Petition for Writ of Certiorari — Helvering v. Horst

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CITATIONS

Bing v. Bowers, 22 F. (2d) 450, affirmed, 26 F. (2d) 1017_.

OE eS 6 SS Fe

Deputy v. du Pont, decided January 8, 1940, No. 151_.---

Dickey v. Burnet, 56 F. (2d) 917, certiorari denied, 287

Griffiths v. Helvering, decided December 18, 1939, No. 49 _.

Helvering v. Clifford, No. 383, this term__-_-_-..-.-.------

Higgins v. Smith, decided January 8, 1940, No. 146 _.._--

SE i: Me SE Is I io Digi hsm tgsah hemeepi ane aeddasectsebes

Matchetie v. Helvering, 81 F. (2d) 73, certiorari denied, 298

Old Colony R. Co. v. Commissioner, 284 U. S. 552__.-_-_--

Porter v. United States, 52 F. (2d) 1056_........--------

SnD ©... Hs SP Gy We ReMi wel caccsccmmegiveccuce

Resenwald v. Commissioner, 33 F. (2d) 423, cerworari

I SU Wo a at id nee enews

Saenger v. Commissioner, 69 F. (2d) 631__.....--.-------

Ward v. Comn.issioner, 58 F. (2d) 757, certiorari denied,

4 Williston v. Commissioner of Corpora’ions and Tazation,

Nos. 90u3 and 9064, Supreme Judicial Court of Massa-

Wood v. Commissioner, 74 F. (2d) 78....---------------

Statutes:

Revenue Act of 1934, c. 277, 48 Stat. 680, Sec. 22 (U.S. C.,

I I I i sina itd cerns eens eeeaiee anaes

Miscellaneous:

2 Paul & ae Law of Federal Income Tazation (1934),

“2 213451—40 (1)

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i ee) aAweawors aan

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Inthe Supreme Court of the Wnited States

OcToBER TERM, 1939

No. —

Guy T. HELVERING, COMMISSIONER OF INTERNAL

REVENUE, PETITIONER

Vv.

Pavut R. G. Horst

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT

The Solicitor General, on behalf of Guy T. Hel-

vering, Commissioner of Internal Revenue, prays.

that a writ of certiorari issue to review the judg-

ment of the Cireuit Court of Appeals for the Sec-

ond Circuit:entered in the above-entitled cause on

December 2, 1939, reversing the decision of the

United States Board of Tax Appeals.

OPINIONS BELOW

The opinion of the Board of Tax Appeals (R.

24) is reported in 39 B. T. A. 757. The opinion of

the Circuit Court of Appeals (R. 46) is reported

in 107 F. (2d) 906.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on December 2, 1939 (R. 49). The

(1)

ei nk Ae ee te A 2 ae al A

2

jurisdiction of this Court is invoked under Section

240 (a) of the Judicial Code, as amended by the

Act of February 13, 1925.

QUESTION PRESENTED

Whether the owner of coupon bonds should in-

clude in his gross income the amount of coupons

which he detached and gave to his son several

months prior to maturity.

STATUTE INVOLVED

Revenue Act of 1934, ¢. 277, 48 Stat. 680:

Sec. 22. Gross INCOME.

(a) General definition —‘Gross income’’

includes gains, profits, and income derived

* * * from interest, rent, dividends, se-

curities, or the transaction of any business

carried on for gain or profit, or gains or

profits and income derived from any source

whatever. * * * [U. 8. C., Title 26,

Sec. 22].

STALEMENT

The stipulation of facts (R. 39-43) was adopted

by the Board of Tax Appeals as its findings of fact ;

they are substantially as follows (R. 25-26) :

Taxpayer is and was during the years 1934 and.

1935 a citizen of the United States, temporarily

residing in Paris, France (R. 25).

During the years 1934 and 1935 taxpayer kept .

his books and made his income-tax returns on the

cash receipts and disbursements basis (R. 25).

3

Throughout the year 1934 taxpayer owned for-

eign, state, municipal, and industrial coupon bonds.

On August 10, 1934, he detached, prior to their

maturity, negotiable interest coupons and trans-

ferred them by manual delivery to his son, Robert

P. K. Horst, as a gift. They had an aggregate face

value of $25,182.50. (R. 25.) All of the coupons

matured during the year 1934; and in that year the

son coilected the total amount due and reported it in

his income-tax return for that year (R. 25).

Throughout the year 1935 taxpayer owned for-

eign, state, municipal, and industrial coupon

bonds. In August 1935 he detached, prior to their

maturity, negotiable interest coupons and trans-

ferred them by manual delivery to his son as a

gift. They had an aggregate face value of $37,-

032.50. (R. 25.) ‘All of the coupons matured dur-

ing the year 1935, and in that year the son collected

the amount of $25,495 and reported it in his

income-tax return for that year (R. 26).

The taxpayer did not report in his income-tax

returns for the years 1934 and 1935 any part of the

amount represented by the interest coupons deliv-

ered as a gift to his son in those years (R. 26). The

Commissioner in determining the deficiency for

the year 1934 added to the taxable income of

the taxpayer the amount of $25,182.50 as the

value of the coupons transferred to his son in that

year, and in determining the deficiency for the

year 1935 the Commissioner added to the taxable

a

BAA IOS tol TIER TT ty é

4

income of the taxpayer the amount of $22,360 as the

aggregate net worth of all of the coupons trans-

ferred by taxpayer to his son in that year (R. 26).

The deficiency in income tax for the year 1934 re-

sulted solely from the addition to income of the

for the year 1935 resulted from the addition to

income of the value of the transferred coupons plus

certain other minor adjustments not in controversy

here (R. 26).

The Board of Tax Appeals upheld the Commis-

sioner’s determination, with three members dis-

senting, and the taxpayer appealed to the Circuit

Court of Appeals, which reversed the Board’s deci-

sion and held that the amount of the coupons was

not income of the taxpayer.

SPECIFICATION OF ERRORS TO BE URGED

The Circuit Court of Appeals erred:

1. In holding that the owner of bonds need not

include the amount of certain coupons in his gross

income where he detached and gave the coupons to

his son several months prior to maturity. |

2. In failing to hold that the owner of bonds

should include the amount of certain coupons in his

gross income although he detached and gave the

coupons to his son several months prior to maturity.

3. In reversing the decision of the Board of Tax

Appeals.

4)

REASONS FOR GRANTING THE WRIT

1. The decision of the court below conflicts in

principle with decisions of this Court and of the

circuit courts of appeals.

In Helvering v. Clifford, No. 383, this Term,

decided February 26, 1940, this Court held the

grantor of an irrevocable but short term trust

taxable upon the income payable to the beneficiary.

The issue, the Court said, was simply “‘whether the

grantor after the trust has been established may

still be treated, under this statutory scheme, as the

owner of the corpus”’ (p. 3). The short period

before reversion, and the retention of cgntrol over

the principal, fortified by the familiay relations

between settlor and beneficiary, provided the solu-

tion to that issue. The result in the present case

should fellow a fortiori from the Clifford decision.

For here the taxpayer has surrendered simply his

claim to future income and has retained intact the

entire bundle of rights which constitute his owner-

ship of the underlying property.*

The decision below is not only in conflict with

the Clifford case, but the court below has ignored

the settled rule relating to the assignor’s taxability

upon assigned future income. Lucas v. Eari, 281

U. S. 111, in which the rule was first established,

1 There can be no question that the coupons represented

interest, divorced from the principal. Old Colony R. Co. v.

Commissioner, 284 U. S. 552, 561; see Deputy v. duPont,

No. 151, this Term, decided January 8, 1940.

dealt, it is true, with the income from personal

services. But the basis of the decision is the broad

principle that tax liability remains the same

whether the income is assigned before or after its

receipt ; in this doctrine there is no room for dis-

tinction according as the future income is derived

from the taxpayer’s services or his ownership.

Thus, in Burnet v. Leininger, 285 U. S. 136, the

assignor was held taxable when the income, derived

from a laundry partnership, was produced, by a

combination of property and personal services.

A‘ul in Reinecke v. Smith, 289 U. 8. 172, 177, the

Court noted that ‘‘This court has repeatedly said

that such an assignment, where the assignor con-

tinued ‘o own the corpus, does not immunize him

from taxation upon the income.”’ See also Saen-

ger v. Commissioner, 69 F. (2d) 631, 632 (C. C. A.

5th). With minor exceptions,’ the circuit courts

of appeals have consistently held that unless the

taxpayer assigns the corpus which produces the

income, he cannot by assignment of future income

be relieved of taxation on that income. Bing v.

2 In Rosenwald v. Commissioner, 33 F. (2d) 423, certiorari

denied, 280 U. S. 599, the amount of income in dispute was

about $830,000, of which about $815,000 represented assigned

income from rents, stocks, and bonds, while $15,000 rep-

resented income from bond coupons assigned by the owner

of the bonds. The court held the owner taxable on all

except the coupons. The Government did not apply for a

writ of certiorari in regard to the assigned coupons because

of the relatively small amount of tax involved. Cf. Mat-

chette v. Helvering, 81 F. (2d) 73 (C. C. A. 2d), certiorari

denied, 298 U. S. 677.

7

Bowers, 22 F. (2d) 450, 454 (S. D. N. Y.) affirmed,

26 F. (2d) 1017 (C. C. A. 24); Rosenwald v. Com-

missioner, 33 F. (2d) 423, 426 (C. C. A. 7th), cer-

tiorari denied, 280 U. S. 599; Porter v. United

States, 52 F. (2d) 1056 (C. Cls.); Ward v. Com-

missioner, 58 F. (2d) 757 (C. C. A. 9th), certiorari

denied, 287 U. S. 656; Dickey v. Burnet, 56 F.

(2d) 917, 921 (C. C. A. 8th), certiorari denied, 287

U. 8. 606; Wood v. Commissioner, 74 F. (2d) 78

(C. C. A. 6th). ;

The substance of the transaction is, in truth, sim-

ply a gift by respondent of his income to his son.

He clearly would be taxable on the amount of the

bond coupons if he had collected the interest pay-

ments before piving the proceeds to his son; or, in-

deed, if he had directed the son to collect the

a a a tenet ony

coupons as his agent and to keep the proceeds. as a ;

gift.‘ These technical variations upon the transac-

tion would not alter its practical substance, and re-

spondent is taxable in this case equally with its

*See also 2 Paul & Mertens, Law of Federal Income

Taxation (1934), Sec. 15.03, p. 25. A case substantially

similar to this is now pending decision in the Supreme

Judicial Court of Massachusetts. Williston v. Commis-

sioner of Corporations and Taxation, Nos. 9663-9064.

* Indeed, under ordinary standards, the respondent made

a gift to his son which was largely past rather than future

income. The coupons were given one to four months in

advance of maturity (R. 5, 16, 40,42). Although respond-

ent kept his books upon a cash basis, the commercial truth

of the matter is that the accrued interest was already his;

he could have discounted the coufftn or, had he sold the

bond, his receipts would have included the accrued interest.

8

variations. See Griffiths v. Helvering, No. 49, this

Term, decided December 18, 1939; Higgins v.

Smith, No. 146, this Term, decided January 8, 1940.

-2. The question is one of considerable impor-

” tance. The substantial conflict in decisions will in-

evitably result in confusion in the lower covirts,

And should the result below become accepted, tax-

payers have obtained a ready means by which to

escape the surtax rates without surrendering con-

trol of their propety.*

CONCLUSION

It is therefore respectfully submitted that this

petition for a writ of certiorari should be granted.

FRANCIS BIDDLE,

Solicitor General.

Marcu 1940.

5 Tax services have already pointed out that the decision

of the court below may be used to advantage by taxpayers.

1939 C. C. H., Vol. 1, pp. 461, 463; Alexander Tax News

Letter, Vol. IV, No. 19, November 24, 1939. While it is

true that there would be a gift tax on gifts of bond coupons

amounting to more than $4,000, the gift tax would not reach

gifts of less than that amount, and the donee in practically

all cases would be in a lower surtax bracket than the donor.

G. S. GOVERNMENT PRINTING OFFICE: 1940