
    DETROIT-MICHIGAN STOVE COMPANY v. THE UNITED STATES
    [No. 48600.
    Decided June 8, 1954]
    
      Mr. Ralph W. Barbier for plaintiff. Messrs. Raymond H. Berry, Roy M. Tolleson, Jr., and Barbier, McFarlane <& Tolleson, were on the briefs.
    
      
      Mr. J. W. Hussey, with whom was Mr. Assistant Attorney General H. Brian Holland, for defendant. Messrs. Andrew D. Sharpe and Ellis N. Slade, were on the brief.
   Littleton, Judge,

delivered the opinion of the court:

Plaintiff, Detroit-Michigan Stove Company, a Michigan corporation, brings this action to recover the sum of $87,-742.08 with interest, representing excess profits tax for the Calendar year 1943 alleged to. have been wrongfully collected from plaintiff’s predecessor corporation, A-B Stoves, Incorporated. Plaintiff, acquired the. assets and assumed the liabilities of this corporation April 25, 1945. This transaction is not in question. : The issue presented is whether or not the transaction, hereinafter described, whereby A-B Stoves, Incorporated, acquired the assets of A-B Stove Company in 1935, was a reorganization involving non-recognition of loss under the provisions of sections T12 (b) (10) and 112 (e) of the.Internal Revenue Code, so that the bases of the assets acquired by plaintiff in 1935 were the adjusted bases of the assets in the hands of thé A-B Stove Company under the provisions of section 113 (a) (22) of the Code. The case is before the court on the merits upon an agreed stipulation of facts.

A-B Stoves, Inc., was incorporated under the laws of the State of Michigan on April 16, 1935, for the purpose of acquiring the assets of A-B Stove Company (hereinafter sometimes referred to as the old corporation). On August 1, 1935, A-B Stoves, Inc., acquired the assets of the old corporation.

The old corporation had been engaged in the business of. manufacturing stoves for many years. On June 28, 1934, it became insolvent, was unable to pay its debts, and filed a petition in bankruptcy under section 77B of the Bankruptcy Act of 1898, as amended, 48 Stat. 912, in the District Court of the United States for the Eastern District of Michigan. A trustee in bankruptcy was duly appointed by the court. At that time, the capitalization of the old corporation consisted of 4,364 shares of $100 par value preferred stock and 125,000 shares of $10 par value common stock, and its liabilities were approximately $384,000 in 6% first mortgage, bonds with accrued interest thereon, $39,000 in notes payable, and $104,000 in accounts payable, a total of $527,000.

' On December 20,' 1934, A-B Stove Company submitted to the court a “Plan of Reorganization and Memorandum of Agreement,” and on January 31, 1935, the court issued an order approving the plan subject tó its acceptance by all parties concerned. On July 9, 1935, a supplemental order amending the plan was issued by the court. ■

The plan provided, inter alia, that Marshall Furnace Company (hereinafter Marshall) should buy all of the machinery and equipment of the old corporation for $35,000, payment therefor to be made by the six months’ note of that company and with title to the property reserved in the trustee in bankruptcy until payment of the $35,000, together with payment of 80% of the purchase price of the inventory of the old corporation, had been made. There is no evidence of the value of the inventory, machinery and equipment of the old corporation. It ' was agreed that Marshall should buy from the trustee in bankruptcy the entire inventory of the old corporation, the purchase price to be determined as set forth in the plan, with payment to be made by the 25th day of the month following that in- which Marshall took-or used the inventory, but with the total purchase price to be paid within 13 months. It was further agreed that the trustee in bankruptcy would execute a lease to Marshall of the buildings and real estate of the old corporation at a monthly rental of $750, with an option in Marshall to purchase within one year for $75,000. The trustee in bankruptcy was to deliver to Marshall all of the notes and accounts receivable of the old corporation for collection (the amount of which is not shown), and Marshall was to deliver the proceeds of collections to the trustee. The trustee was to execute and deliver to Marshall a grant of privilege to use for one year the trade name, trade-marks, and patents belonging to the old corporation in carrying on the business, with this grant to extend to a “new corporation” contemplated by the agreement. This “new corporation” was to be organized by Marshall or its nominee prior, to the expiration of the one-year option to purchase the buildings and real estate of the old corporation. Marshall agréed to assign and transfer to the new corporation the lease and option to purchase and, at cost, every right, title, and interest which Marshall then enjoyed under the agreement, so that the new corporation should be substituted to every right, duty, and liability of Marshall under the agreement.

Under the plan as amended, Marshall carried on the business of the old corporation until July 31,1935. The new corporation contemplated by the agreement was incorporated, on April 16, 1935, as A-B Stoves, Inc., with an authorized capitalization of 200,000 shares of no-par common stock, of which 150,000 shares were sold to outside interests for $1.00 per share. The remaining 50,000 shares were reserved, for distribution to the stockholders of the old corporation, as hereinafter described. On August 1, 1935, the new corporation took over all of the assets of the old corporation, except cash and bills and accounts receivable, which were retained by the trustee in bankruptcy for distribution to creditors of the old corporation.

The new corporation, in addition to paying Marshall an agreed operating profit of $5,000 and assuming liabilities of $142,696.70, turned over to the trustee in bankruptcy $150,-000 in cash, and the remaining 50,000 shares of no-par common stock of the new corporation for distribution to the preferred and common stockholders of the old corporation, as provided in the agreement.

The holders of 4,864 shares of $100 par value preferred stock of the old corporation received 83,833 shares of the new stock, and the holders of 125,000 shares of $10 par value common stock of the old corporation received 16,667 shares of the new stock, in proportion to their respective stockhold-ings in the old corporation. Each stockholder was required, as a condition to receiving his pro rata share of the stock of the new corporation, to turn in for cancellation his shares of stock in the old corporation. The holders of 6% first mortgage bonds in the principal amount of $384,000, with accrued interest thereon, holders of notes payable in the principal amount of $39,000, with accrued interest, and holders of accounts payable, and which the old corporation was unable to pay, in the amount of $104,000, received in liquidation cash payments from the trustee and inventory sales, of approximately 30 cents on the dollar in settlement of their claims against the old corporation. The secured creditors’ indebtedness of $384,000 had been reduced as a secured debt to $110,000. The bond holders and the holders of notes and accounts payable did not share in the distribution of stock of the new corporation.

Plaintiff carried the assets of the old corporation on its books at their cost to itself, a total of $160,001, as shown in findings 8-10. The aggregate adjusted cost bases to the old corporation of the properties transferred to plaintiff, as of August 1, 1935, was $497,201.22. On its excess profits tax returns for 1941,1942, and 1943, plaintiff reported the amount it had paid ($160,001) for the assets of the old corporation as a component of invested capital. Plaintiff also computed depreciation on the basis of this amount for the purposes of its corporate income and excess profits tax returns for the years 1941,1942, and 1943.

On October 27, 1944, plaintiff filed a timely claim for refund of excess profits tax paid by it for the calendar year 1943 in the amount of $87,742.08. The grounds asserted in support of the claim for refund were that plaintiff had acquired the assets of the old corporation in a tax-free reorganization under sections 112 (b) (10) and 112 (e), supra, and that the bases of the assets acquired by it from the old corporation were therefore the adjusted bases of those assets in the hands of the old corporation, under section 113 (a) (22), supra. Plaintiff contended that it was entitled, therefore, (1) to additional depreciation deductions for the years 1941, 1942, and 1943; (2) to increased excess profits credits for the years 1941,1942, and 1943; and (3) in computing its. excess profits credits for the year 1943, to avail itself of a carry-over of unused excess profits credits for the years 1941 and 1942. The claim was disallowed on March 25, 1946,. and a request for reconsideration was denied on June 16, 1947.

Plaintiff’s contentions in this court are identical with those urged upon the Commissioner of Internal Revenue in support, of its claim for refund, and the amount in controversy is,, exclusive of interest, the same amount there claimed. Defendant takes the position that the transaction whereby plaintiff acquired the assets of the old corporation in 1935, did not qualify as one from which no gain or loss should be recognized under the provisions of sections 112 (b) (10) and 112 (e), and that absent a reorganization within the meaning of those sections the “basis” provisions of section 113 (a) (22) have no application. Defendant’s basic argument is that the “continuity of interest” requirement, implicit in section 112 (b) (10) and explicit in Treasury Regulations 111, section 29.112 (b) (10)-1, has not been satisfied in the present case. We think defendant is correct.

Treasury Regulations 111, section 29.112 (b) (10)-1, 26 C. F. R. 1949 Ed., p. 380, provides in part as follows:

As used in section 112 (b) (10), the term “reorganization” is not controlled by the definition of “reorganization” contained in section 112 (g). However, certain basic requirements, implicit in the statute, which are essential to a reorganization under section 112 (g), are likewise essential to qualify a transaction as a reorganization under section 112 (b) (10). Among these requirements are continuity of the business enterprise under the modified corporate form and a continuity of interest therein on the part of those persons who were the owners of the enterprise prior to the reorganization. Thus the nonrecognition accorded by section 112 (b) (10) applies only to a genuine reorganization as distinguished from a liquidation and sale of property to either new or old interests supplying new capital and dis-. charging the obligations of the old corporation. For the purpose of determining whether the requisite continuity of interest exists, the interest of creditors who have, by appropriate legal steps, obtained effective command of the property of an insolvent corporation is considered as the equivalent of a proprietary interest. But the mere possibility of a proprietary interest is not its equivalent. The determinative and controlling factors are the corporation’s insolvency and the effective command by the creditors over its property. The term “insolvent” as used in this section refers to insolvency at any time during the course of proceedings referred to in section 112 (b) (10), either in the sense of excess of liabilities over assets or in the sense of inability to meet obligations as they mature.

Defendant contends that the “Plan of Reorganization” was merely a contract for the purchase and sale of the assets of the old corporation, not a reorganization within the meaning of the statute and the above quoted portion of the Regulations. On the'facts we agree with defendant’s contention.

It is clear that the nonrecognition of gain or loss accorded by section 112 (b) (10) and the regulations, swpm, was intended to and does apply only to an actual reorganization as distinguished from a liquidation and sale. The nature of the transaction with which we are here concerned turns not upon abstract definitions but upon whether or not there was the requisite continuity of proprietary interest in the new corporation “on the part of those persons who were the owners of the enterprise prior to the reorganization.” If this question cannot be answered in the affirmative, which we think is the case, from the facts and circumstances before us, then there was no section 112 (b) (10) reorganization from which no gain or loss should be recognized.

The preferred and common stockholders of the old corporation received only 50,000 shares of the stock, valued at $1.00 a share, of the new corporation in exchange for and in cancellation of their $1,686,400 par value shares of stock of the old corporation. This was 25% of the total of 200,000 shares of stock issued by the new corporation. This stock was issued as “gratuitous stock.” Plaintiff asserts that the stockholders of the old corporation thereby retained a continuing proprietary interest in the reorganized enterprise. We cannot agree. Prior to the sale by the Trustee to the Marshall Furnace Co., and later a transfer by that company to the new corporation, whose capital was contributed by outside interests, the investment and stock of the old stockholders was worthless. Defendant, in contending that there was no continuity of interest within the concept of the statute and section 29.112 (b) (10)-1 of the Regulations, places emphasis upon the fact that the remaining 150,-000 shares of the stock of the new corporation were sold to outside interests for $1.00 per share. We think this is important under the facts and circumstances of the case.

While the requirement of continuity of interest does not, in the absence of a specific statutory requirement of control, carry with it a requirement of continuity of control over the assets of the old corporation in their new corporate form, John A. Nelson Co. v. Helvering, 296 U. S. 374; New Jersey Mortgage & Title Co., 3 T. C. 1277, and “The transferors’ stock in the transferee corporation may not amount to more than a small minority interest; this dilution [with exceptions not here pertinent] of control will not affect the reorganization, as long as a substantial part of the transferors’ proprietary interest, as measured by the value of the thing [assets, etc.] transferred, has been perpetuated.” 6 Collier on Bankruptcy (14th Ed.), Par. 15.10 (10), pp. 5168-5169, yet there is inherent in the continuity of interest test the requirement that the interest which is perpetuated in the new corporation be the proprietary interest “of those persons who were the owners of the enterprise prior to the reorganization.” We do not find that situation in this case. Where the stockholders of the old corporation continue to be represented in substantial measure in the affairs of the new one, those stockholders must have something of substantial value, which the old stockholders in this case did not have, to exchange for their stock in the new corporation in order for the transaction to come within the meaning of section 112 (b) (10). In our opinion the defendant rightly asserts that this was not so under the facts of the instant case.

Where the debtor corporation in a section 77B proceeding is insolvent in the sense that its assets are exceeded by its liabilities, as the facts show was the case-here, the stockholders consequently have no equity, and are excluded, by the full priority rule of Northern Pacific Ry Co. v. Boyd,, 228 U. S. 482, from any interest in the debtor. Case v. Los Angeles Lumber Co., Ltd., 308 U. S. 106. The equivalent of the proprietary interest of the stockholders of the debtor corporation vests in its creditors, and the continuity of interest test is satisfied where the transferee corporation issues its stock to such creditors. Helvering v. Alabama Asphaltic Limestone Co., 315 U. S. 179; Cf. Chicago Stadium, Corp., 13 T. C. 889. Most of the stock in this case was sold to outside interests. Where the proprietary interest of the stockholders has completely disappeared by reason of the insolvency, in the bankruptcy sense, of the debtor corporation, which was clearly the situation in this case, the acquisition of the assets by the stockholders or their new corporation does not constitute a reorganization. See Tarleau, Some Tax Considerations in Reorganizations of Insolvent Corporations, N. Y. U. 8th Annual Institute on Federal Taxation, 201, 205-206. The proprietary interest of the stockholders of the old corporation is thereby broken. See Mascot Stove Co. v. Commissioner, 120 F. 2d 153, cert. denied 315 U. S. 802; Templeton's Jewelers, Inc. v. United States, 126 F. 2d 251; Johnson, Insolvent Reorganizations and the Continuity of Proprietary Interest Rule, N. Y. U. 9th Annual Institute on Federal Taxation 1267, 1273; cf. Chicago Stadium Corp., supra. In this case there was, in reality, as shown by the facts, a sale of the assets of the old corporation and a new start with new interests.

We need not discuss the situation where the debtor corporation is insolvent, not in the sense that its assets are exceeded by its liabilities, but only in the sense that it is unable to meet its obligations as they mature. See Darrell, Creditors’ Reorganizations and the Federal Income Tax, 57 Harv. L. Rev. 1009 et seq. In this case it is clear, we think, that the old corporation was insolvent in the sense that its liabilities far exceeded its assets, and in the end there had been a break in that continuity of interest necessary to a real “reorganization” contemplated by the statute and Regulation 111, section 29.112 (b) (10)-1, supra.

Plaintiff is not entitled to recover and its petition is dismissed.

It is so ordered.

Madden, Judge; Whitaker, Judge; and Jones, Ohief Judge, concur.

Judge Laramore took no part in the consideration or decision of this case.

FINDINGS OF FACT

The court makes findings of fact, based upon the evidence, the stipulation of the parties, and the briefs and argument of counsel, as follows:

1. Detroit-Michigan Stove Company is a Michigan corporation. As of April 25, 1945, it acquired all of the assets and assumed all of the liabilities of A-B Stoves, Inc., a Michigan corporation, solely in exchange for stock of said Detroit-Michigan Stove Company.

2. A-B Stoves, Inc., was incorporated under the laws of Michigan April 16, 1935, for the purpose of acquiring the assets of a predecessor corporation, A-B Stove Company, which assets it acquired as of August 1, 1935.

3. A-B Stove Company had been engaged in the business of manufacturing stoves in Battle Creek, Michigan, since 1909. On June 28,1934, A-B Stove Company filed a petition in bankruptcy under Section 77 B of the Bankruptcy Act of 1898, as amended, in the District Court of the United States for the Eastern District of Michigan, and a trustee in bankruptcy was appointed by the Court. At that time, the capitalization and liabilities of A-B Stove Company were 4,364 shares of $100 par value preferred stock and 125,000 shares of $10 par value common stock, approximately $384,000 in 6% first mortgage bonds, with accrued interest thereon, $39,000 in notes payable and $104,000 in accounts payable.

4. December 20, 1934, A-B Stove Company submitted a proposal called a “Plan or Reorganization and Memorandum of Agreement” to the District Court, and on January 31, 1935, the Court issued its order approving the plan subject to its acceptance by all parties concerned.

5. The plan provided in part as follows:

This Plan of Reorganization and Memorandum of Agreement made and entered into by and between

“(a) A-B Stove Company, a Michigan corporation, hereinafter sometimes designated as ‘debtor,’ party of the first part,

(b) The City National Bank and Trust Company of Battle Creek, a national banking association having trust powers, with its principal office at Battle Creek, Michigan, as Trustee, hereinafter sometimes designated as ‘trustee’, party of the second part,

(c) Frank G. Wright, of Chicago, Illinois, Charles C. Green, of Battle Creek, Michigan, and E. R. Guyer, of Chicago, Illinois, hereinafter designated as ‘committee’, party of the third part,

(d) The several creditors of the debtor, who, in any manner shall be bound by the terms of this agreement or entitled to distribution by virtue thereof, hereinafter sometimes designated as ‘creditors’, parties of the fourth part.

(e) The several Stockholders of the debtor, both holders of common stock and holders of preferred stock, who, in any manner shall be bound by the terms of this agreement or entitled to any benefit thereunder, hereinafter sometimes designated as ‘stockholders’, parties of the fifth part, and

(f) Marshall Furnace Company, a Michigan corporation, of Battle Creek, Michigan, hereinafter sometimes designated as ‘purchaser,’ party of the sixth part,

Witnesseth:

That, Whereas the debtor, being unable to meet its obligations as they matured, did on the 28th day of June 1934 file its petition in the District Court of the United States, for the Eastern District of Michigan under the provisions of Section 77B of the Bankruptcy Act of 1898, as amended, to reorganize its affairs, and to carry into effect the intent and purpose of such petition and otherwise to cooperate with its creditors, desires to offer to them a method of liquidating its assets with a minimum of cost, and

Whereas, .the said debtor has for many years past engaged in the business of manufacturing and distributing stove products in the city of Battle Creek; in the State of Michigan, and in that business was at the time of the filing of the petition aforesaid and now is vested with legal title to certain assets consisting of cash on hand, notes and accounts receivable, inventory of merchandise, land, buildings, machinery, tools, dies, patterns, office furniture, automobiles and trucks, securities, patent rights, insurance policies, unexpired insurance and other assets, the land above referred to being known and described as follows: * * *

Together with all buildings upon and appurtenances of the parcels above described; and

Whereas, to effectuate the purpose of this agreement the said debtor has requested the party of the sixth part to become the purchaser of certain of the assets of the debtor and to take a lease of the real estate with an option to buy the same, upon the terms and conditions hereinafter more fully set out;

Now, Therefore, in consideration of the mutual covenants and agreements severally to be performed by the parties hereto,

It is Agreed as Follows:

(1) No provision of this agreement shall become operative until and unless an order shall be duly entered by the District Court of the United States for the Eastern District of Michigan, approving and confirming a plan of reorganization for the above named debtor, in and by which plan of reorganization this agreement in its present form, or with such modifications as shall be approved by the court in the aforesaid proceedings, shall be incorporated and made a part, and the date of the order approving and confirming such plan shall be the effective date of this agreement.

In case this plan shall be approved by said court with modifications affecting the rights or liabilities of the purchaser hereunder, the purchaser shall have the right to withdraw its consent hereto and to be thereby relieved of all further obligation hereunder, by filing with said court and delivering to any member of the committee a written notice of such withdrawal within forty-eight hours after service upon the purchaser of notice of such modifications, and in case such notice of withdrawal shall not be given in the manner and within the time above provided, the purchaser shall be conclusively presumed to have consented to such modifications and in that event this agreement shall become and be in full force. Nothing herein shall prevent the purchaser from giving binding consent to modifications by oral statements in open court.

In case this agreement shall not become effective within a period of sixty days after December 1,1934, in one of the two manners herein provided, the purchaser, at its option, shall be deemed to have withdrawn herefrom and shall be Avithout further obligation hereunder, unless the purchaser shall grant a Avritten extension of time hereunder.

(2) Subject to the provisions of paragraph 1, and upon the effective date of this agreement, the trustee herein named shall stand possessed of all of the assets and property of the debtor, and the debtor does hereby grant, bargain, sell, assign, transfer, set over and convey to the trustee all and singular the land, tenements, hereditaments and appurtenances, goods, chattels, accounts, promissory notes, bonds, bills, debts, cash, choses in action, claims, demands, property and effects of every kind and description, real, personal and mixed, belonging to the said debtor or in which it has any right or interest, or which are held by any person or persons for it or in trust for it, the same to be more fully and particularly enumerated and described in an inventory to be taken as of the first day of January 1935, or any earlier date, as hereinafter more fully set out; also the books of accounts of said debtor and all papers, documents and vouchers relating to its business dealings or affairs, in trust, however, for the uses and purposes hereinafter more fully set out. As soon as may be without unnecessary delay after this agreement becomes effective, the debtor will convey, assign and transfer to said trustee by proper deeds, bills of sale, assignments and other instruments all of the assets of said debtor, tangible and intangible, real, personal and mixed, upon the trust aforesaid.

(3) Upon the effective date of this agreement as above set out the trustee shall deliver to the purchaser all of the notes and accounts receivable and all the books and records pertaining thereto. It is contemplated by the parties that tbe purchaser or a new corporation to be organized as hereinafter provided will continue the operation of the business of manufacturing and selling stove products heretofore carried on by the debtor and shall in the ordinary course of its business collect the notes and accounts receivable due and payable from time to time and deliver the proceeds of such collections without cost (except as hereinafter set out) to the said trustee. In the event any of the notes or accounts receivable shall not be paid in the ordinary course of business to the purchaser and extraordinary or unusual methods of collection shall be required to bring about the payment of such notes and/or accounts receivable, the purchaser may deduct the unusual or extraordinary expense incurred by it in that connection. Such deductions, however, shall at all times be subject to the approval of the committee and should the committee fail to give its approval to any proposed expense to be incurred in and about the collection of any of the notes and/or accounts receivable, the purchaser may, at its option, deliver such unpaid notes and/or accounts receivable to the trustee and shall thereupon be relieved of any further duty in that regard.

(4) The purchaser shall buy, as of the effective date of this agreement, and the trustee shall sell, free from all taxes, labor claims and incumbrances, the machinery shown in the schedule of machinery hereto attached and made a part hereof, and all tools, dies and patterns, office furniture, office equipment and trucks for the sum of Thirty-five Thousand ($35,000.00) Dollars, and the purchaser shall pay for the property referred to in this paragraph by its note (reserving title to said property to the trustee) due and payable six months from the effective date of this agreement, with interest thereon at the rate of six (6%) per cent per annum. The property referred to in this paragraph shall be deemed a part of the personal property agreed to be sold hereunder and the reservation of title contained in said note shall be effective as to all personal property covered by this agreement or any subsequent agreement to purchase and sell executed in pursuance of the provisions hereof. The said reservation to be effective until eighty (80%) per cent of the purchase price of the inventory to be determined as hereinafter set out, together with the sum of Thirty-five Thousand ($35,000.00) Dollars shall have been paid. Upon said consideration the trustee shall also execute and deliver to said purchaser a grant of privilege to use for one year after the effective date hereof, the trade name, trade marks and patents now belonging to said debtor in carrying on the business herein contemplated, and such grant shall extend also to the new corporation hereinafter mentioned when organized as hereinafter provided.

(5) The trustee will, as of the effective date of this agreement, execute a lease to the purchaser of the real estate and premises above described for a term of one year from the effective date hereof in and by the terms whereof the trustee will lease to the purchaser all of the real estate and premises hereinabove described, and the use of all machinery, fixtures and implements which constitute a part of said real estate. The trustee will make a provision of the said lease that the said party of the sixth part at its option may purchase the premises, together with said machinery, fixtures and implements at any time within one year from the effective date of this agreement for the sum of Seventy-five Thousand ($75,000.00) Dollars in cash, the option to become absolutely null and void unless executed within the period set out in the said lease, time to be of the essence of such option. The purchaser shall agree to pay to the trustee as rent for the said premises for the period of the lease the sum of Nine Thousand ($9,000.00) Dollars, the same to be paid in monthly installments of Seven Hundred Fifty ($750.00) Dollars on the first day of each month of the term, the lease to be in the usual form of leases for like property in general use in the state of Michigan.

It is agreed that, after purchase and payment of said items mentioned in paragraph 4 hereof, and prior to the expiration of said option mentioned in this paragraph 5 hereof, the purchaser or its nominee shall cause a corporation (hereinafter sometimes called “new corporation”) to be organized under the name A-B Stove and Bange Company, or under some other suitable name, having authorized common stock, consisting of not less than 100,000 shares of no par value, of which not less than 75,000 shares shall be paid up in cash at a price of One ($1.00) Dollar per share, or a total price of not less than Seventy-five Thousand ($75,000.00) Dollars, and when said new corporation shall have been organized and capitalized as aforesaid, said Marshall Furnace Company shall assign and transfer to said new corporation said lease and option of purchase and, at cost, every right, title and interest which said Marshall Furnace Company then enjoys under this agreement, including the property mentioned in paragraph 4 hereof, but excepting accounts and bills receivable, if any, accumulated through any operation hereunder prior to that time, and said new corporation by proper action of its board of directors shall assume and covenant to perform all of the then unperformed duties and discharge all of the obligations of said Marshall Furnace Company which have then arisen hereunder or pursuant hereto and of which said Marshall Furnace Company shall not have had the benefit, and thereupon said Marshall Furnace Company shall stand discharged of and from all further duties and responsibilities under this agreement and said new corporation then shall be deemed the purchaser and shall be substituted to every right, duty and liability of said Marshall Furnace Company hereunder. The trustee is authorized to consent to the use of said name A-B Stove and Bange Company, or any similar name, as a corporate name, by said proposed new corporation, upon an agreement by said new corporation to discontinue use of said name and to assign all right therein back to said trustee in case eighty (80%) per cent of said inventory shall not be purchased and paid for within one year after the effective date hereof.

Twenty-five thousand (25,000) shares of the common stock of no par value of said new corporation may be paid up in property or otherwise, and shall be issued fully paid and non-assessable to said trustee at the time of organization of said new corporation and said trustee shall distribute the same to the shareholders of record of A-B Stove Company pro rata their respective holdings of A-B Stove Company stock, in the proportions hereinafter set forth as to the several classes thereof, in exchange for, and upon surrender for cancellation of, the certificates of said A-B Stove Company shareholders respectively evidencing their stock holdings in said A-B Stove Company. Sixty-six and two-thirds (66%%) per cent of said twenty-five thousand (25,000) shares of common stock of said new corporation shall be distributable by the trustee to holders of preferred stock in A-B Stove Company, and thirty-three and one-third (33%%) per cent of said twenty-five thousand (25,000) shares of common stock of said, new corporation shall be distributable by the trustee to holders of common stock in said A-B Stove Company as such stockholders appear of record upon the stock record books of A-B Stove Company at the time of such exchange.

Said lease and option shall be assignable and shall be assigned to said new corporation when formed. If and in case said option of purchase shall be exercised by said purchaser or by said new corporation, then upon payment of said purchase price of Seventy-five Thousand ($75,000.00) Dollars the trustee shall convey and transfer to the buyer under said option all of the property, real and personal, covered by said option, free and clear from all liens and incumbrances, and shall deliver to the buyer abstracts of title renewed to date of such conveyance, showing title in the trustee, free from incumbrances of record.

(6) The party of the sixth part agrees to buy and the trustee agrees to sell, as of the effective date of this agreement, the entire inventory of the debtor, consisting of raw material, products in process, including finished parts, finished goods, factory supplies and all parts whether usable- or obsolete, the value of the inventory to be determined- and the purchase to be paid for as hereinafter set out. Said inventory is to be delivered to the purchaser free and clear of all tax claims, labor claims, liens and encumbrances. The debtor shall take an inventory as of the first day of January, 1935, or as of any earlier date upon which the purchaser and the committee may agree, and the purchaser and the committee may each, at its option, designate one or more persons, who shall aid the employees of the debtor in verifying the correctness of the quantities and the classifications as hereinafter set out, to wit: * * *

(7) The purchaser shall on the first day of each calendar month render to the trustee a statement of the materials and finished products it shall have taken and used during the previous month. Payment for the materials and finished products so used shall be made by the purchaser by the twenty-fifth day of the month, meaning and intending that all inventory and finished products taken by the purchaser in any calendar month shall be paid for by the twenty-fifth day of the month following. All inventory not taken and used upon the expiration of the twelfth month following the effective date of this agreement shall be paid for nevertheless by the purchaser by the twenty-fifth day of the thirteenth month following the effective date of this agreement. * * *

(10) Unless otherwise ordered by the court in the proceedings above referred to, the proceeds of the sale or sales of the land, buildings, machinery, tools, dies and patterns and other fixed assets shall be made only to the holders of the first mortgage six per cent bonds of the debtor dated October 1, 1932, secured by a trust deed to the Continental Illinois National Bank and Trust Company as corporate trustee, of which issue there are now outstanding bonds of the principal sum of Three Hundred Eighty-four Thousand ($384,000.00) Dollars, with accrued interest thereon. In the 'distribution to be made to creditors generally, the value of the securities held by the secured creditors referred to in this paragraph shall be the sum of One Hundred Ten Thousand ($110,000.00) Dollars and the holders of the said bonds shall, with respect to the remaining part of the obligation due them, be deemed unsecured creditors and entitled to distribution on a pro rata basis as to such excess with the other unsecured creditors of the debtor. * * *

(12) Upon the payment of the amount due to the trustee for the inventory sold and delivered to the purchaser herein, the purchaser shall be in all respects and for all purposes deemed the owner of the good will, trade marks, trade names, patents, stock in A-B Stove Sales Company and like intangible property of the debtor without further or additional cost. At the request of the purchaser the trustee shall in consideration of One Dollar, execute and deliver to the purchaser such assignment or other documents as shall be fully effective to vest in the purchaser title to such intangible property. * * *

(17) Any creditor or stockholder of said debtor may become bound hereby by separate written consent to the provisions hereof given directly, or by any agent or committee thereunto authorized, and this agreement is made for the benefit of all creditors and stockholders of said debtor.

In Witness Whereof the parties of the first, second, third, and fifth and sixth parts have hereunto affixed their signatures and seals as of the 20th day of December, 1934.

A-B Stove Company
By: F. K. Berry
President
P. C. De Yoe
Secretary
The City National Bank and Trust Company of Battle Creek
By: Chas. C. Green
President
Cashier
Frank G. Wright (L. S.)
Chas. C. Green (L. S.)
Edw. R. Guyer (L. S.)
Committee
Marshall Furnace Company By: F. K. Berry
President
Secretary”

6. On July 9,1935, the Court issued a supplemental order amending the plan to authorize the issuance of 50,000 shares instead of 25,000 shares of the new common stock of A-B Stoves, Inc. (the new corporation to be formed in accordance with the plan), to the trustee in bankruptcy of the old corporation for distribution to the holders of the preferred and common stock of A-B Stove Company.

7. Under the plan as amended, Marshall Furnace Company conducted the business as the A-B Stove Division of Marshall Furnace Company until July 31, 1935; the new corporation contemplated by the agreement was incorporated as A-B Stoves, Inc., and it paid Marshall an agreed operating profit for the period ending July 31,1935, of $5,000 and returned Marshall’s net investment in the property in cash, that is, $35,000 paid for machinery and equipment by a 6-months’ note of Marshall Furnace Company, $111,674.50 paid in cash for usable inventory. The newly organized corporation also undertook the lease of the buildings at $750 per month with an option to purchase the buildings for $75,000 within a year. The Marshall note of $35,000 was paid at maturity and purchase of the buildings for $75,000 was completed before expiration of the option by the new corporation. All cash, bills, and accounts receivable of the A-B Stove Company were retained by the trustee in bankruptcy and the titles to all property of the A-B Stove Company, which was sold, were reserved by the trustee until paid for in full.

8. A-B Stoves, Inc., took over the business of A-B Stove Company, from Marshall Furnace Company, on August 1, 1935. The consideration paid by A-B Stoves, Inc., to the trustee in bankruptcy of A-B Stove Company, was $150,000 in cash, plus the assumption of liabilities of $142,696.70, plus 50,000 shares of no par common stock of A-B Stoves, Inc., which shares were for distribution to the preferred and common stockholders of A-B Stove Company on the following basis: 16,667 shares of the new stock for 125,000 shares of the $10 par old stock, 33,333 shares of the new stock for 4,364 shares of $100 preferred stock of the old company. Each stockholder of the A-B Stove Company was required, as a condition to receiving his pro rata share of A-B Stoves, Inc., to turn in for cancellation his shares of stock of A-B Stove Company. The new corporation upon organization authorized and issued a total of 200,000 shares of no par common stock, of which 150,000 shares were sold at $1 per share for cash to outside interests. The noteholders and general creditors of the A-B Stove Company received part of the purchase price paid for the buildings, and each class of creditors received in liquidation approximately 30 cents on the dollar of their claims.

9. The original cost to A-B Stove Company of tbe properties transferred to A-B Stoves, Inc., on August 1, 1935, together with depreciation accrued thereon to August 1,1935,, and the adjusted bases of said properties as of that date were as follows:

Adjusted
Original Bases
Cost Depreciation at 8/l/S5>
Land_ $19,098.57 $_ $19,098.57
Buildings_ 440,096.16 129,835.00 310,261.16.
Machinery and equipment— 319, 857. 80 201, 349. 34 118, 508.46
Tools, dies, and patterns_ 184,968. 81 177,384. 87 7, 583. 94
Patents_ 41,749. 09 _ 41, 749. 09'
Totals_ 1, 005,770. 43 508, 569.21 497,201.22

10. A-B Stoves, Inc., carried the aforesaid assets on its books in an aggregate amount equal to their cost to itself.. Such cost was allocated on its books among the several assets. as follows:

Land_ $6, 000. 00
Buildings_ 69,000. 00
Machinery and equipment- 85,000. 00
' Tools, dies, and patterns- 0. 00
Patents_ 1. 00
Total_ 160,001.00

11. The aggregate adjusted cost bases to the A-B Stove Company of the properties transferred to A-B Stoves, Inc., on August 1, 1935, was $497,201.22. On its excess profits, tax returns for 1941, 1942 and 1943, A-B Stoves, Inc., reported the amount it had paid for the property of A-B Stove Company as a component of its invested capital, that is, $160,001. If A-B Stoves, Inc., is entitled to treat the aggregate adjusted cost bases to A-B Stove Company of the properties transferred on August 1,1935, as a component of A-B. Stoves, Inc., equity invested capital, then its excess profits credit for each of the years 1941, 1942 and 1943 should be increased over the amount of such credit, namely, $36,000,. reported on its excess profits tax returns, by the amount of $23,636.17 which is computed at 8% of the adjusted basis of the items transferred on August 1, 1935, and is exclusive of patents.

12. On its income and excess profits tax returns for 1941, 1942 and 1943, A-B Stoves, Inc., deducted depreciation on buildings and on machinery and equipment in the following ■amounts:

191,1 191,% 1HS
Buildings_ $2,082.48 $2,078.95 $2,102.92
Machinery and Equipment_ 7,061.67 7, 703. 75 9,528.03
Total_ 9,144.15 9, 782. 70 11, 630.95

Of the above amounts, the following figures show proper depreciation deductions on buildings and on machinery and equipment costs of items as of August 1,1935:

191,1 19!,% 191,9
Buildings- $2, 070 $2,070 $2,070
Machinery and Equipment_ 5, 950 5,950 6,375

13. A-B Stoves, Inc., is entitled to compute deductions for depreciation for the years 1941, 1942 and 1943 at the rate of 3% per annum on buildings acquired in 1935, and at the rate of 5% per annum on additions to machinery and equipment acquired after 1935. On the machinery and equipment acquired in 1935, the rate of 7% per annum is correct for 1941 and 1942, and 7*4% per annum for 1943, as claimed in plaintiff’s income and excess profits tax returns.

14. In the event A-B Stoves, Inc., is entitled to compute its depreciation deductions for the years 1941, 1942 and 1943, for the purpose of determining its 1943 income and excess profits tax liabilities on the adjusted cost in the hands of A-B Stove Company of the properties transferred from that company on August 1, 1935, then A-B Stoves, Inc., may deduct for depreciation on account of buildings and machinery and equipment at the rates used in plaintiff’s returns and shown in finding 13, on the following bases and in the following amounts :

Basis for Depreciation
Maeh. and
Buildings Equip.
Adjusted Basis 8/1/35- $310,261.16 $118,508.46
Basis Used- 69,000.00 85,000.00
Additional Bases- 241,261.16 33,508.46

On the above basis, the depreciation allowable, if plaintiff’s claim should be sustained, would be as follows:

Mach, and
19 U Buildings JBquip. Total
Deducted on Tax Returns-$2, 082. 48 $7, 061. 67 $9,144.15
Additional on above basis_ 7,237. S3 2,345. 59 9,583. 42
Total for 1941_ 9,320. 31 9,407.26 18, 727. 57
191,2
Deducted on Tax Returns_ 2,078. 95 7, 703. 75 9, 782. 70
Additional on above basis-7,237.83 2,345.59 9, 583.42
Total for 1942_ 9.316.78 10,049.34 19,366.12
191s
Deducted on Tax Returns_ 2,102.92 9,528.03 11, 630.95
Additional on above basis_ 7,237. 83 2, 513.13 9, 750.96
Total for 1943_ 9,340. 75 12, 041.16 21,381.91

15. On October 27, 1944, A-B Stoves, Inc., filed a timely claim on Form 843, for refund of excess profits taxes paid by it for the calendar year 1943 in the amount of $87,742.08 plus interest. It was contended that A-B Stoves, Inc. had acquired the assets of A-B Stove Company, in a tax-free reorganization under sections 112 (b) (10) and 112 (e) of the Internal Bevenue Code, and that it was entitled to use as its basis for these assets the adjusted basis of the trans-feror, A-B Stove Company, under section 113 (a) (22) of the Code. It was further contended that A-B Stoves, Inc., was entitled to additional depreciation deductions for the years 1941,1942, and 1943; to increased excess profits credits for those years; and, in computing its excess profits credits for 1943, to avail itself of a carry-over of unused excess profits credits for the years 1941 and 1942.

16. On March 25,1946, the Commissioner of Internal Revenue rejected the claim for refund in full. On June 16,1947, an application for reconsideration of the claim was rejected.

CONCLUSION OF LAW

Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover and its petition is therefore dismissed. 
      
       Hereinafter sometime.s ref erred, to as plaintiff.
     
      
       26 U. S. C. (1946 Ed.) §§ 112 (b) (10), 112 (e), added by section 121 of the Revenue Act of 1943, 5& Stat. 21, 41-43.
      Sue. 112. Recognition of Gain'ok Loss. * * *
      (b) Exchanges Solely in Kind. * * *
      (10) Gain or lose not recognized or reorganization of corporations in certain receivership and bankruptcy proceedings. No gain or loss shall be recognized if property of a corporation (other than a railroad corporation, as defined .in -section -17m- of the National Bankruptcy Act, as amended), is transferred, in a taxable year of such corporation beginning after December 81,-1983,-in pursuance of an order of the court having Jurisdiction of such corporation—
      (A) in a receivership, foreclosure, or Bimilar proceeding, or
      (B) in a proceeding under section 77B or Chapter X of the National Bankruptcy Act, as amended, to another corporation organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, in exchange solely for stock or securities in such other corporation.
      under section 112 .(e),. if an exchange would be within the provisions of section 112 (b) (10) were it not for the fact that the property received in exchange consists not- only of -“stock or securities in such other corporation,” but also of other property or money, no loss from the exchange shall be recognized.
     
      
       26 U. S. C. (1946 Ed.) § 113 (a) (22), added by section 121 of the Revenue Act of 1943, supra.
      
     
      
       The plan contemplated the Issuance of 100,000 shares of stock, but this was Increased by the court’s amending order of July 9,1935.
     
      
      
         See H. R. Rept. No. 1079, 78th Cong., 2d Sess., p. 46.
     