Kirby Lumber Co. v. Commissioner , 19 B.T.A. 1046 ( 1930 )

KIRBY LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kirby Lumber Co. v. Commissioner

Docket No. 44954.

United States Board of Tax Appeals

19 B.T.A. 1046; 1930 BTA LEXIS 2273;

May 21, 1930, Promulgated

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Held that the petitioner derived no taxable income by purchasing and retiring certain of its outstanding bonds at amounts which were less than it had issued them for.

Robert Ash, Esq., for the petitioner.

F. A. Lyons, Esq., for the respondent.

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TRAMMELL

This proceeding if for the redetermination of deficiencies in income tax of $1,755.18 and $9,385.49 for the years 1925 and 1926, respectively. The only matter in controversy is whether taxable gain was derived by the petitioner in purchasing its own bonds for less than the issue price and retiring them. The case was submitted on stipulation, from which we make the following findings of fact.

FINDINGS OF FACT.

The petitioner is a Texas corporation with its principal office at Houston.

On July 16, 1923, it made a deed of trust or mortgage on certain of its property to the Miners Bank of Wilkes-Barre, Pa., trustee, to secure the payment of certain bonds aggregating the total principal sum of $14,000,000 which were to be issued July 16, 1923. Although the deed of trust or mortgage authorized the issue of $14,000,000 in bonds, only $12,126,800 were actually issued. The bonds were dated July 16, 1923, and were issued at par.

The article in the deed of trust or mortgage describing the bond issue is as follows:

ARTICLE I.

CONCERNING THE BONDS

SECTION 1. The bonds to be issued hereunder shall be in denominations of One Hundred ($100.00) Dollars, Five Hundred ($500.00) Dollars, and One Thousand ($1000.00) respectively. All bonds issued shall be numbered consecutively from 1 to 15.150, both inclusive. Bonds Numbers 1 to 1000, both inclusive, shall be of the denomination of One hundred ($100.00) each; bonds numbers 1001 to 1500, both inclusive shall be of the denomination of Five Hundred ($500.00) Dollars each; bonds Numbers 1501 to 15,150, both inclusive, shall be of the denomination of One Thousand ($1000.00) Dollars each. All bonds are of like tenor, terms and effect; are dated July 16, A.D. 1923, and are due and payable at the First National Bank of Houston, Texas, on the 16th day of July, A.D. 1938. They bear interest at the rate of six percent (6%) per annum, interest payable semi-annually on the 16th day of January and the 16th day of July, in each year, and coupons for the several installments of interest are attached to the respective bonds, and each bond shall be authenticated by the Trustee, and contain a form for the registration thereof, all of which shall be in substantially the following form, to-wit:

(Form of Bond)

UNITED STATES OF AMERICA

STATE OF TEXAS

No. $100.00 ($500.00) ($1000.00)

(The correct denomination of each bond will be set at the proper space.)

KIRBY LUMBER COMPANY

FIRST MORTGAGE SIX PERCENT

SINKING FUND GOLD BOND

Kirby Lumber Company, a corporation created under the laws of the State of Texas, with its domicile in the City of Houston, in Harris County, Texas (hereinafter called Company), acknowledges itself to be indebted and, for value received, hereby promises to pay to the bearer hereof (or in case this bond be registered, to the registered owner hereof), the sum of One Hundred ($100.00) Dollars ($500.00) ($1000.00) (correct denomination of each bond will be inserted here.) in gold coin of the United States of America, of or equal to the present standard of weight and fineness, on the sixteenth day of July, A.D. 1938, together with interest thereon from the sixteenth day of July, A.D. 1923, at the rate of six percent per annum, payable in like gold coin, semi-annually, on the sixteenth day of January and the sixteenth day of July in each year, until the principal sum shall be paid, interest payable on presentation and surrender of the interest coupons hereto attached as they severally mature. The principal hereof is payable at the office of the First National Bank of Houston, Houston, Texas, upon presentation and surrender of this bond, when drawn or at its maturity. The interest hereon is payable at the office of the New York Trust Company of New York, in the City of New York, or at the holder's option at the First National Bank of Houston, Houston, Texas, upon presentation and surrender of the respective coupons hereto attached as they severally mature.

This bond is one of a series of fifteen thousand, one hundred and fifty bonds issued by the Company, and numbered consecutively from 1 to 15,150, both inclusive, being for the sum of One Hundred Dollars each, and bonds numbered 1001 to 1500, both inclusive, being for the sum of Five Hundred Dollars each, and bonds numbered 1501 to 15150, both inclusive, being for the sum of One Thousand Dollars each; all of like tenor, terms, date and effect, differing only as to amount, and aggregating the total principal sum, par value, of Fourteen Million ($14,000,000.00) Dollars. All of said bonds are equally secured by a Deed of Trust or Mortgage dated the 16th day of July, A.D. 1923, made by the Company to Miners Bank of Wilkes-Barre, Wilkes-Barre, Pennsylvania, as Trustee; and for the description of the property thereby mortgaged, the nature and extent of the security, and the rights of the holders of the bonds issued thereunder, reference is hereby made to said mortgage or Deed of Trust, with the same force and effect as if the provisions thereof were herein fully set forth.

The right is hereby reserved to the Company to draw, by lot, from time to time, outstanding bonds, on any semi-annual interest date, and to redeem the same by the payment of the principal of such bonds and accrued interest thereon, plus a premium of two percent on the principal thereof, upon giving thirty (30) days' notice, by publication in some newspaper of general circulation, published in the City of New York, and by depositing in the First National Bank of Houston, Houston, Texas, to be used for that purpose only, the amount necessary to pay the principal, premium and interest in full of each bond so drawn, on or before the advertised date of such payment. The Company likewise reserves the right to redeem all bonds at any time outstanding, upon any semi-annual interest date upon like advertisement, by payment thereof at par and accrued interest, plus five per cent on the principal of such bonds.

This bond shall not be valid or obligatory for any purpose unless and until authenticated as one of the series of bonds herein described by a certificate endorsed hereon and executed by the Trustee, or its successor in trust.

This bond shall pass by delivery, and be payable to the bearer hereof, unless registered in the owner's name on the registration books kept at the office of the New York Trust Company of New York, as Registrar, in the City of New York. Such registration shall be noted on the bonds by said Registrar, after which no transfer hereof shall be valid unless made on the bonks of the Registrar by the registered owner hereof, in person or by his attorney duly authorized, and similarly noted on the bond. This bond, however, may be discharged from registration by being transferred in the manner aforesaid to the bearer, by notation hereon by the Registrar, after which it shall be transferable by delivery; but may again be registered or discharged from registration as before, and as often as the owner may desire. The interest coupons hereon, however, shall continue negotiable and transferable by delivery, and payable to bearer, notwithstanding any registration hereof.

IN WITNESS WHEREOF, Kirby Lumber Company has caused these presents to be signed in its corporate name, by its president, its corporate seal to be hereto affixed, to be attested by its Secretary, and the interest coupons hereto attached to be authenticated by the facsimile signature of its Treasurer, as of the sixteenth day of July, A.D., 1923.

KIRBY LUMBER COMPANY,

By ,

Attest: President.

,

Secretary.

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During the years 1924, 1925, and 1926 the petitioner purchased certain of the above-mentioned bonds at less than par, which was also the issue price, and retired them. The amounts of the bonds so retired and the amounts paid for them by the petitioner are as follows:

	Par value (issue price)	Paid for bonds	Difference
1924	$1,113,600.00	$1,025,033.30	$88,566.70
1925	661,200.00	631,910.00	29,290.00
1926	554,300.00	549,944.00	4,356.00

Upon the audit of the returns of the petitioner for the years here involved the respondent held that the difference between the issue price (par) of the bonds retired and the price paid therefor is taxable gain.

In determining the deficiency for 1925 the respondent allowed as a deduction an amount of $228,555.65 representing a net loss sustained in 1924. In computing the amount of the net loss the respondent included as income the difference between the price at which the bonds retired in the year 1924 were issued by the petitioner and the price at which the petitioner purchased them.

OPINION.

TRAMMELL: Upon the authority of our decisions in ; ; ; and , the inclusion in the income of the petitioner for the respective years of the amounts set forth in our findings of fact as the difference between the price at which the petitioner purchased and retired its bonds and the price at which it issued them was in error. In a redetermination of the petitioner's tax liability proper adjustment should be made in the amount of the net loss for 1924 as a result of the inclusion in income for that year of the difference between the price at which the bonds retired in such year were issued by the petitioner and the price at which the petitioner purchased them.

Judgment will be entered under Rule 50.