Brennen v. Comm'r of Internal Revenue, Docket No. 39129.

• Decision Date: 28 May 1953
• Docket Number: Docket No. 39129.
• Citation: 20 T.C. 495
• Parties: JAMES BRENNEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

20 T.C. 495

JAMES BRENNEN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 39129.

Tax Court of the United States.

Promulgated May 28, 1953.

OPINION

STATUTE OF LIMITATIONS— SECTION 3801(b)(2)— (b)(5).— The petitioner purchased bonds in 1914 and sold them in 1945. He claimed a deduction in 1944 for amortizable bond premium, adjusted his basis in like amount and reported a corresponding increase in gain on sale of the bonds in 1945. The respondent reversed these steps, determined a deficiency for 1944, and granted a refund for 1945. The petitioner accepted the refund, which was premised on the increased 1945 basis. The petitioner successfully contested the 1944 deficiency in a proceeding in this Court. The respondent determined a deficiency for 1945, the assessment and collection of which was barred except for section 3801. Held, section 3801 is not available to life the bar of section 275(a). DeWitt Williams, Esq., for the petitioner.

Douglas L. Barnes, Esq., and John D. Picco, Esq., for the respondent.

TIETJENS, Judge:

The respondent determined a deficiency in income tax for the year 1945 in the amount of $8,878.57. This determination was made after the 3-year statute of limitations for assessment, prescribed by section 275(a) of the Internal Revenue Code, had run. The respondent relies on section 3801 of the Code as his authority for determining the deficiency.

All of the facts have been stipulated and are so found. Those material to the controversy are set forth in our findings of fact.

1. The petitioner is an individual and a resident of the State of Washington. The returns for the calendar years 1944 and 1945 were filed by the petitioner with the collector of internal revenue for the district of Washington.

2. In filing his income tax return for the year 1944 the petitioner claimed a deduction for amortization of bond premium in the aggregate amount of $37,439.25. Of said amount, $35,514.25 represented the amortization of ‘bond premium‘ paid for the acquisition on November 24, 1944, and November 25, 1944, of debentures of the American Telephone & Telegraph Co. and Commonwealth Edison Company in the respective amounts of $32,718.75 and $2,795.50.

3. The American Telephone & Telegraph Co. convertible debentures referred to above were purchased on November 24, 1944, at a total cost of $214,718.75, exclusive of purchase interest. Said debentures had a par value of $175,000, callable at $104 on a 30-day notice. The total call price was therefore $182,000, and the petitioner charged off the excess cost in the amount of $32,718.75 paid for the acquisition claimed as a deduction on petitioner's 1944 return in accordance with his interpretation of the provisions of section 125 of the Internal Revenue Code.

4. On November 25, 1944, the petitioner also purchased $20,000 par value of 3 1/2 per cent convertible debentures of Commonwealth Edison Company, as referred to in paragraph 2, at a total cost of $23,245.50 exclusive of interest. Said debentures were callable at $102.25 on 30-day notice. The total call price of these debentures was $20,450, and the petitioner charged off as ‘bond premium‘ the amount of $2,795.50 which was claimed as a deduction o n his tax return for 1944, also in accordance with his interpretation of the provisions of section 125 of the Code.

5. Between June 5, 1945, and June 11, 1945, the petitioner sold all of the American Telephone & Telegraph Company and the Commonwealth Edison debentures referred to above. In reporting the gain on his 1945 return, the petitioner used a cost for tax purposes for each block of debentures which was reduced by the amount of ‘amortizable bond premium‘ claimed by him as a deduction on his 1944 return. The petitioner received a total of $250,343.10 for the American Telephone & Telegraph Company and Commonwealth Edison debentures, and reported a long-term capital gain from the sale thereof in the amount of $47,883.10 on his return for the year 1945.

6. The petitioner's return for the year 1945 was filed with the respondent on January 15, 1946, and was immediately examined in connection with the return filed for the year 1944. As a result thereof a report of examination was prepared under date of January 25, 1946, in which the revenue agent found that there was a deficiency in the 1944 income tax in the amount of $26,034.92, primarily by reason of disallowance of the bond premium expense deduction shown on petitioner's 1944 return. He also determined an over assessment in income tax for the year 1945 in the amount of $9,431.74, primarily attributable to the increase in the basis of the American Telephone & Telegraph debentures and the Commonwealth Edison debentures and the corresponding reduction in gross capital gains by said amount of $47,883.10. A report of the examination of both the 1944 and 1945 returns was transmitted to the petitioner on June 14, 1946.

7. The petitioner protested the determination of the agent's office with respect to the disallowance of the deduction for bond premium amortization as claimed on the 1944 return. However, he did agree with the agent's findings and thereafter a statutory notice of deficiency was issued to him regarding the 1944 liability in which the following determination was made:

Deduction of $32,718.75 claimed in your income tax return for the calendar year 1944 as bond premium expense attributable respectively to the American Telephone and Telegraph Company debentures, $175,000.00 par value, and Commonwealth Edison Company debentures, $20,000.00 par value acquired in that year, have been disallowed for the reason that the stated deductions did not represent true bond premiums within the meaning of the applicable provisions of the statute.

The facts show that the debentures in question were convertible at the option of the holder into capital stock of the issuing companies, and furthermore that substantially all of the excess of the purchase price thereof over the call prices represented consideration paid for the conversion options as distinguished from premiums paid for the investment value of the debentures free of conversion options.

The petitioner filed his petition from said statutory notice of deficiency with The Tax Court of the United States on May 21, 1947, Docket No. 14104.

8. The petitioner did not file a claim for refund or execute any agreement with respect to acceptance of the overassessment determined by the examining agent for the year 1945 in the amount of $9,431.75. However, the Commissioner authorized refund of said amount as shown in the report of the examination dated June 13, 1946. The check in the amount of $9,431.74 was paid to the petitioner by the respondent on July 15, 1947, as a result of said action. The check representing said sum was cashed and the amount thereof has been retained by the petitioner and has not been refunded to the Government subsequent to July 15, 1947.

9. The petitioner at no time signed or filed Treasury Department Form 872 or other agreement waiving and extending the statute of limitations with respect to the assessment of income tax for the year 1945.

10. Prior to the trial of the proceeding in Docket No. 14104 the parties filed a joint motion for continuance of the hearing and a request to place the proceeding on a reserve calendar of the Tax Court. Said motion was filed with the Court in April 1948. The grounds for said motion as expressed therein, are, in part, as follows:

3. This same question of law has recently been presented to this Court for determination in the appeal of Christian W. Korell, Docket No. 13842, which was heard before a division of this Court at New York, N.Y., on December 8, 1947, and in the appeals of Nose and Rose Schoong, Docket Nos. 15475 and 15476, which were heard before a division of this Court at San Francisco, California, on March 22, 1948.

4. It is believed that the ultimate decisions in the causes mentioned in paragraph 3 above, will be determinative of the issue in the present proceeding and that the time of this Court and of the parties hereto may be conserved by deferring the hearing in this matter until the decisions in the foregoing appeals become final.

11. The case of Korell v. Commissioner, referred to above, was ultimately appealed to the Supreme Court and decision on the same issue in dispute in Docket No. 14104 entered therein, 339 U.S. 1019. Said decisions of the Supreme Court decided the issue regarding the amortization of bond premium in accordance with the petitioner's contentions regarding an identical issue then pending before the Tax Court in Docket No. 25061, involving the petitioner's liability as transferee of a corporation, Piston Service, Inc. 12. Following the decision of the Supreme Court, the respondent's determination in Docket No. 14104 was conceded by the Government to the extent it involved the bond premium issue. Accordingly, a stipulation of the parties was filed with the Tax Court reflecting a deficiency in the amount of $807.80, and decision was entered therein January 16, 1951. The difference between the deficiency as determined and the reduced deficiency found by the Court was attributable entirely to the allowance by the respondent of the deduction in the year 1944 of the amortized ‘bond premium‘ claimed as an expense on his return and also eliminated by him on his 1945 return from the basis of said debenture bonds at the time of sale.

13. The liability of the petitioner for 1945 was reexamined thereafter by the respondent and a revised report prepared under date of August 22, 1951, recommending a deficiency of $8,857.51 for said year. A copy of said examination was transmitted to the petitioner under date of October 12, 1951. The petitioner did not protest said determination and the liability shown therein was the subject of the deficiency letter dated December 11, 1951, from which the petitioner appealed in the present proceeding.

14. The decision of...