The opinion
Black,
dissenting: I dissent on the second point. This point is stated in the majority opinion as follows:
The other question is whether a corporation which acquires all of the assets and assumes the liabilities of another, including the liability on outstanding *477 bonds, in exchange for its capital stock ¡may amortize over the remaining life of the bonds the unamortized discount and expense incidental to the original issuance of the bonds under the circumstances here present.
The majority opinion gives a negative answer to that question and disallows the amortization deduction claimed.
I agree that where one corporation purchases outright the assets of another and as a part of the purchase price assumes and agrees to pay prior issued bonds of the selling corporation, the purchasing corporation is not entitled to set up on its books the remaining unamor-tized discount and expenses incurred in the original issuance of the bonds and take an annual deduction of unamortized discount spread ratably over the remaining life of the bonds. The reason for this is because a transaction whereby assets are sold by one corporation to another is one in which gain or loss is recognized and the selling corporation is then and there entitled to take a deduction of its remaining unamortized discount and expenses connected with the previous issuance of its bonds.
That seems to be the main ground upon which the court based its decision in Turner-Farber-Love Co. v. Commissioner, 68 Fed. (2d) 416, and New York C. & St. L. R. R. Co. v. Burnet, 64 Fed. (2d) 152, both cases cited by the majority opinion in support of the conclusion therein reached. The court emphasized this point in the Turner-Farber-Love case, wherein it said:
There was obviously no merger or consolidation of the two companies, but an outright sale of the assets of the one to the other. The vendor, until dissolved, continued to be a corporation. The sale of its assets did not destroy its identity, and it might have continued legally thereafter to do any business its corporate charter authorized. It might have filed a tax return and claimed a loss on the sale of its bonds or on the sale of its other assets. Granted it had the right to amortize its bond discount, petitioner, in purchasing its assets, did not succeed to this right any more than it would have succeeded to the right to set up its losses occurring prior to the purchase. Athol Mfg. Co. v. Commissioner, (C. C. A.) 54 Fed. (2d) 230.
So, where there has been a sale of the assets of one corporation to another and the purchasing corporation assumes the bonded indebtedness of the debtor corporation as a part of the consideration for the assets purchased, I agree that the purchasing corporation has no right to avail itself as a deduction from its own gross income, of the unamortized discount of the selling corporation. If the facts in the instant case showed an outright sale of assets of one corporation to the other, I would agree to the result reached in the majority opinion. But I think the situation is altogether different where there is a nontaxable exchange under the reorganization provisions of the applicable revenue acts. In that sort of a situation no gain or loss is recognized in the transaction and the corporation to which *478 the assets are transferred takes the same basis of cost for depreciation and gain or loss on the subsequent disposal of the assets as the transferor corporation had.
In a very real sense the transferee corporation steps into the shoes of the transferor corporation. Speaking on this point, the court in New York Central Railroad Co. v. Commissioner (a case involving facts somewhat akin to those we have here), 79 Fed. (2d) 247, said:
In Western Maryland Ry. Co. v. Commissioner, 33 F. (2d) 695, (C. C. A. 4) supra, it was held that a consolidated corporation steps into the place of the constituent corporations and is entitled to deduct amortized discount on bonds issued by them. We think this decision is sound and should be followed in the case at bar. The consolidated corporation does not succeed to the rights and liabilities of the constituent companies as a purchaser but as a successor by operation of law. See Cortland Specialty Co. v. Commissioner, 60 F. (2d) 937, 939 [11 Am. Fed. Tax Rep. 857) (C. C. A. 2); Commissioner v. Oswego Falls Corp., 71 F. (2d) 673, 676 [14 Am. Fed. Tax Rep. 311] (C. C. A. 2). The assets of the consolidated corporation have the same cost basis as they had when held by the old companies and are subject to the lien of the bond issues. Hence the consolidated corporation will suffer a loss when it pays the bonds at par, and the regulations as to spreading this loss over the life of the bonds should apply. They do not in terms confine discount deductions to the issuing corporation, and should not be construed to do so. If the new corporation cannot take the deduction, no one can, for the old companies sustained no loss when the consolidation was effected. As already stated the subject of amortization is the difference between the cash realized on the bonds and their par value. This difference the consolidated corporation will pay when the bonds mature, and this expenditure it should be allowed to anticipate by early amortization during the life of the bonds in order more clearly to reflect its income.
Therefore, under the facts stated in the majority opinion and the law applicable thereto, I think petitioner is entitled to prevail on the second issue as well as the first.
Smith, Trammell, Arundell, and Van Fossan agree with this dissent.