Sheppard v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 87430.
| Decision Date | 04 February 1938 |
| Docket Number | Docket No. 87430. |
| Parties | CHESTER A. SHEPPARD, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
C. D. Phillips, Esq., for the petitioner.
W. W. Kerr, Esq., for the respondent.
This proceeding involves a deficiency of $1,881.79 for the fiscal year ended October 31, 1934. Two issues are presented, namely, whether petitioner is entitled to deduct $13,685.72 alleged to represent interest accrued on mortgage trust certificates for the period from November 8, 1933, to March 31, 1934, and whether petitioner is entitled to an additional depreciation deduction on the properties held by him as trustee in the sum of $2,418.24.
FINDINGS OF FACT.
On November 8, 1933, petitioner, as trustee, acquired a gasoline absorption and compression plant in Texas under circumstances hereinafter set forth, and operated the plant until March 31, 1934.
The plant had formerly been the property of the Forrest E. Gilmore Co. of Texas, hereinafter called Texas Gilmore. A mortgage had been placed on the property by Texas Gilmore with the Security Savings & Trust Co. of Portland, Oregon, as trustee, against which mortgage the Trust Co. had issued trust certificates in the amount of $482,000, bearing 7 percent interest.
The capital stock of Texas Gilmore was owned by the Forrest E. Gilmore Co. of Delaware, hereinafter called Delaware Gilmore. Certain creditors of Delaware Gilmore brought proceedings against that company and made Texas Gilmore a party thereto. The Trust Co. intervened in the proceedings in order to protect the mortgage held by it.
In January 1932 the holders of the trust certificates issued by the Trust Co. and secured by the mortgage of Texas Gilmore, entered into an agreement which had for its immediate objects the acquisition of the properties of Texas Gilmore under foreclosure, the formation of a new corporation, and the execution by the new corporation of bonds secured by the properties in place of the trust certificates they then held. The agreement conferred upon designated trustees, of whom the petitioner was one, the necessary authority to act for the subscribers and gave in considerable detail the steps to be taken. As far as material here the agreement provided that the certificate holders would "accept, severally, either first mortgage bonds against the newly acquired property * * * and/or trust certificates for the amount of their respective claims plus accrued interest, and plus such costs as may be incurred by them in the acquisition of said property * * *." Other provisions were to the effect that any value in the property in excess of the amount necessary to secure the contemplated mortgage should be made available to security holders of Delaware Gilmore after the subscribers were fully protected, including provision for "interest which may hereafter accrue."
Interest was paid on the old trust certificates by Texas Gilmore to June 1, 1932. Thereafter that company paid no further interest on the certificates.
On November 8, 1933, the petitioner, acting under the terms of the agreement of the certificate holders, bid in the property of Texas Gilmore for $50,000. None of the trust certificates were turned in to the court or to Texas Gilmore.
From November 8, 1933, the petitioner operated the property as trustee for the certificate holders. On or about March 31, 1934, he conveyed all of said property, plus any and all profits received from his operation thereof, to the Portland Gasoline Co., a Delaware corporation.
The Portland Gasoline Co. was organized in or about March 1934, pursuant to the terms of the aforesaid agreement. Thereafter it executed and delivered to the Title & Trust Co. of Portland, Oregon, its indenture of mortgage, to secure the payment of the sum of $482,000 aggregate principal amount of first mortgage sinking fund bonds due June 1, 1944, bearing interest at the rate of 7 percent per annum. This trust indenture and the bonds were dated as of June 1, 1934, and had attached thereto interest coupons representing the interest from June 1, 1934, to the time of maturity. In addition to those coupons, there was also attached the following form of coupon:
(For interest June 1, 1932, to June 1, 1934)
THIS IS TO CERTIFY That interest on this bond at the rate of seven per centum (7%) per annum from June 1, 1932, shall become due and payable on December 1, 1932, at the office of Title and Trust Company, in the City of Portland, Oregon, if so declared in the absolute discretion of the Board of Directors of the Portland Gasoline Company, and not otherwise. Until interest is declared by the Board of Directors, this coupon shall not be payable.
__________ Treasurer.
The mortgage and the bonds of the new Portland Gasoline Co. were in the same aggregate principal amount, $482,000, as the former issue of bonds or trust certificates secured by the mortgage of Texas Gilmore which was foreclosed. The Portland Gasoline Co. has paid all interest upon said indebtedness from June 1, 1932, up to the present time, including the period during which the properties were operated by the petitioner...
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