Nutter v. Commissioner , 7 T.C. 480 ( 1946 )

OPINION.

Oppee, Jvdge:

Petitioner borrowed the major part of the purchase price of certain securities. Some of these became worthless prior to the taxable year, leaving in the hands of the creditor, as collateral, securities with a basis to petitioner of less than the amount remaining due on the loan. The question is whether petitioner realized gain, suffered a deductible loss, or did neither, when in the tax year he settled with his creditor by surrendering title to the securities and delivering to it $1,000 in cash.

As in Lutz & Schramm Co., 1 T. C. 682, 689, “ * * * the question is not whether [petitioner] realized income from the discharge or forgiveness of indebtedness, cf. United States v. Kirby Lumber Co., 284 U. S. 1; Lakeland Grocery Co., 36 B. T. A. 289; but is rather whether it realized gain from the disposition of * * * property.”

The present transaction, however, was clearly in the nature of a purchase money borrowing. As in Helvering v. American Dental Co., 318 U. S. 322, 330, it “is more akin to a reduction of sale price than to financial betterment through the purchase by a debtor of its bonds in an arms-length transaction.” Unlike Helvering v. American Chicle Co., 291 U. S. 426, this was a face-to-face transaction between debtor and creditor. See Lewis F. Jacobson, 6 T. C. 1048. And unlike Lutz & Schramm, sufra, it can not be said here that “The property was acquired on August 19, 1924, from a predecessor company, and the mortgage was not placed upon it until January 2, 1925. We, therefore, conclude that the petitioner borrowed the money * * * and used it for its own purpose and benefit.”

We think it follows that petitioner merely surrendered property which had fallen in value below the amount which he had undertaken to pay for it, and hence that no gain resulted from that transaction. Cf. Hirsch v. Commissioner (C. C. A., 7th Cir.), 115 Fed. (2d) 656. “In this view, there is no substance in the Commissioner’s differentiation between a solvent or insolvent corporation or the taxation of income to' the extent of assets freed from the claims of creditors by a gratuitous cancellation of indebtedness.” Helvering v. American Dental Co., supra, p. 330. On this doctrine cf. Texas Gas Distributing Co., 3 T. C. 57, and Main Properties, Inc., 4 T. C. 364, on the one hand, with Carlisle Packing Co., 29 B. T. A. 514, and J. K. McAlpine Land & Development Co., Ltd., 43 B. T. A. 520, 526, on the other.

It does not follow, however, that petitioner is entitled to claim any loss on the transaction. If he had paid for the property in cash and had thereafter secured a loan upon it, his argument might be more persuasive. But in that case he would be met by the necessity of treating the settlement with the creditor as a sale and of returning the resulting gain. Lutz & Schramm, supra. Because we have found here that this was in effect a purchase money transaction, the taxable gain phase of this proceeding has been decided in petitioner’s favor. He can not at the same time have the benefit of the assumption that he paid for the property something of value which has been lost and for which he may have a deduction. He has in fact lost nothing¹ of his own and has merely avoided payment of an obligation which could have resulted in a loss only if it had been enforced. In such a situation the loss is too illusory for the practical purposes of the tax law. See Eckert v. Burnet, 283 U. S. 140.

Reviewed by the Court.

Decision will be entered wnder Rule 50.

Disney, J., dissents.

1 Any amount of cash contributed by petitioner is more than eliminated by the $33,000 of securities which are shown to have become worthless in a prior year.