The opinion of the court was delivered by: BRENNAN
This action involves the application of the provisions of the Internal Revenue Code relative to the imposition of an excess profits tax. The parties have stipulated that the decision in this case may be made upon the record made at the time of the trial of this action before the late Judge Bryant.
The facts are not in dispute and they may be summarized concisely. The plaintiff seeks to recover alleged over-payments of the excess profits tax imposed for the year 1940. The action is based upon the refusal of the defendant Collector to allow an item of $ 107,730, to be considered as part of the equity invested capital of the plaintiff corporation in the computation of its excess profits tax for the year 1940. During the period from June, 1932, through 1940, Frank A. Augsbury was the president of the plaintiff corporation, and owned substantially two-thirds of its outstanding stock, and two-thirds of its outstanding debenture bonds. By reason of his ownership he became entitled to receive interest upon said bonds in the amount of $ 26,932.50 in each year. Such interest was not paid during the years 1932, 1933, 1934 and 1935. In 1936 and 1937 Frank A. Augsbury completely and irrevocably forgave the amount of accrued debenture interest which was due him, as above stated. His action was motivated by his desire to cooperate with the plaintiff, in the matter of obtaining a loan from the Federal Reserve Bank of New York; such loan being made necessary by reason of the financial embarrassment of the plaintiff.
The plaintiff at all times material herein computed its income and reported its income tax upon an accrual basis, so that each year there was deducted from its income the item of $ 26,932.50, representing debenture interest accrued to Frank A. Augsbury, but not paid to him.
Frank A. Augsbury at all times material herein computed his income and reported his income tax upon a cash basis, and at no time did he include any part of the accrued debenture interest as a taxable item of income in his tax return.
Upon the forgiveness of the accrued interest, as above described, the item of $ 107,730 was credited to 'donated surplus' on the books of the plaintiff corporation. It is apparent that litigation arose out of the taxing status of the item of $ 107,730, and it was determined that same was a gift to the plaintiff corporation and not taxable, as income. George H. Hall Corporation v. Commissioner, 2 T.C. 146.
The excess profits tax return of plaintiff for the year 1940 included the item of $ 107,730, as a part of its equity invested capital, which was used as a basis for the assessment of an excess profits tax. The item was eliminated by the Commissioner, and an additional tax imposed, which was paid. Plaintiff has brought action to recover from the Commissioner an amount equal to such additional tax.
The plaintiff contends that the item of $ 107,730 is a 'contribution to capital' which may be added to its equity invested capital in determining same within the meaning of the applicable law.
While the defendant does not concede that the forgiveness of accrued interest by Augsbury constituted a contribution to capital, it contends that, even if it be so considered, the plaintiff corporation may not include such item as an addition to its equity invested capital under the applicable law.
The conclusion is reached that Augsbury's action in forgiving the corporate debt due him constituted a contribution to the capital of the corporation. Helvering v. American Dental Co., 318 U.S. 322, 63 S. Ct. 577, 87 L. Ed. 785; Commissioner v. Auto Strop Safety Razor Co., 2 Cir., 74 F.2d 226; Carroll-McCreary Co., Inc., v. Commissioner, 2 Cir., 124 F.2d 303.
To determine the basis which must be used by the corporation in including such contribution to capital in its excess profits tax return is, therefore, the ultimate question to be determined in this action.
The parties are not in dispute as to the provisions of law which must govern the decision. They are Internal Revenue Code, Title 26 U.S.C.A. § 718(a)(2), Section 113(a)(8)(B); Treasury Regulation 109, Sec. 30.718-1. It is the application of the above provisions to the facts in this case which is the crux of the dispute between the parties. There is no question but that the statute does not clearly and specifically enunciate the basis which a corporation may use in determining the amount of its equity invested capital, where a chose in action is the subject of the contribution to the capital of the corporation.
Section 718, above referred to, provides in part that the equity invested capital of a corporation shall be determined by the sum of money paid in, and of the property contributed to capital ' * * * in an amount equal to its basis (unadjusted for determining loss upon sale or exchange.'
Section 113, as far as applicable, is quoted below:
'Sec. 113. Adjusted basis for determining ...