## Facts

- An insolvent corporation’s liabilities substantially exceeded the value of its assets.
- Most unsecured creditor-noteholders formed a committee and adopted a plan to place the debtor into involuntary bankruptcy and continue the business through a newly formed corporation owned by creditors.
- In the bankruptcy sale, the creditors’ committee bid in substantially all assets for $150,000.
- A new corporation was formed and received the assets from the committee in exchange for its stock; the stock was issued to the old corporation’s creditors in satisfaction of their claims, eliminating the old shareholders.
- Non-assenting minority creditors were paid cash, and the business operations continued without interruption under substantially the same management.
- For later depreciation and depletion, the new corporation used the old corporation’s asset basis; the Commissioner asserted the basis should be the bankruptcy sale price.

## Issues

1. Whether the acquisition of substantially all assets of an insolvent corporation through a creditor-controlled bankruptcy plan constituted a “reorganization” under § 112(i)(1)(A) of the Revenue Act of 1928.
2. Whether the continuity-of-interest requirement can be satisfied by creditors who become equity owners when an insolvent debtor’s shareholders are eliminated.
3. Whether the successor corporation’s basis for depreciation and depletion was a carryover basis from the predecessor or a cost basis measured by the bankruptcy sale price.

## Decision

- The Court held the transaction qualified as a statutory “reorganization” under § 112(i)(1)(A).
- Continuity of interest existed because, upon enforcing claims in bankruptcy against an insolvent debtor, creditors effectively replaced shareholders as the proprietary owners.
- The intermediate committee’s purchase at the bankruptcy sale did not prevent reorganization treatment because the steps were part of an integrated plan.
- The Court affirmed the judgment sustaining the taxpayer’s use of the predecessor’s basis for depreciation and depletion.

## Legal Principles

- A creditor-driven bankruptcy restructuring can qualify as a “reorganization” when a new corporation acquires substantially all assets as part of a single plan and creditors receive equity in substitution for claims.
- For an insolvent debtor, continuity of interest may be supplied by creditors who obtain effective control and ultimately receive the new equity; continuity need not rest with eliminated shareholders.
- A multi-step sequence (bankruptcy filing, committee purchase, transfer to a new corporation for stock) is treated as one integrated transaction when the steps are interdependent parts of the reorganization plan.
- The full-priority rule permits excluding shareholders entirely when the debtor is insolvent; creditor ownership in the reorganized enterprise is consistent with nonrecognition reorganization treatment.
- When the transaction is a qualifying reorganization, the successor generally takes a carryover basis in the acquired assets rather than a basis equal to the judicial-sale price.

## Conclusion

The Court treated the bankruptcy sale and subsequent transfer to a new, creditor-owned corporation as an integrated reorganization, allowing the successor to use the predecessor’s asset basis for depreciation and depletion because creditors supplied continuity of interest in an insolvency setting.


Helvering v. Ala. Asphaltic Limestone Co., 315 U.S. 179 (1942)