Opinion
Docket No. 14982.
1949-05-13
AMES TRUST & SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. R. Austin, Esq., for the petitioner. Frank M. Cavanaugh, Esq., for the respondent.
Outstanding obligations evidenced by ‘certificates of deposit‘ issued by petitioner bank, not subject to check, bearing interest, and payable only at maturities of 6 months and 1 year, held includible in borrowed capital under section 719, Internal Revenue Code, for purposes of computing petitioner's excess profits credit. Economy Savings & Loan Co., 5 T.C. 543. J. R. Austin, Esq., for the petitioner. Frank M. Cavanaugh, Esq., for the respondent.
By this proceeding petitioner challenges respondent's determination of deficiencies in excess profits tax for the years 1943 and 1944 in the amounts of $3,603.38 and $271.07, respectively. Petitioner claims an overpayment for the year 1944 in the amount of $880.13.
The above deficiencies result from respondent's action in failing to include as borrowed invested capital 50 per cent of petitioner's daily average outstanding certificates of deposit, in computing its excess profits credit for the years 1942, 1943, and 1944.
FINDINGS OF FACT.
The parties have filed a stipulation of facts which we hereby find accordingly.
Petitioner, an Iowa banking corporation created in 1913, has been engaged exclusively in a general banking business in Iowa. Throughout the taxable period it was a member of the Federal Deposit Insurance Corporation. It filed the returns here in controversy with the collector for the district of Iowa.
Petitioner issued certificates of deposit on a standard form as follows:
AMES TRUST AND SAVINGS BANK
CERTIFICATE OF DEPOSIT
AMES, IOWA, __________ 192 ___. No. ___
___________________________________HAS DEPOSITED IN THIS BANK
________________________________ DOLLARS $__________ PAYABLE TO
THE ORDER OF ____________________ IN CURRENT FUNDS ON THE RETURN
OF THIS CERTIFICATE PROPERLY ENDORSED __________ MONTHS AFTER
DATE WITH INTEREST AT THE RATE OF _____ PER CENT PER ANNUM.
NO INTEREST AFTER MATURITY
NOT SUBJECT TO CHECK
______________________________
Cashier Teller
It was petitioner's practice to repay the principal amount of those certificates only upon maturity, except where the holder made a showing of unusual circumstances and forfeited accrued interest for the preceding six months.
During the years 1942, 1943, and 1944 petitioner had outstanding certificates of deposit on the above standard form in the following daily average amounts:
+----------------+ ¦1942¦$36,972.26 ¦ +----+-----------¦ ¦1943¦38,708.02 ¦ +----+-----------¦ ¦1944¦41,201.28 ¦ +----------------+
Each of the above outstanding certificates had a maturity date of either six or twelve months from its date of issue.
For each of the years 1942, 1943, and 1944 petitioner submitted to the Federal Reserve Bank a report of its condition as of December 31. As a subhead under ‘Liabilities,‘ line 14 of the form upon which the above reports were submitted was captioned ‘Time deposits of individuals, partnerships, and corporations.‘ Line 19, also under ‘Liabilities,‘ was captioned ‘Total Deposits (items 13 to 18, inclusive).‘ Petitioner's obligations under its outstanding certificates of deposit which had been executed on the standard form set out above were included in the amounts reported on lines 14 and 19 of the reports of condition. Those amounts for the years 1942, 1943, and 1944 were as follows:
+--+ ¦¦¦¦ +--+
Year Line 14 Line 19 1942 $513,060.11 $2,402,173.83 1943 613,959.92 3,501,769.39 1944 802,718.35 4,435,560.65
OPINION.
OPPER, Judge:
That the instruments in controversy were certificates of indebtedness within the meaning of section 179, Internal Revenue Code,
follows from the holding in Economy Savings & Loan Co., 5 T.C. 543, reviewed other issues (C.C.A., 6th Cir.), 158 Fed.(2d) 472. That case, as this, involved a certificate of deposit, and respondent relied upon the definition contained in Regulations 112, sec. 35.719-1:
SEC. 719. BORROWED INVESTED CAPITAL.(a) BORROWED CAPITAL.— The 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 which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, plus * * *
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 * * *
But we held:
* * * that the certificate of deposit issued by petitioner is a certificate of indebtedness, an instrument having the general character of an investment security, and thus is within the meaning of section 719 * * *
having previously concluded in language equally applicable here:
* * * Are the funds deposited with petitioner under the circumstances hereinabove set forth invested in petitioner's business? Does this certificate have the general character of investment securities? We think these questions must be answered in the affirmative. * * *
In construing the succeeding sentence of the regulations, the question of whether ordinary bank deposits are includible in borrowed capital was not decided. That sentence reads:
* * * 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.
We said:
Respondent argues that petitioner was really in the banking business and therefore the money deposited with it, as evidenced by the certificates hereinabove referred to, must be excluded in computing petitioner's borrowed capital. Respondent claims that these certificates fell squarely within the definition set forth in the regulations excluding indebtedness incurred by a bank * * * . Respondent's suggestion that petitioner was really in the banking business and that the funds evidenced by the certificates herein involved are analogous to the deposits of a bank is not borne out by the evidence. The distinction between ordinary bank deposits and the deposits such as these was recognized in Stoddard v. Miami Savings & Loan Co., 63 Fed.(2d) 851 * * *
We do not pass on the question of whether or not petitioner is in the banking business. We think that is immaterial to the precise question presented * * * .
The regulation is manifestly directed at the ordinary bank deposit of a demand nature. Under the principle of noscitur a sociis, the association of certificates of deposit with passbooks and checks satisfies us that what was referred to was a certificate of demand deposit. It may well be that ordinary bank deposits, even though represented by a certificate, would not be the kind of investment security to which the statute has reference. See Kellogg Commission Co., 12 T.C. 182. We find it unnecessary to express an opinion on this subject, since the purpose of the legislation and the form of the regulation satisfy us that it has no application here.
The certificates of deposit in question had maturities of six months or a year; they bore interest; they were payable only upon maturity and were not subject to check. That, unlike West Construction Co., 7 T.C. 974, the business here assumed the risk of the investment seems demonstrable from the consequence of a loss of the funds. The holder of the certificate would be repaid, and repayment would be by the petitioner and not by the Federal Deposit Insurance Corporation, which (12 U.S.C. 264(1)(7)) insures the depositor and not the bank. Cf. Brann & Stewart Co., 9 T.C. 614; acq. 1948-2 C.B. 1. In all respects, these certificates are as comparable to the investment securities envisaged by the regulation as those involved in Economy Savings & Loan Co., supra. The mere fact that petitioner in its other capacities may have dealt with depositors as a banking institution is insufficient to qualify that result here as it was there.
Decision will be entered under Rule 50.