Opinion
Docket Nos. 3571 3572.
1945-03-31
BABETTE G. LURIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LOUIS R. LURIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Tevis Jacobs, Esq., for the petitioners. T. M. Mather, Esq., for the respondent.
Preferred income notes issued originally without registration, were duly registered in August 1940 and retired in 1941. Held, that to qualify under section 117(f), Revenue Act of 1938, the securities retired must have been in registered form for at least the minimum period of 18 months provided by section 117(b). Tevis Jacobs, Esq., for the petitioners. T. M. Mather, Esq., for the respondent.
The respondent determined a deficiency of $1,517.34 in the income tax of petitioner Louis R. Lurie for the year 1941 and of $1,177.03 in the income tax of petitioner Babette G. Lurie for the same year.
The sole issue is whether a gain of $3,448.53 realized by each petitioner upon the retirement of preferred income notes of Hilton Hotel Co. of California constituted capital gain or ordinary income.
FINDINGS OF FACT.
The facts were stipulated. In so far as they are material to the issue, they are as follows:
The petitioners, Louis R. Lurie and Babette G. Lurie, are husband and wife and reside in San Francisco, California. They filed their income tax returns for the year 1941 with the collector of internal revenue for the first district of California.
In 1938 the Hilton Hotel Co. of California (then known as Huckins-Newcomb Hotel Co.), hereinafter called the company, had outstanding various stock, bonds, notes, and other obligations. A group of individuals, including the petitioners, acquired all of such securities and obligations. In order to facilitate the handling of them, units were formed consisting of an equal percentage of all of the securities and obligations. Thereupon, pursuant to permits of the Commissioner of Corporations of the State of California, each member of the group received voting trust certificates, promissory notes, and other securities in proportion to the number of units held by him. Included was a series of preferred income notes in the total amount of $203,747.94, issued pursuant to a permit of the Commissioner of Corporations. Each note was a printed document containing no reference to registration.
At the time of the original issuance of the notes the petitioners jointly owned approximately one-third of the units and therefore owned one-third of the outstanding securities, including one-third of the total amount of the preferred income notes. Shortly thereafter, late in the year 1938 and early in 1939, the petitioners acquired additional units and included in each were preferred income notes which were acquired at less than face value and which are involved herein. After the acquisition of these additional units, the petitioners owned slightly in excess of 40 percent of the units.
The voting trustees in the voting trust certificates included in the units consisted of petitioner Louis R. Lurie, C. N. Hilton, and Don B. Burger, the last named being an owner of a small number of voting trust certificates and prior preferred income notes and an employee of C. N. Hilton. The remaining voting trust certificates and prior preferred income notes (and other securities of the corporation in the same proportion) were owned by C. N. Hilton and various associates of his, who at all times controlled the company and whose attorney was employed as attorney for the company. The directors of the company consisted of Louis R. Lurie, his auditor, J. A. Kurzman, C. N. Hilton, Don B. Burger, and Packey Dee of Chicago.
In the application for the permit to issue the promissory notes it is recited: ‘Said new promissory notes are to be registered and applicant hereby designates itself to act as the registrar thereof.‘ Annexed to the application was a printed form of a preferred income note and there was an additional printed page entitled ‘Registration,‘ on which was set forth a form for registering the notes. When the notes were finally printed and issued, the page entitled ‘Registration‘ was omitted. In August of 1940 the company requested of the holders of the notes that they be returned to it.
The notes were thereupon returned to the company and on the face of each of the notes was printed the following: ‘Notice to Holder: This note may be registered as provided on the back hereof,‘ and on the back of each was printed the following:
This note may be registered in the holder's name upon a register to be maintained by the Company at its office in San Francisco, California. Such registration shall be noted on this note by the Company, after which no transfer hereof shall be valid unless made on said register and noted on this note. The Company may deem and treat the person in whose name this note is from time to time registered as the absolute owner hereof for the purpose of receiving payments of principal and interest due hereon and for all other purposes.
+-----------------------------------------------------------------------------+ ¦(Registration) ¦ +-----------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------¦ ¦Notice to Holder: Do not write on this note. Consult the Company for method ¦ ¦of transferring registration. ¦ +-----------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ +--------------------+------------------------------+-------------------------¦ ¦Date of Registry ¦In Whose Name Registered ¦Register ¦ +--------------------+------------------------------+-------------------------¦ ¦ ¦ ¦Hilton Hotel Company ¦ +--------------------+------------------------------+-------------------------¦ ¦ ¦ ¦of California ¦ +--------------------+------------------------------+-------------------------¦ ¦ ¦ ¦By ¦ +--------------------+------------------------------+-------------------------¦ ¦ ¦ ¦Authorized Officer ¦ +-----------------------------------------------------------------------------+
On August 6, 1940, the petitioners returned to the company the notes involved herein and had them registered in the name of Louis R. Lurie, one of the petitioners. A photostatic copy of one of the original notes, after registration, is in the record and reference is here made to it.
For the year 1940 the taxpayers returned as a capital gain the profit on the principal payments made on account of the notes in that year after registration, and the Bureau of Internal Revenue held it to be ordinary income. The petitioners acceded to the contention of the Bureau on advice of counsel that, regardless of whether or not the notes were in registered form, the notes were not retired in the year 1940 as required by section 117(f) of the Revenue Act in order to fall within its terms.
All of the notes in question were retired in 1941, more than two years after the acquisition of them by the petitioners and less than 18 months after the date that the notes were returned to the company and registered as aforesaid, at a profit to each of the petitioners in the amount of $3,448.53. This profit was returned by each of the taxpayers as a capital gain. The respondent determined that such profit was ordinary income.
OPINION.
VAN FOSSAN, Judge:
There is, and can be, no question raised as to the fact that the notes here in question were capital assets under the statutory definition of section 117(a)(1). The issue arises solely from the fact that the notes were not in registered form when originally issued, formal registration or registered endorsement on the backs of the notes not being perfected until August 6, 1940, less than 18 months before retirement.
The problem being one of statutory interpretation, we look first to the legislative history. Antedating section 117(f) were the cases of Henry P. Werner, 15 B.T.A. 482, and John H. Watson, Jr., 27 B.T.A. 463. In the Werner case the Board of Tax Appeals held that gain realized when certain bonds were retired and called prior to maturity was a gain on the ‘sale or exchange‘ of a capital asset within the meaning of section 206 of the Revenue Act of 1921, reversing the practice of the Bureau of Internal Revenue as laid down in I.T. 1637. After the promulgation of the Werner case, the Bureau, by I.T. 2488, adopted the doctrine of that case.
In John H. Watson, Jr., supra, we reexamined the question under an identical statutory provision of the Revenue Act of 1928 and on such reconsideration reversed the ruling of the Werner case and held that the payment of an amount specified in a bond, either at maturity or pursuant to an authorized call prior to maturity, is not a ‘sale or exchange‘ of such bond under section 101(c)(2) of the Revenue Act of 1928. We specifically disapproved I.T. 2488. See Fairbanks v. United States, 306 U.S. 436.
Thereafter Congress, in the Revenue Act of 1934, embraced the holding of the Werner case and adopted section 117(f),
which has persisted in subsequent acts and the Internal Revenue Code.
SEC. 117. CAPITAL GAINS AND LOSSES.(f) RETIREMENT OF BONDS, ETC.— For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.
Addressing ourselves to the specific phase of the question before us, we may note that we have examined the Congressional reports without gleaning any help in our problem.
Petitioners make two contentions: (1) That the notes were in registered form when retired and that this is sufficient compliance with the statute, and (2) that the notes were capital assets, held for more than two years and, therefore, on retirement, profit constituted long term capital gain, regardless of the fact that they were not in registered form for the statutory period. Respondent contends that, when properly read, section 117(f) requires that securities be in registered form at the time of issuance and subsequent registration is insufficient. He argues, alternatively, that, since registration occurred in August 1940 and retirement in 1941, petitioners did not hold the notes in registered form for the period of 18 months required by section 117(b).
(b) PERCENTAGE TAKEN INTO ACCOUNT.— In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:100 per centum if the capital asset has been held for not more than 18 months;66 2/3 per centum if the capital asset has been held for more than 18 months but not for more than 24 months;50 per centum if the capital asset has been held for more than 24 months.
As to petitioners' first contention, that if the notes were in registered form at the time of retirement the statute was satisfied, we have not the slightest doubt that this was not the Congressional intent. Such a last minute registration just before retirement, even after the call for retirement has been issued, would permit the holders of notes or other securities to determine for themselves, in accord with their individual advantages, the tax consequences that would flow from retirement, without regard for uniformity of treatment or the interests of the Government. The suggested interpretation seems contrary to the whole basic concept of section 117(f).
The second contention is equally untenable. They argue that the notes were capital assets, held for more than two years, and that therefore it is immaterial that they were not in registered form for the minimum period provided by section 117(b). The fault of this argument is that in the absence of section 117(f) the ruling of this Court in John H. Watson, Jr., supra, and cases to the same effect, would be operative and it would, of necessity, be held that, albeit the notes were capital assets, there was no sale or exchange of such notes on retirement. Section 117(f) superseded the above ruling, but it did not invalidate or reverse the principles underlying, or the logic of, that decision. Thus it follows that if petitioners are to prevail the case must be held to come within the provisions of section 117(f).
Although we find ourselves in disagreement with both contentions of the petitioners, we do not, under the facts, find it necessary to approve respondent's main contention that the notes must be in registered form from the time of issuance and that no subsequent registration can convert unregistered notes into notes in registered form. Rather, we find in respondent's alternative argument sufficient basis for our ruling that, since petitioners' notes were not in registered form for the minimum period fixed by section 117(b), i.e., 18 months, they can not be held to satisfy section 117(f).
In our opinion there can be no doubt that, taking all the provisions of section 117 into consideration and having due regard for the purpose of the section, to come within section 117(f) the notes must be, at the very least, in registered form for the minimum period provided by section 117(b). This period is 18 months. Since petitioners' notes were in registered form for less than such period before retirement, they do not qualify under section 117(f).
Reviewed by the Court.
Decisions will be entered for the respondent.