O'CONNELL, Circuit Judge.

The Commissioner of Internal Revenue appeals herein from a Tax Court decision holding that, in 1935, an exchange of old debentures for new collateral trust income bonds of the Portland Electric Power Company (hereinafter called Portland) was pursuant to a reorganization within the meaning of Sections 112(b)(3), 112(g)(1)(D), and 113(a)(6) of the Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C.A. Int.Rev. Acts 1924 to date, pages 692, 695, and 697. Pertinent portions of the statute are set forth in the footnote below.

On September 26, 1934, Portland filed a petition for the relief of debtors under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. On December 21, 1934, the plan of reorganization incorporated in the petition was approved by the bankruptcy court. Thereafter it appeared that the plan as approved was subject to objection, in that no provision was made for possible claims by bondholders of Willamette Valley Southern Railway Company, the bonds of which company had been unconditionally guaranteed by Portland. Consequently, on February 11, 1935, Portland filed an amended plan of reorganization. The bankruptcy court confirmed the amended plan on March 5, 1935.

Under the provisions of the confirmed amended plan, Portland was authorized and directed to issue $16,581,600 of 6% collateral trust income bonds. Of this issue, $581,600 was deposited in trust, to be applied, if necessary, against liability arising from the guaranty of the Willamette bonds; and the remaining $16,000,000 was to be exchanged, dollar for dollar face value, for the 6% debentures. The record does not reveal the differences between the debentures and the collateral income trust bonds; but both the plan and the decree of confirmation make it clear that the rights of Portland stockholders were not modified or altered by those court proceedings.

Taxpayer, a Pennsylvania attorney, in 1930 purchased Portland debentures of $5000 face value. Pursuant to the decree of confirmation of the amended plan, he surrendered his debentures, on March 30, 1935, for $5000 face value of the collateral trust income bonds, plus $150 in cash as adjustment of the 1934 interest. At that time, the fair market value of the debentures surrendered was $406.25, the same as that of the collateral trust income bonds. Taxpayer did not claim a loss on the exchange in his 1935 income tax return.

In December, 1941, taxpayer sold the collateral trust income bonds for $747.50. On his 1941 income tax return, he claimed a capital loss of $4,227.50, the difference between the cost of the debentures in 1930 and the sale price in 1941. The Commissioner, upon the theory that the exchange in 1935 was one in which gain or loss was to be recognized, disallowed the loss. The Commissioner's position is that taxpayer should have claimed the loss in his 1935 tax return, and that actually taxpayer, by selling the bonds in 1941, had a taxable gain of $341.25 (the difference between $747.50, the sale price, and $406.25, the fair market value of the bonds in 1935).

The Tax Court, upon the authority of Commissioner v. Neustadt's Trust, 2 Cir., 1942, 131 F.2d 528, supported taxpayer's contention that the exchange in 1935 falls within the non-recognition provisions of the Revenue Act of 1934 set forth in footnote 1, supra.

Since the Tax Court in the instant case announced a rule of general applicability on a clear-cut question of law, viz., the proper construction of the pertinent statutory provisions, we may review that rule. See Crane v. Commissioner, 1947, 331 U.S. 1, 15, 67 S.Ct. 1047.

At the outset, it is not inapposite to note that the case at bar is not one in which the corporation involved is the alter ego of the taxpayer, or where the plan of reorganization was a vehicle for conveying earnings from accumulations to the stockholders. Cf. Bazley v. Commissioner, 1947, 331 U.S. 737, 740, 67 S.Ct. 1489. Taxpayer in the case at bar was but a minor creditor of Portland; and the exchanges in question were solely in kind. Taxpayer's exchange of indentures for bonds was not an act of his own inspiration, for the approval of the plan by the bankruptcy court left him no free choice. In short, the situation presented by the case at bar is not one of a scheme for tax avoidance.

The Commissioner concedes that the bonds and debentures here involved are "securities" within the meaning of Section 112(b) (3); see Helvering v. Watts, 1935, 296 U.S. 387, 389, 56 S.Ct. 275, 80 L.Ed. 289. The exchange of bonds, therefore, was tax-free, unless, as the Commissioner contends, that exchange was not a "recapitalization." The Commissioner chooses to term the transaction a "refinancing," dealing exclusively with indebtedness; and he maintains that such "refinancing" is not the revision of capital structure contemplated by the word "recapitalization." He admits that Commissioner v. Neustadt's Trust, supra, is contrary to the position which he urges.

In one respect, the case sub judice is even more favorable to taxpayer than the facts presented in the Neustadt's Trust case, supra. The latter case specifically favored a broad rather than a restricted meaning for "recapitalization," even though the taxpayers in that case voluntarily accepted a formal offer of exchange without court interposition; while in the case at bar taxpayer was enjoined by the bankruptcy court, as the result of a formal proceeding, from enforcing "any right in, to or under said Debenture except in, to or under such rights of exchange as specifically given to such holder by the terms of this decree." Any question whether Congress meant to hold in suspense the recognition of gain or loss, until a more substantial change in taxpayer's original investment occurred, seems to us to disappear, where the exchange is of an involuntary nature and is precipitated by a formal court proceeding.

The Commissioner urges that persuasive weight should be accorded the "long continued and unchanged" administrative construction of "recapitalization" as not including "refinancing." Equally cogent, however, is the consideration that the Neustadt's Trust case, supra, determined the Congressional intent to be otherwise. The Commissioner suggests that an amendment effected by the Revenue Act of 1943 supports his position, in that specific provision was made for consummation of a plan of reorganization "by adjustment of the capital or debt structure" (emphasis supplied); but, in the absence of more definite indications, it is at least as likely that Congress was merely spelling out the law as it had existed previously and in accordance with the Neustadt's Trust decision.

Moreover, in determining the Congressional intent, we deem it not without significance that, less than one month after the passage of the Revenue Act of 1934, the same session of Congress specified that a plan of reorganization "shall include provisions modifying or altering the rights of creditors generally, or of any class of them, secured or unsecured, either through the issuance of new securities of any character or otherwise." Sec. 77B(b), 48 Stat. 913, 73rd Cong., Sess. II, Ch. 424, June 7, 1934, 11 U.S.C.A. § 207(b). Finally, this court has cited with approval the Neustadt's Trust decision. See United Gas Improvement Co. v. Commissioner, 3 Cir., 1944, 142 F.2d 216, 218, certiorari denied 1944, 323 U.S. 739, 65 S.Ct. 52, 89 L.Ed. 592.

The Commissioner further contends that, since a bondholder has no proprietary interest in a corporation, the exchange in the instant case does not meet a basic test of LeTulle v. Scofield, 1940, 308 U.S. 415, 60 S.Ct. 315, 84 L.Ed. 355. The LeTulle case, however, involved a merger in which all the assets of one corporation were transferred in exchange for cash and bonds of another corporation. That situation is very different from a bona fide exchange, pursuant to a bankruptcy court proceeding, of old bonds for successor bonds of the same corporation, without substantially changing the original investment of the bondholders. See Helvering v. Limestone Co., 1942, 315 U.S. 179, 62 S.Ct. 540, 86 L.Ed. 775.

We conclude, therefore, that, as applied to the facts of the case at bar, "recapitalization" includes the exchange of debentures solely for bonds of like face value, of the same corporation, pursuant to a bona fide court reorganization of that corporation. The decision of the Tax Court must be affirmed.

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