bonds, debentures, or certificates of stock and of indebtedness, and other documents, instruments, matters, and things mentioned and described in Schedule A of this title * * * the several taxes specified in such schedule." Revenue Act of 1926, Section 800, 26 U.S.C.A.Int.Rev. Acts, page 284.
"* * * On all bonds, debentures, or certificates of indebtedness issued by any corporation, and all instruments, however termed, issued by any corporation with interest coupons or in registered from, known generally as corporate securities, on each $100 of face value or fraction thereof, 5 cents: Provided, That every renewal of the foregoing shall be taxed as a new issue * * *." Revenue Act of 1926, Tit. 8, Section 808, Schedule A(1), 26 U.S.C.A.Int.Rev. Acts, page 287.
The amount claimed represents stamp taxes assessed by the Commissioner of Internal Revenue on the ground that the extension of the maturities of the bonds and certificates constituted renewals of such instruments within the meaning of the above statutes, and within the meaning of Article 8 of Regulations 71 providing as follows: "An agreement extending a mortgage upon maturity, where a bond is secured by the mortgage and such agreement operates to renew the bond, subjects the latter to stamp tax as a renewal." The Commissioner in his memorandum denying an abatement of the taxes pointed out that the above Regulation applies to extension of unmatured corporate bonds as well: Campbell River Timber Co. v. %vierhus, 9 Cir., 86 F.2d 673, 108 A.L.R. 763; Sheldon v. Mississippi Cottonseed Products Co., 5 Cir, 81 F.2d 169. He rejected the contention that the renewal was involuntary, since the holders of the plaintiff's obligations consented to the plan of operations.
Herein, plaintiff argues that its business is affected with a public interest and that the Commissioner of Banking and Insurance under the Act of March 16, 1933, enacted by the Legislature of the State of New Jersey was acting within the field of police powers. The defendant does not contest this proposition. The issue in this respect is confined to whether or not these taxes interfere with the police powers of New Jersey. Plaintiff refers us to the cases of Ambrosini v. United States, 187 U.S. 1, 23 S. Ct. 1, 47 L. Ed. 49 and Indian Motocycle Co. v. United States, 283 U.S. 570, 51 S. Ct. 601, 75 L. Ed. 1277. In the former case the claim of the United States for stamp taxes upon the issuance of bonds to saloon keepers required by a statute of Illinois was disallowed. This determination depended upon an exception in the statute providing for the tax and not upon constitutional issues as presented herein. In the latter case the Supreme Court refused to allow an excise tax upon the sale of motorcycles to a municipal corporation to be used in its police service, because a direct burden upon a governmental function was conceived. Herein, the burden of taxation does not fall upon the State of New Jersey directly or indirectly. The state has no financial interest in the instruments involved.
The next problem is whether or not the statute itself embraces the transaction herein. It is argued that the extension of maturity and dcrease in interest rate on the various obligations pursuant to the plan were in effect a reorganization of the plaintiff's business; that the plan of operations, although consented to by the holders of the various obligations, was actually accomplished at the direction of the Commissioner of Banking and Insurance, and, hence, was his act and not the act of the plaintiff or the holders of its obligations.
In the case of United States v. Powell, 4 Cir., 95 F.2d 752, the receivers of a corporation issued certificates pursuant to court decrees upon which the United States claimed a documentary tax. The court pointed out that under the statute the tax should be applied only when the securities were issued by a corporation and that since the securities were issued by the receivers the statute was inapplicable. It stated: "The object of the stamp tax provisions of the Revenue Laws is evidently to place a tax on the carrying on of a corporate function. A receivership is usually instituted and carried on for the purpose of winding up or at least reorganizing a corporation, and is a function of the court to those ends. The possession and control of a receiver constitutes an ouster of corporate management and control, United States v. Whitridge, 231 U.S. 144, 34 S. Ct. 24, 58 L. Ed. 159, and the issuance of receivers' certificates is in no sense a function of the corporation whose property is in the hands of a receiver, and no act of the corporation is necessary for their issuance." 95 F.2d 752, 754.
In the case of Consolidated Gas Electric Light & Power Co. of Baltimore v. United States, D.C., 27 F.Supp. 206, affirmed, 4 Cir, 108 F.2d 609, a bank which had been closed by presidential proclamation paid 5% of the funds on deposit to its depositors and the balance due was evidenced by certificates of indebtedness. A depositor assigned a certificate to the plaintiff and the question was whether or not the documentary tax should be applied to such transfer. The court determined that certificates of indebtedness were not "known generally as corporate securities", and, hence, the statute imposing the tax was inapplicable. It stated: "The acceptance of these certificates by both depositor and general creditor was in essence compulsory. None of them considered that he was making an 'investment.' He did not expect to derive any income or profit therefrom. He knew that in all likelihood, he must sustain a loss and he has in fact done so, up to the present time." 27 F.Supp. 206, 209. The court also noted that this type of investment was not intended under the Regulations of the Tax Department to be taxed: "Thus, these Regulations indicate that the Department itself has felt that the Congress was not seeking to tax either the issuance or transfer of instruments which were merely evidence of an effort on the part of insolvent banking institutions to liquidate their obligations to their depositors. 27 F.Supp. 206, 210.
The facts of the case of United States v. Powell are distinguishable, since in that case the certificates were issued by the receivers and not by the corporation. Also, the facts in the case of Consolidated Gas Electric Light & Power Co. of Baltimore v. United States, supra, are easily differentiated, since certificates of indebtedness were not contemplated by the statute. These cases have some relevancy, however, because they throw some doubt upon the intention of Congress to tax securities issued in an effort to effect a reorganization.
In the case of Weil v. United States, 2 Cir., 115 F.2d 999, the Superintendent of Insurance of New York pursuant to state law took over legal title to bonds and mortgages guaranteed by the New York Title and Mortgage Co. Afterwards the Superintendent transferred these assets to the Mortgage Commission set up to administer and reorganize guaranteed mortgage properties. The Mortgge Commission Act of New York provided that when a plan of reorganization was approved by the court the Commission should terminate its functions. The Mortgage Commission proposed such a plan of reorganization providing for the appointment of trustees to take over the assets held by it. This proposal was accepted by the certificate holders, approved by a court, and the transfer to the trustees was perfected. The government asserted a stamp tax upon the transfer from the Commission to the trustees pursuant to Schedule A(9), Title VIII of the Revenue Act of 1926 as amended by Section 724(a) of the Act of 1932, 26 U.S.C.A.Int.Rev. Acts, page 297. The amendment provides as follows: "On all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to any of the instuments mentioned or described in subdivision 1 * * * whether made by any assignment in blank or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale * * *." The court held that transfers wholly by operation of law and not through the voluntary act of the parties were not taxable, e.g., the transfer to the Superintendent of Insurance and the transfer from him to the Mortgage Commission. The court distinguished the case from those examples on the ground that the plan of operation was conditioned upon court consent which in turn was conditioned upon a two-thirds consent of the certificate holders. For that reason the transfers were not "wholly by operation of law." The court stated: "* * * We think that a transfer in pursuance of an order dependent on such a consent cannot be regarded as 'wholly by operation of law.' The certificate-holders had the option either to require liquidation of their securities by the Mortgage Commission or to reject the plan proposed and obtain, if possible, the approval of some other plan which they might think more advantageous. It is true that both before and after the order approving the plan was made they had substantially the same equitable interest in the mortgages and that they would have it under any other plan which would have received the sanction of the court, but the consent of two-thirds was necessary in order that the transfer should be carried out and this requirement made the transaction differ substantially from one where there was a mere substitution of trustees after the first trustee had died or become incapacitated and his successor was chosen solely through an order of the court or in accordance with the terms of the original trust agreement. Here there was not only a change in the trustees but the plan approved also imposed duties upon them which varied from those of the Superintendent of Insurance or the Mortgage Commission." 115 F.2d 999, 1002.
It appears that the court in the above case considered all the alleged extenuating circumstances offered in relief of taxation that have been offered herein. There the plan required court approval; here the plan required the approval of the Commissioner of Banking and Insurance. In both cases the consent of the certificate holders was required and in both cases the certificate holders exchanged their holdings for different securities, by virtue of economic pressure. We are constrained to follow the guidance established in this case and, therefore, we conclude that the claim for refund must be denied.
Counsel have dealt separately with the claim for refund of taxes assessed in the amount of $1,282.60 against the policies guaranteeing the payment of principal and interest on specific whole mortgages assigned by the plaintiff. Plaintiff argues in this respect that the obligations guaranteed by it were those of individuals and that the corporate guarantee of payment did not make them corporate instruments.
The defendant points out that this contention was never presented to the Commissioner of Internal Revenue, but it argues the point on the assumption that, if presented, the contention would have been rejected. In such a case we do not understand that defendant contends that we are without jurisdiction to consider the merits of this issue. On the contrary we feel that defendant joins with the plaintiff in bringing this issue squarely before us. See Tucker v. Alexander, 275 U.S. 228, 48 S. Ct. 45, 72 L. Ed. 253.
Plaintiff relies upon the case of Mitten Bank Securities Corp. v. United States, D.C., 24 F.Supp. 198, in which an individual issued his own bonds secured by mortgages on real estate with payments of principal and interest guaranteed by a corporation. The question was whether or not stamp taxes were assessable. The court overruled the government's argument that an individual bond fortified by a guaranty of a corporation is no different from a security issued by a corporation, and should be so classified. The court, instead chose to follow the literal wording of the Act, holding them free from the documentary tax.
The defendant endeavors to overcome the force of this decision by analogy. It contends that if the corporation in the Mitten case had not guaranteed the bonds issued by the individual, but had held them and issued certificates of interest in them, the certificates which replaced the bonds would have been taxable.
We cannot be guided by the merit of the analogy presented to us by the defendant, because as pointed out by defendant in other parts of its brief of law offered to us, we are not concerned with what might have occurred in some other form of transaction, but with the actual transaction herein involved. Founders General Corp. v. Hoey, 300 U.S. 268, 57 S. Ct. 457, 81 L. Ed. 639. Therefore, we feel bound by the case cited by plaintiff and conclude that the taxes exacted in this respect were not authorized by law.
Judgment should be entered in accordance with the findings herein contained.
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