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Timestamp: 2020-01-28 19:48:37
Document Index: 162664628

Matched Legal Cases: ['§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 113', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22']

US Supreme Court Decisions On-Line> Volume 336 > COMMISSIONER V. JACOBSON, 336 U. S. 28 (1949)
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(a) The provision of the Internal Revenue Code for the exclusion of "gifts" from gross income is to be construed with restraint in the light of the purpose of Congress to tax income comprehensively. Pp. 336 U. S. 47-49. chanrobles.com-red
This decision applies the federal income tax to gains derived by a debtor from his purchase of his own obligations at a discount, and his consequent control over their discharge. It presents the specific question whether a chanrobles.com-red
The respondent, Lewis F. Jacobson, in 1938, 1939, and 1940, resided, practiced law, and owned or controlled substantial property interests in Chicago, Illinois. In 1943, the petitioner, Commissioner of Internal Revenue, found deficiencies in the income taxes paid by the respondent for chanrobles.com-red
By purchases made in 1922 and 1923, the respondent acquired a 99-year lease, running from May 1, 1914, together with a two-story store, office, and apartment building on the leased premises in Chicago. On or about May 1, 1925, he borrowed $90,000 from a nearby bank and, together with his wife, executed in return 200 bonds secured by a trust deed mortgaging to that bank the leasehold and the improvements thereon. The bonds bore interest at 6 1/2 percent per annum, and were for chanrobles.com-red
The bonds due on or before November 1, 1931, were paid at or about their maturities. The debtor has never been in default on any interest payment. However, after the trustee bank closed on June 8, 1931, a committee was formed to represent the holders of this issue of bonds. May 1, 1932, the respondent secured from the committee and individual bondholders a five-year extension of the maturity on all of the bonds and a reduction in the interest rate from 6 1/2 to 5 percent. During this extension, the respondent issued his checks in the names of the respective bondholders to cover interest due them. The checks were delivered by the secretary of the bondholders' committee, the respondent kept himself fully informed as to the identity and location of the respective bondholders and they, in turn, frequently visited him to learn about his financial condition and that of the trusteed property. In 1937 he procured a further extension of the maturity of the bonds to May 1, 1942, and, in that connection, paid 10 percent o chanrobles.com-red
164 F.2d 596.
In his petition to the Tax Court, the respondent stated, and it has not been disputed, that the value of the leasehold and building had sharply depreciated since his acquisition of them. The neighborhood had changed, stores were vacant or paid less than half of their previous rents, from 1932 to 1938, the value of the property was substantially less than its cost to him, conditions were chanrobles.com-red
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 chanrobles.com-red
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 percent 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 was 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 percent 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 chanrobles.com-red
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 1938 [Footnote 2] 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 Act [Footnote 3] and Code. We hold, however, that those Sections do not, in the light of the decisions of this Court, permit that result. chanrobles.com-red
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 percent 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 percent 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 percent chanrobles.com-red
or less of that amount reflected a substantial benefit which he had derived from the use of that borrowed money. [Footnote 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 realized 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. [Footnote 5] The nature chanrobles.com-red
of the gain derived by a debtor from his purchase of his own obligations 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. [Footnote 6] United States v. Kirby Lumber Co., 284 U. S. 1; Helvering v. American Chicle Co., 291 U. S. 426. Similar provisions appeared in the Regulations in effect in 1938-1940. [Footnote 7] chanrobles.com-red
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. [Footnote 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 chanrobles.com-red
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 chanrobles.com-red
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 chanrobles.com-red
These Amendments describe gains corresponding almost 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 were 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. [Footnote 10] Furthermore, the exclusion under chanrobles.com-red
§ 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 Regulations [Footnote 11] prescribed under § 113(b)(3), [Footnote 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, chanrobles.com-red
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. [Footnote 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 chanrobles.com-red
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 chanrobles.com-red
gifts from taxation prescribed by § 22(b)(3). [Footnote 15] This was applied by this Court in favor of a taxpayer in Helvering v. American Dental Co., 318 U. S. 322, 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. [Footnote 16] The contrast between the provisions chanrobles.com-red
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 chanrobles.com-red
In the instant case, the relation between the bondholder and the respondent may be assumed in each transaction to have been one in which the ultimate parties were known to each other to be such. There was no suggestion in the evidence or the findings that any bondholder was acting from any interest other than his own. Each transaction was a sale. The seller sought to get as high a price as he could for the bond, and the buyer sought to pay as low a price as he could for the same bond. If the transaction had been completely on the open market through a stock exchange, the conduct and intent of each party could have been the same, and there would have been little, if any, basis for any claim that the respondent's gain was not taxable income. The mere fact that the seller knew that he was selling to the maker of the bond as his only available market did not change the sale into a gift. In the absence of proof to the contrary, the intent of the seller may be assumed to have been to get all he could for his entire claim. Although the sales price was less than the face of the bond and less than the original issuing price of the bond, there was nothing to indicate that the seller was not getting all that he could for all that he had. There is nothing in the evidence or findings to indicate that he intended to transfer or did transfer something for nothing. The form of the transaction emphasized this relationship. The seller assigned the entire bond to his purchaser. The seller did not first release the maker from a part of the maker's obligation and, having made the maker a gift of that release, then sell him the balance of the bond, or vice versa. It the seller actually had intended to give the maker some gift, the natural reflection of that gift would have been a credit on the face of the bond, or at least some record or chanrobles.com-red
The situation in each transaction is a factual one. It turns upon whether the transaction is, in fact, a transfer of something for the best price available, or is a transfer or release of only a part of a claim for cash and of the balance "for nothing." The latter situation is more likely to arise in connection with a release of an open account for rent or for interest, as was found to have occurred in Helvering v. American Dental Co., supra, than in the sale of outstanding securities, either of a corporation as described in § 22(b)(9), or of a natural person as presented in this case. For these reasons, we hold that the Commissioner was chanrobles.com-red
"It was self-interest and good business judgment exercised by all prudent persons to take cash settlements when otherwise greater losses might be incurred. I have done that very thing myself, and have advised clients to do so in similar circumstances. Most real estate bonds in Chicago were selling from 5¢ to 25¢ on the dollar in 1932 to 1940."