Reliable Incubator & Brooder Co. v. Commissioner

Reliable Incubator and Brooder Company, an Illinois Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent Reliable Incubator & Brooder Co. v. Commissioner Docket No. 6722 United States Tax Court 6 T.C. 919; 1946 U.S. Tax Ct. LEXIS 208; April 30, 1946, Promulgated *208 Decision will be entered for the respondent. 1. Petitioner, a corporation, owed $ 26,830.76 to the widow of a deceased creditor of petitioner. In consideration of her promise to cancel the indebtedness and to release petitioner from all her claims for moneys due, petitioner undertook to pay her thirty dollars per week for remainder of her life. Held, no part of the weekly payments is deductible by petitioner as "interest" under section 23 (b), Internal Revenue Code. 2. On August 1, 1940, petitioner was obligated to pay M $ 50 per month on a total indebtedness of $ 6,700. At M's request petitioner paid M $ 600 in August 1940, in consideration of which payment M reduced the principal debt by $ 1,200, thereby canceling $ 600 of the total debt. Held, petitioner realized income of $ 600 as a result of this cancellation of indebtedness within meaning of section 22 (a), Internal Revenue Code, since there was consideration for this forgiveness of part of the debt. Helvering v. American Dental Co., 318 U.S. 322, distinguished. 3. In years prior to 1940 petitioner was allowed depreciation on certain items in a class of assets designated as*209 "machinery and equipment" in an amount exceeding the cost of said items. Held, that the excessive depreciation allowed on certain assets in the class may be properly applied by respondent to the depreciation reserve of other assets in the class so as to reduce the amount of depreciation accruable annually on the other assets. 4. In its income tax returns for years prior to 1939 petitioner had deducted as expense the full amount of its expenditures in connection with a certain patent application. Later, petitioner capitalized these expenditures, and when the patent application was denied in 1942 petitioner sought to charge off on its return for that year the full amount of said expenditures thus capitalized. Held petitioner is not entitled to deduct these expenditures for the second time, in 1942. Robert S. Hunter, Esq., for the petitioner. David F. Long, Esq., for the respondent. Kern, Judge. KERN *920 This proceeding involves deficiencies for the taxable years ended June 30, 1941, 1942, and 1943, as follows: June 30, 1941 June 30, 1942 June 30, 1943 Income tax $ 479.49 $ 409.29 $ 216.16 Declared value excess profits tax 191.11 175.35 342.72 Excess profits tax 677.56 Five separate questions are presented for decision. For purposes of clarity the facts pertinent to each will be set forth separately in the findings of fact and our decision on each question will be separately stated in the opinion. The questions presented are whether any portion of certain periodic payments made by the petitioner to an individual during the taxable years here involved are deductible*211 by petitioner as "interest" under section 23 (b) of the Internal Revenue Code; whether the cancellation by a creditor of a part of certain indebtedness of the petitioner secured by a second mortgage constituted taxable income to the petitioner in the year ended June 30, 1941; whether respondent erred in applying excessive depreciation which had been allowed on part of petitioner's machinery and equipment in years prior to the taxable years to reduce the basis of other machinery and equipment not fully depreciated, the petitioner using a composite account method of determining depreciation on its machinery and equipment; whether petitioner is entitled to deduct in its return for the year ended June 30, 1942, the full amount of its expenditures in connection with a patent application which was denied in that year, petitioner having previously deducted said expenditures as expenses in its tax returns for prior years; and whether petitioner is entitled in the taxable years here involved to claim depreciation on a typewriter acquired in the year ended June 30, 1939, the entire cost of which was deducted as an expense in petitioner's tax return for that year. FINDINGS OF FACT. Petitioner*212 is a corporation, incorporated in 1913 under the laws of the State of Illinois, with its principal office at Quincy, Illinois. Its *921 returns for the periods here involved were filed with the collector of internal revenue for the eighth district of Illinois. I. On March 1, 1940, petitioner was indebted in the amount of $ 26,830.76 to the estate of John W. Myers, Sr., who died in August 1939. The decedent's will bequeathed to his widow, Lillian Myers, all moneys due the decedent from the petitioner for back salary or on open account and also all notes of the petitioner owned by the decedent. The will further devised to the petitioner certain real estate which had formerly belonged to it, subject to a condition of defeasance in favor of Mrs. Myers in the event of the failure of the petitioner "to pay off said mortgages and all encumbrances on all of my property, real, personal, and mixed, and all promissory notes and wages due me by said Reliable Incubator and Brooder Company of Quincy, Illinois, within eight months after my [the decedent's] death." Petitioner was unable to meet the demands of Mrs. Myers for the moneys due her and accordingly negotiations were entered into*213 by the interested parties. A written agreement was entered into on March 1, 1940, among Mrs. Myers, the petitioner, and the sons and daughters of the deceased. Under this agreement Mrs. Myers agreed to cancel and return to petitioner all notes, checks, and other evidences of indebtedness of the petitioner to the deceased, to release petitioner from all her claims for moneys due the decedent for back salary or on open account, and to convey to petitioner by quitclaim deed all her right and interest in the above mentioned real estate. She also agreed to waive all benefit of any provision of the decedent's will whereby the real estate might revert to her. Petitioner, on its part, agreed, inter alia, as follows: a) That commencing immediately upon the full compliance with the provisions hereof by the party of the first part [Mrs. Lillian Myers], on her part to be kept and performed, it will pay or cause to be paid to the party of the first part, the sum of Thirty Dollars ($ 30.00) per week in consideration of the cancellation of the indebtedness of the party of the third part [the petitioner] as hereinabove provided, said weekly payments to continue so long as the party of the*214 first part shall live, and no longer, unless the party of the third part shall deliver to the party of the first part a fully paid annuity, issued by an insurance company qualified and admitted to do business in the State of Illinois under the terms of which the party of the first part shall receive not less than One Hundred and Twenty Dollars ($ 120.00) per month for the rest of her natural life, and in that event the said payments by the party of the third part shall terminate. b) To pay to the party of the first part, upon full compliance by the party of the first part with the provisions of this agreement, the sum of One Thousand Seven Hundred and Thirty and No/100 Dollars ($ 1,730.00) in cash; provided however, that said payment shall not be made until sufficient funds are available in the treasury of the party of the third part so that such payment will not, in *922 the opinion of the directors of the party of the third part, seriously deplete the working capital of the party of the third part. Under the decedent's will Mrs. Myers was also bequeathed 252 shares of the capital stock of the petitioner, which was the majority interest. In the agreement of March 1, 1940, she*215 agreed to transfer these shares to the sons and daughters of the decedent, who in turn agreed to transfer the shares to designated trustees in trust. In the event that the petitioner defaulted in making the payments to Mrs. Myers or in fulfilling certain other covenants of the agreement, it was provided in the agreement that the trust would terminate and the trustees would deliver the stock to Mrs. Myers as her absolute property. The agreement was given effect and, pursuant to its terms, petitioner paid Mrs. Myers for the taxable years ended June 30, 1941, 1942, and 1943, the respective amounts of $ 1,590, $ 1,560, and $ 1,560. In its returns for those taxable years petitioner deducted the entire amounts of the payments as interest. The respondent has disallowed the deductions as not allowable under the provisions of the Internal Revenue Code. Mrs. Myers was 47 years old on March 1, 1940, and was living on the date of the hearing of this proceeding. II. On about August 1, 1940, petitioner was indebted to Clarence A. Myers in the approximate amount of $ 6,700. This indebtedness was evidenced by a note secured by a second mortgage on the petitioner's real estate. A balance sheet*216 of the petitioner showing its condition as at August 31, 1939, sets forth as a current liability "Second Mortgage -- Past Due $ 8,400.00." In the agreement of March 1, 1940, heretofore referred to, petitioner agreed: (c) To assume, * * * by written obligations delivered to the respective mortgagees promptly after the execution hereof, the present mortgage indebtedness of the said John W. Myers, deceased, and Lillian M. Myers, his wife, * * * to Clarence A. Myers, on which there is now due and owing approximately Eight Thousand Four Hundred Dollars ($ 8,400.00) and interest, * * * and to make regular monthly payments to Clarence A. Myers at the rate of Fifty Dollars ($ 50.00) per month until November 6, 1944, on which last-mentioned date the party of the third part shall pay to the said Clarence A. Myers the entire unpaid balance of principal and interest then due and owing on said mortgage indebtedness; provided, that whenever and as soon as all of the mortgage indebtedness of the said John W. Myers, deceased, to said Quincy-Peoples Building and Loan Association shall have been paid and released, then in such event said monthly payments to Clarence A. Myers shall immediately be increased*217 from Fifty Dollars ($ 50.00) per month to One Hundred Dollars ($ 100.00) per month. No evidence has been offered as to the method whereby the indebtedness to Clarence Myers was reduced from approximately $ 8,400 on March 1,, 1940, to $ 6,700 on August 1, 1940. *923 On July 28, 1940, Clarence Myers was urgently in need of money and made a written offer to the then president of the petitioner whereby he offered to allow the petitioner a credit of $ 2 for each $ 1 paid on the note. Petitioner accepted the offer and made two payments of $ 100 and $ 500, respectively, on the note, and received in consideration therefor a discharge of $ 1,200 on its indebtedness, evidenced by two receipts providing respectively: Aug. 3, 1940 Received of John W. Myers Jr. Check No. 12760 100.00 Credit on note 100.00 $ 200.00 [Signed] C. A. Myers, Hawthorne, California. Received of John W. Myers Jr. Quincy, Illinois. For Value Received ($ 500.00) I Credit Your Note for $ 1000.00 As Per Special Agreement. [Signed] Clarence A. Myers (Date) Aug 31, 1940 Respondent has determined that the cancellation of indebtedness in the amount of $ 600 by Clarence Myers was in consideration of advance*218 payments by the petitioner, and that such cancellation represented income to the petitioner. Petitioner did not file with its return for the fiscal year ended June 30, 1941, a consent to have the basis of its property adjusted pursuant to the provisions of sections 19.22 (b) (9)-1 and 19.22 (b) (9)-2 of Regulations 103. Petitioner's financial condition for the year ended June 30, 1941, is not disclosed by the record. III. For the purpose of computing depreciation in connection with its income tax returns, petitioner has followed a practice of grouping its depreciable assets into three separate classes, namely, buildings, office devices, and machinery and equipment (machinery and equipment being referred to hereinafter as machinery), and taking varying percentages of the entire book values of the respective classes in computing its allowances for depreciation. For example, in computing depreciation on the machinery class, petitioner took 6 percent of the entire book value of the class as depreciation for the fiscal year ended June 30, 1937. For each of the fiscal years ended in 1938 and 1939, petitioner took as depreciation on its machinery 5 percent of the book *924 value*219 of the entire class. Similarly, in computing depreciation on its buildings petitioner took 3 percent of the book value of the buildings class in 1937 and 2 percent in 1938 and 1939. A large part of petitioner's machinery was fully depreciated on or before June 30, 1932. This included certain machinery valued at $ 22,423.42 and purchased prior to 1921. Nonetheless, in computing its depreciation for certain fiscal years between July 1, 1933, and ending June 30, 1939, petitioner continued to include the fully depreciated machinery in the machinery class, and applied the percentage figure against the book value of the entire class. As a result, petitioner claimed excessive depreciation in those years on the entire class of its depreciable assets grouped by it under the classification "Machinery and equipment." For the fiscal years ended June 30, 1941, petitioner claimed depreciation in the amount of $ 2,440.88, of which respondent has disallowed $ 911.51. Similarly, respondent has disallowed $ 718.92 of the $ 2,321.75 depreciation claimed for the year ended June 30, 1942, and $ 734.26 of the $ 2,383.78 depreciation claimed for the year ended June 30, 1943. These disallowances resulted*220 from the fact that respondent has carried over the excessive depreciation described above and applied such excess to other machinery in the class acquired in later years, but prior to the taxable years and not fully depreciated, thereby reducing the basis of such subsequently acquired machinery and equipment. 1 IV. In undisclosed years prior to June 30, 1939, petitioner expended the sum of $ 286.70 for a patent application, including attorney's fees. The entire $ 286.70 was deducted as expense items by the petitioner in years prior to the year ended June 30, 1939, in determining its net income and in preparing its Federal income tax returns for prior years. When an audit of petitioner's books and accounts was made in September 1939, the error was discovered and correcting entries were made in petitioner's books capitalizing the cost of developing the patent, the patent application*221 being set up as a deferred asset. However, petitioner did not file any amended returns for the years in which it had deducted as expenses its expenditures in connection with the patent application. During the year ended June 30, 1942, the patent application was denied and petitioner in its Federal income tax return for that year deducted the full amount of $ 286.70 as an expense item. The respondent disallowed the deduction for the reason that the expenses were not incurred or paid during the taxable year ended June 30, 1942. *925 V. During the fiscal year ended June 30, 1939, petitioner purchased a typewriter for the sum of $ 199.26, which entire sum was deducted as an expense item in petitioner's income tax return for that fiscal year. Petitioner has not filed any amended return for the year in which this sum was deducted as an expense item. In its income tax returns for the taxable years ended June 30, 1941, 1942, and 1943, petitioner claimed depreciation on this typewriter, which depreciation respondent has also disallowed. 2 *222 OPINION. Five separate questions are presented here for decision. We shall consider each of them separately. I. The first question is whether petitioner is entitled to deductions for each of the three fiscal years ended June 30, 1941, 1942, and 1943, respectively, for the payments made to Mrs. Myers, to the extent that such payments included interest, as computed on an actuarial basis. Petitioner concedes that the entire amounts paid to Mrs. Myers in these taxable years are not deductible as interest, but contends that it is entitled to deduct as interest such portions of these payments as represent interest computed on an actuarial basis. 3 *223 *926 Section 23 (b) of the Internal Revenue Code provides, in so far as here material, that all interest paid or accrued within the taxable year on indebtedness shall be allowed as a deduction in computing net income. The liability of the petitioner to make these payments was not "indebtedness" within the meaning of section 23 (b), and no part of the payments is deductible as "interest" under the statute. The "indebtedness" of the petitioner was paid by its creditor's acceptance of its contractual obligation to make small weekly payments during the creditor's life. Until and unless these payments were in arrears there was thereafter no "indebtedness" of petitioner upon which interest could be paid and, therefore, no interest is deductible under the statute. Irene W. Johnson, 39 B. T. A. 702, 710; affd., 108 Fed. (2d) 104. Petitioner relies on Florence L. Klein, 6 B. T. A. 617, and Commissioner v. Moore Corporation, 42 Fed. (2d) 186, affirming 15 B. T. A. 1140. Florence L. Klein is clearly distinguishable from the instant*224 case for the reason set forth in Edwin M. Klein, 31 B. T. A. 910, 919. In the Moore case the question at issue was the cost of the property received by the annuity writer from the annuitant, and not the deductibility of interest under section 23 (b). II. The second question for decision is whether the cancellation by Clarence Myers of $ 600 of the indebtedness owed him by the petitioner resulted in taxable income to the petitioner in the year ended June 30, 1941. Petitioner contends that the cancellation of $ 600 of the indebtedness by Clarence Myers was a gift and not taxable as income. In support of this contention petitioner relies exclusively on Helvering v. American Dental Co., 318 U.S. 322. The decision in that case is not applicable to the case before us, inasmuch as the forgiveness of $ 600 of the debt by Clarence Myers was not gratuitous. On the basis of the evidence offered by the parties we have found that petitioner was obligated to make payments on the indebtedness to Myers only at the rate of $ 50 per month. When petitioner made the payments of $ 100 and $ 500 in August 1940, it, in so far as we *225 are able to determine, made payments on its obligations before they were due. Therefore, there was consideration for the forgiveness of part of the debt. If a debtor pays his debt or a part of it before it is due, the consideration is sufficient to support a promise by the creditor. Crowe v. Gore, 85 Fed. (2d) 291, 294. See also Williston on Contracts, Rev. Ed. 1936, vol. 1, sec. 121, and authorities there cited; Restatement of the Law of Contracts, sec. 76, illustration 6; and the annotation at 24 A. L. R. 1474. There is no evidence in the record showing that petitioner was insolvent *927 in August 1940, or was in an "unsound financial condition"; and it did not file the consent required by section 22 (b) (9) of the Internal Revenue Code and section 19.22 (b) (9)-2 of Regulations 103. Petitioner accordingly realized income in the amount of $ 600 as a result of this cancellation of indebtedness within the meaning of section 22 (a) of the Internal Revenue Code and section 19.22 (a)-14 of Regulations 103. 4 *226 III. The third question is whether respondent erred in applying the excessive depreciation allowed in years prior to the taxable years on a part of petitioner's machinery acquired before 1921 to the depreciation reserve of other machinery acquired by petitioner after 1920, but before the taxable years and grouped by petitioner in the same class of depreciable assets, to wit: "Machinery and equipment", to which a composite rate of depreciation was applied, thereby reducing the amount of depreciation accruable in each of the tax years here involved on the machinery acquired after 1921. It should be pointed out that the evidence presented on this issue by petitioner, who had the burden of proof, is extremely unsatisfactory. We have based our findings of fact upon the evidence presented by the entire record and the presumptions raised by the respondent's determination where those presumptions have not been overcome by the evidence. Petitioner relies exclusively on Pittsburgh Brewing Co., 37 B. T. A. 439; reversed on another point, 107 Fed. (2d) 155. It is our opinion that the Pittsburgh Brewing Co. case is not controlling *227 here and that we must hold for the respondent on the basis of Hoboken Land & Improvement Co. v. Commissioner, 46 B. T. A. 495; affd., 138 Fed. (2d) 104. The Pittsburgh Brewing Co. case, supra, is distinguishable on its facts from the instant case for much the same reasons as we set forth in Hoboken Land & Improvement Co., supra, at page 500. The taxpayer in the Pittsburgh Brewing Co. case maintained separate depreciation accounts for the buildings, brewing machinery, engine room machinery, refrigerator machinery, stationary cooperage, furniture *928 and fixtures, and cooper shop machinery belonging to each of its several breweries; no composite depreciation method was ever used either on its books or on its income tax returns. In essence the Pittsburgh Brewing Co. maintained separate depreciation accounts for groups of assets, the assets in each group being similar in kind. 5 This Court pointed out in its opinion in that case that "there was no composite depreciation used" and held that "in a method of depreciating specific groups of assets there is no justification for *228 applying the excessive amount computed as to one asset or group so as to reduce the basis of another." ( Pittsburgh Brewing Co., supra, at p. 445.) In the Hoboken Land & Improvement Co. case, supra, the taxpayer was allowed excessive depreciation on a class of its property described as "piers and waterfront properties". We held that excessive depreciation allowed on assets in this account could be allocated against the unexhausted basis of other assets acquired and placed in the account after the accumulation of the excess. In sustaining our holding, *229 the Circuit Court of Appeals for the Third Circuit stated, "Nor is Pittsburgh Brewing Company v. Commissioner * * * helpful since it involved an attempt to apply excessive depreciation, taken at a certain rate on one group of assets, to another, depreciated at a different rate. Here, of course, there was only one class of depreciable assets." Hoboken Land & Improvement Co.v. Commissioner, supra, 138 Fed. (2d) 104, 108. The petitioner in the instant case has used a modification of composite accounting in that it placed all of its depreciable assets into three general property accounts or classes, namely, buildings, office devices, and machinery. 6 We see no real distinction between the problem involved in the Hoboken case and the problem here before us. Therefore, we hold that the excessive depreciation taken by petitioner on machinery acquired by it prior to 1921 was properly added by*230 respondent in the taxable years to the depreciation reserve applicable to machinery acquired by petitioner after 1920 and prior to the taxable years which was grouped by petitioner for depreciation purposes in the same class of depreciable property, and upon which class depreciation was calculated at a composite percentage. IV. The fourth question is whether petitioner is entitled to charge off in its tax return for the fiscal year ended June 30, 1942, the full amount of its expenditures in connection with a patent application which was *929 denied in that year, even though petitioner had deducted the full amount of these expenditures as expenses in its tax returns for years prior to the year ended June 30, 1939. Petitioner has not come here offering to correct its tax returns for the years in which it erroneously deducted as expenses its expenditures in connection with the patent application. Furthermore, from the evidence before us it would appear that the respondent would be barred by the statute of limitations from assessing any deficiencies for those years. It is apparent that the petitioner is not asking us to determine its true tax liabilities for those years, but rather*231 is requesting that we allow for a second time a deduction from gross income which it has already enjoyed. In Firemen's Insurance Co., 30 B. T. A. 1004, this Court held that where the period of limitations has run against any adjustment, a taxpayer may not receive a deduction for depreciation on any property the full cost of which was deducted from income as an operating expense in the year paid or incurred and allowed as such. Although the question under immediate consideration does not involve an allowance for depreciation, the principle enunciated in that case is clearly applicable and, we think, decisive of the point. See also Mrs. R. L. Wheelock, 28 B. T. A. 611; affd., 77 Fed. (2d) 474, in which it is said at page 617: Petitioners do not come here offering to correct their return for 1924 on the basis of the true income for that year and, even if they were willing so to do, such action is now barred by the statute of limitations as well as the closing agreement. It is apparent therefore, that in the present proceeding they are not asking us to redetermine their true tax liability for each*232 of the years 1923 and 1924, but for the second time to allow them an offset against their taxes which they have already enjoyed. Unless the law inescapably permits such an inequitable result, they should not prevail. We believe that respondent's disallowance of the deduction here in question is justified by the same equitable principle. Petitioner has obtained the benefit of the deduction of the entire cost of the patent application in prior years. Even though this deduction might have been disallowed by the respondent for those prior years as erroneously taken, it was not questioned, and, so far as the record discloses, it can not now be questioned, and petitioner makes no offer that its tax returns for those prior years be adjusted to rectify its own error by which it has benefited. To hold in favor of petitioner would be to allow it a double deduction for the same expenditures. "A construction of a taxing statute permitting a duplication of deductions is not favored by the courts." Keystone Automobile Club Casualty Co., 40 B. T. A. 291, 308. See also Ilfeld Co. v. Hernandez, 292 U.S. 62; Comar Oil Co. v. Helvering, 107 Fed. (2d) 709;*233 and Bank of Newberry, 1 T. C. 374, 376. *930 V. The final question is whether petitioner is entitled to take deductions in the tax years here involved on a typewriter acquired by it in the fiscal year ended June 30, 1939, the entire cost of which was deducted as an expense in petitioner's income tax return for that year. Inasmuch as petitioner has not discussed this point in its brief, we can assume that it has abandoned its contention that the respondent erred in disallowing the deductions for depreciation. However, we might point out that even if petitioner had pursued this point, it could not prevail for the same reasons as are set forth immediately above in regard to the petitioner's expenditures for the patent application. Decision will be entered for the respondent. Footnotes 1. In its brief, petitioner indicates that the machinery "acquired in later years" was acquired during the years 1921 to 1928, both inclusive.↩ 2. Petitioner's tax returns for the taxable years in question are not in evidence and neither party has indicated in any way the taxable years in which the petitioner claimed depreciation on the typewriter. We assume, therefore, on the basis of all the evidence before us, that petitioner claimed depreciation on the typewriter for each of the taxable years here involved.↩ 3. The petitioner has not offered any detailed evidence as to its method of computing the amounts which it now claims deductible as "interest." However, petitioner has set forth its computations in its petition and brief, which for the purpose of clarity in this opinion we here reproduce, without, however, finding in any way as to the accuracy of petitioner's analysis: Computed in accordance with Table A, of Regulations 80, the value of an annuity of $ 30.00 per week, for a person aged 47 years, the age of Lillian Myers in November, 1939, computed on the basis of 4%, would be $ 20,474.47 calculated as follows: $ 1,560.00 x 13.31698 is $ 20,774.49 Less 1/3 year to bring value down to March 1, 1940 300.02 20,474.47 Life Annuity Age expectancy Period Principal Interest balance (years) Mar. 1, 1940 $ 20,474.47 — 47 — 23.08 6/30/40 $ 295.70 $ 214.30 June 30, 1940 20,178.77 — 48 — 22.36 6/30/41 902.45 687.55 June 30, 1941 19,276.32 — 49 — 21.63 6/30/42 891.16 668.84 June 30, 1942 18,385.16 — 50 — 20.91 6/30/43 879.25 680.75 June 30, 1943 17,505.91 — 51 — 20.20 Petitioner's present contention is that it should be permitted to deduct as interest the amounts shown under the heading "interest" in the above computation.↩ 4. SEC. 22. GROSS INCOME. (a) General Definition. -- "Gross Income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, business, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * Sec. 19.22 (a)-14 [Regulations 103]. Cancellation of indebtedness. -- (a) In general. -- The cancellation of indebtedness, in whole or in part, may result in the realization of income. * * * A taxpayer realizes income by the payment or purchase of his obligations at less than their face value. * * * For exclusion from gross income of income attributable to discharge of indebtedness of a corporation in an unsound financial condition, see section 19.22 (b) (9)-1↩. 5. Under Bulletin "F" (Revised January 1942) of the Bureau of Internal Revenue, these would be designated as "group accounts," had the bulletin as revised been in effect at the period involved in the Pittsburgh Brewing Co↩. case. See U. S. Treasury Department -- Bureau of Internal Revenue, Bulletin "F" (Revised January 1942) -- Income Tax, Depreciation and Obsolescence -- Estimated Useful Lives and Depreciation Rates, at p. 6. 6. Such accounts are designated as "classified accounts" in Bulletin "F," supra↩.