Court Opinion

ID: 4486647
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:35.564503+00
Date Added: 2024-06-11T15:03:50.341867
License: Public Domain

Halpern, J., dissenting. I believe that the majority is wrong in concluding that section 1281 does not require a bank to accrue interest on short-term loans made to customers in the ordinary course of its business. That conclusion is neither called for by the language of the statute nor supported by the statute's legislative history. I would hold that the short-term loans in question have acquisition discount of zero (if that is indeed the case) and that any stated interest must be taken into account as it accrues. The majority would hold to the contrary for two reasons, each of which is sufficient to justify its holding. First, the majority concludes that section 1281 was enacted solely to address problems associated with purchased debt instruments and not with loans made by a bank in the ordinary course of its business. See majority op. pp. 41-42. Secondly, the majority concludes that Congress intended section 1281 to apply to stated interest only if the short-term obligation in question also gives rise to acquisition discount. See majority op. p. 42. As to the majority's first ground, I believe that the majority has put too much stock in the word “acquisition” in the term acquisition discount and has misread the legislative history of subtitle C, title I, division A, Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 531 (sec. 41 of which enacted secs. 1281 through 1283). Prior to DEFRA., a deferral rule applied both to acquisition discount, which was a term used to describe discount on short-term governmental obligations, and to original issue discount on certain short-term obligations held by cash-method taxpayers. See section 1232A(a)(2)(C), prior to its repeal by section 42(a)(1) of DEFRA (no current inclusion of original issue discount on short-term Government obligations); H. Rept. 98-432 (Part II) at 1174 (1984), 1984 U.S.C.C.A.N. 697, 848; sec. 1.1232-3(b)(l)(iii) Income Tax Regs, (similar with regard to other short-term obligations). The legislative history of sections 1281 through 1283 indicates that discount on short-term obligations was made subject to accrual reporting because of two concerns: (1) That the contrary rule allowing deferral of acquisition discount on short-term governmental obligations was inappropriate for accrual-method taxpayers, and (2) that taxpayers had been making leveraged purchases of short-term discount obligations at year's end to achieve tax deferral. H. Rept. 98-432 (Part II), supra at 1174; H. Conf. Rept. 98-861, 1984-3 C.B. (Vol. 2) 61. The report of the Ways and Means Committee states that: “Only for the ordinary investor making unleveraged purchases of Treasury bills or other short-term discount obligations does the Committee believe that the present tax deferral remains appropriate.” H. Rept. 98-432 (Part II), supra at 1174 (emphasis added). It is consistent with that statement to conclude that Congress viewed cash-method banks as extraordinary investors who, for that reason alone, should not be permitted any deferral on short-term obligations, with the question of leverage being irrelevant. Alternatively, it would be consistent with the committee report to conclude that Congress believed deferral on short-term discount obligations never appropriate for a bank, because leverage plays a role in all situations in which banks obtain short-term obligations. After all, banks, being in the business of borrowing and lending funds every day, are necessarily leveraged to a substantial degree. Under either rationale, there would be no reason for distinguishing between purchased short-term obligations and short-term obligations arising from a bank's own loans (loans not purchased). In both contexts, a bank fails to qualify as the “ordinary investor” for whom the committee considered tax deferral appropriate; and, in both contexts, leverage plays an equal role. Thus, the purposes of the statute, as can most clearly be divined from the available legislative history, would best be served by reading section 1281 as treating those two situations, which are alike in all relevant respects, in the same manner. The language of the statute does not prohibit and, indeed, invites such a reading.1 The majority fails to explain why Congress' concerns in any way were dependent upon the manner in which a bank, or some other entity, obtains a short-term obligation. I would not read section 1281 as limited in application to purchased obligations. Alternatively, the majority agrees with petitioner that Congress intended to apply accrual accounting only to short-term obligations with both acquisition discount and stated interest. Majority op. p. 42. However, the available information overwhelmingly contradicts that view. Preliminarily, I note that the language of the statute itself imposes a formidable barrier to the majority's interpretation. Section 1281(a) provides (1) that acquisition discount shall be included in gross income and (2) that stated interest shall be included in gross income: neither command is conditional in any way. While, arguably, that language is not sufficiently plain that no additional inquiry need be made, a contrary interpretation, at a minimum, ought to be somewhat logical and amply supported by the legislative history. Yet, the unusual interpretation advocated by the majority is amply refuted on both grounds. Apparently, in the majority's view, a taxpayer otherwise on the cash method that held both a short-term obligation with stated interest and no discount and a similar obligation with stated interest and a discount representing 1 percent would report the stated interest on the first obligation under the cash method and the stated interest on the second obligation under the accrual method. An interpretation that taxes differently the stated interest on these two obligations seems illogical. More specifically, I am not clear on whether the majority means that the first requirement (acquisition discount) is a precondition for taxing under the accrual method the second (stated interest) or that each is a precondition for taxing under the accrual method the other. If the majority holds the latter view, then I suppose that it would not apply accrual accounting to a short-term obligation with acquisition discount but no stated interest. Even if the majority means only the former, that seems clearly inconsistent with the language of the statute and the intent of Congress. The committee reports from both the Senate and the House explain the 1986 amendment to section 1281(a) that provided for accrual taxation of stated interest, as follows: Present Law Under section 1281 of the Code, certain taxpayers are required to include as interest for a taxable year that portion of the acquisition discount or OID on a short-term obligation that is allocable to the portion of the taxable year during which the taxpayer held the obligation. * * * Explanation of Provision The bill clarifies that taxpayers subject to the rule for mandatory accrual are required to include in income for a taxable year all amounts on interest allocable to that year with respect to short-term obligations, irrespective of whether the interest is stated or is in the form of acquisition discount or OID, and irrespective of when any stated interest is paid. For example, a calendar-year taxpayer designated in section 1281(b) holds an obligation from the time it is issued on October 1, 1985 until its maturity on October 1, 1986. Under the bill, the taxpayer is required to include in income for 1985 the equivalent of three months interest on the obligation, regardless of whether the interest income is in the form of acquisition discount, OID, stated interest, or any combination thereof. H. Rept. 99-426, 877, 886 (1985), 1986-3 C.B. (Vol. 2) 877, 886; S. Rept. 99-313, 893, 902-903 (1986), 1986-3 C.B. (Vol. 3) 893, 902-903 (emphasis added).2  As stated earlier, I would apply section 1281 to the short-term obligations in question by treating them as if they have acquisition discount of zero (if that is so) and by requiring accrual of any stated interest. Kórner, Hamblen, Swift, Gerber, and Ruwe, JJ., agree with this dissent.   Under sec. 1283(c)(1), in the case of short-term nongovernmental obligations, original issue discount is taken into account in lieu of acquisition discount. Original issue discount certainly can arise in connection with a bank's own (nonpurchased) obligations. Sec. 1272, which requires the current inclusion in income of original issue discount (with an exception for short-term obligations), speaks in terms of the “holder” of a debt instrument having original issue discount and is effective for debt instruments “issued” after a certain date. It has not been argued that sec. 1272 applies only to purchased obligations.    Congress does not appear to have considered the extent to which the policy inherent in the accrual rule adopted with respect to stated interest on short-term obligations conflicts with the exception to general accrual accounting available to small taxpayers (including banks) found in sec. 448(b)(3).