Citations
- 330 F.2d 520
Full opinion text
FREEMAN, District Judge.
In 1911, the Kentucky & Indiana Terminal Railroad Company, plaintiif-appellee herein, sold an issue of gold sterling bonds secured by a mortgage on its properties, to mature in 1961. These bonds were sold for English pounds sterling, were payable in pounds sterling, and each bond had a par value of 100 pounds. For each pound of the sales price of the bonds, the plaintiff received $4.8666, the dollar value of the pound in 1911, and set up its obligation accordingly in dollars on its books. In 1916 and 1917, all except 3925 of such bonds then outstanding were stamped with a legend, making them payable in dollars at the fixed rate of $4.8665 per pound sterling. None of the bonds here in issue were so stamped.
On or about September 1, 1949, the English pound sterling was devalued to $2.80 per pound. During the year 1951, plaintiff purchased in the open market 438 of the unstamped bonds, having a total par value of 43,800 pounds and thereby realized a gain of $105,623.42, being the difference between the basis of the bonds and the cost of acquisition. Of the 438 bonds so purchased, 196 were purchased by plaintiff or its agent in New York and paid for in United States currency; 63 were purchased by plaintiff’s agent in London and paid for in currency of Great Britain; and 179 were delivered to plaintiff’s agent in London, but were paid for in New York in United States currency. All 438 bonds were purchased for retirement and were cremated by plaintiff. The purchase of such bonds by plaintiff was either proposed, discussed, authorized, ratified or voted upon at various meetings of plaintiff’s Board of Directors, and the subject was first brought before the Board by plaintiff’s President on October 25, 1949.
On March 17, 1952, when plaintiff filed its federal income tax return for the year 1951, it excluded from its gross income the said sum of $105,623.42, claiming this to be a gain realized in 1951 attributable to the discharge of its own indebtedness under Section 22(b) (9) of the Internal Revenue Code of 1939, and, with the return, pursuant to Section 22(b) (9), filed United States Treasury Form 982 requesting that the amount of such profit be applied to the reduction of the basis of its properties, in accordance with the provisions of Section 113(b) (3) of the 1939 Code.
On March 13, 1959, the Commissioner assessed a deficiency for 1951 in the amount of $39,427.87 plus interest, asserting that only the sum of $20,062.93 (the difference between the face value of the bonds in dollars in 1951 and the cost of acquisition) was excludable from gross income as gain attributable to the discharge of indebtedness, under Section 22(b) (9), and that the balance of the gain attributable to the difference in value of the pound at the time the 438 bonds were issued and the value of the pound at the time the bonds were reacquired, or $85,560.49, was includable in plaintiff’s gross income for 1951 as being derived from speculation in foreign exchange.
Plaintiff-taxpayer paid the assessed deficiency, filed a claim for refund which was rejected, and this suit for refund followed. The District Court held that the entire profit realized by the taxpayer in reacquiring the 438 bonds was attributable to the discharge of its own indebtedness, within the meaning of Section 22(b) (9) of the 1939 Code, and, consequently, was excludable from income. From that decision the Government has appealed to this Court.
The taxpayer concedes that it realized a gain or profit on the transactions in question, including that portion attributable to the devaluation of the British pound, which constituted income under Section 22(a) of the 1939 Code, but contends that the devaluation of the pound and the then existing depressed market for the bonds were simply conditions which made the gain possible when it reacquired its bonds in 1951, all of which gain was attributable to (i. e., caused by) the discharge of its own indebtedness and was, therefore, excludable from its 1951 taxable income under the provisions of Sections 22(b) (9) and 113(b) (3), which the taxpayer invoked by filing the appropriate Form 982 with its tax return. Taypayer also contends that no gain was realized until the bonds were actually purchased.
The Government contends that the transaction contained two elements (1) a discharge of the indebtedness, and (2) a dealing in foreign exchange, and argues that the taxpayer engaged in a speculative activity to take advantage of the devaluation of the pound sterling and thus better its financial condition as indicated by discussions at taxpayer’s Board of Directors’ meetings commencing shortly after the pound devaluation and also by the fact that taxpayer borrowed money in order to reacquire its bonds. The Government further argues that where a transaction contains two such elements, viz. (1) an ordinary business transaction, and (2) a dealing in foreign exchange, the latter is to be treated separately for tax purposes, and cites certain cases in support of such contention.
First of all, it should be noted that Sections 22(b) (9) and 113(b) (3) do not exempt from taxation a gain realized by the taxpayer attributable to the discharge of its indebtedness, but simply provide a means whereby the taxpayer may elect to defer the gain by applying it to the reduction of the basis