CASH-METHOD BANK NEED NOT ACCRUE INTEREST OR OID ON SHORT-TERM LOANS.

                       UNITED STATES TAX COURT

Charles M. Berlau, for respondent.

OPINION

[1] RUWE, JUDGE: Respondent determined a deficiency of $29,972.41 in petitioner's 1989 Federal corporate income tax. The issue for decision is whether section 1281(a) ¹ requires petitioner, a cash basis taxpayer, to accrue interest and/or original issue discount earned on short-term loans.

BACKGROUND

[2] The parties submitted this case fully stipulated. The stipulation of facts and supplemental stipulation of facts are incorporated herein by this reference. Petitioner is a corporation whose principal place of business was in Wellington, Kansas, at the time it filed the petition.

[3] Petitioner is a commercial bank that makes a variety of loans in the ordinary course of its business. These loans are of varying duration, including loans of less than 1 year, loans of 1 year, and loans of more than 1 year. Petitioner had, and still has, business reasons for using notes with a term of 1 year or less.

[4] During 1989, petitioner made some loans that were documented by promissory notes with a stated maturity date that was 1 year from the date the notes were issued. Such loans will be referred to as category X loans. Petitioner held the category X loans on December 31, 1989. During 1989, petitioner also made some loans that were documented by promissory notes with a stated maturity date that was less than 1 year from the date the notes were issued. Such loans will be referred to as category Y loans. Petitioner held the category Y loans on December 31, 1989. The interest and principal payable on all categories X and Y loans were due at maturity.

[5] Petitioner reported its taxable income using the cash method of accounting. Petitioner reported interest income from its categories X and Y loans as it was received pursuant to the cash method of accounting.

[6] Petitioner had interest income of $60,086.89 during 1989 that had accrued, but was not yet paid, on its category X loans. Petitioner had interest income of $65,687.11 during 1989 that had accrued, but was not yet paid, on its category Y loans.

DISCUSSION

[7] Petitioner uses the cash method of accounting to report its taxable income. Consistent with that method, it did not report as income on its 1989 return any accrued interest or original issue discount that was earned but unpaid at the end of 1989. Respondent does not contest petitioner's general use of the cash method. ² Rather, respondent relies on the specific provisions of section 1281 requiring the accrual of income earned on short-term obligations.

[8] The pertinent provisions of section 1281(a) are as follows:

     SEC. 1281. CURRENT INCLUSION IN INCOME OF DISCOUNT ON CERTAIN

[10] Security Bank Minn. v. Commissioner, supra, was a Court- reviewed opinion. The majority opinion contains an extensive analysis of the statute, its evolution, the context in which it appears, and its legislative history. There was a dissenting opinion which was joined by five Judges. In affirming our opinion, the Court of Appeals for the Eighth Circuit also made an extensive analysis of the same factors. One of the judges on the Court of Appeals panel dissented.

[11] No purpose would be served by repeating the statutory analysis that led this Court and the Court of Appeals to decide that section 1281(a)(2) does not apply to loans made by banks in the ordinary course of business. Suffice it to say that this matter has been thoroughly considered and decided. The doctrine of stare decisis generally requires that we follow the holding of a previously decided case, absent special justification. This doctrine is of particular importance when the antecedent case involves statutory construction. Hesselink v. Commissioner, 97 T.C. 94, 99-100 (1991). While respondent has skillfully rearticulated his arguments in support of a different interpretation of the statute, we find nothing therein that would cause us to refrain from applying the doctrine of stare decisis with respect to the section 1281(a)(2) issue. ³

[12] Respondent alternatively argues that the loans in question were made in return for notes that contained "original issue discount" within the purview of sections 1281(a)(1) and 1283. According to respondent, section 1281(a)(1) requires petitioner to accrue the daily portion of that discount during the year in which the note was held, regardless of whether petitioner actually received anything in that year.

[13] In Security Bank Minn. v. Commissioner, supra at 37, the Commissioner refrained from arguing that section 1281(a)(1) applied, although he stated on brief that it "arguably does." it was therefore not necessary for us to make a specific holding regarding the application of section 1281(a)(1). In a technical sense, respondent's proposed application of section 1281(a)(1) presents an issue of first impression. However, we believe that the analysis upon which the holding in Security Bank Minn. was based compels us to hold against respondent's argument that section 1281(a)(1) applies in the instant case.

[14] Our holding in Security Bank Minn. that section 1281(a)(2) did not apply to loans made by banks in the ordinary course of business was based on our interpretation of section 1281 as originally enacted in 1984. As originally enacted, section 1281(a) applied only to acquisition discount or original issue discount. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 41, 98 Stat. 548. Section 1281 was amended in 1986 to add the provisions of section 1281(a)(2). Tax Reform Act of 1986, Pub. L. 99-514, sec. 1803, 100 Stat. 2791. In Security Bank Minn., we first analyzed section 1281 in its original form. On the basis of that analysis, we stated:

     We conclude that the legislative history supports petitioner's

     We do not believe that the 1986 amendment, which originated as a

[16] Decision will be entered for petitioner.

² Although it is not explicitly indicated in the record, it appears that petitioner was allowed to use the cash method of accounting in 1989 because it had gross income of less than $5 million. See secs. 446(a), (c)(1), 448(b)(3).

³ Respondent has made no argument that the issues presented are of great overall significance. Sec. 448 generally precludes corporations with more than $5 million in gross receipts from using the cash method of accounting. Thus, our holdings appear to have application only to small banks.

⁴ Because of our legal conclusion, there is no need to decide whether respondent is correct in characterizing the loans in issue as generating original issue discount.