Commissioner of Int. Rev. v. Coastwise Transp. Corp.
| Decision Date | 18 May 1934 |
| Docket Number | No. 2866.,2866. |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. COASTWISE TRANSP. CORPORATION. |
| Court | U.S. Court of Appeals — First Circuit |
J. Louis Monarch, Sp. Asst. to Atty. Gen. (Sewall Key and J. P. Jackson, Sp. Assts. to Atty. Gen., on the brief), for petitioner for review.
Leonard Wheeler, Jr., of Boston, Mass. (Robert E. Goodwin and Allan H. W. Higgins, both of Boston, Mass., on the brief), for Coastwise Transp. Corporation.
Before BINGHAM, WILSON, and MORTON, Circuit Judges.
The Coastwise Transportation Corporation acquired a fleet of ships from the American Hawaiian Company in 1922 and gave, as part payment therefor, serial notes of the face value of $608,400 secured by mortgage on the ships. In 1924, the corporation purchased for $75,000 two of these notes having a face value of $152,000, thereby making a gain of $77,100; and in 1925, by negotiations through a syndicate, acquired $456,300 of the notes in exchange for bonds having a par value of $375,000, thus making a gain of $81,300. The mortgage notes were retired by the corporation. In making a deficiency return for the years 1924 and 1925, the Commissioner assessed these two amounts of $77,100 and $81,300 as taxable income for the respective years, from which assessments the corporation appealed to the Board of Tax Appeals. The Board reversed the ruling of the Commissioner, and the case came before us on his petition for review. It also appeared that in 1924, without taking into consideration the gain for that year by the purchase of the two notes, the corporation suffered a net loss of $100,338.25, which it took as a deduction in its return for 1925.
Upon these facts we held when the case was previously before us (62 F.(2d) 332, 334) that it was governed by the decision in United States v. Kirby Lumber Co., 284 U. S. 1, 52 S. Ct. 4, 76 L. Ed. 131, and that the Commissioner was correct in treating the gains realized by the purchase of the notes for less than their face value as taxable income. The case, however, was remanded to the Board of Tax Appeals to find further facts as to the depreciation of the assets of the corporation through losses in operation and by depreciation, whether the negotiations with reference to these notes amounted to a reorganization of the corporation, and "for further proceedings not inconsistent with this opinion."
On rehearing the Board found no evidence of a reorganization of the corporation. It also found that from the time the vessels were purchased in 1922, down to December 31, 1924, they had depreciated in value from $1,267,500 to $1,083,419.73, or to the extent of $184,080.25; that as of December 31, 1923, the balance sheet of the corporation showed a deficit of $73,340.24, and as of December 31, 1924, after taking into consideration the mortgage notes, a deficit of $113,883.31, and, applying the $81,300 by which the liabilities were further reduced, there would still remain a deficit of $32,583.31, which was not likely to have been wiped out during the first part of January, 1925; that this was in addition to the loss by depreciation of the vessels, which in itself amounted to more than the gains made from the purchase of the notes; and that at the close of 1925 there was a surplus of $49,452.52.
The Board, in its findings, gives the details of the negotiations with the American Hawaiian Company and the syndicate resulting in retiring the mortgage notes for less than their face value, and comes to the conclusion that "the transactions merely amounted to a reduction in the purchase price of the fleet of vessels, that there was no release of free assets by the transactions involved, and that the operation in 1924 resulted in a loss." It was therefore of the opinion that United States v. Kirby Lumber Co., supra, did not apply and the gains were not taxable income.
We have carefully reviewed these transactions and can find nothing therein that indicates they had anything to do with the purchase price of the vessels. The parties dealt solely about the notes and their value and not about the ships or their value. The offer of the Coastwise Corporation and the acceptance of the American Hawaiian Company were in writing and were for the purchase and sale of the notes at a reduced price and not an agreement that the Hawaiian Company should reduce the purchase price of the ships. The gains came about from a reduction in the value of the notes. The contract being in writing, its construction and meaning are for the court.
We still are of the opinion that the...
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