After the reorganization is completed, there will also be outstanding $420,000 First Mortgage 6% Ten Year Sinking Fund Bonds dated August 1, 1933, and due August 1, 1943. The 7% Endorsed Gold Notes due August 1, 1934, will continue to remain outstanding. The mortgage securing them will be extended for a fiveyear period. The holders of these Notes will receive 4% Five Year Certificates of Beneficial Interest. The Central National Bank, holding $38,000 note also signed by the endorsers, will receive a similar certificate.

The financial condition of the company was also set forth in the notice. In May 1934 an extension agreement was reached with the first mortgage bondholders providing for an extension of 10 years from August 1, 1933, for payment of the remaining outstanding principal balance of $420,000.

On August 8, 1934, petitioner was chartered under the laws of the State of South Carolina. The minutes of its first meeting on August 8, 1934, recited the adoption of à resolution "that the Corporation [petitioner] be and it hereby is authorized and empowered to receive from the Montgomery Building, Inc., a deed to all of its property of every nature and description in consideration of the assumption by this corporation of the outstanding first and second [7 percent gold notes] mortgages covering said property, aggregating $852,562.89." On August 20, 1934, all of the assets of Montgomery Building, Inc., were transferred to petitioner. The common stock of petitioner consisted of 1,000 shares of no par value, which was issued under date of August 20, 1934, to the 7 endorser directors of the old company. It was divided as follows:

Following the transfer of all of its assets to petitioner, the corporate charter of the old company was surrendered and it was dissolved. In the company's closing journal entries of August 20, 1934, appeared the following:

Petitioner's opening journal entries of August 20, 1934, note "Land and Building $852,562.89."

Petitioner's opening journal entries also showed directors' accounts of $1,000 for the purchase of capital stock as follows:

Petitioner's balance sheets for its first period of operations, August 20, 1934, through December 31, 1934, are as follows:

Petitioner's bylaws provided that its capital stock of 1,000 shares of no par value would be issued to each stockholder who fully paid for his stock.

On August 20, 1934, the old company had an authorized capital stock of 5,000 shares of a par value of $100 per share. The 7 endorserdirectors of the old company to whom all of the stock of petitioner was issued were the owners of the following shares of the common stock of the old company on August 20, 1934:

In addition to the 1,469 shares there were issued and outstanding in the hands of the public approximately 2,281 shares, leaving 1,250 shares unissued.

Following the issue of petitioner's stock to the seven endorserdirectors as of August 20, 1934, the stock certificates were endorsed in blank and held as collateral for the benefit of the holders of the endorsed refunding gold notes of Montgomery Building, Inc., in accordance with provisions of the noteholders' deposit agreement dated August 1, 1933.

On the Federal income tax return for the period ended August 20, 1934, for the old company the following statement appears:

The Montgomery Building Inc. was dissolved Aug. 20, 1934 and the assets and liabilities as of that date were purchased by the Montgomery Bldg. Realty Co., which Company was chartered Aug. 11, 1934, State of South Carolina.

OPINION.

OPPER, Judge: The correct depreciation basis for the property which petitioner acquired from its predecessor depends upon whether petitioner is entitled to take the basis of its transferor. That in turn goes back primarily to the question whether the transaction by which the property was acquired was a reorganization. Subdivision (a) (16) of section 113 of the Internal Revenue Code refers the basis of property acquired, as this was, in 1934, to the provisions of the 1934 Act.1

1 SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) BASIS (UNADJUSTED) OF PROPERTY.-The basis of property shall be the cost of such property; except that

(16) BASIS ESTABLISHED BY REVENUE ACT OF 1934.-If the property was acquired, after February 28, 1913, in any taxable year beginning prior to January 1, 1936, and the basis thereof, for the purposes of the Revenue Act of 1934 was prescribed by section 113 (a) (6), (7), or (8) of such Act, then for the purposes of this chapter the basis shall be the same as the basis therein prescribed in the Revenue Act of 1934.

Section 113 (a) (7) of the 1934 Act, dealing with the basis after a reorganization, reads as follows:

(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

The definition of a reorganization, which is identical in the 1934 Act, as amended, with that included in the code, speaks of a reorganization as, among other transactions, "the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all the properties of another corporation **" This is literally what happened when petitioner ("one corporation") in exchange "solely" for "all" of its "voting stock" acquired all of the properties of its predecessor ("another corporation"). The conceded insolvency of the latter permits the continuity of interest requirement to be fulfilled by issuance of the new stock to the transferor's creditors. Helvering v. Alabama Asphaltic Limestone Co., 315 U. S. 179; Palm Springs Holding Corporation v. Commissioner, 315 U. S. 185. Here, unlike the transfer in Helvering v. Southwest Consolidated Corporation, 315 U. S. 194, the acquisition was "solely" for all of petitioner's "voting stock." And "The fact that the new company's stock was issued to the old bondholders rather than to the old corporation is immaterial. Helvering v. New Haven & Shore Line R. R. Co., 121 Fed. (2d) 985." Louis E. Stoddard, Jr., 47 B. T. A. 584, 589; reversed, other grounds (C. C. A., 2d Cir.), 141 Fed. (2d) 76.

True, the new stock was not issued here to all the old creditors, but only to the holders of unsecured claims for advances to the old company. But, as the Court points out in the Alabama Asphaltic case, the full priority rule of Northern Pacific R. Co. v. Boyd, 228 U. S. 482, applies equally to bankruptcy and equity reorganizations. The upshot is that first mortgage bondholders having a prior lien on property sufficient to satisfy their claims are entitled to maintain that position and to be placed ahead of creditors holding unsecured claims or subordinate liens. See Case v. Los Angeles Lumber Co., 308 U. S. 106, 116. Bondholders whose rights and priorities are left unchanged, even though some other interests undergo an alteration, are not even affected by a reorganization and ordinarily have no standing to contest it. "A plan does not 'affect' the claims of creditors when they retain exactly what they had before: the claims of the bondholders in the case at bar

'Assumption of the predecessor's liabilities may be disregarded. Southland Ice Co., 5 T. C. 842.

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