Stern Bros. & Co. v. Commissioner of Internal Revenue

• Decision Date: 05 January 1940
• Docket Number: No. 11555.,11555.
• Citation: 108 F.2d 309
• Parties: STERN BROS. & CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

108 F.2d 309 (1940)

STERN BROS. & CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11555.

Circuit Court of Appeals, Eighth Circuit.

January 5, 1940.

John H. McEvers and Herman M. Langworthy, both of Kansas City, Mo. (Ryland, Stinson, Mag & Thomson and Reece A. Gardner, all of Kansas City, Mo., on the brief), for petitioner.

Newton K. Fox, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

W. Glenn Harmon, of San Francisco, Cal., Ernest L. Wilkinson, of Washington, D.C., and Carl D. Matz, of Kansas City, Mo., amici curiæ.

Before STONE, SANBORN, and THOMAS, Circuit Judges.

SANBORN, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals redetermining deficiencies in the income taxes of the petitioner for the years 1934 and 1935. The facts were stipulated. During the years in question the petitioner sold at a profit bonds of Joint Stock Land Banks issued under the Federal Farm Loan Act of July 17, 1916, c. 245, 39 Stat. 360, 12 U.S.C.A. § 641 et seq. Believing that the profits derived from the sale of these bonds were exempt, the petitioner did not include them in taxable income in making its returns. The Commissioner, being of the opinion that these profits were taxable, added them to the income of the petitioner subject to tax, and proposed deficiencies accordingly. This led to the proceedings before the Board and the decision of which the petitioner now complains.

The sole question presented is whether the profits in suit were nontaxable because of Section 26 of the Farm Loan Act, which, so far as pertinent, provided that bonds issued under the 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." c. 245, 39 Stat. 380, Tit. 12, U.S.C. § 931, 12 U.S.C.A. § 931. The Board in this case and in the case of Agricultural Securities Corp. v. Commissioner, Stewart v. Commissioner, 39 B.T.A. 1103, has ruled that Section 26, 12 U.S.C.A. § 931, did not exempt profits derived from the sale of such bonds. Stewart v. United States, D.C., 24 F.Supp. 145, which was to the same effect, was reversed by the United States Circuit Court of Appeals of the Ninth Circuit in Stewart v. United States, 106 F.2d 405, that court being of the opinion that Section 26 exempted all income from such bonds, including gains derived from the sale thereof. This divergence of informed opinion as to the meaning and scope of Section 26 indicates that the question will not be put to rest until it has been decided by the Supreme Court of the United States.

It would serve no useful purpose to state the contentions of the parties, which are in substance the same as those considered by the Board and by the Circuit Court of Appeals of the Ninth Circuit in the cases referred to, or to express at length our views with respect to the proper construction of Section 26. We offer no criticism of the reasoning with respect to the meaning of Section 26 upon which the conflicting opinions are based. The judges who decided Stewart v. United States, 9 Cir., 106 F.2d 405, were convinced that the language of Section 26 was unambiguous and expressed the intent of Congress that profits derived from the sale of bonds issued under the Act should be nontaxable. Being of that view, they could have reached no other conclusion than that such profits were exempt. On the other hand, a majority of the members of the Board of Tax Appeals were of the opinion that a doubt existed as to the meaning and intent of Section 26, which doubt they were required to resolve in favor of the Government. See Swan & Finch Co. v. United States, 190 U.S. 143, 146, 23 S.Ct. 702, 47 L.Ed. 984; Cornell v. Coyne, 192 U.S. 418, 431, 24 S.Ct. 383, 48 L.Ed. 504; Pacific Co. v. Johnson, 285 U.S. 480, 491, 52 S.Ct. 424, 76 L.Ed. 893.

We think there is a doubt as to whether Section 26 was ever intended to exempt profits derived from the purchase and sale of bonds issued under the Farm Loan Act. We agree that the language of Section 26 is susceptible of a construction which would make such gains nontaxable, but we do not agree that that is the only meaning which may be accorded to the language used. There are several considerations which have influenced us in reaching this conclusion. One is that shortly after having passed the Farm Loan Act, Congress, in enacting the Revenue Act of 1916, provided in Section 4, c. 463, 39 Stat. 756, 758, as...