Court Opinion

ID: 4487576
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:00:50.767276+00
Date Added: 2024-06-11T15:04:25.960863
License: Public Domain

Milliken,
dissenting: The bondholders’ committee deemed it advisable to reduce the obligor company’s indebtedness, in order that interest payments might be made when due and enable ihe obligor to continue in business. Early in 1922, the petitioners joined the other bondholders of the Meridian Light & Railway in accepting the proposal. Pursuant to the plan adopted for execution of the proposed action, petitioners deposited their bonds with the designated depository, which was authorized to and did effect the cancellation. Thereafter, the bondholders were entitled to principal and interest on only the remaining 70 per cent face value of their bonds.
The cancellation agreement between the bondholders and the debtor company was nothing more or less, to my mind, than a composition agreement by which the bondholders or creditors agreed to forever give up a part of their claim against the debtor to increase the probability of recovering the remainder of the debt. In the case of the Pacific Novelty Co. v. Commissioner, 5 B. T. A. 1017, we held that a debt reduction under a composition agreement was a deductible loss in the year in which the agreement was entered into and became binding. I am of the opinion that the decision rendered is controlling in the case at bar.
The respondent contended that the facts herein constitute an exchange of property for property of a like kind, within the meaning of section 202(c) (1) of the Revenue Act of 1921, and, therefore, any loss sustained on the transaction may not be recognized for income tax purposes.
The loss of 30 per cent of the face value of the bonds occurred when the bonds were deposited for cancellation and petitioners became bound by the terms of the agreement with their committee. By becoming a party to the agreement and depositing their property, they gave up 30 per cent of its face value and secured nothing in its stead. The loss preceded the exchange, if such there was, and I am *1096of the opinion that the statutory authority for the deduction claimed finds a basis pursuant to the provisions of section 214(a) (5) of the Revenue Act of 1921, which provides as follows:
Sec. 214. (a) That in computing net income there shall be allowed as deductions:
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(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * '* *.
But what is the measure of the deduction allowable ? It seems to me the basis to be used by petitioners for income-tax purposes is fixed by section 202(a)(3) at the fair, market value of the bonds when inherited. The fair market value of each bond, at that time, was $525 for those with coupons clipped and $825 in the case of the bonds with coupons attached. I agree with the majority opinion concerning the $10 assessment. Thus the basis of the bonds in the hands of petitioners was $525 for the bonds with coupons clipped and $835 for those with coupons attached. Petitioner’s urged that the deduction allowable is measured by 30 per cent of such basis. The fallacy in such contention is evident. If so measured, 30 per cent of $535, or $100.50, would be allowable as a deduction on the bonds with coupons clipped, yet the bondholders had hopes of recovering the $700, which remained as the face value after the cancellation was made. Thus the possible total capital recovery, under the petitioner’s contention, ivould be $700 plus $160.50, or' $860.50 on a bond having a basis for income-tax purposes of only $535. Manifestly, there is an allowable deduction only to the extent that the basis exceeds the debt remaining. As the debt remaining is greater than the basis, in the bonds with coupons clipped, no deduction is allowable on account of the 30 per cent cancellation on these bonds. The basis or investment in each bond with coupons attached being $835, and the debt remaining being but $700, I am of the opinion that the difference between those amounts or $135, on each bond of that cla,ss, is an allowable deduction. When the facts in this case are considered, the question of fair market value of the bonds after partial cancellation gives me no trouble.