In the application of this rule, it would seem clear that if the lender required the borrower to purchase common stocks at a price greater than its market value, as a part of the loan transaction, the excess of the price over the market value would be deemed interest in the case involving usury laws. Plaintiff relies heavily upon Ancel Greene Co., 38 T.C. 125 (1962), asserting that it is "square authority for the deduction claimed by plaintiff" herein, and also upon McMillan Mortgage Co., 36 T.C. 924 (1961). In Ancel Greene, taxpayer was engaged in buying, selling, and servicing real estate mortgages, and sold mortgages to the Federal National Mortgage Association (FNMA), created by Congress and operating with government-owned capital, as a secondary market facility for home mortgages.
405 U.S. at 312. Similarly, in Ancel Green & Co. v. Commissioner, 38 T.C. 125 (1962), and McMillan Mortgage Co. v. Commissioner, 36 T.C. 924 (1961), the taxpayer, a mortgage lender, sold mortgages to the Federal National Mortgage Association. As a condition of each sale, the taxpayer also purchased stock of the association at a price substantially higher than the stock's value.
405 U.S. at 312. Similarly, in Ancel Green Co. v. Commissioner, 38 T.C. 125 (1962), and McMillan Mortgage Co. v. Commissioner, 36 T.C. 924 (1961), the taxpayer, a mortgage lender, sold mortgages to the Federal National Mortgage Association. As a condition of each sale, the taxpayer also purchased stock of the association at a price substantially higher than the stock's value.
The court in Ancel Greene also ruled that the stock sold by the taxpayer was a capital asset, with the fair market value at the date of issuance as the basis. In ruling that the stock was a capital asset, the court distinguished Ancel Greene from an earlier tax case, McMillan Mortgage Co. v. Commissioner, 36 T.C. 924 (1961) (held that gains or losses on the subsequent sale of FNMA stock were ordinary gains or losses), on the basis that the taxpayer in McMillan Mortgage held its FNMA stock for a relatively short period of time and with no intent to hold it as an investment, while the taxpayer in Ancel Greene held the stock as an investment for periods in excess of a year and a half. Then in 1968 the rules governing private shareholder transactions with FNMA changed and it is from this change that the problem in the case at bar arises.
The Court of Claims rejected it stating: See Ancel Greene Co. v. Commissioner of Internal Revenue, 38 T.C. 125 (1962); McMillan Mortgage Co. v. Commissioner of Internal Revenue, 36 T.C. 924 (1961). These cases are thoroughly discussed in Penn Yan. 417 F.2d at 1380-1381.
Whether or not the expenditures of the taxpayer for the Class C stock in this case are deductible under section 162(a) turns upon whether they are in the nature of a capital expenditure or a day-to-day business expense. The cases of Ancel Greene Co., 38 T.C. 125 (1962), and McMillan Mortgage Co., 36 T.C. 924 (1961), are cited by both parties in support of their positions. The taxpayers in these cases purchased stock in the Federal National Mortgage Association.
Greene, involving a tax year prior to the effective date of section 162(d), in effect held that the difference between the $100 purchase price the petitioner therein was required to pay for FNMA stock and its average market price of approximately half that amount was deductible in the year of issue. See also McMillan Mortgage Co. v. Commissioner, 36 T.C. 924 (1961). Shortly thereafter, the Internal Revenue Service revoked its prior ruling, and acquiesced in the Greene decision.
While it is true these securities do not fit into any of the exclusions to the definition of a capital asset as found in section 1221, there is substantial authority that when such property is not acquired for investment purposes and the particular facts of the taxpayer's business show the expenditures for the securities were proper and necessary in the furtherance of such business, the property is not a capital asset. See Corn Products Co. v. Commissioner, 350 U.S. 46 (1955); Western Wine Liquor Co., 18 T.C. 1090 (1952); McMillan Mortgage Co., 36 T.C. 924 (1961); and Rev. Rul. 58-40, 1958-1 C.B. 275. The bonds in question were purchased only to meet the FHA reserve requirements and the FHA loan was necessary in furtherance of R.R.R.'s business.
While it is true these securities do not fit into any of the exclusions to the definition of a capital asset as found in section 1221, there is substantial authority that when such property is not acquired for investment purposes and the particular facts of the taxpayer's business show the expenditures for the securities were proper and necessary in the furtherance of such business, the property is not a capital asset. See Corn Products Co. v. Commissioner, 350 U.S. 46 (1955); Western Wine & Liquor Co., 18 T.C. 1090 (1952); McMillan Mortgage Co., 36 T.C. 924 (1961); and Rev. Rul. 58-40, 1958-1 C.B. 275. The bonds in question were purchased only to meet the FHA reserve requirements and the FHA loan was necessary in furtherance of R.R.R.‘s business.
The National Housing Act is not, of course, a revenue statute, and the label attached to section 1727(d) payments therein is not, and was not intended to be, conclusive in the determination of how these payments should be treated for Federal tax purposes. See McMillan Mortgage Co., 36 T.C. 924, 928. The label is at any rate ambiguous, though if we were to give it binding effect here, we should most certainly adopt the characterization of ‘prepayment’ as controlling, and would therefore have to deny petitioner a current deduction for its section 1727(d) payment under a long line of decisions by this Court holding that prepaid insurance premiums are capital expenditures to be expensed over the years in which coverage is actually obtained.