The opinion
Sternhagen,
dissenting: I find myself unable to accept the decision in Docket No. 87240, to the effect that the Jane Holding Corporation realized no income through the cancellation in 1933 by its creditor, the trustee, of the accumulated interest of $2,510,222.07. The decision is rested entirely upon Commissioner v. AutoStrop Safety Razor Co., 74 Fed. (2d) 226, affirming 28 B. T. A. 621, and the last sentence of article 64 of Regulations 77. It is important to remember that the nature of so much of the canceled indebtedness as is now in issue was accumulated accrued interest and did not represent the principal of a loan of money which had been made by the trustee to the corporation. I think that this fact is of primary importance in considering’whether it can properly be said that the trustee shareholder made a contribution to the corporation’s capital, as he might have done when he made the original loan upon which the interest was computed. As I read the regulations and the AutoStrop case, they were intended to deal with such principal indebtedness and not with accrued interest. Certainly the three illustrations of the article of the regulations indicate that accrued interest was not in the draftsman’s mind. When the Board and the court came to decide the AutoStrop case the dominant indebtedness which was thought of was that described in the instrument of cancellation as “royalties or commissions or on account of moneys loaned or advanced or otherwise.” The word “interest”, which appears but once in the findings and nowhere in the opinion, was entirely lost sight of. I think, therefore, that both the Board’s opinion and the court’s opinion should be regarded as dealing entirely with the question whether the principal of an indebtedness owing by a corporation to its shareholder becomes a contribution to capital when it is canceled. That case held that it does, and that the corporation thereby realizes no taxable income.
In the present case there is nothing to support a finding that the creditor, being the sole shareholder, intended a contribution of capital. On the contrary, the cancellation was made in order that *976 the trustee might distribute to one of its beneficiaries. The creditor corporation seems to me to have “made a clear gain” and “realized within the year an accession to income”, to use the Supreme Court’s language in United States v. Kirby Lumber Co., 284 U. S. 1 . Any thought of hardship which might result from tins view is dispelled by the fact that the debtor corporation has for many years accrued interest on its books and deducted it on its returns, thus indicating that no contribution of capital was in contemplation. As I understand, there was a credit by the corporation to surplus and undivided profits, and thus the amount which had theretofore been definitely obligated to be paid as a d_ebt was now freed of that obligation and was distributable or not to the shareholders entirely in the discretion of the directors. The trustee’s position was changed from that of a creditor with a right against the corporation to that of a shareholder with no such right. As a debtor, the corporation had been firmly bound and the amount of the debt had been a true liability; with the forgiveness of the debt the liability ended, notwithstanding that the accounting item “surplus” may still appear on the liability side.