(2d) 158, and 17 B. T. A. 263, holding that one liable on a note, the payment of which would constitute a deductible loss, is not entitled to such credit, when on a cash basis, where in the taxable year he merely satisfies the old obligation by giving a new note.

In our opinion, the cited cases are not in point. They hold, only, that where credit is allowed to one on a cash basis for a loss sus. tained, it must be actually sustained and not merely postponed. The present question is not one of loss, but of credit claimed for interest paid.

Although taxation is highly practical and has regard for substance rather than form, Tyler v. United States, 281 U. S. 497; Weiss v. Stearn, 265 U. S. 242, it is sometimes difficult to recognize the effective difference between these vague alternatives. Cf. Commissioner v. Sansome, 60 Fed. (2d) 931. However, assuming the existence of such difference here, certainly, in form, this transaction evidenced the payment of the original loan and interest thereon, since it is uncontradicted that the original note or loan certificate was returned to petitioner marked paid in full with interest as of the date of the new loan. Clarendon County v. Curtis, 46 Fed. (2d) 888. In re Dixon, 13 Fed. 109. The forms or steps adopted and thereafter executed to carry out the disputed transaction were legal and effect must be given to them individually. E. H. Nielsen Co., 26 B. T. A. 223; Evelyn F. Gregory, 27 B. T. A. 223.

Nor does the substance of what here occurred seem other than a deductible payment of interest. We can see no real difference, where credit under section 23 is concerned, in a taxpayer's payment of interest with money borrowed or cash already on hand and representing accumulated earnings. We have consistently held that the borrowing of money with which to pay deductible business expenses does not postpone credit for the payment to the year of repayment of the loan. Ida Wolff Schick, 22 B. T. A. 1067; Robert B. Keenan. 20 B. T. A. 498. The fact that the full amount of the second loan was not handed to this petitioner in cash and the sum necessary to cover the first loan and interest handed back is of no importance. It was applied in satisfaction of petitioner's indebtedness and so was constructively received and disbursed by him. United States v. Boston & Maine R. R. Co., 279 U. S. 732; Henry D. Muller, 16 B. T. A. 1015; Mrs. Frank Andrews, 26 B. T. A. 642. Nor do we think the fact that both loans were from the same party is material. There is no difference in the case of one who is indebted to his bank for principal and interest and negotiates with the bank for a new and larger loan and pays with the proceeds of the second loan the interest on the first, and a case where the second loan was negotiated

with a different bank. Nor can we differentiate the legal effect, under the first example given, where the bank deducts from the proceeds of the second loan an amount necessary to cover interest and principal on the first loan or credits the fll amount to the borrower's deposit account and charges against that account the first note and interest, or, alternatively, pays the full amount to him in cash and receives back cash sufficient to satisfy the first obligation. In all of these cases the same thing in fact is done. The taxpayer has paid a debt and accrued interest with borrowed cash. Actual payment of interest on an indebtedness by the taxpayer within the taxable year meets the requirements of the statute. Where the taxpayer obtained the money to make the payment is not material. In the cases cited involving claimed deductions for loss, no credit was allowed, as no loss was actually sustained, because the satisfaction of the first liability merely created a similar one to take its place, but, in the present case, the interest in question was actually satisfied. At the time the second loan was negotiated petitioner was indebted for interest on borrowed money. Upon the second transaction being completed, he had no such liability. The situation is not similar to that presented in Utah Orpheum Co., 3 B. T. A. 1041, where the payment of an existing debt not created by a loan was merely deferred by the giving of a promissory note. In the instant case the note was the basis of a new loan, and the prior note and interest were satisfied from the proceeds.

Respondent admits that petitioner, on a cash basis, is entitled to have his net income determined on the basis of the amount actually or constructively received and disbursed by him during the taxable year. Had petitioner maintained a formal set of books on the cash basis it would have been perfectly proper in our opinion to record the transaction detailed in the findings by debiting cash with the full amount of the second loan obtained and crediting cash with the $2,250.66 of interest paid.

Respondent's theory, if accepted, would preclude the allowance of credit against gross income to one on a cash basis of interest paid except in cases where payment was made from cash surplus, and we can see no intent on the part of Congress in the enactment of section 23 of the Revenue Act of 1928 so to limit the deduction allowed.

We hold that petitioner is entitled, in determining his net income for the year in question, to deduct $2,250.66 representing that portion of the loan obtained by him in that year which was applied in satisfying his interest obligations.

Judgment will be entered under Rule 50.

ABE ACKERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 43295. Promulgated December 22, 1932.

1. The petitioner during the taxable year was a member of a partnership which held substantially all of the common voting stock of an operating corporation. Petitioner's contention that the accounts of the partnership and of the corporation should be consolidated, pursuant to the provisions of sections 240 (d) and 240 (f) of the Revenue Acts of 1924 and 1926, denied, in the absence of proof of the necessity for such consolidation of accounts and the facts essential for making an accurate and equitable apportionment of income and expense between the two related businesses. Roessler & Hasslacher Chemical Co., 25 B. T. A. 915; Western Hide & Fur Co., 26 B. T. A. 354.

2. The transfer of assets by the partnership to the corporation was a sale.

Paul E. Shorb, Esq., and George B. Buist, C. P. A., for the petitioner.

Dean P. Kimball, Esq., for the respondent.

This is a proceeding for the redetermination of deficiencies in income tax for the years 1924 and 1925 in the amounts of $6,763.04 and $116.62, respectfully. The issues are: (1) Whether or not the accounts of a partnership, of which the petitioner was a member, and a corporation, of whose common voting stock the partnership owned more than 99 per cent, should have been consolidated for the taxable years under the provisions of sections 240 (d) and 240 (f) of the Revenue Acts of 1924 and 1926; (2) whether or not the transfer in 1924 of assets by the partnership to the corporation was a capital contribution which did not give rise to recognizable gain to the partnership; and (3) whether or not the partnership realized. "income" within the contemplation of the Sixteenth Amendment and the revenue acts on the transfer of said assets to the corporation in 1924.

FINDINGS OF FACT.

The following facts were stipulated by the parties:

The petitioner is an individual with residence at Fort Wayne, Indiana. During the years 1924 and 1925 and prior and subsequent thereto he was a member of the co-partnership Straus Brothers and Company of Fort Wayne, Indiana, Owning a one-third interest in said partnership. The other members of said partnership were Simon J. Straus and Isaac D. Straus, who each owned a one-third interest in said partnership. Isaac D. Straus died on May 16, 1921, his estate continuing as member of the partnership during 1924 and 1925. Prior to 1910 the partnership of Straus Brothers and Company, consisting of S. J. Straus, Isaac D. Straus and the petitioner, was organized and was engaged

in the business of buying, selling, leasing, holding and owning farm lands, and dealing in mortgage loans on such farm lands.

On April 1, 1910 the aforementioned business of said partnership was transferred to a corporation organized under the laws of the State of Indiana, said corporation bearing the name of The Straus Brothers Company. Said corporation was organized for carrying on the business theretofore engaged in by the partnership. Practically all of the assets of said partnership were transferred to said corporation and in return the partnership received more than 95% of the corporation's voting common stock. After said transfer the assets of said partnership consisted of said stock in the corporation and some stocks and bonds which consisted chiefly of investments in country banks in farming sections, the ownership of said investments being deemed advantageous in the conduct of the business, but, which upon the organization of said corporation it was not deemed necessary or advisable to transfer to the corporation. From 1910 the partnership became practically a holding partnership.

The three members of the partnership were the principal officers of the corporation and directed and were responsible for the administration of its affairs. The salaries of Simon J. Straus, Isaac D. Straus and petitioner as corporation officers were drawn from the corporation. They received no salaries from the partnership.

From time to time over a period of several years, the partnership made some other investments in banks or other companies and the money which was advanced by the corporation for such purposes was charged to the partnership on the books of the corporation and credited on the partnership books to the corporation. Likewise from time to time the corporation collected income belonging to the partnership which was credited to the latter on the corporation's books. Interest was charged by each at the rate of 5% annually on the balances owed by the other.

Since the organization of the corporation and during 1924 and 1925 it acted as fiscal agent for the partnership and collected cash for it and paid out all money on behalf of the partnership, crediting and charging same respectively on the partnership account on its books. Said corporation would collect rents and dividends and interest on stocks, bonds and notes owned by the partnership and was debited on the partnership books with said amounts, as well as rents collected on partnership real estate. Said partnership books would in turn credit the corporation with cash drawn from the corporation by the partners, interest on balance of account with the corporation, money advanced by the corporation to pay for investments purchased by the partnership and taxes paid by the corporation for the partnership.

On May 28, 1924, the outstanding common capital stock of The Straus Brothers Company corporation consisted of 10,290 shares. Said stock was the only voting stock and on said date was owned as follows: Simon J. Straus, 1 share; Abe Ackerman, 1 share; James I. D. Straus, 1 share; Straus Brothers and Company, a co-partnership, 10,216 shares; Jonas Schloss, 1 share; Harry Murphy, 50 shares; and M. G. Cass, 20 shares. On May 28, 1924 a duly called special meeting was held by the stockholders of the said corporation, the portion of the minutes of said meeting material to this case reading as follows:

STOCKHOLDERS' MEETING OF MAY 28, 1924

The Secretary laid before the meeting the draft of a contract prepared to be executed between this corporation and Straus Brothers & Company, a co-partnership, which draft is as follows, to-wit:

day of

"This agreement made and entered into in duplicate this May 1924, by and between Straus Brothers & Company, a co-partnership hereinafter for convenience called the " Co-partnership," party of the first part, and The Straus Brothers Company, an Indiana corporation hereinafter for convenience called the "Corporation," party of the second part, witnesseth:

"The Co-partnership now owns stocks, bonds, notes, mortgages and other securities of the book value of $344,299.50 and is indebted to the corporation upon open account in the sum of $191,290.12, and the co-partnership also owns certain stock in the corporation.

"The corporation is and for many years has been engaged in buying, selling and dealing in real estate, stocks, bonds and other securites.

"It is desired by the parties hereto that the corporation purchase, take over, own and hold all of the assets of the co-partnership excepting only the capital stock of the corporation owned by the co-partnership which shall be retained by it, and that the indebtedness due from the co-partnership to the corporation shall be cancelled, released and discharged. "The premises considered, it is agreed by the parties hereto as follows, to-wit:

"1. The co-partnership shall and does hereby sell, assign, transfer and set over to the corporation all of its assets and property of every kind and nature whatsoever and wheresoever situated, save and except only the capital stock in the corporation owned and held by the co-partnership as aforesaid, for the price and sum of $324,299.50 and the co-partnership agrees when and if requested so to do by the corporation to execute to it such further assignments, transfers or papers writing as may be necessary or convenient to assure unto the corporation a good and indefeasible title to any of the property so transferred and sold unto the corporation as aforesaid. It is agreed, however, that this instrument shall operate as a present assignment, conveyance and transfer by the co-partnership to the corporation of all of the assets and property of the co-partnership so to be assigned and transferred to the corporation as aforesaid.

"2. The corporation agrees that it will pay to the co-partnership for the assets transferred to it as aforesaid the sum of $324,299.50 as follows, to wit:

"$191,290.12; by applying the same in satisfaction and discharge of the amount due from the co-partnership to the corporation as aforesaid; and that it will credit the balance of said purchase price, to wit: $133,099.38 [sic] to the co-partnership upon the books of the corporation; and the corporation promises and agrees to pay the same to the co-partnership or its assigns on or before five years from this date, with interest thereon at the rate of six per centum per annum from the date hereof without relief from valuation or appraisement laws and with attorneys fees; and in consideration of the transfer of the assets from the co-partnership to the corporation so to be transferred as aforesaid, the corporation shall and does hereby release, discharge and forever acquit the co-partnership and each and every member thereof from any and all liability to it of any kind or nature whatsoever by reason of the indebtedness owing from the co-partnership to the corporation as hereinbefore recited."

*

Thereupon James I. D. Straus offered the following resolution and moved the adoption thereof: