Ambassador Hotel Co. of Los Angeles v. Comm'r of Internal Revenue

• Decision Date: 29 October 1954
• Docket Number: Docket No. 33123.
• Citation: 23 T.C. 163
• Parties: AMBASSADOR HOTEL COMPANY OF LOS ANGELES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

23 T.C. 163

AMBASSADOR HOTEL COMPANY OF LOS ANGELES, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 33123.

Tax Court of the United States.

Filed October 29, 1954.

John E. Hughes, Esq., for the petitioner.

Robert G. Harless, Esq., and Donald P. Chehock, Esq., for the respondent.

1. EXCESS PROFITS TAX INCOME— EXCLUSION— PROFIT ON PURCHASE OF OWN BONDS—SEC. 711(a)(2)(E).— Profits made by the petitioner on the purchase of its own bonds during the taxable year were excluded from excess profits net income under the provisions of section 711(a)(2)(E).

2. CONSENTS— CORPORATE SEAL— SEC. 22(b)(9).— A consent under section 22(b) (9) is not invalid because of the absence of the corporate seal, particularly where the consent was bound as a part of the return to which the seal was affixed, although the instructions on the back of the consent were that such seal should be affixed thereto.

3. CONSENTS— SIGNATURES OF OFFICERS— SEC. 22(b)(9).— A consent under section 22(b)(9), on which the name of the corporation had been typed, was not invalid because unsigned, where the consent was bound to and made a part of the return which was signed by two officers of the corporation and impressed with the corporate seal.

4. NET OPERATING LOSS DEDUCTION ADJUSTMENT— INTEREST DEDUCTION— SEC. 711(a) (2)(L)(i).— The operating loss for 1940 is not reduced by one-half of the interest on borrowed money under section 711(a)(2)(L)(i) since no excess profits credit is computed or allowed for that year.

5. AMORTIZATION OF BOND DISCOUNT— BY CORPORATION NOT OBLIGATED— NO MERGER OR CONSOLIDATION.— A new corporation to which some assets of an insolvent corporation were transferred, freed of all liens and claims of the creditors of the insolvent corporation, by bondholders of the insolvent corporation in exchange for bonds of the new corporation in a proceeding under section 77B of the National Bankruptcy Act, which proceeding was in no way similar to a merger or consolidation and under which the new corporation did not become liable for the obligation of the insolvent on its bonds, is not entitled to deductions for unamortized bond discount on the bonds of the insolvent corporation.

OPINION.

MURDOCK, Judge:

The Commissioner determined deficiencies as follows for fiscal years ended January 31:

+----------------------------------------------+
                ¦          ¦Declared     ¦Excess    ¦          ¦
                +----------+-------------+----------+----------¦
                ¦Year ended¦value excess-¦profits   ¦Income tax¦
                +----------+-------------+----------+----------¦
                ¦          ¦profits tax  ¦tax       ¦          ¦
                +----------+-------------+----------+----------¦
                ¦1944      ¦$2,235.44    ¦$92,000.04¦          ¦
                +----------+-------------+----------+----------¦
                ¦1945      ¦             ¦72,821.28 ¦          ¦
                +----------+-------------+----------+----------¦
                ¦1946      ¦2,799.52     ¦51,072.92 ¦          ¦
                +----------+-------------+----------+----------¦
                ¦1947      ¦             ¦          ¦$22,893.15¦
                +----------------------------------------------+
                

The issues for decision are:

(1) Whether profits on purchases by the petitioner of its own bonds should be included in excess profits income;

(2) Whether consents filed by the petitioner under section 22(b)(9) were sufficient to exclude from its gross income the income attributable to the discharge of its indebtedness;

(3) Whether the net operating loss for the year ended in 1940 must be reduced by interest in the computation of the unused excess profits credit carry-over to the year ended in 1944; and

(4) Whether the petitioner is entitled to a deduction for the unamortized bond discount of its predecessor's. The facts have been presented by a stipulation which is adopted as the findings of fact.

The returns for the taxable years were filed with the collector of internal revenue for the sixth district of California.

The petitioner contends that profits which it realized during the taxable years on purchases of its own bonds are not to be included in its excess profits tax income. The Commissioner concedes that the profit made by the petitioner on the purchase of its own bonds during the taxable years was included in excess profits net income and states: ‘It appears that under Section 711(a)(2)(E) such profit is not includible for excess profits tax purposes.’ The profits in question are excluded from excess profits net income for each year under the provisions of section 711(a)(2)(E) as they applied to the taxable years and the first issue is decided for the petitioner.

Section 22(b)(9) of the Internal Revenue Code, as it applied to the taxable years, provided that the income of a corporation attributable to the discharge within the taxable year of any indebtedness of the taxpayer shall not be included in gross income and shall be exempt from income tax ‘if the taxpayer makes and files at the time of filing the return, in such manner as the Commissioner, with the approval of the Secretary, by regulation prescribes, its consent to the regulations prescribed under section 113(b)(3) then in effect.’ Section 113(b)(3) provided that the basis of any property held by the taxpayer should be reduced by any amount excluded from gross income under section 22(b) (9). Regulations 111, section 29.22(b)(9)-2, state that a consent to have the basis of its property adjusted as provided in the sections of the Internal Revenue Code referred to ‘shall be made by or on behalf of the taxpayer corporation in duplicate on Form 982, in accordance with these regulations and the instructions on the form or issued therewith’ and the original and duplicate ‘shall be filed with the return.’ The instructions on the back of Form 982 stated in paragraph 3 that it ‘shall be signed with the corporate name, followed by the signature and title of at least two officers of the corporation * * * , in addition to which the corporate seal shall be fixed.’

The return of the petitioner for the year ended in 1944 was signed and sworn to by its president and by its treasurer, and was impressed with the corporate seal. A filled-in Form 982 was signed by those same two officers and was bound to that return, along with a number of schedules and other papers. It did not bear the corporate seal of the petitioner.

The return of the petitioner for the year ended in 1945 was signed and sworn to by its president and by its treasurer and was impressed with the corporate seal. A filled-in Form 982 was bound to that return, along with a number of schedules and other papers. The Form 982 was unsigned and was not impressed with the seal. The name of the taxpayer was typed on the form immediately above the place provided for signatures, and immediately above that the following was typed in: ‘The attached statement marked ‘Form 982 Statement’ is an integral part of this consent.' The statement referred to was bound to the return. Its effect was to state the taxpayer's brief that it was not in receipt of any taxable income from the discharge of its bond indebtedness and, therefore, was not required to have the basis of its property reduced, but the consent was filed because the Commissioner had not yet acted upon this contention and the consent was to be effective if it should be determined finally that the provision of section 22(b)(9) applied.

The return of the petitioner for the year ended in 1946 was signed and sworn to by its vice president and by its treasurer and was impressed with the corporate seal. A filled-in Form 982, singed by those same two officers and impressed with the corporate seal, was bound to the return along with a number of schedules and other papers. It bore a reference to a statement and had a statement attached to it similar to those described for 1945.

The return of the petitioner for the year ended in 1947 was signed and sworn to by its vice president and by its treasurer and was impressed with the corporate seal. A filled-in Form 982 was signed by those same two officers and was bound to that return along with a number of schedules and other papers. It did not bear the corporate seal of the petitioner. It bore a reference to a statement and had a statement attached to it similar to those described for 1945.

The Commissioner, in determining the deficiencies, held that the taxable income attributable to the discharge of indebtedness could not be excluded from taxable income and applied to reduce the basis of assets because of the petitioner's ‘failure to properly execute and file unconditional consents on Form 982 in accordance with Regulations 111, Section 29.113(b)(3).’

The Commissioner, in his brief, does not refer to section 29.113(b)(3) of Regulations 111. He makes no real argument based upon the conditions attached to the consents but merely says ‘the consents contain a condition which may very well have the effect of rendering them invalid.’ There was no statement attached to the 1944 consent. The statements do not render the consents invalid. They merely call attention to the fact that if the gain on the redemption of the bonds is not income, there is no occasion for any consent or adjustment to the base, but clearly disclose that if there is any occasion for the consents, the petitioner wants them to be effective. The Commissioner makes no argument in his brief that the petitioner failed to file duplicates of Form 982, although the...