First American National Bank of Nashville v. United States ( 1972 )

O’SULLIVAN, Senior Circuit Judge

(dissenting in part).

I concur in the opinion of the court except as it relates to bonds acquired by appellant bank and later sold to various trusts under administration in its trust department. As to the other tax free bonds which were acquired by the bank and sold to customers, I believe that this Court’s decision in Union Planters National Bank of Memphis v. United States, 426 F.2d 115 (6th Cir. 1970), established the law of this Circuit. In that case, we followed the Fifth Circuit’s decision in American National Bank of Austin v. United States, 421 F.2d 442 (1970). But neither of these decisions dealt with a bank acquiring tax free bonds for ultimate acquisition as investments by trust accounts being administered by the bank’s trust department.

The Act of Congress providing exemption of publicly issued bonds provides in 26 U.S.C. § 103(a)(1) as follows:

“(a) General Rule. — Gross income does not include interest on—

(1) the obligations of a State, a Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia;”

This is plain language, and I find nothing in the conduct of the bank or its trust officers which made it necessary for the bank to include in its taxable income that which the Internal Revenue Code says is not to be included.

Section 264(a) of the Code provides against abuse of Section 103(a)(1) by forbidding deduction from income of interest paid on borrowings made for the purpose of acquiring tax free bonds. Section 265(2) provides:

“No deduction shall be allowed for—

(2) Interest — Interest on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest on which is wholly exempt from the taxes imposed by this subtitle. ...”

In my view, the above language has no application to the transactions here involved. Neither the bank nor its trust accounts have deducted from income interest paid on any borrowings made for acquisition of tax-exempt bonds. The conclusion that there was somehow a tax evasion in the transaction between the bank and its trust accounts appears to derive from the fact that it was stipulated that “the trust accounts paid the bank the cost of the bonds plus accrued interest.” There is no evidence in the record to show that any of the bonds purchased by the Trust Department had declined in value from the time of the original purchase to the date of a trust estate’s acquisition of them. If the trust accounts paid more than the market value of acquired bonds, there might indeed be a breach of fiduciary duty upon the part of the trust officer. Such conduct, however, would not repeal Section 103(a)(1) so as to make taxable what that Section says is not taxable. I am unable to find illegality or immorality in the handling of bonds for the bank’s trust accounts, and the United States was not denied any tax revenue that was due to it.

I would vacate the District Court judgment as it relates to the bonds acquired by the appellant bank’s trust accounts.