336 U.S. 28 (1948), Commissioner v. Jacobson

Citation:336 U.S. 28, 69 S.Ct. 358, 93 L.Ed. 477
Party Name:Commissioner v. Jacobson
Case Date:January 17, 1949
Court:United States Supreme Court
 
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336 U.S. 28 (1948)

69 S.Ct. 358, 93 L.Ed. 477

Commissioner

v.

Jacobson

United States Supreme Court

Jan. 17, 1949

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

In 1938, 1939, and 1940, an individual taxpayer, in straitened financial circumstances but solvent, purchased at less than their face amount certain secured negotiable bonds originally issued by him at face value for cash. Some of the purchases were directly from the bondholders, others were through agents of the taxpayer or of the bondholders. Although each seller knew that the bonds were being bought by or for the maker, there was nothing to indicate that any seller intended to transfer or release something for nothing, or to make a gift of any part of his claim, as distinguished from making a sale and assignment of his whole claim for the highest available price.

Held: under § 22(a) of the Revenue Act of 1938 and of the Internal Revenue Code, the gain to the taxpayer from each purchase was includible in gross income for the year in which he made the purchase, and was not excludable as a "gift" under § 22(b)(3) of that Act and Code. Pp. 29-52.

1. The taxpayer's gains from such transactions must be included in his gross income under § 22(a). Pp. 38-47.

(a) On the facts of this case, the taxpayer realized an immediate financial gain from his purchase of these bonds at a discount. Pp. 38-41.

(b) The amendments to § 22(b) of the Internal Revenue Code by the Revenue Act of 1939, though relating to corporate taxpayers, are persuasive that a natural person is obliged to include in his gross income under § 22(a) gains of the kind here involved. Pp. 41-47.

2. Gains of this type are not excluded from the taxpayer's gross income by the general exemption of "gifts" from taxation prescribed by § 22(b)(3). Pp. 47-52.

(a) The provision of the Internal Revenue Code for the exclusion of "gifts" from gross income is to be construed with restraint in the light of the purpose of Congress to tax income comprehensively. Pp. 47-49.

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(b) On the facts of this case, there is nothing to indicate that the bondholders intended to transfer or did transfer something for nothing. Pp. 50-51.

(c) The decision in this case is not rested on the fact that the sale was made before maturity, or that the seller may have received valid consideration for a total release of his claim because the debtor's payment was made before maturity. P. 51.

(d) Helvering v. American Dental Co., 318 U.S. 322, distinguished. P. 51.

3. The situation in each transaction is a factual one, turning upon whether the transaction is, in fact, a transfer of something for the best price available, or is a transfer or release of only a part of a claim for cash and of the balance "for nothing." Pp. 51-52.

164 F.2d 594 reversed.

BURTON, J., lead opinion

MR. JUSTICE BURTON delivered the opinion of the Court.

This decision applies the federal income tax to gains derived by a debtor from his purchase of his own obligations at a discount, and his consequent control over their discharge. It presents the specific question whether a

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solvent natural person, in straitened financial circumstances, must include in his gross income for federal income tax purposes the difference between (1) the face amount of his personal indebtedness as the maker of secured bonds, originally issued by him at face value for cash, and (2) a lesser amount paid by him for their purchase. The debtor's obligations were not unpaid balances of purchase prices which could be readjusted by the discharge of the obligations. The proceeds of the obligations were not traced into identifiable losses offsetting the debtor's realized gains from the discharge of these obligations. Each seller knew that the bonds he sold were being bought by or for the maker of them. In each sale, the bondholder sought to minimize his probable loss by getting as much as possible, directly or indirectly, from the maker of the bonds as the one available purchaser of them. The maker of the bonds, at the same time, sought to reduce his obligations as much as possible by buying the bonds as cheaply as he could. While each seller thus knew that he was receiving from the maker of the bonds less than their face amount, there is no finding that any seller intended to transfer or release something for nothing, or to make a gift of any part of his claim, as distinguished from making a sale and assignment of his whole claim for the highest available price. The maker thus realized a gain from each purchase, and the Commissioner of Internal Revenue found correctly that, for federal income tax purposes, the maker must include that gain in his gross income for the tax year in which he made the purchase.

The respondent, Lewis F. Jacobson, in 1938, 1939, and 1940, resided, practiced law, and owned or controlled substantial property interests in Chicago, Illinois. In 1943, the petitioner, Commissioner of Internal Revenue, found deficiencies in the income taxes paid by the respondent for

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each of those years. Those deficiencies totaled $3,967.97, of which about $2,500 are now before us. This case arose from the Commissioner's addition to the reported gross [69 S.Ct. 360] income of the respondent of the differences between (1) the principal face amounts of certain leasehold bonds executed by the respondent and (2) the lesser amounts paid by him for their purchase. Such purchases were made by or for him substantially as follows:

---------------------------------------------------------------

Purchased Percentage

D-Direct of face

B-Through Principal Purchase amount

broker face price paid by

C-Through amount purchaser-

bondholders' maker-

committee taxpayer

---------------------------------------------------------------

1938

Apr. 9, 1938 D $ 450.00 $ 202.50 45

June 9, 1938 D 3,600.00 1,620.00 45

Aug. 17, 1938 D 900.00 405.00 45

1939

Feb. 15, 1939 B 1,800.00 900.00 50

June 16, 1939 D 450.00 225.00 50

Oct. 23, 1939 B 180.00 86.50 48

1940

Apr. 4, 1940 C 270.00 130.00 48

May 21, 1940 C 450.00 210.00 47

May 23, 1940 C 2,700.00 1,080.00 40

June 19, 1940 C 1,800.00 720.00 40

July 1, 1940 B 450.00 200.00 45

July 3, 1940 B 450.00 200.00 45

July 10, 1940 B 450.00 184.50 41

Sept. 23, 1940 B 450.00 185.00 41

---------------------------------------------------------------

Total $14,400.00 $6,348.50

---------------------------------------------------------------

Upon the respondent's petition, the Tax Court reviewed the Commissioner's findings and --

Held, that, as to the bonds acquired by petitioner [Jacobson, the respondent here] through direct negotiations with the bondholders, he is not taxable on the gain therefrom under the doctrine of Helvering v. American Dental Co., 318 U.S. 322; held, further, that petitioner is taxable on the gain realized

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in the purchases from bondholders through the secretary of the bondholders' committee and the security dealers, under the doctrine of the Supreme Court in United States v. Kirby Lumber Co., 284 U.S. 1, he being at all times solvent.

6 T.C. 1048.

Six of the sixteen judges dissented, and five of those six voted to uphold Commissioner completely on the ground that none of the transactions was gratuitous. 6 T.C. 1048, 1057-1059. The Commissioner petitioned the Court of Appeals for the Seventh Circuit to review that part of the judgment which was unfavorable to him. The respondent did the same as to the remainder of the judgment. That court decided against the Commissioner on both petitions. It held that, because the respective sellers knew that the bonds they sold were being bought by or for the respondent, as the maker of them, any excess of the [69 S.Ct. 361] face values of the bonds over their sales prices should be treated as gifts to the respondent, and as exempt from income tax. 164 F.2d 594. Due to the importance of the issues in the unsettled field of the taxability of gains derived by a debtor from his discharge of his own obligations at a discount, we granted certiorari in both cases. 333 U.S. 866. We have heard and decided them together.

The further material facts, as found by the Tax Court or as shown by undisputed evidence, are as follows:

By purchases made in 1922 and 1923, the respondent acquired a 99-year lease, running from May 1, 1914, together with a two-story store, office, and apartment building on the leased premises in Chicago. On or about May 1, 1925, he borrowed $90,000 from a nearby bank and, together with his wife, executed in return 200 bonds secured by a trust deed mortgaging to that bank the leasehold and the improvements thereon. The bonds bore interest at 6 1/2 percent per annum, and were for

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the total principal amount of $90,000, with $2,500 maturing semiannually up to and including November 1, 1931. The balance of the bonds, totalling $57,500, were to mature May 1, 1932. The original proceeds were used by the respondent to retire the existing encumbrance, of an undisclosed amount, on the property, pay for a $16,250 addition made by him to the building on the leasehold and pay the necessary brokerage commission of approximately 10 percent of the loan, plus the cost of printing the bonds and other expenses in connection with the loan. A remaining "small surplus" was paid to the respondent. In 1925, the respondent, for the purposes of computing depreciation, allocated $76,580.56 to the improvements, including the new addition, and $40,000 to the leasehold, out of their total cost to him of...

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