Opposition Brief — Helvering v. Horst

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INDEX.

PAGE

Opinions below 1

Jurisdiction 2

Question presented 2

Statute involved 2

Statement of Case 2

Argument 3

Conclusion 8

Citations. >

CasEs:

_ Blair v. Commissioner, 300 U. 8. 5 5, 7,8

_ Burnet v. Leininger, 285 U. S. 136 7

; Clark v. Iowa City, 20 Wall. 583 4

Clokey v. Evansville & T. H. R. R. Co., 16 App. Div. 304 4

Helvering v. Clifford, No. 383,-this term 6,7

Koshkonong v. Burton, 104 U. S. 668 4

Lucas v. Earl, 281 U.S. 111 7

Matchette v. Helvering, 81 F. (2d) 73, certiorari de-

nied, 298 U. S. 677 6

Pratt v. Higginson, 230 Mass. 256 4

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

denied, 280 U. S. 599 6,7

Spooner v. Holmes, 102 Mass. 503 4

United States v. First National Bank of Birmingham,

74 F. (2d) 360 ;

Williston v. Commissioner, 2 Mass. A. T. B. 663 ............ 5,6

Statute.

Revenue Act of 1934, c. 277, 48 Stat. 680, Sec. 22

(U. S. C., Title 26, Sec. 22) 2

Text Book. |

Daniel.on Negotiable Instruments, 7th ed. (1933)

Vol. 3, p. 1919, See. 1873 4

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IN THE

Supreme Court of the United States

= # Octoser Term, 1939

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Guy T. Hetvexrnc, Commissioner

of Internal Revenue,

Petitioner, '

against

Paut R. G. Horst.

4

On Petition For a Writ of Certiorari to the

United States Circuit Court of Appeals

For the Second Circuit. -

BRIEF FOR THE RESPONDENT IN OPPOSITION.

Opinions Below.

Two opinions were delivered in the Board of Tax Ap-

peals. Three members of the Board joined in a written

dissent from the majority opinion. The majority opinion

(R. 24) and the minority opinion (R. 31) are — in

39 B. T. A. 757. X

The opinion of the Circuit Court of — (R. 46) is

reported in 107 F. (2d) 906.

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2

Jurisdiction.

The judgment of the Circuit Court of Appeals was en-

tered on December 2, 1939 (R. 49). The petition for

certiorari was filed March 2, 1940. The jurisdiction of this

Court is invoked bythe Commissioner under Section 240(a)

of the Judicial Code, as amended by the Act of February

13, 1925.

Question Presented.

The sole question presented is whether the taxpayer

who detached coupons from bonds owned by him and de-

livered the coupons to another as a gift prior to their ma-

turity is liable for income tax on the amounts thereafter

collected on the coupons by the donee.

Statute Involved.

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

‘*Sec. 22. Gross Income.

(a) General definition.— Gross Income’ includes

gains, profits, and income derived * °° from in-

terest, rent, dividends, securities, or the transaction

of any business carried on for gain or profit, or gains

or profits and income derived from any source what-

ever. * * *” (U.S.S., Title 26, Sec. 22.)

Statement of Case.

The facts were stipulated and the Board of Tax Appeals

adopted the stipulation (R. 39-43) as its findings of fact,

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

(HIE, UTA NATH ANON, PORNO PTE RONT EST REPT

3

The taxpayer is a citizen of the United States. He kept

his books and made his income tax returns on the cash

basis (R. 25).

Throughott 1934 and 1935 the taxpayer was the owner

of a number of coupon bonds (R. 25). ¢

On August 10, 1934, the taxpayer detached unmatured

coupons in the total amount of $25,182.50 and delivered

them to his son as a gift. In August, 1935, the taxpayer

made a similar gift to his son, involving unmatured coupons

-in the total amount of $37,032.50 (R. 25).

- When the coupons matured, the sdn cashed them and

included the proceeds-in his income tax returns (R. 25-26).

The Commissioner, claiming that the proceeds were in-

come to the taxpayer, added them to the taxable income of

the taxpayer and determined a deficiency against the ‘tax-

payer for each year (R. 26). ©

The Board of Tax Appeals, three members dissenting,

approved the Commissioner’s determinations (R. 24-31).

The taxpayer appealed tothe Circuit Court of Appeals

for the Second Circuit, which reversed the Board’s decision,

holding that the amounts collected on the coupons were not

income of the taxpayer (R. 46-48).

Argument.

I.

The Court below has held that the taxpayer is not

liable for income tax on the amounts collected by his son

on the coupons which the taxpayer, prior to their maturity,

detached and delivered to his son as a gift. This decision

;

4

is in accord with applicable decisions of this Court and

of the Circuit Courts of Appeals.

Negotiable interest coupons, when severed from the

bonds to which they were originally attached and trans-

ferred to a person other than the owner and holder of the

bonds, cease to be incidents of the bonds and become in

fact separate and independent instruments, distinct from

the bonds, and pass by delivery. They may be sold or

\ the subject of a gift inter vivos.

, Clark v. Iowa City, 20 Wall 583;

Koshkonong v: Burton, 104 U. S. 668;

Clokey v. Evansville € T. H»R. R. Co., 16 App.

Div. 304;

Spooner v. Holmes, 102 Mass. 503;

Pratt v. Higginson, 230 Mass. 256;

Daniel on Negotiable Instruments, (7th ed. (1933) .

Vol. 3%p. 1919, Sec. 1873).

This Court, in Clark v. Iowa City (20 Wall. 583), supra,

stated the rule as follows (p. 589):

‘‘These coupons, when severed from the bonds, are

negotiable and pass by delivery. They then cease to be

incidents of the bonds, and become in fact independent

claims; they do not lose their validity, if for any cause

the bonds are cancelled or paid before maturity; nor

their negotiable character; nor their ability to support

separate actions, and the amount for which they are

issued draws interest from its maturity. They then,

possess the essential attributes of commercial paper,

as has ce aap by this court in repeated instances.

ean when oo from the bonds to which

they were originally attached , are in legal effect equiv-

5

alent to separate bonds for the different instaliments

of interest. The like action may be brought upon each

of them, when they respectively become due, as upon

the bond itself when the principal matures; * * *.’’

When the taxpayer detached the unmatured coupons

and delivered them to his son as a gift, ‘‘the donee acquired

title to a severable part of each of the original instruments;

the part which carried the right to receive the payment in

question, free from the interference or assistance of the

donor, and without regard to what disposition was made of

the remainder of the instrument’’.

Williston v. Commissioner, 2 Mass. A. T. B. 663;

Cases, supra.

The amounts collected on the coupons by the donee were

the donee’s income, not the income of the donor, as it was

subject to the unfettered command of the donee, not sub-

ject to any power of control over it exercisable by the

donor; the source of it being severable parts of the orig-

inal instruments ca¥?ying the right to receive the interest

thereon for stated periods and irrevocably vested in the

donee.

Cf. United States v. First National Bank of

Birmingham (C. C. A. 5) 74 F. (2d) 360.

The income in question was not taxable to the taxpayer

because he did not control it, or receive it, or own it, or

have any beneficial interest therein. ‘‘The one who is to

receive the income as the owner of the beneficial interest is

to pay the tax’’.

Blair v. Commissioner, 300 U. S. 5.

a

6

The Court below followed the decision of the Circuit

Court of Appeals for the Seventh Circuit in Rosenwald v.

Commissioner, 33 F. (2d) 423, where the precise question

here presented was decided against the Commissioner.

There the taxpayer clipped negotiable interest coupons

from Third Liberty Loan bonds and delivered the coupons

to a donee prior to maturity. The donee collected the in-

terest due on the coupons at maturity. It was held that the

interest collected on the coupons by the donee was not tax-

able as income to the taxpager.

This Court decided that the question here presented is

one which it will not review when it denied the Commis-

sioner’s petition for a writ of certiorari in Maichette v.

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

- 298 U. S. 677, where it was held that a stockholder who

made an outright assignment of a dividend after the date

of declaration but before the date of payment was not tax-

able on the dividend.

The Massachusetts Appellate Tax Board, in Williston

v. Commissioner (2 Mass. A. T. B. 663), supra*, where the

facts were identical with those in this case, citing the

Board’s decision in this case, but refusing to be persuaded

by it, reached the same conclusion as the Court below a few

months before the decision below was handed down.

The alleged conflict of decision (Pet. 5) does not exist.

In Helvering v. Clifford, No. 383, this term, decided Febru-

1 The taxpayer’s petition for a writ of certiorari in this case was denied

(280 U. S. 599). The Commissioner, then, did not think enough of the point

that he is now urging to seek a review in this Court of the decision against him.

2 This case is now pending on appeal in the Supreme Judicial Court of

Massachusetts.

7

ary 26, 1940, this Court held that on the facts of the case

the taxpayer, who was the grantor of an irrevocable, short

term trust, remained, for the purposes of section 22(a) of

the Revenue Act of 1934, the owner of the trust corpus.

**In view of this result,’’ the Court said, ‘‘we need not ex-

amine the contention that the trust device falls within the

rule of Lucas v. Earl, 281 U. S. 111 and Burnet v. Leininger,

285 U. S. 136, relating to the assignment of future income;

***’ The Clifford decision, therefore, does not touch the

question here presented.

Nor has the Court below ignored the doctrine of Lucas

v. Earl (281 U. S. 11), supra, and Burnet v. Leininger (285

U. S. 136), supra. The Commissioner invoked the doctrine

of those cases in this Court in Blair v. Commissioner (300

U. S. 5), supra, only to learn that that doctrine was limited

in its application to the assignment of future personal

_ earnings and did not apply to the assignment by a father

to his children of beneficial interests in the income of a

testamentary trust. As this Court there pointed out (pp.

11-12):

‘These cases (Lucas v. Earl and Burnet v. Lein-

inger) are not in point. The tax here is not upon

earnings which are taxed to the one who earns them.”’

‘*In the instant case, the tax is upon income as to

which, in the general application of the revenue acts, .

the tax liability attaches to ownership.”’

The Commissioner cites a list of cases in which, he saya,

‘*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 re-

lieved of taxation on that income’’ (Pet. 6-7). Among the

cases cited is Rosenwald v. Commissioner (33 F. [2d] 423,

8 ‘

certiorari denied, 280 U. S. 599), supra, which does in fact

support. thé-€ommissioner’s contention. It is that very

case, however, which draws the distinction that takes this

case out. of the rule which the Commissioner seeks to apply

here.

The Commissioner says that the taxpayer “clearly

would be taxable on the amount of the bond coupons if he

had collected the interest payments before giving the pro-

ceeds to his son; or, indeed, if he had directed the gon to

collect the coupons as his agent and to keep the proceeds

as a gift’’ (Pet. 7).

This would undoubtedly be true, but the taxpayer did not

do either of these things any more than did the taxpayer in

Blair v. Commissioner (300 U. S. 5), supra, when he

assigned to his children beneficial interests in the income of

a testamentary trust.

Conclusion.

The decision below is correct. There is no conflict of

decision, but, on the contrary, there is unanimity of deci-

sion; and besides, this Court has already decided that the

question here presented is one which it will not review. It

follows, therefore, that the petition for a writ of certiorari

should be denied.

Respectfully submitted,

Harry H. Wicarns,

Attorney for Respondent,

Office and P. O. Address:

No. 15 Broad Street,

New York, N. Y.

March, 1940.

eo

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