United States v. Wells Fargo Bank

Decision Date23 March 1988
Docket NumberNo. 86-1521,86-1521
PartiesUNITED STATES, Appellant v. WELLS FARGO BANK et al
CourtU.S. Supreme Court
Syllabus

Under § 5(e) of the Housing Act of 1937, certain state and local public housing agency obligations, commonly termed "Project Notes," are "exempt from all taxation . . . imposed by the United States." It was generally assumed that this exemption applied only to the federal income tax until, in 1984, a Federal District Court ruled that Project Notes were also exempt from federal estate taxes. Shortly thereafter, Congress enacted the Deficit Reduction Act of 1984 (DEFRA), § 641 of which eliminated the purported exemption and foreclosed those who had already paid estate taxes on Project Notes from obtaining a refund thereon. After the Commissioner of Internal Revenue denied appellee executors such refunds, they filed suit in the District Court below, which concluded that their Project Notes were tax exempt when they filed their estate tax returns. The court also held that § 641 of the DEFRA unconstitutionally denied appellees due process and equal protection of the laws under the Fifth Amendment. The United States appealed directly to this Court under 28 U.S.C. § 1252.

Held:

1. Section 5(e) of the Housing Act does not exempt Project Notes from federal estate taxation. The settled presumption against implied tax exemptions applies here, particularly since 26 U.S.C. §§ 2001 and 2002 (1982 ed. and Supp. III), which define the taxable estate for estate tax calculation, by their terms include Project Notes. Moreover, an exemption of property from all taxation, such as that contained in § 5(e), has long been understood to apply only to direct taxes such as the federal income tax, and not to excise taxes such as the estate tax. The various aspects of the legislative history relied on by appellees as indicia of congressional intent are insufficient to demonstrate unambiguously that Project Notes are exempt from estate taxes in contravention of the aforesaid presumption and the understood meaning of § 5(e). Pp. 354-359.

2. Resolution of the estate tax exemption question obviates the need for this Court to consider the constitutionality of § 641 of the DEFRA. P. 359.

86-2 USTC ¶ 13,703, reversed.

BRENNAN, J., delivered the opinion of the Court, in which all other Members joined, except KENNEDY, J., who took no part in the consideration or decision of the case.

Lawrence G. Wallace, Washington, D.C., for appellant.

Robert H. Rotstein, Beverly Hills, Cal., for appellees.

Justice BRENNAN delivered the opinion of the Court.

This case, which consists of two actions consolidated below, Wells Fargo Bank v. United States and Rosenberg v. United States, 86-2 USTC ¶ 13,703 (CD Cal.1986), presents two issues: first, whether certain state and local public housing agency obligations (Project Notes or Notes) were exempt from federal estate taxation prior to June 19, 1984, and second, if so, whether § 641 of the Deficit Reduction Act of 1984 (DEFRA), 98 Stat. 939, which forecloses any refund for estate taxes paid on such Project Notes, is unconstitutional. Relying on Haffner v. United States, 585 F.Supp. 354 (N.D.Ill.1984), aff'd, 757 F.2d 920 (CA7 1985), the District Court for the Central District of California ruled that Project Notes were exempt. It further held § 641 of the DEFRA unconstitutional. The United States appealed that judgment directly to this Court pursuant to 28 U.S.C. § 1252. We noted probable jurisdiction, sub nom. United States v. Crocker National Bank, 481 U.S. 1047, 107 S.Ct. 3207, 96 L.Ed.2d 694 (1987), and now reverse.

In the late 1930's, the Nation faced a severe housing shortage. To meet that crisis, Congress enacted the Housing Act of 1937, 50 Stat. 888 et seq., which was designed to stimulate local financing of housing projects by empowering state and local housing authorities to issue tax-free obligations, termed "Project Notes." For almost 50 years after the Act's passage, it was generally assumed that this exempted the Notes from federal income tax, but not from federal estate tax. See Committee on Tax Exempt Financing, Section of Taxation, ABA, Report on the Tax Provisions of the United States Housing Act of 1937: Beyond the Looking Glass, 33 Tax Lawyer 71, 105 (1979); Rev.Rul. 81-63, 1981-1 Cum.Bull. 455. However, in 1984, the District Court for the Northern District of Illinois ruled that Project Notes were exempt from estate taxes as well, basing its decision on a variety of statutory construction tools. Haffner v. United States, supra. The District Court's judgment caused a "rush to market" for Project Notes, and also prompted those who had already paid estate taxes on the Notes to seek refunds. Within months of the District Court's ruling, Congress enacted the DEFRA, § 641 of which, effective June 19, 1984, eliminated the purported estate tax exemption for Project Notes, and also foreclosed those who had already paid estate taxes on Project Notes from obtaining a refund thereon. Against this backdrop, we turn to the facts of the instant appeal.

The Wells Fargo appellees are the executors of the estate of Jules C. Stein, who died in April 1981. Included in the estate are Project Notes with an aggregate face value of $9,550,000. They filed an estate tax return listing these notes as taxable, and paid the tax. In June 1984, following the Haffner decision, appellees timely filed an amended estate tax return declaring that the Project Notes were exempt from taxation and claiming a refund. After the Commissioner of Internal Revenue rejected their claim, they brought suit in the District Court for the Central District of California.

The Rosenberg appellees are the coexecutors of the estate of Morris Folb, who died in July 1982. Project Notes with face values totaling $250,000 are part of the estate. Appellees filed an estate tax return, and, like the Wells Fargo appellees, included the Project Notes as taxable assets and paid tax on them. In August 1984, also like the Wells Fargo appellees, they filed their amended tax return claiming that the Project Notes were exempt from estate taxation. The Commissioner denied their claim and they too filed suit in the Central District of California, where their case was consolidated with Wells Fargo.

On cross-motions for summary judgment the District Court concluded, as mentioned above, that the Project Notes were tax exempt when the returns were filed, relying on the reasoning in Haffner. The court also held that § 641 of the DEFRA unconstitutionally denied appellees due process and equal protection of the laws as guaranteed by the Fifth Amendment. Although it is the portion of the judgment declaring an Act of Congress unconstitutional that provides us with appellate jurisdiction, such an appeal brings the entire case before us. United States v. Locke, 471 U.S. 84, 92, 105 S.Ct. 1785, 1791, 85 L.Ed.2d 64 (1985). Moreover, our established practice is to resolve statutory questions at the outset where to do so might obviate the need to consider a constitutional issue. Ibid.; Ashwander v. TVA, 297 U.S. 288, 347, 56 S.Ct. 466, 483, 80 L.Ed. 688 (1936) (Brandeis, J., concurring). Therefore, we consider first the question whether the statute exempts Project Notes from estate taxation.

Informing our examination of this issue is the settled principle that exemptions from taxation are not to be implied; they must be unambiguously proved. E.g., Oklahoma Tax Comm'n v. United States, 319 U.S. 598, 606, 63 S.Ct. 1284, 1288, 87 L.Ed. 1612 (1943); United States Trust Co. v. Helvering, 307 U.S. 57, 60, 59 S.Ct. 692, 693-694, 83 L.Ed. 1104 (1939); Rapid Transit Corp. v. New York, 303 U.S. 573, 592-593, 58 S.Ct. 721, 731, 82 L.Ed. 1024 (1938). Appellees do not dispute, however, that 26 U.S.C. §§ 2001 and 2002 (1982 ed. and Supp. III), which define the taxable estate for estate tax calculation, by their terms include the Project Notes. Only by referring outside the Internal Revenue Code, specifically to § 5(e) of the Housing Act of 1937, 50 Stat. 890, as amended, 42 U.S.C. § 1437i(b), do appellees endeavor to establish their exemption.

Of course, we begin our analysis of § 5(e) with the statutory language itself. This section states that "[Project Notes], including interest thereon, . . . shall be exempt from all taxation now or hereafter imposed by the United States." Well before the Housing Act was passed, an exemption of property from all taxation had an understood meaning: the property was exempt from direct taxation, but certain privileges of ownership, such as the right to transfer the property, could be taxed. Underlying this doctrine is the distinction between an excise tax, which is levied upon the use or transfer of property even though it might be measured by the property's value, and a tax levied upon the property itself. The former has historically been permitted even where the latter has been constitutionally or statutorily forbidden. The estate tax is a form of excise tax. Greiner v. Lewellyn, 258 U.S. 384, 42 S.Ct. 324, 66 L.Ed. 676 (1922) (municipal bonds subject to federal estate taxation notwithstanding an intergovernmental tax immunity barring a direct tax on the bond); Murdock v. Ward, 178 U.S. 139, 148, 20 S.Ct. 775, 779, 44 L.Ed. 1009 (1900) (federal tax exemption on federal bonds did not extend to taxation on the right to transfer the bonds at death); Plummer v. Coler, 178 U.S. 115, 20 S.Ct. 829, 44 L.Ed. 998 (1900) (State may calculate estate tax based on total value of property passing through the estate, including federal obligations exempt from direct taxation by the State). See also United States Trust Co. v. Helvering, supra, 307 U.S., at 60, 59 S.Ct., at 693-694 (applying the rule of Greiner, Murdock, and Plummer to hold that property subject to a general exemption from "all taxation" would not exempt it from excise taxes such as the estate tax); Treas.Reg. § 20.2033-1, 26 CFR...

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