Dixon v. United States

PETITIONER: Dixon
RESPONDENT: United States
LOCATION: Longshore and Warehouse Union

DOCKET NO.: 486
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 381 US 68 (1965)
ARGUED: Mar 30, 1965 / Mar 31, 1965
DECIDED: May 03, 1965

Facts of the case

Question

Media for Dixon v. United States

Audio Transcription for Oral Argument - March 30, 1965 in Dixon v. United States

Audio Transcription for Oral Argument - March 31, 1965 in Dixon v. United States

Earl Warren:

W. Palmer Dixon, et al., Petitioner versus United States.

Mr. Goodman, you may continue your argument.

Frank I. Goodman:

Mr. Chief Justice, may it please the Court.

When we broke off yesterday, I had just offered an analogy which in our view aptly illustrates the basic principle of this case.

I suggested that if A lends B $100 today, in return for B's promise to repay the $100 plus $6 extra one year from today, B's obligation could be expressed in the note in a number of different ways, all of which mean exactly the same thing.

The note could say $100 plus 6% interest or $100 plus 6% or $100 plus $6 or as in the present case, the note could simply say $106.

In each of these cases, the $6 increment simply represents the compensation which the borrower agrees to pay the lender in return for the lender's money, in short, interest as this Court has defined it.

Everyone agrees that in the case of the note with 6% stated interest an accrual basis taxpayer would be required to accrue the $6 increment over the life of the note and we say exactly the same result should obtain in the case of $106 note issued at a $6 discount.

A cash basis taxpayer of course would not be required to account for the gain until he sold or redeemed the note.

At that time, he would be deemed to be selling two things; first, the note itself carrying with it the right to interest accruing in the future, and secondly, the right to the interest that had already been earned up to the date of the sale or redemption.

Part of the purchase price would have to be allocated to the note and the rest of it would have to be allocated to the interest component and that part allocated to the interest component would be taxable as ordinary income.

Potter Stewart:

What if the going rate of interest changed between the time of the issuance of the note and the sale of third party and which would affect the price because of the going of the change and the going rate of interest.

Frank I. Goodman:

Yes.

Well, if -- let's suppose first that nothing happens and he sells the note at the end of six months for $103.

Potter Stewart:

Well, that's the case you've already given.

Frank I. Goodman:

That's right.

In that case, there would be no capital gain or loss and there would be interest income of $3.

If the market rate of interest increased we'll say, so that he was able to sell the note only for $102, the result in that case roughly speaking, not quite exactly, but roughly speaking, would be a $1 capital loss and $3 of interest income.

It wouldn't be exactly that because the $102 would have to be -- well 100, one hundred and thirds of that would have to be allocated to the note and three one hundred and thirds to the interest element and would come out that he had perhaps received about $2.97 of interest and slightly less than $100 would be attributable to the note in that case.

Potter Stewart:

I understand that a good deal of this problem has been explicitly covered in the 1954 --

Frank I. Goodman:

That's right Mr. Justice Stewart.

Potter Stewart:

Am I right in my understanding that with respect to the note of an individual person --

Frank I. Goodman:

That's right.

Potter Stewart:

The 54 statute does not --

Frank I. Goodman:

That's right, the 54 statute applies only to securities issued by a corporation or by a governmental entity.

Arthur J. Goldberg:

Can you explain to us why that happened Mr. Goodman, why the individual was left out?

Frank I. Goodman:

Well I think for the most part Mr. Justice Goldberg, the 1954 statute was intended primarily as a legislative overruling of the Caulkins case.

They primarily were thinking within the general framework of that decision and simply didn't provide a legislative solution which went to the heart of the principle.

Arthur J. Goldberg:

Had the Treasury proposed a broader solution, do you know?

Frank I. Goodman:

I don't think so.