On Petitions for Review of the Decisions of the United States Board of Tax Appeals (now Tax Court of the United States).
Before BIGGS, MARIS, and GOODRICH, Circuit Judges.
This appeal involves personal holding company surtaxes for the years 1937 and 1938.The petitioners are B. D. Phillips, Incorporated, a Delaware corporation, and B. D. Phillips, its sole shareholder. The latter, it has been stipulated, is liable as the transferee of the entire assets of the corporation for any deficiencies in taxes determined to be due from the corporation for the years in question. The issue presented is whether certain payments made by the corporate taxpayer in the years 1937 and 1938 were deductible as amounts used to discharge a pre-1934 indebtedness. The Commissioner did not allow these deductions and was sustained in this action by the Board of Tax Appeals, now the Tax Court of the United States.
The Revenue Acts of 1936 and 1938 allow, in the computation of the undistributed net income of a personal holding company subject to surtax, a deduction for "Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind incurred prior to January 1, 1934, * * * "*fn1
In Commissioner of Internal Revenue v. Sun Pipe Line Co., Cir., 1942, 126 F.2d 888,*fn2 This Court held that, as used in the statute, "indebtedness" referred merely to an amount owing both prior to and after the date specified; the fact that the identity of the obligees of that indebtedness may have changed was considered to be of no consequence. This construction was contrary to the one contained in the Treasury Regulations to the extent that the latter required continuity of identity between the persons in the debtor-creditor relation.*fn3 The Commissioner in his argument has, in the conciliatory language of reconsideration, at least tacitly asked that the Sun Pipe Line Co., decision be overruled. However, we are still convinced that the result there reached is sound and proper, although we think, as pointed out in the concurring opinion of Judge Jones, that some of the discussion concerning the effect to be given regulations was not necessary to the decision of the case, and do not wish to be bound by it.
The alternative argument of the Commissioner is that even if the Sun Pipe Line Co., decision be accepted, it does not control the instant factual situation. In the former, it is said, the transactions were simple and direct. The corporation borrowed from B to discharge a pre-1934 indebtedness owed A and was entitled to a deduction when it ultimately paid B. Here, without any charge of tax evasion even being hinted, the transactions are described as "unnecessarily" circuitous and indirect and it is urged that therein lies the difference. We have no way of knowing whether the various transactions which were conducted between the parties and which terminated with the payments for which credit is claimed were unnecessarily circuitous or not. It may be granted that they were involved. But the statute says nothing about circuity, of either necessary or unnecessary variety. By its terms, the only requirement a corporate taxpayer must meet to be allowed the deduction is to show that it used or irrevocably set aside funds to pay or retire a debt incurred prior to January 1, 1934. We think the taxpayer has shown this here.
The transactions leading to the claimed deduction are best presented in chronological order: 1933. Cororation owes (inter alia)
$259,821.80 to Shareholder Phillips - book account
25,000.00 to B 25,000.00 to C 197,000.00 to E*fn4 Promissory notes
1934. (1) Shareholder Phillips pays on behalf of Corporation's 1933 ...