Petition for Writ of Certiorari — Helvering v. Metropolitan Edison Co.

7

Se INDEX

: ve an gulations inv olved Hip aor Sok wicka ae en

ee ra ee ne ee :

ification of errors to be urged.__..---- ----- --- Ae 12

ons for Pranting the writs............._.._-_.-_..- ee. 3

CITATIONS

© American Gas & Elec. Co. v. Commissioner, 85 F. (22) 527. 16,17

Americon Gas & Electric Co. v. United States, 17 F. Supp.

3 on ES ES 5 gr eee 6 eR aa 16, 17

B= Athol Mfg. Co. v. Commissioner, 54 ¥. (24) 230__._.-__-- 17

i - Connecticut Electric Service Co. v. Commissioner, 35 B. T. A.

me General Gas & Elec. Corp. v. Commissioner, 98 F. (2d) 561. 13

ce «6. Gt. W. Power Co. v. ini aisatanie eee. 0 OER es ooo eee 18

me. Helsering v. Union Pecifiz Co., 293 U. 8. 282......._---- 18

x - Tlinois Power & Light Corp. v. Commissioner, 33 B. T. A.

B a atc: mii eis e ae Gaeads Ss hat hae aay a, baa 17

ee’ 6. Merwine v. Mi. Pocone Light & Imp. Co., 304 Pa. 517__- 15

New Colonial Co. v. Heirering 292 U.S. 435___-.____--. 16, 17

pe = New York Cert. R. Co. v. Commissioner, 79 F. (24) 247,

certiorari denicd, 296 U. S. 653__ _- a 17

E New York, C. & St. L. R. Co. v. Burnet, 64 F. (2d) 152___- 16

= Pennsyleania Co., etc. v. Commissioner, 75 F. (2d) 719_-_-- 18

Ee Turber-Farber-Lore Co. v. Helvering, 68 F. (24) 416. __-- 16

& Westerr, Maryland Ry. Co. v. Commissioner, 33 F. (24) 695 17

> York Haven Weter & Po-rer Co. v. Public Service Commis-

a ston, 287 Pa. 241...___-- Sornirale es ok ar aad are cle 10

= Purdon’s Pennsvivania Statutes, Annotated (Permanent

f Fd.), Title 15:

s Sec. 421____.- Seta ; ; 27

: Gece. 422........ hes 27

q Sec. 423. _. - 15, 28

a Sec. 595._____ : __..... 6,10, 13, 29

110492—38———-1

It

Statutes—Continned.

Revenue Act of 1926, c. 27, 44 Stat. 9:

Miscellaneous:

Rule 38 of the Rules of the Supreme Court of the,United

Treasury Regulations 69:

eG OGOs Jae ese lose a teeta tas eowenereun eee 26

nthe Supreme Court of the Bnited States

OcroBeR TERM, 1938 ~

No. 486

ivy T. HELVERING, COMMISSIONER OF INTERNAL

REVENUE, PETITIONER

v.

METROPOLITAN Epison CoMPANY

No. 487

Guy T. HELVERING, CoMMISSIONER OF INTERNAL

REVENUE, PETITIONER

v.

PENNSYLVANIA WATER & POWER COMPANY

ETITION FOR WRITS OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE THIRD

CIRCUIT

The Solicitor General, on behalf of the Commis-

ioner of Internal Revenue, prays that writs of

ertiorari issue to review the judgments of the

ireuit Court of Appeals for the Third Circuit

ntered in the above causes on August 23, 1938,

eversing the decisions of the Board of Tax

ippeals.

2

OPINIONS BELOW

The opinion of the United States Board of Tax

Appeals in the Metropolitan Edtson Company case

(R. 59-83) is reported in 35 B. T. A. 1110, and that

of the Circuit Court of Appeals (R. 95-100) is

reported in 98 F. (2d) 807. The opinion of the

Board of Tax Appeals in the Pennsylvania Water

d: Power Company case (R. 32-44) is reported in

36 B. T. A. 467, and that of the Cireuit Court of

Appeals (R. 82-84) is reported in 98 F. (2d) 812.

JURISDICTION

The judgments of the Circuit Court of Appeals

in the two cases were entered August 23, 1938.

(Metropolitan Edison case, R. 100; Pennsylvania

Water case, R. 84-85.) The jurisdiction of this

Court is invoked under Section 240 (a) of the

Judicial Code, as amended by the Act of February

13, 1925."

QUESTIONS PRESENTED

1. The taxpayer, a Pennsylvania corporation,

acquired all of the assets of its wholly owned sub-

sidiary in consideration of the delivery to the sub-

*The two cases were not consolidated, eithc: before the

Board or the Circuit Court of Appeals, but both tribunals

recognized that the two@ cases presented similar questions

and the Circuit Court of Appeals decided the Pennsy/vania

Water & Power Company case upon the authority of the

Metropolitan Edison Company case, and entered its judg-

ments in the two cases on the same day. For that reason,

we are filing a single petition for writs of certiorari.

l— 2 — ie i ian a a. Ce- . . -

wo re.

3

iary of all of the subsidiary’s capital stock and

assumption by the taxpayer of all of the sub-

iary’s indebtedness. This transaction was car-

d out in accordance with Section 595, Title 15,

rdon’s Pennsylvania Statutes, infra. The tax-

ver, the parent company, retired bonds issued at

liseount by its furmer subsidiary. Is the tax-

ver entitled to deduct from its gross income the

amortized bond discount and expense in the year

the retirement of the bonds?

. The facts are the same as in Question 1, ex-

t that the transaction was not carried out under

y Pennsylvania statute and the subsidiary was

- immediately dissolved. Is the taxpayer en-

ed to deduct the unamortized bond discount and

ense in the year of the retirement of the

ids ??

STATUTES AND REGULATIONS INVOLVED

The statutes and regulations involved will be

nd in Appendices A and B, infra, pp. 21-30.

STATEMENT

The facts in these cases are not in dispute and

found by the Board of Tax Appeals are sub-

ntially as follows:

The first question is presented in both cases. The JJetro-

tan Edison Company case presents also the second

tion.

4

METROPOLITAN EDISON OASE

The taxpayer, the Metropolitan Edison Con-

pany, is a Pennsylvania corporation which in 1927

and 1928 filed consolidated returns in behalf of

itself and its subsidiaries, (R. 62-63.)

The Metropolitan Power Company, also a Penn-

sylvania corporation, was organized in 1923 as a

wholly owned subsidiary of the taxpayer. The

taxpayer in 1923 purchased and guaranteed and

sola to the publie all of the bonds issued by the

Metropolitan Power Company, purchased all of

its stock, and loaned to that company on open

account approximately $3,000,000. The bonds, m

the amount of $3,250,000, were issued to the tax-

payer at 90.and, after endorsement and guaran-

tee by the taxpayer, were sold to the public at the

same price. (R. 63-64.)

On February 15, 1927, the Public Service Com-

mission of the State of Pennsylvania issued a Cer-

tificate of Public Convenience authorizing the

Metropolitan Power Company tc sell all of its prop-

erty except public franchises to the taxpayer.’ The

actual transfer occurred on February 28, 1927, the

assets and liabilities of the Metropolitan Power

Company being transferred as they stood on its

books and a deficit from operations being charged

*The Board found that the petition specifically states

that the Metropolitan Power Company had no public fran-

chises and for that reason a sale was resorted to rather than

amerger. (R. 64.)

3D

against the surplus of the taxpayer. The taxpayer

surrendered the stock of the Power Company for

cancellation and the latter became inactive on Feb-

ruary 28, 1927, and was dissolved on January 8,

1998. (R. 64.) On February 28, 1927, the tax-

payer assumed the liability of the Metropolitan

Power Company’s $3,250,000 bond issue, the pay-

ment of which had been guaranteed by it, and the

intercorporate debt of the Metropolitan Power

Company to the taxpayer in the sum of $3,000,000

was cancelled. (R. 64.)

The bonds in question were callable on thirty

days’ notice at a premium, and were called for re-

demption and redeemed during 1927, the taxpayer

paying a premium of $243,645 on their retirement.

(R. 64-65.)

At the time of the redemption of the bonds in

question there remained of the discount and ex-

pense incurred on the issuance of the bonds the

sum of $308,097.80 unamortized by annual deduc-

tions. That amount was claimed as a deduction in

the return of the taxpayer for 1927. (R. 61, 65.)

During the year 1928 the taxpaver also retired

certain obligations of the Cumberland Valley Light

& Power Company, the York Haven Water &

Power Company, the Hanover Power Company,

and the Pennsylvania Edison Company. (R. 66-

67.) Those companies also were former subsidi-

aries of the taxpayer, whose obligations it had

assumed when it took over their assets. (R. 68.)

6

The so-called mergers of all those companies with

the taxpayer were effected under the Act of the

General Assembly of the Commonwealth of Penn-

sylvania, enacted April 29, 1874, and the amend-

ments and supplements thereto. (See Section 595,

Title 15, Purdon’s Pennsylvania Statutes, Appen-

dix B, infra, p. 29; R.68.)* They were made upon

application, with the approval of the Public Serv-

ice Commission of Pennsylvania, under Section

3 (ec), Article III, and Sections 18 and 19, Article

V, of the Public Service Company Law, and fol-

lowed the issuance of a report, order and certifi-

eate of public cOnvenience. (R. 68.) In each

instance the documents relating to the transfer of

assets to the taxpayer referred to the transaction

as a sale of assets by the subsidiary to the parent

corporation. (R. 68, 77-78.)

At the time that these obligations were redeemed

there existed wnamortized discount_and expense

with respect to them in the aggregate sum of $752,-

481.26. (R. 67.) The taxpayer claimed a dedue-

tion of that amount in its return for 1928. (R. 68.)

On the basis of the disallowance of the deduc-

*The provision in question is Act of Apri] 29, 1874,

P. L. p. 73, section 23, as amended by Act of April 17, 1876,

P. L. p. 30, section 5, and Act of June 2, 1915, P. L. p. 724.

section 1. An inadvertent error at R. 68 refers to the !ast

Act as that of April 2, 1915. Although the manner of

presentation in the findings might suggest otherwise, the

assets of each of the companies were acquired pursuant to —

the same statute.

, ee ee. ee ee

7

ions for unamortized discount and expense related

10 these bonds and the Metropolitan Power Com-

pany bonds, and because of other adjustments not

here involved, the Commissioner of internal Rev-

nue determined deficiencies of $101,395.24 and

$320,017.64 for 1927 and 1928, respectively. (R. 61.)

Upon appeal the Board of Tax Appeals sustained

he Commissioner on this issue (R. 75) and deter-

mined deficiencies of $21,657.13 aud $78,620.55 for

[927 and 1928, respectively. (R. 83.)°

The Circuit Court of Appeals reversed the Board.

[t held that the transactions by means of which the

faxpayer absorbed the Cumberland Valley Light

t Power Company, the York Haven Water &

Power Company, the Hanover Power Company,

and the Pennsylvania Edison Company, had all of

the essential elements of a merger; that the sub-

sidiaries ceased to exist by overation of law; that

the taxpayer, an existing corporation before the

alleged merger, continued to exist thereafter and

became liable for the debts of the absorbed cor-

poration, both under the contract and by operation

of law ; and hence that it could deduct the unamor-

‘ized bond discount and expense with respect to the

bonds of the subsidiaries.

*It should be noted that the Board (R. 78-81) held that

he taxpayer might deduct unamortized bond discount and

Xpense with respect. to bonds issued by another subsidiary,

he Metropolitan Electric Company, for the reason that in

hat instance there was a strict merger or consolidation

pursuant to the Act of May 3, 1909, P. L. 408, sec. 1. See

Section 421, Title 15, Purdon’s Pennsylvania Statutes, Ap-

bendix B, infra, p. 27.

tt eee

8

The court held further that while the procedure

by which the taxpayer acquired the assets and as-

sumed the liabilities of the Metropolitan Power

Company was not within the provisions of any

merger statute, the essential elements of such a

merger were present, it not being material that the

Power Company did not automatically cease to ex-

ist upon completion of the transaction, since it was

left without stockholders or property and there

was a de facto dissolution. Accordingly, the court

held that the unamortized bond discount and ex-

pense with reference to the Metropolitan Power

Company bonds could be deducted.

PENNSYLVANIA WATER CASE

On August 9, 1924, the taxpayer, a Pennsylvania

corporation, organized a subsidiary, the Holtwood

Power Company, under the laws of Pennsylvania.

It acquired all of the stock of that company except

that fifty qualifying shares were placed in the

names of seven directors, the taxpayer remaining

‘the equitable owner of the latter shares. (R. 33.)

With the funds paid by the taxpayer to its sub-

sidiary for its capital stock and the proceeds re-

ceived from the sale of the bonds hereinafter men-

tioned, the subsidiary erected an auxiliary steam-

generating plant on a site immediately adjacent to

the taxpayer’s hydroelectric plant." (R. 33-34.)

“it appears that the subsidiary was organized because the

energy generated at the taxpayer's plant was insufficient to

serve its customers and its counsel believed that its charter

did not permit it to generate electricity by steam. (R. 3%.)

9

By an agreement between the two companies

dated August 26, 1924, and effective until January

1, 1975 (R. 60-64), the subsidiary agreed to deliver

electric power of the steam generating plant to the

taxpayer, which in turn agreed to pay all obliga-

tions and expenses of the subsidiary and a net re-

turn of 8 per cent on the par value of all its securi-

ties at any time outstanding. It was specifically

provided that the taxpayer should pay a sum to

provide for amortization of debt, discount, and se-

curity issue expense and the expenses attending the

issue, registration and transfer of the capital stock

and bonds then or thereafter issued and outstand-

ing, and interest on bonds or other indebtedness.

(R. 34, 60-64.)

From the date of the completion of the steam

plant on August 16, 1925, to December 21, 1927, all

electric energy generated at fie steam plant (which

was not used constantly) was delivered to the tax-

payer. The taxpayer’s officers and employees

managed the plant without compensation from the

subsidiary and it was operated as a department of

the taxpayer. (R. 31.)

The funds for construction were secured in part

by a mortgage and deed of trust to the New York

Trust Company, whereby all the subsidiary’s prop-

erty was transferred to the trustee to secure a bond

issue which was not to exceed $25,000,000. It was

provided that the bonds might be issued in series

and that the first series, limited to $2,750,000, desig-

10

nated Series A and bearing 6 per cent interest,

should be dated September 1, 1924, should mature

September 1, 1954, and might be redeemed on vari-

ous dates at various premiums. (R. 35.)

Series A bonds in the amount of $2,750,000 were

issued by the subsidiary at a discount of $137,500,

and it incurred an expense of $25,249.87 in issuing

them. Deductions for amortized bond discount and

expense were claimed in the consolidated returns

of the taxpayer and its affiliate for the years 1924

to 1927. Because of the obligation of the taxpayer

to make payments to its subsidiary for these items,

which payments were deductible as business ex-

penses, the subsidiary reported such payments as

income. (R. 35-36.)

On October 4, 1927, the taxpayer surrendered its

corporate power to store, transport and supply

water in order to be in a position to effect a merger

or consolidation with its subsidiary in accordance

with the rules laid down in York Haven Water ¢

Power Co. v. Public Service Commission, 287 Pa.

241. Thereafter, a ‘‘short form of merger’’ was

effected pursuant to the Pennsylvania statutes pre-

viously mentioned. (See Section 595 of Title 15 of

Purdon’s Pennsylvania Statutes, Appendix B,

infra, p. 29; R. 36-37.)'

Pursuant to the procedure described in those

provisions the subsidiary, by deed dated December

* This transaction was treated by the Commissioner as 4

nontaxable exchange. (R. 37.)

11

21, 1927, transferred all of its franchises and prop-

erty, real, personal and mixed, to the taxpayer, the

sole consideration for the transfer being the deliv-

ery to the subsidiary of its capital stock held by the

taxpayer and the taxpayer's assuming the indebted-

ness of the subsidiary. Thereupon the subsidiary

ceased to exist. (R. 37.)

On March 1, 1928, the taxpayer sold to the public

a $6,000,000 issue of its own bonds for the purpose

of retiring some of its own bonds and the Holt-

wood bonds. The latter were retired on March 1,

1928, at a 7 per cent premium amounting to $192,-

500. (R. 37-38.)

On January 1, 1928, the unamortized discount

and expense applicable to the Holtwood bonds was

$145,159.52. (R. 38.)

In its income tax return for 1928 the taxpayer

edaimed a deduction of $904.42 for amortization of

bond discount and expense for the period January

1, 1928, to February 28, 1928, and a deduction for

mamortized discount and expense, as of the

date of retirement, in the amount of $144,255.10.

(R. 38.)

The Commissioner disallowed these deductions,

made certain other adjustments which are not ma-

terial here. and determined a deficiency of $86,-

508.25. but made claim for a deficiency of only

$39,675.82 at the trial. (R. 32-33.)

Upon appeal the Board of Tax Appeals sus-

tained the Commissioner’s determination and

found a deficiency of $16,575.82. (R. 45.)

12

The Cireuit Court of Appeals reversed the

Board, holding that its decision in the Metropoli-

tan Edison Company case, rendered the same day,

controlled this case, and hence that the deductions

should be allowed.

SPECIFICATION OF ERRORS TO BE URGED

The Cireuit Court of Appeals erred:

1. In holding that a transfer of assets from one

Pennsylvania corporation to another by an agree-

ment pursuant to Section 595, Title 15, of Pur-

don’s Pennsylvania Statutes effects a merger -r

consolidation. (Nos. 486, 487.)

2. In holding that where the successor corpora-

tion under such a cu ‘tract agrees to pay the trans-

feror’s debts, it is liable for such debts by opera-

tion of law. (Nos. 486, 487.)

3. In holding that the Metropolitan Edison Com-

pany was merged or consolidated with the Cumber-

land Valley Light & Power Company, the York

Haven Water & Power Company, the Hanover

Power Company, and the Pennsvivania Edison

Company, or with any one of those companies.

(No. 486.)

4. In holding that the Metropolitan Edison Com-

pany became liable for the debts of those companies

by operation of law. (No. 486.)

5. In holding that when bonds issued by those

corporations are redeemed by the Metropolitan

Edison Company, that company should be allowed

a deduction for the unamortized discount and

expense. (No. 486.)

a

13

6. In holding that there was a merger or consoli-

dation of the Pennsylvania Water & Power Com-

pany and the Holtwood Power Company. (No.

487.)

7. In holding that the Pennsylvania Water &

Power Company became liable for the debts of the

Holtwood Power Company by operation of law.

(No. 487.)

8. In holding that when bonds issued by the Holt-

wood Company are redeemed by the Pennsylvania

Water & Power Company, that company may de-

duet the unamortized bond discount and expense.

(No. 487.)

9, In holding that the Metropolitan Edison Com-

pany beeame liable for the debts of the Metropoli-

tan Power Company by operation of law. (No.

486.)

10. In holding that when bonds issued by the

Metropolitan Power Company are redeemed by the

Metropolitan Edison Company, that company is

entitled to deduct unamortized bond discount and

expense. (No. 486.)

REASONS FOR GRANTING THE WRITS

1. The decisions of the court below are in con-

flict with the decision of the Circuit Court of Ap-

peals for the Second Circuit in General Gas &

Elec. Corp. v. Commissioner, 98 F. (2d) 561. In

that case the taxpayer, a Pennsylvania Corpora-

tion, acquired the assets of each of two subsidiaries,

surrendering the capital stock of and assuming the

14

debts of each subsidiary. The transaction was car-

ried out in accordance with Section 595, Title 15,

Purdon’s Pennsylvania Statutes (Appendix B,

infra, p. 29), hereinafter referred to as the ‘‘Short-

Form-Merger Statute.’”’ The question involved

was whether in the year of its retirement of the sub

sidiary’s bonds, 1$28, the taxpayer could deduct

the unamortized discount and expense incurred by

the subsidiaries in issuing the bonds. The Circuit

Court of Appeals held that the deductions were not

allowable to the taxpayer, for the reason that it was

not a successor corporation which through merger

or consolidation had carried forward the corporate

identity of the issuing corporations and assumed the

liabilities of its predecessors by operation of law.

Thus the case presented precisely the same ques-

tion as the instant cases, and involved the same

Federal statutes and regulations and the same pro-

visions of the Pennsylvania statutes." The court

there held that a transfer of assets and the assump-

tion of liabilities effected under the Short-Form-

Merger Statute of Pennsylvania did not carry for-

ward the identity of the corporation which issued

the bonds and did not make the successor corpora-

tion liable for debts of the old by operation of law,

and hence that the latter could not claim the

deduction.

* Both the instant cases involve the year 1928, but the

Metropolitan Edison case also involves the year 1927. There

was, however, no material difference in the statutes and

regulations applicable to that year.

15

In these cases the court below held directly to

he contrary, stated (R. 97) that ‘‘the petitioner

ecame liable for the debts of the absorbed sub-

idiaries both under the contract and by operation

f law’’, and allowed the deductions to the successor

orporations. Both courts considered the applica-

le Pennsylvania decisions and reached opposite

onclusions as to the effect of the Short-Form-

Merger Statute.

In construing the Pennsylvania statute the court

slow relied primarily upon the fact that the Penn-

ylvania courts had often referred to transactions

ffected under it as mergers, and upon the fact that

for a long time it was the only method for effecting

mergers as distinguished from consolidations. The

statute itself uses the word ‘“‘sale’’, and is in con-

radistinction to Section 423, Title 15, Purdon’s

Pennsylvania Statutes (Appendix B, infra, pp. 28-

9) which expressly provides that ‘‘all debts’’ of

each constituent corporation ‘‘shall thenceforth

attach to the said new corporation.”

In what the court below conceded was the only

Pennsylvania case dealing with the question

whether under that statute the successor corpo-

ration is liable for the debts of the selling corpora-

tion by operation of law, it was held that the seller’s

ereditor could not sue the successor, and the court

indicated, as a possible basis of liability of the

suecessor, only the principle of fraudulent convey-

ance. Merwine v. Mt. Pocono Light & Imp. Co.,

110492—-38—-2

16

304 Pa. 517. The court below declined to follow

that case but cited no Pennsylvania decisions over

ruling it. It is believed that the court below plainly

erred in declining to follow the Mt. Pocono case and

that the Circuit Court of Appeals for the Second

Circuit properly accepted that decision as control-

ling in its construction of the Pennsylvania statute. ‘

Thus, there is a two-fold basis for invocation of

Rule 38 of this Court. The court below not only

“‘rendered a decision in conflict with the decision

of another circuit court of appeals on the same

matter”’ but it also ‘‘decided an important question

of local law in a way probably in conflict with ap-

plicable local decisions.”’

2. In so far as the court below in the Metropoli-

tan Edison case held that the taxpayer could deduet

unamortized bond discount and expense with ref-

erence to the Metropolitan Power Company bonds,

notwithstanding the fact that the transfer of assets

and the assumption of liabilities was not effected

pursuant to any merger or consolidation statute,

its decision conflicts in principle with several de-

cided cases which have denied the deduction of

unamortized discount and expense to a successor

corporation with respect to bonds issued by a prede-

cessor, where there has not been a strict merger or

consolidation. American Gas & Elec. Co. v. Com

missioner, 85 F. (2d) 527 (C. C. A. 2nd) ; American

Gas & Electric Co. v. United States, 17 F. Supp. 151

(C. Cls.) ; Turner-Farber-Love Co. v. Helvering, 68

17

1 (2d) 416 (App. D. C.).’ See, also, New York,

'& St. L. R. Co. v. Burnet, 64 F. (2d) 152 (App.

. C.).

This conflict is not resolved by the court’s asser-

ion that there was a de facto dissolutiop of the

fetropolitan Power Company, even th@agh it was

ot formally dissolved until 1928. The only theory

pon which a successor corporation has been al-

ywed the deduction in any case is that the life of

he transferor corporation has been continued in

he new corporation, so that the deduction is not

eing allowed to a new or different taxpayer but

» the original taxpayer whose personality is con-

mued by operation of law in and through the suc-

essor corporation. American Gas & Elec. Co. v.

lommissioner, supra; American Gas & Electric

'o. v. United States, supra; New York Cent. R. Co.

. Commissioner, 79 F. (2d) 247 (C. C. A. 2nd),

ertiorari denied, 296 U. S. 653; Western Mary-

md Ry. Co. v. Commissioner, 33 F. (2d) 695

©. C. A. 4th); Illinois Power & Light Corp. v.

‘ommissioner, 33 B. T. A. 1189; Connecticut Elec-

ric Service Co. v. Commissioner, 35 B. T. A. 444.

No other theory would support the allowance of

he deduction, for one corporation is not entitled

0 a deduction which the law grants to another.

Yew Colonial Co. v. Helvering, 292 U. S. 435;

ithol Mfg. Co. v. Commissioner, 54 F. (2d) 230

C. C. A. Ist). The court below itself recognized

*That decision was cited with approval by this Court in

he case of Vew Colonial Co. v. Helvering, 292 U. 5. 435, 442.

18

that principle in an earlier decision involving a

different kind of deduction. See Pennsylvania Co.,

etc. v. Commissioner, 75 F. (2d) 719 (C. C. A. 3d).

There are no express statutory provisions rela-

tive to the allowance of a deduction for amortiza-

tion of bond discount, but Treasury Regulations

have authorized the deduction and have provided

that if the bonds are redeemed before maturity, the

unamortized bond discount may be deducted at that

time. See Article 68 of Regulations 74 ( Appendix

A, infra, p. 24). These regulations have been sus-

tained by this Court (Helvering v. Union Pacific

Co., 293 U. 8. 282), and a like principle has been

applied to expenses incurred in issuing bonds (Gt.

W. Power Co. v. Commissioner, 297 U. 8. 543).

The theory of the deduction is that the taxpayer

issuing the bonds has a loss or an expense which

should properly be spread over the life of the bonds.

This reasoning does not apply to a successor cor-

poration which has taken over the assets of the cor-

poration issuing the bonds and agreed to pay its

debts. The successor has directly incurred no ex-

pense and, even if the value of the assets received

is less than what was given for them ( including the

total of the predecessor’s obligations which it is to

pay ), no loss has then been realized. ° When the loss

is realized, deductibility would seem to depend

upon provisions dealing with the recognition of

gains or losses from sales. Any loss incurred does

not represent bond discount or expense which may

properly be amortized under the regulations.

19

The courts, therefore, should have held that in

no case does the successor corporation have the

right to the deductions for amortization of bond

discount and expense during the life of the bonds

or for the unamortized bond discount and expense

upon the retirement of the bonds. But they have

not gone so far. Instead, they have granted the

allowance where there is a strict statutory merger

or consolidation which preserves the identity of the

transferor corporations in the successor corpora-

tion and makes the successor liable for the debts

of the transferor by operation of law. We question

the soundness of such decisions. In these cases,

however, the court has gone further and allowed

the successor the deduction, even though the trans-

feror corporation itself had not been dissolved and

there was no statutory merger or consolidation.

3. The question arising in these cases is of gen-

eral importance. The decision in the Metropolitan

Edison case clearly creates a new rule for deter-

mining when a successor corporation shall be al-

lowed to deduct amortization of bond discount and

expense with respect to bonds iss~2d by its prede-

cessor ; and the decision, if allowed to stand, is likely

to create confusion regarding the correct rule to

be applied in the case of successor corporations in

all States and not merely in Pennsylvania.

_ CONCLUSION

Beeause of the direct conflict of authorities. and

because of the general importance of the question

20

involved, it is respectfully submitted that this peti-

tion for writs of certiorari should be granted.

Rosert H. Jackson,

Solicitor General.

NOVEMBER, 1938.

APPENDIX A

Revenue Act of 1928, ¢. 852, 45 Stat. 791:

Src. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be

allowed as deductions:

(a) Expenses—All the ordinary and

necessary expenses paid or incurred during

the taxable year in carrying on any trade

or business, including a reasonable allow-

ance for salaries or other compensation for

personal services actually rendered; travel-

ing expenses (including the entire amount

expended for meals and lodging) while away

from home in the pursuit of a trade or busi-

ness; and rentals or other payments _re-

quired to be made as a condition to the con-

tinued use or possession, for purposes of the

trade or business, of property to which the

taxpayer has not taken or is not taking title

or in which he has no equity.

(b) Interest.—All interest paid or ac-

crued within the taxable year on indebted-

ness, except on indebtedness incurred or

continued te purchase or carry obligations

or securities (other than obligations of the

United States issued after September 24,

1917, and originally subscribed for by the

taxpayer) the interest upon which is wholly

exempt from taxation under this title.

* * = * *

(f) Losses by corporations.—In the ease

of a corporation, losses sustained during the

taxable year and not compensated for by in-

surance or otherwise.

a * * ~ *

(21)

_ 22

Sec. 41. GENERAL RULE.

The net income shall be computed upon

the basis of the taxpayer’s annual account-

ing period (fiscal year or calendar year, as

the case may be) in accordance with the

method of see ag. | regularly employed in

keeping the books of such taxpayer ; but if

no such method of accounting has been so

employed, or if the method employed does

not clearly reflect the income, the computa-

tion shall be made in accordance with such

method as in the opinion of the Commis-

sioner does clearly reflect the income. If

the taxpayer’s annual accour*ing period is

other than a fiscal year as defined in section

48 or if the taxpayer has no annual account-

ing period or does not keep books, the net

income shall be computed on the basis of the

calendar year. * * *

Sec. 43. Periop FOR WHICH DEDUCTIONS

AND CREDITS TAKEN.

The deductions and credits provided for

in this title shall be taken for the taxable

year in which “‘paid or aecrued”’ or ‘‘paid

or incurred,’’ dependent upon the method of

accounting upon the basis of which the net

income is computed, unless in order to clear-

ly reflect the income the deductions or credits

should be taken as of a different period.

Revenue Act of 1926, c. 27, 44 Stat. 9:

Sec. 200. When used in this title—

” * * o .

(d) The terms “‘paid or ineurred’’ and

‘‘paid or accrued”’ shall be construed ac-

cording to the method of accounting upon

the basis of which the net income is com-

puted under section 212 or 232. The dedue-

tions and credits provided for in this title

shall be taken for the taxable year in whieh

23

‘paid or acerued”’ or ‘paid or incurred”,

dependent upon the methed of accounting

upon the basis of which the net income is

computed under section 912 or 232, unless in

order to clearly reflect the income the deduc-

tions or credits should be taken as of a dif-

ferent period.

Sec, 212. (b) The net income shall be com-

puted upon the basis of the taxpayer’s an-

nual accounting period (fiscal year or

calendar year, as the case may be) in aceord-

ance With the method of secounting regu-

larly employed in keeping the books of such

taxpayer; but if no such method of account-

ing has been so employed, or if the method

employed does not clearly reflect the income,

the computation shall be made in accordance

with such method as in the opinion of the

Commissioner does clearly reflect the in-

come. *

Src. 234. (a) In computing the net in-

eome of a corporation subject to the tax

imposed by section 230 there shall be allowed

as deductions:

(1) All the ordinary and necessary ex-

penses paid or incurred during the taxable

year in carrying on any trade or business,

including a reasonable allowance for salaries

or other compensation for personal services

actually rendered, and including rentals or

other payments required to be made as a con-

dition to the continued use or possession of

property to which the corporation has not

taken or is not taking title, or in which it

has no equity ;

(2) All interest paid or accrued within the

taxable vear on its indebtedness, except on

indebtedness incurred or continued to pur-

chase or carry obligations or securities

24

(other than obligations of the United -Stites

issued after September 24. 1917, and orig-

inally subscribed for by the taxpayer) the

interest upon which is wholly exempt from

taxation under this title ;

* * * * *

(4) Losses sustained during the taxable

year and not compensated for by insurance

or otherwise. * * *

Treasury Regulations 74:

Arr. 68. Sale and retirement by corpora-

tion of its bonds.—(1) (a) If bonds are

issued by a corporation at their face value,

the corporation realizes no Zain or joss.

(6) If thereafter the corporation purchases

and retires any of such bonds at a price in

excess of the issuing price or face value, the

excess of the purchase price over the issuing

price or face value is a deductible expense

for the taxable year. (c) If, however. the

corporation purchases and retires any of

such bonds at a price less than the issuing

price or face value, the excess of the issuing

price or face value over the purchase price is

gain or income for the taxable vear.

(2) (a) If bonds are issued by a corpora-

tion at a premium, the net amount of such

premium is gain or income which should be

prorated or arnortized ever the life of the

bonds. (b) If thereafter the corporation

purchases and retires any of such bonds at a

price in excess of the issuing price minus any

amount of premium already returned as in-

come, the excess of the purchase price over

the issuing price minus any amount of pre-

mium already returned as income (or over

the face value plus any amount of premium

not yet returned as income) is a deductible

25

expense for the taxable year. (c) If, how-

ever, the corporation purchases and retires

any of such bonds at a price less than the

issuing price minus any amount of premium

already returned as income, the excess of the

issuing price minus any amount of premium

already returned as income (or of the face

value plus any amount of premium not yet

returned as ineome) over the purchase rrice

is gain or income for the taxable vear.

(3) (a) If bonds are issued by a corpo-

ration at a discount, the net amount of such

discount is deductible and should be pro-

rated or amortized over the life of the bonds.

(b) If thereafter the corporation purchases

and retires any of such bonds at a price in

excess of the issuing price plus any amount

of discount already deducted, the excess of

the purchase price over the issuing price plus

any amount of discount already deducted

(or over the face value minus any amount of

discount not yet deducted) is a deductible ex-

pense for the taxable year. (c) If, however,

the corporation purchases and retires any of

such bonds at a price less than the issuing

price plus any amount of discount already

deducted, the exeess of the issuing price plus

any amount of discount already deducted (or

of the face vaiue minus any amount of dis-

count not vet deducted) over the purchase

price is gain or income for the taxable year.

Art. 176. Sale of capital stock, bonds, and

capita! assets.—A corporation sustains no

deductible loss from the sale of its capital

stock. (See article 66.) If it sells its bonds

at a discount, the amount o* such discount is

treated in the same way as interest paid,

and if it retires its bonds at a price in ex-

cess of the issuing price, such excess may

usually be deducted as expense. (See article

26

68.) Any loss sustained by a corporation

upon the sale of its capital assets, computed

as provided in sections 111-113 and articles

561-604, subject to the limitation provided

in section 118 as to the purchase and sale of

stock or securities, is deductible.

Inasmuch as Articles 545 and 563 of Regulations

69 are identical in all material respects with Articles

68 and 176 of Regulations 74 above quoted, they are

not set forth separately.

APPENDIX B

Purdon’s Pennsylvania Statutes, Annotated

(Permanent Edition), Title 15:

Src. 421. Merger authorized; exceptions ; ¢x-

clusive franchise not extended;

merger subject to act of 1907

It shall be lawful for any corporation, now

or hereafter organized under the provisions

of any general or special act of Assembly

authorizing the formation of any corpora-

tion or corporations, to merge its corporate

rights, franchises, powers, and privileges

with and into those of any other corporation

or corporations transacting the same or a

similar line of business, so that by virtue of

this act such corporations may consolidate,

and so that all the property, rights, fran-

chises, and privileges then by law vested in

either of such corporations, so merged, shall

be transferred to and vested in the corpo-

ration into which such merger shall be

mene: -* -% 3

Src. 422. Procedure; joint agreement; ap-

proval by stockholders; certtfi-

cates; approval by governor

Said merger or consolidation shall be made

under the conditions, provisions, and restric-

tions. and with the powers, herein set forth;

to wit,—

First. The directors of each corporation

shall enter into a joint agreement, under

the corporate seal of each corporation, for

the merger and consolidation of said cor-

porations; prescribing the terms and con-

ditions thereof, the mode of carrying the

(27)

28

same into effect, the name of the new cor-

poration, the number and names of the di-

rectors and other officers thereof, and who

shall be the first directors and officers, and

their places of residence, the number of

shares of the capital stock, the amount or

par value of each share, and the manner of

converting the capital stoek of each of said

corporations into the stock of the new cor-

poration, and how and when directors and

officers shall be chosen, with such other de-

tails as they shall deem necessary to perfect

the said consideration and merger; but said

agreement shall not be effeetive unless the

same shall be approved by the stockholders

of said corporations, in the manner herein-

after provided.

Second. Said agreement shall be sub-

mitted to the stockholders of each cf said

corporations, at separate special meetings or

at any annual meetings, of the time, place

and object of which respective meetings due

notice shall be given by publication, once a

week for two consecutive weeks before said

respective meetings, in at least one news-

paper in the county or in each of the

counties in which the principal office of

said respective corporations shall be s't-

Bisa! bes

Sec. 423. Effect of merger; new patent;

bonus; certificate of reports and

payment of taxes

Upon the filing of said eertificates and

agreement, or copy of the agreement, in the

office of the Secretary of the Commonwealth,

and upon the issuing of new letters patent

thereon by the Governor, the said merger

shall be deemied to have taken place, and the

29

said corporations to be one eorporation un-

der the name adopted in and by said agree-

ment possessing all the rights, privileges,

and franchises theretofore vested in each of

them; and all the estate and property, real

and personal, and rights of action, of each

of said corporations, shall be deemed and

taken to be transferred to and vested in the

said new corporation, without any further

aet or deed: Provided, That all rights of

ereditors and all liens upon the property of

each of said corporations shall continue un-

impaired, limited in lien to the property

affected by such liens at the time of the cre-

ation of the same, and the respective con-

stituent corporations may be deemed to be

in existence to preserve the same; and all

debts not of record, duties, and liabilities of

each of said constituent corporations shall

thenceforth attach to the said new corpora-

tion, and may be enforced against it to the

same extent and by the same process as if

said debts, duties, and liabilities had been

contracted by it. * * *

Sec. 595. Reduction of capital stock ; change

in valuc of shares; conveyance

of franchise and property

Any corporation created under the pro-

Visions of this act, and any corporation of the

classes named in the second section hereof,

that is now in existence by virtue of any law

of this Commonwealth, may reduce its cap-

ital stock or alter and change the par value

of the shares thereof, by a vote of the stock-

holders taken in the manner and under the

regulations prescribed in the eighteenth,

nineteenth, twentieth, twenty-first and

twenty-second sections of this act; and it

shall be lawful for any corporation in the

same manner to sell, assign, dispose of and

30

convey to any corporation created under

accepting the provisions of this act, its

chises, and all its property, real, pe

and mixed, and thereafter such corpora

Shall cease to exist, and the said pro

and franchises not inconsistent with this

shall thereafter be vested in the corporati

SO purchasing as aforesaid: Provided,

the returns required by said section shall

be filed in the office of the Secretary of

Commonwealth until each and every eo

ration, so selling, assigning, disposing,

conveying such franchises and property

Shall have filed with the Secretary of

Commonwealth a certificate from the A

tor General of the Commonwealth, setti

forth that all reports required by the

Auditor General of the Commonwealth have

been duly filed to the date of the proposed:

sale, assignment, disposition and convey-

ance; and that all taxes due the Common-

wealth of Pennsylvania have been paid up

to and including such date.

VS GOVERNMENT Printing office tose