Opinion
Docket No. 27771.
1951-04-13
NATIONAL BANK OF COMMERCE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas J. Reilly, Esq., for the petitioner. D. Louis Bergeron, Esq., for the respondent.
Thomas J. Reilly, Esq., for the petitioner. D. Louis Bergeron, Esq., for the respondent.
Petitioner, a national banking corporation, in its regular course of business issued interest bearing nonnegotiable certificates of deposit which were not subject to check and with maturity dates of either 6 or 12 months. In its regular course of business petitioner accepted savings deposits evidenced by passbooks which deposits were not subject to check and the withdrawal of which petitioner required 60 days notice. Held, petitioner's outstanding indebtedness evidenced by the certificates of deposit and savings passbooks is not includible in borrowed capital under section 719(a)(1) of the Internal Revenue Code and section 35.719-1 of Regulations 112. Commissioner v. Ames Trust & Savings Bank, 185 F.2d 47, followed.
The Commissioner has determined a deficiency in petitioner's excess profits tax liability for the calendar year 1945 in the amount of $91,077.77.
The only part of the deficiency in contest results from respondent's adjustment of petitioner's borrowed invested capital for determining petitioner's excess profits credit for the calendar year 1945 and its unused excess profits credit carry-over for the calendar year 1943. This adjustment was explained in the deficiency notice as follows:
It is held that amounts due your depositors, represented by so-called certificates of deposits and/or passbooks, do not represent borrowed capital. Such indebtedness is not of a type allowed under the provisions of section 719(a)(1) of the Internal Revenue Code, and/or section 35.719-1 of regulations 112. By appropriate assignment of error petitioner contests this adjustment.
FINDINGS OF FACT.
All of the facts have been stipulated and we adopt them as our findings of fact. They may be summarized as follows:
Petitioner is a United States national banking corporation with its place of business in San Antonio, Texas. Petitioner's income and declared value excess-profits tax return and its excess profits tax return for the calendar year 1945 were timely filed with the collector for the first district of Texas. Petitioner's excess profits credit for the calendar years involved is based upon invested capital.
Petitioner in its regular course of business issued certificates of deposit the form of which was as follows:
+-----------------------------------+ ¦CERTIFICATE OF DEPOSIT¦30-11 Number¦ +----------------------+------------¦ ¦ ¦ ¦ +-----------------------------------+
NATIONAL BANK OF COMMERCE A7813 of San Antonio
NOT NEGOTIABLE NOT SUBJECT TO CHECK San Antonio, Texas,_ 19___ $______ This certifies that _______________ ha ____ Deposited in this bank ___________________________________________________ DOLLARS Payable to_______________________________________________________ in current funds__________ Months after date with interest at the rate of ___ per cent per annum on the return of this certificate maturity properly endorsed. No interest after date. In keeping with the regulations of the Federal Reserve Board, this bank may require thirty days notice of the withdrawal of this deposit. Countersigned_ _______ Teller. Vice President and Cashier Asst. Cashier
Petitioner had outstanding indebtedness evidenced by these certificates of deposits for the calendar years 1943 and 1945, in the daily average amounts of $72,498.36 and $19,263.34, respectively. Each of these outstanding certificates of deposit had a maturity date of either 6 or 12 months from the date of issue. It was petitioner's practice to repay the principal amount of these certificates only upon maturity, except where the holder made a showing of unusual circumstances and forfeited accrued interest for the preceeding 6 months. Petitioner paid interest on these certificates of deposit for the calendar years 1943 and 1945 in the respective amounts of $607.72 and $1,891.42.
Petitioner in its regular course of business accepted savings deposits and each depositor was issued a passbook wherein it was provided inter alia:
This book is accepted and all deposits are made subject to the By-Laws of the Bank as herein printed and made a part of this deposit contract.
No payments can be made or money withdrawn without presentation of this book.
The rules and regulations governing savings deposits and payments are printed in the passbook and the material provisions thereof are as follows:
1. Each account and pass book will be known by its number, as well as by the name of the owner. Each depositor, in opening a savings account with this Bank agrees to be governed by the rules and regulations of the Savings Department of the National Bank of Commerce.
2. Interest will be allowed on deposits, even dollars, at such rate or rates as may be determined by the Bank from time to time, the calculation beginning on the first day of the month succeeding the deposit, on all sums which have been in the bank three or more months. No interest will be paid between interest dates or on sums withdrawn between those dates. Interest will be allowed only when it amounts to 25 ¢ or more for any interest period.
June 30th and December 31st shall be interest dates and interest will be credited to all Savings Accounts only on those dates. * * *
3. Deposits made in our Savings Department are not subject to check. * * *
5. Sixty days' notice in writing is required for any withdrawal of deposits in our Savings Department.
7. Sixty days after notice to withdraw a deposit is given to any depositor personally or by mail to the address on the books of the Bank, interest on said deposit shall cease.
8. Acceptance of pass books shall be considered and held as an assent to these regulations.
Petitioner had outstanding indebtedness evidenced by savings deposits for the calendar years 1943 and 1945, in the average daily amounts of $3,701,481.53 and $6,391,696.21, respectively. Petitioner paid interest on savings deposits for the calendar years 1943 and 1945 in the respective amounts of $56,149.71 and $61,754.51. Petitioner has paid to the collector for the first district of Texas $40,000 of the deficiency in excess profits tax determined for the calendar year, 1945.
OPINION.
Black, Judge:
The only issues we have to decide in this proceeding are whether petitioner is entitled under section 719(a)(1) or the Internal Revenue Code,
to include in borrowed invested capital for 1943, and 1945, 50 per cent of (1) its daily average amount of certificates of deposits outstanding and (2) its daily average savings deposits evidenced by passbooks.
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, andnot including indebtedness described in section 751(b) relating to certain exchanges) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust * * *
The Court of Appeals for the Eighth Circuit has decided that a time certificate of deposit is not a ,certificate of indebtedness ‘ includible in the borrowed invested capital of a banking corporation within the meaning of section 719(a)(1), I.R.C. Commissioner v. Ames Trust & Savings Bank, 185 F.2d 47, reversing our decision 12 T.C. 770. In reversing this Court the Eighth Circuit approved that portion of section 35.719-1 of Regulations 112 relating to bank deposits, which is printed of t e margin
and held that this regulation referred to time deposits as well as demand deposits.
SEC. 35.719-1— Borrowed Invested Capital.— * * *(d) * * *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.
Faced with the same question presented in the Ames case, we must now decide whether we will stand by our decision in that case and respectfully decline to follow the Eighth Circuit's decision or whether we will accept it as laying down the correct law and follow it in the instant case. See discussion in Estate of William E. Edmonds, 16 T.C. 110. We have examined the opinion of the Eighth Circuit in the Ames case and we decide to follow it and no longer follow our own decision in the Ames Trust & Savings Bank, 12 T.C. 770.
Borrowed invested capital within the meaning of section 719(a)(1) is capital invested in the business (Player Realty Co., 9 T.C. 215), and it must be evidenced by a document answering the statutory description of ‘bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust.‘ West Construction Co., 7 T.C. 974; Canister Co., 7 T.C. 967, affd., 164 F.2d 579; Journal Publishing Co., 3 T.C. 518. In Ciro of Bond Street, Inc., 11 T.C. 188, we cited with approval that portion of Regulations 112, section 35.719-1 which states that:
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. * * *
The eighth Circuit pointed out in the Ames case that bank deposits do not have the character of investment securities and in 5 Zollmann, Bank and Banking sec. 3154, is found the following:
The main purpose of a loan is investment. The main purpose of a deposit is safe-keeping. A deposit clearly is not a loan pure and simple. The depositor deals with the bank not merely on the basis that it is a borrower, but that it is a bank subject to the provisions of law relating to the custody and disposition of the money deposited and that the bank will faithfully observe such provisions. The loan in effect is on condition that the use conform to the safeguards provided by law. The acceptance of such deposit implies that the bank and its directors agree to conform to the conditions named.
In addition to this and the opinion of the Eighth Circuit in the Ames case we have new evidence as to the Congressional intent of including certificates of deposit in the borrowed invested capital of a banking corporation.
It is a principle of statutory construction that where the doubtful meaning of a former statute is rendered certain by subsequent legislation the recent legislation is strong evidence of what the legislature intended by the first statute. Wetmore v. Marko, 196 U.S. 68; Johnson v. Southern Pacific Co., 196 U.S. 1; Bailey v. Clark, 21 Wall. (88 U.S.) 284; State of Minnesota v. Keeley, 126 F. 866; Sutherland, Statutory Construction (3d ed., 1943) section 5110.
Since the date of the decision of the Eighth Circuit in Commissioner v. Ames Trust & Savings Bank, supra, Congress has enacted the ‘Excess Profits Tax Act of 1950‘ Public Law 909— 81st Congress, 2d Session, approved January 3, 1951.
Section 439 of the Excess Profits Tax Act of 1950 provides in part as follows: SEC. 439 BORROWED CAPITAL.
(a) AVERAGE BORROWED CAPITAL.— For the purposes of this subchapter, the average borrowed capital for any taxable year shall be the aggregate of the daily borrowed capital for each day of such taxable year, divided by the number of days in such taxable year.
(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 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, plus This section as finally enacted was prepared by the Senate Finance Committee and the following language contained in Senate Report 2679, 81st Congress, 2d session, December 18, 1950, explains this section as follows:
(c) Definition of borrowed capital.— Borrowed capital, under your committee's bill, is indebtedness (but not including interest) 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. This is substantially the same definition as appears in the House bill. However, your committee's bill limits the amount to be considered as borrowed capital to outstanding indebtedness ‘incurred in good faith for the purposes of the business.‘ No such limitation was contained in the House bill although the report of the House committee indicated that it was intended to limit indebtedness treated as borrowed capital to indebtedness ‘employed in the trade or business.‘ The definition of borrowed capital in both the House bill and your committee's bill is substantially the same as the definition appearing in the World War II statute except for the addition of conditional sales contracts and bank loan agreements. Conditional sales contracts are a form of borrowing which has been used extensively, and your committee believes that their omission from the definition of borrowed capital would work a hardship on taxpayers borrowing substantial amounts in this manner. The category of indebtedness evidenced by a bank loan agreement, added by your committee's bill, includes such indebtedness owing to a bank, and does not include the indebtedness of a bank to its depositors.
The only reason we can see for the explanation of the Senate Finance Committee that ‘The category of indebtedness evidenced by a bank loan agreement * * * does not include the indebtedness of a bank to its depositors,‘ is that the indebtedness of a bank to its depositors is under no portion of section 439 to be included in borrowed capital. If the indebtedness of a bank to its depositors were includible in borrowed capital under the words ‘certificate of indebtedness‘ then it would be without meaning to exclude it under ‘a bank loan agreement‘ and we, therefore, conclude that the indebtedness of a bank to its depositors is not within the definition of borrowed invested capital evidenced by a certificate of indebtedness. We, therefore, hold that petitioner's outstanding certificates of deposit are not includible in its borrowed invested capital under section 719(a)(1).
The other issue in this proceeding involves the includibility of petitioner's daily average savings deposits evidenced by passbooks. In accordance with petitioner's rules regulating its savings deposits these deposits must be treated as time, rather than demand deposits. We can see, however, no substantial distinction between the character of petitioner's time certificates of deposit and its savings deposits. Like the certificates of deposit, these passbooks evidenced deposits in the banking business of petitioner and we believe that Congress did not intend that they should be included in borrowed invested capital under section 719(a)(1).
Reviewed by the Court.
Decision will be entered for the respondent.