The opinion of the court was delivered by: COLLAHAN
This is a suit for a refund of federal documentary stamp taxes, and interest thereon, which the plaintiff paid to the Commissioner of Internal Revenue under protest after the Commissioner determined that land transactions in which the plaintiff involved itself were of such a nature that federal documentary tax stamps should have been purchased and affixed to certain deeds conveying realty. Claim for refund having been made and disallowed, and the parties having entered into a stipulation as to the facts in this action, the matter is presently properly before the court on the parties' cross motions for summary judgment.
The alleged statutory basis for the defendant's assessment of plaintiff for the documentary stamp taxes is 26 U.S.C. § 4361 which provides:
There is hereby imposed, on each deed, instrument, or writing by which any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale) exceeds $100, a tax at the rate of 55 cents for each $500 or fractional part thereof. . . .
Plaintiff contends that the land transactions in which it was involved, and which the Commissioner contends require imposition of the tax, do not in fact come within the ambit of section 4361. In addition, it contends that 26 U.S.C. § 4362 is applicable, and operates to remove the transactions from the Commissioner's grasp. Section 4362 provides that "the tax imposed by section 4361 shall not apply to any instrument or writing given to secure a debt. . . ." It becomes essential at this point to consider the nature of these transactions, as described by the parties in the stipulation into which they have entered.
The plaintiff's land transactions which the court has made reference to were dealings with the Veterans Administration (hereinafter referred to as the "VA"). As a result of its loan guarantee program, the VA acquired real property following default and foreclosure on G.I. loans. The VA then sought to sell the acquired property. In New Jersey, the property was sold by way of installment contracts to individual purchasers, none of which was the plaintiff. Under the terms of the installment contracts, the VA retained legal title to the realty until an individual purchaser's monthly payments had reduced the balance of the purchase price to a certain amount, at which time the purchaser would receive, upon demand, a warranty deed conveying title to the realty to him. Simultaneously therewith, the buyer would execute and deliver to the VA a bond and mortgage for the premises. If, before the purchaser acquired legal title to the property in the aforementioned manner, the purchaser should have defaulted in his obligations to the VA pursuant to the installment contract, he would have lost all rights to and interest in the realty. Should the installment purchaser have defaulted subsequent to his acquisition of legal title to the property, the VA would have been relegated to its rights under the bond and mortgage executed by the purchaser on behalf of the VA.
The VA was not engaged in the business of banking. Desirous of liquidating the value of the property sold to the installment purchasers, and only with respect to properties as to which the purchasers had not as yet acquired legal title, the VA entered into transactions with certain persons, such as the plaintiff Savings and Loan Association, with regard to the installment contracts. In the course of these transactions, the plaintiff paid to the VA the sum of all payments remaining unpaid by the individual purchasers, and the VA, in turn, assigned to the plaintiff the installment contracts involved and conveyed legal title in the realty to the plaintiff through deeds of transfer. Possession and equitable title to the property remained in the installment purchasers. Among the terms involved in the assignments to the plaintiff of the installment contracts were certain guarantee provisions under VA Regulation 4600, according to which the plaintiff could, in the event of default in the installment obligations by an installment purchaser and prior to that purchaser's acquisition of legal title from plaintiff, return to the VA the installment contract and legal title to the property and obtain from the VA payment for all moneys due and owing from the purchaser. As a result of the protection afforded by Regulation 4600, the plaintiff could, in the event of a default by an installment purchaser which preceded that purchaser's acquisition of legal title from plaintiff, elect one of two options: (1) it could, pursuant to Regulation 4600, transfer the installment contract and legal title in the property back to the VA and receive payment from the VA for the money due and owing to the plaintiff from the installment purchaser; (2) it could retain both the legal title and the installment contract involved, and proceed under its legal rights as established by those documents. In the event of default by the installment purchaser after plaintiff transferred legal title to the property to that purchaser, plaintiff's elective invocation of Regulation 4600 would take the form of a transfer of the contract and plaintiff's mortgage on the property to the VA in exchange for the VA's payment to plaintiff of the money still owing to plaintiff from the installment purchaser.
As has been adverted to earlier, the documentary stamp tax provision involved in the present case, 26 U.S.C. § 4361, calls for a tax on all deeds or other instruments by which lands or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser; 26 U.S.C. § 4362 provides that section 4361 shall not apply to any instrument given to secure a debt. The parties to this action are in agreement that documentary stamps need have been placed on the deeds to the property sold by the VA pursuant to the installment contracts at that point in time where the installment purchaser, having paid in the required amount to entitle him to take legal title to the property, did in fact take legal title thereto. This would apparently also be the rule when the plaintiff, having previously acquired legal title from the VA, transferred that title to an installment purchaser. Stamps were apparently affixed on these occasions. The sole question for consideration here is whether documentary stamps need additionally have been affixed to the deeds given by the VA to plaintiff, which deeds did in fact convey naked legal title in the property to the plaintiff. Defendant contends that the conveyances of legal title by the VA to the plaintiff constitute transactions within the contemplation of section 4361. Plaintiff contends that a conveyance of naked legal title does not automatically operate to bring a transaction within the ambit of section 4361; instead, it urges that what is essential, according to both the language of section 4361 and the limited case law relating to that section, is the purpose of the transaction, and that in the present case the purpose of the conveyances of legal title was not to ultimately vest dominion over the property in the plaintiff, but was instead to provide plaintiff with security for its installment contract rights. Plaintiff additionally points to the provisions of section 4362, which excludes from the operation of section 4361 "any instrument or writing given to secure a debt. . . ." It is the conclusion of the court that documentary stamps need not have been affixed to the deeds from the VA to the plaintiff, and a verdict in this matter will be rendered in favor of the plaintiff.
In the court's view, the bare language of sections 4361 and 4362 goes against the Government's position. Firstly, section 4361 imposes the tax on "each deed, instrument, or writing by which any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers . . . ." (Emphasis added.) From the language of that section it is clear that not all deeds, instruments, or writing conveying land or other realty are to have stamps affixed to them; only those deeds, instruments, or writings conveying land or other realty sold need have stamps affixed. Necessary, then, is an examination of the transaction being considered to see if there is a sale of realty; whether or not there is a sale depends, in the court's view, on whether or not the transfer of title was for consideration, and on the intention of the parties and the purpose for which the "purchasing" party desires the property. In the context of the present case, the court must conclude that in essence the plaintiff-VA transactions were not sales of realty; the plaintiff is not in the business of purchasing realty outright, and is in fact prohibited from doing so by New Jersey law,
and its acquisitions of the legal title to the property were merely incidental to its primary purpose in the transactions, which was to discount the installment purchasers' obligations to the VA. That this is the case is further indicated by the fact that the VA remained liable to the plaintiff even after legal title and the installment contracts passed to the plaintiff, by virtue of VA Regulation 4600. That regulation, which, it will be recalled, permitted the plaintiff to return the legal title and installment contract to the VA in the event of default by the installment purchaser, is most interestingly designated as applying to "Sale of Loans, Guarantee of Payment." Although it is clear that the VA in the present case did not sell to plaintiff any "loans," the fact that a regulation applicable to sale of loans should be deemed by the VA and plaintiff to be applicable to the VA's sale to plaintiff of its installment contract and legal title is most reflective of the intent of the contracting parties that the transfers of legal title from the VA to the plaintiff were for the purpose of security, and not for the purpose of sale. Furthermore, there is considerable doubt in the court's mind as to whether or not there was any consideration given to the VA for its transfers of title to the plaintiff. It will be recalled that both the legal title and the installment contract were transferred at the same time; both instruments recited that the transfer was for ten dollars and other valuable consideration. In the court's view, it is just as likely, considering the total content of the transactions, that the total sum of money paid by plaintiff to the VA was for the contracts rather than for the legal title to the property. Realistically speaking, the plaintiff was just as interested in obtaining the contract assignments as it was in obtaining the property; the court cannot conclude that the money paid by plaintiff to the VA need necessarily be held to have been paid for the transfers of legal title to the property.
Alternatively, even should the language of section 4361 not be deemed to compel a conclusion that documentary stamps need not have been affixed to the VA-plaintiff deeds, the language of section 4362 should settle the issue. Section 4362 provides that "the tax imposed by section 4361 shall not apply to any instrument or writing given to secure a debt." The reference in section 4362 to section 4361 makes clear that "instruments or writings" within the purview of section 4362 necessarily include deeds and other instruments mentioned in section 4361; this being clear, it quickly and once again becomes evident that not all deeds need have documentary stamps affixed, but that, instead, only those deeds not given to secure a debt - i.e., deeds given for "sale" - need stamps. The court would once again repeat that in essence the typical VA-plaintiff transaction was not a sale of land, but that, instead, the transfer of legal title to the plaintiff was for the purpose of securing the debt of the installment purchaser to the plaintiff. This being the case, section 4362, like section 4361 before it, operates to prevent taxation of the VA-plaintiff transactions involved in the present case.
Case law concerning section 4361 supports the court's position. Although there are apparently no reported cases analyzing section 4361 with respect to transactions of the same type as those involved in this case, cases involving section 4361 do support the proposition that not all conveyances of legal title to property by deed or otherwise come within the purview of that section, but that, instead, the court must consider whether, in essence, the transaction was a sale of the property. In Berry v. Kavanagh, 137 F.2d 574 (6th Cir. 1943), for example, the Sixth Circuit Court of Appeals found that the transfer by deed of an insolvent insurance company's assets to a reinsurer, as part of an arrangement whereby the reinsurer agreed to assume all valid outstanding obligations of the insolvent company, was not a sale within the meaning of the predecessor to section 4361, but was, instead, a creation of an agency relationship. The court pointed out that
Whether a taxable sale occurs depends upon the intention of the parties gathered from their whole writing when giving to the words and phrases used, their ordinary signification. . . .
If Congress had intended to levy a tax on every transfer of title it could have expressed its purpose in a sentence, but it is clear from the language of the section that it intended to confine the tax to actual sales.
137 F.2d at 576. Similarly, in Murray v. Hoey, 32 F. Supp. 1008 (S.D.N.Y. 1940), it was held that, where the charitable beneficiaries of a will deeded property to a charitable corporation created to effectuate the purposes of the will, there was no sale of property within the meaning of the statute. The court's interest in the purpose of ...