The opinion
TtiRNER,
dissenting: In my opinion the conclusion reached in Docket No. 87339 can not be reconciled with that reached in Docket No. 87240. In the case first mentioned it is concluded that the accrued *979 interest due and owing from the corporation to the trust, the payment of which was waived or canceled by the trust, did not constitute taxable income to the trust for the reason that the trust, being on the cash receipts basis, never received it actually or constructively; while at the same time it is concluded in the latter case that the interest so waived or canceled by the trust did not constitute income to the corporation because it was received by the corporation from the trust, its sole stockholder, as a payment or contribution to capital. I have been unable to think of any situation or arrangement whereby it might probably be said that the one entity can make a payment or contribution of any sum to another without first receiving, actually or constructively, the money so paid or contributed.
The situation here does not involve a normal and ordinary relationship between a stockholder and a corporation, and it is unlikely that the events which took place could have happened unless the interests of the sole stockholder and of the corporation were so nearly the same that it would make little if any difference, except for income tax purposes, whether the interest, so-called, was paid over to the stockholder or retained by the corporation. As I understand the facts, the Jane Holding Corporation was organized and maintained solely for the purpose of carrying on under corporate form certain enterprises of the trust, and particularly to erect a substantial office or business building, and the trust was to furnish such amounts as were needed for completion of the project. The income of the corporation was to be derived almost if not wholly from the rents to be obtained on the building. Assuming the separate entities of the trust and the corporation, the facts, as I understand them, are that as rents began to come in the Jane Holding Corporation from time to time made cash payments on the open account which it had set up to, cover the loans or advances from the trust, which account covered not only the sums which had been advanced but interest thereon as it accrued from year to year. In making these payments there was no designation by the Jane Holding Corporation that these payments constituted a payment of interest or capital, and they were entered on the corporate books merely as payments on account. Normally under such circumstances there would be no occasion to designate the application of such payment to interest or principal, because it seems to me fundamental that where, in the absence of prior agreement or understanding, payments are made in respect of advances or loans, the amount so paid is to be regarded as the payment of interest to the extent of the interest then due and then as to any balance as a payment on principal. The only fact which could in any way indicate that such was not the case here is the fact that upon receiving these sums the trust, for some *980 reason which it has not seen fit to explain, made entries on its boohs designating the amounts received as payments of principal, leaving the interest to accumulate from year to year. In my opinion that fact alone should not be sufficient to justify either a conclusion of fact or a conclusion of law that the amounts dealt with in 1933 constituted interest and not principal. It seems to me therefore that the correct conclusion on the facts as I understand them would be that the interest accrued on the advances had been actually paid by the corporation over the period of years and actually received in cash by the trust to the extent of the cash payments, limited only to the amount of the interest which had accrued but remained unpaid at the time any particular payment was received. Under such circumstances, if that conclusion is correct, the only manner in which income tax may now be collected in respect of such interest payments would be through the adjustment of trust income for the years in which the prior payments were made, unless, by reason of the act of the trust in treating the payments as the return of principal and in failing to report in income as interest the payments made, some form of estoppel may be spelled out so as to justify the inclusion of a corresponding amount in income for 1933, when payment of the balance due on the account was waived.
According to my understanding of the report herein, however, all parties in interest, including the trust, the corporation, and the respondent, have either agreed, or have proceeded to the trial of the issues in the two cases on the assumption, that the amounts which were actually paid by the corporation to the trust during the preceding years were in truth and in fact the payments of principal and that in the year 1933 interest accrued on that principal actually remained unpaid in the amount of $2,510,222.01, and to that extent the payment waived by the trust was in fact interest. On the basis of such an understanding, assumption, or agreement of fact, I am of the view that the only reasonable and logical conclusion that may be reached is that the interest so accrued and unpaid was constructively received by the trust at the time payment was waived and by it paid into the corporation as a contribution to capital. In that view of the case the conclusion of the majority in Docket No. 87339 is in error and the conclusion reached in Docket No. 87240 is correct. There seems to be no question that if the amount waived had been admitted to be principal, cancellation of the indebtedness would have been accepted by all parties as a payment to capital.
While I do feel that the reasoning in Burnet v. Sanford & Brooks Co., 282 U. S. 359 , and South Dakota Concrete Products Co., 26 B. T. A. 1429, referred to in the dissent of Mr. Hill, is persuasive, I am convinced that the situation in those cases, as in the case of the recovery of a bad debt, is quite different from that in the cases *981 before us. In each of the cases mentioned and in the case of a bad debt recovery, the recovery of funds was an actual realization on rights which existed in the person or corporation sought to be taxed, while here the acquisition of or the freeing of the sum of $2,510,222.07 from liability to the trust was not a realization on any right existing in the Jane Holding Corporation but the result of a voluntary act or gratuity of its sole stockholder, and, being a sum received or retained at the will of the stockholder, for which the corporation gave nothing, it constituted paid in capital. I am unable to see any analogy between a transaction such as we have in the cases before us and a transaction between a corporation and a stranger, as distinguished from a stockholder, such as took place in United States v. Kirby Lumber Co., 284 U. S. 1 .
For the reasons set forth, I respectfully express my dissent.
Oppee agrees with this dissent.