PER CURIAM.
This is an appeal from the district court’s denial of plaintiff’s action to recover income taxes paid on certain interest income for the years 1961, 1962, and 1963. A number of other issues were decided, but no appeal has been taken from the district court’s disposition of them. The case was submitted on the pleadings and a stipulation of facts.
Plaintiff bank, a licensed bond dealer, instituted this action to recover taxes paid on interest it received from municipal bonds. Such interest is ordinarily [1100]*1100tax-exempt under Internal Revenue Code § 103(a), and it had been so reported by the bank. The Commissioner of Internal Revenue disallowed this treatment with respect to several categories of bond purchases by appellant, only three of which concern us on this appeal:
(1) Instead of purchasing municipal bonds for which they had successfully bid, certain bond dealers orally agreed with appellant that the bank would buy the bonds from the issuers and later sell them to the dealers at the price the bank had paid. Until these latter sales occurred, the bank in each case accrued the interest on the bonds at the coupon rate and credited this interest to an exempt-interest account. In no case did a successful bidder fail to buy the bonds from the bank at the bid price.
(2) Instead of consummating purchase agreements they had made with bond dealers, certain customers of appellant orally agreed with the bank that it would acquire the bonds from the dealers and later sell them to the customers at the prices it had paid, with adjustments for accrued interest. Here, too, the bank reported the accrued interest as tax-exempt income.
(3) Appellant purchased municipal bonds from bond dealers and later sold the bonds to various trusts for which its trust department acted as trustee. Prior to these purchases, officers of appellant’s trust department indicated to officers of its commercial department that the bonds under discussion were suitable for trust accounts and that the trust department desired to acquire them for its accounts when funds were available. Usually, it was not known at the time of purchase by the commercial department to which trust accounts particular bonds would be allocated, although sometimes a particular lot of bonds was earmarked for transfer to a particular trust account when the account had funds available. Until the trust accounts purchased the bonds, appellant kept them in its regular investment account. When the trust accounts acquired the necessary funds, they paid the commercial department the cost of the bonds plus accrued interest and took possession of the bonds in return. Here, too, appellant reported the interest it received on the bonds as tax-exempt income.
The district court, 327 F.Supp. 675, agreed with the Commissioner that the interest accruing on these categories of bonds between the time of appellant’s acquisition and disposition of them was not tax-exempt. Relying on American National Bank of Austin v. United States, 421 F.2d 442 (5th Cir. 1970), and Union Planters National Bank of Memphis v. United States, 426 F.2d 115 (6th Cir. 1970), the court held that the “material fact” was “that the bank had the ability in these transactions to insulate itself from any loss and at the same time had possession of the bonds as security.” We agree.
The American National Bank case concerned transactions similar in substance to those described in category (1), supra. In that case, the Fifth Circuit held that, for tax purposes, the bank functioned as a secured lender in its transactions with the bond dealers. In Union Planters, we applied the same rationale to arrangements under which a bank purchased bonds from dealers upon the written promise of the dealers to repurchase the bonds at the price paid by the bank plus accrued interest. We expressly approved in Union Planters the reasoning of Judge Ainsworth in American National Bank, 426 F.2d at 118.
Appellant, although conceding that categories (1) and (2), supra, are “similar in substance” to the transactions discussed in American National Bank, urges us to reject the reasoning of that case on the ground that the Fifth Circuit ignored the line of authority holding that, for tax purposes, ownership does not pass until property is actually delivered pursuant to a contract of sale. Under this rule, an option to buy or any other contract to sell is deemed a mere executory contract and does not pass [1101]*1101ownership. See, e. g., Lucas v. North Texas Lumber Company, 281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668 (1930). Thus, appellant contends, ownership of the bonds in question did not pass to the bond dealers or. the bank customers, respectively, until those parties actually paid for the bonds and took delivery of them. It further argues that Union Planters is inapposite here both because appellant is a licensed bond dealer and because it did not acquire the bonds from the parties to which it ultimately sold them. Our expression of approval of the American National Bank decision in Union Planters is asserted to be dictum and not binding because we regarded the Government’s case there as a stronger one than that presented in the Fifth Circuit decision. 426 F.2d at 118.
We see no merit to any of these contentions. As appellee observes, a lender of the purchase price of municipal bonds should not be able to collect interest tax-free on the bonds as payment for lending the money. See Union Planters, supra, 426 F.2d at 116-117. Yet, under the arrangements described herein, as in American National Bank and in Union Planters, the bank in effect is lending money to purchase bonds and is paying no tax on the interest received. Moreover, the person who purchases the bonds from the bank in effect borrows money to buy the bonds without paying interest. This results in the double tax benefit that Congress intended to prevent by enacting I.R.C. § 265(2). Union Planters, supra, 426 F.2d at 116. And, the bank is completely insulated from the risk of market fluctuations in this type of transaction — its investment is completely secured since it is assured of receiving the price it paid for the bonds. In these circumstances, the bank in substance is clearly a secured lender instead of an owner.
We therefore reiterate our approval of the American National Bank decision, and we hold the rationale of that case to be equally applicable to the transactions described in categories (1) and (2), supra. As appellee points out, appellant’s reliance on the Lucas line of authority begs the question — the issue in this case is whether appellant ever owned the bonds for tax purposes, not whether appellant surrendered ownership at the time the contracts for sale were executed. We hold, for the reasons found persuasive in American National Bank and Union Planters, that appellant in substance never owned the bonds described in categories (1) and (2), supra, cf. Commissioner of Internal Revenue v. Court Holding Company, 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed.
Free access — add to your briefcase to read the full text and ask questions with AI
PER CURIAM.
This is an appeal from the district court’s denial of plaintiff’s action to recover income taxes paid on certain interest income for the years 1961, 1962, and 1963. A number of other issues were decided, but no appeal has been taken from the district court’s disposition of them. The case was submitted on the pleadings and a stipulation of facts.
Plaintiff bank, a licensed bond dealer, instituted this action to recover taxes paid on interest it received from municipal bonds. Such interest is ordinarily [1100]*1100tax-exempt under Internal Revenue Code § 103(a), and it had been so reported by the bank. The Commissioner of Internal Revenue disallowed this treatment with respect to several categories of bond purchases by appellant, only three of which concern us on this appeal:
(1) Instead of purchasing municipal bonds for which they had successfully bid, certain bond dealers orally agreed with appellant that the bank would buy the bonds from the issuers and later sell them to the dealers at the price the bank had paid. Until these latter sales occurred, the bank in each case accrued the interest on the bonds at the coupon rate and credited this interest to an exempt-interest account. In no case did a successful bidder fail to buy the bonds from the bank at the bid price.
(2) Instead of consummating purchase agreements they had made with bond dealers, certain customers of appellant orally agreed with the bank that it would acquire the bonds from the dealers and later sell them to the customers at the prices it had paid, with adjustments for accrued interest. Here, too, the bank reported the accrued interest as tax-exempt income.
(3) Appellant purchased municipal bonds from bond dealers and later sold the bonds to various trusts for which its trust department acted as trustee. Prior to these purchases, officers of appellant’s trust department indicated to officers of its commercial department that the bonds under discussion were suitable for trust accounts and that the trust department desired to acquire them for its accounts when funds were available. Usually, it was not known at the time of purchase by the commercial department to which trust accounts particular bonds would be allocated, although sometimes a particular lot of bonds was earmarked for transfer to a particular trust account when the account had funds available. Until the trust accounts purchased the bonds, appellant kept them in its regular investment account. When the trust accounts acquired the necessary funds, they paid the commercial department the cost of the bonds plus accrued interest and took possession of the bonds in return. Here, too, appellant reported the interest it received on the bonds as tax-exempt income.
The district court, 327 F.Supp. 675, agreed with the Commissioner that the interest accruing on these categories of bonds between the time of appellant’s acquisition and disposition of them was not tax-exempt. Relying on American National Bank of Austin v. United States, 421 F.2d 442 (5th Cir. 1970), and Union Planters National Bank of Memphis v. United States, 426 F.2d 115 (6th Cir. 1970), the court held that the “material fact” was “that the bank had the ability in these transactions to insulate itself from any loss and at the same time had possession of the bonds as security.” We agree.
The American National Bank case concerned transactions similar in substance to those described in category (1), supra. In that case, the Fifth Circuit held that, for tax purposes, the bank functioned as a secured lender in its transactions with the bond dealers. In Union Planters, we applied the same rationale to arrangements under which a bank purchased bonds from dealers upon the written promise of the dealers to repurchase the bonds at the price paid by the bank plus accrued interest. We expressly approved in Union Planters the reasoning of Judge Ainsworth in American National Bank, 426 F.2d at 118.
Appellant, although conceding that categories (1) and (2), supra, are “similar in substance” to the transactions discussed in American National Bank, urges us to reject the reasoning of that case on the ground that the Fifth Circuit ignored the line of authority holding that, for tax purposes, ownership does not pass until property is actually delivered pursuant to a contract of sale. Under this rule, an option to buy or any other contract to sell is deemed a mere executory contract and does not pass [1101]*1101ownership. See, e. g., Lucas v. North Texas Lumber Company, 281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668 (1930). Thus, appellant contends, ownership of the bonds in question did not pass to the bond dealers or. the bank customers, respectively, until those parties actually paid for the bonds and took delivery of them. It further argues that Union Planters is inapposite here both because appellant is a licensed bond dealer and because it did not acquire the bonds from the parties to which it ultimately sold them. Our expression of approval of the American National Bank decision in Union Planters is asserted to be dictum and not binding because we regarded the Government’s case there as a stronger one than that presented in the Fifth Circuit decision. 426 F.2d at 118.
We see no merit to any of these contentions. As appellee observes, a lender of the purchase price of municipal bonds should not be able to collect interest tax-free on the bonds as payment for lending the money. See Union Planters, supra, 426 F.2d at 116-117. Yet, under the arrangements described herein, as in American National Bank and in Union Planters, the bank in effect is lending money to purchase bonds and is paying no tax on the interest received. Moreover, the person who purchases the bonds from the bank in effect borrows money to buy the bonds without paying interest. This results in the double tax benefit that Congress intended to prevent by enacting I.R.C. § 265(2). Union Planters, supra, 426 F.2d at 116. And, the bank is completely insulated from the risk of market fluctuations in this type of transaction — its investment is completely secured since it is assured of receiving the price it paid for the bonds. In these circumstances, the bank in substance is clearly a secured lender instead of an owner.
We therefore reiterate our approval of the American National Bank decision, and we hold the rationale of that case to be equally applicable to the transactions described in categories (1) and (2), supra. As appellee points out, appellant’s reliance on the Lucas line of authority begs the question — the issue in this case is whether appellant ever owned the bonds for tax purposes, not whether appellant surrendered ownership at the time the contracts for sale were executed. We hold, for the reasons found persuasive in American National Bank and Union Planters, that appellant in substance never owned the bonds described in categories (1) and (2), supra, cf. Commissioner of Internal Revenue v. Court Holding Company, 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945), and thus was not entitled to a tax exemption for the interest that accrued on the bonds during the period under consideration.
With respect to the bonds described in category (3), supra, appellant contends that it would be unrealistic to regard the bank as a secured lender. It was stipulated that, with the exception of two of the trust accounts involved in these transactions, the bank as trustee had no authority to borrow funds for the purpose of investing trust assets. Moreover, appellant contends that the risk of depreciation in value lay on the commercial department and not on the trust accounts since a trustee, under well-established principles of trust law, is not allowed to “purchase bonds from itself at a price higher than it would purchase similar bonds from an outsider, even though the bonds had been earmarked for the particular trust account.”
The record on appeal is unclear concerning the exact terms of the agreements between officers of appellant’s trust and commercial departments. However, it was stipulated that “[t]he trust accounts paid the bank the cost of the bonds plus accrued interest.” It thus appears that, appellant’s protestations to the contrary notwithstanding, the trust department did indeed indemnify the commercial department against any depreciation in the value of the bonds. In these circumstances, we see no significant difference between the intra-bank transactions and those described in categories (1) and (2), supra. [1102]*1102Nor do we think it significant that not all the bonds purchased for the trust department were earmarked for specific trust accounts; the significant fact is that the bonds were acquired and held for the purpose of ultimately transferring them to the trust accounts, in a manner insulating the bank from the risk of market fluctuations.1
Affirmed.