Liberty Finance Serv., Inc. v. Comm'r of Internal Revenue, Docket No. 62634.
| Citation | 34 T.C. 682 |
| Decision Date | 11 July 1960 |
| Docket Number | Docket No. 62634. |
| Parties | LIBERTY FINANCE SERVICE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Albert R. Brown, Jr., Esq., for the petitioner.
Harold G. Clark, Jr., Esq., for the respondent.
Petitioner, a licensed personal finance company, derived more than 80 per cent of its gross income from interest. More than 80 per cent of such interest received by petitioner exceeded the lawful rate in Alabama. More than 50 per cent in value of petitioner's outstanding stock was owned by not more than five individuals. Petitioner borrowed certain funds from members of the general public, from its shareholders and officers, and from a bank, for which it issued interest-bearing notes having a fixed maturity date. Held: Petitioner is a personal holding company subject to personal holding company surtax. Petitioner admittedly fails to meet the requirements for exemption under section 501(b)(6)(A) of the Code of 1939 applicable to personal finance companies. Petitioner also fails to meet the requirements for exemption under section 501(b)(7) which has no application to license personal finance companies.
This case involves deficiencies in personal holding company surtax determined by respondent as follows:
+---------------------------------+
¦Year ended Oct. 31— ¦Amount ¦
+-----------------------+---------¦
¦1950 ¦$2,612.73¦
+-----------------------+---------¦
¦1951 ¦6,123.41 ¦
+-----------------------+---------¦
¦1952 ¦5,686.76 ¦
+-----------------------+---------¦
¦1953 ¦6,292.10 ¦
+---------------------------------+
The sole issue presented is whether petitioner is entitled to exemption from personal holding company surtax under section 501(b)(7) of the Code of 1939.
The stipulated facts are so found, and are incorporated herein by reference.
Liberty Finance Service, Inc., hereinafter referred to as petitioner, was incorporated under the laws of Alabama on November 8, 1948, and was, during the taxable years in question, a licensed personal finance company. During all the taxable years in question, more than 50 per cent in value of petitioner's outstanding stock was owned by not more than five individuals, and more than 80 per cent of petitioner's gross income was derived from interest (other than interest constituting rent).
Petitioner's articles of incorporation provide, in part, as follows:
2. The objects and purposes for which said corporation is formed and the nature of the business to be engaged in by the same are as follows:
a. To undertake, conduct, and carry on the business of making loans of money.
b. To undertake, conduct, and carry on the business of making secured and unsecured loans of money.
c. To buy, sell, lease, rent, or exchange real property or improve the same.
d. To borrow money, and to issue notes or other negotiable paper to secure the same.
e. To carry on any other business which may seem to the corporation capable of being conveniently carried on in connection with any of the above, or calculated directly or indirectly, to render profitable or enhance the value of the corporation's property or rights for the time being.
The total amount of loans made by petitioner, the total interest charged thereon, and the gross income (interest received) of petitioner for the taxable years in question are as follows:
During the taxable years in question, substantially all loans made by petitioner were at interest rates in excess of the lawful rate of 8 per cent allowed in Alabama. More than 80 per cent of interest received by petitioner exceeded the lawful rate.
Individual members of the general public would make loans of money to petitioner from time to time at the rate of 1 per cent per month. During the taxable years in question four individuals (other than petitioner's officers and shareholders or their wives) made loans to petitioner. The yearly weighted averages of loans made by members of the general public for the years in question were as follows:
+----------------------------------------------------------+
¦Year ended Oct. 31— ¦Dollar months ¦Weighted average ¦
+-----------------------+---------------+------------------¦
¦1950 ¦39,000 ¦3,250 ¦
+-----------------------+---------------+------------------¦
¦1951 ¦66,000 ¦5,500 ¦
+-----------------------+---------------+------------------¦
¦1952 ¦63,500 ¦5,292 ¦
+-----------------------+---------------+------------------¦
¦1953 ¦70,000 ¦5,833 ¦
+----------------------------------------------------------+
Yearly weighted averages of loans to petitioner for the same years from officers and shareholders show the following amounts:
+----------------------------------------------------------+
¦Year ended Oct. 31— ¦Dollar months ¦Weighted average ¦
+-----------------------+---------------+------------------¦
¦1950 ¦103,650 ¦8,638 ¦
+-----------------------+---------------+------------------¦
¦1951 ¦8,500 ¦708 ¦
+-----------------------+---------------+------------------¦
¦1952 ¦21,800 ¦1,817 ¦
+-----------------------+---------------+------------------¦
¦1953 ¦24,500 ¦2,042 ¦
+----------------------------------------------------------+
In addition, for the year ended October 31, 1953, the wife of petitioner's president loaned petitioner $1,000 for a 2-month period.
The yearly weighted averages of bank loans to petitioner for the same years show the following amounts:
+----------------------------------------------------------+
¦Year ended Oct. 31— ¦Dollar months ¦Weighted average ¦
+-----------------------+---------------+------------------¦
¦1950 ¦10,100 ¦842 ¦
+-----------------------+---------------+------------------¦
¦1951 ¦7,500 ¦625 ¦
+-----------------------+---------------+------------------¦
¦1952 ¦11,500 ¦958 ¦
+-----------------------+---------------+------------------¦
¦1953 ¦19,250 ¦1,604 ¦
+----------------------------------------------------------+
Loans were made by its stockholders to petitioner only when additional funds were needed for continued satisfactory operations.
Standard form promissory notes, each dated and bearing a maturity date, were executed in each instance by petitioner to the lender at the time the loans were made.
During the taxable years in question, petitioner made no loans to any of its shareholders.
OPINION.Section 500 of the Code of 1939 imposes a surtax upon certain income of personal holding companies. Section 501(b) lists exceptions from the term ‘personal holding company.’ Petitioner maintains that it falls within the exception stated in section 501(b)(7),1 and concedes that this is the only subsection which could apply so as to prevent imposition of the surtax.
Petitioner argues that it is a loan corporation; that a substantial part of its business consists of receiving funds not subject to check and evidenced by installment or fully paid certificates of indebtedness or investment in that it gave notes to those who loaned it money at 1 per cent per month; and that it makes loans. In short, petitioner contends that section 501(b)(7) is applicable to a licensed personal finance company, a substantial part of whose business consists of giving time notes to its creditors for funds not subject to check.
Respondent maintains (1) that section 501(b)(6) provides the sole relief from personal holding company surtax for a licensed personal finance company; (2) that petitioner failed to meet the statutory requirement that a substantial part of its business consisted of receiving funds not subject to check and evidenced by a certificate; (3) that it was not the intent of Congress to exempt the ‘corporate loan shark’ from personal holding company status.
Section 501(b)(6)(A)2 of the Code of 1939, formerly section 501(b)(6), excepts from the definition of ‘personal holding company’ a licensed personal finance company which meets certain requirements, one of which is that at least 80 per cent of gross income must come from lawful interest.
Section 182 of the Revenue Act of 1942 added section 501(b)(7) and amended section 501(b)(6) in the manner proposed by the Senate Finance Committee. S. Rept. No. 1631, 77th Cong., 2d Sess., 1942-2 C.B. 632, 633, states, in part, as follows:
This section amends section 501(b) of the Code, relating to exemptions from personal holding company tax. Exemption from the tax * * * is extended to loan or investment corporations which fall in the same general category as licensed personal finance companies. They exist in most States under various designations such as industrial banks, industrial loan and investment companies, loan corporations, loan and investment companies, banking companies, industrial loan and thrift companies, Morris Plan companies, special plan banks, installment investment companies, and consumer discount companies. These loan companies have many of the characteristics of banks except the right to accept deposits subject to check.
The House bill in the case of licensed personal finance companies and loan or investment companies imposed a limitation that the companies must be ‘subject to the...
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