District Bond Co. v. Commissioner of Internal Rev., 9324.
Citation | 113 F.2d 347 |
Decision Date | 01 August 1940 |
Docket Number | No. 9324.,9324. |
Parties | DISTRICT BOND CO. v. COMMISSIONER OF INTERNAL REVENUE. |
Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Dana Latham and R. W. Lund, both of Los Angeles, Cal., for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Berryman Green, and Ellis N. Slack, Sp. Assts. to Atty. Gen., for respondent.
Before DENMAN, MATHEWS, and HEALY, Circuit Judges.
Petitioning taxpayer seeks a review of a decision of the Board of Tax Appeals (a) holding not tax exempt the obligations of certain municipal subdivisions of the State of California on street improvement and like bonds issued by them, and (b) denying a deduction of interest coupon debts to taxpayer on certain of the bonds which became worthless in a tax year later than that in which the mature coupons were accrued on taxpayer's books but not charged into its taxable income.
(a) Taxpayer's bond interest taxed by the Commissioner was accrued on taxpayer's books in the tax years 1934 and 1935. The interest was on bonds issued under the California Improvement Act of 1911, St.Cal.1911, p. 730, the California Street Opening Bond Act of 1911, St.Cal. 1911, p. 1192, and the California County Improvement Act of 1921, St.Cal.1921, p. 1658. It is stipulated that:
The brief of the Commission concedes that
(b) Taxpayer, keeping its accounts on an accrual basis, complains of the Board's decision denying it the right to "charge off" from its gross income for the tax year 1935 tax exempt interest coupons on bonds of California municipalities which had become worthless, the cash amounts of which coupons were entered on its books as an accrual of income in previous tax years, but which, as tax exempt interest, are not charges on gross income to be returned for income tax purposes.
The bonds whose coupon interest is here involved are in the principal sum of $1,000 each and payable from a tax levied and collected from all the property in a district in the California municipalities which issued them under the California Acquisition and Improvement Act of 1925, St.Cal.1925, p. 849, to pay for various public improvements. For the purposes of this review we accept taxpayer's contention that their interest is tax exempt.
Interest on tax exempt bonds must be excluded from gross income in determining the income tax obligation of the owner of the bonds. 26 U.S.C.A.Int.Rev. Code, § 22 (b) (4). For tax purposes such interest is never charged on in contemplation of the Revenue Act of 1934, the Act here under consideration. The Board decided that because the income of the tax exempt interest could not be charged on the taxpayer's income for tax computation, it could not be charged off under the provisions of § 23(k) (1) of that Act, 26 U.S. C.A.Int.Rev.Code, § 23(k) (1), which reads:
The Board had so held with reference to accounts kept by a taxpayer on a cash basis in Charles A. Collin v. Com'r, 1 B.T. A. 305, decided January 13, 1925. That this has been the Board's established administrative practice with regard to bad debt deductions claimed by cash accounting taxpayers is apparent from a succession of decisions of the Board since that date.1
Taxpayer kept its books on an accrual basis and, under the law, is required to have its taxable income tax computed otherwise than for those keeping their books on a cash basis. 26 U.S.C.A.Int.Rev. Code, §§ 41, 44. Under this law such a taxpayer is required to accrue taxable income in the year in which it is payable to him, regardless of the fact that it may not have been received by him in that year. This he must do even though the debt to him is valueless on the date it becomes due. His remedy in the case of a worthless debt is to report it in gross income and take a deduction for the bad debt in the same year. Spring City Co. v. Commissioner, 292 U.S. 182,...
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