Girard Inv. Co. v. Commissioner of Internal Revenue

• Decision Date: 22 August 1941
• Docket Number: No. 7696.,7696.
• Citation: 122 F.2d 843
• Parties: GIRARD INV. CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

122 F.2d 843 (1941)

GIRARD INV. CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 7696.

Circuit Court of Appeals, Third Circuit.

August 22, 1941.

Jackson R. Collins, of New York City, and James D. McHugh and Frank F. Truscott, both of Philadelphia, Pa. (Robert I. Staples, of Philadelphia, Pa., and Reginald H. Smith, Jr., of New York City, on the brief), for petitioner.

Louise Foster, 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.

Before BIGGS, MARIS, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

This is a second attempt to construe away the effect of some quite unambiguous language. We say second because now one more closely held small loan company seeks to avoid the application of the "incorporated pocketbook" provision of the Revenue Act of 1934.¹ In the first case² the First Circuit Court of Appeals, in an able opinion by its presiding judge, refused relief. Learned counsel, who argued as amicus curiae in that case, may have given and no doubt has given some polish to his earlier contentions. They are, however, in essence the same and, we think, should receive the reception previously accorded. Counsel maintained then and now: first, that the return charged for the use of money loaned in small amounts is not interest; second, that the plain and specific words of the Act are overridden by a general intention not to apply them to operating companies; and third, that a subsequent amendment is clarifying rather than altering.

The petitioner's interpretation of interest seems to us a curious one. It is unnecessary to set down the depressing history of the small loan industry. It seems to be a discouraging example of human cupidity.³ We had occasion to note it in a recent opinion.⁴ The regulation of these companies turns on what rate of interest is excessive and so usurious.⁵ The authors of the Encyclopædia of the Social Sciences define "interest" as follows:

"Interest in its primary meaning is the payment for the use of money. * * * In theoretical analysis it is generally taken to mean a `pure' remuneration for the use of money, or yield on money capital; pure interest is deduced from nominal interest by elimination of all elements imputable to cost or effort of administration, to insecurity of payment of interest or principal, to prospective changes in the purchasing power of money and to amortization necessary to maintain the principal intact." 8 Encyclopædia of the Social Sciences 131 (Italics ours).

With many small loans to the kind of people who need small sums the "effort of administration" and the "insecurity of payment" is more pronounced. The small loan companies have advocated and been granted rates covering this increased cost and risk. It is a non sequitur to use this justifiable excess in nominal interest as an argument in support of its own exclusion from the general word interest and the limitation of that word to pure interest.

The "general intention" versus "specific language" theory has this basis. The incorporated pocketbook became a quite scandalous device for tax avoidance.⁶ The recipient of a large income incorporated himself and so took advantage of legal ghost lore.⁷ In the average case the person thus desiring taxwise invisibility was of the "rentier" class. Undoubtedly that most usual instance was predominantly in the legislative mind. That is not to say, however, that the Congress approved any individuals paying the low corporate rates on what was in substance individual income. Such an approval would be to import into our law the English distinction between earned and unearned income.⁸ Because that is the only difference between the incorporation of income from your investments and the incorporation of income from the operation of your business, small loan or otherwise.⁹ We think, therefore, that petitioner has failed to bring his case within the "occasions when words may be interpolated."¹⁰ This may be done only when the statutory language is equivocal¹¹ or where literal interpretation leads to absurdity "so gross as to shock the general moral or common sense."¹²

If the existing is obscure anything subsequent can be interpreted either as a clarification or as a change. If the former, the effect is retrospective and therefore to be eschewed. It can, of course, be so stated and if it is, governs. One might prescribe this the sine qua non. In any event, caution has been indicated:

"Statutory construction is often aided by a consideration of later enactments which may clarify doubt as to the meaning of the earlier statute or correct manifest error in its administration.¹³ No rule of construction needs more careful application. Ordinarily, the deliberate selection of language differing from the language of previous acts indicates an intended change of the law. But no change may be intended; the later statute may be declaratory of the meaning of the previous law or a codification, or recognition of a contemporaneous construction, crystallizing it into statutory law; it may be a clarification of an earlier act. On the other hand, a later statute may be intended to supplant an earlier act rather than as an elucidation of it. * * * Above all, the courts may not apply later acts to a period prior to their adoption by assuming that they supply inadvertent omissions. This, of course, is but another way of saying that statutes must be given a prospective application if a contrary intention does not clearly appear, and that the function of the courts is judicial, not legislative." 1 Paul and Mertens, Law of Federal Income Taxation, § 3.15, pp. 46, 47.

Certainly a three years' rejection of the later language betokens a change. We hesitate to alter but hasten to explain. In 1935,¹⁴ 1936¹⁵ and 1937,¹⁶ a plea for exemption was unsuccessfully pressed. In preparing the Revenue Act of 1936, the House bill omitted Section 351 entirely. The Senate Finance Committee rewrote the section and attempted to specifically exempt small loan companies. This insertion in the provision was eliminated by the Conference Committee.¹⁷ Finally in 1938 counsel for a body of which the petitioner was a member was persuasive.¹⁸ Personal finance companies that met certain specified conditions were exempted.¹⁹ But the amendment of 1938 is to be given no retroactive effect.²⁰

The petitioner also resists the imposition of a 25 per cent penalty for failure to file a separate return on Form 1120 H as required by Article 351-8 of Regulations 86. Section 351(c) of the Revenue Act of 1934 incorporates the administrative provisions (including penalties) applicable in respect to the tax imposed by that section. One of those administrative provisions reads:

"In case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * *" 26 U.S.C.A. Internal Revenue Act of 1934, § 291, page 750. (Italics ours.)²¹

Petitioner's taxes for 1934, 1935 and 1936 were returned on Form 1120. This Form is entitled "Corporation Income and Excess-Profits Tax Return." The fourth question at the top of this return reads: "Is the Corporation a Personal Holding Company Within the Meaning of Section 351 of the Revenue Act of 1934? . . . . . (If so, an additional return on Form 1120 H must be filed.)" Petitioner answered the question in the negative and so did not disclose either its stock ownership or the percentage of its gross income from interest. In the space provided for remarks on page 2 of this Form, we find the following:

"The Girard Investment Co. is in business to make loans up to $300.00. It is an operating company charging a flat rate fixed by the Legislature of Penna. to cover examination fees, investigation fees, service charges incidental to operating the business. We are therefore of the opinion that the company is not a personal holding company." Exhibit C, Appendix to Petitioner's brief, p. 60.

The return was prepared by a firm of accountants, Snyder and McAlpine. On June 3, 1939, and two years after the last of these Forms 1120 were filed, petitioner made his return on Form 1120 H, "Return of Personal Holding Company." This was done at the suggestion of the revenue agent concerned.

We agree with the respondent that the filing of Form 1120 does not constitute a sufficient return.²² The information therein contained is clearly not adequate. Petitioner fails to mention that the case on which he relies²³ is under an earlier Act²⁴ which contains much the broader phraseology "In case of any failure to make and file a return or list * * *."²⁵ That being so, we must determine, first, whether the penalty is mandatory and second, if it is not mandatory whether the facts disclose "reasonable cause" for the failure to file. Since there was ultimately a correct return, the very words of the statute preclude any mandatory impact. The principal case falls within the facts of Edmonds v. Commissioner,²⁶ Sabatini v. Commissioner,²⁷ and Plunkett v. Commissioner,²⁸ rather than Helvering v. Boekman²⁹ and Noteman v. Welch.³⁰ It is interesting, perhaps, to observe that the harsh language of the 1934 Act³¹ has since been modified.³²

The burden of establishing reasonable cause is on the taxpayer.³³ The rule as to "reasonable cause" has been well stated by a leading authority:

"Obviously, ignorance of the necessity of filing a return does not of itself relieve the taxpayer of the 25% penalty. Nevertheless, the fact that `every man is presumed to know the law' hardly justifies the imposition of the penalty. A more satisfactory reason would be that the penalty is directed to some extent against such delinquents. ...