Court Opinion

ID: 4608049
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:41:56.899531+00
Date Added: 2024-06-11T07:53:38.561993
License: Public Domain

AMERICAN CHICLE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American Chicle Co. v. CommissionerDocket No. 29897.United States Board of Tax Appeals23 B.T.A. 221; 1931 BTA LEXIS 1904; May 14, 1931, Promulgated 1931 BTA LEXIS 1904">*1904  1.  A corporate taxpayer which assumes the bonded indebtedness of a predecessor in business, as part consideration for its predecessor's assets and business, realizes no taxable gain from the purchase, for retirement, of its predecessor's bonds, at a price less than the face or par value of such obligations.  Any and all sums paid by the petitioner for the retirement of such obligations represent payments on the purchase price of the assets and business.  2.  A corporate taxpayer, keeping its books on an accrual basis, which has issued its own notes for a price less than their face or par value, and, during the taxable year, purchases, for retirement, a part or all of such obligations, at less than the issuing price, or the issuing price plus the total deductions for amortization, of discount allowable to the date of such purchase, is not entitled, in computing net income for the taxable year, to deduct the unamortized discount which would have been deductible in a period subsequent to the date of purchase, had the notes continued to remain outstanding to the date of maturity and then had been retired at face or par value.  3.  A corporate taxpayer, keeping its books on an accrual1931 BTA LEXIS 1904">*1905  basis, which has issued its own notes for a price less than their face or par value, and, during the taxable year, purchases, for retirement, a part or all of such obligations, at a price in excess of the issuing price plus the total deductions for amortization of discount allowable to the date of purchase, is entitled, in computing net income for the taxable year, to deduct, as an expense, the excess of the purchase price over the issuing price plus the total deductions for amortization of discount allowable to the date of purchase.  P. L. Peyton, Esq., for the petitioner.  Byron M. Coon, Esq., for the respondent.  MCMAHON 23 B.T.A. 221">*221  In this proceeding, the petitioner seeks a redetermination of deficiencies in income tax asserted by the respondent for 1924 and 1925 in the amounts of $19,419.17 and $6,674.90, respectively.  The sole issue raised in the petition is that the respondent erred in including in income for 1922, 1923, 1924, and 1925, as taxable gains the excess of the face or par value of certain bonds and notes, purchased for retirement in several transactions during those taxable years, over the purchase price thereof.  In an amended answer, 1931 BTA LEXIS 1904">*1906  the respondent affirmatively alleges that should the Board find he erred 23 B.T.A. 221">*222  as charged in the petition, then, he also erred in allowing as deductions for 1923, 1924, and 1925, the sums of $7,122.10, $18,200.94, and $27,689.79, respectively, for unamortized discount on the notes purchased for retirement in those years.  The case was submitted for decision on a written stipulation of facts.  FINDINGS OF FACT.  Petitioner is a corporation organized and existing under the laws of the State of New Jersey and has its principal office at Thomson Avenue and Manly Street, Long Island City, New York.  In 1909, the Sen Sen Chiclet Company, a Maine corporation, issued $2,700,000 face value of bonds, maturing May 14, 1929, with a sinking fund clause providing that a deposit be made with the trustee of at least $50,000 per year to provide for the purchase of bonds submitted to the trustee in open bid by bondholders under the terms of the indenture.  In August, 1914, petitioner acquired all of the assets of the Sen Sen Chiclet Company and assumed the payment of its liabilities, among which was $2,425,000 par value of bonds then outstanding and unredeemed.  In 1922 petitioner purchased1931 BTA LEXIS 1904">*1907  from the public $82,000 par value of Sen Sen Chiclet Company bonds and paid therefor, $55,650.94, making a difference of $26,349.06 between the par value and the redemption price paid.  The respondent, in making his determination of petitioner's net loss for the calendar year 1922, included as taxable income to petitioner for that year the difference between the par value and the redemption price paid, or $26,349.06.  The petitioner reported only $16,767.50 of the $26,349.06 on the original return filed for 1922.  The respondent increased this amount by $9,581.56.  On October 1, 1919, petitioner issued $2,500,000 par value of its 6 per cent notes maturing serially October 1, 1920 to 1927, inclusive.  In October, 1922, such serial notes remaining unredeemed at that time, of $1,710,000 par value, were refunded by the issuance of petitioner's five-year notes maturing October 1, 1927, in the same amount, to wit, $1,710,000 par value.  The petitioner reported, on its original income-tax return filed for the year 1923, as a profit the amount of $12,428.42 on the purchase and retirement of $256,500 face value of its 6 per cent five-year notes which were purchased for $244,071.58.  The1931 BTA LEXIS 1904">*1908  discount on these American Chicle Company 6 per cent notes, from October 1, 1922, to date of maturity, October 1, 1927, is $9,496.14, of which $2,374.04 is discount from date of issue to date retired, and $7,122.10 is discount from date retired to date of maturity.  The respondent, in the audit of the return for the year 1923, as shown in the notice of dificiency 23 B.T.A. 221">*223  dated May 26, 1927, reduced the amount of $12,428.42 returned as a profit on the purchase of the American Chicle Company 6 per cent notes, by the sum of $7,122.10, the amount of discount from date of retirement to date of maturity, and determined a profit of $5,306.32.  The petitioner also reported, on its original return filed for the year 1923 as a profit the sum of $14,259.42 on the purchase of Sen Sen Chiclet Company 6 per cent bonds of a par value of $62,500 which were purchased for $48,240.58.  The amount of $14,259.42 was included in income by the respondent in his determination for the year 1923.  The petitioner's net income for the calendar year 1923, as determined by the respondent in the notice of deficiency dated May 26, 1927, was $177,432.69, and the respondent applied under section 204 of the1931 BTA LEXIS 1904">*1909  Revenue Act of 1921 against petitioner's 1923 net income, $3,917,760.86 of the net loss for 1921, as determined by him in a prior audit.  In 1924 petitioner purchased from the public $15,000 par value of Sen Sen Chiclet Company bonds and paid therefor $11,391, and the trustee of the sinking fund also purchased from the public in that year $44,000 par value of the Sen Sen Chiclet Company bonds, paying therefor $36,211.10, the difference between the par value of such bonds and the redemption prices paid being the amount of $11,397.90.  The petitioner reported, on its income-tax return filed for the year 1924, as a profit the amount of $11,397.90 on the purchase of the Sen Sen Chiclet Company 6 per cent bonds.  The respondent in the audit of this return, as shown in the deficiency notice dated May 26, 1927, included the amount of $11,397.90 in the taxable income for 1924.  In 1924, petitioner also purchased from the public $769,500 par value of its five-year notes and paid therefor the sum of $745,440.45, the difference between the par value of said notes and the redemption price paid being $24,059.55.  The petitioner also reported this amount as profit in its return for the year1931 BTA LEXIS 1904">*1910  1924.  The discount on these notes from date of issue to date retired is in the amount of $10,287.49, and from date retired to date of maturity, $18,200.94, or a total of $28,488.43 from October 1, 1922, to maturity, October 1, 1927.  The respondent, in computing the taxable profit on the purchase of those notes reduced the amount of $24,059.55 reported by petitioner as a profit for 1924 by the sum of $18,200.94, the unamortized discount from date retired to date of maturity, and included only a net amount of $5,858.61 in the taxable income for the year 1924, as shown in the deficiency notice dated May 26, 1927, In computing the deficiency for 1924, the respondent applied against the net income of $804,431.17 for that year petitioner's net loss for the calendar year 1922, as determined by the respondent in 23 B.T.A. 221">*224  the deficiency notice dated May 26, 1927, in the sum of $649,077.81.  In the computation of said net loss for 1922, the respondent included as income said difference of $26,349.06 arising out of redemption by petitioner in 1922 of Sen Sen Chiclet Company bonds.  Petitioner in 1925 purchased $166,500 par value of Sen Sen Chiclet Company bonds from the public and paid1931 BTA LEXIS 1904">*1911  therefor $152,016.81, and the trustee of the sinking fund likewise purchased from the public $35,000 par value of Sen Sen Chiclet Company bonds and paid therefor $34,129.50, the difference between the par value of the bonds and the redemption prices paid therefor being $15,353.69.  The petitioner reported on its income-tax return filed for the year 1925, as a profit on the purchase of these bonds, the amount of $15,353.69 which the respondent included as income in his determination for the year 1925.  In 1925 the petitioner purchased at par, for retirement, $684,000 of its 6 per cent notes which had been issued at a discount for $658,676.55.  The discount on these notes from date of issue to date retired was $14,349.75, and the amount of unamortized discount at the date retired was $10,973.72.  The respondent, in his determination of deficiency, allowed as a deduction from income a loss in the amount of $10,973.72 due to the purchase and retirement of these notes.  The petitioner also purchased in 1925, for retirement, $275,500 debentures at par which had been issued at a discount for $232,950.  The discount on these debentures to date of retirement was $25,833.93, and the unamortized1931 BTA LEXIS 1904">*1912  discount was $16,716.07.  The respondent, in his determination of the deficiency for 1925, allowed as a deduction a loss in the amount of $16,716.07 due to the purchase and retirement of these debentures.  The petitioner's books of account and records for 1921 to 1925, inclusive, are kept on the accrual basis of accounting and its returns for those years were filed on the same basis.  OPINION.  MCMAHON: The tax liabilities of the petitioner for the years 1921, 1922, and 1923 are not before us for redetermination, but we are concerned with any net losses sustained by the petitioner in those years in so far as they affect the petitioner's tax liability for the year 1924.  Since the net loss for 1921 exceeds the net income for 1923 and the petitioner sustained a net loss for 1922, the adjudication of the issues as they relate to 1923 would not change the amount of the net loss for 1922 which the petitioner is entitled to deduct, under section 206(e) of the Revenue Act of 1924, in computing net income for 1924.  We will, therefore, not consider the issues in so far as they relate to the year 1923.  23 B.T.A. 221">*225  The respondent has charged the petitioner with income in 1922, 1924, 1931 BTA LEXIS 1904">*1913  and 1925, in the amounts of $26,349.06, $11,397.90, and $15,353.69, representing, in each instance, the amount by which the face or par value of the Sen Sen Chiclet Company 6 per cent bonds purchased for retirement during the year exceeded the purchase price paid by the petitioner.  The bonds in question were a part of the bonds of the Sen Sen Chiclet Company oustanding at the date of the purchase of that company's assets by the petitioner, payment of which was assumed by the petitioner as part of the purchase price of those assets.  Potentially, the liability created by the petitioner, in assuming the payment of these bonds, was equal to their aggregate face or par value, but its actual liability to the Sen Sen Chiclet Company was not for any specific sum but, rather, one which could be satisfied by whatever amount the petitioner might be required to pay in acquiring the bonds for retirement.  Therefore, there is not here, in fact, as both parties have assumed, a matter of the petitioner's satisfaction of an obligation for less than the full amount or face value thereof.  The payments involved in the transactions under consideration were payments on the purchase price of the Sen Sen1931 BTA LEXIS 1904">*1914  Chiclet Company's assets, paid, under the conditions of the agreement, to the holders of that company's bonds.  When all of the bonds have been retired by the petitioner, its obligation to the Sen Sen Chiclet Company will have been satisfied in full, and whatever the total amount paid to retire the bonds, it will constitute a part of the cost to petitioner of the Sen Sen Chiclet Company assets.  Accordingly, we hold that the petitioner derived no income in 1922, 1924, and 1925 from the purchase of the Sen Sen Chiclet Company bonds, for retirement, at a price less than the face or par value of such bonds, and that the respondent erred in including in income for those years the items of $26,349.06, $11,397.90, and $15,353.69, respectively.  See . The petitioner further complains against the respondent's action in charging it with income in 1924, in the amount of $24,059.56, representing the amount by which the face or par value of the petitioner's notes purchased for retirement during the year exceeded the purchase price paid by the petitioner.  Against this item of $24,059.55 the respondent allowed an offset1931 BTA LEXIS 1904">*1915  of $18,200.94, representing the the so-called "unamortized discount" on these notes at the date of purchase and retirement, so that the net amount which the respondent has included in income is $5,858.61.  The respondent denies the error charged in the complaint, and counters with an affirmative allegation that if the petitioner prevails as to the item of $24,059.55, the offsetting item of $18,200.94 should be eliminated 23 B.T.A. 221">*226  from the computation of net income, and, further, that he erred in allowing a deduction for 1925, of $27,689.79, for unamortized discount on the notes and debentures purchased for retirement in that year.  We understand that wherever the term "discount" has been used in the stipulation of facts, the parties used the term to mean the difference between the issuing price of the petitioner's obligations, for cash, and the face or par value thereof, which brings it within the definition of "discount" as stated in Following the principle laid down in 1931 BTA LEXIS 1904">*1916 , the Board has repeatedly held, in a long line of cases, that a corporate taxpayer realizes no taxable gain from the purchase of its own bonds at less than the issuing price.  See , and cases therein cited.  The facts of this case require the application of the same rule.  However, the item of $18,200.94, which the respondent has allowed as an offset against the alleged gain of $24,059.55, for "unamortized discount" on the notes retired in 1924, should be eliminated from the computation of net income for that year, since it is clear that any such discount was not actually paid upon retirement of the notes.  These notes, having a face or par value of $769,500, had been issued for $741,011.57 and were purchased by the petitioner at the price of $745,440.45.  Thus, the discount which the petitioner actually paid amountyd to only $4,428.88.  The discount amortized to the date of purchase, which the petitioner was entitled to take as deductions in returns of prior years, to wit, $10,287.49, was more than twice as great as the discount which the petitioner actually paid.  Clearly, 1931 BTA LEXIS 1904">*1917  under these facts, the petitioner was not entitled to any further allowance in respect of the discount on these notes when they were purchased for retirement in 1924, Accordingly, we hold that the net income for 1924, as determined in the deficiency notice, should be reduced by the sum of $5,858.61.  However, we hold that the respondent correctly allowed a deduction of $27,689.79, for 1925, in connection with the purchase and retirement of certain notes and debentures in that year.  These notes and debentures, having an aggregate face or par value of $959,500, had been issued for $891,626.55, and were purchased by the petitioner at par.  The amortized discount on these obligations to the date of purchase, which the petitioner, keeping its books on an accrual basis, was entitled to deduct in its returns, amounted to $40,183.66.  Article 545(3) of Regulations 69 provides: (a) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds.  (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any amount of 23 B.T.A. 221">*227 1931 BTA LEXIS 1904">*1918  discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value minus any discount not yet deducted) is a deductible expense for the taxable year.  * * * The petitioner purchased and retired the notes and debentures at a price which exceeded, by $27,689.79, the issuing price plus the amortized discount which the petitioner was entitled to deduct in its returns; and under the foregoing provisions of the regulations, which we believe to be a fair and reasonable interpretation of the applicable statute, it was entitled to the deduction of $27,689.79 which the respondent has allowed.  In view of the conclusions reached in this opinion, the net incomes for 1924 and 1925, as determined by the respondent in the deficiency notices, should be reduced by the amounts of $43,605.57 and $15,353.69, respectively.  Reviewed by the Board.  Judgment will be entered under Rule 50.