1957 U.S. Tax Ct. LEXIS 166">*166 Decision will be entered under Rule 50.
While serving as counsel for the receivers of a corporation, petitioner, in 1941 and 1944, purchased 98,000 voting trust certificates of the corporation's stock. Some 60,000 certificates were purchased from the corporation which had held them as security for debts owed it by its deceased president; the other 38,000 certificates were purchased from the administrators of the deceased president's estate. The corporation purchased outstanding judgments against its deceased president, and would have been entitled to resort to the 38,000 certificates, along with his other assets, to satisfy the judgments so purchased. As a result of litigation commenced by stockholders of the corporation, petitioner, in 1952 and in 1954, paid to the corporation's receivers, the amount of the outstanding indebtedness owed by the corporation's deceased president, together with all interest thereon, in order to retain the voting trust certificates. Petitioner claimed the interest on such indebtedness, accruing from the time he originally purchased the certificates up to the time of the court decree awarding him a clear title thereto, as deductible interest on1957 U.S. Tax Ct. LEXIS 166">*167 his returns for 1952 and 1954. The respondent disallowed the deductions. Held, such amounts of interest represented an additional cost of the voting trust certificates and were not deductible as "interest paid or accrued" within the meaning of section 23 (b), I. R. C. 1939, and section 163 (a), I. R. C. 1954.
28 T.C. 586">*587 This proceeding involves a deficiency in income tax for the year 1952 in this amount of $ 28,235.84, determined by respondent under the provisions of the Internal Revenue Code of 1939, and a deficiency in income tax for the year 1954 in the amount of $ 40,092.22, determined by the respondent under the provisions of the Internal Revenue Code of 1954.
The issue to be decided is whether certain sums paid by petitioner Arthur B. Koontz in 1952 and 1954 were deductible as "interest paid or accrued" during such years, within the meaning of section 23 (b) of the 1939 Code and section 163 (a) of the 1954 Code, respectively, or were an additional cost of voting trust certificates purchased in 1941 and 1944.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference. We likewise adopt by this reference, as a part of our findings, the facts set forth in Bank of Mill Creek v. Elk Horn Coal Corp., 133 W. Va. 639">133 W. Va. 639, 57 S.E.2d 736 (1950);1957 U.S. Tax Ct. LEXIS 166">*169 and Bank of Mill Creek v. Elk Horn Coal Corp., 136 W. Va. 36">136 W. Va. 36, 65 S.E.2d 892 (1951).
During the years in issue, Arthur B. Koontz, hereinafter referred to as the petitioner, and his wife, Mazie W. Koontz, were residents of Charleston, West Virginia. They filed joint income tax returns for such years with the former collector and the district director of internal revenue, respectively, for the district of West Virginia.
Prior to his death on May 24, 1940, Clarence W. Watson had served as president of the Elk Horn Coal Corporation, sometimes hereinafter referred to as the corporation. At the time of his death, he was insolvent and indebted to the corporation. As security for such indebtedness, he had pledged 60,000 voting trust certificates of the corporation's stock. The corporation was placed in receivership on August 21, 1940, and petitioner and his brother, Patrick D. Koontz, became counsel for the receivers. At a public sale which was confirmed on December 23, 1941, petitioner and his brother, through an agent, purchased the 60,000 voting trust certificates from the corporation.
In 1942, the corporation receivers purchased 1957 U.S. Tax Ct. LEXIS 166">*170 certain outstanding judgments against Watson's estate. In May and June 1944, petitioner and his brother, through an agent, acquired an additional 38,000 Elk Horn voting trust certificates from the administrators of Watson's estate in West Virginia and Ohio.
28 T.C. 586">*588 On July 23, 1946, a committee of stockholders of Elk Horn filed a petition in the Circuit Court of Kanawha County praying that the petitioner and his brother be divested of all rights in the 98,000 voting trust certificates which they had purchased, on the ground that they were disqualified from making such purchases because of their fiduciary relationship to Elk Horn and its receivers by virtue of their serving as counsel for the latter.
Petitioner's brother died on July 23, 1947. By will, he bequeathed to petitioner all of his stock interest in the Elk Horn Coal Corporation.
The ultimate result of the protracted litigation which followed was that the sales to petitioner and his brother were held to be voidable sales. Petitioner could have returned the certificates and received back what he and his brother had initially paid for them. However, in order to retain the voting trust certificates which they had purchased, 1957 U.S. Tax Ct. LEXIS 166">*171 petitioner agreed to, and did, pay the outstanding indebtedness, with all interest thereon, owed by Watson to Elk Horn.
On August 28, 1952, petitioner paid to the receivers of Elk Horn the sum of $ 124,906.24, representing the amount of the indebtedness, together with all interest thereon up to date of such payment, for which the 60,000 voting trust certificates had been pledged. On June 11, 1954, petitioner paid to the receivers of Elk Horn the sum of $ 287,563.27, representing the amount of the indebtedness of Watson, together with all interest up to date of such payment, which had been purchased by the receivers who, as general creditors, would have been entitled to resort to the 38,000 voting trust certificates for satisfaction of such indebtedness. The court then confirmed the sales of the certificates to him, free and clear of the claims of Elk Horn.
On his return for 1952, petitioner deducted the sum of $ 40,581.92 as interest on Watson's indebtedness, which he paid in that year. The respondent allowed $ 5,296.50 of such sum as deductible interest on such indebtedness from August 22, 1951, the date used by the court in computing the amount of Watson's indebtedness to Elk1957 U.S. Tax Ct. LEXIS 166">*172 Horn, until petitioner paid such indebtedness on August 28, 1952, on the theory that from the date of such computation to the date of payment the interest payable was on the indebtedness of petitioner. The petitioner now concedes that of the remaining amount of interest claimed on his return, only $ 23,712.82 is properly deductible. On his return for 1954, the petitioner claimed that $ 90,607.89 of the amount which was paid to the Elk Horn receivers in satisfaction of Watson's indebtedness in that year was deductible as interest. The respondent allowed $ 1,348.18 of such sum as deductible interest on such indebtedness from the date on which the court entered its decree on April 17, 1954, until the time petitioner made the payment on June 11, 1954, on the same theory on which he allowed the $ 5,296.50 for 1952.
28 T.C. 586">*589 OPINION.
The deduction for interest paid or accrued by a taxpayer allowed by section 23 (b) of the 1939 Code is for interest owed on an outstanding debt of the taxpayer claiming the deduction. Automatic Sprinkler Co. of America, 27 B. T. A. 160 (1932). As the Ways and Means Committee noted in its report accompanying the Internal Revenue1957 U.S. Tax Ct. LEXIS 166">*173 Code of 1954, H. Rept. No. 1337, 83d Cong., 2d Sess. (1954), p. A-44: "Subsection (a) of section 163 continues the deduction for interest contained in section 23 (b) of the 1939 Code." Thus, the deduction permitted by the 1954 Code is likewise for interest paid or accrued on indebtedness of the taxpayer.
The amounts of interest which petitioner seeks to deduct, and which the respondent disallowed, are the amounts of interest accruing on Watson's indebtedness from the time petitioner purchased the voting trust certificates in 1941 and 1944 up to and including the date of the court decrees confirming the release of the certificates to him, free and clear of any claims.
Petitioner argues that such amounts of interest are analogous to interest payments by transferees of corporate assets for the interest on corporate indebtedness accruing from the time the assets were transferred to them until payment of the indebtedness was made. In support of that argument he relies on such cases as Koppers Co., 3 T.C. 62 (1944), affirmed sub nom. Commissioner v. Breyer, 151 F.2d 267 (C. A. 3, 1945); W. D. Haden Co. v. Commissioner, 165 F.2d 5881957 U.S. Tax Ct. LEXIS 166">*174 (C. A. 5, 1948), affirming in part a Memorandum Opinion of this Court dated April 9, 1946; Elise Avery Johnson, 19 T.C. 465 (1952); Andrew Jergens, 17 T.C. 806 (1951); Philip D. Armour, 6 T.C. 359 (1946); and Robert L. Smith, 6 T.C. 255 (1946).
In support of his determination that the interest deductions, which petitioner claims, are not allowable, respondent contends that the payments were not interest on indebtedness for which petitioner was personally liable but were, in fact, a part of the consideration paid by petitioner for the voting trust certificates.
In Koppers Co., supra, we held that the interest which accrued on indebtedness of the transferor subsequent to the transfer of its assets to the transferee, was deductible by the transferee, and said, at page 64:
At that time [of the transfer of the assets] each transferor owed respondent the amount of its tax deficiency, together with interest thereon from the date of its determination. The petitioner [transferee] took the assets encumbered with those debts. The debts1957 U.S. Tax Ct. LEXIS 166">*175 as well as the assets then became those of petitioner. And the interest which thereafter accrued on those debts was therefore interest on the obligations of petitioner.
We further said that our holding was intended and accomplished by the effect of section 311 of the statute.
28 T.C. 586">*590 The difficulty with petitioner's argument here is that he cannot show that his liability to pay Watson's indebtedness was an absolute and unconditional liability, such as was true of the transferee in Koppers Co., supra, and of the transferees in the other above-cited cases. It is settled law that a transferee is fully liable for the debts of the transferor, together with interest thereon from the date of the transfer, to the extent of the value of the assets which he received. That is not true of petitioner here since he is not a transferee, and was not under any fixed legal obligation similar to that of a transferee. Here, the decrees of the West Virginia Supreme Court of Appeals held that the sales of the voting trust certificates to petitioner and his brother were voidable sales by virtue of their fiduciary relationship to the receivers of Elk Horn. When they1957 U.S. Tax Ct. LEXIS 166">*176 initially purchased the certificates they paid amounts which, at the time, may have approximated the then fair market value of the certificates; but later, as the result of the litigation, in order to retain full and clear title to the certificates, petitioner paid additional substantial amounts which included the sums which he seeks to deduct here as interest. But petitioner was under no absolute liability to pay such sums. Had he not wished to do so, he could have returned the certificates and received back what he and his brother had paid initially. Hence, the amounts which he paid in 1952 and 1954, to satisfy Watson's outstanding indebtedness, together with interest thereon, were simply additional cost of the voting trust certificates, no part of which is deductible. Eskimo Pie Corporation, 4 T.C. 669 (1945), affd. 153 F.2d 301 (C. A. 3, 1946); Orange Securities Corporation, 45 B. T. A. 24 (1941), affd. 131 F.2d 662 (C. A. 5, 1942). See Magruder v. Supplee, 316 U.S. 394">316 U.S. 394 (1942). In the latter case, real estate taxes on a 1957 U.S. Tax Ct. LEXIS 166">*177 parcel of property for the year 1936 became due and payable on January 1 of that year. The property was sold during the year and the seller and buyer agreed to apportion such taxes on a pro rata basis. The buyer attempted to deduct his share of the taxes under section 23 (c) as "taxes paid" within the meaning of that section. The Supreme Court denied the deduction. It agreed that the taxes in question were a burden which the buyer paid, but said that it was a burden which had been contractually assumed rather than one which was directly imposed upon him. It quoted from the dissenting opinion of Chief Judge Parker in Commissioner v. Rust's Estate, 116 F.2d 636, 641 (C. A. 4, 1940):
Payment [of the taxes] by a subsequent purchaser is not the discharge of a burden which the law has placed upon him, but is actually as well as theoretically a payment of purchase price; * * * a part of the payment for unencumbered title.
It concluded that the amount of the taxes paid by the buyer was nothing more than part of the purchase price of the property. Much 28 T.C. 586">*591 the same was true of the interest payments in question here. The interest had accrued1957 U.S. Tax Ct. LEXIS 166">*178 on the indebtedness of Watson, and petitioner agreed to assume and did pay such interest. We think here, as was true of the taxes in the Magruder case, that such interest payments represented a part of the purchase price of the property.
In addition, the payments which petitioner made are essentially similar to expenses incurred in clearing title to property, and it is settled law that any such expenses represent an additional cost of the property. Brand v. Commissioner, 209 F.2d 255 (C. A. 6, 1953), affirming a Memorandum Opinion of this Court dated January 30, 1953, certiorari denied 347 U.S. 968">347 U.S. 968, 347 U.S. 968">1022 (1954), 348 U.S. 804">348 U.S. 804 (1954); Louisiana Land & Exploration Co., 7 T.C. 507 (1946), affd. 161 F.2d 842 (C. A. 5, 1947); Morgan Jones Estate, 43 B. T. A. 691 (1941), affd. 127 F.2d 231 (C. A. 5, 1942); Bermont Oil Co., 33 B. T. A. 1061 (1936), affd. 91 F.2d 710 (C. A. D. C., 1937); Shaw-Hayden Building Co., 18 B. T. A. 949 (1930).1957 U.S. Tax Ct. LEXIS 166">*179
We therefore conclude that since the claimed interest deductions in the amount of $ 112,972.53 represented an additional cost to petitioner of the voting trust certificates, they were not payments of deductible interest under the Internal Revenue Codes of 1939 and 1954.
Decision will be entered under Rule 50.