Before SCHNACKENBERG, KNOCH and CASTLE, Circuit Judges.
Maysteel Products, Inc., petitioner, prosecutes this appeal from a Tax Court decision ruling that Maysteel was not entitled to a deduction claimed for amortizable bond premium and determining a deficiency in the amount of $9,618.25 in connection with taxpayer's corporate income tax for its fiscal year ending November 30, 1953. In that year taxpayer purchased certain bonds, borrowing the major portion of the purchase price, and shortly thereafter transferred its equity in the bords to a tax-exempt corporation. The Tax Court held the taxpayer was entitled to a deduction claimed for the charitable contribution but not entitled to a deduction for amortizable bond premium.
The contested issues are:
(1) Whether there was clear error in the Tax Court's finding that the taxpayer's purchase and disposition of the bonds were for a non-business purpose - a charitable donation - and were motivated solely by the purpose of obtaining an additional tax deduction by virtue of the premium paid.
(2) And, if not, does such lack of commercial purpose coupled with the coexistent tax deduction motive preclude application of Sections 23(v) and 125 of the 1939 Internal Revenue Code, 26 U.S. C.A. §§ 23(v), 125?
Pertinent facts established by the record may be summarized as follows:
Taxpayer is a Wisconsin corporation. Prior to 1953 its stockholders organized a separate corporation, Maysteel Foundation, Inc., for the purpose of receiving donations to be disbursed for religious, educational and related purposes. During 1953 the Foundation was exempt from income tax under Section 101(6) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 101(6), and contributions to the Foundation were deductible.
On September 22, 1953, the taxpayer purchased $100,000.00 in principal amount of 3 3/4 per cent Appalachian Electric Power Company bonds due June 1, 1981. The purchase price of the bonds was 114 1/8. The total cost to the taxpayer was $115,843.75, which included $500.00 commission and $1,218.75 accrued interest. The bonds were subject to call for redemption by their issuer on thirty-days' notice at 100 plus a special redemption premium of 2 3/8 per cent.
The taxpayer borrowed $100,000.00 of the purchase price of the bonds from a bank, paying the balance from its own funds. It gave its promissory note to the bank in the amount of $100,000.00, dated September 30, 1953, due thirty-five days after date, with interest at 3 3/4 per cent.The bonds were held as collateral for payment of the loan.
On October 23, 1953, taxpayer recorded on its books an amortization of the premium paid for the bonds in the amount of $12,250.00 (cost plus commission less call price) which it deducted on its income tax return for the fiscal year as part of its general and administrative expenses.
On October 26, 1953, taxpayer made a gift of the bonds to the Foundation, subject to the taxpayer's indebtedness to the bank. The Foundation sold the bonds October 27, 1953 for $119,000.00, plus accrued interest of $1,572.92, less a commission of $500.00, and federal tax of $50.00, for a net amount of $120,022.92. Taxpayer also claimed a deduction for the charitable contribution.
The Commissioner disallowed both the claimed deductions. The Tax Court allowed the charitable deduction but not the deduction for amortization of bond premium.
The entire transaction was proposed to the taxpayer, and carried out on its behalf, by an investment broker who was soliciting business of clients interested in the cumulative tax benefits of an amortization deduction and a charitable contribution. This broker handled the purchase of the bonds, arranged for the bank financing, prepared all of the documents necessary for the taxpayer's execution and ...