Commissioner of Internal Revenue v. Kellogg

• Decision Date: 19 April 1941
• Docket Number: No. 9659.,9659.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. KELLOGG et al.
• Court: U.S. Court of Appeals — Ninth Circuit

119 F.2d 115 (1941)

COMMISSIONER OF INTERNAL REVENUE v. KELLOGG et al.

No. 9659.

Circuit Court of Appeals, Ninth Circuit.

April 19, 1941.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Warren F. Wattles, and L. W. Post, Sp. Assts. to the Atty. Gen., for petitioner.

Vernon M. Brydolf, of Pasadena, Cal., for respondents.

Before DENMAN, MATHEWS, and STEPHENS, Circuit Judges.

DENMAN, Circuit Judge.

The Commissioner seeks a review of a redetermination by the Board of Tax Appeals of a deficiency determined by him of the tax due on income of F. W. Kellogg,¹ hereafter called taxpayer, for the tax year 1935.

Taxpayer's petition to the Board for the redetermination of the deficiency was in the usual form setting forth the deficiency letter of the Commissioner and his exceptions to the Commissioner's determination. It admits that there was income taxable to the amount of $6,846.31, but complains that a deficiency assessment of an additional $5,776.89 was erroneously made. Taxpayer complained that this deficiency was due to a finding by the Commissioner overvaluing the cancellation of an obligation of the taxpayer to pay, at his death, to the Kellogg Investment Company, a corporation, without interest, the sum of $43,533.60, the amount of premiums on a policy insuring taxpayer's life which the corporation had paid. It is not claimed that there is fraud or collusion or want of consideration for the absence of interest on the premiums advanced. On the contrary, it appears that a part of the consideration was the assumption by taxpayer of a $20,000 obligation of another debtor of the corporation.

The taxpayer was 69 years of age and had a normal life expectancy of 8.97 years. In his return he gave as income for the cancellation of the future obligation to pay the amount of the premiums the sum of $26,426.90. It is not disputed that this is the present worth of the amount payable at taxpayer's death, if discounted at 6 per cent. per annum. The Commissioner found the value of the cancelled obligation was the full future obligation of $43,533.60 and denies here that the value of the present cancellation was in any way lessened because the amount was not payable by taxpayer until nearly nine years later and then without interest.

The Board determined that the Commissioner erred in finding that the value of the indebtedness payable at taxpayer's death was its valuation at the time the obligation was cancelled by the corporation, and redetermined the tax on the basis of the $26,426.90 gain returned by the taxpayer, — that is, it found no deficiency.

The cancellation of the indebtedness was a part of a final liquidating dividend of the corporation, taxpayer taking it in lieu of other property. The applicable sections of the 1934 Revenue Act in determining a gain or loss from the exchange of his stock in a liquidation of all the assets of a corporation are:

"§ 115. Distributions by Corporations

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"(c) Distributions in Liquidation. Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income. * * *" 26 U.S.C.A. Int.Rev.Acts, page 703.

"§ 111. Determination of Amount of, and Recognition of, Gain or Loss

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"(b) Amount Realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received." 26 U.S.C.A. Int.Rev.Acts, pages 692.

The claim against taxpayer for a future noninterest-bearing debt was property, not money, in the hands of the corporation. It certainly would not have been regarded as money if sold to a third party or distributed in liquidation to other stockholders. If the taxpayer, instead of having it cancelled in liquidation, had procured another to assume the obligation, in determining his charge the party assuming it would have calculated the amount of money, less than the principal, which at some rate of cumulating interest would produce the principal sum at the taxpayer's death. The cancellation of such a chose in action is, in effect, a distribution to taxpayer of "property" in the hands of the corporation. We are unable to see how it can be regarded as a liquidating dividend of "money" to the taxpayer. Warren Service Corp. v. Commissioner, 2 Cir., 110 F.2d 723, 725, holding: "The sum received in 1926 as security for the lessee's performance was, by specific agreement, available for the lessor's general use and was not to bear interest. The value of a release of an obligation to pay $125,000 in 1941, without interest, is obviously less than the value of the release of a debt for like amount presently due, or of an obligation to pay the sum in 1941 with interest. See Chesapeake & Ohio R. Co. v. Kelly, 241 U.S. 485, 489, 36 S.Ct. 630, 632, 60 L.Ed. 1117, L.R.A. 1917F, 367, where it is said: `It is self-evident that a given sum of money in hand is worth more than the like sum of money payable in the future.' See also Hollwedel v. Duffy, Mott Co., 263 N.Y. 95, 188 N.E. 266, 90 A.L.R. 1312. The present case is to be * * * differentiated from a situation where the lessor is to pay the lessee interest on the deposited sum, as in the case relied upon by the Board. Commissioner v....