*278 Decision will be entered under Rule 50.
Interest paid by a corporation on debentures which it issued in payment for assets and on other debentures which it issued as a dividend out of earnings, held, deductible as interest.
*333 This proceeding involves income tax deficiencies of $ 288.61 and $ 689.60 for the fiscal years ended February 28, 1941, and February 28, 1942, respectively. The only question in issue is whether petitioner is entitled to deduct the full amount of the interest which it paid on its outstanding debentures during the taxable years.
The parties have submitted a written stipulation of facts and have further stipulated*279 that all of the evidence adduced in a prior proceeding brought by this petitioner, Docket No. 108145, involving deficiencies for the years 1937 and 1938, shall be treated as evidence in this proceeding. Our memorandum findings of fact and opinion in the prior proceeding was entered October 7, 1942.
FINDINGS OF FACT.
Petitioner is a Florida corporation, with its principal office located in Miami. Its income tax returns for the tax years involved were filed with the collector of internal revenue for the district of Florida.
The petitioner was incorporated under the laws of the State of Florida in February 1935, under the name of Sky-Monument, Inc., later changed to Dade-Commonwealth Title Co., for the purpose of acquiring a certain abstract plant, together with the building containing such plant and the land upon which it was built in Miami, Florida, under an option from the Guardian Life Insurance Co. of America (hereinafter sometimes referred to as the Life Insurance Co.). The Dade County Abstract Title Insurance & Trust Co., the stock of which was originally owned by S. M. Tatum and two associates, had at one time owned the above mentioned abstract plant, together with the property*280 above mentioned. Because of financial difficulties incident to the depression, that company borrowed money secured by a mortgage on this property from the Life Insurance Co. On account of the continuing depressed business conditions and petitioner's consequent inability to meet its obligation, the mortgage was foreclosed and title to the property was acquired by the Life Insurance Co.
Forrest Sullivan, an attorney who had from 1925 to about the end of 1931 represented approximately 20 companies, including the Dade County Abstract Title Insurance & Trust Co., Bay Serena Co., and S. M. Tatum, Inc., controlled by S. M. Tatum, at an annual salary, was employed by S. M. Tatum and his companies to defend the foreclosure suit. Sullivan, acting solely for his clients, secured an option on the above described abstract plant and property on April 4, 1932, from the Life Insurance Co., which then owned it. The option price was a sum equal to the principal of the mortgage, plus interest, court costs, attorneys' fees and other expenses incidental to the foreclosure. The abstract business was thereafter conducted for the Dade County Abstract Title Insurance & Trust Co., S. M. Tatum, or the *281 companies *334 he controlled, under the option, with the intention of earning sufficient funds from its operations with which to exercise the option. That operation failed and in order to secure several extensions of the option the Bay Serena Co., all of whose stock was owned by S. M. Tatum, advanced $ 26,134.71 to the Life Insurance Co., which amount was to be credited on the purchase price in the event the option was exercised. The option was taken in the name of Sullivan because the Life Insurance Co. refused to deal with S. M. Tatum or any of his companies because of a number of judgments which had been obtained against Tatum and his several companies.
S. M. Tatum was of the opinion that the properties covered by the option had a value greatly in excess of the amount which would be required for the exercise of the option. He was of the opinion that if the abstract plant were to be operated by competent abstract attorneys it could be operated at a great profit. In December 1934 or January 1935 Tatum was approached by J. C. Coppinger and William A. Lane, who were experienced abstract title attorneys and desired to become identified with the business. After negotiations *282 extending over several weeks Tatum requested his attorney, Sullivan, to organize a new company which would take up the option held by Sullivan and acquire the plant from the Life Insurance Co. Accordingly, in February 1935 Sullivan caused the petitioner corporation to be organized under the name of Sky-Monument, Inc. It was organized with a capital stock of $ 5,000, divided into 50 shares of a par value of $ 100 each. Sullivan had not been paid for services which he had rendered to Tatum and his various companies since about 1931. He requested that about 25 percent of the stock be issued to him for services. Tatum agreed that 12 of the 50 shares should be issued to him for his services, but for the purpose of completing the incorporation 2 of those shares were issued to nominees of Sullivan who, immediately upon the receipt of their certificates, endorsed them over to Sullivan.
On February 19, 1935, the following subscriptions for stock were accepted:
| Shares | |
| Forrest Sullivan | 10 |
| A. Cowart | 1 |
| C. A. Wentley | 1 |
| Bay Serena Corporation | 38 |
The shares of stock issued to Cowart and Wentley were at all times beneficially owned by Sullivan.
At a meeting of the subscribing stockholders*283 on February 19, 1935, the following resolution was passed:
Resolved that capital stock of the amount of 38 shares be issued to Bay Serena Company, a Florida corporation, and that an assessment of 100% be now laid against said subscribing stockholder, Bay Serena Company, which 100% amounts to 38 shares of the capital stock of this corporation, and that the same be paid *335 at once, either in cash, property or services acceptable to the incorporators and subscribing stockholders at this meeting; and the said Bay Serena Company having rendered valuable services in the organization of said corporation, and having heretofore paid into the treasury of this corporation $ 500.00 in cash, it is
Further Resolved that the incorporators and subscribing stockholders do hereby fix the just valuation of said cash, property and services to this corporation, rendered by said Bay Serena Company to be worth said 38 shares of the capital stock of this corporation, and that said stock be issued fully paid and nonassessable.
The stock was issued as subscribed for.
At the same meeting these incorporators adopted bylaws for the petitioner under which they elected the three incorporators as directors. *284 On the following day, February 20, 1935, these directors held a meeting, the minutes of which contain the following:
Present in person were:
Forrest Sullivan
A. CowartC. A. Wentley* * * *
Thereupon Forrest Sullivan called attention to the fact that Bay Serena Company, a Florida corporation, had advanced the sum of $ 26,134.71 upon an option between the Guardian Life Insurance Company of America and Forrest Sullivan, relating to the purchase of the abstract plant formerly known as Dade County Abstract, Title Insurance & Trust Company plant, and the lands and buildings housing the same, located at 37 Northeast First Street, in Miami, Florida; and stated that the said Bay Serena Company had offered to this corporation, to accept in lieu of the sum so advanced by it, debentures of this corporation in amount of $ 47,500.00 to be dated March 1, 1935, and to mature 20 years after date thereof, with interest at the rate of 8% per annum, and to release this corporation from all claims or liabilities arising by reason of the said sum so advanced.
Forrest Sullivan further stated that he had been negotiating with the Guardian Life Insurance Co. of America for the exercising of the option, *285 and had reached an agreement whereby the Guardian Life Insurance Co. of America would, pursuant to the option, convey the plant, land, and buildings, subject to a mortage of $ 35,000 to be placed on the plant and land and buildings.
This proposal was then discussed by the directors and, it being the unanimous opinion of the board that the title plant and land and buildings were worth the sum of $ 82,500, it was, on motion duly made and seconded, unanimously:
Resolved that said proposal of Bay Serena Company to purchase debentures of this corporation in amount of $ 47,500, and to pay for the same by cancellation of the sum of $ 26,134.71 so advanced by Bay Serena Company in connection with the abstract of title plant, land and buildings described in a certain option agreement dated April 4, 1932 and amendments thereto dated respectively October 4, 1933 and November 2, 1934 given by Guardian Life Insurance Company of America to Forrest Sullivan, and to release this corporation of and from all *336 claims or liabilities arising by reason of said sum so advanced, be and the same is hereby accepted; and it is
Further Resolved that the proper officers of this corporation be, and they*286 are hereby authorized and directed to issue said debentures of this corporation, and to execute a mortgage to the Guardian Life Insurance Company of America, in amount of $ 35,000 in accordance with said option as amended.
Shortly after March 1 Sullivan was on a business trip in Boston. While there he was called on the telephone by S. M. Tatum and advised that his negotiations with Coppinger and Lane required that he, Tatum, be able to control and vote all the stock of Sky-Monument, Inc., and requested a power of attorney from Sullivan covering his stock. Sullivan, on March 8, 1935, wired Tatum as follows:
I hereby elect, authorize and appoint S. M. Tatum my proxy to vote all stock I own in the Sky Monument, Inc., as of February 25 and confirm any and all acts of S. M. Tatum my proxy. I hereby waive notice of directors and stockholders meetings of the Sky Monument Company as of February 25.
On his return to Miami, two weeks later, Sullivan was informed by Tatum that Coppinger and Lane were now holders of half the stock in the petitioner and that he, Tatum, retained the other half; that, since both Coppinger and Lane were lawyers, there was no room for a third, namely, Sullivan. *287 Though dissatisfied, Sullivan accepted the arrangement upon the promise of Tatum that the stock theretofore held by Sullivan would be paid for. After Tatum's death, Sullivan was remunerated for the stock by the family of Tatum.
Over date of March 11, 1935, Bay Serena Co., by Forrest Sullivan, its president, and J. C. Coppinger and William A. Lane entered into an agreement. In this agreement Bay Serena Co. was represented as being the sole owner of the stock of Sky-Monument, Inc. (now this petitioner) and Lane and Coppinger were represented as being the sole owners of the stock of Commonwealth Title Corporation and controlling all of the stock of Commonwealth Abstract Co.
The agreement set forth that:
(1) Sky-Monument, Inc., was the owner of certain lands, building, and an abstract plant subject to a mortgage of $ 35,000 and subject to debentures of $ 47,500, the plant and equipment then being operated by Dade Abstract Title Co.
(2) Bay Serena Co. would, on its behalf,
(a) Cause the name of petitioner to be changed from Sky Monument, Inc., to Dade-Commonwealth Title Co.;
(b) Discontinue operations of Dade Abstract & Title Co.;
(c) Transfer one-half of the capital stock of Dade-Commonwealth*288 Title Co. to Coppinger and Lane; and
(d) Make provisions for disposition of certain contingencies should they arise.
*337 (3) Coppinger and Lane, on their behalf, agreed:
(a) To issue to Bay Serena Co. one-half of the capital stock of Commonwealth Title Corporation and Commonwealth Abstract Co.;
(b) To discontinue the business of the Commonwealth Title Corporation and Commonwealth Abstract Co.;
(c) J. C. Coppinger was to be manager of the petitioner for a period of five years at $ 6,000 per year, the agreement also outlining his authority in the company; and
(d) That Coppinger and Lane should cause the existing contract between Lawyers Title Insurance Corporation of Richmond, Virginia, and J. C. Coppinger, whereby the latter was authorized to issue policies of the corporation, to be transferred to petitioner in consideration of debentures in the amount of $ 17,500, dated March 1, 1935, maturing 20 years after date and bearing interest at 8 percent per annum;
(e) To make provisions for the disposition of certain contingencies should they arise.
In addition, both sides agreed to certain commitments relative to future operations of the company, all portions of the agreement being*289 effective March 1, 1935.
The contract referred to in (3) (d) above was duly assigned to petitioner with the consent of Lawyers Title Insurance Corporation.
Petitioner issued 130 debentures dated March 1, 1935, in the principal amount of $ 500 each, or a total principal amount of $ 65,000, of which $ 47,500 principal amount was issued to the Bay Serena Co. and $ 17,500 principal amount was issued to J. C. Coppinger and William A. Lane. The debentures provided as follows:
No. 68
$ 500.00
DEBENTURE OF SKY-MONUMENT, INC.
A Florida Corporation
Miami, Florida, March 1, 1935
Sky-Monument, Inc., a Florida corporation, hereinafter called "the company" will on the 28th day of February, A. D. 1955, pay to Bay Serena Company, a Florida corporation, or its successors, the sum of Five Hundred Dollars ($ 500.00). The company will, in the meantime, and thereafter until the principal moneys and interest shall have been fully paid, pay interest thereon at the rate of 8 percent per annum, payable monthly.
And the Company hereby charges with such payment of its undertaking all its property whatsoever and wheresoever, both present and future.
This Indenture is Issued Subject to the conditions endorsed*290 hereon.
Sky-Monument, Inc.
By Forrest Sullivan,
President.
Attest:
A. CowartSecretary*338 CONDITIONS
This Indenture is one of a series of ninety-five (95) debentures, each securing the principal sum of $ 500.00, issued by the company. The debentures of said series are all to rank pari passu as a charge upon the property hereby charged, without any preference or priority over one another; and such charge is to be a floating security, but so that the company is not at liberty to create any mortgage or charge in priority to the said debenture, it being understood, however, that there is now existing an indebtedness due by the company to Guardian Life Insurance Company, a New York Corporation, in the principal amount of $ 35,000.00, which sum is secured by a mortgage upon the property described therein, which mortgage bears date of February 18, 1935, and is recorded in Mortgage Book 934 at Page 165 in the office of the Clerk of The Circuit Court in and for Dade County, Florida, and which is a lien superior in dignity to the lien of this debenture. This debenture is issued simultaneously with an issue of thirty-five (35) debentures of the company each in the principal *291 amount of $ 500.00, aggregating $ 17,500.00, all of even date herewith, payable to J. C. Coppinger and William A. Lane, which said debentures are a charge upon the property herein charged of equal dignity to the debentures issued pursuant thereto.
On March 1, 1935, before Sullivan had authorized S. M. Tatum to act as his proxy, the board of directors of Sky-Monument, Inc., held a meeting, the minutes of which contain the following:
Resolved that the said proposal of J. C. Coppinger to assign to this corporation his agency contract with Lawyers Title Insurance Corporation, of Richmond, Virginia, and have the same approved by said last named corporation, whereby Sky-Monument, Inc., would be an authorized agent of said Lawyers Title Insurance Corporation in Dade County, Florida, in exchange for debentures of this corporation, in amount of $ 17,500.00, dated March 1, 1935, maturing 20 years from date thereof, with interest at the rate of 8% per annum, be, and the same is, hereby accepted; and it is
Further Resolved that the proper officers of this corporation be, and they are, hereby authorized to issue said debentures upon the securing of said assignment of the agency contract of Lawyers*292 Title Insurance Corporation, as aforesaid.
* * * *
Resolved that all stock of this company, when issued, shall contain a provision referring to a certain contract by and between Ray Serena Company, a Florida corporation, and J. C. Coppinger and William A. Lane, dated March 1, 1935, a copy of which was presented at this meeting; and all matters therein set forth incumbent upon this corporation to fulfill, are hereby accepted by this corporation, and the terms thereof are hereby ratified, approved and confirmed; and the said contract is hereby ordered filed as a permanent part of the minutes of this corporation.
After the issuance of the $ 17,500 debentures to Coppinger and Lane pursuant to the board of directors' meeting of March 1, 1935, there was outstanding a total of $ 65,000 of the 8 percent debentures of the corporation.
After the arrangement with Coppinger and Lane was completed, the stock in petitioner was reissued as follows:
| Shares | |
| Bay Serena Co | 25 |
| William A. Lane | 10 |
| J. C. Coppinger | 10 |
| William A. Lane and J. C. Coppinger | 5 |
*339 In June 1935, at the request of an attorney for the Life Insurance Co., the minutes of the directors' meeting of petitioner dated*293 February 20, 1935, were rewritten as follows:
All the directors were present.
Thereupon, Forrest Sullivan acted as Chairman of the meeting, and A. Cowart, as Secretary thereof.
Mr. Sullivan thereupon stated to the meeting that at the meeting of the incorporators held on the 19th day of February, 1935, a resolution was adopted that 12 shares of the capital stock of this corporation be issued and that the corporation accept in full payment therefor cash or property acceptable to it. Mr. Sullivan further stated that he was the holder of an option, dated April 4, 1932, together with two extensions thereof dated respectively October 4, 1933, and November 2, 1934, from the Guardian Life Insurance Company, under and by the terms of which he had been given an option to purchase from the said Guardian Life Insurance Company certain real and personal property therein described on the terms and in the same therein set forth. Mr. Sullivan further stated that certain changes had been recently made in the terms of the option agreement by correspondence with the said Guardian Life Insurance Company, and thereupon the three option agreements and the subsequent correspondence were exhibited to the*294 directors, and fully discussed. Mr. Sullivan thereupon offered to assign the said option agreements and his right to purchase said property to this corporation in exchange for 12 shares of the capital stock of this corporation, to be issued to him, or his nominees, and to be fully paid for and non-assessable. After a further discussion of the matter, the directors decided to accept Mr. Sullivan's proposition and to exercise the option so assigned to the corporation for the purchase of said property from the Guardian Life Insurance Company.
Whereupon the following Resolution was unanimously adopted, to-wit:
Be It Resolved that this corporation, by and through its President, do accept from Forrest Sullivan an assignment of that certain option agreement between the Guardian Life Insurance Company of America and said Forrest Sullivan, dated April 4, 1932, together with two extensions thereof dated respectively October 4, 1933 and November 2, 1934, covering the purchase of the following described real and personal property situate, lying and being in Dade County, Florida, to-wit:
* * * *
Be It Further Resolved that upon the delivery of the said assignment, as aforesaid, the President*295 and Secretary of this corporation are hereby authorized and empowered to deliver to the said Forrest Sullivan, or his nominees, twelve shares of the capital stock of this corporation fully paid and non-assessable; and
Be It Further Resolved that this corporation do exercise said option to purchase the above described property from the said Guardian Life Insurance Company at the price and upon the terms and in the manner therein set forth in said option agreements and in the correspondence subsequently had with said company, and/or upon such further terms as may be agreed upon by and between the President of this corporation and the said Guardian Life Insurance Company, the said President of this company being hereby given the power and authority to arrange for the cash payment required thereby and to evidence and secure any indebtedness incurred or created thereby in any manner deemed necessary or expedient by him; and
Be It Further Resolved that the President of this corporation, and its Secretary, be and they are hereby authorized to execute and deliver to said Guardian Life Insurance Company of America the note in the amount of $ 35,000.00 and the mortgage securing the same, as*296 required under the option agreements, upon delivery *340 to them of a deed and bill of sale conveying the title to the above described real and personal property to this corporation; * * *
Under the terms of a contract of March 1, 1935, between Bay Serena Co. and Coppinger and Lane the latter paid up to February 1, 1939, the sum of $ 8,978.45 in approximately equal installments paid semimonthly toward the purchase of petitioner's debentures.
The petitioner had a net income for its fiscal year ended February 28, 1937, of $ 6,568.16 and for its fiscal year ended February 28, 1938, a net income, adjusted, of $ 16,134.19.
On March 1, 1938, the petitioner declared a dividend on its stock of $ 6,000 par value junior debentures, one-half of which was received by Coppinger and Lane and the other one-half by Bay Serena Co.
The junior debenture provided as follows:
JUNIOR DEBENTURE
No. 12-A
$ 500.00
Dade-Commonwealth Title Company
A Florida Corporation
Miami, Florida
February 15, 1938
Dade-Commonwealth Title Company, a Florida corporation, hereinafter called "the company" will on the 14th day of February, A. D. 1958, pay to William A. Lane and J. C. Coppinger, or his, their, or*297 its successors, heirs, assigns or legal representatives, the sum of
Five Hundred Dollars ($ 500.00)
The company, will in the meantime, and thereafter until the principal moneys and interest shall have been fully paid, pay interest thereon at the rate of 8% per annum, payable monthly on the first day of each month.
And the Company hereby charges with such payment of its undertaking all its property whatsoever and wheresoever, both present and future.
This Debenture Is Issued Subject to the conditions endorsed hereon.
Dade-Commonwealth Title Company
By J. C. Coppinger
PresidentAttest:
W. J. McLeod, Jr.SecretaryCONDITIONS
This Indenture is one of a series of 12 debentures, numbers 1-A, to 12-A, inclusive, each securing the principal sum of $ 500.00, issued by the company. The debentures of this said series are all to rank pari passu as a charge upon the property hereby charged without any preference or priority one over the other, but all of this said series of debentures, Nos. 1-A to 12-A, inclusive, are junior in dignity to:
Debentures, dated March 1, 1935, of this company, now outstanding, rights of creditors of this company, but are prior in dignity to the rights*298 of stockholders of this company.
This debenture may be paid off and discharged at any time prior to maturity without penalty.
*341 On February 1, 1939, Coppinger and Lane agreed to purchase $ 35,000 par value of the debentures issued to Bay Serena Co. at the inception of the corporation, the $ 35,000 to be paid on the following terms:
$ 450.00 per month, including interest, the first payment to begin on March 1, 1939, and $ 450.00 on the first of each month thereafter until the sum of $ 35,000.00 be fully paid, together with interest on the unpaid balance at the rate of eight percent per annum, payable monthly, each of said monthly payments to include interest.
On the same day Coppinger and Lane also agreed to purchase and did purchase from Bay Serena Co. $ 3,000 of par value of junior debentures, $ 3,521.55 of the debentures remaining in the possession of Bay Serena Co. and issued at the inception of Sky-Monument Co., and 25 shares of the stock of Sky-Monument Co. for $ 15,000 cash, of which $ 8,978.45 had been paid as above.
During the fiscal year ended February 28, 1941, petitioner accrued and paid interest in the sum of $ 5,680 to the holders of its aforesaid $ 65,000 par*299 value debentures and $ 6,000 par value junior debentures; and of this amount respondent disallowed as a deduction the sum of $ 1,749.22.
During the fiscal year ended February 28, 1942, petitioner accrued and paid interest in the sum of $ 5,680 to the holders of its aforesaid $ 65,000 par value debentures and $ 6,000 par value junior debentures; and of this amount respondent disallowed as a deduction the sum of $ 1,749.22.
Petitioner's corporation income and declared value excess profits tax return for the fiscal year ended February 28, 1943, deducted a net loss in the amount of $ 3,246.49. Of this sum the respondent has allowed a deduction in the notice of deficiency for the fiscal year ended February 28, 1942, of $ 1,497.27 as an operating loss carry-back. The remainder, or $ 1,749.22, was disallowed as a deduction for the same reason the sum of $ 1,749.22 was disallowed in each of the fiscal years ended February 28, 1941, and February 28, 1942.
OPINION.
During each of the taxable years the petitioner paid interest upon $ 71,000 par value debentures outstanding, a total of $ 5,680, and deducted that amount from gross income in its income tax return. In the determination of the*300 deficiencies the respondent has disallowed the deduction of $ 1,749.22 for each year. This is the amount of interest payable on $ 21,865.29 face value of debentures. The record does not show the debentures upon which the interest has been disallowed. It is noted, however, that the disallowed interest is the exact amount of interest payable on the difference between $ 47,500 debentures issued to the Bay Serena Co. and $ 26,134.71 which that company had paid to the Guardian Life Insurance Co. of America, plus $ 500.
*342 In his brief the respondent claims that the disallowance was proper. He states:
* * * It is contended that this adjustment is not only correct in principle but may be too small a disallowance. * * *
It is the respondent's position that none of the bonds in excess of $ 26,134.71 were issued for value and do not represent a real indebtedness of the Company.
With respect to the issuance of the $ 17,500 debentures to Coppinger and Lane for an assignment to the petitioner of their contract with the Lawyers Title Insurance Corporation of Richmond, Virginia, the respondent states: "Manifestly, there could not have been any transferable value to such a contract." He*301 further states with regard to the junior debentures issued as a dividend in 1938 in the amount of $ 6,000:
* * * While the record shows that they were issued as a dividend on stock, the financial status of the company at the time is not available and without this it is clear that the matter of a bona fide indebtedness cannot be established.
Section 23 of the Internal Revenue Code provides in material part as follows:
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(b) Interest. -- All interest paid or accrued within the taxable year on indebtedness, * * *
with exceptions not here material.
This same petitioner was before us in Docket No. 108145, referred to above, with respect to deficiencies in income tax for the fiscal years ended February 28, 1937, and February 28, 1938, and for a deficiency in excess profits tax for the latter year. The only issue in that proceeding was the proper basis for the computation of depreciation on property owned by the petitioner and the basis for the computation of its capital gain resulting from the sale of its real estate in the later year. We held that upon the evidence the petitioner*302 had failed to show error on the part of the respondent in his determination of the deficiencies. There was no issue in that proceeding with regard to the right of the petitioner to deduct interest upon its outstanding debentures. Our determination in that proceeding is not therefore res judicata of the present proceeding.
The principal contention of the respondent with regard to a part of the debentures issued to the Bay Serena Co. is that they were not issued for value, and with regard to the debentures issued to Coppinger and Lane in the amount of $ 17,500 that they likewise were not issued for value, because the contract for which they were issued had no value.
In Lawrence v. McCalmont, 2 How. 425">2 How. 425, Mr. Justice Story said, in speaking of a guaranty of another's debt made in consideration of one dollar:
*343 A valuable consideration, however small or nominal, if given or stipulated for in good faith, is, in the absence of fraud, sufficient to support an action on any parol contract. * * * A stipulation in consideration of one dollar is just as effectual and valuable a consideration as a larger sum stipulated for or paid.
See also Appeal of Ferguson et ux., 117 Pa. 426">117 Pa. 426;*303 11 Atl. 885.
The respondent contends that the payment of Bay Serena Co. of $ 26,134.71 to the Life Insurance Co. over a period of years is not enough to support a valid issuance of debenture bonds in the amount of $ 47,500. We do not think that there is legal ground for this position. If the petitioner was bound to pay debentures in the amount of $ 26,134.71, it was equally bound to pay the full amount of the debentures that were issued to the Bay Serena Co. No contention is made by the respondent that there was any bad faith on the part of any of the interested parties. There is much evidence in the record that the fair market value of the abstract plant in 1935 was approximately $ 100,000. Coppinger testified that in his opinion it was worth $ 110,000. Although the option contract was held in the name of Sullivan, Tatum was the real party in interest. He was the one who had caused Bay Serena Co. to advance to the Life Insurance Co. $ 26,134.71. This amount was allowed as a credit against the purchase price in the acquisition of the property by the petitioner.
In the absence of any claim of bad faith by the respondent or of any evidence of bad faith*304 in the issuance of the $ 47,500 debentures to Bay Serena Co., we are of the opinion that the entire amount of interest paid upon that amount of debentures is deductible from gross income of the taxpayer for each of the taxable years.
We are furthermore of the opinion that the evidence of record refutes the respondent's claim that the contract which Coppinger and Lane had with the Lawyers Title Insurance Corporation of Richmond, Virginia, had no value. Coppiner testified that in his opinion it was worth a minimum of $ 17,500. He and Lane had had the contract covering Dade County, Florida, since 1932. Under it the petitioner was able to have its title abstracts insured by a responsible title insurance company. The petitioner was permitted to charge its clients an amount in excess of the amount which it had to pay the insurance company as a premium for such insurance. The $ 17,500 debentures were not to be issued to Coppinger and Lane unless the Lawyers Title Insurance Corporation was agreeable to the assignment. It was agreeable. The petitioner has operated under the contract from the time that Coppinger and Lane became identified with the petitioner in March 1935 and apparently*305 contributed importantly to successful operation of the petitioner. In the absence of any claim of bad faith on the part of the petitioner in issuing the debentures, we hold that *344 they constituted a valid indebtedness of the petitioner the same as the debentures which it issued to Bay Serena Co.
In Estate Planning Corporation v. Commissioner (C. C. A., 2d Cir.), 101 Fed. (2d) 15, reversing 37 B. T. A. 418, it was held that the interest paid on $ 600,000 of bonds issued by a New York corporation principally for the good will of a going business was deductible, since the bonds were a valid enforceable obligation of the maker under the laws of the State of New York. The Board of Tax Appeals had held that the evidence adduced failed to show that the bonds were issued for consideration or that the taxpayer was legally bound to pay interest on them. Cf. Commissioner v. Park (C. C. A., 3d Cir.), 113 Fed. (2d) 352, affirming 38 B. T. A. 1118, in which it was held that the interest on a promissory note which a husband gave to his wife was deductible because*306 it constituted an enforceable obligation of the maker under the laws of the Commonwealth of Pennsylvania.
The $ 6,000 face value of junior debentures which petitioner issued to its stockholders as a dividend in 1938 stand on a slightly different footing from the senior debentures issued by it, but we think they too must be recognized as a lawfully incurred indebtedness of the petitioner. The debenture holders were creditors of the corporation the same as the general creditors. They had an entirely different status from those of stockholders. The $ 6,000 junior debentures were issued out of the profits of the corporation for the fiscal year ended February 28, 1938. As above indicated the adjusted net income of the petitioner for the fiscal year ended February 28, 1938, was $ 16,134.19. The dividend was taxable to the recipients of the debentures the same as a cash dividend. A cash dividend was not paid in order to conserve the cash resources of the company. In T. R. Miller Mill Co., 37 B. T. A. 43, the Board of Tax Appeals held that a $ 500,000 note given to its stockholders in place of a distribution in cash represented a legal indebtedness of*307 the corporation and that the interest paid upon such legal obligation was a legal deduction from gross income. Our decision in that case was affirmed (C. C. A., 5th Cir.), 102 Fed. (2d) 599.
We hold that the petitioner's debentures outstanding during each of the taxable years in the amount of $ 71,000 constituted an enforceable indebtedness of the petitioner and that the interest paid thereon is a legal deduction from gross income.
Decision will be entered under Rule 50.