Rodenbough v. United States, 3702.

• Decision Date: 28 March 1928
• Docket Number: No. 3702.,3702.
• Citation: 25 F.2d 13
• Parties: RODENBOUGH v. UNITED STATES.
• Court: U.S. Court of Appeals — Third Circuit

25 F.2d 13 (1928)

RODENBOUGH v. UNITED STATES.

No. 3702.

Circuit Court of Appeals, Third Circuit.

March 28, 1928.

William C. Alexander, Jr., Porter, Foulkrod & McCullagh, and Walter Lee Sheppard, all of Philadelphia, Pa., for plaintiff in error.

George W. Coles, U. S. Atty., and Mark Thatcher, Asst. U. S. Atty., both of Philadelphia, Pa. (Clarence M. Charest and William T. Sabine, Jr., both of Washington, D. C., of counsel), for the United States.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

The United States brought this action against Elmer E. Rodenbough, executor of the will of Elizabeth McCahan Rodenbough, to recover taxes on a sum claimed as a deduction in determining the decedent's estate tax and disallowed by the Commissioner of Internal Revenue under provisions of Section 403 (a) (2) of the Revenue Act of 1918 (Comp. St. § 6336¾d), which read as follows:

"Sec. 403. That for the purpose of the tax the value of the net estate shall be determined —

"(a) In the case of a resident, by deducting from the value of the gross estate —

* * * * * * *

"(2) An amount equal to the value at the time of the decedent's death of any property, real, personal, or mixed, which can be identified as having been received by the decedent as a share in the estate of any person who died within five years prior to the death of the decedent, or which can be identified as having been acquired by the decedent in exchange for property so received, if an estate tax under the Revenue Act of 1917 or under this act was collected from such estate, and if such property is included in the decedent's gross estate."

A jury was waived and the case tried to the court on facts stipulated. Those presently pertinent are as follows:

W. J. McCahan, the father of Elizabeth McCahan Rodenbough, the defendant's decedent, died in 1918 leaving an estate of $14,688,694.20, on which a tax of $2,894,173.55 was paid. His estate consisted chiefly of stocks and bonds and Mrs. Rodenbough's share, which his executors gave her in kind, amounted to $3,831,506.22. Subsequently she sold some of the securities, others were paid off by the obligors, and one company of whose stock she held many shares went into liquidation and disbursed to her over $1,200,000. With these moneys, it is stated, Mrs. Rodenbough purchased or "acquired" other securities. She died in 1921. Her executor, in computing the estate tax, regarded the value of the securities she had purchased with the proceeds of the securities she had received from her father's estate deductible under the cited provisions of the Revenue Act of 1918. The Commissioner, however, thought otherwise and, first adding the same to her estate, determined a deficiency in taxes amounting to $113,000. Whereupon her executor appealed to the United States Board of Tax Appeals which found against the deficiency in the estate tax determined by the Commissioner on a holding that the value of the property so purchased was properly deductible, and, after making small adjustments, entered an order determining the deficiency to be the sum of $1,797.12, which the executor paid. 1 B. T. A. 477.

The Commissioner refused to acquiesce in the determination of the Board of Tax Appeals and brought this action against the executor to recover $111,852.58, the difference between the deficiency determined by him and that determined by the Board.

The learned trial court found on its construction of the cited provisions of the Revenue Act that the value of the father's property which in the hands of the decedent had thus revolved from one transaction to another was not deductible, and even if deductible in principle it was impossible on the facts to identify the estate of the father which, admittedly, had been taxed within five years. On the first ground and others to be mentioned presently, it entered judgment for the plaintiff for $144,849.04, the principal of its claim with interest. The defendant then sued out this writ of error.

The first question is whether the securities whose value is claimed as a deduction in determining the decedent's taxable estate constitute "property * * * which can be identified as having been acquired by the decedent in exchange for property" which she received from her father's estate. The government's position is based on a strictly literal interpretation of the word "exchange" as used in the statute. It contends that property whose value can be deducted in computing an estate tax must have been acquired in a transaction constituting an exchange in the sense of barter and that the statute excludes all transfers of property for money, and all exchanges of property with money as the media; that it limits the deduction to cases where only one exchange of that kind has taken place; and that none of the transactions by which Mrs. Rodenbough acquired the property whose value is now claimed as a deduction was an exchange within the statute thus construed, and, therefore, the question of the identification of those securities as having been purchased with the proceeds of securities received from her ancestor is immaterial. On the other hand it is the position of the defendant that — looking not to the form but to the substance of the transactions — the securities which Mrs. Rodenbough purchased to replace those she received from her father's estate (subsequently paid off, liquidated and sold) constitute property "acquired" (by her) in exchange for property so received, and that by tracing the proceeds through her bank account the securities whose value is claimed as a deduction can be identified as property so acquired.

The learned trial court in construing the statute did not confine its consideration to the single word "exchange" as strictly denoting barter, but quite properly extended it to the phrase, "acquired * * * in exchange for" property received from the first decedent. Yet in doing so it held to the conception of exchange of one property for another, carrying the idea of substitution and extending it to what if not in form must be in substance an exchange of one security for another, giving this illustration (21 F.2d 781, 784): "Where the only facts that can be shown are that property was sold and that sometime subsequently other property of approximately the same value purchased, it cannot be said that the property so purchased was acquired in exchange for the property sold, even though it could be shown that it was purchased with the proceeds of the property sold." The court finally held that: "The fact, if it be a fact, that with the money so received from the disposition of securities which the decedent had received from her father she subsequently bought some of the securities now claimed as deductible does not bring those securities within the language of the deduction," as they were not "acquired in exchange" for the original securities and there was no relation between the original securities and those subsequently purchased except, in certain cases, the equivalence of the sums of money involved.

We have studied very carefully the construction which the learned trial judge gave the statute and have been impressed by his logical and closely knit reasoning, yet we find ourselves at variance with some of his premises and therefore opposed to his conclusions.

Before construing the statute in question we bring into view certain applicable, and helpful, canons of construction, the fundamental one being that courts should ascertain and give effect to the intention of the legislative body. 36 Cyc. 1106. When, because of doubtful language, two possible intentions appear, another canon of construction requires that courts shall select the one which is rational and sensible, Scandinavian Belting Co. v. Asbestos, etc., Works (C. C. A.) 257 F. 937, and which bears most directly on the object which the legislative body sought to obtain or the evil which it endeavored to remedy or avoid. Holy Trinity Church v. United States, 143 U. S. 457, 12 S. Ct. 511, 36 L. Ed. 226; Northern Pacific v. United States (C. C. A.) 213 F. 162, L. R. A. 1917A, 1198. In performing this responsible function courts are careful not to be led astray by definitions of single unrelated words of a statute or by the refinements of lexicographers, but to adhere closely to the use of words in their commonly understood meaning and in immediate relation to their subject-matter. Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054; Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570. And particularly in construing a tax act, courts are required to incline most strongly against the government and in favor of the citizen. Gould v. Gould, 245 U. S. 153, 38 S. Ct. 53, 62 L. Ed. 211.

And so in construing this statute we first look at its subject; next search for its purpose in respect to some particular problem; and then find if we can the intention of the legislative body that enacted it. The subject of the act, without question, is taxation at death; and equally certain such taxation is not on the estate or property of a decedent but on the right to transmit his estate, ascertained in a way the statute defined. Knowlton v. Moore, 178 U. S. 41, 20 S. Ct. 747, 44 L. Ed. 969; N. Y. Trust Co. v. Eisner, 256 U. S. 345, 41 S. Ct. 506, 65 L. Ed. 963, 16 A. L. R. 660. Realizing that, unless avoided by legislative provision, the same or substantially the same estate would be twice taxed when two deaths occur successively within a short time, the Congress enacted the provisions in question with the general purpose or intention to avoid the hardship and inequity of double taxation. Its particular intention, however, is to be gathered from the particular manner by which, as specified in the statute, it proposed its general purpose should be carried out. Thu...