Opinion
Docket No. 20077.
1951-06-12
HARBOR BUILDING TRUST, ROBERT L. MOORE, TRUSTEE, A TRUST ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS BY A DECLARATION OF TRUST DATED JANUARY 6, 1939, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
David Burstein, Esq., for the petitioner. Paul P. Lipton, Esq., and James R. McGowan, Esq., for the respondent.
1. H corporation owned land and a building on which it placed first, second, and third mortgages. After default on the third mortgage, it was foreclosed and the property was sold in April 1928. It was bought and operated by nominees of the third mortgagee. In August 1930, after default on the first mortgage, the trustees thereunder entered the property and took over its operation preliminary to effecting foreclosure. The property continued to be operated by trustees under the first mortgage until January 1939 when it was sold to petitioner pursuant to a court decree foreclosing the first mortgage. Petitioner had been organized by first mortgage bondholders for the purpose of acquiring the property. Held, in computing depreciation on the acquired property, petitioner was not entitled to use H's basis pursuant to sections 113(a)(22) and 112(b)(10), I.R.C., since petitioner had not acquired the property from H.
2. For several years petitioner paid local real estate taxes in the amounts assessed but in each year immediately started proceedings to abate the assessments. In a later year, 1947, all these proceedings were decided and petitioner received refunds on the taxes earlier paid. Held, the refunds must be reflected as income in petitioner's 1947 returns; they could not be used to reduce the deductions taken by petitioner in the earlier years on account of such real estate taxes.
3. Petitioner was on the accrual basis, and its tax year was a fiscal year ending April 30. As of January 1 within each fiscal year, there was assessed against petitioner a local real estate tax which became a lien on the property at that time. However, the assessment was not in fact completed and petitioner was unable to learn the exact amount of the tax until later in the calendar year. It estimated the amount of the real estate tax each year and deducted that amount on its returns. Held, the deduction for the tax accrued during the fiscal year for which it was claimed by petitioner, but the estimate must be corrected so as to reflect the amount actually assessed. David Burstein, Esq., for the petitioner. Paul P. Lipton, Esq., and James R. McGowan, Esq., for the respondent.
The Commissioner determined deficiencies in petitioner's income tax for its fiscal years ending in 1945, 1946, and 1947 in the respective amounts of $3,644.02, $4,475.03, and $19,486.67.
Two principal questions are presented: (1) Was petitioner entitled to use the adjusted basis of a prior owner, Harbor Trust Incorporated, in computing its depreciation? (2) Did petitioner realize income in 1947 on account of a refund in that year of real estate taxes paid to the City of Boston in prior years? A corollary to the second question relates to the manner in which the real estate taxes should be treated on petitioner's returns for such prior years.
FINDINGS OF FACT.
The essential facts have been almost entirely stipulated, and the stipulation is hereby adopted as part of the findings.
Petitioner is a Massachusetts trust organized by a declaration of trust, dated January 6, 1939, under the laws of the Commonwealth of Massachusetts and it is taxable as a corporation under the Internal Revenue Code. Its income tax returns were made on the accrual basis and for a fiscal year ending April 30, and for the years in issue were filed with the collector of internal revenue for the district of Massachusetts.
The Depreciation Issue.
Harbor Trust Incorporated (hereinafter sometimes referred to as the ‘corporation‘) was incorporated under the laws of Massachusetts in 1925. In the same year it acquired certain waterfront real estate in the City of Boston for the erection of a building, which it began to construct the following year. The total cost to the corporation of improving the land and constructing the building was $1,664,660.50.
In order to finance the cost of construction, Sinking Fund 6 Per Cent Coupon Gold Bonds were issued in the amount of $1,250,000, maturing July 1, 1937, secured by a first mortgage on the land and building, which was executed on July 29, 1925. On the same day a second mortgage on the same property was executed to secure another bond issue of $400,000. A third mortgage on the same property was given to the First National Bank of Boston (referred to herein as the ‘Bank‘) in November 1926 to secure a demand note for $250,000. The third mortgage provided in part:
* * * BUT UPON ANY DEFAULT in the performance or observance of the foregoing conditions (prescribing terms of the third mortgage) or the conditions of said prior mortgages, the said grantee or its successors or assigns, may SELL the granted premises, or such portion thereof as may remain subject to this mortgage in case of any partial release hereof, together with all improvements that may be thereon, by public auction in said Boston, first publishing a notice of the time and place of sale once each week for three successive weeks in some one newspaper published in said Boston, and may convey the same by proper deed or deeds to the purchaser or purchasers absolutely and in fee simple, and such sale shall forever bar the said grantor and all persons claiming under it from all right and interest in the granted premises, whether at law or in equity. * * * ; and the said grantor hereby, for itself and its successors and assigns, covenants with the said grantee and its successors and assigns, that in case a sale shall be made under the foregoing power, it (the said grantor) or they, will, upon request, execute, acknowledge and deliver to the purchaser or purchasers a deed or deeds of release confirming such sale * * *
In February 1928 the Bank assigned the third mortgage to Dudley B. Wallace. Because of failure of the corporation to make payments of principal, interest, and taxes as required under the third mortgage, Wallace foreclosed the mortgage and caused the property to be sold on April 18, 1928, at a public auction for the highest bid, $200,000. At that time the corporation was insolvent. On April 28, 1928, a foreclosure deed was given to the purchaser, Olin L. Fuller, who in turn gave a new third mortgage to the Bank to secure a demand note of $350,000. The property was conveyed by Fuller, and, after further conveyances, Alexander M. Stewart and Mary E. Hurley acquired undivided one-half interests therein. All these persons, including Wallace, Fuller, Stewart, and Hurley, acted on behalf of the Bank. From April 28, 1928, to August 6, 1930, rents paid by tenants of the building were collected by the Bank as agent for Stewart and Hurley.
The corporation filed no Federal income tax returns after March 15, 1929, when it filed its return for the calendar year 1928. The following statement was attached to that return:
During the taxable year the Company's entire property was lost by foreclosure proceedings under one of the mortgages thereon.
The Company, therefore, had no property, and many liabilities, at the close of the taxable year, and is filing this return for the purpose of giving the Department a record of the facts.
In 1932 the corporation was dissolved by an act of the Massachusetts legislature (Mass. Acts, 1932, c. 139), pursuant to state law providing for dissolution upon failure of a corporation for two successive years to file an annual report of condition (Mass. Gen. Laws, c. 156, sec. 50).
Under the terms of the first mortgage, payments on principal and interest were required to be made to a depositary, S. W. Straus & Co., Inc.
There were defaults on the payments due on June 1, 1930, amounting to $10,094.67, and on July 1, 1930, amounting to $9,382.50. On August 6, 1930, the trustees under the first mortgage entered the premises for the purpose of foreclosing that mortgage, and a certificate of entry for that purpose was recorded. From August 6, 1930, to February 16, 1939, the trustees under the first mortgage were in continuous, open, and unopposed possession. For the calendar years 1930 to 1038, inclusive, fiduciary Federal income tax returns were filed by the trustees.
The interest falling due under the first mortgage on January 1, 1931, was paid, in part ($6,874.30) from net earnings of the property turned over for this purpose and in part ($27,580.63) from funds contributed by the depositary under the mortgage. The net rents from January 1, 1931, to January 1, 1932, were sufficient to pay the interest maturing on July 1, 1931, and January 1, 1932. The interest falling due after January 1, 1932, remained unpaid until November 1935, when the then successor trustee under the first mortgage placed with the then depositary a sum sufficient to pay all interest coupons which had matured on July 1, 1932, with interest thereon to December 3, 1935. Interest maturing on January 1, 1933, was met by a deposit by the trustee on December 12, 1936, of a sum sufficient to pay the same in full.
In a letter to the then trustee dated January 8, 1937, holders of $57,000 of the first mortgage bonds stated that they believed it desirable to sell the property for cash or to create a permanent organization to hold and operate the property, ‘rather than the somewhat anomalous and temporary present organization of the trustee in possession; especially as the nature of the trustee's title and possession as trustee under the indenture is not wholly clear.‘ They suggested that the trustee obtain court approval for a public sale of the property for a minimum of $800,000 in cash, the proceeds to be distributed to the bondholders. If such sale could not be made, they offered, subject to court approval, to form a corporation to acquire the property from the trustee in exchange for trust certificates representing the entire issue of stock and bonds of the new corporation.
On January 20, 1937, the trustee petitioned the Probate Court in Suffolk County, Massachusetts, for approval to carry out the foregoing plan. The petitioner described the default under the first mortgage and the mortgage provisions authorizing the trustees to enter into possession and to sell the property; declared that no foreclosure sale had yet been made under the mortgage; and stated that question had been raised as to the trustee's interest in the property and the manner in which he might convey good title. A hearing was held by the Probate Court on the petition in May 1937, at which there were present or represented by counsel holders of about $900,000 in the principal amount of bonds. In describing the hearing in a letter to the bondholders dated May 11, 1937, the trustee stated that ‘The consensus of opinion appeared to be that no change in the management of the property is necessary at the present time and that in any event a cash sale of the property for not less than $700,000 (if such a sale should become possible in the near future) would be preferable to a reorganization. * * * After hearing all parties the Court decided to enter no order at the present time but, instead, to continue the case with leave to any party to bring it on for hearing again if any change should occur in the situation.‘
A ‘Harbor Building Bondholder's Protective Committee‘ was organized pursuant to a deposit agreement dated May 5, 1932. On January 1, 1937, the Committee held $604,000 face value Harbor Trust Incorporated first mortgage bonds. On January 25, 1937, the Committee submitted to the bondholders an offer made by Standard Investing Corporation to purchase deposited bonds, and any undeposited bonds that might be offered, for $50 net per $100 bond, with unpaid coupons attached. The offer was conditioned on acceptance by the holders of not less than $500,000 face value bonds. Thereafter, and prior to August 3, 1937, the offer submitted was accepted and the deposit agreement was terminated.
On July 1, 1937, the maturity date of the first mortgage bonds, those bonds remained outstanding and unredeemed in the amount of $1,150,500, and unredeemed interest coupons maturing July 1, 1933, and thereafter aggregated $310,905.
Modification of the plan, on which the trustee's petition had been based, was proposed in a letter of August 3, 1937, sent to the trustee in behalf of holders of over 70 per cent of the outstanding bonds. The trustee amended his petition to modify it in accordance with the proposed changes. On November 1, 1937, this petition was dismissed by the Probate Court without prejudice.
A change in the trustee was thereafter made by written instrument executed by certain dominant bondholders purporting to act pursuant to the trust mortgage. The new trustee retained counsel to advise him respecting various questions as to the trustee's title to the property, his rights and duties under certain provisions of the trust indenture, and the status of the bondholders. The opinion rendered by counsel was that it seemed that, by the entry on August 6, 1930, under the first mortgage and by continuous possession of the premises thereafter for 3 years, the equity of redemption in the property had been cut off; that this was made uncertain, however, because the payment of interest maturing after the foregoing entry may have worked a waiver of that entry, ‘and that the equity of redemption is, therefore, still outstanding in the successors of the original trust‘; that the trustee, if there were such a waiver, had a power of sale for the purpose of foreclosure under the mortgage, but if there had been no waiver, he was only a trustee of a dry trust with very limited powers which did not include a power of sale under the mortgage. The counsel advised the trustee to file a bill praying for a court decree foreclosing the mortgage by judicial sale and also a second bill petitioning the court for instructions and a decree authorizing sale of the property.
The trustee adopted this advice and on March 11, 1938, filed a bill in equity to foreclose the mortgage, as well as a petition for instructions. In both, substantially the same allegations were made and the same defendants were named, including Alexander M. Stewart, Mary E. Hurley, and the First National Bank of Boston. Neither Stewart, Hurley, nor the Bank entered an appearance. Harbor Trust Incorporated was not named as a defendant, and no appearance was entered by it or by any person purporting to act for it or its officers, directors, or stockholders.
A joint answer was filed by the owners of more than two-thirds of the bonds, praying for a determination that the entry on the property by the trustees did not result in a foreclosure of the equity of redemption and that the trustee had the right to foreclose by a foreclosure sale in accordance with the mortgage, and requesting that the court direct the trustee to foreclose in accordance with the written request of a majority of the bondholders. The answers of minority bondholders were substantially similar in opposing the bill to foreclose: they alleged that the mortgage had been foreclosed by the trustees' entry and possession for more than 3 years; that there had been no waiver; that the trustee was the owner of the fee for the benefit of all the bondholders under the mortgage. Several of the minority bondholders alleged that they had purchased their bonds at face value whereas the majority bondholders had bought their bonds at large discounts for the purpose of acquiring the mortgaged property; that the minority opposed a sale of the property; and that their interests would be best served by continuing the operation and management of the building for the benefit of the bondholders. The minority asked the court to determine that the mortgage had been foreclosed, and to enjoin the trustee from selling the property whether or not the mortgage had been foreclosed.
On or about November 1, 1938, the minority bondholders who had appeared in opposition to the trustee's bill to foreclose sold their bonds to the majority. The minority took no further part in the proceedings, although they were not formally dismissed as defendants.
On December 2, 1938, the Superior Court of Suffolk County entered a decree of foreclosure and sale on the trustee's bill to foreclose. It found that the first mortgage had been continuously in default since July 1, 1930, and that the mortgage had not yet been foreclosed and was still outstanding. It directed a sale of the property at a public auction unless the mortgagor or any person claiming under or through it should pay for the property the total amount found to be in default under the mortgage; and that upon such sale, ‘all the right, title, interest, and equity of redemption of the Mortgagor, its creditors, and shareholders and all persons claiming, or that may hereafter claim under it or them, or any of them, in and to any of said described property and every part and parcel thereof, shall be forever barred and foreclosed.‘
In accordance with this order, a plan was filed with the Superior Court on or about January 9, 1939, on behalf of the holders of about 85 per cent of the principal amount of the outstanding bonds. The plan provided for the formation of a Massachusetts trust with one class of stock; this stock was to be exchanged for first mortgage bonds in a specified ratio; the property was to be bid for by the trust or the bondholders at the foreclosure sale, the bonds of participating holders to be used in satisfaction of the price bid; and bondholders not assenting to the plan were to receive a proportionate share of the net proceeds of the price bid for the property.
Petitioner was organized as a Massachusetts trust on January 6, 1939, with an authorized capital stock of 11,515 shares of no par value, pursuant to an indenture of trust. At the first meeting of petitioner's trustees on January 16, 1939, authorization was given to bid no more than $500,000 for the property. The trustees also voted to accept deposits of bonds from holders assenting to the proposed plan.
The public sale, authorized by the court decree, was held on January 16, 1939. The only and successful bid was in the amount of $500,000 in behalf of petitioner. On January 23, 1939, sale to petitioner for this amount was approved by the court. In payment of this amount, petitioner was authorized to deliver bonds at the rate of $44.278 per $100 of face value, the difference between the aggregate so delivered and the purchase price to be paid by petitioner in cash. Upon receipt of payment, the trustee was directed by the court to deliver a deed and bill of sale and assignment transferring the property to petitioner free from the lien of the foreclosed mortgage and free of all interests and rights of the mortgagor, its creditors, shareholders, and any persons claiming under any of them, except for certain prior public charges and subject to outstanding leases. Provision was made for redemption of bonds not used in payment of this purchase, and for distribution of funds held by the trustee.
On January 26, 1939, petitioner's trustees voted to carry out the foregoing plan filed on or about January 9, 1939. Pursuant to the plan, petitioner issued its stock for bonds of the face amount of $1,054,500; and it paid for the Harbor property with bonds of the face amount of $1,014,000 (accepted at $448,978.92) and cash of $51,021.08. The sale became final on February 16, 1939, and on or about that date the trustee under the mortgage executed and delivered a deed conveying the property to petitioner. At the same time the trustee provided for the redemption for cash, at the same rate at which petitioner's bonds were accepted in purchase of the property, of bonds of the face amount of $137,500 which remained outstanding after the sale. As part of such redemption, petitioner received $17,932.69 in exchange for bonds of the face of $40,500.
On August 16, 1939, petitioner's trustees executed a first mortgage, covering the real estate and other tangible property held by the trust, to secure a loan of $330,000 from the Equitable Life Assurance Society of the United States. From the proceeds of this loan petitioner repaid $51,021.08 borrowed at or about the time of the purchase of the property. On August 21, 1939, petitioner's trustees voted a cash distribution of $28 per share on the 10,545 shares outstanding, and on August 22, 1939, paid this distribution, amounting to $295,260. On September 19, 1939, they voted distribution of $15 per share, to be distributed either in cash or 6 1/2 per cent second mortgage bonds of an equal principal amount, at the option of the stockholders. Those electing cash received $5,075; others received $153,100 in second mortgage bonds.
In its income tax return for the fiscal year ending April 30, 1943, petitioner claimed $12,587.42 as depreciation on the building, using a basis of $402,797.59. In its income tax return for the fiscal year ending April 30, 1944, however, petitioner claimed $37,454.86 as depreciation on the building, using a basis of $1,664,660.50, the cost of the building to Harbor Trust Incorporated. Depreciation in the same amount and calculated on the same basis as in the 1944 return was claimed in petitioner's income tax returns for the fiscal years ending April 30, 1945, April 30, 1946, and April 30, 1947. In the letter of deficiency sent to petitioner, pertaining to the returns for 1945, 1946, and 1947, respondent reduced the amounts allowed for depreciation, finding that petitioner was not entitled to use the corporation's basis for this purpose.
The Real Estate Tax Issue.
The property acquired by petitioner was subject to real estate taxes imposed by the City of Boston. Such taxes were assessed annually, and became a lien on the property as of January 1 of the year in which assessed. However, the tax bill disclosing the amount of tax, which depended upon the valuation of the property and the tax rate for the particular year, was not sent to the owner until considerably later in the year. Since petitioner's income tax returns were filed for a fiscal year ending April 30, and since those returns became due prior to receiving the tax bill from the City during the years in question, petitioner undertook to estimate the amount of real estate taxes accruable against it for deduction purposes on its income tax returns.
In its income tax return for the fiscal year ending April 30, 1944, which disclosed a net loss of $3,141.77, petitioner claimed a deduction on account of Boston real estate tax in the amount of $43,890. That deduction was based upon an estimated valuation of$1,100,000, which had been the valuation for 1943. However, the tax bill for 1944, which was thereafter mailed to petitioner on August 10, 1944, showed a real estate tax in the amount of $51,870 for 1944, based upon a valuation of $1,300,000. Petitioner paid that tax in full on or about September 29, 1944, and at that time filed an application for abatement of the tax.
The tax bill for 1945, disclosing a liability in the amount of $59,500, was mailed to petitioner on August 31, 1945. It paid the tax in full on or about September 28, 1945. In its income tax return for the fiscal year ending April 30, 1945, petitioner had claimed a deduction on account of real estate taxes of only $51,870. The tax assessed for 1945 was based on a valuation of $1,400,000. Petitioner filed an application for abatement on September 28, 1945, and in February 1946 filed a petitioner with the Massachusetts Board of Tax Appeals.
The tax bill for 1946, disclosing a liability in the amount of $58,800, was mailed to petitioner on August 28, 1946. It paid the tax in full on or about September 26, 1946. In its income tax return for the fiscal year ending April 30, 1946, petitioner had claimed a deduction of $61,810 on account of real estate tax for that year. Petitioner filed an application for abatement of that tax on September 26, 1946, and thereafter filed a petition with the Massachusetts Board of Tax Appeals.
On April 25, 1947, the Massachusetts Board of Tax Appeals ordered abatements in petitioner's taxes as follows: for 1944, $7,980; for 1945, $12,750; for 1946, $8,400. On April 25, 1947, petitioner received refunds in the amounts of these abatements, totaling $29,130.
On July 10, 1947, petitioner filed amended income tax returns for the fiscal years ending April 30, 1945 and 1946, in which the deductions for the real estate taxes were reduced to the amounts paid as abated: $46,750 for 1945 and $50,400 for 1946. These adjustments involved reductions of $5,120 and $11,410 respectively in the deductions claimed by petitioner in its 1945 and 1946 returns.
As to the real estate taxes paid in 1945 and 1946, respondent allowed deductions to the extent that the taxes were actually assessed and paid in those years in the unabated amounts. This resulted in an increase in the amount of the amended deduction by $12,750 for the fiscal year ending in 1945, raising it to $59,500; and an increase in the amount of the amended deduction by $8,400 for the fiscal year ending in 1946, raising it to $58,800. Respondent did not make a similar adjustment, in petitioner's deduction for real estate taxes for the fiscal year ending in 1944, because of the expiration of the period of limitations.
Respondent adjusted in the same manner the deduction petitioner took for real estate taxes for the fiscal year ending in 1947. For that year petitioner deducted $58,800 as an estimated tax. Respondent added $10,950, increasing the deduction to $69,750, which was the tax thereafter actually assessed.
For the year ending in 1947, respondent also increased petitioner's income by $29,130, to include the refunds received in 1947 on the real estate taxes paid in 1944, 1945, and 1946. Respondent concedes that inclusion in income of the refund for 1944 was improper to the extent that petitioner had not had the benefit in an earlier year of a reduction in its income tax liability.
OPINION.
RAUM, Judge:
1. Petitioner acquired the so-called Harbor property in 1939, and the first issue involves its basis for depreciation. Normally, depreciation deductions are based upon cost. Sections 113, 114, Internal Revenue Code. However, petitioner seeks to use a considerably higher basis, namely, the basis which the property had in the hands of Harbor Trust Incorporated, and its claim is founded on the contention that it acquired the property in a transaction governed by section 112(b)(10) of the Code.
In the pleadings, petitioner relied upon section 112(b)(4) as well as section 112(b)(10). However, petitioner's brief makes no argument based upon section 112(b)(4), so that any contention based upon section 112(b)(4) must be deemed to have been abandoned.
If section 112(b)(10) were applicable, then, pursuant to section 113(a)(22), the basis in the hands of petitioner would be ‘the same as it would be in the hands of the corporation whose property was so acquired * * * .‘ The applicable provisions are reproduced in full in the margin.
SEC. 112. RECOGNITION OF GAIN OR LOSS.(b) EXCHANGES SOLELY IN KIND.—(10) GAIN OR LOSS NOT RECOGNIZED ON REORGANIZATION OF CORPORATION 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 77m of the National Bankruptcy Act, as amended) is transferred, in a taxable year of such corporation beginning after December 31, 1933, in pursuance of an order of the court having jurisdiction of such corporation—(A) in a receivership, foreclosure, or similar 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.SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) BASIS (UNADJUSTED) OF PROPERTY.— THE basis of property shall be the cost of such property; except that—(22) PROPERTY ACQUIRED ON REORGANIZATION OF CERTAIN CORPORATIONS.— If the property was acquired by a corporation upon a transfer to which section 112(b)(10), or so much of section 112(d) or (e) as relates to section 112(b)(10), is applicable, then, notwithstanding the provisions of section 270 of the National Bankruptcy Act, as amended, the basis in the hands of the acquiring corporation shall be the same as it would be in the hands of the corporation whose property was so acquired, increased in the amount of gain recognized to the corporation whose property was so acquired under the law applicable to the year in which the acquisition occurred, and such basis shall not be adjusted under subsection (b)(3) by reason of a discharge of indebtedness pursuant to the plan of reorganization under which such transfer was made.
We think that sections 112(b)(10) and 113(a)(22) do not authorize petitioner to take over the basis of Harbor Trust Incorporated. Petitioner did not acquire the property from Harbor Trust Incorporated, and therefore could not inherit the latter's basis under those sections.
There is no disagreement as to the basic facts concerning the history of the Harbor property. Harbor Trust Incorporated constructed a building, on land owned by it, at a cost of $1,664,660.50. It placed three mortgages on the land and building, the first and senior of these mortgages being executed as security for a bond issue made to finance the cost of construction. As a result of a default under the third mortgage, the property was sold at a foreclosure sale in April 1928, and a foreclosure deed was given to the purchaser, a nominee of the third mortgagee. The property thereupon passed into new ownership, subject to the two prior mortgages, and Harbor Trust Incorporated lost all right or interest therein. Cf. Mt. Holyoke Realty Corp. v. Holyoke Realty Corp., 284 Mass. 100, 106, 187 N.E. 227, 230.
The new owner or his successors in interest, of whom there were several, and all of whom also acted for the former third mortgagee, administered the property until August 1940. At that time there had been a default in payments required to be made under the first mortgage, and the trustees under that mortgage, pursuant to its terms, entered the premises for the purpose of effecting a foreclosure. The property remained, from that time until about February 16, 1939, under the control of and was managed by the trustees under the first mortgage. On the latter date, the property was sold to petitioner pursuant to a court decree foreclosing the first mortgage. Petitioner had been organized in accordance with a plan submitted to and approved by the court; its stock had been issued solely for first mortgage bonds; and it bought the Harbor property at the foreclosure sale for $500,000, making payment primarily by applying the first mortgage bonds, at a specified rate, and partly in cash.
These facts plainly show that, between the time Harbor Trust Incorporated owned the property and the time petitioner acquired it, there had been interposed a third and separate set of ownership interests, representing the holder of the old third mortgage. The original corporation had ceased to own the property by the time petitioner bought it. Indeed, it had long ceased to exist, having been dissolved in 1932. Whether or not the 1939 transfer to petitioner were otherwise a transaction not then subject to tax, as petitioner contends, it did not acquire the property from Harbor Trust Incorporated, or from anyone representing that corporation, and therefore did not become entitled to take over the latter's basis. Cf. Bondholders Committee, Marlborough Investment Co. First Mortgage Bonds v. Commissioner, 315 U.S. 189; Adwood Corporation, 15 T.C. 148.
Of course, section 112(b)(10) does not require that the old corporation be the transferor in a technical sense; it may well be sufficient if the transfer is made by some intermediary, provided that the separate steps are integrated parts of a single plan (cf. Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 184-185), and this is recognized by the Commissioner's regulations. See Regulations 111, section 29.112(b)(10)-1. The difficulty here is that there is no nexus whatever between the original corporation, whose basis petitioner wishes to inherit, and the 1939 transfer.
Harbor Trust Incorporated had long since passed out of the picture; it was not even a party to the proceedings, nor could it have been, since it had been dissolved some six or seven years earlier. The 1939 proceedings were in no sense intended to reorganize Harbor Trust Incorporated or to foreclose a mortgage on its property. We have here no ‘intermediate procedural devices,‘ such as were noted in the Alabama Asphaltic Limestone Co. case.
By reason of the 1928 foreclosure sale, brought about by the third mortgagee, all of the interest of Harbor Trust Incorporated in the property was completely wiped out. Thereafter, for some 27 months, until the first mortgage trustees made entry upon the property, the property was in the hands of the purchaser at the foreclosure sale or his successors. Default on the first mortgage bonds occurred for the first time in 1930.
In the Alabama Asphaltic Limestone Co. case, the Court said (315 U.S. at pp. 184-185): * * * Some contention, however, is made that this transaction did not meet the statutory standard because the properties acquired by the new corporation belonged at that time to the committee and not to the old corporation. That is true. yet, the separate steps were integrated parts of a single scheme. Transitory phases of an arrangment frequently are disregarded under these sections of the revenue acts where they add nothing of substance to the completed affair. Gregory v. Helvering, 293 U.S. 465; Helvering v. Bashford, 302 U.S. 454. Here they were no more than intermediate procedural devices utilized to enable the new corporation to acquire all the assets of the old one pursuant to a single reorganization plan.
Petitioner appears to contend that in reality the equity in the Harbor property was owned by the first mortgage bondholders as far back as the time when the third mortgagee foreclosed and bought the property in 1928, and that therefore there has been no break in the chain of ownership between the corporation and petitioner. Its theory would appear to be that declared in Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 183-184, and Helvering v. Cement Investors, Inc., 316 U.S. 527, 532, which recognized that there may be circumstances in which creditors may be considered to have displaced the stockholders as the real owners of the corporate enterprise. To sustain equitable ownership in the first mortgage bondholders at some particular time under the principle of those cases, however, petitioner must establish at the very least that the debtor was insolvent as to them at the time in question. It has not done so. The stipulation between the parties that the corporation was ‘insolvent‘ in 1928 is insufficient for this purpose, since it leaves unresolved whether at that time the insolvency pertained only to general creditors, or to the third mortgage or the second mortgage or whether it was so serious as to affect rights under the first mortgage as well. There was no evidence that prior to 1930, when there was a failure to make certain payments required under the first mortgage, there had been any default in the financial obligations imposed by that mortgage, or that the first mortgage bondholders or their trustees considered themselves entitled for any reason to foreclose under the mortgage or acquire control of the property. No proof was made of any attempt to exercise or enforce any rights of the first mortgage bondholders against the Harbor property prior to August 6, 1930, when the trustees entered the premises for the purpose of foreclosure. In these circumstances, there is no justification for considering the first mortgage bondholders as the equitable owners in 1928.
It can be of no assistance to petitioner to find such equitable ownership arising at some time later than 1928— and on the evidence that would not appear to be earlier than 1930— because there then would come into being a substantial gap between the corporation's ownership and that of petitioner. Nor can that gap and the intervening interests be closed by a claim that the third mortgagee, in foreclosing and acquiring control over the Harbor property, acted for the first mortgage bondholders, and that in substance there was really a single transaction between the time the corporation's interest in the property was severed and the petitioner's interest commenced. The facts simply do not support such a conclusion.
2. Abatement and refund in 1947 of local real estate taxes accrued and deducted from gross income in earlier years present the second principal issue. In 1944, 1945, and 1946, petitioner paid real estate taxes as assessed by the City of Boston. Considering the tax assessed in each of those years to be excessive, petitioner promptly filed an application for abatement in each year upon payment of the tax. On April 25, 1947, the Massachusetts Board of Tax Appeals ruled in petitioner's favor on all these applications and ordered abatements of $7,980 in the 1944 tax, $12,750 in the 1945 tax, and $8,400 in the 1946 tax. On the same date, refund was made to petitioner of these amounts, in the total sum of $29,130.
Respondent included the total amount refunded in petitioner's 1947 income. Petitioner alleges this to be error. It asserts that these refunds were not income in 1947, but that instead the abatement applicable to a particular year must be taken back and applied to reduce the deduction taken for that year for real estate taxes, and it filed amended income tax returns in order to make these adjustments. Support for petitioner's position may be found in some of the decisions, reflecting the uncertainty that existed on this point at one time. See, e.g., Leach v. Commissioner (C.A. 1), 50 F.2d 371; E. B. Elliott Co., 45 B.T.A. 82. However, the theory of these cases has more recently been explicitly rejected (Bartlett v. Delaney (C.A. 1) 173 F.2d 535, certiorari denied, 338 U.S. 817; Standard-tilton Milling Co., 3 T.C. 1026; Baltimore Transfer Co., 8 T.C. 1; Taylor Instrument Cos., 14 T.C. 388), and the principle which here controls is the one applied by respondent. The refunds received in 1947 must therefore be regarded as income in that year.
The controversy between the parties concerning these real estate taxes extends, furthermore, to the manner in which they are to be treated initially for deduction purposes. The problem posed deals essentially with the time at which the deduction is to be taken.
Massachusetts law called for assessment of the tax to the owner of the property as of January 1 of the year of assessment, and made it a lien on the property as of that date. Mass. Ann. Laws, c. 59, sec. 11; c. 60, sec. 37. The state law required that bills for the tax determined to be due and payable for a particular year be sent out not later than June 14 of that year. Mass. Ann. Laws, c. 59, sec. 57. In fact, however, during 1944 and succeeding calendar years, it was not until August that petitioner's tax bills were mailed to it and petitioner was informed of the amount of tax assessed against it.
Since petitioner's income tax returns were filed on a fiscal year ending April 30, it was not in receipt of those tax bills either by the time its fiscal years closed or the due date arrived for filing its income tax returns for those years. For each of the fiscal years ending in these calendar years, petitioner therefore accrued an estimated amount on account of the real estate tax to be assessed, and deducted the estimated amount on its income tax return for the particular fiscal year.
In determining the deficiencies, respondent adjusted the deduction for real estate tax for a particular year so as to make it equivalent to the amount of tax thereafter actually assessed for that year. Petitioner, on the other hand, in keeping with its view, rejected above, that the 1947 refunds were not income, would adjust the initial estimates to reconcile them with the amounts ultimately held due in the abatement proceedings, giving effect to the refunds in this way. It denies that the return for a particular fiscal year must be corrected for the difference between estimated and assessed amounts of tax. It asserts in the alternative, if adjustment must be made for this difference, that the claimed deduction in the amount of the estimated tax must be allowed to stand for the fiscal year to which it applies, but the difference between the estimated and assessed tax is to be taken into account in the deduction for taxes in the next fiscal year, when the actual tax for the prior fiscal year could first be known. Thus the tax assessed in August 1944, as of January 1, 1944, was $7,980 more than the amount petitioner estimated on its return for the year ending April 30, 1944, and under this alternative method that difference would be deducted on its return for the following year ending April 30, 1945.
The problem is by no means free from difficulty. It has been indicated that accrual of an item must be preceded by events which not only determine liability but also fix the amount. Cf., e.g., United States v. Anderson, 269 U.S. 422, 441. On the other hand, it has been held that where liability is fixed and where the amount involved can be estimated with reasonable accuracy, the liability may be accrued even though it may be necessary at some later time to correct the estimate by an amended return or by some other means. Continental Tie & Lumber Co. v. United States, 286 U.S. 290, 297-299. And in the case of Massachusetts real estate taxes, it has already been held that liability accrues as of the date when they are assessed and become a lien. H. H. Brown Co., 8 T.C. 112 (Acq., VII-1 C.B. 5). In these circumstances, we hold that the real estate taxes in question accrued during the year as of which they were assessed, and that the estimates made by petitioner must be corrected so as to reflect the amounts actually assessed.
Decision will be entered under Rule 50.