Court Opinion

ID: 7915522
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:10:28.530647+00
Date Added: 2024-06-11T16:32:47.502606
License: Public Domain

Hoch, J.
(dissenting): Being unable to concur in this decision, I shall state briefly my principal reasons for dissent.
While the facts of the instant case are somewhat involved, the question presented may be simply stated. Under our income-tax law, the pertinent provision of which appears in the court’s opinion, may a corporation, in computing its net taxable income, deduct the interest paid on indebtedness to stockholders for loans made by them for the purpose of proper capital expenditures for plant and facilities actually used in carrying on the business of the, corporation? It is conceded that such interest on indebtedness to nonstockholders is deductible, but the court holds it is not deductible where the loans *424were made to the corporation by stockholders. The state does not contend that the expenditures here involved were not proper and in every way legitimate. It does not deny that such plant facilities were necessary in the appellant’s business or that they form a large and essential part of its income-producing property. The construction which we here give the statute will have general application and its soundness must be tested accordingly.
The court holds that the word “expenditures” as used in the statute is synonymous with “expenses”; that expenditures for plant and equipment are not “ordinary” expenditures for “actually carrying on the business” and that the statute was only intended to permit deduction for interest on loans advanced by stockholders to pay ordinary operating expenses. General dictionary authorities are cited wherein the terms “expenditures” and “expenses” are listed as synonyms, though the opinion states that certain textbooks on auditing and accounting appear to differentiate between the terms. The differentiation seems to me to be both plain and sound, and since the question at issue lies directly in the field of accounting I see no reason for discounting textbook authorities in that field. Moreover, the general listing of words as synonyms does not, of course, necessarily mean that they are always interchangeable. The word “expenditures” is a broad term, applying to all outlays. Such outlay may be, in the instant case, either for capital investment or to meet operating costs. The word “expenses” is generally used to apply only to outlays to meet current operating costs. And the word “ordinary” is by no means limited to a frequently recurring expenditure. An expenditure for needed plant, whether incurred at the inception of the business of the corporation or during later operation is certainly “ordinary”—it is not only “ordinary” but it is essential to “actually carrying on the business of the corporation” successfully. (Welch v. Helvering, 290 U. S. 111, 78 L. Ed. 212.)
But let us not stop with mere formal definitions. In order to test the soundness of constructions of a statute, we need to look at the intent and spirit of the law. What is the purpose and intent of the income-tax law? The obvious purpose—in the case of a corporation—is to levy a tax on the net income available for distribution in dividends to stockholders, after deducting from gross income the costs necessarily incurred in producing the income. Where a corporation borrows money either from stockholders or nonstockholders, for creation of the plant necessary to carry on the business, interest *425on the indebtedness must of course be paid before any funds are available for dividends. That is equally true whether the debt be to a stockholder or to a nonstockholder. A stockholder who has loaned money to the corporation is a creditor—nothing more nor less—to the extent of the bonds which evidence the indebtedness. As a bondholder, he has the disadvantages, as well as the advantages, under the law, of a creditor as compared with a stockholder. Furthermore, he must report in his individual income-tax return the interest received on his bond. Certainly an expenditure which a corporation has had to make for interest on its debts does not then represent “ability to pay” taxes.
Let me pose a simple case to illustrate where the majority opinion would lead. A corporation—let us say a pipe-line company, as in the instant case—finds profitable operation impossible on account of inadequate plant facilities. Let us say its only chance to produce a net income is through the enlargement of its compressor stations. It seeks a loan for the purpose but investors generally are skeptical and no outside loans are found available. A stockholder or a group of stockholders, with greater faith in the company’s possibilities, are willing to loan the money to the corporation, which will give them the priority status of creditors to the extent of the loan, but are not willing to invest merely as stockholders through new stock issues. Let us suppose that the year after the new compressors are installed the increase in income is just enough to pay the interest on the loan. Obviously the company does not yet have any net income out of which income tax can be paid. It may just be “breaking even” or be actually “in the red.” But the interpretation here adopted would deny deduction for the interest and compel the company to pay income tax on the interest it was required to pay on its debt. I don’t think the legislature intended such a result. In my opinion the plain and proper intent was to allow no deduction for interest payments to stockholders, unless the expenditures were for legitimate purposes within the normal scope of the company’s business. The purpose was to prevent collusive tax evasions by interest payments to stockholders on alleged loans not made for “ordinary expenditures,” either for plant or for operation, incident to actually carrying on the business. Any other interpretation leads to taxing an “income” which does not in fact exist.
It may be noted in passing that the legislative history of the statute at issue shows that the original bill contains the word expenses *426but that upon the recommendation of the Senate committee which reported the measure for passage the word expenses was struck out and the words “expenditures for actually carrying on the business” substituted therefor. (Senate Journal for March 15, 1937, p. 475.)
I shall not here discuss the constitutional question. In my opinion, doubt as to validity of the statute as construed by the court does not arise because of any lack of legislative power to apply, within reason, a different rule to stockholders and nonstockholders. It arises from the fact that the statute, as construed, would attempt, in cases, to impose a tax on “net income,” when in fact there is no net income.