Great W. Power Co. of Cal. v. Comm'r, 297 U.S. 543 (1936)
Case details
Bluebook Citation
Great W. Power Co. of Cal. v. Comm'r, 297 U.S. 543 (1936)
Full caption
GREAT WESTERN POWER COMPANY OF CALIFORNIA v. COMMISSIONER OF INTERNAL REVENUE.
Country
United States
Jurisdiction
Federal
Court
Supreme Court of the United States
Decided
Mar. 16, 1936
GREAT WESTERN POWER COMPANY OF CALIFORNIA v. COMMISSIONER OF INTERNAL REVENUE.
CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.
No. 525. Argued March 5, 1936.—Decided March 16, 1936.
Under § 234 (a), Revenue Act of 1924, and Treasury Regulations 65, Art. 545, § 3, where bonds of a corporation, sold at a discount, are retired by exchanging for them bonds of another issue and paying a premium, the unamortized discount and expense of issuance allocable to the retired bonds, and the premium paid and expense incurred in the exchange, are part of the cost of obtaining the loan and, for the purpose of deduction in income accounting, should be amortized over the term of the bonds delivered in the exchange. P. 546. 79 F. (2d) 94, affirmed.
Certiorari, 296 U. S. 568, to review a judgment reversing a decision of the Board of Tax Appeals, 30 B. T. A. 503, which overruled the Commissioner of Internal Revenue in respect of the disallowance of deductions in the Power Company’s income tax return.
Mr. Thomas R. Dempsey, with whom Mr. A. Calder Mackay was on the brief, for petitioner.
Mr. John MacC. Hudson, with whom Solicitor General Reed, Assistant Attorney General Wideman, and Mr. Sewall Key were on the brief, for respondent.
Mr. Justice Roberts delivered the opinion of the Court.
The parties disagree as to petitioner’s right to deduct from gross income for 1924 unamortized discount, premiums, and expenses paid and incurred in that year in connection with the retirement of certain bonds. The petitioner took the deduction in its income tax return. p. 544The respondent disallowed it and determined a deficiency. The petitioner appealed to the Board of Tax Appeals which held the deduction proper.1 The Circuit Court of Appeals reversed the Board’s decision in part.12 We granted the writ to resolve a conflict.3
March 1, 1919, the company executed a mortgage securing four series of bonds, one of which was designated “Series B 7%.” February 1, 1921, the company executed another mortgage, securing bonds known as “General Lien Convertible 8% Gold Bonds,” and thereby covenanted to deposit and pledge with the trustee Series B 7’s equal in par value to the General Lien 8’s at any time outstanding. The indenture provided that when this should be accomplished the debtor should have the right to redeem the General 8’s at 105 and accrued interest, the holders to have the option to receive cash or Series B bonds, of equal face value, plus five per cent, in cash. The General Lien 8’s were issued at a discount of $150,- 000 and an expense of $22,283.54. Prior to December 31, 1923, certain General Lien 8’s had been redeemed for cash and the then unamortized discount and expense allocable to the bonds retired had been charged off in the year of retirement. May 8, 1924, the company called the remaining outstanding General Lien 8’s for redemption August 1, 1924. The holders of $2,354,000 face value exercised the option to exchange for Series B 7’s at par and a cash premium of five per cent. The total premium paid to them was $117,725 and the expense of the conversion was $1,461.05. The unamortized discount and expense of issuance in respect of the General Lien 8’s thus exchanged, at the date of exchange, was $126,176.97. For the remaining General Lien 8’s, which were not ex-
130 B. T. A. 503. 2 79 F. (2d) 94.
8 San Joaquin L. & P. Corp. v. McLaughlin, Collector, 65 F. (2d) 677.
changed for Series B 7’s, cash was paid at the rate of 105% of par and the company incurred certain expenses in the transaction. The total of the premium, the expense, and the unamortized discount applicable to all of the bonds redeemed for cash or in exchange for Series B bonds was charged off in 1924 and taken as a deduction from income for that year. The company keeps its accounts on the accrual basis. The Commissioner disallowed the entire deduction, but before the Board he admitted the propriety of so much of it as applied to bonds redeemed for cash. He insisted, however, that as to those retired by exchange of the Series B 7’s the discount, premium, and expense should be amortized over the life of the latter. The Board overruled his contention, but the Circuit Court of Appeals sustained it, holding that the items would not be deductible as realized losses until payment or redemption of the Series B bonds, and should be amortized in annual instalments during their term.
Section 234 (a) of the Revenue Act of 19244 directs that in computing the net income of a corporation subject to the tax there shall be allowed as deductions ordinary and necessary expenses paid or incurred during the taxable year in carrying on the business, interest paid or accrued within the year on indebtedness, and losses sustained during the year not compensated by insurance or otherwise. The Treasury promulgated a regulation under the Revenue Act of 1918 covering treatment of discounts and premiums, which, with immaterial changes, has remained in force under all the revenue acts and appears as Art. 545 of Regulations 65 applicable to the Revenue Act of 1924.5
4 c. 234, 43 Stat. 253. '“ART. 545. Sale and retirement of corporate bonds.— . . , “(3) (a) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or
43927°—36------ 35
Although the article does not expressly cover the items in question other than discount and premiums paid at redemption, expense in connection with the issuance of the securities is deductible on the same theory as unamortized discount.6 It has accordingly been held that where an issue of bonds is retired for cash, whether the cash be obtained by the sale of a new issue or not, the items in question are deductible in the year of retirement.7
The question then is whether, upon an exchange of one obligation for another which is to be retired, the transaction is to be viewed as if the retirement were accomplished by the payment of cash. If the retired bonds had not been called, the expense items incurred in connection with their issuance would properly be amortized over the remainder of their life. Here the petitioner substituted a new obligation for the old. The remaining unamortized expenses of issue of the original bonds and the expense of the exchange are both expenses attributable to the issuance of the new bonds and should be treated as a part of the cost of obtaining the loan. They should, accordingly, be
amortized over the life of the bonds. (6) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the taxable year, (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted) over the purchase price is gain or income for the taxable year.”
6 Helvering v. Union Pacific R. Co., 293 U. S. 282; Helvering n. California Oregon Power Co., 64 App. D. C. 125; 75 F. (2d) 644.
7 Helvering n. California Oregon Power Co., supra; Helvering v. Central States Electric Corp., 76 F. (2d) 1011; Helvering n. Union Public Service Co., 75 F. (2d) 723; T. D. 4603, XIV C. B. 46, p. 3.
amortized annually throughout the term of the bonds delivered in exchange for those retired.
The judgment of the Circuit Court of Appeals is
Affirmed.
WISCONSIN v. MICHIGAN.
No. 12, original. Argued March 2, 3, 1936.—Decided March 16, 1936.
Final decree confirming report of special master and establishing boundary between Wisconsin and Michigan.
This suit was brought to correct an earlier decree, 272 U. S. 398, entered after the decision reported 270 U. S.
295. The opinion in the present case, explaining the corrections to be made and directing a second reference to the Special Master, Frederick F. Faville, Esq., of Des Moines, Iowa, is in 295 U. S. 455. The decree printed below is the old decree as now amended.
Mr. Adolph J. Bieberstein, with whom Mr. James E. Finnegan, Attorney General of Wisconsin, Mr. Joseph G. Hirschberg, Deputy Attorney General, and Mr. J. E. Messerschmidt, Assistant Attorney General, were on the brief, for plaintiff.
Mr. Edward A. Bilitzke, with whom Mr. David H. Crowley, Attorney General of Michigan, and Mr. James F. Shepherd, Deputy Attorney General, were on the brief, for defendant.
Decree.
Michigan brought suit in this court against Wisconsin to have ascertained and established a part of the boundary between them. March 1, 1926, we announced our decision. 270 U. S. 295. To carry it into effect, the States acting through their counsel agreed upon and submitted a form of decree. November 22, 1926, the court relying p. 548upon the agreement and consent of the parties entered the decree proposed. 272 U. S. 398.
November 7, 1932, Wisconsin brought this suit against Michigan, alleging that as a result of mistakes of the parties the decree of November 22, 1926, did not carry our decision into effect as to the tracts called “Grassy Island” and “Sugar Island” on the north bank and a short distance from the mouth of the Menominee River and as to the Green bay section of the boundary. Issue was joined, and a special master took evidence, heard counsel for the States, made findings of fact, stated his conclusions of law and recommended a form of decree. The parties filed exceptions to his report and, after hearing counsel, the court May 20, 1935, decided (295 U. S. 455, 462):
“The decree to be entered in this case will establish the boundary through and along, or near, the middle of the waters of Green bay that are here involved. That line commences at a point midway between the piers at the harbor entrance of the Menominee River; thence east by south seven and one-eighth miles; thence approximately north by east one-eighth east, about eight and seven-eighths miles; thence to and along a line in or near the middle of the bay to a point west of the Rock Island passage; thence easterly by courses and distances to be designated through that passage to the boundary in the middle of Lake Michigan. The decree will appropriately define the tracts called ‘Grassy Island’ and ‘Sugar Island’ and declare them to belong to Michigan.” And the court ordered (p. 463):
“The case is referred to the special master, and he is directed to prepare and submit to the court a form of decree which will give effect to this decision. Inasmuch as the preparation of the decree may involve the ascertainment of physical facts and the formulation of technical descriptions, the master is authorized to hear counsel, take evidence and procure such assistance, if any, as may be p. 549necessary to enable him conveniently and promptly to discharge the duties here imposed upon him. He may call upon counsel to propose forms of decree. He is directed to give them opportunity to submit objections to the form prepared by him and to include the objections, if any, in his report.”
The master took evidence, viewed the locus, heard counsel and in accordance with the court’s directions filed his report. It includes a form of decree. Wisconsin objects to the proposed decree in respect of the part of the boundary in Green bay, Rock Island passage and Lake Michigan not defined by our decision of May 20, 1935, and submits for consideration alternative forms of decree. Michigan urges adoption of that proposed by the master.
After hearing counsel for the respective States, the court does hereby order, adjudge and decree:
1. Wisconsin’s objections are overruled. The definitions of the boundary recommended by the master are approved and adopted.
2. The decree of this court, entered November 22, 1926, in the suit brought by Michigan against Wisconsin, is modified by striking therefrom the provisions that purport to define the parts of the boundary in the Menominee River downstream from the concrete bridge on United States Highway No. 41 between the cities of Menominee, Michigan, and Marinette, Wisconsin, and in the waters of Green bay, the Rock Island passage and Lake Michigan and by inserting in lieu of the parts of the decree so stricken out, definitions of the boundary recommended by the master.
3. The decree in Michigan v. Wisconsin, as modified by this decree, defines and establishes the boundary between these States. As modified, it is as follows:
It is ordered, adjudged and decreed:
That the boundary between the States of Michigan and Wisconsin along the following course be and it is hereby fixed and finally established as follows:
From Lake Superior through the middle of the main channel of the Montreal River, to the headwaters thereof, as established in the survey of Captain Cram at the junction of the Pine River and Balsam Creek (also known as Lehman’s Creek), thence along the line of the survey of William A. Burt of 1847, to the center of the channel between Middle and South Islands in the Lake of the Desert, thence continuing along the line of said survey to the shore of Lake Brulé, thence along the southerly shore of Lake Brulé to the center of the main channel of the River Brulé, thence down the center of the main channel of the rivers Brulé and Menominee, to the intersection of the longitudinal center line of the concrete bridge on United States Highway No. 41 between the cities of Menominee, Michigan, and Marinette, Wisconsin, with the center line of the stream crossing of said bridge, which said point of intersection bears north forty-two degrees and thirty minutes (42°30') east, a distance of four hundred twenty-four and five-tenths (424.5) feet from the southerly end of said stream crossing of said bridge, and a distance of nine hundred and ninety-nine and ninety-three hundredths (999.93) feet upon the same course from the center line of Eggner street as now laid out and existing in the city of Marinette, Wisconsin, and which said point also bears south forty-two degrees and thirty minutes (42°30') west, two thousand three hundred fifty-eight and one-tenth (2,358.1) feet from the south line of Ogden avenue as now laid out and existing in the city of Menominee, Michigan, all these courses being measured along the center line of said bridge and its approaches, thence south seventy-four degrees and twenty-eight minutes (74°28') east, one thousand one hundred twenty-seven and seven-tenths (1,127.7) feet to a point from which a monument set upon a nearby island consisting of an iron pin set in a concrete block of p. 551approximately one-half ton bears south eighteen degrees and fifty-five minutes (18°55') west, a distance of seventy-one (71) feet, thence south sixty-six degrees and fifty-four minutes (66°54') east, one thousand seven hundred thirty-nine and three-tenths (1,739.3) feet to a point from which a monument set in a nearby island consisting of an iron pin set in a concrete block of approximately one-half ton bears south nineteen degrees and thirty minutes (19°30') west, one hundred sixty and two-tenths (160.2) feet, thence along the center line of the dredged channel of the Menominee River through the center of the movable span of the drawbridge between the cities of Menominee and Marinette, and continuing along the center of said dredged channel of said river to a point midway between the outer ends of the Menominee Harbor piers. Provided, that the section of the boundary in the Brulé and Menominee rivers shall follow the main channel thereof, except that where islands occur in the Brulé River or in the Menominee River, down to and inclusive of the Quinnesec Falls, extending to the line between sections 5 and 6, Township 38 north, of Range 20 east, of the Wisconsin Public Survey, extended across said river, the line shall pass through the channel nearest the Wisconsin bank, so as to throw all such islands into Michigan; and where islands occur in the Menominee River below the Quinnesec Falls, and upstream from the above-mentioned concrete bridge on United States Highway No. 41, the line shall pass through the channel nearest the Michigan bank, so as to throw all such islands into Wisconsin.
From a point midway between the outer ends of the Menominee Harbor piers, thence upon a true course of which the azimuth is one hundred one degrees and fifteen minutes (101 ° 15') for eleven thousand four hundred seventy (11,470) meters, the same being approximately east by south for seven and one-eighth (7ys) miles.
Thence upon a true course of which the azimuth is eleven degrees and forty-five minutes (11°45') for fourteen thousand two hundred fifty (14,250) meters, the same being approximately north by east for eight and seven-eighths (8%) miles.
Thence upon a true course of which the azimuth is fifty-eight degrees and fifty minutes (58° 50') for eight thousand two hundred ninety (8,290) meters, the same being approximately northeast by east one-fourth east for five and one-eighth (5%) miles.
Thence upon a true course of which the azimuth is forty-two degrees and eighteen minutes (42° 18') for sixteen thousand seven hundred eighty (16,780) meters, the same being approximately northeast one-fourth north for ten and one-half (10%) miles.
Thence upon a true course of which the azimuth is twenty-eight degrees and ten minutes (28° 10') for eleven thousand five hundred eighty (11,580) meters, the same being approximately north northeast one-half east for seven and one-fourth (7%) miles.
Thence upon a true course of which the azimuth is ninety degrees (90°) for twenty-seven thousand one hundred seventy (27,170) meters, the same being approximately east for sixteen and seven-eighths (16%) miles.
Thence upon a true course of which the azimuth is one hundred twenty degrees (120°) for forty-five thousand six hundred (45,600) meters, the same being approximately southeast by east three-eighths east for twenty-eight and three-eighths (28%) miles to the center of Lake Michigan.
In the, descriptions contained in this decree, all azimuths are computed from 0 as true north, clockwise.
The costs of this action, including the fees and expenses incurred by the special master, shall be divided equally between the parties.