Malley v. Howard

• Decision Date: 06 June 1922
• Docket Number: 1551-1554.
• Parties: MALLEY v. HOWARD et al. (No. 1551.) CASEY v. HOWARD et al. (No. 1552.) MALLEY v. CROCKER et al. (No. 1553.) MALLEY v. HECHT et al. (No. 1554.)
• Court: U.S. Court of Appeals — First Circuit

281 F. 363

MALLEY v. HOWARD et al. (No. 1551.) CASEY v. HOWARD et al. (No. 1552.) MALLEY v. CROCKER et al. (No. 1553.) MALLEY v. HECHT et al. (No. 1554.)

Nos. 1551-1554.

United States Court of Appeals, First Circuit.

June 6, 1922

S Milton Simpson, Sp. Atty. Internal Revenue Department, of Washington, D.C. (robert O. Harris, U.S. Atty., of Boston Mass., and Frederic S. Harvey, Asst. U.S. Atty., of Lowell Mass., Carl A. Mapes, Solicitor of Internal Revenue, and Malcolm A. Coles, Sp. Atty. Internal Revenue Department, both of Washington, D.C., on the brief), for plaintiff in error in all four cases.

Edward F. McClennen, of Boston, Mass. (William H. Dunbar, Bernhard Knollenberg, and Allison L. Newton, all of Boston, Mass., on the brief), for defendants in error Howard, Hecht, and others.

Harrison M. Davis and Felix Rackemann, both of Boston, Mass. (Dunbar & Rackemann, of Boston, Mass., on the brief), for defendants in error Crocker and others.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

ANDERSON Circuit Judge.

These cases involve the validity of taxes imposed upon business organizations, commonly known as 'Massachusetts Trusts,' under the Revenue Acts of 1916 (39 Stat. 789) and 1918 (40 Stat. 1057). Nos. 1551 and 1552 involve the Haymarket Trust, and we treat them as one case. The cases were argued as a group and may be conveniently dealt with in one opinion.

The chief business of the Haymarket and Hecht Trusts is that of owning, managing, and leasing real estate and distributing the net income to its shareholders. These concerns deny that they are associations within the meaning of the statutes.

The Crocker Trust is a large manufacturing concern. It admits that it is an association within the meaning of the statutes, but it claims immunity from the tax on the ground that it has no capital stock within their meaning.

The court below sustained the plaintiff's contentions in each case, and the government brought the cases here on writs of error.

The fundamental question is whether the plaintiffs are associations having a capital stock represented by shares, within the meaning of these provisions. So far as the issues in these cases are concerned, the provisions of the two statutes seem to us to be equivalent, for there is now presented no controverted question as to the amount of any tax; we therefore need not consider the different amounts exempt under the two statutes or the retroactive and substitutional effect of the 1918 statute.

The act of 1916 (section 407) levies a tax on associations 'now or hereafter organized in the United States for profit and having a capital stock represented by shares * * * with respect to the carrying on or doing business by such * * * association * * * equivalent to 50 cents for each $1,000 of the fair value of its capital stock, and in estimating the value of capital stock the surplus and undivided profits shall be included. * * * The amount of such annual tax shall in all cases be computed on the basis of the fair average value of the capital stock for the preceding year'-- with an exemption not now material.

Act 1918, Sec. 1 (Comp. St. Ann. Supp. 1919, Sec. 6371 1/4a), includes associations under the term 'corporation,' and in section 1000a (section 5980n), provides for an annual 'special excise tax with respect to carrying on or doing business, equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year,' etc. 'In estimating the value of capital stock the surplus and undivided profits shall be included.' Both acts are conceded to levy an excise tax with respect to doing business; the amount of the tax being measured by the average value of the capital stock, including any surplus and undivided profits as a part thereof. All the plaintiffs agree that they are doing business within the meaning of these acts.

While we recognize that in applying this and every other tax statute reasonable doubts must be resolved in favor of the taxpayer (Gould v. Gould, 245 U.S. 151, 38 Sup.Ct. 53, 62 L.Ed. 211), yet revenue acts are not penal statutes; the government is not to be crippled by strained and unnatural construction of tax statutes fairly plain. Cliquot's Champagne, 3 Wall. 114, 145, 18 L.Ed. 116; United States v. Hodson, 10 Wall. 395, 19 L.Ed. 937; Worth Bros. v. Lederer, 251 U.S. 507, 40 Sup.Ct. 282, 64 L.Ed. 377.

Taxation of this general kind began with the passage of Act Aug. 5, 1909 (36 Stat. 11, 112), which imposed a tax 'on every corporation, joint-stock company or association, organized for profit and having a capital stock represented by shares * * * now or hereafter organized under the laws of the United States or of any state or territory * * * with respect to the carrying on or doing business by such corporation, joint-stock company or association * * * equivalent to one per centum upon the entire net income over and above $5,000,' etc.

This statute, passed before we had the Sixteenth Amendment, was attacked as an income tax, and therefore unconstitutional. But the Supreme Court held that it was not an income tax, and sustained it as an excise tax. Flint v. Stone Tracy Co. (1911) 220 U.S. 107, 31 Sup.Ct. 342, 55 L.Ed. 389, Ann.Cas. 1912B, 1312. It was measured by the income, not, as under the present law, on the capital used.

In Eliot v. Freeman, 220 U.S. 178, 31 Sup.Ct. 360, 55 L.Ed. 424, the court at the same time held the act of 1909 not to cover two typical Massachusetts real estate trusts, on the ground that 'the language of the act, 'now or hereafter organized under the laws of the United States,' etc., imports an organization deriving power from statutory enactment. ' Organized as purely nonstatutory, they were exempt.

The gist of the present case is whether the statutes of 1916 and 1918 are, as the plaintiffs contend, to be given the same interpretation in favor of exempting such organizations as was given by the Supreme Court to the act of 1909.

The government, on the other hand, contends that the language of the acts is plainly applicable to such organizations, that the history of the legislation shows that Congress intended to avoid the result reached in Eliot v. Freeman, supra, and that there are no applicable decisions of the courts supporting the plaintiffs' position. We think the government is right, and that the court below erred in holding that such organizations are not associations within the meaning of these Revenue Acts.

The language of the statutes, supra, seems so plain that repetition and paraphrasing would add nothing.

The history of the legislation lends emphasis to the initial impression of its import. For it is elementary that, when language used in an earlier statute has in application received judicial construction, change in language in later analogous legislation imports legislative purpose to attain a different result. If Congress had intended the acts in question to have the restricted application given by the Supreme Court to the act of 1909, there was no conceivable reason for changing the words 'organized under the laws of the United States or of any state,' etc., to 'organized in the United States.'

We think it plain that by this change Congress intended in the later acts to include nonstatutory organizations, and to avoid the restriction found by the Supreme Court in the words of the 1909 act. We cannot accord with the learned District Judge in his view that 'it is hard to discover any substantial distinction between the scope of' the act of 1909 and the acts of 1916 and 1918 'as far as 'associations' are concerned. ' We think there is a vital and controlling distinction.

Eliot v. Freeman was decided in 1911. In 1913 an income tax act was passed (38 Stat. 114, 166, 172), imposing such tax on 'every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created or organized, not including partnerships. ' The original case of Crocker v. Malley, 249 U.S. 223, 39 Sup.Ct. 270, 63 L.Ed. 573, 2 A.L.R. 1601, the plaintiffs' chief reliance, arose under this statute. Sitting as District Court, Judge Bingham, in July, 1917, held the Wachusett Realty Company, the predecessor of the present Crocker Association, a trust, according in that regard with Judge Hale in a decision made on May 23, 1914, in the case of Crocker v. Crocker.

But in this court (Crocker v. Malley, 250 F. 817, 163 C.C.A. 131) the organization was held an association within the meaning of the statute. The Supreme Court reversed this court, adopting the view of the District Court. The decisions, both in the Supreme and District Courts, against the government, turned upon the fact that the shareholders had no real control over the trust estate; so that it therefore fell within the doctrine of Williams v. Milton, 215 Mass. 1, 102 N.E. 355, from the opinion in which Mr. Justice Holmes quoted (249 U.S. 223, 232, 39 Sup.Ct. 270, 271, 63 L.Ed. 573, 2 A.L.R. 1601), as follows:

'There can be little doubt that in Massachusetts this arrangement would be held to create a trust and nothing more. ' The certificate holders * * * are in no way associated together, nor is there any provision in the (instrument) for any meeting to be held by them. The only act which (under the (declaration of) trust) they can do is to consent to an alteration * * * of the trust,' and to the other matters that we have mentioned. They are confined to giving or withholding assent, and the giving or withholding it 'is not to be had in a meeting, but is to be given by them individually.' 'The sole right of the cestuis que trust is to have the property administered in their interest by the trustees, who are the masters, to receive income while the trust

...