1946 U.S. Tax Ct. LEXIS 193">*193 Decision will be entered under Rule 50.
1. Petitioner is the owner in Chicago, Illinois, of a leasehold and buildings thereon. In 1925 petitioner borrowed $ 90,000 on the property and executed his negotiable bonds therefor. Some of the bonds have been paid off and retired from time to time and the interest has at all times been paid. On January 1, 1938, $ 51,750 of such bonds was still outstanding. In the years 1938, 1939, and 1940 petitioner acquired some of these bonds at less than their face value. Some of them were acquired by petitioner directly from the bondholders themselves after negotiations with them. Some were acquired by purchases through the secretary of a bondholders' committee and through security houses. Held that, as to the bonds acquired by petitioner through direct negotiations with the bondholders, he is not taxable on the gain therefrom under the doctrine of Helvering v. American Dental Co., 318 U.S. 322">318 U.S. 322; held, further, that petitioner is taxable on the gain realized in the purchases from bondholders through the secretary of the bondholders' committee and the security dealers, under the doctrine of the Supreme1946 U.S. Tax Ct. LEXIS 193">*194 Court in United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1, he being at all times solvent.
2. On the evidence, held, petitioner is entitled to a deduction in each of the taxable years 1939 and 1940 for $ 750 expended in entertaining clients in the course of his law business and paying for meals for employees for which he was not reimbursed by his law firm.
3. On the evidence, held, the expenses of operating petitioner's automobile in 1939 and 1940 were incurred one-half for petitioner's personal use and the use of his family, which expenses are not deductible, and one-half in its use for business purposes, which expenses are deductible.
6 T.C. 1048">*1048 The Commissioner has determined deficiencies in petitioner's income tax for the years 1938, 1939, and 1940, respectively, of $ 842.99, $ 708.19, 6 T.C. 1048">*1049 and $ 2,416.79. The petitioner contests parts of these deficiencies by the following assignments of error:
(a) The Commissioner erred in failing to allow automobile and entertainment expenses in connection with his practice of law, aggregating $ 597.97 for 1938, $ 793.34 for 1939 and $ 750.55 for 1940.
(b) The Commissioner erred in holding that the acquisition by the petitioner of his mortgage obligations, at a price lower than the face value thereof during each of the years in question, represented taxable income to the petitioner during any of said years.
(c) The Commissioner erred in failing to hold that the holders of the bonds, being creditors of the petitioner, gratuitously and because of debtor's straitened circumstances, diminishing security and other facts, accepted from petitioner an amount less than the face value thereof.
(d) The Commissioner erred in failing to hold that the payment for said bonds at an amount less than the face1946 U.S. Tax Ct. LEXIS 193">*196 value thereof did not create any taxable income to the petitioner.
At the hearing petitioner abandoned his assignment of error as to the $ 597.97 automobile and entertainment expenses disallowed by the Commissioner for the year 1938. He continues to press his assignment of error as to the disallowance by the Commissioner of such expenses of $ 793.34 for 1939 and $ 750.55 for 1940. Several adjustments made by the Commissioner in his deficiency notice were not contested in the petition.
FINDINGS OF FACT.
The petitioner is an individual who resides in Chicago, Illinois. He filed his income tax returns with the collector of internal revenue for the first district of Illinois.
In June 1922 petitioner purchased a half interest in the building located at the northwest corner of 47th Street and Drexel Boulevard, Chicago, Illinois, and leasehold running for 99 years from May 1, 1914, and in March 1923, he purchased the remaining half interest therein. In December 1925 a substantial addition was made to the building. The total cost to the petitioner of the leasehold and improvements and the addition was $ 116,580.56. When the petitioner became the owner of all the interest in the above1946 U.S. Tax Ct. LEXIS 193">*197 leasehold and building, he allocated, for the purpose of depreciation, $ 76,580.56 to the building and $ 40,000 to the leasehold.
On or about May 1, 1925, petitioner borrowed the sum of $ 90,000 from the South Side Trust & Savings Bank, and petitioner and his wife executed 200 bonds secured by a mortgage trust deed on the leasehold and building to evidence and secure the payment of the loan. The proceeds of the loan were used to pay off the existing encumbrance on the property, to pay for an addition to the building which cost $ 16,250, and to pay the necessary brokerage commission and expenses in connection with the loan, leaving a small surplus over and above the several items above enumerated, which was paid to the petitioner.
6 T.C. 1048">*1050 The bonds were payable at the rate of $ 2,500 semiannually to and including November 1, 1931, and the balance of $ 57,500 on May 1, 1932, with interest at 6 1/2 percent per annum. All of the bonds which became due up to and including November 1, 1931, were paid at or about their respective maturity dates.
On June 8, 1931, the South Side Trust & Savings Bank failed to open its doors.
A bondholders' committee was formed for the bondholders who 1946 U.S. Tax Ct. LEXIS 193">*198 had purchased bonds on petitioner's building. On May 1, 1932, petitioner applied to the bondholders' committee and the bondholders themselves for an extension of the time of payment of this loan. He communicated with the individual bondholders, as well as the committee, and procured an extension to May 1, 1937, for the payment of the principal of the bonds. At no time did petitioner default in the payment of interest on the bonds.
During this extended period checks for interest were issued by petitioner directly to the holders of the bonds and were delivered to them by R. W. Gerding, secretary of the committee. Bondholders frequently visited the petitioner at his office in connection with the collection of their interest and to find out the status of the property. Petitioner kept a list of the bondholders, the dates of payment of their interest, the numbers of their bonds, and their addresses, and he was fully informed as to who his creditors on this bond issue were and where they were, and they were kept informed, from time to time, as to petitioner's general financial condition.
In 1937 petitioner again procured an extension of time for the payment of the bonds to 1942, and 1946 U.S. Tax Ct. LEXIS 193">*199 in that connection he paid 10 percent on account of the principal of the bonds, leaving an unpaid balance of $ 51,750 as of January 1, 1938.
On April 9, 1938, petitioner purchased $ 450 of bonds from Beatrice Johnson and Margaret Finn, owners thereof, and paid therefor $ 202.50. The checks of Sidney C. Nierman (a partner of the petitioner, whose office was the same as petitioner's) were issued to the owners of the bonds with an endorsement that they were in full payment of the purchase price of said bonds. Petitioner reimbursed Sidney C. Nierman for this payment, as Nierman was acting for petitioner in the transaction and the owners of the bonds knew that he was.
On June 9, 1938, petitioner purchased $ 3,600 of bonds from Beatrice Johnson and Margaret Finn, owners thereof, under the same circumstances as shown in the foregoing paragraph, and paid $ 1,620 therefor.
On August 17, 1938, petitioner purchased $ 900 of bonds from Beatrice Johnson, owner thereof, under the same circumstances as shown in the foregoing paragraphs and paid $ 405 therefor.
Summarizing the transactions in 1938, the total unpaid principal amount of the bonds purchased by petitioner during 1938 was the 6 T.C. 1048">*1051 1946 U.S. Tax Ct. LEXIS 193">*200 sum of $ 4,950 and the amount paid therefor was $ 2,227.50, or a difference of $ 2,722.50.
In 1938 petitioner purchased bonds from Dr. Kemp in the unpaid principal sum of $ 900 for $ 957. The Commissioner (by evident mistake) included the sum of $ 43 as income in connection with this Kemp purchase on the assumption that the unpaid amount of the bonds was $ 1,000 instead of $ 900, and on that assumption included in income for the year 1938 the sum of $ 2,767.50, instead of $ 2,722.50 shown above.
On February 15, 1939, petitioner purchased $ 1,800 of bonds owned by H. N. Samuels through McGraw & Co., who were representing Samuels in the transaction, and paid $ 900 therefor.
On June 16, 1939, petitioner purchased $ 450 of bonds directly from Dolly Stoecker, the owner thereof, and paid $ 225 therefor.
On October 23, 1939, petitioner purchased $ 180 of bonds of which Ernest Zentner was the owner, at the price of $ 86.50. The purchase was made through the brokerage firm of Anderson, Plotz & Co. Petitioner paid the firm a fee of $ 10 for making the purchase.
Summarizing the transactions of 1939, the total unpaid principal amount of bonds purchased by the petitioner was the sum of $ 2,4301946 U.S. Tax Ct. LEXIS 193">*201 and the amount paid therefor was the sum of $ 1,211.50, or a difference of $ 1,218.50.
On April 4, 1940, petitioner purchased through R. W. Gerding, secretary of the bondholders' committee, $ 270 of bonds of which Jens Hendrickson was the owner, and paid therefor the sum of $ 130. A fee of $ 7.50 was paid by petitioner to Gerding for making the purchase.
On May 21, 1940, petitioner purchased $ 450 of bonds of which Garnet Grayson was the owner and paid the sum of $ 210. The transaction was handled by R. W. Gerding, secretary of the bondholders' committee and a service charge of $ 7.50 was paid to Gerding for his services.
On May 23, 1940, petitioner purchased $ 2,700 of bonds of which Edna Mary Griffin was the owner and paid the sum of $ 1,080. The transaction was handled by R. W. Gerding, secretary of the bondholders' committee and a service charge of $ 27 was paid to Gerding for his services.
On June 19, 1940, petitioner purchased $ 1,800 of bonds of which Mary Melody was the owner and paid the sum of $ 720. The transaction was handled by R. W. Gerding, secretary of the bondholders' committee and a service charge of $ 18 was paid him for his services.
On July 1, 1940, petitioner1946 U.S. Tax Ct. LEXIS 193">*202 purchased $ 450 of bonds of which William Verhey was the owner and paid the sum of $ 200. The bonds were purchased through Anderson, Plotz & Co. The $ 200 which petitioner paid for these bonds included a fee of $ 15 to Anderson, Plotz & Co. for their services.
On July 3, 1940, petitioner purchased $ 450 of bonds of which John F. Sullivan was the owner and paid the sum of $ 200. The purchase 6 T.C. 1048">*1052 was made through Anderson, Plotz & Co. and the purchase price of $ 200 included a fee of $ 25 to Anderson, Plotz & Co. for their services.
On July 10, 1940, petitioner purchased $ 450 of bonds of which Edward Foley was the owner and paid the sum of $ 184.50. The purchase was made through Anderson, Plotz & Co. Petitioner paid a fee of $ 4.50 to Anderson, Plotz & Co. for making the purchase.
On September 23, 1940, petitioner purchased $ 450 of bonds of which Edward Foley was the owner and paid the sum of $ 185. The purchase was made through Anderson, Plotz & Co. and petitioner paid that firm a fee of $ 5 for making the purchase.
Summarizing the transactions in 1940, the total unpaid principal amount of the bonds purchased during 1940 by petitioner was the sum of $ 7,020 and the amount1946 U.S. Tax Ct. LEXIS 193">*203 paid therefor was the sum of $ 2,950, or a difference of $ 4,065.
There was never any listing of the bonds or a quoted price. Nobody was buying these bonds except petitioner.
The gross income from the real estate located at 47th Street and Drexel Boulevard, Chicago, Illinois, in 1926 was $ 34,105.61 and the net income was $ 15,335.81. The gross income and net income from the property depreciated from year to year from 1926 through 1940, so that in 1938, 1939, and 1940 the income was as follows:
| 1938 | 1939 | 1940 | |
| Gross income | $ 16,550.00 | $ 16,520.75 | $ 15,578.50 |
| Net income | 1,233.95 | 1,107.11 | 1,719.41 |
The above amounts of net income were after deduction of expenses, depreciation, and interest on the bonds.
The fair market value of this leasehold and buildings for the year 1938 was the sum of $ 80,000. It was the same in 1939 and 1940, less depreciation on the buildings which accrued subsequent to January 1, 1938. At all times during the years 1938, 1939, and 1940 the value of the buildings and leasehold exceeded the bonded indebtedness against the property.
In addition to the rental income from the above mentioned leasehold and buildings, petitioner had gross income1946 U.S. Tax Ct. LEXIS 193">*204 during the years 1938, 1939, and 1940, as follows:
| From Chicago | |||||
| Year | From | Interest | Dividends | Title & | Total |
| partnership | Trust Co. | ||||
| 1938 | $ 35,613.41 | $ 812.50 | $ 1,964.94 | $ 38,390.85 | |
| 1939 | 32,686.90 | 863.38 | 2,094.50 | 35,644.78 | |
| 1940 | 26,900.11 | 819.78 | 4,672.20 | $ 2,887.50 | 35,279.59 |
| Total | 95,200.42 | 2,495.66 | 8,731.64 | 2,887.50 | 109,315.22 |
6 T.C. 1048">*1053 Petitioner owned considerable other property in Chicago outside of the leasehold and buildings here in question. The details of this other property which petitioner owned in the taxable years are in the record, but it is deemed unnecessary to set forth further details as to such property here. On the strength of the showing of petitioner's assets and liabilities, we find petitioner was solvent during each of the taxable years 1938, 1939, and 1940.
Entertainment Expenses for Clients, etc.
In each of the years 1939 and 1940 petitioner was a partner of the firm of Jacobson, Nierman & Silbert, attorneys at law. Petitioner received from this firm for each of these years the aggregate sum of $ 2,850 in cash, which was charged to his account on the firm's books. Petitioner used these cash sums1946 U.S. Tax Ct. LEXIS 193">*205 withdrawn from his firm for his own day-to-day personal expenses and for expenses in connection with the business of petitioner for the payment of lunch and supper for employees of his law firm and for the entertainment of clients. Petitioner expended at least $ 750 in each of the taxable years 1939 and 1940 in the entertainment of employees and clients and was not reimbursed therefor by the firm or by the clients. He kept no itemized account of these expenditures.
All of petitioner's household, living and family expenses and major personal expenses were paid by checks of petitioner and are not here involved.
The gross income of the firm, of which petitioner produced most of the business during each of these years, was between $ 75,000 and $ 80,000.
Automobile Expenses.
In 1939 petitioner expended for operating his automobile the sum of $ 1,030.04 and in 1940 the sum of $ 1,051.66, and he deducted in his returns two-thirds of that expense as business expense. The Commissioner in his determination of the deficiencies allowed only one-third of these deductions. One-half of these automobile expenses was incurred in the personal use of the automobile by petitioner and his family. 1946 U.S. Tax Ct. LEXIS 193">*206 One-half of such expenses was incurred by petitioner in the use of the automobile for business purposes for his law firm in making trips to see clients, to interview witnesses, and other similar uses. Petitioner received no reimbursement from his law firm or his clients for these expenditures.
OPINION.
The main issue in this proceeding, which is common to all three of the taxable years, is whether petitioner is taxable on the difference between the face value of certain bonds upon which 6 T.C. 1048">*1054 he was liable as the issuer and the price for which he purchased some of these bonds during each of the taxable years. The facts as to the amounts of such bonds purchased and the price which was paid for them are not in dispute. The controversy between the parties concerns itself only with the manner, form, and effect of the purchases.
It is respondent's contention that it is a case controlled by , and petitioner is taxable on all the gain realized. On the other hand, petitioner contends that the bonds were all purchased under such circumstances and arrangements with the creditors as to bring the case within1946 U.S. Tax Ct. LEXIS 193">*207 Supreme Court's decision in , a later case than Kirby Lumber Co. We have endeavored to set out in our findings of fact a full statement of the facts and circumstances connected with each purchase in each of the taxable years. We shall not repeat those facts here. Suffice it to say the facts show that some of the bonds were acquired by petitioner through direct conferences and negotiations between him and the bondholders, with whom he was acquainted. These conferences were either between petitioner and the bondholders personally or between petitioner's half-brother and law partner, Sidney Nierman, representing petitioner, and the bondholder. As to these purchases, we hold that the doctrine of the American Dental Co. decision applies and petitioner is not taxable on that part of the gain which the Commissioner has determined.
The facts also show that petitioner acquired a number of the outstanding bonds through R. W. Gerding, secretary of a bondholders' committee, and through two security houses in Chicago and paid commissions on such purchases. As to those bonds, we think the situation is1946 U.S. Tax Ct. LEXIS 193">*208 analogous to that in , where the taxpayer acquired certain of its debentures at discount figures on the open market. As to such purchases, we held that the doctrine of American Dental Co. did not apply.
It is petitioner's contention in the instant case that there was no open market for the sale of his bonds. It is true that there was no open market for the bonds in the sense that they were bought and sold on any securities exchange or in an over-the-counter market. However, the manner in which petitioner acquired a number of his bonds through R. W. Gerding, secretary of the bondholders' committee, and through the security dealers, Anderson, Plotz & Co., and through McGraw & Co., bears close resemblance to purchase in the open market, if, indeed, it does not properly fall within that classification. As to these purchases, the personal element we think necessary to make a gift within the meaning of the American Dental Co. case was absent.
6 T.C. 1048">*1055 As an example of what we mean by the above statement, one of the transactions involved in the instant case was the purchase by petitioner, through1946 U.S. Tax Ct. LEXIS 193">*209 R. W. Gerding, secretary of the bondholders' committee, of $ 2,700 face value of bonds owned by Edna Mary Griffin at 40 cents on the dollar, amounting to $ 1,080. Petitioner paid Gerding $ 27 for making this purchase in his behalf and claims that we should not recognize the gain to him, under the doctrine of the American Dental Co. case, supra. With reference to this transaction, George D. Griffin, husband of Edna Mary Griffin, testified on behalf of respondent. His testimony in substance was that he had practiced medicine in Chicago, Illinois, for 37 years; that he had custody of his wife's bonds, kept them in a vault, and always represented his wife in bond transactions; that he negotiated the sale in question with the bondholders' committee and received for the bonds 40 cents on the dollar flat. He further testified he was not acquainted with the petitioner and probably had never seen him before. While Griffin was the only witness called by respondent to testify as to any particular bond transaction, we think this testimony is illustrative of the nature of the purchases which were made for petitioner's account by Gerding and by the two firms which were dealers in securities. 1946 U.S. Tax Ct. LEXIS 193">*210 On the basis of the evidence in the record, we can not hold that these purchases fall within the ambit of the American Dental Co. case. Therefore, applying what we have said above to petitioner's bond purchases for each of the respective taxable years, we make the following holdings:
As to 1938 petitioner has proved that all the bonds which he purchased in that year were after direct negotiations and agreements with the bondholders. He did not purchase through any third party and paid no commissions or other fees. We hold that the doctrine of the American Dental Co. case applies to these purchases.
As to 1939, only $ 450 face value of the bonds purchased in that year for $ 225 falls within the above classification. This purchase was made by petitioner after direct negotiation with the owner of the bond, Dolly Stoecker. All the rest of the purchases which petitioner made in 1939 were either through R. W. Gerding, secretary of the bondholders' committee, or through the two dealers in securities which we have named in our findings of fact. In each instance, save one, in making these purchases petitioner paid a fee to the one making the purchase in his behalf. For reasons1946 U.S. Tax Ct. LEXIS 193">*211 already stated, we hold that petitioner is taxable on the gain which the Commissioner has determined resulted from these particular purchases, except the one made direct from Dolly Stoecker.
As to 1940, the evidence shows that all the purchases made by petitioner in that year were made either through R. W. Gerding, secretary 6 T.C. 1048">*1056 of the bondholders' committee, or through Anderson, Plotz & Co., security dealers. In each instance petitioner paid a fee to the one acting for him in making the purchase. No bonds were purchased in 1940 by petitioner in dealing directly with the owners. Therefore, for reasons already stated, we sustain the Commissioner as to all purchases in 1940.
Petitioner contends, in the alternative, that at the time he purchased said bonds he was insolvent and that he was still insolvent after the purchases were made, citing . It requires no citation of authorities, of course, that in establishing this contention the burden of proof is on petitioner. We think he has failed to sustain that burden. It is true that petitioner did establish by the evidence1946 U.S. Tax Ct. LEXIS 193">*212 that there had been considerable decline in the value of property which he owned and in the revenues which it had been producing, but petitioner failed to establish to our satisfaction that he was insolvent. In fact, we think that the weight of the evidence establishes that he was solvent in each of the taxable years, and we have so found. Considering the property in question against which the bonded indebtedness existed, it yielded petitioner a small net income in each of the taxable years, after all expenses, depreciation, and the interest on the bonds were deducted. Also, petitioner had considerable net income in each of the taxable years from his law practice, as shown in our findings of fact.
We hold, after considering all the evidence, that petitioner was solvent in each of the taxable years and that the doctrine of the Dallas Transfer & Terminal Warehouse Co. case, supra, has no application. Petitioner's alternative contention is not sustained.
Entertainment Expenses for Clients and Employees.
The testimony of petitioner is to the effect that in each of the taxable years 1939 and 1940 he drew $ 2,850 from his law firm to defray certain personal expenses of his1946 U.S. Tax Ct. LEXIS 193">*213 own, such as taking meals downtown while working at nights and expenses of entertaining clients and employees of the firm. Petitioner testified that he expended not more than $ 1,000 of this amount in each of the taxable years for his own meals, tips, etc., and that the balance was expended in entertaining customers and in paying for lunches and suppers of employees of the firm for which he was not reimbursed by the firm. While petitioner in effect claims that he spent $ 1,850 in each of the taxable years for these purposes, he only claims a deduction of $ 750 in each of the taxable years 1939 and 1940 therefor. Petitioner did not keep any record of separate items of these expenditures. However, he has testified at 6 T.C. 1048">*1057 length as to them and as to the circumstances under which he made them, and we are convinced that he expended at least $ 750 for these purposes, and we have so found in our findings of fact.
In a computation under Rule 50 the Commissioner should allow petitioner a deduction of a total of $ 750 in each of the taxable years 1939 and 1940 for these entertainment expenses. Of this amount, we do not know how much the Commissioner has already allowed in his determination1946 U.S. Tax Ct. LEXIS 193">*214 of the deficiencies. The detailed statement which usually accompanies the deficiency notice is not attached to the petition. Some of the statement is attached, but the details which show the adjustments that the Commissioner has made have been omitted from the statement.
Automobile Expenses.
The uncontradicted evidence in the record is that petitioner expended $ 1,030.04 in the operation of his automobile during 1939 and $ 1,051.66 in 1940 for the same purpose. Petitioner claims that at least two-thirds of these expenditures was incurred in the firm's business, for which he was not reimbursed, and that not more than one-third was incurred in operating the automobile for the personal use of petitioner and his family. Respondent's contention is that petitioner kept no record of his automobile expenses, except as to amounts expended for all purposes, and that he fails, for a lack of evidence, to support the deductions which he claims.
We have carefully examined and considered petitioner's testimony as to these automobile expenses and have decided that one-half of the total amount expended in 1939 and 1940 should be attributed to personal expenses, which are not deductible, and1946 U.S. Tax Ct. LEXIS 193">*215 one-half should be attributed to use for business purposes, which are deductible. Apparently the Commissioner in his determination of the deficiencies has allowed as a deduction one-third of these expenses and has disallowed two-thirds. In a recomputation under Rule 50 one-half of such expenses should be allowed as a deduction and the other one-half should be disallowed because incurred for petitioner's own personal benefit and convenience and that of his family. Cf. .
Decision will be entered under Rule 50.
Kern, J., dissenting: In its opinion in Helvering v. American Dental Co., 318 U.S. 322">318 U.S. 322, the Supreme Court cited, with approval, United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1, and unmistakably indicated 6 T.C. 1048">*1058 that it considered that the two cases were distinguishable. I submit that the majority opinion is in error in finding the distinction to be the impersonal character of the transaction and in applying to the facts of the instant case the sole criterion of whether "the bonds were acquired by petitioner through direct conferences1946 U.S. Tax Ct. LEXIS 193">*216 and negotiations between him [taxpayer's agent] and the bondholders with whom he was acquainted," for the purpose of determining whether the doctrine of the American Dental Co. case or the doctrine of the Kirby Lumber Co. case should be controlling.
The true point of distinction between the two cases is, to my mind, found in the following language in the American Dental Co. opinion:
* * * Gifts however, is a generic word of broad connotations * * *. Its plain meaning in its present setting denotes, it seems to us, the receipt of financial advantages gratuitously.
* * * *
* * * The fact that the motives leading to the cancellations were those of business, or even selfish, if it be true, is not significant. The forgiveness was gratuitous, a release of something to the debtor for nothing and sufficient to make the cancellation here gifts within the statute. [Emphasis supplied.]
Thus, the criterion to be applied in determining whether the American Dental Co. case or the Kirby Lumber Co. case controls the transactions here in question is not whether the bonds were acquired by petitioner through direct conferences and negotiations with bondholders who were1946 U.S. Tax Ct. LEXIS 193">*217 personal acquaintances, but whether the acquisition of these bonds by petitioner at prices below their face value constituted "the receipt of financial advantages gratuitously," so that it might be said that "the forgiveness [of the excess of the face value over the price paid] was gratuitous * * * and sufficient to make the cancellation here gifts within the statute."
Applying the criterion of distinction to the facts of the instant case, it is apparent that none of the transactions here in question was gratuitous. Petitioner's bonds which he acquired were not payable until 1942. He purchased them in 1938, 1939, and 1940 by paying to the bondholders an amount smaller than the amount which he would have been obliged to pay if the bonds had been held until maturity. The payment of a part of a debt before it is due constitutes consideration which will support a promise of the creditor to waive or forgive the balance of the debt. See ; Williston on Contracts, Rev. Ed. 1936, vol. 1, sec. 121. Since a consideration existed by reason of the equivalent of the payment of an obligation before maturity, the transactions1946 U.S. Tax Ct. LEXIS 193">*218 can not be considered as gratuitous within the meaning of the American Dental Co. case, regardless of the fact that petitioner's officers were personally acquainted with the bondholders who received these payments.
6 T.C. 1048">*1059 The majority opinion appears to go on the theory that all transactions carried on directly with personal acquaintances must be gratuitous. It is my opinion that, while all gratuitous transactions will normally be carried on directly between personal acquaintances, not all transactions carried on directly between personal acquaintances are gratuitous. The instant case is an example.
To make the tax consequences to petitioner of the acquisition of his bonds before maturity at less than their face value depend on each case of acquisition of a bond solely upon the degree of acquaintance shown to exist with the particular bondholder and the personal or impersonal character of the negotiations leading to their acquisition, is to give an effect to the American Dental Co. decision which, in my opinion, was not intended by the Supreme Court and which its opinion does not compel.
It may also be pointed out that the basic facts here presented show a typical 1946 U.S. Tax Ct. LEXIS 193">*219 Kirby Lumber Co. case: The borrowing of money, the issuance of bonds to evidence the indebtedness thereby created, and the acquisition of these bonds by the debtor from the bondholders for payments less than those called for on the face of the bonds, at a time when the value of the assets of the debtor was in excess of his liabilities. Such a state of facts can not be said to be analogous to "a reduction of sale price" to be "treated as a readjustment of the contract rather than as a gain." The Supreme Court said in the American Dental Co. case:
* * * In , the taxpayer purchased its own bonds at a discount. It was held taxable on the increase in net assets which resulted.
It later used language in its opinion which may be construed as characterizing the Kirby Lumber Co. case as one of "financial betterment through the purchase by a debtor of its bonds in an arm's length transaction." If we combine the two characterizations, we find the Supreme Court considering the Kirby Lumber Co. case as one in which the debtor corporation purchased its own bonds in an arm's length transaction at a1946 U.S. Tax Ct. LEXIS 193">*220 discount and thus bettered itself financially. The instant case can be accurately described in exactly the same words. Only by distorting the meaning of "an arm's length transaction" can this case be distinguished. It is impossible for me to believe that the Supreme Court intended the words "an arm's length transaction" to exclude those transactions carried on "through direct conferences and negotiations" between the officers of the debtor corporation and bondholders with whom they happened to be personally acquainted.