Agricultural Securities Corporation v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 39 BTA 1103 |
| Decision Date | 25 May 1939 |
| Docket Number | 90569,90570.,Docket No. 87668 |
| Parties | AGRICULTURAL SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MARY W. STEWART, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. A. O. STEWART, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
W. G. Harmon, Esq., Ernest L. Wilkinson, Esq., John W. Cragun, Esq., and Herman Langworthy, Esq., for the petitioners.
Benjamin M. Brodsky, Esq., Paul E. Waring, Esq., Elizabeth B. Fegan, Esq., and Ellyne E. Strickland, Esq., for the respondent.
These proceedings, consolidated for hearing and opinion, involve deficiencies in income tax, surtax, and excess-profits tax determined by respondent against the several petitioners as follows:
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Petitioner | Year | Tax | Amount
--------------------------------------|------|------------------------|-----------
Agricultural Securities Corp ________ | 1934 | Income _______________ | $19,785.36
Do _______________________________ | 1934 | Surtax _______________ | 28,059.24
Do _______________________________ | 1934 | Excess-profits _______ | 7,194.68
Mary W. Stewart _____________________ | 1932 | Income _______________ | 493.90
A. O. Stewart _______________________ | 1932 | Income _______________ | 493.91
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There is also involved a penalty in the amount of $7,014.81, determined against the petitioner, Agricultural Securities Corporation, representing 25 percent of the deficiency in surtax determined against that petitioner for the year 1934 and imposed by reason of that petitioner's failure to make and file a return within the time prescribed by law.
These deficiencies resulted from the inclusion in petitioners' gross income of profits resulting to them from the sale and redemption of farm loan bonds issued by joint stock land banks under the provisions of the Federal Farm Loan Act of 1916, at a price greater than that paid for them by petitioners. The facts appear from a stipulation of the parties and from exhibits and the testimony of witnesses.
FINDINGS OF FACT.
All of the stipulated facts are found. The following consists of a summary thereof and such additional facts as are found from the evidence:
The petitioners, A. O. Stewart and Mary W. Stewart, are husband and wife, whose principal place of business is 206 Sansome Street, San Francisco, California. Their income tax returns for the calendar year 1932 were filed with the collector of internal revenue in San Francisco, California. These petitioners filed separate identical returns for that year under the income tax laws, and in accordance with the community property law of the State of California their income was divided equally between them. A. O. Stewart managed all business dealings for the marital community. Both of these petitioners were on a cash basis for the year in question.
Prior to 1932, the taxable year, petitioners A. O. and Mary W. Stewart acquired through purchase certain Federal farm loan bonds of the Kansas City Joint Stock Land Bank, paying therefor $178,500.26. In 1932, pursuant to resolutions of the Federal Farm Loan Board authorizing payment by the receiver of the Kansas City Joint Stock Land Bank of liquidating dividends to bondholders upon surrender of their bonds, petitioners Stewart surrendered their bonds to the receiver of the bank and were paid by the receiver the sum of $182,028.20. It is the taxability of the gain of $3,527.97, one-half to each of the petitioners Stewart, which is the issue in their petitions.
The petitioner, Agricultural Securities Corporation, is a corporation organized under the laws of the State of Colorado. During 1934 this petitioner had its principal place of business at San Francisco, California. The petitioner A. O. Stewart was then its president and managed its business.
The Agricultural Securities Corporation before March 15, 1935, filed with the collector of internal revenue at San Francisco, its income tax return for the year 1934 on form 1120, making a full disclosure therein. Thereafter, on August 5, 1935, it voluntarily filed a return on form 1120H for the same taxable year, this one being filed with the collector of internal revenue for the district of Colorado in Denver, where petitioner's office had been moved.
During the year 1934 the Agricultural Securities Corporation sold Federal farm loan bonds it owned and which had been issued by various joint stock land banks chartered under the provisions of the Federal Farm Loan Act, for a price which exceeded the purchase price by $147,546.78. It is the taxability of this amount which is the principal issue in the Agricultural Securities Corporation case.
All of the bonds in question were purchased as investments in the hope and belief that they would enhance in value. Bonds issued under the Federal Farm Loan Act by joint stock land banks, including the bonds involved in each of the cases here pending, bore on their face the following covenants:
This bond is payable ____ years from date of issue with interest at the rate of ____ per centum per annum, payable semi-annually following date of issue. Both principal and interest are payable in gold or lawful money of the United States at the office of the issuing Joint Stock Land Bank, or at the office of such fiscal agent or agents as such bank may hereafter designate. This bond is subject to redemption on any interest date after ten years from the date hereof by the payment of the principal of the bond and the unpaid accrued interest.
This bond is issued under 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."
From the time of the passage of the Farm Loan Act in 1916, the Federal Farm Loan Board issued various circulars and bulletins to acquaint the public with the act and with the advantages of Federal farm loan bonds. These circulars 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"; that "this exemption is complete"; that "in addition to the exemption from State, city and local taxation the bonds are free from the normal and additional Federal income tax and need not be included in tax returns"; that these bonds were "exempt from every form of taxation, — Federal, state or local — with the single exception of succession and inheritance taxes"; that people could buy the bonds and "forget about the taxes on them." Petitioner A. O. Stewart, acting for himself and the other petitioners, had seen and studied the above mentioned and other circulars, none of which negatived or restricted the language above quoted. He relied upon the statements in the circulars in making all the purchases, and believed that capital gains arising from transactions in farm loan bonds were exempt from Federal income tax. He regarded the April 3, 1933, General Counsel's memorandum, about to be mentioned, as corroborating this opinion.
On April 3, 1933, the General Counsel of the Bureau of Internal Revenue issued a memorandum, the contents of which correctly appear in petitioners' Exhibit 8. On May 2, 1933, the Federal Farm Loan Board issued a notice, the contents of which correctly appear in petitioners' Exhibit 9. On February 28, 1935, the Assistant General Counsel of the Bureau of Internal Revenue issued a memorandum (No. 14541), the contents of which correctly appear in petitioners' Exhibit 16.
Petitioners relied on the advise of their tax consultant in failing to file a return on form 1120H for the taxable year 1934 when the same was due. The reason for their tax consultant's advice does not appear, but the applicable provisions of the act were new and he was of the opinion that petitioner, Agricultural Securities Corporation, was not a personal holding company, and he had knowledge that its entire income arose in connection with transactions in joint stock land bank bonds. The failure to file form 1120H was not due to willful neglect, but there was reasonable cause therefor.
The precise question to be decided has not previously come before us. Cases somewhat analogous have determined that profit from the disposition of Government bonds is taxable to a nonresident alien, even though the exemption of principal as well as interest was from "any and all taxation", Hubert De Stuers, 26 B. T. A. 201; that Federal obligations are subject to gift tax even though the principal thereof as well as the interest was specifically exempted from all taxation with certain stated exceptions which did not include that tax, Lawrence C. Phipps, 34 B. T. A. 641; affd., 91 Fed. (2d) 627, (C. C. A., 10th Cir.); and that securities of the character involved in the instant proceeding are subject to inheritance tax, even though the act under which they are issued is silent in this regard, Edgar A. Igleheart, Executor, 28 B. T. A. 888; affd., 77 Fed. (2d) 704 (C. C. A., 5th Cir.).
Petitioners rely almost entirely upon the inclusion in the legislation under review of the word "income" as opposed to "interest." They say, in effect, in the able and comprehensive treatment of the subject submitted in their behalf, that since income includes capital gains under the Sixteenth Amendment, Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, the word is to be read as including them for purposes of exemption when it appears in the Farm Loan Act1 under which these securities were...
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