Source: http://openjurist.org/print/25747
Timestamp: 2016-02-12 16:19:12
Document Index: 524599279

Matched Legal Cases: ['§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 113', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 213', '§ 1303', '§ 1245', 'Art. 22', 'Art. 22', '§ 19', '§ 29', '§ 215', '§ 22', '§ 22', '§ 22', '§ 113', '§ 215', '§ 19', '§ 19', '§ 19', '§ 19', '§ 22', '§ 22', '§ 19', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 711', '§ 711', '§ 711', '§ 735']

336 US 28 Commissioner of Internal Revenue v. Jacobson
Home > 336 US 28 Commissioner of Internal Revenue v. Jacobson
The Tax Court's findings describe each bond sale that is material. Some were to the respondent personally and some to his law partner, acting on his behalf. The rest were made indirectly to the respondent through brokers or through the bondholders' committee. The Tax Court said that each sale that was made through a broker or the committee was closely akin to an open market transaction. It made no finding that any seller intended to transfer or release something for nothing. It referred to all of the respondent's acquisitions of bonds as purchases. Apparently the bonds were payable to bearer and the Tax Court referred to them as negotiable bonds. Each seller made a complete transfer to the respondent of all the seller's rights to or under the bonds. Each seller thus determined the amount of his own loss on his investment. Each knew that the maker of the bond would acquire or secure control over it and would thus be enabled to reduce his liabilities by its face amount. Except for the 10 per cent paid on each bond in 1937, there is no evidence that any bondholder at any time received any partial payment on any bond or consented to a reduction of the indebtedness evidenced by the bond. There is no suggestion that any of the respondent's payments made in 1938, 1939 or 1940 were made specifically in partial reduction of the respondent's obligation as evidenced by a bond or that any bondholder specifically discharged him from any part of the balance of that obligation. On the other hand, it does appear that each of such payments was made in consideration of the transfer to the respondent of title to the entire bond. Each bond was delivered to the respondent evidencing his obligation for its full original face amount, less only the 10 per cent payment made, on account, in 1937. At the time of the trial, the respondent apparently still held the purchased bonds 'intact.' The Court of Appeals repudiated any distinction made by the Tax Court for present purposes between the direct and indirect sales to the respondent. The Court of Appeals based its decision on each seller's knowledge that he was transferring his bond to the maker of it. Thus far we agree. The Court of Appeals, however, without any finding of intent by the respective sellers to transfer or release something for nothing, as distinguished from an intent to get the highest available price for their entire claims, treated the respondent's gain from each purchase as exempt from the taxation imposed by § 22(a) of the Revenue Act of 19382 and of the Internal Revenue Code, because that court felt itself obliged by precedent to classify each such gain as a 'gift' under § 22(b)(3) of that Act3 and Code. We hold, however, that those Sections do not, in the light of the decisions of this Court, permit that result.
The respondent realized an immediate financial gain from his purchase of these bonds at a discount. By that acquisition he was enabled, at will, to cancel them and thus discharge himself from liability to pay them. While the record indicates that he held them 'intact', apparently without crediting released indebtedness on them or otherwise physically cancelling them in whole or in part (except for the 10 per cent payments made by him on each bond in 1937), his possession of them and control over them is not disputed and the petitioner has properly treated their acquisition as constituting a reduction of the respondent's debts to the extent of their face amount. At the time of their purchase the respondent was unconditionally and primarily bound to pay their face amounts on May 1, 1942, with interest. Although in straitened financial circumstances he was solvent, both before and after his acquisition of the bonds, and the bonds apparently were collectible from him in full through appropriate enforcement proceedings. His acquisition, and consequent control over the discharge of these bonds, therefore, improved his net worth by the difference between their face amount and the price he paid for them. It also relieved him of the semiannual interest payments on them of 5 per cent per annum. His acquisition of them likewise reduced the face amount of the lien held by others upon his leasehold property. In the first instance he had received the full face amount in cash for these bonds so that his repurchase of them for 50 per cent, or less, of that amount reflected a substantial benefit which he had derived from the use of that borrowed money.4 These were not purchase money bonds. The gains from their cancellation were not akin to reductions in balances due on the prices of previously acquired property. The respective sellers of the bonds bore no relation to the respondent other than that of creditors. The gains derived by the respondent through these purchases were comparable to those he would have realized if he had purchased, at the same discount, like bonds issued by a third party and had resold them at full face value or had turned them in at full value as a credit upon some other indebtedness of the respondent. His gains were comparable in their nature to those which he would have reali ed if a third party, pursuant to a contract, had paid off his indebtedness on these bonds for him to the extent of the discount at which he purchased them.5 The nature of the gain derived by a debtor from his purchase of his own obligatins at a discount is the same whether the debtor is a corporation or a natural person. That such a gain comes within the meaning of gross income as used in federal income tax laws was long ago recognized by the Treasury Department's Regulations and by this Court in the leading cases in this field.6 United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131; Helvering v. American Chicle Co., 291 U.S. 426, 54 S.Ct. 460, 78 L.Ed. 891. Similar provisions appeared in the Regulations in effect in 1938-1940.7
A striking demonstration of the meaning given by Congress to § 22(a) appears in its Amendments to § 22(b) of the Internal Revenue Code by the Revenue Act of 1939, c. 247, 53 Stat. 862, approved June 29, 1939.8 These Amendments then applied only to taxable years beginning after December 31, 1938, and only to discharges of indebtedness occurring on or after June 29, 1939. The value of these Amendments for the purposes of the instant case is not so much in the exclusions which they prescribe, as in the clear light which their own limitations shed upon §§ 22(a) and 22(b) to the extent that those Sections remain unchanged.
Unless those Sections as they stood in 1938 meant that the gains derived by a debtor corporation from its purchases of its own obligations at a discount resulted in gross income under § 22(a), there was no need for these 1939 Amendments. Furthermore, as the status of natural persons and corporations is not differentiated in § 22(a), the new Amendments make it equally clear that, inasmuch as they relieve only certain corporations from the taxability of gains derived from their purchases of their own obligations at a discount, it must be that similar gains derived by natural persons also remain taxable under § 22(a). The strength of this reflection of the Amendments upon the unamended Sections is emphasized by their temporary character. The Amendments expressly provide that they shall not apply to a taxable year beginning after December 31, 1942. This indicates that, for its permanent program, Congress regarded such gains as properly taxable and it indicates that the Amendments were intended to authorize temporary changes in policy and were not clarifications of existing or continuing tax policies. While the time limit originally prescribed has been subsequently extended, the extensions have been made by separate Acts, each for a period of one to three years.9 This repeated emphasis upon their temporary character increases the contrast which they make with the permanent policy of Congress as to the general taxability of this kind of gains under § 22(a).
These Amendments describe gains corresponding lmost precisely with those derived by the respondent from his transactions in the instant case but the Amendments apply only to corporate gains. They thus indicate that such gains wee recognized as not having been excluded from gross income by § 22(b)(3) or by any other Section. If they had been so excluded there would have been no need for the new Amendments to exclude those which they did, even temporarily. Furthermore, those gains are not excluded from gross income for all purposes of the income tax laws. Section 22(b)(9) excludes them only from the ordinary income taxes for the taxable year in which the taxpaying corporation purchases its own securities at a discount.10 Furthermore, the exclusion under s 22(b)(9), as distinguished from other exclusions under § 22(b), is available only upon the express condition that the taxpayer makes and files at the time of filing the return its consent to the Regulations11 prescribed under § 113(b)(3)12 then in effect. That Section and such Regulations require that, where any amount is excluded by a corporation from its gross income under § 22(b)(9) on account of its discharge of its own indebtedness, the whole or a part of such amount shall be applied to the reduction of the basis of property held by the taxpayer during any portion of the taxable year in which such discharge occurs. The amount to be so applied and the properties to which the reduction shall be allocated are to be determined by Regulations approved by the Secretary of the Treasury. This means that such a gain, instead of being completely excluded as exempt from taxation, is postponed, for income tax purposes, until a later date when the property is disposed of in a way which will permit another form of ascertainment of the taxpayer's gain or loss in its disposition.13 These provisions therefore demonstrate that Congress, at least since 1939, has prescribed that, in order for a corporate taxpayer to exclude from its gross income under § 22(a) certain gains attributable to the discharge within the taxable year of the taxpayer's indebtedness evidenced by bonds, the taxpayer must consent to the subsequent use of those gains in reducing the basis of property held by the taxpayer during any portion of the taxable year in which such discharge occurred. A corporate taxpayer with gains meeting these specifications but not filing the required consent would be obliged to include those gains in its gross income, unless additional facts brought them under some other exemption. A fortiori, a natural person, such as the respondent in the instant case, who has derived gains precisely within these specifications but who, as a natural person, is ineligible to file the required consent is obliged to include those gains in his gross income under § 22(a). It remains, therefore, to consider whether there are facts in this case which bring this respondent's transactions within any exclusion other than that stated in § 22(b)(9).14
The only provision for the exclusion of these types of gains from the respondent's gross income that is presented for our consideration is the general exemption of gifts from taxation prescribed by § 22(b)(3).15 This was applied by this Court in favor of a taxpayer in Helvering v. American Dental Co., 318 U.S. 322, 63 S.Ct. 577, 87 L.Ed. 785, as well as by the court below in the instant case. Both the general provision for taxation of income and this provision for the exclusion of gifts from gross income, for income tax purposes, have been in the Federal Income Tax Acts in substantially their present form since the Revenue Act of 1916.16 The contrast between the provisions is striking. The income taxed is described in sweeping terms and should be broadly construed in accordance with an obvious purpose to tax income comprehensively. The exemptions, on the other hand, are specifically stated and should be construed with restraint in the light of the same policy. Congress could have excluded from the gross income of all taxpayers the gains derived by debtors either from their acquisitions of their own obligations at a discount and their consequent control over them, or from their respective releases from all or part of such obligations by their respective creditors upon the debtor's payment to the creditor of something less than the full amount of the debt. Congress, especially since the Revenue Act of 1938, has been cognizant of this issue and of its power to meet it as stated, but it has chosen to extend such relief only on the above described restricted and temporary basis and only in the case of corporations. In its treatment of the issue Congress also has required the corporate taxpayer's consent to an alternative plan for a reduction of the corporation's basis of property values to be used in later determinations of its gains or losses. This special treatment is far different from the total exclusion of a gain resulting from an exempt gift. If such gains were already exempted as gifts under § 22(b)(3), as representing something transferred to the debtor for nothing, there would have been no need for § 22(b)(9). The conclusion to be drawn is that such transfers as are described in § 22(b)(9) could not, without more, quality as exempt gifts under § 22(b)(3). The same may be said of the acquisition, by a natural person, of his own obligations as debtor. The facts in the instant case present a situation quite similar to one contemplated by § 22(b)(9) except that the taxpayer here is a natural person. This emphasizes the taxability of the gains before us.
As detailed in Helvering v. American Dental Co., 318 U.S. 322, 63 S.Ct. 577, 581, 87 L.Ed. 785, the problems of the tax results to the debtor of the release of indebtedness have been difficult. That opinion shows that both Congress and Internal Revenue Regulations have taken varying views as to whether a taxpayer should pay an income tax on such balance sheet improvements.1
'(a) General definition.—'Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind nd in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property, also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *' 52 Stat. 457.
'(b) Exclusions from gross income.—The following items shall not be included in gross income and shall be exempt from taxation under this title:
'(3) Gifts, bequests, and devises.—The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income) * * *.' 52 Stat. 458.
See note 1, supra, showing the varied uses to which the respondent applied these proceeds and showing that it is not practicable in this case to determine his losses from his resulting investments, and much less to offset them against his gains now at issue. His tax benefits from those losses are thus postponed until some such occasion as the sale of the properties reflecting them makes it possible to ascertain the losses clearly.
Such discharges of a taxpayer's debts by payments made for his benefit are realizable income to him. In Douglas v. Willcuts, 296 U.S. 1, 9, 56 S.Ct. 59, 62, 80 L.Ed. 3, 101 A.L.R. 391, this Court said:
'* * * By the Revenue Act of (November 23,) 1921, c. 136, § 213(a) 42 Stat. 238, gross income includes 'gains or profits and income derived from any source whatever,' and by the Treasury Regulations authorized by § 1303 (26 U.S.C.A. § 1245), that have been in force through repeated re-enactments, 'If the corporation purchases and retires any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year.' Article 545(1)(c) of Regulations 62, under Revenue Act of 1921. See Article 544(1)(c) of Regulations 45, under Revenue Act of 1918; Article 545(1)(c) of Regulations 65, under Revenue Act of 1924; Article 545(1)(c) of Regulations 69, under Revenue Act of 1926; Article 68(1)(c) of Regulations 74, under Revenue Act of 1928. We see no reason why the Regulations should not be accepted as a correct statement of the law.
'Art. 22(a)—14. Cancellation of indebtedness.—(a) In general. The cancellation of indebtedness, in whole or in part, may result in the realization of income. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income in the amount of the debt is realized by the debtor as compensation for his services. A taxpayer realizes income by the payment or purchase of his obligations at less than th ir face value.
'Art. 22(a)—18. Sale and purchase by corporation of its bonds. (1) (a) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. (b) If the corporation purchases any of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense for the taxable year. (c) If, however, the corporation purchases any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year.' Treasury Regulations 101, promulgated under the Revenue Act of 1938.
In Treasury Regulations 103, promulgated under the Internal Revenue Code, §§ 19.22(a)—14 and 19.22(a)—18 were identical with the above. Even today they are the same in Treasury Regulations 111, promulgated under the Internal Revenue Code, as §§ 29.22(a) 13 and 29.22(a)—17.
These Amendments are contained in § 215 of the Internal Revenue Act of 1939, c. 247, 53 Stat. 862, 875, 876, 26 U.S.C. (1940 ed.), §§ 22(b)(9), 113(b) (3), 26 U.S.C.A. §§ 22(b)(9), 113(b)(3). They added to the Internal Revenhe Code § 22(b)(9) and § 113(b)(3), both relating to the discharge of indebtedness. A cross reference is made to the latter in the former. Such § 215, in its entirety, is as follows:
'(a) Income from discharge of indebtedness.—Section 22(b) of the Internal Revenue Code (relating to exclusions from gross income) is amended by adding at the end thereof the following new paragraph:
"(9) Income from discharge of indebtedness.—In the case of a corporation, the amount of any income of the taxpayer attributable to the discharge, within the taxable year, of any indebtedness of the taxpayer or for which the taxpayer is liable evidenced by a security (as hereinafter in this paragraph defined) if—
'(b) Basis reduced.—Section 113(b) of the Internal Revenue Code (relating to the adjusted basis of property) is amended by adding at the end thereof the following new paragraph:
"(3) Discharge of indebtedness.—Where in the case of a corporation any amount is excluded from gross income under section 22(b)(9) on account of the discharge of indebtedness the whole or a part of the amount so excluded from gross income shall be applied in reduction of the basis of any property held (whether before or after the time of the discharge) by the taxpayer during any portion of the taxable year in which such discharge occurred. The amount to be so applied (not in excess of the amount so excluded from gross income, reduced by the amount of any deduction disallowed under section 22(b)(9)) and the particular properties to which the reduction shall be allocated, shall be determined under regulations (prescribed by the Commissioner with the approval of the Secretary) in effect at the time of the filing of the consent by the taxpayer referred to in section 22(b)(9). The reduction shall be made as of the first day of the taxable year in which the discharge occurred except in the case of property not held by the taxpayer on such first day, in which case it shall take effect as of the time the holding of the taxpayer began.'
'(c) Taxable years to which applicable.—The amendments made by this section shall be applicable to taxable years beginning after December 31, 1938.' 53 Stat. 875, 876.
See also, Treasury Regulations 103, promulgated under the Internal Revenue Code; § 19.22(b)(9)—1, Income from discharge of indebtedness; § 19.22(b)(9)—2, Making and filing of consent; § 19.113(b)(3)—1, Adjusted basis: Discharge of corporate indebtedness: General rule; § 19.113(b)(3)—2, Adjusted basis: Discharge of corporate indebtedness: Special cases.
While § 22(b)(9) originally did not apply to any discharge occurring in a taxable year beginning after December 31, 1942, 53 Stat. 875, this date was changed to December 31, 1945, 56 Stat. 811; December 31, 1946, 59 Stat. 574; December 31, 1947, 60 Stat. 749; and December 31, 1949, 61 Stat. 179.
The exclusions made by § 22(b) apply to the taxes imposed by the Income Tax Chapter of the Internal Revenue Code. These include the ordinary income taxes but not the additional income taxes such as those imposed on personal holding companies or the excess-profits taxes.
Treasury Regulations 103, supra, §§ 19.113(b)(3)—1 and 2 cover the subject. They provide a comprehensive procedure for decreasing the cost or other basis of a taxpaying corporation's properties as a condition of its taking advantage of § 22(b)(9). This procedure applies not only in 'the case of indebtedness incurred to purchase specific property' but also in 'the case of specific property (other than inventory or notes or accounts receivable) against which, at the time of the discharge of the indebtedness, there is a lien (other than a lien securing indebtedness incurred to purchase such property) * * *.' It even provides that if any excess of amount excluded from gross income under § 22(b)(9) exceeds hose two adjustments, the cost or other basis of all the property of the debtor other than inventory and notes and accounts receivable shall be reduced proportionately and, finally, the balance, if any, of the amount excluded from the debtor's gross income is applied to the reduction of the cost or other basis of the debtor's inventory or notes or accounts receivable. It thus offers affirmatively a broad alternative plan for reaching the corporate debtor's gains from its discharge of its indebtedness at a discount.
Subsequent Amendments have altered these provisions but have not changed their general effect nor their reflection upon the meaning of § 22(a). For the extension of the temporary nature of the provisions, see note 9, supra. The requirement of a specially certified 'unsound financial condition' for a corporate taxpayer in order to make § 22(b)(9) applicable was eliminated by the Revenue Act of 1942. That Act also eliminated the limitation to securities in existence on June 1, 1939. 56 Stat. 811.
In making these temporary provisions Congress had in mind especially the conditions presented by railroads and other corporations then seeking to liquidate heavy indebtedness. The Committees reporting the bills for passage emphasized the limitations that were imposed by these Amendments upon corporations seeking to excluded from taxable income the gains derived from their acquisition of their own securities at a discount. H.R. Rep. No. 855, 76th Cong., 1st Sess. 5, 23—25 (1939); Sen. Rep. No. 648, 76th Cong., 1st Sess. 2—3, 5 (1939). Obviously it was expected that these provisions would decrease the existing burdens of income taxation. It certainly was not intended to impose a burden of postponed taxability upon gains which otherwise would have been completely exempted from taxation by § 22(b)(3).
Several provisions have extended comparable relief to other taxpayers. None of them apply to the respondent. They emphasize, however, the understanding of Congress that, without special provision for their exclusion, the gains of a taxpayer from the discharge of his indebtedness at a discount are required by § 22(a) to be included in his gross income. They recognize that the mere exclusion of 'gifts' under § 22(b)(3) is not enough to cover factual situations like those presented in § 22(b)(9) or in the other relief provisions above mentioned.
Exclusion, from excess profits credit, of income derived from the retirement or discharge by the taxpayer of the taxpayer's own obligations if they have been outstanding more than 18 months. Internal Revenue Code, §§ 711(a)(1)(C), 711(a)(2)(E), and § 711(b)(1)(C), 26 U.S.C.A. § 711, added by the Second Revenue Act of 1940, c. 757, 54 Stat. 976—978, repealed by the Revenue Act of 1945, c. 453, 59 Stat. 568.
'Sec. 2. (a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever: * * *
'Sec. 4. The following income shall be exempt from the provisions of this title (Title I.—Income Tax):
Helvering v. American Dental Co., supra, 318 U.S. 322, page 326, note 5, p. 328, note 9, 63 S.Ct. 577, 579, 580, 87 L.Ed. 785, particularly tax free railroad adjustments under c. XV, § 735, 53 Stat. 1140.
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