Safe Deposit & Trust Co. of Baltimore v. Magruder

• Decision Date: 19 July 1940
• Docket Number: Civ. No. 420.
• Citation: 34 F. Supp. 199
• Parties: SAFE DEPOSIT & TRUST CO. OF BALTIMORE v. MAGRUDER, United States Collector of Internal Revenue for District of Maryland.
• Court: U.S. District Court — District of Maryland

34 F. Supp. 199

SAFE DEPOSIT & TRUST CO. OF BALTIMORE v. MAGRUDER, United States Collector of Internal Revenue for District of Maryland.

Civ. No. 420.

District Court, D. Maryland.

July 19, 1940.

Venable, Baetjer & Howard, Charles McHenry Howard and Stuart S. Janney, Jr., all of Baltimore, Md., for plaintiff.

Arthur L. Jacobs, Sp. Asst. to Atty. Gen., and G. Randolph Aiken, of Baltimore, Md., Asst. U. S. Atty., for defendant.

COLEMAN, District Judge.

This is a suit for the refund of $42,810.30, representing an alleged overpayment of income taxes, plus interest, by the plaintiff for the year 1935.

Plaintiff's right to recover depends upon whether it shall be found to be "a bank or trust company * * * a substantial part of whose business is the receipt of deposits, * * *" within the meaning of Section 117(d) of the Revenue Act of 1934, C. 277, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Code, § 117 note. If the plaintiff is such a company, it is entitled, in computing deductions from its taxable income for the year 1935, to take into account losses from sales of bonds amounting to $286,691.37. These losses were disallowed by the Collector on the ground that "receipt of deposits" was not "a substantial part" of plaintiff's business.

Section 117(d) of the Revenue Act of 1934 is as follows: "Limitation on capital losses — (1) Corporations. Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the United States or of any State or Territory, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale (except such portion of the loss as does not exceed the amount, if any, by which the adjusted basis of such instrument exceeds the par or face value thereof) shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses."

There is no dispute as to the relevant facts, most of them having been stipulated into the case by agreement of the parties. The precise point presented has not heretofore been adjudicated, and the law has been amended by substituting other provisions for the one here under review. Act of June 29, 1939, 26 U.S.C.A. Int.Rev.Code, § 117.

In due course plaintiff filed its Federal income tax return for 1935 and paid the tax liability reported therein. The Commissioner of Internal Revenue, however, determined that there was due as additional tax for that year the sum of $42,408.47, together with interest in the amount of $7,004.37, or a total of $49,412.84, which amount the plaintiff paid on January 12, 1939, and on February 4 of the same year filed a claim for refund in the amount of $45,930.76, which was rejected on December 6, 1939, and the present suit followed.

The plaintiff is a Maryland corporation. Its principal business is the management of trusts and estates, and acting as fiduciary or agent for individuals and corporations. It also acts as receiver for corporations, and as transfer agent, registrar and depositary under corporate reorganizations, etc. In the course of its business it receives deposits of money of the following types: (1) deposits of funds from trusts and estates that it manages; (2) deposits made for special purposes by individuals; (3) sinking fund deposits under bond indentures; (4) deposits for the payment of interest, dividends and principal on corporate bonds and stocks; and (5) deposits received as fiscal agent for various individuals and corporations.

The Company received its original charter in 1864 by Act of the Maryland Legislature, Laws 1864, c. 242, which incorporated it as a safe deposit company, the present day type of trust company being then unknown. By an amending act in 1868, Laws 1868, c. 394, the Company was granted the power to accept and execute trusts. Although by this amendment it had no power to do a banking business, this restriction was annulled by the Maryland law relating to banks and trust companies adopted in 1910 (Annotated Code of Maryland, Art. 11, Sec. 46), whereby the powers of trust companies incorporated under the provisions of this new law included all such powers as shall be usual in carrying on the business of banking, including "receiving deposits of money upon which interest may be paid; * * *" and any other transactions usual to banking; including "purchasing, investing in and selling stocks, bills of exchange, bonds and mortgages and other securities; * * *." Section 51 extended these powers and provisions to trust companies that had been previously incorporated under Maryland law. Thus, the prohibition against transacting a banking business (except the power to issue notes to circulate as currency) was repealed by the Act of 1910. Furthermore, so far as the power to receive deposits and to make a profit from them is concerned, this power was given to the Company by Section 6 of its original charter of 1864 above referred to.

There are really two questions: First, is the present plaintiff the kind of trust company contemplated by the Act of 1934? Second, even if it is, did the amount of deposits received by it in the year 1935 constitute a substantial part of its business?

In order that these questions may be correctly answered it is necessary, initially, to understand the background of the Revenue Act of 1934. This legislation introduced a new method of treating capital gains and losses for income tax purposes. Prior thereto, a corporation was permitted to offset capital losses against ordinary income. The section here under review changed this ruling and provided that corporations should be limited in the amount of allowable deductions for capital losses up to the amount of capital gains plus $2,000. When the bill was originally introduced in the House it did not contain any exception relating to banks or trust companies. However, the Senate Finance Committee wrote into it the provision here under review, to the effect that banks and trust companies, a substantial part of whose business is the receipt of deposits, should be entitled to deduct the full amount of losses resulting from the sale of bonds, excluding premiums. The following excerpt from the report of this Committee is very pertinent to our present inquiry: "Third, in the case of the general limitation provided in the House bill that capital losses should only be allowed to the extent of the capital gains, your committee recommends that $2,000 of such excess of losses may be charged off from ordinary income. This protects the little taxpayer with little or no capital from being assessed a tax which he may be unable to pay. Your committee also recommends, in view of the necessary dealings of the banks and trust companies in bonds and other evidences of indebtedness of corporations and governments, that such banks and trust companies be permitted to deduct from ordinary income the loss resulting from the sale of such obligations in an amount not greater than the difference between the sale price and the par or face value." Senate Report No. 558, 73d Congress, Second Session, pages 12 to 13.

This is the extent of the light thrown upon the precise question here in issue, by what transpired in the Congress preceding the passage of the law. The reason for the exception was a recognition of the fact that banks and trust companies were accustomed to invest their deposits in Government and other bonds, which had greatly...