Document: 336 U.S. 28 69 S.Ct. 358 93 L.Ed. 477 COMMISSIONER OF INTERNAL REVENUEv.JACOBSON (two cases). Nos. 32, 33. Argued Nov. 8, 1948. Decided Jan. 17, 1949. Mr. Arnold Raune, of Washington, D.C., for petitioner. Theodore R. Colborn, Cleveland, Ohio, respondent. Justice BURTON delivered the opinion Court. 1 This decision applies federal income tax to gains derived by a debtor from his purchase own obligations at discount and consequent control over their discharge. It presents specific question whether solvent natural person, in straitened financial circumstances, must include gross purposes difference between (1) face amount personal indebtedness as maker secured bonds, originally issued him value cash, (2) lesser paid purchase. The debtor's were not unpaid balances prices which could be readjusted discharge obligations. proceeds traced into identifiable losses offsetting realized these Each seller knew that bonds he sold being bought or them. In each sale bondholder sought minimize probable loss getting much possible, directly indirectly, one available purchaser same time reduce possible buying cheaply could. While thus was receiving less than amount, there is no finding any intended transfer release something nothing make gift part claim, distinguished making assignment whole claim highest price. gain Commissioner Internal Revenue found correctly that, purposes, year made 2 respondent, Lewis F. Jacobson, 1938, 1939 1940 resided, practiced law owned controlled substantial property interests Chicago, Illinois. 1943 petitioner, Revenue, deficiencies taxes respondent those years. Those totaled $3,967.97, about $2,500 are now before us. case arose Commissioner's addition reported differences principal amounts certain leasehold executed Such purchases substantially follows: Purchased Percentage D—Direct B—Through Principal 3 Date broker Purchase 4 C—Through price purchaser- 5 bondholders' maker- 6 committee taxpayer 1938 7 Apr. 9, 1938....... D. $450.00 $202.50 45 8 June 3,600.00 1,620.00 Aug. 17,1938....... 900.00 405.00 9 Feb. 15, 1939...... B. 1,800.00 50 16, 450.00 225.00 Oct. 23, 180.00 86.50 48 4, 1940....... C. 270.00 130.00 May 21, 210.00 47 10 2,700.00 1,080.00 40 11 19, 1940...... 720.00 July 1, 200.00 3, 10, 184.50 41 Sept. 1940..... 185.00 12 Total......... ---------- $14,400.00 $6,348.50 13 Upon respondent's petition, Tax Court reviewed findings and— 14 'Held acquired petitioner (Jacobson, here) through direct negotiations with bondholdes, taxable on therefrom under doctrine Helvering v. American Dental Co., 318 322, 63 577, 87 785; held, further, bondholders secretary security dealers, Supreme United States Kirby Lumber 284 52 76 131, all times solvent.' T.C. 1048. 15 Six sixteen judges dissented five six voted uphold completely, ground none transactions gratuitous. 1048, 1057—1059. petitioned Appeals Seventh Circuit review judgment unfavorable him. did remainder judgment. That court decided against both petitions. held because respective sellers they them, excess values sales should treated gifts exempt tax. 164 F.2d 594. Due importance issues unsettled field taxability discount, we granted certiorari cases. 333 866, 68 792. We have heard them together. 16 further material facts, shown undisputed evidence, 17 By 1922 1923 99-year lease, running 1914, together two-story store, office apartment building leased premises Chicago. On 1925, borrowed $90,000 nearby bank and, wife, return 200 trust deed mortgaging improvements thereon. bore interest 1/2 per cent annum total $90,000, maturing semiannually up including November 1931. balance totalling $57,500, mature 1932. original used retire existing encumbrance, an undisclosed property, pay $16,250 necessary brokerage commission approximately t e loan, plus cost printing other expenses connection loan. A remaining 'small surplus' 1925 computing depreciation, allocated $76,580.56 improvements, new addition, $40,000 leasehold, out $116,580.56. 18 due 1931, maturities. has never been default payment. However, after trustee closed formed represent holders this issue bonds. 1932, individual five-year extension maturity reduction rate cent. During extention checks names cover committee, kept himself fully informed identity location they, turn, frequently visited learn condition trusteed property. 1937 procured 1942, connection, bond, leaving outstanding $51,750 payable 19 fair market thereon $80,000 it same, accrued depreciation. testified valued considerably less, even low twice its income, $32,000. net deduction expenses, depreciation also was: 20 received practice sources following additional income: $38,390.85; 1939, $35,644.78; 1940, $35,279.59. said that: 'On strength showing petitioner's assets liabilities, find during years 1940.' 1948, page 1053. said: 'The accept finding, although perusal record makes quite apparent circumstances.' 596. 21 petition stated, disputed, had sharply depreciated since acquisition neighborhood changed, stores vacant half previous rents, 1932 him, conditions worse felt would sustain large property.1 22 Court's describe bond material. Some personally some partner, acting behalf. rest indirectly brokers committee. closely akin open transaction. nothing. referred acquisitions purchases. Apparently bearer negotiable complete seller's rights determined investment. acquire secure enabled liabilities amount. Except 1937, evidence partial payment consented evidenced bond. There suggestion payments specifically obligation discharged obligation. hand, does appear such consideration title entire evidencing full only made, account, 1937. At trial, apparently still purchased 'intact.' repudiated distinction present indirect based knowledge transferring it. Thus far agree. Appeals, however, without intent nothing, get claims, taxation imposed § 22(a) Act 19382 Code, itself obliged precedent classify 'gift' 22(b)(3) Act3 Code. hold, Sections do not, light decisions Court, permit result. 23 first test relates inclusion within 22(a), reference exclusions 22(b). consists application exclusions. hold come but stated 24 immediate discount. enabled, will, cancel liability indicates 'intact', crediting released otherwise physically cancelling (except 1937), possession disputed properly constituting debts extent unconditionally primarily bound interest. Although circumstances solvent, collectible appropriate enforcement proceedings. His acquisition, therefore, improved worth relieved semiannual annum. likewise reduced lien others upon instance cash so repurchase cent, reflected benefit use money.4 These money cancellation reductions previously relation creditors. comparable if purchased, like third party resold turned credit nature reali ed party, pursuant contract, off them.5 obligatins corporation person. comes meaning laws long ago recognized Treasury Department's Regulations leading cases field.6 131; Chicle 291 426, 54 460, 78 891. Similar provisions appeared effect 1938-1940.7 25 If stood alone, 22(b), unquestionably constitute purposes. 22(b) change contrary, confirm 26 striking demonstration given Congress appears Amendments Code c. 247, 53 Stat. 862, approved 29, 1939.8 then applied beginning December 31, discharges occurring 1939. instant prescribe, clear limitations shed §§ remain unchanged. 27 Unless meant resulted need Amendments. Furthermore, status persons corporations differentiated equally inasmuch relieve similar 22(a). reflection unamended emphasized temporary character. expressly provide shall apply 1942. permanent program, regarded authorize changes policy clarifications continuing policies. limit prescribed subsequently extended, extensions separate Acts, period three years.9 repeated emphasis character increases contrast general kind corresponding lmost precisely corporate gains. They indicate wee having excluded Section. exclude did, temporarily. laws. Section 22(b)(9) excludes ordinary taxpaying securities discount.10 exclusion s 22(b)(9), express files filing consent Regulations11 113(b)(3)12 effect. require where account indebtedness, basis portion occurs. properties Secretary Treasury. means gain, instead completely taxation, postponed, until later date when disposed way will another form ascertainment taxpayer's disposition.13 therefore demonstrate Congress, least order attributable subsequent reducing occurred. meeting specifications required unless facts brought exemption. fortiori, case, who who, ineligible file remains, consider bring 22(b)(9).14 29 provision types presented our exemption 22(b)(3).15 favor 785, well below case. Both Federal Income Acts 1916.16 striking. taxed described sweeping terms broadly construed accordance obvious purpose comprehensively. exemptions, restraint policy. taxpayers debtors either releases creditors creditor debt. especially cognizant power meet chosen extend relief above restricted corporations. treatment alternative plan corporation's determinations losses. special different resulting gift. already exempted 22(b)(3), representing transferred 22(b)(9). conclusion drawn transfers more, quality 22(b)(3). may debtor. situation contemplated except here emphasizes 30 assumed transaction ultimate parties known such. own. sale. high buyer stock exchange, conduct little, any, income. mere fact selling absence proof claim. issuing had. relationship. assigned purchaser. maker's release, sell vice versa. actually give testimony release. saying conclusive. Assuming binding creditor, valid maturity. might anyone, establish contradiction implications arising assignments made. conceivable, hardly likely, bondholder, course business debtor, claims parts 'for nothing.' extraordinary asks us, matter law, read simple took place unable Cf. Bogardus 302 34, 58 61, 82 32. 31 factual one. turns best latter more likely arise rent interest, occurred supra, securities, person thi For reasons justified rather gift, accordingly reversed cause remanded action opinion. ordered. 32 Reversed remanded. 33 RUTLEDGE, joining opinion, view result essentially conflict reached 785. 34 .Mr. REED whom DOUGLAS joins, dissenting. 35 As detailed 581, problems results difficult. shows taken varying views sheet improvements.1 36 'receipt advantages gratuitously' Int.Rev.Code 22, U.S.C.A. 22. time, nor requested so. discussed length affirmed. describing 'It self good exercised prudent take settlements, greater incurred. I done very thing myself, advised clients circumstances. Most real estate Chicago 5c 25c dollar before, after, realization question. mortgage fails sufficient suffered which, offset Little how funds invested. Even traced, part, encumbrance premises, shrinkage investments clearly ascertained ratio indicated merely estimates. larger 1940. See Mertens, Law Taxation, 11.20 n. 99 (1942). 'Sec. Gross '(a) General definition.—'Gross income' includes gains, profits, salaries, wages, compensation service, whatever nd paid, professions, vocations, trades, businesses, commerce, sales, dealings personal, growing ownership rent, dividends, carried profit, profits source whatever. * *' 457. re-enacted I.R.C., amended manner 574, 575, U.S.C. (1940 ed.), '(b) Exclusions income.—The items included title: '(3) Gifts, bequests, devises.—The bequest, devise, inheritance (but income) *.' 458. change. note varied uses practicable determine investments, issue. benefits postponed occasion reflecting ascertain clearly. realizable Douglas Willcuts, 296 56 59, 62, 80 101 A.L.R. 391, statutory construction. think definitions (Revenue 1926, 213, 1928, (26 U.S.C.A.Int.Rev.Acts, pages 163, 354)) broad enough description. considered evident 'to extent.' Irwin Gavit, 268 161, 475, 476, 897; Stockholms Enskilda Bank, 293 84, 89, 55 50(52), 79 211. taxpayer, when, debt benefit. substance transmitted creditor. Old Colony Trust Co. 279 716, 49 499, 73 918; Boston & Maine Railroad, 732, 505, 929.' '* (November 23,) 1921, 136, 213(a) 42 238, 'gains whatever,' authorized 1303 1245), force re-enactments, 'If retires value, year.' Article 545(1)(c) 1921. 544(1)(c) 45, 1918; 65, 1924; 69, 1926; 68(1)(c) 74, 1928. see reason why accepted correct statement law. defendant error accession words plain popular meaning, here.' 2, 131. 'Art. 22(a)—14. Cancellation indebtedness.—(a) general. If, example, performs services thereof cancels debt, services. realizes th ir value. 22(a)—18. Sale (a) loss. (b) deductible expense year. (c) 101, promulgated 1938. 103, 19.22(a)—14 19.22(a)—18 identical above. today 111, 29.22(a) 29.22(a)—17. contained 215 875, 876, 113(b) (3), 113(b)(3). added Revenhe 113(b)(3), relating indebtedness. cross former. 215, entirety, 215. Discharge indebtedness.—Section (relating adding end paragraph: "(9) indebtedness.—In corporation, discharge, year, liable (as hereinafter paragraph defined) if— "(A) established satisfaction Commissioner, "(B) certified agency loans behalf exercise regulatory unsound condition, return, approval Secretary, regulations prescribes, section 113(b)(3) unamortized premium (computed day occurred) respect allowed deduction. n term 'security' debenture, note, certificate, existence enactment 1942.' Basis reduced.—Section adjusted property) "(3) indebtedness.—Where (whether discharge) (not disallowed 22(b)(9)) particular allocated, (prescribed Secretary) day, holding began.' '(c) Taxable applicable.—The amendments applicable 1938.' 876. also, Code; 19.22(b)(9)—1, indebtedness; 19.22(b)(9)—2, Making consent; 19.113(b)(3)—1, Adjusted basis: indebtedness: rule; 19.113(b)(3)—2, Special changed 1945, 811; 1946, 59 574; 1947, 60 749; 1949, 61 179. Chapter companies excess-profits taxes. 19.113(b)(3)—1 subject. comprehensive procedure decreasing taking advantage 'the incurred property' (other inventory notes accounts receivable) securing provides exceeds hose two adjustments, receivable proportionately finally, balance, receivable. offers affirmatively reaching supra. Subsequent altered provisions, requirement specially 'unsound condition' eliminated limitation 811. mind railroads seeking liquidate heavy Committees reporting bills passage H.R. Rep. No. 855, 76th Cong., 1st Sess. 5, 23—25 (1939); Sen. 648, 2—3, (1939). Obviously expected decrease burdens taxation. certainly impose burden Several extended taxpayers. None emphasize, understanding exclusion, recognize 'gifts' situations mentioned. Among following: Exclusion, credit, retirement months. 711(a)(1)(C), 711(a)(2)(E), 711(b)(1)(C), 711, Second 757, 976—978, repealed 453, 568. railroad modification court. 22(b)(10), 619, 812, 1945; 2. That, subject exemptions deductions allowed, service trade, whatever: 4. (Title I.—Income Tax): life insurance policies beneficiaries death insured; insured, premiums insurance, endownment, annuity contracts, mentioned contract surrender contract; descent income); State political subdivision possessions farm loan seventeenth, nineteen hundred sixteen; President elected, inferior courts office, officers employees State, thereof, Government.' (Italics supplied.) Ac 1916, 463, 39 756, 758, 759. An To tariff duties revenue Government, October 1913, 38 114, 167, II, subd. 326, p. 328, 579, 580, particularly free adjustments XV, 735, 1140.

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