Opinion
No. 36.
November 16, 1944.
Petition for Review of a Decision of the Tax Court of the United States.
Petition by Rodney, Incorporated, against Commissioner of Internal Revenue to review a decision of the Tax Court of the United States. 2 T.C. 1020.
Affirmed.
Taxpayer was a holding company which possessed all the stock of a subsidiary known as Gladstone Company. One Ruth Scott, who had caused the organization of Gladstone, was also the owner of all the stock of the taxpayer. On or about June 17, 1938, Gladstone transferred to taxpayer all its assets. The taxpayer surrendered to Gladstone all the latter's stock for cancellation, and taxpayer assumed all the liabilities of Gladstone, whereupon Gladstone was dissolved. Ruth Scott held certain bonds of Gladstone, payment of which was assumed as of June 17, 1938, by taxpayer and made by taxpayer on December 21, 1938, together with accrued interest which on December 21, 1938, amounted to $34,380. The taxpayer in its return for 1938 claimed a deduction for interest in that latter amount. The Commissioner disallowed $32,569.33 thereof, representing that part of the interest attributable to the period before June 17, 1938. The Tax Court sustained the Commissioner; its opinion is reported in 2 T.C. 1020.
Section 23 of the Revenue Act of 1938, subdivision (b), 26 U.S.C.A. Int.Rev.Code, § 23(b), allows the deduction of "all interest paid or accrued within the taxable year on indebtedness. * * *"
LeBoeuf Lamb, of New York City (Horace R. Lamb, and Leo A. Diamond, both of counsel), for petitioner.
Samuel O. Clark, Jr., Sewall Key, and L.W. Post, all of Washington, D.C., for respondent.
Before SWAN, AUGUSTUS N. HAND, and FRANK, Circuit Judges.
We think that the Tax Court correctly held that the assumption by taxpayer on June 17, 1938, of the liabilities of Gladstone in exchange for Gladstone's assets was a capital transaction in the nature of consideration for the receipt of the assets of Gladstone, and that interest paid in that year, which had accrued before such purchase, was not "interest" within the meaning of § 23(b). Nor do we think that the payment of $32,569.33 representing interest accrued prior to June 17, 1938, can be regarded as the declaration of a dividend by taxpayer to Mrs. Scott. It constituted the payment of a debt assumed by taxpayer which it was obligated to pay and was not a voluntary distribution by its board of directors.
Affirmed.