The opinion
Hide, J., dissenting: Petitioner is a closely held family corporation. It was- organized to hold title to patrimonial property and to distribute the rental income therefrom. Beyond that it is not an operating corporation. It has even constituted an outside agent to perform all services in the collection of rents and to distribute the distributable portion thereof. Its only source of income is rents under a term lease arrangement.
The debentures which it issued proportionately to its stockholders are essentially preferred stock and not evidences of debt and hence confer upon the holders thereof proprietary interests in the corporate assets instead of giving them the status of creditors.
The debentures, as of the time of their issuance, have no fixed or determinable maturity date. May 10,1946, is specified as the maturity date thereof, with the proviso, however, that should the term of the existing lease “be extended beyond its present expiration date (April 28, 1946) or should the same be renewed either in its present form or other form satisfactory to the Company; then and in such event the maturity hereof shall .be extended and postponed for a period equivalent to the term (or terms) of any such extension (or extensions) or renewal (or renewals).”
From such provisions in the debentures it is evident that the debentures are to fun so long as rental income shall be received from the corporate property. If, as, and when the property shall not be under lease, the debentures may be converted into common stock or redeemed with the liquidating proceeds of the corporate property. Such redemption would be of the same character and with like priority as that of preferred stock. To me, the conclusion is inescapable that no other disposition of the debentures was or is contemplated. If payment of the debentures as evidences of debt within the lifetime of the corporation were intended, a fixed and determinable maturity date would be provided for in the debenture agreement. Such agreement would also provide for an accelerated maturity in the event of defalcations.
Of course, the debentures could be redeemed by borrowing the money necessary therefor. If this should be done, common business practice dictates the necessity for a deed of trust or other pledge of assets as security, with definite maturity dates, accelerated maturity provisions for defalcations, and an agency outside the corporate oificials to enforce the contract. The latter arrangement would unquestionably result in an indebtedness in distinctive contrast to that under which the retired debentures were issued. If a loan were negotiated for such purpose, a large part of petitioner’s income would be paid out in interest to a person or persons other than the holders of proprietary interests in the corporate assets of petitioner. Obviously, such distribution of income would not comport with the purpose of petitioner’s financial setup.
My opinion is that the petitioner’s financial structure was ingeniously designed and consummated to reap all the advantages incident to a corporate entity without the offsetting burden of corporation taxes. I regret to see the stamp of approval placed on what, in my opinion, is a legalistic farce set up for the sole purpose of evading corporation income taxes by distributing its profits as deductible interest payments when'in actuality such distributions are dividends.