## Facts

- Hillman Coal & Coke Co. and W. J. Rainey, Inc. had extended credit to and held various claims against Davison Coke & Iron Co.
- In 1932, amid Davison’s financial distress, Hillman and Rainey formed Neville Coke & Chemical Co. to hold their Davison-related interests, including accounts, bonds, receivables, notes due in three to five years without interest, and stock.
- Davison later entered a court-supervised reorganization under § 77B of the Bankruptcy Act in 1935; a plan was approved and a final decree entered on January 31, 1936.
- Under the plan, Davison issued new common stock and debenture bonds; certain existing obligations were exchanged for new securities.
- Neville exchanged Davison notes for (1) new debentures in the same face amount and (2) 22,580 shares of Davison common stock.
- Neville’s 1936 return reported no gain from the exchange; the Commissioner determined Neville realized taxable gain and treated the debentures’ fair market value as par.
- The Tax Court sustained the Commissioner on taxability and par valuation of the debentures, while reducing the stock valuation to $5.00 per share.

## Issues

1. Whether the 1936 exchange of Davison notes for new debentures and stock under the § 77B plan qualified for nonrecognition as a tax-free reorganization exchange.
2. If gain was recognizable, whether substantial evidence supported the Tax Court’s finding that the newly received debentures had a fair market value equal to par at acquisition.

## Decision

- The Third Circuit affirmed the Tax Court.
- The court held the 1936 exchange did not qualify for nonrecognition treatment as a tax-free reorganization exchange; gain was recognizable in 1936.
- The court upheld the Tax Court’s finding that the debentures had a fair market value equal to par, concluding the valuation determination was supported by evidence and was not reversible on appeal.

## Legal Principles

- A creditor’s exchange of a debtor’s obligations for new securities in a court-supervised reorganization is taxable unless a specific nonrecognition provision applies.
- A later bankruptcy reorganization is not automatically treated as a continuation of an earlier, informal restructuring for purposes of reorganization nonrecognition rules; the later proceeding may be treated as a separate transaction.
- Fair market valuation of securities received in a reorganization is a fact question; appellate review is deferential and will sustain the Tax Court if supported by substantial evidence.

## Conclusion

The court held that Neville’s 1936 exchange of Davison notes for new debentures and stock in a § 77B reorganization produced taxable gain, and it sustained the Tax Court’s finding that the debentures were worth par when received.


Neville Coke & Chemical Co. v. Commissioner, 148 F.2d 599 (3d Cir. 1945)