Opinion ID: 368059
Heading Depth: 1
Heading Rank: 2

Heading: cancellation by shareholder hunt of indebtedness for

Text: 51 ACCRUED INTEREST OWED TO HIM BY THE TWO CORPORATIONS 52 The facts regarding the appeal of this issue by the Commissioner were found by the Tax Court, as follows: 53 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 Purselley, Hunt and H. L. Farquhar. 8 54 Putoma and Pro-Mac were engaged in the business of making complex structural aircraft parts for the F-111 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. 55 On September 15, 1970, Hunt forgave the total amount of the accrued interest owed to him by both corporations ($24,950.44). 9 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. 56 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. 57 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: 58 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, P 5251, p. 217, 1978. 10 59 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. 11 60 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. 12 61 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. 62 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. 13 63 Prior to 1939, Treasury Regulations 101, Art. 22(a)-14 (1938 Revenue Act) provided, in pertinent part, as follows (without the underlined language): 64 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. 65 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. 66 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. 67 In this regard, the Government states in its brief: 68 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). 69 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. 70 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: 71 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. 72 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. 73 The Government also relies on Alice Phelan 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: 74 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). 75 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. 76 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. 77 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: 78 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.' 79 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). 80 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: 81 Article 24(a)-14 of Regulation 86, promulgated under the Revenue Act of 1934, is set out in the margin. 1 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 falls 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 'gratuitous'; it was. 82  . . . Article 24(a)-14 states broadly that a debt gratuitously forgiven by a shareholder is considered a contribution to capital. There is nothing in the language of the Article to suggest the Commissioner's limited construction that the Article is not to apply if the debts or items of expense they represent, have been used to decrease the corporation's income taxes in the prior years. That consideration we said in Commissioner v. Auto Strop Safety Razor Co., 2 Cir., 74 F.2d 226, 227, is foreign to the question of determining whether the release of a debt amounts to a contribution to capital. Moreover, if release by a shareholder-creditor is to be considered income in case the released debt has been used to reduce taxable income in a prior year, the same result should follow when bankruptcy discharges a claim for interest, wages or business expense deducted from gross income; yet the Regulation states clearly that income is not realized by a taxpayer by virtue of the discharge of his indebtedness in bankruptcy. We adhere to our decision in the Auto Strop case and hold that under the Regulation the petitioner at bar realized no income from the gratuitous cancellation of the debts for unpaid salaries owing to its officer shareholders. 83 This conclusion is not at variance with the actual decision in Helvering v. Jane Holding Corp., 8 Cir., 109 F.2d 933. As Judge Woodrough noted, at page 942, of 109 F.2d, this case is distinguishable from our Auto Strop decision because in the case before him the cancellation of the debt was not gratuitous and improvement of the capital structure was not the moving consideration for the cancellation. In so far as the opinion contains dicta contrary to the construction we have given the Regulation, we must respectfully disagree with them. 124 F.2d 304, 305. (Emphasis supplied). 84 We now come to the case of Helvering v. American Dental Co., supra. In that case an accrual basis corporation owed interest on notes and also back rent which it had deducted from its income prior to 1936. In 1937 the note holders cancelled the interest and the landlord cancelled a part of the back rent. The Commissioner ruled that such cancellations resulted in income to the corporation in 1937 and assessed a deficiency. The court of appeals reversed on the ground that the cancellations were exempt gifts (128 F.2d 254). The Supreme Court affirmed the decision of the court of appeals. As to the item of cancelled interest, the case was practically on all fours with the case before us. The Supreme Court held that the cancellation of the interest and a part of the rent was a gratuitous contribution to the capital of the corporation, and, therefore, a gift that was non-taxable. The court said: 85 Where a stockholder gratuitously forgives the corporation's debt to himself, the transaction has long been recognized by the Treasury as a contribution to the capital of the corporation. Regulations 45, Art. 51, through to Regulations 94, Art. 22(a)-14. Commissioner (of Internal Revenue) v. Auto Strop Safety Razor Co. (CCA 2d) 74 F.2d 226. 8 86 Gifts, however, is a generic word of broad connotation, taking coloration from the context of the particular statute in which it may appear. Its plain meaning in its present setting denotes, it seems to us, the receipt of financial advantages gratuitously. 87 The Board of Tax Appeals decided that these cancellations were not gifts under § 22(b)(3). It was said: 88 'No evidence was introduced to show a donative intent upon the part of any creditor. The evidence indicates, on the contrary, that the creditors acted for purely business reasons and did not forgive the debts for altruistic reasons or out of pure generosity.' 44 B.T.A. 425, 428. 89 With this conclusion we cannot agree. We do not feel bound by the finding of the Board because it reached its conclusions, in our opinion, upon an application of erroneous legal standards. Section 22(b)(3) exempts gifts. This does not leave the Tax Court of the United States free to determine at will or upon evidence and without judicial review the tests to be applied to facts to determine whether the result is or is not a gift. The fact that the motives leading to the cancellations were those of business or even selfish, if it be true, is not significant. The forgiveness was gratuitous, a release of something to the debtor for nothing, and sufficient to make the cancellation here gifts within the statute. Affirmed. 318 U.S. 328, 330, 63 S.Ct. 580, 87 L.Ed. 790, 791. (Emphasis supplied). 90 As shown above, the court held that the plain meaning of the word gifts denotes the receipt of financial advantages gratuitously and is a forgiveness or release of something to the debtor for nothing. 91 The Supreme Court changed somewhat its concept of the meaning of the word gifts in the tax laws and regulations in the case of C. I. R. v. Jacobson, 336 U.S. 28, 69 S.Ct. 358, 93 L.Ed. 477 (1949). In that case a natural person had issued bonds at face value and later bought them at a discount from various holders. The question was whether the discounted savings were gifts and non-taxable or were taxable as income to him. The court held that there was no intent on the part of the sellers to make gifts nor any intent on their part to transfer or release something for nothing, and, therefore, the gain was not a gift and was taxable to the taxpayer in the tax year in which he made the purchases. The court said: 92 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 exception of gifts from taxation prescribed by § 22(b)(3). 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. 93 The facts and findings in this case do not establish any such intent of the seller to make a gift in contradiction of the natural implications arising from the sales and assignments which he made. 94 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. (U.S.) supra, than in the sale of the 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 justified in finding a taxable gain, rather than an exempt gift, in each of the transactions before us. The judgment of the Court of Appeals accordingly is reversed and the cause is remanded for further action in accordance with this opinion. 95 It is so ordered. 96 336 U.S. 47, 51-52, 69 S.Ct. 368, 370, 93 L.Ed. 488, 490. 97 By this decision, the Supreme Court established the principle that in order for financial gain resulting from a transfer of property, or the cancellation of a debt, to be an exempt gift and non-taxable to the recipient, there must have been an intent on the part of the party making the transfer or cancellation to make a gift. In other words, the mere fact that it was gratuitous is not enough. The court also pointed out that the situation in each (case) is a factual one. 98 The Supreme Court further amplified the meaning of the word gift in the tax laws and regulations, and laid down guidelines that may be followed in determining whether a transaction is a gift, in the case of C. I. R. v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). In that case a corporation transferred a Cadillac automobile to a taxpayer who had supplied the corporation with the names of potential customers for its products. The question in the case was whether the transfer was a non-taxable gift to the taxpayer. The court held that it was not a gift, but was payment for the taxpayer's services or an inducement for him to be of further service in the future. 99 In disposing of the case, the court refused to promulgate a new test as to what is or is not a gift. However, it did hold that the term gift is not used in the statute in the common-law sense, but in a more colloquial sense. The court stated that a transfer of property without consideration, though a common-law gift, is not necessarily a gift within the meaning of the statute. The court held further that the most critical consideration is the transferor's intention or basic reason the dominant reason for making the transfer. All of the factors must be considered by the trier of facts in each case to determine whether a transfer amounts to a gift. Where the trial is held by a judge, his findings must stand unless clearly erroneous. In so holding, the Supreme Court said: 100 The meaning of the term 'gift' as applied to particular transfers has always been a matter of contention. Specific and illuminating legislative history on the point does not appear to exist. Analogies and inferences drawn from other revenue provisions, such as the estate and gift taxes, are dubious. See Lockard v. Commissioner (CA1) 166 F.2d 409. The meaning of the statutory term has been shaped largely by the decisional law. 101 The Government suggests that we promulgate a new 'test' in this area to serve as a standard to be applied by the lower courts and by the Tax Court in dealing with the numerous cases that arise. We reject this invitation. We are of opinion that the governing principles are necessarily general and have already been spelled out in the opinions of this Court and that the problem is one which, under the present statutory framework, does not lend itself to any more definitive statement that would produce a talisman for the solution of concrete cases. 102 The course of decision here makes it plain that the statute does not use the term 'gift' in the common-law sense, but in a more colloquial sense. This Court has indicated that a voluntarily executed transfer of his property by one to another, without any consideration or compensation therefor, though a common-law gift, is not necessarily a 'gift' within the meaning of the statute. For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730, 49 S.Ct. 499 (, 504, 73 L.Ed. 918, 928). And, importantly, if the payment proceeds primarily from 'the constraining force of any moral or legal duty,' or from 'the incentive of anticipated benefit' of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, (58 S.Ct. 61, 65, 82 L.Ed. 32, 37,) it is not a gift. And, conversely, '(w)here the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.' Robertson v. United States, 343 U.S. 711, 714, (72 S.Ct. 994, 996, 96 L.Ed. 1237, 1240). A gift in the statutory sense, on the other hand, proceeds from a 'detached and disinterested generosity.' Commissioner (of Internal Revenue) v. Lo Bue, 351 U.S. 243, 246 (, 76 S.Ct. 800, 803, 100 L.Ed. 1142, 1147); 'out of affection, respect, admiration, charity or like impulses.' Robertson v. United States, supra 343 U.S. at page 714, (72 S.Ct. 994 at page 996). And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's 'intention.' Bogardus v. Commissioner, 302 U.S. 34, 43, (58 S.Ct. 61, 65, 82 L.Ed. 32, 38). 'What controls is the intention with which payment, however, voluntary, has been made.'  103 We take it that the proper criterion, established by decision here, is one that inquires what the basic reason for his conduct was in fact the dominant reason that explains his action in making the transfer. Further than that we do not think it profitable to go. . . . The conclusion whether a transfer amounts to a 'gift' is one that must be reached on consideration of all the factors. 104 Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case. 105 . . . primary weight in this area must be given to the conclusions of the trier of fact. 106 But the question here remains basically one of fact, for determination on a case-by-case basis. 107 Where the trial has been by a judge without a jury, the judge's findings must stand unless 'clearly erroneous.' Fed.Rules Civ.Proc. 52(a) (28 U.S.C.A.). 108 A majority of the Court is in accord with the principles just outlined. And, applying them to the Duberstein Case, we are in agreement, on the evidence we have set forth, that it cannot be said that the conclusion of the Tax Court was 'clearly erroneous.' It seems to us plain that as trier of the facts it was warranted in concluding that despite the characterization of the transfer of the Cadillac by the parties and the absence of any obligation, even of a moral nature, to make it, it was at bottom a recompense for Duberstein's past services, or an inducement for him to be of further service in the future. 363 U.S. 284, 285-286, 288, 289, 290, 291-292, 80 S.Ct. 1196-1197, 1198-1199, 1200, 4 L.Ed.2d 1224, 1225, 1226, 1227, 1228. 109 While the definition of a gift as stated in American Dental Co. case was modified somewhat in the case of Commissioner v. Jacobson, that case cited the American Dental Co. case with approval, and the latter case cited Commissioner v. Auto Strop Safety Razor Co., supra, with approval. Suffice it to say, American Dental has continued to be a leading case that precludes taxation of cancelled debts that have been deducted previously, in situations similar to the facts in the instant case. In Reynolds v. Boos, 188 F.2d 322 (8 Cir. 1951) back rent had been cancelled for a lessee who had previously deducted it. Relying on American Dental, the court held that the item was non-taxable as a gift, saying: 110 The Supreme Court specifically said in Dobson v. Commissioner of I. R., 320 U.S. 489, 506, 64 S.Ct. 239, 249, 88 L.Ed. 248, We are not adopting any rule of tax benefits. And, in any event, the American Dental Co. case, supra, 318 U.S. 322, 63 S.Ct. 577, 87 L.Ed. 785, makes clear that the Tax-benefit argument has no place in the present situation. In that case, the identical situation of alleged tax benefits existed as in our case. The opinion of the Supreme Court noted 318 U.S. at page 323, 63 S.Ct. at page 578, that 'This back rent had been accrued as an expense', but it nevertheless held that the subsequent cancellation had constituted a gift and so could not be taxed as income. See also American Dental Co. v. Commissioner of I. R., 7 Cir., 128 F.2d 254. We are aware of no departure by the Supreme Court from that position in a gift situation. 188 F.2d 326. (Emphasis supplied). 111 See also Commissioner v. Fender Sales, 338 F.2d 924 (9 Cir. 1964); Utilities & Industries Corp., 41 T.C. 888 (1964); Hartland Associates, 54 T.C. 1580 (1970); George Hall Corp., 2 T.C. 146 (1943); Pancoast Hotel Co., 2 T.C. 362 (1943); McConway & Torley Corp., 2 T.C. 593 (1943); and Midland Tailors, 2 T.C.M. 281 (1943). 112 The Commissioner argues that since the amendment of Treasury Regulation 101, Art. 22(a)-14, (1938 Revenue Act), (Now Regulation 1.61-12), effective January 1, 1938, the contribution to the capital of a corporation by the gratuitous cancellation of a previously deducted debt by a shareholder extends or applies only to the Principal of the debt and not to the interest. The Commissioner has made this argument in many cases, but it was rejected in the Auto Strop case and in the Carroll-McCreary case. Only one circuit court of appeals has agreed with the argument, namely the 8th Circuit Court in the case of Helvering v. Jane Holding Corporation, 109 F.2d 933 (8 Cir. 1940), but Judge Woodrough who wrote the opinion in that case himself distinguished it from the Auto Strop Safety Razor Co. case as follows: 113 The Board of Tax Appeals to sustain its conclusion against the tax in this case relied upon the decision of the Court of Appeals of the Second Circuit, Commissioner v. Auto Strop Razor Company, 74 F.2d 226, 227. In that case the court sustained a finding made by the Board of Tax Appeals that a debt owing by the taxpayer corporation to its sole stockholder had been gratuitously forgiven. The court held that the Regulation (identical with 77, Article 64, supra), should be applied and that in accordance with the regulation the taxpayer did not receive taxable income. It also clearly appeared in the case that in fact the purpose of the forgiveness of the taxpayer's debt was to improve its capital structure and that a contribution to capital was intended. To the extent that the decision was rested on the regulation, and the established intent to improve the capital structure, The case is to be distinguished from the present case, because in this case the cancellation of the debt was not gratuitous and it is evident here that improvement of capital structure was not the moving consideration for the cancellation. 109 F.2d 942. (Emphasis supplied). 114 In commenting on this argument of the Commissioner, the Tax Court held in Midland Tailors, supra : 115 Respondent's position is simply that the transaction was not the payment of a voluntary assessment upon stock in petitioner under the first cited Regulation, but a forgiveness of indebtedness to its three shareholders by petitioner which resulted in the realization of income to petitioner under the cited Regulation since, he argues, it was not the forgiveness of a principal debt. 116 The italicized words of the Regulation quoted in the margin were added as of January 1, 1938. Respondent urges that the Regulation as it formerly appeared should be construed as it now reads. But, in any event it is argued that its import, as changed and effective during the taxable year, renders taxable the forgiveness of the indebtedness here for accrued and unpaid salaries from petitioner to its shareholders. 117 In the recent opinion of this Court in George Hall Corp., 2 T.C. 146 (Dec. 13, 1941), it was held that 'as a legal proposition' the voluntary cancellation of debenture interest by a debenture holder, who was also a stockholder, was a gift and thus not taxable income to the recipient corporation, upon the authority of Helvering v. American Dental Co., 318 U.S. 322 (63 S.Ct. 577, 87 L.Ed. 785) (43-1 USTC # 9318). In that Opinion of this Court it was added that 'The fact that the regulations may give ground for calling it also a contribution of capital, cf. Carroll-McCreary Co. v. Commissioner, 124 F.2d 303 (42-1 USTC P 9183), does not affect the decision.' 118 Since there is no difference, at least for present purposes, between the facts here and those in the Hall case, supra, we follow the precedent there established and reverse the respondent in his contested determination. 2 TCM 284. 119 While we realize that the present regulation (1.61-12) does limit the cancelled debt to the principal, we consider it merely as the Commissioner's interpretation of the statutes, which is not binding on us and with which we do not agree. We find nothing in the statutes that authorizes such a limitation. 120 When the requirements set forth in the American Dental, Jacobson, and Duberstein cases for a non-taxable gratuitous gift to a person or corporation, or a gratuitous contribution to the capital of a corporation, are considered and applied to the facts of the instant case, we find and conclude that such requirements have been met by Hunt, Putoma and Pro-Mac. This is true whether the cancellation of the interest by Hunt is considered to be a gift within the meaning of Section 102 of the Code, or is held to be a contribution to the capital of the corporations within the meaning of Section 118 of the statute, or both. The findings of fact by the Tax Court support this conclusion. 121 The Tax Court found that Putoma and Pro-Mac were in the business of making parts for the F-111 airplane for the Government. In 1969 the F-111 program was sharply curtailed and as a result Putoma and Pro-Mac suffered severe decline in their sales. In order to reflect a better financial condition to creditors and potential lenders, Hunt and Purselley cancelled corporate salaries and bonuses owed to them, and Hunt cancelled interest on notes owed to him by the corporations. This was done at the request of the corporations. When Hunt cancelled the interest he made a gratuitous contribution of the interest to the capital of the corporations without consideration. 122 It is evident from these findings that Hunt intended to contribute to the capital of the corporations by making a gift to them of the cancelled interest; that the dominant reason for his doing so was to improve their financial condition; that the cancellation was voluntary, gratuitous, and without consideration or payment of any kind to him; and that there was no Quid pro quo given nor received for such cancellation. 123 The Tax Court held that Hunt made a contribution to the capital of the corporations when he cancelled the interest, and that the tax-benefit rule was not applicable, and the corporations were not required to include the cancelled interest in their income in the taxable year of its cancellation. We agree. 124 We hold that under the facts of this case Hunt made a gift to the corporations within the meaning of Section 102 by contributing to their capital within the meaning of Section 118 of the Internal Revenue Code (26 U.S.C.A. §§ 102 and 118) when he cancelled the interest. We hold further that the tax-benefit rule is not applicable and is superceded in this case by the above Sections of the Code. Consequently, Putoma and Pro-Mac were not required to include the cancelled interest in their gross income in the taxable year of its cancellation. 125 The judgment of the Tax Court is affirmed. 126 AFFIRMED. 127