Coastwise Transp. Corp. v. Commissioner

COASTWISE TRANSPORTATION CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Coastwise Transp. Corp. v. Commissioner

Docket No. 39916.

United States Board of Tax Appeals

22 B.T.A. 373; 1931 BTA LEXIS 2137;

February 25, 1931, Promulgated

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Held, no taxable income is derived from the purchase by a corporation of its outstanding bonds or notes at less than amount received upon issuance.

H. H. Gilman, Esq., for the petitioner.

R. S. Scott, Esq., for the respondent.

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MATTHEWS

This proceeding arises upon a deficiency in income tax for the year 1925 in the amount of $22,716.84, and involves two closely related questions: (1) Whether the petitioner in the purchase of its previously issued securities for a sum substantially less than the face amount of such securities has thereby made a taxable profit; and (2) whether petitioner has made a taxable profit in its issuance of new securities by way of substitution for its old securities, when such new securities are substantially less in face amount than those surrendered in exchange for cancellation.

The facts arising thereon were agreed under stipulation of the parties, from which we make our findings of fact.

FINDINGS OF FACT.

Coastwise Transportation Corporation, the petitioner, is a corporation organized under the laws of the State of Maine, and has a usual place of business at 100 Milk Street, Boston, Mass.

The petitioner acquired a fleet of ships from American Hawaiian Company in 1922, and in part payment of the purchase price thereof it gave its serial notes of the face value of $608,400, dated February 20, 1922, which notes were secured by a mortgage on said fleet of ships.

During the year 1924, the petitioner purchased for $75,000 and retired two of its said serial secured notes of the face value of $76,050 each (total $152,100) which would have matured in February, 1925 and 1926.

During the year 1925, the petitioner issued $375,000 face value of 7 per cent serial gold bonds, secured by mortgage on its said fleet of vessels, in consideration of the return to it for retirement of the remainder of its said serial secured notes to the face value of $456,300, which were retired when received by the petitioner.

The petitioner duly filed within the period prescribed by law and regulations then in force and effect, its Federal income tax return for the year 1925. This tax return showed net income of $5,633.58, and had attached thereto schedules in which it claimed it was entitled to take as a deduction from its 1925 income the amount of its alleged 1924 net loss. The schedules showed that a net loss of $100,338.25 was reported on an amended tax return for the year 1924. The alleged net loss of $100,338.25 for the year 1924 was taken as a deduction on the petitioner's 1925 tax return.

The Commissioner of Internal Revenue recomputed the net loss for the year 1924 and reduced it from $100,338.25 reported on the amended tax return to $23,238.25. The sole reason for the reduction in net loss was that the Commissioner found a profit of $77,100 from the purchase by the taxpayer of two of its serial notes of a face value of $76,050 each (total $152,100) for $75,000. The profit so found he deducted from the loss claimed on the amended return.

The amount of $81,300 was included by the Commissioner, in his computation of the net income for the year 1925, as a profit derived from the issue of $375,000 face value serial gold bonds in consideration of the surrender of $456,300 face value of secured notes.

OPINION.

MATTHEWS: The petitioner accepts the tax computation made by the Commisioner of Internal Revenue, as set forth in the deficiency notice dated June 16, 1928, with the exception that it contends (1) that it is entitled to a further deduction on account of net loss sufferred in the year 1924 in the additional amount of $77,100, which is the amount of the loss disallowed by the Commissioner, and (2) that it did not realize a profit in 1925 of $81,300 as found by the Commissioner.

Inasmuch as the serial notes were given in part payment of the purchase price of a fleet of ships, we assume that the face value of the notes represents that part of the purchase price discharged by the issuance of the notes, and therefore, that such notes were issued at their face value. The respondent, in his computation, has treated the notes as having been issued at face value.

The question as to whether a corporation derives taxable income from the purchase of its outstanding bonds or notes at amounts less than the amount received upon issuance, has been before the Board in a long line of cases, beginning with . In all such cases we have held that no taxable income is realized from such purchases. The Court of Claims held to the same effect in . The same question was involved in , which case involved years subsequent to the year involved in the Court of Claims case.

No appeal was taken by the Commissioner from the , decision or from the later decisions of the Board to the same effect.

On the authority of the line of decisions beginning with the , we hold that petitioner derived no income from the purchase in 1924 of two of its serial notes for less than their face value.

In the second transaction the petitioner merely reduced the amount of its outstanding indebtedness by substituting for the larger obligation in the form of notes, a smaller obligation in the form of bonds, as in the first transaction it had likewise reduced its indebtedness as to two such notes by a payment in cash at less than their face value. We see no difference in essence between the two transactions and hold that the second is controlled by the same authorities as the first.

Judgment will be entered under Rule 50.