Court Opinion

ID: 4484049
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:28.751986+00
Date Added: 2024-06-11T11:33:37.423953
License: Public Domain

Dawson, J., concurring: Basically I agree with the rationale of the majority opinion. I think a nongift, no- or low-interest transfer of the use of the value of money between a lender and a borrower requires a realization of a taxable benefit by the borrower if the lender can, at the moment of transfer, reasonably expect to receive a quid pro quo in exchange. In the circumstances present here, I also think Mr. Greenspun is entitled to an offsetting deduction under section 163(a), notwithstanding the rather unequivocal language of that section. I would go a step further than the majority and expressly overrule Dean v. Commissioner, 35 T.C. 1083, 1090 (1961), to the extent it holds that “an interest-free loan results in no taxable gain to the borrower.” As I see it, this statement is too broad and the principle established in Dean is destined for ultimate reversal by the Courts of Appeals. Moreover, I doubt that many taxpayers have relied on this principle in Dean becáuse it was a departure from prior law and the discussion of the issue was rather cryptic. It is indeed an unusual circumstance where a lender trusts an employee or shareholder with a large amount of money. It is even rarer to find a corporation or business that will place such assets beyond its use for a long period of time without receiving reasonable value in return for the use of such money. Most businesses are not liquid enough to make any, or many, interest-free or low-interest loans. The usual recipient is a highly paid, key employee or the owner of a closely held corporation. While I usually respect the principle of stare decisis, I think we are free of its numbing effect here and we should not permit it to dictate our answer. See the rationale of the concurring opinion of Judge Opper (joined by three other judges) in Dean v. Commissioner, 35 T.C. at 1090-1091. A reversal now of this stated principle in Dean will not automatically designate all interest-free or low-interest loans as income producing transactions. In a nongift situation, each taxpayer will have an opportunity to prove that the loan was a product of skillful negotiation, a windfall, or something else that fits within our opinions in the Husted, Pellar, Aspegren, and Hunley cases cited on page 944 of the majority opinion. Fay, Simpson, Irwin, and Chabot, JJ., agree with this concurring opinion. Goffe, </., concurring: I concur only in the result reached in the majority opinion. Even though Dean v. Commissioner, 35 T.C. 1083 (1961), has apparent disabilities, I conclude that it should be followed. We should decline to fashion a set of court-made rules in an area susceptible of and ripe for legislation, and we should not extend Dean by expressing views on the deduction side of petitioners’ tax liabilities. I agree with the majority that Dean should not be overruled and that its application to the facts herein requires a holding that petitioner realized no income from the low-interest loan. However, my agreement with the majority opinion does not extend to its gratuitous implication that petitioner would be entitled to a deduction for interest paid. That implication is unnecessary because the majority does not overrule Dean. To hold that petitioner paid additional interest to Toolco would be to push further the theoretical but not actual predicate of Dean. Such an extension portends further extensions. If petitioner is deemed to have paid additional interest to Toolco, as the majority seems to hold, then Toolco is deemed to have received additional interest income. Another taxpayer in a position similar to Toolco, because of the theoretical receipt of additional interest income, could lose its status as a small business corporation or could be deemed to be a personal holding company. This is not the occasion to introduce such uncertainties into an area of law which is long established but which could be subject to legislative change. To overrule Dean at this time would fly in the face of the actions Congress has taken with respect to regulations which the Treasury sought to adopt in 1975 to tax other fringe benefits. In 1975, the Treasury Department issued a discussion draft of proposed regulations which contained a number of proposed rules for changing prior administrative practice. The proposed rules treated some employee fringe benefits as taxable compensation. The discussion draft was withdrawn on December 28, 1976. Those in favor of withdrawal felt that the Commissioner’s positions and practices in the fringe benefit area were of such long-standing duration that they carried the force of law. Consistent with that position is the fact that the Commissioner acquiesced in Dean for 12 years.1 Then, in 1977, Congress began to review the tax treatment of fringe benefits. When it became pressed for time, it issued a moratorium on the issuance of new regulations in this area. That moratorium was later extended until 1980. A task force was created by the Committee on Ways and Means to study the fringe benefit area and make recommendations to the committee. The task force concluded that the area was so important and complex that it could only present a discussion draft bill covering general concepts, as a starting point for further consideration by the committee. The committee also requested recommendations from the Department of the Treasury. In light of this legislative activity in the fringe benefit area and the congressionally imposed moratorium on administrative changes of policy in the fringe benefit area, it would be inappropriate to overrule Dean at this time, as it deals with a form of employee or shareholder fringe benefit, the low- or no-interest loan. A very thin and ill-defined line separates judicial construction from “judicial legislation.” Overruling Dean at this time would cross over the line into judicial legislation. In this case, we should heed the following words of the Supreme Court: Courts properly have been reluctant to depart from an interpretation of tax law which has been generally accepted when the departure could have potentially far-reaching consequences. When a principle of taxation requires reexamination, Congress is better equipped than a court to define precisely the type of conduct which results in tax consequences. When courts readily undertake such tasks, taxpayers may not rely with assurance on what appear to be established rules lest they be subsequently overturned. Legislative enactments, on the other hand, although not always free from ambiguity, at least afford the taxpayers advance warning. [United States v. Byrum, 408 U.S. 125, 135 (1972).] Also, to overrule Dean would conflict with what we pointed out in a Court-reviewed opinion only 2 years ago; i.e., the courts have uniformly rejected every attempt by the Internal Revenue Service to subject the making of non-interest-bearing loans to income or gift taxes. Crown v. Commissioner, 67 T.C. 1060, 1064 (1977), affd. 585 F.2d 284 (7th Cir. 1978). As we stated in the final paragraph of Crown v. Commissioner, supra at 1065: “Accordingly, if the scope of the gift tax is to be expanded to encompass such permissive use, we think it should come through congressional action, and not through unnecessarily broad judicial interpretation.” There are always going to be some economic benefits that flow between related parties which escape taxation. Drawing accounts of shareholders in closely held corporations are common. Usually, they are “flushed out” prior to the end of the taxable year by an offset against a bonus or by-repayment. The Commissioner has, with mixed success, frequently determined that a corporation's advances to its shareholders were, in fact, dividends not loans. To hold that such advances result in receipt of income because no interest is charged goes more than one step further. If Dean were overruled, the Commissioner could charge a shareholder with dividend income during the year if the advances were repaid during the taxable year. Another unanswered question would present itself if we overruled Dean; i.e., the timing of the benefit conferred upon the shareholder. If no interest or interest at a rate lower than a commercial rate is involved, the benefit is conferred at the time the deal is struck between the parties or the time at which the shareholder withdraws funds from the corporation. But interest is á charge paid for the use of money and can be allocated to the appropriate taxable years over the life of the loan to prevent a material distortion of income. Sandor v. Commissioner, 62 T.C. 469 (1974), affd. 536 F.2d 874 (9th Cir. 1976); Rernik v. Commissioner, 66 T.C. 74 (1976), affd. 555 F.2d 634 (7th Cir. 1977). For the foregoing reasons, I agree with the majority that Dean should not be overruled. As for the application of Dean to the instant case, it seems appropriate to point out a distinction between the facts present in Dean and those found herein. Dean did not involve compensation as does the instant case, but, instead, shareholder distributions from a closely held corporation. Compensation is taxable under the broad precepts of section 61 and the courts generally hold it taxable to the recipient if an employment relationship is found to exist. By contrast, the taxability of distributions to shareholders is based upon the more specific provisions of subchapter C.2 Nevertheless, as the majority has correctly held, the principles of Dean mandate a decision that petitioner realized no income through his receipt of the low-interest loan. Tannenwald, Sterrett, and Wiles, JJ., agree with this concurring opinion.   In the instant case, the parties struck their bargain before the Commissioner published his nonacquiescence in Dean. 1973-2 C.B. 4.    Also, note that Congress has specifically legislated by imputing interest between parties in certain deferred payment contracts. Sec. 483,1.R.C. 1954.