7 T.C. 793 (1946), 6806, Bush Terminal Bldgs. Co. v. C. I. R.

Docket Nº:6806.
Citation:7 T.C. 793
Opinion Judge:KERN, Judge:
Attorney:Holt S. McKinney, Esq., for the petitioner. Wm. A. Schmitt, Esq., for the respondent.
Case Date:September 20, 1946
Court:United States Tax Court

Page 793

7 T.C. 793 (1946)




Docket No. 6806.

United States Tax Court.

September 20, 1946

Holt S. McKinney, Esq., for the petitioner.

Wm. A. Schmitt, Esq., for the respondent.

1. In 1940 petitioner purchased a considerable amount of its own bonds at less that their face value. Held, amendment of Section 22(b)(9) of Revenue Act of 1939 made by Revenue Act of 1942 is not retroactive; held, further, the evidence does not establish that petitioner was ‘ in an unsound financial condition‘ in 1940, and therefore gain resulting from the discharge of an indebtedness by purchase of its bonds is taxable to petitioner. Twin City Rapid Transit Co., 3 T.C. 475.

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2. An affiliated corporation owed petitioner an account receivable in the amount of $1,614,819.98 as of December 31, 1939. A compromise settlement was arranged in 1940 by which petitioner received cash in the amount of $200,000, and an agreement for installment payments having a fair market value of $91,125. Petitioner, its debtor affiliate, and their common parent had filed consolidated returns from 1919 through 1933, during which period losses of the debtor affiliate in the aggregate amount of $1,185.965.34 had been availed of by the group. Held, petitioner's bad debt loss realized in 1940 must be reduced by the affiliate's losses so availed of, to the extent to which petitioner's taxable net income was reduced by such losses during the consolidated returns period. That proportion of such losses will be applied to reduce petitioner's bad debt loss which represents the proportion of petitioner's taxable net income during the consolidated returns period to the combined taxable net income of petitioner and the parent corporation.

3. Petitioner, in 1939, accrued interest on a small part of an account receivable which it then considered to be collectible, and included that accrued interest in its income tax return on an accrual basis. In the computation of its 1939 net loss carry-over for its 1940 income tax return, petitioner eliminated this item from its 1939 income on the ground that it was improperly accrued on a bad debt. The account was settled by compromise in 1940 and petitioner received considerably less than the principal amount of the debt due to it in 1939. Held, the interest was improperly eliminated in the computation of petitioner's 1939 net loss carry-over.

4. Petitioner incurred certain items of expense in 1939 and 1940 in connection with a reorganization pursuant to a 77-B proceeding. It charged these items to a ‘ reserve for reorganizations expenses‘ on its books, but now claims a deduction for expenses in account thereof. Held, these items are not deductible as ordinary and necessary expenses.

The Commissioner determined deficiencies in petitioner's income and declared value excess profits taxes for the calendar year 1940 in the amounts of $43,479.75 and $3,192.54, respectively.

Of the six issues originally involved, respondent has conceded error with respect to one, and another was resolved by stipulation that the amount to be added to petitioner's taxable income for 1940 on account of the disallowance of a deduction for New York City sales and personal property taxes should be reduced from $9,498.50 to $6,113.39.

The four issues now before us are:

1. Did respondent err in increasing petitioner's taxable income in the amount of $242,790.36 on account of the discharge of an indebtedness arising from the purchase of its own bonds at less than face value?

2. Did petitioner sustain a deductible bad debt loss in 1940 resulting from a settlement of an indebtedness owing to it by an affiliated corporation which had, during the period of consolidated returns, operating losses availed of in such returns to reduce petitioner's taxable income, and if so, what is the amount of such deductible loss?

3. Did respondent err in resorting $13,750 as interest accrued and reported as income in 1939 to the computation of net operating loss carry-over for 1940?

4. Was petitioner entitled to additional deductions in 1939 of $39,135.71 and in 1940 of $95,641.22 for certain items of expense incurred in a 77-B proceeding and charged on its books to reserve for reorganization expenses?


Some of the facts were stipulated by the parties, and we find them to be as stipulated.

Petitioner is a New York corporation, organized in 1905, and during the taxable year had its principal office in New York City and filed its income tax, declared value excess profits tax, and defense tax returns with the collector of internal revenue for the second district of New York. It kept its books on an accrual basis of accounting. Petitioner owns and operates sixteen loft buildings in Brooklyn, renting space to manufacturing and industrial concerns and furnishing steam, electricity, and freight-handling services to its tenants. The buildings are multiple story buildings of steel and concrete construction, approximately 75 per cent of which were constructed prior to

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1913. They are located on land adjacent to the Brooklyn-New York water front, and adjoin the property of Bush Terminal Co.

In addition to these sixteen buildings in Brooklyn, petitioner also owns as office building at 100 Broadway in New York City, and an office building in London, England, called Bush House, which latter building represents in 1940 an investment of $1,925.94.

In 1940 approximately 75 per cent of petitioner's gross income consisted of rents and approximately 25 per cent consisted of payments for services to tenants.

Bush Terminal Co. (hereinafter sometimes referred to as Terminal) has at all times owned all of petitioner's common stock, and all the stock of Bush Terminal Railroad Co. (hereinafter sometimes referred to as Railroad). Petitioner's preferred stock is owned by the public. Petitioner has never owned any stock in Bush Terminal Railroad Co. From 1919 to 1933, inclusive, petitioner, Terminal, and Railroad filed consolidated income and profits tax returns.

Bush Terminal Co., the parent, owned and operated terminal facilities, consisting of piers and warehouses, and rental space for manufacturing and industrial concerns located adjacent to petitioner's property. Bush Terminal Railroad Co., the wholly owned subsidiary of Terminal, handles freight over the street of Brooklyn in the locality served by Terminal and petitioner.


From 1910 to 1926 petitioner issued first mortgage 5 per cent sinking fund bonds due in 1960, secured by a lien on all its properties, in a total face amount of $12,000,000, for $10,984,000. On January 1, 1940, there were outstanding bonds in the principle required to be made by petitioner to the sinking fund for these bonds were in arrears in the amount of $396,000. During 1940 petitioner purchased in the open market, on the New York Stock Exchange, its bonds in the principal amount of $681,000 for a price of $412,502.50. As of December 31, 1939, petitioner held it bonds in the face amount of $680,000, which it had purchased at a cost of $432.045. The highest price at which these bonds were listed on the New York Stock Exchange in 1940 was $690 per $1,000 principal amount. Petitioner paid prices ranging from $463.75 to $682.50 per $1,000 principal amount for the bonds which it purchased in 1940. The average price paid by petitioner for these bonds in 1940 was 64 plus per cent of face value. From January 1 to April 1, 1940, it purchased its bonds in the face amount of $184,000. The unamortized discount on the bonds purchased on 1940 was, as of January 1, 1940, $25,707.14. The difference between the par value of

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the bonds purchased and the amount paid for them, plus unamortized discount, amounted to $242,790.36.

The bonds were at all times guaranteed as to payment of principal and interest by the Bush Terminal Co. The interest has always been paid by petitioner when due. The highest price and the lowest price at which these bonds were listed on the New York Stock Exchange during the period 1931 through 1940 were as follows:

Year High Low Year High Low

1931 103 1/4 83 1/2 1936 67 50

1932 90 35 1/4 1937 73 1/2 53

1933 64 1/2 19 1938 61 35 1/4

1934 61 36 3/8 1939 60 47

1935 70 52 1/2 1940 69 46 1/8

Petitioner's gross income for the years 1930 to and including 1939 and its taxable net income were as follows:

Year Gross income Taxable net income (or loss) Year Gross income Taxable net income (or loss)

1930 $3,956,911.23 $1,170,505.15 1935 $2,075,326.03 ($146,969.74)

1931 3,691,828.72 1,137,886.28 1936 2,049,542.90 (266,738.36)

1932 3,176,394.94 435,220.75 1937 2,598,961.46 27,803.20

1933 2,616,419.16 317,806.66 1938 2,312,946.28 (565,542.82)

1934 2,341,859.02 99,630.11 1939 2,160,900.26 (81,199.33)

In November of 1934 Bush Terminal Co., owner of petitioner's common stock, the only stock which carried voting rights, filed in the District Court of the United States for the Eastern District of New York its petition for reorganization under section 77-B of the Bankruptcy Act. On or about October 1, 1936, petitioner filed in the same cause its petition for reorganization under section 77-B, in which it stated that petitioner was not insolvent in a bankruptcy sense, but was unable to meet its debts as they matured. By an order of the court approving the filing of the petition, petitioner was continued in possession of its...

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