
    TEXAS CITY TERMINAL RAILWAY COMPANY v. THE UNITED STATES
    [No. 295-52.
    Decided June 5, 1957]
    
      
      Mr. Charles B. Melnnis for tbe plaintiff. Messrs. C. Kibby Munson, Philip 8. Jessup and Roberts & Melnnis were on the briefs.
    
      Mr. Herbert 8. Fessenden, with whom was Mr. Assistant Attorney General Charles K. Rice, for the defendant. Mr. James P. Garland was on the briefs.
   LittletoN, Judye,

delivered the opinion of the court:

This is a suit to recover income taxes alleged to have been erroneously assessed and collected from the plaintiff corporation for 1945 and 1946. The principal issue is whether the plaintiff, in computing depreciation and gain or loss upon the sale of certain assets acquired from a predecessor corporation, may, for income tax purposes, use as the basis of such assets (1) the basis they would have had in the hands of a predecessor corporation, or (2) the cost of such assets to the plaintiff taxpayer corporation. Should we hold that plaintiff is entitled to the basis of its predecessor corporation, then a second issue as to the correct evaluation of that basis is presented.

Plaintiff’s predecessor corporation was the Texas City Transportation Company, hereinafter referred to as the Transportation Company. Prior to August 20, 1920, when Transportation Company ceased operations, it owned certain terminal and warehouse properties located on the shore of Galveston Bay in Texas City, Texas. These properties consisted of docks, piers, warehouses, a grain elevator, about thirty-four miles of belt line railroad tracks, switch engines, freight cars, etc. Transportation Company operated the non-carrier type properties, and its wholly owned subsidiary, the Texas City Terminal Company, operated the carrier type facilities under lease from the Transportation Company.

Transportation Company had issued and outstanding 25,000 shares of common stock of $100 par value, of which all but five shares, held as director’s qualifying shares, were owned by the Texas Investment Company of Pittsburgh, Pennsylvania. Transportation Company also issued and had outstanding 3,000 shares of preferred stock of $100 par value which were owned by 21 different individuals in varying amounts.

On November 1, 1909, Transportation Company issued $2,000,000, six percent (serial) gold bonds which matured annually in various amounts beginning November 1, 1912. These bonds were secured by a first mortgage and deed of trust on all of Transportation Company’s land and other property, and by a pledge of all of the capital stock in its subsidiary, the Texas City Terminal Company. The Central Trust Company of Illinois and James L. Houghteling, a member of the firm of Peabody, Houghteling & Co., underwriters and investment brokers, were trustees under the first mortgage and deed of trust. Subsequent to the issue of the first mortgage bonds, the Transportation Company issued $600,000 principal amount six percent gold notes (unsecured), dated August 1, 1912, with original maturity date of August 1,1917, but extended for the entire issue to August 1, 1922. These notes were subordinate to the claims of the holders of all of Transportation Company’s outstanding first mortgage bonds and interest thereon.

Transportation Company paid the annual maturities on the first mortgage bonds of $50,000 in each of the years ended November 1, 1912, 1913 and 1914. However, due to the decrease of its business, Transportation Company was unable to pay its first mortgage bonds maturing serially on November 1, 1915, 1916, 1917, 1918 and 1919, or the interest which became due thereon in those years. Neither was it able to pay the interest due on its gold (unsecured) notes.

The first mortgage bonds of $75,000 which matured November 1,1915, and $75,000 which matured November 1,1916, together with unpaid interest coupons thereon, were purchased by Peabody, Houghteling & Co., hereinafter referred to as Houghteling & Co. That partnership also purchased all interest coupons presented for redemption by the holders of other outstanding first mortgage bonds which became due semi-annually for the years ended November 1, 1915 to November 1, 1917, inclusive. Houghteling & Co. from time to time entered into agreements with the Transportation Company extending the time of payment on the bonds held by the partnership and the interest coupons which it had purchased. The time as finally extended for the payment of this indebtedness owed Houghteling & Co. by Transportation Company was December 10, 1919. Under the terms of the first mortgage and deed of trust, the agreement extending the time for payment of the principal and interest of the first mortgage bonds, without the prior consent of three-quarters of all the holders of the other outstanding first mortgage bonds, caused the lien and security of the first mortgage and deed of trust, so far as it applied to the bonds and interest so extended, to be postponed and subordinated to the lien and. security of all other outstanding first mortgage bonds and unpaid interest coupons not then due and not so extended. The lien and security of the extended bonds and interest coupons remained at all times superior to the unsecured gold notes and other unfunded indebtedness of the Transportation Company.

The $150,000 face value first mortgage bonds and all interest coupons which had been purchased by Houghteling & Co., became due and unpaid on December 10,1919, and were in default thereafter. Of the remaining outstanding bonds, $75,000 matured November 1, 1917, $100,000 November 1, 1918, and a like amount on November 1, 1919. Also all interest coupons which became due semi-annually during 1918 and 1919 were unpaid and in default. These bonds and interest coupons were not extended so that the owners thereof retained equal rights with other outstanding first mortgage bondholders whose bonds and coupons had not yet matured.

Houghteling & Co. addressed a circular letter, dated April 20, 1919, to all of the holders of the first mortgage bonds in an attempt to reorganize the Transportation Company by providing for the issuance of new securities by either the Transportation Company or by a newly formed corporation. Under the plan proposed by Houghteling & Co., the holders of the unsubordinated (not extended) first mortgage bonds were to receive a new issue of first mortgage, six percent 20-year sinking fund income bonds which would be dated May 1, 1919, in a principal amount equal to the face value of the bonds then held plus unpaid interest coupons to date of issue of the new bonds. Interest coupons were to be attached to the new bonds for interest maturing May 1, 1921. All holders of subordinated first mortgage bonds and interest coupons, and all other junior creditors and stockholders were to deposit their securities with a trustee, subject to the condition that if the new first mortgage bonds did not receive full interest at six percent for the first two years, the first mortgage bondholders would become absolute owners of the property without foreclosure or any legal proceeding. This plan of reorganization was not successful and a second letter, dated January 10, 1920, was sent to the holders of the unsubordi-nated first mortgage bonds. This letter contained a copy of the first letter with a form of endorsement and reply for depositing their bonds with Houghteling & 'Co. The letter stated in part:

A very large majority of the holders of the first mortgage bonds agreed to the plan and made deposit of their bonds, but we have not been able to declare the plan operative because one stockholder of the Company, who had agreed to deposit his stock, has failed to do so.
In view of these facts we cannot carry out the procedure originally proposed, but we can produce the same result by a foreclosure of the present first mortgage. This, however, means the incurring of considerable expense which we had hoped to avoid by our prior plan. * * * We are willing to relieve our clients of this burden, however, and we ourselves will agree to advance the necessary moneys upon your acceptance of the following conditions: * * *

The letter went on to provide as one of the conditions that Houghteling & Co., for moneys advanced and services rendered and to be rendered, would receive all of the junior securities, including stock, that might be issued by the new corporation. This stock and junior securities were to be deposited with a trustee for the benefit of the holders of the new first mortgage bonds.

Approximately 93 percent of the first mortgage bondholders of the Transportation Company agreed to the foreclosure plan and deposited their bonds with Houghteling & Co. As in the original proposal, the holders of the unsubor-dinate first mortgage bonds were to receive from the new corporation first mortgage bonds with the same face value as those turned in, plus interest as shown by the overdue interest coupons.

Pursuant to this plan, the Central Trust Company of Illinois and James L. Houghteling, Jr., as trustees under the first mortgage and deed of trust, instituted on March 16, 1920, foreclosure proceedings in the District Court of Galveston County, Texas. The court appointed a receiver to hold, possess and operate all of the properties of the Transportation Company. On June 11,1920, the court gave judgment to the trustees for the payment of certain taxes made by them on behalf of the Transportation Company, and to the holders of the unsubordinated first mortgage bonds for principal and interest in the total amount of $1,875,524.19, and to the holders of the subordinated bonds, and interest coupons held by Houghteling & Co., for principal and interest in the total amount of $494,208.05. The court appointed a Special Master Commissioner who was ordered to sell the property July 6,1920, at public auction to the highest bidder. In accordance with an amended petition filed by the trustees in the foreclosure proceedings asking for the above-mentioned judgment for the bondholders, the court required that the sale be of the entire properties of the Transportation Company as one parcel and as an entirety. The order of the .court further provided that the purchaser could present a receipt from the trustees for the payment of the judgment given for the taxes paid by them and could present first mortgage bonds which had not been postponed or subordinated as a pro tanto credit on the purchase price. If the purchase price was more than sufficient to pay the judgments to the trustees and to the holders of the unsubordinated first mortgage bonds, then the subordinated bonds and interest coupons could be presented and credited on the purchase price in the same amount as they would be entitled to in cash. No bid was received for the property when it was put up for auction on July 6, 1920, and a new order was then issued to sell the property at auction on August 3, 1920. On this date the properties of the Transportation Company were sold to Augustus S. Peabody, the only bidder, for the bid price of $500,000. There was no objection raised by anyone and the sale was therefore confirmed by the court. The purchase by Peabody was made on behalf of the first mortgage unsubordi-nated bondholders who had agreed to the plan of reorganization, and on behalf of Houghteling & Co. This whole procedure was carried out in accordance with the provisions set forth in the Houghteling & Co. letter of January 10,1920, to the bondholders (finding 13).

Having made full payment of the $500,000 bid price on September 18, 1920, the Receiver and Special Master Commissioner executed a deed conveying the property, including contracts and claims of the Transportation Company, to Peabody. In paying for the property, Peabody, in accordance with the court’s order, had deposited with the Special Master Commissioner unsubordinated bonds with the face value of $1,566,000, plus interest coupons thereon. There remained outstanding only $55,500 face value unsubordinated bonds with unpaid interest coupons attached which represented only about 3.42 percent of the total face value un-subordinated bonds of the Transportation Company outstanding at the time of the foreclosure sale. The holders of these bonds were entitled to their pro rata share of the purchase price which amounted to $15,019.97. This amount was paid by the purchaser to the Special Master Commissioner, who in turn gave it to the trustees for distribution to the nonparticipating bondholders. By order of the court on December 17,1920, the Receiver was discharged and the receivership closed. None of the junior creditors, i. e., those not represented by bonds, received anything from the foreclosure sale. A judgment was obtained on behalf of certain note holders, but the proceeds of the sale were not sufficient for them to participate in any division to creditors. Likewise they did not participate in any plan of reorganization since their interests were “washed out” and eliminated by the foreclosure proceedings and resultant sale of the property to the secured creditors. Thus, after the receivership was closed, all of Transportation Company’s property was in the hands of Peabody for the benefit of the participating unsubordinated bondholders who were now entitled to new first mortgage bonds secured by the property so acquired.

All of the property held by Peabody was then transferred to the plaintiff corporation, which was organized January 18, 1921. Thereafter, plaintiff, issued to Peabody, subject to the approval of the Interstate Commerce Commission, all of its common stock, except four director’s qualifying shares. Plaintiff also issued $1,945,856.34 face amount 20-year first mortgage bonds to those bondholders of the unsubordinated bonds who participated in the purchase of the property at the foreclosure sale with interest thereon to January 26, 1921.

At the time plaintiff corporation was organized the properties acquired in the mortgage sale were set up on its books on the same cost basis which the properties had carried on the books of the Transportation Company, adjusted by additional property acquired from August 21,1920, the date the sale was approved, to January 13, 1921, when plaintiff was formed.

The fixed assets, including land and other non-depreciable property, acquired by the plaintiff, are summarized at book costs as follows:

Investments in road and equipment as of August 20,
1920, on the books of the Transportation Company— $5, 301,726.47 Properties acquired during the operations by H. B.
Moore, as Receiver and on behalf of the purchaser,
Augustus S. Peabody, August 21,1920, to January 13,
1921:
Net additional purchases, as recorded- 9, 096. 64
Oil storage tanks and docks acquired from H Company under contract of June 11, 1919, suant to decree of June 11,1920, Par. 4 (j): umble Oil and pur-
Payments under contract during period $20,789.09 Liability assumed for balance due $117,-376.04 $138,165.13
Oil storage tanks acquired from Vacuum Oil under contract March 30, 1920, pursuant of June 11,1920, Par. 4 (1)_ Company to decree 10,299. 66
Total property acquired January 13,1921_ 5,459,285.80

The exact method of computing these costs is set out in finding 26 and will not be repeated here. It represents as nearly as possible an accurate computation of the actual book costs of such assets using the basis upon which they would have been carried by the transferor corporation, Transportation Company.

The plaintiff for the calendar years 1945 and 1946, made certain sales of property acquired from Transportation Company and reported the income therefrom. Also for those' years plaintiff computed and claimed deductions for depreciation of assets obtained from the mortgage sale. Plaintiff used as a basis for computing its gain on the sales of property and the depreciation of the assets an original basis other than the basis the properties would have had in the hands of its predecessor corporation, Transportation Company. Thereafter the plaintiff filed claims for refund of taxes for the years 1945 and 1946 claiming that the correct basis from which to compute gain or loss and depreciation was the basis that the properties would have had in the hands of Transportation Company adjusted in accordance with the provisions of law. The claims of the plaintiff were denied by the Commissioner of Internal Kevenue and it now brings suit in this court to recover the difference between the tax computed by using the basis of Transportation Company and the amount of tax paid by reason of using another allegedly erroneous basis.

By using the original cost basis of the property acquired at the time of its organization, January 18, 1921, i. e., the same basis at which it had been carried on the books of Transportation Company and adjusted for later expenditures, losses, wear and tear, etc., the plaintiff’s net income would be reduced for the year 1945 by $22,716.07 and for 1946 in the amount of $26,726.23. This represents the difference between the net income computed by the Commissioner, using as the original unadjusted basis of the property the cost of such property to the plaintiff corporation at the foreclosure sale, and the unadjusted basis the property would have if plaintiff could use the basis of Transportation Company.

For support of its position that it may use the basis of Transportation Company, plaintiff points to sections 113 (a) (7) and 114 of the Internal Revenue Code of 1939, which were in effect during the years 1945 and 1946. These sections provided in pertinent part as follows:

Sec. 113. Adjusted basis for determining gain or loss— (a) Basis (u/nadjusted) of property.
The basis of property shall be the cost of such property ; except that—
* * * * *
(7) Transfers to corporation.
If the property was acquired—
(A) after December 31, 1917, and in a taxable year beginning before January 1, 1936, 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, or
(B) in a taxable year beginning after December 31, 1935, by a corporation in connection with a reorganization, 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 a party to the reorganization, unless acquired t>y the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
*****
•(b) Adjusted basis.
The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
(7) General rule.
Proper adjustment in respect of the property shall in all cases be made—
(A) for expenditures, receipts, losses, or other items properly chargeable to capital account, but no such adjustment shall be made for taxes or other carrying charges for which deductions have been taken by the taxpayer in determining net income for the taxable year or prior taxable years;
(B) in respect of any period since February 28,1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this chapter or prior income tax laws. Where for any taxable year prior to the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for the depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;
(C) in respect of any period prior to March 1, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained;
* * * * *
Seo. 114. Basis for depreciation and depletion—
(a) Basis for depreciation.
The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.
Ü= * * * *

Plaintiff contends that it meets the requirements of section 113 (a) (7) and is therefore entitled to use as the basis for determining gain or loss from the sale of assets acquired in the mortgage sale transaction the same basis as those assets had with Transportation Company. Also, since the basis for computing depreciation is the same as the basis determined under section 113 (a), adjusted by section 113 (b), plaintiff claims the right to Transportation Company’s basis in determining, for tax purposes, the depreciation it is entitled to deduct on properties acquired at the sale. Plaintiff bases this contention on the premise that it acquired the property between 1917 and 1936, in connection with a reorganization, and immediately after the transfer, an interest or control in such property of more than 50 percent remained in the same parties.

It is undisputed that plaintiff acquired the property in question between December 31, 1917 and January 1, 1936, and to that extent it meets the requirements of the above provision of law. There remains for determination the questions (1) whether the property was acquired by plaintiff “in connection with a reorganization,” and if so (2) whether immediately after the transfer an interest or control in such property of 50 percent or more remained in the same persons who had owned the property prior to the transfer.

In order to determine whether there has been in fact a reorganization for the purposes of the internal revenue laws, we must look to the provisions of revenue law in effect at the time of the transfer in question. In this particular case the applicable law is section 202 (c) (2) of the Revenue Act of 1921, 42 Stat. 227, providing that:

(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gam or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized—
*****
(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by hira, stock or securities in a corporation a party to or resulting from such reorganization. The word “reorganization”, as used in this paragraph, includes 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 classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form, or place of organization of a corporation, (however affected); * * *

Plaintiff says that the transaction hereinbefore described meets the qualifications of section 202 (c) (2) because the acquisition by it of “substantially all the properties” of the Transportation Company constituted such a reorganization subject only to the “continuity of interest” rule set forth by the Supreme Court in Pinellas Ice & Gold Storage Company v. Commissioner, 287 U. S. 462, and Le Tulle v. Scofield, 308 U. S. 415. In support of its position plaintiff cites Helvering v. Alabama Asphaltic Limestone Company, 315 U. S. 179, where a reorganization was carried out through bankruptcy proceedings.

In the Limestone Co., case, supra, the Court dealt with the interpretation of section 112 (i) (1) of the Eevenue Act of 1928, 45 Stat. 791, which was a successor provision to section 202 (c) (2) of the 1921 Act. Section 112 (i) (1) provided : “The term ‘reorganization’ means (A) a merger or consolidation (including the acquisition by one corporation of '* * * substantially all the properties of another corporation * * It is apparent that no substantial change was made in the 1928 Act from those provisions found in the 1921 Act. The facts in the Limestone Co. case were that a creditors’ committee proposed a plan of reorganization to which all noteholders with the exception of two assented. Under the plan a new corporation would be formed to acquire all of the assets of the old corporation with the stock of the new corporation being issued to the creditors in satisfaction of their claims. The old corporation went through bankruptcy and its assets were put up for sale by the trustee in bankruptcy and bid in by the creditors’ committee. Stock was issued to the assenting creditors after the formation of the new corporation and the nonassenting creditors were paid off in cash. The court held that this was a reorganization under the Eevenue Act of 1928, rejecting the argument that in order to meet the “continuity of interest” rule a substantial ownership interest in the transferee company must be retained by the holders of the ownership interest in the trans-feror. The Court went on to say that under such a rule there could be no reorganization in this case since the stockholders of the old corporation had been eliminated. The court held that the creditors, at the time they invoked the processes of law to enforce their rights, stepped into the shoes of the old stockholders and that “The sale [bankruptcy] ‘did nothing but recognize officially what had before been true in fact.’ Helvering v. New Haven & S. L. R. Co., 121 F. 2d 985, 987.” Therefore a continuity of interest was maintained when the creditors received the stock in the new corporation to the exclusion of the old stockholders and junior creditors. It is also clear that the fact that title to the property sold may have passed to a trustee prior to the organization of a new corporation does not break the “continuity of interest” since this is merely a step in the reorganization.

We think that the record herein discloses a transaction very much like that presented in the Limestone Co. case. It is true, as defendant points out, that the creditors of plaintiff’s predecessor did not receive all of the stock since the unsubordinated first mortgage bond holders received new bonds of the reorganized corporation. This, however, does not defeat a reorganization under the 1921 Act since there is no requirement, as there was in later years, that the transfer be solely for voting stock of the transferee corporation. The only requirement of section 202 (c) (2) is that there be a merger or consolidation “of substantially all the properties of another corporation.” As used in the statute, insolvency reorganizations are within the meaning of “merger” and “consolidation,” Limestone Co., supra.

The 50 percent rule of section 113 (a) (7) of the 1939 Code is met because the persons who had the rights of ownership in the old corporation continued to have such rights in the new corporation. The unsubordinated bondholders of the old corporation, with their superior rights, got new first mortgage bonds of the reorganized corporation, while the junior creditor, Houghteling & Co., succeeded to the equity interest. All other junior creditors were washed out since their interests were inferior and nothing remained for them to share in. As the Tax Court said in Montgomery Building Realty Co. v. Commissioner, 7 T. C. 417:

* * * We think it follows that the transfer of control to the junior creditors upon insolvency and the ownership by them of the equity in the new corporation, subject to the assumption and continuation of the prior rights of the mortgage bondholders, effectively carried through in the reorganization the ownership and control which had already become an economic reality, and that under the rule of the Alabama Asphaltic case the reorganization and basis provisions are applicable. * * *

The Montgomery case involved a slightly different factual situation, but nevertheless illustrates that in a transaction such as herein presented the code requirements are met for a corporate reorganization.

Defendant argues that plaintiff’s transactions with its predecessor corporation are unlike the Limestone Co. case because there was no plan of reorganization. This argument is clearly refuted by the facts in this case and a reference thereto clearly shows that a definite plan of reorganization was proposed and in fact carried out.

Defendant also contends that plaintiff’s transactions fall within other sections of the 1921 Act and the 1939 Code. This may well be so, but it in no way alters the fact that the transaction also falls within the corporate reorganization provisions of 202 (c) (2) of the 1921 Act and 113 (a) (7) of the 1939 Code. Defendant cites Helvering v. Cement Investors, 316 U. S. 527, for support of its position. A close reading of that case presents no conflict with our holding in this case. Cement Investors involved events occurring under the Revenue Act of 1936 which required the exchange of property to be solely for voting stock of the new corporation. The Court held that even though the transaction involved therein did not amount to a corporate reorganization under the 1936 Act it could still qualify as a nontaxable transaction under another provision of law. It also appears that had the 1928 and 1921 Revenue Acts been in effect during the time that the transfer in Cement Investors took place, it would have been a corporate reorganization under those acts.

On the authority of Alabama Asphaltic Limestone Co., supra, we hold that plaintiff is entitled to use as the basis of the property transferred the same basis as that property would have had in the hands of its predecessor corporation, the Transportation Company.

A second issue is raised by the defendant with respect to the cost basis of the assets so transferred to the plaintiff by Transportation Company. We will not go into a lengthy discussion as to the proper method of computing costs. We have found that the costs as carried on the books of Transportation Company and transferred to the plaintiff represent an accurate figure (finding 23). Plaintiff is entitled to a reduction of its net income for the years 1945 and 1946 in the amounts of $22,716.07 and $26,726.23, respectively, and is therefore entitled to recover taxes paid thereon in the amount of $14,513.05, with interest thereon as provided by law to the date of payment on $1,650.22 thereof from September 20, 1946; on $7,436.21 thereof from December 11, 1946, and on $5,426.62 thereof from March 17,1947.

It is so ordered.

Laramore, Judge; MaddeN, Judge; Whitaker, Judge; and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the report of Commissioner Paul H. McMurray, and the briefs and argument of counsel, makes findinds of fact as follows:

1. The plaintiff, Texas City Terminal Eailway Company, is a corporation organized January 13, 1921, and existing under and by virtue of the laws of the State of Texas, with its principal office located in Texas City, Texas.

2. The plaintiff brought this suit pursuant to Title 28, section 1491 of the United States Code, to recover income taxes assessed and collected in the amount of $9,877.28 for the calendar year 1945, and in the amomit of $5,426.62 for the calendar year 1946, plus interest from the respective dates of payment thereof.

This suit involves a controversy between the plaintiff and the Commissioner of Internal Eevenue concerning the correct basis for computing depreciation and gain or loss on certain land sold, and for computing depreciation on railroad tracks, warehouses and other properties which had been owned by the Texas City Transportation Company, and were acquired by plaintiff on January 13, 1921, in exchange for plaintiff’s stocks and bonds.

3. For the calendar year 1945 the plaintiff reported net taxable income of $74,362.26, with taxes computed thereon in the amount of $29,744.90. This tax was paid in quarterly installments as follows:

March 21, 1946_$7,436.23
June 21,1946_ 7,436.23
September 20, 1946_ 7,436.23
December 11, 1946_ 7,436.21

For the calendar year 1946 tlie plaintiff reported net taxable income of $23,706.47, with taxes computed thereon in the amount of $5,426.62. It was paid in full March 17,1947.

4. On March 15,1949, the plaintiff filed with the Collector of Internal Revenue for the First District of Texas a claim for refund of $9,877.28 of the income tax paid for the calendar year 1945, “or such larger amount as may be determined”. The claim for refund stated as a basis thereof that:

Gain upon sale of land and depreciation on certain structures, equipment and other depreciable property transferred to the taxpayer in exchange for its stock and bonds in connection with the reorganization of its predecessor company, The Texas City Transportation Company, were erroneously reported in the return upon bases other than those to which the taxpayer is entitled under the provisions of Internal Revenue Code Sections 113, 113 (a) (7) and 114. Corrected schedule is attached hereto and made a part hereof.

The schedule attached to the claim for refund set out a list of items of depreciable property owned and used by plaintiff during the year 1945, with valuations as the alleged basis for depreciation of the items of property in the hands of the Texas City Transportation Company as adjusted to December 31, 1944, on which depreciation was recomputed.

Depreciation, as recomputed for 1945, was increased in the amount of $19,184.17 (from $57,577.91 to $76,762.08). Profit in 1945 from the sale of land, previously reported at $5,509.02, was eliminated in this schedule. The plaintiff’s net taxable income was thus reduced by $24,693.19. The claim for refund was at 40 percent thereof (24% normal and 16% surtax).

5. On or before March 15, 1950, plaintiff filed with the Collector of Internal Revenue for the First District of Texas a claim for refund of $5,426.62 income tax paid for the calendar year 1946, under the same provisions of law as its claim for refund in 1945.

Depreciation, as recomputed for 1946, was increased in the amount of $23,194.31 (from $55,060.36 to $78,254.67). Profit in 1946 from the sale of land, previously reported at $5,509.04, was eliminated as an item of income, thus reducing the taxable income previously reported by $28,703.35 and resulting in a deficit for that year of $4,996.88.

6. The Commissioner of Internal Revenue rejected both claims, notifying plaintiff by registered letters dated June 14, 1950, in respect of the claim for refund of income tax for 1945 and August 18, 1950, in respect of the claim for refund of income tax for 1946.

7. Prior to August 20,1920, when it ceased operations, the Texas City Transportation Company, hereinafter sometimes called the Transportation Company, owned certain terminal and warehouse properties located on the shore of Galveston Bay in the City of Texas City, Texas. Those properties consisted of approximately 1,200 acres of land with several miles of water front, docks, piers, a number of shoreside and land warehouses, a grain elevator, coal docks with crane, an oil dock with pipe lines, power house, station and office buildings, shops and machinery, approximately thirty-four miles of belt line railroad tracks, switch engines, freight cars, passenger cars, hoists and other operating equipment. The Transportation Company operated the non-carrier properties, and its wholly owned subsidiary, the Texas City Terminal Company, operated the carrier properties under lease from the Transportation Company prior to August 20,1920.

8. The Transportation Company issued and had outstanding 25,000 shares of common stock of $100 par value, of which 24,995 were owned by the Texas Investment Company of Pittsburgh, Pennsylvania, a holding company; the remaining five shares being held as directors’ qualifying shares. It also issued and had outstanding 3,000 shares of preferred stock of $100 par value which were owned by twenty-one different individuals in varying amounts.

Its “funded debt” consisted of the following:

On November 1,1909, the Texas City Transportation Company issued $2,000,000, six percent (serial) gold bonds which matured annually in various amounts, beginning November 1, 1912. Of this issue, $1,921,500 were sold through the investment banking firm of Peabody, Houghteling & Company, of Chicago, Illinois, a partnership. These bonds were secured by a deed of trust for all of its land, and other property, and a pledge of all of its capital stock in its subsidiary, the Texas City Terminal Company, having a par value of $100,000. The Central Trust Company of Illinois and James L. Houghteling, a member of the underwriting firm of Peabody, Houghteling & Company, were trustees under the first mortgage and deed of trust. The Transportation Company paid annual maturities of $50,000 each of the years ended November 1,1912,1913 and 1914, leaving outstanding $1,771,500.

The Transportation Company also issued six percent, gold notes, all dated August 1, 1912, limited to the principal amount of $600,000, with original maturity date of August 1, 1917, but extended for the entire issue to August 1, 1922. These notes were unsecured and subordinated to the claims of all bondholders of outstanding bonds with interest thereon.

9. Due to the diversion of steamship service from the Gulf of Mexico to the Atlantic Seaboard during the First World War, the business of the Texas City Transportation Company and its subsidiary and lessee decreased materially, with the result that the Transportation Company was unable to pay its first mortgage bonds maturing serially on November 1, 1915, 1916, 1917, 1918 and 1919, nor the interest which became due thereon in said years, on their original or their extended maturity dates as hereinafter described. Neither was it able to pay the interest due in said years on its gold notes.

10. First mortgage bonds of $75,000 which matured November 1, 1915, and $75,000 which matured November 1, 1916, together with unpaid interest coupons thereon, were purchased by the investment banking firm of Peabody, Houghteling & Company of Chicago, Illinois, a partnership, through the Central Trust Company of Illinois, trustee. They also purchased all interest-coupons presented to the trustees for redemption by holders of other outstanding bonds which became due semiannually for the years ended November 1,1915 to 1917 inclusive.

Peabody, Houghteling & Company, a partnership, entered into agreements with the Transportation Company from time to time extending the time for payment of the said bonds and interest coupons to and including December 10, 1919. Under the terms of the first mortgage and deed of trust, the said agreements to extend the time for payment of the principal and interest at maturity, without the prior consent thereto of three quarters of the holders of the other outstanding first mortgage bonds, caused the lien and security of said mortgage and deed of trust, so far as it applied to the bonds and interest coupons so extended, to be postponed and subordinated to the lien and security in favor of all other outstanding first mortgage bonds and unpaid interest coupons not then due and not so extended. The lien and security of these extended bonds and interest coupons at all times remained superior to the gold notes and other unfunded indebtedness of the Texas City Transportation Company.

The $150,000 face value of bonds and all interest coupons which had been purchased by Peabody, Houghteling & Company, became due December 10, 1919, but were not paid and were in default after that date.

Of the remaining outstanding bonds, $75,000 matured November 1,1917, $100,000 matured November 1,1918 and a like amount November 1,1919, none of which were paid and were in default in the hands of the owners thereof. Also interest coupons which became due semiannually during 1918 and 1919 were unpaid and in default from the due dates thereof. These bonds and interest coupons were not extended so that the owners thereof retained equal rights with other outstanding bonds under the first mortgage and deed of trust.

11. Following the death of one of the partners, William E. Stirling, the partnership of Peabody, Houghteling & Company discontinued general business November 30,1918, and a corporation by the same name was organized and took over its office, lease, business and inventory, other than the bonds and interest coupons of the Texas City Transportation Company which had been purchased, and extended for payment, by the partnership. These securities were retained by the remaining partners and surviving heirs, who continued their interest therein and assumed all obligations in connection with the proposed reorganization of the Transportation Company and the foreclosure by the trustees reported hereinafter. They received all of the common stock, except qualifying shares, of the newly organized company, the plaintiff herein.

12. Early in 1919, E. A. Bynum, Vice President and General Manager of the Transportation Company, conferred with partners of Peabody, Houghteling & Company with a view to the reorganization of the Transportation Company.

Peabody, Houghteling & Company by circular letter dated April 20, 1919, to the holders of the First Mortgage Bonds, attempted to effect a reorganization of the Transportation Company, providing for the issuance of new securities by either the Transportation Company or a newly formed company. The holders of unsubordinated first mortgage bonds were to receive a new issue of first mortgage, six percent 20 year sinking fund income bonds, which would be dated May 1, 1919, of a principal amount equal to the face value of bonds then held plus unpaid interest coupons to the date of issue of the new bonds. Interest coupons were to be attached to the new bonds for interest maturing after May 1,1921, but interest payable for the first two years would be from income only, and if not earned or paid the bonds would not be considered in default.

All holders of subordinated bonds and interest coupons, and all other junior creditors and stockholders were to deposit their securities with a trustee, subject to the condition that if the new first mortgage bonds did not receive full interest at six percent for the first two years, the bondholders would become absolute owners of the property without foreclosure or any legal proceeding. The proposal then provided as follows:

If on May 1,1921, the interest for the two years period has been paid in full to the first mortgage bondholders, either from earnings of the company or from advances made by the junior creditors or stockholders, the trustee shall thereupon turn over to the junior creditors and stockholders, or to that group which shall have made the payment, in the event it shall not have been made from the earnings of the company, all the junior securities above mentioned, and these securities shall be considered as reinstated.

13. A second letter dated January 10, 1920, was sent to holders of the unsubordinated first mortgage bonds of the Transportation Company, together with a copy of the first letter of April 20, 1919, which contained a form of endorsement and reply for depositing their bonds with Peabody, Houghteling & Company. This letter stated in part:

A very large majority of the holders of the first mortgage bonds agreed to the plan and made deposit of their bonds, but we have not been able to declare the plan operative because one stockholder of the Company, who had agreed to deposit his stock, has failed to do so.
In view of these facts we cannot carry out the procedure originally proposed, but we can produce the same result by a foreclosure of the present first mortgage. This, however, means the incurring of considerable expense which we had hoped to avoid by our prior plan. * * * We are willing to relieve our clients of this burden, however, and we ourselves will agree to advance the necessary moneys upon your acceptance of the following conditions: * * *

The letter provided as one of the conditions that Hough-teling & Co., for moneys advanced and service rendered, would receive all of the junior securities, including stock, that may be issued by the new corporation. All stock and junior securities were to be deposited with a trustee for the benefit of the holders of the new first mortgage bonds.

Approximately 93 percent of the first mortgage bondholders consented to the foreclosure plan and deposited their unsubordinated bonds with Peabody, Houghteling & Company. As in the original proposal, the holders of unsubordi-nated bonds of the Transportation Company were to receive from a new corporation organized to take over and operate the properties of the Transportation. Company new first mortgage bonds of a face amount equal to the face amount of their old bonds, plus interest represented by interest coupons that had become due and remained unpaid and interest thereon to the date of issuance of the new securities.

14. On March 16,1920, Central Trust Company of Illinois and James L. Houghteling, Jr., as trustees under the first mortgage and deed of trust, executed by the Texas City Transportation Company in 1909 instituted foreclosure proceedings by filing a petition in the District Court of Galveston County, Texas, requesting the appointment of a receiver due to the failure of the Transportation Company to pay overdue bonds and interest.

The Transportation Company answered the aforesaid petition on March 16,1920, and raised no objection to the appointment of a receiver, and on the same day the Court appointed H. B. Moore Eeceiver to hold, possess and operate all the properties of the Transportation Company under the orders of the Court.

15. On June 1, 1920, the trustees filed a First Amended Original Petition in the cause mentioned in the preceding finding.

This amended petition described in detail the bonds, the trust indenture, and the property of the Transportation Company securing the same. It asked the court to enter judgment for the trustees for taxes advanced and paid on the property of the Transportation Company on January 25, 1917; judgment for the unsubordinated bondholders, and for the subordinated bondholders, and that the property be condemned and sold in satisfaction of the claims set out in the amended petition.

The amended petition listed numerous contracts executed by the Transportation Company with various persons, firms and corporations in the operation of its business and asked that whatever order of foreclosure and sale that may be entered provide that all of the properties may be sold with the benefits of said contracts and subject to the burdens and obligations thereof. It also averred that the properties could not be segregated and sold separately without great loss and damage and serious impairment to the securities described therein, and asked that the properties be sold as an entirety and as one parcel, so that the purchaser thereof could take, hold and operate the same as a going concern; and that any purchaser or purchasers could pay pro tanto the purchase price of said property with the above described bonds, to the extent of the distributive share of each of said bonds as may be presented under such rules and upon such conditions as the court might determine.

16. On June 11, 1920, the District Judge entered a decree and judgment. Judgments were awarded, with interest thereon at six percent from the date thereof, to the trustees, for the payment of taxes on property of the Transportation Company January 25, 1917, in the sum of $25,201.84; to the holders of $1,621,500 unsubordinated first mortgage bonds, and unpaid interest coupons with interest on matured bonds and coupons, in the sum of $1,875,524.19; and to the holders of subordinated bonds of $150,000 and interest coupons purchased through the trustees, with interest thereon, in the sum of $494,208.05.

The court appointed the Receiver, H. B. Moore, as Special Master Commissioner, and he was ordered to sell the property July 6, 1920, at public auction to the highest bidder. The court imposed the condition that each bidder must deposit the sum of $50,000, prior to the auction, in order to qualify his bid, and that this sum would represent part of the purchase price to the successful bidder; and deposits by unsuccessful bidders would be returned to them. The decree further provided, in part:

No person shall be permitted to make any separate bid upon any separate part or parcel of said property, real, personal or mixed, and it shall not be necessary to assemble any personal or other property, tangible or intangible, at the place of sale, for the purpose of making said sale. Said property shall be offered and cried and sold as one parcel and as an entirety.

The court further ordered that the $50,000 cash deposit of the purchaser would “be held by the Court subject to the further orders and final distribution of the Court”. The order provided that the purchaser could present to the Special Master Commissioner a receipt from the trustee for the judgment awarded in the sum of $25,201.34 for money advanced to pay taxes, with interest thereon; and that in lieu of cash for the balance of the purchase price, the purchaser could then present first mortgage bonds which had not been postponed or subordinated, and that each such bond, with interest thereon which was past due and unpaid, would be received by the Special Master Commissioner as a credit pro tanto on the purchase price; and that if the purchase price (exclusive of the $50,000 cash deposit) was more than sufficient to pay the judgments to the trustees and the holders of the unsubordi-nated first mortgage bonds, then the subordinated bonds and unpaid interest coupons with accrued interest thereon could be presented by the purchaser and credited by the Special Master Commissioner with the proportionate shares they would be entitled to receive in cash, in the same maimer as the unsubordinated bonds; but that the proportionate share of any such bond, or unpaid interest coupon, not so presented for credit, should be paid in cash by the purchaser.

The court also decreed that the contracts of the Transportation Company be continued according to their terms and subject to all the conditions thereof. The decree also provided that, upon the sale of the property, the confirmation thereof and the payment of the purchase price, the court reserved the right to adjudge immediate delivery to the purchaser or postpone delivery and continue the operation of said properties by the Eeceiver as the public interest and justice at that time might require, and to make such orders, judgments and decrees as in the judgment of the court might then be necessary or proper.

17. Under date of July 7, 1920, Peabody, Houghteling & Company, in its own interest and on behalf of certain other note holders of the Transportation Company filed a petition to intervene in the aforesaid foreclosure proceedings. The court, on July 31, 1920, entered its order decreeing recovery by the intervenors in the sum of $369,622.70 for Peabody, Houghteling & Company and $301,998.99 for Peabody, Houghteling & Company as assignees and trustees for other note holders, with interest thereon at six percent from the date of judgment. The court reserved the right to fix the equities for the claims of the intervenors and make awards and apportionments after the sale of the properties of the Transportation Company.

There is no evidence that any of the stockholders or other junior creditors of the Transportation Company took any part of the f oi-eclosure proceedings.

18. No bid having been received when the property was put up for sale on July 6th, the Eeceiver and Special Master Commissioner returned the order of sale on July 7, 1920. A new order was then issued to sell the property at auction on August 8, 1920, on which date it was sold at the bid price of $500,000 to Augustus S. Peabody, the only bidder. There being no objection to the sale within the time decreed in the order of June 11th, the court confirmed the sale of the property of the Transportation Company August 21, 1920, to Augustus S. Peabody.

Peabody purchased the property on behalf of the partners and heirs of Peabody, Houghteling & Company, the partnership which owned the subordinated first mortgage bonds and interest coupons for which judgment was entered in the sum of $494,208.05; and also represented the holders of the unsubordinated first mortgage bonds who had agreed to the reorganization plan and had deposited their bonds for presentment to the Special Master Commissioner for pro rata credit as their respective shares of the purchase price of the property.

Thus the partnership, Peabody, Houghteling & Company, became the new owners of all the property of the Transportation Company, and the unsubordinated bondholders, who participated in the purchase price, became entitled to new first mortgage bonds secured by all of the property thus acquired. The stockholders and all other creditors of the Transportation Company forfeited all rights and interest in such property under the foreclosure proceedings.

10. The balance sheet of the Texas City Transportation Company, as of August 20, 1920, reported to the Eailroad Commission of the State of Texas, is as follows:

Assets
Investment in road and equipment_ $5,301, 725.47
Deposits in lieu oí mortgaged property sold_ 28,522. 66
Miscellaneous physical property (see contra)- 32,291.30
Advances_ 133,587. 27
Miscellaneous accounts receivable_ 8,383.34
Material and supplies_ 40, 844.26
Total_ 5, 545,354.30
Liabilities
Capital stock, Common_ $2,500,000.00
Capital stock, Preferred_ 300, 000.00
Funded debt unmatured- 1, 946, 500. 00
Loans and bills payable_ 673,051. 06
Miscellaneous accounts payable (see contra)_ 32,291.30
Interest matured unpaid_ 882, 517. 59
Funded debt matured unpaid_ 425,000. 00
Other current liabilities_ 15,529. 65
Accrued depreciation — Equipment_ 38,206. 93
Other unadjusted credits- 292.62
Profit and loss debit-( — 1,268, 034. 85)
Total_ 5,545,354.30

The investment in road and equipment was made in the following periods:

July 1,1907 to June 30,1914_$5,098,895.01
June 30, 1914 to December 31, 1919_ 163,455. 28
January 1 to August 20,1920- 39,375.18

The funded debt unmatured consisted of $1,346,500 of the first mortgage bonds and the $600,000 of unsecured gold notes. The funded debt matured and unpaid consisted of $275,000 of the first mortgage bonds which were not extended but held by the original owners, and $150,000 subordinated bonds which had been purchased by Peabody, Houghteling & Company and extended for payment. The interest matured and unpaid included the unpaid interest coupons on both the unsubordinated and subordinated bonds, notes and other indebtedness.

The Transportation. Company filed a corporation income tax return for the period January 1 to August 20,1920, which reported an operating loss of $41,890 for the period.

20. Having made full payment on September 18, 1920, of the bid price of $600,000 within 30 days after the approval of the foreclosure sale in the manner decreed by the court, the Eeceiver and Special Master Commissioner executed and delivered to Peabody a deed conveying the property, including the contracts and claims of the Texas City Transportation Company.

At the close of September 17,1920, unsubordinated bonds of the face value of $1,566,000 plus interest thereon had been deposited and endorsed by the Special Master Commissioner in the following form.

Credited on the within bond the sum of $261.85 (or $130.93 for $500 bonds) being the amount of credit to which this bond including coupon No. 17 is entitled, in part payment on the purchase price of Texas City Transportation Company’s property sold August 3,1920, under court decree and purchased by Augustus S. Peabody.

There remained outstanding bonds of $55,500 face value, with unpaid interest coupons, or 3.42 percent of the total unsubordinated bonds of the Transportation Company of $1,621,500 face value. The holders of these bonds were entitled to their pro rata share of the purchase price amounting to $15,019.97. The $15,019.97 was received in cash from Peabody and turned over by the Special Master Commissioner to the Trustees for distribution to the said bondholders.

By order of the court December 17,1920, H. B. Moore was discharged as Eeceiver and the receivership was closed. However, H. B. Moore continued to operate the business and became Chairman of the Board of Directors of the plaintiff corporation after it was organized January 13,1921.

21. All of the property which had been acquired at the foreclosure sale and which constituted substantially all the property of the Transportation Company was transferred by Augustus S. Peabody to the plaintiff corporation. The plaintiff issued to Augustus S. Peabody, subject to the approval of the Interstate Commerce Commission, all of its common stock, except four directors’ qualifying shares out of a total of 5,000 shares of a par value of $100 per share, and $1,945,-856.34 face amount of 20-year first mortgage bonds for those bondholders of the unsubordinated bonds who participated in the purchase of the property at the foreclosure sale with interest thereon to January 26,1921.

In addition to the foregoing securities the plaintiff issued, subject to the ICC approval, bonds to another party in the face amount of $38,443.66 as the purchase price of a monorail system which had been leased but not owned by the Transportation Company and was not included in the foreclosure sale.

On July 27, 1921, the Interstate Commerce Commission authorized plaintiff to issue 5,000 shares of common capital stock of a par value of $100 per share, and $1,984,300 of 20-year first mortgage bonds. Its report and order are published in 70 I. C. C. 244.

22. On January 29, 1921, the plaintiff issued a stock certificate to Augustus S. Peabody for 4,995 shares of its common capital stock, which was later exchanged and held for the surviving partners and heirs of a deceased partner of Peabody, Houghteling & Company until November 18,1925, when these shares were transferred to the New Orleans, Texas & Mexico Eailway Company, The Atchison, Topeka and Santa Fe Bailway Company, and the Missouri, Kansas & Texas Eailroad Company in equal amounts of 1,665 shares to each. Augustus S. Peabody was also issued a director’s qualifying share, and four shares were paid for at $100 each for directors’ qualifying shares.

By reason of the default under the first mortgage and deed of trust and the foreclosure sale, all interest and control of the property and business of the Texas City Transportation Company passed from the stockholders and junior creditors of said company to the partnership of Peabody, Houghteling & Company, subject only to the new first mortgage bonds issued to holders of the unsubordinated bonds of the Transportation Company, equal to the face amount of such bonds, with interest thereon to the date of issue of the new bonds.

The $500,000 in common capital stock, represented by 5,000 shares of a par value of $100 per share, was the only equity capital issued by the plaintiff. It was less than the amounts owing for subordinated first mortgage bonds and interest by the Transportation Company, which were owned by the partnership, Peabody, Houghteling & Company.

23. When the plaintiff corporation was organized on January 13, 1921, there was set up on its books the properties which it acquired from Augustus S. Peabody. This was done on the same basis at which the properties had been carried on the books of the Transportation Company, adjusted by additional property acquired from August 21, 1920, the date the sale was approved, to January 13,1921, and claimed that basis for the purpose of computing depreciation and gain or loss upon the sale or other disposition of said properties.

The fixed assets, including land and other nondepreciable property, acquired by the plaintiff, are summarized at book costs as follows:

Investments in road and equipment as of August 20, 1920, on the books of the Transportation Company_$5, 301, 725.47
Properties acquired during the operations 1 Moore, as Receiver and on behalf of the p Augustus S. Peabody, August 21,1920, to Ja: 1921 : jy H. B. urchaser, nuary 13,
Net additional purchases, as recorded_ 9, 095. 54
Oil storage tanks and docks acquired from Hi Company under contract of June 11, 1919, suant to decree of June 11,1920, Par. 4 (j) : imble Oil and pur-
Payments under contract during period $20, 789.09 Liability assumed for balance due $117,-376.04 138,165.13
Oil storage tanks acquired from Vacuum Oil under contract March 30, 1920, pursuant 1 of June 11,1920, Par. 4(1)_ Company to decree 10,299. 66
Total property acquired January 13,1921_ 5, 459, 285. 80

The amount of $5,459,285.80 does not include a monorail system which plaintiff acquired through the issuance of its first mortgage bonds in the amount of $38,443.66.

24. The Commissioner of Internal Eevenue approved a Revenue Agent’s report dated May 20, 1926, in which the properties acquired by plaintiff from Augustus S. Peabody on January 13,1921, was determined on the following basis.

Cost of property August 21, 1920:

Judgments awarded trustees for first mortgage bondholders (decree of June 11,1920)_$2,422,416. 42

Expended to acquire property- 47, 747. 28

Total_ 2,470,163. 70

Less: Current assets acquired at face value_ $100,993.25

Net cost of fixed property_ 2, 369,170.45

Am
Acquisitions of property August 21, 1920, to January 13,1921:
Net additional purchases, as recorded- 9,095.54
Oil storage tanks and docks acquired from the Humble Oil Company under contract of June 11, 1919, pursuant to the court’s decree_$165, 000.00
Less equity owned for payments prior to August 21, 1920_ 26, 834. 87
- 138,165.13
Oil storage tanks acquired from Vacuum Oil Company under contract March 30,1920_ 10,299. 66
Monorail system acquired by issue of bonds- 98,443.66
Total_ 2, 565,174.44
Less Depreciation August 20,1920 to January 13, 1921_ 17, 912.78
Net value at January 13,1921_ 2, 547,261.66

25. On the return filed by plaintiff for the period January 13, 1921, to December 31, 1921, an income tax liability of $7,909.69 and no excess profits tax liability was reported. After an examination the revenue agent, in his report dated May 20,1926, proposed a deficiency in income tax of $1,919.35 and a deficiency in excess profits tax of $19,427.41, or a total of $21,346.76. In the determination of excess profits tax, the revenue agent computed an adjusted invested capital of $483,561.64 for the taxable period based on a computed cost to Augustus S. Peabody, who had bid in the property on August 20, 1920, and turned it in for stock on January 13, 1921. The revenue agent, in said report, determined the transaction constituted a transfer of property subsequent to March 3,1917, and was covered by the provisions of Section 331 of the Eevenue Act of 1921.

By reason of this determination, plaintiff on September 17,1926, filed an application under the provisions of Section 327 for assessment of its excess profits tax liability for the 1921 period as prescribed by Section 328 of the Eevenue Act of 1921. After consideration, the Commissioner allowed plaintiff’s application and determined a deficiency in excess profits tax of $10,253.11 and an income tax deficiency of $2,836.78, or a total of $13,089.89 for the 1921 period, of which plaintiff was notified by letter dated January 24,1927. Plaintiff did not raise any objection to this determination, and the deficiencies were subsequently assessed and paid.

26. The books and records of the Transportation Company, except a duplicate of an annual report to the Eailroad Commission of Texas, were completely destroyed by an explosion and fire in 1947. The property taken over by plaintiff from the Transportation Company was recorded in a lump sum. It was not classified for the proper rates of depreciation applicable. The Texas Eailroad Commission had fixed values on the property of the Transportation Company at June 20, 1916, at $4,920,088.84. The Interstate Commerce Commission engineers appraised the property at June 30, 1917, at $4,352,142, with classifications into the required primary accounts.

The plaintiff utilized the ICC appraisal of June 30, 1917, for the purpose of classifying the property into proper primary accounts for depreciation. After adjusting these accounts by additions and retirements from July 1,1917, to the end of 1920, and the elimination of accounts for interest and general expense included in the appraisal of the ICC, the book costs were then distributed according to these classifications, at the ratio of 121.62 percent of the adjusted appraised values.

The revenue agent used the same method of classifying the property accounts for depreciation purposes in the year 1921, except that the ICC appraisal, with adjustments to January 13,1921, were adjusted downward to the cost basis as reported in finding 24, whereas the plaintiff adjusted such appraised values upward by 21.62 percent to the cost basis reported in finding 23.

The plaintiff used annual reports made to the ICC from 1917 to 1943, for the determination of changes in the cost basis of the property, represented by annual additions and retirements in each classification. The changes during 1944 and 1945 were taken from its book records. By using plaintiff’s property costs, as reported in finding 23, with additions and retirements of property during the intervening years, its property account at the end of the years 1944 and 1945, would be as follows:

19H 1U$
Depreciable property_$3,613, 078.62 $3, 653,126.14
Nondepreciable property_ 1,163, 726. 96 1,165,491.16
Land- 1, 390, 730. 94 1, 390, 730.94
Totals- 6,167, 536. 52 6,209,348.24

The plaintiff included in both years a Brown Hoist 15-ton crane, at a cost of $8,589.08 which had been fully depreciated, but no additional depreciation was computed or claimed on this item.

27. The amount of depreciation on depreciable property held and acquired in 1945 and 1946, as determined in the preceding finding, was $76,762.08 for 1945 and $78,254.67 for 1946.

Prior to 1945 the plaintiff sold land for $43,100, having an original cost basis of $32,448.29 as determined in the preceding finding. The profit of $10,651.71 was allocable in the amount of $1,977.12 to collections of $8,000 in 1945 and a like amount to collections of $8,000 in 1946.

28. By using the original cost basis of property acquired at the time of its organization January 13,1921, on the same basis at which it had been carried On the books of the Texas City Transportation Company, the plaintiff’s net income would be reduced for 1945 and 1946 by the net amounts shown in the following tabulation:

Original cost basis: 1945 1946
Depreciation_ $76,762.08 $78,254.67
Less: Profit on sale of land. 1,977.12 1,977.12
Net amount_ 74, 784.! 76,277.55
As reported in tax returns:
(Findings 3, 4, 5)
Depreciation_ 57, 577.91 55, 060.36
Less: Profit on sale of land. 5, 509.02 5, 509. 04
Net amount_ 52, 068. 89 49, 551.32
Net reduction of income_ 22,716. 07 26, 726.23

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and it is therefore adjudged and ordered that plaintiff recover of and from the United States the sum of fourteen thousand five hundred thirteen dollars and five cents ($14,513.05), together with interest provided by law to date of payment on $1,650.22 thereof from September 20, 1946; on $7,436.21 thereof from December 11, 1946, and on $5,426.62 thereof from March 17, 1947. 
      
      
         unsubordinated first mortgage bondholders of $1,621,500 face amount were awarded judgment June 11, 1920, of $1,875,524.19, which amount, together with interest thereon at six percent per annum until January 26, 1921, amounts to $1,945,856.34. All of these bondholders did not participate in the purchase of the property, but following the settlement on September 18, 1920, the remaining bonds were substantially all deposited and endorsed for participation in the new issue. Plaintiff also issued bonds to another party in the face amount of $38,443.66 for the purchase of a monorail system which had been leased but not owned by the Transportation Company and was not included in the foreclosure sale.
     
      
       Tax rates applicable to 1945 Income:
      Normal tax at 24% on total net Income_$17, 846. 94
      Surtax at 16% on total net Income_ 11, 897. 96
     
      
       Tax rates applicable to 1946 Income:
      Normal tax at 15% on flrst $5,000 Income- $750. 00
      Normal tax at 17% on next $15,000 Income- 2, 550. 00
      Normal tax at 19% on $3,706.47 (20M to 25M)- 704. 23
      Surtax at 6% on total $23,706.47 Income- 1, 422. 39
     
      
       The schedule attached to plaintiff’s claim does not show the basis of cost in respect to the sale of land, as stated in par. 6 of the stipulation of facts but merely shows 1945 profit on land eliminated from taxable income, without any basis for such determination.
     
      
       Plaintiff’s accountant sliows a cost basis oí $32,448.29, and sale price of $43,100, with a total profit of $10,651.71 on such sale; that the installment payments received were $8,000 in 1945 and $8,000 in 1946, resulting in a profit of $1,977.12 for each of those years. See Finding 27.
     
      
      It is deemed pertinent to show the status of the Transportation Company, the book value of property acquired, periods of original investments, as well as the accrued depreciation, as shown in the company’s books (reported).
      It will be noted that the balance sheet as reported to the Texas RR Commission at the close of Aug. 20, 1920, is identical with the balance sheet furnished to the ICC by the plaintiff in connection with its application for the approval of the bonds and stocks.
     
      
      A monorail system costing approximately $39,458.89 was constructed by one I'. G. Dufour for conveying cotton between compresses and sbipslde. It was not owned by the Transportation Company, but was employed in its operations.
     
      
       Unsubordinated first mortgage bondholders of $1,621,500 face amount were awarded judgment June 11, 1920, of $1,875,524.19, wbieb amount, together with interest thereon at 6 percent per annum until January 26, 1921, amounts to $1,945,856.34. All of these bondholders did not participate in the purchase of the property, but following the settlement on September 18, 1920, the remaining bonds were substantially all deposited and endorsed for participation in the new issue.
     
      
       The decree of June 11, 1920, awarded the holders of these subordinated bonds' and interest coupons judgment of $494,208.05, which, together with interest thereon to January 26, 1921, of $18,532.80 amounted to $512,740.85. In addition four shares were paid for at $100 each, and the partnership paid into the court $50,000 of the purchase price of the property and incurred other expense in connection with the foreclosure and organization of the Texas City Terminal Railway Company, plaintiff herein.
     
      
       The decree of June 11, 1920, awarded the trustees judgments as set forth in finding 16 herein, totaling $2,394,933.58, which, with interest at 6% to August 20. 1920, of $27,541.74, would amount to $2,422,475.32.
     