Court Opinion

ID: 4491916
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:07.842485+00
Date Added: 2024-06-11T15:03:57.065049
License: Public Domain

Tkhssell,
dissenting: I agree with the conclusion reached in the foregoing opinion that deductions taken by the petitioner in the taxable years and representing interest paid or accrued in such years upon its outstanding bonds may not be adjusted by deduction of an aliquot part of a premium received on sale of the bonds. I do not agree, however, with the conclusion that the bond premium in question represented income within the purview of the Sixteenth Amendment to the Constitution.
The definition of “ income ” under the amendment as given by the court in Eisner v. Macomber, 252 U. S. 189, as “ * * * the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets * * * ” calls for a careful consideration of all the facts to determine just what the premium here in question represents in order that we may, in the language of that court “ * * * apply ⅛6 distinction as cases arise, according to truth and substance without regard to form.”
The premium in question is certainly not a gain realized in the sale of capital assets. The issuance and sale of bonds is merely an operation of borrowing capital — of securing investment of funds in the enterprise. Neither can the premium be said, in my opinion, to be a gain realized through the use of capital or labor, or both combined, as it is part of a fund obtained through a purely financing transaction, not carried out as an incident of the operation of the business in its use of capital or labor in producing income, but to provide the fund for such operation — to secure and assemble for use the capital necessary to be used, together with labor, in the operations from which the gain anticipated is to flow.
Does such an item represent capital or income? The court said in the case last cited, “ The fundamental relation of ‘ capital ’ to ‘ income ’ has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream to be measured by its flow during a period of time.” As a prelude of the production of income a corporation must provide the capital to be employed in its production. This it does by securing investments of funds in the enterprise by the issue of stocks and bonds. The difference in character of the investments is to suit the needs of the several classes of investors, to draw from the entire field of those having money to invest — the investor who is willing to speculate and take a risk of loss or deferred gain, in return for the opportunity presented of ultimate probability of generous profits, and to whom an investment in common stock appeals; the investor desiring a generous yield of income, but willing to *176have this limited, in return for priority given his investment as to earnings and capital, and consequently favors a preferred stock; and the investor who is willing to take a small return of income, but desires this fixed, and his investment to obtain for a limited period and to be secured by a mortgage on corporate property, and to whom, in consequence, a bond investment is more desirable. All three of these classes, although their investments differ in character are, nevertheless, investors in the enterprise. The amounts which they pay into the corporation for stock or bonds represent their investments therein, whether these amounts are less or more than the par value of the securities received. In so far as the question presented is concerned, I can see, as to the investor, no difference in the character of the payments, up to the face value of the stock or bonds as distinguished from an amount in excess of that value, and I can see no real distinction, in so far as their representing contributions to capital of the corporation by the purchasers, between a purchase of stock and a purchase of bonds.
May we hold, then, as to a bond purchase that an amount which the investor pays in excess of the face value of the bond, and representing his investment in the corporation, is, to the latter, not capital but income ? Using the same comparison employed by the court in Eisner v. Maeomber, supra, I can see by reason of amounts received by a corporation from the investors in its bonds, even though these amounts be in excess of the face of the bonds, nothing more than an increase in the capital “ reservoir/’ a feeding of the latter by the “ springs ” of investment.
We have consistently held that a corporation which repurchases its bonds at a figure less than- the amount at which they were issued, and retires them, has realized no income thereby. New Orleans, Texas & Mexico Railway Co., 6 B. T. A. 436; Independent Brewing Co., 4 B. T. A. 870. In Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, it was held that a corporation which satisfied a loan obligation at less cost to it than the amount borrowed, although money in pocket to the extent of the difference, had not realized income within the purview of the Sixteenth. Amendment as the transaction 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 * * *.)> Applying the same definition of income to the transaction here detailed, I can not see that the premium received by this petitioner falls within its scope.