Transcript of Record — United States v. Flannery

SUPREME COURT OF THE UNITED STATES

OcTOBER TERM, 1924

No. 527

THE UNITED STATES, APPELLANT

vs.

HARRIET ROGERS FLANNERY AND J. ROGERS FLAN-

NERY, EXECUTORS OF THE ESTATE OF JAMES

FLANNERY, DECEASED

APPEAL FROM THE COURT OF CLAIMS.

J.

INDEX

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21568—24 I

al UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL. 1

i IN COURT OF CLAIMS OF THE UNITED STATES

Harrier Rogers FLANNery anv J. Rogers FLANNERY.

Executors of the Estate of James J. Flannery, de-

ceased, No. C-1080.

v8.

Tue Unirep Srates.

I. Petition. Filed October 8, 1923

The claimants respectfully represent :

I. The claimants are the executors of the estate of James J.

Flannery, late of Pittsburgh, Pennsylvania, and file herewith a duly

authenticated copy of the record of their appointment.

II. On March 1, 1913, the said James J. Flannery, now deceased,

was the owner of 473 shares of the capital stock of the Flannery

Bolt Company, acquired by him before March 1, 1913, the fair

market price and value of which on March 1, 1913, was $275 a

share, totaling $130,075. James J. Flannery sold said stock,

2 229 shares October 29, 1919; 99 shares October 30, 1919; and

75 shares October 31, 1919, all for $225 a share, receiving for

said 473 shares the total sum of $106,425.

III. The Revenue Act of 1918, which was in effect dung (he

year 1919, provided in part as follows:

“Sec. 202. (a) That for the purpose of ascertaining ti» gain

derived or loss sustained from the sale or other disposition of

property, real, personal, or mixed, the basis shall be—

“(1) In the case of property acquired before March 1, 1913,

the fair market price or value of such property as of that

Bb teen:

Article 1561 of Regulations 45 promulgated by the Commissioner

of Internal Revenue and approved by the Secretary of the Treasury

April 16, 1919, pursuant to the provisions of the Revenue Act of

1918 provided that:

“For the purpose of ascertaining the gain or loss from the

sale or exchange of property the basis is (a) its fair market

price or value as of March 1, 1913, if acquired prior thereto,

or (b), if acquired on or after that date, its cost or its approved

inventory value. * * *”

This regulation in words and figures as aforesaid was in force when

the return was made for James J. Flannery, deceased, for the tax-

able year 1919, as described in the next paragraph hereof.

IV. Said James J. Flannery died March 6, 1920. On or about

April 12, 1920, a return of his income for the year 1919 was

3 filed pursuant to law by these executors, and in filing such

return a loss was taken of $23,650, the difference between the

fair market price and value on March 1, 1913, and the actual price

received for said stock of the Flannery Bolt Company, and the same

— Sheteere “ CRNA SORE I mbt NETRA

2 UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL.

was dleducted in computing the net income of said taxpayer, all

pursuant to said law and regulations.

V. By Treasury Decision 3206 promulgated July 28, 1921, by the

Commissioner of Internal Revenue with the approval of the Secre-

tary of the Treasury, Article 1561 of Regulations 45 was amended

to read as follows:

“ Arr. 1561. Basis for determining gain or loss from sale.—

For the purpose of ascertaining the gain or loss from the sale

or exchange of property the basis is the cost of such property,

or if acquired on or after March 1, 19138, its cost or its ap-

proved inventory value. But in the case of property acquired

before March 1, 1913, when its fair market value as of that

date is in excess of its cost, the gain which is taxable is the

excess of the amount realized therefor over such fair market

value. Also in the case of property acquired before March 1,

1913, when its fair market value as of that date is lower than

its cost, the deductible loss is the excess of such fair market

value over the amount realized therefor. No gain or loss is

recognized in the case of property sold or exchanged (a) at

more than cost but at less than its fair market value as of

March 1, 1913, or (b) at less than cost but at more than its

fair market value as of March 1,1913. * * *”

The petitioners contend that this amendment to Article 1561 is in-

consistent with the Revenue Act of 1918 and is unlawful and void

and that even if said regulation were lawful it is not lawfully to

be applied retroactively to the return of the income of James

4 J. Flannery, deceased, for the year 1919, but the taxation of

such income must be governed by the statute and lawful

regulations in effect when the loss was sustained and when the re-

turn was made.

VI. On or about June 2, 1923, the Collector of Internal Revenue

at Pittsburgh, Pennsylvania, made demand for the payment of ad-

ditional taxes for the year 1919 totaling $12,875.24, of which addi-

tional assessment $9,046.98 was attributable to the disallowance of

the said loss taken on the sale of the Flannery Bolt Company stock

by the Commissioner of Internal Revenue, upon the authority of

said amendment to Article 1561, Regulations 45, applied retroac-

tively. These executors paid the amount so demanded under duress

and with protest on June 11, 1923, and the same was duly paid into

the United States Treasury. On or about July 13, 1923, these

executors filed a claim for refund of said sum of $9,046.98, and the

same was rejected by the Commissioner of Internal Revenue on or

about September 19, 1923.

VII. No part of said sum of $9,046.98 so erroneously collected

by the United States has been repaid to these executors. They

have at all times borne true allegiance to the Government of the

United States and have not in any way voluntarily aided, abetted

or given encouragement to rebellion against said Government. They

See ee a

UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL. 3

are the sole and absolute owners of the claim herein presented.

They have made no transfer or assignment of said claim or any part

thereof and they are justly entitled to the amount claimed herein

from the United States after allowing all just credits and set-

offs.

5 VIII. Under Section 1324 of the Revenue Act of 1921 the

claimants may be allowed interest at the rate of 6 per cent

per annum on said sum of $9,046.98 from June 11, 1923, the date of

payment under protest.

IX. The claimants, therefore, pray judgment in their favor

against the United States in the sum of $9,046.98, with interest

thereon at 6 per cent per annum from June 11, 1923.

Harriet Rogers Fuaxnnery and

J. Rogers FLannery,

Executors of the Estate of

James J. Flannery,

By Epwarp B. Buriine.

Covineton, Burtinc & Rusier,

Attorneys for Claimants.

’

(Jurat showing the foregoing was duly sworn to by Edward B.

Burling, omitted in printing.)

6 II. General traverse. Filed December 8. 1923

No demurrer, plea, answer, counterclaim, set-off, claim of dam-

ages, demand, or defense in the premises, having been entered on

the part of the defendant, a general traverse is entered as provided

by Rule 34.

111, Argument and submission of case

On May 5, 1924, this case was argued and submitted on merits by

Mr. Edward B. Burling, for plaintiffs, and by Mr. Roscoe R. Koch,

for defendant.

-

7 LV. Findings of fact, conclusion of law and opinion of the

Court by Campbell, Ch. J. Entered May 19, 1924

This case having been heard by the Court of Claims upon a stipu-

lation of the facts made on the part of the plaintiff by their at-

torneys of record in this case, and on behalf of the Goverrment by

Mr. Robert H. Lovett, Assistant Attorney General, the court adopts

the stipulation of facts which is set out below as its

FINDINGS OF FACTS

I

The plaintiffs, Harriet Rogers Flannery and J. Rogers Flannery,

are the executors of the estate of James J. Flannery, deceased.

UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL.

II

During his lifetime the said James J. Flannery was the owner of

423 shares of the capital stock of the Flannery Bolt Co. acquired by

him before March 1, 1913, at a price of less than $225 a share. The

fair market price and vaiue of said stock on March 1, 1913, was $275

a share, totaling $116,325. James J. Flannery sold said stock Octo-

ber 29 to 31, 1919, for $225 a share, receiving for said 423 shares the

total sum of $95,175.

III

Article 1561 of Regulation 45 promulgated by the Commissioner

of Internal Revenue and approved by the Secretary of the Treasury

April 16, 199, pursuant to the provisions of the revenue act of 1918

(Treasury Decision 2831), provided :

“For the purpose of ascertaining the gain or loss from the sale or

exchange of property the basis is (a) its fair market price or value

as of March 1, 1913, if acquired prior thereto, or (}) if acquired on

or after that date, its cost or its approved inventory value. * * *”

This regulation in words and figures as aforesaid was in force

until July 28, 1921.

8 IV

James J. Flannery died March 6, 1920. On or about April 12,

1920, a return of his income for the year 1919 was filed by his execu-

tors. In filing such return a loss was claimed based on the difference

petween the fair market price and value on March 1, 1913, of said

stock in the Flannery Bolt Co. and the actual price received for the

same in 1919 by said James J. Flannery. The loss so claimed was

deducted in said return in computing the net income of said tax-

payer.

Vv

By Treasury Decision 3206, promulgated July 28, 1921, by the

Commissioner of Internal Revenue with the approval of the Secre-

tary of the Treasury, article 1561 of Regulations 45 was amended

to read as follows:

“ Articte 1561. Basis for determininy gain or loss from sale.—

For the purpose of ascertaining the gain or loss from the sale or

exchange of property the basis is the cost of such property, or if

acquired on or after March 1, 1913, its cost or its approved inventory

value. But in the case of property acquired before March 1, 1913,

when its fair market value as of that date is in excess of its cost,

the gain which is taxable is the excess of the amount realized there-

for over such fair market value. Also in the case of property ac-

quired before March 1, 1913, when its fair market value as of that

date is lower than its cost, the deductible loss is the excess of such

No gain or

fair market value over the amount realized therefor.

UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL. 5

loss is recognized in the case of property sold or exchanged (a) at

more than cost but at less than its fair market value as of March 1,

1913, or (4) at less than cost but at more than its fair market value

as of March 1,1913. * * *”

VI

On or about June 2, 1923, the collector of internal revenue at

Pittsburg, Pa., made demand for the payment of additional taxes

on the income of James J. Flannery for the year 1919 totaling

$12,875.24, of which additional assessment $7,440.67 was attributable

to the disallowance by the Commissioner of Internal Revenue of the

loss taken on the sale of the said 423 shares of Flannery Bolt Co.

stock, upon the authority of said amendment to article 1561, Regula-

tions 45. The plaintiff executors paid the amount so demanded

under duress and with protest on June 11, 1923. On or about July

13, 1923, these executors filed a claim for refund, and the same was

rejected by the Commissioner of Internal Revenue on or about

September 19, 1923.

Vil

No part of said sum of $7,440.67, based on the disallowance of

the loss claimed on the sale of 423 shares of Flannery Bolt Co. stock

has been repaid to the plaintiff executors. They have at all times

borne true allegiance to the Government of the United

9 States and have not in any way voluntarily aided, abetted,

or given encouragement to rebellion against said Govern-

ment. They are the sole and absolute owners of the claim. They

have made no transfer or assignment of said claim or any part

thereof.

CONCLUSION OF LAW

Upon the foregoing findings of fact the court decides as a con-

clusion of law, that the plaintiffs are entitled to recover the sum

of $7,440.67, with interest thereon at the rate of 6 per cent per

annum from June 11, 1923.

It is therefore adjudged an ordered by the court that the plain-

tiffs recover of and from the United States the sum of seven

thousand four hundred and forty dollars and sixty-seven cents

($4,440.67), with interest thereon at the rate of 6 per cent per

annum from June 11, 1923.

OPINION

CampsELL, Chief Justice, delivered the opinion of the court:

James J. Flannery was the owner of 423 shares of the capital

stock of the Flannery Bolt Co., acquired by him prior to March 1,

1913, at a price less than its fair market price and value was on

March 1, 1913, and also less than he sold the same shares for in

UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL.

6

October, 1919. The fair market price and value of these 423 shares

on March 1, 1913, was $275 per share, making a total value of

$116,325. He sold them in October, 1919, for $225 per share, re-

ceiving therefor a total sum of $95,175. The difference between the

values at these two dates was a loss of $21,150. As between the

original cost of the shares purchased prior to March 1, 1913, and

the price received upon their sale after March 1, 1913, there was

no loss.

James J. Flannery died March 6, 1920. Shortly thereafter the

executors of his estate filed a return of his income for 1919, and

upon this return claimed a loss based on the difference between the

fair market price and value on March 1, 1913, of the stock already

mentioned and the price received therefor upon its sale in October,

1919. This claimed loss was deducted in the return in computing

the net income of the decedent. Thereafter, on or about June 2,

1923, the collector of internal revenue made demand upon the ex-

ecutors for additional taxes on the income of James J. Flannery for

the year 1919, of which additional assessment $7,440.67 was at-

tributable to the disallowance by the Commissioner of Internal

Revenue of the loss on the sale of the 423 shares of stock in the

Flannery Bolt Co. The additional taxes so demanded were paid

by the executors under protest and duress, and on or about July 13,

1923, they duly filed with the commissioner a claim for refund which

he disallowed. This suit seeks a recovery of the sum of $7,440.67,

based on the disallowance of the claimed loss in the stock transac-

tion.

The question for decision is whether under the revenue act of

1918 (40 Stat. 1057) the taxpayer in computing his net income for

the year 1919 can make a deduction therefrom as for a loss sus-

tained during the taxable year of the difference between the fair

market price or value of certain corporate stock on March 1,

10 1913, and the price at which it was sold during 1919, this sell-

ing price being less than its value on March 1, 1913, but

more than the price at which it was acquired, and the stock hav-

ing been acquired before March 1, 1913.

Section 210 of the act imposes upon “the net income” of every

individual a stated normal tax for the calendar year 1918, and for

each year thereafter a lesser rate. Section 212 defines “net in-

come” of an individual as meaning the gross income as defined in

section 213, less the deductions allowed by section 214.

Section 213 declares what the term “ gross income” includes and

also provides that the term shall not include certain designated

“items, which shall be exempt from taxation under this title.”

Section 214, under the heading “Deduction allowed,” provides

that in computing net income there shall be allowed * as deductions ”

a number of items listed as “(1) business expenses, (2) interest on

certain indebtedness, (3) taxes paid.

“(4) Losses sustained during the taxable year and not compen-

sated for by insurance or otherwise if incurred in trade or business.

——

PIT ee - cians > SPREE RDNA

os UNITED STATES VS. HABRIET ROGERS FLANNERY ET AL. 7

“(5) Losses sustained during the taxable year and not compen-

sated for by insurance or otherwise if incurred in any transaction

entered into for profit, though not connected with the trade or busi-

ness.”

There are a number of other authorized deductions.

The act anticipated the question as to what are “ losses ” that are

thus authorized to be deducted because it prescribes a “basis for de-

termining gain or loss,” and provides:

«Sgcrion 202 (a). That for the purpose of ascertaining the gain

derived or loss sustained from the sale or other disposition of prop-

erty, real, personal, or mixed, the basis shall be—

“(1) In the case of property acquired before March 1, 1913, the

fair market price or value of such property as of that date; and

«(2) In the case of property acquired on or after that date, the

cost thereof * * *.

In interpreting these provisions it is a cardinal rule that the in-

tention of Congress be given effect. Where the statute is expressed

in plain and unambiguous terms, Congress should be intended to

mean what they have plainly expressed. Chief Justice Marshall in

United States v. Fisher, 2 Cranch 358, 386, said: “ Where the intent

is plain nothing is left to construction.” In St. Paul R. R. Co. v.

Phelps, 137 U. S. 528, 536, it is said that where a statute is clear and

free from ait ambiguity, the letter of it is not to be disregarded in

favor of a mere presumption as to what is termed the policy of the

Government, even though it may be the settled policy of a depart-

ment. In Jnsurance Co. v. Ritchie, 5 Wall. 541, 545, the court say

that when terms are unambiguous we may not speculate on prob-

abilities of intention. And in the State Tonnage Tax Cases, 12

Wall. 204, 217, it is said: “ Legislative enactments, where the

language is unambiguous, can not be changed by construction, nor

can the language be divested of its plain and obvious meaning.”

See Crawford v. Brooks, 195 U. S. 176, 189; Franklin Sugar Co. v.

United States, 202 U. S. 580, 582; White v. United States, 191 U. S.

545, 551.

It is a primary and general rule of statutory construction that

the intent of the lawmaker is to be found in the language

11 that he has used. See Goldenberg Case, 168 U. S. 95, 102.

In Bates Refrigerating Co. v. Sulzberger, 157 U. S. 1, 33, the

following language is adopted: “It is not only the safer course to

adhere to the words of a statute construed in their ordinary im-

port, instead of entering into any inquiry as to the supposed inten-

tion of Congress, but it is the imperative duty of the court to do so.”

See Lake County v. Rollins, 130 U. S. 662, 670. Another familiar

rule is that the statute must be construed as a whole. Its clauses

are not to be segregated, but every part is to be construed with

reference to every other part. See Blair v. Chicago, 201 U.S. 400,

463; Market Co. v. Hoffman, 101 U. S. 112, 115; Pollard v. Bailey,

20 Wall. 520, 525. These rules are the more applicable when it be-

comes the duty of a court to construe a taxing statute because such

8 UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL,

a statute directly concerns the individual citizen as well as others,

and the popular or received import of its words should furnish. the

general rule of its interpretation to the end that its provisions may

be the better understood by those who must pay the taxes which it

imposes. See Maillard v. Lawrence, 16 How. 251, 261.

In the revenue act of 1918 Congress was imposing a tax on the

net income of the individual, among others, and defined gross in.

come. It provided that in computing this taxable net income there

should be allowed certain “ deductions.” ‘These deductions included

losses sustained during the taxable year if incurred in trade or busi-

ness, of if incurred in any transaction entered into for profit though

not connected with trade or business. If the question of the mean-

ing of these deductible losses were left to section 214 alone its solu-

tion would be more difficult, but it was not permitted to rest in such

uncertainty. By section 202 (a) a basis is established for the pur-

pose of ascertaining the loss sustained from the sale of property,

and in the case of property acquired before March 1, 1913, this

basis is the fair market price or value of such property as of that

date. With this value found and the sale price fixed, the loss sus-

tained, if any, is the difference between these amounts. ‘The sub-

ject matter of section 214 is the ascertainment of net income less

certain authorized deductions. Many of these deductions are allow-

able only because Congress authorized them, and what deductions

should be allowed is plainly a matter of legislative discretion.

The present case has to do with losses sustained, and the loss

which Congress authorized to be deducted was a loss measured by

the difference between the price stated at one time and another

time. Manifestly the meaning of losses sustained as the words ap-

pear in section 214 is not to be determined independently of other

parts of the act. Even a technical word is not construed technically

where otherwise defined in the statute itself. See Pirie v. Chicago

Title Co., 182 U. S. 438, 448. Congress could have omitted the

basis for determining loss, but it did not do that, and inserted sec-

tion 202 instead. The losses sustained which are authorized to be

deducted are losses ascertained as the act requires. It thus defines

what are deductible losses. They are not required to be such as

could arise if the property were sold for less than it cost. Con-

gress could have required that such a loss be shown, but it did

otherwise. It carefully distinguished between “ property acquired

before March 1, 1913,’ and property acquired on or after

12 that date. As to the former, the price or value as of March 1,

1913, governs, and as to the latter, “ the cost thereof ” governs.

The first of these distinctions is wiped out if the cost prior to

March 1 be required, and the second clause is useless if the original

cost of the property must in every case be used in ascertaining the

deductible loss.

A fact not to be lost sight of is that Congress has authorized de-

ductions in computing the net income and that the statutory rule for

ascertaining the loss sustained is a prescribed method of finding

RR TEN ERT FH ET PEND SATE YEE EE ARI GTI RIE NS EE HS AN a TR

UNITED STATES VS. HARRIET ROGERS FLANNERY ET AL. 9

these authorized deductions. This stetutory rule as applicable to

property acquired before March 1 does not purport to show what is

called in defendant’s brief an “actual * loss, by which is meant a

loss based on the original cost and selling price; but as applied

to property acquired on or after March 1, 1913, the statute does con-

template an actual loss before it is properly deductible. Differently

expressed, the statute adopts « more or less arbitrary basis for ascer-

taining a “loss sustained” on property acquired before March 1,

1913, and sold after the passage of the act of 1918, and it was

competent for Congress to adopt this basis and authorize the re-

sultant deduction. Speaking for the court, Mr. Justice Harlan,

in Bate Refrigerating Co. v. Sulzberger, 157 U. S. 1, 36, said: “In

our judgmer * the language used is so plain and unambiguous that

a refusal to recognize its natural, obvious meaning would be justly

regarded as indicating a purpose to change the law by judicial ac-

tion, based upon some supposed policy of Congress.” We think it

the duty of this court to give effect to the language of the enactment.

Upon the question under consideration we find no mate: 7 differ-

ence between the revenue act of 1918 and the two prior enactments

of 1916 and 1917, 39 Stat. 756; 39 Stat. 1000, and the view we have

taken is in keeping with the regulations of the Treasury (Treas.

Dec. 2831) in force until July 28, 1921. (See Treasury Decision

3206.) It is urged, however, that the cases of Goodrich v. Edwards,

955 U. S. 527, and Walsh v. Brewster, 255 U. S. 536, are decisive

of the question. These cases deal with the question of “ gain” in the

act of 1916. They do not discuss or decide whether a loss claimed

and ascertained as in this case is a proper deduction in compiiting net

income of the individual under the revenue act of 1918. That the

right to tax income and the right to authorize deductions are gov-

erned by different considerations is manifest. Our conclusion i: that

the plaintiffs are entitled to recover. And it is so ordered.

Hay, Judge; Downey, Judge, and Boorn, Judge, concur.

13 V. Judgment

‘At a Court of Claims held in the city of Washington on the

nineteenth day of May, A. D. 1924, judgment was orde -d to be

entered as follows:

The court, upon due consideration of the premises, find in favor

of the plaintiffs, and do order and adjudge that the plaintiffs, as

aforesaid, are entitled to recover and shall have and recover of and

from the United States the sum of seven thousand four hundred

and forty dollars and sixty-seven cents ($7,440.67), with interest

thereon at the rate of 6 per cent per annum from June 11, 1923.

By the Court.

VI. Petition for and order allowing appeal filed June 27, 1924

From the judgment rendered in the above-entitled cause on the

19th day of May, 1924, in favor of claimants, the defendants, by

10

their Attorney General, on the 27th day of June, 1924, make a

cation for, and give notice of, an appeal to the Supreme Court

the United States.

UNITED STATES VS. HARRIET ROGERS FLANNERY ET Als

Rosert H. Loverr,

Assistant Attorney General.

Ordered :

That the above application for appeal be allowed as prayed for,

June 30, 1924.

By the Court.

14 In Court of Claims

(Title omitted.)

Clerk’s certificate

I, F. C. Kleinschmidt, assistant clerk Court of Claims, certify that

the foregoing are true transcripts of the pleadings in the above-

entitled cause; of the argument and submission of case; of the find-

ings of fact, conclusion of law and opinion of the court by Camp-

bell, Ch. J.; of the judgment of the court; of the defendant’s appli-

cation for an appeal and of the order of the cc irt allowing said

application.

In testimony whereof I have hereunto set my hand and affixed the

seal of said court at Washington City this seventh day of July,

A. D. 1924.

[ SEAL. | F. C. Kiemscumipr,

Assistant Clerk Court of Claims.

(Indorsement on cover:) File No. 30,492. Court of Claims.

Term No. 527. The United States, appellant, vs. Harriet Rogers

Flannery and J. Rogers Flannery, executors of the estate of James

J. Flannery, deceased. Filed July 9th, 1924. File No. 30,492.

O