Commissioner of Internal Revenue v. Jacobson, Nos. 32

CourtUnited States Supreme Court
Writing for the CourtBURTON
Citation69 S.Ct. 358,93 L.Ed. 477,7 A.L.R.2d 857,336 U.S. 28
Decision Date17 January 1949
Docket NumberNos. 32,33
PartiesCOMMISSIONER OF INTERNAL REVENUE v. JACOBSON (two cases)

336 U.S. 28
69 S.Ct. 358
93 L.Ed. 477
COMMISSIONER OF INTERNAL REVENUE

v.

JACOBSON (two cases).

Nos. 32, 33.
Argued Nov. 8, 1948.
Decided Jan. 17, 1949.

Page 29

Mr. Arnold Raune, of Washington, D.C., for petitioner.

Mr. Theodore R. Colborn, of Cleveland, Ohio, for respondent.

Mr. Justice BURTON delivered the opinion of the Court.

This decision applies the federal income tax to gains derived by a debtor from his purchase of his own obligations at a discount and his consequent control over their discharge. It presents the specific question whether a

Page 30

solvent natural person, in straitened financial circumstances, must include in his gross income for federal income tax purposes the difference between (1) the face amount of his personal indebtedness as the maker of secured bonds, originally issued by him at face value for cash, and (2) a lesser amount paid by him for their purchase. The debtor's obligations were not unpaid balances of purchase prices which could be readjusted by the discharge of the obligations. The proceeds of the obligations were not traced into identifiable losses offsetting the debtor's realized gains from the discharge of these obligations. Each seller knew that the bonds he sold were being bought by or for the maker of them. In each sale the bondholder sought to minimize his probable loss by getting as much as possible, directly or indirectly, from the maker of the bonds as the one available purchaser of them. The maker of the bonds, at the same time sought to reduce his obligations as much as possible by buying the bonds as cheaply as he could. While each seller thus knew that he was receiving from the maker of the bonds less than their face amount, there is no finding that any seller intended to transfer or release something for nothing or to make a gift of any part of his claim, as distinguished from making a sale and assignment of his whole claim for the highest available price. The maker thus realized a gain from each purchase and the Commissioner of Internal Revenue found correctly that, for federal income tax purposes, the maker must include that gain in his gross income for the tax year in which he made the purchase.

The respondent, Lewis F. Jacobson, in 1938, 1939 and 1940 resided, practiced law and owned or controlled substantial property interests in Chicago, Illinois. In 1943 the petitioner, Commissioner of Internal Revenue, found deficiencies in the income taxes paid by the respondent for

Page 31

each of those years. Those deficiencies totaled $3,967.97, of which about $2,500 are now before us. This case arose from the Commissioner's addition to the reported gross income of the respondent of the differences between (1) the principal face amounts of certain leasehold bonds executed by the respondent and (2) the lesser amounts paid by him for their purchase. Such purchases were made by or for him substantially as follows:

Purchased Percentage
D—Direct of face
B—Through Principal amount

Date of purchase broker face Purchase paid by

C—Through amount price purchaser-
bondholders' maker-
committee taxpayer

1938

Apr. 9, 1938....... D. $450.00 $202.50 45

June 9, 1938....... D. 3,600.00 1,620.00 45

Aug. 17,1938....... D. 900.00 405.00 45

1939

Feb. 15, 1939...... B. 1,800.00 900.00 50

June 16, 1939...... D. 450.00 225.00 50

Oct. 23, 1939...... B. 180.00 86.50 48

1940

Apr. 4, 1940....... C. 270.00 130.00 48

May 21, 1940....... C. 450.00 210.00 47

May 23, 1940....... C. 2,700.00 1,080.00 40

June 19, 1940...... C. 1,800.00 720.00 40

July 1, 1940....... B. 450.00 200.00 45

July 3, 1940....... B. 450.00 200.00 45

July 10, 1940...... B. 450.00 184.50 41

Sept. 23, 1940..... B. 450.00 185.00 41

Total......... ---------- $14,400.00 $6,348.50 ----------

Upon the respondent's petition, the Tax Court reviewed the Commissioner's findings and—

'Held that, as to the bonds acquired by petitioner (Jacobson, the respondent here) through direct negotiations with the bondholdes, he is not taxable on the gain therefrom under the doctrine of Helvering v. American Dental Co., 318 U.S. 322, 63 S.Ct. 577, 87 L.Ed. 785; held, further, that petitioner is taxable on the gain realized

Page 32

in the purchases from bondholders through the secretary of the bondholders' committee and the security dealers, under the doctrine of the Supreme Court in United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131, he being at all times solvent.' 6 T.C. 1048.

Six of the sixteen judges dissented and five of those six voted to uphold Commissioner completely, on the ground that none of the transactions were gratuitous. 6 T.C. 1048, 1057—1059. The Commissioner petitioned the Court of Appeals for the Seventh Circuit to review that part of the judgment which was unfavorable to him. The respondent did the same as to the remainder of the judgment. That court decided against the Commissioner on both petitions. It held that, because the respective sellers knew that the bonds they sold were being bought by or for the respondent, as the maker of them, any excess of the face values of the bonds over their sales prices should be treated as gifts to the respondent and as exempt from income tax. 164 F.2d 594. Due to the importance of the issues in the unsettled field of the taxability of gains derived by a debtor from his discharge of his own obligations at a discount, we granted certiorari in both cases. 333 U.S. 866, 68 S.Ct. 792. We have heard and decided them together.

The further material facts, as found by the Tax Court or as shown by undisputed evidence, are as follows:

By purchases made in 1922 and 1923 the respondent acquired a 99-year lease, running from May 1, 1914, together with a two-story store, office and apartment building on the leased premises in Chicago. On or about May 1, 1925, he borrowed $90,000 from a nearby bank and, together with his wife, executed in return 200 bonds secured by a trust deed mortgaging to that bank the leasehold and the improvements thereon. The bonds bore interest at 6 1/2 per cent per annum and were for

Page 33

the total principal amount of $90,000, with $2,500 maturing semiannually up to and including November 1, 1931. The balance of the bonds, totalling $57,500, were to mature May 1, 1932. The original proceeds were used by the respondent to retire the existing encumbrance, of an undisclosed amount, on the property, pay for a $16,250 addition made by him to the building on the leasehold and pay the necessary brokerage commission of approximately 10 per cent of t e loan, plus the cost of printing the bonds and other expenses in connection with the loan. A remaining 'small surplus' was paid to the respondent. In 1925 the respondent, for the purposes of computing depreciation, allocated $76,580.56 to the improvements, including the new addition, and $40,000 to the leasehold, out of their total cost to him of $116,580.56.

The bonds due on or before November 1, 1931, were paid at or about their maturities. The debtor has never been in default on any interest payment. However, after the trustee bank closed on June 8, 1931, a committee was formed to represent the holders of this issue of bonds. May 1, 1932, the respondent secured from the committee and individual bondholders a five-year extension of the maturity on all of the bonds and a reduction in the interest rate from 6 1/2 to 5 per cent. During this extention the respondent issued his checks in the names of the respective bondholders to cover interest due them. The checks were delivered by the secretary of the bondholders' committee, the respondent kept himself fully informed as to the identity and location of the respective bondholders and they, in turn, frequently visited him to learn about his financial condition and that of the trusteed property. In 1937 he procured a further extension of the maturity of the bonds to May 1, 1942, and, in that connection, paid 10 per cent on

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the principal of each bond, leaving a total outstanding balance of $51,750 payable on these bonds.

The Tax Court found that in 1938 the fair market value of the leasehold and the improvements thereon was $80,000 and that in 1939 and 1940 it was the same, less accrued depreciation. The respondent testified that he valued it at considerably less, even as low as twice the amount of its gross income, or about $32,000. The gross and net income from the trusteed property, after deduction of expenses, depreciation and also the interest on the bonds, was:

The respondent received from his law practice and other sources the following additional gross income: 1938, $38,390.85; 1939, $35,644.78; and 1940, $35,279.59. The Tax Court said that: 'On the strength of the showing of petitioner's assets and liabilities, we find petitioner was solvent during each of the taxable years 1938, 1939, and 1940.' 6 T.C. 1948, at page 1053. The Court of Appeals said: 'The Tax Court found that the taxpayer was solvent during each of the taxable years 1938, 1939 and 1940, and we accept the finding, although a perusal of the record makes it quite apparent that he was in straitened financial circumstances.' 164 F.2d at page 596.

In his petition to the Tax Court the respondent stated, and it has not been disputed, that the value of the leasehold and building had sharply depreciated since his acquisition of them. The neighborhood had changed, stores were vacant or paid less than half of their previous rents, from 1932 to 1938 the value of the property was substantially less than its cost to him, conditions were

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getting worse and he felt certain that he would sustain a large loss in connection with the property.1

The Tax Court's findings describe each bond sale that is material. Some were to the respondent personally and some to his law partner, acting on his behalf. The rest were made indirectly to the respondent through brokers or through the bondholders' committee. The...

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231 practice notes
  • Title Ins. Co. of Minnesota v. State Bd. of Equalization, No. A045664
    • United States
    • California Court of Appeals
    • June 24, 1991
    ...power. (See Commissioner v. Kowalski (1977) 434 U.S. 77, 82-83, 98 S.Ct. 315, 318-319, 54 L.Ed.2d 252; Commissioner v. Jacobson (1949) 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477; Helvering v. Clifford (1940) 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788.) In doing so the Court ha......
  • Putoma Corp. v. C. I. R., No. 77-1591
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • August 27, 1979
    ...Court changed somewhat its concept of the meaning of the word "gifts" in the tax laws and regulations in the case of C. I. R. v. Jacobson, 336 U.S. 28, 69 S.Ct. 358, 93 L.Ed. 477 (1949). In that case a natural person had issued bonds at face value and later bought them at a discount from va......
  • Neptune Mut. Ass'n, Ltd. of Bermuda v. U.S., Nos. 88-1275
    • United States
    • United States Courts of Appeals. United States Court of Appeals for the Federal Circuit
    • November 30, 1988
    ...are to be narrowly construed. Bingler v. Johnson, 394 U.S. 741, 751, 89 S.Ct. 1439, 1445, 22 L.Ed.2d 695 (1969); Commissioner v. Jacobson, 336 U.S. 28, 48, 69 S.Ct. 358, 369, 93 L.Ed. 477 Page 1554 Neptune also relies on Rev.Rul. 80-225, 1980-2 C.B. 318 for the proposition that it was autho......
  • United States v. Burke, No. 91-42
    • United States
    • United States Supreme Court
    • May 26, 1992
    ...United States v. Centennial Savings Bank FSB, 499 U.S. ----, ----, 111 S.Ct. 1512, 1519, 113 L.Ed.2d 608 (1991); Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477 (1949). That is, an accession to wealth is not to be held excluded from income unless some provision of......
  • Request a trial to view additional results
231 cases
  • Title Ins. Co. of Minnesota v. State Bd. of Equalization, No. A045664
    • United States
    • California Court of Appeals
    • June 24, 1991
    ...power. (See Commissioner v. Kowalski (1977) 434 U.S. 77, 82-83, 98 S.Ct. 315, 318-319, 54 L.Ed.2d 252; Commissioner v. Jacobson (1949) 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477; Helvering v. Clifford (1940) 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788.) In doing so the Court ha......
  • Putoma Corp. v. C. I. R., No. 77-1591
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • August 27, 1979
    ...Court changed somewhat its concept of the meaning of the word "gifts" in the tax laws and regulations in the case of C. I. R. v. Jacobson, 336 U.S. 28, 69 S.Ct. 358, 93 L.Ed. 477 (1949). In that case a natural person had issued bonds at face value and later bought them at a discount from va......
  • Neptune Mut. Ass'n, Ltd. of Bermuda v. U.S., Nos. 88-1275
    • United States
    • United States Courts of Appeals. United States Court of Appeals for the Federal Circuit
    • November 30, 1988
    ...are to be narrowly construed. Bingler v. Johnson, 394 U.S. 741, 751, 89 S.Ct. 1439, 1445, 22 L.Ed.2d 695 (1969); Commissioner v. Jacobson, 336 U.S. 28, 48, 69 S.Ct. 358, 369, 93 L.Ed. 477 Page 1554 Neptune also relies on Rev.Rul. 80-225, 1980-2 C.B. 318 for the proposition that it was autho......
  • United States v. Burke, No. 91-42
    • United States
    • United States Supreme Court
    • May 26, 1992
    ...United States v. Centennial Savings Bank FSB, 499 U.S. ----, ----, 111 S.Ct. 1512, 1519, 113 L.Ed.2d 608 (1991); Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477 (1949). That is, an accession to wealth is not to be held excluded from income unless some provision of......
  • Request a trial to view additional results

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