San Jacinto Life Ins. Co. v. Commissioner

SAN JACINTO LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. San Jacinto Life Ins. Co. v. Commissioner Docket No. 75348. United States Board of Tax Appeals 34 B.T.A. 186; 1936 BTA LEXIS 734; March 24, 1936, Promulgated *734 The petitioner, reporting its income on the cash basis, received a demand promissory note as additional evidence of the liability of the maker for overdue semiannual interest on a series of notes given in connection with the purchase of real property. The security for the series of notes and interest thereon was continued to secure payment of the demand note. Nothing was paid on the note during the taxable year. Held, that the petitioner did not derive any interest income from the note during the taxable year. Walter E. Barton, Esq., for the petitioner. Willis R. Lansford, Esq., and Edward M. Woolf, Esq., for the respondent. SEAWELL *186 In this proceeding the petitioner seeks the redetermination of a deficiency of $494.91 in income tax for 1931. The sole question is whether the respondent erred in failing to exclude from gross income the amount of $25,000 reported as interest received on a mortgage loan. FINDINGS OF FACT. The petitioner is a Texas corporation engaged in the life insurance business. On May 1, 1929, the petitioner transferred by warranty deed to the San Jacinto Building, Inc., a certain property known as *735 *187 the San Jacinto Building for a consideration of $1,000,000, payable $100 cash, $25,000 annually for five years, commencing May 1, 1930, $35,000 annually thereafter for five years, $200,000 on May 1, 1940, and the remainder of $500,000 on May 1, 1941. The deferred payments were evidenced by a series of promissory notes bearing interest at the rate of 5 percent per annum, overdue interest and principal to bear interest at the rate of 8 percent per annum. The interest was payable semiannually. The deed contained a provision reading: "Vendor's lien, however, is expressly retained against the above described premises for the security, and until the full and final payment of the above described promissory notes, when and whereupon this deed shall become absolute." The two notes of $25,000, due, respectively, on May 1, 1930, and May 1, 1931, were not paid prior to December 31, 1931. The semiannual interest of $25,000 due November 1, 1931, was not paid at maturity. On December 31, 1931, the San Jacinto Building, Inc., executed and delivered to the petitioner a promissory note reading as follows: On demand San Jacinto Building, Incorporated promises to pay to the order*736 of the San Jacinto Life Insurance Company the sum of Twenty Five Thousand Dollars ($25,000.00) with interest at five percent per annum from date until paid annually as it accrues. In the event this note is not paid at maturity or is placed in the hands of an attorney for collection, it is agreed that an additional amount of ten percent on the principal and interest due will be paid as attorney fees. This note represents an unpaid balance of interest due on a series of notes executed May 1st, 1929 by the maker hereof in favor of the San Jacinto Life Insurance Company, which notes are secured by a vendor's lien on certain property located in Block Forty One (41) in the city of Beaumont, Jefferson County, Texas, and the vendor's lien is not in any way disturbed or affected by this extension note, but is continued in full force and effect to secure the payment of this note. In an instrument executed the same day the maker of the note recited that the petitioner "has agreed to an extension of the payment of interest" and that the "note represents unpaid interest on the said vendor's lien notes." The instrument then provides: NOW, THEREFORE, said San Jacinto Building, Incorporated*737 does hereby declare that the said note is covered and secured by the vendor's lien, hereinbefore described, in the same manner and to the same effect as when the interest which it represents accrued. It is further stipulated and agreed that the notes and extension of the maturity of the interest which it represents in no way affects the vendor's lien originally securing the same. The note was given at the suggestion of the president of the petitioner to enable petitioner to include it in its annual insurance statement to the Department of Insurance of the State of Texas as a mortgage loan instead of accrued interest, a nonledger asset on the *188 statement, and constitutes additional evidence of the maker's liability for the unpaid interest of $25,000 due Novembner 1, 1931. The balance sheet of the San Jacinto Building, Inc., as of the close of 1931, showed assets and liabilities, as follows: ASSETS Current: Cash in banks $37,572.28 Notes receivable 18,501.39 Suspense 40.12 Total current $56,113.79 Investments: Stocks of other corporations 2,500.00 Fixed: Site (land) $208,169.20 Main building $738,382.22 Annex building 53,448.58 Annex building improvements 1,217.35 793,048.15 Less depreciation reserve 33,859.86 759,188.29 Total fixed 967,357.49 Grand total of assets 1,025,971.28 LIABILITIES Notes payable - secured $1,025,000.00 Accrued taxes payable 27,465.50 Capital stock (fully paid) 10,000.00 Surplus (deficit) (red) 36,494.22 Grand total of liabilities 1,025,971.28 *738 The assets referred to in the balance sheet as the main building and annex building were the property acquired from the petitioner on May 1, 1929. The main building is a steel frame 15-story office building, with basement and tower, located on a lot 60 by 120 feet, situated in the business district of Beaumont, Texas. The annex building is a 3-story brick building adjoining the main building. The first floor is used for a store and the second and third floors are used for offices. The petitioner included the face amount of the note of December 31, 1931, in its income tax return for 1931 as interest received during the taxable year. The note has not been paid. The note had a fair market value of $25,000 on December 31, 1931. OPINION. SEAWELL: The contention of the respondent is that the note was executed by the San Jacinto Building, Inc., and accepted by the petiktioner in payment of the semiannual interest due November 1, 1931, a *189 view the petitioner seems to have had when it filed its return for the taxable year. Irrespective of its conclusions at that time and the manner in which it reported the transaction in its income tax return, the petitioner now*739 argues that the note merely operated to extend the time of payment of the interest. The note and collateral agreement contain inconsistent provisions. Each refers to an agreement to extend the time of payment of the overdue interest and provides that the note "represents" the unpaid interest. The semiannual interest had been due since November 1, 1931, and the petitioner's right to receive it could have been asserted at any time thereafter. The note given did not operate to extend the time of payment of the interest, for the holder could have demanded payment immediately. An extension of the maturity date of an obligation contemplates a future due date or one capable of being ascertained. The execution and delivery of a note, as here, to represent an obligation to pay under an agreement previously entered into, implies the substitution of a new promise for an old one. Nothing of record establishes any intent to discharge the debt by the note. The real purpose of the instruments was to have the obligation of the debtor expressed in such form as to enable the petitioner to use it in its annual report to the state insurance commissioner. At all times after November 1, 1931, the*740 petitioner could have assigned or asserted its claim for interest. The note gave the petitioner no additional rights to payment. It was nothing more than additional evidence of its claim to the overdue interest. In , the petitioner surrendered a note, the security therefor, consisting of stock of the maker of the note, and a claim for overdue interest and attorney fees incurred, in exchange for certificates of indebtedness of the receiver for the debtor. It was held that the transaction constituted merely a renewal of the note and interest thereon and that the taxpayer, being, as here, on the cash basis of accounting, would derive no income in the way of interest until the certificates of indebtedness were paid or otherwise disposed of. In , the taxpayer, in connection with mortgage loans on real estate, deducted its commissions from the loans and paid the net amounts to the borrower. In holding that the commissions were not subject to tax at the time the loans were made, the court said: It is plain that until the loan is paid or rediscounted*741 the respondent has earned no profit, but has simply parted with its funds on the faith of the security. The commission is not actually received until respondent gets back what it has previously paid out plus the commission. The deduction of the commission from the face of the loan brings nothing into the copffers of the banks. *190 A like ruling was made in . The cases cited control the answer here. Accordingly, the respondent is reversed. Decision will be entered under Rule 50.