Court Opinion

ID: 4482216
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:22.907968+00
Date Added: 2024-06-11T13:32:56.538360
License: Public Domain

Kern, J., dissenting: In its opinion in Helvering v. American Dental Co., 318 U. S. 322, the Supreme Court cited, with approval, United States v. Kirby Lumber Co., 284 U. S. 1, and unmistakably indicated that it considered that the two cases were distinguishable. I submit that the majority opinion is in error in finding the distinction to be the impersonal character of the transaction and in applying to the facts of the instant case the sole criterion of whether “the bonds were acquired by petitioner through direct conferences and negotiations between him [taxpayer’s agent] and the bondholders with whom he was acquainted,” for the purpose of determining whether the doctrine of the American Dental Co. case or the doctrine of the Kirby Lumber Co. case should be controlling. The true point of distinction between the two cases is, to my mind, found in the following language in the American Dental Co. opinion: * * * Gifts however, is a generic word of broad connotations * * *. Its plain meaning in its present setting denotes, it seems to us, the receipt of financial advantages gratuitously. ******* * * * 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. [Emphasis supplied.] Thus, the criterion to be applied in determining whether the American Dental Co. case or the Kirby Lumber Co. case controls the transactions here in question is not whether the bonds were acquired by petitioner through direct conferences and negotiations with bondholders who were personal acquaintances, but whether the acquisition of these bonds by petitioner at prices below their face value constituted “the receipt of financial advantages gratuitously,” so that it might be said that “the forgiveness [of the excess of the face value over the price paid] was gratuitous * * * and sufficient to make the cancellation here gifts within the statute.” Applying the criterion of distinction to the facts of the instant case, it is apparent that none of the transactions here in question was gratuitous. Petitioner’s bonds which he acquired were not payable until 1942. He purchased them in 1938, 1939, and 1940 by paying to the bondholders an amount smaller than the amount which he would have been obliged to pay if the bonds had been held until maturity. The payment of a part of a debt before it is due constitutes consideration which will support a promise of the creditor to waive or forgive the balance of the debt. See Crowe v. Gore, 85 Fed. (2d) 291, 294; Williston on Contracts, Rev. Ed. 1936, vol. 1, sec. 121. Since a consideration existed by reason of the equivalent of the payment of an obligation before maturity, the transactions can not be considered as gratuitous within the meaning of the American Dental Co. case, regardless of the fact that petitioner’s officers were personally acquainted with the bondholders who received these payments. The majority opinion appears to go on the theory that all transactions carried on directly with personal acquaintances must be gratuitous. It is my opinion that, while all gratuitous transactions will normally be carried on directly between personal acquaintances, not all transactions carried on directly between personal acquaintances are gratuitous. The instant case is an example. To make the tax consequences to petitioner of the acquisition of his bonds before maturity at less than their face value depend on each case of acquisition of a bond solely upon the degree of acquaintance shown to exist with the particular bondholder and the personal or impersonal character of the negotiations leading to their acquisition, is to give an effect to the American Dental Co. decision which, in my opinion, was not intended by the Supreme Court and which its opinion does not compel. It may also be pointed out that the basic facts here presented show a typical Kirby Lumber Co. case: The borrowing of money, the issuance of bonds to evidence the indebtedness thereby created, and the acquisition of these bonds by the debtor from the bondholders for payments less than those called for on the face of the bonds, at a time when the value of the assets of the debtor was in excess of his liabilities. Such a state of facts can not be said to be analogous to “a reduction of sale price” to be “treated as a readjustment of the contract rather than as a gain.” The Supreme Court said in the American Dental Co. case: * * * In United States v. Kirby Lumber Co., 284 U. S. 1, the taxpayer purchased its own bonds at a discount. It was held taxable on the increase in net assets which resulted. It later used language in its opinion which may be construed as characterizing the Kirby Lumber Co. case as one of “financial betterment through the purchase by a debtor of its bonds in an arm’s length transaction.” If we combine the two characterizations, we find the Supreme Court considering the Kirby Lumber Co. case as one in which the debtor corporation purchased its own bonds in an arm’s length transaction at a discount and thus bettered itself financially. The instant case can be accurately described in exactly the same words. Only by distorting the meaning of “an arm’s length transaction” can this case be distinguished. It is impossible for me to believe that the Supreme Court intended the words “an arm’s length transaction” to exclude those transactions carried on “through direct conferences and negotiations” between the officers of the debtor corporation and bondholders with whom they happened to be personally acquainted. Turner, Leech, Arnold, and Harlan, JJ., agree with this dissent.