Brief for the Respondent in Opposition — Raphael v. Commissioner

INDEX

Page

Opinions below pa PR tL IS nar J

Jurisdiction ____ ; ' Seem Sea et 1

Question presented eee : Ss ere 2

Statute involved. __- ; aoe ss tee ea 2

Statement __ aon aaa ra 3

Argument. mein ; ae 7

Conclusion ahoaee ; ata 10

CITATIONS

Cases:

Deputy v. du Pont, 308 U.S. 488__ Set eee Rata a 8

Doyle v. Commissioner, 110 F. 2d 157, certiorari denied, 311

US. 658 ; . 10

Helvering v. Stockholms &e. Bank, 293 U. S. 84 8,9

Aieselbach v. Com misstoner, 317 U.S. 399. 2 8

Metlink v. Unemployment Comm'n, 314 U.S. 564___- 8

North American Oil v. Burnet, 286 U.S 117 10

Old Colony R. Co. v. Commissioner, 284 U. 8. 552 8

United States v. Childs, 266 U.S. 304 s babies 8

United States vy. Safety Car Heating Co., 297 U.S. 88 10

Statutes:

Civil Code of California:

Sec. 1915____ : , 8

Sec. 3288____ : 2 £4 . 8,9

Internal Revenue Code:

Sec. 119 (U.S. C., Title 26, See, 119) 7 2

Sec. 211 (U.S. C., Title 26, See. 211). a Ee 2,9

See. 212 (U.S. C., Title 26, See. 212)_. eee 3

(1)

W348 20— 43

Inthe Supreme Court of the United States

OcToBER 'TERM, 1942

No. 1057

MaArGcurritk CAHN RAPHAEL, PETITIONER

v.

Guy 'T. HELVERING, COMMISSIONER OF INTERNAL

ReEVENUB

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE NINTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION A

OPINIONS BELOW

The opinion of the Board of Tax Appeals (R.

37-60) is reported in 45 B. T. A. 256 under the

title of Francois Lang v. Commissioner. The i

opinion of the Cireuit Court of Appeals (R.

9-102) is reported at 133 F. 2d 442.

JURISDICTION

The judgment of the Circuit Court of Appeals |

was entered February 1, 1943 (R. 103). A_peti-

tion for rehearing was denied March 15, 1943 (R.

104). Petition for a writ of certiorari was filed

May 28, 1943. The jurisdiction of this Court is

a)

2

invoked under Section 240 (a) of the Judicial

Code, as amended by the Act of February 13,

1925.

QUESTION PRESENTED

Was taxpayer, a nonresident alien, taxable

under Section 211 (a) (1) (A) of the Internal

Revenue Code upon her share of the interest paid

to her during the tax year pursuant to a judgment

of a federal court?

STATUTE INVOLVED

Internal Revenue Code:

Sec. 119. INcOME FROM SOURCES WITHIN

UNITED STATES.

(a) Gross Income from Sources in United

States—The following items of gross in-

come shall be treated as income from

sources within the United States:

(1) Interest.—Interest from the United

States, any Territory, any political subdi-

vision of a Territory, or the District of

Columbia, and interest on bonds, notes, or

other interest-bearing obligations of resi-

dents, corporate or otherwise, * 2 im

* * * * *

(U.S. C., Title 26, See. 119)

Src. 211. Tax ON NONRESIDENT ALIEN

INDIVIDUALS.

(a) No United States Business or

Office.—

(1) General Rule.—

(A) Imposition of Tax.—There shall be

levied, collected, and paid for each taxable

year, in lieu of the tax imposed by sections

3

11 and 12, upon the amount received, by

every nonresident alien individual not en-

gaged in trade or business within the

United States and not having an office or

place of business therein, from sources

within the United States as interest (except

interest on deposits with persons carrying

on the banking business), dividends, rents,

salaries, wages, premiums, annuities, com-

pensations, remunerations, emoluments, or

other fixed or determinable annual or peri-

odical gains, profits, and income, a tax of

10 per centum of such amount, except that

such rate shall be reduced, in the ease of

a resident of a contiguous country, to such

rate (not less than 5 per centum) as may

be provided by treaty with such country. :

* * * * *

(U.S. C., Title 26, See. 211.)

Sec. 212. Gross INCOME.

(a) General Rule—lIn the case of a non-

resident alien, individual gross income in- Pe

cludes only the gross ineome from sources

within the United States.

* * * * *

(U.S. C., Title 26, See. 212.)

STATEMENT

The facts found by the Board (R. 38-60) may

be summarized as follows:

During the tax years and prior years the tax-

payer, and certain others, were nonresident alien

individuals not engaged in trade or business within

4

the United States and not having an office or place

of business in this country (R. 39). Before

World War I they, or their predecessors in in-

terest, held title as tenants in common to several

thousand acres of land located in Kern County,

California (R. 39). The Anglo California Na-

tional Bank of San Francisco (hereinafter re-

ferred to as the bank) for several years had been

the agent of the owners of the lands and had in its

possession powers of attorney with respect to

them. Herbert Fleishhacker was the president of

the bank. In May of 1915 the bank, acting under

the powers of attorney, caused 110 acres to be

sold for $33,000. This 110-acre pareel had a

market value of $260,000 at the time of sale. In

March of 1917 the bank and Fleishhacker, acting

under the powers of attorney, sold 40 additional

acres of the land for $13,500. This 40-acre tract

had a market value of $40,000 when it was sold.

The owners consented to the sales upon fraudulent

misrepresentations made to them by the bank and

Fleischhacker. (R. 39-40.)

In 1933 taxpayer and her associates filed an

action against Fleishhacker, the bank, and other

named individuals and corporations in the United

States District Court for the Southern District of

California (R. 40). In this action the trial court

found (R. 41):

By reason of the fraudulent acts and con-

duct of the Bank and Fleishhacker * * *

with respect to the * * * sale of the

5

110 acres on or about May 24, 1915 [the

plaintiffs were damaged] in the amount of

227,000, representing the difference be-

tween the market value of said 110 acres

of said date, $260,000, and the sum of

$33,000 received therefor, together with in-

terest on the said sum of $227,000, from the

date of said sale; and, with respect to

the * * * sale of 40 acres on or about

March 22, 1917, the said plaintiffs had been

damaged in the amount of $26,500, repre-

senting the difference between the market

value of said 40 acres on said date, $40,000,

and the sum of $13,500 received therefor,

together with interest on the said sum of

$26,500 from the date of said sale in 1917.

The court concluded that the plaintiffs were

(R. 41-42):

* * * entitled to judgment against

[Fleishhacker and the Bank] in the

sum of $253,500, together with interest from

May 24, 1915, to date of judgment at the

rate of seven percent (7%) per annum on

the sum of Two Hundred Twenty-Seven

Thousand Dollars ($227,000) plus interest

at the same rate from March 26, 1917, to date |

of judgment on the sum of Twenty-six

Thousand Five Hundred Dollars ($26,500) |

and for their costs and disbursements in |

this action.

On January 11, 1938, judgment was entered in

favor of plaintiffs and against the bank and

Fleishhacker ‘‘in the sum of $651,579.71" (to-

°

i)

gether with costs (R. 42)), of which $398,079.91

was computed as an amount equal to seven per-

cent per annum on $227,000 from May 24, 1915,

to January 11, 1938, and seven percent per an-

num on $26,500 from March 26, 1917, to J anuary

11, 1938 (R. 29).

The bank and Fleishhacker appealed to the Cir-

cuit Court of Appeals for the Ninth Cireuit, which

on September 7, 1939, affirmed the judgment of

the lower court.’ A petition for certiorari was

denied by this Court on January 2, 1940.2 (R. 42).

On January 19, 1940, the full amount of the

judgment, together with interest thereon in the

sum of $92,644.93, or a total of $743,925.60, ex-

clusive of taxable costs, was paid in satisfaction

of the judgment (R. 42).

Taxpayer filed with the Collector of Internal

Revenue for the District of Maryland an income

tax return for the fiscal year ended January 31,

1940, on the cash receipts and disbursements basis,

reciting that she had received a 1% ooths part of

the total sum paid in satisfaction of the judg-

ment, but asserting that no part of the sum re-

ceived constituted taxable gain, profit, or income

subject to taxation (R. 38-39). The Commis-

sioner determined a deficiency against the tax-

payer for the tax year by including as taxable in-

"The opinion is reported sub nom. Anglo California Nat.

Bank v. Lazard, 106 F. 2d 693.

> 308 U.S. 624.

é

come her proportionate share, i. e., 1%ooths, of

$490,425.60, which represented all of the $398,-

079.71 interest included in the judgment (save

$299.04) plus the $92,644.93 paid as interest on

the judgment (R. 12-13, 42, 92).

The Board of Tax Appeals held (R. 48-57) that

the taxpayer was taxable upon her proportionate

share of the $92,644.93 but was not taxable upon

her share of the $398,079.71." The Circuit Court

of Appeals held her taxable upon her proportion-

ate share of the entire $490,425.60 (R. 90-102).

On her petition for certiorari the taxpayer secks

review of only that part of the decision of the

Cireuit Court of Appeals which held her taxable

upon her proportionate part of the 398,079.71

(Pet. 2).

ARGUMENT

The decision below is correct; it presents no

conflict; and there is no occasion for further

review.

It is plain that the $398,079.71 included in the

judgment of the District Court as interest (R.

41-42) was allowed by the District Court as com-

pensation for the withholding of the money to which

the petitioner and the other owners were entitled

* By agreement, final decision was not entered by the Board

of Tax Appeals in the companion cases of the other alien

landowners. Entry of final decision in those cases has been

held in abeyance pending final determination by the courts

of the issues here presented.

8

for their lands. Cf. Kieselbach v. Commissioner,

317 U.S. 399. It depended ‘‘on time”’ (Meilink v.

Unemployment Comm’n, 314 U. 8S. 564, 570), was

calculated at the legal rate in California, was in-

terest ‘‘in the common understanding’’ (Old Col-

ony R. Co., v. Commissioner, 284 U. 8. 552, 561),

and hence was ‘‘interest’’ within the meaning of

the term ‘‘interest’’ as used in the Revenue Acts

(Deputy v. du Pont, 308 U. 8. 488, 498; United

States v. Childs, 266 U.S. 304, 308).

It is also obvious that the interest thus included

in the judgment of the District Court and collected

during the tax year was interest from sources

within the United States, within the meaning of

Section 119 (a) (1) of the Internal Revenue Code,

supra, and therefore taxable to the nonresident

aliens under Section 211 (a) (1) (A) of the Code,

supra. This interest, paid by the Anglo California

National Bank of San Francisco and by its presi-

dent, Herbert Fleishhacker, with respect to fraud-

ulent dealings in California property, was plainly

‘*from sources within the United States’’ within

the meaning of Section 211 (a) (1) (A).

This Court has already held (J/elvering ¥.

Stockholns &e. Bank, 293 U. S. 84, 86) that the

* The Civil Code of California provides:

Sec. 1915, [nrerest, wHat. Interest is the compensation

allowed by law or fixed by the parties for the use, or forbear-

ance, or detention of money.

Sec. 3288. In AcTIONS OTHER THAN ConTRACT. In an action

for the breach of an obligation not arising from contract,

and in every case of oppression, fraud, or malice, interest may

be given, in the discretion of the jury.

9

obligation of the United States to pay interest

upon a refund of taxes is an ‘‘interest-bearing ob-

ligation’’ within the meaning of that statutory

phrase. So also the obligation of the Anglo Cali-

fornia Bank and of Fleishhacker to pay interest,

pursuant to the judgment in favor of the owners,

was an ‘“‘interest-bearing obligation.”’ It was

a judicially declared obligation, and no less

an interest-bearing obligation because judicially

declared pursuant to provisions of a California

Statute (See. 3288, Civil Code of California). The

interest received on such obligation was therefore

“interest on * * * interest-bearing obliga-

tions’”’ of residents. Helvering v. Stockholms ce.

Bank, supra.

Moreover, the $398,079.71 also constituted

‘other fixed or determinable annual or periodical

gains, profits, and income”’ within the meaning

of Section 211 (a) (1) (A) of the Internal Rev-

enue Code, and the Circuit Court of Appeals

properly so held (R. 96). Taxpayer merely econ-

tends in this connection that the $398,079.71 was

not ‘‘annual or periodical’’ income (Br. 28). Ad-

mittedly taxpayer, who was on the cash basis (R.

28, 39), could not properly have reported her pro-

portionate share of the $398,079.71 for purposes

of taxation until the suecessful conclusion of the

litigation with the bank and Fleishhacker and the

payment by them of the judgment against them.

Thus taxpayer could not be charged with gains,

profits, or income on account of her recovery from

10

her agents until her fiscal year ended January

31, 1940. United States v. Safety Car Heating

Co., 297 U.S. 88; North American Oil v. Burnet, 286

U.S. 417; Doyle v. Commissioner, 110 F. 2d 157

(C, C. A. 2d), certiorari denied, 311 U. S. 658,

Nevertheless, the interest was ‘annual or period-

ical” in nature, even though paid all at one time.

It was caleulated at an annual rate (seven percent

per annum) for a period of years. It merely

could not be collected until January 1940. There

is no similarity between interest so caleulated for

a period of more than twenty years and the oe-

casional winnings of a nonresident alien at a horse

race or the occasional prizes which a nonresident

alien may win at an art exhibit, which the Bureau

of Internal Revenue has informally ruled did

not constitute ‘‘annual or periodical’’ income ( Pet.

29-30).

CONCLUSION

The petition for certiorari should be denied.

Respectfully submitted.

CHARLES Fany,

Solicitor General.

SAMUEL O. CuarK, JR,

Assistant Attorney General.

SEWALL Key,

SAMvEL H. Levy,

WARREN F. Warr es,

Special Assistants to the Attorney General.

JUNE 1943.

U. S. GOVERNMENT PRINTING OFFICE: 194s