American Dental Co. v. Commissioner of Internal Rev., 7847.

Decision Date15 May 1942
Docket NumberNo. 7847.,7847.
PartiesAMERICAN DENTAL CO. v. COMMISSIONER OF INTERNAL REVENUE.
CourtU.S. Court of Appeals — Seventh Circuit

James A. O'Callaghan, of Chicago, Ill., for petitioner.

J. P. Wenchel and Vernon F. Weekley, both of Washington, D. C., Bur. of Int. Rev., Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Newton K. Fox, Sp. Asst. Attys. Gen., for respondent.

Before MAJOR, KERNER, and MINTON, Circuit Judges.

MINTON, Circuit Judge.

The petitioner has appealed from a decision of the Board of Tax Appeals confirming the Commissioner's determination of a deficiency in petitioner's income tax for 1937. The question we are confronted with at the threshold is whether the cancellation of certain indebtedness owed by the petitioner in the amount of $19,234.21 constituted taxable income.

In December, 1933 petitioner was indebted to its landlord for past-due rent in the sum of $15,298.99. On December 19, 1933 when petitioner's president and landlord's agent were negotiating a new lease, petitioner's president asked for an adjustment on the past-due rent. The landlord's agent replied: "Well, I will make an adjustment of this item. Go ahead and sign up the new lease, and so forth, and I will give it a little thought and will let you hear from me."

The new lease, which reduced the annual rent from $15,200 to $8,400, was signed. Nothing more was said about adjustment of the past-due rent until April, 1934, when petitioner again took it up with the landlord's agent, who said: "Pay me $7,500, and I will call it square and forget the rest of it."1

The petitioner in 1936 was also indebted to three firms for interest upon past-due accounts for merchandise. In November, 1936 petitioner's president secured from these three firms separately adjustments in these past-due accounts, cancelling the interest accrued after January, 1932. Petitioner kept its books and made its income tax return upon an accrual basis, and up to 1937 it took deductions for the rent and interest which were allegedly adjusted, as we have indicated. The rent forgiven offset income of $7,798.99, and the indebtedness for interest forgiven offset income of $11,435.22. There is no question of wilful misrepresentation or fraudulent intent. The Commissioner concedes in his brief that there is no question of estoppel.

In 1937 petitioner paid in three equal installments $7,500 to its landlord, and in its income tax return for 1937, it acknowledged as a "credit to surplus" the cancelled rent and interest. The Board held that the cancelled rent and the cancelled interest in the sum of $19,234.21 constituted income taxable to the petitioner in 1937 and were subject to the undistributed profits tax, and upon this basis confirmed the Commissioner's determination of a deficiency.

The Government freely conceded that unless the forgiveness of indebtedness in each of these instances was based upon a consideration, it would amount to a gift, and gifts are not taxable as income to the donee. Article 64 of Regulation 77 promulgated by the Commissioner of Internal Revenue reads as follows: "* * * If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. * * *"

Were these debts cancelled by the creditor for the benefit of the debtor and without consideration? The negotiations for the new lease took place in December, 1933, and the lease was then agreed upon and executed. At that time, the taxpayer-petitioner asked for an adjustment of the past-due rent account. The landlord's agent said: "* * * I will make an adjustment of this item. Go ahead, and sign up the new lease, and so forth, and I will give it a little thought and will let you hear from me." That terminated the negotiations at that time. No promise was made as to what the adjustment would be. The matter of debt forgiveness was not agreed upon but was left for future negotiations. If the landlord had said: "If you will make the new lease,...

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8 cases
  • Putoma Corp. v. C. I. R.
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • 27 Agosto 1979
    ...the corporation in 1937 and assessed a deficiency. The court of appeals reversed on the ground that the cancellations were exempt gifts (128 F.2d 254). The Supreme Court affirmed the decision of the court of appeals. As to the item of cancelled interest, the case was practically on "all fou......
  • Putoma Corp. v. Comm'r of Internal Revenue, Docket Nos. 7468-73— 7472-73.
    • United States
    • U.S. Tax Court
    • 30 Junio 1976
    ...the forgiven items were in fact previously deducted. 15. See American Dental Co., 44 B.T.A. 425, 428 (1941); American Dental Co. v. Commissioner, 128 F.2d 254, 256 (7th Cir. 1942). 16. The Government argued in its brief before the Supreme Court: ‘The gains resulting to a solvent debtor from......
  • Helvering v. American Dental Co
    • United States
    • U.S. Supreme Court
    • 1 Marzo 1943
    ...of Internal Revenue, 44 B.T.A. 425. The Court of Appeals reversed on the ground that the cancellations constituted exempt gifts. 7 Cir., 128 F.2d 254. On account of a variety of views in the circuits as to the taxability of similar adjustments of indebtedness, we granted certiorari.2 317 U.......
  • Sportwear Hosiery Mills v. Commissioner of Int. Rev.
    • United States
    • U.S. Court of Appeals — Third Circuit
    • 25 Junio 1942
    ...of Internal Revenue, 1931, 22 B.T.A. 111, 113. 25 See Bogardus v. Commissioner, supra; cf. American Dental Co. v. Commissioner of Internal Revenue, 7 Cir., 1942, 128 F.2d 254. 26 Petitioner's only evidence to show a gift was a reimbursement in the absence of a contract to reimburse and a po......
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