the closed bank but did not seek an extension of time for payment of their superadded liability as such, and did not furnish any of the capital for the resuming bank through the purchase of its debentures. As to those persons, the plan provided that the superintendent of banks might1937 BTA LEXIS 606">*621 and should proceed against them immediately for the collection of the superadded liability owed by them as stockholders of the closed bank. It provided further that the shares of stock in the resuming bank issued in their names should be held by the superintendent and sold by him at any time he might think wise.
Pursuant to the plan the authorized capital stock of the bank was reduced on January 3, 1934, to $741,645, consisting of 148,329 shares of the par value of $5 a share and it resumed business under date of January 15, 1934. The superintendent of banks borrowed the $27,000,000 from the Reconstruction Finance Corporation and turned over to the resuming bank the amount of cash necessary for the resuming bank to meet the liabilities of the bank to the extent of 25 percent thereof assumed by it, and $1,149,999 in cash, together with the real estate, furniture and fixtures valued at $150,001, or a total of $1,300,000, representing the amount of the capital stock, surplus and undivided profits of the resuming bank. The resuming bank 36 B.T.A. 1233">*1240 issued temporary certificates of stock in the names of the bank's stockholders of record and delivered the same to the superintendent1937 BTA LEXIS 606">*622 of banks. The shares in the names of the stockholders who had signed the plan and who had purchased the necessary debentures were delivered to the National City Bank of Cleveland, as escrow agent, and the remaining shares were retained by the superintendent of banks. Four thousand of such shares were immediately sold by him to the directors of the resuming bank, to qualify them as directors. The bank had had about 27 or 28 directors but the resuming bank had only eight directors. None of the persons who had been on the board of directors or were officers of the closed bank were members of the board of directors or officers of the resuming bank.
Under date of April 25, 1934, the superintendent of banks instituted a proceeding in the Court of Common Pleas of Summit County, Ohio, against all stockholders of the bank who were residents of the State of Ohio and who had not consented to the plan for resumption of business to enforce the collection of the assessment of $50 per share on their stock. The case was still pending at the time of the hearing of these proceedings.
During the three-year period from January 15, 1934, to January 15, 1937, there was no trading in the options1937 BTA LEXIS 606">*623 given stockholders to purchase the stock of the resuming bank and said options had no value.
Under date of December 24, 1936, the Court of Common Pleas of Summit County, Ohio, in a proceeding entitled "In the matter of liquidation of THE FIRST-CENTRAL TRUST COMPANY, Akron, Ohio", found, among other things, that the total amount to be reasonably expected through the liquidation of the remaining assets of the bank in the possession of the superintendent of banks, together with a full 100 percent collection of the assessed double liability and together with the amount to be reasonably expected through the sale of all of the new shares of the capital stock of the resuming bank would be insufficient to pay in full the claims of depositors and creditors of the bank. The court ordered that on or after January 15, 1937, all of the shares of the resuming bank, not theretofore sold by the superintendent of banks should be offered at public sale. It authorized the superintendent of banks to offer a bid for such shares, to collect the full 100 percent assessment of $50 per share against the stockholders of the bank, and in his discretion to accept in payment of such assessment at least 101937 BTA LEXIS 606">*624 percent in cash and the individual unconditional promissory notes, bearing 3 percent interest, in an amount equivalent to 90 percent of the $50 per share assessment, payable 10 percent of the original assessment on or before January 15, 1938, 20 percent on or before January 15, 1939, and the balance 36 B.T.A. 1233">*1241 on or before January 15, 1940, the promissory notes to be secured by the hypothecation of the shares of the new bank stock purchased by any stockholder in the exercise of the option and paid for as required at $5 per share in cash. The total amount of the notes delivered by stockholders to the superintendent of banks as evidence of their liability for 100 percent assessment on the bank stock was $2,702,445.87.
Whenever the 100 percent assessment on the bank stock, in addition to the $5 per share of stock of the resuming bank, had been paid in full, permanent certificates of stock of the resuming bank were issued and delivered to the stockholders entitled thereto. The certificates for the outstanding stock of the bank of the par value of $50 a share were not called for surrender and were not surrendered to the resuming bank.
After January 15, 1937, approximately 40,0001937 BTA LEXIS 606">*625 shares of the resuming bank were held by the superintendent of banks.
C. T. Grant consented in writing to the plan prior to November 1, 1933, and caused to be paid to the superintendent of banks the amount of $995. The balance due on his liability in the amount of $8,955 was paid in full January 8, 1937, by the administratrix of his estate and on January 9, 1937, she purchased under the option given stockholders of the bank 199 shares of the stock of the resuming bank at $5 per share.Willis C. Behoteguy consented to the plan on November 1, 1933, and also purchased debentures according to the plan.
The Credit Corporation did not at any time sign or consent to the plan. Thirty-seven thousand six hundred and one shares of the stock of the resuming bank were issued in its name but were never delivered to it. They were held by the superintendent of banks. Suit was commenced against the Credit Corporation by the superintendent of banks for the collection of the 100 percent assessment on its bank stock in the amount of $1,880,050, plus interest at 6 percent from September 22, 1933. Under date of February 18, 1937, judgment was entered against it in the Court of Common Pleas1937 BTA LEXIS 606">*626 of Summit County, Ohio, in the sum of $2,256,060, together with 6 percent interest thereon from January 22, 1937.
The superintendent of banks and his deputies repeatedly informed inquirers during the year 1933 that depositors in the closed bank would not be paid in full and expressed the opinion that the total amount which they would probably ultimately receive would be 50 or 55 percent of their deposit. The depositors had received approximately 36 percent of their deposits at the time of the hearing of these proceedings in May of 1937.
36 B.T.A. 1233">*1242 At the time of the resumption of business the resuming bank had about $7,500,000 of resources and in May 1937 it had about $26,000,000 of resources. During such period no change was made in the capital stock of the resuming bank.
Willis C. Behoteguy determined in 1933, from conversations with persons connected with the closed bank, from representatives of the superintendent of banks, and from other persons who were familiar with the affairs of said bank that 40 percent of the amount which he had on deposit in said bank at the time it was closed was the maximum amount that he could expect to recover. He kept no books of account1937 BTA LEXIS 606">*627 but in the joint return of income filed by him and his wife for the year 1933 he deducted 60 percent of said deposit, or $4,319.15. The deposit in the bank was, in 1933, recoverable only in part and the facts ascertained by Behoteguy justified him in concluding that the maximum amount which would ever be paid to him was 40 percent of his deposit.
OPINION.
MELLOTT: It has been found as a fact that Behoteguy was justified in concluding, in 1933, that 40 percent of the amount which he had on deposit in the bank when it was closed was the maximum amount which he might reasonably expect to recover. The evidence clearly justifies such finding. As pointed out in , the right to deduct a portion of a debt is provided for by section 23(j) of the Revenue Act of 1932, 1 and the Commissioner's failure to allow a proper deduction may be reviewed. Behoteguy, who was an employee of the B. F. Goodrich Co., kept no formal books of account and hence could not charge off a portion of his bank deposit in the ordinary way. The deduction was claimed in the joint return and respondent does not question the deduction on that ground. Under1937 BTA LEXIS 606">*628 the circumstances sufficient charge-off was made. Cf. . The claimed deduction should be and is allowed.
The petitioning corporations contend that since the sole asset of the Credit Corporation, i.e., the capital stock of the bank, became worthless during the taxable year, then their stock in the Credit Corporation likewise became worthless and their investment therein was properly charged off during such year. Inferentially the respondent agrees that if the bank stock became worthless so, also, did the stock of the Credit Corporation, for upon brief he states: 36 B.T.A. 1233">*1243 "With respect to the rights of the Credit Corporation of Akron as a stockholder in the First-Central Trust Co., the facts are only1937 BTA LEXIS 606">*629 slightly different from those in the Grant and Behoteguy cases." The difference which he points out is that the Credit Corporation did not file a consent to the plan, as a result of which suit was brought against it to enforce collection of the 100 percent assessment which had been made against it as a stockholder of the bank. It seems, therefore, that it must be held that if the bank stock was worthless the stock of the Credit Corporation was in the same category; for such stock of the Credit Corporation clearly had no greater value than the stock of the bank.
The difference pointed out by the respondent and referred to in the preceding paragraph ultimately resulted in a judgment being entered against the Credit Corporation in the amount of $2,256,060. If the Board is wrong in concluding that the stock of the Credit Corporation became worthless because its sole asset became worthless, it probably should nevertheless be held that the corporate holders of such stock were justified in determining that it was worthless in 1933; for the suit which resulted in the judgment of more than two million dollars was imminent and the facts as they were known to exist were such that the petitioners, 1937 BTA LEXIS 606">*630 as such stockholders, had every reason to believe that the very thing which did happen would happen. However, in spite of what has been said, the deficiency determined by the respondent against the stockholders of the Credit Corporation will not be set aside upon this ground; but the contentions made by the respective parties, which they deem to be applicable to all four of the proceedings, will be considered.
The first question to be considered is whether or not the stock of the bank became worthless during 1933. It is unnecessary to restate the facts but a brief reference to some of them will not be amiss.
The bank had not been permitted to reopen after the "bank holiday" of 1933 for the reason that its capital was impaired. Its liabilities exceeded its assets by several millions of dollars. It was in the process of being liquidated by the state bank officials, who, being familiar with all of its affairs, were advising depositors that they could not expect to receive more than 50 or 55 percent of their deposits - an estimate which subsequent events have shown was too high. Stockholders had been formally advised that they would be required to pay an assessment equal to1937 BTA LEXIS 606">*631 the par value of the stock owned. Creditors and depositors were clamoring for payment of their claims. Such, in brief, was the situation toward the end of 1933. Clearly the stock was then worthless; and sufficient "identifiable events" had occurred to justify the stockholders in forming such conclusion, ; for 36 B.T.A. 1233">*1244 "all reasonable hope and expectation of even a partial return of capital" was gone. ; certiorari denied, . Cf. ; In the .
Since it has been found as a fact that the stock of the bank became worthless during 1933, the losses were deductible unless some reason exists which requires or justifies some other holding. The respondent contends that such reason does exist, his contention being succinctly stated in his notice of deficiency in one of the proceedings in the following language:
Under the terms of the plan for resumption of business of The First-Central Trust Company1937 BTA LEXIS 606">*632 of Akron, Ohio, in accordance with which the par value of the shares of stock was reduced from $50.00 to $5.00 per share and there was required the payment of not less than $5.00 of the stockholder's statutory liability by the purchase of debentures of such bank, a recapitalization results which constitutes a reorganization within the meaning of section 112(i) of the Revenue Act of 1932. In accordance with the provisions of section 112(b)(3) of that Act no gain or loss resulted to a stockholder by reason of such reduction in the par value of the stock and the subscription to the capital debentures of the bank.
The portions of the revenue act referred to in the notice of deficiency and other related subsections are shown in the margin. 2
1937 BTA LEXIS 606">*633 It will be noted that section 112 applies only in case there have been "sales or exchanges" by the petitioners of their stock in the closed bank. Clearly there were no sales. Indeed the evidence indicates that the stock could not have been sold at any price. No one would have been willing to invest his funds in such stock; for it not only had no value but it was an actual liability to the owner. But the 36 B.T.A. 1233">*1245 Commissioner is not contending that any sale of the stock was made so it is unnecessary to discuss this phase of the matter any further.
The theory upon which the deficiencies were determined is: That there was a recapitalization of the bank (sec. 112(i)(1)(C)) and hence a reorganization; that there were exchanges of stock solely for stock (sec. 112(b)(3)) in pursuance of the plan of reorganization; and that no gain or loss is to be recognized in connection with such exchange. If, therefore, there were exchanges - if, in the language of the statute, the petitioners exchanged their "stock or securities in a corporation a party to a reorganization, * * * solely for stock or securities in such corporation, or in another corporation a party to a reorganization" - 1937 BTA LEXIS 606">*634 and if in fact there were a reorganization, as such term is defined in the statute, then the deficiencies must be approved. But if there were no reorganization, or if no exchange were made, then the petitioners are entitled to deduct the losses, under section 23(e) or 23(f) of the Revenue Act of 1932. 3
The essence of an exchange is a reciprocal transfer of property - "the act of giving or taking one thing in return for another regarded as an equivalent. Mutual1937 BTA LEXIS 606">*635 giving and receiving of commodities without the intervention of money." Webster's New International Dictionary. The question then is whether or not reciprocal transfers of property were made. We think not. The Credit Corporation made no transfer whatever. It had 37,601 shares of the stock of the closed bank out of the 148,329 shares outstanding. It did not consent to the plan nor to the reduction of the par value of the stock which it owned. It did not consent to the issuance of stock of the resuming bank in its name nor that the escrow agent should hold such stock and ultimately turn it over to the superintendent of banks for sale. It suffered the penalty of having a judgment taken against it for the full amount of the superadded liability which it had as a stockholder. But it did not exchange its stock in the closed bank for stock in the resuming bank.
But did the individual stockholders who consented to the plan make an exchange of their stock in the closed bank for stock in the resuming bank? While this question is more difficult than that 36 B.T.A. 1233">*1246 discussed in the preceding paragraph, we are convinced that the answer must be the same, viz., that they did not.
1937 BTA LEXIS 606">*636 Whether there was a recapitalization of the bank and hence a reorganization under the revenue act need not be decided. The stockholders gave up nothing and nothing was delivered to them. This fact distinguishes the instant proceeding from , affirming the decision of the Board in ; for in that case the taxpayer surrendered his stock in one corporation for stock in another corporation. But not so here. The stock of the resuming bank, though issued in the names of the old stockholders as a matter of convenience, was nevertheless owned by the superintendent of banks in his representative capacity. He, as the owner of the assets of the bank, had pledged such shares for the purpose of securing the funds forming the capital and surplus of the resuming bank. True the stockholders had the right, if they chose to exercise it, to purchase the stock of the resuming bank provided they first paid their superadded liability as stockholders of the closed bank. But the right to purchase such stock had no value in 1933; and any purchasers of it would have subjected themselves immediately1937 BTA LEXIS 606">*637 to the possibility that an additional assessment might be made against them in the event that it was unable to meet its liabilities. Nor did the consenting stockholders give up their stock in the closed bank or surrender their certificates therefor. If, preadventure, the liquidation of the closed bank should result in the collection of funds sufficient to pay all of its liabilities, the excess, if any, would belong to the stockholders; for the resuming bank was merely the agency selected by the superintendent of banks to aid him in the liquidation - "to perform all or part of such liquidation."
"Congress intended to exempt from consideration for either profit or loss transfers of property which were really exchanges of capital assets * * *." ; affd., . Since there were no exchanges in the instant proceedings, it is not necessary to discuss, nor to decide, whether or not there was a reorganization; for if no exchanges were made it necessarily follows that section 112 is wholly inapplicable.
1937 BTA LEXIS 606">*638 , cited by the respondent is distinguishable upon its facts. In that case a corporation had capitalized $300,000 of its surplus by a stock dividend. Later it reduced its capital stock and distributed to its stockholders its assets in excess of par value of its new capital stock. It was held that the distribution of assets was a division among the shareholders of the corporation's surplus and hence taxable as a dividend. The conclusion that the change in capital structure from 4,000 common shares to 500 common 36 B.T.A. 1233">*1247 and 750 preferred was a recapitalization and hence within the statutory definition of a reorganization was clearly justified under the facts; but it was pointed out that section 112 applies "to exchanges, and there is nothing to indicate whether the word exchange is to be so broadly construed as to include every instance where, irrespective of the terms or circumstances thereof, a stockholder gives up shares and comes out of the arrangement with other shares or something else." It should be noted, also, that the Board held the assets which were distributed out of the corporation's surplus were not received by way1937 BTA LEXIS 606">*639 of exchange for the shares surrendered.
, is more nearly analogous on its facts to the instant proceedings. In that case, if the corporation in which the petitioner was a common stockholder had been liquidated, there would have been nothing to be distributed among the common stockholders. Under a plan of reorganization, they were given the right to exchange one share of their old common stock for two shares of the new no par common stock upon payment of an assessment of $20. Persons who were not common stockholders could and did subscribe for and receive two no par value shares in the reorganized company at the price of $20 for the two shares. The Board held that inasmuch as the ownership of the old common stock did not confer any special benefit or valuable privilege upon the stockholders, their investment in such stock was worthless and might be deducted from gross income. The facts in the instant proceedings justify a similar holding.
Respondent argues that the payment of $5 for the capital debentures of the resuming bank constituted an amount paid for increasing the capital value of property. None of the petitioners1937 BTA LEXIS 606">*640 are claiming that the amount so paid constituted a deductible loss during the taxable year so the issue is not before us except in so far as it may affect the issue which has been discussed. The plan, after referring to the assessment which had been made against stockholders, provides: "Payment and collection of said $50 per share shall be made as follows: (a) At least $5 thereof shall be paid by the delivery to the Superintendent of Banks of capital debentures of the resuming Bank purchased and paid for by the stockholder. The debentures so delivered to the Superintendent shall be held by him solely for the benefit of the depositors and creditors of the present Bank and may be disposed of by him at any time. The stockholder who has purchased and paid for the debentures so delivered shall have no interest therein at any time. (b) The balance of the $50.00, or such part as may be necessary shall be collected by the Superintendent three years after the time of resumption of business by the Bank * * *." Whether the purchase of such debentures is a capital transaction or 36 B.T.A. 1233">*1248 the payment of a portion of the assessment made against the stockholders of the closed bank, it must1937 BTA LEXIS 606">*641 nevertheless be held, for the reasons set out above, that there was not an exchange of stock solely for stock and hence section 112 of the revenue act is not applicable.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Income tax, $862.85; excess-profits tax, $313.76. ↩
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
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(j) BAD DEBTS. - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. ↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(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 or securities in such corporation or in another corporation a party to the reorganization.
* * *
(i) DEFINITION OF REORGANIZATION. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) 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 which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation. ↩
3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(e) LOSSES BY INDIVIDUALS. - Subject to the limitations provided in subsection (r) of this section, 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; or * * *
(f) LOSSES BY CORPORATIONS. - Subject to the limitations provided in subsection (r) of this section, in the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise. ↩