Task: songer_opinstat

What follows is an opinion from a United States Court of Appeals. Your task is to identify whether the opinion writter is identified in the opinion or whether the opinion was per curiam.

SKELTON, Senior Judge.
This is an income tax case that involves an appeal by the Commissioner of Internal Revenue (Commissioner or Government) from a decision of the United States Tax Court, and cross-appeals by Putoma Corporation (Putoma), successor by merger of Pro-Mac Company (Pro-Mac), with J. M. Hunt and wife, Inez Hunt, as appellees in the appeal of the Commissioner.
At all times pertinent to this case, Puto-ma Corporation and Pro-Mac Company were Texas corporations using the accrual basis of accounting.
The Commissioner of Internal Revenue appeals from decisions of the Tax Court in which the court ruled that taxpayers Pro-Mac Company and Putoma Corporation did not realize taxable income as the result of the cancellation by J. M. Hunt of their liability for accrued interest due him on Putoma’s notes. The two corporations have filed cross-appeals from the portions of the Tax Court’s decisions disallowing certain deductions claimed for accrued salaries and bonuses for J. M. Hunt and Lee Roy Pursel-ley. The Tax Court filed its findings of fact and opinion on June 30, 1976 (reported at 66 T.C. 652) and entered its decisions on December 15, 1976.
The issues on appeal are as follows:
THE ISSUE PRESENTED BY THE COMMISSIONER IS:
(1) Whether the Tax Court erred in holding that said accrual basis corporations, which previously had accrued and deducted interest which they owed, but never paid, to J. M. Hunt, one of their shareholders, did not realize taxable income when the shareholder cancelled their liability for the accrued interest.
THE ISSUE PRESENTED BY THE TAXPAYERS IS:
(2) Whether the Tax Court erred in holding that said accrual basis corporations, which accrued certain compensation for their officer shareholders, Lee Roy Purselley and J. M. Hunt, under a fixed.formula, but which was not paid, were not entitled to deduct such compensation on the ground that their obligation for same was conditional and not properly accruable during the years in question.
We affirm the decision of the Tax Court on both issues.
We consider first the second issue involving the accrued compensation for officer-shareholders Purselley and Hunt, which was never paid but was deducted by the corporations.
I. DEDUCTIONS FOR ACCRUED UNPAID COMPENSATION.
The facts relevant to this appeal by taxpayers were found by the Tax Court as follows:
At a meeting of Putoma’s directors held in July, 1964, Purselley’s salary was set at $600 per month, retroactive from July 1, 1963. This salary was not to be paid, but was to accrue to his credit until such time as,, in the judgment of the majority of directors, corporate earnings were sufficient to justify payment of the salary. In addition, as part of his compensation, Purselley was to receive 25 percent of the corporation’s net profits. Compensation from July 1, 1964, was to be determined at a future meeting.
. The minutes of the board of directors’ meeting for Putoma held on August 23, 1965, contain the following statement relating to salary:
Upon motion duly made and seconded, the salary of Lee Roy Purselley for the current year was fixed at $2,000.00 per month plus 25% of the net profit of the corporation after deduction of the $2,000.00 monthly salary, but before deduction for any bonus or Federal income taxes. This salary is to be retroactive from July 1, 1965. Such salary in excess of the $2,000.00 per month is not to be paid but to accrue to his credit until such time as in the judgment of the majority of the directors of the company, the company has such cash reserve in order to pay the additional salary.
Upon further motion duly made and seconded, the salary of J. M. Hunt was established at 10% of the net income of the company before the deduction of any bonus or Federal income taxes. This salary is to be retroactive from July 1, 1965. Such salary is not to be paid, but to accrue to his credit until such time as in the judgment of the majority of the directors of the company, the company has sufficient cash reserve in order to pay the salary.
The compensation formula set out above remained unchanged until January 1, 1970. At a meeting of Putoma’s directors held on December 10, 1969, bonuses for Purselley and Hunt were discontinued as of December 31, 1969, and Purselley’s salary was set at $3,000 per month beginning January 1, 1970.
The following schedule shows salary and bonus accruals, and cash payments for Pur-selley and Hunt recorded on Putoma’s books for fiscal years ended June 30, 1964, through calendar year December 31, 1971:
LEE ROY PURSELLEY RECORDED ON BOOKS
PERIOD ENDED YEARLY SALARY YEARLY BONUS CASH PAYMENTS
6/30/64 $ 7,200 $ 2,763.64 $ -
6/30/65 7,200 2,791.59 10,335.94
6/30/66 24.000 21,408.42 11,210.00
6/30/67 24.000 45,115.41 29,909.32
6/30/68 24.000 85,324.03 38,004.57
6/30/69 24.000 43,833.66 33,269.86
6/30/70 30.000 25,480.44
12/30/70 18.000 14,000.00
12/31/71 15.473.75
$158,400 $201,236.75 $177,688.88
J. M. HUNT
6/30/64 $ -
6/30/65
6/30/66 8,563.87
6/30/67 6,711.92
6/30/68 34,129.61
6/30/69 17,533.46
6/30/70
12/31/70
12/31/71
$66,938.86
Pro-Mac was formed on December 1, 1966. Article V, Section 4 of Pro-Mac’s by-laws provides that the salaries of corporate officers are to be fixed by the board of directors. The minutes of the organizational meeting of Pro-Mac’s board of directors, however, contain no mention of officer compensation. Further, there were no board of directors’ minutes for Pro-Mac during the period November 30, 1966, through July 18, 1969. Nevertheless, Pro-Mac’s books and records for that period reflect that the corporation consistently recorded a salary expense of $1,000 per month for both Hunt and Purselley, and further recorded a bonus expense equal to 25 percent of profits for Purselley and bonus expense equal to 10 percent of profits for Hunt. The Tax Court found, however, that the salaries and bonuses for Purselley and Hunt recorded by Pro-Mac on its books were not payable until Pro-Mac’s earnings were sufficient to permit payment.
The first minutes to discuss compensation for Pro-Mac’s officers were those of a directors’ meeting held December 10, 1969. At that time, it was decided to discontinue the bonuses for Purselley and Hunt and to fix Purselley’s salary at $3,000 per month commencing January 1, 1970. At a subsequent meeting held August 27, 1970, a $1,000 per month salary was also voted for Hunt, retroactive to January 1, 1970. Due to the low cash condition of the corporation, Hunt’s salary was to be recorded in his “accrued salary account,” but was not to be paid until a later date when the corporation was “financially able.”
The following schedule shows when salary and bonus amounts and cash payments for Purselley and Hunt were recorded on Pro-Mac’s books for fiscal years ended July 31, 1967, through August 31, 1971 (R. 104):
At a meeting of Putoma’s board of directors on July 9, 1970, a discussion was held concerning the current financial condition of the corporation. It was agreed that in order to reflect a better financial condition to creditors and potential lenders, Hunt and Purselley would be asked to forgive a portion of the salaries shown owing to them on the books. Substantially the same decision was made by Pro-Mac’s board of directors in a meeting held the same day.
On September 15, 1970, Purselley and Hunt forgave the following items shown owing to them on the books and records of Putoma and Pro-Mac:
On September 15, 1970, Purselley’s accrued payroll account on Putoma’s books showed a balance of $194,626.32, before forgiveness, and $106,017.26 after forgiveness. Hunt’s accrued payroll account on Putoma’s books and records showed a balance of $66,-938.36 before forgiveness and $0 after forgiveness.
On September 15, 1970, Purselley’s accrued payroll balance on Pro-Mac’s books showed a balance of $72,064.09 before forgiveness and $27,610.59 after forgiveness. Hunt’s accrued payroll account on Pro-Mac’s books showed a balance of $37,673.76 before forgiveness and $2,000 after forgiveness.
On their returns for the years ip issue, the taxpayer corporations claimed deductions for the salaries and bonuses for Pur-selley and Hunt which they had accrued on their corporate books. The Commissioner disallowed the deductions to the extent they represented accrued but unpaid salaries on the ground that taxpayers’ liability for the accrued salaries and bonuses was contingent and not fixed during the years in question. The Tax Court, in a reviewed opinion with no dissents as to this issue, sustained the Commissioner’s determination.
Ever since the Supreme Court rendered its opinion in United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347 (1926), it has been the rule that accrual taxpayers, such as Putoma and Pro-Mac in the instant case, may deduct an expense in the taxable year in which “all the events” have occurred which determine the fact of liability and which fix with reasonable certainty the amount of such liability. In that case the court said:
“Only a word need be said with reference to the contention that the tax upon munitions manufactured and sold in 1916 did not accrue until 1917. In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee’s books. In the economic and bookkeeping sense with which the statute and Treasury decision were concerned, the taxes had accrued.” 269 U.S. 440-441, 46 S.Ct. 134.
The “all events” test has been applied many times by various courts since the decision in Anderson was handed down. See Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725 (1934); Dixie Pine Products Co. v. Commissioner, 320 U.S. 516, 64 S.Ct. 364, 88 L.Ed. 270 (1944); Trinity Construction Co. v. United States, 424 F.2d 302 (5 Cir. 1970); Guardian Investment Corp. v. Phinney, 253 F.2d 326 (5 Cir. 1958); United States v. Consolidated Edison Co., 366 U.S. 380, 385, n. 5, 81 S.Ct. 1326, 6 L.Ed.2d 356 (1961); Clevite Corp. v. United States, 386 F.2d 841, 843, 181 Ct.Cl. 652, 658 (1967); Denver & Rio Grande Western Railroad Co. v. Commissioner, 38 T.C. 557, 572 (1962); Turtle Wax, Inc. v. Commissioner, 43 T.C. 460, 466-67 (1965); Union Pacific R. R. Co. v. United States, 524 F.2d 1343, 208 Ct.Cl. 1 (1975); and Koehring Co. v. United States, 421 F.2d 715, 190 Ct.Cl. 898, 905 (1970). In fact, the test is now included in the Treasury Regulations as follows:
“Under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.” Treas.Reg. § 1.461-1(a)(2) (1970), promulgated by T.D. 6282,1958-1 Cum.Bull. 215, 22 F.R. 10686, Dec. 25, 1957, 26 C.F.R. § 1.461-1(a)(2) (1970).
Stated conversely, the accrual of an item of expense is improper where the liability for such item in the taxable year is contingent upon the occurrence of future events. Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725 (1944); Brown v. Helvering, supra. The Supreme Court stated in Brown, supra:
“Except as otherwise specifically provided by statute, a liability does not accrue as long as it remains contingent * * 291 U.S. 200, 54 S.Ct. 360.
This court held in Guardian Investment Corporation v. Phinney, supra :
“A contingent obligation may be a liability, but it is not a debt: and accrual is improper for tax deductions when the liability is contingent.” 253 F.2d 329.
The Court of Claims held in Union Pacific R. R. Co. v. United States, supra :
“So long as a liability remains contingent or if the liability has attached but the amount cannot be reasonably estimated, a business expense deduction is not allowed.” 524 F.2d 1350, 208 Ct.Cl. 18.
The foregoing authorities show that without dispute the all-events test is incorporated in the law. The only question to be answered in this case is whether or not the test has been met. Putoma and Pro-Mac contend that the accrued salaries and bonuses were definite fixed obligations that were mathematically arrived at under an authorized and definite formula, and that only the payment was deferred. They argue that under these facts the all-events test has been complied with. We do not agree.
The minutes of Putoma’s Board of Directors’ meeting held on August 23, 1965, quoted above, show that the Board set Pur-selley’s salary at $2,000 per month month plus a bonus of 25% of the net profit of the corporation. However, the payment of the bonus was made conditional on the financial condition of the corporation by the following minutes:
“Such salary in excess of the $2,000 per month is not to be paid but to accrue to his credit until such time as in the judgment of the majority of the directors of the company, the company has such cash reserve in order to pay the additional salary.”
As a part of the same minutes, the Board set Hunt’s salary at 10% of the net income of the corporation which was not to be paid, like Purselley’s bonus, until such time as in the judgment of the directors, the corporation had sufficient cash reserve in order to pay the salary. In this regard, the minutes provided:
“Upon further motion duly made and seconded, the salary of J. M. Hunt was established at 10% of the net income of the company before the deduction of any bonus or Federal income taxes. This salary is to be retroactive from July 1, 1965. Such salary is not to be paid, but to accrue to his credit until such time as in the judgment of the majority of the directors of the company, the company has sufficient cash reserve in order to pay the salary.”
The compensation formula set out above remained unchanged until January 1, 1970. At a meeting of Putoma’s directors held on December 10, 1969, bonuses for Purselley and Hunt were discontinued as of December 31, 1969, and Purselley’s salary was set at $3,000 per month beginning January 1, 1970.
It is clear from these minutes of the Board that Putoma had no fixed obligation during the years involved to pay Hunt’s salary or Purselley’s bonus. Such obligation was not to come into being until sometime in the future when the directors determined that the corporation had sufficient cash reserve to make the payments.
Pro-Mac had a similar arrangement. Its books showed that Purselley was entitled to a bonus of 25% of the company’s profits and that Hunt was entitled to a bonus of 10% of the profits of the company. The Tax Court found that Pro-Mac’s liability for these salaries and bonuses, like those of Putoma, were contingent on the financial condition of the company.
We conclude that the obligation of Putoma and Pro-Mac to pay the salaries was not a fixed obligation but was contingent and conditioned on future events, namely, the financial condition of the corporations and the determination of the same by their Boards of Directors. In addition to the authorities cited above that prohibit the deduction of contingent and conditional obligations, see this court’s decision in Burlington-Rock Island Railroad Co. v. United States, 321 F.2d 817 (5 Cir. 1963), cert. denied, 377 U.S. 943, 84 S.Ct. 1349, 12 L.Ed.2d 306 (1964). In that case, the taxpayer sought to deduct accrued but unpaid interest on its debt to its shareholder-creditors. Under the terms of an agreement entered into with its creditors, the taxpayer was required to make the interest payments “from time to time, insofar as its cash situation will reasonably permit.” In disallowing the claimed interest deductions, this Court pointed out that the agreement created only a conditional obligation to pay the interest and that the creditors could enforce payment only by showing that taxpayer had sufficient funds for that purpose. The court then went on to conclude:
“Burlington’s [taxpayer’s] duty to pay the statutory interest was thus contingent upon its financial situation, and no legal obligation could arise under the agreement until the occurrence of that contingency.” 321 F.2d 821.
Also, see Pierce Estates v. Commissioner, 195 F.2d 475 (3 Cir. 1952). There, the taxpayer was obligated to pay annual interest at a fixed rate but only from its net income “as ascertained and declared by its board of directors.” The court held that the taxpayer had correctly deducted the interest in the year of payment rather than accruing and deducting the interest each year because its legal duty to pay the interest was contingent on the actions of its directors. In so holding, the court stated:
“Because interest is compensation for the use or forbearance of money it ordinarily accrues as an item of expense from day to day even though its payment may be deferred until a latter date. But this is not true if the payment is not merely deferred but the obligation to pay at all is wholly contingent upon the happening of a later event as, for example, the subsequent earning of profits. In the latter case, the interest may not be regarded as an accrued expense until the year in which, by the earnings of the profits the contingency is satisfied and the obligation to pay becomes fixed and absolute.” 195 F.2d 477.
We hold that the all-events test was not met as to salaries and bonuses of Purselley and Hunt and that the deductions of such items were improperly made by Putoma and Pro-Mac.
II. CANCELLATION BY SHAREHOLDER HUNT OF INDEBTEDNESS FOR ACCRUED INTEREST OWED TO HIM BY THE TWO CORPORATIONS
The facts regarding the appeal of this issue by the Commissioner were found by the Tax Court, as follows:
Putoma Corporation, which was organized in 1963, and Pro-Mac Company, which was formed in 1966, were both Texas corporations. Both corporations have always kept their books and records and filed their corporate income tax returns using the accrual basis of accounting. J. M. Hunt and Lee Roy Purselley each owed 50 percent of the stock of Putoma and Pro-Mac during the years in issue. Purselley served as president of both corporations while Hunt was treasurer of Putoma and secretary-treasurer of Pro-Mac. Putoma’s board of directors consisted of Purselley, Hunt and Harold Wright, Putoma’s accountant. Pro-Mac’s board of directors was comprised of Pursel-ley, Hunt and H. L. Farquhar.
Putoma and Pro-Mac were engaged in the business of making complex structural aircraft parts for the F-lll airplanes then being built by General Dynamics Corporation. On several occasions, Hunt purchased machinery needed by Putoma and Pro-Mac and resold it to the corporations at his cost. Hunt received no cash from the corporations with respect to these sales but instead received interest-bearing notes secured by chattel mortgages. Putoma and Pro-Mac claimed deductions on their returns for the accrued interest on the notes. The interest, however, was not paid to Hunt. Accordingly, Hunt as a cash basis taxpayer, did not include in his taxable income the accrued interest claimed as a deduction by Putoma and Pro-Mac.
On September 15, 1970, Hunt forgave the total amount of the accrued interest owed to him by both corporations ($24,950.44). The Commissioner determined that the cancellation of the previously deducted liability for accrued interest gave rise to taxable income to Putoma and Pro-Mac under the tax-benefit rule. In the alternative, the Commissioner determined that the amount of the cancelled accrued interest was includable in the income of Hunt. The Tax Court rejected the Commissioner’s alternative contention that the amount of cancelled interest was includable in the gross income of Hunt, a cash basis taxpayer. The Government filed a notice of appeal from this part of the Tax Court’s decision (T.C. No. 7471-73), but decided not to prosecute the appeal, and it has requested in its brief that such appeal be dismissed. Accordingly, the appeal of such issue is hereby dismissed.
The Tax Court in a reviewed opinion rejected the Commissioner’s position as to the cancellation of the accrued interest and held that such cancellation constituted a nontaxable contribution to the capital of Putoma and Pro-Mac, notwithstanding the tax benefits secured by the corporations through their prior interest deductions. Judge Simpson filed a dissenting opinion, in which Judges Raum and Sterrett joined, wherein he expressed the view that the majority erred in failing to apply the tax-benefit rule.
The sole question to be resolved in this part of the instant case is whether or not the tax-benefit rule required Putoma and Pro-Mac to restore the deducted interest owed to Hunt to their income in the year Hunt cancelled their interest indebtedness. The tax-benefit rule is generally described as follows:
“The recovery of an item previously deducted — is includible in income in the year of recovery except to the extent the previous deduction did not result in any tax benefit to the taxpayer.” 34 Am. Jur.2d, Federal Taxation, ¶ 5251, p. 217, 1978.
Section 111 of the 1954 Code accorded tax-benefit treatment only to the recovery of bad debts, prior taxes and delinquency accounts, but Treasury Regulations have broadened the rule of exclusion by extending similar treatment to “all other losses, expenditures, and accruals made the basis of deductions from gross income for prior taxable years — See Treasury Regulation, § 1.111-1.
Congress has provided in Sections 102 and 118 of the Code certain exclusions from gross income, namely (as far as this case is concerned), the value of property acquired by gift, or in the case of a corporation, contribution to its capital.
These Sections of the Code are, in effect, exceptions to the tax-benefit rule, when applicable to a particular case under consideration, and in such an instance prevent the universal application of the rule “across the board” in every case. This is especially true where, as in the instant case, the recovery of an item deducted by the taxpayers in a previous year and recovered in a later year is both a gift and a contribution to the capital of a corporation.
Pursuant to Section 118 of the Code, the Treasury Department issued Regulation, Sec. 1.118-1, which provides that contributions to the capital of a corporation, whether by a shareholder or an outsider, are not included in the gross income of the taxpayer corporation.
Prior to 1939, Treasury Regulations 101, Art. 22(a)-14 (1938 Revenue Act) provided, in pertinent part, as follows (without the underlined language):
“In general, if a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt.”
In 1938 the Regulations were amended by the insertion of the above underlined language, and they have remained unchanged since 1938 and are currently designated as Treasury Regulations on Income Tax, Section 1.61-12(a). The argument of the Commissioner, with respect to this amended Regulation will be discussed below.
The Commissioner argues, in effect, that the tax-benefit rule should be applied “across the board” in every case, including the one before us, where an expense item (interest here) has been deducted but not paid by a taxpayer (Putoma and Pro-Mac here), and recovered in a later year (when Hunt cancelled the interest) must be restored to taxable income of the taxpayers during the year of recovery, regardless of the circumstances. We do not agree.
In this regard, the Government states in its brief:
“Indeed, it is well established that the tax-benefit rule has general application in all areas of the tax law. Thus, it has been held applicable to the recovery of previously expensed bad debts (Home Savings & Loan Ass’n v. United States, 514 F.2d 1199 (C.A.9, 1975), cert. denied, 423 U.S. 1015 [96 S.Ct. 449, 46 L.Ed.2d 386] (1975); Merchants Nat. Bank v. Commissioner, 199 F.2d 657 (C.A.5, 1952); Citizens Federal S. & L. Ass’n of Cleveland v. United States, 290 F.2d 932 [154 Ct.Cl. 305] (Ct.Cl., 1961)); recovery with respect to securities written off as worthless (Dobson v. Commissioner, 321 U.S. 231 [64 S.Ct. 495, 88 L.Ed. 691] (1944)); recovery of taxes previously deducted (Union Trust Co. v. Commissioner, 111 F.2d 60 (C.A.7, 1940), cert. denied, 311 U.S. 658 [61 S.Ct. 12, 85 L.Ed. 421] (1940)); reimbursements for guaranty and legal payments (Goodman v. Helvering, 115 F.2d 242 (C.A.2, 1940)); recoupment of losses under construction contracts (Burnet v. Sanford & Brooks Co., 282 U.S. 359 [51 S.Ct. 150, 75 L.Ed. 383] (1931)); insurance recoveries in subsequent years (Volspar Corp. v. Commissioner, T.C. Memo Op. Dkt 7621 (1946); Zeeman v. United States, 275 F.Supp. 235 (S.D.N.Y., 1967), aff’d and remanded, 395 F.2d 861 (C.A.2, 1968)). Further, the tax-benefit rule has been held to require that previously expensed items which are sold or disposed of for value in a later taxable period in connection with a corporate liquidation must be included in income. See Commissioner v. Anders, 414 F.2d 1283 (C.A.10, 1969); Anders v. United States, 462 F.2d 1147 [199 Ct.Cl. 1] (Ct.Cl., 1972); Spitalny v. United States, 430 F.2d 195 (C.A.9, 1970).”
Without discussing these cases in detail, suffice it to say that it is obvious that they do not involve the same facts that we have in the instant case, such as a gift and a contribution to a corporation’s capital, and are clearly distinguishable. The tax-benefit rule is one that has been created by the judiciary, except to the extent some parts of it have now been included in the Treasury Regulations cited above. Such a judicially created rule cannot supercede and take precedence over the statutes enacted by Congress, such as 26 U.S.C.A., Sections 102, 111, and 118 quoted above.
We acknowledge that the tax-benefit rule is viable and may be applied in a proper case. In fact, we used it in Mayfair Minerals, Inc. v. C. I. R., 456 F.2d 622 (5 Cir. 1972) where the taxpayer, a utility company, accrued and deducted amounts representing refunds due its customers. The company’s liability to make the refunds was subsequently cancelled and the Commissioner determined that under the tax-benefit rule the previously deducted amounts had to be restored to the taxpayer’s income. This Court agreed, saying:
“When an accrual basis taxpayer accrues an expense and offsets it against taxable income, and subsequently the expense is not paid, the amount of the prior deduction must be restored to income in the year the liability is extinguished. Rothensies v. Electric Storage Battery Co., 1946, 329 U.S. 296, 67 S.Ct. 271, 91 L.Ed. 296 * * *. Taxpayer, having received the prior tax benefits from the accrued deductions, realized income in 1961. Bear Manufacturing Co. v. United States, 7 Cir. 1970, 430 F.2d 152, cert. denied, 400 U.S. 1021, 91 S.Ct. 583, 27 L.Ed.2d 632.” 456 F.2d 623.
The Government relies heavily on the Mayfair Minerals case here and contends that it should control our decision in the instant case. We do not agree. That case is clearly distinguishable as it did not involve a gift within the meaning of the Code nor a contribution to the capital of the corporation.
The Government also relies on Alice Phe-lan Corporation v. United States, 381 F.2d 399, 401-2, 180 Ct.Cl. 659, 663 (1967), decided by the Court of Claims, in which the court held:
“Yet the principle is well engrained in our tax law that the return or recovery of property that was once the subject of an income tax deduction must be treated as income in the year of its recovery. Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 67 S.Ct. 271, 91 L.Ed. 296 (1946); Estate of Block v. Commissioner, 39 B.T.A. 338 (1939), aff’d sub nom. Union Trust Co. v. Commissioner, 111 F.2d 60 (7th Cir.), cert. denied, 311 U.S. 658, 61 S.Ct. 12, 85 L.Ed. 421 (1940).”
In that case the Alice Phelan Corporation conveyed certain real estate to a donee for religious or educational purposes and claimed a charitable deduction from its income tax. Years later the donee decided not to use the gifts and returned the property. The Commissioner and the Court of Claims required the Alice Phelan Corporation to include the value of the property in its income in the year it was returned. Here again, the case is distinguishable from our case. There, when the donee returned the property, it was not done with the intention, purpose or motive to make a gift to the donor within the meaning of the Code. The donee returned the property for the simple reason that it had decided not to use it and did not need it. Being a religious and educational entity, the donee no doubt concluded that it would be right and proper to return the property to the donor from whence it came. Furthermore, the donee had no intention, motive or purpose to contribute to the capital of the Alice Phelan Corporation. As far as the record shows in that case, the donee had no knowledge of the capital structure of the corporation and never considered nor intended to contribute to its capital. It simply returned property it did not need. Under these circumstances, the Commissioner and the Court of Claims were correct in requiring the corporation to restore the value of the property to its income in the year of its recovery.
The leading case in this area of the law is Helvering v. American Dental Co., 318 U.S. 322, 63 S.Ct. 577, 87 L.Ed. 785 (1943). That case and its progeny are dispositive of the instant case and will be discussed below.
Prior to the American Dental Company case, the Second Circuit Court of Appeals had occasion to consider some of the problems involved here in the case of C. I. R. v. Auto Strop Safety Razor Co., Inc., 74 F.2d 226 (2 Cir. 1934), and in Carroll-McCreary Co., Inc. v. C. I. R., 124 F.2d 303 (2 Cir. 1941). In the Auto Strop Safety Razor Co. case a shareholder and creditor of a corporation cancelled the debt of the corporation, which kept its books on an accrual basis, and the amount of the cancelled debt was credited to the surplus account of the corporation. The Commissioner added this amount to the income of the corporation. The Tax Court (then the Board of Tax Appeals) reversed the Commissioner, which reversal was affirmed by the court. The court said:
“Article 49 of Regulations 69 which went into effect under the Revenue Act of 1918 substantially as it is quoted below and has so been continued reads:
‘Art. 49. Forgiveness of Indebtedness — The cancellation and forgiveness-of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.’
“The Board found that the sole stockholder of the Auto Strop Safety Razor Company acted gratuitously in forgiving the debt, and, as there was evidence to support the finding, we accept it. It held correctly in accordance with the above regulation that by the transaction, being a contribution to its capital, the Auto Strop Safety Razor Company did not receive taxable income.” 74 F.2d 226 (Emphasis supplied).
In Carroll-McCreary v. C. I. R., supra, the Second Circuit Court held that the cancellation by officer-shareholders of salaries owed to them by an accrual basis corporation and deducted by it in prior years was a contribution to its capital by the officer-shareholders and was not income to the corporation in a subsequent year when the debt was cancelled. In so holding, the court stated:
“Article 24(a)-14 of Regulation 86, promulgated under the Revenue Act of 1934, is set out in the margin. The petitioner relies upon that provision of the article which says that ‘If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.’ Contributions to capital are, of course, not taxable as corporate income. But the Board held that income was realized by the petitioner since the case at bar fails outside the scope of the Regulation. This conclusion was reached on the ground that forgiveness of the debt for the unpaid salaries was not gratuitous because the officer shareholders obtained advantages ‘in furthering the life of the company as accomplished by the agreement providing for the cancellation.’ Such a construction of the Regulation deprives it of any function whatever; for an indirect benefit of this character always results to the shareholder from a gift to his corporation. At least, this is true if the corporation is a going concern or if the gift enables it to continue in business even though insolvent. In our opinion the phrase ‘gratuitously forgives the debt’ means simply that no consideration is paid by the corporation for release of the debt. We find nothing in Helvering v. Jane Holding Corp., 8 Cir., 109 F.2d 933, conflicting with this interpretation. The Board’s order cannot be supported on the ground that release of the debts was not

Question: Is the opinion writer identified in the opinion, or was the opinion per curiam?
A. Signed, with reasons
B. Per curiam, with reasons
C. Not ascertained
Answer:

Answer: A