Docket Nos. 60387 60525.
Sanford M. Stoddard, Esq., for the petitioners. 1 T. M. Mather, Esq., for the respondent.
By permission of the Court, Bert A. Lewis, Esq., and F. Daniel Frost, III, Esq., filed a brief as amicus curiae.
“We should perhaps add that we do not consider Economy Savings & Loan Co. v. Commissioner * * * as being in any way applicable to the present situation. Under the contract governing the dealings of the parties, the funds received by the loan company in that case were not of the nature of a deposit transaction with a bank, as the court itself there recognized, in saying that 'Respondents suggestion that petitioner was really in the banking business * * * is not borne out by the evidence.'“
Held, amounts received by petitioners represented by thrift certificates issued to customers do not qualify as borrowed capital within the purview of section 439(b)(1), I.R.C. 1939.
These consolidated proceedings involve deficiencies in income tax of the respective petitioners as follows:
+----+ ¦¦¦¦¦¦ +----+
Fiscal year Docket No. Petitioner ended Deficiency April 30 ( 1951 $856.48 60387 Jackson Finance and Thrift Company ( 1952 1,175.25 ( 1953 1,253.41 ( 1951 6,163.32 60525 Ford Finance Company ( 1952 6,619.93 ( 1953 6,623.78
The sole issue is whether the thrift certificates issued by the respective petitioners to their customers are to be considered as borrowed invested capital for the purpose of computing excess profits tax credit. Separate stipulations of fact were filed. Facts common to both petitioners will be designated as general facts.
FINDINGS OF FACT.
The stipulated facts are found accordingly.
Jackson Finance and Thrift Company, Docket No. 60387.
Petitioner is a corporation which was created May 16, 1947, under the laws of the State of Utah, with its principal place of business at Ogden, Utah. Its income tax return for the year ended April 30, 1951, was filed with the collector, and its returns for the years ended April 30, 1952 and 1953, were filed with the district director of internal revenue for the district of Utah.
Petitioner's aggregate loans to borrowers and the aggregate loans outstanding in the respective taxable years ended April 30, 1951, 1952, and 1953, were as follows:
+--+ ¦¦¦¦ +--+
Fiscal year ended April 30 Loans to Loans borrowers outstanding 1951 $768,809.63 $438,434.57 1952 916,817.31 504,380.04 1953 1,114,004.08 669,084.84
In its taxable years ended April 30, 1951, 1952, and 1953, the daily average amount of petitioner's outstanding indebtedness attributable to bank borrowings was the respective amounts of $175,006.85, $182,452.19, and $192,867.
Petitioner's daily average amount of outstanding indebtedness attributable to thrift certificates for the taxable years ended April 30, 1951, 1952, and 1953, was in the respective amounts of $48,760.30, $81,311.81, and $152,079.
Ford Finance Company, Docket No. 60525.
Petitioner is a Utah corporation created January 27, 1946, with its principal place of business at Ogden, Utah.
Petitioner filed its income tax return for the year 1951 with the collector, and its returns for the years 1952 and 1953, with the district director of internal revenue for the district of Utah.
Petitioner made loans to borrowers in the aggregate amounts for the years 1951, 1952, and 1953, as follows:
+--+ ¦¦¦¦ +--+
Number of Loans to Year loans borrowers 1951 3929 $1,779,750.69 1952 5447 2,674,388.60 1953 3783 2,174,625.98
Petitioner's aggregate loans outstanding were as follows:
+-------------------------------+ ¦Period ¦Loans outstanding¦ +-------------+-----------------¦ ¦Jan. 1, 1951 ¦$831,578.68 ¦ +-------------+-----------------¦ ¦Dec. 31, 1951¦1,002,177.93 ¦ +-------------+-----------------¦ ¦Dec. 31, 1952¦1,385,382.01 ¦ +-------------+-----------------¦ ¦Dec. 31, 1953¦1,370,302.16 ¦ +-------------------------------+
In the taxable years 1951, 1952, and 1953, the petitioner's average daily amount of outstanding indebtedness attributable to bank borrowings and attributable to thrift certificates was as follows:
+--+ ¦¦¦¦ +--+
Year Bank Thrift borrowings certificates 1951 $76,027.40 $639,635.21 1952 67,486.34 857,547.28 1953 23,986.30 1,006,095.33
In the event that petitioner's indebtedness attributable to thrift certificates issued and outstanding in each of the taxable years is held to be not includible as borrowed capital for excess profits tax purposes, petitioner's excess profits credit for each of such years should be computed as provided by section 435 of the Internal Revenue Code of 1939, rather than in the manner provided in section 436 thereof.
Petitioner's borrowed capital (not treating indebtedness attributable to thrift certificates as borrowed capital) on January 1, 1950, the beginning of its first excess profits tax year, was $165,626.02.
The term ‘petitioner’ as hereinafter used has reference to each petitioner.
Since its creation and during the periods involved, petitioner has continuously engaged in business as an industrial loan corporation, operating pursuant to the provisions of chapter 8, title 7, Utah Code Ann. (1953), and its predecessor chapter 6, title 7, Utah Code Ann. (1943), as amended.
The business of petitioner and the principal source of its income in the taxable years and since its creation, was the lending of money at interest on the personal undertaking of the borrower, or on personal security. The loans were made largely to individuals to finance the payment of medical bills, dental and other necessities, to finance car purchases, to take care of business needs, to pay for home or automobile repairs, to pay taxes, insurance premiums, moving expenses, food bills, rent, and the like, to meet educational costs, and to meet various other family needs and emergencies. Such loans were required to be repaid in uniform weekly, semimonthly, or monthly installments, with or without an allowance of interest on such installments, no unsecured loan to be made for a longer period than 2 years from the date thereof.
Petitioner is empowered by the Utah industrial loan statute and by its articles to issue and sell certificates for the payment of money at any time, either fixed or uncertain, and to receive payments therefor in installments or otherwise, with or without allowance of interest on such installments, but subject to the express provision in the statute that nothing therein shall be construed to authorize industrial loan corporations to receive deposits or to create a liability due on demand. The certificates are required to be approved as to form by the bank commissioner of the State Banking Department and must bear upon their face the words ‘This is not a certificate of deposit.’
The indebtedness of petitioner attributable to thrift certificates was evidenced by certificates, the form of which was as follows:
THRIFT CERTIFICATE BOOK
THIS IS TO CERTIFY that . . . of . . . delivered to Jackson Finance & Thrift Co., a corporation, the sums of money as listed hereafter and in consideration of the same, the said corporation agrees to repay the said sums to the said party or order as herein provided with interest payable at the rate of . . . per centum from date until paid. Amounts of less than $100.00 shall not draw interest under this Contract.
This Thrift Book may be issued as payable to one or more persons in which case payment to the persons producing this Thrift Book and appearing to be either one or the other of such owners, shall have the same force and effect as if there were only one owner.
The said corporation reserves the right to retain this Thrift Book at its face value with accrued interest on any date, by giving notice in writing, by registered mail, to the last known address of the owner or owners thereof as furnished to the said corporation by the owner hereof, of its intention to redeem the same, and interest shall cease on and after ten (10) days from the mailing of such notice.
The said corporation will redeem this Thrift Book at any time on the request of an owner hereof at its face value and accrued interest, subject to the right of the Corporation to require thirty days notice in writing, and to limit the aggregate amount of withdrawal payments of its thrift books in any one calendar month to an amount not exceeding one-half its net receipts of the previous calendar month.
THIS IS NOT A CERTIFICATE OF DEPOSIT
IN WITNESS WHEREOF the said corporation has caused this Thrift Book to be signed by its duly authorized officer and its seal to be affixed hereto this . . . day of . . . , 19 . . . JACKSON FINANCE & THRIFT CO.
By . . .
Withdrawals may be made from this account on the signature, or signatures, appearing below.
. . .
Petitioner financed its lending activities in each of the taxable years with equity capital and surplus, with funds from bank borrowings, and with funds obtained from the issuance of thrift certificates.
Petitioner has been regularly inspected and supervised in the conduct of its business, including the years involved herein, by examiners in the office of the bank commissioner of the Utah State Banking Department, and no violations of the provisions of the Utah statute, relating to industrial loan corporations or any irregularities in the conduct of its business were found.
Petitioner has never, at any time, used any sign or name at its place of business, which would indicate that such place or business is the place or office of a bank or trust company, or that deposits are received therein, or that payment was made on a check, or that any other form of banking or trust company business is transacted on its premises.
Petitioner has never made use of or circulated any letterheads, billheads, blank notes, blank receipts, certificates or circulars, or any printed or written or partly printed and partly written paper whatsoever having thereon any word or words indicating that its business is the business of a bank or trust company.
Petitioner has never transacted any business under any name which contains any of the words ‘bank,’ ‘bankers,’ ‘banking,’ ‘savings bank,’ ‘savings,’ ‘trust,’ ‘trustee,‘ or ‘trust company.’
Petitioner has never been a member of the Federal Reserve System, a member of the Federal Deposit Insurance Corporation, or designated as a depository for State or Federal funds.
Petitioner has never engaged in any of the primary functions of discount, deposit, or circulation.
Petitioner is not required by law or regulation to publish financial statements or reports of condition and does not do so.
The amounts received by petitioner on thrift certificates are not subject to check.
The rate of interest paid by petitioner on thrift certificate indebtedness during the taxable years involved was 4 per cent. The prevailing rate of interest paid by commercial banks and saving banks on savings accounts or time deposits in the Ogden, Utah, area during the years involved herein was not in excess of 2 1/2 per cent.
Thrift certificates are represented by amounts delivered to petitioner and entered in a thrift certificate book under the heading ‘deposits.’ To withdraw funds from the account, a customer presents the thrift certificate book and the amount withdrawn is entered under the heading ‘withdrawn.’ If all the funds are withdrawn the thrift certificate book is taken up.
The only question presented for decision is whether the petitioners are entitled to include in their borrowed invested capital for the purposes of determining excess profits tax credit, the amount of thrift certificates issued to customers.
The respondent has determined that the amounts received by petitioners represented by thrift certificates do not qualify as borrowed capital under section 439 of the Internal Revenue Code of 1939. It is incumbent upon petitioners to demonstrate the existence of an outstanding indebtedness evidenced by one of the types of instruments specified in such section. Canister Co. v. Commissioner, 164 F.2d 579, certiorari denied 333 U.S. 874; Journal Publishing Co., 3 T.C. 518, 522; Brizard Co., 28 T.C. 1142.
SEC. 439. BORROWED CAPITAL.(b) DAILY BORROWED CAPITAL.— For the purposes of this subchapter, the daily borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following:(1) The amount of the outstanding indebtedness (not including interest) of the taxpayer, incurred in good faith for the purposes of the business, which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, deed of trust, bank loan agreement, or conditional sales contract. In the case of property of the taxpayer subject to a mortgage or other lien, the amount of indebtedness secured by such mortgage or lien shall be considered as an indebtedness of the taxpayer whether or not the taxpayer assumed or agreed to pay such indebtedness * * *
Petitioners' contention is limited to the claim that the thrift certificates involved herein qualify as a ‘certificate of indebtedness,‘ under section 439(b)(1), and, hence, our inquiry is narrowed to the question of what is encompassed within that specific designation.
The respondent's Regulations 130 deal with the excess profits tax imposed by the Excess Profits Tax Act of 1950, which is here involved. Section 40.439(1) (f) covers the term ‘certificate of indebtedness' as used in section 439(b) (1) of the Internal Revenue Code of 1939, relating to borrowed capital for excess profits tax purposes.
Section 40.439(1)(f) of Regulations 130 provides in part as follows:(f) The term ‘certificate of indebtedness' includes only instruments having the general character of investment securities issued by a corporation as distinguishable from instruments evidencing debts arising in ordinary transactions between individuals. * * * Borrowed capital does not include indebtedness incurred by a bank arising out of the receipt of a deposit, and evidenced, for example, by a certificate of deposit, a passbook, a cashier's check, or a certified check, and the term ‘bank loan agreement’ does not include the indebtedness of a bank to a depositor.
The respondent takes the position that the thrift certificates in question are not instruments having the general character of investment securities issued by a corporation within the definition of the regulations or as the term ‘certificate of indebtedness' is generally understood and defined; and that the funds which petitioners received from customers were ‘deposits' evidenced by a thrift certificate book similar to a passbook and hence were not borrowed capital for excess profits tax purposes within the regulations and the cases upholding their validity. Commissioner v. Ames Tr. & Sav. Bank, 185 F.2d 47, reversing 12 T.C. 770; National Bank of Commerce, 16 T.C. 769; Capital National Bank of Sacramento, 16 T.C. 1202.
We cannot regard the thrift certificate in question as an investment security of a corporation by general understanding.
The thrift certificate is nonnegotiable. It has no maturity date, but it is payable on presentation of the certificate book, with the right of the corporation to require a 30-day notice. Only amounts in excess of $100 bear interest. The corporation can redeem the certificate at any time upon payment of the face amount with accrued interest. The fact that the moneys delivered to petitioners for which a certificate is issued are used in the conduct of their business is not determinative. Nor is the fact that the thrift certificate is an obligation and creates a debtor and creditor relationship. Mere debts are not investment securities as generally understood or within the meaning of that phrase as contained in the regulations.
The thrift certificate evidences the fact that funds have been placed with petitioners under a thrift plan contract, and is more analogous to a deposit than an investment security.
Since the regulation has been sustained as properly interpreting the meaning of the term ‘certificate of indebtedness' as used in section 439(b)(1) of the Code, we conclude that the thrift certificate in question does not qualify as borrowed capital for excess profits tax purposes.
The respondent further argues that petitioners are in the banking business within the purview of section 104(a) of the Code. In view of the conclusion we have reached on the narrow question presented to us, do not pass on the merits of that argument.
Petitioners rely heavily on the holding of this Court in Economy Savings & Loan Co., 5 T.C. 543, as a controlling authority. Undoubtedly, our holding in that case and in Ames Tr. & Sav. Bank, supra, relying upon the Economy case, supra, would require a decision in favor of petitioners. While the Economy case was affirmed on appeal (158 F.2d 472), the issue before us was not raised or passed upon. The Ames case, supra, was reversed (185 F.2d 47). This Court has followed the opinion of the Eighth Circuit in the Ames case; National Bank of Commerce, supra; Capital National Bank of Sacramento, supra. As certain affirmative statements in the Economy case, supra, are in our opinion, directly contrary to our opinion, directly contrary to our holding in the National Bank of Commerce case, supra, our decision in the Economy case, supra, to the extent of the holding that a certificate of deposit is a certificate of indebtedness and constitutes borrowed capital for excess profits tax purposes, will no longer be followed.
The respondent's determinations that the amounts represented by thrift certificates issued by the respective petitioners are not includible in the taxable years involved as borrowed capital for the purpose of computing excess profits tax credit are sustained.
Reviewed by the Court. OPPER, J., dissenting: It seems to me impossible to dispose of this case on the authority of respondent's regulation without concluding that petitioners were ‘banks.’ If they were not, the quoted portion of the regulation (footnote 3, supra) by its terms has no application. See Commissioner v. Ames Tr. & Sav. Bank, (C.A. 8) 185 F.2d 47, 50. There the Court of Appeals distinguished Economy Savings & Loan Co., 5 T.C. 543, affd. (C.A. 6) 158 F.2d 472, on the ground that that petitioner was not engaged in the banking business.1 If we are relying on the Ames reversal, what do we do about this distinction? Petitioners' activities are much more comparable to those in the Economy case than to either Commissioner v. Ames Tr. & Sav. Bank, supra, or National Bank of Commerce, 16 T.C. 769, which was decided on the authority of a legislative history and a case ( Commissioner v. Ames Tr. & Sav. Bank, supra) applying only to ‘banks.’
In spite of this, we now say: ‘The respondent further argues that petitioners are in the banking business * * * . In view of the conclusion we have reached on the narrow question presented to us, we do not pass on the merits of that argument.’ Unless we do so, I fail to see how we can conclude that the statements contained in the Economy case (which has never been before been repudiated) are ‘directly contrary to our holding in the National Bank of Commerce case,‘ or even that the conclusion being reached in the correct one. I must accordingly disagree with the present Opinion.