Court Opinion

ID: 4481013
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:39.083655+00
Date Added: 2024-06-11T14:53:38.666667
License: Public Domain

Fay, J., dissenting: With all deference, I am unable to agree with the conclusion reached by the majority of the Court. It is my opinion that the literal statutory construction adopted by the majority is unnecessarily narrow and succeeds only in frustrating the purpose for which Congress enacted section 166(g). In all of the litigation which preceded and was directly responsible for the enactment of section 166 (g), essentially what was presented was a single-fact pattern. What transpired was an installment sale by a retail dealer to a purchaser who made a downpayment and executed a conditional sales contract for the balance of the purchase price The dealer then sold with recourse the conditional sales contract to a finance company or bank in order to acquire money to replenish his stock and acquire further inventory. See remarks of Mr. Schneebeli, 112 Cong. Rec. 25639 (1966). In the above situation (see for example Wilkins Pontiac) we sustained the Commissioner’s position that when the obligations were sold they no longer represented a debt owed the dealer, but constituted a debt owed to the finance company. On appeal, however, this position was rejected based upon the idea that the technical requirement that the debt be owing to the dealer on these facts ignored the realities of the business world. The reversal stressed the idea that in substance the risk of loss was always upon the dealer and to deny the deduction by limiting it to direct debt would be to defeat the purpose of the reserve for bad debts. It is against this specific background that section 166(g) was proposed and enacted. In this light it is not difficult to understand why the subsection is worded as it is. The language of the enactment was couched exactly in terms of the problem presented in the prior litigation. The committee reports also 'adopt the same background in expressly limiting the scope of the subsection. Both reports make the following general explanation as to the limits of the applicability of the subsection: New reserve only way of talcing guaranteed had debt deductions for future.- — ■ Tlie bill provides that the new reserve previously described is to be the only reserve through which a deduction is to be allowed ior any addition to a reserve for bad debts wbicb arises out of the taxpayer’s liability as guarantor, endorser, or indemnitor of debt obligations. For example, if the taxpayer has an account receivable from, a customer [emphasis supplied] simply for services rendered (not in connection with a sale of a property) the bill provides that no deduction is to be allowed for an addition to a reserve for liabilities arising out of the sale with recourse of such a debt obligation. I do not contend that there is any specific statement in either the prior case law or the legislative history which evidences a realization of the problem now before the Court. In fact, I think it is clear that Congress did not foresee this variation of the problem. What I do contend is that the legislative history evidences a congressional purpose to adopt an attitude in this area which recognizes the realities of the business community. It is my opinion that Congress did not, as the majority suggests, intend the statute to be applied in so literal a fashion, for to do so ignores the business realities of this case. What we have before us is a dealer-parent which indirectly through a wholly owned subsidiary is financing its trade receivables. Kespond-ent has not questioned and the majority opinion even concedes the bona fide business purpose of this arrangement. The parent sells the receivables without recourse to the subsidiary which thereupon transfers them to a bank under an agreement which respondent has conceded renders the subsidiary potentially liable as a guarantor, endorser, or indemnitor. Because technically the parent is the dealer and the wholly owned subsidiary is the guarantor upon which rests the risk of loss, under my reading of the majority construction neither will be entitled to the deduction. In contrast to this, had the parent dealt directly with the bank, it is clear that the deduction would be available to it. I do not believe such result is reasonable because in my opinion the two situations are not in substance distinguishable. I, therefore, conclude that Congress would have intended section 166(g) (1) (A) to be sufficiently broad to encompass the case before us had they specifically focused on it and would not have intended the technical approach suggested by the majority. SimpsoN, /., agrees with this dissenting opinion.