1. A corporation which sold an issue of bonds at a discount and
paid commissions for marketing them, and which keeps its accounts
and makes its returns on the accrual basis, may amortize the
commissions as well as the discount over the life of the bonds, and
the amount so allocated to each year may be deducted from gross
income as a loss or expense of that year. P.
293 U. S.
284.
2. So
held where the commissions had been paid or
allowed before the year 1913.
Old Colony R. Co. v.
Commissioner, 284 U. S. 552,
distinguished. P.
293 U. S.
287.
69 F.2d 67 affirmed.
Certiorari to review the reversal of a decision of the Board of
Tax Appeals, 26 B.T.A. 1126, upholding in part a deficiency
assessment made by the Commissioner.
MR. JUSTICE STONE delivered the opinion of the Court.
Prior to 1913, respondent, directly or through a subsidiary
corporation, sold three issues of bonds, all maturing at dates
subsequent to 1923. All were sold at a discount, and petitioner
paid or allowed to bankers an additional amount as commissions for
marketing the bonds. The commissions and discounts, amortized over
the periods
Page 293 U. S. 283
from the dates of issue to maturity of the bonds, exceeded
$300,000 in each of its taxable years 1918 to 1923, inclusive.
Respondent kept its books and made its tax returns on the accrual
basis. Deduction from gross income, in its tax returns, of the
amortized amount of the commissions and discount was disallowed by
the Commissioner, who found a corresponding deficiency under the
applicable Revenue Acts of 1918, c. 18, 40 Stat. 1057, and 1921, c.
136, 42 Stat. 227.
The Board of Tax Appeals ruled that the petitioner was entitled
to the deduction for the discount, but not commissions. 26 B.T.A.
1126. On the appeal of the taxpayer alone, the Court of Appeals for
the Second Circuit reversed the Board, holding that the commissions
should be treated in the same manner as the discount, and that the
deductions were rightly made. 69 F.2d 67. This Court granted
certiorari on the petition of the Commissioner, which set up that
the decision below conflicted with that of the Court of Appeals in
the Seventh Circuit in
Chicago, R.I. & P. Ry. Co. v.
Commissioner, 47 F.2d 990,
see also Bonded Mortgage Co. v.
Commissioner, 70 F.2d 341, and is inconsistent with the
decision of this Court in
Old Colony Railroad Co. v.
Commissioner, 284 U. S. 552,
which held that premiums received by the taxpayer upon the sale of
its bonds before 1913 could not be subjected to income tax in later
years by the expedient of prorating them over the period between
the date of issue of the bonds and their maturity.
In support of its petition, the Government contends that the
commissions are not, as the court below held, losses incurred in
the taxable year which are deductible under § 234(a)(4) of the
Revenue Acts of 1918 and 1921 (40 Stat. 1077, 1078, 42 Stat. 254,
255), although not to be realized until payment of the bonds at
maturity. It insists instead that the commissions are expenses
incurred and paid at the date of the
Page 293 U. S. 284
bond issue which cannot, on any theory, be deducted in later
years. Further, it contends that the amortization of the
commissions paid before 1913 and their deduction as amortized in
tax returns in later years are inconsistent with the decision of
this Court in
Old Colony R. Co. v. Commissioner,
supra.
1. There is no provision in either the 1918 or 1921 Revenue Acts
specifically authorizing the deduction from gross income of
commissions or discount paid or allowed by the taxpayer upon an
issue of bonds. Section 234 of the 1918 and 1921 Acts, like the
corresponding provisions of the acts before and since, allow
deduction of expenses paid or incurred, interest paid or accrued,
and losses sustained during the taxable year. Sections 212(b) and
213(a) of the 1918 and 1921 Acts (40 Stat. 1064, 1065, and 42 Stat.
237), like § 13(d) of the 1916 Act, c. 463, 39 Stat. 756, 771,
authorize the taxpayer to make his income tax returns on the
accrual basis where his books are kept on that basis and reflect
true income; they require it if he fails or is unable to make his
return on a cash receipts and disbursements basis. The taxpayer is
thus enabled to charge against income of the taxable period
expenses incurred in and properly attributable to the process of
earning income during that period, although payable in a later one.
See United States v. Anderson, 269 U.
S. 422,
269 U. S. 440;
Aluminum Castings Co. v. Routzahn, 282 U. S.
92;
Niles Bement Pond Co. v. United States,
281 U. S. 357. It
follows that, when the return is made on the accrual basis,
expenses or obligations incurred by the taxpayer in connection with
a bond issue, which are not discharged until the payment of the
bonds at maturity, may properly be accrued or amortized over the
period of the life of the bonds and allowed as annual deductions
from gross income.
By Article 150, Treasury Regulations 33, as revised, relating to
the 1916 Revenue Act, both commissions and discount upon bond
issues of the taxpayer were classified
Page 293 U. S. 285
as losses sustained on payment of the bonds at maturity, and
taxpayers were permitted to amortize them over the life of the
bonds and deduct them as amortized from gross income in each year.
These regulations were continued under the 1918 and 1921 Acts, but
the reference to commissions was omitted. [
Footnote 1] Art. 544 of T.R. 45; Art. 545 of T.R. 62.
The Board of Tax Appeals has consistently applied the regulations
as to bond discount allowed before 1913, and, in each case, as in
the present, the Government, by failing to seek review of the
ruling, has acquiesced in it. [
Footnote 2]
Page 293 U. S. 286
Both commissions and discount, as the Government concedes, are
factors in arriving at the actual amount of interest paid for the
use of capital procured by a bond issue. The difference between the
capital realized by the issue and par value, which is to be paid at
maturity, must be added to the aggregate coupon payments in order
to arrive at the total interest paid. Both discount and commissions
are included in this difference. If the difference be viewed as a
loss resulting from the funding operation, it is one which is
realized only upon the payment of the bonds at maturity.
But even if the commissions, unlike discount, may, as the
Government insists, be regarded as a contemporary expense of
procuring capital, it is one property chargeable to capital
account. In practice, it is taken out of the proceeds of the bonds
by the banker. But, in any case, it must be deducted from the
selling price to arrive at the capital realized by the taxpayer
from the sale of the bonds, in return for which he must, at
maturity, pay the face value of the bonds. The effect of the
transaction in reducing the capital realized, whether through the
payment of commissions or the allowance of discount, is the same.
In this respect, the commissions do not differ from brokerage
commissions paid upon the purchase or sale of property. The
regulations have consistently treated such commissions not as items
of current expense, but as additions to the cost of the property or
deductions from the proceeds of sale, in arriving at net capital
profit or loss for purposes of computing the tax. [
Footnote 3]
Page 293 U. S. 287
Here, the commission, when paid, were properly chargeable
against capital, and reduced by their amount the capital realized
by the taxpayer from the bond issue. They come out of the pocket of
the taxpayer only on payment of the bonds at maturity. But, unlike
the purchase and sale of property, the transaction contemplated
from the beginning a fixed date, the due date of the bonds at which
the difference between the net amount of capital realized upon the
issue and the par value of the bonds must be paid to bondholders by
the taxpayer. We think that the revenue acts, as they have been
interpreted by this Court and the treasury regulations upon this
and related subjects, require that this difference between receipts
and disbursements of the taxpayer should, in some form, enter into
the computation of his taxable income. It is a loss to the
taxpayer, definite as to its date and amount, and represents a part
of the cost of the borrowed capital during each year of the life of
the bond issue.
Cf. United States v. Anderson, supra. At
least where the taxpayer's books are kept upon the accrual basis,
its final disbursement may be anticipated by amortization, and the
amortized amount deducted annually from his gross income.
Page 293 U. S. 288
2. Our decision in
Old Colony Railroad Co. v. Commissioner,
supra, does not require a different conclusion because the
commissions in the present case were allowed before 1913. It was
recognized in that case that premiums on a bond issue received
after the Sixteenth Amendment might be prorated over the period of
the life of the bonds and taxed annually as income during this
period. In refusing to allow premiums received before 1913 to be
thus prorated and taxed, the Court was moved by the consideration
that the premiums, which were received as income and had become a
part of the taxpayer's capital before the Sixteenth Amendment,
could not be taxed as income by virtue of that amendment and
legislation under it.
No such consideration is presented here, where the question is
only of the deduction of an expense incurred before the amendment.
Hence, the decision in the
Old Colony case can militate
against our conclusion here only if returns, prepared in conformity
to it, would fail to reflect true income if the rule announced in
the
Old Colony case were also complied with. Plainly, such
is not the case. There can be no question of receipt of a premium
where the bonds are sold at a discount. When sold at a premium, as
in any other case, commissions must be deducted from gross proceeds
in arriving at the capital realized upon the bond issue. There is
no occasion for deduction of commissions from gross income at a
later time unless the total amount realized by the sale of the
bonds is less than their par value. In that case, the difference
alone is the amount to be amortized and deducted from gross income
in the annual returns of the taxpayer. This would reflect his true
income where, as in the present case, his accounts are kept on the
accrual basis.
Affirmed.
[
Footnote 1]
Notwithstanding this change in the regulations, the Commissioner
appears to have continued to permit taxpayers to amortize and
deduct commissions paid on bond issues prior to 1913, as the
regulations under the 1916 Act had expressly permitted. A change of
practice was sanctioned in Chicago, Rock Island & Pacific Ry.
Co. v. Commissioner, 13 B.T.A. 988, 1034, affirmed by the Court of
Appeals of the Seventh Circuit, 47 F.2d 990, 991, where the
taxpayer, while allowed to deduct bond discount, was not allowed to
deduct from gross income the amortized expenses of a bond issue
incurred before 1913. This refusal to allow amortization of
commissions was confined to the case of bonds issued before
1913.
Treasury regulations have also been silent as to commissions on
bonds issued after that date. Art. 544 of T.R. 45; Art. 545 of T.R.
62, 65, 69; Art. 68 of T.R. 75, 77. But there are a number of
Treasury rulings which permit the amortization of commissions on
bonds issued after 1913. O.D. 936, 4 Cum.Bul. 276; O.D. 959, 4
Cum.Bul. 129; I.T. 1412, I-2 Cum.Bul. 91; I.T.1962, III-1 Cum.Bul.
291; S.M. 3691, IV-1 Cum.Bul. 145.
[
Footnote 2]
Chicago, Rock Island & Pacific Ry. Co. v. Commissioner, 13
B.T.A. 988, 1027-1034; Kansas City Southern Ry. Co. v.
Commissioner, 16 B.T.A. 665, 686; Terminal Railroad Assn. of St.
Louis v. Commissioner, 17 B.T.A. 1135, 1169; Chicago & North
Western Ry. Co. v. Commissioner, 22 B.T.A. 1407. In one case, the
Board refused to allow the amortization on the theory that the
bonds were issued not by the taxpayer, but by a predecessor
corporation. Western Maryland Ry. Co. v. Commissioner, 12 B.T.A.
889, 907. On appeal by the taxpayer, the Board was reversed. 33
F.2d 695, 697. The Government did not seek review.
[
Footnote 3]
Art. 8 of T.R. 33, revised; Art. 293 of T.R. 45, 62; Art. 292 of
T.R. 65, 69; Art. 282 of T.R. 74, 77; Hutton v. Commissioner, 12
B.T.A. 265, 266. Commissions paid to a banker for selling the
taxpayer's corporate stock have not been allowed to be deducted as
a current business expense, but have been treated as a capital
expenditure.
Simmons Co. v. Commissioner, 33 F.2d 75, 76;
Appeal of Charles H. Lilly Co., 2 B.T.A. 1058; Appeal of Emerson
Electric Manufacturing Co., 3 B.T.A. 932, 935; Harrisburg Hospital,
Inc. v. Commissioner, 15 B.T.A. 1014, 1017; Frischkorn Real Estate
Co. v. Commissioner, 21 B.T.A. 965, 969, 970.
Compare the
requirement that commissions and expenses paid by a lessor in order
to secure a tenant be prorated over the term of the lease. Bonwit
Teller & Co. v. Commissioner, 17 B.T.A. 1019, 1024; Howard v.
Commissioner, 19 B.T.A. 865, 866; Clawson v. Commissioner, 19
B.T.A. 1253; Roby Realty Co. v. Commissioner, 19 B.T.A. 696, 698;
Butler v. Commissioner, 19 B.T.A. 718, 729, 730; Central Bank Block
Association v. Commissioner, 19 B.T.A. 1183, 1185; Webb v.
Commissioner, 20 B.T.A. 274; Spinks Realty Co. v. Commissioner, 21
B.T.A. 674, 677; Young v. Commissioner, 20 B.T.A. 692, 695.
Compare also the compulsory proration of fees and
commissions paid by a borrower in order to obtain a loan. Lovejoy
v. Commissioner, 18 B.T.A. 1179, 1182, 1183; S. & L. Building
Corp. v. Commissioner, 19 B.T.A. 788, 794.