The opinion of the court was delivered by: WILLSON
Plaintiff sued for the refund of federal taxes in the sum of $ 6,600, representing federal documentary stamp taxes paid by plaintiff.
On August 12, 1948, plaintiff borrowed $ 6,000,000 from the Metropolitan Life Insurance Company for use in its corporate business. This loan transaction was consummated pursuant to a loan agreement executed between plaintiff and Metropolitan on August 6, 1948, and was evidenced by a 'note' executed and delivered to Metropolitan on August 12, 1948. A description of the form and substance of this note may be summarized as follows:
1. Both the note and loan agreement were printed on plain white paper and were executed by the president of Sharon Steel Corporation without the use of a corporate seal.
2. As a condition of this borrowing taxpayer undertook to observe the following covenants and restrictions:
(b) Conserve and keep in proper working condition all property necessary in the conduct of its business.
(c) Keep its properties adequately insured.
(d) Except under specified conditions, not to undertake any further corporate borrowing or otherwise dispose of its tangible or intangible assets.
(e) Not to pay any dividends to its stockholders unless certain 'conditions shall be fulfilled.'
3. The terms of the loan were from August 12, 1948 to August 1, 1967, a period of twenty years. The first payment was deferred until August 1, 1952, four years after the original loan. The schedule of repayment was set forth as follows (Ex. 'B', par. 3(a)):
'3. (a) The Company covenants and agrees that on August 1 of each year, commencing August 1, 1952 and continuing to and including August 1, 1967, it will prepay an aggregate principal amount of the outstanding Notes as follows: '$ 200,000 on August 1 of each of the years 1952 to 1956, both inclusive; '$ 400,000 on August 1 of each of the years 1957 to 1966, both inclusive; and '$ 500,000 on August 1, 1967.'
Thus, 33 1/3 per cent of the loan was to be repaid during the first ten years of the loan's duration and 66 2/3 per cent of the loan was to be repaid in the last ten years.
4. Plaintiff also had the right, at its option, to prepay all or any part of the loan in multiples of $ 1,000, with, however, an added premium being charged. The amount of the premium varied in time, its range being 3 1/2 per cent on prepayments made during the first year, to 1/8 per cent on prepayments made during the last year of the loan's duration.
5. The loan agreement indicated taxpayer's understanding that Metropolitan was acquiring 'the Notes for (its) own account for investment and not with a view of sale, nor with any present intention of selling the Notes * * *' Metropolitan affirmed this understanding by its acceptance.
26 U.S.C.A. §§ 1800-1801, being a portion of the Internal Revenue Code of 1939, as amended, imposes a tax upon all instruments known generally as corporate securities. Debentures are taxable. Treasury Regulations 71 (1941 ed.), promulgated under the Internal Revenue Code of 1939, Section 113.55, provides:
'Sec. 113.55. Issues Subject to Tax. -- Ordinarily, a corporate instrument styled a bond, debenture, or certificate of indebtedness is subject to the tax. However, the taxability of an instrument is not determined by the name alone but depends upon all the circumstances, such as the name, form, and terms of the instrument, etc. Hence, an instrument, however designated, having all the essential characteristics of a bond, debenture, or certificate of indebtedness is taxable as such. Similarly * * *' etc.
Plaintiff contends that its borrowing is evidenced by what is, for the purposes of this discussion, a promissory note, and that the borrowing is not evidenced by a debenture and that the loan transaction is not typical of one customarily evidenced or secured by a debenture or a number of debentures. Plaintiff cites many decisions in support of its argument that the document is a promissory note. It is impossible to reconcile all of the decisions of the district courts and the courts of appeal. Two decisions in the Second Circuit, General Motors Acceptance Corporation v. Higgins, 161 F.2d 593, and Niles-Bement-Pond Co. v. Fitzpatrick, 213 F.2d 305, the first of which was against the taxpayer and the second in favor of the taxpayer, pose the problems facing the trial court in attempting to decide the issue presented here. In the latter case, Judge Harlan discusses some five characteristics of the document in deciding that the obligation was nontaxable. A careful comparison of the characteristics mentioned in the General Motors case and in the Niles-Bement case with the instrument presented here leads to the conclusion that the document executed by plaintiff has the essential characteristics of a debenture, and is accordingly taxable as such. In comparing the characteristics of the instrument executed by plaintiff with those found in the General Motors case and in the Niles-Bement-Pond Co. case, it is noted:
1. The note here is printed on plain white paper that is not tinted or engraved and does not bear the corporate seal, but is merely executed by the president of plaintiff. The loan agreement is printed on 8 pages of 8 1/2 by 12 1/4 pager. The note and loan agreement together require some twenty-three pages of the same size printed matter. As Judge Harlan indicated, the appearance of the instrument, while not of great weight, is at least of more ...