*183 Decision will be entered under Rule 50.
1. Held, a trust is not an "individual" within the meaning of section 24 (b) and the deduction of interest accrued by petitioner corporation on sums owing to a trust that owned all the stock of the petitioner is not disallowed by section 24 (c), and is allowed by section 23 (b).
2. In 1946 the petitioner received a refund of part of the New York City real estate taxes paid for the years 1934 through 1945. Held, further, under section 22 (b) (12) this sum is includible in petitioner's 1946 income and subject to income tax to the extent of the amount of the deductions for the taxes which resulted in an income tax benefit to the petitioner in the prior years.
*185 The respondent has determined the following deficiencies in the petitioner's tax liability:
| Declared | ||
| Income | value | |
| Calendar year | tax | excess-profits |
| tax | ||
| 1944 | $ 1,625.54 | $ 971.88 |
| 1945 | 1,610.99 | 944.70 |
| 1946 | 6,950.47 |
The petitioner contests all deficiencies and alleges as the respondent's principal error the disallowance of deductions for interest accrued during the taxable years but never paid. Other errors relate to the disallowance of net operating loss deductions and the inclusion of real estate tax refunds in the petitioner's taxable *185 income. All facts have been stipulated and have been found as stipulated.
FINDINGS OF FACT.
The petitioner, a New York corporation, incorporated on November 24, 1933, filed its returns for the years in question with the collector *186 of internal revenue for the third district of New York. The petitioner at all times has kept its books of account and filed its returns on the calendar year basis and on the accrual method of accounting
The petitioner was authorized to issue 200 shares of common stock without par value.
Pursuant to an agreement dated November 25, 1933, between the petitioner and Jesse Isidor Straus, the petitioner had assigned to it a contract for the purchase of premises known as 1120-1130 Lexington Avenue, in New York City. The purchase price was $ 123,000 of which $ 15,000 was paid upon execution of the contract, the balance payable upon passage of title. The $ 15,000 was advanced by Jesse Isidor Straus. Also pursuant to the agreement, Jesse Isidor Straus acquired all the authorized stock, consisting of 200 shares of no par common at $ 5 per share, and he agreed to loan to the petitioner the further sum of $ 107,000, plus such additional amounts needed to*186 pay the balance of the purchase price upon delivery of the petitioner's promissory note, payable on demand, with interest at 6 per cent per annum, in an amount equal to the amount so loaned, plus the $ 15,000 advanced for the down payment.
On February 1, 1934, in accordance with the agreement dated November 25, 1933, the petitioner acquired title to the premises 1120-1130 Lexington Avenue. The petitioner issued and delivered all of the authorized 200 shares of common stock without par value of the petitioner to Jesse Isidor Straus for the sum of $ 1,000. Jesse Isidor Straus loaned to the petitioner the further sum of $ 107,109.10 and the petitioner executed and delivered to Jesse Isidor Straus a promissory note of the petitioner, payable on demand, to the order of Jesse Isidor Straus, dated February 1, 1934, in the amount of $ 122,109.10, consisting of the aforementioned amounts of $ 15,000 and $ 107,109.10.
On April 6, 1934, in order to provide the petitioner with funds to purchase the real property known as 615 Lexington Avenue in New York City, Jesse Isidor Straus loaned to the petitioner the further sum of $ 99,262.12 and the petitioner executed and delivered to Jesse Isidor*187 Straus a promissory note of the petitioner, payable on demand, to the order of Jesse Isidor Straus, dated April 6, 1934, in the amount of $ 99,262.12, with interest thereon at the rate of 6 per cent per annum.
Jesse Isidor Straus died testate on October 4, 1936. He devised his entire residuary estate in trust to pay the net income thereof to his widow, Irma N. Straus, for life, and upon her death to distribute the principal to his then living children and the issue of any then deceased children, in equal shares, per stirpes. He was survived by his widow, his daughter, Beatrice S. Levy, his sons, Jack I. and Robert K. Straus, and several grandchildren, all of whom are still living. At the time of his death, Jesse Isidor Straus owned all of the 200 shares of the petitioner's capital stock and the two promissory notes referred to *187 above, all of which were included in his residuary estate. No payments had been made on the principal or interest of the notes. On December 27, 1943, the shares of stock and the notes were transferred to the trustees and since that date this property has been held in trust.
The trustees of the trust and Irma N. Straus, the income beneficiary of*188 the trust, have at all times kept their books and filed their income tax returns on the cash receipts and disbursements method and on the calendar year basis.
The petitioner has made payments on the principal of the promissory note dated February 1, 1934, on the dates and in the amounts set forth below:
| Date | Amount |
| Dec. 24, 1942 | $ 45,000 |
| Dec. 19, 1944 | 15,000 |
| Dec. 20, 1945 | 35,000 |
| $ 95,000 |
leaving an unpaid balance of $ 27,109.10 since December 20, 1945. On November 19, 1946, the petitioner made a payment in the amount of $ 20,000 on the principal of the promissory note dated April 6, 1934, leaving an unpaid balance of $ 79,262.12 since November 19, 1946.
The petitioner has accrued on its books and has deducted in its income tax returns for the calendar years 1934 to 1946, inclusive, the amounts set forth below for interest on the unpaid balances from time to time of the principal of the two promissory notes:
| Amount accrued and | |
| Year | deducted for interest |
| 1934 | $ 11,083.54 |
| 1935 | 13,282.28 |
| 1936 | 13,282.28 |
| 1937 | 13,282.28 |
| 1938 | 13,282.28 |
| 1939 | 13,282.28 |
| 1940 | 13,282.28 |
| 1941 | 13,282.28 |
| 1942 | 13,223.10 |
| 1943 | 10,582.28 |
| 1944 | 10,552.77 |
| 1945 | 9,618.99 |
| 1946 | 7,444.16 |
*189 The petitioner has not paid any part of the above-mentioned accrued interest.
The petitioner's tax returns for the years 1934 to 1943, both inclusive, showed net losses in the following amounts, after deducting the aforementioned accruals of interest:
| Net loss shown on | |
| Year | the return |
| 1934 | $ 10,035.10 |
| 1935 | 14,067.69 |
| 1936 | 12,600.53 |
| 1937 | 8,915.40 |
| 1938 | 8,575.60 |
| 1939 | 8,287.61 |
| 1940 | 16,923.99 |
| 1941 | 25,510.56 |
| 1942 | 26,321.25 |
| 1943 | 24,495.38 |
The petitioner's 1944 tax return shows a net loss of $ 19,098.84 for that year.
*188 The petitioner's 1945 amended tax return shows an ordinary net loss of $ 7,991.28, net capital gain of $ 39,058.07, and net income of $ 31,066.79.
The petitioner's 1946 tax return shows net income of $ 1,521.85.
In computing the net losses shown in the income tax returns of the petitioner for the taxable years 1934 to 1943, inclusive, in the amounts set forth above, and the net loss shown in the tax return of the petitioner for the taxable year 1944, petitioner deducted the following amounts for New York City real estate taxes which had accrued for 1934 to 1944, inclusive:
| New York City real | |
| Year | estate taxes deducted |
| 1934 | $ 7,764.57 |
| 1935 | 8,742.00 |
| 1936 | 8,100.00 |
| 1937 | 8,142.00 |
| 1938 | 8,411.80 |
| 1939 | 8,482.50 |
| 1940 | 8,481.23 |
| 1941 | 8,464.50 |
| 1942 | 8,315.50 |
| 1943 | 8,277.50 |
| 1944 | 8,181.25 |
*190 In computing the ordinary net loss of $ 7,991.28 and the net income of $ 31,066.79, shown in the amended tax return of the petitioner for the taxable year 1945, the petitioner deducted $ 6,865.05 for New York City real estate taxes which had accrued for that year. The $ 6,865.05 represented $ 7,741.69 deducted in the original 1945 return, less $ 876.64, which constituted the amount of the $ 7,741.69 payment refunded to the petitioner in 1946.
During the taxable year 1946, the petitioner received from the City of New York refunds in the amounts set forth below of portions of the New York City real estate taxes, theretofore paid by the petitioner which had accrued for the taxable years 1934 to 1945, inclusive, and which the petitioner had deducted in its income tax returns for those years:
| Amount of real | |
| estate tax | |
| Year | refunded |
| 1934 | $ 1,496.00 |
| 1935 | 1,974.00 |
| 1936 | 1,626.75 |
| 1937 | 1,642.20 |
| 1938 | 1,646.10 |
| 1939 | 1,678.37 |
| 1940 | 1,640.37 |
| 1941 | 1,785.03 |
| 1942 | 1,852.07 |
| 1943 | 1,726.88 |
| 1944 | 1,743.03 |
| 1945 | 876.64 |
| 19,687.44 |
In computing the net loss of $ 19,098.84 for the year 1944, the petitioner deducted the amount of $ 15,908.81 as a net operating loss deduction, which amount*191 represented the sum of the net operating losses of $ 9,098.30 and $ 6,810.51 shown on the petitioner's tax returns for the years 1942 and 1943, respectively. In computing the ordinary net loss of $ 12,337.83 and the net income of $ 26,720.24, shown in the original *189 tax return of the petitioner for the year 1945, the petitioner deducted the amount of $ 10,000.54 as a net operating loss deduction, which amount represented the sum of the net operating losses of $ 6,810.51 and $ 3,190.03 shown in the petitioner's tax returns for the years 1943 and 1944, respectively. In computing the ordinary net loss of $ 7,991.28 and the net income of $ 31,066.79, shown in the amended tax return of the petitioner for the year 1945, the petitioner deducted $ 6,530.63 as a net operating loss deduction.
OPINION.
The basic question is whether the deductions claimed by the petitioner corporation, an accrual basis taxpayer, for interest accrued during the taxable years but not paid at any time on promissory notes owing to a trust are disallowed by section 24 (c), Internal Revenue Code. 1 The trust was created for legitimate testamentary purposes and no question of bona fides is raised by the *192 respondent, nor does the respondent raise any question as to whether the notes represented an equity interest rather than a loan.
*193 Section 24 (c) provides that no deduction shall be allowed under section 23 (b) 2 on interest accrued if all three conditions specified in section 24 (c) are present. The parties agree that the first two conditions in section 24 (c) are present. The interest was never paid and the person to whom it is to be paid, namely, a trust, reports its income by the cash method of accounting. The parties are at issue as to the third condition which is that both the taxpayer and the person to whom the payment is to be made are persons between whom losses on sales or exchanges of property would be disallowed under section *190 24 (b). 3 Therefore, the ultimate issue is the interpretation of section 24 (b).
*194 Section 24 (b) enumerates several persons between whom "losses from sales or exchanges of property, directly or indirectly," are disallowed but nowhere refers to transactions between a trust and a corporation. Nevertheless, the respondent contends that the relationship set forth in subparagraph (B) of section 24 (b) (1) is present here. Subparagraph (B) provides for a disallowance of losses where the sale or exchange is between an "individual" and a corporation more than 50 per cent in value of the outstanding stock of which is owned, directly or indirectly, by or for such "individual." The respondent contends a trust is an individual within the meaning of this provision. The trust owns all of the capital stock of the petitioner corporation.
This very issue has recently been decided by this Court in John A. Snively, Sr., 20 T.C. 136">20 T. C. 136, where we held that a trust was not an individual within the meaning of section 24(b)(1)(B), and that a loss incurred by a corporation on a sale to a trust, the beneficiaries of which were the children of the owner of approximately 94 per cent of the stock of the corporation, was allowable as a loss deduction to the corporation. *195 On the authority of John A. Snively, Sr., supra, and for reasons set forth therein, we hold that the testamentary trust in question was not an individual within the meaning of section 24(b)(1)(B). Therefore, the interest accrued and unpaid on the sums due to this trust by the petitioner corporation is not disallowed by section 24(c) and is allowed by section 23(b).
*191 The second issue is the extent to which the petitioner must include in its taxable income for 1946 the sum of $ 19,687.44, representing a refund received in 1946 for New York City real estate taxes paid for the years 1934 through 1945. The amount of the refund attributable to each year is set forth in our Findings of Fact.
Section 22(b)(12) provides that there shall not be included in gross income and there shall be exempt from income taxation "Income attributable to the recovery during the taxable year of a * * * prior tax * * * to the extent of the amount of the recovery exclusion with respect to such * * * tax * * *." Paragraph (12) defines a "prior tax" as a "tax on account of which a deduction or credit was allowed for a prior taxable year." As set forth in our Findings of*196 Fact, these real estate taxes had accrued 4 and were deducted and allowed in full for the taxable years 1934 through 1945.
In addition, paragraph (12) defines "recovery exclusion" as "the amount * * * of the deductions * * * allowed, on account of such * * * prior tax * * * which did not result in a reduction of the taxpayer's" income tax. Therefore, the sum refunded in 1946 is includible in the petitioner's 1946 income and subject to income tax to the extent of the amount of the deduction for these taxes which resulted in an income tax benefit to the petitioner in the prior years. This amount will be determined under a Rule 50 computation.
We find no merit in the petitioner's contention that since the years 1944 and 1945*197 are open and in issue in this proceeding, the income for those years can be recomputed by reducing the deduction taken in those years by the amount of the refund applicable to them. It is now well settled that taxes are deductible in the year the liability accrued and events occurring in subsequent years do not permit the reopening of the prior years and the adjusting of the deductions. Security Flour Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281, Taylor Instrument Companies, 14 T. C. 388, and cases cited therein.
Finally, the issue of the deductions in the taxable years 1944 and 1945 for net operating losses is dependent on the allowance of the interest deductions as set forth above. The facts relative to the net operating loss deductions were stipulated and set forth in our Findings of Fact. The matter may be determined under a Rule 50 computation.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 24. ITEMS NOT DEDUCTIBLE.
(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of --
* * * *
(c) Unpaid Expenses and Interest. -- In computing net income no deduction shall be allowed under section 23 (a), relating to expenses incurred, or under section 23 (b), relating to interest accrued --
(1) If such expenses or interest are not paid within the taxable year or within two and one-half months after the close thereof; and
(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and
(3) If, at the close of the taxable year of the taxpayer or at any time within two and one-half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b)↩.
2. 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 * * *.↩
3. SEC. 24. ITEMS NOT DEDUCTIBLE.
(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of --
* * * *
(b) Losses from Sales or Exchanges of Property. --
(1) Losses disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly --
(A) Between members of a family, as defined in paragraph (2) (D);
(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
(C) Except in the case of distributions in liquidation, between two corporations more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;
(D) Between a grantor and a fiduciary of any trust;
(E) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or
(F) Between a fiduciary of a trust and a beneficiary of such trust.
(2) Stock ownership, family, and partnership rule. -- For the purpose of determining, in applying paragraph (1), the ownership of stock --
(A) Stock owned, directly, or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;↩
4. The parties have stipulated that the sums claimed and allowed as deductions represented taxes that had accrued during the respective years. The record does not show the basis of the refunds but there is nothing to indicate that they were due to miscalculations or to errors by the petitioner.↩