Helvering v. AL Killian Co., 12164.
Citation | 128 F.2d 433 |
Decision Date | 15 May 1942 |
Docket Number | No. 12164.,12164. |
Parties | HELVERING, Commissioner of Internal Revenue, v. A. L. KILLIAN CO. |
Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Louise Foster, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to the Atty. Gen., on the brief), for petitioner.
Helen Goodner, of Washington, D. C. (George E. H. Goodner and D. F. Prince, both of Washington, D. C., on the brief), for respondent.
Before GARDNER, THOMAS, and RIDDICK, Circuit Judges.
This is a petition for review of a decision of the Board of Tax Appeals reversing a determination of a deficiency in respondent's income tax for the year 1935. The question presented is whether respondent received taxable income during the year 1935 under § 22 of the Internal Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 669, as a result of a transaction by which the purchase price of real property, a portion of which was payable by respondent in 1935, was reduced and the notes evidencing respondent's liability for the balance of the purchase price were replaced by other notes for a lesser amount.
The facts, as found by the Board of Tax Appeals, are not disputed. During the taxable year 1935, the respondent, A. L. Killian Company, a corporation, was engaged in business at Norfolk, Nebraska. In 1920 it purchased real property for a consideration of $100,000, paying $10,000 in cash at the time of purchase, $10,000 in the year 1921, and giving to the vendor its notes for $80,000, maturing on February 1, 1935. The notes were secured by a purchase-money mortgage on the property. When respondent's notes became due in 1935, the fair market value of the property was not in excess of $60,000. The respondent at that time had large outstanding obligations but was not insolvent. It offered to convey the real property to the vendor in settlement of its liability on the notes. The vendor refused to accept this offer, but proposed to reduce the purchase price of the property by $20,000 and to accept $60,000 in full settlement of the balance due on the purchase price, provided the respondent would pay $5,000 cash and execute new notes for $55,000 secured by a new mortgage on the property. Respondent accepted the vendor's offer, paid $5,000 in cash, delivered new notes for $55,000, and received its old notes in the sum of $80,000 from the vendor.
The Board of Tax Appeals found that because of the shrinkage in value of the property purchased, and the resulting decrease in the assets of respondent, the parties had made a new agreement in 1935 reducing the purchase price to conform more nearly to the real value of the property at the time the new agreement was executed. The decision was that the transaction in question resulted in no taxable gain to the respondent.
The Commissioner contends that the transaction between respondent and its creditor constituted nothing more nor less than a cancellation of indebtedness of the respondent resulting in a realization by it of taxable income in the year in which the cancellation was made, relying upon Commissioner v. Coastwise Transportation Company, 1 Cir., 71 F.2d 104; Haden Company v. Commissioner, 5 Cir., 118 F.2d 285; Helvering v. American Chicle Company, 291 U.S. 426, 54 S.Ct. 460, 78 L.Ed. 891; United States v. Kirby Lumber Company, 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131; and Helvering v. Jane Holding Corporation, 8 Cir., 109 F.2d 933.
It is true that a release or cancellation of indebtedness may result in taxable income. Helvering v. Jane Holding Corporation, supra. But in determining what constitutes income, substance rather than form must be given controlling weight. Bowers v. Kerbaugh-Empire Company, 271 U.S. 170, 46 S.Ct. 449, 70 L.Ed. 886; Hirsch v. Commissioner, 7 Cir., 115 F.2d 656; Ruben v. Commissioner, 8 Cir., 97 F.2d 926. The transaction out of which the supposed income arises must be viewed in its entirety. "The mere diminution of loss is not gain, profit, or income." Bowers v. Kerbaugh-Empire Company, supra 271 U. S. 170, 46 S.Ct. 451, 70 L.Ed. 886.
The transaction in question here was not a mere cancellation of indebtedness, but was a reduction in the purchase price of property brought about by shrinkage in the value of the property and the consequent decrease in the assets...
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