Commissioner of Internal Revenue v. Auto Strop Safety Razor Co., Inc., 110.

• Decision Date: 10 December 1934
• Docket Number: No. 110.,110.
• Citation: 74 F.2d 226
• Parties: COMMISSIONER OF INTERNAL REVENUE v. AUTO STROP SAFETY RAZOR CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

74 F.2d 226 (1934)

COMMISSIONER OF INTERNAL REVENUE v. AUTO STROP SAFETY RAZOR CO., Inc.

No. 110.

Circuit Court of Appeals, Second Circuit.

December 10, 1934.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, and Norman D. Keller, Sp. Assts. to Atty. Gen., for petitioner.

Laurence Arnold Tanzer, of New York City, and John W. Townsend, of Washington, D. C., for respondent.

Before L. HAND, SWAN, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

The predecessor of the respondent, Auto Strop Safety Razor Company, owed the Auto Strop Company, in 1926, $2,170,478.98 on account of royalties, loans, and interest. In that year the Auto Strop Company was dissolved and all of its assets were distributed in liquidation to the Autan Transfer Corporation which owned all of its stock.

The Autan Transfer Corporation also owned all of the stock of the Auto Strop Safety Razor Company, and on January 19, 1927, canceled the debt owed by that company and released it from all liability therefor. The amount of the debt so canceled was thereupon entered upon the books of the Auto Strop Safety Razor Company to the credit of its surplus account.

In June, 1927, the respondent, Auto Strop Safety Razor Company, Inc., was organized. It filed an income tax return for the entire calendar year of 1927 in which it included the business of the Auto Strop Safety Razor Company for that portion of the year up to the time it was dissolved, but the canceled debt of $2,170,478.98 was not in any way reflected in the return. The Commissioner added that amount to net income and determined a deficiency which included it. The correctness of the decision of the Board overruling the Commissioner in this respect is the sole question presented.

Article 49 of Regulations 69 which went into effect under the Revenue Act of 1918 substantially as it is quoted below and has so been continued reads:

"Art. 49. Forgiveness of Indebtedness — The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation."

The Board found that the sole stockholder of the Auto Strop Safety...