1941 BTA LEXIS 1239">*1239 Petitioner was the owner of some bonds which had been issued in a prior year by a corporation operating a chain of hotels. The corporation got into financial difficulties and was unable to keep up the interest payments on the bonds. In 1935 a petition was filed by the corporation in the United States District Court for a reorganization under section 77B of the National Bankruptcy Act. In 1936 this reorganization was accomplished and as part of the plan of reorganization petitioner exchanged his old bonds for part cash and the remainder in third mortgage income bonds of the new corporation. Later in the year petitioner sold the bonds which he had received in the reorganization. Held, the reorganization under section 77B of the Bankruptcy Act was a reorganization within the meaning of section 112(g), Revenue Act of 1936, and petitioner was not entitled to take his loss as a bad debt at or about the time he exchanged his old bonds for cash and the new income bonds; held, further, when petitioner, later on in the year, sold the new income bonds which he received in the exchange, his loss was then realized and it was a capital loss, limited by the provisions of section 117(d), 1941 BTA LEXIS 1239">*1240 Revenue Act of 1936.
44 B.T.A. 1046">*1047 The Commissioner determined a deficiency in petitioner's income tax for the year 1936 of $1,252.08. This deficiency is due to adjustments made in the income tax return filed by petitioner ofr the year 1936 which the Commissioner explained in his deficiency notice as follows:
(a) The amount of $5,422.51 claimed as a deduction under item 2, page 1, of the return, in connection with Tampa Commercial Hotel Company and Hotel Dixie Court bonds has been disallowed. (Section 117(a), (d) and (f) of the Revenue Act of 1936).
Capital loss of $1,940.00 claimed as a deduction under item 10, page 1 of the return has been adjusted to $2,000.00, the amount of capital loss allowable by law, and is computed as follows:
| Capital loss, Schedule C of the return | $4,850.00 |
| Bond loss - item 2 of the return | 5,422.51 |
| Total capital loss | $10,272.51 |
| Loss limited to (Section 117) | $2,000.00 |
| Loss and deduction claimed | 7,362.51 |
| Increase in income | $5,362.51 |
The petitioner, by appropriate assignments of error, contests the adjustments1941 BTA LEXIS 1239">*1241 which the Commissioner has made and contends that he is entitled to the deduction claimed as a debt which was ascertained to be partially worthless within the taxable year and charged off.
FINDINGS OF FACT.
The petitioner is an individual, residing in Atlanta, Georgia. His income tax return for the year 1936 was filed with the collector of internal revenue at Atlanta, Georgia. He is an attorney and regularly engaged in the practice of law, with offices in Atlanta.
In 1926 petitioner purchased $17,000 face value of bonds of the Tampa Commercial Co. for $9,350. Later he bought $500 of Hotel Dixie Court bonds for $100. These hotels were included in a group of hotels which had been financed by the Adair Realty & Trust Co., the bonds on which were in part guaranteed by the Globe Indemnity Co. During the same year petitioner was employed by the Globe Indemnity Co. to look after its interests. The Globe Indemnity Co. owned $1,200,000 of the total issue of $3,300,000 of the bonds on these hotels. In 1927 seven of these hotels were put in receivership. In 1929 these hotels were sold by the receivers to Barron G. Collier and his associates to operate as a chain, under a corporation1941 BTA LEXIS 1239">*1242 to be known as Florida-Collier Coast Hotels, Inc., the latter corporation to issue new bonds in exchange for the old bonds, petitioner receiving bonds of the Floridan Hotel for those which he held in the Tampa Commercial Hotel Co. In 1932 petitioner, representing the Globe Indemnity Co., brought a petition and had the Collier chain put in receivership in 44 B.T.A. 1046">*1048 Federal equity. In the latter part of 1935, while being operated by the receivers, the unpaid taxes had mounted up to $356,000 and at that time petitioner prepared petition for reorganization under section 77B of the Bankruptcy Act. While he could not act as counsel, he did prepare all of the papers because of his particular familiarity with the properties, Globe and Collier agreeing to pay petitioner's fee.
Petitioner, for the Globe Indemnity Co. and for himself, weighed what could probably be collected through liquidation against what could be secured through reorganization. In the five-year period ended December 30, 1934, the Floridan Hotel had earned above taxes and insurance an average of $8,446.43 per year. Petitioner found that there was no market in which money could be borrowed to finance a purchase of1941 BTA LEXIS 1239">*1243 the hotels and that the properties could not be sold except upon the basis of the income showing; that five years' operations showed that petitioner and his client, the Globe Indemnity Co., could not collect more through liquidation than they could through reorganization.
The reorganization plan provided that 10 percent was to be paid in cash on all bonds except those of the Floridan Hotel; 15 percent was to be paid in cash on the bonds of that hotel; and 20 percent of the face value of bonds was to be paid in third general mortgage 5 percent income bonds. The plan of reorganization also provided as to stockholders as follows:
The stockholder of the present owner, Florida-Collier Coast Hotels, Inc., Debtor, will, upon the surrender of this stock, participate ratably in one-half of the common stock of such new corporation so taking title to said properties, and the present stock will be cancelled.
Petitioner was not a stockholder of the old corporation and, therefore, did not receive any of the common stock of the new corporation.
Before the plan was agreed upon the Globe Lndemnity Co. demanded cash in lieu of income bonds. Barron G. Collier thereupon agreed to purchase1941 BTA LEXIS 1239">*1244 the income bonds, if and when issued, at 25 cents on the dollar. Petitioner took the position that 25 cents on the dollar would suit him. Collier agreed he would buy "all of them" if the holders desired to sell at that figure. The plan was thereafter approved by 80 percent of all the common unsecured creditors and had likewise been accepted by 87.69 percent of the stockholders and by 73 percent of the bondholders. Thereafter, on November 4, 1935, notice of hearing upon the plan and the plan of reorganization were mailed to all the stockholders, creditors, and bondholders. In the early part of 1936 the plan was approved. For his old bonds the petitioner received money and income bonds as provided by the plan. In June of 1936 petitioner received the cash payment of 15 percent on the Floridan and 10 percent on the Dixie Court bonds. In August 1936 he sold 44 B.T.A. 1046">*1049 his income bonds which he had received in the reorganization to .collier at 25 cents on the dollar.
In preparing his income tax return for the year 1936 in a schedule attached to the return the petitioner recited, among other things, the transactions relating to his bonds from the dates purchased to the date of1941 BTA LEXIS 1239">*1245 the sale of the exchanged bonds in terms as follows:
| Nov. 10, 1928, purchased 17 ($1,000.00 face value each) Tampa Commercial Hotel Co. bonds for | $9,350.00 | |
| In 1930 purchased 1 Hotel Dixie Court bond (face value $500.00) for | 100.00 | |
| Total cost bonds | $9,450.00 | |
| Amounts received on above bonds: | ||
| Hotel Floridan (Tampa Commercial Hotel Co.): | ||
| Check from Florida National Bank, Trustee, Jacksonville, Florida, distribution resulting from reorganization under 77B | 2,964.37 | |
| Check from Barron G. Collier for income bonds issued under reorganization, sold to Collier at 25 cents on $1.00 | 988.12 | |
| Hotel Floridan total | 3,952.49 | |
| Hotel Dixie Court: | ||
| Check from Fulton National Bank, depositary, at 10 cents on $1.00, resulting from reorganization under 77B | $50.00 | |
| Check from Barron G. Collier for income bond issued under reorganization, sold to Collier at 25 cents on $1.00 | 25.00 | |
| Hotel Dixie Court total | $75.00 | |
| Total amounts received on bonds | $4,027.49 | |
| Total cost bonds | $9,450.00 | |
| Total amounts received on bonds | 4,027.49 | |
| Total amount loss | $5,422.51 |
It was agreed by the petitioner and the respondent that the above computation of loss1941 BTA LEXIS 1239">*1246 is correct. The petitioner's explanation in his income tax return of his method of treatment of the loss is as follows:
The reason that this loss on the Florida-Collier Coast Hotels, Inc. bonds is deducted as against the $7,400.00 net fee shown in the item of fees is this:
I had $17,500.00 face value of these bonds, which represented an original cost of $9,450.00. The $4,027.49 represents the amount received for these bonds, sold pursuant to the reorganization, thus making a loss of $5,422.51.
At the time I filed the equity receivership in 1932 in the United States District Court for the Southern District of Florida I held these bonds.
I received as attorney's fees something in the neighborhood of $4,000.00 a year, which fees were reported as income by the partners in my old firm of Spalding, MacDougald & Sibley.
44 B.T.A. 1046">*1050 When the reorganization proceedings were filed by the attorneys for the Florida-Collier Coast Hotels, Inc., Mr. Barron G. Collier employed me to represent him in connection with his interests therein. I was at the same time employed generally by the Globe Lndemnity Company and represented it in the reorganization proceedings, it holding a large1941 BTA LEXIS 1239">*1247 block of the bonds of the Florida-Collier Coast Hotels, Inc.
I was allowed a fee of $10,000.00 in the wind-up of the Federal equity suit. Of this sum I turned into my new firm (Colquitt, MacDougald, Troutman & Arkwright) $4,500.00, and deducted $100.00 as miscellaneous costs and expenses incurred by me, retaining the sum of $5,400.00 individually.
In addition to the foregoing, Mr. Collier owed me a $15,000.00 fee, of which $2,000.00 was paid on account in 1936. This $2,000.00 and the $5,400 makes the $7,400 referred to above.
I also received in connection with representation of the Globe Indemnity Company the sum of $10,000.00 which is reported income as fees received on above schedule.
Mr. Collier's balance due me of $13,000.00 has been paid in part during the year 1937 and this sum so paid and all other sums received by me during the year 1937 will be returned as income.
Feeling that I was a party at interest in the reorganization proceedings of the Florida-Collier Coast Hotels, Inc., I thought that my loss as a bondholder could be set off against the efforts made to salvage something for the bondholders.
The petitioner in his income tax return did not report1941 BTA LEXIS 1239">*1248 the loss of $5,422.51 as a bad debt under "DEDUCTIONS 16. Bad Debts (including bonds determined to be worthless during taxable year). (Explain in Schedule F)', but did report the transaction under "INCOME 2. Net Profit (or Loss) from Business or Profession. (From Schedule A) Law practice."
In auditing the return the Commissioner of Internal Revenue redetermined petitioner's income tax and considered the loss as one resulting from the exchange and sale of capital assets for cash which was governed by section 117(a), (d), and (f) of the Revenue Act of 1936.
Petitioner kept no set of books or ledger and only kept check stubs and memoranda reflecting receipts and disbursements, from which data he made his income tax returns on the cash receipts and disbursements basis.
OPINION.
BLACK: On the facts disclosed in our findings of fact, we think the Commissioner must be sustained.
If the transaction by which petitioner received a cash disbursement of 15 percent on his Floridan bonds and 10 percent on his Dixie bonds, and by which he later received from Barron G. Gollier 25 percent in cash for his income bonds, be viewed as one transaction and not separable, then it amounted1941 BTA LEXIS 1239">*1249 to a retirement of the old bonds which he held for which he received 40 percent in cash for the Floridan bonds and 35 percent in cash for the Dixie bonds. The transaction 44 B.T.A. 1046">*1051 would then come within the provisions of section 117(f) of the Revenue Act of 1936, printed in the margin. 1
If the transaction be viewed as a retirement of the old bonds which petitioner held, for cash, then the loss sustained thereby was a capital loss within the provisions of section 117(d) of the Revenue Act of 1936, printed in the margin. 2, and .
1941 BTA LEXIS 1239">*1250 If However, the transactions be viewed separately, as petitioner contends they should be, we think the results are the same. Petitioner's exchange of his old bonds for a cash payment and new income bonds of 20 percent of the face value of the old ones was done as part of a plan in a 77B bankruptcy reorganization and we have held that no gain or loss is recognized in such a reorganization. . In the latter case we held that, where, pursuant to a reorganization of a corporation under section 77B of the Bankruptcy Act, a taxpayer exchanged her old bonds for new and different bonds having a lesser face value, the taxpayer was not entitled to deduct the difference in such value as a partially worthless debt.
Thus, in the instant case, when petitioner exchanged his old bonds for a cash payment and new and different bonds of a 20 percent face value of the old bonds, he was not entitled to deduct the difference between the cost basis of his old bonds and the aggregate value of what he had received in exchange as a partially worthless debt. 1941 BTA LEXIS 1239">*1251 Of course, when, in the same year, he sold the income bonds which he had received in the exchange for 25 cents on the dollar, he was entitled to take his loss deduction, but that loss deduction is a capital loss and is limited by the provisions of section 117(d), supra.
Therefore, whether we view the transactions as a retirement of petitioner's old bonds for cash which was equal to part of their face value or whether we view the transactions as a reorganization under 77B of the Bankruptcy Act, and therefore a statutory reorganization under section 112(g) of the Revenue Act of 1936, and the subsequent sale by petitioner of the income bonds which he received in the reorganization, the loss which petitioner incurred is in either event a capital loss, limited by section 117(d), and can not be taken as a partial bad debt loss under section 23(k) of the Revenue Act of 1936.
Decision will be entered for respondent.
Footnotes
1. (f) RETIREMENT OF BONDS, ETC. - For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor. ↩
2. (d) LIMITATION ON CAPITAL LOSSES. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * * ↩