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Bush Terminal Bldgs. Co. v. Commissioner of Internal Revenue.


decided: May 15, 1953.


Author: Frank

Before L. HAND, AUGUSTUS N. HAND and FRANK, Circuit Judges.

FRANK, Circuit Judge.

This case relates to an asserted deficiency in taxpayer's income for 1941. As the facts and rulings of the Tax Court are adequately stated in its findings and opinion reported in 17 T.C. 485, they will not be repeated here.

1. Gain from purchase by taxpayer of its own bonds in 1941 .

(1) The taxpayer argues that the amendment of § 22(b) (9)*fn1 in § 114(a) of the Revenue Act of 1942, 26 U.S.C.A. § 22(b) (9)*fn2 - eliminating (A) and (B) from § 22(b) (9) - was retroactive. We do not agree. The amendatory statute contains three subsections, (a), (b) and (c). Subsection (c) reads thus: "(c) Taxable years to which Amendment Applicable . - The amendment made by subsection (b) shall be applicable to taxable years beginning after December 31, 1939." With such an explicit provision concerning subsection (b) exclusively, we think it cannot reasonably be said that Congress intended subsection (a) to have a retroactive effect, especially as generally repeals by implication must be cold-shouldered.

(2) Unamended § 22(b) (9) (B), with reference to certification "by any Federal agency authorized to exercise regulatory power over such corporation, that at the time of such discharge [of indebtedness] the taxpayer was in an unsound financial condition," plainly does not include a certification by a federal "constitutional" court having statutory jurisdiction of the taxpayer's reorganization proceeding. Consequently, the certification by the reorganization judge had as little significance as the number of home runs in 1941.

(3) Section 22(b) (9) (A) provides that a discharge of indebtedness shall not be included in gross income if "it is established to the satisfaction of the Commissioner" that the taxpayer was in an unsound financial condition at the time of the discharged indebtedness. Obviously, here the Commissioner evidenced no such "satisfaction," for he determined a deficiency in respect of this deduction. We think this determination was conclusive of a lack of the required "satisfaction" because there was no showing of bad faith, or of gross error indicative of irrationality or caprice, on the Commissioner's part.

2. Expenses in connection with taxpayer's reorganization . These items were not deductible as "ordinary" business expenses under § 23(a) (1) (A), 26 U.S.C.A. § 23(a) (1) (A). See Skenandoa Rayon Corp. v. Commissioner, 2 Cir., 122 F.2d 268, 271; Motion Picture Capital Corp. v. Commissioner, 2 Cir., 80 F.2d 872.

3. "Interest" on sinking-fund instalments . The taxpayer's supplemental mortgage (executed pursuant to its reorganization plan) provided that the taxpayer, if and when it paid to the indenture trustee deferred sinking-fund instalments, would pay them "together with interests thereon at the rate of five (5) percent per annum." Although labelled "interest," the amounts so paid to the trustee were the taxpayer's capital assets - later to be applied in certain circumstances in reduction of its debts - and therefore when paid to the trustee did not constitute deductible "interest paid" on indebtedness within § 23(b), since none of the funds so paid to the trustee were in turn paid out as interest on taxpayer's indebtedness.

4. "Net operating loss carryover ." Taxpayer asserts that it was entitled to have its "net operating loss carry-over", pursuant to § 122(b) (2), 26 U.S.C.A. § 122(b) (2), increased by including three items. Two of them we have already discussed.*fn3 The third has to do with expense incurred in litigation involving taxpayer's right as a tenant to the use and occupancy of a powerhouse. Consequently, we think the expense was a cost incurred in "defending * * * title to property." Such a cost, under the applicable Regulation,*fn4 "constitutes a part of the cost of the property and is not a deductible expense." This regulation is valid*fn5 and applies to defense of a leasehold interest.*fn6 Because of the disposition of this contention, we need not consider the question whether the Tax Court correctly ruled as to this item on the basis of res judicata on account of the Tax Court's previous decision in Bush Terminal Buildings Company v. Commissioner, 7 T.C. 793.


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