above referred to, the plaintiffs on July 21, 1934, each paid additional taxes for the year 1932.In the case of Mr. Felin the additional tax amounted to $663.54 with interest of $53.73 and in the case of Mrs. Felin $69.82 with interest of $5.65.
On November 17, 1934, Mr. Felin paid the deficiency assessment above referred to, amounting to $3,745.34, with interest of $374.53, or a total of $4,119.87. On November 30, 1934, Mrs. Felin paid the deficiency assessment above referred to amounting to $146.83, with interest of $14.68, or a total of $161.51. On January 16, 1935, each of the plaintiffs filed claims for the refund of the additional taxes and interest so paid, and these claims were rejected by the Commissioner on June 19, 1935.
Other facts which may be material appear in the agreed statements of facts filed by the parties which are incorporated herein by reference.
The question which these cases raise is whether the gain admittedly derived by the plaintiffs from their Lumber & Millwork Company notes was a capital gain and taxable as such or an ordinary gain subject to normal tax and surtax. The notes had been held by the plaintiffs for more than two years and were admittedly capital assets. The answer to this question, therefore, depends upon whether the transaction involved a sale or exchange of capital assets within the meaning of section 101(c) (1) of the Revenue Act of 1932, 26 U.S.C.A. § 101 note, which defines "capital gain" as meaning "taxable gain from the sale or exchange of capital assets consummated after December 31, 1921." Clearly there was no sale of the notes. The question, therefore, resolves itself into whether there was an exchange of the notes within the meaning of the law.
The plaintiffs argue that they exchanged their notes for the Erny and Nolen mortgages. Whether they did so is, however, a question of fact, and it is clear from the facts as I have found them that they did not do so. Whatever might have been the situation if the notes had been delivered by the plaintiffs to Messrs. Erny and Nolen in return for the mortgages and afterward presented by the latter to the trustee for redemption, the fact is that the plaintiffs themselves presented their notes to the trustee for redemption, received the redemption price in cash, and with a part of the cash thus received purchased the mortgages from Messrs. Erny and Nolen. Under these circumstances the exchange between the plaintiffs and Messrs. Erny and Nolan was of cash for mortgages and the notes did not enter into the exchange at all.
The plaintiffs further contend, however, that, even though it be held that their notes were redeemed by Lumber & Millwork Company, the redemption itself constituted an exchange of the notes for cash within the meaning of section 101(c) (1) of the Revenue Act 1932, 26 U.S.C.A. § 101 note. They argue that the language of the statute should be construed as if it read "sale or other disposition of capital assets" and point to certain congressional proceedings in support of their view. In my opinion, however, the language of the statute is clear and such a construction is inadmissible. Accordingly the transaction, which was essentially but the payment by the Lumber & Millwork Company of certain of its outstanding obligations in accordance with their terms, was neither a sale nor exchange of the notes within the meaning of the statute. Watson v. Commissioner, 27 B.T.A. 463; Braun v. Commissioner, 29 B.T.A. 1161; Brown v. Commissioner, 36 B.T.A. 178.
The following language of Member Van Fossan of the Board of Tax Appeals in Watson v. Commissioner, supra, 27 B.T.A. 463, at page 465, is applicable to the present case:
"It is elemental that where a statute is clear and unambiguous in its terms and provisions resort should not be had to legislative history to determine the limits of its compass. The statute in question is so simple in construction and so clear in meaning that it justifies no resort to the Congressional Committee's reports as an aid in the interpretation thereof.
"The words 'sale or exchange' are ordinary words of well established meaning. Taken in their context they are susceptible of no misconstruction. Payment of the amounts specified in the bonds, either at maturity or pursuant to an authorized call prior to maturity, is not a 'sale or exchange' of such bonds. It is merely the payment of an obligation according to its fixed terms. For these reasons we believe the decision in Henry P. Werner, supra [ Werner v. Commissioner, 15 B.T.A. 482], was erroneous and it is accordingly overruled.
"In the instant case there was neither a 'sale' nor an 'exchange' of a capital asset when the Liberty bonds were paid at maturity. There was the satisfaction of an obligation of the United States by payment. Loss incurred or gain realized in such a transaction is not a capital loss or a capital gain under the definition found in the statute."
Braun v. Commissioner, supra, and Brown v. Commissioner, supra, each involved the gain derived from the redemption prior to maturity of corporate obligations, and the Board in each case held, following Watson v. Commissioner, supra, that these gains were not derived from the sale or exchange of the obligations but rather from their payment. These cases are indistinguishable from the present one. Being in accord with them, I conclude that the gains derived by the plaintiffs in 1932 upon the redemption of the notes of the Lumber & Millwork Company did not result from the sale or exchange of the notes, and were, therefore, not capital gains within the meaning of the Revenue Act.
As the Board pointed out in Childs v. Commissioner, 35 B.T.A. 1125, the case is not analagous to that of the redemption of preferred stock, since the latter does not involve the payment and cancellation of existing indebtedness. Furthermore, the fact that the Congress in enacting the Revenue Act of 1934 specifically added a provision in section 117, 26 U.S.C.A. § 101, that amounts received by a bondholder upon the retirement of corporate bonds should be taxable as capital gain raises a strong presumption that this was not so under the prior act. This amendment of the prior law was made after the latter had been construed otherwise by the Board in Watson v. Commissioner, supra, and after that construction had been adopted by the Commissioner, I.T. 2678, XII-1 C.B. 117. It thus becomes clear that the Congress intended by this new provision to change the prior rule. United States v. Southern Pacific Co., D.C., 230 F. 270; United States v. Bashaw, 8 Cir., 50 F. 749, reversed on other grounds 152 U.S. 436, 14 S. Ct. 638, 38 L. Ed. 505.
I accordingly reach the following conclusions of law:
The Lumber & Millwork Company notes owned by the plaintiff which were redeemed by the company in 1932 were not sold or exchanged by the plaintiffs within the meaning of section 101(c) (1) of the Revenue Act of 1932, 26 U.S.C.A. § 101 note.
The gain derived by the plaintiffs from the redemption of said notes was an ordinary gain and was properly included by the Commissioner in their ordinary net income for the year 1932.
The additional income taxes assessed against and collected from the plaintiffs for the year 1932 were legally assessed and collected and the plaintiffs are not entitled to the refund thereof.
I accordingly find in favor of the defendant and against the plaintiff in each suit.
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