Rieger v. Commissioner of Internal Revenue, 9489-9491.

• Decision Date: 30 November 1943
• Docket Number: No. 9489-9491.,9489-9491.
• Citation: 139 F.2d 618
• Parties: RIEGER v. COMMISSIONER OF INTERNAL REVENUE. PICKREL et al. v. SAME. SCHAEFFER v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

139 F.2d 618 (1943)

RIEGER v. COMMISSIONER OF INTERNAL REVENUE.

PICKREL et al. v. SAME.

SCHAEFFER v. SAME.

Nos. 9489-9491.

Circuit Court of Appeals, Sixth Circuit.

November 30, 1943.

In case No. 9489:

Benjamin R. Shaman, of Dayton, Ohio, for petitioner.

In case No. 9490:

William G. Pickrel, of Dayton, Ohio, for petitioners.

In case No. 9491:

Virgil Schaeffer, of Dayton, Ohio, for petitioner.

Louise Foster and J. P. Wenchel, both of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, A. F. Prescott, and Mamie S. Price, all of Washington, D. C., on the brief), for respondents.

Before SIMONS, MARTIN, and McALLISTER, Circuit Judges.

MARTIN, Circuit Judge.

The Union Trust Company of Dayton, Ohio, was closed on October 31, 1931, and taken over for liquidation by the Superintendent of Banks of Ohio, pursuant to the law of that state, under which the bank was chartered. At the time of closing, the bank had some ninety thousand depositors who had an aggregate of $28,000,000 on deposit. Thousands of the depositors were school children, whose accounts were paid off in full immediately after the bank closed. All preferred and secured creditors' accounts were also paid in full and set-off credit was given debtors against their deposits. These adjustments were completed by April 1932; whereupon negotiable certificates of claim were issued to the remaining depositors of the bank who then numbered some fifty thousand persons, whose deposits totalled the approximate sum of $15,377,000.

With the approval of the Superintendent of Banks, borrowers were permitted to liquidate their bank indebtedness with these certificates of claim, sometimes at full face value, on other occasions at less than face value but more than market value. Union Trust Company certificates being in demand not only for use in the liquidation of indebtedness to the bank but also for speculative purposes, extensive trading in them ensued. In mid-year of 1932, some twenty brokerage houses in Dayton were dealing in these certificates and also in certificates of claim issued by nineteen building and loan associations of Dayton which had suspended withdrawals. The volume of dealing in the certificates of all these closed financial institutions became so heavy that, in the fall of 1932, by concerted action the Dayton brokerage houses established an exchange for trading in and handling the certificates. Quotations of the bid and asked prices of the Union Trust Company certificates were furnished daily by the exchange for publication on the market page of local newspapers. The operating banks of the city of Dayton accepted the Union Trust Company certificates of claim as security on loans on the basis of these published market reports; and the market for the exchange of the certificates was active up to the final liquidation of the Union Trust Company. From time to time, dividends on the certificates were paid by the liquidator and, in each instance, such payment was endorsed on the back of the certificate.

In 1937, the petitioning taxpayers in these three consolidated cases purchased Union Trust Company certificates of claim and in their respective income tax returns reported their profits therefrom as capital gains. Rieger reported his capital gains for the years 1938 and 1939, and Schaeffer and Pickrel reported theirs for the single year 1939, in which the final liquidating dividend was paid and the certificates of claim were surrendered to the Superintendent of Banks of Ohio.

The Commissioner of Internal Revenue and the Board of Tax Appeals both held that under Section 117(f) of the Revenue Act of 1938, 26 U.S.C.A. Int.Rev.Acts, pages 1061, 1063, the profits realized by the respective petitioning taxpayers from dividends received by them on the Union Trust Company certificates of claim purchased by each respectively constituted ordinary income and not capital gain. The correctness of the decisions of the Board of Tax Appeals (now the Tax Court of the United States) is challenged by the taxpayers' petitions for review addressed to this court.

Decision on this review must rest upon whether the certificates purchased by the petitioners are "certificates or other evidences of indebtedness" within the meaning of the quoted language of Section 117 (f) of the Revenue Act of 1938: "For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor."

Inspection of the form of certificate of claim involved herein shows that the certificates were issued by the Superintendent of Banks of Ohio and signed by his special deputy in charge of liquidation of the Union Trust Company. On its face, the certificate states that the Union Trust Company of Dayton, Ohio, is justly indebted to the claimant named in the certificate in a definite sum of money, representing a bank balance, certificate of deposit, cashier's check, certified check, Christmas Account, or school savings' account; that the claimant or his lawful assignee will alone be entitled to dividends on the claim; and that the claim represented by the certificate is subject to any direct or contingent liability that now exists against the Union Trust Company, or that may hereafter exist against anyone to whom the certificate is issued or anyone who later by purchase or assignment may acquire the claim represented by the certificate.

This important language is printed on the face of the certificate: "No assignment of this claim, or any portion thereof...