Before MAJOR and KERNER, Circuit Judges, and LINDLEY, District Judge.
These petitions are here to review a decision of the Tax Court of the United States. In No. 9319, the Commissioner requests a review of that part of the decision unfavorable to him, and in No. 9320, Lewis F. Jacobson (taxpayer) requests a review of that part of the decision unfavorable to him. The petitions in each instance have to do with deficiencies in the taxpayer's income taxes for the years 1938, 1939 and 1940.
The principal issues involved are whether the taxpayer realized taxable income within the meaning of Sec. 22 (a) and (b) of the Revenue Act of 1938 and the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 22(a, b), from his purchase at a discount of his own mortgage bonds originally issued at par (1) as a result of direct negotiations between the taxpayer and the bondholders, and (2) as a result of negotiations with the bondholders carried out by agents of the taxpayer or with an agent of the bondholders, both parties knowing of the agency.
The Tax Court held that situation (1) above was controlled by Helvering v. American Dental Co., 318 U.S. 322, 63 S. Ct. 577, 87 L. Ed. 785, but that situation (2) was controlled by United States v. Kirby Lumber Co., 284 U.S. 1, 52 S. Ct. 4, 76 L. Ed. 131. The Commissioner contends that the Kirby Lumber Co. case controls both situations, while the taxpayer urges that the American Dental Co. case is controlling as to both.
A third issue is whether the Tax Court erred in approving the Commissioner's computation under Rules of Practice Board of Tax Appeals, rule 50, 26 U.S.C.A. Int. Rev. Code following section 5012, with respect to the amounts allowed the taxpayer for entertainment expenses.
On or about May 1, 1925, the taxpayer borrowed the sum of $90,000 from the South Side Trust and Savings Bank of Chicago, Illinois; and he and his wife executed 200 bonds secured by a mortgage trust deed on a building located at the northwest corner of 47th Street and Drexel Boulevard, Chicago, and a leasehold running for 99 years from May 1, 1914, to evidence and secure the payment of the loan. The bonds were payable at the rate of $2,500 semi-annually, to and including November 1, 1931, and the balance of $57,500 on May 1, 1932, with interest at 6 1/2% per annum. All the bonds which became due up to and including November 1, 1931 were paid at or about their respective maturity dates.
The South Side Trust and Savings Bank closed on June 8, 1931, and a bondholders' committee was formed for the bondholders who had purchased bonds on taxpayer's building. On May 1, 1932, the taxpayer, after communicating with the individual bondholders as well as the bondholders' committee, procured an extension to May 1, 1937 for payment of the principal of the bonds.
During the extended period checks for interest were issued by taxpayer directly to the holders of the bonds, which were delivered to them by R.W. Gerding, secretary of the committee. Bondholders frequently visited the taxpayer at his office in connection with the collection of their interest and to ascertain the financial status of the debtor. The taxpayer kept a list of the bondholders, the dates of the payment of their interest, the numbers of their bonds and their addresses, and was fully informed as to who owned the bonds as well as their whereabouts, and they were kept informed from time to time as to taxpayer's general financial condition.
In 1937, the taxpayer paid 10% on account of the principal of the bonds then outstanding and again procured an extension of time for the payment of the remaining bonds to 1942.
As of January 1, 1938, the principal amount of the bonds unpaid was $51,750.00. The Tax Court found that the taxpayer was solvent during each of the taxable years 1938, 1939 and 1940, and we accept the finding, although a perusal of the record makes it quite apparent that he was in straitened financial circumstances. The Tax Court having thus found, we see no occasion to relate the somewhat lengthy and complicated facts concerning the value of the building which secured the bonds, its depreciation, the rental income derived therefrom, or the extent of the taxpayer's income from other sources.
The taxpayer is a lawyer and during the taxable years was a member of the firm of Jacobson, Nierman & Silbert, attorneys at law. Commencing in 1938 and continuing through the years 1939 and 1940, the taxpayer purchased certain of his outstanding bonds either directly from the bondholders or through his agent or an agent of the bondholders at amounts less than their face value. The difference between the face amount of such bonds and the amount at which they were purchased was included by the Commissioner as a part of the taxpayer's gross income, and it was this action of the Commissioner which formed the main subject of controversy before the Tax Court.
The Tax Court made detailed findings as to the dates, amounts and other circumstances concerning each bond purchased. The Commissioner has in the main repeated such findings in his brief. For the purpose of this opinion, we are of the view that a brief resume of such facts is sufficient. During the year 1938, purchases were made from three bondholders, the face value of which was $4,950, for the sum of $2,227.50, or a difference of $2,722.50. The purchase made on April 9, 1938, from Beatrice Johnson and Margaret Finn is typical of the other two purchases. The checks of Sidney C. Nierman (a partner of the taxpayer whose office was the same as the taxpayer's) were issued to the owners of the bonds, with an endorsement that they were in full payment of the purchase price of the bonds. The taxpayer reimbursed Nierman for this payment, as Nierman was acting for him in the transaction and the owners of the bonds knew that he was.
Three purchases were made in 1939, one on June 16, wherein the taxpayer paid directly $225 for bonds having a face value of $450. On February 15, 1939, the taxpayer purchased bonds of the face value of $1,800, owned by one Samuels, through McGraw & Company, for the sum of $900. On October 23, 1939, taxpayer purchased bonds of a face value of $180, owned by one Zentner, through the firm of Anderson, Plotz & Company, for the amount of $86.50, and paid the firm a fee of $10 for making the purchase.In 1940, the taxpayer made eight purchases of bonds at less than their face value, four of which were through R.W. Gerding, secretary of the bondholders' committee, for which he paid the latter a fee in each instance, ranging from $7.50 to $27. Four other purchases in this year were made, all at less than their face value, through Anderson, Plotz & Company, and in each a fee ...