United States v. Mississippi Chemical Corporation

PETITIONER: United States
RESPONDENT: Mississippi Chemical Corporation, Costal Chemical Corp
LOCATION: Mississippi Chemical Corporation

DOCKET NO.: 70-52
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 405 US 298 (1972)
ARGUED: Jan 10, 1972
DECIDED: Mar 06, 1972
GRANTED: Feb 22, 1971

John C. Satterfield - for respondents
Matthew J. Zinn - for petitioner

Facts of the case

Mississippi Chemical Corp. and Costal Chemical Corp. were “cooperate associations” within the meaning of the Agricultural Marketing Act. The associations qualified for membership in a “bank for Cooperatives”, which allowed them to borrow money. The Farm Credit Act of 1955 required that the associations buy Class “C” stocks valued at $100. The associations claimed a $99 interest deduction on their taxes for every stock purchased. When the Internal Revenue Service disallowed the deduction, the associations paid the deficiency and then sued for a refund. The district court found for the associations and the U.S. Court of Appeals for the Fifth Circuit affirmed.


Were the Class “C” stock purchases deductible interest?

Media for United States v. Mississippi Chemical Corporation

Audio Transcription for Oral Argument - January 10, 1972 in United States v. Mississippi Chemical Corporation

Warren E. Burger:

Next in Number 52, United States against Mississippi Chemical Corporation.

Mr. Zinn.

Matthew J. Zinn:

Mr. Chief Justice and may it please the Court.

This Federal Income Tax case is hereon writ of certiorari to the Court of Appeals for the Fifth Circuit.

It raises the question whether farmer cooperative associations like the respondents which are required to purchase the Class C stock of the New Orleans Bank of Cooperatives as a condition to borrowing from the bank may deduct the cost of such stock as interest expense or as an ordinary necessary business expense.

In New Orleans, Bank for Cooperatives is one of 12 regional banks which together with the Central Bank here in Washington were created by Congress in 1933 to furnish credit to farmer cooperatives at the lowest possible cost.

The bank’s original capital was furnished by the United States but under a Congressional plan embodied in the Farm Credit Act of 1955, the government capital was to be replaced gradually by capital belonging to member-borrowers which would purchase Class C stock.

The ultimate goal of the statute was complete borrower ownership of the banks.

The banks' authorize capital consists of three classes of stock, A, B, and C, each with a par value of a $100.00 a share.

Class A stock represents the government’s initial contribution to capital is nonvoting, pays no dividend and is to be retired at par with the retirement proceeds coming from borrower contributions to capital and the banks’ earnings.

Class B stock is intended for sale to the public.

It is issued at par, is nonvoting and may pay a noncumulative dividend not to exceed 4% a year.

After all, Class A stock has been retired; Class B stock may then be retired at par, the oldest Class B stock to be retired first.

Class C stock is the voting common stock of the banks.

It may normally be issued only to farmer cooperatives at its par value of a $100.00 a share.

Farmer cooperatives may acquire Class C stock in four ways.

First, each must purchase at least one share of Class C stock to be eligible to borrow from the bank.

Each of the respondents purchased the so-called qualifying share and capitalized its cost.

The capitalization treatment of the so-called qualifying share is not here in dispute.

Second, each borrower must invest quarterly in Class C stock, an amount equal to at least 10, but not more than 25% of the interest and payees to the bank on its loan during the calendar quarter.

The percentage requirement of the New Orleans Bank during the year’s here at issue was 15%.

It is the proper treatment of the cost of the Class C stock purchased under the 15% requirement that is herein dispute.

The respondents contend that they may deduct in addition to the stated interest on their loans, the cost of Class C stock in excess of a nominal value of a dollar share.

They contend that this is deductible as interest or as ordinary necessary business expense.

William J. Brennan, Jr.:

Mr. Zinn, this is a stock that pays no dividends, right?

Matthew J. Zinn:

It pays no dividends.

That is right Mr. Justice.

William J. Brennan, Jr.:

Actually with those stock certificate is that --

Matthew J. Zinn:

That is correct, Mr. Justice.

William J. Brennan, Jr.:

It is just bookkeeping, is it?