Thе State Revenue- Commissioner disallowed certain interest deductions of the taxpayer, Snyder Brothers Company, on its income tax returns for several years and issued an execution for the deficiency in income tax payments сreated thereby. To the executions the taxpayer filed its affidavit of illegality alleging that the interest deducted and which the Revenue Commissioner disallowed was interest paid upon an indebtedness evidenced by certain debentures of the taxpayer and was therefore deductible under Code § 92-3109. The taxpayer then made a motion for summary judgment attaching thereto an affidavit of its secretary which showed that from April 1, 1947, until November 30, 1957, Franklin D. Snyder and Floyd R. Snyder, who are brothers, carried on the business of manufacturing industrial furniture finishes as a partnership under the name Snyder Brothers Company, in which each was an equal partner; that on November 30, 1957, Franklin D. Snyder and Floyd R. Snyder transferred substantially all of the assets of such partnеrship to a new Georgia corporation which they had organized under the name Snyder Brothers Company; that in exchange for the assets of such partnership transferred to the company, the company assumed liabilities of such partnership in the amount of $202,568.13, and issued capital stock of the company having a par value of $100,000, plus 6% subordinated debentures in the principal amount of $140,000; that the book value of the assets transferred to the company wаs $450,382.87, which was $7,814.74 more than the sum of such assumed liabilities, capital stock and debentures, and this excess was shown on the books of the company as *93 "paid-in surplus”; that as equal partners in the transferring partnership, Franklin D. Snyder and Floyd R. Snyder eaсh received one-half of such capital stock and debentures of the company; that upon the original issuance of such debentures, Franklin D. Snyder made gifts of all the debentures to which he was entitled to his minor children by having them issued to Gеorge B. Ramsay, Jr., as custodian for such children under the laws of Georgia. Floyd R. Snyder also made gifts of debentures in the principal amount of $15,000 to his minor children upon original issuance by having them issued to George B. Ramsay, Jr., as custodian for such children, and thereafter Floyd R. Snyder made gifts of additional debentures in the principal amount of $45,000 to his minor children by transferring them to such custodian; that interest has been paid on all of the outstanding debentures in each year as it became due; that the debentures have at all times been treated as indebtedness on the books of the company, and all payments of interest have been shown as such. Attached to the affidavit was a facsimile of the debentures which rеads as follows: "6% Subordinated Debenture, Snyder Brothers Company, Toccoa, Georgia, due December 1, 1977. For value received, the undersigned Snyder Brothers Company, a Georgia Corporation, and herein referred to as 'The Company’ hereby promises to pay to the registered holder hereof, on December 1, 1977, at the principal office of the Company in Toccoa, Georgia, the principal sum of__with interest from date at six per cent рer annum, payable semi-annually on June 1 and December 1 in each year. This debenture is transferable only on the books of the Company by proper written assignment duly executed by the registered holder hereof and the presentation of this debenture at the office of Company in Toccoa, Georgia, for notation of such transfer hereon and on the books of the Company. The Company may deem and treat the registered holder of this debenture as the absolute owner thereof for all purposes. The Company may make payment of interest hereon by mailing check to the registered holder at the address shown *94 on the books of the Company, provided such check is duly paid upon due presentation thereof to the bank on which drawn. The Company may refuse to make any requested transfer until furnished with evidence satisfactory to it that the transfer has been duly executed by the registered holder hereof and that such registered holder is duly authorized to make such requested transfer. The Company shall have the privilege of redeeming this note at any time prior to maturity at the office of the Company in Toccoa, Georgia, by giving 30 days nоtice in writing by mail addressed to the person in whose name this note is registered and by paying the principal amount thereof plus accrued interest. This note is one of a series of Subordinated Debentures (hereinafter referred to аs 'Notes’) aggregating $140,000 in principal amount, issued or about to be issued by the Company, All of which will become due on December 1, 1977. All the Notes of this series are payable pari passu, and the holders shall have no preference over each other. Anything in this note to the contrary notwithstanding, the indebtedness evidenced by this note and all notes of this series shall be subordinate and junior in right of payment, to the extent and in the manner hereinafter set forth, to all indebtedness оf the Company whether outstanding at the date of this note or incurred and not subordinated after the date of this note, (such indebtedness of the Company to which the notes are subordinate and junior being sometimes hereinafter referred to as 'superior indebtedness’): (a) In the event of any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Company or to its creditors, as such or to its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company, whether or not involving insolvency or bankruptcy, then the holders of the superior indebtedness shall be entitled to receive payment in full of all principal and interest on all superior indebetedness before the holders of the notes are entitled to receive any payment on account of principal or interest *95 upon the notes, and to that end the holders of the superior indebtedness shall be entitled to receive for application in payment thereof any payment or distribution of any kind or character, whether in cash or prоperty or securities, which may be payable or deliverable in any such proceedings in respect of the notes; and (b) In event the principal or any interest payment on these notes becomes in default, then the holders оf the superior indebtedness outstanding at the time of such default shall be entitled to receive payment in full of principal and interest on all superior indebtedness before the holders of the notes are entitled to receive аny payment on account of the principal or interest upon the notes. No present or future holder of superior indebtedness shall be prejudiced in his right to enforce subordination of the notes by any act or failure to act on the part of the Company. The provisions of the preceding paragraph and its two sub-paragraphs are solely for the purpose of defining the relative rights of the holders of superior indebtedness on the one hand, аnd the holders of the notes on the other hand, and nothing herein shall impair, as between the Company and the [hjolder of any note, the obligation of the Company, which is unconditional and absolute, to ,pay to the holder hereof the principal and interest thereon in accordance with its terms, nor shall anything herein prevent the holder of a note from exercising all remedies otherwise permitted by applicable law or hereunder upon default, subjeсt to the rights, if any, under the proceeding [sic] paragraph and its two subparagraphs of holders of superior indebtedness to receive cash, property or securities otherwise payable or deliverable to the holdеrs of the notes. The Company agrees, for the benefit of the holders of superior indebtedness, that in the event the principal or any interest payment on this note becomes in default; (a) the Company will give prompt notice in writing оf such happening to the holders of superior indebtedness, and (b) all superior indebtedness shall forthwith become immediately due and payable upon demand, regardless of the expressed maturity thereof.” The State Revenue Commissioner also *96 made a motion for summary judgment presenting certain correspondence between the taxpayer and its attorney in reference to the debentures which shows the attorney’s approval of the issuance оf the debentures although an officer of the taxpayer’s bank had some differences of opinion thereon.
The Commissioner relies primarily upon a case decided adversely to the taxpayer, as to a deduction оf interest from federal income taxes, decided by the Fifth Circuit Court of Appeals in United States v. Snyder Brothers Co., 367 F2d 980, certiorari denied,
However, we cannot agree that no issues of material fact existed either as to the State Revenue Commissiоner or as to the taxpayer, for the reason that we cannot accept as true value the book value of the assets. Until the true value of these assets is determined this court cannot decide as a matter of law thаt there is a proper ratio to debt financing or whether it reflects a gross imbalance or whether the value of the property transferred to create the debt is less than the amount of the debt created. The burden to prоve true value rested respectively upon the movant in each motion for summary judgment.
Bagley v. Firestone Tire &c. Co.,
Judgment affirmed in part; reversed in part.