American National Bank of Austin v. United States

• Decision Date: 18 February 1970
• Docket Number: No. 27301.,27301.
• Citation: 421 F.2d 442
• Parties: AMERICAN NATIONAL BANK OF AUSTIN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

421 F.2d 442 (1970)

AMERICAN NATIONAL BANK OF AUSTIN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 27301.

United States Court of Appeals Fifth Circuit.

January 19, 1970.

Rehearing Denied February 18, 1970.

COPYRIGHT MATERIAL OMITTED

Seagal V. Wheatley, U. S. Atty., Warren N. Weir, Asst. U. S. Atty., San Antonio, Tex., John O. Jones, Atty., Tax Div., U. S. Dept. of Justice, Fort Worth, Tex., Johnnie M. Walters, Asst. Atty. Gen., Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, William A. Friedlander, Louis M. Kauder, Elmer J. Kelsey, Attys., Tax Div., Dept. of Justice, Washington, D. C., Ted Butler, U. S. Atty., of counsel for appellant.

Buford P. Berry, J. W. Bullion, Dallas, Tex., Donald S. Thomas, Sander W. Shapiro, Austin, Tex., for appellee.

Before GEWIN, THORNBERRY and AINSWORTH, Circuit Judges.

AINSWORTH, Circuit Judge:

The issue presented in this case is whether certain transactions of taxpayer, a national bank, with various municipal bond dealers during the years 1962-1964 are correctly characterized as sale-repurchase transactions, as the District Court concluded,¹ or whether they should be held to be secured-loan transactions for tax purposes, as the Government contends. If they were sale-repurchase transactions, the municipal bond interest collected by taxpayer during the years 1962-1964 should have been excluded from taxpayer's gross income as interest received on state governmental obligations owned by taxpayer. Int.Rev.Code of 1954, § 103(a) (1). On the other hand, if they were secured-loan transactions, this interest should have been included in taxpayer's gross income as taxable income realized by taxpayer from bond dealers for advancing funds on their behalf. Int.Rev.Code of 1954, § 61(a) (4).

This is a tax refund suit brought by taxpayer, the American National Bank of Austin, against the United States to recover income taxes and interest assessed against it and collected by the Commissioner of Internal Revenue in the amount of $788,031.77 for the taxable years 1962, 1963, and 1964. After a nonjury trial at which oral testimony and exhibits were received, together with a stipulation of facts and attached exhibits, the District Court agreed with taxpayer's contentions and ordered the refund. From this judgment the Government appeals.

During the years 1962-1964 taxpayer received income in the form of interest it collected or accrued on municipal bonds² while these bonds were in its possession. In its income tax returns for these years taxpayer excluded this interest from its gross income and computed its tax liability in reliance upon section 103(a) (1) of the Internal Revenue Code of 1954, which provides that a taxpayer's gross income does not include interest on municipal bonds.³ The Commissioner determined that taxpayer was not entitled to the section 103(a) (1) income exclusion on the ground that taxpayer never acquired ownership of the bonds. Accordingly, he found deficiencies in taxpayer's reported tax liability for the years here in issue. Taxpayer paid the deficiencies and made refund claims asserting that the Commissioner's determination was erroneous. This suit followed the Commissioner's disallowance of taxpayer's claims.

Since sale-versus-loan cases turn upon their own particular facts, United States v. Ivey, 5 Cir., 1969, 414 F.2d 199, the decided cases⁴ which have considered the precise question presented here offer little directional guidance toward a proper resolution of this case. We therefore take the route of ad hoc exploration through an expanse of essentially undisputed facts, see United States v. Winthrop, 5 Cir., 1969, 417 F.2d 905, to find that taxpayer was not entitled to the section 103(a) (1) income exclusion. The judgment appealed from must consequently be reversed.

I.

Taxpayer is a national banking association.⁵ Its banking house is located in Austin, the state capital of Texas, where practically all bond issues floated by political subdivisions of that state are examined, certified, and executed. Taxpayer's business in connection with municipal bonds began in the late 1930's when many Texas municipalities had bond issues outstanding which they desired to refund with new issues. Under then existing law, these municipalities could not refund issues piecemeal, but had to refund entire issues at one time. As a condition precedent to refunding, someone, a single concern or syndicate, had to acquire all the bonds in an issue.

When taxpayer began obtaining bonds to be refunded, it opened in its general ledger an account styled "Refunding Bonds Purchased." Taxpayer maintains this account as an asset account in which a balance is struck daily showing the book balance of bonds on hand at the close of the business day. Although taxpayer now engages in few transactions involving refunding, the account retains its original name, and into it are entered as assets all bonds that have come into taxpayer's possession as a result of the transactions here in issue.⁶ Aided by its location, taxpayer has vigorously pursued its municipal bond activity and now engages in transactions involving from 50 to 80 per cent of all bonds issued by Texas political subdivisions. During the years 1962-1964 taxpayer concluded with bond dealers approximately 4500 transactions involving issues of municipal bonds in bearer form. Approximately 90 per cent, by dollar volume, of taxpayer's bond transactions involve new issues. The remainder of its transactions involve transfers from dealers rather than from issuing authorities.⁷

The distribution of a new issue of municipal bonds in Texas is commenced by the issuing authority when it publishes the official notice of sale. Such a notice generally will include statements of the amount of the issue to be floated, types of bids and interest rates, requirements regarding a good-faith deposit by the successful bidder, and the place designated for delivery of the bonds. As a general rule, bonds are made deliverable to taxpayer's banking house. If taxpayer's banking house is so designated, taxpayer first becomes involved in the distribution of an issue when the issuing authority notifies it of the successful bidder and authorizes it to deliver the bonds to the purchaser against payment of the specified bid price. The depositary bank of the issuing authority then advises taxpayer regarding transmittal to the depositary of the proceeds derived from the bond flotation. The bonds, following their approval and certification by the appropriate state officers, are then delivered to taxpayer. Upon receiving the bonds, taxpayer performs numerous functions on behalf of the issuing authority and the successful bidder-dealer. For example, it examines the bonds for printing errors, determines whether the correct number of coupons have been attached, obtains an opinion letter on the validity of the issue, and receives an undated receipt for payment of the purchase price to the issuing authority by the bond dealer.

Taxpayer concluded its new-issue transactions with bond dealers in either one of two ways during the years in issue. First, the successful bidder might pay taxpayer the purchase price of the bonds for transmittal to the depositary bank of the issuing authority. In this situation taxpayer would simply transmit the payment to the depositary and deliver the bonds to the dealer or at the dealer's order. For its services taxpayer would receive from the dealer a handling charge of 25¢ per $1,000 of par value and reimbursement for the expenses, such as insurance, postage, and wires, it had incurred.⁸ Secondly, the successful bidder and taxpayer might agree that taxpayer's funds, rather than the bidder's funds, would be transmitted to the depositary of the issuing authority in payment of the purchase price bid by the dealer.

During the years 1962-1964 dealers occasionally wrote to taxpayer to request that taxpayer "make payment" to the issuing authority for bonds the dealers had been awarded and "accept delivery for our account" or "take the bonds up for our account." Usually, however, communications between the parties were by telephone. Taxpayer and the dealers made no written agreements regarding their various rights and obligations with respect to new issues. All these agreements, however, were the same.

Upon receiving the successful bidder's notification, taxpayer, if satisfied with the credit rating of the issuing authority, would pay with its own funds the full bid price to the authority and retain the bearer bonds in its possession. Taxpayer normally would agree to such arrangements with dealers if the issue was rated "BAA" or higher. Relying upon this rating, taxpayer would make no credit investigation of the dealer obligated to buy the bonds.⁹ The dealer would transmit no payment to the issuing authority, receive no payment from taxpayer, and execute no debt instrument of any kind.¹⁰ After paying the issuing authority, taxpayer would send to the successful bidder a form notice captioned "The following securities were purchased today," which fully identified the purchased bonds.

Generally the official notice of sale would provide for a good-faith deposit by the successful bidder. At one time the notice normally specified that this deposit would be applied against the purchase price of the issue. During the years 1962-1964, however, the issuing authority in approximately 90 per cent of the new-issue transactions in which taxpayer was involved returned the successful bidder's deposit to the bidder upon receipt of payment from taxpayer. In approximately 9 per cent of these transactions the issuing authority sent the bidder's check to taxpayer. In approximately 1 per cent of the transactions the issuing authority negotiated the bidder's check in partial payment of the purchase price. When the issuing authority either sent the check to taxpayer or negotiated it, taxpayer made the dealer whole.

Taxpayer does...