US SUPREME COURT DECISIONS

In 1949, a corporation in need of funds to meet maturing bank loans and for working capital borrowed $3,000,000 from one insurance company and $1,000,000 from another for 15 years, giving each a single typewritten instrument entitled "3 1/4% Sinking Fund Promissory Note Due February 1, 1964." Each note was subject to the terms of an underlying agreement containing elaborate provisions for the protection of the note holders and a provision under which each insurance company could require the borrower to convert its note into a series of new notes in denominations of $1,000 or multiples thereof, "either in registered form without coupons or in coupon form, and in printed or in fully engraved form." This option had not been exercised by either note holder.

Held: these two notes are not subject to the documentary stamp taxes laid under §§ 1800 and 1801 of the Internal Revenue Code of 1939 on "all bonds, debentures, or certificates of indebtedness issued by any corporation. . . ." Pp. 350 U. S. 384-398.

(a) It is significant that the stamp tax which was levied on "promissory notes" for many years, but which has been repealed, was always carried in a separate section from that containing the tax on "bonds, debentures, or certificates of indebtedness," and was always at a lower rate than the tax on the latter instruments. P. 350 U. S. 388.

(b) That these notes are for large amounts and of long maturity and are secured by an elaborate underlying agreement does not prevent them from being promissory notes, nor does anything in the earlier legislation or its history indicate that this type of note would not have been taxable at the lower rate provided in the promissory note section of the former statute. P. 350 U. S. 389.

(c) Even if these notes could not fairly be called "promissory notes," it does not follow that they must be regarded as "debentures" or "certificates of indebtedness." P. 350 U. S. 389.

(d) The administrative history of the statute establishes that, until 1947, when General Motors Acceptance Corp. v. Higgins, 161 F.2d 593, was decided, the Treasury considered no instruments chanrobles.com-red

Page 350 U. S. 384

subject to the "debenture" tax except those which were issued (1) in series, (2) under trust indentures, and (3) in registered form or with coupons attached. Pp. 350 U. S. 389-393.

(e) Since 1920, the Treasury has considered "certificates of indebtedness" as akin to bonds and debentures, and as including "only instruments having the general character of investment securities," which these notes do not have. Pp. 350 U. S. 393-395.

(f) The stamp taxes on "debentures" and "certificates of indebtedness" are based upon the character of the instruments employed, not upon the nature of the transactions involved, and an instrument which is neither a "debenture" nor a "certificate of indebtedness" does not become such merely because it evidences a long term debt obligation supported by elaborate protective covenants. Pp. 350 U. S. 395-396.

(g) In new of the Treasury's prior longstanding and consistent administrative interpretation of the terms "debentures" and "certificates of indebtedness" and the fact that Congress has let that administrative interpretation remain undisturbed for many years, the Treasury's present ad hoc contention that those terms should now be construed as including the notes here involved cannot stand. Pp. 350 U. S. 396-397.

(h) The fact that the agreement underlying these notes provides for the substitution of instruments which might qualify as "debentures" does not render these notes taxable as "debentures." P. 350 U. S. 398.

218 F.2d 91 affirmed.