American Cigar Co. v. Commissioner of Internal Revenue

L. HAND, Circuit Judge

(concurring).

I find it impossible to say that money given by a creditor to his debtor for the purpose of paying the debt to him, is income of the creditor. This must certainly be true when the creditor’s books are on a cash basis. When they are on an accrual basis, I should be prepared to say that the debtor’s recognized necessity of getting a gift, not a loan, to discharge his debt was evidence of its worthlessness and charge off. In substance the transaction is a cancellation o> the debt. But I do not think that the petitioner’s loan to the Havana Cigar Company was a gift. To be sure it did not expect to be paid, but it did expect to have a corresponding legal claim against the borrower, which apparently it used in a later reorganization. This precludes the notion of a gift and it is irrelevant I think that as things stood the lender knew that the loan could never be repaid in full. I agree that in these circumstances the coupons falling due were income, the petitioner’s books being on an accrual basis. They had not been charged off during the year; I also agree that to put items in a “suspense account” is not to charge them off as worthless. The purpose is to leave them ambiguous for a season; when their disposition is eventually decided, they will appear in their proper place, probably as worthless; but the present meaning is to delay that determination for the time being.

I find it rather hard to reconcile Corn Exchange Bank v. U. S., 37 F.(2d) 34 (C. C. A. 2), with this conclusion. However, the majority of the court appears to have there regarded the coupons as worthless. Here they were not; neither were the notes which raised the money to pay them. Indeed, in form, anyway, the coupons were paid. In substance, the transaction may be regarded as this; the petitioner did not think the coupons wholly worthless and reserved the question of their value for the future. It could secure the counter-charge only when it definitively valued them as partially, or wholly, worthless. Till then its power was suspended.