Powell v. Comm'r of Internal Revenue (In re Estate of Egger )

• Decision Date: 23 September 1987
• Docket Number: Docket No. 39777-86
• Parties: ESTATE OF LUIS G. EGGER, DECEASED, JAMES H. POWELL, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

89 T.C. 726

89 T.C. No. 50

ESTATE OF LUIS G. EGGER, DECEASED, JAMES H. POWELL, EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 39777-86

United States Tax Court

Filed September 23, 1987.

HELD: Notes and bonds issued under the United States Housing Act of 1937, as amended, are included in the decedent' s gross estate. Herbert Hoover Chaice, for the petitioner.

Kevin C. Reilly, Louis B. Jac, and Vincent J. Juliano, for the respondent.

OPINION

STERRETT, CHIEF JUDGE:

This case was assigned to Special Trial Judge Carleton D. Powell pursuant to the provisions of section 7456(d) (redesignated as section 7443A by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) and Rule 180 et seq. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

POWELL, SPECIAL TRIAL JUDGE:

The issue in this case is whether certain so-called project notes issued under the United States Housing Act of 1937, as amended, are includible in a decedent's gross estate for Federal estate tax purposes.

FINDINGS OF FACT

The facts are undisputed. Luis G. Egger (decedent) died testate December 21, 1983. Letters testamentary were issued to James H. Powell on February 21, 1984, by the Surrogate's Court of New York County. At his death, decedent owned certain so-called project notes, issued by state housing agencies under the United States Housing Act of 1937, as amended, that had a fair market value of $844,193.25. On September 21, 1984, the executor (petitioner) filed a Federal estate tax return. That return did not include the value of the project notes owned by decedent at death. Respondent, by a notice of deficiency dated September 4, 1986, determined a deficiency against petitioner in the amount of $411,192.30. The only adjustment was the inclusion of the value of the project notes in the gross estate. On October 7, 1986, petitioner filed a timely petition with this Court. The case stands submitted to us on cross-motions for summary judgment.

OPINION

Code section 2001 ¹ imposes a tax on ‘the taxable estate of every decedent who is a citizen or resident of the United States.‘ Code section 2051 provides that ‘value of the taxable estate‘ is determined by deducting from the ‘value of the gross estate,‘ the deductions allowed in Part IV of Subchapter A of Chapter 11. The value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death. Code secs. 2031 and 2033. As the Supreme Court noted, ‘The transfer upon death is taxable, whatsoever the character of the property transferred and to whomsoever the transfer is made.‘ Greiner v. Lewellyn, 258 U.S. 384, 387 (1922). Thus, under the literal language of these Internal Revenue Code provisions there is no justification for the exclusion of the value of the project notes from the decedent's gross estate.

On the other hand, there is no question that Congress can exempt property otherwise within the purview of sections 2031 and 2033. The Supreme Court and other courts, however, have consistently adhered to the principle that ‘exemption from taxation must be clearly made out‘ and not rest on ‘doubt or ambiguity‘ (Bank of Commerce v. Tennessee, 161 U.S. 134, 146 (1896), on rehearing 163 U.S. 416, 423 (1896)). It ‘cannot rest upon mere implication.‘ United States v. Stewart, 311 U.S. 60, 71 (1940). Accordingly, as Judge Goldberg has stated, ‘we must proceed in the guise of Scrooge, balefully scrutinizing taxpayer's claim to an exemption with a miser's eye.‘ City of Woodway, McLennan County, Texas v. United States, 681 F.2d 975, 978 (5th Cir. 1982).

An unbroken line of decisions of the Supreme Court and other courts have held that a statutory provision that obligations are exempt from ‘all taxation‘ does not bar the imposition of estate, inheritance or gift tax upon the transfer of those obligations. See, e.g., Plummer v. Coler, 178 U.S. 115 (1900) (state inheritance tax on United States bonds); Murdock v. Ward, 178 U.S. 139 (1900) (Federal inheritance tax on United States bonds); Greiner v. Lewellyn, supra (Federal estate tax on municipal bonds). Thus, the question is whether Congress has unequivocally provided that the obligations here in dispute are exempt from Federal transfer taxes.

The genesis of petitioner's claim that the value of the project notes is not includible in the gross estate resides in the United States Housing Act of 1937, ch. 896, 50 Stat. 888, also informally referred to as the Wagner Housing Act. Several courts have considered this question and the results are not uniform. The progenitor of the cases supporting petitioner's position is Haffner v. United States, 585 F. Supp. 354 (N.D. Ill. 1984), affd. per curiam 757 F.2d 920 (7th Cir. 1985) with Judge Posner dissenting. On the other hand, the court in Shackelford v. United States, 649 F. Supp. 1347 (E.D. Va. 1986), on appeal No. 87-2512 (4th Cir.), has followed Judge Posner's dissent in Haffner. ² To understand these conflicting results, it is necessary to discuss in some detail the Housing Act, its legislative history and the amendments to that act.

The majority's analysis, however, defies the logic of legislative drafting. It is difficult to comprehend why Congress would have seen fit to draft two sections of the same statute differently, if it intended each section to accomplish the same result as to the application of estate and gift tax. Instead, it is entirely possible that Congress intended that the public housing notes issued under section 5(e) carry with them an added incentive for investors to buy them. By exempting such notes from Federal estate taxes, Congress effectively lowered their overall cost (or increased the return on investment), thus making them an attractive investment for citizens in the post-Depression era, as well as a vehicle to spur local participation in the national housing endeavor. ²

The majority's approach would be more acceptable to me if we did not have the comments of Senator Walsh who played an important role in the passage of this legislation. ³ The majority chooses not to attach much significance to Senator Walsh's comments concerning the section 5(e) exemption. In making his comments, Senator Walsh noted that he was ‘discussing every financial feature‘ of the bill, 81 Cong. Rec. 8085 (1937). He also purported to ‘put in the Record the viewpoint of the Committee‘ that considered the bill. It appears rather incongruous that members of the Senate, who made frequent comments during the lengthy discussion of the bill prior to its passage, would have let a ‘misstatement‘ stand on the record without making any reference to it or undertaking any effort towards correcting it if it were indeed wrong. Therefore, in my view, given his position, Senator Walsh's statement stands in the absence of a Committee report as the uncontradicted legislative history as to Congressional intent with respect to the taxability of public housing agency project notes.

HOUSING ACT OF 1937 AND AMENDMENTS

The purpose of the United States Housing Act of 1937 (hereinafter Act of 1937) was to assist the States and their political subdivisions ‘to remedy the unsafe and insanitary housing conditions and the acute shortage of decent, safe, and sanitary dwellings for families of low income * * *.‘ Sec. 1, Act of 1937. Section 3 of the Act created a ‘body corporate‘ known as the United States Housing Authority within the Department of Interior. The Authority was exempt from ‘all taxation now or hereafter imposed by the United States or by any State, county, municipality, or local taxing authority.‘ Sec. 5(e). The Authority was authorized ‘to issue obligations, in the form of notes, bonds, or otherwise‘ (sec. 20(a)) that were ‘fully and unconditionally guaranteed upon their face by the United States (sec. 20(c)). Section 20(b) provided that:

Such obligations shall be exempt, both as to principal and interest, from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States or by any State, county, municipality, or local taxing authority. »50 Stat. 898.†

While the notes at issue here were not issued by the Authority, as we shall see, section 20(b) was deemed to be a factor in the resolution of the matter by the District Court in Haffner.

The Act of 1937 also recognized the existence of ‘public housing agenc» ies†>>>>>‘ that were defined as ‘any State, county, municipality, or other governmental entity or public body (excluding the Authority), which is authorized to engage in the development or administration of low-rent housing or slum clearance.‘ (Sec. 2(11)). Under the Act, the Authority was authorized to make loans (section 9) and annual contributions (section 10) to public housing agencies. The Authority, however, was not authorized to engage directly in the construction of housing projects. Rather, it was envisioned that, in addition to the contributions and loans from the Authority to construct housing, the public housing agencies would raise additional funds and would be the actual developer of the project. Section 5(e) provided:

Obligations, including interest thereon, issued by public housing agencies in connection with low-rent-housing or slum- clearance projects, and the income derived by such agencies from such projects, shall be exempt from all taxation now and hereafter imposed by the United States. »50 Stat. 890.†

While the tax exemption for agency obligations contained in section 5(e) continued over the years (see, e.g., sec. 102(g), Housing Act of 1949, ch. 338, 63 Stat. 413, 416; sec. 201(a), Housing and Community Development Act of 1974, Pub. L. 93-383, °8 Stat. 633, 667), the tax exemption of the Authority's obligations under section 20(b) of the Act of 1937 did not survive. In 1941, Congress revoked the tax exemption for interest on and gains or...