Court Opinion

ID: 4482650
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:36.810255+00
Date Added: 2024-06-11T14:19:45.311468
License: Public Domain

Wiles, J., dissenting: I respectfully disagree with the majority opinion on the second issue. Although I agree with the majority that collateral estoppel does not preclude relitigation of whether the securities are debt or equity, I do not believe that our reconsideration of this issue should ignore the prior opinions rendered by the Board of Tax Appeals and the Fourth Circuit. The Board of Tax Appeals weighed all the facts in evidence in order to determine the character of the securities in question. It concluded as follows: Though there are facts pointing to either interpretation [debt or stock], on a full study of the case we are convinced that the second characterization [as a debt] more aptly fits the situation and that the owner of the guaranteed stock should be classed as a creditor of the petitioner. True, he had the right to vote and was entitled to a share in the petitioner’s net earnings after the payment of its current liabilities, including the so-called “dividends”, but the primary consideration appears to have been the specified and certain income to the owner, coupled with an assured recovery of the principal by resort to the property if a default in the interest payment should occur. [S3 B.T.A. at 899.] In affirming the opinion of the Board, the Fourth Circuit stated: Nor does the fact that the guaranteed stock shares in the profits of the corporation above the guaranteed dividends, if these are exceeded by the ordinary stock dividends, and that it has a vote in the management of the corporation, detract from its position as secured indebtedness. These incidents of stock ownership were doubtless added to the ordinary rights of a secured creditor for the purpose of making the loan attractive; but a bond does not cease to be a bond merely because a share of stock is issued with it, and if the law, as did the law of Virginia, permits some rights of a stockholder to be included in an instrument evidencing a secured debt, the rights of the creditor are not impaired by so including them. This guaranteed stock, then, while sui generis, is, in the light of all its attributes, nothing more than a secured debt which is not to be repaid so long as the interest payments thereon are met when due, and which entitles the lender, in addition to interest, to participate with the stockholders in the earnings and management of the business. And the guaranteed dividends paid on such stock differ in no particular from interest paid on a secured debt, and should be treated as such as a matter of corporate financing and for income tax purposes. [90 F. 2d at 974-975.] Thus, the Board and the Fourth Circuit, taking into consideration all of the attributes of the securities and the intent of the parties at the time of issuance, determined that the securities possessed more characteristics of a debt than of a stock and therefore should be treated as debt securities. The securities in question are the same as those examined by the Board and the Fourth Circuit. Furthermore, no new facts have been presented which would lead us to question the validity of the prior determinations made by those tribunals. I, therefore, would hesitate to declare that the characteristics which those tribunals found to preponderate debt securities have somehow in the interim been transformed into characteristics which indicate that they represent stock securities. The majority opinion in effect reverses the factual determinations made by the Board. The presentation of a new issue regarding these securities does not change their basic characteristics. We should accept the thorough examination of the attributes and history of these securities made by the Board and the Fourth Circuit. The price paid for the securities was undoubtedly affected by the presence of the “stock-type” attributes of the securities; however, that fact does not change the basic nature of the securities. Having determined that the securities should be classified as debt securities, it follows that the premium paid on redemption would be deductible under section 1.61-12 (c), Income Tax Regs. Goefe, c/., agrees with this dissent.