Neville Coke & Chemical Company v. Commissioner

Hillman Coal & Coke Company (Hillman) and W.J. Rainey, Inc. (Rainey) advanced money and sold coal on credit to Davison Coke & Iron Company (Davison). In 1932, Davison was in financial distress, and a reorganization plan was created. Hillman and Rainey formed Neville Coke & Chemical Company (Neville Coke) (plaintiff) to facilitate the reorganization. Hillman and Rainey transferred their preferred accounts, first mortgage bonds, accounts receivable, notes of Davison due in three, four, and five years, and various classifications of stock in Davison to Neville Coke. Davison’s financial problem persisted, and the company filed for bankruptcy. A new reorganization plan was approved in 1936 as part of the bankruptcy proceedings. Under the new reorganization plan, Davison issued common stock and debenture bonds. Holders of Davison’s old bonds were debentures. Additionally, the holders of certain notes in Davison received new debentures in the same face amount plus over 22,000 shares of Davison stock in the newly reorganized company. In Neville Coke’s 1936 tax return, the company did not include a gain realized on the exchange of notes for debentures and stock. The Commissioner of Internal Revenue (the commissioner) (defendant) argued that Neville Coke realized a taxable gain on the exchange. Neville Coke appealed to the United States Tax Court; however, the tax court upheld the commissioner’s determination. Neville Coke appealed to the circuit court.