Court Opinion

ID: 9445098
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:19:28.502776+00
Date Added: 2024-06-11T17:30:07.256862
License: Public Domain

BIGGS, Chief Judge
(dissenting in part, concurring in part).
The definition of discount which the majority enunciates here was rejected by this court in American Smelting & Refining Co. v. United States, 3 Cir., 1942, 130 F.2d 883. The theory that a “discount” cannot arise where bonds are issued in payment for property is contrary to our holding in American Smelting and finds no support in the Treasury Regulations.
In view of the importance of the question presented by this appeal, .directly affecting corporate taxation generally, I think it desirable to repeat certain facts so that the reasons for my dissent may be clear. The taxpayer, The Monr tana Power Company (Power) seeks to recover from the United States amounts of increases in its 1940 and 1941 income and its 1941 excess profits taxes resulting from its failure to deduct as amor*551tized discount the difference between the principal amount of debentures issued by it and the lower tax basis of property acquired by it in a non-taxable corporate reorganization. The court below held that only the difference between the principal amount of the debentures and the fair market value of the property could be deducted as discount and that the market value of the property was not shown to be less than the face value of the debentures. See, D.C.1954, 121 F.Supp. 577.
In 1936, American Power and Light Company owned all of the stock of Montana Power Gas Company (Gas) and over ninety percent of the voting stock of the taxpayer, Power. In 1936 Gas transferred all of its assets, held by it at a tax basis of $7,044,544, to Power in exchange for five percent, thirty-year debentures in the principal amount of $10,589,900 issued by Power. On the completion of this transfer of assets, the transferee, Power, was controlled by the stockholder of the transferor, Gas, so that this transaction was a “reorganization” within the definition of Section 112(g) (1) (C) of the Revenue Act of 1936, 49 Stat. 1648, 26 U.S.C.A.Int.Rev. Acts, page 858, applicable here. Inasmuch as Gas exchanged property solely for the securities of Power pursuant to that reorganization, no gain or loss was cognizable under Section 112(b) (4) of that Act by reason of the transaction. Under Section 113(a) (6), the pertinent “basis” section, Gas was required to hold the debentures of Power at the same basis at which Gas had held the property transferred. Under Section 113(a) (7) Power was required to hold the property acquired from Gas at the same basis at which it had been held by Gas.
After this transaction was consummated, Gas was subject to a tax on the difference between what it received on the debentures and the basis of the property it exchanged for the debentures.1 If Gas had received $10,589,900, the principal amount of the debentures, the difference between that amount and $7,-044,544, the basis of the property transferred to Power, would be $3,545,356 ultimately taxable to Gas as a result of the non-taxable exchange. On the other hand, Power takes the $7,044,544 basis of Gas as its own basis for the property acquired. Power must employ this basis to compute its depreciation and its gain or loss on any future sale. Therefore, if the property acquired by Power has an actual market value equal to the $10,-589,900 principal amount of the debentures, as the United States contends, there is a $3,545,356 difference between what can be gotten out of the property by Power and the tax basis of the property which is ultimately taxable to Power as a result of the non-taxable exchange.
It follows that if no tax adjustments be made, a tax on $7,090,712 ($3,545,356 on Gas + $3,545,356 on Power) may result from this non-taxable exchange. If this had been an ordinary taxable exchange, there could accrue a tax on only half that amount, $3,545,356, which would be imposed on Gas.
Power contends that it should be allowed to deduct yearly as discount, pursuant to Section 19.22(a)-18(3) (a) of T.R. 103, an amortized portion of the amount of $3,545,356, the difference between the principal amount of the debentures issued by it and the tax basis of the property acquired by it, to the end that a double tax may be avoided. Power’s argument is that the reorganization provisions were not intended to double the tax accruing from a nominally non-taxable exchange but only to postpone the recognition of the usual tax. *552The government’s reply to this assertion is that the statute allows only that which is interest in the classic, economic sense to be deducted as discount. Since Power exchanged its debentures for the property of Gas which in value equalled or exceeded the principal or face amount of the debentures, the government contends thát no such deductible discount arose.
Section 19.22(a)-18(3) (a) of Treasury Regulations 103, applicable in the years in question, provided that: “If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds.” In American Smelting & Refining Co. v. United States, supra, 130 F.2d at page 885, we held that under the Regulation the excess of the principal amount of, bonds over the fair market value of property for which the bonds were exchanged in a taxable transaction was deductible as discount. We said: “Thus, when the investor is paid the face amount of the bond at maturity, he is taxable for the difference between that sum and the "cost of the bond. Here the cost of the bond is the fair market value of the stock [given for the bond] at the time the corporate obligations were exchanged. To sustain the government’s contention, in view of these considerations, would be to say, in effect, that, on the same loan, the taxable ‘interest’ earned by the investor varies in amount and is computed as of a different time than the deductible ‘interest’ paid by the obligor.' We think that this not only distorts, unnecessarily, the ordinary incidents of a commercial transaction but also upsets the balance of the tax situation.” '
In Sacramento Medico Dental Building Co. v. Commissioner, 1942, 47 B.T.A. 315, the Board of Tax Appeals anticipatéd byway of dictum a Situation'similar to that presented by this case, saying at' page 329 of its opinion r “As petitioner [taxpayer] points out, if the basis for determining gain or loss upon the disposition of this property by petitioner had been held by us to be a sum considerably less than the face amount of the bonds issued by it in return for the property, as, for example, the amount bid for the property at the foreclosure sale or its fair market value at the time of such sale, then a strong' argument might be made that inequities would result from the disallowance of discount amortization, since, upon a later disposition of the property for a sum equivalent to the face amount of the bonds, a fictitious profit would arise, which could only be offset by a previously allowed deduction on account of discount.”
The reorganization provisions of the tax law under which this transaction was consummated were designed to postpone recognition of transactions between members of single economic units until there occurs a transaction outside the family circle.2 See, Helvering v. Cement Investors, Inc., 1942, 316 U.S. 527, 62 S.Ct. 1125, 86 L.Ed. 1649. Since corporate affiliates have been regarded as single economic units in formulating tax laws to govern this type of transaction, it is desirable to consider the tax impact of such a transaction as that at bar on the whole economic unit. Here, unless some adjustment be made the whole economic unit suffers a tax on double the amount that would be taxable if this were the usual taxable exchange. Although it has been said “as to double taxation, when, though seemingly unfair, the purpose is plain, courts will not interfere”, T. W. Phillips, Jr., Inc., v. Commissioner, 3 Cir., 1933, 63 F.2d 101, 102, no purpose to tax doubly is here apparent. Therefore, a “discount” deduction *553is properly allowable under our Smelting ruling and the Tax Court’s Sacramento dictum as a means of avoiding the double tax. The deduction must be allowed to preserve that “balance of the tax situation” which we considered important in the Smelting decision and which I think is of equal import here. Whether or not this is an “interest” expense in the classic sense should not be controlling in determining its deductibility as discount. The tax law requires that in this particular type of transaction Power carry the property acquired at a lower figure for tax purposes than the principal amount of the debentures issued in exchange. This figure, as I have said, is the one that must be used in ascertaining the depreciation deduction on the property and the gain or loss on its sale and, taxwise, is equally applicable in computing the discount on the issue of the debentures for which the property was exchanged. The difference in the principal amount of the debentures issued and the tax basis of the property acquired should therefore in my view be deductible by Power as discount.
I am aware that this view of the term “discount” might not meet the approval of classic economists; but we are dealing here with a living company, not with an example in a text book. We have here a tax basis, strictly imposed by the Revenue Act; and an inequitable result may be reached, and an integrated tax structure may be demolished if that basis is not applied in this situation.
The United States argues that, even though Power may obtain a refund on its 1940 and 1941 income taxes on the basis of the discount deduction, the third cause of action for a refund of 1941 excess profits taxes on this basis cannot be maintained because the court lacks jurisdiction to adjudicate this claim. Section 1346, Title 28 U.S.C., in specifying the jurisdiction of the district courts in suits for tax refunds, provides: “(a) The district courts shall have original jurisdiction, concurrent with the Court of Claims, of: (1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws, (i) if the claim does not exceed $10,000 or (ii) even if the claim exceeds $10,000 if the collector of internal revenue by whom such tax, penalty or sum was collected is dead or is not in oífice as collector of internal revenue when such action is commenced.”
In its third cause of action, Power alleges that payments on its 1941 excess profits tax were made on December 13, 1946 in the amount of $614,000, on May 24, 1948 in the amount of $151,487, and on June 22, 1948 in the amount of $85,-751, and on the basis of the discount deduction a refund of $71,070 is claimed on these payments of the 1941 excess profits tax. To sustain jurisdiction, Power alleges generally that the taxe? in issue were collected by a Collector of Internal Revenue “who is not now in office” and avers particularly: “At all times from July 6, 1933 to June 30, 1947 Lewis Penwell was Collector of Internal Revenue for the . District of Montana * * * Penwell resigned from the office of Collector of Internal Revenue for the District of Montana on or about June 30, 1947 and is not now in office as such Collector.” Since the excess profits tax claim was brought against the United States for more than $10,000, it is necessary to determine whether the amount in issue was paid by the 1946 installment. If it was, jurisdiction on the court below was conferred by Section 1346 because the 1946 payment was made to a collector not now in office. On the other hand, if the excess profits tax claim was paid by the 1948 installments, there was no jurisdiction in the court below because those- payments were not made to a collector not in office at the time of the suit.
In analogous situations it has been held that the actual overpayment of the tax is the significant factor jn dpteiunin*554ing the attributes of refund claims. In Lewis v. Reynolds, 1932, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293, the Supreme Court determined that a taxpayer was not entitled to a refund for a particular year until the entire tax for that year had in fact been overpaid. And in Blair v. United States ex rel. Birkenstock, 1926, 271 U.S. 348, 46 S.Ct. 506, 70 L.Ed. 983, it was held that the United States is not liable for interest until there actually has been an overpayment of taxes.
These decisions demonstrate that a tax may not be held to have been erroneously collected until there has been actual overpayment of the tax due for the ■ period in question. If this rule is not applicable in this case, it is indeed difficult to formulate a standard for resolving the issue. There would be no justification for regarding the first payment equal to the amount of the claimed refund as determinative when all the tax due has not been paid, and any apportionment of the refund over the various payments would seem to be equally unwarranted. It is my conclusion, therefore, that a district court has no jurisdiction of a refund claim in excess of ■$10,000 against the United States until there has been an overpayment of the entire tax due to a collector who is not in office at the time of institution of the suit.
In reaching this conclusion I am not unmindful of the fact that Section 1346 (a) (1), Title 28 U.S.C. was amended on July 30, 1954, 68 Stat. 589. The amendment abolished the requirement that the Collector be out of office at the time of institution of a suit for refund in excess of $10,000. However, I regard this change as jurisdictional rather than remedial; and therefore in no event can the amendment have any application to a pending action such as this. Amalgamated Ass’n, etc., v. Southern Bus Lines, 5 Cir., 1949, 172 F.2d 946, 947.
I would reverse the judgment of the court below as to the first two causes of action with the direction to enter judgment thereon in favor of Power. I would vacate the judgment • as to the third cause of action and direct the court below to dismiss that cause for want of jurisdiction.

. Gas did dispose of the bonds. The parties’ stipulation of fact number 7 says: “On November 20, 3945 plaintiff retired the aforesaid $30,589,900 principal amount of its 5% debentures originally issued in the said exchange of November 30, 1936, by making cash payment to the then holders thereof, The Chase National Bank of the City of New York and Bank of America National Trust and Savings Association, in the amount of $10,589,900, the full principal amount of said debentures.”

. “ * * * Congress, recognizing that certain types of ‘gains’ which are constitutionally taxable as income do not truly represent a change in the economic status of the taxpayer, and being desirous, too, of preventing the writing off of paper losses, has provided that the recognition of such gains and losses be postponed to some future date.” Jacobson and Johnson, “The Revenue Act of 1936: Pyramiding Gains and Losses Through ‘Tax-Free’ Exchanges,” 14 N.Y.U.L.Q. Rev* 59, 60 (1936).