MNR v. Mandelbaum, 62 DTC 1093 (Ex Ct)

The taxpayers, who were shareholders of a company that was being pressured by its bank to dispose of non-interest bearing conditional sales contracts and mortgage receivables owing to it, purchased those agreements and mortgages for a lump sum purchase price equal to 65% of the amounts owing. Before going on to find that the full amount of the gain subsequently realized by the taxpayers when the mortgages and agreements matured was income from business, Thorson P. rejected (at p. 1097) an argument that s. 7 of the 1952 Act applied to deem a portion of the amounts received by them to be interest income:

"As between the Respondents and Sunnibilt there is nothing of a capital nature in any of the payments under the mortgages and agreements and I am unable to see how any of the profit realized by the respondents from their purchase of the mortgages and agreements could possibly be regarded as an accretion of their capital."

In finding that the purchase by individual shareholders of a company of mortgage receivables and conditional sales contracts owing to that company was an adventure in the nature of trade in addition to being a transaction in the course of their business of managing the company, Thorson P. stated (at p. 1098) that "if a person deals with the commodity purchased by him in the same way as a dealer in it would ordinarily do such a dealing is a trading adventure" and that "when the respondents purchased [the company's] mortgages and agreements their transaction was similar to the kind of transactions that dealers in mortgages and agreements engaged in".

A Corporation ("Sunnibilt") was pressured by its bank to sell conditional sales contracts and mortgage receivables owing to it in order to pay down debt. The taxpayers purchased the mortgages and agreements for a lump sum equal to 65% of their face amount.

In finding that the resulting gains to the taxpayers when the mortgages and agreements matured were received on income account, Thorson P. found that they had purchased the mortgages and agreements in the course of their business of managing Sunnibilt (and an affiliated corporation), noted that no prudent person would have thought of purchasing the mortgages and agreements as an investment and also noted that it would have been anomalous to conclude that amounts that clearly would have been income to Sunnibilt could be received on a tax-free basis through the device of selling the mortgages and agreements to the taxpayers. Thorson P. further found that if the gains had not been realized from a business in the ordinary sense of the word, the transactions would have represented an adventure in the nature of trade given that "if a person deals with the commodity purchased by him in the same way as a dealer in it would ordinarily do such dealing is a trading adventure" and "it might reasonably be said that when the respondents purchased Sunnibilt's mortgages and agreements their transaction was similar to the kind of transactions that dealers in mortgages and agreements engaged in".