1938 BTA LEXIS 789 | B.T.A. | 1938
Lead Opinion
opinion.
The Commissioner determined a deficiency of $5,920.01 in the petitioner’s income tax for 1932. The only issue is whether the Commissioner erred in disallowing a deduction of $31,156.15 claimed as a loss on account of the worthlessness of preferred and common stock of the Middle West Utilities Co. The facts are hereby found
The Commissioner now relies almost entirely upon the decision of the Board in the case of George H. Horning, 35 B. T. A. 897. Horning was there claiming a loss on common and preferred stock of the Middle West Utilities Co. on the ground that it became worthless in 1932. Thus the issue there was identical with the issue here. The headnote and the statement of the question in the opinion indicate that the petitioner failed for lack of proof. Each case of this kind must be decided upon the evidence presented in that particular case. All of the evidence introduced in the Homing case to show worthlessness in 1932 has been introduced here, together with important additional evidence. The petitioner contends that all of this evidence now shows worthlessness of these two classes of stock in 1932.
The Middle West Utilities Co. (hereafter called Middle West) was a holding company incorporated under the laws of Delaware. Its assets consisted largely of stocks and bonds of subsidiaries. The latter were engaged in supplying electric service or were holding the securities of subsidiaries which were so engaged. There was considerable pyramiding of the holdings in the group. An involuntary petition in bankruptcy was filed on April 15, 1932, in a Federal District Court hi Illinois, praying that Middle West be adjudicated a bankrupt. The court on the same day appointed receivers. The receivership resulted from the inability of Middle West to finance its obligations. The bankruptcy proceedings never came to an adjudication. Middle West had controlled eight large utilities systems and two large investment companies. It lost its entire eastern subsidiary group through bankruptcy and foreclosure during 1932. That group had earned 40 percent of the entire gross income of the Middle West group. But Middle West still served 2,882 communities. The book value of the assets of Middle West as of December 31, 1932, was $623,514,849.69. The liabilities shown upon its books at that time were $62,823,604.99 less than the above amount, so that the book value of the preferred and common stock was $62,823,604.99.
A committee for the holders of serial gold notes of Middle West in the amount of $40,000,000 made an appraisal of the assets and liabilities of Middle West and made a report dated November 12, 1932. This appraisal showed assets worth $13,526,879.20 and liabilities of
Quotations on Middle West securities were as follows:
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Attempts were made to reorganize Middle West under section 77B of the Bankruptcy Act. An appraisal was made of its assets for that purpose, pursuant to a court order. The appraiser determined that the value of the assets on July 23, 1934, was $50,973,827 and that the liabilities exceeded the assets. The excess was over $15,000,000. A plan was finally agreed upon and was confirmed by the court on November 27,1935. There was a statement in the plan that the assets of Middle West were much less than its liabilities and the preferred and common stockholders had no equity in its assets. The plan provided, however, that preferred stockholders should receive one share of $5 par value stock of the new company and a warrant to purchase one additional share for each four shares of the old preferred owned. It also provided that common stockholders should receive one share of the new common and a warrant to purchase an additional share for each 100 shares of old common owned. The warrants gave the right to purchase the new share on a sliding scale beginning at $8. Although the petitioner had taken no part in the court proceedings, she received her allotment of new shares and warrants, 20.5 shares and 20.5 warrants for her 82 shares of preferred and 21.64 shares and 21.6’4 warrants for her 2,164 shares of common.
Price ranges on November 27, 1935, were as follows:
New stock_$8. 00 -$S. 25
Warrants_ 3.25 -> 3.75
Old common- . 125- . 25
Old preferred_ 2. 50 - 3.00
The Middle West Utilities Co. was being operated at the close of 1932, its common and preferred stock had a substantial book value at that time, the common and preferred stock was quoted on the exchange, and in the final reorganization in 1935 the common and pre
Decision will be entered v/nder Bule 50.