Petition for Review of Decision of the Tax Court of the United States.
Before KERNER and MINTON, Circuit Judges, and LINDLEY, District Judge.
This is a petition to review a decision of the Tax Court involving respondent's income taxes for the year 1937.
There is no dispute as to the facts. Respondent is engaged in the publishing and radio broadcasting business. It has kept its books and made its tax returns on the accrual basis. During and prior to 1937 its total capital stock was owned by Corn Belt Publishers, Inc. November 1, 1937, Corn Belt had outstanding common and $400,000 of 7% cumulative preferred stock, on which no dividends had been paid for a number of years.
November 1, 1937, respondent submitted to Corn Belt's common and preferred stockholders a plan of recapitalization, proposing that if such stockholders would transfer all of their stock to respondent, respondent would issue one no-par share of its common stock in exchange for each 10 shares of Corn Belt common stock surrendered; and, further, in exchange for each share of Corn Belt preferred stock, respondent would issue its $10 face value 7% capital note, dated January 1, 1937, and maturing January 1, 1987, plus interest accrued thereon to date of exchange, thereby partially recouping the advantage lost in foregoing the preferred dividends accumulated because not earned.
The plan was accepted and on December 7, 1937, respondent issued and delivered $400,000 of its capital notes to Corn Belt's preferred stockholders in exchange for their stock. In such notes, dated January 1, 1937, the respondent, for value received, acknowledged itself indebted and promised to pay $400,000 on January 1, 1987, and to pay interest thereon semi-annually at 7% per annum. December 29, 1937, respondent paid to the holders of these notes $28,000, representing 7% on the $400,000 notes for the calendar year 1937, and on its income tax return for 1937 deducted $28,000 as "interest."
The Commissioner disallowed $26,082.19 of the claimed interest deduction, based on his determination that such amount incurred as a liability for the period January 1 to December 7, 1937, was not interest paid or accrued on indebtedness within the meaning of the statute.
Section 23(b) of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int. Rev. Code § 23(b), permits the deduction from gross income of "all interest paid or accrued within the taxable year on indebtedness."
In support of the order of the Tax Court, respondent, though conceding that no indebtedness existed prior to December 7, 1937, insists that the indebtedness was created on December 7; that it existed at the time of payment of the $28,000 and was respondent's fulfillment of its contractual obligation to pay the interest promised.
The argument is that by resorting to the phrase "on indebtedness" without inserting one single qualification, Congress indicated a disinclination to confine the term to a narrow field and denoted a deliberate intention not to be concerned with the time the "indebtedness" was incurred, the period thereof, or with the circumstances of its origin. And the respondent asserts that the same attitude was displayed with respect to the words "all interest"; that there was opportunity here for the exercise of restriction and the words could have been qualified to exclude interest for a period non-conforming with the period of indebtedness.
To be sure, the popular or received import of words furnishes the general rule for the interpretation of public laws, and care should be exercised not to extend a statute by implication beyond the clear import of the language used.But it has been held that deductions from gross income are allowed as a matter of legislative grace, White v. United States, 305 U.S. 281, 292, 59 S. Ct. 179, 83 L. Ed. 172, and are strictly and narrowly construed, Pacific Co. v. Johnson, 285 U.S. 480, 491, 52 S. Ct. 424, 76 L. Ed. 893; Helvering v. Northwest Steel Rolling Mills, 311 U.S. 46, 49, 61 S. Ct. 109, 85 L. Ed. 29; United States v. Stewart, 311 U.S. 60, 71, 61 S. Ct. 102, 85 L. Ed. 40, and in securing them, the taxpayer must bring himself clearly within the terms of the statute, New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 78 L. Ed. 1348; Burnet v. Thompson, etc., 283 U.S. 301, 51 S. Ct. 418, 75 L. Ed. 1049; Woolford Realty Co. v. Rose, 286 U.S. 319, 326, 52 S. Ct. 568, 76 L. Ed. 1128.
Respondent admits that the cases cited are authority for the rules quoted, but he makes the point that they may not be applied to establish a taxpayer's "eligibility to the general expense deductions such as interest." With this argument we are unable to agree.
Before the Tax Court petitioner contended, as he does here, that so much of the $28,000 expenditure as is allocable to the period from January 1 to December 7, 1937, could not be interest paid or accrued on indebtedness within the meaning of the statute, because it was not paid or accrued on, or in respect of any indebtedness owing by the respondent during that period. The Tax Court rejected the contention and held that the entire $28,000 constituted deductible interest. In reaching this conclusion the Tax Court relied upon Journal Co. v. Commissioner, 7 ...