# Respondents Brief — Teamsters v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386009_0081%3A07 ## Record - **Collection:** Supreme Court brief - **Document type:** Respondents Brief - **Published:** January 1, 1934 - **Citation:** 291 U.S. 293 ## Text Opinions | OE LEE PS rch KES Wsusawes wens 1 Ce ee oh ay ie oh ake Sino ede ae 2 Questions presented ____-- ey epee ca sss ahd Ree eee Oe epee 2 Statutes and er involved... Se eae nn eceec a one a DAI. «0 ntinn wn cnd kanes th bina uen sees eee 3 Specification of errors to be urged in No. 873__-__----------~-« 5 Summary of sa caniasiiatirntaiata ce eit oe prey eg rE 5 * Argument: : I. Under Section 202(a) (2) of the Revenue A€®of 1921, the basis for determining the gain from the 4ale of the ; stock hy the trustee was its cost to the grantor_ __.- 8 Il. The gain from the sale by the triistee is not taxable aga - capital gain under Section 206 of the Revenue Act of 1921, since the property was not held by the taxpayer for more than two years. .....-.---------- ea ean 17 CI. 0 Soc eng cewenecceeee a eates ide aeetehase 28 DON iax cen s cacennnkbunten thse heh ene stake wun eeee a ame - 20 i CITATIONS : . Cases: Anderson v. Wileon, 280 U.8. 20.22. : 2.0220 ene - cen sten va 18 ‘Bank of Commerce v. Tennessee, 161 U.S. 134-__..----_-- 24 Bankers Trust Co. v. Commissioner, 24 B.T. A. Dea xcucnsses ~ 16 “Bok v. McCaughn, 42 F. (2d) 616-__~- ameccans see 11 Brewster v.. Gage, 280 U.S. 327_.__..--_-- keg uae 13, 21, 26 Burnet v. Guggenheim, 288 U.S. ag ry erie 5, 10 Burnet v. S. & L. Bldg. Corp., 288 U.S. 406 acken kee kane 14 Caminetti v. United States, 242 U.S. 470_.- 2-2 +2 ee . 19 Commissioner v. New York Trust Co., 54 F. (2d) 463, certio- rest dended, GBS UB. Gili. xnacndscnacuenes eee a Commissioner v. Rosenbloom Finance Corp., 66 F. (2d) 556, certiorari denied, 290 U.S. 692.-.-.-.-.--..:.2-.. 11, 13° Cooper v. United Bates, 06 US: .. t 9 Crooks v. Harraloott, 363 U.S. 66. .2..2.0 Ist Sess., p. I6.-...-.----:.° - 14 If the cost to the grantor is the basis, whether the period that the stock was held by the grantor may . he consideréd in detenffining whether the gain on the sale by the trustee was t taxable as capital gain within the meanmg of Section 206 of the Revenue Act of 1921, which defines capital assets as prep- erty’ “held by the taxpayer * * * for more than two years.” «> STATUTES AND REGULATIONS INVOLVED pS "es statutes anid regulations. involved are: set forth in the Appendix, infra, pp. 29-36. - . ‘ STATEMENT - : The facts foundty the Board of Tax Appeals (R. 30-31) may be summarized as follows ‘On-April 27, 1906, Conrad Henry Shanthdeneen, a resident of New York, (R. 6), acquired 6,Q00 shares of the common stock of the Corn Products Refining: Company at acost of $141,375. This cost exceeded the fair market v alue of the stock on Mareh 1, 1915. (R. 30.) . od Ns In order to make a settlement for. his son, Mat- thiessen transferred the stock to the New York - Trust Company in trust to accumulate the inconre and pay the accumulations to the son when he be- came twenty-one, thereafter to pay him the income yearly until he became twenty-five and at that time _ Nary. income. 4 to transfer the shares to him, with remainders over in the event of his death. The transfer was made by an irreyoeable deed of trust dated December 24, ~ 1921. On that date the shares had a fair market value of $577,500. (R. 31.) During the vear 1922 the New York Trust Com- pany sold the 6,000 sliares which it held as trustee for $603,385 (R. 31)" - In the audit of the trustee’s-return for 1922 the : Commissioner determined that the cost of the stock to the grantor and not the fair market value of the~ stock as of December 24, 1921, should be used as a basis, and held that the gain was not taxable as a capital gain under Section 206 of the Revenue Act’ of 1921 (infra, pp. 30-31) (R. 5-6,31). The triistee appealed to the Board, claiming that the proper basis was the fair market value of the shares as of the date when they were acquired by the trustee, and that Section 202 (a) (2) of the Revenue Act df 1921 was unconstitutional, and in the alternative, that if that provision.applied, the tax should be computed under the capital gain pro- vision (R. 3). The Board sustained the “Commis- sioner iS determination (R. 34). On appeal to the Circuit’ Court of Appeals, that court, with one jvdge dissenting, sustained the Commissione:’s de- ‘termination: as to the proper basis for computing the amount of the gain, but concluded that the gain — was taxable as ‘a capital net gain and i: ot as ordi- _* The grantor’s son Erard Matthiessen had not reached the age of twenty-one during 1922 (R, 31). ee eEeEeEeEeEeEeEeEEE eee a ee ee . . . 4) SPECIFICATION OF ERRORS TO BE URGED IN NO. 873 The Circuit Court of Appeals erred : 1. In holding that the gain from the sale of the stock by the respondent . in 1922 was taxable as © capital gain within the nieaning of Section 206 of — the Revenue Act of 1921. ~~ 7 vs 2. In holding that the gain from the sale of the stock by the respondent i in 1922 was not taxable as ~ ordinary income. 3. In reversing the decision of the Board of Tax Appeals. SUMMARY OF ARGUMENT i T ; ” aden Section 202 (a) - (2) of the Revenue Act of 1921 (infra, p. 29), which is applicable to “‘prop- -’ erty, acquired by gift’’, the basis for determining the gain from the sale of the stock by the trustee was its cost to the grantor. In the present case. — _the tristee who sold the stock received it by an irrevocable transfer in trust, which completely divested the grantor 0 of all ownership of or interest in the property. The transfer of title from the donor to the trustee was made by delivery of the securities and was without consideration. This was a gift in trust, as distinguished from a gift | direct, but it was none the less a gift. If there could have been any doubt on this question, it is - removed, we submit, by this Court’s decision in Burnet v.-Guggenheim, 288 U.S. 280.. Since, as it 55110—34——2 * 6 was there held, the relinquishment of a power to _ revoke a trust constitutes a gift, it would seem to follow a fortiori that the er eation of an ir revocable trust is likewise a gift. : A gift is a transaction affecting the legal title to” property. The essentialgrequirements of a gift. — have been developed at law as distinguished from. "in equity. Gifts may be beneficial or otherwise; but if a gratuitous transfer does-not result to the ~ benefit of the transferee, the reasons lie in equity— _ the trahsaction is none the less a‘ gift at law.. : . The Bureau of Internal Revenue has consistently _ construed the phrase ‘ ‘acquired by gift” to include: irrevoeable transfers in trust. These rulings have not been revoked and are still in effect. This long continued administrative interpretation of the statute is entitled to. great weight. - ) In the Revenue Aet of 1924, Congress inebadiod ‘a 1 specific provision relating to: transfers in trust. We submit that in so doing Congress was enacting into law the.accepted administrative interpretation in order to remove any possible doubt as to the cor- rectness of that interpretation. Il The gain from the sale by the trustee is not tax- able as a capital gain under Section 206 of the Rev- enue Act of 1921 (infra, pp. 30-31). In that section the term ‘‘capital assets’”’ is defined as property . * “held by the.taxpayer’’ for more than two years, In this ease, the trust is the taxpayer, and it is un- -_ 7 ; disputed that the trust’ had not: held the property. for two years. There is no ambiguity, in the statute. ; It allows no. room for construction.. | The conclusion ° that the property sold a the trustee did ‘not. constitute ‘‘capital assets’’ is not only required by: the plain text of the statute itself, but this was the: contemporaneous construction of the Treasury Department which has been uni- ' formly followed by the Board of Tax*Appeals and by the courts, until, thee decision of the court below in the present case; The question was.passed on in three rulings of the, Treasury Department, be- ginning in°1921. Thereafter the issue was raised | before the Board of Tax Appeals, and the Board in © - at least six cases reached the. same conclusion. The same result was reached in two appellate . courts. The decision of the court below, more than twelve years after the enactment of the statute, was the first decision of any court or tribunal to the contrary. In so doing, we submit that the court . below. ignored the rule that the plain meaning of "a — may not be circumvented by ‘‘construc- tion.’ The rule for which the taxpayer contends was.ex- pressly adopted in Section 208 of the Revenue Act of 1926 (infra, pp. 33-34). But sucha change in the law cannot authorize construction of an earlier Act not consonant with the language there employed.. Here the change in the statute is contrary to the * plain language of the earlier law and also to the — — : Deetce : uniform administrative construction of that law. The change shows a recognition of the administra- tive construction and a desire on the part of Con- gress to establish a different rule for the future. Congress could. have made the change retroactive if it had desired ; but it did not do so. ARGUMENT. - I a ¥ UNDER SECTION 202 (a) (2) OF THE REVENUE ACT OF 1921, THE BASIS FOR DETERMINING THE GAIN FROM THE SALE OF THE STOCK BY THE TRUSTEE W a ITs COST TO THE _ GRANTOR ‘Section -202: ia) (2) of tis Reverme ‘Act of 1921 (infra, p- 29) provides that the basis for ascertain- ing the gain or loss sustained from a sale of prop- erty shall be the cost of the property, except that— : In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor or the last pre- ceding =_— by whem it was not acquired. by gift. - - . | In the sania ease, the trustee who sold the — received it by an irrevocable transfer i in trust, which completely divested the grantor of all ownership of or interest in the property. The transfer of title from the donor to the trustee was made by’ delivery of the securities, and was without consideration. Clearly, the donor made a gift to someone. The - trustee received the title, not for,its own benefit,” but upon a trust for others. In other words, the 9 gift was not direet toe the inténded beneficiaries, but to a trustee for. them: It was a gift in trust, as disting ruished from a gift direct, but it was none the less a gift, because it was a transfer of the property by delivery, inter vivos, and without consideration. If title passed to the trustee at all (and everyone agrees it did) it must have passed: by gift. No ~ other known legal machinery for. passing title is applicable to the actual transaction. Since the - title passed by gift, and passed to the trustee, it - must follow that the trustee acquired the property by gift. The transaction was, therefore, covered by Section 202 (a) (2), supra, since that prevision is in terms applicable to property. ‘‘acquired by gift. oe The basis for determining gain or loss in the case of purchases of property is prescribed in ‘other subdivisions of Section 202, and these subdivisions - show by contrast that the provision involved in this _ case was intended to cover all acquisitions of .prop- erty without cost. In Taft v. Bowers, 278 U.S. 470, this Court recognized that the purpose of Congress in enacting Section 202 (a) (2) was to prevent the escape fron’ taxation of the increase in value of property which was possible under earlier statutes under which an owner of property could tr ansfer it _to his wife or children, and thus establish a new and increased basis for measuring the gain upon its" sale. See also Cooper v. United States, 280 US. a 10 409. And as this Court said in District of Colum- bia v. Brookey214 U.S. 138, 150, ‘* not only the pur- pose of a law must be considered, but the means of its administration—the ways it may be defeated.” It is obvious that evasion could be accomplished as readily and as satisfactorily by the donor if he | transferred his property in trust for his wife or -. children as if he -made an outright gift to them. QO It would therefore seem to follow that Congress in- - ‘ténded the word ‘‘gift”’ in Section 202 (a) (2) to. inelude. gifts in trust as well as direct gifts. ‘Phe - mischief is the same in either case, and the lan- guage used was apt to cover both, for the phrase . “property, acquir ed by gift” is plainly broad. enough to include gifts in trust as Well as gifts direct. | | If there could have been any doubt on this ques- tion, it is removed, we submit, by this Court’s deci- sion in Burnet. v. Guggenheim, 288 U.S, 280; That case involved Section 319 of the Revenue Act of * 1924 (U.S.C., Title 26, Sec. 1131), imposing a tax © © upon ‘‘the transfer by a resident by gift *'* *. : of any pxéperty. wherever situated, whether made P direetly or indirectly, * * *.’’? This Court held © that the surrender of the power to revoke a re vocable deed of trust constituted 4 transfer of the property by gift and was’thus subject to the tax. Since the relinquishment of a power to revoke a trust constitutes a gift, it would seem to follow a \ Py , @ \ “ts “fortiori that the creation of an irrevocable trust is. likewise a gift.’ ‘2 *This conclusion is supported by many other cases in which gratuitous transfers of progr ty in trust have been held to be gifts. Thus, in Moore v. Tiller, 61 F. (2d) 478 (C.C.A. 5th), the seik said (p. 479): The manifestation of an intention to make a-present gift to another, and, in. ,con- summation of this intention, delivery ot thé’ ‘property to or for the use of the intended donee, or some act indicating a renunciation of dominion in,favor of the intended donee, are essentials of a gift, — inter vivos or causa mortis. * * ‘(Italics ours. ) eihitiee language is found in Bok vy. M cCau ghn, 42 F. (2d) 616, 618°(C.C.A. 3d). Sd ‘also Ithaca Trust Co, v. United States, 279 U.S. 151. We submit that there is no merit in the argument. of the-trustee’ that it did not acquire. the property . by gift within the mez aning: of the statute because it” did not receive theultimate beneficial] interest in: the property.’ Apart from’ the considerations *In Reinecke v. Northern Trust Co., 278 U.S. 339, 346, 347, "348, this Court. repeatedly referred to transfers in trust as | gifts.» And in Heiner y, Donnan, 285 U.& 12, 320, this Court said, in, stating the facts, that “ me 4 by complete and irrevocable gift intag. vivos, transferred without consid- eration certain securities to trustees for his four children.” *The ultimate beneficial. interest in the property of a . . . . . . 7. . : corporation is in its stockholders and not‘in the corporation itself. Nevertheless property transferred to the corporation without: consideration is acquired by the corporation by gift for tax purposes. Commissioner v. Rosenbloom Finance Corp., 66 F. (2d) 556 (C.C.A. 8d), certiorari denied, 290 USS. 692. inlet S: = = ‘7 és horse LIPOMA FES tT aD ' , 4, ‘already advanced, this argument ignores the fact that wider both Section 2 (9) and Section 219 of the Act (infra, pp. 29, 31-32), the trust is the tax- -payer, and the trustee is simply charged w ith the "duty of making the return. Ina trust such as this, where the income is to be accumulated anid: the trust alone is’ taxed on the income during the period of accumulation, the trust (through the agency of the { rustee) represents all the interests in the property. Admittedly*the trust is regarded as a unit for the purpose of taxing the gain’ from the sale of the property. Just as the sale by the trustee is a-sale of the property itself and not.of separate interests ° -in it, so the acquisition by the trustee is an acquisi- tion of the property. .Though the trustee did ‘not - ‘receive the beneficial interest, it did acquire: the - legal title, and it acquired that title by gift. The taxpayer's argument makes the statute. applicable ‘only to the sale of the beneficial interest; but- the statute itself makes no such limitation. The tax- payer’s argument on this point,dt would seem fair to wer falls within this Céurt’s language in Lynch : », Alworth “Stephens Co$ » 267 _— 364, 370, where it uae And the plain, obvious, and rational meaning of a statute is alway% to be preferred to any: curiots, harrow, hidden sense that nothing but the exigency of a hard case and -thé in- genuity and study of an aeute and powerful intellect would discover. / & A similar arguinent was advanced and ‘ejected _ in ene Trust Co. v. Commissioner, 65 F. (24) ~ 13 877° (C. C.A. 6th), certiorari denied, 290 U.S. 686, where it was held ‘that a testamentary trustee ac- quires the property by bequest or devise as of the date of the decedent’s death, so that the basis is the fair market value at that time. Since a testa- . mentary trustee acquires property by bequest or devise, though the bequest or devise is for the ulti- mate benéfit of beneficiaries and not for the trustee,. -.it would seem to follow that.the trustee acquired the property in this case by gift, although the gift “was not for its own: benefit. A gift is a transaction affecting the legal tit e to property. The essential requirements of a gift _ have been developed at law, as distinguished from in.equity. A gift is merely a voluntary transfer . of property by one to another without considera- tion, and effectuated thr ough delivery either of the property or of a deed: representing the property. Commissioner V. Rosenbloom Finance Corp., 66 F. (2d) 556 (C. C.A. 3d), certiorari denied, 290 U.S. 692; Nocl v. Partott, 15 F. (2d) 669 (C.C.A. 4th), certiorari denied, 273 U.S. 754. Gifts may be bene- . ficial or otherwise ; but if a gr ‘atuitous transfer does not result to the benefit of the transferee, the rea- sons lie in equity—the tr ansaction is none the less. GS a gift at law. ° Th®Bureau of Internal Revenue has consistently, construed the. phrase ‘‘aequired by gift’? to include irrevocable transfers in trust. See I.T. 1379, I-2 Cumulative Bulletin vad uly—Deceniber 1922) 41 55110—34——8 Z ' 14 ~* {transfer by will); I.T. 1636, II-1 Cumulative _ Bulletin (January—June 1923) 20; I.T. 1622, II-1 Cunulative Bulletin (January-June 1923) 135. ~ These rulings have not been revoked and are still in effect. This long-continued adininistrative in- terpretation of the statute is entitled to great weight. . Brewster v. Gage, 280 U.S. 327; Me- —Caughn v. Hershey Chocolate Co., 283 U.S. 488. | In the court below it was argued that since Con- gress in enacting the Revenue Act of 1924 included a specific provision concerning the basis to be used in measuring gain in the case of property trans- | ferred in trust (Section 204 (a) (3); infra, pp. 32- | 33), it must be assumed that the law prior to that | time was different. We submit that in view of the fact that the administrative rulings under fhe Reve- nue Act of 1921 were to the same effect as the new provision, it is more reasonable to assume that Con- gress was enacting into law the accepted inter- ’ pretation of existing law in order ‘to remove any possible doubt as to the correctness of that inter-- pretation. Jordan v. Roche, 228 U.S, 486, 445-446 ; ~ Merle-Smith v. Commissioner, 42 F. (2d) 837, 842 (C.C.A. 2d), certiorari denied, 282 U.S. 897; Dickey v. Burnet, 56 F. (2d).917 (C.C.A. 8th), cer- tiorari denied, 287 U.S. 606. See also Burnet v. S. & L. Bldg. Corp., 288 U.S. 406. | The statement of the Ways and Means Committee of the House of Representatives in regard to the change in the law was as follows (House Rep. No. 179, 68th Congress, Ist Sess., p. 16): b 15 Section 204: law which corresponds to paragraph (3). This paragraph applies the same principles _ to transfers to a trustee as is applied‘in para- graph (2) to gifts, and provides that where property was acquired after December 31, 1920, by. a transfer in trust, the basis for determining the gain or loss from its-sale - shall be the sanie as it would be in the hands of the grantor. | ° Senate. Rept? No, 398, 68th’ Cncige ess, Ist Sess., p. 17, is‘as follows: ‘Phere is no provision in the.existing law © which corresponds to paragraph (3) of sub- # division (a). According to this- paragraph, the basis for determining gain or loss from the sale or other disposition of property ac- quired after: December 31, 1920, by a volun- tary transfer in trust, is the same as it would be in the hands of the grantor, following the principle laid down in paragraph (2) as to gifts. If the transfer in trust resulted in ~ the recognition ‘of a taxable gain or a de- ductible loss to the. grantor, then this basis 7 will be increased or decreased accordingly: These statements give no indication that Con- gress was intending to change the law as it had been interpreted by the Bureau; they are equally - consistent with the view that. Congress intended only to make clear in the statute what had ian: fore been left to interpretation. The situation is - somewhat similar to that involved in Rice v. Eisner, . (1) There is no provision in the existing * Seeceerresceree iets WENGE" ‘ 16 16 F. (2d) .358, 360 (C.C.A. 2d), certiorari denied, 273 U.S. 764: | “ The trustee relies upon the decisions of the Board — of Tax Appeals in Francis vy. Commissioner, 15 B.T.A. 1332, and Bankers Trust Co. v. Commis- . sioner, 24 B.T.A. 10. The Board distinguished — both of these cases in its decision in the present case, ‘anid we submit, correctly. In the F’ rancis case there was no gift of the pr operty after December 31, 1920, and Section 202 (a) (2) of the RevenueAct-of 1921 . only applies to property acquired by gift after that date. In the Bankeys Trust case the transfer was : not absolute and irrevocable, for by its terms the grantor reserved an interest in the income and upon the happening of certain events the principal would return to His estate. Such a transaction obviously falls far short of the common law —— for a gift. ici In the pr esent case the frust was irr evocable and .— the grantor reserved no inter est of any kind in the income or in the principal of the trust _property. The gift was as completé when the trust was created as it would ever be. The transaction constituted not a purchase but a transfer without considera- tion, that is, a gift; and Section 202 (a) (2) a quired that the increment in the value of the stoi during the period that it was held by the grantor should be included in the gain from the sale. ——— se ee eee . e { } ane II THE GAIN FROM THE SALE, BY THE TRUSTEE IS NOT | TAXABLE AS A CAPITAL GAIN UNDER SECTION 206 OF THE REVENUE ACT OF 1921, SINCE THE PROPERTY WAS NOT HELD BY THE TAXPAYER, FOR MORE THAN TWO ° YEARS Section 206 of the ee Act of 1921 hates. p. 30) provides that the net gain | from the sale of capital assets may be taxed at the rate of 12%% instead of at the ordinary rates, and provides that the term ‘‘capital assets’? as used in the section shall mean— property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business),,.*. * *. In Section 2 (9) of the Act the term “taxpayer” defined as including— any person, trust or estate subject to a tax imposed’ by this Act ; By Section 219 of the same Act it is arn (a) That the tax imposed by sections 210 ma 211 shall apply to the income of estates ~ r of any kind of property — in trust, ra ne tol ..* : * * * . & (3) Income held.for future distribution under the terms of the will or trust; * * * * a * . * fe) In cases under -paragraphs (1), (2), or (3) of subdivision (a) * * * the - tax shall be Ynposed. upon the net income of 18 the estate or trust and shall be paid by the maeeery,.* *- *. When these provisions of the statute are applied to the facts of this case, we submit that there can be no possible doubt as to their meaning and appli- eation. There is ho dispute as to the facts. A trust “was created on December 24, 1921, with the New York Trust Co, as trustee. By the terms of the trust, the trustee was directed to collect the income. and accumulate it until Erard A. Matthiessen should reach the age of 21 years. ‘Erard Matthies- sen had not reached the age of 21 during the year -: 1922, the tax year in question (R. 31). The trust was, therefore, one under which the income was ‘held for future -distribution’’ under Section 219 (a) (3) of the statute. Under paragraphs (a) and (¢c) of Section 219, the income of such a trust was expressly subjected to the tax imposed by See- tions 210 and 211 of the Act. Under Section 2 (9), the trust was, therefore, expressly defined as the ‘*taxpayer.’’ Anderson V. Wilson, 289 U.S. 20, 27.. Since it is undisputed that the trustee ‘in this case had not held’the property for two.years, it must follow that the taxpayer had not held the property for two years, and thus that the property in ques- tion did not. constitute ‘apital assets”’.as that term) is defined in Section 206 of the Revenue Act of 1921. | ae et ae . There is no ambiguity in the statute; its terms are clear. The statute provides no exception of any sort; it allows no room for. construction. As r PANES BARRA A Se Sohal BES ATRL ON air RRS SB elds RG OS NORTH dR a . ‘ ‘ . “Wall. 385, 396: | 19 | this Court said in United States v. Hartwell, 6 If the language be clear it is conclusive. There can be no construction where there 1 is nothing to construe. This Court has recently applied this rule in United States v. Shreveport Grain & Elevator Co., 287 U.S. 77,83. See also Ruggles v. Illinois, 108 US. 526, 534; Lake County v. Rollins, 130 U.S. 662, 670-671; Hamilton v. Rathbone, 175 U.S. 414, 419; Caminetti v. United States, 242 U.S. 470;.Thomp- son v. United States, 246 U.S. 547, 551.5 ‘* Where the statute contains no exception, the courts carmot ereate one.’ Hyde v. Shine, 199 U.S. 62, 78. To do so ‘*would be to enact a law under the pretense of construing one.’ Heiner v. Donnan, 285 US. 312, 331. | The conclusion that the property. sold by the trustee in this case did not constitute ‘capital assets’? is not only required by the plain text of the statute itself, but this was the contemporaneous construction of the Treasury Department which | has been uniformly followed by the’ Board: of Tax - Appeals and by the courts, until the decision of the >In Hamilton v.Rathbone, supra, this Court said (p. 419) : ~ But where the Act is clear upon its face, and when standing alone it is fairly susceptible of but one construction, - that construction must be given to it.” And in Thompson v. United States, supra, this Court said (p. 551) : “The inten- tion of the Congress is to be sought for primarily in t Janguage used, and where this expresses an intention reagon- ably intelligible and plain it must be accepted without modification by resort to construction orsconjecture.” 90 a : court below in the present ¢ ise, ‘The question arose in the Treasury Department. yery shortly after the enactment of the Revenue Act of 1921. It was first passed upon jn IT. 1379, 1-2 Cumulative Bulletin (July- December 1922) 41, which was promulgated inl July 1922, during the tax year in question in this vase. That ruling involved stock which had been given toa trust company. in-trust, and the question passed on was precisely thre same as that raised here. It was held that | Section 206 of the Revenue Act of 1921 . has no application, because the securities have not been held by the trustee for a period of two years prior to the sale. | The same question was also direetly involved in LT. 1660, II-1 Cumulative Bulletin (January—June. 1923) 36, which was promulgated before the trustee a ‘in this case filed its return. -That ruling involved — ‘a . * | 7 ’ facts substantially the same as those here, so far as e the present case is concerned. Its ‘holding is in the es , . . a following terms: e Held, the date of acquisition of the stock rE _ for the purposes of Section 206 of the Act, if the stock cqnstitufed a gift inter vivos, a \ was the date upon which the gift was made ; sy OM ee Therefore, as the stock had not | been held for more than two years prior to “. its sale, the taxpayer will not be permitted to treat the amount of profit derived fr om the-sale as capital gain. | : A similar ruling was made in I.T, 1889, ITI-1 Cu- z Z mulative Bulletin (January-June 1924) 70, where a7 Y 2il the question at issue was the date of acquisition of stad acquired by will." net -This construction of the statute received legisla- tive approval when Congress reenacted the defini- . tion of capital assets in the Revenue Act of 1924 without change. See Section 208 (a) (8) of the- Revenue Act of 1924. The administrative con- struction, therefore, being %e ontemporaneous, and having been acce pted by © ‘ongress in the reenact-. -ment of the statute, should be given the force and effect of law. MeCaughn v. Hershey Chocolate Co., 283 U.S. 488 ; Brewster v. Gage, 280 U.S. 327. This is especially tr ue where the departmentat practice merely carries into effect the plain and unambigu- -ous terms of the statute itself. Following the administrative construction.of the statute in the Treasury Department, taxpayers raised the issue before the Board of Tax Appeals, and the Board itvat least six cases reached the same conclusion.” The same result was reached in two "Artic he i651 of Re ‘sideline 62 (/nfra, pp. 35-36), under the Revenue Act of jou, and Article 1651 of Regulations 65, under the Revenue Act of 1924, define the term ¥ capital assets ’,1n the language of the statute, as property “ held by - the faxpayer ” for more than two years. ' 7 McHinney.-v. Commissioner, 16 B.T.A. ing Johnson v. Commissioner, 17 B.T.A. 611, affirmed, 52 (2d) 726 , (CCA, ~— Shoenbery v. Commissioner, = BT. A. 399, affirmed, 55 F. (2d) 543 (App.D.C.) ; Steagall vy. Commis- sioner, 24 B.T.A..1231; MeCrory v. Commissioner, 25 B.T.A. . 994, affirmed’ without consider ation of this point, C.C.A. 5th, — decided March 19. 1934; New York Trust Co. v. Commis- sioner, 27 B.T,A. 1127 (the present case). *- z yreEerent A hee OO AOA BIG ABA NT, . . a . . ° , 99 # ead appellate courts before whom taxpayers brought these decisions of the Board for review. Johnson v. Commissioner, 52 F. (2d) 726 (C.C.A. 3d);° - 3 Shoenberg Vv. Burnet, 55.F. (2d) 543 (App.D.C.).- These courts rejected the argument that a donee | may consider the time that the donor held the prop- erty in “order to bring himsélf within the two- ~year, requirement of Section 206, én the ground that tlie donee must usé the donor's basis in measuring his. loss. In the Johnson case the court said (p. 727) : ee ‘Indeed, the words used by Congress in see- J -, tion 206 are so plain that there is no ‘all for construction or con jee ture. The court also pointed out that See tions 202, relat- ing to the basis for determining gain or tiss, and Section 206, defining the phrase ‘capital askets’’, have no necessary relation, and that the provisions . of the one section aré Wholly independent of — provisions of the other. The decision of the court below, more than twelve le “SpE T Brain i . years after the enactment of the statute, and with : one judge dissenting (R: 42), was the first decision t of any court or tribunal holding that the time dur- - x fg ing which the property was held by the grantor may . : be added to the time _during which it was held by : the trustee for the purpose of measuring the two- year period provided in Section 206.° In reaching 4 , this result, the majority of’the court below made . no mention of’ the contenrporaneous and uniformly e continued administrative construction, nor of the : : . unbroken line of decisions of the Board of Tax Ap- ‘ . ~“ . we peal. It expressly onmied (R. 40) that the tax- payer ‘‘did not ‘hold’ the property for .two years in the usual sense.” It held, nevertheless, that the : trustee must be “tres ated as though he had”’ held the property for two years (R. 41). This conclu- sion 1S apparently based largely on the ground that the contrary result ‘seems to us an extremely im- probable one for Congress to have intended” (R: 40). But the court’s concession that the trustee had not held the property for two years ‘‘in the usual sense”? seems to be fatal to the.result which it reached. This Court has repeatedly held that the words of a statute must: be given their ‘usual, ordi- nary and everyday’ meaning.’’ Old Colony Rail- road Co. ¥. Commissioner, 284 U.S. 552, 561. See also Lynch v. Alworth-Stephens Co., 267 U.S. 364, 370s DeGanay Vv. Lederer, 250 U.S. 376, 381 ; ; Mail- lard v. Lawrence, 16 How. 951, 961. And this Court has also held that the plain meaning of a statute ‘ may not be circumvented by ‘‘construction’’ merely because ‘‘hard and objectionable or absurd conse- quences, which probably were not within the con- templation of the framers, are produced by an act of legislation. y 4 rooks v. Harrelson, 282 U.S. 55, 60. In the latter case this Court also alt OF: 61): 7 ie unless the Constitution be violated, Con- eress may select the subjects of taxation anid qualify them differently as it sees fit; and if it does so in. plain terms, as it has done here, . it is not within the province of the court to _modify the law by construction. 24 This rule is as applicable in favor of the Govern- ment as against it, especially where as ‘here the stat- utory. provision in question is one of exemption as to which all doubts must be resolved against the taxpayer, Bank of Commerce v. Tennessee, 161 U.S. 154, 146; Heiner v. Colonial Trust Co., 275 U.S. 232, 235. | 4 | The conclusion that the word ‘“‘taxpayer”’ as used | iu Section 206 means the trustee in this case and. “not the trustee together with the donor (whe is not subjected. to any tax on the transaction) is-fortified : by another group of cases. In Section 204 (ce) of ‘the Revenue Act. of 1924 it is provided that ‘‘in the case of mines, oil and gas wells, discovered by the taxpaver after February 28, 1913”’, the basis for depletion shall be the fair market value of the prop- erty at the date of discovery or within thirty days ' thereafter. It has been contended ital ceases that this prevision is applicable where the discov- erer of the oil well or mine turns if-over to a core _ poration in return for all the stock of the corpora- tion. Where such a transfer is made, no gain or . loss is recognized, afal the transferee takes as its ~ basis for determining gaim or loss the basis of the “transferor. Section 203 (b) (4) of the Revenue ; Act of 1924. The argument made is that since the transferee takes the transferor’s basis, it must be regarded as standing in the shoes of the transferor, | and, is, therefore, entitled to a depletion allowance based: on discovery. *'The argument is, therefore, substantially the same as that advanced in the pres- ot a os 9 ent case. It bien: however, been. uniformly rejected. Darby-Lynde Co. v. Commissioner, 51 F. (2d) 32 (€.C.A. 10th) ; Rialto Mining Corp. v. Commission- er, 25 B.T.A. 980; Hoffer Ou Corp. v. Commissioner, 97 B.T.A. 98. The same contention has been ad- vancéd and similarly rejected where-the taxpayer in question (as the trustee here) is a donee, and therefore takes his. donor’s ‘basis. Thompson v. Commissioner, 10 B.Ta. 25; McKinney v. Commis- | sioner, 16 B. T.A. 804; Daniel v. Commissioner, 16 B.T.A. 925, affirmed on other grounds, 45 F. (2d) 58 (CO. A. 5th); Scarbrough v. Commissioner, 18 B.T. Aw 951; McCrory v:.Commissioner, 25 B.T.A. | 994, affirmed on other grounds, C,C.A. 5th, decided March 19, 1934. In the court below the taxpayer relied almost solely on the fact that the rule for which it con: | tends was expressly adopted in Section 208 of the Revenue Act of 1926 (infra,-pp. 33-34). In that Act, the cree sentence was added to the defini- tion of the term “capital assets”: In determining the period for which ‘the tax- payer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 204 such ‘property has, for thé purpose of determin- ing gain or loss from a sale or exchange, the same basis.in whole or in part in his hands as | it would have in the hands of such other per- son. . 4 26 . This change in the law was referred to in the opin- ion of the court below: (R. 40). But this change ‘introduced into the Act of 1926 can not authorize construction of the earlier one not consonant with the language there employed.”? Russell vy. United States, 278 U.S. 181, 188. The situation seems in- distinguishable from that involved in Spring City Foundry Co. v. Commissioner, Nos, 727, 728, Octo- ber Term, 1933, decided April 30, 1934, where this Court said: no We think the fair import of this’ provision, as contrasted with the earlier one, is that the Congress, recognizing the signifi ‘ance of the existing: provision and its appropriate con- struction by the Treasury: Department, de- liberately intended a change in the law. See also Schwab-v. Doyle, 258 U.S, 529, 536; Brew- ster v. Gage, 280 U.S. 327, 337. : ~ We are not unmindful that we have argued in Point I above that the change in the statute there involved represented no change in the law but merely enacted into law the administrative. inter- pretation -of the. earlier statute. The argument ‘there is in no Way inconsistent with our position here. There the change in the text of the statute Was in precise accord with the administrative in- terpretation of the prior law. Here the change in the statute is contrary to the administ ‘ative con- struction of the prior law as well as to its plain lan- guage: It shows a recognition of the adfninistra- tive. construction by Congress and a desire on the eo 20 part of Congress to change the law for the future. . Congress could have made the change retroactive if it had desired to do so; but it did not. Congress must, therefore, have intended a change in enacting the present provision, and this is confirmed by the committee reports. In House Report No. 1, 69th Congress, Ist Sess., the House Committee on Ways and Means said’ (p. 7): The same question arises in the case of prop- erty received by gift after December 31, 1920. The amendment provides that the pe- riod in which the property was held by the donor shall be added to the period in which the property was held by the donee in deter- mining whether or not the property so re- ceived falls within the capital gain or loss section. | -s To the same effect ‘is Senate Report No. 52, 69th Congress, Ist Sess., p. 18. . These reports show that the committees of Congress referred to the pro- Vision as an ‘amendment.’ hey furnish no basis for the contention that Congress desired that Sec- tion 208 (a) (8) of the Revenue Act of 1926 should. be given retroactive effect. In the absence of such ~ an intention, the new provision has no effect on ‘ases arising under the earlier Act. United States’ v. Magnolia Co., 276 U.S. 160, There is consequently no support, either in the terms ofthe statute itself, in its administrative con- + struction, or in the change introduced in the 1926 - Act for the construction which the Circuit Court of Appeals has placed upon the statute. Since the . EEE Os © EN es SRS # sim ante oa; Duke “oe wi se) 28 property here in question was not held by the tax- payer for more than two years, the gain from the transaction must be treated as an ordinary gain and not as a capital gain. | CONCLUSION The decision of the Circuit Court of Appeals on. the first issue should be affirmed, and its decision on the second issue should be reversed. Respectfully submitted. | J. Crawrorp Bias, Solicitor General, Frank J. WIDEMAN, Nn aes Assistant Attorney General. : CRWIN N. GRISWOLD, 1 James W. Morris; “ HELEN R. Caross> Special Assistants to the Attorney General. ~ May 1934. | 24 ~eneieneet —— Se ee aekigh Rianne bite dat ders ana Se Bite CAMP pa 7 APPENDIX STATUTES AND REGULATIONS INVOLVED | REVENUE ACT OF 1921, C. 136, 42 STAT. 227, 229, 232, 246 Sec. 2. That when used in this Act— - * % * . * . * (9) The terin ‘taxpayer’? includes any person, trust or estate subject to a tax imposed by this Act ; Srec..202. (a) That the’ basis for ase Maining the vain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property : except that— * 5 * % * (2) In the -case of Suish property, acquired by eift atter December 31, -1920. the ‘basis shall be_ the same as that which it would have in the hands of the donor or the last preceding owner by whom it Was tot acquired by gift. If the facts necessary to determine such basis are unknown to the donee, ‘the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Com-. missioner finds»sit impossible to obtain such facts, the basis shall’ be the value of such property as found by the Commissioner as of the date or ap- proximate date at which, according to the best information the Commissioner is able to obtain, such property was acquired by such donor or iast preceding owner. Inthe case of such property ac- : (29) *d.) ow “e . quired by gift on or before December 31, 1920, the basis for ascertaining gain or loss from a sale or *ther disposition thereof shall be the fair market price or value of such property at the time of such acquisition 3 | ‘ | * e. ' * . * © (bh) The basis for ascertaining the gain derived or Joss sustained from the sale or other disposition, of property, real, personal, or mixed, acquired. be- fore March 1, 1913, shall be the same as that pro- vided by subdivision (a); but— * “*) *) > Src. 206. (a) That for the purpose of this title: (1) The term ‘teapital gain means taxable gain td from the sale or exchange of capital assets con- E- | stummmated after: December 31,1921; * . * Ss * _* (6) The term ‘capital assets’? as useél in this section means property acquired and held by the ~ taxpayer for profit or investmeént for more than two vears Cwhether or net connected with his trade’ or business), but does not include property held for ; the personal use or coustunption of the taxpayer or his: family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. : (b) ‘In the case of any taxpaver (other than a corporation) who for any taxable vear derives a capital net gain, there shall (at the election of the ? taxpaver) be levied, collected and paid, in lieu of the ‘taxes imposed by sections 210 and 211 of this tithe. a tax determined as follows:- | A partial tax shall first be computed upon the basis of the ordinary net Income at the rates and in an * 2 Vie A tas SPAS ee NETS 31 9 . -the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12) per contum of the capital net gain; but if the taxpayer elects to be taxed’ under this section the total tax shall in no such ease be less than 125 per centum of she total net income, The total tax thus determined shall be computed, collected and paid in the same manner, at the same time, and subject to the same: yrovisions of law, including enalties, as other ] taxes under this title. (c) In the case of a partne rship or of an estate or trust, the proper part of each share af the net ime conie Which consists, respectively, of ordinary net income and capital net gain,:shall be determined under rules and regulations to be preser ‘ibed by the Commissioner with the approval of the Secretary, and shall be separately shown in the return of the partnership or estate or trust, and shall be taxed to the member or beneficiary or to the estate or trust as prov ided in sections 218 ‘and 219, but at the rates and in the me umer “provided in sinintim daieaaaal (hb) of this section, Src. 219) (a) That the tax imposed hy sections 210 and 211 shall apply to the income of estates or of any kind of property beld m trust, ineludine— (3) Income held for future distribution under the terms of the will or trust; and x * x x * (hb) The fiduciary shall he responsible for mi viking the return, of income fer the estate or trust for which he acts. * * * (©) In cases under paragraphs (1). (2), or (3) of subdivision (a) or in any other case w thi sub- ge. 7) *)e) .% Om division (2) of this section except paragraph (4) thereof the tax shall be imposed upen the net in- come of the estate or trust and shall be paid hv the — fiduciary, exeept that in determining the net income of the estate of any deceased person during thé per iod of administration or se ‘ttlement- fhere may be. deducted the amount of any income properly paid — or credited to any legatee, herr, or other beneficiary, Insuch eases the estate or trust shall, for the pur- poseof the normal tax, be allowed the same credits asare allowe “ul to single persons under section 216. REVENUE ACT OF. 1024, C244, 45 SIPARP, 2535 See. 204, (a) The basis for determining the gain or loss from the sale or other disposition of prop- erty acquired after February 28, 1913, shall be the ‘vost of such property; except thai - ~ * * x. * (2) If the property was acquired by gift after’ December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the Last pre- ceding owner iv whom it Was net acquired by gift. If the facets necessary to determine suche basis are | unknown to the donee, the Commissioner shall, if possible, obtaiwsuch facts from such donor or last preceding owner or any other person cognizant thereof. Tf the Commissioner finds it’ impossible to obtain sueh tacts, the basis shall be the fair mar- .’ ket Value af such property as found by the Com- missioner as of the date or approximate date at Which, accotding to the best information that’ the Comuotssioner is able to obtain, such property Was acquired by such donor or last preceding owner ; ° = --~° =~ > or ae a PS *>*) od (3) If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by bequest or devise) the basis shall-be the same as it-would be in the hands of the 4, . vrantor, inereased in the amount of gain or de- ereased in the amount of loss recognized to the erantor upon such transfer under the law appli- cable to the year in which the tkansfer was: made. The provisions’ of this pardgraph shall not apply to the aequisition of such prope vty interests as are. specified in subdivision (¢) or (ce) of section 402 of the Revenue Act of 1921 or in ene ea (c), (d), or (1) of section 302 of this Act. (ULS.C., Title 26, 7 See. 935. ) a — aa REVENUE ACTOR 19265 C. 27, 44 STAT. 9 Src. 208s (a) For the purposes of this tithe— . * * * * * (8) ee “capital assets’? means property held by the taxpayer for more than two years (whether or not connected with his trade’or busi- ness), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the tax- payer if of hand at the close of the taxable year, or property held by the taxpa¥er primarily for sale in the course of his trade or business. In deter- niining the period for which the taxpayer has held property received oi an exchange there shall be meluded the period for which he held the property exchanged, if under the provisions of section 204 the property received has, for the purpose of de- termining gain or Joss from a sale,or exchange, the same hasis in whole or in part in his hands as the S ? ’ t : property exchanged. In determining the period for which the taxpayer has held property however ~aequired there shalf be included the period for ‘which such property was held by any other person, if under the provisions of section 204 stich property has, for the purpose of determiding gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have inthe hands of such other person. In determining the period tor which the taxpayer has held stock or secugities received upon a distribution where no @ain is rec: ognized to the distributee under the provisions of subdivision (¢) of section 203 of this Act or of the Reverte Act of 1924, there shall be included the period for which he held the stock or securities in the distributing corporation prior tothe receipt of the stock or securities upom such distribution, TREASURY REGULATIONS 62, UNDER THE REVENUE ACT OF Ta | Mer. 1562. Sale of property acquired by gift after December 31, 1920.— In computing the @ain or loss from the sale or other disposition of, prop- erty acquired by, gift subsequent toy December 31, 19200 the basis Ahall be the same as it woukd have in the hands oKthe donor or the last preceding owner by whom it Was not acquired by gift. This basis in the hands of the donor or last preceding owner by whom it was not acquired by gift shall be determined under the provisious of artiele 1561 and the taxable gain or deductible loss from the sale or exchange shall be computed in accordance therewith * * * | : Art. 1503. Sale of properly acquired bir gift on or before December 31, 1920, or by bequest, devise, 7. ‘as bo ae Pee Tie, or inheritance.—In computing the gain or loss from the sale or, other disposition of property acquired by gift on or before December 31, 1920, or by be- quest, devise, or inheritance, the basis shall be the fair market price or value of such property at the {ime of acquisition, The term “property acquired by bequest, devise, or inheritance” as used herein includes (a) sucli property interests as the tax- payer has received as the result of a transfer, or creation of a trust, in contemplation of or intended to take effeet in possession or enjoyment at or after death, and (>) sueh property interests as the tax- paver has received as the result of the exercise by person of-a general power of appointiuent (1). by will, or (2) by deed exccuted in contemplation of or intended to take effect in possession or cn joy- ment at orafter his death. Sce further section 402 (¢) and (¢) and Regulations 63, articles 17-21, 24 and 25. Tn the case of property acquired by gift, bequest, devise, or inheritance, prior to Mare 1, 1913, the taxable, gain or deductible loss from the Sale or other disposition thereof:shall be computed in accordance with article 1561, * * * Arr. 1651, Definition and illustration of capital net gain.—(a) Section 206 applies only to sales or exchangcs of capital assets consumated after De- cember 31, 1921. It provides that any taxpayer other than a.corporation may, if he so desires, state separately in his return his net gain on sales or ex- changes of capital assets and pay on such ee net gain (as defined. and limited in the section) ¢ flat tax of 1242 percent in lieu of the tax he cada otherwise pay on such income under sections 210° and 211. @n his net income from other sources, termed “ordinary net income” in this section, he + *yy? ob e would be taxed under those sections. If, however, ' he elects thus to segregate his capital net gain, his total tax on the agerégate amount of both kinds of income must be atleast 121% percent thereof. The term ‘capital assets”? is defined to mean propérty - of any kind whatever acquired and held by the tax- A paver for profit or investment for more than two vears, Whether or not connected with his trade or business, not inefuding property (for example, a. dwelling): held for the personal use or consump- tion of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind prop- i erly included in an inventory. * * * U S$ SOVERNMENT PRINTING OFFICE: 1934 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386009_0081%3A07. Public record. Not legal advice.