Amicus Curiae Brief — Willcutts v. Bunn

jan 6 1530

FILE COPY ;

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In the

Supreme Court of the United States.

OcTorer TERM, 1929.

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No. 5252 A,

-« WILLCUTTS, Collector of Internal Revenue,

v.

CHARLES W. BUNN.

MOTION FOR LEAVE TO FILE BRIEF AS

AMICUS CURIAE, AND BRIEF IN SUPPORT

THEREOF.

* JoserH E. Warner,

Attorney General of Massachusetts.

* R. Amoi Curter,

Assistant Attorney General of Massachusetts.

Of Counsel:

‘Henry F. Lona,

Commissioner of Corporations

and Taxation of Massachusetts.

ADDISON C, GETCHELL & SON, LAW PRINTERS, BOSTON,

—s

SUBJECT INDEN.

Reference to report of decision below 3

Statement of the case 3

Grounds upon which leave to tile brief as amicus

curiac is sought 4

Points and authorities 5

I. Gains from the sale of stocks, bonds, and other

intangible personal property are derived from the

use of business acumen and knowledge of invest-

ments. ‘Taxation of such net gains from human

endeavor imposes no perceptible burden upon

the intangible property sold—even though it con-

sist of tax-exempt bonds 6

II. The implied prohibitions of the Constitution of

the United States protect the obligations of one

member of our system of dual sovereign govern-

ments only from taxation by the other govern-

ment which burdens directly and substantially the

obligations themselves or the interest upon them Ht)

TABLE OF CASES CITED.

Blodgett v. Silberman, 277 U.S. 1 10

Doyle vy. Mitchell Bros, Co., 247 U.S, 179 6, 7

Kisner v. Macomber, 252 U.S, 189 6

Flint v. Stone Tracy Co., 220 U.S, 107 0, 10

Greiner v, Lewellyn, 258 U.S, 384 10

_ Hamilton Co. v, Massachusetts, 6 Wall. 682 10

Home Insurance Co. v. New York, 134 U.S. 594 10

Lucas v. Howard, U.S. Supr. Ct., Oct. Term, 1929,

No, 52 10

Macallen Co. vy. Massachusetts, 279 U.S. 620 9, 10

Merchants Loan & Trust Co. v. Smietanka, 255

U.S. 509 7

Metcalf & Eddy v. Mitchell, 269 U.S, 514 10, 11

Miller v, Milwaukee, 272 U.S. 713 9

EE

il INDEX

National Life Insurance Co, v. United States, 277

US. 308

Plummer v. Coler, 178 U.S. 115

Provident Institution v. Massachusetts, 6 Wail. 611

Society for Savings v. Coite, 6 Wall. 594

Stratton’s Independence v. Tlowbert, 231 U.S. 399

Taft v. Bowers, 278 U.S. 470

Tax Commissioner v. Putnam, 227 Mass. 522

TABLE OF AU TITORITLIES CLPED.

3 Ilarvard Law Review, 280

Mass. General Laws (1921), ¢. 62, sec. 5 (¢)

Regulation 80017 of the Department of Corpora-

tions and Taxation

Regulation 8002 of the Department of Corpora-

tions and Taxation

ar)

In the

Supreme Court of the United States.

Ocroner Tero, 1929.

WILLCUTTS,

COLLECTOR OF INTERNAL REVENUE,

v.

CHARLES W. BUNN.

MOTION FOR LEAVE TO FILE BRIEF AS

AMICUS CURIAE,

And now come the undersigned, as counsel for the

Commonwealth of Massachusetts, and respectfully move

for leave of this Honorable Court to file the accompany-

ing brief in the above-entitled case as amicus curiac, both

upon the petition for certiorari and upon the argument of

the principal case, if the petition for certiorari be granted.

JOSEPH BE. WARNER,

Attorney General of Massachusetts.

R. AMMI CUTTER,

Assistant Attorney General of Massachusetts.

Of Counsel:

Henry F. Lone, Commissioner of Corporations

and Taxation of Massachusetts.

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: In the

Supreme Court of the United States.

&

OcTroBer TERM, 1929.

?

No. 535.

WILLCUTTS,

CoLLECTOR OF INTERNAL REVENUE,

v.

CHARLES W. BUNN.

J BRIEF OF THE COMMONWEALTH OF MAS-

SACHUSETTS AS AMICUS CURIAE.

REFERENCE TO REPORT OF DECISION

BELOW.

The case below is reported as follows: District Court

of the United States for the District of Minnesota (Cant,

J.), 29 Fed. (2d) 132, sub nom. Bunn v. Willcutts, Col-

lector, decided November 17, 1928, Circuit Court of Ap-

peals, Eighth Circuit (Stone, Booth, and Gardner, JJ.),

35 Fed. (2d) 29, decided September 16, 1929.

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STATEMENT OF THE CASE.

: This was an action (R. 1) by the taxpayer, Mr. Bunn,

to recover a Federal income tax assessed upon gains re-

ceived by the taxpayer from the sale of municipal bonds

issued by counties or cities in Minnesota. The Collector

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demurred to the petition (R. 3). The demurrer was over-

ruled (29 Fed. (2d) 132, R. 4). The Collector stood

upon his demurrer and appealed, and the judgment was

affirmed (35 Fed. (2d) 29, R. 14, 17). The government

is now petitioning for certiorari. The ground of the de-

cisions below was that profits from the sale of state mu-

nicipal securities are not constitutionally subject to taxa-

tion as income by the Federal Government, the courts

below taking the view that such taxation would be an

impairment of the power of the States and of their sub-

divisions to borrow money to carry out the powers re-

served to them by Article X of the Amendments to the

Constitution of the United States. No questions of the

taxation of the principal amount of state bonds or of

interest upon state bonds is here involved.

GROUNDS UPON WHICH LEAVE TO FILE

BRIEF AS AMICUS CURIAE IS SOUGHT.

If the doctrine, announced in its particular application

for the first time by the courts below, is sustained, the

States will be subjected to the converse of the doctrine—

and will be foreclosed from taxing as income profits re-

ceived by their inhabitants from the sale of I*ederal se-

curities.

Massachusetts has, since 1916, imposed a tax upon in-

come from the gains from the sale of intangible nersonal

property, including Federal securities.

GENERAL Laws or MassacHuseTts (1921), ¢. 62, § 5

(c), as amended by Sr. 1928, c. 217, § 1:

“Income of the following classes received by any

inhabitant of the commonwealth during the preced-

ing calendar year shall be taxed as.follows:

+ * * * * * * *

‘““(c) The excess of the gains over the losses re-

ceived by the taxpayer from purchases or sales of

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intangible personal property, whether or not said

taxpayer is engaged in the business of dealing in such

property, shall be taxed at the rate of three per cent

”

per annum... .

The regulations of the Department of Corporations

and ‘Taxation construing said sect’on with respect to so-

called “tax exempt” bonds read:

“gg01. The tax of 3 per cent upon the excess of

the gains over the losses from purchases or sales of

intangible personal property shall be imposed upon

the excess of such gains from dealings in stocks,

bonds, certificates of indebtedness, notes, bills receiv-

able, ‘futures,’ ‘puts,’ ‘calls,’ ‘rights,’ and all other

classes of intangible personal property.

“8002. The tax upon the excess of gains over

losses shall be imposed upon the amount of such ex-

cess, irrespective of whether the property involved in

such transactions is taxable or non-taxable on its in-

come.”

The question of the power of the State to tax the gains

received from the sale of Federal Government bonds has

not been passed upon by any Massachusetts court. The

decision in the case at bar by this Honorable Court will,

as a matter of practical fact and of logic and reason, de-

cide the question.

POINTS AND AUTHORITIES.

Massachusetts contends that the decision below was er-

roneous because-—

1. The non-discriminatory taxation of all gains de-

rived from the use of business knowledge and of human

ingenuity in dealings in intangible property can have no

6

material effect to impair the ability of a government to

issue its bonds and obligations, even if gains from the sale

of such bonds are subjected to the tax.

2. The history of the exemption of state instrumental-

ities from Federal taxation and of the exemption of Fed-

eral instrumentalities from state taxation reveals that the

doctrine of exemption has protected governmental obli-

gations only from taxation of the principal amount of

such obligations and of the stated interest upon such ob-

ligations, This appears not only from the stattites author-

izing such tax-exempt obligations, but also from the court

decisions construing express and impliea constitutional

provisions.

I.

GAINS FROM THE SALE OF STOCKS,

BONDS, AND OTHER INTANGIBLE PER-

SONAL PROPERTY ARE DERIVED FROM

THE USE OF BUSINESS ACUMEN AND

KNOWLEDGE OF INVESTMENTS. TAX.\-

TION OF SUCH NET GAINS FROM HUMAN

ENDEAVOR IMPOSES NO PERCEPTIBLE

BURDEN UPON THE INTANGIBLE PROP-

ERTY SOLD—EVEN THOUGH IT CONSIST

OF TAX-EXEMPT BONDS.

The nature of income derived from the sale of property

at a profit has been referred to by this court frequently

as the gain derived from capital and labor combined.

See, e.g., Stratton’s Independence v. Howbert, 231

U.S. 399, 415;

Doyle v. Mitchell Bros. Co., 247.U.S. 179,

184-185;

Eisner v. Macomber, 252 U.S. 189, 207—

where it was said:

“After examining dictionaries in) common use

(Bouv. L.D.; Standard Dict.; Webster's Internat.

Dict.; Century Dict.). we find little to add to the

succinct definition adopted in two cases arising under

the Corporation Tax Act of 1909 (Stratton’s Inde-

pendence Vv. Howbert, 231 U.S. 399, 415; Doyle v.

Mitchell Bros. Co., 247 U.S. 179, 185)— Income

may be defined as the gain derived from capital, from

labor, or from both combined,’ provided it be under-

stood to include profit gained through a sale or con-

version of capital assets, to which it was applied in

the Doyle Case (pp. 183, 185).”

See also Merchants Loan & Trust Co. v. Smietanka,

255 U.S. 509, 517-520- aha

where the use of human ingenuity in obtaining a profit

from sales even in isolated transactions was held to pro-

duce income.

See Taft v. Bowers, 278 U.S. 470, 481-482.

That the base of the tax in the case at bar and in cases

arising under the Massachusetts Tax Act is the net gain

from dealings in intangible personal property can hardly

be disputed (see Merchants Loan & T. Co. v. Smietanka,

255 U.S. 509, 519-520; Doyle v. Mitchell Bros, Co., su-

pra, at p. 185; see Tax Commissioner vy. Putnam, 227

Mass. 522, 531). What is subjected to tax is the gross

amount of profits derived from all the transactions of the

taxpayer during the taxable year in intangible property,

less all the gross losses suffered by the taxpayer in such

dealings during the same period. The base of the tax rep-

resents the net product of the ingenuity of the taxpayer

in employing his capital in realizing gains from dealings

in particular commodities. The commodities themselves

Beticerce eee tae.

8

are not by the statute subjected to tax. The distinction

between a lav on intangible property or upon the interest

or dividends derived from such property and a tax on

gains from dealings in such property was expressed

clearly by Rugg, C.J., in Tae Commissioner v. Putnam,

227 Mass. 522, 531:

“The tax upon interest and dividends is levied up-

on a return which comes to the owner of the princi-

pal security without further effort on his part. The

tax upon excess of gains over losses in the purchases

and sales of intangible personal property is levied,

not upon income derived from a specific property but

from the net result of the combination of several fac-

tors, including the capital investment and the exer-

cise of good judgment and some measure of business

sagatity in making purchases and sales. Gain de-

rived in this way, to express it in ‘summary and com-

prehensive form,’ ‘is the creation of capital, industry,

and skill?) Wileor v. County Commissioners, 108

Mass. 544. It is not the production of capital alone

and does not arise solely from a simple investment.”

It is submitted that to subject to a non-discriminatory

tax on income the product of human effort realized in the

form of gains upon the sale of so-called “tax exempt’ * ob-

ligations is to impose no substantial or unconstitutional

burden upon the obligations themselves, provided no tax

is laid upon the principal amount of the obligations or

upon the interest paid by the government issuing the ob-

ligations.

9

If,

THE IMPLIED PROTHITBETIONS OF THE CON-

STITUTION OF THE UNITED STATES

PROTECT THE OBLIGATIONS OF ONE

MEMBER OF OUR SYSTEM OF DUAL SOYV-

EREIGN GOVERNMENTS ONLY FROM

TANATION BY THE OTHER GOVERN-

MENT WHICH BURDENS DIRECTLY AND

SUBSTANTIALLY THE OBLIGATIONS

THEMSELVES OR THE INTEREST UPON

THEM,

The freedom of state bonds and the interest upon them

from property taxation by the Federal Government and

the similar immunity from state taxation enjoyed by Fed-

eral bonds and the interest upon them are weil settled.

Historically, the exemption has been construed by this

court principally in cases where the obligations them-

selves, or the interest) payable by the terms of the obliga-

tions, were directly submitted to a property tax—

See, e.g., Miller v. Milwaukee, 272 U.S. 713;

National Life Insurance Co, v. United States,

277 U.S. 508, 520—

or to what was construed by this court as having the effect

of a direct property tax upon the bonds themselves or the

interest upon them.

See, e.g. Macallen Co. v. Massachusetts, 279 U.S. 620.

Cf. Flint v. Stone Tracy Co., 220 U.S. 107, 162-

165.

The bonds of a State or of the Federal Government

are not, by reason of their tax-exempt feature, removed

10

from the possibility of being used as the subject of com-

mercial transactions and of market speculation—in which

individuals take advantage of their judgment of economic

conditions to obtain a profit by purchasing at a low price

and selling at a high (see the ingenious argument 43 Far-

vcard Law Review, 280, 284, December, 1929). The fruits

of human ingenuity, even when employed in intimate re-

lationship with a state government, are not always exempt

from taxation by the Federal Government.

Metcalf & Eddy v. Mitchell, 269 U.S. 514,

Lucas vy. Howard, Supreme Court of the

United States, Oct. Term, 1929, No. 52,

decided December 9, 1929.

The taxation of zains derived from the sale of exempt

homls——as the product of the joint employment of busi-

ness judgment and capital—bears, we submit, far less

directly upon the principal amount of the bonds than the

legacy taxes sustained in Plummer vy. Coler, 178 U.S.

115, and in Blodgett v. Silberman, 277 U.S. 1, 12, and

the estate tax held valid in Greiner v. Lewellyn, 258 U.S.

384. Excise taxes upon corporations owning exempt

bonds are sustained when the burden upon the bonds is

incidental and casual—-though the bonds add to the value

of the privilege taxed.

Provident Institution v. Massachusetts, 6

Wall. 611.

Hamilton Co, v. Massachusetts, 6 Wall. 632.

Society for Savings v. Coite, 6 Wall. 594.

Home Insurance Co. v. New York, 134 U.S.

594,

Flint v. Stone Tracy Co., 220 U.S. 107, 162-

165.

Cf. Macallen Co. v. Massachusetts, 279 U.S. 620,

628.

She ~) 66 44) a2- 2a

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1]

The tax in the case at bar touches no portion of the tax-

payer's investment. It touches no increment of wealth

upon that investment to which he became entitled by the

terms of the contract contained in the bond he bought. It

touches only a profit arising from changed external busi-

ness circumstances, which the taxpayer has foreseen and of

which the taxpayer has taken advantage.

Doubtless there are exemptions and immunities from

Federal action which could be added to municipal bonds

making those bonds more marketable. However, the ne-

cessity that two governments operate within the same

geographical area makes it necessary that the exemption

granted to the obligations and instrumentalities of one of

these governments from taxation by the other be given a

practical construction.

See Mr. Justice Stone, speaking for the Court

in Metcalf § Eddy vy. Mitchell, 269 U.S. 514,

522-524,

The indefinite and shadowy nature of the casual and

indirect burden of the tax involved in the case at bar upon

the ability of the subdivisions of States to borrow money

should, we submit, lead this court to decide that the tax

imposed is not prohibited by any express or implied pro-

vision of the Constitution of the United States.

Respectfully submitted,

JOSEPH BK. WARNER,

Attorney General of Massachusetts.

R. AMMI CUTTER,

Assistant Attorney General of Massachusetts.

Of Counsel:

Henry F. Lone, Commissioner of Corporations

and ‘Taxation of Massachusetts.