dissenting: I disagree with the opinion of the majority of the Board in Docket No. 87240.
It is my opinion that Jane Holding Corporation is taxable in the year 1933 on the amount of accrued interest canceled in that year by the Mallinckrodt trust, to the extent of deductions of such accrued interest taken by the corporation in its income tax returns for previous taxable years. The principal upon which the interest obligations were accrued by the corporation represented loans to it by its sole shareholder for use in its business operations.
The only justifiable theory upon which a taxpayer may deduct interest or ordinary and necessary business expenses accrued but not paid is that, for the purposes of taxation, such accrual is treated as payment. Of course, in order to subject the payee of such accruals to income tax on the amounts thereof, where the payee is on a cash basis, the amount of such accruals must be actually or constructively paid to him, notwithstanding the fact that as to the payor the accruing of such obligations, for the purposes of taxation, is tantamount to their payment. Where I refer hereinafter to accruals as payments it is to be understood that such expression is employed in the sense and in the connection above indicated.
In the present proceeding the accruals of interest were, to the extent of their deductions in the several taxable years, payments out of gross income and were not capital investments or paid out of capital. Taxable net income was reduced by the amounts of such deductions on the theory that so much of gross income as was neces*977sary to meet sucb accrued obligations for interest must be taken and set apart for that purpose. Therefore, to the extent of such deductions, the corporation did not receive taxable income in the years of such deductions. It received the amounts of such deductions as gross income but lost such amounts to taxable income through their appropriation to meet the accrual of interest obligations. The cancellation of the accrued interest obligations by the trust operated as a refundment in 1933 of such amounts lost to taxable income in the previous years and constituted income to the corporation in 1933. Such cancellation was a refundment of expenditures out of earnings and not out of capital of the corporation.
The fact that from the standpoint of the trust as sole shareholder of the Jane Holding Corporation such cancellation constituted a contribution to capital of the corporation does not alter the fact that from the standpoint of the corporation itself the cancellation constituted a restoration to it of taxable income to the extent of the amount of accruals which it deducted from its gross income in previous taxable years. The capital contribution by the trust was not of itself income to the corporation, but through such contribution by cancellation of interest obligations previously deducted by Jane Holding Corporation from its gross income an amount of income equal to the amount of such deductions was restored to the corporation’s taxable income. Such restoration occurred in 1933 and constituted taxable income of the corporation in the year here involved.
I think my views herein are in harmony with the principle of the Board’s decision in South Dakota Concrete Products Co., 26 B. T. A. 1429, which has been frequently cited with approval by the Board. I think, also, that my views are supported by the principle upon which the Supreme Court based its opinion in Burnet v. Sanford & Brooks Co., 282 U. S. 359. In that case the taxpayer, who was engaged in business for profit and in carrying out a dredging contract entered into with the United States, expended in the taxable years 1913, 1915, and 1916 as expenses more than was received in each of those years as compensation under its contract, and on its income tax return for those years reported net losses by reason of the deductions of such expenditures. As a result of a suit against the United States for the recovery of such excess expenditures the taxpayer recovered from the United States in 1920 the amount of such excesses but did not return the amount of such recovery in its income tax return for the year 1920. The Commissioner determined a deficiency against the taxpayer based upon the amount of such recovery. The taxpayer petitioned the Board for a redetermination, contending that such recovery did not constitute income but a return of capital *978and hence the deficiency based thereon was erroneous. The Supreme Court in its opinion said:
That the recovery made by respondent in 1920 was gross income for that year within the meaning of these sections cannot, we think, be doubted. The money received was derived from a contract entered into in the course of respondent’s business operations for profit. While it equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses incurred in the prosecution of the work under the contract, for the XDurpose of earning profits. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income. See Doyle v. Mitchell Brothers Go., supra, page 185 of 247 U. S., 88 S. Ct. 467. [Emphasis added.]
I think, also, that my views are in harmony with the principle adopted and adhered to by the Board and the courts that, when a deduction for a bad debt is taken in a given taxable year and such debt is paid in a subsequent taxable year, the amount thereof becomes taxable income in the year received notwithstanding the fact that the amount received in payment of the debt is or may be a return of capital. In such case the taxpayer is not taxed on capital but upon restored net income lost in the taxable year when the deduction for the bad debt was, for tax purposes, allowed from gross income.
I am aware that in Commissioner v. AutoStrop Safety Razor Co., 74 Fed. (2d) 226, on facts similar to those here, the Circuit Court of Appeals for the Second Circuit held:
When the indebtedness was cancelled, whether or not it was a contribution to the capital of the debtor depends upon considerations entirely foreign to the question of the payment of income taxes in some previous year. Since the cancellation, under the circumstances shown, did not make it income to Auto Strop Safety Razor Company in the year the debt was cancelled, it cannot be taxed as its income in that year.
I find it difficult to distinguish the facts in the instant case from those in the AutoStrop Safety Razor Co. case, supra, but with due deference to the court rendering the opinion in that case, I am impelled to the belief that its opinion therein is out of harmony with the principle underlying the opinion of the Supreme Court in the Sanford & Brooks Co. case, supra.
For the reasons assigned it is my opinion that the Jane Holding Corporation is taxable in 1933 on an amount equal to the amount of the deductions taken by it from gross income in previous taxable years for accrued interest obligations canceled by the Mallinckrodt trust in 1933.