observing that a depreciation deduction “as claimed here is never allowable unless the capital of the claimant has gone into the property.”
How later courts described this case
- observing that a depreciation deduction “as claimed here is never allowable unless the capital of the claimant has gone into the property.”
Written by the judges who cited it.
The opinion
STEPHENS, Associate Justice
(concurring) .
The majority opinion, as I read it, rests essentially upon two points: first, that the transaction was a sale, not a loan; second, that the petitioner had no capital investment in the property.
Against these points a cogent argument can be made for the petitioner as follows. As to the first point: The conclusion that there was no loan is reached because on the face of the papers there was no stated maturity date and no stated duty to repay a debt. But the testimony of the witnesses Lee and Harris was to the effect that the intention of the parties was that the transaction should be merely a means of financing, that it should be a loan rather than a sale. If that be the fact, then the doctrine of Peugh v. Davis, 1877, 96 U.S. 332 , 24 L. Ed. 775 , is applicable. Within that doctrine a deed absolute upon its face may be shown to have been a mortgage if that was the intention of the parties when the deed was given. While that doctrine is ordinarily applied in redemption suits between the original parties, it may also be availed of by a party in a controversy with a stranger if this will not operate to harm others who have relied upon the form of the transaction. Walton v. Cronly’s Administrator, 1835, 14 Wend., N.Y., 63; Stumpe v. Kopp, 1907, 201 Mo. 412 , 99 S.W. 1073 . No proper reason exists why it should not be applied here. The essence of the doctrine is that equity will regard the substance rather than the form, will give effect to the actual contract of the parties. The courts in tax issues between the Government and the citizen should look at the real character of the transactions involved, rather than at the form thereof, if no harm will come to third persons in so doing. No harm can come to the certificate holders in the present case if for no other reason than that since the certificate holders are not parties to this suit the decision herein cannot be res judicata as to them; and it cannot be claimed that the Government relied to its detriment upon the form of the transaction. To the effect that the courts will look through form to substance to ascertain the essential nature of a transaction in tax cases as well as in equitable cases, see: Eisner v. Macomber, 1920, 252 U.S. 189 , 40 S.Ct. 189 , 64 L.Ed. 521 , 9 A.L.R. 1570 ; United States v. Phellis, 1921, 257 U.S. 156 , 42 S.Ct. 63 , 66 L.Ed. 180 ; Weiss v. Stearn, 1924, 265 U.S. 242 , 44 S.Ct. 490 , 68 L.Ed. 1001 , 33 A.L.R. 520 . These are cited in Commissioner of Internal Revenue v. H. F. Neighbors Realty Co., 6 Cir. 1936, 81 F.2d 173 . Senior v. Braden, 1935, 295 U.S. 422 , 55 S.Ct. 800 , 79 L.Ed. 1520 , 100 A.L.R. 794 , is not controlling because it did not pass upon the question in the instant case. It held only that the trust certificates were under Ohio law not taxable against the holders as intangibles for the reason that they represented an interest in the property. As to the second point — that the petitioner had no capital investment in the property— that falls with the first, .because if the transaction was a loan, not a sale, then in essence the petitioner bought the property from the Nebraska corporation and kept it; that it bought it with borrowed money made the investment none the less that of the petitioner.
Convincing as seems the foregoing argument for the petitioner, it appears to me that the result reached by the majority is nevertheless correct, but for a reason not clearly expressed in the majority opinion. It is true that the witnesses Lee and Harris testified that the intention of the parties was that the transaction should be merely a means of financing, a loan rather than a sale. But the testimony of the witness Lee was also to the effect that the trust certificate form of financing was much in demand in Ohio at the time of this transaction, because while upon bonds the Ohio tax was quite heavy, there was no tax on land trust certificates in Ohio, where most *222 of the certificates were placed. The witness Harris specifically testified:
“The land trust certificates were a more popular means of financing at that time because it [this means of financing] developed out of the then existing tax situation in Ohio under which the first mortgage bonds were literally subject to the personal property tax which amounted to 2.50 or 2.55, or 2.60. The result was that those bonds became undesirable for a great many types of investments, investors who had to make public their holding for instance, such as a testamentary trust, and in those cases where the conscience of an investor required him literally to conform to the letter of the tax requirement obviously could not buy these bonds and retain them. This tax was only on first mortgage bonds in Ohio at that time and land trust certificates were tax-exempt. That was the principal distinction which I made as a seller of securities and as a layman. I regarded both the land trust certificate issues and mortgage bond issues as being merely forms of financing.”
It thus appears that the transaction was put in the form that it was and trust certificates issued and marketed in Ohio for the definite purpose, and with the effect, of avoiding the Ohio tax on first mortgage bonds. The Ohio tax statutes in effect at the time of the transaction in question imposed a tax on “money loaned on pledge or mortgage of real estate, although a deed or other instrument may have been given for it, if between the parties thereto it is considered as security merely.” See Ohio Gen.Code Ann., Throckmorton, 1926, §§ 5325, 5328; Patrick v. Littell, 1880, 36 Ohio St. 79 , 38 Am.Rep. 552 . Thus under the Ohio statutes the substance rather than the form of the transaction was the basis of taxation, and it seems necessarily to follow that in adopting the trust certificate method of financing, with the intent, as shown by the testimony that the certificates should not be taxable under Ohio law, the parties must also be taken to have intended the necessary prerequisite under Ohio law to the non-taxability of the transaction as a mortgage of making it actually a sale, and the testimony that it was by the parties regarded as a means of financing only cannot negative this. The petitioner essentially relies, as above pointed out, upon an equitable doctrine that the court should look at the substance rather than at the form of the transaction. But he who seeks equity must do equity, and in my view the petitioner cannot in equity secure the advantage of having the transaction regarded in Ohio as a sale, for the purpose of making the trust certificates tax free under Ohio law and thus more marketable, and then ask that the transaction be regarded not as a sale but as a loan for the purpose under Federal law of diminishing by depreciation deductions its Federal income tax. •