Court Opinion

ID: 4496455
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:52.641475+00
Date Added: 2024-06-11T14:54:14.138099
License: Public Domain

Leech,
dissenting: The majority holds that petitioner, a corporation, realized taxable gain in the purchase of its own bonds at less than the issuing price, in spite of what I think is the conclusively established fact that it did not then intend nor has it since intended to cancel or retire these purchased bonds.
This conclusion is said to be supported by Garland Coal & Mining Co. v. Helvering, 28 B. T. A. 348; affd., 75 Fed. (2d) 663, which is the only court or Board case cited, touching the point. Instead of supporting that conclusion, in my judgment, the opinion of the court in that case definitely and convincingly opposes it.
The taxpayer there purchased its own bonds in 1928 for less than their issuing price, and retired them in the following year. The *339only question presented was in which of those years petitioner’s admitted gain was taxable. The answer to this inquiry was dependent on whether, in view of the respondent’s applicable regulation (Regulations 74, art. 68 (1) (c)), retirement of the purchased bonds was necessary to establish the transaction as “closed”, and thus give rise to gain.
Without doing more than doubting the validity of that regulation, the court recognized the existence of the superficially anomalous but nevertheless widely adopted rule that, whether the purchase of its bonds by a corporate obligor constitutes payment of the purchaser’s debt evidenced by the bonds, and thus is a “closed” transaction for tax purposes, depends upon the intention of the purchaser when it purchased the bonds. Thus, the court in that case, after stating this rule and citing a few of the many authorities therefor, says in the following paragraph of its opinion:
And so, in this case the question is, the intention of petitioner when it redeemed its bonds.
The court then decided that the mere purchase of the bonds in 1928 was a closed transaction, and that a taxable gain resulted then and not in 1929 when the bonds were actually retired, solely because the evidence established the fact that when petitioner purchased the bonds it then intended to retire them and so pay its debt thus evidenced. The actual retirement of the bonds was only corroborative of petitioner’s book entries during the year of purchase, which indicated its then intention to retire the bonds. And, of course, the fact that the bonds were not actually retired until the next year could not and did not change the decisive fact that the bonds were purchased with the intention of retiring them. It seems to me this interpretation of the meaning of the court in its opinion in the Garland case is confirmed rather than disputed from the excerpt of that opinion appearing here in the majority opinion.
If that intention of the purchaser of the bonds be controlling, it would be difficult to conceive a stronger case than this, proving that such intention was not to buy and retire the bonds, but was to keep them alive, as an investment. The Southern Railway Co., not the obligor, purchaser of the bonds, was obligated to pay the interest on them. That fact distinguishes the situation here from that in the Garland case and is convincing to me that the petitioner purchased its bonds here with the intention, not of retiring them, but of keeping the obligation they reflected, alive.
It seems to me that the rationale of the majority opinion faces the dilemma of either violating the elementary rule that a debt once paid is thereby extinguished and can not be revived thereafter, or *340recognizing the rule of intention for which I contend, in that the sale or pledge of such purchased bonds legally continues the obligation they evidence. I think the sale or pledge of such bonds, after their purchase, merely establishes the necessary fact to their continuing validity that the intention of the purchaser was not to retire the bonds but to keep them alive. Cf. Garland Coal & Mining Co. v. Helvering, supra; R. J. Reynolds Tobacco Co., 35 B. T. A. 949. Therefore, I do not think the petitioner realized taxable income by its purchase of its own bonds for less than the issuing price, and, accordingly, dissent.