Court Opinion

ID: 9446588
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:59:00.382859+00
Date Added: 2024-06-11T17:30:42.305730
License: Public Domain

WISDOM, Circuit Judge
(dissenting).
With due deference to my learned brothers, I dissent from the holding that notes receivable discounted at a bank are “borrowed capital” for purposes of the Korean War excess profits tax.
The persuasive force of the majority opinion, if I may say so, comes from a proper distrust of broad, handed-down rules.1 *Courts should reach for realities instead of a rubric. But in this case, as in all cases where the decision turns on “the realities”, the question is — what realities ? To my mind, there is nothing realistic about treating a sale as a loan, an asset as a liability, and a contingent liability as an “outstanding indebtedness” within the meaning of the tax term "“borrowed capital”.
The hard cold truth is that the taxpayer sold (discounted) customers’ notes receivable on the taxpayer’s unrestrictive endorsement with recourse. There is nothing in the record to show that the taxpayer retained any title or attached any strings to the notes. Such a sale has certain legal consequences, whatever the parties may have thought or whatever thoughts may be read into their minds ex post facto, for the taxpayer and the bank were careless — or careful— enough not to state their intentions in a written agreement. The consequence of selling commercial paper is that the makers continue to owe the debt on the notes and the indorser (taxpayer) is not liable except secondarily, if and when a maker defaults. As a practical matter, Burford-Toothaker was not and never would be liable for more than a small fraction of the indebtedness due on the notes. To say, therefore, that the taxpayer “borrowed” the full amount of the indebtedness due on the notes is simply not descriptive of what happened.
The majority of the Court and the taxpayer do not deny that “on the surface of things” the taxpayer’s liability “was secondary and hence contingent”. It is urged, however, that the bank and the taxpayer both treated the transaction as “the lending of money”. It seems to me that, in the absence of a written agreement, the evidence needed to contradict the usual effects of discounting commercial paper should be clear and overwhelming. The trial judge found that the taxpayer had failed to support its contention by its evidence. I read the record as showing more evidence of a sale than of a loan.
The taxpayer had reached the limit of its credit at the bank, under Alabama banking regulations.2 The bank could handle the transaction only if it were not treated as a loan or as an extension to credit to the taxpayer. The bank there*897fore credited to the taxpayer the full amount of the indebtedness on the notes, indicative of a purchase rather than a loan. The taxpayer’s actions were ambiguous and inconsistent. The trial judge found that the taxpayer’s books “did not show any liability to the bank”. The taxpayer’s accountant testified that the discounted notes were current liabilities because, though the customers were primarily liable to the bank, legally they were not actually liable; the taxpayer was actually liable, though only secondarily liable legally. Overlooking the double-talk, the fact is that on monthly statements to Caterpillar Company and on federal income tax returns the accountant showed the discounted notes as an offset or as a reduction of notes receivable — an asset. In the text of the report attached to the annual statements the discounted notes were treated as an asset. Caterpillar required its dealers to show discounted notes as an asset, an offset to notes receivable.
The fact that the bank required Bur-ford-Toothaker regularly to remit the amounts paid or due by the makers, and in some other respects looked to Burford to service the notes, should come as no surprise. The bank was in a position to require Burford to meet any conditions it imposed. The taxpayer has no complaint. The taxpayer converted its customers’ notes receivable into cash and received 2% for its services as a collector for the bank. There is nothing unusual about this sort of arrangement. And it proves only that Burford-Toothaker collected for the bank (to the advantage of both) and was a conduit between the makers and the bank.
In final analysis, the case turns on the intention of Congress. No doubt Congress might have concocted an excess profits tax law in which “borrowed capital” would have been defined as “the amount of the taxpayer’s outstanding liability”. Instead, Congress chose a narrow definition of obligation. Congress defined “borrowed capital”, in pertinent part as “the amount of the outstanding indebtedness * * * of the taxpayer”. Section 439(b) (1), Code of 1939. At the time Congress adopted the Korean excess profits tax a large number of cases had held, with respect to the excess profits tax of World War II, that: “The term indebtedness, as used in the Revenue Act, implies an unconditional obligation to pay * * * While the sum of money may be payable upon a contingency, yet in such case it becomes a debt only when the contingency has happened, the term ‘debt’ being opposed to ‘liability’ when used in a sense of an inchoate or contingent debt”.3 Congress liberalized the Korean War excess profits tax in several respects, but not to the point of permitting as a credit for “borrowed capital” contingent liabilities or other uncertain and loose obligations that would throw the door wide open to subterfuge.
The evidence is clear that by oral agreement Burford-Toothaker was obligated to perform certain services for the bank. But the taxpayer’s only legal liability on the notes discounted was contingent. I submit that it is a figure of speech, but only a figure of speech, unrelated to the realities in this case, to call these obligations “borrowed capital”.

. The majority opinion contends that the government has “an unrealistic disregard of the practical nature of the transaction” and “a dogged insistence on the rubric often announced that ‘a contingent obligation may be a liability, but it is not a debt,’ Guardian Investment Corp. v. Phinney, 5 Cir., 1958, 253 F.2d 326, 329, as well as the notion that the obligation, if contingent, becomes a debt only when the duty to pay becomes absolute”.

. Banking laws of the State of Alabama restrict outright loans on the Borrower’s note to 10% of the capital'and surplus of the bank.

. Gilman v. Commissioner, 8 Cir., 1931, 53 F.2d 47, 50, 80 A.L.R. 209. See also Canister Co. v. Commissioner, 3 Cir., 164 F.2d 579, certiorari denied 333 U.S. 874, 68 S.Ct. 904, 92 L.Ed. 1150; C. L. Downey Co. v. Commissioner, 8 Cir., 172 F.2d 810; Pacific Affiliates, Tnc. v. Commissioner, 18 T.C. 1175, 1204-1205, affirmed per curiam, 9 Cir., 224 F.2d 578, certiorari denied 350 U.S. 967, 76 S.Ct. 437, 100 L.Ed. 840.