Source: https://en.wikisource.org/wiki/John_Kelley_Co_v._Commissioner_Of_Internal_Revenutalbot_Mill/Opinion_of_the_Court
Timestamp: 2020-01-23 06:00:38
Document Index: 369959383

Matched Legal Cases: ['§ 1100', '§ 240', '§ 347', '§ 240', '§ 3224', '§ 3653', '§ 3653', '§ 1003', '§ 1100', '§ 1100', '§ 1103', '§ 1118', '§ 1118']

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John Kelley Co v. Commissioner Of Internal Revenutalbot Mill/Opinion of the Court
< John Kelley Co v. Commissioner Of Internal Revenutalbot Mill
John Kelley Co v. Commissioner Of Internal Revenutalbot Mill
899838John Kelley Co v. Commissioner Of Internal Revenutalbot Mill — Opinion of the Court
JOHN KELLEY CO. v. COMMISSIONER OF INTERNAL REVENUE. TALBOT MILL
Argued: Oct. 11, 1945. --- Decided: Jan 7, 1946
These writs of certiorari were granted to examine the deductibility as interest of certain payments which the taxpayer corporations made to holders of their corporate obligations. Although the obligations of the two taxpayers had only one striking difference, the noncumulative in one and the cumulative quality in the other of the payments reserved under the characterization of interest, the Tax Court (formerly the Board of Tax Appeals, 56 Stat. 957, 26 U.S.C.A.Int.Rev.Code, § 1100; only its present name will be used herein) held that the payments under the former, the Kelley Company case, were interest and under the Talbot Mills were dividends. The Circuit Court of Appeals reversed the Tax Court in the Kelley case and another circuit affirmed the Talbot Mills decision. [1] On account of the diversity of approach in the Tax Court and the reviewing courts, we granted certiorari.
The payments in question on corporate obligations were for the years in the Kelley case, 1937, 1938 and 1939; in the Talbot Mills case for the year 1940. Both corporations deducted the payments as interest from their reports of gross income under statutory sections and regulations set out in the footnote. [2] The applicable statutes and regulations were identical for all periods. The Commissioner asserted deficiencies because the payments were considered dividends and not interest.
The provisions for review are the same now as they were when enacted in 1926. Congress, and all others interested, were then well aware of the difficulties in drawing a line between questions of fact and questions of law. [3] The legislation was upon a subject, the collection of the revenue, in which federal administrative finality had been given wide scope. [4] The Tax Court was originally established to 'secure an impartial and disinterested determination of the issues involved,' [5] so that the taxpayer and the Government would have an independent review of the position of either on tax demands before payment of the tax or foreclosure of an asserted deficiency. Two years later its success was recognized by committee commendation and the enlargement of the finality of its decisions from 'prima facie evidence of the facts contained therein' to reviewability only 'if the decision of the oard is not in accordance with law' [6] As to the mischief which the limitation of the scope of judicial review was to cure, we find only the words of the committee reports. [7] Without a clearer description by Congress of the intended line to separate reviewability of the Tax Court decisions from non-reviewability, courts must interpret the review statute, as best they can, to accomplish the declared Congressional purpose of adequate control of administrative action without substituting judicial opinion for that of the Tax Court upon the evidence. Note 7, supra.
These cases now under consideration deal with well understood words as used in the tax statutes-'interest' and 'dividends.' They need no further definition. Equiable Life Assurance Society v. Commissioner, 321 U.S. 560, 64 S.Ct. 722, 88 L.Ed. 927; Deputy v. Du Pont, 308 U.S. 488, 498, 60 S.Ct. 363, 368, 84 L.Ed. 416. The Tax Court is fitted to decide whether the annual payments under these corporate obligations are to be classified as interest or dividends. The Tax Court decisions merely declare that the undisputed facts do or do not bring the payments under the definition of interest or dividends. [8] The documents under consideration embody elements of obligations and elements of stock. There is no one characteristic, not even exclusion from management, which can be said to be decisive in the determination of whether the obligations are risk investments in the corporations or debts. So called stock certificates may be authorized by corporations which are really debts and promises to pay may be executed which have incidents of stock. Such situations seem to us to fall within the Dobson rule. [9]
In the first place, I do not believe that Congress has authorized the Tax Court to make or the reviewing courts to sustain directly conflicting determinations of tax liability in identical fact situations. Nor, in my opinion, was this the purpose or effect of the Dobson decisions, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248. So to regard them or the statute nullifies the right to review expressly given by Congress. Moreover that view destroys the very uniformity which Dobson sought, transferring the conflict of decision from the Courts of Appeals back to the Tax Court, by making the conflicting decisions of its sixteen divisions final. [1] This affords relief to the taxpayer from judicial review and to the courts from judicially reviewing. But it defies Congress' mandate for review and, what is more, perpetuates chaos in the law.
All this presupposes, of course, that the records now here present fact situations identical in all material respects. That is true in my judgment. It is hardly necessary to attempt demonstration. But, besides referring to the opinions of the Courts of Appeals for the small details of the facts and their minute differences, [2] it may be noted that there was no question of credibility. Substantially all of the evidentiary facts were stipulated in both cases. Nor is there any finding in either case that the arrangements were a sham. Cf Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355. Apart from such considerations, the material facts in my opinion were not substantially different in any respect sufficient to support one ultimate conclusion, whether labelled of 'law,' of 'fact,' or 'mixed,' for one case and the opposite conclusion for the other.
Tax liability should depend upon the subtle refinements of corporate finance no more than it does upon the niceties of conveyancing. [3] Sheer technicalities should have no more weight to control federal tax consequences in one instance than in the other. The taxing statute draws the line broadly between 'interest' and 'dividend.' This requires one who would claim the interest deduction to bring himself clearly within the class for which it was intended. [4] That is not done when the usual signposts between bonds and stock are so obliterated that they become invisible or point equally in both directions at the same time.
'Dividend' and 'interest,' 'stock and 'bond,' 'debenture' or 'note,' are correlative and clearly identifiable conceptions in their simpler and more traditional exemplifications. But their distinguishing features vanish when astute manipulation of the broad permissions of modern incorporation acts results in a 'security device' which is in truth neither stock nor bond, but the half-breed offspring of both. At times only the label enables one to ascertain what the manipulator intended to bring forth. But intention clarified by label alone is not always legally effective for the purpose in mind. [5] And there is scarcely any limit to the extent or variety to which this kind of intermingling of the traditional features of stock and bonds or other forms of debt may go, as the books abundantly testify. [6] The taxpayer should show more than a label or a hybrid security to escape his liability. He should show at the least a substantial preponderance of facts pointing to 'interest' rather than 'dividends.'
Something more is at stake in these cases than nice distinctions between 'stock' and 'bonds' on the one hand or between ultimate conclusions of 'fact' and 'law' or 'mixed fact and law,' on the other, just as was true in the conveyancing cases. The border cutting across one set of normally opposing conceptions may be deliberately obscured and made into a no man's land as readily as that involved in the other. When this happens, the final link in the chain of judgment is decisive whatever its label. [7] If the ultimate conclusion of the Tax Court or its divisions can be made in exactly opposing ways, and must be left undisturbed, without substantial differentiating facts, or when hybrid arrangements bear tax indicia equally with marks of nontaxability, not only is the statutory review nullified. The right of taxpayers to be treated with equal justice before the law is denied.
^1 1 T.C. 457; 7 Cir., 146 F.2d 466; certiorari granted, 325 U.S. 843, 65 S.Ct. 1084; Judicial Code § 240(a), 28 U.S.C.A. § 347(a). 3 T.C. 95; 1 Cir., 146 F.2d 809, certiorari granted 325 U.S. 844, 65 S.Ct. 1086; Judicial Code § 240(a).
^2 Internal Revenue Code:
'Sec. 19.23(b)-1. Interest.-Interest paid or accrued within the year on indebtedness may be deducted from gross income, * * *
^3 Compare Thayer, A Preliminary Treatise on Evidence at the Common Law, Ch. V, with Holmes, The Common Law, pp. 123-129. 1 Holdsworth, History of English Law, 298, 312; Dickinson, Administrative Justice, c. III, p. 55:
^4 R.S. § 3224, 26 U.S.C. § 3653, 26 U.S.C.A. Int.Rev.Code, § 3653; Heiner v. Diamond Alkali Co., 288 U.S. 502, 53 S.Ct. 413, 77 L.Ed. 921; Cary v. Curtis, 3 How. 236, 246, 11 L.Ed. 576.
^5 5 Rep. No. 398, 68th Cong., 1st Sess., p. 9.
^6 H.Rep.No.179, 68th Cong., 1st Sess., p. 8; 44 Stat. 110, sec. 1103(b); H.Rep.No.1, 69th Cong., 1st Sess., p. 17; S.Rep.No.52, 69th Cong., 1st Sess., p. 34.
^7 H.Rep.No.1, 69th Cong., 1st Sess., p. 19-20:
'Court review-Questions of fact and law.-The procedure is made to conform as nearly as may be to the procedure in the case of an original action in a Federal district court. Inasmuch as the complicated and technical facts governing tax liability require a determination by a body of experts, the review is taken directly to an appellate court, just as, for instance, in the case of orders of the Federal Trade Commission, and orders of the Secretary of Agriculture under the packers and stockyards act. In view of the grant of exclusive power to the board finally to determine the facts upon which tax liability is based, subdivision (b) of section 914 limits the review on appeal to what are commonly known as questions of law. The court upon review may consider, for example, questions as to the constitutionality of the substantive law applied, the constitutionality of the procedure used, failure to observe the procedure required by law, the proper interpretation and application of the statute or any regulation having the force of law, the existence of at least some evidence to support the findings of fact, and the validity of any ruling upon the admissibility of evidence (see subdivision (a) of section 907 and subdivision (b) of section 914). (§ 1003(b) of the Act as passed.) The court, therefore, may adequately control the action of the administrative officer or agency, but will not be burdened with the duty of substituting its opinion for that of the board upon the evidence.'
^8 Dickinson, Administrative Justice, 312; Paul, Dobson v. Commissioner; The Strange Ways of Law and Fact, 57 Harv.L.R. 753, 826, 832, 840; Brown, Fact and Law in Judicial Review, 56 Har.L.R. 899, 904.
^9 Compare Helvering v. F. & R. Lazarus Co., 308 U.S. 252, 255, 60 S.Ct. 209, 210, 84 L.Ed. 226; Wilmington Trust Co. v. Helvering, 316 U.S. 164, 167, 62 S.Ct. 984, 985, 86 L.Ed. 1352; Helvering v. Chicago Stock Yards Co., 318 U.S. 693, 700, 702, 63 S.Ct. 843, 846, 847, 87 L.Ed. 1086; Equitable Life Assur. Society v. Comm'r, 321 U.S. 560, 563, 64 S.Ct. 722, 723, 88 L.Ed. 927; Comm'r v. Scottish American Co., 323 U.S. 119, 65 S.Ct. 169.
^1 The Internal Revenue Code provides that the chairman (now presiding judge of the Tax Court, § 1100, 26 U.S.C.A. Int.Rev.Code, § 1100) may 'from time to time divide the Board into divisions of one or more members' and 'a majority of the members of the Board or of any division thereof shall constitute a quorum for the transaction of the business of the Board or of the division, respectively.' § 1103(c), d). By § 1118(b), 26 U.S.C.A. Int.Rev.Code § 1118(b), the report of a division becomes the report of the Board within 30 days unless the chairman directs that it be reviewed by the Board.
^2 146 F.2d 466; 146 F.2d 809.
^3 Helvering v. Hallock, 309 U.S. 106, 117, 118, 60 S.Ct. 444, 450, 451, 84 L.Ed. 604, 125 A.L.R. 1368; Smith v. Shaughnessy, 318 U.S. 176, 180, 63 S.Ct. 545, 547, 87 L.Ed. 690.
^4 Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593, 63 S.Ct. 1279, 1281, 87 L.Ed. 1607; see also New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348; Deputy v. Du Pont, 308 U.S. 488, 493, 60 S.Ct. 363, 366, 84 L.Ed. 416; McDonald v. Commissioner, 323 U.S. 57, 60, 65 S.Ct. 96, 97, 155 A.L.R. 119.
^5 In re Fechsheimer Fishel Co., 2 Cir., 212 F. 357, 360; In re Collier's Estate, 112 Misc. 70, 182 N.Y.S. 555; Cass v. Realty Securities Co., 148 App.Div. 96, 100, 132 N.Y.S. 1074, affirmed, 206 N.Y. 649, 99 N.E. 1105; see Commissioner v. Schmoll Fils Associated, Inc., 2 Cir., 110 F.2d 611.
^6 See Hansen, Hybrid Securities: A Study of Securities Which Combine Characteristics of Both Stocks and Bonds (1936) 13 N.Y.U.L.Q. 407; Uhlman, The Law of Hybrid Securities (1938) 23 Wash.U.L.Q. 182; Jewel Tea Co. v. United States, 2 Cir., 90 F.2d 451, 452, 453, 112 A.L.R. 182.
^7 The legal element is not eliminated merely because it appears in 'a molecular combination of fact and law which defies separation.' Berry v. 34 Irving Place Corporation, D.C., 52 F.Supp. 875, 881. It may be the dominant element in the combination. When it is, minutiae of factual difference should not govern result or sustain conflicting outcomes.
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