The opinion of the court was delivered by: TENNEY
This is an action pursuant to 26 U.S.C. § 7422 (1970) and 28 U.S.C. 1346(a)(1) (1970) for refund of income taxes paid by plaintiff for the calendar years 1953 and 1954. Plaintiff, in 1947, issued 30-year 3 percent debentures with a face value of $115,246,950 in exchange for shares of its own $6 preferred stock, $6 preference BB stock, and 60 cents preference B stock.
By the terms of the indenture, plaintiff was required to retire annually $1,500,000 principal amount of debentures. In 1953 and 1954 plaintiff purchased in the open market and retired in excess of $1,500,000 principal amount of debentures. Plaintiff asserts that when the debentures were issued in 1947 it received less in value for them than their face value, and alleges that the difference between the face amount of the debentures and the consideration received by it on the exchange is a "loss" within the meaning of 26 U.S.C. § 165(a) (1970), which loss may be realized as the debentures are redeemed or amortized over the life of the debentures. Treas. Reg. § 1.61-12(c) (3) (1968).
This case is before the Court pursuant to an order entered on February 11, 1971, by United States District Judge (now Circuit Judge) Walter R. Mansfield. The order was entered pursuant to an opinion dated July 23, 1970, in which Judge Mansfield denied motions for summary judgment made by plaintiff and defendant. Cities Service Co. v. United States, 316 F. Supp. 61 (S.D.N.Y. 1970). The order decreed:
". . . that this case be set down for trial in due course with the sole factual question to be resolved thereat being the value to plaintiff of the preferred and preference shares received by it in exchange for the issuance of its 3% Thirty Year Sinking Fund Debentures ("the Bonds") on May 27, 1947; and
". . . that . . . the bonds shall be deemed issued at a price equal to the value to plaintiff of the preferred and preference stocks received in exchange for their issuance on May 27, 1947; and
". . . that . . . the value of those shares to plaintiff shall be no less than $45,323,846, the value of the consideration originally received for their issuance . . . ."
On February 9, 1971, defendant's second motion for summary judgment was heard by United States District Judge Inzer B. Wyatt and denied on June 21, 1971, in an opinion reaffirming Judge Mansfield's determination. Cities Service Co. v. United States, 330 F. Supp. 421 (S.D.N.Y. 1971).
Although both Judge Mansfield's and Judge Wyatt's opinions, findings of fact and conclusions of law are incorporated herein, it will be helpful to repeat certain of the conclusions reached by Judge Mansfield in order to define the specific issue remaining.
From the evidence before him, Judge Mansfield concluded, first, "that the shares were worth less than the face amount of the debentures", and, second, "that the 1947 exchange did not constitute a redemption". 316 F. Supp. at 66. "In conclusion we view the 1947 issuance of debentures as an exchange and not a redemption. . . . However one chooses to measure the consideration they gave up, there is every indication that it was substantially less than the face amount of the debentures they received." Id. at 69. On the motion for summary judgment, plaintiff, relying principally on the Court of Claims' decisions in Erie Lackawanna R.R. v. United States, 190 Ct. Cl. 682, 422 F.2d 425 (Ct. Cl. 1970) and Missouri Pacific R.R. v. United States, 192 Ct. Cl. 318, 427 F.2d 727 (Ct. Cl. 1970), cert. denied, 402 U.S. 944, 29 L. Ed. 2d 112, 91 S. Ct. 1618 (1971), argued not only that the original cost of the preferred and preference shares represented the minimum value for determining its loss or discount, but also that this figure represented the maximum. Judge Mansfield disagreed with the latter proposition holding:
"Although a taxpayer, upon issuance of bonds in exchange for its shares, may not claim a loss based upon a decline in the market price of the shares below the price realized by it upon their original issuance, it does not follow that the shares or obligations cannot turn out to have a greater value to the taxpayer than their original issue price". 316 F. Supp. at 72.
It is interesting to note that on the basis of Judge Mansfield's opinion the Court of Claims modified its prior opinion in Missouri Pacific, supra, and held that the original issue or cost price did not represent the ceiling value for the purpose of calculating debt discount. Missouri Pacific R.R. v. United States, 193 Ct. Cl. 257, 433 F.2d 1324 (1970), cert. denied, 402 U.S. 944, 29 L. Ed. 2d 112, 91 S. Ct. 1618 (1971). Judge Mansfield further observed that
"even though the accrued and unpaid accumulated dividends did not constitute a firm obligation for which the plaintiff had received any consideration, the preferred and preference shareholders could use the dividend provisions of the charter to preclude plaintiff's management from paying any dividends on the common and to restrict the uses to which plaintiff's earnings could be put." 316 F. Supp. at 72.
He concluded that "[the] actual value to the taxpayer can be determined only after consideration of all relevant data, including the market value of the shares, the financial condition of the taxpayer at the time of the exchange, its profits prospects and expert opinion." Id. at 72-73.
In accordance with Judge Mansfield's opinion and the order entered pursuant thereto, plaintiff called three experts in the fields of corporate finance, value analysis, economics and business management and has submitted other evidence. These ...