Mansfield, Oakes and Timbers, Circuit Judges. Mansfield, Circuit Judge (concurring and dissenting).
Appellant Columbia Gas System, Inc. (Columbia) appeals from a judgment entered in the Southern District of New York, Inzer B. Wyatt, District Judge, 334 F. Supp. 1279 (S.D.N.Y.1971), granting the government's motion for summary judgment and dismissing the complaint in a tax refund action brought by Columbia to recover federal corporate income taxes and interest for the taxable years 1955, 1956, 1957 and 1958 in the aggregate amount of $244,084.33 claimed to have been erroneously assessed and collected.*fn1
Three essential issues are involved on this appeal:
(1) Whether the conversion of debentures into Columbia's common stock as provided in a certain indenture constituted payment by Columbia of interest accrued on the debentures.
(2) Whether, on conversion, Columbia realized income in the form of discharge of indebtedness.
(3) Whether, for the taxable years 1955 and 1956, the refusal of the Commissioner to accept Columbia's consents to a reduction in the basis of its assets under Section 108(a) of the Internal Revenue Code*fn2 was an abuse of discretion.
Since we agree with the district court's application of the law to the undisputed facts, we affirm.
In view of the district court's clear, comprehensive and detailed statement of the facts based on a stipulation by the parties, 334 F. Supp. at 1280-81, it is sufficient for our purpose to set forth here only such facts as are necessary to an understanding of our rulings below.
Under a 1954 indenture, Columbia issued $50,000,000 principal amount of 3 1/2% subordinated debentures due 1964. Interest on the debentures was payable semiannually on May 10 and November 10. The debentures were convertible into Columbia's common stock at the rate of $13 1/3 per share, or 7 1/2 shares per $100 principal amount of debentures, with cash adjustments to be made in lieu of fractional shares. The indenture provided that "there shall be no adjustments in respect of interest or dividends on the conversion of any Debenture or Debentures." Each debenture provided that "no adjustment is to be made on conversion for interest accrued hereon or for dividends on securities issued on conversion."
Columbia used the accrual method of accounting. Each month it entered on its books as accrued interest debt the amount of interest earned on the debentures, and transferred to capital surplus the amount of interest accrued on debentures converted during the monthly accounting period.
On its federal income tax returns for the taxable years 1955 through 1958, Columbia deducted*fn3 as interest expense all of the interest accrued on the debentures, including the amount accrued on those debentures converted during the particular year. The District Director found this improper. His audit of the returns for the years 1955 and 1956 resulted in the determination of a deficiency of $127,910.64, plus $38,669.97 interest,*fn4 on the ground that Columbia, by failing to report its discharge of indebtedness as gross income,*fn5 had understated its taxable income. An audit of the returns for the years 1957 and 1958 resulted in the determination of a further deficiency of $60,082.80, plus $17,420.92 interest.*fn6 While the same end was reached for the years 1957 and 1958 as for the years 1955 and 1956, the route was by disallowance of the deduction rather than by an addition to gross income. The additional tax for the years 1955 and 1956 was paid on July 31, 1961; that for the years 1957 and 1958 was paid on March 29, 1963.
Refund claims for the taxable years 1955 and 1956 were filed by Columbia on September 26, 1962, together with consents to reduce the basis of its assets pursuant to § 108(a) of the Internal Revenue Code.*fn7 Refund claims for the taxable years 1957 and 1958 were filed in March 1965, but not accompanied by § 108(a) consents.
The District Director disallowed the refund claims for each of the four years. He also refused to give effect to the § 108(a) consents on the ground that they had not been filed with the income tax returns for the years to which they related.
In January 1968, Columbia commenced the instant tax refund action in the district court, pursuant to 28 U.S.C. § 1346(a) (1) (1970), to recover $244,084.33 in income taxes and interest claimed to have been erroneously assessed and collected for the taxable years 1955-1958. The parties in due course filed a joint stipulation of facts. Each moved for summary judgment. In a well reasoned opinion, the district court held that on conversion the accrued interest was discharged and not paid; and that the Commissioner had not abused his discretion in refusing ...