Opinion
Docket No. 112722.
1944-03-24
PACIFIC NORTHWEST FINANCE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William B. Finlay, C.P.A., for the respondent. T. M. Mather, Esq., for the respondent.
1. Petitioner in 1930 entered into a participating agreement with a newly organized mutual life insurance company chartered in the State of Montana, by which petitioner agreed to advance certain funds during the initial periods of the insurance company's existence, for which financial assistance the insurance company agreed to pay petitioner 2 percent of its annual gross premiums during a period of 16 years. In the taxable year 1940 the insurance company made payments to petitioner of a certain sum under the contract, most of which represented 2 percent on gross premiums collected by the insurance company in prior years. Held, that such sums in their entirety were gross income to petitioner, on the cash basis, in 1940.
2. Petitioner's entire gross income in 1940 consisted of these sums paid to it by the insurance company under the participating agreement between the two companies. The Commissioner has determined that the amounts so paid by the insurance company to petitioner were interest and that petitioner was a personal holding company in 1940 and subject to a personal holding company surtax. Held, the sums so paid to petitioner by the insurance company were not interest and petitioner was not a personal holding company in 1940 and was not subject to the personal holding company surtax.
3. Petitioner, not being a personal holding corporation in 1940, was under no obligation to file a personal holding corporation return on Form 1120H, and the imposition of a 25 percent penalty by the Commissioner for petitioner's failure to file such a return was error. William B. Finlay, C.P.A., for the respondent. T. M. Mather, Esq., for the respondent.
The Commissioner has determined against the Pacific Northwest Finance Corporation for the year 1940 deficiencies as follows:
+------------------------------------------------------+ ¦ ¦Deficiency¦Penalty ¦ +---------------------------------+----------+---------¦ ¦Income tax ¦$792.05 ¦None ¦ +---------------------------------+----------+---------¦ ¦Declared value excess profits tax¦613.34 ¦None ¦ +---------------------------------+----------+---------¦ ¦Personal holding company surtax ¦4,830.41 ¦$1,207.60¦ +---------------------------------+----------+---------¦ ¦Total ¦6,235.80 ¦1,207.60 ¦ +------------------------------------------------------+
The following explanation of adjustments is contained in the deficiency notice:
(a) * * *
It is held that the amount of $6,135.00, received from Pacific Northwest Life Insurance Company represents interest received, and as such is includible in gross income under the provisions of Section 22(a) and Section 502(a) of the Internal Revenue Code.
The petitioner contests the correctness of the determination of the Commissioner in the following assignments of error:
(a) The Commissioner erroneously included the income of the years 1930-1939, inclusive, in arriving at the total alleged income for the year 1940.
(b) The Commissioner erred in holding that the petitioner is a personal holding company and liable for the personal holding company surtax.
(c) The Commissioner erred in assessing a penalty for the alleged failure to file a personal holding company tax return.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Montana, with its principal place of business at Great Falls, Montana. The return for the year 1940 was filed with the collector of internal revenue for the district of Montana at Helena, Montana. Petitioner's returns were made upon the cash basis and upon the basis of the calendar year.
On June 15, 1929, the petitioner corporation was organized under the laws of Montana, with an authorized capital of 1,000 shares of a par value at $100 per share, or a total of $100,000. Only a small amount of the authorized capital stock was ever issued. In the taxable year 13 shares of a par value of $100 per share were issued and outstanding. During the last half of the taxable year 1940 more than 50 percent of these shares were owned by not more than five individuals.
On January 6, 1930, petitioner caused the organization of the Pacific Northwest Life Insurance Co., a mutual nonstock life insurance company, under the laws of Montana, subject to regulation by the Insurance Commissioner of Montana. The incorporators of each company were identical, both companies occupied the same offices, and their officers jointly controlled the operations of both companies.
On April 17, 1930, the corporations entered into a ‘participating agreement,‘ the original of which, marked petitioner's Exhibit A, is incorporated herein by reference. Under the participating agreement the petitioner advanced to the Pacific Northwest Life Insurance Co., hereinafter called ‘the insurance company,‘ the following respective sums:
+---------------+ ¦1930¦$7,249.12 ¦ +----+----------¦ ¦1931¦2,638.47 ¦ +----+----------¦ ¦1932¦720.73 ¦ +----+----------¦ ¦1933¦2,066.44 ¦ +----+----------¦ ¦1936¦3,000.00 ¦ +---------------+
All of these sums were entered on the books of the insurance company as ‘Surplus Contributions‘ or ‘Advanced to Surplus.‘
The insurance company, under the terms of the participating agreement, returned to petitioner as repayment on principal the following annual sums:
+-----------------------------+ ¦1932¦$155.00 ¦1937¦$4,114.44 ¦ +----+--------+----+----------¦ ¦1933¦163.98 ¦1938¦918.00 ¦ +----+--------+----+----------¦ ¦1934¦3,500.00¦1939¦6,404.00 ¦ +----+--------+----+----------¦ ¦1935¦297.75 ¦1940¦99.55 ¦ +----+--------+----+----------¦ ¦1936¦16.25 ¦ ¦ ¦ +-----------------------------+
Under the participating agreement the insurance company was to set aside annually and pay the petitioner 2 percent of the gross annual premiums received by the insurance company from valid outstanding life insurance, and to make payments thereof to petitioner annually upon the first day of each January, beginning January 1, 1931, for a full period of at least 16 years from January 1, 1930, and if the 2 percent of the gross annual premiums did not equal or exceed 8 percent per annum in any current year the insurance company was to pay the difference between 2 percent and 8 percent of the total of the outstanding certificates of indebtedness provided in the participating agreement. On January 19, 1940, the insurance company furnished the petitioner with a statement showing that there was accumulated to the credit of the petitioner the sum of $6,704.66. After that date there accumulated in the year 1940 a further 2 percent on $22,446.34 of premium income, or $448.93, the total income for the 11 years of operation amounting to $7,153.59. During the year 1940 the insurance company paid $6,135 to the petitioner on account of the above indebtedness, which sum was reported in full in the petitioner's income tax return on Form 1120 as dividends received. The only deduction claimed was for $7.50 of state and county taxes paid. The amount of taxes computed on that return was $135.54 income tax and $33.03 declared value excess profits tax, a total of $168.57, all of which was duly paid.
Petitioner filed corporation income tax returns for each of the years 1930 to 1939, inclusive, in addition to the return for the year 1940. Petitioner reported income of $651.62 as interest received in 1930. in 1931 petitioner reported $667.82 as interest received in 1931. Both of these latter returns stated they were filed on the cash basis. No tax was shown on these returns because of the $3,000 exemption allowed domestic corporations. Petitioner's income tax returns for the years 1932 to 1939, inclusive, showed no business transacted and no income. Petitioner did not in any year file a personal holding company tax return on Form 1120H.
The petitioner received no other income and did not transact any business other than with the insurance company.
The statement of account furnished by the insurance company to petitioner on January 19, 1940, reads as follows:
Pacific Northwest Finance Corporation,
Great Falls, Montana.
Gentlemen:
Below we hand you statement of the amount of premiums received by us, which, in accordance with our participating agreement with you dated April 17, 1930, shows a balance due you from us of $6,704.66:
+-------------------------------------------------+ ¦Year¦Premiums¦2% ¦Advance¦8% ¦Agreement¦ +----+--------+--------+-------+--------+---------¦ ¦ ¦ ¦ ¦balance¦ ¦ ¦ +----+--------+--------+-------+--------+---------¦ ¦1930¦$14,214 ¦$284.28 ¦$7,249 ¦$579.92 ¦$579.92 ¦ +----+--------+--------+-------+--------+---------¦ ¦1931¦7,680 ¦153.60 ¦9,888 ¦791.04 ¦791.04 ¦ +----+--------+--------+-------+--------+---------¦ ¦1932¦6,809 ¦136.18 ¦10,453 ¦836.24 ¦836.24 ¦ +----+--------+--------+-------+--------+---------¦ ¦1933¦19,502 ¦390.04 ¦10,356 ¦828.48 ¦828.48 ¦ +----+--------+--------+-------+--------+---------¦ ¦1934¦32,083 ¦641.66 ¦8,856 ¦708.48 ¦708.48 ¦ +----+--------+--------+-------+--------+---------¦ ¦1935¦31,946 ¦638.92 ¦8,558 ¦684.64 ¦684.64 ¦ +----+--------+--------+-------+--------+---------¦ ¦1936¦30,844 ¦616.88 ¦8,542 ¦683.36 ¦683.36 ¦ +----+--------+--------+-------+--------+---------¦ ¦1937¦27,567 ¦551.34 ¦7,427 ¦594.16 ¦594.16 ¦ +----+--------+--------+-------+--------+---------¦ ¦1938¦26,727 ¦535.54 ¦6,509 ¦520.72 ¦534.54 ¦ +----+--------+--------+-------+--------+---------¦ ¦1939¦23,190 ¦463.80 ¦105 ¦8.40 ¦463.80 ¦ +----+--------+--------+-------+--------+---------¦ ¦ ¦220,562 ¦4,411.24¦ ¦6,235.44¦6,704.66 ¦ +-------------------------------------------------+
Pertinent parts of the participating agreement under which the payments here involved were made are as follows:
WHEREAS, both corporations, parties hereto, were simultaneously organized by the same persons for the purpose, among others, and with the intention, that the Second Party, to the extent of Fifty Thousand Dollars ($50,000.00), if so much is demanded by the First Party, should finance the First Party and advance it necessary money to acquire beginning new business and meet its necessary financial obligations, and
WHEREAS, in the very nature of the business of the First Party its assets must be preserved and necessary securities provided to meet its primary obligations and give assurance of its ability to pay its liabilities arising from the death of persons whose lives were insured by it, and
WHEREAS, because there, the Second Party is willing to accept the contingent obligation of the First Party to repay the principal sums advanced by the former to the latter from time to time only and upon the condition, that the First Party's surplus attain certain proportions and its solvency at the time be not threatened by the payment of such principal sums, and
WHEREAS, sound public policy requires that life insurance companies do not jeopardize their financial ability to pay death losses by liberal expenditures of money received as premiums upon life insurance at least until they have built adequate surplus account, and therefore, mutual life insurance companies must, out of the necessities of each case, look to some fostering person or organization to launch them upon a successful business venture, and
WHEREAS, it seems that in procuring business the initial years, two percent of gross annual premiums, in addition to usual agents' commissions, may safely be set aside as a reasonable share of the income of such insurance company to be paid to the fostering organization until it is able, out of accumulated profits, to fully finance itself, and that such mutual life insurance company ought, in addition thereto, to build up ample surplus by proper business administration out of which to repay the principal sums advanced by the fostering organization during the initial years, and
WHEREAS, the Second Party (petitioner) already has raised considerable money out of issuance of capital stock and purposes to raise more, and has adopted as one of its business policies to furnish the First Party such amounts of money as may be reasonably necessary, not to exceed Fifty Thousand Dollars, to finance the First Party, and in consideration thereof is willing to accept a contingent obligation of the First Party to repay the principal sum so advanced by the Second Party, and two percent of the gross annual premiums received by the First Party until paid principal sums are fully repaid, and
WHEREAS, for all moneys so advanced, the First Party had issued and delivered to the Second Party certificates of indebtedness each containing a promise to replay such advances upon the contingencies, terms, and conditions in said certificates contained.
NOW, THEREFORE, in consideration of the premises and the advancement by the Second Party to the First Party of such sums of money for business administration as has already been made, or may hereafter be made, aggregating in all not to exceed Fifty Thousand Dollars, the First Part covenants and agrees that it will set aside and pay to the Second Party two per cent of the gross annual premiums received by the First Party each year upon valid outstanding life insurance, whether such premiums be paid upon an annual or less than annual basis, and to make payments thereof to the Second Party annually, upon the first day of each January beginning January 1st, 1931, and to continue payment of two per cent of said gross annual premiums to the Second Party for a term of at least sixteen years from January 1st, 1930, and if payment in full of all outstanding certificates has not then been made by the First Party, thereafter until payment in full has been made by the First Party of all Certificates of Indebtedness issued by it to the Second Party, payment of which Certificates has been made contingent upon any condition or event. If said two per cent of the gross annual premiums does not equal or exceed eight per cent per annum any current year of the total amount of such Certificates outstanding such year, then and in that event the First Party will pay to the Second Party, in addition to said two per cent of the said gross annual premiums, the difference between said two per cent and eight per cent of said total of outstanding certificates. If such payments any year should jeopardize the solvency or sound financial condition of the First Party, the whole, or any part thereof, may be made by like certificates of indebtedness subject to the limitation upon the amount of the total of such certificates outstanding at any time hereinafter contained.
OPINION.
BLACK, Judge:
The petitioner's first assignment of error, (a), complains that the Commissioner erred in including the entire amount of $6,135 which it received in 1940 from the insurance company as gross income for 1940. As a matter of fact, petitioner itself included this amount as gross income under the heading of ‘dividends received‘ in its income tax return filed for the year 1940 and paid the tax which it calculated thereon. It is not very clear from the statements and arguments made in petitioner's brief why it now contends that this amount of $6,135 should not be included in its gross income for 1940. Of course petitioner is within its rights in so contending if it did in fact err in reporting this $6,135 as gross income for 1940.
But we find no error in the petitioner reporting and the Commissioner determining that this amount was gross income to petitioner in 1940. Petitioner filed its income tax returns for all the years of its existence on a cash receipts basis. There is no controversy that petitioner actually received this $6,135 in 1940 from the insurance company and no reason has been shown why this amount should not be included in its gross income. If some parts of this amount were included in petitioner's income tax returns for the years 1930 and 1931, a fact which has by no means been proved in this case, petitioner still could not prevail on this point, it being on the cash basis. However, we think it is unnecessary to discuss that phase of the matter, because petitioner has not proved that any part of the $6,135 which it received in the year 1940 from the insurance company had ever been returned by it for taxation in any prior year. It seems to be petitioner's contention that this $6,135, having been accrued over a period of several years, should not be taxed to petitioner all in one year. There is nothing unusual about such a situation for one who is on the cash basis. It has been stipulated that petitioner filed income tax returns for 1933 to 1939, inclusive, which had written on them ‘no business transacted in this company during the year‘ and reported no income.
It does not seem to be petitioner's contention that the amounts due petitioner in each year from the insurance company under the participation agreement were credited to the petitioner's account in such a manner on the insurance company's books as to amount to a constructive receipt by petitioner. Even if such contention had been made, the evidence does not sustain it. The evidence is clear and undisputed that the $6,135 here in question was received by the petitioner during the taxable year. In Alice H. Moran, Executrix, 26 B.T.A. 1154, it was held:
Where a taxpayer on the cash basis has consistently followed the practice over a long period of years of excluding from his return income which he did not receive in such years, but which he could have received had he so desired, he may not invoke the doctrine of constructive receipt when such income is actually received and thus have the income placed in a year where a tax thereon may not be collected.
In affirming that decision, Moran v. Commissioner (C.C.A., 1st Cir.), 67 Fed.(2d) 601, the court said:
* * * The present case is not different in principle from those in which a taxpayer, having the right to file either one of two different sorts of returns, makes his choice and files his returns accordingly. It is settled that he cannot afterwards change. * * *
The petitioner being on the cash basis, the income here in question was properly taxable to the petitioner for the year 1940, when received. On this assignment of error petitioner is not sustained.
Petitioner's next assignment of error is that the Commissioner erred in holding that the petitioner is a personal holding company and liable for the personal holding company surtax. In this assignment of error we think petitioner must be sustained.
The applicable statutes are printed in the margin.
SEC. 501 (Internal Revenue Code). DEFINITION OF PERSONAL HOLDING COMPANY.(a) GENERAL RULE.— For the purposes of this subchapter and chapter 1, the term ‘personal holding company‘ means any corporation if—(1) GROSS INCOME REQUIREMENTS.— At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; but if the corporation is a personal holding company with respect to any taxable year beginning after December 31, 1936, then, for each subsequent taxable year, the minimum percentage shall be 70 per centum in lieu of 80 per centum, until a taxable year during the whole of the last half of which the stock ownership required by paragraph (3) does not exist, or until the expiration of three consecutive taxable years in each of which less than 70 per centum of the gross income is personal holding company income; and(2) STOCK OWNERSHIP REQUIREMENT.— At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.SEC. 502. PERSONAL HOLDING COMPANY INCOME.For the purposes of this subchapter the term ‘personal holding company‘ means the portion of the gross income which consists of:(a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas royalties), annuities.
Petitioner concedes that in so far as the stockholding requirements are concerned it falls within the statutory provisions for personal holding companies, but it denies that its income was of the sort required by section 502. As has already been stated, petitioner, on the income tax return which it filed for 1940 on Form 1120, reported as dividends the $6,135 which it had received in that year from the insurance company and paid the tax which it computed thereon. Plainly petitioner was in error in designating the $6,135 as dividends. The insurance company was a mutual company with no stockholders and the $6,135 could not have been paid to petitioner as dividends. Petitioner owned no proprietary interest whatsoever in the insurance company. It merely had the right under certain conditions to receive a part of its gross receipts. This right was contractual and not proprietary. The Commissioner has determined that the $6,135 in question was interest. He makes no contention that it was dividends. If the Commissioner was correct in his determination that the payments were interest, then petitioner is a personal holding company, because it had no other business dealings or income and its entire income would be interest, thus bringing it within the provisions of section 502, printed in the margin.
We do not believe, however, for reasons which we shall presently state, that the $6,135 in question can properly be classed as interest. For a full discussion of the meaning of interest as that term is used in section 502, see Elverson Corporation, 40 B.T.A. 615, 643, et seq., affd., 122 Fed. (2d) 295. In that case we held that certain profits or compensation which the taxpayer realized from dealings with its debtor, although denominated by the Commissioner as interest, were not in fact interest and therefore the corporation was not a personal holding company.
In the instant case it is clear that the insurance company had no funds of its own with which to finance itself during the initial period of its existence and that petitioner agreed to advance it certain funds under the terms of a participating agreement entered into by the two corporations under which petitioner was to receive 2 percent of annual gross premiums of the insurance company over a period of 16 years. There was also a provision in the participating agreement which reads:
* * * If said two per cent. of the gross annual premiums does not equal or exceed eight per cent. per annum any current year of the total amount of such Certificates outstanding such year, then and in that event the First Party will pay to the Second Party, in addition to said two per cent. of the said gross annual premiums, the difference between said two per cent. and eight per cent. of said total of outstanding certificates. * * *
The sums which were advanced by petitioner to the insurance company under the terms of this participating agreement were set up on the books and records of the insurance company as ‘surplus contributions‘ or ‘advanced to surplus.‘
While petitioner, under the terms of the agreement, agreed to advance to the insurance company sums of money up to a total of $50,000, the stipulated facts show that from 1930 to 1936, inclusive, petitioner advanced to the insurance company a total of only $15,674.76. Petitioner, although it had an authorized capital stock of $100,000, never issued but a small amount of this capital stock and was at all times here involved a corporation with a small amount of assets. It appears not to have advanced any further sums since 1936. The insurance company, under the terms of the agreement, repaid to petitioner on principal during the years 1932 to 1940, inclusive, the sum of $15,668.97. This left at the end of the year 1940 only $5.79 unpaid of the amounts which petitioner had advanced to the insurance company in prior years. Notwithstanding that the insurance company had practically repaid at the end of 1939 all the sums which had been advanced to it by petitioner in prior years, it is stipulated that in 1940 a further 2 percent on $22,446.34 of premium income accumulated to petitioner's credit, amounting to $448.93. In other words, the 2 percent on annual premiums of the insurance company continued to be accrued by the insurance company to the credit of petitioner under the participating agreement notwithstanding the insurance company had repaid to petitioner all advanced except the small sum of $5.79.
In 1940 the contract still had six years to run and, so far as the record shows, this 2 percent of gross premiums will be paid to petitioner during the remainder of this time, notwithstanding that only a nominal amount of the advancements remain unpaid. Are these annual payments to petitioner under the terms of the participating agreement ‘interest‘ as that term is used in section 502(a)? The word ‘interest‘ as used in section 502(a), I.R.C., carries its usual and ordinary understood meaning. Cf. Elverson Corporation, supra.
Mertens, in his Law of Federal Income Taxation, vol. 4, sec. 26.01, in speaking of the deduction for interest which is allowed to taxpayers by the statute, says:
* * * There is no requirement that deductible interest be ordinary and necessary or reasonable. However, there are distinct conditions precedent to the deductibility of interest. The statute requires that there should be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. * * *
And the same author, in section 26.04 of the same volume, under the heading ‘What Constitutes Indebtedness,‘ says:
* * * The term ‘indebtedness‘ as used in the revenue act implies an unconditional obligation to pay.
A contingent or inchoate claim may be a liability, but it is not a debt, at least until the contingency happens. It follows that interest ‘calculated‘ for cost-keeping or other purposes on account of capital or surplus invested in the business which does not represent a charge arising under an interest-bearing obligation‘ is not deductible. * * * (Citing certain Treasury regulations.)
In the instant case there were no interest-bearing obligations. What happened was in substance this: A small mutual life insurance company was chartered under the laws of the State of Montana. Having no capital stock, someone had to finance its expenses and death losses in the initial stages of its existence. Petitioner undertook this function and entered into a participating agreement with the insurance company by which it agreed to advance the insurance company, from time to time as it might need the funds, sums of money which were not to exceed at any one time $50,000. As has already been stated, petitioner was to receive for this financial sustenance which it gave the infant insurance company 2 percent of the insurance company's gross premiums over a period of 16 years, but in no event was this 2 percent of gross premiums to be less than 8 percent per annum on the advancements outstanding. There was no unconditional agreement that these sums advanced by petitioner to the insurance company should be repaid. On the contrary, these advances were to be repaid to petitioner ‘only and upon the condition‘ that the insurance company's surplus attain certain proportions and its solvency at the time be not threatened by the payment of such principal sums. Not only was there no unconditional obligation on the part of the insurance company to repay the principal sums advanced, but the obligation to make the annual payment of 2 percent of the gross premiums was not unconditional. The participating agreement with reference to these annual payments provided:
* * * If such payments any year should jeopardize the solvency or sound financial condition of the First Party, the whole or any part thereof, may be made by like certificates of indebtedness subject to the limitation upon the amount of the total of such certificates outstanding at any time hereinafter contained.
As we have already stated, the insurance company set up these advancements of principal sum to it on its books not as loans, but as ‘surplus contributions‘ or ‘advanced to surplus.‘ And annual payments to petitioner of the agreed payments of 2 percent of gross premiums are continuing to be made although the advancements have been, with the exception of a very small amount, repaid. So, while undoubtedly the annual payments made by the insurance company to petitioner under the terms of the participating agreement possess some of the characteristics of interest, we do not think such payments are interest as that term is used in section 502(a), Internal Revenue Code. These amounts were income to petitioner under section 22(a), as we have already decided under the first issue, for reasons which we have stated above, we do not think these payments were interest. Cf. Elverson Corporation, supra. We, therefore, hold that petitioner was not a personal holding company in the taxable year. The Commissioner erred in determining a personal holding company surtax against petitioner.
We think the instant case is distinguishable on its facts from Benjamin Franklin Life Assurance Co., 46 B.T.A. 616, in which we held that certain sums paid by the taxpayer as interest pursuant to the terms of certificates of indebtedness which it had issued to a management corporation were properly deductible as interest, pursuant to section 203(a)(8), Revenue Act of 1934. We rested our decision in that case largely on a California statute under which the certificates of indebtedness had been issued. In the instant case both the insurance company and petitioner are Montana corporations and we have been cited to no Montana statute which is similar to the California statute upon which we largely relied in the Benjamin Franklin Life Assurance Co. case. Therefore we think the cases are distinguishable.
We think the instant case is also distinguishable on its facts from Manhattan Mutual Life Insurance Co., 37 B.T.A. 1041, which was cited and relied upon in Benjamin Franklin Life Assurance Co., supra. These two cases have been carefully examined and considered by us, and we do not think they compel a different result from that which we have reached on the personal holding company issue which we have to decide.
Petitioner's assignment of error (c) alleges that the Commissioner erred in determining a 25 percent penalty of the amount of personal holding company surtax because of petitioner's failure to file a personal holding company return on Form 1120H. Naturally, if petitioner was not a personal holding company in 1940 it was under no legal requirement to file a personal holding company return on Form 1120H, and its failure to do so would not subject it to any penalty. We sustain petitioner in its assignment of error (c).
Reviewed by the Court.
Decision will be entered that there is a deficiency in petitioner's income tax for the year 1940 of $792.05 and a deficiency in petitioner's declared value excess profits tax of $613.34, and that there is no deficiency in personal holding company surtax or penalty.
MELLOTT, J., concurs only in the result.
MURDOCK, J., dissenting: The petitioner never agreed to do anything but lend money to the insurance company. Actually it advanced a total of $15,674.76. The agreement provided that the insurance company should compensate the petitioner for advancing funds, and the $6,135 is a part of the amount which the insurance company paid, in accordance with its agreement, to the petitioner for the use of petitioner's money. These payments were solely to compensate the petitioner for the loan of its money. They were part of the amounts fixed by the parties for the use of money. These circumstances, according to my understanding of the law, would make this $6,135 interest when received by the petitioner. Furthermore, this case seems to come within the intendment of the personal holding company provisions of the statute, so much so that the reason advanced why this might not be interest would tend to bring the payment into some other class of personal holding company income, such as dividends or profit on sale of an interest in the corporation.
STERNHAGEN, DISNEY, and OPPER, JJ., agree with this dissent.
TURNER, J., dissenting: Stripped of verbiage the agreement here in question provided that the petitioner should in any event receive 8 percent per annum on the balance of its advances to the insurance company, and the facts show that $6,235.44 of the $6,704.66 which had accrued under the agreement represented 8 percent on such balances for the years 1930 through 1939. Such being the facts, the sound conclusion, in my opinion, would be that at least $6,235.44 of the amount accrued was interest. See and compare Manhattan Mutual Life Insurance Co., 37 B.T.A. 1041. It is true that under the agreement the payments by the insurance company, whether of the 8 percent on the balance of the advances or the 2 percent of gross premiums, were not required to be in cash if such payments in ‘any year should jeopardize the solvency or sound financial condition‘ of the insurance company. In that circumstance, however, the insurance company was not relieved of its obligation to make the said payments, but, in the alternative, had the privilege of issuing certificates of indebtedness therefor. There does seem to have been some limitation on the amount of such certificates that might be outstanding at any one time, but I do not understand that there was any showing or claim that such limit was ever reached or even approached. Furthermore, it is to be noted that the obligation of the insurance company to pay a minimum of 8 percent on the balances advanced to continue ‘until payment in full * * * of all Certificates of Indebtedness issued by it‘ to petitioner. Under the circumstances here, I am unable to conclude, as the majority does, that the $6,135 paid in the taxable year on the $6,704.66, accrued as above stated, was not interest, and for that reason respectfully note my dissent.