*210 Decision will be entered for the respondent.
Petitioner was a loan company incorporated in California, on Apr. 23, 1959, with an initial capitalization of $ 1,500. Ninety-nine percent of the issued and outstanding stock was owned by Joseph K. Stanley, petitioner's president, and his wife, Ernestine. At the time of petitioner's incorporation, assets (primarily in the form of notes receivable) were transferred to petitioner from another corporation controlled by Joseph K. Stanley. During 4 years of corporate life, more than 80 percent of petitioner's income in each year was interest from the notes transferred to it or from notes reflecting new loans made by it. At no time during its 4-year corporate existence did petitioner receive funds from the public or from any source other than the Stanleys or a corporation controlled by them. The Stanleys, during the first 2 years of petitioner's life, did advance substantial sums to fund petitioner's loan operations. Corporations more than 90-percent controlled by Joseph K. Stanley also advanced lesser amounts. These advances or loans from the Stanleys or Stanley-controlled corporations were evidenced by ordinary demand promissory *211 notes, bearing interest at the rate of 6 percent per annum, "payable at maturity." Held:
1. Petitioner was a personal holding company during the taxable years ended Apr. 30, 1960, 1961, and 1962. It does not fall within the exception for loan or investment corporations found in former
2. Held, further, petitioner's liquidating distribution which occurred on Apr. 30, 1963, the end of petitioner's final fiscal year, may not be applied as a dividends-paid deduction against petitioner's undistributed personal holding company income for taxable years prior to the year of distribution. Former
*584 Respondent determined the following deficiencies in petitioner's income taxes for the taxable years ended April 30, 1960, 1961, and 1962:
| Fiscal year | Deficiency |
| 1960 | $ 6,805.38 |
| 1961 | 14,317.24 |
| 1962 | 10,471.39 |
| 31,594.01 |
The only questions presented for our decision are whether respondent was correct in imposing the personal holding company tax of
*217 OPINION
All of the facts have been stipulated and are adopted as our findings and incorporated herein by this reference.
The petitioner is a dissolved California corporation with its former principal office at 1533 Highland Avenue, National City, Calif. During the years here involved, the petitioner's books were kept and its income reported and returned on an April 30 fiscal year basis. The cash method of accounting was employed, and Federal corporate income tax returns were filed with the district director of internal revenue at Los Angeles, Calif., for the years ended April 30, 1960, 1961, 1962, and 1963.
Joseph K. Stanley for the period 1940-58 was associated with the South Bay Savings & Loan Association at Chula Vista, Calif., in the capacity of manager and controlling stockholder. In this capacity, he was primarily engaged in the real estate loan business. In 1958 Joseph sold his stock interest in the South Bay Savings & Loan Association and severed his relationship with that organization. However, because of his long experience, he intended to remain active in the business of making or acquiring real estate loans. Prior to his retirement from the Savings & Loan Association, *218 he had set up two corporations whose functions were complementary and which were intended to aid Joseph in his prosecution of the loan and related businesses.
South Bay E & R Corp. was incorporated under the laws of the State of California on April 9, 1956. The main business of this corporation was to act as trustee under deeds of trust in connection with real estate transactions where the Savings & Loan Association had loaned money secured by trust deeds (of which it was the beneficiary) on various parcels of real estate. Joseph K. Stanley has owned 90 percent of the issued and outstanding stock of South Bay E & R Corp. since its inception, and upon the termination of his association with the Savings & Loan Association in 1958 it was agreed that South Bay E & R Corp. would continue to operate as trustee for the Savings & Loan Association for a period of 5 years. South Bay E & R Corp. also engaged to an undisclosed extent in the business of making real estate loans.
A second complementary corporation, South Bay Loan Service, was incorporated on May 27, 1957, under the laws of the State of *586 California. Since its incorporation, Joseph has owned all of its stock. The primary*219 function of South Bay Loan Service is to operate as an escrow company; however, it too also engaged in the making of real estate loans to an undisclosed extent. The funds used in the real estate loan business of South Bay Loan Service were obtained from Joseph K. Stanley and from his wife, Ernestine Stanley.
After 1958, when he severed his relationship with the Savings & Loan Association, Joseph founded two further complementary corporations, J.K.S. Enterprises and petitioner, Jos. K., Inc.J.K.S. Enterprises was incorporated on July 14, 1959, under the laws of the State of California, and since its inception, over 99 percent of its stock has been owned by Joseph K. Stanley. The primary business of this corporation was to act as a collection agency for holders of trust deeds; it received trust deeds, collected monthly payments from the debtors thereunder and after deducting a small collection charge, remitted the balance to the holder of the trust deed. In connection with this collection business, J.K.S. Enterprises also initiated foreclosure proceedings on behalf of the holders of trust deeds in appropriate cases.
The petitioner, Jos. K., Inc., was incorporated on April 23, *220 1959, some 3 months earlier than J.K.S. Enterprises (the collection agency) and under the following circumstances: In early 1959, South Bay Loan Service (the escrow company) had been audited by the State of California, Division of Corporations, in connection with that agency's control over escrow companies doing business in the State of California. After the conclusion of the audit, South Bay Loan Service received a letter from the Division of Corporations dated April 14, 1959, the effect of which was to state the division's conclusion that South Bay Loan Service's current liabilities exceeded its current assets by the amount of $ 20,388.13, resulting in a deficit of working capital. Section 1740 of title 10 of the California Administrative Code provides that escrow agents must be financially solvent, and the letter closed with a request that South Bay Loan Service advise the division of the steps which would be taken to comply with the solvency provisions of the California statute. Among South Bay Loan Service's debts was $ 286,700 owing to Joseph, the liability being evidenced by a series of demand promissory notes bearing interest at the rate of 6 percent per annum. The notes*221 were identical in all respects except for the dates and amounts.
It was at this juncture, on April 23, 1959, as previously indicated, that petitioner was formally incorporated under the laws of the State of California, with Joseph K. and Ernestine Stanley owning 148 of the 150 original shares of issued and outstanding stock. At Joseph's direction, South Bay Loan Service discharged its indebtedness to him under the following procedure. Assets of South Bay were transferred to petitioner having a face value on petitioner's books of $ 286,700. *587 Petitioner then assumed South Bay Loan Service's indebtedness to Joseph K. Stanley in the amount of $ 286,700. These transactions occurred on May 1, 1959, 8 days after petitioner's incorporation and 17 days after South Bay Loan Service received the warning letter from the Division of Corporations. They were recorded on petitioner's books as follows:
| Debit | Credit | |
| Account receivable -- South Bay Loan Service | $ 86,114.36 | |
| Real estate | 1,759.32 | |
| Notes receivable | 194,352.50 | |
| Accrued interest receivable | 4,473.82 | |
| Notes payable | $ 286,700.00 |
To record acquisition of real estate and notes receivable (plus accrued interest) *222 and assumption of notes payable (without accrued interest) from South Bay Loan Service
The record does not disclose if South Bay Loan Service was restored to solvency with the completion of the transaction just described, to the satisfaction of the California Division of Corporations, but petitioner's corporate existence was launched with an assumption of indebtedness amounting to $ 286,700 and a corresponding receipt of assets from South Bay Loan Service in the same amount. 2 Petitioner was authorized to issue 2,500 shares of common stock at a par value of $ 10 per share. During the entire period of its existence, only 150 shares were ever issued and outstanding, and, as mentioned, 148 of these were owned by Joseph and Ernestine; Joseph served as petitioner's president throughout the period. Petitioner commenced business with an initial capitalization of $ 1,500.
During its entire existence, petitioner was engaged principally*223 in the business of making real estate loans, and during this span of time petitioner's business operations were conducted out of the same office in which the operations of Joseph's three other complementary corporations were being carried on. That is, the petitioner, a loan company, was being operated at the same office with South Bay E & R Corp. (trustee for trust deeds), South Bay Loan Service (escrow company), and J.K.S. Enterprises (collection agency). The building in which all four corporations were housed displayed a large neon sign with the words "South Bay Loan Service." The names of all four corporations were on the front door. Four employees assisted Joseph Stanley in the operation of these four corporations. They were a bookkeeper, two escrow officers, and one clerical employee. The salaries of these employees were allocated to the four corporations in accordance with services rendered to each.
All the loans made by petitioner during its 4-year existence were made to business friends and acquaintances of Joseph K. Stanley. It *588 was not necessary for petitioner to advertise or solicit loans. Rather, as a result of Joseph's long connection with the real estate*224 loan industry, business friends and acquaintances would come to him for loans, and during petitioner's 4-year corporate life, many loans were made, the rate of interest varying from a low of 6.6 percent to a high of 7 percent. These loans will be discussed in greater detail below. However, it is accurate to state generally that a substantial percentage of the funds which petitioner used in its lending business was provided by the Stanleys or one of the complementary corporations in the form of "advances" or loans.
The initial capitalization of $ 1,500 and the assets which were transferred by South Bay Loan Service to petitioner simultaneously with the assumption of its liability on notes to the Stanleys, were insufficient to fund an active loan business on the scale of petitioner's operations during its 4-year life and its first 2 years particularly. The record is devoid of any evidence that persons other than the Stanleys or two of their other three complementary corporations ever made any capital contributions, advances to, or deposits with the petitioner. The funds to operate petitioner's business were entirely furnished by the Stanleys, or by one of the other Stanley corporations*225 housed in the same office with petitioner. No portion of petitioner's business operation in any year before us consisted of receiving funds from other investors or depositors.
During the first fiscal year, ended April 30, 1960, petitioner made 115 loans in the total amount of $ 702,631.41, all secured by first or second deeds of trusts. 3 During the same year, the Stanleys and South Bay Loan Service lent the amounts listed below to petitioner on the following dates and at the stated rate of interest. No funds received by petitioner during this fiscal period were "subject to check"; checks or orders to pay could not be written against these funds.
| Amount | Interest | Date | |
| Percent | |||
| Jos. K. and Ernestine Stanley | $ 50,000 | 6 | 9/22/59 |
| Jos. K. and Ernestine Stanley | 80,000 | 6 | 10/ 9/59 |
| Jos. K. and Ernestine Stanley | 10,000 | 6 | 2/ 3/60 |
| Jos. K. and Ernestine Stanley | 10,000 | 6 | 2/ 3/60 |
| Jos. K. and Ernestine Stanley | 10,000 | 6 | 2/23/60 |
| South Bay Loan Service | 15,000 | 6 | 3/ 7/60 |
| South Bay Loan Service | 5,000 | 6 | 3/11/60 |
| Jos. K. and Ernestine Stanley | 70,000 | 6 | 4/26/60 |
*226 All of the advances or loans listed above were evidenced by unsecured demand promissory notes bearing interest at the rate of 6 percent *589 per annum and payable at maturity. These notes were on printed forms entitled "Straight Promissory Note" with the blanks filled in to reflect the details of a particular loan.
Over 99 percent of petitioner's income for the fiscal year ended April 30, 1960, was from interest or "loan fees" derived from real estate loans. More specifically, petitioner in this period reported the following gross income:
| Fees for drawing paper | $ 78.00 |
| Loan fees | 7,949.62 |
| Demand fees | 55.00 |
| Interest | 22,140.09 |
| Total income | 30,222.71 |
At the end of this first fiscal period, April 30, 1960, petitioner's balance sheet reflected notes receivable (less reserve for bad debts) of $ 555,963.01 and notes payable of $ 536,700. This latter figure represents the sums advanced to petitioner by the Stanleys and South Bay Loan Service, as well as the assumed South Bay Loan Service's indebtedness to the Stanleys at the time of petitioner's incorporation. The notes receivable figure, representing 99 percent of petitioner's assets, consists of the balance *227 due on loans made in the first year of operation, as well as the balance due on South Bay Loan Service's notes receivable which were transferred to petitioner as assets at the time of its incorporation. The notes payable figure represents 94 percent of petitioner's total liability and net worth.
No loan to Joseph or Ernestine Stanley exceeded $ 5,000 in principal amount during this first fiscal year. Earnings and profits were accumulated on operations for the year in the amount of $ 8,241.62, and during the year $ 40,000 of the amount owing to the Stanleys was repaid.
During the next fiscal year, which ended on April 30, 1961, petitioner made 39 loans secured by first or second deeds of trust and these loans totaled $ 87,363.33 in amount. 4 During this second fiscal period, petitioner reported the following gross income:
| Fees for drawing paper | $ 14.00 |
| Loan fees | 3,877.50 |
| Demand fees | 15.00 |
| Interest | 46,783.74 |
| Total income | 50,690.24 |
*228 Again to provide needed funds for petitioner's loan operations, the Stanleys and one of the complementary corporations advanced moneys to petitioner during this year. The following amounts were advanced, *590 and the advances were likewise evidenced by printed-form unsecured 6-percent demand promissory notes with interest payable at maturity:
| Amount | Interest | Date | |
| Percent | |||
| Jos. K. and Ernestine Stanley | $ 5,000 | 6 | 5/ 3/60 |
| Jos. K. and Ernestine Stanley | 5,000 | 6 | 5/24/60 |
| Jos. K. and Ernestine Stanley | 10,000 | 6 | 6/28/60 |
| J.K.S. Enterprises | 5,000 | 6 | 6/28/60 |
None of the funds received by petitioner during this second fiscal period were "subject to check."
The balance sheet at the end of this second fiscal period, April 30, 1961, reflected notes receivable (less reserve for bad debts) in the amount of $ 468,298.79. Notes payable came to $ 516,700. The sources of both the receivables and payables are the same as for the year ended April 30, 1960, except that new loans to borrowers and new advances from the Stanleys and J.K.S. Enterprises are reflected. The notes receivable account of $ 468,298.79 represented 81 percent of petitioner's total assets. The remainder*229 of petitioner's assets was in cash, excepting a real estate parcel whose book value was only $ 1,759.32, this asset being one of South Bay's assets transferred on May 1, 1959. The notes payable figure represents 90 percent of petitioner's total liabilities and net worth.
In the second fiscal year, no loans to Joseph or Ernestine Stanley exceeded $ 5,000 in principal amount. During the year $ 17,079.10 was added to accumulated earnings and profits, and $ 25,000 of the funds advanced was repaid to the Stanleys and the complementary corporations.
For petitioner's third fiscal year, May 1, 1961 through April 30, 1962, five secured loans were made which totaled $ 95,322.92 in amount. During this fiscal period petitioner reported the following gross income:
| Demand fees | $ 72.50 |
| Interest received | 39,909.86 |
| Realized discounts | 6,006.96 |
| Loan fees | 100.00 |
| Total income | 46,089.32 |
As in all other fiscal periods before us, the table above demonstrates that over 99 percent of petitioner's income was from interest, loan fees, or realized discounts. In this period, no further funds were advanced by the Stanleys or any of the corporations controlled by them, and at the close of*230 this fiscal period, the balance sheet reflected notes receivable (less reserve for bad debts) of $ 406,667.87 and notes payable of $ 496,700. The "notes receivable" figure accounts for 71 percent of *591 petitioner's assets. More than 99 percent of the remainder of petitioner's assets was in cash. The notes payable figure represents 86 percent of petitioner's total liabilities and net worth.
As always, loans to the Stanleys were less than $ 5,000 in principal amount. The record is devoid of any evidence that there were any advances or loans to, or deposits with petitioner from any source during this fiscal period, all notes payable at the end of the year being balances remaining unpaid on loans or advances made in earlier years. The earnings and profits accumulated for the year came to $ 12,554.57, and there were no repayments to the Stanleys or the Stanley-controlled corporations which had advanced funds in prior years.
For the fourth and final fiscal period of petitioner's existence, the record fails to disclose whether any loans were made. In this period, however, the following gross income was reported:
| Interest income | $ 29,382.49 |
| Demand fees | 50.00 |
| Discount realized | 2,090.23 |
| Bad debt reserve | 12,369.09 |
| Total income | 43,891.81 |
*231 The earnings and profits which were accumulated in this final fiscal period came to $ 7,335.42 and $ 130,000 of the funds he had advanced earlier was repaid to Joseph Stanley.
On April 30, 1963, at the close of its final fiscal period the petitioner was liquidated pursuant to the Corporation Code of the State of California, and all of its assets were distributed to its shareholders on that date. At this time, the total earnings and profits of the petitioner accumulated over its 4-year life and after February 28, 1913, came to $ 45,210.71. The distribution of assets to the shareholders on April 30, 1963, included this amount of $ 45,210.71 properly chargeable to earnings and profits. To reflect the final distribution in liquidation, the following journal entries were made on petitioner's books on April 30, 1963:
| Description | Charges | Credits |
| Notes payable | $ 349,671.26 | |
| Accrued Federal income tax | 3,143.75 | |
| Unrealized discounts | 18,316.62 | |
| Stock | 1,500.00 | |
| Surplus | 45,210.71 | |
| Bank -- U.S. National | $ 100.68 | |
| Oceanside S/L Assn | 10,000.00 | |
| Notes receivable | 405,982.34 | |
| Lot 376, Lincoln Acres | 1,759.32 | |
| To close all accounts -- Corporation liquidated | ||
*232 *592 The petitioner met the gross income requirement of section 543(a)(1) and the stock ownership requirement of
The petitioner's shareholders, on their individual returns for 1963, reported the distribution of the assets in complete liquidation under section 331 as capital gain.
In his notice of deficiency to petitioner corporation, respondent determined that Jos. K., Inc., was a personal holding company as defined in
The parties have agreed to certain adjustments in petitioner's income for the years before us as to interest expense, bad debt, and "discounts earned" items. The only question for our decision is whether respondent was*233 correct in imposing the personal holding company tax of
The definition of personal holding companies as presently found in
The parties agree and the petitioner concedes that the "loan fees" received by petitioner in each fiscal period constituted interest income within the meaning of section 543 (defining personal holding company income). There is therefore no question but that the petitioner fell within the statutory*234 definition of a personal holding company, unless it can show that it is entitled to treatment under the exceptions provided for by former
*593 Petitioner advances two arguments which, if successful, would relieve it from liability for the earlier years even though the definitional requirements of
(1) Petitioner argues primarily that it falls within the exception for "a loan or investment corporation," which during the years in issue was provided for in former
(2) In the alternative, petitioner argues that it is entitled to a dividends-paid deduction under
*235 (c) Exceptions. -- The term "personal holding company" as defined in subsection (a) does not include --
* * * *
(8) a loan or investment corporation, a substantial part of the business of which consists of receiving funds not subject to check and evidenced by installment or fully paid certificates of indebtedness or investment, and making loans and discounts, and the loans to a person who is a shareholder in such corporation during such taxable year by or for whom 10 percent or more in value of its outstanding stock is owned directly or indirectly (including, in the case of an individual, stock owned by members of his family as defined in
It is clear that petitioner was, basically and generically, a corporation actively engaged in the business of making or acquiring real estate loans for at least the first 2 years of its 4-year life. However, this fact alone will not qualify it for the exception treatment which is sought. Under the plain language of the statutory paragraph just quoted, several technical and more exacting requirements than the mere operation*236 of a nonregulated loan business are called for.
(1) The taxpayer must be a loan or investment corporation;
(2) a substantial part of whose business consists of receiving funds not subject to check,
*594 (3) which are evidenced by installment or fully paid certificates of indebtedness or investment;
(4) and a substantial part of whose business consists of making loans and discounts.
(5) Loans to a shareholder owning 10 percent or more in value of its outstanding stock (under pertinent attribution rules) must not exceed*237 $ 5,000 in principal amount at any time during such year.
Petitioner submits that each of these requirements was met during each of the 3 years in issue. We disagree. The petitioner during at least some years met requirements (1), (4), and (5). However, we do not believe that requirements (2) and (3), which are related, were met by petitioner, i.e., receiving funds not subject to check which are evidenced by installment or fully paid certificates of indebtedness or investment, as a substantial part of its business.
In short, even if the loans or "advances" by the Stanleys to petitioner corporation are considered to constitute a substantial part of its business and "receiving funds not subject to check," which proposition we reject as being clearly not within the statutory contemplation, these advances were not evidenced by "certificates of indebtedness" but by ordinary-form demand promissory notes. Petitioner insists that its loans from the Stanleys constituted a substantial part of its business and that, in effect, the statutory terminology "certificates of indebtedness" means nothing more than instruments of indebtedness generally. It is concluded and urged by petitioner*238 that we likewise conclude that the promissory notes issued by petitioner to the Stanleys are within this broad category.
In the articles of incorporation of Jos. K., Inc., the principal purpose for which the corporation was formed was stated to be the "buying, selling and otherwise dealing" in real estate loans. Incidental to this purpose, the usual other purposes and powers were provided for, including power to borrow money, enter into contracts, etc. However, nowhere do the articles indicate that petitioner was incorporated to operate a business to receive funds or deposits from the general public. We must conclude that it would subvert the congressional purpose and intent to hold that because the corporation and its shareholders determined to finance the corporate operation by borrowing funds from the shareholders, a substantial part of the business of the corporation was "receiving funds not subject to check."
If the shareholders had made additional contributions to petitioner's capital either by stock purchases or otherwise and petitioner had thus obtained the funds needed to finance its operations, it would have received funds not subject to check but it would have been no*239 more in the business of "receiving funds not subject to check" within the statutory intendment than we believe this petitioner was in the years before *595 us. The method adopted internally by the officers and shareholders to finance petitioner's business operation did not convert the business itself into one of "receiving funds" as that term is used in the statute.
The entire concept of "a loan or investment corporation" excepted by
However, even if petitioner were to prevail with respect to the argument that its business qualifies for the exception, because a substantial part of its business consisted of receiving funds *240 not subject to check, we would conclude notwithstanding that it does not meet the further requirement that such funds be evidenced by "installment or fully paid certificates of indebtedness or investment." Here the loans or advances from Stanley to petitioner were evidenced by printed-form demand promissory notes of the most elemental kind, and nothing more.
In support of its contention that the phrase "certificates of indebtedness" includes demand promissory notes, petitioner relies upon a broad interpretation of the legislative history of
In this instance, we conclude that "certificates of indebtedness" must be given a commonly accepted technical and legal meaning, and not the more general dictionary meaning found in Webster's Third New International, a meaning we consider too broad. The terminology "certificate of indebtedness" connotes a more formal document in the nature of a security instrument. We must acknowledge that the term does not import as exact a definition as is desirable in taxing statutes, but in our view an unsecured demand promissory note lacks the necessary formality and, perhaps, the necessary security to qualify as a certificate of indebtedness. We believe the definition for certificate of indebtedness found in Black's Law Dictionary (4th ed. 1951), *596 represents a more commonly accepted legal definition, if we were reduced to resolving this dispute in a battle of lexicographers:
CERTIFICATE OF INDEBTEDNESS. An obligation sometimes issued by corporations having practically the same force and effect as a bond, though not usually secured on any specific property.
Fortunately, we are not reduced to relying solely upon our dictionary preference.
The legislative history of
As mentioned, however, petitioner does not base his claim solely on the ground that his is a definition found in Webster's Dictionary. He urges that the legislative history of
The exception for loan or investment companies was made part of the Code by section 182(b)(7), Revenue Act of 1942, which added
When the original personal holding company surtax was added by the 1934 Revenue Act, banks, a substantial part of whose business was the receipt of deposits, had been excluded from coverage. Sec. 351 (b), Revenue Act of 1934. See also S. Rept. No. 558, 73d Cong., 2d Sess., p. 15 (1934). Two years later, in 1936, another exception was added for another group of active lenders, the "small loan companies." See sec. 351(b)(1), Revenue Act of 1936, and S. Rept. No. 2156, 74th Cong., 2d Sess., p. 24 (1936). In the Revenue Act of 1938, the exception for small loan companies was rephrased so that the special treatment was available only for "licensed personal finance companies." Sec. 402(b), Revenue Act of 1938.
These exceptions were carried forward into the 1939 Code in
A substantial impetus for the new exception which became
The American Industrial Bankers Association proposed the following exemption, which is practically*245 identical to
an industrial loan and investment company incorporated and doing business under the laws of any State, a substantial part of the business of which consists of receiving funds not subject to check and evidenced by installment or fully paid certificates of indebtedness or investment, and making loans and discounts * * * and which company is subject by law to supervision and/or examination by State authority having supervision over such institutions, and which company has not, during the taxable year, made loans, directly or indirectly, to any of its controlling stockholders. [Hearings, supra at 2691.]
In reporting out the amendment which became
They [the excepted companies] exist in most *246 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 supervision of State authority having supervision over financial institutions." *598 * * * in the case of loan or investment companies the laws of the various States are not as uniform as they are with respect to licensed personal finance companies. Many loan or investment companies are not under State supervision or subject to the supervision of State authority having supervision over financial institutions. In view of the fact that
Petitioner's argument that the broad range of companies which the Finance Committee Report mentions for exception treatment indicates that no particular formality is required in the debt instruments issued by qualifying lending companies must be viewed in the light of this background. We think the legislative history of the loan company exception here involved indicates rather conclusively that petitioner's view of a qualifying lending operation is not in accord with*248 congressional intent. For its part, petitioner did not even attempt to demonstrate by proof that any of the broad range of companies mentioned in the Senate Finance Committee Report, supra, issue demand promissory notes to those persons who supply them with funds through account investments or deposits. It is clear to us that Congress was acting in response to the complaints of lenders who were "near banks," but whose qualification as banks under
The hearings and committee reports considered together leave no doubt that the category of lenders intended to be excepted were those companies which receive funds from the general public (upon which check could not be drawn) and issued either investment paper or made entries in a formal passbook to evidence the debts to investor-depositors. The provision definitely contemplates an operation very similar in nature to that of a commercial or industrial bank, except that the funds supplied by depositors cannot be drawn upon*249 by check. Nowhere is it even suggested that what would otherwise be regarded as a personal holding company should be exempt merely because it finances its operation by borrowing from its own shareholders.
Two cases were cited to the Ways and Means Committee in illustration of the sort of lending business for which statutory exception was sought. See
In both of the cases just cited, the lending organizations received funds (deposits) from the general public and issued in return formal certificates of indebtedness, *250 formal certificates of investment, or a passbook issued to the depositor. Both cases recognize that an important reason a special category had been created earlier for banks was to enable those lending institutions to build up sufficient surpluses to protect depositors. See also the Ways and Means Committee Hearings on the 1942 Revenue Act, supra at 2691.
As we view it, Congress added
The petitioner *251 in the instant case did not receive funds from the general public in the nature of deposits not subject to check. To borrow the language of
*252 *600 While we have stressed the form of the instruments evidencing the indebtedness, the requirement of a "certificate" is merely an incidental and related requirement to the fundamental notion that the qualifying "loan or investment corporation" receive funds analogous to deposits or other funds invested from "outside" investors or savers. If it were not anticipated that funds would be deposited and invested from the community at large, why would the formality of a "certificate" have been required? This word choice reinforces our belief that to qualify under former
In reaching the conclusion just stated, we have, as urged by the parties, resorted to the legislative history of the section, including the committee hearings. We think that a court may seek out any reliable evidence of legislative purpose even when the statutory language appears to be clear. See
Having concluded that petitioner was a personal holding company during the years in issue and not excepted by former
On April 30, 1963, petitioner was liquidated and all of its assets were distributed to the shareholders. On the liquidation date, petitioner had accumulated earnings and profits totaling $ 45,210.71. Petitioner contends that under
Respondent's position is that the*255 liquidating dividend deduction to which petitioner is entitled may be applied only against the taxpayer's personal holding company income of the taxable year in which the distribution was made, i.e., the fiscal year ended April 30, 1963. Respondent has applied the liquidating dividend against petitioner's personal holding company income for this final fiscal year, and the final year is not therefore in issue.
A review of the applicable statutory provisions reveals that petitioner's contention, which would grant him something in the nature of a "carryback," is simply not authorized by the statutory scheme. All statutory references, as mentioned, are to the 1954 Code sections as they existed during the years in issue.
* * * For purposes of this part, the term, "undistributed personal holding company income" means the taxable income of a personal holding company adjusted in the manner provided in subsections (b), minus the dividends paid deduction as defined in
(a) General Rule. -- The deduction for dividends paid shall be the sum of --
(1) The dividends paid during the taxable year,
(2) the consent dividends for the taxable year (determined under
(3) in the case of a personal holding company, the dividend carryover described in
(b) Special Rules Applicable. -- In determining the deduction for dividends paid, the rules provided in
[Emphasis added.]
Finally,
* * * Rules Applicable in DETERMINING DIVIDENDS ELIGIBLE FOR DIVIDENDS PAID DEDUCTION. [Emphasis added.]
(a) General Rule. -- For purposes of this part, the term "dividend" shall, except as otherwise provided in this section, include only dividends described in
*602 (b) Distributions in Liquidation. -- In the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for purposes of computing the dividends paid deduction. In the case of a complete liquidation occurring within within 24 months after the adoption of a plan of liquidation, any distribution within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made, be treated as a dividend for purposes of computing the dividends paid deduction.
As the statutory framework excerpted above illustrates, a personal holding company tax or surtax was imposed on undistributed personal holding company income for each taxable year. In computing*258 this amount, a deduction was allowed, among other things, for dividends paid during the taxable year under
The governing section on the facts of the present case is, therefore,
Petitioner's basic contention is that is that
The provision in question simply provides as follows:
In the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for purposes of computing the dividends paid deduction. * * *
*603 From this language, petitioner concludes through his reasoning already alluded to that "Congress could not have intended to give a taxpayer a large deduction for dividends paid and at the same time limit the amount of*260 the deduction which could be effectively utilized."
We have already indicated our conclusion that
Respondent's determinations must in all respects be sustained.
Decision will be entered for the respondent.
Footnotes
1. All statutory references herein are to the Internal Revenue Code of 1954, unless otherwise noted.↩
2. Technically, Jos. K., Inc.'s corporate existence began 8 days earlier on Apr. 23, 1959.↩
3. Of these 115 loans, more than half were made to two separate builders, "Brown and Parker."↩
4. Of these loans, more than 30 were made to the builder named Brown who received many of the loans made during the preceding fiscal year.↩
5. See the amendments made by sec. 225, Revenue Act of 1964.↩
6.
Sec. 542(c)(8) was eliminated and recast by sec. 225, Revenue Act of 1964. See presentsecs. 542(c)(6) and542(d) ,I.R.C. 1954↩ .7. Apparently the House Committee on Ways and Means was concerned that mere "incorporated loan sharks," to use their terminology, might qualify for exception treatment. See H. Rept. No. 2333, 77th Cong., 2d Sess., p. 135 (1942).↩
8. The parties seem to have agreed that petitioner was thinly capitalized in their settlement of an issue not before us for decision. In the taxable year ended Apr. 30, 1961, petitioner apparently deducted some of the "interest" at 6 percent which it had paid Joseph K. Stanley on funds "advanced" to it. The amount deducted by this cash basis taxpayer as interest on the Stanley advances was only $ 4,166.70. The parties stipulated that for purposes of determining the deductibility of this purported interest payment they entered into a pre-deficiency notice agreement that interest on $ 336,700 would be treated as a dividend distribution. This latter figure represents more than 60 percent of the total notes payable at year end.↩
9. As with most of the other Code sections cited herein, technical changes were made by sec. 225, Revenue Act of 1964.↩
10. This section was amended for years after Dec. 31, 1963, Pub. L. 88-272, sec. 225.↩