Court Opinion

ID: 4495792
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:31.153331+00
Date Added: 2024-06-11T08:00:12.677464
License: Public Domain

*1201OPINION.
MoRRis:
In connection with the claimed deduction of $68,052.50 for bond premium, the case before us is this: In connection with the purchase of the assets of its four subsidiaries, several years prior to the taxable year, petitioner agreed to pay sellers’ outstanding bonds. In 1930, petitioner caused to be called all of the said bonds then outstanding and paid in redemption thereof $68,052.50 more than their face.
The case, as thus presented, is the direct converse of Helvering v. American Chicle Co., 291 U. S. 426. The facts in that case were *1202summarized by the Court, as follows: “In connection with the purchase of the assets of another company, in 1914, respondent assumed— agreed to pay — more than $2,000,000 of the seller’s outstanding bonds. During 1922, 1924 and 1925 it purchased a considerable number of these bonds in the market at less than their face. The Commissioner assessed the difference between these two amounts as income.” Upon those facts, the Court held, as follows:
We know nothing concerning the nature of the assets acquired from the Sen Sen Company, have no means of ascertaining what has become of them, or whether any of them still exist. Nothing indicates whether respondent lost or gained by the transaction.
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We find nothing to distinguish this cause in principle from United States v. Kirby Lumber Co., 284 U. S. 1, 52 S. Ct. 4, 76 L. Ed. 131. The doctrine there announced is controlling here. Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 46 S. Ct. 449, 70 L. Ed. 886, is not applicable. The final outcome of the dealings was revealed — the taxpayer suffered a loss. Here, for aught we know, there was substantial profit — certainly, the record does not show the contrary. Doubtless, respondent’s books indicated a decrease of liabilities with corresponding increase of net assets.
Earlier, this Board had held in American Chicle Co., 23 B. T. A. 221, that the transactions in which the American Chicle Co. purchased the seller’s bonds were capital transactions — payments on the purchase price of assets — that in nowise impinged upon net income; and that view was upheld by the Circuit Court of Appeals, Second Circuit, in Commissioner v. American Chicle Co., 65 Fed. (2d) 454, but, as indicated above, was reversed by the Supreme Court.
It is clear from the above opinion that a gain does not necessarily result upon the discharge of an obligation for less than its face. That is clearly to be drawn from the Court’s statement that “Nothing indicates whether respondent lost or gained by the transaction”, when read in the light of the Court’s further statement that respondent “purchased a considerable number of these bonds in the market at less than face.” So, too, we read the earlier opinions of the same Court in Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; and United States v. Kirby Lumber Co., 284 U. S. 1.
In Bowers v. Kerbaugh-Empire Co., supra, the taxpayer borrowed several amounts on its own promissory notes, repayable in German marks or their equivalent in gold coin of the United States. The several amounts borrowed were contemporaneously advanced to a subsidiary and were expended and lost in the performance of construction contracts. The losses, exceeding the subsidiary’s income by more than $684,456.18, were allowed as deductions in the subsidiary’s returns for 1913, 1914, 1916, 1917, and 1918. In 1921, on the demand of the Alien Property Custodian, the taxpayer made full settlement of principal and interest owing on its notes. *1203Measured by United States gold coin the difference between the value of the marks borrowed at the time the loans were made and the amount paid to the Custodian was $684,456.18, and the Commissioner held that amount to be income. The Court held that looking at the entire transaction there was no gain, but a loss, stating as follows:
The transaction here in question did not result in gain from capital and labor, or from! either of them, or in profit gained through the sale or conversion of capital. The essential facts set forth in the complaint are the loans in 1911, 1912 and 1913, the loss in 1913 to 1918 of the moneys borrowed, the excess of such losses over income by more than the item here in. controversy, and payment in the equivalent of marks greatly depreciated in value. The result of the whole transaction was a loss.
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The contention that the item in question is cash gain disregards the fact that the borrowed money was lost, and that the excess of such loss over income was more than the amount borrowed. When the loans were made and notes given, the assets and liabilities of defendant in error were increased alike. The loss of the money borrowed wiped out the increase of assets, but the liability remained. The assets were further diminished by payment of the debt. The loss was less than it would have been if marks had not declined in value; but the mere diminution of loss is not gain, profit or income.
If the intervening events be disregarded and the transaction treated as isolated therefrom, there was a clear gain to the taxpayer, due to the fact that at the time of payment the marks had fallen in value. But the Court concluded that the result could only be determined from an examination of the whole transaction — -the loans, the loss of proceeds of the loans, and payment in the equivalent of depreciated marks — and, upon such an examination, it was determined that the result was a clear loss.
In United States v. Kirby Lumber Co., supra, the taxpayer issued its own bonds for cash, at par, and in the same year purchased some of the bonds at $137,521.30 less than par. The Court held that amount to be income, stating as follows:
In Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 46 S. Ct. 449, 70 L. Ed. 886, the defendant in error owned the stock of another company that had borrowed money repayable in marks or their equivalent for an enterprise that failed. At the time of payment the marks had fallen in value, which so far as it went was a gain for the defendant in error, and it was contended .by the plaintiff in error that the gain was taxable income. But the transaction as a whole was a loss, and the contention was denied. Here there \was no shrinkage of assets and the taxpayer made a clear gain. As a result < of its dealings it made available $137,521.30 assets previously offset by the ^obligation of bonds now extinct.
As we read these three opinions of the Supreme Court, the tax 'consequences of transactions like those under consideration are to Ibe determined with reference to the nature of the assets acquired, *1204their value when acquired, their disposition, and amounts paid for the purchase or in redemption of the bonds; and if these factors, as a whole, reveal that the taxpayer actually has been enriched or suffered a loss by the transactions, the results must be recognized for tax purposes.
In the instant case, we know little or nothing about the circumstances under which petitioner acquired the assets of its four subsidiaries many years before the taxable year, nothing concerning the nature and value of those assets, and have no knowledge as to what has become of them, or whether any of them still exist. All we know is that the petitioner, in connection with the purchase of the subsidiaries’ assets, agreed to pay their bonds and actually paid $68,052.50 more than their par value in the redemption thereof. But if the fact of payment of the bonds at less than par was insufficient for the Court to conclude that there was a gain, in Helvering v. American Chicle Co., supra, so here, the fact of petitioner’s payment of the subsidiaries’ bonds at more than par is insufficient to support a deduction for the amount paid above par. We know, as a matter of general knowledge, that corporate bonds are frequently sold by the issuing companies at prices above par; and it is neither a harsh nor arbitrary suggestion here that the consideration received by petitioner for agreeing to pay the subsidiaries’ bonds may have been worth more than the face of the bonds and as much as petitioner paid in redemption of the bonds. Certainly, the record does not show the contrary. In that event, the petitioner’s loss would be less than the amount claimed and might be nil.
The petitioner argues, however, that the bonds were paid by the subsidiaries out of funds furnished by the petitioner, and, therefore, that deductions for the amounts paid above the face of the bonds are available to the subsidiaries in computing the consolidated net income. Of course, after all, what the petitioner here is seeking is the deduction of the amounts in the computation of consolidated net income; and it makes little or no difference whether the deductions be attributed to the petitioner or its subsidiaries. In either event, the effect upon consolidated net income would be the same. But in order that the deductions may be made in the consolidated return, they must be available, as a matter of statutory right, to one or the other. We do not agree that the subsidiaries may deduct the amounts paid in excess of the face of the bonds. The petitioner agreed to pay and actually paid the bonds; and the loss, if any, resulting therefrom was sustained by petitioner and not the subsidiaries. Cf. Helvering v. American Chicle Co., supra. The subsidiaries were merely conduits through which petitioner’s payments passed to the bondholders. But even if the petitioner’s contention in this respect could be conceded as correct in principle, the loss is *1205not determinable, for the record does not show the considerations received by the subsidiaries for the bonds when issued.
It might be further argued that the subsidiaries actually sustained the losses resulting from the payment of the bonds at more than their face, since they conveyed their assets in consideration for petitioner’s promise to pay the bonds. But, in that event, their losses would be measured by the excess of the cost of the assets to them over the considerations they received for the bonds, and such excess is not shown by the record.
As to the claimed deduction of $18,419.60 for unamortized discount and expenses incurred by the Contra Costa Gas Co. in connection with the issuance of its bonds in 1914, the issue must be resolved against the petitioner. The reason for recognizing discount was stated in Pierce Oil Corporation, 32 B. T. A. 403, as follows:
The reason for recognizing discount is the anticipation of payment at maturity of the full amount of the obligation, which amount is greater than the amount originally received. Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289. During the period of the obligation the supposition .is indulged that it will be paid in full, and this supposition is what supports the amortization of the discount. Helvering v. Union Pacific R. R. Co., 293 U. S. 282.
The same reasoning applies to the recognition of expenses incurred in connection with the issuance of bonds. From 1914 to 1923, Contra Costa Gas Co. was entitled to amortize the discount and expenses incurred in connection with the issuance of its bonds, and to deduct a pro rata part thereof in each of its tax returns, upon the hypothesis that it would pay the bonds at maturity. When in 1923, however, the petitioner, as part consideration for the assets of Contra Costa Gas Co., agreed to pay the latter’s bonds, the hypothesis which theretofore supported the deductions available to Contra Costa Gas Co. failed and its right to the amortization and deductions ceased. Nor is this petitioner entitled to any deductions with respect to the unamortized discount and expenses. Turner-Farber-Love Co. v. Helvering, 68 Fed. (2d) 416; American Gas & Electric Co., 33 B. T. A. 471. There was no merger or consolidation of the two companies, but an outright sale of the assets of the one to the other. The Contra Costa Gas Co. continued its existence after the sale of its assets, and that was its status in the taxable year under consideration. Upon those facts, this case is distinguishable from Western Maryland Railway Co. v. Commissioner, 33 Fed. (2d) 695.
As to the claimed deduction of $3,018.46 for expenses incurred by petitioner in the redemption and retirement of the subsidiaries’ bonds, which it agreed to pay, the petitioner is right. These were ordinary and necessary expenses of carrying on petitioner’s business, and their deduction is proper in computing petitioner’s net income.
Beviewed by the Board.

Judgment will be entered under Rule 6G.