Prudden v. Commissioner, Docket No. 1447.

Docket No. 1447. | B.T.A. | Jun 10, 1925

Lead Opinion

OPINION.

Littleton:

The question presented in this appeal is whether taxpayers are entitled to deduct interest on indebtedness the amount of which is admitted to have been incurred or'continued to purchase or carry obligations or securities, the interest upon- which is wholly exempt from taxation.

Section 214(a) (2) of the Revenue Acts of 1918 and 1921 provides:

(a) That in computing net income there shall he allowed as deductions:

(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or contimied to purchase or carry obligations or securities * * * the interest upon which is wholly exempt from taxation under this title * * *. (Italics ours.)

The taxpayers are engaged in the business of buying and selling tax-exempt bonds and securities; their business as dealers in securities necessitated the borrowing, during the years involved, of large sums of money, the interest upon which exceeded that received from such bonds. The taxpayers point out that the character of their business is such that the tax-exempt bonds constitute their stock in trade, similar to the merchandise of a merchant; that the interest paid on loans to carry this stock is a business expense which should be deducted in the same way as is allowed to the merchant; and that, by disallowing such deductions, a tax is indirectly assessed upon tax-exempt securities.

The provisions of the statute specifically except deduction of interest paid or accrued “ on indebtedness incurred or continued to purchase or carry obligations or securities * * * the interest

upon which is wholly exempt from taxation.” There is no occasion in this appeal for the application of the rules of statutory construction. The language of the statute is clear and makes no exception. If Congress had intended to except dealers in this class of securities it would have so provided. It is obviously the duty of the Board to follow the statute.

The taxpayer further contends that the denial to dealers in municipal bonds of the right to deduct interest incurred to purchase or carry these bonds operates as a tax upon the interest derived therefrom, and that the statute, if so applied, is unconstitutional. The effect, if any, upon the municipalities whose bonds are handled is too remote or indirect to deserve serious consideration. It is plain from the provision of the section in question that interest paid or incurred to purchase or carry tax-exempt securities may not be deducted in determining net income, and the action of the Commissioner in refusing to allow the deduction thereof is approved.