*2516 1. INCOME - FORGIVENESS OF INDEBTEDNESS. - Petitioner operated cotton gins and purchased for cash considerable cotton from growers and street dealers throughout its territory. It shipped the cotton to commission merchants for sale and drew upon the latter on the basis of the then market value of the cotton. Before the commission merchants had sold the cotton the market declined greatly, leaving the petitioner insolvent. Petitioner then entered into an agreement with its principal creditors whereby in consideration for the forgiveness by the creditors of 50 per cent of their claims, the petitioner agreed to execute its notes for the remaining 50 per cent, secured by a mortgage and deed of trust on petitioner's assets and the personal endorsement of its two principal stockholders. The agreement was duly executed during the fiscal year ended April 30, 1922, for which year the petitioner had sustained a net loss. Held that no part of the amount forgiven by the creditors should be included in petitioner's gross income for that year.
2. NET LOSSES. - Net losses for the fiscal years ended April 30, 1921 and 1922, allowed as deductions from net income for the fiscal years ended*2517 April 30, 1923 and 1924.
*793 In this proceeding, the petitioner seeks a redetermination of its income-tax liability for the fiscal years ended April 30, 1923 and 1924, for which years the respondent, as set forth in his deficiency letter dated October 1, 1926, determined deficiencies of $2,151.16 an d $1,941.82, respectively. Five errors were assigned. The petitioner has conceded the first and fourth assignments, leaving for our determination the following three:
(b) The disallowance of a deduction for depletion of the said oil producing property of the petitioner to the amount of $1,341.76 in the fiscal year 1922, thereby reducing the loss sustained in that year, and thus reducing the amount thereof to be carried forward and deducted from income in succeeding years.
*794 (c) The inclusion in income of indebtedness of the petitioner forgiven to it by its creditors in the amount of $119,927.24 in the fiscal year 1922, thereby reducing and eliminating the net loss sustained in said year and so reducing and eliminating the amount thereof*2518 to be carried forward and deducted from income in later years.
(e) In failing to carry forward and deduct from income in the fiscal years 1923 and 1924, losses sustained in previous years and which should be carried forward and deducted from income in the said years 1923 and 1924.
FINDINGS OF FACT.
The petitioner is a corporation organized and existing under the laws of the State of Oklahoma, with its principal office at Frederick, Okla. It kept its books and rendered its income-tax returns on a fiscal year basis ending April 30.
During the fiscal year ended April 30, 1922, the petitioner, in accordance with section 234(a)(9) of the Revenue Act of 1921, sustained depletion based upon discovery value in the amount of $1,341.80. The respondent did not allow the petitioner any deduction for depletion for that year.
The petitioner's business is that of ginning, buying and selling cotton.
Prior to August, 1920, the petitioner purchased, for cash, considerable cotton from farmers and street dealers throughout its territory. It shipped for resale the greater part of the cotton so purchased to two commission firms in New Orleans by the name of M. Levy & Sons and A. S. *2519 England & Co., and at the same time drew on such firms certain amounts based on the then market value of the cotton. Beginning in August, 1920, the cotton market declined sharply, leaving the petitioner insolvent and owing the commission firms much larger amounts than the cotton held by such firms as collateral was worth.
In March, 1921, the creditors of the petitioner held a meeting in Dallas, Tex. On June 30, 1921, the total outstanding indebtedness of the petitioner, both secured and unsecured, amounted to $559,836.51. On July 1, 1921, all of the creditors (except two fully secured creditors having claims in the amounts of $10,000 and $3,000, respectively, and certain miscellaneous unsecured small creditors having claims in the total amount of $1,138.15) entered into an agreement with the petitioner, whereby in consideration of the petitioner executing interest-bearing notes payable in equal amounts to each creditor, in one, two, three and four years, respectively, from July 1, 1921, for a total of one-half of the amount of the creditor's account with the petitioner, the creditors agreed to relinquish and cancel the other one-half of the indebtedness owing to them by the petitioner. *2520 The notes were to be endorsed by the two principal stockholders of the *795 petitioner corporation and further secured by a deed of trust and first mortgage on petitioner's assets. It was also understood in the agreement that there was at that time a first mortgage on the Padycah Gin, securing the Quanah Cotton Oil Co. in the sum of $10,000, and a mortgage on the engine in the same plant securing the Fairbanks-Morse Co. in the sum of $3,000. Paragraph 7 of the agreement provided that:
Where the indebtedness of any one of the parties of the second part hereto is secured by cotton as collateral, such creditor shall estimate the value of the cotton, and shall credit such amount against the full amount of his indebtedness, and when the cotton is sold and an account of sale rendered, any difference between the net proceeds of the cotton and the estimated amount credited aforesaid, shall be settled between the party of the first part and the creditor holding said cotton. If the estimated value is greater than the net amount realized from the sale of the cotton, the party of the first part agrees to pay fifty percent of the difference in cash, and if the net amount realized from*2521 the sale of said cotton is greater than its estimated value, then fifty percent of the difference shall be credited rateably upon the notes of the party holding such collateral, in accordance with the terms of settlement at fifty cents on the dollar.
The cotton held as collateral was, in accordance with paragraph 7 above, valued at $40 a bale. On that basis the remaining unsecured indebtedness of the petitioner on July 1, 1921, (except the $1,138.15 mentioned above) amounted to $340,691.52.
On July 1, 1921, the petitioner executed the following notes due in one, two, three and four years, respectively, from that date, with interest at 6 per cent:
| Payee | Number of notes | Amount of each note | Total |
| M. Levy & Sons | 4 | $19,294.18 | $77,176.72 |
| A. S. England & Co | 4 | 12,151.38 | 48,605.52 |
| National Bank of Commerce | 4 | 5,000.00 | 20,000.00 |
| Chickasha Cotton Oil Co | 4 | 3,478.08 | 13,912.32 |
| Continental Gin Co | 4 | 2,173.54 | 8,694.16 |
| First State Bank | 4 | 489.26 | 1,957.04 |
| Total | 170,345.76 |
The above payees orally agreed with the petitioner that the miscellaneous creditors in the amount of $1,138.15 should be paid in full.
On November 23, 1921, the petitioner, *2522 in accordance with the agreement of July 1, 1921, executed a first mortgage on its property located in Oklahoma, and a deed of trust on its property located in Texas.
Between July 1, 1921, and April 30, 1922, all the cotton held as collateral was sold. It sold for more than $40 per bale, and in accordance with paragraph 7 of the agreement of July 1, 1921 (quoted above), the petitioner's notes in the amount of $170,345.76 were *796 accordingly reduced to $119,927.24. The creditors forgave indebtedness in an equal amount, which amount the respondent has included in petitioner's gross income for the fiscal year ended April 30, 1922. The reason given by the respondent in his deficiency letter for so including the item of $119,927.24 is as follows:
Your objection to the adjustment of income for the fiscal year ended April 30, 1922, restoring to taxable income, the forgiveness of indebtedness amounting to $119,927.24, has been considered by this office and it is held that since the Commissioner has not acquiesced in the decision of the United States Board of Tax Appeals, rendered in the appeal of the Meyer Jewelry Company, Docket #3143, the amount involved is properly subject*2523 to tax under the ruling as expressed in I.T. 1547, Cumulative Bulletin II-1, page 58. It is noted that in the Meyer Jewelry case, all the creditors entered into the agreement, whereas in the case of your corporation only comparatively few of the principal creditors entered into the agreement to forgive and cancel the indebtedness. No allowance has, therefore, been made.
The respondent's determination, expressed in terms of net loss or net income for each of the fiscal years ended April 30, 1921 to 1924, inclusive, is as follows:
| Year | Net income | Net loss |
| April 30, 1921 | $132,328.68 | |
| April 30, 1922 | $6,348.14 | |
| April 30, 1923 | 54,970.69 | |
| April 30, 1924 | 17,534.56 |
The correct net loss or net income for each of the above years is as follows:
| Year | Net income | Net loss |
| Apr. 30, 1921 | $132,328.68 | |
| Apr. 30, 1922 | 113,579.10 | |
| Apr. 30, 1923 | $54,970.69 | |
| Apr. 30, 1924 | 17,534.56 |
Four-twelfths of the net loss of $132,328.68 for the fiscal year ended April 30, 1921, determined in accordance with section 204(d) of the Revenue Act of 1921, is $44,109.56.
OPINION.
GREEN: The principal question involved in this proceeding is whether the*2524 forgiveness of indebtedness in the amount of $119,927.24 should be included in the gross income of the petitioner for the fiscal year ended April 30, 1922. The petitioner contends that the amount forgiven does not constitute income within the meaning of that *797 term as used in the Sixteenth Amendment of the Constitution of the United States. The respondent asserts the converse. The facts and surrounding circumstances are set out in our findings.
We held in the Appeal of Meyer Jewelry Co.,3 B.T.A. 1319">3 B.T.A. 1319, on facts substantially identical with the facts in this case, that the amount of indebtedness canceled by the creditors of an insolvent person did not constitute income to the debtor. In that case, after reviewing the law applicable thereto, we said:
Now to apply the tests as laid down by the courts to facts in the instant appeal. The evidence is clear that it was not compensation for services; it can not be considered as income from a business entered into for profit, and there is no element to identify it as a gain which was derived from capital, or from labor, or from a combination of both. It is true, the taxpayer has been relieved from paying*2525 an amount to its creditors by their common consent, an amount which the evidence shows it could not have in fact paid whether voluntarily relieved of payment or not. Its balance sheet will disclose a more favorable financial condition, but "enrichment through increase in value of capital investment is not income in any proper meaning of the term." Eisner v. Macomber, supra. That the taxpayer received a benefit in the sense of being able to continue its business, may be conceded, but such an opportunity can not constitute a gain or income, within the meaning of the Constitution and the Revenue Acts. It is not believed that relief from paying an obligation, under the circumstances set forth in this case, constitutes income, and it is our opinion that is not taxable under the statute.
Subsequent to our decision in Meyer Jewelry Co., supra, the United States Supreme Court in Bowers v. Kerbaugh-Empire Co.,271 U.S. 170">271 U.S. 170, held that where a borrower, whose obligation was payable in German marks, repaid at a time when the marks had fallen in value, and the whole transaction for which the money was borrowed resulted in a loss, the borrower realized*2526 no taxable income. See, also, Independent Brewing Co.,4 B.T.A. 870">4 B.T.A. 870; National Sugar Manufacturing Co.,7 B.T.A. 577">7 B.T.A. 577; and Douglas County Light & Water Co.,14 B.T.A. 1052">14 B.T.A. 1052, which cases stand for the proposition that a corporation realizes no taxable income on the purchase and retirement of its own bonds at less than par.
In the recent case of John F. Campbell Co.,15 B.T.A. 458">15 B.T.A. 458, the petitioner there, in 1920, became indebted to two creditors for goods purchased in the amounts of $24,700 and $114,200, respectively. In 1921 the creditors forgave and canceled $50,087.51 of the indebtedness incurred the previous year. The petitioner there also reported a net loss of $50,545.64 and contended that such net loss should be allowed as a deduction from the net income of the two following years. In sustaining the petitioner's contention we said in part that, "As we view this proceeding, the facts are not distinguishable from those in Meyer Jewelry Co., supra, and our conclusion must be the same as in that case."
*798 In the instant case the respondent, in his deficiency letter, stated: "It is noted*2527 that in the Meyer Jewelry case, all the creditors entered into the agreement, whereas in the case of your corporation, only comparatively few of the principal creditors entered into the agreement to forgive and cancel the indebtedness." This distinction was again emphasized by respondent's counsel at the hearing. In the first place, the fact element of the distinction is not correct, as over 97 per cent of all the petitioner's creditors, both secured and unsecured, entered into the July1, 1921, agreement. But we do not consider the distinction material. We think the question at issue has already been decided by us in the Meyer Jewelry and Campbell cases, supra, and, accordingly, hold that the respondent committed error in including the item of $119,927.24 in the petitioner's gross income for the fiscal year ended April 30, 1922.
The petitioner concedes that, if it is not required to include in its gross income for the fiscal year ended April 30, 1922, the preceding item of $119,927.24, then, and in that event, it is not entitled, under section 204(a)(5) of the Revenue Act of 1921, to any allowance for depletion based upon discovery value for that year. In view*2528 of our decision on the principal question, this issue disappears. It would only have become material had we decided the principal question adversely to the petitioner as the respondent had determined a net income for the fiscal year 1922 of $6,348.14, without allowing the petitioner the depletion based upon discovery value which it sustained in that year, in the amount of $1,341.80.
The last issue relates to the deduction from the net income of the fiscal years ended April 30, 1923 and 1924, the net losses sustained during the two preceding years. In accordance with section 204(d) of the Revenue Act of 1921, the petitioner is only entitled to the benefits of four-twelfths of the net loss for the fiscal year ended April 30, 1921, or $44,109.56. This amount, plus the net loss of $113,579.10 for the fiscal year ended April 30, 1922, eliminates entirely the net income of $54,970.69, for the fiscal year ended April 30, 1923, and leaves $102,717.97 to be deducted under section 206(e) of the Revenue Act of 1924, from the net income of $17,534.56 for the fiscal year ended April 30, 1924.
It is apparent, from the foregoing, that there is no net income subject to tax for any of the*2529 years in question. It follows that the determination of the deficiencies by the respondent was in error. The petitioner is not asking for any refund, as it has paid no Federal income taxes for the years involved.
Judgment of no deficiency will be entered for the petitioner.