Prudence Securities Corporation v. Com'r of Int. Rev.

Second Circuit

Prudence Securities Corporation v. Com'r of Int. Rev.

135 F.2d 340, 30 A.F.T.R. (P-H) 1446, 1943 U.S. App. LEXIS 3274

CourtCourt of Appeals for the Second Circuit

DecidedMarch 30, 1943

Docket158

StatusPublished

Cited by15 cases

This text of 135 F.2d 340 (Prudence Securities Corporation v. Com'r of Int. Rev.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Second Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

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Prudence Securities Corporation v. Com'r of Int. Rev., 135 F.2d 340, 30 A.F.T.R. (P-H) 1446, 1943 U.S. App. LEXIS 3274 (2d Cir. 1943).

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Opinion

FRANK, Circuit Judge.

The B bonds, accrued interest on which taxpayer seeks to deduct, are owned by a corporation which also owns all taxpayer’s stock. A corporation, ordinarily, cannot in a real sense become a creditor of one of its own incorporated departments. The situation here is substantially the same as if the taxpayer were seeking to deduct accrued interest on its own unissued bonds because it had set them aside in an envelope in its vault. While there are perhaps conceivable circumstances in which accruing interest on bonds of a wholly owned subsidiary held by its parent company might be deductible from the subsidiary’s gross income, certainly when the government chooses to assail the transaction such a deduction cannot be permitted. Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406.

But, even aside from the parent-subsidiary relation, taxpayer must lose. For here the contingencies, both in form and substance, affecting the future payment of the interest on the B bonds were such that in the taxable year no reasonable person could assume that payment would ever be likely to occur. This is not a case where *342 the unlikelihood of payment is due to the impending bankruptcy of the debtor, 2 but one where indeed only events approximating the bankruptcy of the debtor could bring about any reasonable possibility of payment of interest on the B bonds. If ever there was a case where flimsy paper transactions were put forward as a basis for avoidance of tax, this is it. 3

Affirmed.

2

Zimmerman Steel Co. v. Commissioner, 8 Cir., 130 F.2d 1011.

3

Cf. Lucas v. American Code Co., 280 U.S. 445, 50 S.Ct. 202, 74 L.Ed. 538, 67 A.L.R. 1010; Lucas v. North Texas Co., 281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668; Commissioner v. Brooklyn Radio Service Corp., 2 Cir., 79 F.2d 833, 834; Jamaica Water Supply Co. v. Commissioner, 2 Cir., 125 F.2d 512, 513.

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FRANK, Circuit Judge.

The B bonds, accrued interest on which taxpayer seeks to deduct, are owned by a corporation which also owns all taxpayer’s stock. A corporation, ordinarily, cannot in a real sense become a creditor of one of its own incorporated departments. The situation here is substantially the same as if the taxpayer were seeking to deduct accrued interest on its own unissued bonds because it had set them aside in an envelope in its vault. While there are perhaps conceivable circumstances in which accruing interest on bonds of a wholly owned subsidiary held by its parent company might be deductible from the subsidiary’s gross income, certainly when the government chooses to assail the transaction such a deduction cannot be permitted. Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406.

But, even aside from the parent-subsidiary relation, taxpayer must lose. For here the contingencies, both in form and substance, affecting the future payment of the interest on the B bonds were such that in the taxable year no reasonable person could assume that payment would ever be likely to occur. This is not a case where *342 the unlikelihood of payment is due to the impending bankruptcy of the debtor, 2 but one where indeed only events approximating the bankruptcy of the debtor could bring about any reasonable possibility of payment of interest on the B bonds. If ever there was a case where flimsy paper transactions were put forward as a basis for avoidance of tax, this is it. 3

Affirmed.

2

Zimmerman Steel Co. v. Commissioner, 8 Cir., 130 F.2d 1011.

3

Cf. Lucas v. American Code Co., 280 U.S. 445, 50 S.Ct. 202, 74 L.Ed. 538, 67 A.L.R. 1010; Lucas v. North Texas Co., 281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668; Commissioner v. Brooklyn Radio Service Corp., 2 Cir., 79 F.2d 833, 834; Jamaica Water Supply Co. v. Commissioner, 2 Cir., 125 F.2d 512, 513.

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135 F.2d 340, 30 A.F.T.R. (P-H) 1446, 1943 U.S. App. LEXIS 3274, Counsel Stack Legal Research, https://law.counselstack.com/opinion/prudence-securities-corporation-v-comr-of-int-rev-ca2-1943.

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