*830 During 1935 the petitioner, at a cost of $40,021.15, purchased all the first mortgage bonds ($50,000 face value), of another corporation, which were secured by a deed of trust to certain dock property, and on which interest payments were in default. Petitioner thereupon placed the bonds as collateral security for the payment of certain indebtedness it had incurred with two parties in connection with the purchase of the bonds. In 1936 the petitioner instructed the trustee under the first mortgage bond issue to foreclose on the property, which was then being operated by petitioner. At the foreclosure sale on October 10, 1936, the property was bid in for and in behalf of the petitioner at a price of $62,308.45. Title to the property was taken in the name of the trustee, who thereafter continued to hold the title thereto until June 1940, when at the direction of the petitioner it was transferred to a newly organized corporation. Held, that petitioner, through application of the selling price of the dock property to the satisfaction of its claim for principal and interest under the bonds, realized taxable income. Helvering v. Midland Mutual Life Insurance Co.,300 U.S. 216">300 U.S. 216.*831
*689 The Commissioner determined deficiencies in the petitioner's income and excess profits taxes of $5,618.05 and $2,716.76, respectively, for the fiscal year ended April 30, 1937. The only issue presented is whether the petitioner realized taxable income as the result of a foreclosure sale of the property of another corporation whose bonds the petitioner had theretofore acquired and on which the interest payments were in default.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation, organized May 5, 1934, and has its principal office in St. Paul. Its income tax return for the fiscal year ended April 30, 1937, was filed with the collector of internal revenue for the district of Minnesota.
Since petitioner's organization it has been engaged in the sale of coal at wholesale. One-third of its stock is owned by Worrell Clarkson, Jr., its president, one-third by T. E. Du Boe, its vice president and treasurer, and one-third is held in trust to be distributed to Worrell Clarkson, Jr., and Du Boe upon the death of Worrell Clarkson, Sr.
The Clarkson*832 Coal & Dock Co., a Delaware corporation, sometimes referred to as the Dock Co., was organized about 1923 and had its principal office in St. Paul. It owned and operated among other things a dock at Ashland, Wisconsin, for the discharge, storage, and handling of coal. During 1933 through 1935 the Dock Co. stock was owned by Worrell Clarkson, Sr., his wife, and J. A. Vaughan. Worrell Clarkson, Jr., was vice president and Du Boe was vice president and secretary or treasurer.
The Clarkson Securities Co., sometimes referred to as the Securities Co., was a Delaware corporation. Worrell Clarkson, Sr., was president and Du Boe was secretary. The Securities Co. did not own any stock in either the petitioner or the Dock Co., nor did either of them own any stock in it or in each other.
On January 1, 1927, the Dock Co. executed a first mortgage deed of trust to its dock property in Ashland to secure the payment of 50 *690 first mortgage 6 percent bonds of $1,000 each. These bonds were to become due and payable January 1, 1937, with interest payable semiannually on January 1 and July 1. Thereafter on some undisclosed date a second mortgage was placed on the property by the Dock*833 Co. and second mortgage bonds were issued in connection therewith for an amount not shown by the record. The first mortgage bonds, sometimes referred to herein as the bonds, were bearer bonds with interest coupons attached. After the bonds were issued the Dock Co. delivered $33,000 of the face amount thereof to the Blue Diamond Coal Co. as collateral for notes in the amount of $22,000 owing by it to that corporation. It delivered $14,000 face amount of the bonds to the West Virginia Coal & Coke Corporation as collateral for notes owing by it to that corporation. The Securities Co. paid $3,000 for the remaining bonds which thereafter came into the hands of Worrell Clarkson, Sr.
On April 1, 1933, the Dock Co. leased its dock property to the Securities Co. for the period beginning April 1, 1933, and ending April 1, 1938. On June 13, 1935, the Securities Co. and petitioner entered into an agreement, effective July 1, 1935, under which petitioner took over the operation of the dock property and thereafter continued to operate it until 1938.
About June 1934 the Dock Co. went into receivership and thereafter carried on no active business. While the Dock Co. was apparently dissolved*834 subsequent to going into receivership, the date of dissolution is not otherwise disclosed.
Beginning on January 1, 1934, and through July 1, 1935, the Dock Co. paid no interest on its outstanding bonds. Default was also made by that company in the payment of interest on its notes held by the Blue Diamond Coal Co. and the West Virginia Coal & Coke Corporation.
On January 31, 1935, the Blue Diamond Coal Co. caused the $33,000 of Dock Co. bonds held by it as collateral to be sold at a sheriff's sale and bid them in, thereby becoming the owner of the bonds. On February 2, 1935, it informed the Dock Co. of an intention to instruct the trustee under the bond issue to proceed to foreclose and sell the dock property. Foreclosure proceedings were instituted but were subsequently discontinued. During the summer of 1935, in order to make sure that the dock property would not come into the hands of someone other than itself and in order that it might continue to operate the property, the petitioner entered into negotiations for the purchase of all the Dock Co.'s outstanding bonds of $50,000. In these negotiations the petitioner offered to pay $26,560.95 to the Blue Diamond Coal Co. *835 , $10,000 to the West Virginia Coal & Coke Corporation, and $3,000 plus accrued interest of $460.20 to Worrell Clarkson, Sr.
*691 The petitioner also entered into negotiations with the Wyatt Coal Sales Co. of Charleston, West Virginia, sometimes referred to as the Wyatt Co., for a loan to be used in purchasing the bonds. On October 21, 1935, the Wyatt Co. agreed to loan the petitioner $38,000 for use in purchasing the $47,000 of bonds held by the Blue Diamond Coal Co. and the West Virginia Coal & Coke Corporation, and petitioner agreed to deliver to the Wyatt Co. 15 promissory notes totaling $38,000 and as security therefor the $47,000 of the Dock Co.'s bonds. Any unused portion of the $38,000 was to be repaid by petitioner to the Wyatt Co. and credited on the principal of the first maturing note. On the same date the petitioner and the Wyatt Co. entered into an agreement whereunder the petitioner agreed that for a period of 15 years it would purchase from the Wyatt Co. all of the coal of kinds and qualities sold by the Wyatt Co. which it, petitioner, should require.
On or about November 15, 1935, the above mentioned loan transaction and the purchase of the Dock Co. *836 bonds was consummated through the First National Bank of St. Paul. The Wyatt Co. forwarded the $38,000 to the bank and that amount was credited to the account of the petitioner. The Blue Diamond Coal Co. and the West Virginia Coal & Coke Corporation presented the $47,000 of bonds held by them and the bank on behalf of the petitioner paid the former $26,560.95 and the latter $10,000. The bank thereupon forwarded to the Wyatt Co. the 15 notes of petitioner, together with the $47,000 of bonds of the Dock Co. At or about the same time the petitioner purchased the remaining $3,000 of the Dock Co.'s bonds from Worrell Clarkson, Sr., for $3,460.20, giving him its note secured by the $3,000 of bonds as collateral. The total cost to the petitioner for the $50,000 of bonds of the Dock Co. was $40,021.15.
On January 2, 1936, the trustee under the deed of trust resigned effective January 25, 1936, and on February 27, 1936, John F. Swain, at the request of Worrell Clarkson, Sr., who acted in behalf of petitioner, accepted the position of trustee. Swain, who was auditor for a corporation of which some of the officers of the petitioner were also officers, acted as trustee only as a personal*837 favor to Worrell Clarkson, Sr.
After acquisition of the bonds and the appointment of Swain as trustee, petitioner concluded that steps should be taken to clear the dock property of liens existing under the second mortgage bond issue and instructed Swain to foreclose under the deed of trust securing the first mortgage gonds. The Clarkson Coal & Dock Co. was in default under the first mortgage bonds and in August 1936 notice of foreclosure by advertisement, as provided in article V, section 3, of the trust deed, was served on the Clarkson Coal & Dock Co. and was thereafter published in the Ashland Daily Press for the required period. *692 The notice recited that the indebtedness then due and secured by the bonds amounted to $62,646.79, as follows:
| Amount due on debt secured by the bonds | $60,156.83 | |
| Insurance premiums advanced by trustee | $1,482.22 | |
| Interest on advances for insurance premiums | 107.74 | |
| 1,589.96 | ||
| Trustees' fees | 400.00 | |
| Attorneys' fees | 500.00 | |
| 900.00 | ||
| 62,646.79 |
It was specified in the said notice that the sheriff would sell the property at public auction to the highest bidder for cash at the front door of the court house on*838 October 10, 1936, the sale being made "to satisfy the amount which shall then be due on said note and trust deed together with expenses of sale, attorneys' fees, trustees' fees and insurance premiums paid."
The property was sold by the sheriff at public auction and was bid in for Swain, as trustee, by a local attorney in Ashland, who was acting under instructions from the petitioner's attorney in St. Paul. Swain was not present at the sale but Du Boe, vice president and treasurer of petitioner, did attend. The price at which the property sold and the amount bid for Swain, as trustee, was $62,308.45. A certificate of sale was issued by the sheriff showing "John F. Swain (Trustee)" as the purchaser and the certificate so issued was filed in the office of the Register of Deeds of Ashland County, Wisconsin, on October 13, 1936. After expiration of the one-year period for redemption and on October 16, 1937, a sheriff's deed to the property was issued to "John F. Swain, as Trustee" and was filed for record on October 19, 1937. The deed recited the sale of the property to John F. Swain, as trustee, for the sum of $62,308.45, and further, that the consideration in that amount was "paid*839 by the said John F. Swain, Trustee."
No money was paid to the Wyatt Co. as a result of the foreclosure sale of the dock property in 1936, nor were any of the first mortgage bonds surrendered to Swain at that time or at any subsequent time prior to June 1940, when they were surrendered in connection with another transaction. While Swain was the holder of the legal title to the property both before and after its sale in 1936, he never at any time paid any money for it, never received any money from it, and never considered that he was the owner of it. The petitioner, who by purchase in 1935 had become the owner of all the first mortgage bonds, did not consider that the Wyatt Co. had become the owner of the property as a result of the foreclosure sale and did not consider that as a result of that sale Swain had acquired any personal interest in it, but considered that after the sale the bondholders were the owners of it.
*693 Under date of January 31, 1938, Swain, "as trustee for the benefit of the bondholders under a certain trust deed and mortgage executed by The Clarkson Coal and Dock Company bearing date the 1st day of January 1927", and petitioner executed an instrument*840 which recited that in consideration of one dollar "and other good and valuable consideration to him in hand paid" Swain leased the dock property to the petitioner for the period commencing April 1, 1938, and ending April 1, 1943. The instrument recited that the petitioner agreed to keep the premises in such repair, order, and condition as they were then or might be put in during the term of the lease, reasonable use and damage by accidental fire or other unavoidable casualty excepted. The instrument contained no recital respecting the rental to be paid to Swain by petitioner for the property. Swain executed this instrument at the request of one Faricey, an attorney for the petitioner. Although the instrument recited the payment of a consideration for the lease, the petitioner, in fact, paid Swain nothing and no rental was ever paid him with respect to the property. While nothing was contained in the instrument as to the payment of insurance and taxes on the property, the petitioner, on November 15, 1935, in connection with the loan to it from the Wyatt Co., had agreed that, so long as any of its notes given to that company remained unpaid, it would see that the insurable part*841 of the dock property was insured at all times against loss by fire, with a provision that payment for any loss would be made to, or for the use and benefit of, the bondholders, and, further, that it would see that all taxes on the property were paid within such times as necessary to save it for the benefit of the bondholders.
Under date of May 2, 1938, the petitioner and the St. Paul Terminal Warehouse Co. executed an agreement whereby the petitioner leased the dock property to the St. Paul Terminal Warehouse Co. for the period beginning May 15, 1938, and ending May 14, 1941, the stated rental being one dollar. The St. Paul Terminal Warehouse Co. agreed at its own expense to keep the premises and all apparatus installed therein in constant good repair and order. The lease could be terminated by either party upon 30 days' notice. By letter dated May 13, 1938, the Wyatt Co., as pledgee of first mortgage bonds of the Dock Co., authorized Swain, as trustee, to consent to the lease between the petitioner and the St. Paul Terminal Warehouse Co. and on May 17, 1938, Swain, as trustee, executed his consent conditioned upon the continued liability of the petitioner for the payment of*842 rent and performance of the obligations and conditions contained in the lease of January 31, 1938, from him to it.
On June 19, 1940, Swain, as trustee and at the request of petitioner, transferred the dock property to the Arrowhead Coal & Dock Corporation of Knoxville, Tennessee, hereinafter referred to as *694 Arrowhead. On the same date petitioner and Arrowhead executed an agreement whereby Arrowhead leased the said property to petitioner under the terms and conditions set forth therein. The parties contemplated that it would take approximately $110,000 to pay all taxes assessed against the property and to make desired improvements and installations of machinery and equipment. Schedule A attached to the agreement showed probable cost of improvements and installments at $86,875.58. It was agreed that Arrowhead should furnish at least $100,000 of the needed funds, but not exceeding $105,000, and that petitioner should furnish the additional funds required. For use and occupancy under the lease, certain payments hereinafter described were required of the lessee. On or before March 1, 1943, petitioner was to begin repayment to Arrowhead of the amount advanced by it for*843 taxes and improvements on the property at a total rate of $3,300 per year. Commencing on March 1, 1941, petitioner was to pay Arrowhead 6 percent per annum on the unpaid balance of the amount advanced by Arrowhead for taxes and improvements as described. Petitioner also agreed to pay Arrowhead from March 1, 1941, as depreciation on the dock property, an amount equal to 4 percent of $75,000, the amounts so paid to be held for the usual and proper usage to which depreciation is applied but in nowise to be used by Arrowhead for the payment of dividends. The amount to be paid as depreciation was to be increased or decreased, dependent upon the value and rate of depreciation determined by the Treasury Department for the property. Petitioner was to pay all taxes and assessments levied against the property and all premiums and charges for fire, tornado, windstorm, workmen's compensation, and public liability insurance, and was to keep the property, including machinery and equipment, in an efficient and economical operating condition and state of repair.
It was contemplated, and provision was made therefor in the contract, that the petitioner might acquire all of the stock of Arrowhead*844 and that at the time of the acquisition of said stock Arrowhead should be free and clear of all indebtedness except to the extent allowed under the lease agreement. The agreement prescribed the character, amount, and terms of the stock Arrowhead should issue. It could issue only common stock with shares of a par value of $10 per share, and in a total amount of $100,000. It was provided that if by September 1, 1957, petitioner had repaid a total of $49,000 of the $100,000 Arrowhead was required to advance, it should receive from Arrowhead 49 percent of the latter's capital stock, and, further, that if petitioner on that date had paid for and received 49 percent of the capital stock of Arrowhead, it should have the right and option to pay the balance of the $100,000 and receive the remaining 51 percent of Arrowhead stock. If, however, it should *695 not pay the balance, the right to pay such balance and to receive the remainder of Arrowhead's capital stock should cease and the lease should terminate and the petitioner should vacate the premises. In the case of default on the part of petitioner, Arrowhead had the right to cancel the lease, and in the event it should elect*845 to cancel the lease the agreement provided that it should return to the petitioner 50 percent of all amounts paid to it by petitioner in repayment of the $100,000 Arrowhead was required to advance.
The agreement provided that Arrowhead would confine its business operations to the owning and holding of the dock property and that it would not incur any indebtedness except incorporation expenses. It agreed to pay its clerk hire and office expense from interest payments to be made to it by petitioner, and, further, that at all times it would have available sufficient of its shares of capital stock for delivery to petitioner in blocks of 49 percent and 51 percent, as previously set forth. Paragraph (4), subsection (r), of the contract contained in specific words a provision which was to be printed in all shares of stock issued by Arrowhead. This provision made each share of Arrowhead stock subject to the provisions of the contract between petitioner and Arrowhead and made specific reference to the provision limiting the business to be done by Arrowhead, the delivery of its stock to petitioner if petitioner should meet the conditions with respect thereto, and the requirement that at*846 the time of such delivery of Arrowhead stock to petitioner Arrowhead should be free from debts of every character except such as might have been incurred under the previous paragraph of the contract outlining the business to be conducted by Arrowhead. It was also stated that provision should be made by Arrowhead in its bylaws limiting the scope of its operations and the authority of its directors and officers as provided in the said contract.
The petitioner agreed not to assign or transfer the lease or sublet the premises without consent of Arrowhead. It was provided, however, that petitioner should have the right to hypothecate as collateral the rights accruing to it under the terms relating to the acquisition of stock in Arrowhead and the return of 50 percent of the repayments made to Arrowhead in the event of cancellation of the lease. The parties mutually agreed that neither would cause the agreement to be spread of record at Ashland, Wisconsin, or elsewhere.
On June 19, 1940, and at the request of petitioner, the first mortgage bonds held by the Wyatt Co., amounting to $47,000, and those held by Worrell Clarkson, Sr., amounting to $3,000, as collateral for indebtedness*847 owing by petitioner to them, were surrendered to and canceled by Swain. On the same day the petitioner executed an agreement with the Wyatt Co. whereby the petitioner assigned and transferred to the Wyatt Co., as substituted collateral for the indebtedness of $33,000 *696 owing by petitioner to that company, all rights and privileges which petitioner had or which might accrue to petitioner under those provisions of the Arrowhead agreement relating to petitioner's acquisition of stock in Arrowhead and all rights of petitioner to such amounts as Arrowhead was required to return in the event of cancellation of the lease by reason of petitioner's default.
While the petitioner acquired all of the $50,000 of Dock Co.'s first mortgage bonds for $40,021.15, it entered them as an asset upon its books at $50,000 and credited surplus with $9,978.85, representing the difference between the cost of the bonds and their par or face value. While the dock property was sold under foreclosure in October 1936, the petitioner continued throughout its fiscal year ended April 30, 1937, to carry the bonds upon its books as an asset and at a value of $50,000. The dock property was not carried*848 by the petitioner as an asset upon its books and the petitioner did not list in its returns for either the fiscal year ended April 30, 1936, or April 30, 1937, any amounts as depreciation thereon. The depreciable assets listed in its income tax return for the fiscal year 1936 were shown as furniture and fixtures and automobiles, with costs of $235.50 and $3,294.99, respectively, and the depreciation deduction claimed with respect thereto was $1,118.80. The depreciable assets listed in its return for the fiscal year 1937 were also shown as furniture and fixtures and automobiles, with costs of $35.50 and $4,542.70, respectively, and the depreciation deduction claimed with respect thereto was $2,214.43. For the fiscal years 1936 and 1937, the petitioner took deductions of $10,865.37 and $16,042.48, respectively, for repairs.
In determining the deficiency the respondent determined that as a result of the foreclosure sale of the dock property in October 1936 the petitioner realized capital gain on the bonds of $9,978.85 and interest income in the amount of $12,308.45.
OPINION.
TURNER: In 1935 the petitioner, by purchase and at a total cost of $40,021.15, became the owner of*849 the entire issue of $50,000 par value first mortgage bonds of the Clarkson Coal & Dock Co. In 1936, the Clarkson Coal & Dock Co. being in default on the bonds, John F. Swain, trustee, under the bond indenture and at the request of the petitioner, instituted proceedings for the foreclosure and sale of the mortgaged property for the purpose of satisfying petitioner's claim for principal and interest due under the bonds. The sale was at public auction and Swain, as trustee for petitioner, purchased the property at a price of $62,308.45. The fair market value of the property at the time of the sale is not shown. The question is whether the petitioner, under , realized *697 taxable income as the result of such foreclosure and sale of the mortgaged property.
In , no money passed as a result of the foreclosure sale and the purchaser of the property at the said sale was the owner of the claim in satisfaction of which the proceeds of the sale were to be applied. Such being the case, the purchaser was not called on to pay the*850 purchase price in cash, only to receive it again in satisfaction of its claim, but that same end was accomplished by crediting payment of the purchase price to satisfaction of the claim. The Supreme Court, holding that legal effect should be given to the transaction according to the terms of the sale, just as if the purchaser had been a stranger and cash had actually been paid, said:
* * * A mortgagee who, at foreclosure sale, acquires the property pursuant to a bid of the principal and accrued interest is, as purchaser and grantee, in a position no different from that of a stranger who acquires the property on a bid of like amount. It is true that the latter would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid. But the rights acquired qua purchaser are the same in either case; and, likewise, the legal effect upon the mortgage debt is the same. In each case the debt, including the interest accrued, is paid. Where the stranger makes the purchase, the debt is discharged by a payment in cash; where the mortgagee purchases the property, the debt is discharged*851 by means of a credit. * * *
Such is the case here. The petitioner was the owner of a claim against the Clarkson Coal & Dock Co. for principal and interest under the bonds and that claim was secured by a first mortgage on the dock property. The foreclosure proceedings were instituted and carried out for the purpose of satisfying that claim, and there is no contention that there were other creditors, or, if so, that they had equal or prior rights to those of the petitioner. It is true the foreclosure was accomplished in the name of Swain, as trustee, but the claim belonged to the petitioner and in the notice published as required by Wisconsin statute it was stated that the dock property therein described would be sold at public auction for cash "to satisfy the amount which shall then be due on said mortgage and trust deed, together with expenses of the sale, attorneys' fees, trustees' fees and insurance premiums paid." Pursuant to foreclosure the dock property was sold for the sum of $62,308.45 and petitioner's claim as owner of the bonds for principal and interest thereunder was discharged by means of a credit just as effectively as if cash had actually passed, and to the extent*852 that such application of the selling price of the dock property to the discharge of petitioner's claim discloses a realization of gain on the bonds and the payment of interest thereunder, the respondent's determination is approved. Cf. .
*698 Claiming that it did not become the purchaser or owner of the dock property at the foreclosure sale or at any time thereafter, the petitioner seeks to distinguish Helvering v. Midland Mutual Life Insurance Co., supar. To support this claim a mass of evidence was offered and for such benefit as the petitioner may derive therefrom we have made detailed findings of fact showing conveyance of the property by the sheriff to Swain, as trustee, and subsequent conveyance by him to Arrowhead. If, however, the identity of the purchaser at the foreclosure sale should be of importance along with the identity of the holder of the claim satisfied by reason of such foreclosure and sale, this same evidence unmistakably shows that, even though legal title to the property was taken in the name of Swain, as trustee, petitioner*853 was the real party in interest and became and continued to be the actual owner of the property until the transaction with Arrowhead in 1940. Furthermore, the failure to indulge in the formality of surrendering the bonds themselves is of no moment. The Wyatt Co. and Worrell Clarkson, Sr., held the bonds as security for petitioner's indebtedness to them, not as owners, and the fact that the physical evidences of the bonds were not formally delivered and canceled can in no way affect the income tax consequences flowing from the satisfaction of petitioner's claim thereunder.
Decision will be entered under Rule 50.