U.S. Bancorp v. Commissioner

T.C. Memo. 1998-381

UNITED STATES TAX COURT

U.S. BANCORP, SUCCESSOR IN INTEREST TO WEST ONE
BANCORP AND SUBSIDIARIES, FORMERLY KNOWN AS MOORE
FINANCIAL GROUP, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6544-97.1 Filed October 22, 1998.

David W. Brown and Richard A. Edwards, for petitioner.

William P. Boulet, Jr. and James R. Robb, for respondent.

1
On Nov. 18, 1997, the Court granted petitioner's motion to
consolidate this case with the case at docket No. 27342-96.
Because the issue herein is not related to the issues in docket
No. 27342-96 and does not involve the tax years at issue in
docket No. 27342-96, the order pursuant to this opinion will be
issued only in docket No. 6544-97. Also for this reason, the
Court, by order dated Sept. 15, 1998, has denied petitioner’s
motion for partial summary judgment, as supplemented, and
respondent’s cross-motion for partial summary judgment on the
interest on short-term receivables issue in the case at docket
No. 27342-96.
 - 2 -

MEMORANDUM OPINION

BEGHE, Judge: This matter is before the Court on

petitioner’s motion for partial summary judgment, as supplemented

(petitioner’s motion), and respondent’s cross-motion for partial

summary judgment under Rule 121.2 Petitioner's principal place

of business was at Portland, Oregon, when it filed its petition.

Relying on Security Bank Minn. v. Commissioner, 98 T.C. 33

(1992), affd. 994 F.2d 432 (8th Cir. 1993), petitioner has moved

for an order that Idaho First National Bank (IFNB), a commercial

bank using the cash method of accounting during 1986, the first

taxable year in issue, is not required by section 1281(a) to

include in its 1986 gross income interest on short-term

obligations (maturing in 1 year or less) that had accrued in 1986

but was not received until 1987.3 Petitioner concedes that, if

and to the extent we grant petitioner's motion, the interest

income in question is properly included in full in petitioner's

2
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years in issue (1986-88), unless
otherwise specified.
3
For the purposes of the motion, petitioner has conceded
that 12-month commercial and agricultural loans that are
regularly renewed or rolled over are "short-term" obligations.
Although petitioner's motion states that it does not concede the
point for all purposes, our disposition of the question on such
loans has mooted the point.
 - 3 -

1987 gross income.4 Respondent's cross-motion asks for an order

denying petitioner's motion in full and granting partial summary

judgment for respondent. Subsequent to the submissions of the

parties, we followed and applied Security Bank Minn. v.

Commissioner, supra, in Security State Bank v. Commissioner, 111

T.C. 210 (1998).

With respect to IFNB's consumer, commercial, and

agricultural short-term loans made to its customers, we follow

our decisions in Security Bank Minn. v. Commissioner, supra, and

Security State Bank v. Commissioner, supra, hold for petitioner,

grant petitioner's motion, and deny respondent's motion. By

reason of petitioner's concession, the interest that accrued on

such loans in 1986 is included in petitioner's income in full in

1987.

With respect to the certificates of deposit (CD's) and time

deposits owned by IFNB in 1986, we deny petitioner's motion and

respondent's cross-motion. Respondent's arguments with respect

to the CD's and time deposits raise questions of fact regarding

banking and commercial practices. These questions must be

4
Petitioner has conceded that it is not entitled to its
reporting position that the interest in issue that was received
in 1987 should be spread ratably over the 4 years 1987-90 as a
sec. 481 change in accounting method adjustment under sec.
448(d)(7), as enacted by the Tax Reform Act of 1986, Pub. L. 99-
514, sec. 801(a), 100 Stat. 2347 (TRA 1986). Sec. 448 requires C
corporations having average annual gross receipts of more than $5
million to switch to the accrual method of accounting for 1987
and later years.
 - 4 -

resolved by a trial or obviated by agreement of the parties,

before we can decide whether the rule of law we first expressed

in Security Bank Minn. v. Commissioner, supra, and recently

applied in Security State Bank v. Commissioner, supra, applies to

the CD's and time deposits.

The background facts set forth below are derived from the

pleadings in this case, petitioner's request for admission,

respondent's responses to petitioner's request, the affidavit and

exhibits attached to petitioner's motion for partial summary

judgment and the supplement to petitioner's motion, respondent's

cross-motion for partial summary judgment, the declaration and

exhibits attached to respondent's response to petitioner's

motion, the exhibits attached to petitioner's reply to

respondent's response, and petitioner's supplemental reply and

affidavit attached thereto. The background facts are set forth

solely for the purpose of deciding the motions and are not

findings of fact for this case. Fed. R. Civ. P. 52(a);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994).

Factual Background

Petitioner is a successor in interest by merger to West One

Bancorp, formerly known as Moore Financial Group, Inc. (Moore

Financial), a national bank holding company incorporated in Idaho
 - 5 -

in 1981. During the years in issue, 1986 through 1988, Moore

Financial was the parent corporation of IFNB.5

In 1986, IFNB was a "bank", as defined in section 581, that

was entitled to and did use the cash method of accounting for

Federal income tax purposes.6

Also during 1986, IFNB was the largest commercial and

agricultural lender in Idaho. As a large commercial bank, IFNB

made numerous loans of different maturities in the ordinary

course of its business, including loans of less than 1 year, 1-

year loans, and loans of more than 1 year.

The short-term obligations in issue here all had periods to

maturity of 1 year or less and consisted of the following:

Principal Accrued Interest
Description Balances as of 12/31/86
1 1
Time deposits with banks $164,000,000 $970,214
2 2
CD's with banks 43,000,000 2,373,410
Consumer loans 16,626,503 381,325
Commercial and
3 3
agricultural loans 356,888,213 6,092,248
4 4
Total 580,514,716 9,817,197

5
After the years at issue (in 1989) Moore Financial changed
its name to West One Bancorp (West One). In 1995, West One
merged into U.S. Bancorp (Old Bancorp). In 1997, Old Bancorp
merged into First Bank System, Inc., a bank holding company,
which changed its name to U.S. Bancorp (the petitioner in this
case).
6
IFNB switched to the accrual method of accounting for
1987, as required by sec. 448, enacted by TRA 1986. See supra
note 4.
 - 6 -

1
The time deposits with banks had stated maturities of less
than 180 days, and often less than 61 days. All the time
deposits were in exact multiples of $1 million, and the majority
of the obligors were foreign banks. Petitioner's records showed
the CD's as having originated from the following foreign centers:
The Cayman Islands, Nassau, Toronto, Zurich, London, and
Frankfurt.
2
The CD's with banks had stated maturities of 9 months to 1
year. All the CD's were in exact multiples of $1 million, and
the majority of the obligors were foreign banks. Each CD was
denominated either "Yankee" or "Euro".
3
The amounts agreed upon by the parties with respect to
loans have been adjusted to remove all amounts in respect of
obligations of local governments.
4
The total amounts of interest included in the accruals
include loans due and payable in 1986 on which principal and
interest remained unpaid at yearend.

None of the short-term obligations held by IFNB at yearend

1986 had been previously issued and then acquired by IFNB from

third parties (i.e., from parties other than the borrower,

debtor, or obligor). The only obligations acquired by IFNB from

third parties were long-term corporate bonds and U.S. Government

securities, none of which are in issue in this matter.

Petitioner supports its assertion that IFNB originated the

short-term obligations at issue here in the ordinary course of

its banking business, by stating that IFNB relied upon the

borrower's good faith and credit--along with any collateral used

to secure the loan--to repay the resulting obligation. Although

(as discussed below) respondent asserts that the time deposits
 - 7 -

and CD's owned by IFNB are different from ordinary bank loans,7

respondent does not contest petitioner's assertion that the time

deposits (and impliedly, the CD's) arise in the ordinary course

of business, as a customary method used by banks to earn interest

on surplus funds.

Discussion

I. Whether Summary Judgment Is Appropriate

Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials. Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).

Summary judgment is appropriate where there is no genuine

issue of material fact and decision may be rendered as a matter

of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.

7
There are factual differences between petitioner's
consumer, commercial, and agricultural loans and its time
deposits and CD's with banks. The consumer, commercial, and
agricultural loans provided for periodic payments of interest,
monthly in most cases, quarterly in a few; as a result, the
accrued but unpaid interest with respect to such loans held at
Dec. 31, 1986, amounted on the average to approximately 1 month's
worth of interest on each loan. The CD's with banks provided for
the payment of interest only at maturity; as a result, the amount
of the accrual with respect to each such instrument was
relatively larger. As evidenced by the schedule, supra p. 5, at
1986 yearend, the remaining accrual period on the CD's, which
bore interest at rates ranging from 7.07 percent to 8.10 percent
per year, was, on the average, closer to 6 months than to 1
month. Although the time deposits with banks also provided for
one payment of interest at maturity, the remaining average
accrual period on the time deposits was relatively much shorter
than for the CD's because of the shorter average period to
maturity of the time deposits.
 - 8 -

at 520; Jacklin v. Commissioner, 79 T.C. 340, 344 (1982). In

deciding whether to grant summary judgment, the Court must

consider the factual materials and inferences drawn from them in

the light most favorable to the nonmoving party. Bond v.

Commissioner, 100 T.C. 32, 36 (1993); Naftel v. Commissioner, 85

T.C. 527, 529 (1985). If the conditions of summary judgment are

otherwise satisfied with respect to a single issue or fewer than

all the issues in a case, then partial summary judgment may be

granted, even though all the issues in the case are not disposed

of. Rule 121(b); Naftel v. Commissioner, supra. However,

summary judgment is not a "short cut" to avoid trial or a

substitute for trial. Perma Research & Dev. Co. v. Singer Co.,

410 F.2d 572 (2d Cir. 1969). As stated in Cox v. American

Fidelity & Cas. Co., 249 F.2d 616, 618 (9th Cir. 1957), "When

confronted with a motion for summary judgment, the trial judge

must determine if there are any material factual issues that

should be resolved before the trier of fact. It is not the trial

judge's function * * * to resolve those issues or to weigh

evidence." Finally, summary judgment should be used sparingly

and with caution. Bayou Bottling, Inc. v. Dr. Pepper Co., 543 F.

Supp. 1255 (W.D. La. 1982), affd. 725 F.2d 300 (5th Cir. 1984).

II. The Legal Background and The Parties' Arguments

The parties agree that the controlling statutory provisions

are sections 1281 and 1283, which require the accrual of discount
 - 9 -

on certain "short-term obligations" (the short-term obligation

rules).8

Briefly, if the short-term obligation rules apply to a

"nongovernmental" short-term obligation, the following results

obtain, for any taxable year.9 First, under sections 1281(a)(1)

8
These provisions were added to the Code in 1984, by the
Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, sec.
41(a), 98 Stat. 548. The provisions were amended in 1986, by
sec. 1803(a)(8) of TRA 1986, 100 Stat. 2794.
9
Sec. 1281(a) provides as follows:

SEC. 1281. CURRENT INCLUSION IN INCOME OF DISCOUNT ON
CERTAIN SHORT-TERM OBLIGATIONS.

(a) General Rule.--In the case of any short-term
obligation to which this section applies, for purposes
of this title--

(1) there shall be included in the gross
income of the holder an amount equal to the sum of
the daily portions of the acquisition discount for
each day during the taxable year on which such
holder held such obligation, and

(2) any interest payable on the
obligation (other than interest taken into
account in determining the amount of the
acquisition discount) shall be included in
gross income as it accrues.

Sec. 1283(c) provides in part:

SEC. 1283(c). Special Rules for Nongovernmental
Obligations.--

(1) In general.--In the case of any short-
term obligation which is not a short-term
Government obligation * * * --

(continued...)
 - 10 -

and 1283(c), the holder of the obligation is required to include

any "original issue discount" (OID) that accrues while it holds

the obligation during the taxable year, in its interest income

for that year. Second, under section 1281(a)(2), the holder is

required to include any interest payable on that obligation in

income as it accrues.

In Security Bank Minn. v. Commissioner, supra, we considered

the application of the short-term obligation rules to certain

loans made by a bank. After a thorough consideration of the

statutory language, the relevant legislative history, and the

arguments of the parties, we concluded that the short-term

obligation rules did not require the petitioning bank "to accrue

interest on the short-term loans made to customers in the

ordinary course of its business." Security Bank Minn. v.

Commissioner, 98 T.C. at 43.

Petitioner asserts that the short-term obligations at issue

in this case are indistinguishable from the obligations we

considered in Security Bank Minn. v. Commissioner, supra. As a

result, argues petitioner, under the principle of stare decisis,

we must hold that the short-term obligation rules do not require

9
(...continued)
(A) sections 1281 and 1282 shall be
applied by taking into account
original issue discount in lieu of
acquisition discount * * *
 - 11 -

the accrual of interest--or the accrual of any interest

substitute such as OID--on the loans and other assets at issue in

this case.

Respondent, on the other hand, advances three arguments to

support the determination that the short-term obligation rules do

apply.

First, respondent asserts that our decision in Security Bank

Minn. v. Commissioner, supra, was wrong and that we should

overrule it in this case.

Second, respondent asserts that the obligations in this case

were issued with OID--an assertion respondent expressly declined

to make with respect to the loans at issue in Security Bank Minn.

v. Commissioner, supra. Respondent argues that because the

Court, in Security Bank Minn., therefore assumed that the loans

at issue were not discount loans, this distinction compels (or at

least permits) a different tax result in this case from the

result we decided on in Security Bank Minn, with respect to the

assertedly nondiscount loans there at issue.

Third and finally, respondent asserts that the time deposits

and CD's at issue in this case are different, in legally

significant respects other than their "discount" status, from the

bank loans at issue in Security Bank Minn. v. Commissioner,

supra--and that this difference compels a different tax result

with respect to the time deposits and CD's.
 - 12 -

We consider respondent's arguments seriatim. In so doing,

we explain why summary judgment is appropriate with respect to

IFNB's consumer, commercial, and agricultural loans but is not

appropriate with respect to its time deposits and CD's.

III. Respondent's First Argument: Security Bank Minn. v.
Commissioner Should Be Overruled

Respondent first asks the Court to reconsider its holding in

Security Bank Minn. v. Commissioner, supra, that section

1281(a)(2) of the short-term obligation rules does not require a

bank "to accrue interest on the short-term loans made to

customers in the ordinary course of its business." Security Bank

Minn. v. Commissioner, 98 T.C. at 43. In short, respondent here

argues, as in Security Bank Minn., that section 1281(a)(2)

requires the accrual of interest on all short-term obligations

held by a bank--without regard to the type of obligations

involved, or the manner in which the bank came to hold them.

Although respondent advances this argument with force and

cogency--and also tries to identify certain factual differences

between the loans at issue in this case and the loans considered

in Security Bank Minn. v. Commissioner, supra--we believe that

all respondent has done in advancing this argument is to ask us

to overrule Security Bank Minn., which we decline to do.10

10
For example, we note that most of IFNB's consumer,
commercial, and agricultural loans provided for payments of
interest at monthly intervals, as well as at maturity, while the
(continued...)
 - 13 -

Respondent has not brought to our attention any "prudential and

pragmatic considerations", see Planned Parenthood v. Casey, 505

U.S. 833, 854 (1992), that would lead us to conclude that the

principle of stare decisis should not hold sway.11 See also

Helvering v. Hallock, 309 U.S. 106, 119 (1940).

As we stated in Security State Bank v. Commissioner, 111

T.C. at 213-214:

Security Bank Minn. v. Commissioner [citation
omitted] was a Court-reviewed opinion. The majority
opinion contains an extensive analysis of the statute,
its evolution, the context in which it appears, and its
legislative history. There was a dissenting opinion
which was joined by five Judges. In affirming our

10
(...continued)
agricultural loans at issue in Security Bank. Minn. v.
Commissioner, 98 T.C. 33 (1992), affd. 994 F.2d 432 (8th Cir.
1993) (and in Security State Bank v. Commissioner, 111 T.C. 210
(1998)), provided for payments of interest as well as principal
only at maturity. Even though respondent’s arguments in Security
Bank Minn. arguably are more directly applicable to the loans to
customers in the case at hand than they were to the loans in
Security Bank Minn. and Security State Bank--after all, the
reference to “any interest payable on the obligation” would seem
to apply directly to the interest payable monthly and quarterly
in the case at hand, as opposed to the interest payable at
maturity in Security Bank Minn. and Security State Bank, which
seems more like OID--this does not change our conclusion that all
respondent has done in mounting his primary argument is to ask us
to overrule Security Bank Minn., as stated in the text.
11
Indeed, those considerations point in the other
direction. The issues in this case have limited significance in
subsequent years because of the enactment of sec. 448, requiring
C corporations, including large banks such as IFNB, with average
annual gross receipts of more than $5 million, to switch to the
accrual method of accounting, effective for 1987 and subsequent
years. Petitioner observes that our ruling in this matter will
not apply to petitioner for any other tax year and is not likely
to apply to any other large commercial bank.
 - 14 -

opinion, the Court of Appeals for the Eighth Circuit
also made an extensive analysis of the same factors.
One of the judges on the Court of Appeals panel
dissented.

No purpose would be served by repeating the
statutory analysis that lead this Court and the Court
of Appeals to decide that section 1281(a)(2) does not
apply to loans made by banks in the ordinary course of
business. Suffice it to say that this matter has been
thoroughly considered and decided. The doctrine of
stare decisis generally requires that we follow the
holding of a previously decided case, absent special
justification. This doctrine is of particular
importance when the antecedent case involves statutory
construction. Hesselink v. Commissioner, 97 T.C. 94,
99-100 (1991). While respondent has skillfully
rearticulated his arguments in support of a different
interpretation of the statute, we find nothing therein
that would cause us to refrain from applying the
doctrine of stare decisis with respect to the section
1281(a)(2) issue. [Fn. ref. omitted.]

We agree, and decline to overrule Security Bank Minn. v.

Commissioner, supra, with respect to this issue. Accordingly, we

hold that section 1281(a)(2), as interpreted by Security Bank

Minn. and applied in Security State Bank v. Commissioner, supra,

does not require the accrual of interest with respect to the

short-term consumer, commercial, and agricultural loans made by

IFNB to its customers.

IV. Respondent's Second Argument: Section 1281(a)(1) and OID

Respondent argues in the alternative that, even if we follow

Security Bank Minn. v. Commissioner, supra, the short-term

obligation rules should still be applied to IFNB's loans, CD's,

and time deposits, for the following reason. Respondent asserts

in this case that IFNB's loans and deposits were issued by the
 - 15 -

obligors with OID. By contrast, in Security Bank Minn., the

Commissioner deliberately decided not to assert that the relevant

bank loans had OID. Security Bank Minn. v. Commissioner, 98 T.C.

at 37-38. Respondent argues that this distinction is important,

because the Court in Security Bank Minn. assumed in reaching its

decision that the bank loans there in question were not

"discount" obligations.

As a result, argues respondent, our decision in Security

Bank Minn. v. Commissioner, supra, does not determine the outcome

of this case. Although Security Bank Minn. may prevent the

accrual of interest, under section 1281(a)(2) of the short-term

obligation rules, it does not, in respondent's view, prevent the

accrual of discount, under section 1281(a)(1) of those rules.12

Therefore, concludes respondent, accrual is appropriate with

respect to the loans and deposits held by IFNB in this case.

In response to this argument, we note that there is language

in Security Bank Minn. v. Commissioner, supra, that could be read

to suggest that the Court believed the bank loans there at issue

had no discount, and that this belief was important to the

result.13 Notwithstanding this language, however, we believe the

12
These Code provisions are discussed supra pp. 8-9.
13
As we stated in Security Bank Minn. v. Commissioner,
supra:

As we have noted [citation omitted], the common
(continued...)
 - 16 -

Court in Security Bank Minn. was aware that the loans might, in

respondent's view, have been issued with OID, for the following

reasons.

First, although it is true that respondent, in Security Bank

Minn. v. Commissioner, supra, did not take the position that the

bank loans there at issue had OID, this is not the "whole truth".

In the very next breath, respondent then told the Court that

those bank loans "arguably did" have OID--notwithstanding the

previous disclaimer. Security Bank Minn. v. Commissioner, 98

T.C. at 37-38.

Second, under respondent's 1986 proposed regulations

interpreting the OID rules,14 all short-term obligations would be

13
(...continued)
thread of the sections included in Part V * * * [of
Subchapter P of Chapter 1 of the Code, which Part
contains the original issue discount (OID), market
discount, and discount on short-term obligation rules]
is that amounts defined as discount are to be taken
into account as ordinary income in some appropriate
manner. Thus the obligations or instruments to which
Part V applies are obligations or instruments that
involve some sort of discount--in the case of section
1281, acquisition discount (or, by operation of section
1283(c)(1)(A), original issue discount). There is no
indication that any of the loans here in dispute
involve discount * * *. [Security Bank Minn. v.
Commissioner, 98 T.C. at 41-42; emphasis added.]
14
Secs. 1.1271-1 through 1.1275-5, Proposed Income Tax
Regs., 51 Fed. Reg. 12048-12096 (Apr. 8, 1986) (the 1986 Proposed
Regs.).
 - 17 -

considered to be issued with OID.15 We note that final

regulations were not published until 1994 and are generally not

applicable to debt instruments issued before April 4, 1994.16 In

addition, this Court usually regards proposed regulations as

having no more weight than a position asserted in a brief by the

Commissioner.17 However, the portion of respondent's brief cited

by the majority in Security Bank Minn. v. Commissioner, supra,

did refer to the proposed regulations. Security Bank Minn. v.

Commissioner, 98 T.C. at 37-38. For this reason, we believe that

15
Sec. 1273(a)(1) defines the amount of OID an obligation
contains to be equal to the excess of the obligation's "stated
redemption price at maturity" (SRPM) over the obligation's "issue
price". Under sec. 1.1273-1, Proposed Income Tax Regs., 51 Fed.
Reg. 12059-12061 (Apr. 8, 1986), the SRPM of an obligation was in
turn defined to be equal to the sum of all payments to be made
under the terms of that obligation, other than "qualified
periodic interest payments". In addition, sec. 1.1273-
1(b)(1)(ii)(D), Proposed Income Tax Regs., 51 Fed. Reg. 12060
(Apr. 8, 1986), provided that in the case of short-term
obligations, no interest payments were considered to constitute
"qualified periodic interest payments".

What all this means is that under the 1986 Proposed Regs.,
all interest payments on a short-term obligation would be
included in the obligation's SRPM, and would therefore constitute
OID.
16
Sec. 1.1271-0(a), Income Tax Regs. It does not appear
that the final regulations made any substantive changes to the
1986 Proposed Regs.' definition of OID as discussed in the text.
See sec. 1.1273-1(b), 1.1273-1(c)(5), Income Tax Regs.
17
For examples of opinions so characterizing proposed
regulations, see Laglia v. Commissioner, 88 T.C. 894, 897-898
(1987); F.W. Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265-
1266 (1970).
 - 18 -

the Court in Security Bank Minn. was aware of respondent's view

that short-term obligations were generally issued with OID.

As a result, we were inclined to disregard respondent's

argument that the asserted presence of OID in this case requires

a result different from that decided in Security Bank Minn., even

before we had considered the effect of our recently released

decision in Security State Bank v. Commissioner, supra.18

Subsequent to the parties' submissions in this case, in our

decision in Security State Bank v. Commissioner, supra, we

explained certain aspects of our decision in Security Bank Minn.

v. Commissioner, supra. In Security State Bank, respondent made

essentially the same alternative argument; i.e., that

notwithstanding our decision with respect to the accrual of

interest in Security Bank Minn. (under section 1281(a)(2)),

section 1281(a)(1) requires accrual of OID on short-term bank

loans.

In response to this argument, in Security State Bank v.

Commissioner, supra, we stated that, because it had not been

necessary for us to make a specific holding regarding the

application of section 1281(a)(1) in Security Bank Minn. v.

Commissioner, supra, it could be said "in a technical sense" that

18
For a contemporaneous critical view of respondent's
alternative argument based upon the 1986 Proposed Regs., see
Lokken, "The Time Value of Money Rules", 42 Tax L. Rev. 1, 40
n.100 (1986).
 - 19 -

respondent's proposed application of section 1281(a)(1) presented

an issue of first impression in Security State Bank v.

Commissioner, 111 T.C. at 214. However, after examining our

approach in Security Bank Minn., we concluded in Security State

Bank v. Commissioner, supra, that:

Our analysis in Security Bank Minn. v.
Commissioner, supra, makes clear that we have
interpreted section 1281 as having no application
to loans made by banks in the ordinary course of
business, regardless of whether the loans are
characterized as generating interest or original issue
discount. We, therefore, hold that section 1281(a)(1)
does not apply to the loans in issue. [Id. at 215; fn.
ref. omitted.]

In the case at hand, we follow Security Bank Minn. v.

Commissioner, supra, as explained by Security State Bank v.

Commissioner, supra, to hold that no accrual is required under

section 1281(a)(1) with respect to IFNB's consumer, commercial,

and agricultural short-term loans to its customers.

V. Respondent's Third Argument: IFNB's Time Deposits and
CD's Are Not "Bank Loans Made to Customers"

As an alternative to the foregoing arguments, which relate

to all the short-term obligations held by IFNB during the years

at issue, respondent makes a third argument, which applies only

to IFNB's time deposits and CD's, the obligors of which were

other banks.

In essence, respondent asserts that even if Security Bank

Minn. v. Commissioner, supra, and Security State Bank v.

Commissioner, supra, were properly decided, the legal standard we
 - 20 -

announced in those cases does not apply to the time deposits and

CD's in this case.

According to respondent, our precise holding in Security

Bank Minn. v. Commissioner, supra, was that section 1281 does not

apply with respect to short-term loans made by a bank to its

customers in the ordinary course of its business. Respondent

asserts that IFNB's time deposits and CD's do not constitute

"loans made to customers", as that term was employed by Security

Bank Minn. (and Security State Bank v. Commissioner, supra).

Therefore, argues respondent, our holdings in those cases do not

apply to IFNB's short-term time deposits and CD's, even if we

decide that the holdings do apply to IFNB's loans (as we have

done). As a result, concludes respondent, the short-term

obligation rules can be applied to IFNB's short-term time

deposits and CD's, without violating either the spirit or the

letter of Security Bank Minn. (or Security State Bank).

In support of this argument, respondent notes that the Court

in Security Bank Minn. v. Commissioner, supra, considered in some

detail the meanings of the words "acquire" and "issue" (including

variants thereof). This consideration, of course, was quite

appropriate, because the short-term obligation rules apply to

acquisition discount or original issue discount, depending on the

type of obligation involved.
 - 21 -

In examining the plain language of the statute, the Court in

Security Bank Minn. v. Commissioner, supra, stated:

In the Code and in normal bank parlance, terms
such as acquisition and issue commonly refer to third-
party debt instruments; "loans" are "made" by a bank to
its customers. * * * The terms "loan" and "made" are
noticeably absent from the definition of short-term
obligations in section 1283(a)(1)(A). [Security Bank
Minn. v. Commissioner, 98 T.C. at 39.]

Similarly, in evaluating the legislative record, the Court in

Security Bank Minn. noted that: "all of the available material

[in the legislative history] is expressed in terms relating to

purchased or acquired instruments, not expressly to loans made."

Id. at 41.

Against this background, respondent asserts that time

deposits and CD's are "purchased" or "acquired" from other banks,

within the common meaning of those words, and within the meaning

developed by the Court in Security Bank Minn. v. Commissioner,

supra. Respondent additionally asserts that the obligor banks on

such deposits and CD's are not "customers" of the bank that owns

the deposits and CD's, once again within both the common meaning

of the term and the meaning developed in Security Bank Minn. v.

Commissioner, supra.

We believe that whether, as a matter of law, respondent's

argument is correct depends, at least in part, on the answers to

a number of factual questions concerning the nature of time

deposits and CD's. For example, before we could rule on
 - 22 -

respondent's motion with respect to this issue, we believe we

would need to know how time deposits and CD’s are regarded in

banking and commercial practice--and how, in that practice, they

are considered to differ (if at all) from "bank loans made to

customers". Or, to put it another way, we would need to know

whether bankers consider time deposits and CD’s to be "acquired"

or "issued", in a sense in which bank loans are not.

In addition, we would need to know whether time deposits and

CD’s are considered to be "investments" similar to third-party

commercial paper, while "loans" are considered to be

noninvestment "business done with customers". In this regard, it

would be helpful to know how the documentation evidencing--or

perhaps constituting--time deposits and CD's, differs from the

standard bank loan agreement or promissory note.19

In short, we believe that a number of factual questions

should be answered, before we could properly answer the legal

question raised by respondent's third argument: Whether our

holdings in Security Bank Minn. v. Commissioner, supra, and

Security State Bank v. Commissioner, supra--that Congress did not

intend sections 1281 and 1283 to apply to loans made by banks to

19
Other possible questions concern the importance of the
facts that the time deposits and CD's held by IFNB were in exact
multiples of $1 million, and that the majority of the obligors
were large foreign banks, both of which are factors that would
tend to make the time deposits and CD's much more liquid than a
typical bank loan.
 - 23 -

their customers--apply to the time deposits and CD's that are

also at issue in this case.

The materials submitted by the parties with respect to their

motions for summary judgment do not permit us to answer those

factual questions. As a result, there are genuine issues of

material fact that must be resolved by a trial, or be obviated by

agreement of the parties, before we can decide whether the rule

of law we first expressed in Security Bank Minn. v. Commissioner,

supra, and recently applied in Security State Bank v.

Commissioner, supra, applies to the CD's and time deposits held

by the petitioner. Therefore, we hold that summary judgment is

not appropriate with respect to the treatment of the CD's and

time deposits held by IFNB.20

20
The fact that both parties have moved for summary
judgment does not require the Court to decide that there are no
genuine issues of material fact, or that summary judgment is
appropriate. Under Rule 121(b), summary judgment shall be
rendered "if the pleadings * * * and any other acceptable
materials * * * show that there is no genuine issue as to any
material fact and that a decision may be rendered as a matter of
law." The burden of proving that there is no issue of material
fact is on the moving party; and in deciding whether to grant
summary judgment, the Court must view the factual materials and
inferences drawn from them in the light most favorable to the
nonmoving party. Bond v. Commissioner, 100 T.C. 32, 36 (1993);
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). In addition,
where both parties have moved for summary judgment, each party's
motion must be considered independently, to determine whether
that party has met its burden of proof. Take v. Commissioner, 82
T.C. 630, 633 (1984), affd. 804 F.2d 553 (9th Cir. 1986); Abramo
v. Commissioner, 78 T.C. 154, 162-163 (1982).

This Court has often found that issues of material fact
(continued...)
 - 24 -

VI. Holdings

For all the reasons set forth above, we reject respondent's

arguments, apply stare decisis, follow Security Bank Minn. v.

Commissioner, supra, and Security State Bank v. Commissioner,

supra, and hold that section 1281(a) does not apply to IFNB's

short-term consumer, commercial, and agricultural loans made to

its customers. However, we hold that genuine issues of material

fact exist--which issues must be resolved by a trial or obviated

by agreement of the parties--before the proper tax treatment of

20
(...continued)
exist--and has declined to grant summary judgment for either
party--where cross-motions have been made. See Estate of
Wilbanks v. Commissioner, 94 T.C. 306, 315-316 (1990); Krause v.
Commissioner, 92 T.C. 1003, 1026-27 (1989); Take v. Commissioner,
supra; Burford v. Commissioner, T.C. Memo. 1984-466.

The same approach has been used by courts deciding cross-
motions for summary judgment under the analogous Federal rule,
Fed. R. Civ. P. 56. As has been stated by one of the leading
treatises on Federal civil procedure:

When litigants concurrently pursue
summary judgment, the first impression of the
uninitiated is often that at least one party
inevitably will be victorious and obtain
summary judgment. However, this seemingly
intuitive impression is incorrect. * * *
Each individual summary judgment motion must
be evaluated independently to determine
whether there exists a genuine dispute of
material fact and whether movant is entitled
to judgment as a matter of law. [11 Moore's
Federal Practice sec. 56.10[6] (3d ed. 1998)
at 56-57; fn. ref. omitted.]

See also 10A Wright et al., Federal Practice & Procedure: Civil
sec. 2720 (3d ed. 1998), and the cases cited therein.
 - 25 -

the CD’s and time deposits held by IFNB can be decided.

Accordingly, we hold that the portions of both parties' motions

relating to the time deposits and CD's cannot be decided as a

matter of law and are therefore not ripe for summary judgment.

See Rule 121.

To reflect the foregoing,

An order will be issued

granting in part and denying

in part petitioner's motion

for partial summary judgment,

as supplemented, and denying

respondent's cross-motion for

partial summary judgment.