TAXATION - INCOME TAX - WHETHER PURCHASE AND RETIREMENT BY CORPORATION OF OWN BONDS AT LESS THAN AMOUNT OF ISSUE CONSTITUTES A TAXABLE GAIN WHERE CORPORATION IS INSOLVENT

Petitioner, a railway corporation, in 1906 leased all its property to an operating company for a term of fifty years. At the same time petitioner issued $434,000 in first mortgage bonds which were used to refund a prior issue of $350,000 and to provide for certain improvements on the road. Interest on the bonds was to be met by lessee\u27s payment of the greater part of the rental directly to the trustee of the mortgage bonds, but no provision for a sinking fund was made. In October, 1932, petitioner purchased $19,000 par value of aforesaid mortgage bonds for $4,750, and has since held them in order to collect the interest as it falls due. Because of changed conditions the property leased by petitioner has become practically valueless. The Commissioner of Internal Revenue taxed the difference between issuing price and repurchase price as income for the year 1932. The Board of Tax Appeals supported the Commissioner. Held, the board\u27s decision should be reversed. Transylvania Railroad v. Commissioner of Internal Revenue, (C. C. A. 4th, 1938) 99 F. (2d) 69