Fisher v. Commissioner of Internal Revenue

• Decision Date: 03 February 1954
• Docket Number: No. 11866.,11866.
• Parties: FISHER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

209 F.2d 513 (1954)

FISHER v. COMMISSIONER OF INTERNAL REVENUE.

No. 11866.

United States Court of Appeals Sixth Circuit.

February 3, 1954.

Robert G. Surridge, Detroit, Mich. (Benjamin E. Jaffe, R. M. O'Hara, Detroit, Mich., on the brief), for petitioner.

Meyer Rothwacks, Washington, D. C. (H. Brian Holland, Ellis N. Slack and Hilbert P. Zarky, Washington, D. C., on the brief), for respondent.

Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.

SIMONS, Chief Judge.

Involved in this controversy is the question whether defaulted interest due on notes held by the petitioner became on their sale to a third party, for a price substantially in excess of their face value, capital gain to him or ordinary income taxable at income tax rates. There is no factual controversy, the case having been submitted upon a stipulation of facts supplemented by uncontroverted evidence accepted by the Tax Court in its findings.

The petitioner, during the 1944 tax year, was and had been a stockholder of a Florida development corporation and from time to time had advanced it money. On September 1, 1944, these advancements amounted to $133,849.44, evidenced by the corporation's 6% notes which were in default both as to principal and interest, the unpaid interest being $75,574.29. Upon the same date, the petitioner himself was indebted to The Prime Securities Corporation in the amount of $167,475.00, represented by his demand note held by it. The petitioner sold the Florida notes to Prime for a consideration of $200,000.00, the purchase price being paid by the cancellation of his indebtedness to Prime and Prime's payment to him of $32,525.00, the difference between the purchase price and the canceled obligations of the petitioner. Thereafter, Prime received payments of interest and principal on the Florida notes during the years 1944 through 1950, the entire obligation of the Florida company on the notes being canceled in 1950. In his income tax return for 1944, the petitioner, being on a cash receipts basis, reported as a long-term capital gain the sum of $66,150.56, that being the amount received by him on the sale of the notes above their face value. The Commissioner in determining the deficiency added this amount to net income, eliminated 50% thereof from the reported capital gain and determined that such amount was taxable as ordinary income under the provisions of Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. The Tax Court redetermined the deficiency in income tax found by the Commissioner.

The petitioner asserting that his transaction with Prime was a bona fide arms-length transaction and that the purchase price was fair and reasonable, points out that the sale was for a single consideration of $200,000.00 with no allocation of any part of the purchase price to accrued interest. He says that he sold the notes for a flat price in a single transaction, capital in its nature, which, like the sale of stocks and bonds, results in gain or loss without regard to whether the market price of such securities is enhanced or diminished by defaulted interest or dividends.

We think the fundamental error into which the taxpayer has fallen is that he fails to distinguish, in respect to gains, between the status taxwise of an investor and a lender, or between seller and purchaser. It does not follow that because a transaction may be capital in its nature as to one it is necessarily capital as to the other. One who buys securities that are in default and later sells them at a profit realizes capital gain. One who receives income for the use of money or property or the performance of personal services is taxable upon such income. These propositions are, of course, elementary.

While no exact precedents have been cited and none are found, principles governing the characteristics of income are well understood and have been developed by many cases. In Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, the question presented was whether one who is presently entitled to receive income and who is taxable only on receipt of payment can escape taxation by giving away his right thereto in advance of actual payment. The answer was in the negative. In Hort v. Commissioner, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168, the taxpayer acquired by inheritance real estate subject to a lease. It was there held that a lump-sum payment by the lessee for cancellation of the lease "was clearly a substitute for the rent reserved in the lease" and, thus, taxable as ordinary income to...