The opinion of the court was delivered by: TENNEY
This is an action pursuant to Section 7422 of the Internal Revenue Code of 1954, 26 U.S.C. § 7422, and 28 U.S.C. § 1346(a)(1) for refund of income taxes paid by plaintiff for the calendar years 1953 and 1954. Over the past decade it has been before this Court on several prior occasions: Cities Service Co. v. United States, 316 F. Supp. 61 (S.D.N.Y. 1970) (Mansfield, J.); 330 F. Supp. 421 (S.D.N.Y. 1971) (Wyatt, J.); 362 F. Supp. 830 (S.D.N.Y. 1973) (Tenney, J.). It is currently before this Court pursuant to the decision of the Court of Appeals for the Second Circuit, affirming the decision of this Court in part and reversing and remanding in part. 522 F.2d 1281 (2d Cir. 1974), cert. denied, 423 U.S. 827, 96 S. Ct. 43, 46 L. Ed. 2d 43 (1975).
On April 28, 1977 this Court conducted a bench trial of this matter pursuant to that remand. Inasmuch as defendant believed that the stipulation of the parties entered into on remand (Pretrial Order para. III(a)) -- that "the fair market value of plaintiff's 3%, thirty year sinking fund debentures was $105,355,293 at the time of their issuance in exchange for plaintiff's outstanding preferred and preference stocks" -- answered the only factual question remaining on remand, defendant introduced no evidence at the trial. Plaintiff, electing to disregard the prior holdings in this case, called an expert in financial analysis and securities, who testified that in the financial community the consideration a corporation receives for a security is its "issue price" and that in the case where property is received instead of cash, the issue price is the value of the property received. (Tr. 10).
Plaintiff's other witness, a member of its Tax Department, identified two forms filed with its 1953 and 1954 tax returns. Each was a Form 982 indicating plaintiff's election to reduce the basis of property in lieu of reporting cancellation of indebtedness income in a specified amount.
The Court will not burden the reader with a detailed discussion of the factual background of this dispute, since it has been fully covered in the prior decisions hereinbefore cited. In brief, the claim for refund arises from a dispute between plaintiff and the Internal Revenue Service ("IRS") concerning the proper tax treatment in subsequent years of a 1947 exchange by plaintiff, an accrual basis taxpayer utilizing a calendar tax year, of all of its outstanding preferred and preference stocks for its 3% thirty-year maturity, sinking fund debentures. The aggregate principal amount of the debentures issued on May 28, 1947 in exchange for its preferred and preference stocks was $115,246,950.
During the taxable year ended December 31, 1953, plaintiff retired $1,519,500 in principal amount of said debentures through open market purchases at a total price of $1,398,357.39.
During the taxable year ended December 31, 1954, plaintiff retired $1,805,900 in principal amount of said debentures through open market purchases at a total price of $1,786,569.02.
It is the question of the proper corporate income tax treatment of these open market purchase retirements of its debentures by plaintiff which divides the parties herein.
Since plaintiff persists in arguing issues which one would have thought had been determined by the prior decisions in this case, it is necessary to review briefly those decisions establishing the law of this case.
Initially the Government moved for summary judgment on the theory that plaintiff had suffered no loss on the exchange and any loss incurred was not deductible as "discount" within the meaning of the applicable regulation. Cities Service Co. v. United States, 316 F. Supp. at 63.
Judge Mansfield rejected defendant's arguments and found instead: (1) that the corporation received less consideration in the 1947 exchange than it gave up to the preferred and preference stockholders, id. at 69; (2) that the excess of value given over value received was loss or discount, id. at 71-72; (3) that the minimum value plaintiff could claim to have received for its debentures is the original consideration it received when it issued the preferred and preference stocks it had exchanged for its debentures, id. at 72; and (4) that a trial was necessary to determine the amount, if any, by which the value of its preferred and preference stocks to plaintiff exceeded the original consideration received, id. at 72-73, and once the value of the shares to plaintiff had been determined, any refunds due it could be determined by simple mathematical calculation. Id. at 74.
Thereafter, the Government again moved for summary judgment on the theory that the reorganization proceeding
within which plaintiff had issued its debentures in exchange for its preferred and preference stocks had involved a judicial determination that the value of the debentures was equivalent to the value of the stocks for which they were exchanged. From this premise the Government concluded that the value of the debentures was equal to the value of the preferred and preference stocks and therefore plaintiff had incurred no discount on the exchange. Judge Wyatt rejected the Government's argument, finding that the issue was foreclosed by Judge Mansfield's prior decision. 330 F. Supp. at 423.
The case was then tried before this Court on the one remaining issue framed in Judge Mansfield's order:
". . . the sole factual question to be resolved . . . 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 ...