The issues arise out of deficiency assessments made in respect to petitioner's federal income and excess profits taxes for the years 1935 to 1938 inclusive. They involve the applicability of Section 270 of the Bankruptcy Act, as amended, so as to require reduction of depreciation allowances claimed.
The transactions arose in connection with a reorganization proceeding under Section 77B, 48 Stat. 912, 11 U.S.C.A. § 207. They consisted essentially of petitioner's acquisition of all the assets of the insolvent debtor corporation, by an exchange of its capital stock, without pay value for the latter's bonds then outstanding. The Commissioner contends that the exchange resulted in a cancellation or reduction of indebtedness within the meaning of Section 270, so as to require a corresponding reduction in the basis of the property transferred. Accordingly he now urges that the assessment should be made, as the section requires, upon the basis of the fair market value of the property. The taxpayer's claim is made on the higher basis of the debtor corporation, in the view that Section 270 is not applicable to such a transaction.
This difference has been the basic one between the parties in proceedings before the Tax Court, the Circuit Court of Appeals and here. Others include a similar question with respect to the extinction of the debtor's liability for the accrued unpaid interest on the bonds and whether Section 270 is made applicable retroactively to the years prior to 1938, by virtue of the provisions of Section 276, sub. c(3) of the Chandler Act, 11 U.S.C.A. § 676, sub. c(3).
The Tax Court decided the principal issue on the merits in favor of the taxpayer, except with respect to the accrued interest. Cf. also Capento Securities Corp. v. Commissioner, 47 B.T.A. 691, affirmed, 140 F.2d 382. It likewise limited the application of Section 270 to the year 1938 and succeeding years. 1 T.C. 163. The Court of Appeals reversed the Tax Court's decision in both respects, holding there was a cancellation of indebtedness with respect to the unpaid principal and that Section 270 was applicable retroactively to require the prescribed reduction in basis for each of the tax years in question. 138 F.2d 962. Certiorari was granted, 321 U.S. 759, 64 S.Ct. 788, because of the importance of the questions presented and a conflict on the question of retroactivity. The facts are stated shortly in the margin, to give concrete perspective.
Petitioner earnestly argues that the Tax Court's decision, so far as this was in its favor, should be affirmed on the authority of Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, though in other respects it seeks a reversal of that court's judgment. For reasons presently to be stated, we think the case must be disposed of in its entirety by the application of Section 276, sub. c(3), which determines the extent to which Sections 268 and 270 are applicable in point of time. Accordingly, we are not required to pass upon the merits of the other interesting issues or whether they fall within the Dobson admonition. On the other hand, the question of the applicability of Sections 268 and 270, under the terms of Section 276, sub. c(3), to the transactions involved in this case obviously is one of law and of a sort not requiring the specialized experience of the Tax Court to determine. Furthermore, it involves making an accommodation between the conflicting policies, in part, of the bankruptcy laws and the revenue enactments. Sections 268 and 270 are integral parts of the former, though related in subject matter to the latter, and were so placed for purposes relevant primarily to that legislation. For these reasons the issue falls beyond the scope of the Dobson case.
The question presented by Section 276, sub. c(3) must be determined in the light of the problem created by Sections 268 and 270. A statement of their history is necessary to a general understanding of that problem. It stems basically from United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131, and subsequent decisions which have applied the principle of that case. By them a corporation may realize income from the cancellation or reduction of indebtedness, depending upon the circumstances in which the transaction occurs. However, the line between income producing reductions and others is not precise or definite and great uncertainty prevailed concerning it, both in 1934 when Section 77B was enacted and in 1938 when Chapter X of the Chandler Act was adopted, 11 U.S.C.A. § 501 et seq. The uncertainty was greatest perhaps in relation to transactions occurring in the course of insolvent reorganizations.