*1 еvidence, On this held that Board petitioner had not its burden sustained [Bot any Mills (1928) v. 278 U. S. United States 282, 49 Ct. L. Ed. A. David 4th, April v. Co. Grissom A.C. 279], proving that the bonuses compensation as reasonable rendered, gratuities services and not as mere reaching or the nature of In dividends. conclusion, the Board observed that was neither of the invested evidence from which the return thereon could be deter judging mined nor standard for services, value of the such as salaries companies Peti other similar services. tioner contends es that sueh evidence is not perhaps sential. not. In some eases it is But as the court in Atlas Plaster Fuel said & A.) supra (C. Co. Commissioner, F.(2d) 802, page determining 804: “In excessive, whether salaries are Board MACK, dissenting Circuit Judge, Appeals necessarily Tax exercise must part. discretion, own —reasonable allowances cannot be ascertained with mathe precision. Every matical stand must peculiar its own facts and circumstanc es.” sup- present the bonus ported chiefly ground that in former years only liv- brothers had withdrawn expenses ing in 1924 small salaries. But averaging salary there were increases about average pre- two years. salary Approximately
vious as in scale in effect in 1925 1924. Dempsey Thomas R. and A. Calder Mack- salary view these substantial increases in ay, Angeles, Los appellant. both Cal,, previous years, 1924 and 1925 over Peckham, Atty., I. plainly justified requiring Board was M. U. S. and Esther B. satisfactory pеr Phillips, more Asst. U. S. explanation Atty., of the 75 both San Fran- cisco, petitioner Cal., appellee. bonus than offered. Affirmed. Case, City, White & of New York Montgomery H. Robert and J. Marvin Haynes, Washington, (Walter both D. C. Orr, Morrill, Newlin, Russell D. A. C. all of York City, New amici counsel), JOAQUIN & POWER CORPO SAN LIGHT curias. McLAUGHLIN, RATION v. Collector WILBUR, SAWTELLE, Before Revenue.* Internal MACK, Judges. Circuit 6883. No. Appeals,
Circuit Court of Ninth Circuit. WILBUR, Judge. 1933. Joaquin Light The San Corpora & Power tion, hereinafter referred to taxpay as “the er,” brought $35,717.22 this action to recovеr paid by imposed This amount is 1922. the tax $285,737.79 plaintiff income which the con subject tends an allowable deduction for that taxable under 234 (a) (2), section (4) (42 Act of 1921 Stat. July * Rehearing denied
678 life ($183,750 $15,173) their plus bonds is the of sum 254). The deduction claimed (15 refinancing time of years). At the $105,000 paid to one items, premium two of this issue in 1923 discount bond of a retirement the bondholders per D 8 expense the Series attached to and cent, $2,625,000, and the oth 1020 issue of bond $180,737.79'. un- This bond issue was representing unamortized $180,737.70, er issuе was expense bond floating amortized of the 1920 expense and . discount incurred taxpayer’s new charged on books The jury waived. that A was bond issue. cent, issues, thereof, $77,717.- per bond 43 stipulated ren and facts were per 25, being apportioned B 6 to Series of the col the trial court in favor dered balance, $103,020.- bonds, cent. 1952 and the re revenue, hereinafter lector of internal 54, being per apportioned to the Series 6C taxpayer takes The tо as collector. ferred thereto cent. 1950 bonds. addition appeal. this premium of to holders of $40 utility having a public taxpayer is a The per bonds, 1133 Series D 8 cent.. 1935 large capital large indebtedness. and a bonded per exchanged were Series 6 1950 for C cent. D 8 $2,625,000 its Series of it sold In 1920 amounting $45,320', bonds to entered cent, bonds, due per trust collateral taxpayer’s dis- books as “unamortized $2,441,250. In addition to discount for expense, count and 1950 to Series bonds” C, $183,750 expensеs incurred of subsequently be With reference amortized. of bonds with the issuance these connection per issue, to the Series B 6 cent. 1952 sold por amounting $15,173; to’ the unamortized public per $1,000 being 1 bond, at $990 sum being the ahove-mentioned cent, thereof tion per $11,330, par, discount, below agreement secur $180,737.79. The trust of charged plaintiff’s on the books to “Un- per designated as D 8 ing bonds “Series expense, amortized B 6 discount and Series cent, bonds,” provided payable in also per $74,600' The cash cent. 1952 bonds.” designat additional bonds for the issuance of paid to the 1492 D item the holders of Series cent, bonds,” C, per cent, 6 ed therein “Series accepted per 8 who bonds, 6 Series C deposited to be 1950, which were payable in per bonds, plus $50 cent. 1950 additional aforementioned for the Series as collateral $1,000'bond, charged on the cash on each provided at that at time bonds. expense, books to “Unamortized discount and cent, per D 8 option the holder of Series of per sep- 6 1950 Series C cent. bonds” two a Series C 6 for it could be surrendered bond items, arate as follows: Premium on 1492 D cent, premi bond, $50 additional per cent, and $40, $59',680; per 8 at discount bonds agree $1,000 bond. The trust for each um cent, $14,920; per bonds, total, on 1492 G 6 option to off taxpayer pay gave ment subsequently to be amortized. The cent, per bonds time 8 Series $45,32,0' $59,- items above-mentioned and par plus thereof paying premi value pre- $105,000 680 constitute the claimed as a $1,000 taxpay on each The $40 um bond. mium, applicable to the satisfaction of arrangements refinancing having cent, er made per D 8 bonds and 1920 Series deducti- issue, May 1, 1922-, bond notified 1920 ! ble from income. op that it would its exercise bondholders does not claim discount also called the attention of the hold cent, cent, per per on the B six of 1 and G cent, per D 8 their the Series bonds to ers of bonds as a dеduction on the retirement of the option. pursuance mentioned above cent, per bonds, D 8 concedes that this but per ($1,133,000) cent. notice properly up set amount was books cent, per D 8 bond issue was Series B and amortized the life G public from the sale to the cash derived cent, per six bonds. designated per as Series B 6 cent. 1952 cent, $1,000 per (a at 1 discount bond It will be observed that cent, (57 per $990), spreading that method balance claims the amоr- amounting $1,492,000) 1920' D 8 issue was tization Series whole cent, cent, exchanged per per G 6 bond issue over the life the new Series cent, value, bonds, plus B par cash for issued to $50 each Series $1,000 Thus, D 8 cent. bond. off that bonded indebtedness was errone- Series $1,000 although exchange, standpoint, the income C ous from (dated 1920, Railroad payable required the California Commis- making, en- At and it is were valued at cash. the time sion as basis its 1922 income to a deduction from the 1920 titled chargе amount of the unamortized discount up set on its amortization the whole floating 1920 D cent. spreading the of these and discount and $180,737.79, ury Department system bond ordinary issue also of well, $105,000 paid upon accounting requires the retire- that each bond separate D per ment of issue be treated as and distinct and consequently when bond issue is hand, commissioner, con- on the other *3 the off amount of discount which that the and should be tends is spread had over the life of the bоnd is by its meth- hound books with reference to its paid deemed at time of the the of dealing expense, discount, od with the and of par, the bond is if it redeemed at as in the premium in connection these three bond with paid ease at bar. The amount to redeem the particularly issues, the that in view of fact bond, course, by of be determined would the the 1922 bond issues were the of for agreement the between carrying agreement out tax- the between the redemption, bondholder made at the time of payer bond- and its Series cent. 1935 bar, by agreement in or, as the ease at the with refunding holders reference to of that made in 1920 at the the Series D 8 time made at the time of their issu- obligations mu- as a the then ance and of price gain purchase or face is value over the or tually by taxpayer and bond- year. assumed the income for the taxable corporation "(2) (a). by If bonds are issued a at holders. premium, premium gain a the net amount of such is prorated hand, Discount, premium, on the one and or income which should be or amortized bonds, (b) over the life poration purchases the If of thereafter the cor- mei*e- other, in of issue are the a bond on any and retires such of ly adjusting a means of the transaction price issuing price any at a in excess of tbe minus premium already income, amount of returned as money current market rate for based purchase price issuing the excess of the price the over availability of debtor and the the credit the any premium already amount of minus re- (or plus any money lending by is creditor. turned the of the as income over face value premium yet income) amount of a deductible not returned as recognized by Treasury the rules the De- of expense If, year, (c) for the taxable partment by systems accounting the of however, corporation purchases any the and retires price issuing price such of bonds at a less than the vogue corporate in in affairs that items any premium already minus of amount returned as premium discount, may he, of or the ease income, issuing price any the of the excess minus premium already (of amount of adjusting returned as income are but methods of the actual cost plus any premium face the value amount of therefore, money, of there whether is a yet income) purchasе priue returned over the gain year. premium, or that there is, discount whether or for the taxable by corporation “(3) If bonds are issued a at case, or a in loss either should be discount, net amount of such discount is de spread over the of term the bonds to make the prorated ductible and should bo tbe life of the or amortized over bonds, (b) corpora corporation If reflect actual thereafter the any purchases and retires of such bonds at a money cost of rather than annual the nominal issuing price any price plus in of excess amount specified bond, so that such already deducted, pur of discount chase of discount ue minus of excess price issuing price any plus over the he amount term funds accumulated already (or deducted over the face val in borrower annual installments sufficient deducted) any yet amount of discount not loss; such or with discount or year, (c) If, ais deductible howеver, corporation purchases any and retires of premium, gain, appor- in ease or that an price issuing price, such bonds at less than the tionate amount of should be set plus any already deducted, amount the discount issuing price plus any each excess amount of aside decrease nominal in- dis already (or count any purchase price deducted of the face value minus terest for that to the actual cost of the yet deducted) amount of discount not over the money year. Maryland that gain Western R. or income for the taxable * :St*" year. Commissioner Co. v. C. A. Surplus profits; "Art. 848. and undivided dis- references therein. count sale bonds.—Discount allowed on the is in effect advance account applicable Treasury rule De- interest, of such a case is plus so the effective rate of interest equal to the sum of the partment (Regulations 62, Art. 545) nominal rate is set necessary the rate amоrtize discount out in footnote.1 The rule of the Treas- Where, the life over bonds. under incorrect accounting practices, the discount on bonds has been 1Treasury Reg. Dept. charged 62: property to a account or otherwise incor- corporate rectly "Art. 545. Sale and asset, retirement carried as an and is so reflected in —(1) corporation (a) If surplus account, necessary bonds are issued at computing it is value, corporation gain capital adjustment their face respect realizes no or to make an invested of loss, corporation (b) purchases If thereafter such discount. See Article 563.” any price capital stock, and retires of the of such bonds a in excess capi- "Art. 563. Sale bonds and issuing price value, or corporation face the excess of tal* assets. —A sustains no deductible purchasing price issuing price or face the sale of its stock. See Article year. a deductible value is for the taxable discount, 543. If it sells bonds at the amount (c) way See section statute and article 563. of such discount is treated as in- however, corporation If, purchases paid, price and retires if it terest excess of the ly retires its bonds at a price issuing issuing price, such bonds at a may less than the such excess usual- price value, issuing price expense. face excess of the be deducted as *’»*** cent. 1935 In either event reference to the bond issued. With of 1492 redemp- par the transaction is concluded cent. 1950 $1,000 At the time re- tion of the 1920 bond. value of each demption par cent. par value, the bondholder is val- 1935 bonds of the same good is in effect seems to no treating ue of the bond so that he reason for he lent the amount use made in connection with (both amortized and unamor- the transfer on discount different basis from the tized), which suffered at the 1133 were redeemed in cash. expressed time of the issue in he is also a The views we have are in accord privilege anticipating premium for the a recent decision with Circuit Court maturity Appeals analogous Both the dis- bond the first circuit *4 premium paid count in 1920 and 1922 where there was a retirement of serial represent notes, part by of the cost of the secured purchase of out- procured by standing in 1920 the sale of the notes, part by Series and in exchange of сent, per gold payment by 8 the un- mortgage secured for the bal- outstanding amortized discount and of the Series ance of the serial secured notes. cent, per D 8 is bonds in 1922 thus either a was held that the so made was taxa- ex- ble as of interest whieh the statute income for the pur- in whieh the pressly directs should be from cur- chase and deducted occurred. Commissioner Transp. or is the v. Corp. (C. rent income a loss of whieh Coastwise A.) 62 F. C. (2d) also as corresponding statutе allows a deductible loss. Sec- 332. Had there been a loss, (a) tion 234 (1), (2), bar, ruling Revenue Act 1921. as the case at .in require would its deduction from the income It is this amount so tax- year. of that payer claims be treated as a deducti- The commissioner further contends that loss or ble of interest by system reason bookkeeping money theretofore borrowed at that time taxpayer adopted consequent has and the de- repaid. If it is doubtful under the Revenue ductiоns from its income it has claimed (section (1), Aet of 1921 (a) (2), 234 received in later alleged taxable years, the supra), how these amounts of discount and loss due to refunding operations in 1922 premium paid so should be treated, doubt spread subsequent over these by set at Treasury is rest the above rule of the years and that has had the ad- Department (Reg. 62, 545, supra, art. set out vantage of the amortization installments as applicable footnote) sale and subsequеnt years. deductions in The method retirement of bonded The rule indebtedness. taxpayer keeps which the his 'is not books reasonable; it has been acted years any decisive toas later more than these many years, tacitly approved and has been 1922, it particularly is as to books where the by by Congress repeatedly re-enacting all the kept are in accordance with the directions of provisions of the revenue aet here involved Rаilroad California This Commission. change, and without substantial has been ex by Supreme view was announced approved by Supreme pressly Court, in in the decision of a ease where the part upon ground, Kirby in U. S. v. kept an interstate carrier were in accordance Co., 1, Lumber 284 52 4, U. S. Ct. 76 L. with the directions of the Interstate Com Ed. Therefore, the contentions of the Colony merce Commission. Old R. Co. collector that the is bound Commissioner, 284 U. 52 Ct. 552, 211, system bookkeeping adopted in rеlation also, 484. See, 76 L. Ed. our own decision in expenditures, and his further con Lichtenberger-Ferguson Co. v. Welch that the transaction tention consummated in A.) 54 570. In not this action we are anticipated at the time the 1922 Series subsequent years. concerned with Neither cent, per issued in D 8 1920 government estopped nor the into, contract then entered conse with relation thereto. refunding quently that transaction in mere substitution of 1922 was a one form of taxpayer again In 1928 thе refinanced the pursuance for another in of that outstanding bonded indebtedness and substi- justify original agreement, departure do not per tuted for the B and 6 eent. treasury pur rule or the to, statute in carrying above new referred entire, adopted. 62, Reg. of whieh it was suance Art. expens- into its books the 545; Revenue 234 1921, (a) (2), financing Aet es and deductions due to the all (1), § supra. (Series D per cent., these bonds 8 Series B 6
681 findings plaintiff upon favor In our per cent.). per cent., аnd C 6 together $35,717.22, 6 the sum of with for the also immaterial and view this fact cent, 15, December thereon from are entries book same reason that the other 1923, 284, provided by law. 28 USCA § controlling. 1928, 177, May 29, Code, Jud. as amended § 877, 852, 45 cb. 615 Stats. § limitations. Statute of taxpayers Tbe total income tax Judge MACK, (dissenting $166,407.73 amounting for tbe part). equal $41,- four installments I opinion concur except of the court 14, 1923, 192-3, 13, 609.93 March $103,020.54 as to the September 15, 15, 1923. 1923, and December being former of tbe unamortized aliquot Tbe commissioner contends that discount and tbe latter the part (one-fourth) the amount as a claimed 1,492 D 8 refund March tbe barred exchanged pursuant original option applicable limitations, statute of Act for the Series "C cent. loan. (b) (1) (2), § Stats. treasury regulation (b) (1, 2), pay set out in the ma- because the § USCA jority opinion *5 part does years ment not cover this the was made more than four before though money case. by ap- Even raised a claim for a refund thereof filed on was pellant through the 19, the B bonds is March This is immaterial tbe if stipulated years pay to have been used to off the 43 portion paid of the tax within four D bonds, the two transactions sufficient to cover claim for That refund. were entirely appellant distinct. did part statute is in as What follows: was to money through raise its B sale of “Where there has been § * B general purposes bonds for its predom- —the overpayment tax income ** * inant one payment of which was as imposed by Act, * * many * exchanged. the D bonds as were not Act of 1921 amount such * * * integral There was no relation between the D overpayment shall be refunded bonds so off and new B tbe sold immediately taxpayer. in money market order to raise the to Except “(b) provided as in subdivisions appellant them If off. had had sufficient (d), (g) (e), of this section— (e), treasury, in its there would have been “(1) No such credit refund shall be no need to issue the new B These securities. years allowеd or made after three B bonds were in no sense substituted for oí time the tax was paid, in of a tax raising of the D a continuation bonds. The * * * imposed by this Act nor after money through sale of the B years .paid four from the time the tax was in entirely was a transaction distinct from the imposed by any prior the ease of tax Act, paying off expiration unless before tbe period of such to the G situation, The however, taxpayer; claim therefor filed my entirely is, judgment, in Those different. “(2) The amount the credit or refund exchange who bondholders made exer- portion shall not exceed the of the tax right cised a that had created when during years, the three or respectively, four D bonds were issued. The is- O were immediately preceding claim, filing very sued at the same time for or, filed, if no was claim then the three being substituted if holders ex- years, immediately pre- or four respectively, option. ercise their exchange When the ceding the allowance of the credit or refund.” made in originally the indebtedness cre- prop Claims discusses this ated and evidenced the 1492 D bonds was involving osition in a case estate paid; no sense merely form was subject further elucidation we re changed by the maturity, an extension of opinion fer to its in Hills v. F. S., (2d) U. rate, decrease in the form to 6 opinion and to rebearing cent.; in the however, substance, to some- reported (2d) 1001, same case F. where higher represented by whаt $40 in the court considers the in the premium, difference tbe $10 cash discount legislation brought with reference suits time. moneys paid recover upon estate taxes and my judgment, neither taxes. nor the more loss to is reversed, company with instruc- 1922 than was the tions to the trial court to enter judgment appellee discount. As nn- contends, $10 just what it portion was in 1922 amortized a re- prospective, 1920'—a but was in an aetual would become loss. It alized, actually paid off appellant when only if and par. The substitu- the bonds at and retired origi- pursuant to new bonds tion not, however, a nal contract document debt; remains. One the debt another merely been substituted
evidence of it. argu- too, concur, appellee’s fully, I $50 that the ment origi- terms
pursuant to the under just was created in nal attaching bond as to the C as much a discount attaching original a discount the D bond. Transporta- Commissioner Coastwise 1,A. Corporation, lesser amount 1932), gold for а much Robinson, D. W. Jr., Columbia, C., accepted by note holders in for and J. Brown, Hertz Spartanburg, C.S. corporation’s notes. The court held that (Carlisle, Carlisle, Spartanburg, Brown & values of the bonds the difference face C., Robinson, and Robinson & of Colum- notes, a taxable earned bia, C., brief) appellant. the.exchange. corporation in the *6 Irvine F. Belser, Columbia, (Mel- S. C. case, ease, however, unlike In that the instant Belser, ton & Columbia, C., voluntary purely on both brief), appеllees. op- pursuant to sides, and not a contractual granted holders at the time note PARKER, Before NORTHCOTT, and that the notes were executed. The situation SOPER, Judges. Circuit ease, in that because absence of right, no different than it contractual NORTHCOTT, Judge. offering would have been if instead appeal This is an a judgment, in a holders, corporation to the note suit at law, in the District the Unit- them had sold on the market and instead of ed States for the Eastern District of South exchanging had actually purchased can- Carolina, at Columbia. Appellees, who were celed the notes. plaintiffs below, who will herein re- brought plaintiffs,’ ferred to as the suit in the pleas county, court of common for Richland against C., appellant company (here- defendant) July, referred 1931. S. H. KRESS & CO. v. et FISHER al. petition On of the defendant the No. 3444. removed to the States court. After United complaint removal, the was amended and an- Appeals, Circuit Court Fourth Circuit. swer defendant. A trial was filed July, 1932, jury had in returned a plaintiffs favor of the verdict verdict the amount of on which court judgment, from entered which action below brought appeal. only the defendant assignments of error is question raised judge the action of the trial correctness'of refusing direct a for the de- verdict
fendant. begun 1930, negotiations were In the the defendant plaintiffs and between leasing of certain business looking Columbia, C., located property negotia- These defendant. plaintiffs to.