Appeal from a summary judgment in favor of the government entered in the District of Connecticut, T. F. Gilroy Daly, Chief Judge, in a tax refund action on the ground that the corporate taxpayer was not entitled to a deduction for original issue discount under I.R.C. § 1232 since the taxpayer's debentures were issued pursuant to a reorganization within the meaning of I.R.C. § 368(a)(1).
Timbers, Van Graafeiland and Newman, Circuit Judges.
Appellant Microdot, Inc. (Microdot) appeals from a judgment entered May 27, 1983 in the District of Connecticut, T. F. Gilroy Daly, Chief Judge, upon the recommendation of Magistrate Thomas P. Smith, granting the government's motion for summary judgment and denying Microdot's motion for summary judgment in a tax refund action commenced by Microdot to recover federal corporate income taxes for the calendar year 1975 in amount of $44,612, plus interest, claimed to have been erroneously assessed and collected.
The district court held that Microdot's issuance of debentures in exchange for nearly 10% of its outstanding common stock was a reorganization within the meaning of I.R.C. § 368(a)(1)*fn1 and that accordingly, under I.R.C. § 1232(b)(2), Microdot incurred no original issue discount and could take no corresponding deduction. This appeal followed. We affirm.
The facts, having been stipulated, are not in dispute.
Microdot is a Delaware corporation with its principal office in Darien, Connecticut. On April 7, 1975, Microdot issued, pursuant to an exchange offer to its shareholders, $6,064,400 principal amount of a new issue of 10% Subordinated Sinking Fund Debentures, due February 1, 2000, in exchange for 404,298 shares of Microdot common stock. Stock was exchanged at the rate of $15 principal amount of debentures per share of stock. Each debenture was redeemable at $100 at maturity.
On the day after this exchange, a portion of the issue of debentures was traded over the counter at a price of $75 per $100 principal amount of debenture. The aggregate fair market value of the issue of debentures on the first day they were traded was $4,548,300. Microdot claims that the difference between the face amount of the debentures and the fair market value -- $1,516,100 -- represented an original issue discount within the meaning of I.R.C. § 1232(b)(1), entitling it to an amortized deduction in amount of $75,528 for the calendar year 1975.
In accordance with Treasury Regulations, Microdot sent a Form 1099-OID to each of the debenture holders, advising them of their proportionate share of the original issue discount reportable as income on their individual tax returns. Microdot filed information returns accordingly with the Internal Revenue Service (IRS).
On September 25, 1979, the IRS assessed additional income tax in amount $146,246, plus interest in amount $33,717, against Microdot for the calendar year 1975. Part of this additional tax resulted from the IRS" disallowance of the deduction taken by Microdot in the amount of $75,528 for what it claimed to be the first years' amortization of original issue discount. On October 10, 1979, Microdot paid the assessed amounts. On June 3, 1980, it filed a timely claim for refund of income tax paid. The claim sought the additional tax paid as a result of the disallowance of the original issue discount deduction.
The IRS neither allowed nor disallowed the claim for refund within six months. Microdot consequently commenced the instant action in the district court on March 31, 1981.
After the pleadings were closed, the parties filed a stipulation of facts. The parties thereupon filed cross-motions for summary judgment which the court referred to a magistrate. On March 28, 1983, the magistrate recommended that Microdot's motion be denied and that the government's motion be granted. These recommendations were accepted by the court and judgment was entered as stated above.
Despite Microdot's able written and oral arguments in our Court, we hold, for the reasons set forth below, that the 1975 exchange of debentures for common stock was a ...