Clyde C. Pierce Corp. v. Commissioner of Internal Rev., 9845.

• Decision Date: 17 July 1941
• Docket Number: No. 9845.,9845.
• Citation: 120 F.2d 206
• Parties: CLYDE C. PIERCE CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

120 F.2d 206 (1941)

CLYDE C. PIERCE CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.

No. 9845.

Circuit Court of Appeals, Fifth Circuit.

June 4, 1941.

Rehearing Denied July 17, 1941.

Giles J. Patterson and Lucien H. Boggs, both of Jacksonville, Fla., for petitioner.

Edward H. Hammond and Sewall Key, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and C. R. Marshall, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before FOSTER, HUTCHESON, and HOLMES, Circuit Judges.

HUTCHESON, Circuit Judge.

Petitioner is here leveling two complaints against the findings and order of the Board. One complaint is against the finding that monies paid it on account of interest coupons, past due when defaulted bonds of political subdivisions of the State of Florida were purchased by it, are to be treated as a return of capital, and not as a payment of interest on tax exempt securities. The other is that the taxpayer is not entitled to deduct interest paid on indebtedness incurred by it to purchase and carry the bonds in question. Petitioner, since 1932, has been a dealer in, that is, has been purchasing and selling, bonds issued by political subdivisions of the State of Florida. Most of the bonds petitioner dealt in were in default. When petitioner purchased a bond which was current in payment of principal and interest, it paid a stated amount for the bonds plus a separate sum representing accrued interest to the date of purchase. However, upon purchase of bonds which were in default, a flat price, without distinction as to principal or interest, was paid for the securities. In 1933, 34 and 35, petitioner purchased for a flat price, defaulted bonds on which considerable interest coupons had accrued, and in 1934 and 1935, the tax years in question, it detached the coupons, sold the bonds and collected from the political subdivisions, the detached coupons, both those which had accrued before and those which had accrued after the purchase. In order to purchase and carry the bonds, petitioner borrowed money from banks, usually putting up municipal bonds as collateral. In its income tax returns for the taxable years, petitioner, on the ground that it represented interest on indebtedness incurred, and continued to purchase obligations, the interest on which is wholly exempt from income taxes, did not claim as a deduction, the interest it had paid on monies borrowed to carry the bonds.

The Board, following its rulings in Thompson Scenic Railway Company v. Commissioner of Internal Revenue, 9 B.T.A. 1203; Erskine Hewitt v. Commissioner of Internal Revenue, 30 B.T.A. 962, that amounts realized on coupons detached from securities in default at the date of purchase are not interest but a return of cost, and on the authority of Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304, 71 A.L.R. 1260 and United States v. Stewart, 311 U.S. 60, 61 S.Ct. 102, 85 L.Ed. ___, sustained commissioner's determination, that monies collected from political subdivisions on account of accrued coupons it had detached from the bonds, were received as returns of capital and not as tax exempt interest. Conceding that the securities in which petitioner dealt and for the carrying of which it had borrowed monies from the banks, were tax exempt securities within the meaning of Sec. 23(b), Revenue Act of 1934, 26 U.S.C.A.Int.Rev. Code § 23(b),¹ it sustained the commissioner's determination, that the interest p...