*1449 1. Petitioner refinanced its demand bank loan, contracted prior to January 1, 1934, by issuing debentures in 1934 to its stockholders and using the proceeds of the debentures to pay off the bank. During the taxable year, by appropriate resolutions, property worth $50,000 was set aside to retire the debentures. Held, petitioner is entitled to deduct the aforesaid sum as an amount used or set aside to retire indebtedness incurred prior to January, 1, 1934, under section 351(b)(2)(B) of the Revenue Act of 1934. Sun Pipe Line Co.,42 B.T.A. 1413">42 B.T.A. 1413, followed.
2. So long as an amount is set aside to retire the indebtedness, it does not matter that such indebtedness is not ipso facto extinguished pro tanto, the statute being in the alternative.
*770 This is a proceeding to redetermine a deficiency in personal holding company surtax of $15,456.69 for the calendar year 1935. Certain of respondent's adjustments are not questioned by petitioner. The only issue submitted for decision is whether petitioner is entitled to deduct*1450 $50,000 as an amount set aside to retire indebtedness incurred prior to January 1, 1934, within the meaning of section 351(b)(2)(B) of the Revenue Act of 1934.
*771 FINDINGS OF FACT.
Petitioner is a corporation, organized under the laws of the State of Delaware, with its principal office in Jersey City, New Jersey. Its return for 1937 was filed with the collector of internal revenue for the fifth district of New Jersey.
On July 20, 1933, the directors of petitioner at a special meeting authorized the treasurer of the corporation to open an account in the name of the corporation in the First National Bank of the City of New York, and authorized the president, vice president, and treasurer, or any two of them, to borrow on behalf of petitioner from the First National Bank such sum or sums as they might deem advisable upon such terms as might be satisfactory to them, and to pledge assets of the corporation as collateral, and to execute in the name of the corporation all notes, credit agreements, and other documents required in connection with such loans.
On July 21, 1933, petitioner entered into a loan agreement with the First National Bank of the City of New York*1451 providing for the deposit of collateral with the bank by petitioner for any loans to be contracted and detailing the bank's rights and remedies against such collateral in the event of defaults by petitioner.
Throughout 1933 petitioner borrowed a total of $1,162,561.25 from the First National Bank. This sum, outstanding and unpaid on December 31, 1933, bore interest at 4 percent. Nearly all of the proceeds of the loans were used by petitioner to purchase securities which were pledged by it to the bank as collateral.
In the latter part of 1933 it was realized by the officers of petitioner that the securities which had been bought with the borrowed funds would probably be carried by petitioner for a long time and that the demand loan with the bank subject to the fluctuations of interest in the money market was unsatisfactory. After discussions between the officers and stockholders of petitioner it was decided to issue debentures to replace the demand loan at the bank.
The directors of petitioner on January 31, 1934, authorized the issuance as of January 1, 1934, of $1,000,000 of 20-year 4 percent income debenture bonds. These were taken up by stockholders of petitioner. The*1452 proceeds of the issue were paid over to the First National Bank in reduction of petitioner's indebtedness. The balance of the indebtedness was paid off in 1934 as soon as funds were available.
On December 29, 1934, the directors of petitioner resolved to set aside $50,000 in a sinking fund for the retirement of the debentures. During 1934 and 1935 petitioner had a safe-keeping custodian account with J. P. Morgan & Co. Pursuant to the resolution of December 29, 1934, petitioner's treasurer set aside and earmarked 1,500 shares of the common stock of the General Motors Corporation, then having a value of more than $50,000, for the sinking fund reserve for 1934. *772 The amount of $50,000 was charged to a ledger account entitled "Twenty-Year 4% Income Debentures of January 1, 1934 due January 1, 1954" and a like amount was credited to the account on the books entitled "Reserve for Retirement of Debentures." The treasurer also sent a memorandum to J. P. Morgan & Co. notifying them that 1,500 shares of petitioner's General Motors stock had been set aside for retirement of petitioner's debentures and were no longer to be regarded as available for the ordinary purposes of petitioner. *1453 J. P. Morgan & Co. complied with this memorandum by setting aside and earmarking the securities indicated as a reserve for the retirement of the debentures.
On December 27, 1935, petitioner's directors again resolved to set aside $50,000 as a sinking fund reserve for the retirement of the debentures. This was accomplished by a procedure similar to that of 1934, except that the securities used were 2,000 shares of General Electric Corporation common stock having a market value of more than $50,000.
In each of the years 1934 and 1935 petitioner paid interest on its debentures in the amount of $40,000. None of the debentures was actually retired at December 31, 1935, the total amount outstanding on that date being $1,000,000.
OPINION.
LEECH: Respondent has disallowed the deduction from petitioner's adjusted net income of $50,000 set aside during 1935 for the retirement of its debentures.
The issue, as submitted at the hearing and to a discussion of which the original briefs were limited, was merely whether the bond indebtedness for the retirement of which the contested $50,000 in securities was set aside, was "indebtedness incurred prior to January 1, 1934," within the*1454 meaning of section 351(b)(2)(B) of the Revenue Act of 1934. That issue, as thus submitted, was decided adversely to respondent in Sun Pipe Line Co.,42 B.T.A. 1413">42 B.T.A. 1413. In there discussing the identically paralled section of the Revenue Act of 1936, we said:
* * * We think no distinction was intended between a corporation which after the date set, changes the form of its obligation, even changes the obligee, but remains equally obligated, and one which merely remains bond by the original obligation. * * * [Emphasis supplied.]
However, respondent in his reply brief for the first time argues that the "setting aside" here was not sufficient to entitle petitioner to the disputed deduction because the "setting aside" under the act must be such as to effect, ipso facto, a retirement of the indebtedness pro tanto.
Although this question is thus not before us, we do not agree with respondent. Moreover, assuming any regulation could so construe the pertinent statutory provision, we do not think that either Regulations 86, article 351-4, which originally construed the controlling provision, *773 or*1455 T.D. 4777, XVI-48-9060, approved November 19, 1937, the latter being cited by respondent, does so construe it.
The pertinent subsection reads: "Amounts used or set aside to retire indebtedness * * *." (Emphasis supplied.) The construction for which respondent now contends would eliminate the significant alternative provision of the statute and is therefore improper. In our opinion the statute permits the deduction if the amount is set aside, even though the indebtedness be not to that extent thus extinguished. The evidence here amply proves that the amount claimed as a deduction was set aside within the meaning of the statute.
Whether the amount in dispute was "irrevocably" set aside, in the tax year, is not pertinent. That definitive word was added in the Revenue Act of 1937, section 355, not as "clarifying and giving effect to the regulations" as respondent argues, but "to protect the revenue, so that amounts may not be set aside for retirement of debt, and deductions secured, although finally such amounts are never used to retire the indebtedness." Report of the Senate Finance Committee, 75th Cong., 1st sess., S. Rept. 1242.
Decision will be entered*1456 under Rule 50.