Petition for Writ of Certiorari — Garrett v. District of Columbia

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. FILED *

FEB 11 1947

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IN THE

Supreme Court of the Gnited States

Oocroser Term, 1946.

No. 1014

Erne. S. Garrett anp Grorce A. Garrett, Petitioners,

v.

District or Cotumsi, Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

COURT OF APPEALS FOR THE DISTRICT OF

COLUMBIA, AND BRIEF IN SUPPORT THEREOF.

J Ewine Laporte,

1069 National Press Building,

Washington 4, D. C.,

Counsel for Petitioners.

OF BYRON 5. » WASHINGTON, LU). ©.

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INDEX.

Page

SUBJECT INDEX.

yy. PERSP TTT Crt Perri Ty PlCTea TTT TTT eT eee 1

Opinion of the Court Below ...................55. 1

ee ke rk baka cans ceWkuceetad 2

i i ce dic cvtienccniesessdanna 2

. 2 9 PPT erer Tier rrr 3

ORs SECs UALwh eure enn dees s canceans 4

Qusation Presemted . wns cccccscccccnvecsscccccces 4

Reasons for Allowance of the Writ .............. 5

EN 2s cadccdhAassendethnse bocenesvuanau’ 7

aes Lc der ewdhe shea bhekeueee4uedas aeteceheke 9

MpeniMention Of TRrtOh onwicc ssc ccccccesacsvenceses 9

ES: bn. GRABER RGR Kn cide cvncdues ésnexkehenees 10

TABLE OF CASES.

Colgate v. Harvey, 296 U. S. 404, 56 S. Ct. 252, 80 L.

re & FRe F FAR rrr Tree. 15

Davis v. United States, 87 Fed. 2d 323 .............. 11

Heiner v. Donnan, 285 U. S. 312, 52 S. Ct. 358, 76 L. Ed.

Sees Si oc Kick kh ein ee edhe ceeats 2, 5, 6, 7, 10

Helvering v. New York Trust Co., 292 U. S. 455, 54 S.

oe & 8 5 Frere rere. 6, 11, 13

Helvering v. William Flaccus Oak Leather Co., 313

U. S. 247, 61 S. Ct. 878, 85 L. Ed. 1310 .......... 14

Louisville Gas & Electric Co. v. Coleman, 277 U. S. 32,

Se. Ge, Se Se Bs Bs SOO has Ga bas Kae nw ences 5, 10, 15

Royster Guano Co. v. Virginia, 253 U. S. 412, 40 S. Ct.

fe SO RR rrr reer 15

Smith v. Cahoon, 283 U. S. 553, 51 S. Ct. 582, 75 L. Ed.

PE Sisk Awa REAM A AE OS Coane A eA CURES F045 heehee 15

TABLE OF STATUTES.

District of Columbia Code 1940, sec. 47-2404 (50 Stat.

673, 52 Stat. 371; ibid., sec. 47-1531 (53 Stat.1101).. 4

District of Columbia Revenue Act of 1939, sec. 47-1506

D. C. Code 1940 (sec. 6, e. 367, title II, 53 Stat.

RT AAO teak ag us Oc ke Rg nee KaAe Shs 8 2, 3, 9, 14

Internal Rev enue Code, sec. 117 (53 Stat. 51) ........ 5, 14

Cn ae iawn bane wakes can aa’ 4

bE ro. <0 Ng RE NOREEN

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. SON EY rt ME

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IN THE

Supreme Court of the Anited States

Octoser Term, 1946.

No, ~————.

Erne. S. Gagrert anp Grorce A. Garrett, Petitioners,

v.

District or CoLumsia, Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

COURT OF APPEALS FOR THE DISTRICT OF

COLUMBIA.

To the Honorable, the Chief Justice and the

Associate Justices:

Petitioners, Ethel S. Garrett and George A. Garrett, re-

spectfully pray that a writ of certiorari be issued to review

the judgment of the United States Court of Appeals for the

District of Columbia entered in this cause December 23,

1946, at its number 9275 and 9276, affirming decisions of the

Board of Tax Appeals for the District of Columbia (R. 13).

Petition for rehearing was denied January 17, 1947. (R.

14.) The opinion of the Court of Appeals appears in the

record herein (R. 11-12), and is not yet reported.

noma

2

I. The Matter Involved.

This case involves a peculiar and unique provision of the

income tax law enacted by Congress for the District of Co-

lumbia. It is an enactment which taxes capital gains on

the sale of property which has been held two years or less,

yet imposes no tax whatever if the property has been held

for longer than two years.

No other income tax law has a provision even remotely

comparable in operation and effect. Many do impose a less

burdensome tax if the property sold has been held for a

prescribea period, in order to promote realization of gain

and increase revenue. The unique feature of the enact-

ment here in question is that it fails to impose any tax at

all on gains realized after the prescribed holding period,

yet allows full deduction within the period from all income

otherwise taxable of losses from sales. The result is that

usually losses are realized within the period and gains are

not, thus working injury to the revenue both directly and

indirectly, with no compensating advantage whatever.

The contention is that this enactment is irrational, that

it works an arbitrary, unreasonable and capricious dis-

crimination, without material difference, and that it is,

therefore, invalid within the rule of Heimer v. Donnan,

infra.

Statement of the case.

Petitioners, individuals trading on their own account,

made during 1944 gains from sales of stocks and bonds which

they had held for less than two years. They reported the

transactions in their income tax returns to the District of

Columbia, but did not include the gains in taxable income

on the ground, set forth in letters attached to the returns,

that the sales were of capital assets not subject to tax by

sec. 6(a) of the statute, 53 Stat. 1091, sec. 47-1506(a) D. C.

Code 1940, and that the provision of said section which

purports to limit exclusion from tax to such property only

if held for more than two years in invalid. (R. 4-5, 9.)

3

Petitioners are residents of the District of Columbia, and

the sales in question were made on the New York Stock

Exchange in the State of New York. In some instances

orders therefor were given and securities delivered at the

brokers’ offices in the District of Columbia, and thence

transmitted to New York for execution; in other instances

orders were given and securities delivered at the brokers’

offices in New York. (R. 4-5, 9.)

Additional income tax was assessed and collected from

petitioners upon said gains by the District of Columbia;

petitioners appealed to the Board of Tax Appeals for the

District of Columbia, which affirmed the assessments, and

review was then taken to the Court of Appeals for the Dis-

trict of Columbia, which likewise affirmed. (R. 5, 7-8, 9, 13.)

The statute involved.

The statute involved reads:

‘‘Gaims or Losses from Sale of Assets.—

‘*(a) No gain or loss from the sale or exchange of

a capital asset shall be recognized in the computation

of net income under this chapter. For the purposes of

this chapter, ‘capital assets’ means property held by

the taxpayer for more than two years (whether or not

connected with his trade or business) but does not in-

clude stock in trade of the taxpayer or other property

of a kind which would properly be included in the in-

ventory of a taxpayer if on hand at the close of the

taxable year, or property held by the taxpayer pri-

marily for sale to customers in the ordinary course of

his trade or business.

‘*(b) Gains or losses from the sale or exchange of

property other than a capital asset shall be treated in

the same manner as other income or deductible losses,

and the basis for computing such gain or loss shall be

the cost of such property or, if acquired by some means

other than purchase, the fair market value thereof at

the date of acquisition.”’

a

Sec. 6, District of Columbia Revenue Act of 1939,

c. 367, title II (53 Stat. 1091), sec. 47-1506, D. C.

Code 1940. (Italics added.)

4

It is the language of the statute italicised above, namely

“‘for more than two years’’, which petitioners contend is an

invalid and a separable enactment.

II. Jurisdiction.

Review of this case is invoked under sec. 240(a) of the

Judicial Code as amended, and under sec. 4(a) of the Act

of Congress of Aug. 17, 1937, c. 690, title IX (50 Stat. 673),

as added by Act of May 16, 1938, c. 223, sec. 8 (52 Stat. 371),

sec. 47-2404 D. C. Code 1940, and the Act of July 26, 1939, c.

367, title II, sec. 31 (53 Stat. 1101), sec. 47-1531 D. C. Code

1940.

The provisions cited from the District of Columbia Code

specifically authorize certiorari in cases such as this.

III. Question Presented.

May Congress, enacting an income tax to provide reve-

nue for the District of Columbia, validly impose no tax at

all upon gains from sales of property (other than stock in

trade, inventory-able property, and property held for sale

to customers) if held by the seller for more than two years,

but impose tax thereon notwithstanding if held by the seller

for a shorter time?

Otherwise stated: May an income tax for the District of |

Columbia be validly imposed upon the sole basis of the pe-

riod of time during which property is held, excluding from

tax property held for a longer period of time? For ex-

ample, A and B each acquire the same number of shares of

stock of the same corporation at identical cost, but A ac-

quires his one day earlier than B. Two years after B ac- }

quired his stock, both sell at the same price and realize iden-

tical gains. B’s gain is taxed, A’s gain is not. The prop-

erty of each is the same, the nature of the tenure of each

5

is the same, the gain of each is identical in amount, each

has sold (taxable event) at the same time; only the period

of time the property was held differs. Is the tax validly

imposed upon that single circumstance?

IV. Reasons for Allowance of the Writ.

The statute involved uses a holding period as the basis

to determine whether there shall be any tax or none. In all

other income tax legislation, Congress has used that distince-

tion merely to determine what the proportion or amount of

the tax shall be. Cf. Internal Revenue Code, sec. 117, 53

Stat. 51. The federal revenue acts from 1921 to 1932, in-

clusive, defined capital assets in terms superiicially similar

to the definition thereof in the District of Columbia statute,

in that they included a two year holding provision as does

it. The effect, however, in those acts was radically differ-

ent, for by them all gains were taxed, the period held having

relation only to the size of the tax imposed.

This statute reaches its result by way of definition of the

term ‘‘capital assets’’, after first providing that gains from

their sale shall not be taxed. The consequence of the defini-

tion is in effect to say that a capital asset is not a capital

asset until it is two years old. This is contrary to fact and

arbitrary, because neither the nature of the tenure or the

character of the property is affected by the passage of the

time prescribed. This passage of time, which is the sole

basis of the distinction attempted to be drawn, has no logi-

eal or relevant effect to cause the drastic consequence,

namely tax vel non.

It is contended that this works an unreasonable discrimi-

nation, in violation of the Fifth Amendment of the Consti-

tution, between taxpayers similarly circumstanced in every

material particular, without difference of substance, and

that the distinction drawn is contrary to fact. He-ner v.

Donnan, 285 U. 8. 312, 52 S. Ct. 358, 76 L. Ed. 772; Louis-

ville Gas & Electric Co. v. Coleman, 277 U. S. 32, 37-39, 48

S. Ct. 423, 72 L. Ed. 770.

HENS OITA her |

6

It is further contended that this statutory provision is not

only not comparable to statutes of limitations, as suggested

by the Court of Appeals (R. 12), but that any comparison

therewith serves to accentuate the material difference. Such

statutes are for repose against stale claims rendered diffi-

cult of proof or defense by passage of time. Hence with re-

spect to statutes of limitations, as to the defense of laches,

it is time which has the direct, causative effect to alter cir-

cumstances; whereas time in the statute here involved has

no effect at all to change into a capital asset property which

was something else earlier.

The Court of Appeals suggests that the purpose of the

statute is to distinguish between investment and specula-

tion. This Court in Helvering v. New York Trust Co., 292

_ U.S. 455, 466, 54 S. Ct. 806, 809, 78 L. Ed. 1361, shows that

this is a misapprehension; that, on the contrary, a holding

period requirement in such cases was originally used by

Congress in order to promote realization of gains and

thereby to increase revenue. That purpose, however, fails

altogether in the case of a statute such as here in question,

because therein Congress failed to impose any tax to har-

vest the results of the holding period device. So far as its

opinion shows (R. 11-12) this radical difference between

federal income tax laws and the income tax law here in-

volved was overlooked by the Court of Appeals.

The statute here involved, if the view of the Court of Ap-

peals is correct, would treat as speculative even government

bonds until they had been held longer than two years; it

would treat as speculative involuntary sales of property

acquired in actual fact without thought other than invest-

ment by decedents’ estates, by other fiduciaries, or by in-

solvency, and in many such circumstances.

Even if it be considered that there may be some adven-

titious tendency of this two year holding provision to dis-

tinguish investment from speculation, the undiscriminating

force of the statute is as objectionable as was the statutory

provision held invalid by this Court in Heiner v. Donnan,

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7

supra. Just as under the statute there held invalid, it might

well be the destiny of a transferror of property, made with-

out thought of death, to die before two years had elapsed;

so under the statute in this case it might as well be the des-

tiny of a holder of property, acquired without thought of

speculation, to be compelled to part therewith before two

years had elapsed.

CONCLUSION.

It is believed that the Court of Appeals has herein de-

cided a question of substance relating to the application of

the Constitution of the United States to an Act of Congress,

which is one of material consequence to the revenues of the

District of Columbia and to the taxpayers thereof, and that

in so doing the court has not given proper effect to opinions

of this Court, in particular to its opinion in Heimer v. Don-

nan, supra,

Wherefore it is respectfully urged that the writ be

granted.

Ewrne Laporte,

1069 National Press Building,

Washington 4, D. C.,

Counsel for Petitioners.

9

IN THE

Supreme Court of the Gnited States

Ocroser Term, 1946.

No, ————.

Eruet 8. Garrett anp Greorce A. Garrett, Petitioners,

v.

District or CoLumBis, Respondent.

BRIEF IN SUPPORT OF PETITION FOR CERTIORARI.

The Opinion of the Court of Appeals is not yet reported

but appears in the record (R. 11-12). The Opinion of the

Board of Tax Appeals is in the record (R. 5-7).

Statement of grounds of jurisdiction, statement of the

case, and statement of the question involved and of reasons

urged for allowance of the writ, are set forth in the petition

therefor.

Specification of Error.

It was error for the Court of Appeals to hold reasonable

and, therefore, valid the provision of sec. 6(a) of the income

tax law of the District of Columbia (53 Stat. 1091, sec.

47-1506(a) D. C. Code 1940), which, in defining capital as-

sets, requires that the same be held for more than two years.

10

Argument.

I.

The requirement that property be held for more than two

years, in order to be recognized as a capital asset and as

such immune from tax on sale, is, it is contended, arbitrary,

unreasonable and contrary to fact, and therefore invalid un-

der the Fifth Amendment of the Constitution as applied by

this Court in numerous decisions, including particularly

Heiner v. Donnan, 285 U. S. 312, 52 S. Ct. 358, 76 L. Ed.

772; ef. Louisville Gas & Electric Co. v. Coleman, 277 U.S.

32, 37-39, 48 S. Ct. 423, 72 L. Ed. 770.

The case first cited above holds that a statutory irrebut-

table presumption that a gift made within two years of

death is in contemplation thereof, and subject to federal

estate tax in consequence, is invalid as unreasonable, con-

sidering that the fact may well be otherwise. It appears to

be considered that since one may not be able to control the

hour of his death, he may happen to die within two vears

of such gift, although death was in fact in no sense the

activating motive of the transfer sought to be taxed.

Equally is it true that, under the form of the statute in the

present case, the acquirer of capital assets may be com-

pelled to part therewith through circumstances beyond his

control within two years of acquisition.

Louisville Gas & Electric Co. v. Coleman, supra, appears

particularly apt to the statutory requirement in this case,

although there a statute of a state was in question. The

decision makes plain that a distinction or discrimination

good for one purpose may be bad for another; that the pe-

riod of time that an obligation runs might be used to pro-

portion the amount of tax upon the obligation, but that

such a time factor is not of sufficient relevance or material-

ity to support the radical difference between imposing some

tax or none at all.

The Court of Appeals in its opinion herein says: ‘‘The

apparent purpose of Congress was to distinguish, for tax

purposes, between investment and speculation’’, and quotes

11

similar language from Davis v. United States, 87 Fed. 2d

323, 325, C. C. A. 2d. (R. 12.) The language quoted and re-

lied upon from that case appears to be obiter dicta, because

the question therein was as to allowance of a tax dedaction

which is a matter of grace, and to which no one can be en-

titled as of right in a Constitutional sense, since Congress

might impose an income tax if it saw fit without deduction

at all. Moreover, that case concerned the federal income

tax which, as set forth in the petition herewith, does not

attach the consequence of no tax at all to the holding period

requirement it makes, as does the statute presently involved,

but uses its requirement merely to affect the amount or pro-

portion of the tax imposed.

However, even if apt to this case, the statement of the

court in Davis v. United States, and the echoing statement

of the Court of Appeals above quoted, appear erroneous and

to rest upon misapprehension. It is plain that Congress did

not originally adopt a holding period with respect to capi-

tal gains with the thought of attempting thereby to distin-

guish between investment and speculation. The purpose

was otherwise. It was in order to increase the productiv-

ity of the income tax law. Prior to 1921 income tax stat-

utes made no distinction with respect to gain from sales of

capital assets and income generally. By 1920 it was found

that the attempt theretofore to tax capital gains at full

rates in all circumstances resulted in injury to the revenue

in two ways: first, gains were not realized by sale so there

was nothing to tax, and secondly, losses were taken in order

to offset them against other income, so taxes were reduced.

Accordingly it was that with the Revenue Act of 1921, and

ever since, Congress has offered a more favorable rate if

the property sold had been retained for an appreciable time.

This Court, in Helvering v. New York Trust Co., 292

U. S. 455, 466, 54 S. Ct. 806, 809, 78 L. Ed, 1361, reviews the

history of the provision and quotes at length from a report

of the Ways and Means Committee made at the time of the

original adoption of the distinction as to capital assets, ir

the Revenue Act of 1921, a portion of which reads:

_ ~~

12

‘*The sale of * * * capital assets is now seriously re-

tarded 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 profit taking and

consequent increase of the tax revenue, have been

blocked by this feature of the present law. * * * It is be-

lieved that the passage of this provision’’ (imposing a

lower rate if property is held for a prescribed period)

‘‘would materially increase the revenue, not only be-

cause it would stimulate profit taking transactions but

because the limitation of 15 per cent is also applied to

capital losses. Under present conditions there are

likely to be more losses than gains.’’

It is common knowledge that few investments can be held

with confidence for any extended period of time, that no

investment may be depended upon to maintain its charac-

ter as such without constant attention by the holder and

danger of change for the worse. It is equally well known

that normally also interest or dividend provisions—a fea-

ture of investments—require payments for periods much

shorter than two years.

Fiduciaries, forbidden to speculate, are not infrequently

faced with the necessity of disposing of investments which

they may have held for only a short time, because they are

not adapted to the terms of their trusts, or because market

changes have rendered them imprudent. The tax under this

statute applies to disposal of holdings which have been un-

deniably acquired for investment purposes, whether caused

by settlement of estates, by fiduciary management, by in-

solvency, by unavoidable cash need of the owner, and many

other involuntary causes.

The length of time that property is retained appears to

have little if any force to indicate whether it was originally

acquired for investment or for speculation. Investments

may be, and they often are, changed at short intervals, from

a variety of causes; speculations may be, and they often

are, adhered to through many years of hope deferred. It is

|

d

13

the character of the property or enterprise itself, its dem-

onstrated earning power or income yield, or the reverse,

its present worth or potential value—it is these and other

factors which tend to show the underlying purpose or mo-

tive of acquisition.

Since Congress copied the provision with respect to hold-

ing capital assets in the District of Columbia income tax law

from the federal income tax acts, in spite of the totally

different tax effect of its use, there seems no possible sug-

gestion of a policy to make some new and original distinc-

tion thereby. If Congress had thereby intended some police

regulation, at the expense of the income tax revenue of the

District, with respect to speculation, it could easily have

said so and adopted some test germane to the purpose.

The question arises, then, why did Congress introduce a

holding period with respect to sale of capital assets in the

first place, when it sought to increase revenue yield by dif-

ferent treatment of such sales in the Revenue Act of 1921?

Why, in other words, did it make a distinction between sales

of such assets when held for a longer or shorter period?

The quotation from the Opinion of this Court in Helvering

v. New York Trust Company, above, shows that the basic

purpose was solely to increase the revenue yield, and that a

subordinate rationale was the fact that such gains ordinar-

ily represent increment over a period of time. May it not

be that a holding period, with a lower rate after it, ¥ s used

because it was considered that for a relatively short period

after acquisition sales made would be those in the main

which were unavoidable, hence that revenue would not suf-

fer but benefit by taxing at full rates, but that, in order to

obtain realization of gains substantial in amount and which

could be avoided, some inducement by a more favorable rate

must be extended?

Such consideration as above suggested would apply, with

effect and with marked benefit to the revenue yield, in an en-

actment which did in fact tax all gains at some rate, but it

is inept, destructive of revenue, without reason and dis-

criminatory without basis, when carried, as it is, into an en-

Te LL OELLIII LOCI YS So

eS 2g

actment which fails to impose any tax at all to reap the re-

sults of the inducement, such as the statute here involved.

Thus there is left no rational basis for the discrimination

of the District of Columbia act, and the consequence is an

invalid discrimination against taxpayers such as petition-

ers.

14

I.

‘Since the Court of Appeals in its opinion (R. 11-12) goes

to the merits of petitioners’ contention, it may be unneces-

sary here to refer to the basis of the decision of the Board

of Tax Appeals as disclosed by its opinion (R. 5-7). Briefly,

the Board’s theory was that petitioners could not benefit

even if their contention on the merits were correct, on the

theory that even if sec. 6(a) of the Act were stricken down,

they would still be taxable on their gains by sec. 6(b) and

other provisions of the statute. In addition to the fact that

the Court of Appeals reached the question of constitution-

ality, and hence can have found no merit to that theory of

the Board, it may be enough for present purposes to list

briefly some of the reasons why it is untenable:

1. Petitioners do not contend that sec. 6(a) is invalid in

toto, only that the two year holding provision thereof is in-

valid, and that such provision is separable, namely ‘‘for

more than two years’’. If that provision only be stricken

down, there would then be no tax under sec. 6(a). The defi-

nition of capital assets would then approximate that of

sec. 117 of the Internal Revenue Code.

2. If the two year holding provision is deemed insepar-

able from the rest of the definition of sec. 6(a) and that sub-

section must fall in its entirety, still there would be no tax

here under sec. 6(b), which so far as material here reads:

‘‘Gains * * * from the sale or exchange of property other

than a capital asset’’ (italics added) are to be taxed, leaving

the term ‘‘capital asset’’ without statutory definition. Since

words in taxing acts are to be taken in their ordinary mean-

ings (Helvering v. William Flaccus Oak Leather Co., 313

15

U. S. 247, 249, 61 S. Ct. 878, 880, 85 L. Ed. 1310), and since

securities are in fact manifestly capital assets, no tax would

be imposed here.

3. If the provision here challenged is invalid, the remedy

is to remit the tax at suit of the taxpayer discriminated

against. The authorities are numerous and unanimous that

in such case the tax, not the exemption, falls: Louisville

Gas & Electric Co. v. Coleman, supra; Smith v. Cahoon, 283

U. S. 553, 51 S. Ct. 582, 75 L. Ed. 1264; Royster Guano Co.

v. Virginia, 253 U. S. 412, 40 S. Ct. 560, 64 L. Ed. 989;

Colgate v. Harvey, 296 U.S. 404, 56 S. Ct. 252, 80 L. Ed. 299,

102 A. L. R. 54.

Conclusion.

Wherefore it is respectfully submitted that the petition

for writ of certiorari herein should be granted.

Ewine Laporte,

1069 National Press Building,

Washington 4, D. C.,

Counsel for Petitioners.