*104 Decision will be entered for the respondent.
1. The exchange by petitioner of notes of the Gair Co. purchased by petitioner on the open market at less than their par value, for petitioner's own bonds owned by Gair on the basis of note for bond of equal par value, resulted in taxable income to petitioner, the transaction not being a gift, but to the mutual advantage and benefit of petitioner and Gair.
2. Petitioner failed to file with its return for the taxable year a consent required by section 22 (b) (9), I. R. C., and prescribed by section 29.22 (b) (9)-1 of Regulations 111, and hence is not entitled to the benefit of that section.
*238 The respondent determined deficiencies of $ 20,657.91 and $ 4,830.45 in the petitioner's income tax and declared value excess profits tax, respectively, for the year 1942.
*239 The sole issue is whether or not the petitioner's acquisition of its own debenture bonds for cash and bonds of a creditor corporation at a cost less than their par value resulted in taxable income.
*105 FINDINGS OF FACT.
Certain facts were stipulated. The portions thereof pertinent to the issue are as follows:
The Spear Box Co., hereinafter called the petitioner, is a corporation organized under the laws of the State of New York, on July 1, 1939, with its principal office and place of business in New York, New York. The petitioner is engaged in the business of manufacturing folding and corrugated paper boxes and containers. During all years material herein, William Conescu was president of the petitioner corporation.
The petitioner duly filed its corporation income and declared value excess profits tax return and its corporation excess profits tax return for the year 1942, both on the accrual basis, with the collector of internal revenue for the third district of New York, on or about March 12, 1943. The petitioner also filed with such tax returns a document on Form 982 entitled, "Consent of Corporation to Adjustment of Basis of its Property under Section 113 (b) (3) of the Internal Revenue Code."
The petitioner was organized on July 1, 1939, pursuant to a plan of reorganization involving the corporations Spear Box Co. (Delaware), hereinafter called the Delaware Box Co.; Spear*106 Paper & Twine Co. (Delaware), hereinafter called the Delaware Twine Co.; and the G. & S. Holding Co. (Delaware).
Spear Box Co. (New York), hereinafter called the New York Box Co., a predecessor and not the petitioner, was organized on October 26, 1922, under the laws of the State of New York, with capital stock consisting of 500 shares of common stock of no par value each. At the time of organization, William Conescu owned 250 shares and J. Podell owned 250 shares of said stock. The business of the corporation consisted chiefly of manufacturing, selling, and marketing folding and corrugated paper boxes. J. Podell died in the year 1928 and the 250 shares of stock in the company owned by him at the time of his death were purchased by William Conescu.
Spear Paper & Twine Co. (New York), hereinafter called the New York Twine Co., was organized under the laws of the State of New York on January 16, 1925, with capital stock consisting of 200 shares of $ 100 par value each. At the time of organization the capital stock of the corporation was issued as follows: 160 shares to the New York Box Co., 20 shares to J. Podell, and 20 shares to William Conescu. The 20 shares of stock owned by*107 J. Podell at the time of his death in *240 1928 were purchased by William Conescu. The corporation was engaged in the business of selling paper and twine.
Robert Gair Co., hereinafter called the Gair Co., had been the largest supplier of paper board and paper products to the New York Box Co. and the New York Twine Co. and, in or about 1932, was the largest creditor of the New York Box Co. On November 3, 1932, an option was given to the Gair Co. by William Conescu, president and principal stockholder, directly and indirectly, of the New York Box Co. and the New York Twine Co. to purchase 50 per cent of the stock of the New York Box Co. This option culminated in the plan of reorganization referred to in the following paragraph.
In 1933 the controlling interests in the New York Box Co. and the New York Twine Co. decided upon a plan to reorganize these corporations.
Pursuant thereto an agreement was entered into on January 18, 1934, by the Gair Co., the New York Box Co., the New York Twine Co., the Delaware Box Co., the Delaware Twine Co., the G. & S. Holding Co., and William Conescu, providing, among other things, that Conescu would sell to the Gair Co. 250 shares of common stock*108 of the New York Box Co. for $ 125,000, to be paid as follows: $ 42,000 by the prior payment of the New York Box Co. account; $ 46,125 by the cancellation of an open account; $ 12,000 by the cancellation of a debt owed by Conescu to the Gair Co.; $ 21,000 by the cancellation of a note executed by the New York Box Co. and payable to the Gair Co.; and $ 3,875 by a prior payment under the option agreement.
The New York Box Co. and the New York Twine Co. were to sell, convey, and transfer to the Delaware Box Co. and the Delaware Twine Co., respectively, all the assets of the vendors, the vendees assuming all the liabilities of the vendors. Upon the completion of such transfers, the Delaware Box Co. and the Delaware Twine Co. were to issue to the Holding Co. certain shares of their stock and the Holding Co. was to issue its stock to the Gair Co., as hereinafter set forth. Certain covenants related to the sale, disposition, and retirement of the stock; to the election of officers and directors of the companies involved; to a reciprocal option to the Gair Co. and Conescu to purchase each other's stock; and to business practices and procedures to be observed by the companies.
The agreement*109 also contained the following provisions:
* * * *
Twentieth: For all purposes of this Agreement, the book value of shares of stock shall be determined in accordance with modern accounting practice, by the examination, audit and report of certified public accountants selected by the Gair Company and Mr. Conescu, whose findings, in the absence of error and miscalculation, shall be final.
*241 Inventory shall be adjusted to the then market values. The goodwill of the Delaware Box Company and the Delaware Twine Company shall be valued at $ 50,000., and the plant and equipment of said Companies shall be taken at the book values of the plant and equipment of the New York Box Company and the New York Twine Company as of October 31, 1932, amounting before appraisal adjustments to $ 29,976.96 plus fifty per cent (50%) of the appreciation thereof as shown by appraisal of the Gair Company, that is fifty per cent (50%) of $ 35,290.54 or a total of $ 47,622.23, together with subsequent additions and deductions, if any, and less depreciation computed at rates satisfactory to the Gair Company and Mr. Conescu.
* * * *
Pursuant to the plan of reorganization, a corporation known as G. & S. Holding*110 Co. (Delaware), hereinafter called the Holding Co., was organized on January 18, 1934, under the laws of the State of Delaware, with capital stock consisting of 2,500 shares of 5 per cent preferred stock, par value $ 100 each; 100 shares class A common stock, no par value; and 100 shares class B common stock, no par value. The common and preferred stock were issued to the Gair Co. and William Conescu as follows:
| Issued to -- | ||
| Stock outstanding | ||
| Gair Co. | William | |
| Conescu | ||
| Shares | Shares | |
| 2,500 shares 5% preferred stock, $ 100 par value | 1,250 | 1,250 |
| 100 shares class A common stock, no par value | 100 | |
| 100 shares class B common stock, no par value | 100 |
Pursuant to the plan of reorganization, the Delaware Box Co. and the Delaware Twine Co. were organized on January 11, 1934, under the laws of the State of Delaware, each with capital stock consisting of 200 shares of common stock of no par value. All of such 200 shares of common stock of the Delaware Box Co. and the Delaware Twine Co. were issued to the Holding Co.
At the time of the above reorganization all of the assets of the New York Box Co. were transferred to the Delaware Box Co. and all of the assets of*111 the New York Twine Co. were transferred to the Delaware Twine Co. The assets so transferred were subject to the liabilities of the predecessor corporations. Thereupon the two New York corporations were dissolved.
During the period from January 1934 to June 1939 the Gair Co. sold large quantities of paper board, paper products, and other merchandise to the Delaware Box Co. and the Delaware Twine Co. On or about June 30, 1939, the Delaware Box Co. was indebted to the Gair Co. in the sum of $ 150,000, which indebtedness was evidenced by twelve promissory notes of the Delaware Box Co., all dated prior *242 to June 30, 1939, and due on various dates ranging from July 15 to September 24, 1939. Each of the notes ran for a period of three months. At the same time, the Delaware Box Co. was indebted to William Conescu in the sum of $ 10,000, which indebtedness was evidenced by one promissory note, dated April 16, 1939, and due July 16, 1939.
On or about July 1, 1939, a plan for reorganization of the Holding Co. and its two subsidiaries, the Delaware Box Co. and the Delaware Twine Co., was adopted and executed. The plan or agreement provided that the Holding Co. would transfer all*112 of its assets to the petitioner; that the petitioner would assume all the liabilities of the Holding Co., the Delaware Box Co., and the Delaware Twine Co.; that the petitioner would issue and deliver to the Holding Co., 1,250 shares of its preferred stock, 1,000 shares of its common stock and $ 50,000 principal amount of its 12-year 4 1/2 per cent sinking fund debentures; and that the Holding Co. would distribute its stocks and bonds to its stockholders as agreed among them.
Pursuant to the plan of reorganization dated July 1, 1939, the petitioner corporation was organized and incorporated under the laws of the State of New York on July 1, 1939, with authorized capital stock consisting of 1,250 shares of preferred stock, par value $ 100 each, and 1,000 shares of common stock, no par value. This corporation also authorized the issuance of $ 250,000 principal sum of 12-year 4 1/2 per cent sinking fund debenture bonds, due 1951. The terms of the debenture bonds are set forth in a specimen bond to which reference is here made.
Pursuant to the plan of reorganization of July 1, 1939, the Holding Co. transferred, or caused to be transferred, to the petitioner corporation all of its assets, *113 including those acquired by it upon dissolution of its two subsidiaries, the Delaware Box Co. and the Delaware Twine Co.
The petitioner also issued and delivered to the Holding Co., all of its outstanding capital stock, consisting of 1,250 shares of preferred and 1,000 shares of common, and $ 50,000 aggregate principal amount of its 12-year 4 1/2 per cent sinking fund debenture bonds, due 1951. The stockholders of the Holding Co. thereupon surrendered their stock in that corporation and the corporation was dissolved. Upon its dissolution, the Holding Co. distributed to its stockholders the common and preferred stock and $ 50,000 12-year 4 1/2 per cent sinking fund debenture bonds of the petitioner, as follows:
To the Gair Co., 12-year 4 1/2 per cent sinking fund debenture bonds of the face amount of $ 50,000 issued by the petitioner.
To William Conescu, 1,250 shares of preferred stock and 1,000 shares of common stock of the petitioner.
*243 Pursuant to the plan of reorganization of July 1, 1939, the promissory notes, aggregating $ 150,000, which had been given by the petitioner's predecessor, the Delaware Box Co., to the Gair Co. and assumed by the petitioner were exchanged*114 by the petitioner for its 12-year 4 1/2 per cent sinking fund debenture bonds in the face amount of $ 125,000, together with the sum of $ 14,500 in cash and all of its right, title, and interest in a certain machine known as No-Lox machine.
At or about the same time the petitioner issued and delivered to William Conescu its 12-year 4 1/2 per cent sinking fund debenture bonds in the face amount of $ 10,000 in exchange for the promissory note of $ 10,000 which had been given to him by the petitioner's predecessor, the Delaware Box Co., and assumed by the petitioner.
The 12-year 4 1/2 per cent sinking fund debenture bonds in the face amount of $ 10,000 held by William Conescu were retired under the sinking fund provisions of the bonds, as follows:
| Date of payment | Face amount |
| Mar. 10, 1941 | $ 500 |
| Feb. 28, 1942 | 1,000 |
| Dec. 31, 1942 | 8,500 |
| Total bonds retired | 10,000 |
Of the 12-year 4 1/2 per cent sinking fund debenture bonds in the face amount of $ 175,000, held by the Gair Co., bonds in the amount of $ 26,500 were retired at the face amount thereof, under the sinking fund provisions of the bonds, as follows:
| Date of payment | Face amount |
| Mar. 31, 1940 | $ 9,500 |
| Mar. 10, 1941 | 3,000 |
| Feb. 28, 1942 | 14,000 |
*115 Thereafter and prior to April 23, 1942, the petitioner and the Gair Co., acting through their duly authorized officers, entered into direct discussions and negotiations looking toward the purchase, acquisition, and retirement of the petitioner's debenture bonds owned by the Gair Co. originally having the face value of $ 175,000 and which had been reduced as at the date of the negotiations by retirement at par to $ 148,500. As a result on these discussions, conversations, and negotiations, it was agreed between the petitioner and the Gair Co. that the Gair Co. would accept from the petitioner, at the par value thereof, 40-year 6 per cent income notes of the Gair Co. in exchange for a like principal amount of the 12-year 4 1/2 per cent sinking fund debenture bonds of the petitioner held by the Gair Co. These 40-year 6 per cent income notes had been issued originally on June 20, 1932, in exchange for class A stock by the Gair Co. to the public. On January 1, 1942. there were outstanding such income notes of the face value of $ 5,058,100. *244 During 1942 income notes of the face value of $ 638,450 were retired by the Gair Co. and on December 31, 1942, there were outstanding*116 income notes of the face value of $ 4,419,650. These notes were dealt, quoted, and traded in by the public in the over-the-counter market in New York and could be bought by anyone. At the date of this arrangement, the 40-year 6 per cent income notes of the Gair Co. were quoted at 59, or $ 590 for each $ 1,000 par value income notes, which fact was well known to the Gair Co. The price range of these income notes during 1942 was low 55, high 71 1/2; the price range from 1938 to 1942 was low 30 in 1939 and high 72 1/2 in 1940.
Such arrangement was presented to the board of directors of the Gair Co. and was in all respects approved at a meeting of the board of directors of the Gair Co. held on April 23, 1942.
In accordance with the arrangement of April 23, 1942, from time to time between April 18 and December 28, 1942, the petitioner acquired by purchase in the open market 40-year 6 per cent income notes of the Gair Co. having an aggregate par value of $ 89,750 at prices ranging from 59 on April 18, 1942, to 69 on December 24, 1942. The total cash consideration paid by the petitioner in the open market for these notes was $ 60,490.
As the 40-year 6 per cent income notes were purchased, *117 the petitioner, pursuant to the aforesaid arrangement and during the period from April 18 to December 28, 1942, transferred and delivered the 40-year 6 per cent income notes of an aggregate face value of $ 89,750 to the Gair Co. in exchange for the petitioner's 12-year 4 1/2 per cent sinking fund debenture bonds having the same aggregate face value of $ 89,750 held by the Gair Co.
Prior to December 22, 1942, the petitioner and the Gair Co., acting through their duly authorized officers, entered into further direct discussions, authorizations, and negotiations for the purpose of arranging for the transfer to the petitioner of all the remaining 12-year 4 1/2 per cent sinking fund debentures owned by the Gair Co. As a result of these direct negotiations, it was arranged between the petitioner and the Gair Co. that prior to the end of the year 1942 the Gair Co. would sell to the petitioner its 12-year 4 1/2 per cent sinking fund debentures owned by the Gair Co. for cash equal in amount to 70 per cent of the face amount thereof. This arrangement was presented to the board of directors of the Gair Co. and was in all respects approved unanimously at a meeting of the board of directors *118 of the Gair Co. held on December 22, 1942.
*245 Pursuant to the arrangement of December 22, 1942, the petitioner purchased and acquired directly from the Gair Co. on December 29, 1942, the petitioner's 12-year 4 1/2 per cent sinking fund debentures having aggregate face value of $ 58,750, for which it paid cash in the amount of $ 41,125.
The difference between $ 148,500, the face value of the petitioner's debenture bonds acquired from the Gair Co., and $ 101,615, the sum of the amount paid for the Gair Co. income notes, $ 60,490 and the amount of $ 41,125 is $ 46,885. The sum of $ 46,885 was credited on the petitioner's books to the "Good Will" account originally established in 1933 and carried over in 1939, thereby reducing the amount thereof from $ 50,000 to $ 3,115.
Although the total authorized issue of the petitioner's 12-year 4 1/2 per cent sinking fund debenture bonds was $ 250,000, the aggregate amount of the bonds issued by the petitioner at the time of organization was $ 185,000 and no additional debentures were subsequently issued by the petitioner. At all times from the organization of the petitioner on July 1, 1939, to December 31, 1942, the only owners and holders*119 of its 12-year 4 1/2 per cent sinking fund debenture bonds were the Gair Co. and William Conescu, president of the petitioner. The debenture bonds were never listed, dealt in, traded, priced, or quoted on any exchange or market or over the counter, nor were there any public dealings, sales, or transfers of those bonds.
The original holders of the debenture bonds, the Gair Co. and William Conescu, continued to own and hold all of their debenture bonds from the time of issuance thereof in 1939 until their surrender and transfer to the petitioner. At no time were any of these debenture bonds sold to or purchased by anyone other than the petitioner.
At all times, interest was paid when due on the outstanding 12-year 4 1/2 per cent sinking fund debentures from the date they were issued to dates of their transfer to the petitioner and surrendered.
For the calendar year 1938, the books of the Delaware Box Co. showed a net operating loss of $ 451.24 and the Delaware Twine Co. showed a net operating loss of $ 4,545.32. For the 6-month period from January 1 to June 30, 1939, the books of the Delaware Box Co. showed a net operating loss of $ 6,116.03 and the Delaware Twine Co. showed a net*120 operating loss of $ 5,702.14.
The books of the petitioner show assets, liabilities, and capital accounts as at the beginning and close of the taxable year as follows: *246
| Beginning of taxable year | ||
| Amount | Total | |
| ASSETS | ||
| Cash | $ 29,278.31 | |
| Notes and accounts receivable | $ 213,207.56 | |
| Less reserve for bad debts | 29,262.11 | 183,945.45 |
| Inventories (itemize in separate schedule) | 330,711.12 | |
| Investments in governmental obligations (issued | ||
| on or after March 1, 1941) | 1,505.28 | 1,505.28 |
| Other investments (itemize) Jewish Nat'l bonds | ||
| Capital assets: | ||
| (a) Depreciable assets | 131,078.82 | |
| Less reserve for depreciation | 71,931.50 | 59,147.32 |
| Other assets: | ||
| Officers life ins | 20,460.94 | |
| Prepaid ins., taxes, etc | 3,244.57 | |
| Good will, patents, etc | 50,000.00 | 73,705.51 |
| Total | 678,292.99 | |
| LIABILITIES | ||
| Accounts payable | $ 104,679.17 | |
| Bonds, notes, and mortgages payable: | ||
| (a) With orig. maturity of less than 1 year | 37,000.00 | |
| (b) With orig. maturity of 1 year or more | 172,000.00 | 209,000.00 |
| Accrued expenses: | ||
| Taxes | 57,637.17 | |
| Salaries and commissions | 4,407.61 | 62,044.78 |
| Other liabilities: | ||
| Deposits payable | 86.75 | 86.75 |
| Capital stock: | ||
| (a) Preferred stock | 125,000.00 | |
| (b) common stock | 122,373.51 | 247,373.51 |
| Earned surplus and undivided profits | 55,108.78 | |
| Total | 678,292.99 |
| End of taxable year | ||
| Amount | Total | |
| ASSETS | ||
| Cash | $ 46,748.16 | |
| Notes and accounts receivable | $ 165,717.70 | |
| Less reserve for bad debts | 17,498.12 | 148,219.58 |
| Inventories (itemize in separate schedule) | 215,120.24 | |
| Investments in governmental obligations (issued | ||
| on or after March 1, 1941) | 1,548.61 | 1,548.61 |
| Other investments (itemize) Jewish Nat'l bonds | 3,000.00 | |
| Capital assets: | ||
| (a) Depreciable assets | 153,418.97 | |
| Less reserve for depreciation | 85,648.02 | 67,770.95 |
| Other assets: | ||
| Officers life ins | 22,321.02 | |
| Prepaid ins., taxes, etc | 11,735.56 | |
| Good will, patents, etc | 3,115.00 | 37,171.58 |
| Total | 519,579.12 | |
| LIABILITIES | ||
| Accounts payable | $ 66,072.53 | |
| Bonds, notes, and mortgages payable: | ||
| (a) With orig. maturity of less than 1 year | 77,250.00 | |
| (b) With orig. maturity of 1 year or more | 77,250.00 | |
| Accrued expenses: | ||
| Taxes | 40,727.82 | |
| Salaries and commissions | 3,341.03 | 44,068.85 |
| Other liabilities: | ||
| Deposits payable | ||
| Capital stock: | ||
| (a) Preferred stock | 125,000.00 | |
| (b) common stock | 122,373.51 | 247,373.51 |
| Earned surplus and undivided profits | 84,814.23 | |
| Total | 519,579.12 |
The aggregate face amount*122 of the petitioner's 12-year 4 1/2 per cent sinking fund debenture bonds outstanding as at the beginning of the taxable year herein was $ 172,000 and none was outstanding at the close of the year.
The books of the petitioner show its assets and liabilities as at July 1, 1939, as follows:
| ASSETS | |||
| Current assets: | |||
| Cash in bank | $ 25,810.65 | ||
| Imprest cash | 500.00 | ||
| Cash on hand | 31.43 | ||
| Total cash | $ 26,342.08 | ||
| Notes receivable -- trade | 9,324.00 | ||
| Accounts receivable -- trade | 166,233.62 | ||
| Advances to employees and officers | 1,804.14 | ||
| G. & S. Holding Co. Advances: | |||
| Garment Box Assn | 250.00 | ||
| Samuel S. Wallenstein | 150.00 | ||
| Due from Garment Box Assn. #3 | 2,691.62 | ||
| Due from Garment Box Assn. #2 | 82.03 | ||
| Post-dated checks | 238.32 | ||
| Gross receivables | 180,773.73 | ||
| Less: | |||
| Reserve for bad debts | $ 7,663.60 | ||
| Reserve for sales discount | 3,171.40 | ||
| Total receivables | $ 169,938.73 | ||
| Raw material | 42,619.23 | ||
| Work in process and finished goods | 176,405.65 | ||
| Merchandise in transit | 1,440.88 | ||
| Total inventories | 220,465.76 | ||
| Total current assets | 416,746.57 | ||
| Capital assets: | |||
| Capital assets | 100,380.96 | ||
| Less reserve for depreciation | 49,741.11 | ||
| Total capital assets | 50,639.85 | ||
| Other assets: | |||
| Cash surrender value -- Officers' Life Ins | 15,800.00 | ||
| Investment in Cone Paper Products, Inc | 2,500.00 | ||
| Claims -- New York state franchise tax -- 1939- | |||
| 1940 | 1,100.95 | ||
| Total other assets | 19,400.95 | ||
| Deferred and prepaid charges: | |||
| Prepaid compensation insurance | $ 1,002.21 | ||
| Prepaid fire and other insurance | 513.30 | ||
| Prepaid bank discounts | 137.91 | ||
| Total deferred charges | $ 1,653.42 | ||
| Good will and patents | 50,000.00 | ||
| Total assets | 538,440.79 | ||
| LIABILITIES AND NET WORTH | |||
| Current liabilities: | |||
| Notes payable -- bank | $ 30,000.00 | ||
| Notes payable -- Robert Gair Co | |||
| Notes payable -- William Conescu | |||
| Accounts payable: | |||
| Trade | 64,776.71 | ||
| William Conescu | |||
| Interest payable | 892.54 | ||
| Salaries, wages, commissions | |||
| accrued | 2,369.81 | ||
| New York state unemployment | 2,011.73 | ||
| Federal old age benefit tax | 1,318.48 | ||
| New York city sales tax | 1,503.96 | ||
| Association expense | 1,283.99 | ||
| Federal unemployment | 533.81 | ||
| Total current liabilities | $ 104,691.03 | ||
| Reserves: | |||
| Deposits -- locker keys | $ 36.75 | ||
| Federal income and excess profits | |||
| taxes | 764.50 | ||
| Deferred rent | 575.00 | ||
| Total reserves | $ 1,376.25 | ||
| Total liabilities and | |||
| reserves | 106,067.28 | ||
| 4 1/2% sinking fund debentures due 7/1/51 | 185,000.00 | ||
| Total liabilities | $ 291,067.28 | ||
| Net worth: | |||
| Preferred stock: | |||
| 1,250 shares authorized and issued | 125,000.00 | ||
| Common stock: | |||
| 1,000 shares authorized and issued | 122,373.51 | ||
| Total net worth | 247,373.51 | ||
| Total liabilities and net worth | 538,440.79 |
*123 *248 The consent on Form 982, heretofore mentioned, was as follows:
Spear Box Co., Inc. of 270 Eleventh Avenue, N. Y. C. has excluded under section 22 (b) (9) of the Internal Revenue Code the amount of $ 46,885.00 from its gross income for the taxable year beginning January 1, 1942 and ending December 31, 1942. Under that section such corporation does not consent to have the basis of its property adjusted in accordance with the regulations prescribed under section 113 (b) (3) of the Internal Revenue Code in effect at the time of filing its return for that year. Such corporation is organized under the laws of New York, has its principal office or place of business at 270 Eleventh Avenue, New York, N. Y., and on December, 1942, obtained a discharge of its indebtedness or for which it was liable evidenced by a security as defined in section 22 (b) (9) of the Internal Revenue Code.
Taxpayer requests that the above exclusions be treated as a credit to the good will account.
| Spear Box Co. Inc. | |||
| (Seal) | [Signed] | Jack Kulchin | Vice Pres. |
| Sidney Conescu | Treasurer |
The record discloses the following additional facts:
In the spring of 1939 the management of the Gair Co. *124 changed and a policy was adopted by it to simplify many things on its balance sheet. It also became its policy not to hold stocks, notes, bonds, and similar securities. The company held securities of the Holding Co. The exchange of bonds for notes was for the benefit of both the Gair Co. and the petitioner. During April 1942 T. Raymond Pierce, vice president of the Gair Co., discussed with William Conescu, president of the petitioner, the desire and plan of the petitioner to improve its credit *249 position and to increase its business. At the time, the Gair Co. was attempting to purchase its own outstanding income notes, which were then selling below par (at approximately 59). The proposal was made that if the petitioner could buy the Gair Co. income notes on the open market, the Gair Co. would exchange the petitioner's debenture bonds which it owned for such notes so acquired by the petitioner.
The petitioner was one of the Gair Co.'s largest customers. Both the petitioner and the Gair Co. would benefit by the transaction. The Gair Co. considered it an even trade. What it lost on the petitioner's bonds it gained on the acquisition of its own notes. Its indebtedness*125 and its receivables were reduced by the same amount. The exchanges made in April, 1942 and in December, 1942, were approved by the Gair Co.'s directors and were considered advantageous to both companies.
The following entries appear on the books of the Delaware Box Co. and the Delaware Twine Co. on June 30, 1939:
| Delaware Box Co. | ||
| ASSETS | ||
| Cash | $ 21,886.49 | |
| Accounts receivable -- intercompany | $ 52,970.79 | |
| Notes and accounts receivable -- other | 84,316.17 | |
| 137,286.96 | ||
| Less reserve for bad debts | 2,360.81 | |
| 134,926.15 | ||
| Inventories: | ||
| Raw materials | 22,979.30 | |
| Finished goods | 177,633.87 | |
| 200,613.17 | ||
| Other investments | 2,500.00 | |
| Capital assets | 94,985.76 | |
| Less reserve for depreciation | 44,934.13 | |
| 50,051.63 | ||
| Prepaid items | 1,801.77 | |
| Officers' life insurance | 15,800.00 | |
| Good will | 50,000.00 | |
| Total assets | 477,579.21 | |
| LIABILITIES | ||
| Accounts payable -- intercompany | 1,718.75 | |
| Accounts payable -- other | 48,452.57 | |
| 50,171.32 | ||
| Notes payable: | ||
| Bank | 24,000.00 | |
| Robert Gair Co | 125,000.00 | |
| Wm. Conescu | 10,000.00 | |
| 159,000.00 | ||
| Accrued expenses | 9,015.14 | |
| Capital stock | 271,110.88 | |
| Deficit | (11,718.13) | |
| Total liabilities | 477,579.21 |
| Delaware Twine Co. | ||
| ASSETS | ||
| Cash | $ 4,424.16 | |
| Accounts receivable -- intercompany | $ 1,718.75 | |
| Notes and accounts receivable -- other | 95,658.65 | |
| 97,377.40 | ||
| Less reserve for bad debts | 5,302.79 | |
| 92,074.61 | ||
| Inventories: | ||
| Raw materials | 19,852.59 | |
| Finished goods | ||
| 19,852.59 | ||
| Other investments | ||
| Capital assets | 5,395.20 | |
| Less reserve for depreciation | 4,806.98 | |
| 588.22 | ||
| Prepaid items | 65.11 | |
| Officers' life insurance | ||
| Good will | ||
| Total assets | 117,004.69 | |
| LIABILITIES | ||
| Accounts payable -- intercompany | 52,970.79 | |
| Accounts payable -- other | 16,376.07 | |
| 69,346.86 | ||
| Notes payable: | ||
| Bank | 6,000.00 | |
| Robert Gair Co | ||
| Wm. Conescu | ||
| 6,000.00 | ||
| Accrued expenses | 2,223.50 | |
| Capital stock | 46,343.82 | |
| Deficit | (6,909.49) | |
| Total liabilities | 117,004.69 |
The following are journal entries appearing on the general journals of the New York Box Co. and the New York Twine Co., respectively, on January 2, 1933: *250
| NEW YORK BOX CO. | |||
| Depreciation Reserve Machinery | 114 | $ 20,530.98 | |
| Depreciation Reserve Auto | 115 | 14,610.25 | |
| Depreciation Reserve Wagon | 116 | 825.40 | |
| Depreciation Reserve Furn. & Fix | 117 | 1,522.89 | |
| Plant & Machinery | 6 | 47,586.50 | |
| Office Fixtures | 7 | 2,860.80 | |
| Automobiles | 9 | 3,875.00 | |
| Wagons | 10 | 400.00 | |
| Electrotypes, Engravings, Patterns, etc | 140 | 6,000.00 | |
| Plant & Machinery | 6 | $ 44,784.90 | |
| Office Fixtures | 7 | 4,538.68 | |
| Automobiles | 9 | 16,511.30 | |
| Wagons | 10 | 1,084.60 | |
| Surplus arising as a result of Revaluation | |||
| of Capital Assets | 142 | 31,292.34 | |
| Patents & Good Will | 143 | 50,000.00 | |
| Surplus arising of the valuations of | |||
| patents | 144 | 50,000.00 | |
| Good Will. |
| NEW YORK TWINE CO. | ||||
| $ 23.80 | 128 | Dep. Furniture Fixture | ||
| 200.20 | 127 | Dep. Machinery | ||
| 95.20 | 107 | Furniture & Fixtures | ||
| 1,300.00 | 126 | Machinery | ||
| 4,000.00 | 150 | Electrotypes, Engravings, Patterns, | ||
| etc. | ||||
| Furniture Fixtures | 107 | $ 119.00 | ||
| Machinery | 126 | 1,502.00 | ||
| Cuts | 144 | 2,190.80 | ||
| Surplus arising as result of revaluation | ||||
| of Capital Assets | 151 | 1,807.40 |
In his notice of deficiency the Commissioner added to the petitioner's income the sum of $ 46,885 designated as "Profit on redemption of own bonds" and appended the following explanation:
(a) It is held that you realized a profit of $ 46,885.00 in connection with the retirement of your outstanding debenture bonds and such amount should be included in your gross income for purpose of determining your liability for income and declared value excess profits taxes.
The purchase by the petitioner of its own 12-year 4 1/2 per cent debenture bonds, of the face value of $ 89,750, in consideration of the 40-year 6 per cent income notes of the Gair Co., of the same face value, bought by the petitioner in the open market for $ 60,490 in cash, in accordance with the arrangement of April 23, 1942, resulted in*128 taxable gain to the petitioner.
Likewise, the purchase by the petitioner of its own 12-year 4 1/2 per cent debenture bonds, of the face value of $ 58,750, for $ 41,125 in *251 cash, in accordance with the arrangement of December 22, 1942, resulted in taxable gain to the petitioner. Both transactions were a part of the same plan.
OPINION.
The petitioner contends primarily that the Gair Co. voluntarily and gratuitously relinquished a part of the indebtedness due to it from the petitioner and that such relinquishment constituted a gift. It relies on the principle of "forgiveness" approved in American Dental Co. v. Helvering, 318 U.S. 322">318 U.S. 322, and discussed in Commissioner v. Jacobson, 336 U.S. 28">336 U.S. 28 (Jan. 17, 1949).
Petitioner argues that all of the circumstances of record, including the personal and business relationship existing between it and its officers and the Gair Co. and its officers and also the statements of such officers, indicate that the discount, or the difference between the par value of the petitioner's bonds and the amount paid by it for the acquisition of the Gair Co. notes, constituted a gift, "solicited*129 by the petitioner from its creditor on the one hand, and freely and voluntarily donated, without prior obligation to do so, by the creditor to the petitioner, on the other hand."
We do not so read or so construe the record. Conescu and Pierce agreed that the transactions in question benefited the petitioner, but Pierce was careful to state and to repeat that both the Gair Co. and the petitioner would be benefited by it. The situation spells out ample consideration for the exchange and negates the concept of a gift. The trade was an ordinary business transaction, contributing to the financial welfare of each participant.
The petitioner stresses the promise of the Gair Co. to "stay out of the market" in order to enable the petitioner to purchase the required amount of Gair notes. We see therein no special advantage to the petitioner except perhaps a slight reduction in the market price, nor do we discern any detriment to the Gair Co. If that company had competed with the petitioner and forced the market price of the notes upward, it would have been compelled to pay more for its own securities owned by strangers.
Thus, we find no intent on the part of the Gair Co. to donate *130 to the petitioner any part of its bonds and nothing in Gair's conduct that would impute such intent. Gair considered, desired, and accomplished "an even trade" by means of making the exchange of obligations. The rule in the American Dental Co. case, based on the receipt of a gratuitous financial advantage, does not apply to the case at bar, nor do the converse conclusions in the Jacobson case afford, by implication, any support for the petitioner. There is no evidence that the petitioner was insolvent at any time during its existence; consequently, *252 there is no need to discuss that phase of the situation. Commissioner v. Jacobson, supra;Reliable Incubator & Brooder Co., 6 T. C. 919. Cf. Astoria Marine Construction Co., 12 T.C. 798">12 T. C. 798.
The evidence submitted by the petitioner contains bookkeeping records that might tend to indicate a gratuitous transfer. However, the petitioner disclaims any reliance on any such entries and agrees with the respondent that the decision must rest on the "realities and actualities of the dealing and transactions." That is precisely the basis*131 on which we have arrived at our conclusion.
The petitioner contends further that the acquisition of its own debenture bonds resulted in no taxable gain, even though it might have given rise to income. It argues that, since the debenture bonds, of the face value of $ 50,000, were issued by the petitioner to the Gair Co. for valueless good will and other debenture bonds were issued to the same company for capital assets which had been arbitrarily written up in value on the petitioner's books, the "discount" on the bonds acquired from the Gair Co. was properly recorded in the petitioner's books to reduce the good will account, pursuant to section 22 (b) (9) of the Internal Revenue Code1*132 and the appropriate regulation, Regulations 111, section 29.22 (b) (9)-1, 2 and that hence the petitioner received no gain and was not subject to a tax thereon.
The petitioner argues that it filed with its return, Form 982, headed, "Consent * * * to Adjustment of Basis, etc.," in substantial compliance with the provisions of section 22 (b) (9). There is no merit in this argument. Petitioner*133 did file a document similar to the form prescribed, but it specifically stated that it did not consent to such adjustment. It added to the form the words, "Taxpayer requests that the above exclusions be treated as a credit to the good will account."
*253 A taxpayer can not make a direct denial and disclaimer of consent and at the same time receive the benefit of the statute predicated on that consent. The petitioner has failed to meet the requirements of the statute and, therefore, can not exclude from its income the $ 46,885 in question. Its appended "request" has no significance in the absence of its affirmative consent.
Furthermore, the value and security of the debenture bonds of the petitioner rested on all of its assets. No definite part thereof can be ascribed or allotted to "good will" or to any other specific asset at whatever value it was placed on the petitioner's books. The broad principles established in the familiar case of Kirby Lumber Co., 284 U.S. 1">284 U.S. 1, holding that where a corporation purchased its own bonds at a price less than its issuing price, there being no shrinkage of assets, the difference constituted taxable gain, *134 apply to the facts in the situation before us. Therefore, we hold that the petitioner received a taxable gain of $ 46,885 on the transactions at issue.
Decision will be entered for the respondent.
Footnotes
1. SEC. 22. GROSS INCOME.
* * * *
(b) Exclusions from Gross Income. --
* * * *
(9) Income from discharge of indebtedness. -- In the case of a corporation, the amount of any income of the taxpayer attributable to the discharge, within the taxable year, of any indebtedness of the taxpayer or for which the taxpayer is liable evidenced by a security (as hereinafter in this paragraph defined) if the taxpayer makes and files at the time of filing the return, in such manner as the Commissioner, with the approval of the Secretary, by regulations prescribes, its consent to the regulations prescribed under section 113 (b) (3)↩ then in effect.
2. Sec. 29.22 (b) (9)-1. Income from Discharge of Indebtedness. --
Section 22 (b) (9) provides, with respect to taxable years beginning after December 31, 1941, and before January 1, 1946, a method whereby a corporation may elect to have excluded from its gross income the amount of income attributable to a discharge, within the taxable year, of its indebtedness or of indebtedness for which it is liable as, for example, in the case of a debt arising from an assumption of liability of another corporation. To be entitled to the benefits of the provisions of section 22 (b) (9) for such years a corporation must file with its return for the taxable year a consent to the provisions of the regulations, in effect at the time of the filing of the return, prescribed under section 113 (b) (3)↩ (see sections 29.113 (b) (3)-1 and 29.113 (b) (3)-2, relating to adjustment of basis).