16 T.C. 578">*579 The Commissioner determined a deficiency of $ 2,691.42 in the petitioner's excess profits tax for 1943. An overpayment of $ 3,666.60 in that tax is claimed by the petitioner.

The1951 U.S. Tax Ct. LEXIS 253">*255 question in issue is whether the Commissioner erred in excluding from the petitioner's equity invested capital for 1943 income attributable to a discharge, in 1942, of indebtedness of the petitioner.

The parties have stipulated that, if the Commissioner prevails on this issue, the deficiency should be increased to $ 3,677.45. This increased deficiency is claimed by the Commissioner in an amended answer.

FINDINGS OF FACT.

The facts are found as stipulated.

Petitioner is a corporation organized under the laws of the State of Maine, and has its principal office at Bangor, Maine. It filed its excess profits tax return for the calendar year 1943 with the collector of internal revenue for the district of Maine. Petitioner kept its books and prepared its income and excess profits tax returns on the accrual basis.

During the calendar year 1942, petitioner purchased in the open market certain of its bonds for retirement and cancellation. The aggregate par value of these bonds was $ 634,000, and the total price paid for them by petitioner was $ 497,553.30. The difference amounted to $ 136,446.70, and is hereinafter referred to as the "bond profit." This profit was recorded in the profit1951 U.S. Tax Ct. LEXIS 253">*256 and loss accounts of the petitioner's books, which were maintained in accordance with the system of accounts prescribed by the Interstate Commerce Commission.

In its income tax return for 1942, no portion of that profit was included in the computation of petitioner's net income, normal tax net income or surtax net income. Neither was any part of the bond profit included in the excess profits net income petitioner reported for 1942. Together with its income and declared value excess-profits tax returns for 1942, petitioner filed a Treasury Department form in which it 16 T.C. 578">*580 stated that it had excluded the bond profit from its gross income pursuant to section 22 (b) (9) of the Internal Revenue Code, and consented to have the basis of its property adjusted in accordance with respondent's regulations under section 113 (b) (3) of the Code. But petitioner did not reduce the basis of any property either on its books or in its income or declared value excess-profits tax returns. Thus, in its income tax return for 1942, petitioner claimed deductions for depreciation, cost of property retired and replaced, losses on retirements, and losses on equipment destroyed, all computed on the 1951 U.S. Tax Ct. LEXIS 253">*257 unreduced basis of the property involved.

Petitioner elected to compute its excess profits credit for 1943 on the invested capital method. In calculating the credit, petitioner was entitled to include, in its equity invested capital, its accumulated earnings and profits as of the beginning of the taxable year. Petitioner included in those earnings and profits the bond profit of $ 136,466.70.

In connection with petitioner's 1942 income tax, respondent reduced the basis of petitioner's depreciable property pursuant to section 113 (b) (3) of the Code and the consent filed by the petitioner. The reduction in basis required a reduction of $ 1,736.69 in the amounts of the above-described deductions taken by the petitioner in 1942 for depreciation, property retired and replaced, and losses on retirements and on equipment destroyed. Respondent also disallowed, under section 22 (b) (9) of the Code, a deduction of $ 1,659.63 taken by the petitioner for unamortized discount on some of the bonds purchased by it. The total thus disallowed, as income tax deductions for 1942, was $ 3,396.32. The petitioner concedes that disallowance in this amount was correct.

This amount of $ 3,396.32, disallowed1951 U.S. Tax Ct. LEXIS 253">*258 in reduction of petitioner's 1942 net income, was added by the respondent to petitioner's accumulated earnings and profits as of the beginning of 1943. On the other hand, those earnings and profits were decreased by the respondent in the amount of the bond profit of $ 136,446.70. The respondent therefore decreased the accumulated earnings and profits by the net amount of $ 133,050.38. On the basis of the resulting reduction in the excess profits credit, the respondent asserted a deficiency in petitioner's excess profits tax for 1943.

OPINION.

In 1942 petitioner repurchased its own bonds, paying $ 497,553.30 for bonds of the face amount of $ 634,000, and realized a taxable gain of $ 136,446.70. United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1; Commissioner v. Jacobson, 336 U.S. 28">336 U.S. 28; Spear Box Co. v. Commissioner, 182 Fed. (2d) 844 (C. A. 2). It elected, however, to take advantage of a statutory option under which the gain was excluded from its 1942 gross income, and, instead, the gain was applied 16 T.C. 578">*581 in reduction of the basis of property held by petitioner. Sections 22 (b)1951 U.S. Tax Ct. LEXIS 253">*259 (9) and 113 (b) (3), Internal Revenue Code. ¹

1951 U.S. Tax Ct. LEXIS 253">*260 Thereafter, in calculating its excess profits tax liability for 1943, petitioner used the invested capital method for computing its excess profits credit. Part of that credit consisted of its "accumulated earnings and profits" as of the beginning of 1943. ² Petitioner included its 1942 bond profit in its accumulated earnings and profits as of the beginning of 1943. Respondent, however, excluded that bond profit from petitioner's accumulated earnings and profits and, with the resulting reduction in petitioner's excess profits credit, found a deficiency. 16 T.C. 578">*582 This proceeding was brought to review that determination of deficiency.

1951 U.S. Tax Ct. LEXIS 253">*261 The concept of "earnings and profits" has been an important part of Federal tax legislation for many years, being employed for income tax purposes to identify the source of taxable corporate dividends. Section 115 (l) ³ of the Internal Revenue Code, which was added by section 501 of the Second Revenue Act of 1940, was the first attempt by Congress to deal with the meaning of the concept; prior thereto its intended scope was developed by judicial and administrative construction. See Commissioner v. Wheeler, 324 U.S. 542">324 U.S. 542, 324 U.S. 542">545. Moreover, section 115 (l) deals with "earnings and profits" only in certain particulars; it makes no attempt to furnish a comprehensive definition of the term. But to the extent that it does affect the meaning of the term, it was intended to apply both for income tax and excess profits tax purposes, ⁴ and the rationale and content of the concept as developed prior to 1940, to the extent that it has remained in force for the income tax, is in general likewise applicable to the excess profits tax. Cf. Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 333 U.S. 496">500.

16 T.C. 578">*583 Section 115 (l) is literally not applicable here. By its terms, it deals with the effect on "earnings and profits" of certain corporate distributions and of "gain or loss realized from the sale or other disposition of property." We have before us neither a corporate distribution nor a sale or other disposition of property by petitioner. The gain herein grew out of petitioner's reacquisition of its own obligations, and does not fall into either of the foregoing categories. Accordingly, since section 115 (l) does not provide a comprehensive test applicable in all circumstances as the mandatory measure of earnings and profits, and since the present situation is not covered by the provisions of section 1951 U.S. Tax Ct. LEXIS 253">*263 115 (l), it becomes necessary to determine petitioner's earnings and profits under the statute apart from these provisions.

That is not to say, however, that section 115 (l), and the expression of legislative intent accompanying its enactment, may not be of guidance in the treatment of situations not within its boundaries. When it enacted section 115 (l), Congress was aware that an extensive body of interpretative law had grown up in connection with its use of the term "earnings and profits." It was prompted to act, not primarily to change that law, but to make clear in certain areas the extent to which that law was an accurate embodiment of its pre-existing intent. In the words of the Committee on Ways and Means sponsoring the provision which culminated in section 115 (l), "The purpose of this amendment is to clarify the law with respect to what constitutes earnings and profits of a corporation." (Emphasis added.) H. Rept. No. 2894, 76th Cong., 3d Sess., p. 41. That law, which was then the subject of Congressional examination and which had survived enactment of earlier revenue statutes, treated earnings and profits as unaffected by a transaction on which gain or loss was not1951 U.S. Tax Ct. LEXIS 253">*264 recognized for income tax purposes. Cf. Commissioner v. Wheeler, 324 U.S. 542">324 U.S. 542, 324 U.S. 542">547; Commissioner v. Sansome, 60 Fed. (2d) 931, 933 (C. A. 2). See also Commissioner v. Munter, 331 U.S. 210">331 U.S. 210, 331 U.S. 210">214-215. Some decisions had been rendered, however, which increased earnings and profits because of unrecognized gain in connection with corporate reorganizations or related transactions. Congress desired to clarify the law by disapproving the latter decisions (H. Rept. No. 2894, 76th Cong., 3d Sess., pp. 41-42) and giving statutory recognition to the principle that "there shall be no increase or decrease in earnings and profits by reason of a wholly unrecognized gain or loss" (Sen. Rept. No. 2114, 76th Cong., 3d Sess., p. 25). It therefore provided in section 115 (l) that, as to the sale or other disposition of property, "Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or 16 T.C. 578">*584 loss was recognized in computing net income under the law applicable to the year in which such sale or disposition was 1951 U.S. Tax Ct. LEXIS 253">*265 made."

We think that although section 115 (l) is not applicable here, it nevertheless gave expression to a concept of "earnings and profits" that was already widely recognized and which inheres in the meaning of those words. Cf. Commissioner v. Estate of Holmes, 326 U.S. 480">326 U.S. 480, 326 U.S. 480">487-488. Surely, by taking pains to make certain that unrecognized gains or losses from sales or other dispositions of property would not be reflected in earnings and profits, Congress could not have intended thereby to produce a different result with respect to other unrecognized gains or losses, merely by failing to mention them. There is nothing in the history of the Second Revenue Act of 1940, which added section 115 (l) to the Code, that suggests any such purpose. Basic considerations with respect to the interpretation of the revenue laws do not allow a taxpayer, in the absence of clear language to the contrary, to elect to postpone the recognition of income for purposes of being taxed, and at the same time permit it inconsistently to treat such unrecognized income as earnings and profits. Cf. Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496;1951 U.S. Tax Ct. LEXIS 253">*266 May, Stern & Co. v. Commissioner, 181 Fed. (2d) 407 (C. A. 3), certiorari denied, 340 U.S. 814">340 U.S. 814; White Bros. Co. v. Commissioner, 180 Fed. (2d) 451 (C. A. 5), certiorari denied, 340 U.S. 825">340 U.S. 825; Benjamin Siegel, 29 B. T. A. 1289; Corinne S. Koshland, 33 B. T. A. 634.

Nor is the result sought by petitioner required by the fact that Congress in 1942 amended section 115 (l) by adding the sentence dealing with wash sales. For, notwithstanding the concern which prompted the enactment of the 1942 amendment, it is quite possible that the provisions as they stood prior to the 1942 amendment might have produced the same result, just as the original enactment in 1940 of section 115 (l) itself was regarded in certain respects merely as declaratory of existing law in Commissioner v. Wheeler, 324 U.S. 542">324 U.S. 542. Moreover, the report of the House Ways and Means Committee which sponsored the amendment, in making known its impression that disallowed losses from wash sales could affect earnings1951 U.S. Tax Ct. LEXIS 253">*267 and profits under section 115 (l) as it then stood, made clear its understanding that giving such effect to those losses would be "contrary to the uniform practice prior to the enactment of Section 501 of the Second Revenue Act of 1940." H. Rept. No. 2333, 77th Cong., 2d Sess., p. 93. The purpose of the amendment was to assure adherence to that uniform practice, which was thought to have been interrupted by section 115 (l). As we have observed, there may well be some doubt that section 115 (l), as it was originally enacted in 1940, caused such an interruption. But whatever view is taken in this regard, a wash sale, unlike income from discharge of indebtedness, is a transaction with respect 16 T.C. 578">*585 to property within the general coverage of section 115 (l), and any change in practice produced by that section affected the treatment of the former only. The rule we deem applicable to this case is that of the "uniform practice" understood by the legislature to have obtained prior to 1940 respecting wash sales, and that practice supports the conclusion that unrecognized income from discharge of indebtedness is to be excluded from earnings and profits.

The present case must be distinguished1951 U.S. Tax Ct. LEXIS 253">*268 from situations where fully realized income which is exempt from tax, such as interest on state bonds, is included in earnings and profits. See Treasury Regulations 111, section 29.115-3. Although the general introductory language of section 22 (b) of the Code characterizes the various types of income in the subdivisions to follow as "exempt," the fact is that, under the specific provisions of section 22 (b) (9), the income from discharge of indebtedness escapes taxation only by reason of the option in section 22 (b) (9), and the effect of exercise of the option is not a complete withdrawal or insulation of the profit from tax. Unlike other exclusions from income provided for by section 22 (b), the profit from discharge of indebtedness is excluded only on the condition that it be applied in reduction of the basis of property held by the petitioner. Sections 22 (b) (9), 113 (b) (3), Internal Revenue Code. In reality, by providing for an adjustment altering the basis of property which petitioner would otherwise be entitled to use, Congress did not relieve the profit of tax but only postponed the time for levying the tax. ⁵1951 U.S. Tax Ct. LEXIS 253">*270 Instead of collecting a tax on the profit when received, 1951 U.S. Tax Ct. LEXIS 253">*269 Congress merely deferred recognition of the profit and collection of the tax until the time at which the property with the reduced basis was sold or otherwise disposed of. ⁶ See Commissioner v. Jacobson, 336 U.S. 28">336 U.S. 28, 336 U.S. 28">44-46.

16 T.C. 578">*586 This method of treating the profit is comparable to the treatment accorded nontaxable exchanges governed by the so-called reorganization provisions in section 112 of the Code, where recognition is similarly postponed. In both situations, the earnings and profits are affected, not at the time of the original unrecognized transaction, but at the time that the gains or losses are actually taken into account in computing taxable income. True, the result with respect to section 112 transactions, dealing with sales and exchanges, is specifically called for by section 115 (l), ⁷ but, as we have seen, section 115 (l) was merely declaratory of existing law in this1951 U.S. Tax Ct. LEXIS 253">*271 regard, and the same result is required by a proper interpretation of the term "earnings and profits."

1951 U.S. Tax Ct. LEXIS 253">*272 Moreover, petitioner's position is open to the objection that it might actually require the same gains to be included twice in its earnings and profits. As the Supreme Court emphasized in Commissioner v. Wheeler, 324 U.S. 542">324 U.S. 542, 324 U.S. 542">547, section 115 (l) expressly prescribes, as the basis for computing gain or loss for purposes of earnings and profits, "the adjusted basis * * * for determining gain." As to the property affected by petitioner's election in the instant case, the adjusted basis for determining gain is the basis as adjusted downward under section 113 (b) (3). When petitioner disposes of that property, the adjusted basis will increase the taxable gain or decrease the deductible loss. Since use of the same basis seems to be required under section 115 (l), a comparable increase in earnings and profits apparently will take place at the time of disposition of the property. If this consequence follows from the adjustment in basis under section 113 (b) (3), there would be a duplication in the increase in petitioner's earnings and profits were they also to be increased, as petitioner contends they should be, upon the realization of the bond profit1951 U.S. Tax Ct. LEXIS 253">*273 responsible for the basis adjustment. A construction which involves such an irrational result is to be avoided in the presence of an acceptable alternative. Cf. Taylor-Wharton Iron & Steel Co., 5 T.C. 768, 781-783.

Decision will be entered for the respondent.