Chem Aero, Inc., a California Corporation v. United States

The government appeals the district court’s judgment granting a tax refund to the plaintiff taxpayer, Chem Aero, Inc.

A sales agent for Chem Aero brought a state court action against the corporation for unpaid commissions, and in 1974 was awarded a judgment in the amount of $54,-082. In order to appeal, the losing party in an action of this kind is required by state law to post a bond for one and one-half times the amount of the award. Chem Aero posted such a bond in the amount of $80,900.

The bond was issued by Highlands Insurance Company (“Highlands”) and collateralized to approximately ninety percent of the amount of the bond by an irrevocable letter of credit from Chem Aero’s bank. This letter of credit could be applied at any time against a certificate of deposit in the amount of $100,000. The certificate backed the letter of credit and a bank loan in the amount of $20,000. Chem Aero received interest income on the certificate and listed it as a business asset. The judgment against Chem Aero was listed as a liability.

That judgment was affirmed by the court of appeal, and in March, 1976 the Supreme Court of California denied rehearing. The following month Highlands…