Kena, Inc. v. Commissioner of Internal Revenue

• Decision Date: 18 April 1941
• Docket Number: Docket No. 100406.
• Parties: KENA, INC., SUCCESSOR BY MERGER TO WYDELKE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

44 B.T.A. 217 (1941)

KENA, INC., SUCCESSOR BY MERGER TO WYDELKE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 100406.

Board of Tax Appeals.

Promulgated April 18, 1941.

Charles W. Crawford, Esq., for the petitioner.

John R. Wheeler, Esq., for the respondent.

This proceeding involves a deficiency of $5,250.70 in the petitioner's personal holding company surtax for its fiscal year ended November 30, 1936.

The basic issue is whether or not the petitioner was a personal holding company as defined by section 351 (b) (1) of the Revenue Act of 1934.¹ The specific question is whether or not the income received by the petitioner during the taxable year was either interest or gain from the sale of stock or securities, as those terms are used in the statute.

FINDINGS OF FACT.

The facts were stipulated and, in so far as they are material to the issue, may be summarized as follows:

The petitioner is a Delaware corporation, with a mailing address at 233 Broadway, New York, New York. It is the successor by merger to Wydelke, Inc., and is so designated in the notice of deficiency.

During the taxable year Norman P. deMauriac and Alice B. deMauriac, his wife, owned all of the stock of Wydelke, Inc., a Delaware corporation. Wydelke, Inc., owned all of the stock of the petitioner and also owned other nonincome-producing stock and a book account against deMauriac. Wydelke, Inc., was merged into the petitioner on or about June 26, 1937, and filed its income and excess profits tax returns and also a personal holding company return for the taxable year.

Wydelke, Inc.'s, only source of income during the taxable year was dividends aggregating $93,572 paid to it by the petitioner. The assets of the petitioner consisted of a claim of $500 against Alice B. deMauriac and a claim against deMauriac, amounting to $395,609.26 on November 30, 1936, arising out of a contract dated December 13, 1932, between him and the petitioner. That contract was extended from time to time and, as extended, was in effect during the taxable year.

The contract recited that deMauriac had been successful in conducting stock trading accounts but was without funds and that the petitioner desired to invest its funds "with safety as to principal and an opportunity for enhancement thereof." The parties thereupon agreed that the petitioner should lend $195,227.50 in cash to deMauriac and deMauriac acknowledged the receipt of that sum "as and for a loan", under the following terms:

1. DeMauriac promised to repay the loan on December 1, 1933.

2. DeMauriac agreed, in consideration of the making of the loan, to pay the petitioner on December 15, 1933, "an additional sum of money in lieu of interest, which additional sum shall be an amount equal to 80 per cent of the net profits of deMauriac in his stock trading business" for the period from December 13, 1932, to December 1, 1933.

The petitioner was permitted to have full access to deMauriac's books and records but had no power or authority over his business. The relation between the petitioner and deMauriac was stated to be that of a creditor and debtor. DeMauriac was liable for the payment of only the principal and the petitioner was not liable for any loss "either by way of sharing the same or otherwise." Provisions were made to extend the agreement to cover any future loans and to continue the life of the agreement by mutual consent.

The only income received by the petitioner during the taxable year was $124,091.65, representing the contractual percentage (reduced to 66 2/3 percent by an amendment to the contract) paid to it by deMauriac. The dividends paid to Wydelke, Inc., by the petitioner were paid out of its income for the taxable year.

The "adjusted net income" of Wydelke, Inc., for the purpose of calculating its "undistributed adjusted net income", as contemplated by section 351 of the Revenue Act of 1934, was $93,217, dividends paid by the petitioner to Wydelke, Inc. During the taxable year, Wydelke, Inc., paid to its stockholders dividends aggregating $75,714.67. The respondent, in determining the instant deficiency, disallowed 20 percent of "adjusted net income", or $18,643.40, claimed by the petitioner as a credit in computing the "undistributed adjusted net income" of Wydelke, Inc., on the ground that the petitioner was a personal holding company.

OPINION.

VAN FOSSAN:

The respondent has pitched his entire argument on the interpretation of the word "interest" as used in section 351 (b) (1) (A). The petitioner contends that the sum received by it pursuant to the contract with deMauriac was not interest and did not represent "gains from the sale of stock or securities." If such payment is determined to be either interest or gains from the sale of stock or securities, the section automatically applies to the situation before us since the facts of the case bring it within the provisions of the other subsection (section 351 (b) (1) (B)). It is to be noted that, while counsel for petitioner contends the payment was not interest or gains from the sale of stock or securities, he does not venture to suggest an alternative characterization or name.

It is axiomatic that the language used to describe a thing does not determine its character. The contract of December 13, 1932, denominated the amount to be paid to the petitioner as "an additional sum in lieu of interest." The word "lieu" means "place or stead." It does not imply that the character of the payment was different from interest but indicates that the method of computation was not in accord with the usual method of computing interest, the percentage of profit being employed as a substitute. The contract itself must be examined to determine whether the sum so designated was actual interest or was something else.

Funk & Wagnalls New Standard Dictionary defines interest as "Payment for the use of money, or money so paid; an agreed or statutory compensation accruing to a creditor during the time that a loan or debt remains unpaid, reckoned usually as a yearly percentage of the sum owed."

In Old Colony Railroad Co. v. Commissioner, 284 U. S. 552, the Supreme Court stated:

And as respects "interest", the usual import of the term is the amount which one has contracted to pay for the use of borrowed money. He who pays and he who receives payment of the stipulated amount conceives that the whole is interest. * * * We cannot believe that Congress used the word having in mind any concept other than the usual, ordinarily, and everyday meaning of the term * * *.

In Elverson Corporation, 40 B. T. A. 615, we said:

* * * Interest, as generally understood, means simply the "compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for...