B. F. Goodrich Co. v. Commissioner

Disney, /.,

dissenting: Neither petitioner nor respondent advanced the theory upon which the majority opinion is based, as tó the first issue. The petitioner relies upon payment to the trustee on December 1,1936, as base for its argument that the item in question is ordinary and necessary business expense of 1936, and not interest. In the petitioner’s reply brief we read:

* * * It is admitted that the regulations hold that where a taxpayer keeps books of account on an accrual basis, he must take “interest" deduction in the period in which the liability to pay interest accrues, regardless of when payment is actually made. This rule, however, does not apply to ordinary and necessary business expense. The rule in connection with such expense is that deductions and credits must be taken for the taxable year in which paid or accrued, or paid or incurred.

* * * On December 1, 1936, the mortgage and trust deed securing the payment of these bonds became satisfied and discharged. The claim of the Trustee for itself and the bondholders which it represented was extinguished and completely satisfied when the payment of the full amount due under the indenture was made. * * *

The majority opinion disagrees with that view, yet to a large extent allows the deduction. It is apparent that the petitioner’s present view is inconsistent with the repeated provisions of the deed of trust, with the view taken by the petitioner in issuing the notices of redemption, with its books, and with its income tax return, throughout all of which the item here involved was treated as accrued interest. Even in the petition filed, it is not alleged that the item was not interest, or that it was ordinary and necessary business expense. While a term used is not determinative, it should not “be assumed that the parties have given an erroneous name to their transaction.” Pacific Southwest Realty Co., 45 B. T. A. 426, 436. In Cary v. Savings Union, 89 U. S. 38, the question was whether money was a dividend or interest. In holding it was a dividend, the Court said:

* * * The parties themselves so understood it, for they gave it that name in the contracts, executed when the depositors made their deposits. They stipulated for the payment of dividends and not interest.

See also Commissioner v. Schmoll Fils Associated, Inc., 110 Fed. (2d) 611; Charles N. Spratt, 43 B. T. A. 503; Angelus Building & Investment Co., 20 B. T. A. 667. In Perrine & Buckelew, Inc., 32 B. T. A. 168, we said:

* * * But it is equally well settled that the terms used and the treatment accorded to the instrument by its creator can not be lightly set aside. * * *

On brief, the petitioner admits:

If the bonds had not become due through agreement between the Trustee and the Petitioner and by action of the Petitioner pursuant to such agreement, then of course, the money could have been used in Petitioner’s business, or at least it would have been available for use. * * *

In my opinion, under the petitioner’s option to pay up to February 1,1937, the whole principal was in fact available up to that date and could have been used in petitioner’s business, therefore demonstrating that here an accrual basis taxpayer is asking deduction merely because of making available funds for payment in the taxable year. There is clear analogy here to constructive receipt of income to one who has it in his power to use funds, though he does not avail himself of the privilege. The petitioner should not be heard to say that there is no connection between January 1937 and the item here considered, when the date of payment was altogether optional with it. So far as necessity of indebtedness as a requisite is concerned, we have held that indebtedness is not, under all circumstances, prerequisite to the allowance of deduction for interest. In New McDermott, Inc., 44 B. T. A. 1035, we allowed deduction for interest on a mortgage upon property when purchased by the taxpayer, though the mortgage indebtedness was not assumed, where there was relation between income and “interest” involved. In Columbia River Paper Mills, 43 B. T. A. 104; affd., 126 Fed. (2d) 1009, we held that a taxpayer on an accrual basis was entitled to deduction for interest accrued during the taxable year upon obligations outstanding, even though the obligations were not outstanding until after the date from which interest was accrued. Of the statute allowing deduction of interest accrued, we said: “It does not say that the indebtedness upon which interest has accrued and become a liability of the taxpayer must be outstanding during the entire interest accrual period * * *. The requirement of the statute is, in our opinion, clearly met if the interest accrual period falls within the taxable year, and the payment of the interest becomes a fixed liability of such year.” Here the interest accrual period and the liability for payment were both fixed for 1937.

In fact, however, nonuse of principal during January 1937 is not shown, but on the contrary, use thereof affirmatively appears. The petitioner did get the use of the principal, apparently to some very large extent, in January, and we find compliance with the letter of the definition of interest; for, upon January 1, 1937, only $10,600,000 out of $16,421,500 principal amount of bonds had been presented for payment and upon the difference, which under the majority view hhd not been paid, the petitioner continued to have the right to draw interest through January, to the extent that bonds remained unpresented, under the terms of the trust deed, section 2 of article II. I think it can not validly be said that during that month, through which petitioner had paid for and kept that valuable right, there was no use of the principal, and no proper correlation between income earned and interest accrued. Through January the petitioner had not lost the use of principal, but still had, out at interest, that portion of the principal which was uncalled for by the bondholders. The average daily balance during that month would no doubt amount to a very large sum. I can conceive no more effective use oí money borrowed than to have it out at interest. That portion, and the income therefrom was the direct result of paying “interest,” covering that month, for only by so paying did the petitioner acquire the right to interest on deposits during January. It is true that after $10,600,000 had been taken down by bondholders, up to January 1, 1937, the interest for January 1937 on the balance was at a higher rate, but it was clearly still interest, merely being payment for the use of about $6,000,000, instead of the earlier $16,000,000. Had the petitioner not had the pecuniarily valuable right to draw interest on its unused deposits, it might well have not made the deposit until February 1, 1937. One on an accrual basis, should, under primary principles sustained by authorities too numerous to require citation, accrue interest in the period when it affects income, in order that fair reflection of income result. To neglect interest received for January 1937 is to reflect inaccurately petitioner’s 1937 income. Plainly, petitioner’s income for January 1937 was affected and increased by the privilege it had of drawing interest on the balance of principal sum, a right purchased by payment of interest for that month, and income for January 1937 is thus seen to be directly the result of the item here being considered. The importance of this situation is shown by the careful provision therefor in the trust deed, that the petitioner should receive interest to the extent bonds were not deposited, “and the holders of the bonds shall have no claim thereon.” It has long been recognized, under United States v. Anderson, 269 U. S. 422, that accrual should take place in the period covering the events which fix the amount and liability to pay. “When the obligation to pay an amount becomes fixed, the obligation accrues.” Helvering v. Russian Finance & Construction Co., 77 Fed. (2d) 324. In this matter, neither amount nor liability to pay a business expense was fixed in 1936. Both had been fixed in 1922. Nothing as to January 1937 interest occurred in 1936, except the acceleration of maturity and payment of interest to February 1, 1937. Until January 1937, liability for interest for that month had not accrued. For lack of payment in full, the bond issue was in fact not retired until 1937. Nothing remains to support the taxpayer’s view, except mere making funds available for pajunent. Unless one on the accrual basis may accrue at will, merely by depositing in advance, funds for payment of his debt (yet continuing to draw interest on unpaid amounts), the petitioner here may not accrue. I respectfully dissent.