Petition for a Writ of Certiorari — Weil v. United States

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SUPREME COURT OF THE UNITED) SPATHS."0%: sv

OCTOBER TERM, 1940 : Y

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No. 916

FRANK L. WEIL, WILLIAM E. RUSSELL anp RAY-

MOND J. SCULLY, as Trusrezs Unper a DecuaraTion

oF Trust Datep Aprit 71TH, 1936 anp a Puan or Reorcant-

ZATION OF Sertrs C-2 Mortreace Investments APPROVED

BY AN OrpER OF THE SUPREME Court oF THE StaTE or NEw

York ENterep on THE 16TH Day or January, 1936,

Petitioners,

vs.

THE UNITED STATES OF AMERICA.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT AND BRIEF IN SUP-

PORT THEREOF.

Hersert Burton Bran,

Wuumm E. Russew, Jr.,

THEopoRE TANNENWALD,

Auten Rocow, :

Of Counsel.

INDEX.

Susseot Inpex.

Petition for writ of certiorari ....................

Summary statement of matter involved........

Oueien HON se ee et eS

Basis of decision of the court below............

aes OF Jur ees ee eS es,

Tne HRAGIOR PIONONUEE 6 oo es ke

Reasons relied on for the allowance of the

WEE ih i ewe eRe eae tare we

Brief in support of petition: ... 20.065. 6 ois

Point I—This Court should take jurisdiction to

determine an important question of Fed-

eral law heretofore undecided by it..........

Point Il—The decision of the Circuit Court of

Appeals for the Second Circuit is in direct

conflict with that of the Ninth Cireuit........

A. The conflict regarding the applicability

OF bate 1a she ai ee os i

B. The conflict regarding Article 35 (h) of

Treasury Regulations 71 ............

C. The conflict regarding Article 35 (r) of

Treasury Regulations 71............

Point I1I—The Cireuit Court of Appeals for the

Second Circuit has decided a Federal question

in conflict with applicable decisions of this

Court concerning the controlling effect of

State 1a eS ee ee,

Point I[V—The transfers herein were not tax-

able under the Federal law.................

A. The transfers fit precisely within the

exemption afforded by Article 35 (h).

B. The transfers were wholly by operation

of law and consequently exempt from

taxation pursuant to Article 35 weet

Oonelusiog i. OA a

Appendix. {5.065.050 STS Ey Roe eet

is ae ee ee

16

20

ii INDEX

Cases CITED.

Page

Blair v. Commissioner, 300 U.S.5............... 9, 18, 20

Bowers v. Lawyers Mortgage Co., 285 U. 8. 182..... 27

Burnet v. Harmel, 287 U.S. 103............ 7, 9, 11, 14, 17

Cliffs Corporation v. United States, 103 F. (2d) 77,

Cort: dem: 60 Gen; 0 Sho ci a eS 19

Commissioner v. Schumacher Wall Bd. Corp., 9 Cir.

OB. “CR ee ee as eee ea 27

Dayton & Michigan R. R. v. Commissioner, 112 F.

SR RSE RR Cgc eee PO 18, 20

Electric Bond and Share Company v. State, 249 App.

Div. 371, affirmed 274 N. ¥. G25..............:. 7, 9, 16 |

Erie R. Co. v. Tompkins, 304 U.S. 64.............. 20 |

Founders General Corp. v. Hoey .................. 7,11 |

Freuler v. Helvering, 291 U.S. 35................. 9,18 |

Helvering v. Tex-Pen Oil Co., 300 U. S. 481........ 27 :

Koppers Coal & Transportation Company v. U. 8., |

20T W UGG) SOR ee es Si ks 7, 22 |

Lang v. Commissioner, 304 U.S. 264............. 9, 18, 20 |

Legg’s Estate v. Commissioner, 114 F. (2d) 760.... 18 |

Leser v. Burnet (4th Cir.), 46 F. (2d) 756.......... 18 |

Matter of New York Title & Mortgage Co. (1934),

O64 We. TA ere Se eee 21

Matter of New York Title and Mortgage Company

(Series N-81), 154 Mise. 865 .................... 24, 26

Morgan v. Commissioner, 309 U. 8. 78.......... 9, 18, 20

People v. Title and Mortgage Guaranty Company,

ee Be. OE ge ie Re ee 15, 21, 24

Phelps-Stokes Estates v. Niwon, 222 N. Y.93........ 9,16

Raybestos Manhattan, Inc., v. U. S., 296 U.8.60..... 7,11 )

Rockefeller Foundation v. State, 144 Mise. 460, 258 |

RS i BE os eee er aaa ae 9,16 |

Terminals Transportation Corp. v. State, 169 Misc.

708, 8 N. Y. S. Supp. (2d) 282, affd. 14 N. Y. Supp.

(2d) 603, 961-N. Y. GOR, Ne. Bb. os een so os. 7, 9, 16, 24

U. S. v. Merchants National Trust and Savings Bank,

500: Cs Oe ee ree 8, 9, 12, 17, 18

United States v. Phellis, 257 U. S. 156............. 27

Vandenbark v. Illinois Glass Co., 61 Sup. Ct. 347.... 20

Weil v. President and Directors of Manhattan Com-

gets, Tee Ih Bs NO ooo ok a he Se twee 26

White v. U. S., 306 U. 8; 21... ee, Seika ie 22

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1940

No. 916

FRANK L. WEIL, WILLIAM E. RUSSELL anv RAY-

MOND J. SCULLY, as Trustees Unper a Deciaration

oF Trust Datep Aprit 77TH, 1936 AND a Puan or Reoraant-

ZATION OF Series C-2 Mortcace IJ NvestMENTS APPROVED

BY AN ORDER OF THE SUPREME Court OF THE STATE OF NEw

York Enrerep on THE 167TH Day or January, 1936,

Petitioners,

vs.

THE UNITED STATES OF AMERICA.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT.

To the Honorable The Chief Justice and Associate Justices

of the Supreme Court of the United States:

Summary Statement of Matter Involved.

This case challenges the right of the United States Gov-

ernment to exact a documentary stamp tax on the transfer

of certain corporate bonds under and pursuant to the pro-

1b

2

visions of Schedule A-9, Title VIII of the Revenue Act of

1926, as amended by Section 724A of the Revenue Act-of

1932 (R. 6, 7, 14) (Appendix, p. 29).

The taxing statute and the pertinent Treasury Regula-

tions, insofar as these transfers are concerned, are set forth

in the appendix hereto at pp. 29-32.

The transfers upon which the tax was exacted were the

assignments of corporate bonds, securing the payment of

various indebtednesses further secured by first mortgages

on real estate (R. 5, 6, 9, 10). The transfers were from

Louis H. Pink, Superintendent of Insurance of the State of

New York, as Liquidator of the New York Title and Mort-

gage Company (hereinafter referred to as the ‘‘Superin-

tendent’’) and Mortgage Commission of the State of New

York (hereinafter referred to as ‘‘ Mortgage Commission’’)

to Frank L. Weil, William E. Russell and Raymond J.

Scully as Trustees of Series C-2 mortgage investments

issued and guaranteed by New York Title and Mortgage

Company, petitioners herein (I. 6).

The New York Title and Mortgage Company (hereinafter

referred to as ‘‘Guarantee Company’’) was one of many

companies engaged in the business of making loans secured

by bonds and first mortgages. Undivided interests in these

bonds and mortgages, called certificates, were then sold to

investors with an accompanying guaranty of principal and

interest by the Guarantee Company. Where undivided in-

terests in a single bond and mortgage were sold, it was

identified as an individual issue, and where undivided inter-

ests in pools of bonds and mortgages were sold, they were

identified as group issues. Among these group issues was

one with over 100 bonds, mortgages and properties, repre-

senting $24,184,788.54 in principal amount, sold to approxi-

mately 7500 investors, which constituted the Series C-2

issue of the Guarantee Company (R. 3).

3

In 1933, there was a complete and general collapse of all

of these companies, caused by a variety of economic factors,

which resulted in part from the unprecedented decline in

real estate values and the oppressive obligations repre-

sented by the guaranties which the companies were required

to meet (R. 3).

In order to avert a major economic disaster, these com-

panies were taken over for rehabilitation by the Superin-

tendent pursuant te Article XI of the New York State In-

surance Law. The powers conferred by this section, how-

ever, were inadequate to enable the Superintendent to

administer and reorganize the properties and mortgages

involved for the benefit of the investors. In order to supple-

ment the powers granted to the Superintendent by Article

XI of the Insurance Law, the ‘‘Schackno Act’’ (Chapter

745, New York Laws 1933, as amended, Unconsolidated

Laws of New York, Sections 1796-1807 inclusive) was

enacted (R. 4 and appendix pp. 32-38).

The ‘‘Schackno Act’’ also embodied the legal and pro-

cedural mechanism for plans of reorganization resulting in

the appointment of permanent trustees as successors to the

Superintendent and later the Mortgage Commission (Ap-

pendix pp. 32-38).

Pursuant to the provisions of Article XI, as supplemented

by the ‘‘Schackno Act’’, the Superintendent acquired legal

title to all bonds and mortgages representing the issues of

the Guarantee Company, including the Series C-2 issue

(R. 4).

It is conceded by the government that the transfers from

the Guarantee Company to the Superintendent, pursuant to

Article XI of the Insurance Law of the State of New York

and the Schackno Act, were wholly by operation of law and,

therefore, not taxable.

Despite the impljmentation of the Insurance Law by the

Schackno Act, the office of the Superintendent was found

a

4

to be equipped neither to administer temporarily nor to

reorganize the vast number of issues involved. This reason,

among others, caused the New York State Legislature to

create a separate State agency to assume the burden of

administering temporarily and reorganizing these issues in

the place of the Superintendent. (Section 1 of the Declara-

tion of Cause, Chapter 19 of the Laws of 1935, as amended,

appendix, pp. 38-41.)

Hence, by the Mortgage Commission Act (N. Y. Laws

1935, Chapter 19, as amended) the Mortgage Commission

was created as a provisional organization and its existence

was limited to January 1, 1940 (Appendix, p. 57). The

sole function of the Mortgage Commission was the tem-

porary administration and reorganization of the guaranteed

mortgage properties pending judicially approved reorgani-

zations effecting a final turnover to permanent trustees.

The Mortgage Commission Act incorporated by reference

those provisions of the Schackno Act which created the

statutory machinery for the promulgation of plans of re-

organization (Appendix, pp. 45, 54, 55). In addition

thereto, the Mortgage Commission Act provided for

an alternative legal and procedural mechanism for the pro-

mulgation of these plans (Appendix, p. 48). Either pro-

cedure required reorganization upon court order. Accord-

ing to the Schackno Act procedure, prior to the making

of the court order, the holders of two-thirds in principal

amount of the certificates outstanding in any particular

issue were required to consent (Appendix, p. 36). Accord-

ing to the Mortgage Commission Act procedure, a court

order could be made approving the plan, if the holders of

one-third in principal amount of the certificates outstand-

ing failed to dissent (Appendix, pp. 49-50).

Pursuant to the Mortgage Commission Act, the Mortgage

Commission acquired title to the securities underlying the

various issues, including those of Series C-2, and became

5

Trustee for the benefit of certificate holders (the cestuis),

(R. 4). The Mortgage Commission Act, defining and limit-

ing its powers, was the declaration of trust under which it

acted (McKinney’s Unconsolidated Laws of New York,

Sections 1751-1785 incl.).

The transfers of securities from the Superintendent to

the Mortgage Commission pursuant to the Mortgage Com-

mission Act were conceded by the Government to be ‘‘ wholly

by operation of law’’, and not taxable.

The instant case employed the mechanism of the

‘‘Schackno Act’’ to effectuate the transfers from the Mort-

gage Commission to permanent trustees, the petitioners

herein. To this end, the Mortgage Commission promul-

gated a plan which, after a hearing, was approved by the

interlocutory order of Mr. Justice Alfred Frankenthaler of

the New York Supreme Court, who had exclusive judicial

supervision of the guaranteed mortgage situation in New

York County. Thereupon, the Mortgage Commission ob-

tained the consent of the holders of two-thirds in principal

amount of the certificates outstanding. The plan was then

approved by the Supreme Court of the State of New York

by final order dated January 15, 1936. The Trustees, peti-

tioners herein, were appointed by Mr. Justice Franken-

thaler to act under a declaration of trust approved by

him (R. 5). Immediately upon their qualification, title

vested in the petitioners (R. 50, 51) by virtue of the specific

provisions in the court order and the plan (R. 50, 51, 91)

and in accordance with authority contained in the statute

(Appendix, p. 48). They were to liquidate the issue for

the benefit of the holders according to the terms of the

Declaration of Trust and the plan of reorganization (R. 60).

Over protest, the government collected from the petition-

ers a tax of $6,361.64 on the transfers of the corporate

bonds to them from the Mortgage Commission.

2b

6

On May 11th, 1938, petitioners filed with the Commis-

sioner of Internal Revenue a claim for refund which was

disallowed on September 24, 1938 (R. 7).

Petitioners then instituted this suit in the District Court

for the Southern District of New York to recover the tax

paid (R. 2-10, inclusive). No issue of fact having been

raised by the pleadings, both sides moved for summary

judgment (R. 16-95, inclusive). These motions were argued

before Hon. Henry W. Goddard, District Judge. Pursuant

to the court’s opinion, filed on November 8th, 1938 (R.

96-102, inclusive) an order was entered in that court grant-

ing petitioners’ motion for summary judgment, striking

out the Government’s answer and denying the Govern-

ment’s motion. Judgment was thereupon entered on No-

vember 2nd, 1939, in favor of the petitioners for $6,361.64,

with interest thereon and costs in the amount of $5.00

(R. 103-105, inclusive).

The Government appealed to the Circuit Court of Ap-

peals for the Second Circuit (R. 106). By order entered

January 2nd, 1941 (R. 118, 119), the judgment of the Dis-

trict Court was unanimously reversed pursuant to the

opinion of Hon. Augustus N. Hand, Circuit Judge, filed

on December 16, 1940 (R. 111-117, inclusive).

Opinions Below.

The opinion of the Cireuit Court of Appeals for the

Second Cireuit (R. 111-117) is reported in 115 F. (2d) 999,

and that of the District Court for the Southern District

of New York (R. 96-102) is reported in 30 Fed. Supp. 349.

Basis of Decision of the Court Below.

The court below held the transfers herein taxable for

the following reasons:

1. That this Court had construed the taxing statute lit-

erally and was altogether strict in subjecting the transfers

7

to a tax. Raybestos-Manhattan, Inc. v. U. S., 296 U.S. 60;

Founders General Corp. v. Hoey, 300 U. S. 268; Koppers

Coal and Transportation Co. v. U. S., 107 F. (2d) 706.

2. That the two-thirds consent of the certificate holders

was a voluntary act and therefore the transfer was not

wholly by operation of law.

3. That although New York law held similar transfers

to be by operation of law (Terminals Transportation Corp.

v. State, 169 Mise. 708, 8 N. Y. Supp. (2d) 282, affd. 14

N. Y. Supp. (2d) 493, 281 N. Y. 889; +23; Electric Bond

and Share Company v. State, 249 App. Div. 371, Affirmed

274 N. Y. 625) it must be disregarded in construing the

statute here in question, Burnet v. Harmel, 287 U. S. 103.

Basis of Jurisdiction.

This is a petition for a writ of certiorari to review the

final judgment of the Circuit Court of Appeals for the

Second Circuit, reversing the judgment of the District

Court for the Southern District of New York in favor of

the petitioners and granting final judgment in favor of

the Government, respondent. Jurisdiction is invoked under

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

347a of Title 28 U.S. C. A.) (Appendix, p. 29).

The Question Presented.

Were the transfers of the corporate bonds herein effected

‘‘wholly by operation of law’’ and consequently exempt

from taxation under Schedule A-9, Title VIII of the Reve-

nue Act of 1926 (as amended by Section 724a of the Reve-

nue Act of 1932) and Treasury Regulations 71?

Reasons Relied On for the Allowance of the Writ.

1. The Circuit Court of Appeals for the Second Circuit

has decided erroneously, petitioners submit, an important

8

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

settled by this Court.

The transfers in suit are prototypes of thousands of

other transfers arising under the same New York statutes.

A decision in this case will determine the taxability of

such other transfers.

Pursuant to the Mortgage Commission Act, there were

transferred approximately 15,000 properties and mortgages

totalling over $675,000,000 in principal amount. A substan-

tial proportion of these transfers were of corporate bonds

which were, in effect, held taxable by the decision of the

court below. These transfers involved over 250,000 indi-

vidual certificate holders residing throughout the United

States and in foreign countries.

This unwarranted Federal tax was imposed on scores

of thousands of certificate holders whose life savings were

jeopardized and depleted by the collapse of the mortgage

guarantee companies.

The State of New York fully appreciated the plight of

the certificate holders and created legislation to alleviate

their distress by successive transfers of the bonds and

mortgages securing their investments from the insolvent

guarantee companies to two state agencies: first the Super-

intendent and then the Mortgage Commission, and, finally,

to court appointed Trustees. These steps were merely

part of a State statutory scheme to attempt to salvage these

investments. These constructive effects’ of the State of

New York will be vitiated to the extent that transfer taxes

were imposed which will be permanently siphoned directly

from the certificate holders unless the order herein made

by the Circuit Court of Appeals is reversed.

2. The decision of the Cireuit Court of Appeals for the

Second Circuit in this case is in direct conflict with the de-

cision of the Ninth Cireuit in U. 8S. v. Merchants National

2

—

9

Trust and Savings Bank, 101 Fed. (2d) 399, in three re-

spects. The conflicts concern the question of the applica-

tion and controlling effect of State Law regarding the nature

of the transfers herein and the interpretation and applica-

tion thereto of Articles 35 (h) and 35 (r) of Treasury

Regulations 71.

3. The Circuit Court of Appeals for the Second Circuit

has decided a Federal question in conflict with applicable

decisions of this Court concerning the controlling effect of

State Law. Morgan v. Commissioner, 309 U. 8. 78; Lang

v. Commissioner, 304 U. 8. 264, 267; Blair v. Commissioner,

300 U. S. 5, 9, 10; Freuler v. Helvering, 291 U. S. 35, 45;

Burnet v. Harmel, 287 U.S. 103.

The decisions of the highest courts of the State of New

York have held transfers identical in legal effect to those

here in question to be by operation of law. Terminals

Transportation Corp. v. State, 169 Misc. 708, Affirmed 281

N. Y. 889; Electric Bond and Share Company v. State, 249

App. Div. 371, Affirmed 274 N. Y. 625; Rockefeller Founda-

tion v. State, 144 Misc. 460, 258 N. Y. Supp. 812; Phelps-

Stokes Estates v. Nixon, 222 N. Y. 93. The court below,

recognizing the New York law to be as stated, neverthe-

less held that such law was neither binding upon it nor

controlling.

4. The transfers herein were not taxable under the Fed-

eral law and the court below erred in its application of

the taxing statute to these transfers in two respects. The

court failed to exempt the transfers from the tax pursuant

to the provisions of Articles 35 (h) and 35 (r) of Treasury

Regulations 71; U. 8. v. Merchants National Trust and Sav-

ings Bank, 101 Fed. (2d) 399.

Wherefore, the petitioners respectfully pray that a

writ of certiorari be issued out of and under the seal of

——

10

this Honorable Court directed to the Circuit Court of Ap-

peals for the Second Circuit commanding that court to

certify and to send to this Court for its review and deter-

mination on a day certain to be therein named, a transcript

of the records and proceedings herein; and that the order

of said court entered on January 2nd, 1941 reversing the

judgment of the District Court for the Southern District

of New York be reversed by this Honorable Court and

that petitioners have such other and further relief in the

premises as to this Honorable Court may seem just and

equitable.

Evucene J. Morris,

Counsel for Petitioners.

State or New Yorks,

City of New York,

County of New York, ss:

Eugene J. Morris, being duly sworn, says that he is coun-

sel for the petitioners named in the foregoing petition; that

he prepared the same and that the allegations thereof are

true as he verily believes.

Evucene J. Morris,

Counsel for Petitioners.

Subscribed and sworn to before me this 1st day of April,

1941.

Evetyn R. Laney.

Notary Public, Westchester County. Cert. filed in N. Y.

Co., No. 623, Reg. No. 1-L-377. Commission expires

March 30, 1941.