Koontz v. Comm'r of Internal Revenue
| Decision Date | 31 May 1957 |
| Docket Number | Docket No. 60083. |
| Citation | 28 T.C. 586 |
| Parties | ARTHUR B. KOONTZ AND MAZIE W. KOONTZ, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Donald O. Blagg, Esq., and A. G. Stone, Esq., for the petitioners.
Charles R. Hembree, Esq., for the respondent.
While serving as counsel for the receivers of a corporation, petitioner, in 1941 and 1944, purchased 98,000 voting trust certificates of the corporation's stock. Some 60,000 certificates were purchased from the corporation which had held them as security for debts owed it by its deceased president; the other 38,000 certificates were purchased from the administrators of the deceased president's estate. The corporation purchased outstanding judgments against its deceased president, and would have been entitled to resort to the 38,000 certificates, along with his other assets, to satisfy the judgments so purchased. As a result of litigation commenced by stockholders of the corporation, petitioner, in 1952 and in 1954, paid to the corporation's receivers, the amount of the outstanding indebtedness owed by the corporation's deceased president, together with all interest therein, in order to retain the voting trust certificates. Petitioner claimed the interest on such indebtedness, accruing from the time he originally purchased the certificates up to the time of the court decree awarding him a clear title thereto, as deductible interest on his returns for 1952 and 1954. The respondent disallowed the deductions. Held, such amounts of interest represented an additional cost of the voting trust certificates and were not deductible as ‘interest paid or accrued’ within the meaning of section 23(b), I.R.C. 1939, and section 163(a), I.R.C. 1954.
This proceeding involves a deficiency in income tax for the year 1952 in this amount of $28,235.84, determined by respondent under the provisions of the Internal Revenue Code of 1939, and a deficiency in income tax for the year 1954 in the amount of $40,092.22, determined by the respondent under the provisions of the Internal Revenue Code of 1954.
The issue to be decided is whether certain sums paid by petitioner Arthur B. Koontz in 1952 and 1954 were deductible as ‘interest paid or accrued’ during such years, within the meaning of section 23(b) of the 1939 Code and section 163(a) of the 1954 Code, respectively, or were an additional cost of voting trust certificates purchased in 1941 and 1944.
Some of the facts were stipulated.
The stipulated facts are so found and are incorporated herein by this reference. We likewise adopt by this reference, as a part of our findings, the facts set forth in Bank of Mill Creek v. Elk Horn Coal Corp., 133 W. Va. 639, 57 S.E. 2d 736 (1950); and Bank of Mill Creek v. Elk Horn Coal Corp., 136 W. Va. 36, 65 S.E. 2d 892 (1951).
During the years in issue, Arthur B. Koontz, hereinafter referred to as the petitioner, and his wife, Mazie W. Koontz, were residents of Charleston, West Virginia. They filed joint income tax returns for such years with the former collector and the district director of internal revenue, respectively, for the district of West Virginia.
Prior to his death on May 24, 1940, Clarence W. Watson had served as president of the Elk Horn Coal Corporation, sometimes hereinafter referred to as the corporation. At the time of his death, he was insolvent and indebted to the corporation. As security for such indebtedness, he had pledged 60,000 voting trust certificates of the corporation's stock. The corporation was placed in receivership on August 21, 1940, and petitioner and his brother, Patrick D. Koontz, became counsel for the receivers. At a public sale which was confirmed on December 23, 1941, petitioner and his brother, through an agent, purchased the 60,000 voting trust certificates from the corporation.
In 1942, the corporation receivers purchased certain outstanding judgments against Watson's estate. In May and June 1944, petitioner and his brother, through an agent, acquired an additional 38,000 Elk Horn voting trust certificates from the administrators of Watson's estate in West Virginia and Ohio.
On July 23, 1946, a committee of stockholders of Elk Horn filed a petitioner in the Circuit Court of Kanawha County praying that the petitioner and his brother be divested of all rights in the 98,000 voting trust certificates which they had purchased, on the ground that they were disqualified from making such purchases because of their fiduciary relationship to Elk Horn and its receivers by virtue of their serving as counsel for the latter.
Petitioner's brother died on July 23, 1947. By will, he bequeathed to petitioner all of his stock interest in the Elk Horn Coal Corporation.
The ultimate result of the protracted litigation which followed was that the sales to petitioner and his brother were held to be voidable sales. Petitioner could have returned the certificates and received back what he and his brother had initially paid for them. However, in order to retain the voting trust certificates which they had purchased, petitioner agreed to, and did, pay the outstanding indebtedness, with all interest thereon, owed by Watson to Elk Horn.
On August 28, 1952, petitioner paid to the receivers of Elk Horn the sum of $124,906.24, representing the amount of the indebtedness, together with all interest thereon up to date of such payment, for which the 60,000 voting trust certificates had been pledged. On June 11, 1954, petitioner paid to the receivers of Elk Horn the sum of $287,563.27, representing the amount of the indebtedness of Watson, together with all interest up to date of such payment, which had been purchased by the receivers who, as general creditors, would have been entitled to resort to the 38,000 voting trust certificates for satisfaction of such indebtedness. The court then confirmed the sales of the certificates to him, free and clear of the claims of Elk Horn.
On his return for 1952, petitioner deducted the sum of $40,581.92 as interest on Watson's indebtedness, which he paid in that year. The respondent allowed $5,296.50 of such sum as deductible interest on such indebtedness from August 22, 1951, the date used by the court in computing the amount of Watson's indebtedness to Elk Horn, until petitioner paid such indebtedness on August 28, 1952, on the theory that from the date of such computation to the date of payment the interest payable was on the indebtedness of petitioner. The petitioner now concedes that of the remaining amount of interest claimed on his return, only $23,712.82 is properly deductible. On his return for 1954, the petitioner claimed that.$90,607.89 of the amount which was paid to the Elk Horn receivers in satisfaction of Watson's indebtedness in that year was deductible as interest. The respondent allowed $1,348.18 of such sum as deductible interest on such indebtedness from the date on which the court entered its decree on April 17, 1954, until the time petitioner made the payment on June 11, 1954, on the same theory on which he allowed the $5,296.50 for 1952.
The deduction for interest paid or accrued by a taxpayer allowed by section 23(b) of the 1939 Code is for interest owed on an outstanding debt of the taxpayer claiming the deduction. Automatic Sprinkler Co. of America, 27 B.T.A. 160 (1932). As the Ways and Means Committee noted in its report accompanying the Internal Revenue Code of 1954, H. Rept. No. 1337, 83d Cong., 2d Sess. (1954), p. A-44: ‘Subsection (a) of section 163 continues the deduction for interest contained in section in section 23(b) of the 1939 Code.’ Thus, the deduction permitted by the 1954 Code is likewise for interest paid or accrued on indebtedness of the taxpayer.
The amounts of interest which petitioner seeks to deduct, and which the respondent disallowed, are the amounts of interest accruing on Watson's indebtedness from the time petitioner purchased the voting trust certificates in 1941 and 1944 up to and including the date of the court decrees confirming the release of the certificates to him, free and clear of any claims.
Petitioner argues that such amounts of interest are analogous to interest payments by transferees of corporate assets for the interest on corporate indebtedness accruing from the time the assets were transferred to them until payment of the indebtedness was made. In support of that argument he relies on such cases as Koppers Co., 3 T.C. 62 (1944), affirmed sub nom. Commissioner v. Breyer, 151 F. 2d 267 (CA. 3, 1945); W. D. Haden Co. v. Commissioner, 165 F. 2d...
To continue reading
Request your trial