Petition for Writ of Certiorari — Fairbanks v. United States

FILE COPY -

Supreme Courtofthe United States

Term, 1937.

Petitioner,

UNITED STATES OF AMERICA,

% ’ Respondent.

* ARTHUR F. DRISCOLL,

Counsel for Petitioner.

Ae cannes

‘The Bocie Press. 225 Varick Street. N.Y¥.C. Tel WAlker 65-1436.

A

INDEX.

PAGE

PG as sc esweecone rene aed enN na ceuebersearaaen 1

I a cs écabns cabs bewecsveucedaeiereres 1

DIA. sc o-en tice beeen Gene bnstceunahe ben eees - 4

Case Believed to Sustain the Jurisdiction............ =

I NIL: oo ss banccupenesepessbeaturusss as =

Summary Statement of the Matter Involved..........- 3

NNER GE SEUUOUB So ccc case secepescesesssscave >

Reasons for Granting the Writ.................--.--- t

1. The Court below has decided an important ques-

tion of Federal Law which has not been. but

should be. settled by this Court..........-..--

2. The granting of a writ of certiorari will elimi-

mabe meme Mtietion. oo ccc ccc cs rcs ecccces

Appendix A—Starutes Invoived...........-..-.-----

Appendix B—RKeport No. 350. 67th Congress. First

Session to Accompany H. R. $245 (Revenue Act of

Appendix ©—I. T. 1657. appearing at I1-1C. B.56.....

Appendix D—I. T. 2488. reported in VIII-2 ©. B. 127..

Appendix E—I. T. 267s. reported in NIT-1C. B. 117...

Appendix F—Recommendations of Committee on Fed-

eral Taxation of American Bar Association Sul

mitted to Ways and Means Committee of T3rd Con-

gress. Second Seasion. in Connection with Hearings

om Revenue Act of 1964... 2c ccc ccc cv ccenescces>

CASES CITED.

PAGE

Alexander v. King, 74 A. L. R. 174, 46 Fed. (2d) 235... 7

Brown, Ernest W., 36 B. T. A. 173......0..--+--00e- 9

ae 6: NR Ie Se Ws cos dccacccdexeecess 3

Cameron, Alpin W., 20 B. T. A. 305, aff'd 56 Fed. (2d)

Re ae er ere eer ee Pere er erere re 8

POR We DA Pee, Be Oe I, Deceit csc cctaeccecoens 9

Hale v. Helvering, 85 Fed. (2d) 819................2-. 9

eens, Goatees A; Be Oe. Ee MB. Behe cscccwcsccsccsses 9

Helvering v. New York Trust Co., 292 U. 8S. 455....... 10

McCauley v. Commissioner of Internal Revenue, 44 Fed.

Ce Sey EE FURS ee DEN So REED ORES KMS one oes 6 10

McKee, John D., Trustee, et al., 35 B. T. A. 239....... 9, 10

Merle Smith v. Commissioner of Internal Revenue, 42

gE Re 2 = Se per rep ry ern naan 10

Rands, Wm. C., 34 B. T. A. 1107 (on appeal, C. C. A.

SR hc ac che waa e aba eee Feta in wiey Se haces cas 9

United States v. Kirby Lumber Co., 284 U.S. 1........ 2

Ee, EBs ies ee ss Os ono bc voce neon 8, 9,10

pg ae i ae re Ae

STATUTES AND DOCUMENTS.

Judicial Code, Section 240-A, 28 U.S. C. AL, Section 347. xs

Report No. 350 of Ways and Means Committee of the

67th Congress, First Session, to Accompany H. R.

Sy aces ncaa wee ae area ek Cann cess eas Pe

Revenue Act of 1926, Section 208(a)(1) (44 Stat. 19)..2, 11

Revenue Act of 1928, Section 101(¢) (1) (45 Stat. 811) .2, 11

Revenue Act of 1934, Section 117(f)................-. 9

RULINGS OF COMMISSIONER.

Sy a 2 ya Te” Re ARS nee eae Sf

re rae ge eeeew eh weet £12

er oe NA ne Seb edewen et Ss, 14

IN THE

Supreme Court of the Anited States

OcTOBER TERM, 1937.

DOUGLAS FAIRBANKS,

Petitioner,

against

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

CIRCUIT COURT OF APPEALS FOR THE

NINTH CIRCUIT.

To the Honorable the Chief Justice and the Associate

Justices of the Supreme Court of the United States:

Your petitioner, Douglas Fairbanks, respectfully prays

for a writ of certiorari to the Circuit Court ef Appeals for

the Ninth Circuit, to review a judgment of that Court entered

on April 2, 1938 (R. 139).

Opinions Below.

The opinion of the District Court is not officially reported,

but is printed in full at Record pages 51 to 55. The opinion

of the Circuit Court of Appeals is not as yet officiall)

*)>)>

reported, but appears in full at Record pages 152 to 15s.

to

Jurisdiction.

The date of judgment is April 2, 1938. Jurisdiction is

invoked under Section 240-A of the Judicial Code, 28

U. 8. C. A., Section 347.

Cases Believed to Sustain the Jurisdiction.

Burnet v. Harmel, 287 U. 8. 103;

United States v. Kirby Lumber Co., 284 U. 8S. 1.

Statutes Involved.

Section 208(a)(1) of the Revenue Revenue Act of 1926

(44 Stat. 19) and Section 101(c)(1) of the Revenne Act of

1928 (45 Stat. 811) are printed in full in Appendix “A.”

Questions Presented.

This case presents an important question of the law of

Federal income taxation which has never been passed upon

by this Court and, as is shown hereinafter, is a continuing

source of litigation between taxpayers and the Bureau of

Internal Revenne. The specific questions at issue are:

(1) Does the redemption before maturity of bonds by the

issuing corporation constitute a sale or exchange for the

purpose of income taxation as to the owner and holder of

the bonds, within the meaning of Section 208(a)(1) of the

Revenue Act of 1926 and Section 101(c) (1) of th®.Revenue

Act of 1928.

(2) Does the gain realized by the bondholder from the

redemption constitute

(a) capital gain from the sale or exchange of a capital

asset, taxable at the 1214% rate: or

(b) ordinary income, taxable at both normal and sur:

ss

tax rates.

Summary Statement of the Matter Involved.

There is no issue of fact. All the facts are admitted by

the pleadings, or have been stated as special findings of

fact by the District Court.

The material facts are as follows:

Fairbanks is a cjtizen of the United States and a resident

of California.

He has been engaged in the business of making motion

pictures since the year 1916 (R. 59).

In the year 1925 Fairbanks was the owner of ums com:

pleted motion pictures and one in the process of making

(R. 60).

Under date of March 5, 1925, Fairbanks made a contract

with The Elton Corporation, under the terms of which he

transferred to The Elton Corporation all his right, title and

interest in the nine motion pictures aforementioned in

exchange for $4,000,000 par value debenture bonds, -and

990 shares of no par value stock of said corporation, said

bonds being ten-year bonds, dated March 5, 1925, and

maturing March 5, 1935 (R. 60).

The debenture bonds received by Fairbanks contained the

following provision :

“This debenture bond may be redeemed by the cor-

poration at any time at its face value plus interest

earned and unpaid hereon upon thirty days notice to

registered holder hereof” (R. 60).

Fairbanks entered into a contract with The Elton Cor-

poration at the same time, containing a provision that the

corporation obligated itself to redeem $100.000 face value

of the bonds per year beginning three years after date of

the contract: that is, after March 5, 1925 (R. 60).

The Elton Corporation did redeem and Fairbanks did

surrender for redemption $1.600,000 par value of said de-

benture bonds in 1927 (R. 60): $150,000 par value in 1928

(R. 61) and $150,000 par valne in 1929 (R. 61).

4

Fairbanks duly filed his income tax returns for the years

1927 and 1928 and reported therein the sums received from

the redemption of said debenture bonds (R. 62, 63). He

took no deduction for cost, but reported the gross sum

received as taxable (R. 62, 63). The amount received from

the redemption of said bonds he reported as taxable at the

capital gain rate of 124%.

At the same time—that is, during the years 1927, 1928 and

1929—Fairbanks still had before the Commissioner of

Internal Revenue a dispute as to taxes for the years 1917

to 1926, involving the question of whether or not the cost

of motion pictures could properly be deducted in the year

in which expended (R. 61, 64), as had theretofore been

customary.

In December, 1929, a settlement was reached with the

Commissioner of Internal Revenue as to said years. The

settlement involved a re.computation of the taxes for those

years on the basis of capitalizing the cost of pictures and

amortizing said cost over a period of four years after the

release of each picture—that is, 75% of the cost to be

amortized in the first year, 15% in the second year, 5% in

the third year, and 5% in the fourth year. Fairbanks, pur-

suant to said settlement, paid additional taxes and interest

for the years 1917 to 1926 in the sum of $695,840.53 (R. 64).

Pursuant to the settlement and recomputation, it was deter-

mined that Fairbanks still had an unamortized cost of

pictures of $1,096,445.52 as of December 31, 1926 (R. 64)

which he was entitled to deduct from his income for the

‘lowing years in accordance with the aforesaid formula.

Huwever, pending the settlement and before the unamor-

tized cost had been fixed, Fairbanks had duly filed his

Federal income tax return for the year 1929 and reported

the amount received from the redemption of bonds of The

Elton Corporation at the capital gain rate of 124%4%. In

that return he used as cost to be recouped, or the unamor-

tized cost, the sum of $928,630.87 and deducted a propor-

tionate part of $928,630.87, or the sum of $34,823.65 (RK.

65-66).

5

Under date of August 7, 1930, one L. E. Fellers, an

Internal Revenue Agent, made his report of his audit of the

Federal income tax returns filed by Fairbanks for the years

1927, 1928 and 1929, treating the proceeds in question as

capital net gain, taxable at 1244%, and fixing the unamor-

tized basic cost as of December 31, 1926, at $1,096,445.52

(R. 66).

Following the report of Revenue Agent Fellers, Fairbanks

filed with the Commissioner of Internal Revenue claims for

refunds for the years 1927, 1928 and 1929, setting forth

therein that he had not deducted from his income a proper

cost for the bonds redeemed (R. 67-68).

Thereafter the Commissioner of Internal Revenue caused

an audit to be made in connection with the claims for refund

filed for the years 1927, 1928 and 1929 (RR. 71). The Com-

missioner of Internal Revenue determined tiiat Fairbanks

was entitled to refunds for the years in question, and on

January 26, 1932, did refund to Fairbanks for the year 1927

the sum of $53,231.55, together with interest in the sum of

$9,795.05: for the vear 1928, $7,507.38, together with interest

in the sum of $932.40; for the year 1929, $677.57, together

with interest in the sum of $42.99 (R. 72-73).

Thereafter the Commissioner of Internal Revenue deter-

mined that the refunds were erroneous and, through the

Collector of Internal Revenue at Los Angeles, on July 6,

1933, ofticially demanded the return to the Government of

the sums refunded (R. 73, 74).

No part of the sums refunded has been returned (R. 74).

Specification of Errors.

The errors which petitioner will urge if the writ of

certiorari is granted are that the Circuit Court of Appeals

for the Ninth Circuit erred:

1. In ruling that the redemption of its bonds by The

Elton Corporation during 1927, 1928 and 1929 was not a

“sale or exchange” of capital assets by Fairbanks within

the meaning of the Revenue Acts of 1926 and 1928.

~

Piers: ~~ =

6

2. In ruling that Fairbanks must pc), income tax on the

gain from said redemption at normal and surtax rates

instead of at the 1214% tax rate on capital gains as provided

in the Revenue Acts of 1926 and 1928.

3. In ruling that the refunds made to Fairbanks on

January 26, 1932, by the Commissioner of Interna) Revenue

were erroneous and that the United States was entitled to

recover the amounts of said refunds with 6% interest thereon

from the date of their payment.

4. In not ruling that Fairbanks had overpaid his Federai

income taxes for the years 1927, 19°S and 1929.

Reasons for Granting the Writ.

Petitioner submits that the following reasons exist why

this Court should grant a writ of certiorari:

1. The Court below has decided an important question

of Federal law which has not been, but should be, settled

by this Court and in a way probably in conflict with appli-

cable decisions:of this Court on similar problems arisiny

under the same provisions of the Rerenue Act.

It is conceded that The Elton Corporation bonds had

been held by Fairbanks for over two years prior to their

redemption and that they constituted “capital assets” as

dened in the Revenue Acts of 1926 and 1928.

The sole question is, therefore, whether redemption of

bonds before maturity constitutes a “sale or exchange”

within the meaning of the Revenue Acts. This question has

never been ruled upon by this Court and petitioner respect-

fully submits that sucha ruling should be had for the reasons

hereinafter set fort

In 1921 Congress first legislated into the Revenue Act

the remedial sections of these Acts known as the “Capita!

Gain and Loss” provisions, giving taxpayers the right to

have such gains taxed at a flat rate of 1214% instead of

at the extremely high normal and surtax rates.

” 7 ,

The purpose of said legislation is found in Report No. 250

of the Ways and Means Committee of the 67th Congress,

First Session, to accompany H. R. 8246, which is reprinted

herein as Appendix “D.”

This Court has given a similar clear statement of the

reasons and problems causing the passage of the “Capita!

Gain and Loss provisions,” in Burnet vy. Harmel, 287 U.8.

103, where it is stated:

“Before the Act of 1921, gains realized from the

sale of property were taxed at the same rates as other

income, with the result that capital gains, often ac-

cruing over long periods of time, were taxed in the

year of realization at the high rates resulting from

their inclusion in the higher surtax brackets. The

provisions of the 1921 revenue act for taxing capital

gains at a lower rate, re-enacted in 1924 without ma-

terial change, were adopted to relieve the taxpayer

from these excessive tax burdens on gains resultiny

from a conversion of capital investments, and to re-

move the deterrent effect of those burdens on such

conversions. House Keport No. 350, Ways and Means

Committee, 67th Cong., Ist Sess., on the Revenue Bill

of 1921, p. 10; see Alerander v. Kiny, (C. C. A. 10th),

74 A. L. R. 174, 46 Fed. (2d) 235." (Emphasis

supplied. )

From the viewpoint of the bondholder, Fairbanks, the

redemption of the bonds was the parting with capita!

assets—bonds—in exchange for money paid to him. It was

a transfer of title for money. In 1925 he exchanged a capita!

asset—moving pictures—in return for a capital asset—

bonds. In 1927, 1928 and 1929 he exchanged a capital asset—

bonds—for money. Surely, Fairbanks has complied with the

requirements stated by Mr. Justice Stone in Burnet v.

Harmel, supra, in that he realized “gains resulting from a

conversion of capital assets.”

Fairbanks respectfully submits that the narrow construc-

tion placed upon the words “sale or exchange” by the Circuit

Court of Appeals for the Ninth Circuit denies him the benefit

cf remedial legislation passed for the very purpose of pro-

tecting persons in his position and is in contravention of the

expressed intent of Congress in so passing such legislation.

8

2. The granting of a writ #f certiorari witil eliminate

much litigation.

Certainty in the principles and law of taxation is bene

ficial to both taxpayers and the Burean of Internal Kevenne.

The present problem cries for an authoritative and fina!

ruling, as the many changes in position on the present

problem of both the Burean of Internal Revenue and the

Courts have been costly both to the Bureau and taxpayers

and the source of mach litigation between them.

A short historical resumé of this problem from an income

tax standpoint reveals the following vacillating and contra-

dietory constructions of the words “sale or exchange’ 5;

the Bureau of Internal Revenue and the Courts.

In 1923 the Commissioner ruled that the redemption of

a bond at maturity could not be considered a “sale or ex-

change” of a capital asset, and the remedial 12)...“ tax rate

did not apply (see I. T. 1637. IL-1 C. B. 36, Appendix “”” .

In 1929 the Board of Tax Appeals in Henry P. Werner.

15 B. T. A. 482 (acquiesced in by Commissioner), unan:

mously ruled otherwise.

The Commissioner thereupon revoked I. T. 1637 and pr-

mulgated I. T. 2488, VIII-2 C. B. 127 (Appendix “D™), and

followed the Werner decision.

On July 27, 1930. the Board reaffirmed the Werner dec:-

sion in Alpin W. Cameron, 20 LB. T. A. 305, aff'd 6 Fel.

(2d) 1021 (C. C. A. 3rd).

On December 29, 1932, the Board unanimously reversed

Henry P. Werner, swpra,in John H. Watson, J7., 25 UG. T. +

463 acquiesced in by Commissioner). by holding that the

redemption of a bond at or prior to maturity did not evn

stitute a ~sale or exchange The Commissioner followe!

by revoking I. T. 2488, supra, and promulgated I. T. 20>.

XI1-1 C. B. 117 (see Appendix “E™).

The next move in the checkered career of this probes:

was evolved by taxpayers more fortunate than Fairbanks

whose bonds matured after the Watson decision. To obtain

the benefits of the capital gains provisions denied them

4

OO

9

the Watson case, these taxpayers sold their bonds at the

redemption or call price to friendly purchasers the day before

the day stated in the ¢all for redemption. Over the Com-

missioners opposition the Board of Tax Appeals ruled that

these transactions constituted a true “sale or exchange” and

taxpayers so doing were not affected by the Watson decision.

but could use the remedial 121.% flat tax rate.

John D. McKee, Trustee. et al. 35 B. T. A. 239.

These shifting and conflicting decisions have resulted in

a flood of litigation between taxpayers and the Bureau. A

few of the cases and situations involved are as follows:

ta: Bonds redeemed at or before maturity.

Ernest W. Brown. 36 B. T. A 178:

Wm. C. Rands, 34 B. T. A. 1107 (on appeal. ©. C.

A. 6th):

Felin v. Ayle, 22 Fed. Sapp. 556.

th) Promissory notes settled atter maturity.

Hale +. Heirering. SS Fed. (2d) 819.

ic: Life insurance annuities surrendered.

George A. Heliman,. 33 B. T. A. 901.

The natura! result of the uncertainty created by these

eontlicting decisions was the petitioning of (‘ongress by tax.

payers to ameliorate the confusing situation by clarifying

the law (see Recommendations of Committee on Taxation o/

American Bar Association, reprinted in Appendix “F™).

‘‘ongress took cognizance of the situation and in Section

117; f) of the Revenue Act of 1934 provided that the redemp-

tion of a bond at or prior t maturity constituted the ex-

change of a capital asset. thus spevitically removing from

further controversy the problem involved in the instant case.

Petitioner respectfully urges that Section L17if) of the

Revenue Act of 1934 was not new law as concerns the

rer ee

—

ore ee

10

redemption of bonds, but was more explicit explanation of

the purpose of prior laws.

Heicering ¥. New York Trust Co., 292 U.S. 450:

Jordon ¥. Roche, 238 U. 8. 446-455:

Merie-Smith +. Commissioner of Internal Rerenuc.

42 Fed. (2d) 837-842:

McCauley +. Commissioner of Internal Revenue. 44

Fed. (2d} 919-920.

Taxation being based on principles of equity, it seems

inconceivable that Congress intended to benefit only tax-

payers having bonds redeemed or maturing after January

1. 1934, to the exclusion of their less fortunate brethren

whose bonds were called sr matured prior to that date.

From the viewpoint of the Bureau and the Courts, parties

to an identical transaction are treated in three different

ways:

(a) Taxpayers like Fairbanks, who. relying on the Werner

decision, were trapped by the Watson decision. are taxable

on their gains at ordinary and surtax rates.

ib) Taxpayers having bonds maturing or redeemed after

the McKee decision, supra, and taking advantage there’.

are taxable at the 121. rate.

ic; Taxpayers with bonds maturing or redeemed after

January 1, 1934. are taxable on their capital gains as prr

vided in that Act.

Petitioner respectfully submits that this unfair and ineq":

table situation deserves an authoritative ruling from ths

Honorable Court.

WHEREFoRE. it is respectfully submitted that this petit) 0

should be granted.

ARTHTR F. DRISCOLL.

Counsel for Petitioner

Statutes Involved.

Section 268ia)/1) of the Revenue Act of 1926 (44 Stat.

19) and Section 101/¢)(1) of the Revenue Act of 192s (45

Stat S11) are identical, providing:

“Capital gain’ means taxable gain from the sale

or exchange of capital assets consnammated after

December 31. 1921.~

APPENDIX B.

Report No. 350. 67th Congress. First Session. to accom-

pany H. R. S245 1 Revenue Act of 1921):

“{"APITAL GAINS AND Losses.

The sale of farms, mineral properties. and other

capital assets is now seriousiy retarded by the fact

that gains and profits earned over a series of years are

under the present law taxed as a lump sum ‘and the

amount of surtax greatly enhanced thereby) in the

year in which the profit is realized. Many such sales.

with their possible profi: taking and consequent in-

crease of the tax revenue. have been blocked by this

feature of the present law. In onmier ty permit such

trahsactions to go forward withont fear of a prohibi-

tive tax. the propose! bill. in section 26. adds a new

section (207) to the income tax. previding that where

the net gain derived from the sale or other dispesition

of capital assets would. under the ordinary procedure.

be subject to an income tax in excess of 15 per cent...

the tax upon capital net gain shal! be limited t thar

rate. It is believed that the passage of this provision

would materially increase the revenue. not only be

cause it would stimulate promt taking transactions.

but because the limitation of 15 per cent. ix als

applied t eapital losses. Under present conditions

there are likely to be more losses than gains.”

12

APPENDIX C.

I. T. 1637, appearing at II-1 C. B. 36, provides:

“REVENUE AcT oF 1921.

Non-interest-bearing obligations of a political sub-

division of a State were issued at 88 and upon ma-

turity in the latter part of 1923 a taxable profit of

6 x will be realized by the holder not the original

purchaser. Inasmuch as the obligations have been

held for over two years inquiry is made whether the

taxpayer will be subject to a tax on the capital net

gain derived therefrom at the rate of 121. per cent.”

Section 206 of the Kevenue Act of 1921 reads, in part, as

follows:

“(a) That for the purpose of this title:

(1) The term ‘capital gain’ means taxable gain

from the sale or exchange of capital assets consum-

mated after December 31, 1921.

When an obligation matures it is neither sold nor

exchanged. Any taxable profit derived upon maturity

of a non-interest-bearing obligation is, therefore, not

‘capital gain’ derived from the sale or exchange of

capital assets and section 206 does not apply.”

APPENDIX D.

I. T. 2488, reported in VIII-2 C. B. 127, provides as fol-

lows:

“REVENTE Acts or 1921, 1924, 1926 anv 1928.

The net gain from bonds held for more than two

years, whether received as the result of the maturity

of the bonds or as the result of their redemption be

fore maturity, may, at the option of a taxpayer other

than a corporation, be taxed as a capital net gain

under the provisions of section 206 of the Revenre ct

of 1921. I. T. 1637 (C. B. II-1, 36) revoked.

13

Likewise, any individua! who has held stock in a

corporation for more than two years and who derives

a gain when the stock is ‘called in’ may elect to have

such gain taxed as a capita] net gain in the manner

and subject to the conditions prescribed in section

206 of the Revenue Act of 1921.

The foregoing ruling is also applicable under the

Revenue Acts of 1924, 1926 and 1928.

A ruling is requested as to the manner in which the

gain from bonds or stock held for more than two years

should be treated where the bonds are redeemed be-

fore their maturity date or the stock is ‘called in.’

Under the provisions of section 206 of the Revenue

Act of 1921, any taxpayer (other than a corporation )

who for any taxable year derives a capital net gain

may elect to be taxed on such capita! net gain at the

rate of 121%. per cent. in lieu of the tax he would

otherwise pay on such income under sections 210 and

211. Section 206 of the Revenue Act of 1921 reads,

in part, as follows:

(a) That for the purpose of this title:

(1) The term ‘capita! gain’ means taxable gain

from the sale or exchange of capital assets consum

mated after December 31, 1921.

In I. T. 1637 it was held that when an obligation

matures it is neither sold nor exchanged. It was

further held that any taxab!e profit derived upon ma

turity of an obligation is therefore not ‘capital gain’

derived from the sale or exchange of capital assets

and section 206 does not apply.

Under date of February 19, 1929, the United States

Board of Tax Appeals decided, in the case of Henry

P. Werner (15 B. T. A. 482, see on page 56), that the

redemption of bonds at a ‘called’ date for an amount

in excess of the cost of the bonds to the bondholder

results in a gain from the sale or exchange of capita!

assets within the meaning of section 206 of the Reve

nue Act of 1921. In the decision the legislative his-

tory of section 206 of the Revenue Act of 1921 was

reviewed. It was stated that the Ways anti Means

Conmunittee of the House and the Finance (committee

of the Senate declared that the provision was intended

-auee @

If

to be applicable to the ‘sale or other disposition of

capital assets.’

The ruling contained in I. T. 1637 is hereby revoked.

The net gain from bonds held for more than two

years, whether received as the result of the maturity

of the bonds or as the result of their redemption be

fore maturity, may, at the option of a taxpayer other

than 2 corporation, be taxed under the provisions of

section 206 of the Revenue Act of 1921.

Likewise, any individual who has held stock in a

corporation for more than two vears and who derived

a gain when the stock is ‘called in’ may elect to have

such gain taxed as a capital net gain in the manner

and subject to the conditions prescribed in section 206

of the Revenue Act of 1921.

As the provisions of the Revenue Acts of 1924, 1926

and 1928 relating to capita! net gains are similar to

the provisions of section 206(a)(1) of the Revenue

Act of 1921, the foregoing ruling is also applicable

under those Acts.”

APPENDIX E.

I. T. 2678, appearing in XII-1 C. B. 117, is as ‘ollows:

“Revenue Acts of 1921, 1924, 1926 and 1928.

I. T. 2488 (C. B. VITI-2, 127), which holds that the

gain derived from stock of a corporation ‘called in,’

or the gain derived from bonds as the result of their

maturity or redemption before maturity, where such

stock or bonds have been held for more than two years,

may be taxed as a capital net gain, is revoked, in so

far as inconsistent with the decision of the Board of

Tax Appeals in John H. Watson, Jr. vy. Commissioner

(27 B. T. A. 463, page 13, this Bulletin) .”

15

APPENDIX F.

Recommendations of Committee on Federal Taxation of

American Bar Association, submitted to Ways and Means

Committee of 73rd Congress, Second Session, in connection

with the hearings on the Revenue Act of 1934:

“Section 101(¢c) of the 1932 act defines capita! gains

and losses as the gains or losses resulting from the

‘sale or exchange’ of capital assets. The United States

Board of Tax Appeals has determined in Henry P.

Werner, 15 B. T. A. 482, that included within the

terms of ‘sale or exchange’ was the redemption by the

obligor, at or before maturity, of a capital asset. Later

the Board held, in Watson, 27 B. T. A. 463, that such

redemption was not a ‘sale or exchange. Your com-

mittee believes that the Congress did not intend to

remove from the benefits of the capital gains and loss

provisions gains or losses from the redemption of

capital assets, especially when such gains or losses,

if the assets had been sold by the holder immediately

before redemption, would be considered capital gains

or losses.

Your committee recommends, therefore, the follow-

ing resolution and amendment to Section 101(c¢) of

the 1932 act:

‘Be it resolved, that the American Bar Association

recomunends to the Congress that the Congress re-

define the terms “capital gain” and “capital loss” to

make clear whether such terms include gains and

losses resulting from the redemption at maturity of

capital assets, and that the Association’s Committee

on Federal Taxation is directed to urge the following

proposed amendment and, failing the acceptance of

the proposal as drafted, its equivalent in purpose,

upon the proper committee of the Congress :

(Proposed amendment. }

‘That Section 10:(c) (1) and (2) be amended to

real as follows: “(C) Definitions.—For the purposes

of this title—” (1) “Capital gain” means taxable gain

from the sale, erchanye or redemption of capital assets

consummated after December 31, 1921.

me

. ~—_ -

16

‘(2) “Capital loss” means taxable loss resulting -

from the sale, exchange, or redemption of capital

assets.’ ”

The above appears in the printed record of the reports of

the hearings of the Ways and Means Committee on the -

Revenue Act of 1934, and will also be found in the reports

of the American Bar Association, Volume 58, page 455, 1933.