United States v. Midland-Ross Corporation

PETITIONER: United States
RESPONDENT: Midland-Ross Corporation
LOCATION: Point of picking up hitchhiker

DOCKET NO.: 628
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 381 US 54 (1965)
ARGUED: Mar 31, 1965
DECIDED: May 03, 1965

Facts of the case

Question

Media for United States v. Midland-Ross Corporation

Audio Transcription for Oral Argument - March 31, 1965 in United States v. Midland-Ross Corporation

Earl Warren:

Number 628, United States versus Midland-Ross Inc.

Mr. Goodman.

Frank I. Goodman:

Mr. Chief Justice may it please the Court.

This case presents essentially the same issue as the last case.

The respondent here is an Industrial Corporation which in 1952, 1953, and 1954 advanced large sums of money to financial institutions such as the Commercial Credit Company and CIT in exchange for notes of those Institutions.

The notes, 13 in number were all payable in less than a year.

While they did not in terms provide for the payment of interest, all were issued at a discount, usually, between 2.0% and 2.5%, on an annual basis, the notes were typically in face amounts of $1 million or $2 million.

In each instance, the respondents sold the note to a bank a few days prior to its maturity, realizing a total gain of about $280,000, all of which was attributable to the discount at which they were originally issued.

Taxpayer reported this gain on its tax returns as capital gain.

Commission had determined however, that the excess of the face amount of the notes over the amount at which they were issued represented interest, and since the notes were also within the taxable year, he treated the entire gain realized on the sale of the notes as ordinary income.

Now, I should note parenthetically here that Midland-Ross, like Dixon and the lot like the Dixon, petitioners in the last case, were on the accrual basis and therefore, logically, they should have been required to accrue the interest as it was earned prior to the sales, but since -- and irrespective of whether the notes were sold or not.

But since in this case, the notes were all in fact sold within the tax year, the result is exactly the same whether you treat them as having accrued the interest as it was earned or simply as having realized the interest upon the sale of the notes.

The respondent paid the resulting deficiencies and brought suit for refund.

The District Court held that the gain was all capital gain and the Sixth Circuit affirmed per curiam, citing its earlier decision on the Caulkins case.

Here as in Dixon, the taxpayer does not seriously dispute the fact that discount and stated interested are in substance identical.

The taxpayer argues though that Congress intended that it nonetheless to be treated differently.

The argument I think goes something like this.

Prior to 1954, it was the practice of the Internal Revenue Service to treat original issued discount differently from interest and to treat it as a capital item upon the sale of the notes.

That this practice was confirmed by a 1927 decision of the Board of Tax Appeal, and was impliedly ratified by Congress through its failure to enact a general statute authorizing equality of treatment or the same treatment for interest and discount and we think that this presents a holy misleading picture of the pre-1954 law.

But before getting to that, I’d like to point out preliminarily, within view of the admittedly irrational results for which the respondent contends, it would require nothing less than the clearest statutory or judicial authority to justify that result.

Prior to 1954, apart from the Caulkins case which I’ve already discussed, there was no decision by this Court, by any Court of Appeals or even by any Federal District Court which even dealt with the treatment of original issue discount on the lender’s side and as I’ve suggested, all of the cases on the borrower’s side treated it as interest, most of them.

There are to be sure a number of administrative rulings and decisions for the Board of Tax Appeal on the treatment of discount on the lender’s side, but these are aligned on both sides of the question, some of them treating discount as interest, others treating it differently.

The fact to the matter is, that prior to 1954 when Congress provided a solution for the matter, there simply was no general rule, no general administrative practice as to the treatment of original issue discount.

At most, there were a number of special rules and special practices dealing with particular types of taxpayers, particular types of securities and particular aspects of the tax treatment.

One commentator writing in 1940 in the North Carolina Law Review, summarized the situation as it existed then in the following terms.

“Present federal practices involve on the surface at least a welter of theoretical inconsistencies.

Both administrators and judges have contributed to the State of Affairs and neither the Administrators nor the Board of Tax Appeals, nor the Federal Courts have ever undertaken a complete analysis of all these inconsistent practices in an attempt to show if or how they can be justified in relation to each other.”

So I don’t think it accurate to say that it was the Commissioner’s position prior to 1954 that original issue discount was a capital item to be differentiated from interest.

Now, a detailed analysis of this rather complicated history doesn’t lend itself very well to oral argument and we discuss it I think fully in our brief.

I would like to summarize those, some of the principle strands on the tapestry.