Court Opinion

ID: 9444187
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:44:54.451817+00
Date Added: 2024-06-11T17:29:45.474571
License: Public Domain

*312CLARK, Circuit Judge
(dissenting).
Judge Harlan’s careful and extensive research into the legislative background of the revenue law here involved serves in my judgment to afford strong support for both the reasoning and the decision in General Motors Acceptance Corp. v. Higgins, 2 Cir., 161 F.2d 593, certiorari denied 332 U.S. 810, 68 S.Ct. 112, 92 L.Ed. 388, now largely repudiated in actual result. The narrow distinction of the statute between promissory notes, which are not subject to the stamp tax, and corporate debentures or certificates of indebtedness, which are, is not of our choosing and we have no authority to blot it out or even to soften it. So to do is unjustifiable judicial legislation in my view; and I cannot accept the indictment that the contrary interpretation by Judge Smith and myself is. For the approach of the GMAC decision and of Judge Smith below in a reasoned decision, Niles-Bement-Pond Co. v. Fitzpatrick, D.C.Conn., 112 F.Supp. 132, which I should be glad to accept as my own, is’ but the appropriate and necessary execution of congressional intent to which we are by law obligated.
The GMAC decision was an outstanding milestone in the interpretation of the statute in several aspects. Perhaps most important was its stress on substance and debunking of form. And among the indicia as to substance which it notes, it does not give exclusive weight to the activity and intent of the lender, but rather emphasizes the attitude and need of the borrower, thus contrasting a corporation’s “capital [obtained] for a substantial period of time from investors for general use in its business just as it might by the sale of its bonds, debentures or similar securities” with “the notes used customarily in day to day commercial transactions of a short time credit character.” 161 F.2d at page 595. While Judge Harlan’s opinion does not expressly repudiate this holding, yet the present decision and its reasoning surely treads in the opposite direction. Its practical consequence, I suggest, is that bank loans are excepted from the tax, and the statute is amended to that extent — an obvious gain in simplicity, but obtained at the sacrifice of legislative plan for relatively impartial distribution of tax burdens.
The conclusion I have just drawn from the opinion seems to me to follow from the distinctions it finds between this case and the GMAC case, framed in terms of distinctions between commercial loans, and corporate debentures. As conceded,, some of the features here present operate in favor of the conclusion reached below; these include the restrictions here placed on the borrower, the size of the borrowing, and its very substantial duration. In truth, I do not see anything to override their cumulative impact, any more than did Judge Smith. So the considerations found most significant — those numbered “3” and “5”— seem to me highly illustrative. They come from approaching the problem from the standpoint of the lender, not that of the borrower. Thus the regular intervals of maturity of the notes can mean to the maker only the same kind of amortization now usual in, say, a real, estate mortgage. And the differences stressed in the handling of the loans as affects the lenders show convincingly that the real distinction thus isolated is between a “private placement” for such-investors as insurance companies and an investment house, in the GMAC case,, and a loan by a bank from its own loaning funds. If each suggested difference-is actually examined, it becomes apparent that it is entirely for the lender’s benefit and convenience in carrying on the business in the form to which it is accustomed. Consider the “classic feature” of “ready marketability,” which it is said the present notes did not have. But this is only to say that of course the National City Bank does not make a business of peddling its loans. And can there be doubt that investors would, gladly invest in loans made and negotiated to them by that Bank if they were given opportunity?
The' point may be underlined by considering the application of this case as-*313a precedent to future borrowings. A borrower considering how to avoid the •additional burden of the stamp tax would see that not his needs or assumed obligations, but rather the source of supply of the funds, would be decisive. Since he can thus easily satisfy his needs in the ■one fashion as the other, he naturally will go to the lender who has the advantage of also giving him freedom from the burden of the stamp tax. And that is the kind of one-sided advantage to bank loans now read into the act which does seem to me to be deplored.
A recent analysis of this problem, “Stamp Tax on Promissory Notes Representing Term Loans and Private Placements,” 54 Col.L.Rev. 428-431 (March, 1954), supporting the GMAC decision and the holding below, seems to me to call attention to criteria which have been ■overlooked in my brothers’ opinion. The writer says (footnotes omitted):
“As of 1924 the ‘promissory note’ in corporate borrowing evidenced short term commercial loans arising in the ordinary course of business— rather than capital loans — and it is probably from the former that Congress intended to remove the tax. The confusion in the recent cases is apparently due to two significant post-1924 developments in corporate financing practice: the bank ‘term loan’ and the private placement with institutional investors. All of the GMAC line of cases involved notes representing either term loans or private placements and the courts, usually without recognition that they are dealing with changed methods of corporate finance, have attempted to fit them within the traditional security-promissory note dichotomy.” 54 Col.L.Rev. at 429, 430.
Then, after consideration of “private placement” as “a broad term describing all directly negotiated financing between a corporation and an institutional investor, usually an insurance company,” and of “term loans” by a bank, which occupy “an anomalous position,” being “neither investment nor loan according to traditional banking practice,” the author continues:
“With respect to these new forms of corporate finance, it is apparent that the lender’s motive in treating the transaction as loan or investment is not a helpful guide in determining taxability. Under this view the borrower is subject to the tax when the lender ‘intends to invest.’ But since privately placed loans are generally treated as investments and term loans do not fall within either category, if this distinction is pursued it is conceivable that a term loan note negotiated with the loan department of a bank would be nontaxable though an identical note privately placed with an insurance company would be taxed. Similarly, distinctions based on the instrument’s marketability do not seem substantial in view of the common provision for converting the note into marketable instruments.
“In light of the meaning of ‘promissory note’ in 1924 and the subsequent growth of private placement and term loans, the view of the courts following the GMAC case seems the wiser one. The opposing decisions, emphasizing the loan-investment distinction and marketability, run counter to the apparent Congressional intent to leave taxable loans of substantial duration to be used by the borrower for capital purposes. By including within the term ‘promissory note’ of the 1924 amendment instruments representing the newer methods of corporate finance, these decisions fail to construe these words in light of their meaning at the time of enactment.” 54 Col.L.Rev. at 431.
Following this appropriate and clear-ut analysis, I would affirm.