OPINION.
Murdock, Judge:
The Commissioner determined a deficiency of $27,310.89 in income tax for the calendar year 1936. One of the adjustments made by him in determining the deficiency was the dis-allowance of a deduction of $88,977.16 which he held was interest on bonds accruing in January 1937 and, therefore, not a proper deduction for 1936. The petitioner assigns that action as error. Another adjustment which the Commissioner made in determining the deficiency was the exclusion from income as nontaxable of an amount of $136,970.23 described as “French bank loan transaction.” The Commissioner has moved to increase the deficiency on the ground that he erred in excluding this latter item from income. The facts have been stipulated and the stipulation is adopted as the findings of fact.
The petitioner filed its income tax return for the taxable year with the collector of internal revenue at Cleveland, Ohio. That return was on an accrual basis.
The petitioner issued $25,000,000 of its 6% percent mortgage bonds in 1922. The bonds were to mature on July 1, 1947. The Bankers Trust Co. was trustee. The mortgage indenture was recorded. The indenture provided that all outstanding bonds could be called for redemption by the petitioner upon the first day of any month upon payment of the principal with accrued interest to the date of call and a premium of 7 percent, provided the petitioner should give notice of the call at least 60 days prior to the date fixed for redemption.
The petitioner decided to issue new bonds at a 4*4 percent rate and to redeem the remaining outstanding 6y2 percent bonds above described. It gave the required notice in December 1936 that the 6% percent bonds were called for redemption on February 1,1937, and the holders could receive immediate payment of the full redemption price, including principal, premium, and interest to February 1,1937, upon surrender of the bonds at any time prior to January 1,1937, with January 1,1937, and subsequent coupons attached. The petitioner deposited funds with the trustee on December 1, 1936, for redemption of the bonds. $16,421,500 of the amount deposited represented the face amount of the outstanding bonds, and the remaining amount deposited covered the 7 percent premium and interest on the bonds to February 1,1937. The trustee on that same day marked the indenture as follows: “The condition of this Mortgage and Deed of Trust has been complied with and is hereby satisfied and discharged.” The mortgage was satisfied' of record on December 4, 1936. All registered holders of bonds', were notified by mail on December 4 of the terms of redemption of the bonds. The new bond issue was placed on the market and offered for sale shortly after December 1,1936.
All but $5,821,500 face amount of the &y2 percent bonds had been paid and canceled by the close of business on December 31, 1936.
The petitioner entered a charge of $177,954.32 in its interest account on the 6y2 percent mortgage bonds on November 25, 1936, and the account was closed by a charge to profit and loss on December 31, 1936. The item of $177,954.32 represented interest on the bonds for December 1936 and January 1937. The petitioner claimed the above item as a deduction for interest on its income tax return for 1936. The Commissioner, in determining the deficiency, disallowed $88,977.16 thereof, the equivalent of interest on the bonds for January 1937.
The petitioner contends that the item of $88,977.16 which the Commissioner has disallowed as a deduction for 1936 was not in fact a prepayment of interest but was, like the 7 percent premium, an ordinary and necessary expense which the petitioner was called upon to incur and pay in 1936 in carrying on its business. It gives various definitions of interest and claims that this item does not meet any of them. It says:
No interest was paid by tbe Petitioner after November 30, 1936, on the bonds redeemed by it on December 1, 1936, nor was any interest accrued on them, for there was no debt upon which interest could accrue, be calculated, or attach.
* ******
The obligation of the Petitioner to its bondholders became due at some time prior to the actual payment on December 1, 1936, the date on which the debt was extinguished. On December 1,1936, the mortgage and trust deed securing the payment of these bonds became satisfied and discharged. The claim of the Trustee for itself and the bondholders which it represented was extinguished and completely satisfied when the payment of the full amount due under the indenture was made. (Section 2, Article II, Exhibit A to the Stipulation of Fact, pages 48 and 49).
These statements or arguments of the petitioner are not supported by the facts. The published notices of redemption were dated December 2,1936. The notices were not mailed or published until that date and later. They stated that the petitioner had:
« * * elected to redeem and pay and will redeem and pay on February 1, 1937, all of the above-mentioned bonds then outstanding, at one hundred seven per cent. (107%) of the principal amount thereof, together with accrued interest on said bonds to said date, in accordance with the terms of said bonds and said Indenture, and that all of said bonds are called for redemption on said date. * * * Interest on said bonds will cease to accrue on and after February 1, 1937.
The notices also stated that holders could receive immediate payment in full by prompt surrender of their bonds before the due date.
Obviously the bonds were not redeemed on December 1, 1936. The period of the loan was not terminated on that date. The obligation of the petitioner to its bondholders could not possibly have become “due at some date prior * * * to December 1,1936.” The deposit of funds with the trustee on December 1,1936, and the satisfaction of the mortgage did not terminate the period of the loan. The mortgage was to secure the loan. When cash was paid by the debtor into the hands of the trustee, that cash was sufficient security and the mortgage was no longer necessary. But the loan was not thereby satisfied. It could not have been satisfied under the terms of the indenture prior to the due date unless, prior to that date, the bondholders had actually surrendered their bonds for cancellation and redemption and had received the payments to which they were entitled. The petitioner cites no authority for its contention that there was no debt after December 1,1936, and we know of none. It refers to section 2 of the mortgage indenture, but that section does not support its contention. The section provides that if proper funds have been deposited and due notice given, certain things shall happen “on such redemption date” so that the bondholders shall not be entitled to any benefits thereafter except their right to receive their proportionate part of the funds deposited with the trustee upon surrender of their bonds. The debt continued to exist after December 1,1936, and a part continued to exist after December 31,1936.
Neither is the contention of the respondent on this point entirely sound. He argues that the entire $88,977.16 was a prepayment of interest for January 1937 which accrued during that month and not earlier. He also argues that none of the loan was terminated in December 1936.
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OPINION.
Murdock, Judge:
The Commissioner determined a deficiency of $27,310.89 in income tax for the calendar year 1936. One of the adjustments made by him in determining the deficiency was the dis-allowance of a deduction of $88,977.16 which he held was interest on bonds accruing in January 1937 and, therefore, not a proper deduction for 1936. The petitioner assigns that action as error. Another adjustment which the Commissioner made in determining the deficiency was the exclusion from income as nontaxable of an amount of $136,970.23 described as “French bank loan transaction.” The Commissioner has moved to increase the deficiency on the ground that he erred in excluding this latter item from income. The facts have been stipulated and the stipulation is adopted as the findings of fact.
The petitioner filed its income tax return for the taxable year with the collector of internal revenue at Cleveland, Ohio. That return was on an accrual basis.
The petitioner issued $25,000,000 of its 6% percent mortgage bonds in 1922. The bonds were to mature on July 1, 1947. The Bankers Trust Co. was trustee. The mortgage indenture was recorded. The indenture provided that all outstanding bonds could be called for redemption by the petitioner upon the first day of any month upon payment of the principal with accrued interest to the date of call and a premium of 7 percent, provided the petitioner should give notice of the call at least 60 days prior to the date fixed for redemption.
The petitioner decided to issue new bonds at a 4*4 percent rate and to redeem the remaining outstanding 6y2 percent bonds above described. It gave the required notice in December 1936 that the 6% percent bonds were called for redemption on February 1,1937, and the holders could receive immediate payment of the full redemption price, including principal, premium, and interest to February 1,1937, upon surrender of the bonds at any time prior to January 1,1937, with January 1,1937, and subsequent coupons attached. The petitioner deposited funds with the trustee on December 1, 1936, for redemption of the bonds. $16,421,500 of the amount deposited represented the face amount of the outstanding bonds, and the remaining amount deposited covered the 7 percent premium and interest on the bonds to February 1,1937. The trustee on that same day marked the indenture as follows: “The condition of this Mortgage and Deed of Trust has been complied with and is hereby satisfied and discharged.” The mortgage was satisfied' of record on December 4, 1936. All registered holders of bonds', were notified by mail on December 4 of the terms of redemption of the bonds. The new bond issue was placed on the market and offered for sale shortly after December 1,1936.
All but $5,821,500 face amount of the &y2 percent bonds had been paid and canceled by the close of business on December 31, 1936.
The petitioner entered a charge of $177,954.32 in its interest account on the 6y2 percent mortgage bonds on November 25, 1936, and the account was closed by a charge to profit and loss on December 31, 1936. The item of $177,954.32 represented interest on the bonds for December 1936 and January 1937. The petitioner claimed the above item as a deduction for interest on its income tax return for 1936. The Commissioner, in determining the deficiency, disallowed $88,977.16 thereof, the equivalent of interest on the bonds for January 1937.
The petitioner contends that the item of $88,977.16 which the Commissioner has disallowed as a deduction for 1936 was not in fact a prepayment of interest but was, like the 7 percent premium, an ordinary and necessary expense which the petitioner was called upon to incur and pay in 1936 in carrying on its business. It gives various definitions of interest and claims that this item does not meet any of them. It says:
No interest was paid by tbe Petitioner after November 30, 1936, on the bonds redeemed by it on December 1, 1936, nor was any interest accrued on them, for there was no debt upon which interest could accrue, be calculated, or attach.
* ******
The obligation of the Petitioner to its bondholders became due at some time prior to the actual payment on December 1, 1936, the date on which the debt was extinguished. On December 1,1936, the mortgage and trust deed securing the payment of these bonds became satisfied and discharged. The claim of the Trustee for itself and the bondholders which it represented was extinguished and completely satisfied when the payment of the full amount due under the indenture was made. (Section 2, Article II, Exhibit A to the Stipulation of Fact, pages 48 and 49).
These statements or arguments of the petitioner are not supported by the facts. The published notices of redemption were dated December 2,1936. The notices were not mailed or published until that date and later. They stated that the petitioner had:
« * * elected to redeem and pay and will redeem and pay on February 1, 1937, all of the above-mentioned bonds then outstanding, at one hundred seven per cent. (107%) of the principal amount thereof, together with accrued interest on said bonds to said date, in accordance with the terms of said bonds and said Indenture, and that all of said bonds are called for redemption on said date. * * * Interest on said bonds will cease to accrue on and after February 1, 1937.
The notices also stated that holders could receive immediate payment in full by prompt surrender of their bonds before the due date.
Obviously the bonds were not redeemed on December 1, 1936. The period of the loan was not terminated on that date. The obligation of the petitioner to its bondholders could not possibly have become “due at some date prior * * * to December 1,1936.” The deposit of funds with the trustee on December 1,1936, and the satisfaction of the mortgage did not terminate the period of the loan. The mortgage was to secure the loan. When cash was paid by the debtor into the hands of the trustee, that cash was sufficient security and the mortgage was no longer necessary. But the loan was not thereby satisfied. It could not have been satisfied under the terms of the indenture prior to the due date unless, prior to that date, the bondholders had actually surrendered their bonds for cancellation and redemption and had received the payments to which they were entitled. The petitioner cites no authority for its contention that there was no debt after December 1,1936, and we know of none. It refers to section 2 of the mortgage indenture, but that section does not support its contention. The section provides that if proper funds have been deposited and due notice given, certain things shall happen “on such redemption date” so that the bondholders shall not be entitled to any benefits thereafter except their right to receive their proportionate part of the funds deposited with the trustee upon surrender of their bonds. The debt continued to exist after December 1,1936, and a part continued to exist after December 31,1936.
Neither is the contention of the respondent on this point entirely sound. He argues that the entire $88,977.16 was a prepayment of interest for January 1937 which accrued during that month and not earlier. He also argues that none of the loan was terminated in December 1936. A taxpayer on an accrual basis can not accelerate the accrual of interest by payment in advance, but must accrue it as the liability to pay is incurred over the period of the loan. Higginbotham-Bailey-Logan Co., 8 B. T. A. 566; Street & Smith Publications, Inc. v. United States, 38 Fed. Supp. 461. If the entire debt on the 6% percent mortgage bonds had remained outstanding as an obligation of the petitioner until February 1,1937, or until some earlier date in 1937, the action of the Commissioner in disallowing the deduction of $88,977.16 would have been proper. However, it appears that the debtor paid to the trustee in December 1936 the entire amount necessary to redeem all outstanding bonds; the mortgage was satisfied of record; and the holders of $10,600,000 face amount of the bonds surrendered their bonds for redemption and cancellation in 1936 and received their payment in full in that year. The debtor-creditor relationship between the petitioner and the holders of the $10,600,000 face amount of bonds ceased in 1936, the period of the loan was terminated, and interest could not thereafter accrue in regard to that particular part of this indebtedness. The rule that interest accrues ratably is not to be carried to the extreme of having the accrual contiime after the debt has been paid and canceled.
Bonds in the face amount of $5,821,500 were still outstanding in the hands of the bondholders after the close of 1936. The debtor-creditor relationship between the petitioner and the holders of those bonds had not been completely terminated in 1936. The period of the loan as to those bonds continued into January 1937. While the petitioner had paid to the trustee the funds necessary to retire those bonds, the bondholders had not seen fit to surrender their bonds for cancellation and redemption and had not received payment of either the principal or interest due them. They were within their rights. Consequently, it was not proper for the petitioner to accrue the January interest on those bonds in 1936 and take a deduction for that interest on its income tax return for that year. The determination of the Commissioner was correct in regard to the January interest on bonds in the face amount of $5,821,500, but was incorrect as to the interest on the remainder of the bonds. The latter was a proper deduction for 1936 whether as interest or as an ordinary and necessary expense.
“Colombes-Goodrich, Paris, France, is a French corporation which was a wholly-owned or controlled subsidiary of ‘The International B. F. Goodrich Corporation,’ a wholly-owned subsidiary of Petitioner.” The petitioner borrowed 11,000,000 francs from a Paris bank in November 1933 and gave its note to the bank in the amount of 11,000,000 francs. It then loaned the same 11,000,000 francs to Colombes-Goodrich. The petitioner purchased 11,000,000 francs on October 7,1936, for $514,162.50 in United States currency and repaid its Joan to the French bank. Colombes-Goodrich, which was in operation during the taxable year and thereafter, has not repaid to the petitioner any part of the 11,000,000 francs which it borrowed in 1933. The petitioner recorded the 1933 borrowing from the French bank by debiting cash in bank and crediting notes payable with $651,132.73, which was the value of 11,000,000 francs in United States currency at the time of the transaction in November 1933. The petitioner, when it paid off its debt to the French bank in 1936, recorded the transaction by debiting “Notes payable — French bank” $651,132.73, crediting cash $514,162.50, and crediting as a realized profit on foreign exchange the difference of $136,970.23. It reported this profit on its income tax return for 1936, but later persuaded the Commissioner to exclude it from income in his determination of the deficiency.
Apparently the Commissioner, after carefully considering this question, realized that the bookkeeping entries did not correctly reflect what had happened, and he agreed with the petitioner that no profit had been realized. Nevertheless, his counsel in this proceeding has again raised the question by amended answer. He tries to show a profit by hooking together the transaction which the petitioner had with the French bank and the one it has with Colombes-Goodrich. His argument is that the petitioner, by the expenditure of $514,162.50 in United States currency, acquired an account receivable from Co-lombes-Goodrich worth $651,132.78 and, therefore, was enriched by the difference between those two figures in 1936 when “a completed transaction took place.” He says “this result was obtained regardless of the manner in which the account was set up on the books of the petitioner.”
This reasoning is unsound. The petitioner never acquired an account receivable from Colombes-Goodrich in the amount of $651,-132.73. The stipulation is specific that the petitioner loaned Co-lombes-Goodrich 11,000,000 francs and thereafter “Colombes-Good-rich owed the petitioner 11,000,000 francs.” Likewise, the petitioner owed the French bank 11,000,000 francs. Both debts were for the return of francs and were never expressed in terms of American currency. Thus, the debt which Colombes-Goodrich owed the petitioner never exceeded in amount or value the debt which the petitioner owed the French bank. The amount due the petitioner from Colombes-Goodrich was worth no more than $514,162.50 at the time the petitioner paid off its note to the French bank. Furthermore, the loan to Co-lombes-Goodrich was a separate transaction from the borrowing at the French bank. Perhaps the Colombes-Goodrich account may have a basis for gain or loss in the hands of the petitioner of $514,162.50. Cf. Bernuth-Lembcke Co., 1 B. T. A. 1051. However, that transaction has not been closed, and the question of whether it will result in gain or loss is one which can not be decided at this time. Counsel for the petitioner argues that, even though there was a profit from the transaction with the bank, nevertheless, the case of Bowers v. Kerbaugh Empire Co., 271 U. S. 170, applies, since the money was loaned to Colombes-Goodrich was not operating successfully and the prospects ment because, as just stated, the transaction with Colombes-Goodrich has not been closed and the facts do not show that it will be closed at a loss. However, it may be observed against the Commissioner that Colombes-Goodrich was not operating successfully and the prospects of its paying its debts in full were getting no brighter. The respondent has failed to advance any theory upon which the deficiency could be increased.
Furthermore, the petitioner did not 'realize income for Federal income tax purposes as a result of its transaction with the French bank, despite the fact that it recorded the transaction in such a way as to show a profit of $136,970.23. Bookkeeping entries are not determinative of whether or not income has been realized and can not of themselves create a profit where in fact none is realized. This petitioner borrowed 11,000,000 francs in 1933 and paid them back in 1936 at a cost to it in American currency of $514,162.50. A mere borrowing and returning of property does not result in taxable gain. General Motors Corporation, 35 B. T. A. 523, 526; settled on appeal, see 106 Fed. (2d) 995. Cf. North American Mortgage Co. 18 B. T. A. 418. It must be remembered that this debt was at all times expressed in terms of francs, not in terms of United States currency. Cf. Frederick Vietor & Achelis v. Salt's Textile Manufacturing Co., 26 Fed. (2d) 249. The petitioner did not buy 11,000,000 French francs for $514,162.50 and then sell them for $651,132.73. Neither did it exchange them for property having a value of the latter amount. Cf. Bernuth-Lembcke Co., supra. Foreign currency may be treated as property for income tax purposes, and transactions in it may result in gain or loss just as may transactions in any other property. Bernuth-Lembcke Co., supra; Joyce Koebel Co. 6 B. T. A. 403; James A. Wheatley, 8 B. T. A. 1246. Cf. Louis Roessel & Co., Ltd., 2 B. T. A. 1141; Credit & Investment Corporation, 47 B. T. A. 673, 680. But here the transaction with the French bank did not amount to a taxable transaction consisting of an acquisition of property at one price and a disposition at another. Suppose the petitioner had borrowed 11 bars of metal with an obligation to return their equivalent rather than their money value, and, after using that particular metal, the petitioner had spent some of its United States funds to obtain 11 new bars which it turned over to the lender in satisfaction of its obligation. It would seem clear that no real gain or loss could result from the mere borrowing and return of fungible property. The present is a parallel case.
The petitioner in recording this transaction with the French bank debited $651,132.73 to cash in bank and credited the same amount to notes payable. It closed the transaction by crediting $514,162.50 to cash, debiting $651,132.73 to “Notes payable — French bank,” and crediting $136,970.23 to profit. Perhaps it was necessary for it to make some such entries in keeping its books, but the various entries involving the amount of $651,132.73 and the one recording a profit of $136,970.23 were fictitious and not in any sense a true reflection of what happened. The Commissioner, apparently recognizing this, agreed that the bookkeeping formality was not controlling in reporting income and he does not now insist upon adherence to these bookkeeping entries. The petitioner never had $651,132.73 in bank and it did not have notes payable in that amount. On the contrary, it had 11,000,000 French francs in bank and it had an outstanding note which obligated it to return 11,-000,000 French francs to the French bank. Had it recorded these transactions using the French monetary system instead of our own, it would have recorded no profit. Since mere bookkeeping entries can not create a profit, they should not be used as a basis for taxing this petitioner with a profit which it never realized. We know of no theory upon which the $136,970.23 may be included in income for 1936.
Reviewed by the Court.
Decision will be entered umder Bule 50.
TURNER, J., concurs only in the result on the first point.