Court Opinion

ID: 4487217
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:00:38.515678+00
Date Added: 2024-06-11T14:54:08.195340
License: Public Domain

*154OPINION.
Trammell :
From the facts, it appears that the debts charged off by the taxpayer were in fact not debts ascertained to be worthless during the taxable year.
With reference to the Christmas gifts to employees, the witness for the taxpayer testified that they were considered “ out-and-out gifts.” They were not extra compensation for services rendered. They were nothing more than gratuities and as such are not deductible.
With reference to the amount of interest paid on indebtedness incurred to purchase and carry the stock of a domestic corporation named in the statement of facts, it is the opinion of the Board that the taxpayer is entitled to the deductions claimed. Section 234(a) (2) of the Revenue Act of 1918 provides that in computing net income there shall be allowed as deductions—
All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the Unitd States issued after September 24, 1917), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, in the case of a foreign corporation, the proportion of such interest which the amount of its gross income from sources within the United States bears to the amount of its gross income from all sources within and without the United States.
The Treasury Department interpreted the provision of this section of the statute in Article* 121 of Regulations 45, as follows:
Interest paid or accrued within the year on indebtedness may be deducted from gross income, except that interest on indebtedness incurred or continued to purchase or carry securities, such as municipal bonds, the interest upon which is exempt from tax, is not deductible. However, this exception does not apply to obligations of the United States issued after September 24, 1917, which include Liberty bonds of the second and subsequent issues and Victory notes, and interest on indebtedness incurred to purchase such obligations is deductible pursuant to the general rule. See articles 77-80(a). Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. Payments made for Maryland or Pennsylvania ground rents are not deductible as interest.
That article refers to municipal bonds as an illustration of the kind of securities which were considered by the Treasury Department as covered by section 214(a) of the Revenue Act of 1918. Stock in a domestic corporation is not a security like a municipal bond- Section 234(a)(2), which relates to interest deductions allowed corporations, is identical in language with section 214(a) (2) relating to individuals, except that provision is made for the deduction by foreign corporations. The article of the regulations interpreting the interest provision as it relates to corporations gives no illustration of the word securities and does not purport to define the word. Identical language used in the statute with reference to deductions by corporations as is used with respect to individuals, however, should be given a similar interpretation, unless some clear reason appears which would warrant a different interpretation.
*155It is interest upon certain obligations or securities which is not allowed as a deduction. The Commissioner contends that the word securities is broad enough to include stock in domestic corporations since the dividends upon stock in such corporations are exempt from taxation when received by a corporation. In order to give the provision this interpretation, however, it is not only necessary to construe the word securities to mean stock, but to construe the word interest to mean dividends.
Interest is defined in Webster’s New International Dictionary as follows:
The price or rate of premium per unit of time that is paid by a borrower for the use of what he borrows; Specif: A rate per cent of money paid for the use of money or the forbearance of demanding payment of a debt.
The above definition sets forth the ordinary and generally accepted meaning of the word. A dividend is something entirely different. A dividend is a distribution of the earnings of a corporation among its stockholders. It can not be assumed that Congress used the word interest in such a broad sense as to include dividends. It was only the interest on obligations incurred for the purchase of securities which could not be deducted in determining net income, and no reference was made to the interest on obligations incurred for the purchase of stock.
The word security is defined in Webster’s New International Dictionary as follows:
That which secures or makes safe. Specif: Something given, deposited, or pledged, to make secure, or certain the fulfillment of an obligation, the payment of a debt, etc.
Specif: An evidence of debt or of property, as a bond, stock certificate, or other instrument; a document giving the holder the right to demand and receive property not in his possession.
The interpretation of the expression “indebtedness incurred or continued to purchase or carry obligations or securities, the interest upon which is exempt from taxation ” which the Commissioner contends for in this case is not warranted by the language of the statute or the regulations promulgated by the Treasury Department interpreting the statute. Where the language of the statute is plain and unambiguous it must be construed according to the obvious meaning of the words without attempting to change it by adopting a different construction based upon some supposed policy of Congress in regard to the subject of the legislation, or upon consideration of injustice or inconvenience arising from the enforcement of the statute according to its terms. Bate Refrigerator Company v. Sulzberger, 157 U. S. 1.
For the foregoing reasons, it is the opinion of the Board that the interest which the taxpayer paid during the years 1920 and 1921, upon money borrowed for the purpose of purchasing and carrying stock in the Odell Mill Supply Co., is a properly allowable deduction in determining the net income of the taxpayer for the years in question, but that the deduction claimed by the taxpayer on account of bad debts and Christmas gifts should be disallowed.