United States v. Stewart, No. 13

CourtUnited States Supreme Court
Writing for the CourtDOUGLAS
Citation311 U.S. 60,61 S.Ct. 102,85 L.Ed. 40
Decision Date12 November 1940
Docket NumberNo. 13

311 U.S. 60
61 S.Ct. 102
85 L.Ed. 40



No. 13.
Argued Oct. 17, 1940.
Decided Nov. 12, 1940.
Rehearing Denied Dec. 16, 1940.

See 311 U.S. 729, 61 S.Ct. 390, 85 L.Ed. —-.

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Messrs. Robert H. Jackson, Atty. Gen., and Samuel O. Clark, Jr., Asst. Atty. Gen., for petitioner.

Messrs. W. Glenn Harmon, of San Francisco, Cal., and Ernest L. Wilkinson, of Washington, D.C., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

This case is here on certiorari to resolve a conflict of the decision below (9 Cir., 106 F.2d 405) with Stern Brothers & Co. v. Commissioner, 8 Cir., 108 F.2d 309.

During the year 1930 respondent purchased farm loan bonds issued by joint-stock land banks under the Federal Farm Loan Act of 1916, 39 Stat. 360, 12 U.S.C.A. § 641 et seq. The purchases were made for the prospective increment to the bonds and not for their interest. At the time the purchases were made the banks were in receivership. The bonds were acquired at prices substantially below par. In making these purchases respondent relied upon statements contained in circulars and bulletins issued by the Farm Loan Board, reasonably believing that he was purchasing securities the profit upon which in case of sale would be exempt income. A part of the bonds so purchased, with their appurtenant coupons, was sold in 1931; and a part was surrendered in that year to the receiver of the issuing

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bank in exchange for cash paid to respondent 'under and pursuant to the covenants contained' in the bonds. Each of these transactions resulted in a profit to respondent.1 The Commissioner held that those gains were taxable income. Consequently respondent included them in his income tax return for the year 1931 and claimed a refund. On disallowance of that claim, this suit for refund was instituted. The District Court determined that the gains so realized were income and taxable. 24 F.Supp. 145. The Circuit Court of Appeals reversed.

Sec. 22(a) of the Revenue Act of 1928, 45 Stat. 791, 26 U.S.C.A. Int.Rev.Acts page 354, includes in gross income 'gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal.' Sec. 22(b)(4) exempts from taxation 'Interest upon * * * securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended.'

If those two sections are controlling, it is clear that respondent is taxable on these gains, for they fall squarely within the definition of gross income contained in § 22(a) and they are not 'interest'2 within the meaning of § 22(b)(4). But respondent places his main reliance on § 26 of the Federal Farm Loan Act, 12 U.S.C.A. § 931, which provides that 'farm loan bonds issued under the provisions of this Act (chapter), shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from

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Federal, State, municipal, and local taxation.' It is urged that the gains here involved were 'income derived' from the bonds within the meaning of that section.

We disagree with that conclusion. It is our view that under § 26 respondent is entitled to an exemption only for interest on the bonds.

To be sure, 'income' is a generic term amply broad to include capital gains for purposes of the income tax. Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509, 41 S.Ct. 386, 65 L.Ed. 751, 15 A.L.R. 1305. It is likewise true that Congress will be presumed to have used a word in its usual and well-settled sense. Old Colony Railroad Co. v. Commissioner, 284 U.S. 552, 52 S.Ct. 211, 76 L.Ed. 484; Deputy v. du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416. But § 26 does not exempt simply 'income'; it exempts the bonds and the 'income derived therefrom.' Analytically, income derived from mere ownership of the bonds is clearly different from income derived from dealings or transactions in the bonds. As stated in Willcuts v. Bunn, 282 U.S. 216, 227, 228, 51 S.Ct. 125, 127, 75 L.Ed. 304, 71 A.L.R. 1260:

'The tax upon interest is levied upon the return which comes to the owner of the security according to the provisions of the obligation and without any further transaction on his part. The tax falls upon the owner by virtue of the mere fact of ownership, regardless of use or disposition of the security. The tax upon profits made upon purchases and sales is an excise upon the result of the combination of several factors, including capital investment and, quite generally, some measure of sagacity; the gain may be regarded as 'the creation of capital, industry and skill.' Tax Commissioner v. Putnam, 227 Mass. 522, 531, 116 N.E. 904, 910, L.R.A.1917F, 806.'

True, the Bunn cases dealt only with the alleged constitutional inhibition against taxation of capital gains on municipal bonds and not with a specific statutory exemption. But its analysis is cognate here as indicating that, in absence of clear countervailing evidence, an exemption of 'income derived' from a security does not embrace 'income derived' from transactions in that security.

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There are no circumstances here which should make the reasoning of the Bunn case inapplicable.

The Revenue Act of 1916, 39 Stat. 756, was enacted shortly after the Farm Loan Act by the same Congress and at the same session.3 Sec. 2 of that Act, like § 22(a) of the 1928 Act, included in taxable income 'gains, profits, and income derived from * * * sales, or dealings in property.' And § 4 of that Act, like § 22(b)(4) of the 1928 Act, exempted from taxation 'interest upon * * * securities issued under the provisions of the Federal Farm Loan Act.' It is clear that 'all acts in pari materia are to be taken together, as if they were one law.' United States v. Freeman, 3 How, 556, 564, 11 L.Ed. 724. That these two acts are in pari materia is plain. Both deal with precisely the same subject matter, viz., the scope of the tax exemption afforded farm loan bonds. The later act can therefore be regarded as a legislative interpretation of the earlier act (Cope v. Cope, 137 U.S. 682, 688, 11 S.Ct. 222, 224, 34 L.Ed. 832; Cf. Stockdale v. Atlantic Insurance Company, 20 Wall. 323, 331, 332, 22 L.Ed. 348) in the sense that it aids in ascertaining the meaning of the words as used in their contemporary setting.4 It is therefore en-

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titled to great weight in resolving any ambiguities and doubts. Cf. United States v. Stafoff, 260 U.S. 477, 480, 43 S.Ct. 197, 199, 67 L.Ed. 358. In that view the express exemption of interest alone makes tolerably clear that capital gains are not exempt.

In support of the contrary view great stress is placed on the legislative history of § 26. Extensive references are made to the hearings on this bill and to the debates in Congress. Typical are the statements or criticisms that the bill gave 'these investments a distinct advantage over other investments',5 that the exemption provision was important,6 that maintenance of a market for the bonds was desirable,7 that the exemption was too broad.8 These comments, however, are inconclusive. They are not suf-

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ficiently discriminating in their analysis or criticism to throw light on the narrow issue involved here.

Respondent's resort to administrative interpretation of § 26 is equally unproductive. No established administrative practice is shown. The holding of the unpublished published memorandum9 of the General Counsel of the Bureau of Internal Revenue relied upon is not precisely in point, even were we to assume that it is entitled to authoritative weight.10 It merely ruled that a joint-stock land bank was not taxable on gains from purchases of its own bonds. And when the question of the taxability of an individual on his capital gains from sales of these bonds was raised less than two years later, another such ruling was issued to the effect that he did not have the benefit of any exemption.11

Nor is respondent materially aided by the change in § 26 made by § 817 of the Revenue Act of 1938, 52 Stat. 447, 578, 26 U.S.C.A. Int.Rev.Code, § 3799. That amendment provides that 'all income, except interest, derived' from such bonds shall be included in gross income.12 It is urged that this amendment is affirmative recognition by the Congress that § 26 exempts these capital gains. But here again the legislative record is ambiguous and hence inconclusive. The purpose of § 817, as originally introduced, clearly was to

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make certain that capital gains realized by joint-stock land banks on transactions in their own obligations would not be exempt.13 The section was amended on the floor of the Senate to its present form on the suggestion that 'perhaps the language is not as broad as it should be.'14

Page 68

The purpose of the amendment may well have been to clarity the doubtful and uncertain status of capital gains which were not covered by the Committee's recommendation. There is no clear and convincing evidence that it was designed to change existing law, so far as these other categories of capital gains were concerned. But even if a contrary implication were to be assumed, it would not override so belatedly the clear inference, based on a long series of revenue acts exempting only interest, that capital gains were taxable.

Respondent further argues that comparison of other exemption statutes with the language of § 26 reinforces the view that these capital gains are exempt. In that connection our attention is called to numerous statutes—some exempting only bonds15 and others exempting principal and interest;16 some exempting a corporation, 'including the...

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