Under the Revenue Acts of 1921, 1924 and 1926, a corporation
which acquired all of the assets and assumed all of the liabilities
of another, and thereafter purchased in the open market some of the
latter's bonds at less than their face value,
held to have
realized
Page 291 U. S. 427
a taxable gain in the difference between the face value of the
bonds and the amount it paid for them.
United States v. Kirby
Lumber Co., 284 U. S. 1. P.
291 U. S.
430.
65 F.2d 454 reversed.
Certiorari, 290 U.S. 616, to review a judgment affirming a
decision of the Board of Tax Appeals, 23 B.T.A. 221.
Page 291 U. S. 428
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
Assessments by petitioner which treated as realized income the
difference between the face value of certain bonds assumed by
respondent in 1914 and the amount at which it purchased them in
1922, 1924, and 1925 were disapproved by the Board of Tax Appeals.
The court below affirmed this action, and the matter is here by
certiorari. The meager stipulated facts present only a narrow
point, and to that our decision must be limited.
Page 291 U. S. 429
Respondent is a New Jersey corporation the nature of whose
business is undisclosed. Its books are kept on the accrual
basis.
The Sen Sen Chiclet Company, incorporated under the laws of
Maine, also carried on an undiclosed business. In 1909, it issued a
series of 20-year bonds -- whether secured by a lien, or otherwise
does not appear. The indenture under which they issued required
that $50,000 be supplied each year which the trustee should use for
purchasing outstanding bonds.
In 1914, respondent bought all assets of the Sen Sen Company. In
part payment, it assumed all outstanding liabilities of the seller
-- among them $2,425,000 of the 1909 bonds. There is nothing in the
record to show the nature of these assets, or what became of them,
or the outcome of the transaction.
Respondent purchased in 1922 $82,000 of the Sen Sen bonds for
$55,650.94 -- $26,349.06 less than their face. During 1924, it and
the trustee under the indenture purchased $59,000 of the same bonds
for $47,602.10 -- $11,397.90 below their par value. Likewise,
during 1925, they purchased $201,500 for $186,146.31 -- $15,353.69
less than their face.
The Commissioner treated these differences -- $26,349.06,
$11,397.90 and $15,353.69 -- as income realized by respondent. The
Board of Tax Appeals ruled otherwise, and said:
"The payments involved in the transactions under consideration
were payments on the purchase price of the Sen Sen Chiclet
Company's assets, paid, under the conditions of the agreement, to
the holders of that company's bonds. When all of the bonds have
been retired by the petitioner, its obligations to the Sen Sen
Chiclet Company will have been satisfied in full, and whatever the
total amount paid to retire the bonds, it will constitute a
Page 291 U. S. 430
part of the cost to petitioner of the Sen Sen Chiclet Co.
assets."
In support of the same view, the Circuit Court of Appeals
said:
"When a taxpayer gets money by issuing an obligation which he
later discharges for less than its face, the transaction is
completed, because money need not be sold or exchanged to be
'realized.' So we read
United States v. Kirby Lumber Co.,
supra, 284 U. S. 1. But if he buys
property by an obligation in the form of a bond, note, or the like,
and if it remains in kind after the debt is paid, there can be no
'gain.' The cost has indeed been definitely settled, but that is
only one term of the equation; as long as the other remains at
large, there is no 'realized' gain."
We know nothing concerning the nature of the assets acquired
from the Sen Sen Company, have no means of ascertaining what has
become of them or whether any of them still exist. Nothing
indicates whether respondent lost or gained by the transaction.
The case before us is this:
In connection with the purchase of the assets of another company
in 1914, respondent assumed -- promised to pay -- more than
$2,000,000 of the seller's outstanding bonds. During 1922, 1924,
and 1925, it purchased a considerable number of these bonds in the
market at less than their face. The Commissioner assessed the
difference between these two amounts as income.
We find nothing to distinguish this cause in principle from
United States v. Kirby Lumber Co., 284 U. S.
1. The doctrine there announced is controlling here.
Bowers v. Kerbaugh-Empire Co., 271 U.
S. 170, is not applicable. The final outcome of the
dealings was revealed -- the taxpayer suffered a loss. Here, for
aught we know, there was substantial profit -- certainly the record
does not show the
Page 291 U. S. 431
contrary. Doubtless respondent's books indicated a decrease of
liabilities with corresponding increase of net assets.
Reversed.