Stewart v. United States

Decision Date30 August 1939
Docket NumberNo. 9100.,9100.
Citation106 F.2d 405
PartiesSTEWART v. UNITED STATES.
CourtU.S. Court of Appeals — Ninth Circuit

W. Glenn Harmon, of San Francisco, Cal., Ernest L. Wilkinson, of Washington, D. C., and J. Edward Johnson, of San Francisco, Cal., for appellant.

James W. Morris, Asst. Atty. Gen., Sewall Key, Berryman Green, and Joseph M. Jones, Sp. Assts. to Atty. Gen., and Frank J. Hennessy, U. S. Atty., and Esther B. Phillips, Asst. U. S. Atty., both of San Francisco, Cal.

Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.

GARRECHT, Circuit Judge.

During the year 1930 the appellant purchased bonds of the Kansas City Joint Stock Land Bank, issued under the provisions of the Federal Farm Loan Act of 1916, for the sum of $504,275.74. These bonds were of the par value of $886,000, and bore accrued and unaccrued interest coupons. In 1931 the appellant surrendered the said bonds to the receiver of the Kansas City Joint Stock Land Bank and received therefor the sum of $580,636.69.

Prior to 1931 the appellant purchased bonds, with interest coupons attached, of the Bankers Joint Stock Land Bank of Milwaukee, issued under the provisions of the said Federal Farm Loan Act, of the par value of $90,000, paying therefor the sum of $19,335. In 1931 the appellant sold said bonds for $27,250.

The total amount received by the appellant from the bonds surrendered to the receiver of the Kansas City Joint Stock Land Bank exceeded the total amount paid therefor by $76,360.95; the total amount received by petitioner and his wife upon the sale of the bonds of the Bankers Joint Stock Land Bank exceeded the amount paid therefor by $7,915. Both banks were in receivership at the time the appellant purchased the bonds and neither was paying interest. The purchases were made for the prospective increment and not for their interest.

From the time of the passage of the Farm Loan Act in 1916, the Federal Farm Land Board issued various circulars and bulletins to acquaint the public with the Act and with the advantages of Federal farm loan bonds, which contained statements that the bonds and their income were "free from all forms of taxation," including "income tax and all forms of State and municipal tax of every kind and character," etc. Mr. Stewart, acting for himself and his wife, saw and studied these and other circulars, none of which negatived or restricted the language above quoted. He relied upon these statements in making his purchases, reasonably believing he was purchasing securities the profit upon which, in case of sale, would be exempt income.

In making his income tax return for the year 1931, the year in question, Stewart divided his income between himself and his wife pursuant to the community property law of the state of California. Identical returns were filed. The appellant managed all business dealings for the community.

Prior to filing income tax returns for 1931, appellant sought a ruling from the Commissioner of Internal Revenue that the income so derived from these bonds was exempt income. The Commissioner ruled it was taxable income and appellant included it in the returns, but simultaneously filed a protest. The appellant paid the tax and made claim for refund, which was rejected.

Complaint for refund of the income tax allegedly erroneously assessed against the appellant was filed in the court below (28 U.S.C.A. § 41(5) and (20)); judgment was entered in favor of defendant, from which this appeal is taken. The opinion of the court below is reported in 24 F.Supp. 145.

The question presented by this appeal is whether the gain realized upon the surrender and sale of the bonds involved herein is exempt from federal income taxation by reason of Section 26 of the Farm Loan Act of 1916, 39 Stat. 360, 380, 12 U.S.C.A. § 931. As heretofore noted, the bonds in question were issued under the provisions of the Federal Farm Loan Act of 1916, section 26 of which reads in part as follows: "That every Federal land bank and every national farm loan association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, except taxes upon real estate held, purchased, or taken by said bank or association under the provisions of section eleven and section thirteen sections 761 and 781 of this Act chapter. First mortgages executed to Federal land banks, or to joint stock land banks, and farm loan bonds issued under the provisions of this Act chapter, shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation." (Italics supplied.)

The bonds referred to recited: "This bond is issued under the authority of the Act of Congress approved July 17, 1916, which provides that `farm loan bonds issued under the provisions of this Act shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal and local taxation.'"

The applicable provisions of the Revenue Act of 1928, under which the tax complained of was assessed, are set forth in the margin, as is a pertinent provision of the Revenue Act of 1938.1

The appellant contends that the gains realized were exempt from income tax by virtue of Section 26 of the Federal Farm Loan Act of 1916, falling within the phrase "income derived therefrom" used in the said section of the Act, and as the word "income" is construed and defined by judicial decisions; that Section 26 was not amended or superseded by the Revenue Act of 1928 or prior revenue laws; that no revenue act until 1938 amended or superseded section 26 of the Act of July 17, 1916.

The appellee argues that gain derived from dealings in bonds is not income derived from the bonds; that the Revenue Act of 1928 exempts from taxation only the interest paid on such bonds; and that the decision of the Supreme Court of the United States in Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304, 71 A.L.R. 1260 is controlling. On this case the decision of the court below is based.

The taxpayer is before us claiming an exemption. The rule is that an exemption from taxation is an extraordinary grace of the sovereign and a taxpayer claiming an exemption or deduction must be able to point to an applicable statute and show that he comes within its terms. White et al. v. United States, 305 U.S. 281, 292, 59 S.Ct. 179, 83 L.Ed. 172; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348; Cornell v. Coyne, 192 U.S. 418, 431, 24 S. Ct. 383, 48 L.Ed. 504; Dodge v. Comm'r of Corps. and Taxation, 273 Mass. 187, 174 N.E. 109, 111. Section 26 of the Farm Loan Act of 1916, supra, relied upon by the taxpayer, specifically states that Federal Farm Loan Bonds "and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation." "`Income may be defined as the gain derived from capital, from labor, or from both combined,' provided it be understood to include profit gained through a sale or conversion of capital assets, * * *." Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189, 193, 64 L.Ed. 521, 9 A.L.R. 1570. See Doyle v. Mitchell Brothers Co., 247 U.S. 179, 185, 38 S.Ct. 467, 62 L.Ed. 1054; Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509, 519, 520, 41 S.Ct. 386, 65 L.Ed. 751, 15 A.L.R. 1305; Taft v. Bowers, 278 U.S. 470, 481, 49 S.Ct. 199, 73 L.Ed. 460, 64 A.L.R. 362; MacLaughlin v. Alliance Ins. Co., 286 U.S. 244, 249, 52 S.Ct. 538, 76 L.Ed. 1083. It thus clearly appears that "income" includes both interest and gain realized through dealing in bonds or other property. See Magill, Taxable Income, 1936, pp. 17, 70.

In the absence of indication of contrary intention, it is to be assumed that the legislative body gave to the word "income" the common, every-day meaning which the word has been given in the decisions above noted. If the Congress meant "interest," we are confident that word would have been used. The word "interest" is used in Section 22 of the Act, 26 U.S.C.A. § 22, not less than 6 times; the same section speaks of the purchase of farm loan bonds at below par, while Section 27, 12 U.S.C.A. §§ 942, 943, permits Federal Reserve and member banks to buy and sell farm loan bonds. The first sentence of Section 26 exempts every Federal land bank and every national farm loan association, including the capital and reserve or surplus therein and the income derived therefrom from Federal, State, etc., taxes, while the second sentence includes the exemption of bonds, such as those here involved, and the income derived therefrom in the exemption. (The Section is set out supra.) The General Counsel of the Bureau of Internal Revenue rendered an opinion under date of April 3, 1933, in a case involving the Des Moines Joint Stock Land Bank, in the course of which he said: "It would be inconsistent to define the words `income derived therefrom' found in the third line of section 26, to include profits or gains, while at the same time defining the same words found in the tenth line of the same section, to include only interest." That reasoning continues sound.

The tax was assessed under the Revenue Act of 1928, which was broad enough to include the tax in question if Section 26 was not controlling (Superintendent of Five Civilized Tribes v. Commissioner, 295 U.S. 418, 420, 55 S.Ct. 820, 79 L.Ed. 1517), and it therefore becomes of importance to inquire whether that act repealed or superseded Section 26 in any manner and, if so, to what extent. Section 22 of the Revenue Act of 1928, heretofore set forth, provides, in subdivision (a) thereof, that "`Gross income' includes gains, profits, and income derived from * * * dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; *...

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    ...law is not held to repeal or supersede an earlier specific law in the absence of a definite expressed intention. Stewart v. United States (9 CCA 1939), 106 F.2d 405; Anderson v. Gladden, D.C.Or.1961, 188 F. Supp. 666, aff. 293 F.2d 463. Stone which is chiefly valuable as building stone is, ......
  • United States v. Stewart
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    ...and Sixteen Cents ($8,824.16) for which the government has brought this suit. The defendant urges that, under Stewart v. United States, 9 Cir., Aug. 30, 1939, 106 F.2d 405, realized gain from discounts on the land bank bonds is exempt from taxation; and that, upon the principle of Bull v. U......
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