Liberty Finance Serv., Inc. v. Comm'r of Internal Revenue, Docket No. 62634.

CourtUnited States Tax Court
Writing for the CourtFISHER
PartiesLIBERTY FINANCE SERVICE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Docket NumberDocket No. 62634.
Decision Date11 July 1960

34 T.C. 682

LIBERTY FINANCE SERVICE, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 62634.

Tax Court of the United States.

Filed July 11, 1960.


[34 T.C. 683]

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.

FISHER, Judge:

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.

FINDINGS OF FACT.

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:

+---+
                ¦¦¦¦¦
                +---+
                
Year ended Oct. 31— Loans made Interest charges Gross income
                1950 $113,044.71 $32,349.01 $28,082.87
                1951 145,990.68 47,666.48 43,352.80
                1952 173,218.71 58,379.07 53,717.44
                1953 201,440.20 68,026.24 66,092.44
                

[34 T.C. 684]

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 ¦
...

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3 practice notes
  • Jos. K., Inc. v. Comm'r of Internal Revenue , Docket No. 3961-65.
    • United States
    • United States Tax Court
    • January 13, 1969
    ...been distinguished and held to be mutually exclusive with respect to section 501(b)(6)(B), I.R.C. 1939. See Liberty Finance Service, Inc., 34 T.C. 682 (1960). Despite the lack of prior judicial interpretation, a close analysis of the statutory language reveals that five separate requirement......
  • Essenfeld v. Comm'r of Internal Revenue, Docket No. 79079.
    • United States
    • United States Tax Court
    • October 31, 1961
    ...* * * (United States v. Chase, 135 U.S. 255, 260 (1890).) Ginsberg & Sons v. Popkin, 285 U.S. 204 (1932); Liberty Finance Service, Inc., 34 T.C. 682, 687 (1960). That the distinction so created was not accidental appears from the legislative history. Prior to 1951 there was no express provi......
  • Energy Res., Ltd. v. Comm'r of Internal Revenue, Docket No. 26143-87
    • United States
    • United States Tax Court
    • November 8, 1988
    ...would cause a result contrary [91 T.C. 917] to application of the specific language. * * * (Liberty Finance Service, Inc. v. Commissioner, 34 T.C. 682, 687 (1960).† Coggin's receipt of a notice of final partnership administrative adjustment from respondent does not render him a notice partn......
3 cases
  • Jos. K., Inc. v. Comm'r of Internal Revenue , Docket No. 3961-65.
    • United States
    • United States Tax Court
    • January 13, 1969
    ...been distinguished and held to be mutually exclusive with respect to section 501(b)(6)(B), I.R.C. 1939. See Liberty Finance Service, Inc., 34 T.C. 682 (1960). Despite the lack of prior judicial interpretation, a close analysis of the statutory language reveals that five separate requirement......
  • Essenfeld v. Comm'r of Internal Revenue, Docket No. 79079.
    • United States
    • United States Tax Court
    • October 31, 1961
    ...* * * (United States v. Chase, 135 U.S. 255, 260 (1890).) Ginsberg & Sons v. Popkin, 285 U.S. 204 (1932); Liberty Finance Service, Inc., 34 T.C. 682, 687 (1960). That the distinction so created was not accidental appears from the legislative history. Prior to 1951 there was no express provi......
  • Energy Res., Ltd. v. Comm'r of Internal Revenue, Docket No. 26143-87
    • United States
    • United States Tax Court
    • November 8, 1988
    ...would cause a result contrary [91 T.C. 917] to application of the specific language. * * * (Liberty Finance Service, Inc. v. Commissioner, 34 T.C. 682, 687 (1960).† Coggin's receipt of a notice of final partnership administrative adjustment from respondent does not render him a notice partn......

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