The opinion of the court was delivered by: WYATT
This is a motion by plaintiff (Columbia) for summary judgment in its favor for "the relief demanded in the complaint". Fed. R.Civ.P. 56 The relief demanded in the complaint is a money judgment for $244,084.33 with interest and costs.
The action was commenced on January 25, 1968, and is for recovery of income taxes of $187,993.44 and interest thereon of $56,090.89 paid by Columbia for the years 1955-1958 inclusive ("the four taxable years") and alleged by Columbia to have been "wrongfully and illegally assessed against and collected from" Columbia. The Court is given jurisdiction of the action by 28 U.S.C. § 1346(a) (1).
Deficiencies were determined by the appropriate District Director of the Internal Revenue Service in respect of federal income taxes of Columbia (26 U.S.C. §§ 6211, 6212) for the four taxable years. Columbia elected to pay the taxes and interest to date of payment and timely filed claims for refund (26 U.S.C. §§ 6401, 6402, 6511). The claims were disallowed, and Columbia then commenced this action (26 U.S.C. § 7422).
The facts are not in dispute and both sides agree that summary judgment is appropriate. The government has made a cross-motion for summary judgment in its favor. The motion of Columbia is denied. The motion of the government will be granted.
Columbia in 1954 issued $50,000,000 of 3 1/2% Subordinated Debentures due 1964. These debentures were convertible into common stock of Columbia at the rate of 7 1/2% shares of Columbia common stock for each $100 principal amount of debentures (cash adjustment in place of fractional shares). Interest on the debentures was payable on May 10 and November 10 of each year. It was provided that no adjustment should be made on conversion "for interest accrued" or "for dividends" on stock issued on conversion.
Columbia computes its taxable income on the accrual method of accounting. 26 U.S.C. § 446(c) (2). Each month on its books Columbia accrued interest on the debentures. Each month also Columbia transferred to capital surplus account the amount of interest accrued and unpaid (at least, not paid in cash) in respect of debentures converted during that month into common stock.
In each of the four taxable years Columbia deducted as an interest expense all of the interest accrued and unpaid (at least, not paid in cash) on the debentures converted during that year. This interest will be referred to sometimes as "conversion interest". This was done in reliance on 26 U.S.C. § 163(a): "There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness".
The Service audited the returns for 1955 and 1956 and increased the taxable income of Columbia by the amount of the conversion interest. This was on the theory that "discharge of indebtedness" results in taxable income (26 U.S.C. § 61(a) (12)) and that the accrued conversion interest had been discharged by the conversion. Since the indebtedness discharged was the same interest indebtedness deducted by Columbia on its returns, the deduction was not disallowed. Of course, the increase in income by the same amount deprived Columbia of the benefit of the deduction.
Columbia paid the additional taxes for 1955 and 1956 on July 31, 1961. The audit reports of the examining agent for these years are dated August 1, 1961.
On audit of the returns for 1957 and 1958, the Service disallowed the conversion interest as a deduction for "interest . . . accrued". According to the claim for refund, the Service determined that "the holder lost his right to receive the interest upon conversion" and cited I.T. 2884 CB XIV-1, page 251 -- a citation which to me seems wide of the mark, whatever may be the merit of the determination made by the Service.
Columbia duly filed claims for refund for the four taxable years.
The claims for refund for 1955 and 1956 were filed on or about September 26, 1962. With these claims for refund, Columbia filed consents under 26 U.S.C. § 108(a).
The claims for refund for 1957 and 1958 were filed in 1965. Columbia explains that it did not file such consents for 1956 and 1957 because the Service did not require for those ...