any connection with Stoll's newspaper business. Moreover, when the refinancing of his other liabilities by new loans participated in by three banks to be secured by the assets of the newspaper business and certain real estate including the real estate on which the newspaper business was being conducted, was being considered, Stoll's financial advisers, including the executive vice president of the First National Bank of Louisville, and the president of the Security Trust Company of Lexington, advised him it would not be necessary to disturb the indebtedness which he owed the First National Bank of Louisville. Inasmuch as this indebtedness had no relevancy to the business of the corporation, was amply secured by the cash surrender value of the life insurance policies, and the lender was willing to allow sufficient time for it to be retired, we think it clear that the inclusion of the $415,000 indebtedness in the liabilities assumed by the corporation served no business purpose. Even if the lender had demanded immediate payment and it had been necessary to surrender the life insurance policies to satisfy the indebtedness, there is nothing in the record to indicate that this would have had any effect upon the business of the corporation. If anything, the assumption of this indebtedness was adverse to the business interests of the corporation since it was required to and did pay off an indebtedness having no relation to its organization or in the conduct of its business. Although the liability for such indebtedness was assumed by the corporation, the insurance policies assigned to the bank as security for the loans were not included in the assets transferred to the corporation. Having determined that there was no bona fide business purpose for the assumption by the corporation of Stoll's liability to the First National Bank of Louisville in the amount of $415,000, we are next faced with the question as to whether by reason of the assumption of such particular liability, the total amount of the liabilities assumed ($1,015,000) is to be considered as "other property or money" received so as to render the entire amount ($1,015,000) taxable. So far as we are aware, this problem has never been passed upon by any court. Nor has it been discussed on brief by either of the parties. There is nothing in the statute or the regulations or congressional reports relating to section 112(k) of the 1939 Code which, in our opinion, requires such a holding. Section 112(k) provides that if the principal purpose of the taxpayers with respect to the assumption "was a purpose to avoid Federal income tax on the exchange, or, if not such purpose, was not a bona fide business purpose, such assumption or acquisition (in the amount of the liability) shall, for the purposes of this section, be considered as money received by the taxpayer upon the exchange." (Emphasis supplied.) In our opinion the language "in the amount of the liability" has reference to the liability as to which there was a purpose of tax avoidance or as to which there was not a bona fide business purpose, and does not necessarily include other liabilities as to which there was no purpose of tax avoidance and there was a bona fide business purpose. To hold otherwise would be tantamount to imposing a penalty without a clear statutory mandate therefor. This the law does not favor. Gould v. Gould, 245 U.S. 151; Mead Corporation v. Commissioner, 116 F. 2d 187; Uhl Estate Co. v. Commissioner, 116 F. 2d 403. Both this Court and the Court of Appeals, in the Easson case, recognized that the purpose of section 112(b) (5) is not to exempt gain from taxation but merely to defer or postpone the taxable event to a later time. Thus, strict construction against the taxpayer, as in the case of statutory provisions granting tax exemptions, is not required. We hold that the assumption by the corporation of the $600,000 indebtedness which Stoll owed to the First National Bank and Trust Co., of Lexington, the Security Trust Company of Lexington, and the Louisville Trust Company, is not to be considered as "other property or money" received by Stoll within the meaning of section 112(c) and (k) and that such assumption does not prevent the exchange from being within the provision of section 112(b) (5). We further hold, however, that the assumption by the corporation of the $415,000 indebtedness which Stoll owed to the First National Bank of Louisville is to be considered as "money received" by Stoll upon the exchange, within the meaning of section 112(c) and (k), and as such is to be considered in computing the gain to be recognized upon the exchange of Stoll's newspaper business to the corporation. In arriving at our conclusions, we have not been unaware of the provisions of section 357 (a) and (b) of the Internal Revenue Code of 1954, which correspond to section 112 (k) of the 1939 Code, and of the comment contained in the congressional reports relating thereto. Instead of the phrase "(in the amount of the liability)" employed in section 112(k) of the 1939 Code, section 357 (b) (1) of the 1954 Code contains the phrase "(In the total amount of the liability assumed or acquired pursuant to such exchange)." (Emphasis supplied.) In commenting on this section, S. Rept. No. 1622, 83d Cong., 2d Sess. (1954), at page 270, states: The language of subsection (b), relating to assumption of liability for tax avoidance purpose has been changed in one respect from existing law. Where such a tax avoidance purpose exists, the total amount of the liabilities assumed will be considered as money received by the taxpayer and not merely a particular liability with respect to which the tax avoidance purpose existed. This change is intended merely to clarify existing law. The legislative history of a statute is extremely important in its interpretation, particularly if there is an ambiguity in its language. The relevant legislative history is ordinarily, however, that of the statute under consideration, not of a subsequent statute. Penn Mutual Co. v. Lederer, 252 U.S. 523; Seidman, "Legislative History in Federal Income Tax Cases," 18 Taxes 339; 1 Mertens, Law of Federal Income Taxation, sec. 3.26. Although congressional comments relating to prior Acts are to be considered, they are not necessarily controlling. Fisher Flouring Mills Company v. United States, 270 F. 2d 27 (C.A. 9, 1958); American Exchange Securities Corp. v. Helvering, 74 F. 2d 213 (C.A. 2, 1934); Fire Companies Bldg. Corp. v. Commissioner, 54 F. 2d 488 (C.A. 2, 1931), certiorari denied 286 U.S. 546; Rodner v. United States, 149 F. Supp. 233 (S.D. N.Y. 1957). In United States v. Price, 361 U.S. 304, 313 (1960), the Supreme Court stated, "the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one." In Jorgensen v. United States, 152 F. Supp. 73, 76 (1957), the Court of Claims stated it did not place "great reliance" upon "a statement by a later Congress as to what was intended by a statute enacted by an earlier one. Frequently the intention of the later Congress may be to make clear what was doubtful in the earlier statute." Even if we were to conclude that the statement in the Senate report relating to section 357(b) of the 1954 Code correctly reflected the intention of the prior Congress in the enactment of section 112 (k) of the 1939 Code, such a conclusion would not be dispositive of the question presently being considered. As the report indicates, Congress was concerned with the effect of a tax avoidance purpose upon the total amount of the liabilities assumed. The lack of a bona fide business purpose was not mentioned. Without clear statutory mandate or expression of legislative intent we are unwilling to conclude, on the facts herein presented, that the lack of a bona fide business purpose with respect to the assumption of the $415,000 liability should result in the loss of the nonrecognition benefits provided by section 112(b) (5) with respect to the $600,000 liabilities as to which there was no purpose of tax avoidance and there was a bona fide business purpose. We find no merit in respondent's alternative argument that the entire transaction was a sham and that there was no valid assumption of the liabilities by the corporation. The debts were validly assumed in form and substance. Reviewed by the Court. Decisions will be entered under Rule 50. THE SEAGRAVE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 68787. Filed May 10, 1962. Held, volunteer fire companies are not political subdivisions of States where they are located and interest on their obligations is not tax-exempt interest income under section 103 (a) (1), I.R.C. 1954. Allen I. Pretzman, Esq., for the petitioner. MULRONEY, Judge: The respondent determined a deficiency in petitioner's income tax for the taxable year 1955 in the amount of $36,985.90. All issues have been settled with the exception of one issue as to whether interest accrued to petitioner in the amount of $1,968.28 on obligations issued by six volunteer fire departments is exempt from gross income under section 103 (a) (1), I.R.C. 1954.1 FINDINGS OF FACT. Some of the facts have been stipulated and are found accordingly. Petitioner is a corporation with its principal office at 2000 South High Street, Columbus, Ohio. Its return for the year 1955 was filed with the district director of internal revenue at Columbus, Ohio. Petitioner is engaged in the manufacture and sale of commercial firefighting equipment. During the year 1955 interest accrued on obligations in the form of interest-bearing notes issued to petitioner by the following volunteer fire departments for the purchase of firefighting equipment: . $62.55 West Branch Hose Company, Renovo, Pennsylvania_-_- Petitioner excluded the above amounts of interest from its gross income as interest received from obligations issued by political subdivisions of States pursuant to section 103 (a) (1). The Hooper's Island Volunteer Fire Department was incorporated on April 21, 1953, as a private, nonprofit corporation pursuant to the general incorporation laws of Maryland. During the year 1955, it was engaged in furnishing firefighting aid to the community of Hooper's Island, Maryland. Its membership during 1955 varied from 80 to 100 men. In order to become a member of the department, an application must be filed. The applicant is voted upon by secret ballot at a regular meeting of the department's members. Most of the funds for operation of the Hooper's Island Volunteer Fire Department come from social functions. It did receive $1,000 yearly from Dorchester County, Maryland, but no other financial help from any other governmental agency. The East Rainelle Volunteer Fire Department Inc. was incorporated on March 11, 1953, as a private, nonprofit corporation pursuant to the general incorporation laws of the State of West Virginia. It was 1 All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted. engaged in furnishing firefighting aid to the community of East Rainelle, West Virginia. Its membership consists of approximately 25 active members. The East Rainelle Volunteer Fire Department also has approximately 500 to 600 associate members. In order to become a regular member of the department an application must be filed. This application must be approved by vote of a majority of the regular members of the department. A $2 fee is charged with each application. The associate membership is on the basis of a membership card costing $4 per year. In addition to funds obtained from associate members, other funds for operation are raised from social functions sponsored by the department, such as carnivals, bake sales, and dances. Members of the community served by the East Rainelle Volunteer Fire Department who are nonmembers are charged $100 per call. The department operates independently and without any exercise of control by either the municipality, county, or State involved. The Chesapeake Volunteer Fire Department Incorporated was incorporated on December 12, 1952, as a private, nonprofit corporation pursuant to the general incorporation laws of West Virginia. During the year 1955 it was engaged in furnishing firefighting aid to the community of Chesapeake, West Virginia. Its membership consisted of approximately 25 members. Membership is elective by twothirds or three-fourths majority of the membership. Most of the operating funds are received from solicitation of members of the community and proceeds received from social affairs sponsored by the department. With the exception of gasoline expenses and minor equipment expenses received from the City of Chesapeake, the department received no financial assistance from the city, county, or State governments. The department operates independently and without any exercise of control by either the city, county, or State involved. West Branch Hose Company No. 2 was incorporated in February 1945, as a private, nonprofit corporation pursuant to the general incorporation laws of the Commonwealth of Pennsylvania. It was engaged in furnishing firefighting aid to the borough of Renova, Pennsylvania. Its membership consists of between 35 to 50 active members. In order to become a regular member of the department an application must be filed. The applicant serves a period of apprenticeship following which period he is accepted or rejected by secret ballot at a regular meeting of members of the department. Two dissenting votes are sufficient for rejection. Regular members are charged a fee of $1 per year. Operating funds were obtained from solicitations from members of the community, operation of carnivals, bingo games, lottery cards, and sales of liquor and beer through operation of a men's club. The department operates independently and without exercise of control by either the borough, county, or State involved. 676308-63- -17 |