dissenting: I fully agree with the majority that since we are here applying a definition (of borrowed capital) contained in a Federal statute, our consideration of the problem is not terminated by the fact that these certificates do so qualify under Georgia law.
I fully disagree with the majority’s statement, “the status of these certificates under applicable State law is in no way determinative of the litigated question,” (emphasis supplied) for it is not disputed that strict compliance with that very State law was a prerequisite to realization by this petitioner of more than 8-percent interest.
We are here dealing with a tax on income, and absent this method of doing its business, in compliance with the State law, petitioner’s income would Rave disappeared, or at least have been greatly reduced.1
The broad Congressional purpose behind the enactment of the borrowed capital provision of the excess profits credit based on invested capital is clear. It is to provide relief by means of a credit for 75 percent of funds procured by borrowing which were actually used in the business in order to produce further taxable income. The Senate Finance Committee stated (S. Kept. No. 2679, 81st Cong., 2d Sess., p. 10 (1950)) :
Borrowed capital, under your committee’s bill, is indebtedness (but not including interest) which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, deed of trust, bank loan agreement, or conditional sales contract. This is substantially the same definition as appears in the House bill. However, your committee’s bill limits the amount to be considered as borrowed capital to outstanding indebtedness “incurred in good faith for the purposes of the business.” * * * [Emphasis supplied.]
See also Summary of H.R. 9827 “The Excess Profits Tax Act of 1950” prepared by the staff of the Joint Committee on Internal Revenue Taxation, sec. 5(c), p. 6, providing in part:
Definition of borrowed capital. — Borrowed capital is indebtedness * * * which is evidenced by a * * * certificate of indebtedness * * *. However, the amount to be considered as borrowed capital is limited to outstanding indebtedness “incurred in good faith for the purposes of the business." * * * [Emphasis supplied.]
and section 40.439-1 (d), Regs. 130, which reads: “In order for any indebtedness to be included in borrowed capital it must be incurred m good faith for the purposes of the business and not merely to increase the excess profits credit. [Emphasis supplied.]”
It seems clear to me that during the years in issue petitioner had available cash on a daily average basis in the amounts of $166,293.46 and $186,007.35 which had been paid in by the certificateholders in cash. Respondent argues that these amounts were simply the daily average of the amounts paid on the installment notes and therefore entitled to no credit.
I feel that respondent’s analysis is superficial. Of course, these amounts were what had been paid in on the installment notes, but in a very real sense they were something more.; they were the holders’ equities in the certificates at any given time and petitioner actually had these amounts of cash on hand which it could, and did, lend to new borrowers. These same amounts were also represented by petitioner’s net liabilities (after all offsets) on the certificates, and it is these net liabilities which I feel do qualify as a part of the borrowed capital credit.
The main reliance of the majority in allowing petitioner no credit on the certificates is expressed: “ ‘A given result at the end of a straight path is not made a different result because reached by following a devious path.’ * * *” The following cases are cited: Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613; Starr v. Commissioner, 82 F. 2d 964 (C.A. 4), certiorari denied 298 U.S. 680; Helvering v. Elkhorn Coal Co., 95 F. 2d 732 (C.A. 4); Kimbell-Diamond Milling Co., 14 T.C. 74, affirmed per curiam 187 F. 2d 718 (C.A. 5), certiorari denied 342 U.S. 827; S. Nicholas Jacobs, 21 T.C. 165, affd. 224 F. 2d 412 (C.A. 9); Virginia W. Stettinius Dudley, 32 T.C. 564, affirmed per curiam 279 F. 2d 219 (C.A. 2); but a critical examination of these cases reveals that in each, the identical result as was attained could have been reached by a direct method but would have resulted in more taxes being payable. As expressed by the Supreme Court in Minnesota Tea Co. v. Helvering, supra at 613:
The conclusion is inescapable, as the court below very clearly pointed out, that by this roundabout process petitioner received the same benefit “as though it had retained that amount from distribution and applied it to the payment of such indebtedness.” * * * The preliminary distribution to the stockholders was a meaningless and unnecessary incident in the transmission of the fund to the creditors, all along intended to come to their hands, so transparently artificial that further discussion would be a needless waste of time. * * *
I therefore regard these cases as inapposite here where more than 8-percent interest could not have been realized by petitioner absent the certificates.
I would hold therefore that such daily average amounts ($166,293.46 in 1952 and $186,007.35 in 1953) are within the spirit and purpose of section 439(b) (1) and that such amounts are allowable as a part of petitioner’s borrowed capital.
OppeR and Dawson, JJ., agree with this dissent.The majority state that there was some “general testimony” to the effect that petitioner's business could not have been operated profitably at the legal rate of interest of 8 percent per annum in Georgia. In my view this testimony was convincing. It was by petitioner’s vice president and general counsel as follows:
“We would stay in business just about one month, because we would lose money so fast. You can’t loan money on installments, and take those myriad of detailed transactions, at any 8% interest rate. You wouldn’t be in business 30 days. Mr. Acker wasn’t making any money at 18