First Nat. Bank v. United States, J-71.
| Decision Date | 03 March 1930 |
| Docket Number | No. J-71.,J-71. |
| Citation | 38 F.2d 925 |
| Parties | FIRST NAT. BANK OF CHICAGO v. UNITED STATES. |
| Court | U.S. Claims Court |
The only question involved in this suit is whether interest paid by a joint-stock land bank on its joint-stock land bank bonds, the proceeds of which are used to make loans to farmers, under the provisions of the Federal Farm Loan Act of July 17, 1916, on the security of approved first mortgages as defined in said act, is deductible in computing the taxable income of such joint-stock land bank under section 234(a) (2) of title 2 of the Revenue Act of 1921 (42 Stat. 254).
This case having been heard by the Court of Claims, upon a stipulation of facts, signed on behalf of plaintiff by its attorney, Harold V. Amberg, and on behalf of the defendant by Assistant Attorney General Herman J. Galloway, and the evidence, the court makes the following special findings of fact:
1. At all times herein mentioned, the plaintiff, the First National Bank of Chicago, was and now is a national banking association organized and existing under and by virtue of the laws of the United States of America, engaged in the business of banking, and having its principal office at 38 South Dearborn street, city of Chicago, county of Cook, state of Illinois.
2. On or about March 14, 1923, plaintiff filed with the collector of internal revenue for the First district of Illinois a tentative consolidated corporation income and profits tax return for the calendar year 1922, said return disclosing an estimated consolidated net income of $3,482,004.88 and an estimated income and profits tax liability of $435,250.61. On or about June 13, 1923, plaintiff filed a completed consolidated corporation income and profits tax return for the calendar year 1922, said return consolidating the income of the plaintiff corporation and the following affiliated corporations:
First Trust & Savings Bank, an Illinois corporation, Chicago, Ill.
First National Investment Company, now First-Chicago Corporation, an Illinois corporation, Chicago, Ill.
National Safe Deposit Company, an Illinois corporation, Chicago, Ill.
First Trust Joint-Stock Land Bank of Chicago, a joint-stock land bank organized under the Federal Farm Loan Act of 1916, with its principal office in the city of Chicago, Ill.
First Trust Joint-Stock Land Bank of Dallas, a joint-stock land bank organized under the Federal Farm Loan Act of 1916, with its principal office in the city of Dallas, Tex.
Such consolidated return disclosed a net income of $3,482,004.88 and a total tax liability of $435,250.61.
In computing said net income the plaintiff deducted the amount of $78,807.80 as being interest paid during the year 1922 on joint-stock land bank bonds of the First Trust Joint-Stock Land Bank of Chicago and the First Trust Joint-Stock Land Bank of Dallas, but said deduction was disallowed by the Commissioner of Internal Revenue.
3. Plaintiff paid to said collector of internal revenue said amount of $435,250.61 as follows:
March 15, 1923 .......................... $108,812.65
June 13, 1923 ........................... 108,812.66
September 15, 1923 ...................... 108,812.65
Credit in 1926, ITA 19366 (overassessment
1919) ................................. 49,827.89
Credit in 1926, ITA 19366 (overassessment
1920) ................................. 53,789.97
May 22, 1926 ............................ 663.65
June 1, 1926 ............................ 4,531.14
__________
435,250.61
4. Subsequent to the filing of said completed consolidated return, plaintiff, on or about March 5, 1924, filed with the collector of internal revenue at Chicago, Ill., a claim for credit, and on or about March 12, 1925, filed a claim for refund.
On or about November 11, 1927, the aforesaid claim for refund was rejected and the aforesaid claim for credit was partially allowed in the amount of $4,466.53, but this allowance was not based upon any ground set up or alleged in this suit.
Plaintiff's total tax liability for the year 1922 was redetermined to be $430,784.08, which amount is less than the tax previously paid by $4,466.53. A certificate of overassessment was issued therefor, and the said amount of $4,466.53 was refunded on Schedule IT; 27612.
5. On or about November 25, 1927, plaintiff filed a claim for refund in the amount of $9,124.70 based upon the disallowance as a deduction from income of interest paid by the First Trust Joint-Stock Land Bank of Chicago and the First Trust Joint-Stock Land Bank of Dallas.
In the determination of taxable net income for said year the Commissioner of Internal Revenue allowed as a deduction, in respect of certain intercompany transactions in connection with interest on said joint-stock land bank bonds, the amount of $5,810.25 which item plaintiff concedes is not deductible provided the interest paid by said joint-stock land banks on their outstanding joint-stock land bank bonds is held to be a deductible item.
Said claim for refund was denied by the Commissioner of Internal Revenue by letter dated February 14, 1928, for the reasons set forth in said letter as follows: "It is held that farmers' first mortgage notes executed to joint-stock land banks are issued under the provisions of the farm loan act of 1916, that they are securities in the contemplation of section 213(b) (4) (b) of the Revenue Act of 1921; that they were acquired by purchase, and that the interest on bonds issued to furnish proceeds for their purchase is interest on an indebtedness incurred to purchase or carry obligations or securities; the interest upon which is wholly exempt from taxation under (Title II of the Revenue Act of 1921) and as such is not deductible as an expense."
6. The alleged interest expense was incurred as hereinafter more particularly shown:
The First Trust Joint-Stock Land Bank of Chicago and the First Trust Joint-Stock Land Bank of Dallas, which were organized under the Federal Farm Loan Act of July 17, 1916, issued to and/or had outstanding in the hands of the public in the year 1922 their joint-stock land bank bonds, respectively, on which interest was paid and/or accrued in the year 1922 in the aggregate sum of $78,807.80, part of which was the intercompany transaction in the amount of $5,810.25, leaving a balance paid or accrued of $72,997.55. As security for the payment of said joint-stock land bank bonds said joint-stock land banks, as provided in the Federal Farm Loan Act, deposited with the proper farm loan registrars farmers' promissory notes evidencing loans to said farmers, which in turn were secured as to payment by said farmers' first mortgages on their farms.
The proceeds coming into the hands of said joint-stock land banks from the issuance and sale of said joint-stock land bank bonds were used by said joint-stock land banks to make new additional loans to farmers, which new loans, made from the proceeds of said joint-stock land bank bonds issued and/or outstanding in 1922, were made in each instance in consideration of the making and delivery by the borrowing farmers, respectively, of their promissory notes secured as to payment by first mortgages on their farms. All of said loans, respectively, and the farmers' notes and mortgages, respectively, evidencing said loans, were designed to be and were of such a nature as to comply with (1) all the terms, conditions, restrictions, limitations, and requirements specified in the Federal Farm Loan Act, as requisite to qualify said loans, notes, and mortgages as "first mortgages" in contemplation of said act, so as to make them available as collateral security against the issue of joint-stock land bank bonds; and (2) all terms, conditions, restrictions, limitations, and requirements, statutory or otherwise, specified in the laws of the state in which the farm which was the subject of the particular loan was located (to wit, the states of Illinois, Iowa, Texas, and Oklahoma, respectively), as requisite to qualify said loans, notes, and mortgages as valid and subsisting first mortgages, in contemplation of such laws. Said notes and mortgages contain an agreement providing for the repayment of the loan on the amortization plan, as provided in section 12, second, of the Federal Farm Loan Act (12 USCA § 771), and such agreement in respect of each note and/or mortgage was such that the respective note and/or mortgage was not extinguished within a period of less than thirty-three years, except, of course, at the option of the borrower.
The interest received by the plaintiff on such farmers' notes and mortgages was not taxable as income to the plaintiff and was not so taxed in respect of plaintiff's return for the year 1922.
7. Plaintiff has at all times borne true allegiance to the government of the United States, and has not in any way voluntarily aided, abetted, or given encouragement to rebellion against said government; is the sole and absolute owner of the claim herewith presented; and has made no transfer or assignment of said claim or any part thereof.
Harold V. Amberg, of Chicago, Ill., for plaintiff.
Robert N. Miller, J. Robert Sherrod, and John E. McClure, all of Washington, D. C., amici curiæ.
H. A. Cox, of Washington, D. C., and Herman J. Galloway, Asst. Atty. Gen. (C. M. Charest and Dwight E. Rorer, both of Washington, D. C., on the brief), for defendant.
Before BOOTH, Chief Justice, and GRAHAM, GREEN, LITTLETON, and WILLIAMS, Judges.
Decision in this case was originally rendered in favor of the plaintiff on May 6, 1929. A motion for new trial having been made by the defendant and granted, and the judgment vacated and the findings of fact and opinion withdrawn, the case is again before the court for consideration on merits.
The plaintiff seeks to recover the sum of $9,124.70, an alleged overpayment of its income and profits taxes for the year 1922.
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