Court Opinion

ID: 4601674
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:28:07.337686+00
Date Added: 2024-06-11T07:52:32.051263
License: Public Domain

INDIANA LAMP CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Indiana Lamp Corp. v. CommissionerDocket No. 52761.United States Board of Tax Appeals28 B.T.A. 491; 1933 BTA LEXIS 1111; June 22, 1933, Promulgated *1111  1.  Upon the facts herein the amounts of unamortized discounts and costs of issue of petitionerhs bonds and notes retired in the taxable year are allowable deductions from petitioner's income in such year.  2.  Premiums incident to the retirement of the petitionerhs bonds in the taxable year, by another corporation, in conformity with terms of a merger agreement are deductible from petitioner's income in such year as a loss.  3.  Net loss sustained by petitionerhs subsidiary corporation in 1927 may not be deducted from consolidated net income in 1928, in which year the subsidiary also sustained a net loss.  Frank S. Bright, Esq., for the petitioner.  W. R. Lansford, Esq., for the respondent.  LANSDON *491  The respondent has determined a deficiency in income tax for the period from January 1, 1928, to October 9, 1928, in the amount of $4,321.95.  The questions involved are as follows: (1) Is the petitioner entitled to deduct the amount of $17,485.46 from its income for the taxable period as unamortized discount on its first mortgage bonds retired in such period?  (2) Is the petitioner entitled to deduct from its income for the taxable period*1112  the amount of $5,900 which represents the premium paid in cash on the retirement of its bonds as aforesaid?  (3) Is the petitioner entitled to deduct from its income for the taxable period the amount of $25,707.43 which represents discount and expense incident to the issue of its second mortgage bonds?  (4) Is the petitioner entitled to deduct from its income for the taxable period the amount of a net loss sustained by its subsidiary in the preceding taxable year?  The parties have filed a stipulation, with certain exhibits, from which we make the following findings of fact.  FINDINGS OF FACT.  Petitioner is a Delaware corporation, with its principal offices at Connersville, Indiana.  At the date of its organization it issued its bonds in the amount of $350,000, which it sold at a discount of $28,000 and in such issue and sale incurred expenses in the amount of $4,607.08.  On October 9, 1928, the stock of the petitioner was exchanged by the individual holders thereof for stocks of the Allied Products Corporation.  The agreement under which such exchange was made, in so far as material here, is as follows: *492  AGREEMENT dated September 27, 1928, between Indiana*1113  Lamp Corporation, a corporation of the State of Delaware (hereinafter called ILCO) party of the first part, and Ford, Bacon & Davis, Incorporated, a corporation of the State of New Jersey, (hereinafter called F.B. & D.) party of the second part.  Under a certain revised plan of organization of Allied Products Manufacturing Corporation, dated September 28, 1928, (hereinafter called the "Revised Plan"), F. B. & D. desire to effect a merger of the business and properties of Ilco with those of certain other corporations and for that purpose have entered into contracts to purchase all of the outstanding Class B Common Capital Stock of Ilco, upon the terms and conditions there prescribed.  It is a condition of the Revised Plan that there be redeemed all the outstanding First Mortgage Six and One-Half Per Cent Serial Gold Bonds of Ilco issued under the First Mortgage Deed of Trust dated July 15, 1925, executed by it to Chicago Trust Company as Trustee and amounting to Three Hundred and Ten Thousand Dollars ($310,000) face amount, all the outstanding Second Mortgage Six and One-Half Per Cent Gold Notes of Ilco issued under the Second Mortgage Deed of Trust dated January 1, 1928, executed*1114  by it to Chicago Trust Company as Trustee and amounting to Two Hundred and Fifty Thousand Dollars ($250,000) face amount all the outstanding Preferred Stock of Ilco amounting to two thousand three hundred and eleven (2,311) shares of the par value of $100 each, and all the outstanding Class A Common Stock of Ilco amounting to five thousand (5,000) shares of the par value of $25 each.  In connection with such redemption, F.B. & D. have entered into contracts with the respective holders of all the $250,000 of Second Mortgage Notes and twelve hundred seventy (1,270) shares of the Preferred Stock, and of all said five thousand (5,000) shares of the Class A Common Stock of Ilco whereby such holders have agreed to accept payment of the redemption prices on their securities as follows: * * * The holders of said Second Mortgage Six and One-Half per cent Gold Notes of Ilco have agreed to accept payment of the redemption price of their notes (in addition to accrued interest) in shares of the Common Stock of said Allied Products Corporation at the rate of forty four dollars ($44.00) a share.  * * * The Revised Plan is to furnish sufficient cash and common stock of said Allied Products*1115  Corporation to effect the redemption of all such First Mortgage Bonds, Second Mortgage Notes, Preferred Stock and Class A Common Stock of Ilco (part of the Preferred Stock and Class A Common Stock upon the basis aforesaid), including payment of the redemption premiums, where payable, but not including payment of accrued and unpaid interest and dividends necessary to effect such redemption, which interest and dividends are to be paid by Ilco out of its own funds.  For the purpose of providing for the various redemptions aforesaid, it is agreed as follows: FIRST, Upon being furnished with an amount of cash equal to the aggregate redemption price of said First Mortgage Bonds, including redemption premiums but not including accrued interest, and an amount of common stock of said Allied Products Corporation required to redeem said Second Mortgage Notes on the basis above stated, including redemption premiums but not including accrued interest, Ilco will, as promptly as possible thereafter, redeem all such outstanding bonds and notes and will give such redemption notices and do *493  all such further things as may be necessary to that end, and, at the time and place of redemption*1116  it will, out of its own funds, pay the accrued and unpaid interest on such bonds and notes.  * * * FIFTH: F.B. & D. agree to use their best efforts to carry the Revised Plan into effect, and in the event that under such Revised Plan they shall receive cash and/or Common Stock of said Allied Products Corporation for the purpose of the redemption of Second Mortgage Notes, Preferred Stock and Class A Common Stock of Ilco, they agree to render it available to Ilco for such purpose.  SIXTH: This agreement shall bind and enure to the benefit of F.B. & D., its successors and assigns.  * * * The notes in question were issued on January 1, 1928, at a cost made up of discount and expenses in the amount of $41,971.24, of which there was unamortized at October 9, 1928, the amount of $25,707.43.  The Ilco Sales Corporation's stock was owned in 1927 and 1928 entirely by the Indiana Lamp Corporation.  The Ilco Sales Corporation, for the year 1927, filed a separate return of income tax liability.  For the year 1928 the Indiana Lamp Corporation, the petitioner, received permission from the Commissioner to include the net taxable income of the Ilco Sales Corporation in a consolidated return*1117  filed for that year.  The Ilco Sales Corporation sustained a net loss in the year 1927 in the amount of $16,488.60.  For the year 1928, the Ilco Sales Corporation sustained a net loss of $74,312.08.  The respondent determined, in the 60-day letter from which this appeal arises, that the petitioner had a net income as corrected for the calendar year 1928 of $109,187.84 and that the net loss as corrected of the Ilco Sales Corporation was $73,171.61.  The resulting consolidated net income was determined to be $36,016.23, from which latter sum the petitioner claims the right to deduct the net loss for 1927 sustained by the Ilco Sales Corporation.  OPINION.  LANSDON: The petitioner's claim for deductions in the respective amounts of $17,485.46 and $5,900 arises out of the liquidation of its bonds as provided for in an accomplished merger agreement under which all its stock was acquired by the Allied Products Corporation.  As to the first item claimed the petitioner relies on , which we have since followed in *1118 , and . Respondent contends that under the terms of th merger agreement the Allied Products Corporation appears to have *494  assumed the rights and obligations of the petitioner, which therefore is not the party in interest entitled to claim the deductions here in controversy.  In our opinion this conclusion is not consistent with the stipulated facts.  With cash furnished to it under the terms of the merger agreement, the petitioner redeemed its bonds and ended the life thereof on October 9, 1928.  Apparently the respondent's theory is that the cost of such redemption was borne by the Allied Products Corporation.  We think not.  Under the agreement the redemption was not effected through direct payments by the Allied Products Corporation to the bondholders, but with funds that such corporation was required to furnish the petitioner for that purpose.  After the redemption of the bonds at October 9, 1928, it was impossible for the petitioner or Allied Products Corporation to continue amortization of the discount, since their life was then terminated.  We are of the*1119  opinion that the unamortized discount thereon was deductible in its entirety from petitionerhs income in the taxable period in which the bonds were redeemed.  In conformity with , the expenses of the bond issue are also amortizable and deductible as above decided.  This reasoning and conclusion is also applicable to the petitioner's claim for the deduction of the unamortized discount and cost of issue of the petitionerhs notes which, at the same date, were retired by issue of the stock of the Allied Products Corporation to the holders thereof.  On these two issues the determinations of the respondent are reversed.  Under the terms of the agreement the petitioner was required to pay the redemption premiums and the unpaid interest due on the bonds at date of retirement.  Interest, of course, is a deductible expense.  The amount of $5,900 paid as redemption premiums is a loss sustained by the petitioner in the purchase and retirement of its own bonds.  In , the Supreme Court held that a corporation may realize profit from a transaction in its own bonds. *1120  We think it follows that in such circumstances a loss may be sustained.  On this issue the respondent is reversed.  The petitionerhs claim that it is entitled to deduct the net loss sustained by its subsidiary corporation in 1927 from the consolidated net income of the two corporations in 1928, is without merit.  On this question the determination of the respondent is affirmed.  . Reviewed by the Board.  Decision will be entered under Rule 50.SMITH and MURDOCK dissent.