Brief for the Petitioner — Helvering v. American Dental Co.

Op

FILE CUPY . — _-

. . Cire - Dace Geers, U, §.

FILED

NOV 27 1942

y d OMMBLES FLUONE Eur. EY

No. 308 | - ‘

=_ ~ . = — _ —— ——

>= : f wi

Sn een eto eed St

» Ocromna "Tens, 1942 ©

Guy T. Hlasveine, Cajrictemberies OF: Trem

seek» tesa sic :

&. | ANCA Duta Compa, it

¢ — . ; i - al

ON WRIT OF diiemigliaiiia TO THE UNUrED STATEA OIRCUIF

COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Oo ig F ot eee a Re — :

— , —_

we

INDEX

yiok Page

sree ial teal ais tes Ne ae 1

Jurisdiction... -- A Rea e Cen Neen Win wn aan 1

Questions presented . ca ini ole clean Ui<entinwnken Rewhwseewe 2.

Statute and regulations involved... ..-.. # = 4-. ~~... -----.. 2

Statement. Wh hnchie tanner eehaknienuekee 2

Specification of errors... _.-- aSe een eeebesacencese bwakden . 5

~ Summary of argument...... -...-.-.--+-.----- es ie a ee 5

- Aepement.... 2.252... PSL OSE el LE SR ee See $

™ I. The-.creditors’ cancellation of debts for past due rent and

interest owed by the taxpayer, made for business

reasons, resulted in taxable income to the taxpayer. - 7.

A. The foregiveness of indebtedness here, if not

made as_a gift, results: in taxable income to

the debtor. a i ie ae R Ea 7

B. The cancellation of indebtedness was not made

as a gift within the meaning of Section 22

(b) (3) of the Revenue Act of 1936... ._..--- 12

~ TI. The income resulting from ihe cancellation of indebted-

neSs Was prope rly taxable as income for the year 1937- 16

Conclusion. _ ___- cha eeed Ge Ca adenbkseses Se: 18

SED osteo octgccspaccumes aieieemeete fie bebesakuane “ 19

CITATIONS

Cases:

” Askin & Merine Co. v. Commissioner, 66 F. 2d 776: m eefah al“ 10

Bass vy. Hawley, 62 F. 24-721. a EOE. wetenkd 13

Bogardus vy. Commissioner, 362 U. 8.34 --- 13°14, 15

Boston Consol. Gas Co. v. Commissioner, 128 F. 2d 473 ; 10

Buffalo Union Furnace Co v. Helvering, 72 F.2d 599 ~ 10,11

Burnet v. John F. Campbeil Co., 50 F. 2d PS we nctok 8

Burnet v. Houston, 283 U.S. 223__. = 15

Burnet v. Sanford & Prooks Co., 282 U. 8. 3! 59. : ; 11

‘Carroll- McCreary Co. ¥. Commissioner, 124 F, 2d 303 + ° 9

Charleston & W. C. Ry. Co. v. Burnet, 50 F. 2d 342_- 10

Chicrgo R. 1. & P. Ry. Co. ¥. Commissioner, 47 F. 2d 990,

certiorari denied, 284 U.S. #18. _ 10

Commissictier v. Auto, Strep Safety Razer Co., 74 F. 2d 226 )

Comnrissioner v. Coastwise Transportatign Corp., a F. 2d

. _ a

“- s< Commissioner vy. La riy ‘Bank «& 7 wet Co . 59 F. 2d 320. “10

Comanissioner v. Rail Joint Co., 61 F. 2d 751. es a

(I)

496516—42---—1 ‘

Cases—Continued. Pace

- Commissione? v. Simmons Gin Co., 43 F. 2d RE 8

Commissioner v. Vandevedr, 114 F.2d 719. _... ..-.----- * 10

Dallas T. & T. Warechouae Co. v. Commissioner, 70 F. 3405... Ss

Fisher v. Commissioner, BO. BS Ws nonnccacnuses- = 13

Fitch v. Helvering, 70 F. 2d 583... ......------------- 13

Haden Co. v. Commissioner, 1s F. 2d 385, certiorari de

etek, 906-7. TH Ginn kn cca cctinctccex ae EE - & 9, 13,15

Helvering v. Anutiean, Cite On. 201 U. G. 496........... 79

- Helvering v. Jane Holding Corp., 109 F. 2d ‘tn certiorari

denied, 310 U. 8. 653, rehearing denied, 311 U.S. 725. -8, 9, 10

Helvering v. Kehoe, 309 U, 8. 277.......-...----- enka 17

Helvering v. Lazarus & Co., 308 U. 8. “252. aeekvebnnde 17»

Helvering v. National Grocery Co., 304. U. 8. 282... ....... 13

Helvering v. Siate- Planters Bank & Trust Co., 130 F. ad 44.. ‘10, 11

Helvering.v. Taylor, 203 U. 8. 507... ........-0----5---- 15

Hirach ve Commgssioner, 115 F.2d 656... - , )

Maryland Casualty Co. v. United States, 251 U. ‘8. 342... 6, 11

Noel v. Parrott, 15 F. 24 660... .. ; 13

Old Colony Trust, Company v. Sica. ‘279 U. 8. 716. 13, 15

Rossin, S: & Co. v: Commissioner, 113 F. (2d) 652... .- - - “il

Sportwear Hosiery Mills v. Commissioner, 129 F. 2d 376... 9, 13, 15

United States v.. Kirby Lumber Co., 284 U. Se aee 6,7,9

United States v. Litile War Creek Coal, Co., 104 F. 2d 483. - 8

Walker v. Commissioner, 88 F. 2d 170, certiorari denied,” .

| & 9 RR eh ie eae dein ti aeteae 8

Weagant v. Bower’, 57 © si... ....< cellaiea tins ees 13°

Welch v: Heleering, 200 U. 8. LIh__-. RE a elianes 15

Ww imington Trust Co, v. Helvering, 316 U. NE 15, 16

Statutes: rare

Internal Revenue Code: . 'y

See. 22 (U.S. C., Title 26, See. 22). moiee 1

See. 3861 (U. 8. C., Title 28, Sec. 3801) .. ts 17, 19, 21

Revenue Act of 1936, ¢. 600, 49 Stat. 1648, Sec, 22. 11, 12, 15, 19

. Revenue Act of 1942, Public law 753, 77th Cong., 2d

Seas., See. 116. ,

poconeepanctedadconcesesek Leacnbied i

Miscellaneous; :

Darrell, Discharge of Indebtedness ond the Federal Income

Taz, 53 Harv. L, Rev. 077, 988-990... .......--- 2. 8,9

Maguire, Surrey, and Traynor, Section 820 of the Revenue ,

_ Act of 1938, 48 Yale L. J. 719...) . -.- 17

Surrey, The Revenue Act of 1939 and the fase Taz Treat- ’

ment of Cancellation of Indebtedneee, 49 Yale L. J. 1153,

MBIT. ha tnk cctanebenckttnescutebsicchacias 8, 9

Treasury Regulations 77, promulgated under the Revenue '

Act of 1932, Art. 64. de.

Treasury Regulation? 94, promulgated under the Revenue

Act, of 1936, Art. 22 (a)-14- node . 8, }2, 21

Warren and Sugarman, Cancellation of Indebtedness and Ite

Tur Consequences, 40 Col, L. Rev. 1326, 1351-1356

8, 9

ved

Sue Serene Gere ated ies

OcTOBER TERM, 1942

No. $03: | |

Guy ‘T. Hetvertna, Commissioner oF INTERNAL

: REVENUE, PETITIONER —

| : ;

»» AMeRIcaN Dental CoMPANy

‘ , . e ® ‘

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT :

‘COURT OF APPEALS FOR THE SF. ENTH CIRCUIT

‘ BRIEF FOR THE PETITIONER -

ri M » ; . e

OPINIONS BELOW *

The opinjon ‘of the United States Board of Tax

Appeals (R. 38-42) is reported in 44 B. ‘T, A.

425. The opinion of the circuit court of appeals

(R. 47-50) is reported in, 128 F. 2d 254.

JURISDICTION

The judgment of. the circuit court of appeals

was entered on .May 15, 1942. (R: 51.) The.

petition for a writ of certiorari was filed on *

August 14, 1942, and was granted on October 12,

_ CLs

-

*

®

, 2 3

_ 1942. (The. jurisdiction of this Court is invoke?

under Section 240 (a) of. the :Judicial Code, -as

-amended by the Act of @ebruary 13, 1925,

yi : QUESTIONS PRESENTED

1. Whether creditors’ cancellations, for bus-° -

iness reasons, of debts for, past due rent and

interest. owed by the taxpayer, which amounts

had been acerwed and deducted as business ex-

penses in its tax returns for years, prior to 1937,

resulted in taxable ineéme ta.the taxpayer or, as

held by the Cireuit-Court of Appeals, constituted.

gifts which were exempt from income tax.

2. Whether the cancellations. were properly

taxable as ‘income for 1937.

_ STATUTE AND REGULATIONS INVOLVED

‘The pertinent provisions of the Revenue Act

‘of 1936, e. 690, 49 Stat. 1648, and of Treasury

Regulations 94, promulgated under the Act, are ~’

set forth inthe Appendix, infra, pp. 19-21.

STATEMENT _ ye

~The, facts as ‘found by the Board of “Fax “Ap-. 7

peals anay be sunimarized as. follows (R. 3810) :

The respondent taxpayer is a corporation én

gaged in operating a laboratory where it does’

prosthetic. work*for the dental profession. For

a number of years it has oceupied space in the

Mallers wee in, Chicago. ‘In December, 1933,

PEG om Pr g~- ge =

° v e

i} é

° :

°o .

3

‘it negotiated a new lease which reduced the an-

nual rent from $15,200 to $8,400. There was then >

due from: the taxpayer $15,298.99 in back rent.

‘Its president notified the rental agent that it was

unable to pay-all of that amount.and requested —

an adjustment. The agent said that he would

make an ‘adjustment. The taxpayer regularly

paid the rent under the new lease and in April,

1934,. the agent advised the taxpayer that he

. would accept $7,500 in payment of the back rent

and would eancel the remainder. In 1937 tax-

payer paid $7,506 in discharge of the back rent

and for the first time made an entry on its books

showing that back rent in the amount of $7,798.99

had been forgiven. In the same year the land-

. ‘lord likewise for the first time made an entry

‘on its” books cancelling. the back rent in that

amount. (R. 38-39.) . |

' The taxfaybr kept its books and ‘made its tax

returns upon an accrual basis of accounting. .

ring the years prior to 1934 in which it’ had

ailed to pay its rent, it had regularly accrued

the rent on its books and taken deductions there-

for in its tax returns.. Those deductions served '

to offset income in like amounts for those years.

(R. 39.) :

‘In November, 1936, taxpayer was indebted to

several creditors for merchandise which they had

- furnished it over a period of years and- for which

it had given its interest “bearing notes. It had

4

4 se

been a good customer of these creditors for many

years. During the month mentioned it requested .

three of these creditors to cancel interest on the

notes on the ground that they had made similar

“arrangements with their other customers. The

three creditors agreed to cancel all interest, ac-

eruing after January 1, 1932. The first entry that

the taxpayer made on its books showing that the

interest had been forgiven was made in December,

1937, when the accounts payable to. the three

@editors were credited with a total of $16,947.74

representing interest on the notes accruing aftef

January 1, 1932. All of this amount had been

deducted by the taxpayer in its tax teturns for the

years, including 1936, during which the interest

had accrued. The deductions had offset income

on those’ returns.to the extent of a 1, 435.22. (R.

39-40, ) em

Neither in its return for 1937 nor in any other

return did taxpayer report any of the cancelled

rent or interest as income. The Commissioner in

determining deficiencies in income and excess

profits tax for 1937 held that the cancelled items —

constituted taxable income for that year to the

extent that they had served to offset income in

prior-years. Accordingly, he included 4n tax-

payer's income for 1937 the forgiven rent in the

amount of $7,798.99 and the cancelled interest in

the amount of $11,435.22. (R: 40.) .

The Board stated in its opinion that no evi-

dence was introduced to show a donative intent

. 6

on the part of any creditor and that the evidence

indicated that the creditors “‘acted for purely

business reasons and did not forgive the debts for _

altruisti¢ reasons or out of pure generosity”’

(R. 42). * Holding that there was no gift, it

affirmed the action of the Commissioner in treat-

ing the items as taxable income for 1937 and in

determinating deficiencies (R. 42).

The Circuit Court of Appeals for the Seventh

Circuit reversed the decision of the Board on the

- ground that the cancellations constituted gifts

exempt from income tax since, as the court con-

cluded, they were made without consideration and

for the taxpayer’s benefit (R. 50).

SPECIFICATION OF ERRORS

The Circuit Court of Appeals erged: ;

1, In holding that the cancellations of past due

indebtedness for interest and -rent constituted

gifts exempt from income tax. _

2. In failing to hold that the cancellations re-.

sulted ‘in taxable income. 3

3. In relying upon Article 64 of Treasury Reg-

ulations 77, promulgated under the Revenue Act

_ of 1932, instead of Article 22 (a)-14 of Treasury

Regulations 94, promulgated under the Revenue -

_ Act of 1936,

SUMMARY OF ARGUMENT

The gains resulting to a solvegt debtor from the

cancellation of past due rent’dnd interest obliga- .

6

~ tions which he had accrued and deducted in prior

years from income, are taxable income in the year —

of cancellation. ‘This result is required both by

i doctrine of United States v. Kirby Lumber

Co., 284 U.S. 1, that the cancellation freed assets

of the taxpayer for other purposes, and under the

‘theory of Maryland Casualty Co. v. United States,

«251. U.S: 342, that the cancellations effected a

7 restoration to income of previously deducted,

items. ° .

The cane éllations were “negotiated as “normal

business transactions and were made by the credi-

‘tors in anticipation of commercial benefit with

no intention to. make a gift. The cancellations

therefore resulted in taxable income rather: than

— gifts.

On conflicting evidence the Board correctly de-

termined that the debts were cancelled in 1937.

The finding is supported by substantial —

and is conclusive on appeal.

a

ARGUMENT

The Commissioner of Internal Revenue cor-

rectly determined the deficiency in respondent’s

1937 income and excess profits tax return if the

_caneellations here involved resulted in taxable in-

come to respondent and if that income was taxa-

ble for the year 1937. The court below found it

unnecessary to decide the latter question becausé

it determined that the cancellations were made as . -

7

gifts and therefore did not constitute taxable in-

come. The respondent has indicated that it will -

contend, in this Court that the cancellations, even if

_ not gifts; did not result in taxable income (Brief

in Opposition, p. 7). We submit that the cancel-_

lations of indebtedness, if not made as gifts, con-

ostituted taxable income, that they were not made

as gifts, and that they resulted in income to the

taxpayer which is properly taxable for 1937."

7

THE CREDITORS’ CANCELLATION OF: DEBTS FOR PAST

DUE RENT AND INTEREST OWED BY THE TAXPAYER,

MADE FOR BUSINESS REASONS, RESULTED IN .TAX-

ABLE INCOME TO THE TAXPAYER |

A. The forgiveness of tndebtedness here, tf not

made as a gift, results in taxable income to the

‘debtor. - >

By the eanvellation of the debts here involved

a portion of the assets of the debtor were freed

‘for other. purposes. That sucha release from —

-obligations, if not made as a gift or as-a eapital

contribution, results in.the realization of tax-

able. income was established in United States

- Vv. Kirby Lumber Co., 284 U. S. 1. In a-wide

variety of circumstances, €, g., by the repurchase,

of bonds at less than their issuing value by the

issuer (United States v. Kirby Lumber Company, -

284 U. S. 1), or his successor in obligation (Hel-

~ vering Vv. American -Chicle Company, 291 U. S.

426); or by the compromise of the principal of

*- 496516—42——2 ,

8

(Iladen Co, V. Commissioner, 118 F. (2d) 285

_ (CG, @. A. 5), eertiorari denied, 314 U. 8. 622;

. United States v. Little War Creek Coal Co., 104

F. (2d) 483 (C. C..A. 4)), or interest on, an

obligation (Helvering v. Jane Holding Corp., 109

F. (2d) 933 (C..C. A, 8), certiorari. denied, 310

U.S. 653, rehearing denied, 311 U. S. 725; Walker |

. Commissioner, 88°F. (2d) 170° i t. A. 5),

nea denied, 302 U. S. 692), the reduction

or cancéellatitit of a-~debt has usually: been held to

result in taxable income. And the same restlt is

required by the applicable Treasury regulations.

(See Treasury Regulations No. 94, Article 22 (a)-

‘ 14, promulgated under Revenue Act of 1936.)

Occasionally lower federal courts have at-

tempted to qualify the doctrine thus enunciated.’

Whatever may be said of the merits of some of.

these attempted modifications,’ none of them a in-

volved here. Thus it has been held that if

the debtor is insolvent he realizes no income by

the cancellation of portions of his indebtedness.’

' See footnotes 3, 4, 5, 6, 7, infra. Fe .

* See, Warren and Sugarman, (Cancellation of Indebted-

ness and Its Tax Consequences, 40 Col. L. Rev. 1326; Darrell,

Discharge of Indebtedness and the Federal Income Tar, 53

Harv. J... Rev. 977; Surrey, The Revenue Act of 1939 and the

Income Tar -Treatment of Cancellation of I ndebtedness, 49

Yale L. J. 1153.

- 8C£ Burnet v. John F. Camphell C 0., 50 F . (2d) 487 (ham

D. C.); Dallas T. & T. Warehouse Co. v. Commissioner, 70

F. (2d) 95 (C. C. A. 5): Commissioner v. Simmons Gin Co.,

43 F. (2d) 327 (C.C. A. 10). ° gs |

”

9

But this suggestion, even if valid,’ has no’ bear-

ing on this case, since the taxpayer is not and was

not insolvent. Similarly, it was suggested in

Commissioner v. Rail Joint Co., 61 F. (2d) 751

(C..C. A. 2), thatAf the obligation was originally

contracted without anything of value _bemg re-

ceived therefor its cancellation would ’ not result ~

in ineome to the debtor. But the facts in this’

case do not present that problem either. Nor,

in view of the nature of the transactions and the

relationship of its participants, can the cancel-

lations here be regarded‘as capital contyibutiens,"

or reductions in the purchase price of property

rather than income.’ In short, even the qualifica-

tions which have gained some currency, albeit dis-

puted, in the lower federal courts cannot be urged

to remove the transactions in this case from the —

doctrine of the Kirby case. The taxpayer, having

*See, Warren and Sugarman, sepra, at 1351-1356; Dar-

Tell, supra, at 988-990; Surrey, «upra, at 1157-1167; ef.

Haden Co.¥. Commissioner, supra.

°Cf. Helvering v. Américan Chicle Co., kapra; Commis-

sioner Vv. Coastwise Transportation Corp., 71 F. (24) 104

(C.C. A. 1). |

*Cf. Commissioner vy. Auto Strop Sefety. Razor Co., 74

(2d) 226 (C. C. A. 2); Carroll-McCreary Ca. v. Com-

missioner, 124°F. (2d) 303 (C. C. A. 2). (In these cases

the applicable Treasury regulations expressly provided that

such a cancellation results in a contribution to capital.) _

But cf. Helvering v. Jane Holding Corp., 109 F. (2dj 933.

(C. C. A. 8). peace.

"Cf. Hirsch v. Commissioner, 115 F. (2d) 656 (C. C. A.

7): but ef. Sportirear Hosicry Mills v. Commissioner, 129 F.

(2d) 376, 383 (C. C.A.3).

10

by the cancellation of his debts obtained the free

use of assets which presumably would have gone to

pay those debts, realized income which was prop-

erly taxed.

That the taxpayer had in prior years’ retums

deducted the’ amounts. here cancelled also points |

_ to the éonelusion that the gains now realized were

"properly taxable. ‘The lower federal courts have

consistently: recognized that the reacquisition or

~ release of amounts previously deducted from in-

come aré taxable as restorations to income in the

year of reacquisition.. Helvering v. Jane Hold-

ing- Corp.,. supra.; Helvering v. State-Planters

Bank & Trust Co. 130 F, (2d) 44 ¢€. C. A. 4).

And this Court, while: never squarely ruling on

* Among the many instances of taxation as restored i 1 income

of previously deducted, but ultimateiy reacquired, items are:

Items deducted as expenses for. which there was. subsequent

_ reimbursement (Buffalo Union Furnace Co. v. Helvering, 72 _

F. (2d) 399, 408 (C. C. A. 2)) s settlement with employees for-

less ihan amounts previously deducted as expense (Commis-

sioner v. Vandeveer, 114 F. (2d) 719, 722-723 (C. C. A. 6));

debts deducted as bad in prior years and subsequently paid

(Commissioner v. Liberty Bank & Trust C6., 59 F, (2d) 320

— (C. C. A. 6)); Askin & Marine Co. v. Commissioner, 66 F.

(2d) 776 (C. C. A. 2)); wages deducted as expense but un-

' collected are income when subsequently charged back to

profit and loss (Chicago, R. 1. & P. Ry. Co. v. Commissioner,

47 F. (2d) 990 (C. C. A. 7), certiorari denied, 284 U. S.618;

Charleston & W.C. Ry. Co. v. Burnet, 0 F. (2d) 342 ( App.

D. C.)); unclaimed deposits credited to surplus (Boston

Congol. Gas Co. v. Commissioner, 128 F. (2d) 4738 (C. C. A.

1)).

e

ll

the point, has suggested that items of income

previously deducted‘or accrued as reserve become

taxable when released. Maryland Casualty Co.

_ v. United States, 251 U. 8. 342, 352; [see also S. -

Rossin: & Sons v. Commissioner, 113 F. (2d) 652,

654 (C. C. A. 2)]; ef. Burnet v. Sanford & Brooks

Co.,.282 U. 8. 359. Just as in the latter case, the

reimbursement of earlier expenses was held to con-

stitute income, so here, the release from the obliga-

tion to pay items previously deducted as accrued

must be surcharged to income in order that the

taxpayer’s returns accurately reflect the facts of

its financial affairs. Cf. Buffalo Union: Furnace

Co. v. Helvering, 72 F. (2d) 399, 403 (C. C. A. 2).°

Accordingly, under both the doctrine of the

Kirby case and the theory’ of the Maryland Cas-

ualty. case, the forgiven indebtedness, if not

made as a gift (within-the meaning of Section

22 (b)(3) of the Revenue Act of 1936), was prop-.

erly taxable as income to the debtor. The circuit

* In this conneétion it should be ested that while the tax-

payer's income for 1937 was treated as being increased only

to the extent that the amount of deductions taken for accrued *

rent and interest offset income in prior years’ tax returns

(R. 6, 40) the rationale of these cases properly authorizes

inclusion of the entire amount previously deducted. Cf.

Helvering v. State-Planters Bank & Trust Co., supra.

Compare Section 116 ofthe Revenue Act of 1942 ‘(adding

subparagraph (12) te Section 22 of The Internal Revenue

_ Code), providing for the first time that the recovery of a

previously deducted item (here, bad debts) shall be taxed

only to the extent that a tax benefit was received in pre-

vious years. “" .

12

court of appeals did-not question this conclusion

‘ since its decision turned upon whether the trans-

actions resulted in a gift. oe

B. The cancellation of indebtedness was not made

as a gift within the meaning of Section,

22 (b) (3) of the Revenue Act of 1936.

In holding that the creditor's “cancellations in

‘this case were ‘“‘gifts;’’ the court below relied

solely on the fact that no ‘‘consideration”’ (1. e.,

nothing of commercial value) was. received by the

creditors for forgiving the debts. But the re-

finements of the law of contracts do not mark

out the boundaries of tax conceptions. A, broader

inquiry than simply whether the giver received

‘consideration’? which would bind him contractu-

ally must be made in determining whether given .

disbursals result in gifts: rather than taxable in-

cone under Section 22 of the Revenue Act of 1936.

’ The intention of ‘the person making the payment.

‘© In its opinion the court erroneously relied upon Article

64 of Treasury Regulations 77, ea 9 under the Reve-

nue Actof 1932. The applicable regulation is found, how-

ever, in Article 22 (a)-14 of Treasury Regulations 94, pro-

-muigated under the Revenue Act of 1936 ¢ Cogendix, infra,

p. 21).

a that connectien it should be noted that the court also

erroieously stated in its opinion that (R. 49): °The Govern- *

ment freely conceded that unless the forgiveness of indebted-

ness in each of these instances was based upen a considera-

tion, it-would amount toa giftgand gifts are not taxable as

income to the donee.” No such concession’ was made on brief

or otherwise. However, the court denied a motion-to delete t

the statement from the opinion, (R. 51-52.) -

13

is the ultimate factor to be ascertained, since an

intention to make a gift is at least necessary, if not

itself wholly sufficient, to differentiate a gift from

taxable income under Section 22. Bogardus v.

Commissioner, 302 U. 8, 34; see.also, Helvering V.

— Grocery Company, 304 U.S. 282, 289,

n. In that light, “consideration,” although rel- |

in is not controlling (Sportwear Hosiery Mills

v. Commissioner, 129 F. (2d) 376, 382 (C..C. A.

3)), and the voluntary character of the pay-

ment does not of .itself, therefore, constitute the

forgiveness a gift. Cf. Old Colony Trust Com--

- pany Vv. Commissioner, 279 U. S8..716." And. on

the other hand a payment made in the context of

-eommercial dealing, and-in anticipation of busi-—

ness benefit, although perhaps not sufficient to con-

stitute ‘‘consideration”’”. in the contractual ‘sense

lacks the donative intention which a gift requires.

Haden Co. vy. Commissioner, 118 F. (2d) 285 (C.

A. 5), certiorari, denied, 314 U. 8. 622, Sport-

wear Hosiery Mills v. Commissioner, supra.

Since the court below predicated its decision ex-. .

clusively ona finding of no ‘‘consideration’’ it did

“not find it necessary to ascertain what, in fact, were

. "See also, Sportwear Hosiery Mills v. Commissioner,

supra; Fitch v. Helvering, 70 F.- -(2d) 583, 585°(C. C. A. 8);

Noel v. Parrott, 15 F. (2d) 669, 671 (C. C. A. 4); Weagant

v. Bowers, 57 F. (2d) 679 (C.C. A, 2); Fisher v. Com-

missioner, 59 F. (2d) 192 (C. C. A. 2); Bass v. Hawley, _

| OF. (2d) 721 (C.C.A. 5).

14

the creditors’ intentions in forgiving the debts

here. This question, ¢. ¢., whether the payments

were intended as a gift (as distinguished from

whether or not they resulted in a gift) is a ques-

tion of fact. Cf. Bogardus v. Commissioner,

supra. The record in this case discloses that the

reduction of rent arrearages was first suggested

bythe taxpayer, who had been a tenant of the

lessor for a number of years, in the course of

negotiating for a new lease at a reduced rental,

and that at that, time the lessor intimated that

“an adjustment could be. reached (R.- 13, 16).

Subsequent discussions of the problem. pivoted

on the question of how’ much of the arrearages

the debtor would pay (R.° 13-14). Similarly,

the cancellation. of interest accruing after Jan-

~ uary 1, 1932, was procured in ‘the ordinary course

of business; .the president of the taxpayer sug-

.gested to its creditors that the taxpayer was un-

. able to charge interest on its outstanding accounts,

that the creditors were forgiving interest re-

quirements for others jn the industry, and that

his firm wished a similar adjustment (R. 14-16).

The interest ‘charges after January 1, 1932, were

_ cancelled, and those arising before that date were

to be paid (R..14). On'this record the Board of

Tax Appeals found as a fact that the cancellations

were effected for business reasons and that there

was no intention to make a gift (R.42). This in-

ference of fact, thus supported by substantial evi-

ie Ci) a

dence, is conclusive. Wilmington Trust Co. v.

Helvering, 316 iY: S. 164, 168."

The cancellations of indebtedness in this case,

negotiated as normal arms-length business trans-

' actions, and made in anticipation of commercial

benefit (ef. Haden Co. %, Commissioner, 118 F.

(2d) 285 (C. C. A. 5), Sportwear Hosiery Mills v.

Commissioner, 127 F. (2d) 376, 382) were certainly

no more acts of ‘“‘spontaneous génerosity’’ (ef.

Bogardus v. Commissioner, supra) than was thé

award of extra compensation in Old Colony Trust —

Company ¥. Commissioner, supra. Like that

award, they were properly taxable as income to —

the recipient. The court below therefore erred —

in concluding that they were gifts exempted from

taxation by Section 22 (b) (3).

II

‘THE IXCOME RESULTING FROM THE CANCELLATION oF

INDEBTEDNESS WAS PROPERTY TAXABLE AS INCOME

FORT E YEAR 1037

‘Bince the gains here indian: were taxable in-

come, there remains to be considered only whether °

* Since the presumption of correctness which attaches to

the Commissioner’s determination places the burden of

proof on the taxpayer” [Burnet v. Houston, 283 U. S.. 223,.

227-228; Welch v. Helvering, 290 U. S. 111, 115; Helvering

* Taylor, 293 U>S. 507, 514], the propriety of the. Board’s .

conclugion is in this case emphasized by the taxpayer's

failure to introduce any evidence-to show a donative in-

tent (R. 42). ; |

eo :

they were properly taxed as income for the year

1937, a. question which the court below did not:

decide. The Board of Tax Appeals found as a

fact that the debts were forgiven in 1937 (R. 40).

The record discloses that, although the taxpayer’s

testimony supports the contention that the credi-

tors agreed to caricel the. rent and. interest ar-

rearages in 1934 and 1936 respectively, all the

vther evidence substantiates the -Board’s finding

that the cancellations actually occurred in, 1937.

' And the taxpayer’ s testimony.in this matter was

; inconsistent with its own conduct. "Since “it is

the’function of the Board, not the. Circuit Court

| of Appeals, to weigh the evidence, to draw in--

~.. ferences from the facts, and to choose between con-

flicting inferences’’, and since ‘thé court may not

substitute its view of the facts for that of ‘the

Board”’, the. conclusion that. the cancellations oc-

‘curred in. 1937, supported as it is by substantial’ ~

evidence, cannot. now be upset. Wilmington Trust.

Co. v. Helvering, 316 U! 8. 164,168 ; Helvering ve -

Lazarus & Co,, 308 U, 8. 252; Helvering v. Kehoe,

309.U. 8.277. 7 ees

" “The taxpayer contended below ‘that the gain :

thus realized should not be included in its 1937 *

J’ For example, although the taxpayer's president testified . _Q

to the effect. that he understood ‘the interest, arrearages to

have been cancelled in 1936, the taxpayer's returns for that

. year disclose that items. reflecting’ the. very interest charges

claimed tq have been cancelled were deducted (R. 41}.

v

oe" od

a

return because: it has offered to pay additional

taxes for 1934 and 1936, measured ‘upon the as-

| sumption that the rent and interest were cancelled

in those years respectively, and that under Section .

3801 of the Internal Revenue Code," the Commis-

sioner is authorized to make’ such adjustments re-

specting 1934 and 1936. The whole question, how-’

- ever, is whether the income was realized, im 1934

and 1936 or in 1937. To invoke Section 3801, it

‘would be necessary to assume that the items here in

question represented i income in 1934 and 1936 and.

were improperly omitted from the taxpayer’s re-

turns in those years.” The Board of Tax Ap- -

". peals, however, found as a fact that the cancella-

"tions ‘were income in 1937, not in 1934 or 1936.

Hence, the remedy afforded by Section 3801 can-

not possibly be available here.” Indeed, theargu-—

ment based on that section is wholly irrelevant, be-

cause if the i income was ip fact realized in 1934 and

1936 (a necessary condition for invoking the sec-

" tion) it would not be taxable in 1937 and the sug-

_ gested adjustments would not be required. |

* See Appendix, infra; pp. 19-21. .

**It is hot disputed that the deductions for rent and

; interest were properly taken for the years. i in which accrued.

- It is therefore unnecessary to do more than point oat

~ that for other reasons also, the taxpayer's contention miscon-

ceives the scope of Section 3801. Even if the items here

. Involved were properly | taxable ‘in 1934 and 1936, the remedy

‘afforded by that section does not extend to adjustments of

the kind here urged: See Maguire, Surrey, and Traynor,

Section 820 of the Revenue Act of 1938,48 YaleL. J. 719.

18 .

CONCLUSION

The cancellations of indebtedness for rent and |

interest were properly taxed ‘as income to the .

taxpayer for 1937, and the court below erred in

failing to sustain the determination of the Board :

of Tax Appeals. The judgment of the court be-

low should be reversed.

ey submitted,

_ CHARLEs Fany,

oe Solicitor General.

| SamMven O. Cuiark, Jr.,

| Assistant Attorney General.

SEWALL Key,

HELEN R. Car.oss,

Samve. H. Levy,

Newton K. Fox, .

Special Assistants to the Attorney General.

NOVEMBER, 1942. -

y : we

B

APPENDIX

Reveniie Act of 1936, c. 690, 49 Stat. 1648:

Sec. 22. Gross INCOME. |

(a) General Definition.— ‘Gross income’’

includes gains, profits, and income derived

from salaries, wages, or compensation for

personal service, of whatever kind and in

whatever form paid, or from professions,

vocations, trades, businesses, commerce, or

sales, or dealings in property, whether

real or personal, growing out of the owner-

‘ship or use of or interest in;such prop-

erty; also from interest, rent, dividends,

securities, or the transaction of any -busi-

_ness carried on for gain or profit, or gains

or profits and income derived from any

source whatever. * * * |

(b) Exclusions from Gross Income.—

The following items shall not be intluded

in gross income and shall be-exempt from

| _ taxation. under this title:

+ * * * *

(3) Gifts, Bequests, and Devises. —The

value of property acquired by gift, bequest,

devise, or inheritance (but the income from

such - property shall be included in gross

income) ; “Waa ted thing

* * ‘* + - *s

Internal Revenue Code: are

Sec. 3801.. MITIGATION OF EFFECT OF LIM-

ITATION AND OTHER PROVISIONS IN INCOME

TAX CASES, ‘ |

' (19)

- 20 .

(a) Definitions.—For the purpose of this.

section— —

(1) Determination.—The. term “deter-

+ mination under the income tax laws”’

means—

- (A) A closing agreement made under

section 3760;

(B) A decision by the Board of Tax Ap-

— or a judgment, decree, or-other order

- by any court of competent jurisdiction,

‘which has become final; or ;

(C) A final dis isposition by the Commis-

sioner of aclaim for refund. For the pur-

“poses of .this section a claint for refund

shall be deemed finally disposed of by the

Commissioner—

(i) as to items with ‘respect ‘to which

the claim was allowed, upon the date of

allowance of refund or credit or upon the

date of mailing notice of disallowance (by ©

reason of offsetting items) of the claim for

refund, and :

(ii) as to items with respect to sutaiahh

the claim was disallowed, in whole or in

part,.or as to items applied by the Com-

missioner in reduction of the refund or

credit, upon expiration of the time for in-

stituting suit with respect thereto (ualess |

_ suit is instituted prior to the expiration of

such time). -

Such term shall not inelude any such

agreement made, or decision, judgment,

decree, or order which became final, or

claim for refund finally acca dl of, prior

to August 27, 1938. ¥

*. * : ®. *

(b) Circumstances of » Adjustment.—

When a ‘determination under the income

_ tax laws—

21

a

(1) Requires the inclusion in gross in-

come of an item which was. erroneously

included in the gross income of the tax-

payer for another taxable year or in the

gross income of a related taxpayer; or

-(2) Allows a deduction or credit which

was erroneously allowed to the taxpayer

for ano®*her taxable year or to a related

taxpayer; or —

(3) Requires the exclusion from gross

income of an item with respect to which

tax was paid and which. was erroneously

excluded or omitted from the gross income.

of the taxpayer for another taxable year or

from the gross income of a related taxpayer;

or ss “ ~ P P e

(U. 8. C., Title 26, See: 3801)

Treasury Regulations 94, ee under

the Revenue Act of 1936:

Art. 99 (a)-14. Cancellation of indebted-

ness.—The cancellation of indebtedness, in

whole or in part, may result in-the realiza-

tion ‘of income. If, for example, an in-

dividual performs services for a creditor,

who in. consideration thereof cancels .the

. debt, income in the amount of.the debt 1s.

realized by the debtor as compensation for

his services. A taxpayer realizes income

by the payment or purchase of his obliga- -

tions at less than their face value. (See

article 22° (a)-18.) If a shareholder in a

corporation which is indebted to him gra-

tuitously forgives the debt, the trarisaction

amounts to a contribution to the capital of

the corporation. ie ,

U S GOVEFTRMENT PRINTING OFFICE 19428

-