16 T.C. 147 (1951), 24005, First Nat. Bank of Lawrence County v. C.I.R.

Docket Nº:24005.
Citation:16 T.C. 147
Opinion Judge:DISNEY, Judge:
Attorney:John A. McCann, Esq., for the petitioner. Kalman A. Goldring, Esq., for the respondent.
Case Date:January 24, 1951
Court:United States Tax Court

Page 147

16 T.C. 147 (1951)




No. 24005.

United States Tax Court.

January 24, 1951

Prior to the taxable year petitioner, a bank, had charged off with tax benefit to a certain extent, certain corporate bonds held by it; and in the taxable year the bonds were redeemed and the petitioner recovered more than its basis, including the amount charged off with tax benefit. Held, that to the extent of the tax benefit the recovery was taxable as ordinary income and not capital gain and that the recovery above petitioner's basis in the bonds is capital gain.

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John A. McCann, Esq., for the petitioner.

Kalman A. Goldring, Esq., for the respondent.


DISNEY, Judge:

This case involves income tax for the calendar year 1944. Deficiency was determined in the amount of $4,347.45. The petitioner claims overpayment of $5,652.47. The only question presented is whether the sum of $58,117.73, received in the taxable year by the petitioner from retirement of bonds, after the bonds had been charged off, with tax benefit, in previous years, is taxable as ordinary income or capital gain. All facts were stipulated and are found by us as so stipulated. Only such as are regarded as necessary of statement in discussion of the issue will be set forth here.

The petitioner is a national banking corporation doing business at New Castle, Pennsylvania. Its Federal income tax return for 1944 was filed with the collector of internal revenue at Pittsburgh, Pennsylvania. Petitioner in 1935 acquired 6 per cent bonds of Pennsylvania Engineering Works in the face amount of $179,000. Petitioner's basis therein was $170,050. In 1936 petitioner received similar additional bonds of Pennsylvania Engineering Works of a face value of $5,500 in lieu of interest on bonds held. Petitioner reported the fair market value, $5,225 as interest income for 1936 and paid income tax thereon. From 1936 through 1941 petitioner charged off and deducted, as worthless debts, on income tax returns its entire cost basis in the bonds, i.e., $175,275. It received no tax benefit as to $81,057.27 but the charge-offs and deductions, to the extent of $94,217.73, did result in reduction of petitioner's taxes.

The bonds acquired in 1935 were acquired in a transaction set forth in the excerpts of minutes of petitioner's board of directors, as follows: Prior to April 2, 1934, petitioner held the collateralized promissory note of Pennsylvania Engineering Works for $165,000, and on that date Pennsylvania Engineering Works was authorized by petitioner to execute a collateral note for $165,000, for the former note, and to pledge interim certificates for the approximate amount of bonds the bank had agreed to take if a bond issue was consummated, the note to be secured also by various collateral. On April 9, 1934, petitioner's directors authorized acceptance of the endorsement of Pennsylvania Engineering Corporation on the collateral note of Pennsylvania Engineering Works as stated in the minutes of April 2, 1934. On June 24, 1935, petitioner's directors approved the purchase of various bonds including $179,000 of Pennsylvania Engineering Works. On July 8, 1935, petitioner's directors approved an agreement subscribing for, and agreeing to accept Pennsylvania Engineering Works bonds at 95 per cent of face value ‘ in payment of the principal of the indebtedness

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and obligation of Pennsylvania Engineering Works‘ to petitioner, and agreeing that upon delivery of the bonds the obligation, interim certificates and all collateral held should be surrendered to Pennsylvania Engineering Works. Petitioner's note record shows the note of $165,000, dated May 16, 1934, and paid, in the amount of $165,000, on June 19, 1935. Petitioner's collateral loan record shows the note as withdrawn by Pennsylvania Engineering Works. Petitioner's discount record for demand collateral loans shows entry of payment of the $165,000 note under date of June 19, 1935. Petitioner's daily journal for June 19, 1935, shows the transactions involving the note and bonds, and petitioner's bond register shows the history of the bonds from acquisition until written off.

In 1944 the issuer of the bonds redeemed and retired a part of the bonds held by petitioner in the face amount of $146,500, and redeemed and retired the balance in 1945.

The $146,500 exceeded, by $7,325, the original cost, $139,175, of the bonds so retired. The $139,175 had been written off in prior years by petitioner.

The petitioner and respondent agree that of the $139,175 basis recovered $81,057.27 constitutes recovery exclusions (section 22(b)(12), Internal Revenue Code) and that this controversy relates entirely to the proper income tax treatment of the $58,117.73, the balance of the recovery of the $139,175 basis, and petitioner's claim for overpayment.

Petitioner treated $43,654.73 of the amount recovered in 1944 as ordinary income on its income tax return, but claims an overpayment by reason thereof in the amount of $5,652.47. The respondent agrees with the petitioner that the $7,325 excess of $146,500 over the $139,175 basis is capital gain, but treated $58,117.73, previously charged off with tax benefit, as ordinary income. The petitioner contends that it also is capital gain.

The petitioner's argument is, in short, that the amounts received in 1944 fall squarely within the language of section 117(f) of the Internal Revenue Code. [1] The statute, petitioner argues, is clear and admits of no change by interpretation or construction, which would be to legislate. Tax statutes, it is argued, cannot be extended beyond clear import of the language used, and if clear, plain, and unambiguous may not be construed to cover what is deemed to be even an absurd omission, through addition by the Court of any further limiting provision.

The respondent in substance argues that section 117(f), relied on by the petitioner, does not apply; that a particular statutory provision

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prevails over a general one; that banks are treated differently from others in deduction of losses and recovery of debts previously written off; that section 117(i) specifically deals with banks and provides that a net loss from sale or exchange of bonds shall not be considered sale or exchange of a capital asset; that here there was no sale and the entire amount written...

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