Old Colony Co v. Commissioner of Internal Revenue, 349

CourtUnited States Supreme Court
Citation284 U.S. 552,76 L.Ed. 484,52 S.Ct. 211
Docket NumberNo. 349,349
PartiesOLD COLONY R. CO. v. COMMISSIONER OF INTERNAL REVENUE
Decision Date15 February 1932

Mr. James S. Y. Ivins, of Washington, D. C., for petitioner.

The Attorney General and Mr. G. A. Youngquist, Asst. Atty. Gen.,

[Argument of Counsel from page 553 intentionally omitted] for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The Revenue Act of 1921 defines gross income as including gains, profits, and income derived by the taxpayer from any source whatever, and provides that in computing net income of a corporation 'all interest paid or accrued within the taxable year on its indebtedness' is deductible from such gross income. Treasury regulations promulgated under authority of the statute state that if bonds are issued by a corporation at a premium the net amount of such premium is gain or income which should be amortized over the life of the bonds.1

In making return for 1921, the Old Colony Railroad Company deducted from gross income the full amount paid during the year as interest to holders of its bonds. These had been issued at various dates between 1895 and 1904, and the subscribers had taken them at prices in excess of par. The total of the premiums thus paid the company was $199,528.08. At the dates of issuance of the bonds, and until 1914, the company kept its accounts on a cash basis and credited the sums so received in an account designated 'Premium on Bonds.' In the last-named year, the Interstate Commerce Commission ordered that they should be amortized over the periods of the respective lives of the bonds. The company complied under protest, extinguished by appropriate entries the ratable proportion of the premiums for the years prior to 1914, and thereafter reported to the Commission as income a yearly ratable proportion of the remainder of the premiums, but entered the same on its books in the profit and loss account (a surplus account) and not as income. The proportion of the premiums attributable to 1921 and reported to the Commission as income for that year was $6,960.64, but the company did not in its tax return include this figure in gross income or deduct it from the amount of interest paid on its bonds.2 The Commis- sioner, in his audit of the return, made no adjustment in the item of interest paid, but added the sum of $6,960.64 to the company's gross income for 1921 and found a resulting deficiency in the amount of tax. Upon a petition for redetermination the Board of Tax Appeals held that the Commissioner erred in treating this amount as taxable income of the year in question.3

The Commissioner asked reconsideration, asserting that the mere form of the calculation by which he arrived at a redetermination of the tax was immaterial and that the result was correct since the year's proportion of amortization of bond premiums was in reality a deduction from the stipulated interest paid the bondholders. The Board adhered to its ruling.4 The Circuit Court of Appeals adopted the Commissioner's view and reversed the Board.5 The court distinguished its earlier decision in Commissioner v. Old Colony R. R. Co., supra, note 3, stating that its attention had not been called to the fact that the profit made in the years prior to 1913 was not being taxed, but was used only to determine the expense of the payment of interest on the bonds for the year 1921. We granted certiorari. 284 U. S. 606, 52 S. Ct. 34, 76 L. Ed. —.

The regulations state that the net amount of premium is gain or income. Necessarily, then, the premium is gain or income of the year in which it is received. The provisions of the Revenue Acts of 1918, 1921, 1924, and 1926 are the same as respects gross income of corporations and deductions therefrom. The regulations under the relevant sections of the acts of 1918, 1924, and 1926 employ substantially the same phraseology as that found in those issued under the 1921 act.6 The repeated re-enactment of a statute without substantial change may amount to an implied legislative approval of a construction placed upon it by executive officers. National Lead Co. v. United States, 252 U. S. 140, 40 S. Ct. 237, 64 L. Ed. 496; United States v. Farrar, 281 U. S. 624, 50 S. Ct. 425, 74 L. Ed. 1078, 68 A. L. R. 892; Poe v. Seaborn, 282 U. S. 101, 116, 51 S. Ct. 58, 75 L. Ed. 239.

There is no ambiguity in the language of the regulation, which defines a bond premium as income. As a corollary from this definition, it follows that the petitioner received the income represented by the premiums here involved prior to the adoption of the Sixteenth Amendment, for these premiums could not be income for any other year than that in which they were received. That income had become capital prior to the adoption of the amendment and could not be reached by a subsequent income tax act. This conclusion is not affected by the provision of the regulation which allows the proration or amortization of this item over the life of the bonds, and extends to the taxpayer the privilege of treating the premium as income received in installments instead of in a lump sum in the year of its receipt.

Nor does the fact that the regulation thus ameliorates the burden of the taxpayer authorize the use of the grant to convert income of years prior to the effective date of the Sixteenth Amendment into income assumed to have been received thereafter. The amortization requirement may properly be applied to premiums paid subsequent to March 1, 1913, but cannot operate to contradict the definition of a premium as gain or income.

The government, however, insists that, notwithstanding the regulation's designation of a premium paid by the subscriber to corporate bonds as income, it is not such to the corporation, but is in the nature of capital loaned which must be returned to the lender during the life of the bonds. Reference is made to the practice of bond buyers in determining the amount they will bid. It is said that a purchaser, in arriving at the price he is willing to pay for a bond, has regard to the current rate of interest for money, and, if the bond bears a stipulated rate in excess of the ruling rate, he will pay a premium. He does this although he knows that at maturity he can only receive the par of the bond, but considers that he will be repaid the premium by the excess of the agreed rate of interest over the rate he is content to receive. On the other hand, where the stipulated interest is less than the going rate, bond buyers will bid less than the par of the bond by such amount as is necessary to redress the difference between the agreed rate of interest and the going rate which the subscriber demands. The conclusion is that the actual return to one who pays a premium is less than the nominal interest carried by the bond, and to one who buys at a discount is greater than such nominal rate. The argument is that, although the regulations are inaptly phrased and are susceptible of the construction petitioner places upon them, their real intent was to adjust the nomi- nal interest paid on a corporation's indebtedness to the actual amount it is paying for the use of the money represented by the par of the bond; that is, to what accountants have called the 'effective rate' of interest. In this view the government says that each time the debtor pays an installment of stipulated interest what it in fact does is to pay interest at a lesser rate on the par of the bond and return a ratable proportion of the premium, which really constitutes a loan by the investor to the debtor. Thus that portion of the installment paid at each interest date which is a return of the loaned capital represented by the premium must be deducted from the nominal interest in order to arrive at the 'effective rate' of interest the debtor is really paying. It is said the regulation is intended to afford a method of adjusting the taxpayer's income in the light of these facts, and that it is immaterial whether, as provided, the pro rata yearly return of capital loaned in excess of the face of the bond is added to gross income or deducted from interest paid, for in either case the result in dollars will be exactly the same.

Doubtless the premium received by the corporation is acquired capital rather than income. But if this be admitted the concession does not answer the question whether a premium paid prior to 1913 is taxable. Obviously, therefore, it is not enough for the government's purpose to disregard the regulation which designates this item as income or gain. The Commissioner must and does go farther and contend that the receipt of such a premium reduces the item of interest paid, and renders the sum nominated as such in the bond something different from the 'interest * * * on its indebtedness' mentioned in section 234 of the Revenue Act of 1921 as a permissible deduction from gross income.

In other words, the contention is that by the use of the quoted phrase the statute did not intend to allow the deduction of the amount agreed to be paid, which the con- tract denominates 'interest,' but of a different sum to be ascertained by a calculation which will allocate the payment between a partial and ratable return of the premium and 'effective' interest on the par of the security.

Is this the reasonable construction of the language of the act; 'all interest * * * on its indebtedness'? The rule which should be applied is established by many decisions. 'The legislature must be presumed to use words in their known and ordinary signification.' Levy's...

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