March 11, 1942, at the office of Corporation in the City of New York, with interest from March 11, 1932, at the rate of seven per cent per annum payable quarterannually or otherwise, as hereinafter provided, at the office as aforesaid, or by mail to the registered address of the owner hereof. This Debenture is one of a duly authorized issue of debentures of the corporation of like date, tenor and effect evidencing an aggregate indebtedness of One Million five hundred thousand ($1,500,000.) Dollars and the following is a statement of the rights of the holder of this Debenture and the conditions to which this Debenture is subject, to all of which provisions the holder hereof, by the acceptance of this Debenture, assents: 1. All Debentures of this issue rank equally and ratably without priority over one another. 2. The right title and interest of the holder hereof in and to said principal sum or any part thereof and the interest due and to grow due thereon, is and shall remain subject and subordinate to the claims of all contract creditors of the Corporation, and upon dissolution or liquidation of the Corporation no payment shall be due or payable upon this Debenture unless and until all other contract creditors of the Corporation shall have been paid in full. 3. Interest on all Debentures of this issue may at the option of the Corporation (a) be deferred or suspended without limit of time, or (b) be paid in whole or in part in cash or in interest bearing Debentures of the Corporation, but such suspension of payment shall in no wise relieve the Corporation of the obligation to pay accrued interest thereon at some future time, not later than March 11, 1942. 4. No holder of Debentures of this issue shall institute any suit, action, or proceeding for the enforcement of the payment of principal and/or interest unless the holders of seventy five (75%) per cent in amount of all outstanding Debentures of this issue, join in such suit, action, or proceeding. 5. The Corporation may at any time at its own option, prepay in whole or in part the principal sum of all outstanding Debentures of this issue, on thirty days written notice served by registered mail to the registered address of the owners of all outstanding Debentures of this issue. 6. This Debenture is transferable only upon the books of the Corporation by the holder hereof in person or by duly authorized attorney at the office of the Corporation in the City of New York on surrender of this Debenture properly endorsed. 7. The Corporation may deem and treat the person whose name appears above as the absolute owner hereof for the purpose of receiving payment of or on account of the principal and/or interest due hereon and for all other purposes. 8. This Debenture is the corporate obligation of the Corporation only, and no recourse shall be had for the payment thereof or the interest thereon against any stockholder, officer or director of the Corporation either directly or through the Corporation by virtue of any Statute for the enforcement of any assessment or otherwise; all such liability of stockholders, directors and officers as such being released by the holder hereof by the acceptance of this Debenture. Payments on account of Principal of this Debenture are noted on the Reverse side hereof. Prior to the maturity date of the debentures, March 11, 1942, taxpayer procured from each holder a written consent that the maturity of the unpaid principal and accrued interest be extended to March 1, 1947, and this was endorsed on the debentures. York, unless the sale So long as the amou standing debentures have been recorded on the books as Yr Seven Per Cent. Debenture Bonds, due March 11, 1942," tanding capital stock. aks the value of the land and buildings was set up a 3.45 220, of which $41,362.59 was charged to buildings. ar between 1932 and 1941 taxpayer recorded on its books of interest accrued on its outstanding depart of such interest has been paid except $1,248.74 13. On June 21, 1932, and at various times Sprember 24. 1941, the taxpayer set aside from its On June 3, 1932, the sy subject to the $300,000 mo it issued to the voting trus C shares. On the same da certificates and the taxpaye maturing March 11, 1942, to amounts to be applied pro rata in reduction of res. Such payments were made and so noted of lebentures. From 1932 to 1941 the accrued pted income or loss, and amounts paid on 15728&CHEDE X, 1941, in income tax return is $582,077.47. ts taxpayer reported rents of 8. Its balance sheets as of showed deficits of $283,140.16, Samuel Bernheimer, a son of Ella Bernheimer, sold his one-fourtee and Kline bought such interest for the benefit of Bernheimer's wife and c after the cost had been recovered the remainder would go to the beneficia by sale $15,000 debentures to his wife and in 1933 $15,000 debentures to A continued to hold them for the purpose for which they were originally acqui ~ of the mortgage of $300,000 Since taxpayer's incorporation there have been by inheritance of its debentures and voting trust ce above transfers by Milner are the only transfers of a out a corresponding pro rata transfer of voting tru The provisions on the face of the debentures were as fo 1432 BROADWAY CORPORATION, a Corporation, * hereby promises to pay to the sum of * for va red the deduc n the out sh that nts All the outstanding debentures have been recorded on the books as "Ten Year Seven Per Cent. Debenture Bonds, due March 11, 1942," distinct from outstanding capital stock. On taxpayer's books the value of the land and buildings was set up as $1,430,390, of which $41,362.59 was charged to buildings. In each year between 1932 and 1941 taxpayer recorded on its books the aggregate amount of interest accrued on its outstanding debentures. No part of such interest has been paid except $1,248.74 which was paid in 1933. On June 21, 1932, and at various times thereafter to September 24, 1941, the taxpayer set aside from its surplus funds various amounts to be applied pro rata in reduction of principal of debentures. Such payments were made and so noted on the reverse side of debentures. From 1932 to 1941 the accrued debenture interest, reported income or loss, and amounts paid on account of principal were: Interest accrued shown on balance sheet as of December 31, 1941, in income tax return is $682,077.47. **Deducted in 1940 return. In its 1939, 1940, and 1941 returns taxpayer reported rents of $85,393.84, $214,222.10, and $173,930.88. Its balance sheets as of December 31, 1939, 1940, and 1941, showed deficits of $283,140.16, $219,669.22, and $192,569.22. On December 31, 1941, the principal of the mortgage of $300,000 had been reduced to $140,000. OPINION. STERNHAGEN, Judge: 1. The Commissioner disallowed the deduction taken by the taxpayer of the "interest" accrued upon the outstanding debentures, and the taxpayer undertakes to establish that the debentures are evidences of indebtedness, that the accrued amounts are interest thereon, and that, since the method of its accounts is an accrual method, such amounts are deductible by it in the year of accrual. Sec. 23 (b), I. R. C. The evidence and argument follow a familiar pattern to show that the debentures have attributes of indebtedness. Cf. Charles L. Huisking & Co., 4 T. C. 595. The de bentures are in approved legal form, and, if their legal attributes alone were determinative of the character of the interest accruals, there would be little room for doubt that they were the indebtedness they purport to be. Cf. Clyde Bacon, Inc., 4 T. C. 1107. But, for tax purposes, their conformity to legal forms is not conclusive. Although a taxpayer has the right to cast his transactions in such form as he chooses, and the form he chooses will generally be respected, the Government is not required to acquiesce in the taxpayer's election of form as necessarily indicating the character of the transaction upon which his tax is to be determined. "The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute." Higgins v. Smith, 308 U. S. 473. See also Commissioner v. Court Holding Co., 324 U. S. 331. The Government is not bound to recognize as the substance or character of a transaction a technically elegant arrangement which a lawyer's ingenuity has devised. Griffiths v. Commissioner, 308 U. S. 355. We therefore bypass the examination of the legalistic craftsmanship of the debentures which the taxpayer invites and go directly to the circumstances to determine whether, notwithstanding their form, the substance of the transaction which they purport to evidence was in actuality a loan or indebtedness and whether the substance of the accrual sought to be deducted is in reality interest. The corporation was formed as a means of holding a piece of productive real property in New York City which had been left by a decedent to fourteen individuals scattered about the country, one of whom was discontented and wanted the property sold and his interest converted into cash. A plan was devised whereby the others would buy him. out. This corporation was the result, and to it the property was transferred. No loan was made to the corporation by the owners, either of property or of money. The property was worth at least $1,200,000 (maybe more) and was yielding $85,000 rent; a mortgage was given for $300,000, and the equity plus $40,000 was contributed by the owners to the new corporation for all of its 390 shares and the debentures, aggregating $1,170,000, entirely unsecured. The corporation in the tax years had substantial deficits. In these circumstances, there is no identification of the portion of the contribution contributed for the shares and the portion contributed for the debentures, and the latter was no less at the risk of the business than the former. The entire contribution was a capital contribution rather than a loan, but by the form adopted the corporation was in a position to feign that its rent income was used as a means of discharging its debenture obligation, giving it a tax deduction, and not as a dis |