Case Name: George Hall Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1943-01-19
Citations: 1 T.C. 471
Docket Number: Docket No. 107409
Parties: George Hall Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Smith, KeRu, and Offer, JJn agree with the above.
Reporter: Reports of the Tax Court of the United States
Volume: 1
Pages: 471–474

Head Matter:
George Hall Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 107409.
Promulgated January 19, 1943.
Howard F. Farrington, G. P. A., for the petitioner.
Harold D. Thomas, Esq., for the respondent.

Opinion:
OPINION.
Sternhagen, Judge:
The question at issue is whether the amount forgiven by a shareholder of an indebtedness of his corporation to him for arrears of interest on debentures held by him is properly included in the corporation's income in the year of the forgiveness. The interest, in common with all the other interest on the debentures, had been deducted by the corporation on its returns for the years when the interest accrued. The Commissioner held that the amount constitutes taxable income and the corporation contests the holding. The principal ground for the petitioner's conclusion is that the forgiveness was gratuitous and that petitioner credited it to donated surplus; for these reasons, it argues, the amount swelled the ytilue of the shares and must be regarded as a contribution to the corporation's capital and not as income. We think the Commissioner's determination was correct.
The corporation had, correctly, deducted the interest in the earlier years when it accrued and charged its assets with the burden of the .interest debt. This burden was removed by the cancellation, which "made available $107,130 assets previously offset by the obligation." Cf. United States v. Kirby Lumber Co., 284 U. S. 1. The corporation was solvent, and the amount was apparently available for distribution as dividends, even though it was in the "donated surplus" account.
The petitioner relies upon Regulations 94, art. 22 (a)-14. This is the same as that considered in Pondfield Realty Co., 1 T. C. 217. As applied to cases like this, we can not regard that regulation as a correct, statement of the law. We seriously doubt that the court in Carrell-McCreary Co. v. Commissioner, 124 Fed. (2d) 303, meant to hold, as the regulation categorically says, that every gratuitous forgiveness by a shareholder is per se a contribution of capital, even though the opinion apparently so holds. With some hesitation, we sustain the Commissioner's determination. Cf. Helvering v. Jane Holding Corporation, 109 Fed. (2d) 933; certiorari denied, 310 U. S. 653; rehearing denied 311 U. S. 725.
Reviewed by the Court.
Decision will be entered for the respondent.