1946 U.S. Tax Ct. LEXIS 104">*104
1946 U.S. Tax Ct. LEXIS 104">*105 7 T.C. 554">*554 OPINION.
The Commissioner determined deficiencies of $ 13,363.71 and $ 871.98 in income tax and declared value excess profits tax for the calendar year 1940. The only error assigned is as to his disallowance of a deduction in the amount of $ 55,532.72. The facts have been stipulated and the stipulation is adopted as the findings of fact.
The petitioner is a corporation. Its return for 1940 was filed with the collector of internal revenue for the district of Utah.
The petitioner owned $ 81,800 face value of the first mortgage bonds of the UtahIdaho Central Railroad Co. The petitioner's basis for gain or loss on the bonds was $ 90,297.72.
The properties of the railroad were sold on November 24, 1939, at a receiver's sale. A bondholders' committee, representing practically all of the outstanding first mortgage bonds of the railroad, purchased the properties at that sale at a price of $ 849,787.50, plus the assumption of certain debts. The order of the District Court confirming the sale provided that it was subject to the granting of [ILLEGIBLE WORD] 7 T.C. 554">*555 the Interstate Commerce Commission to the purchasers and their assigns to acquire and operate the properties 1946 U.S. Tax Ct. LEXIS 104">*106 and to issue securities against them and to the payment of the full purchase price. The permission of the Interstate Commerce Commission was granted on June 5, 1940. The purchase price was paid on August 21, 1940, by assumption of the debts mentioned and by giving credit of $ .425 per dollar on the first mortgage bonds.
The purchasers transferred the properties on August 21, 1940, to UtahIdaho Central Railroad Corporation for stock and bonds of the latter and the assumption by it of the indebtedness mentioned. That corporation was organized to effectuate the plan of reorganization of the old company approved in the receivership proceedings. The old company and the new corporation were railroad corporations as defined in section 77m of the National Bankruptcy Act as amended.
The petitioner paid $ 34,765 of the bid price for the properties by crediting that amount on its bonds at $ .425 per dollar. This left an uncollected amount of $ 47,035 due on the bonds and a basis of $ 55,532.72. The petitioner received stock and bonds of the new corporation having a value of $ 34,765, equal to the portion of the purchase price of the assets paid by the petitioner. The remainder of its 1946 U.S. Tax Ct. LEXIS 104">*107 debt became worthless in 1940.
The petitioner reported a long term loss of $ 55,532.72 on its income tax return for 1940. The loss or bad debt is not disputed. The Commissioner disallowed the deduction and attempts to justify his determination solely because of the provisions of
(b) Exchanges Solely in Kind. --
(9) Loss not recognized on certain railroad reorganizations. -- No loss shall be recognized if property of a railroad corporation, as defined in section 77m of the National Bankruptcy Act, as amended, is transferred, after December 31, 1938, in pursuance of an order of the court having jurisdiction of such corporation -- (A) in a receivership proceeding, or (B) in a proceeding under section 77 of the National Bankruptcy Act, as amended,
This is one of the exceptions to the general rule of
The parties disagree only as to the application of
The question presented is only whether the petitioner is to be denied a deduction for a bad debt or a loss on the old company bonds because of
The parties have stipulated that there will be no deficiencies if the deduction is allowed.
