Rullan v. Buscaglia
| Decision Date | 14 June 1948 |
| Docket Number | No. 4310.,4310. |
| Citation | 168 F.2d 401 |
| Parties | RULLAN v. BUSCAGLIA, Treasurer of Puerto Rico, et al. |
| Court | U.S. Court of Appeals — First Circuit |
Francis A. Mahony, of New York City (J. J. Ortiz Alibran, of San Juan, Puerto Rico, and Fred W. Llewellyn and Leon, Weill & Mahony, all of Washington, D. C., on the brief), for appellant.
I. Henry Kutz, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Sewall Key and Lee A. Jackson, Sp. Asst. to Atty. Gen., and Mastin G. White, Sol., Department of the Interior, and Irwin W. Silverman, Chief Counsel, Division of Territories and Island Possessions, Department of the Interior, both of Washington, D. C., on the brief), for appellees.
Before DOBIE, MAHONEY, and WOODBURY, Circuit Judges.
This is an appeal from a decision of the Supreme Court of Puerto Rico which, reversing a decision of the Tax Court of Puerto Rico, denied to appellant a specified deduction from his income tax for the year 1942. The essential facts of the case are not in dispute.
Jose, Salvador and Antonio Rullan, brothers, were the principal stockholders of Sucs. de A. Mayol & Co., Inc. On June 19, 1940, Jose and Salvador each sold to Antonio 400 shares owned by them in this corporation, at the par value of $100 a share. There was no written contract but it was agreed that Antonio would pay to Jose and Salvador annual interest at 8% on the whole amount as well as the value thereof, "whenever he wished." The Rullan brothers do not keep any accounting books and the sale of the shares was entered only in the Stockholder and Transfer Book and in the Journal and Ledger of the corporation. Antonio made no payment to his brothers in the years 1940 and 1941 but in October, 1942, he paid to each one the amount of $7,476.66 as interest payment at 8% annually on the par value of the shares. In his income tax return for the year 1942, Antonio deducted not only these interest payments, but also other payments which he made to his brothers for interest on personal loans. All three of the Rullan brothers filed their returns on the cash basis. Jose and Salvador reported on their returns the interest paid by Antonio to them in 1942 on the value of their shares. Antonio paid the income tax on the dividends which he received on the 800 shares which he had purchased from his brothers. There is no controversy either as to the legitimacy of the transactions or as to the entries appearing on the books of the corporation. The sole question before us is whether or not the interest paid by Antonio to his brothers is deductible from his gross income for the taxable year 1942.
The applicable statute here is Section 16 of Income Tax Act No. 74, approved August 6, 1925, Laws of Puerto Rico 1925, pp. 400, 438, Act No. 31 of April 12, 1941, Laws of Puerto Rico, 1941, pp. 478, 494-496, which provides:
* * * * * *
"(2) All interest paid or accrued within the taxable year on indebtedness * * * Provided, That no interest is deductible if it is payable between members of one family * * *."
Appellant's first (and apparently most serious) contention turns upon the meaning of the word "payable" in the tax statute with which we are concerned. This contention is that "payable" means "`due or accrued and unpaid,' or `capable of being paid,' or `to be paid,' and could never properly be so employed to refer to any debt or obligation already paid." We cannot agree that "payable" here has so narrow a connotation. The definitions of the word in dictionaries, general or legal, and its supposed equivalency to the Spanish word "pagadero" shed little light on the problem.
True it is, as appellant asserts, that from the pure accounting standpoint, interest which has already been paid is not carried on the books as interest payable. It does not follow, however, that when a tax statute, drawn to operate prospectively as to transactions in the future, employs as to interest the word "payable," this excludes interest that is not only payable but is also paid. Surely interest that is payable during a certain tax year, will according to good commercial practice and ethics, actually be paid during that year. Normally and naturally, interest "capable of being paid" or "to be paid" will be paid during the year in which it is due. Appellant's contention thus lacks reality even under the pure analytical approach.
Direct authority here is noticeably lacking. The closest case which counsel have been able to find seems to be Carlisle v. Commissioner of Internal Revenue, 6 Cir., 165 F.2d 645. In that case, Circuit Judge Simons used this significant language, 165 F.2d at page 648:
"However inept the phrasing of the 1942 amendment to Sec. 162(b), it would appear that the Congressional purpose was to include in the income of a legatee or beneficiary the income of an estate or trust which received within the taxable year became payable to the legatee or beneficiary in that year, even though part of an accumulation of income paid to the residuary legatee upon termination of the estate.
* * * * * *
"The contention that even if Congress was motivated by a purpose to tax estate income to a legatee if it is received and is payable during the taxable year it was not its declared purpose to similarly treat estate income paid during the taxable year would seem to be but a play upon words."
See, also, Hart v. Commissioner, 1 Cir., 54 F.2d 848, 852.
Appellant's contention we think, has even less merit when the statute is interpreted in the light of its manifest purpose — the denial of deductions for interest paid by one member of a family to another. Then, it would seem, it was the manifest purpose of the legislature here to match precisely the exclusion to the grant — that is, by permitting as a general rule the deduction of interest on indebtedness yet to deny this deduction when the interest is paid "between members of one family."
The precise wording of the tax statute is unquestionably inept. In the first part of the statute, the general deduction is granted of "All interest paid or accrued within the taxable year on indebtedness;" while the proviso excepts interest from such deduction "if it is payable between members of one family." Italics ours. It would have been the mark of wisdom on the part of the legislature either to repeat in the excepting proviso the same words "paid or accrued" (used in the general grant of deduction) or to have inserted in the excepting proviso the word "such" between the words "no" and "interest."
Yet we must not be deflected from our manifest duty of giving to the statute a fair and practical interpretation by mere inept legislative draftmanship. Section 19 of the Civil Code of Puerto Rico (1930) reads:
"The most effectual and universal manner of discovering the true meaning of a law, when its expressions are dubious, is by considering the reason and spirit thereof, or the cause or motives which induced this enactment."
Our views, too, are supported by other sections of this taxing statute which are in pari materia.
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Ballester v. Descartes
...of the term "profits" in § 4(a) if it did not have the purpose which the court below attributed to it. See also Rullan v. Buscaglia, 1 Cir., 1948, 168 F.2d 401, 403, and cases there Assuming, then, as we think we should, that the Act means what the Supreme Court of Puerto Rico has construed......