
    ECHOTA COTTON MILLS v. ALLEN, Collector of Internal Revenue.
    Civ. A. 742.
    United States District Court, M. D. Georgia, Macon Division.
    April 24, 1951.
    Spalding, Sibley, Troutman & Kelley, Atlanta, Ga. (Furman Smith, and John Izard, Jr., Atlanta, Ga., of counsel), for plaintiff.
    John P. Cowart, U. S. Atty., T. Reese Watkins, Asst. U. S. Atty., Macon, Ga., Rhodes Baker, Special Asst. to Atty. Gen., for defendant.
   Davis, Chief Judge.

The above case having been submitted to the Court without the intervention of a jury, and the Court having heard evidence and argument of counsel for both parties, the Court makes the following findings of fact and conclusions of law:

Findings of Fact.

1.

Plaintiff, Echota Cotton Mills, is a corporation organized under the laws of Georgia.

2.

On June 1, 1937, plaintiff duly issued $40,000 in face amount of “Five Per Cent Capital Notes” to its stockholders in satisfaction of an extra dividend which had been previously declared on its common stock. Plaintiff had ample accumulated earnings to cover said extra dividend, and its common stockholders had been forced to forego dividends out of earnings in the past in order to permit the proper development of the company.

3.

At all times material to this case, $40,000 in face amount of these notes remained outstanding, and semi-annual interest payments in the amount of $1,000 were accrued thereon hy plaintiff, which amounts were in due course paid to the holders of these notes.

4.

Although these notes were fully subordinated to the claims of general creditors, consideration of the various resolutions of plaintiff’s Board of Directors, the terms used in the notes, the treatment of the notes on plaintiff’s books and statements, and the other evidence introduced makes it clear that it was the intention of the parties to create a debtor-creditor relationship.

5.

These notes had a fixed maturity date, and interest thereon was payable in all events. These notes evidence indebtedness of the company.

6.

The semi-annual payments accrued by plaintiff as interest on these notes were in fact interest within the meaning of Section 23(b) of the Internal Revenue Code, 26 U.S.C.A. § 23(b).

7.

In the computation of each of the taxes herein referred to, plaintiff was allowed no deduction from its gross income for the semi-annual payments accrued as interest on these notes.

Conclusions of Law.

1.

The parties involved intended to create a debtor-creditor relationship by issuance of plaintiff’s “Five Per Cent Capital Notes”.

2.

Plaintiff’s “Five Per Cent Capital Notes” evidenced indebtedness of the company.

3.

The semi-annual payments accrued by plaintiff as interest on these notes were in fact interest.

4.

Said semi-annual payments were deductible from plaintiff’s gross income under Section 23(b) of the Internal Revenue Code.

Let the plaintiff submit a judgment in accordance with these Findings of Fact and Conclusions of Law.  