Denman v. Slayton

• Decision Date: 24 February 1931
• Docket Number: No. 60,60
• Parties: DENMAN v. SLAYTON
• Court: U.S. Supreme Court

282 U.S. 514

51 S.Ct. 269

75 L.Ed. 500

DENMAN

v SLAYTON.

No. 60.

Argued Jan. 20, 1931.

Decided Feb. 24, 1931.

The Attorney General and Mr. G. A.

Youngquist, Asst. Atty. Gen., for petitioner.

Messrs. Thomas O. Marlar and E. J. Marshall, both of Toledo, Ohio, for respondent.

[Argument of Counsel from page 516 intentionally omitted] Mr. Justice McREYNOLDS delivered the opinion of the Court.

During the year 1922, while respondent, Slayton, engaged in the business of buying, carrying, and selling tax exempt municipal bonds, he collected $65,720.06, as interest on securities of that character which he owned. He paid out $78,153.84 for interest on money borrowed by himself in due course for the purpose of purchasing and carrying exempt securities. In his return showing income received during that year, he excluded the interest so collected, and he claimed deduction for the interest paid out on the borrowed money. The Commissioner disallowed the deduction, and made a corresponding addi- tional assessment. Respondent paid the sum demanded thereunder, and, after proper preliminary action, sued to recover it.

Determination of the question involved must turn upon the validity, construction and effect of sections 213 and 214, Revenue Act of 1921, 42 Stat. 227, 237, 238, 239. Their pertinent provisions follow.

'Sec. 213. That for the purposes of this title * * * the term 'gross income'-* * *

'(b) Does not include the following items, which shall be exempt from taxation under this title: * * *

'(4) Interest upon (a) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia. * * *'

'Sec. 214 (a) That in computing net income there shall be allowed as deductions: * * *

'(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title. * * *'

By original petition in the District Court, Northern District of Ohio, Slayton asserted that the exception found in paragraph (2), § 214(a), conflicts wtih the Federal Constitution, in that by necessary operation it causes discrimination against the owners of nontaxable securitis, and nullifies their immunity from taxation. Also that the act is discriminatory and unconstitutional, in that necessary expenses incident to all other kinds of business, including interest paid for purchasing and carrying merchandise and inventories, are allowed as part of the operating cost, whereas deduction of interest paid by plaintiff upon funds borrowed to carry nontaxable securities (an ordinary operating expense) is prohibited. Also that the act is arbitrary and unconstitutional because it discriminates against plaintiff, whose resources do not permit him to purchase tax free securities for cash and in favor of those whose resources permit them to purchase and carry such securities without borrowing.

The collector unsuccessfully demurred to the petition upon the ground that it states no cause of...