16 T.C. 1268">*1268 Respondent determined a deficiency of $ 15,707.23 in petitioner's income tax liability for its fiscal year ending June 30, 1946.

The sole issue is whether respondent erred in reducing from the rate of 5 per cent to 3 per cent petitioner's deduction of interest on certain obligations.

16 T.C. 1268">*1269 FINDINGS OF FACT.

Petitioner is a corporation organized in 1940 under the laws of the State1951 U.S. Tax Ct. LEXIS 169">*171 of Washington, with its principal place of business in Spokane, Washington. Petitioner keeps its books and files its returns on the accrual basis of accounting. Its return for the period here involved was filed with the collector of internal revenue for the district of Washington.

Northwestern and Pacific Hypotheekbank (hereinafter called "Northwestern") is a Netherlands corporation. It was organized in 1889 and admitted to do business in the State of Washington in the same year.

De Tweede Northwestern and Pacific Hypotheekbank (hereinafter called "De Tweede") is a Netherlands corporation, organized in 1910 and admitted to do business in the State of Washington in 1911. De Tweede and Northwestern are separate corporations but they have the same officers and directors in Holland. They are both also referred to sometimes herein as the "Dutch banks."

Northwestern and De Tweede have done a general real estate mortgage loan business in the States of Washington, Idaho, and Oregon since their admission. They issued debentures in Holland. Each of these corporations was the owner of notes and mortgages upon real property in Washington, Idaho, and Oregon, considerable cash, and some 1951 U.S. Tax Ct. LEXIS 169">*172 real property acquired in the process of doing business as mortgage companies. These companies suffered substantial net losses during the period 1937 to 1940. Both of these companies conducted their real estate mortgage business through a power of attorney issued to a resident agent. From March 15, 1939, to July 1, 1950, L. de Koning was the resident agent holding the power of attorney for the conduct of the business of Northwestern and De Tweede.

On May 10, 1940, the German Army invaded the Kingdom of the Netherlands and completed its occupation thereof by about May 15, 1940, on which date the Netherlands Government moved in exile to London, England. The invasion of the Netherlands by Germany seriously affected the conduct of business in the United States by Northwestern and De Tweede. There was a threat that the German Government would expropriate in various ways the assets of the two Dutch corporations. There was a possibility that the German Government in occupation of the Netherlands would attempt to cancel the powers of attorney under which the Dutch corporations operated in America. There was the further possibility that there would be a negotiated peace in Europe such1951 U.S. Tax Ct. LEXIS 169">*173 as to be detrimental to interest of the stockholders of the corporations, all at a time when the United States was neutral. It was further possible that the resident agent of 16 T.C. 1268">*1270 De Tweede and Northwestern, L. de Koning, would die or otherwise become incapable to act.

On May 22, 1940, the Netherlands Government, then temporarily exercising its functions in London, promulgated a "Law Appertaining to the Transfer of Seats of Corporations Domiciled in The Netherlands to Other Territories in The Kingdom of The Netherlands."

On May 24, 1940, the Netherlands Government promulgated from London a Royal Decree expropriating assets outside the realm of Europe belonging to corporations domiciled in the Netherlands.

The Netherlands Government subsequently gave to A. Loudon, its Minister in Washington, D. C., a power of attorney to deal with American assets of Dutch corporations affected by the Royal Decree of Expropriation of May 24, 1940.

June 7, 1940, the Netherlands Government issued a decree entitled "Decree Concerning Legal Relations in Wartime," and establishing the Curacao Commission for Regulation of Legal Traffic in Wartime. Pursuant to this decree a change in the corporate 1951 U.S. Tax Ct. LEXIS 169">*174 situs of Northwestern and De Tweede from the Netherlands to Curacao was effected.

In July 1940, after the invasion of the Netherlands, C. D. Fortuyn, a member of the Union of Managing Directors of The Netherlands Mortgage Companies operating abroad, and the sole director in America of any Dutch mortgage company doing business in America, arranged a meeting in Spokane of managers and assistant managers of Dutch mortgage companies operating in the Pacific Northwest. The United States was a neutral nation at that time and remained so until December 7, 1941. Fortuyn was not then an officer or director of either Northwestern or of De Tweede. At one of these meetings Fortuyn made a written report calling the attention of the managers present to the possibility of expropriation of mortgage companies' assets by Germany by reason of the invasion and of the position said companies would be in, should the individual, holding powers of attorney to do business in this country, die.

On July 23, 1940, the petitioner, Hypotheek Land Company, was incorporated in the State of Washington by L. de Koning, E. W. van Tyen, C. P. Compau, and R. S. Gorrill, all American citizens and employees of Northwestern1951 U.S. Tax Ct. LEXIS 169">*175 and of De Tweede in their Spokane office. The petitioner has an authorized capital of 250 shares of common stock of $ 100 par value. The petitioner's paid-in capital, since the time of its incorporation, has consisted of 25 shares of common stock having a par value of $ 100 per share.

On August 5, 1940, L. de Koning, as Attorney in Fact, for Northwestern and De Tweede, sold on contract all of the assets of those companies to petitioner for $ 2,338,419.44 and $ 1,282,368.79, respectively. The contracts provided that proceeds from operations on sales of properties were to be applied on all indebtednesses until the amounts 16 T.C. 1268">*1271 were paid in full. It was further provided that "Interest shall accrue annually but only out of the net earnings (as hereinafter defined) as to each year, up to a maximum rate of 3 per cent but shall not be cumulative." The contracts further provided that payment would be made of the principal amount with interest on or within 30 years from the contract date. There was no provision for obligatory payment of either principal or interest. No other evidence of indebtedness was given by petitioner to Northwestern or De Tweede for the transaction represented1951 U.S. Tax Ct. LEXIS 169">*176 by the contract.

None of the assets purchased by petitioner on the two contracts dated August 5, 1940, consisted of obligations the interest upon which was wholly exempt from the taxes imposed by Chapter 1 of the Internal Revenue Code.

All property formerly standing in the names of Northwestern and of De Tweede in the United States was, pursuant to the contracts of August 5, 1940, transferred in fact, and as a matter of public record, to petitioner.

On June 27, 1940, the United States Department of State notified the United States Treasury Department that it continued to recognize the Netherlands Government in London, its Minister, and, further, that the Department of State extended official recognition to the Royal Decree of May 24, 1940, and accepted the authority of A. Loudon to deal with Netherlands assets.

On July 24, 1940, A. Loudon, Minister of the Netherelands, gave notice that he had no objections to the transfer of the assets of Northwestern to the petitioner.

On September 16, 1940, A. Loudon, Minister of the Netherlands, appointed L. de Koning his Attorney in Fact to take possession of the assets of Northwestern "including the power to sell all or a part of said properties."

1951 U.S. Tax Ct. LEXIS 169">*177 The petitioner, after taking over the assets of Northwestern and De Tweede, continued the general mortgage loan business formerly conducted by those corporations. Petitioner made substantial profits during the war years.

Commencing in 1941 the validity of the titles to mortgages and land which petitioner had acquired from Northwestern and De Tweede, was questioned by the Federal Land Bank of Spokane and by various other title examiners resulting in some cases in lawsuits, and in other cases the requirement that petitioner put up bond to guarantee its title. In 1941 a title insurance company refused to insure releases made by petitioner of mortgages previously owned by Northwestern and De Tweede unless the promissory note, which the mortgage secured, was produced for its inspection. Petitioner could not produce such notes because in most cases they were in Holland. The title insurance company would not insure the title of certain property transferred by 16 T.C. 1268">*1272 petitioner without the insertion of a title note questioning the title to the property because of the invasion of the Netherlands.

By May 8, 1945, Holland was liberated from the occupation by the German Government. Soon1951 U.S. Tax Ct. LEXIS 169">*178 after the liberation of Holland, Jan van Tyen, co-director of Northwestern and De Tweede, came to the United States for the purpose of negotiating an increase of the interest rate of 3 per cent on the contracts of August 5, 1940, and, further, to negotiate a change in the contract making the interest cumulative instead of non-cumulative. In 1945 and 1946 Northwestern was paying an average of 5.13 per cent interest upon its debentures issued in Holland and De Tweede an average of 4.79 per cent.

In the spring of 1946, petitioner's officers told van Tyen that it was necessary to have the stockholders of Northwestern and De Tweede ratify and confirm the contracts of August 5, 1940, and the transfer of mortgages and land thereunder in order to eliminate questions of the petitioner's clear title as to those properties. In the spring of 1946, van Tyen and petitioner's president and secretary were successful in negotiations with the title company to have it remove the title note inserted in the titles of property transferred by petitioner.

On May 23, 1946, the petitioner entered into contracts with Northwestern and De Tweede modifying the contracts as of August 5, 1940, by making the interest1951 U.S. Tax Ct. LEXIS 169">*179 rate 5 per cent cumulative as of July 1, 1945, instead of 3 per cent noncumulative.

On March 27, 1947, at the next annual meeting of the stockholders of Northwestern and De Tweede, the transfer of lands and mortgages on August 5, 1940, was confirmed.

In 1950 Northwestern and De Tweede acquired all but the qualifying shares of petitioner's stock which had been held for them by their prewar employees and who were petitioner's incorporators.

At the close of business on June 30, 1945, petitioner was indebted to Northwestern in the sum of $ 2,682,167.08 under the terms of the contract of August 5, 1940, bearing cumulative interest at the rate of 5 per cent pursuant to the modification agreement of May 23, 1946. Under the same contract and conditions, petitioner, as of the close of business on June 30, 1945, was indebted to De Tweede in the sum of $ 1,464,882.12.

For the fiscal year ending June 30, 1946, petitioner debited interest expense on its books in the sum of $ 208,897.88 and credited the accounts of its creditors in names and amounts as follows:

1951 U.S. Tax Ct. LEXIS 169">*180 16 T.C. 1268">*1273 In the notice of deficiency the respondent disallowed the amount of $ 96,353.78 as an interest deduction in the fiscal year ended June 30, 1946, which disallowance resulted mainly from the use of an interest rate of 3 per cent instead of the rate of 5 per cent used by petitioner.

For the period here involved the legal rate of interest in the State of Washington was 6 per cent.

The increase in the interest rate from 3 to 5 per cent was a gratuitous act on the part of petitioner and made without consideration.

OPINION.

The sole issue is whether the respondent erred in reducing petitioner's deduction of interest allowable on its obligation to the Dutch banks from the rate of 5 per cent to 3 per cent.

The respondent, in disallowing the deduction for interest in excess of 3 per cent, did not cite any section of the Code in the notice of deficiency. Respondent, on brief, presents the case as coming within the purview of section 45 of the Code. ¹ The petitioner argues that section 45 does not apply, as a matter of law, contending that respondent has made a disallowance rather than a distribution, apportionment or allocation of the deduction as provided for in section 45. Petitioner1951 U.S. Tax Ct. LEXIS 169">*181 relies on the theory of General Industries Corporation, 35 B. T. A. 615. See, also, Chelsea Products, Inc., 16 T.C. 840; and Cedar Valley Distillery, Inc., 16 T.C. 870. But, cf. Asiatic Petroleum Co., Ltd. v. Commissioner, 79 F.2d 234.

1951 U.S. Tax Ct. LEXIS 169">*182 We deem it unnecessary to consider the merits of the arguments made by the parties as to the applicability of section 45 because, in our opinion, the deduction representing the amount of the increase in the interest rate is not an allowable deduction under section 23 (b) of the Internal Revenue Code. ² The deduction must be authorized under section 23 (b) ultimately and at least pro forma regardless of the applicability of section 45. We do not think it is so authorized.

The right to a deduction from gross income is a matter of legislative1951 U.S. Tax Ct. LEXIS 169">*183 grace and does not turn upon general equitable grounds, Deputy 16 T.C. 1268">*1274 v. Du Pont, 308 U.S. 488">308 U.S. 488. It must be shown clearly to be within the express provision of the statute. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435. Such was the petitioner's burden. Welch v. Helvering, 290 U.S. 111">290 U.S. 111. Petitioner in this case makes an implicit appeal on equitable grounds for sustaining its position. The difficulties in which the business found itself in 1940, when it seemed very probable that the German Army in occupation of the Netherlands would manage to expropriate Dutch assets abroad, which difficulties resulted in the petitioner's formation, have a certain persuasiveness. Petitioner's underlying reasoning is, in effect, that the event of the postwar increase in interest rate was inseparable in nature from the earlier transactions. But such appeal must yield to a more realistic appraisal of the relations between the petitioner and the Dutch banks after the liberation of the Netherlands, at which time the interest rate was increased. The circumstances and considerations at this latter1951 U.S. Tax Ct. LEXIS 169">*184 date must justify the rate increase.

It is our view that there was no sufficient consideration for the retroactive and cumulative increase in the interest rate from 3 to 5 per cent. The obvious result, if not the chief purpose, was to provide petitioner with an increased deduction from gross income and the deduction thus became a means of transmission of untaxed profits to the Dutch banks. The single fact that a particular transaction results in a tax saving does not, of course, dictate our decision as to validity of the procedure. It may, however, provide an otherwise undisclosed explanation. Petitioner has anticipated an attack on the consideration or business necessity for the increase in interest rate and advances two arguments in support: first, that the Dutch banks had to pay an average of 5 per cent on their bonds in the Netherlands, whereas they were getting only 3 per cent from their holdings in this country, represented by petitioner's assets, and, second, that the ratification by the Dutch banks of what petitioner had done during the war was the consideration for petitioner's agreeing to pay a higher interest rate.

These arguments, in our judgment, fail to establish1951 U.S. Tax Ct. LEXIS 169">*185 any consideration for the increase. Past consideration is no consideration. We have concluded that the increase was a gratuitous payment of interest by petitioner. As such, it is not deductible. Central Cuba Sugar Co., 16 T.C. 882. It is elementary that consideration embodies a giving up of something. The question of what benefit was conferred upon petitioner by the Dutch banks is unanswered on the record.

In our opinion, the increase of the interest rate from 3 to 5 per cent on petitioner's indebtedness to the Dutch banks was not such as to constitute a valid deducation under section 23 (b) of the Internal Revenue Code, and we so hold.

Decision will be entered under Rule 50.