Petitioners Brief — Weil v. United States

ae

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BRIEF IN SUPPORT OF PETITION FOR WRIT OF

CERTIORARI.

Pornt I

This Court should take jurisdiction to determine an im-

portant question of Federal law heretofore undecided by it.

This Court has never been presented with the question

of what constitutes a transfer ‘‘wholly by operation of

law’’ within the meaning of Schedule A-9, Title VIII of

the Revenue Act of 1926 (as amended by Section 724A of

the Revenue Act of 1932) and Treasury Regulations 71,

Articles 35 (h) and 35 (r) (See App., pp. 29-32).

The only decisions of this Court, cited by the court be-

low (R. 116), are: Raybestos Manhattan, Inc. v. U. S.,

296 U. S. 60; Founders General Co. v. Hoey, 300 U. 8S. 268;

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

These degisions are not directly applicable to the tacts

in the case at bar but were merely cited to sustain the gen-

eral propositions of law which the court below believed

were enunciated by them. The Second Circuit apparently

believed that the decisions in the Raybestos and Founders

cases required the taxing statute to be strictly construed

against the taxpayer.

Unlike the case at bar, where the transfers are conceded,

both thie Raybestos and Founders cases were concerned with

whether or not a ‘‘transfer’’ had occurred within the mean-

ing ot the statute. The question in the instant case is

whether or not the transfers were effected ‘‘wholly by

operation of iaw’’.

Burnet v. Harmel, supra, was cited merely on the gen-

eral principle of the controlling effect of local law and did

not involve the tax statute here in question.

12

A determination of the question here presented is of the

most vital and widespread importance both to the Govern-

ment and the taxpayers.

The Series C-2 trust estate is but one of over five thou-

sand other trusts of guaranteed certificated mortgages, each

of which went through the same type of reorganization as

that involved in this case. These other trusts embody ap-

proximately 15,000 properties and mortgages and total

over $675,600,000 in principal amount. These trusts affect

approximately 250,000 certificate holders, a large percent-

age of whom are persons of only moderate means and de-

pendent for their incomes on these investments. (See Gov-

ernor Lehman’s message to Legislature, Legislative Docu-

ment 1939, No. 78, and Chapter 745 of the Laws of New

York 1933, as amended, Section 1796 of the Unconsolidated

Laws of the State of New York.) (Appendix, pp. 34-38.)

Thousands of other transfers legally identical to the sub-

ject transfers will be directly affected by a determination of

this case.

Port II.

The decision of the Circuit Court of Appeals for the Second

Circuit is in direct conflict with that of the Ninth Circuit.

The decision below is in direct conflict with U. S. v.

Merchants National Trust € Savings Bank, 101 Fed. (2d)

399, C. C. A. (Ninth Circuit). In that case a banking and

trust company transferred certain stocks and securities as

a result of the sale of its entire trust business to the Bank

of America of California in accordance with Section 31 of

the California Bank Act.

A tax was assessed and collected under the ‘‘transfer of

legal title’’ provision of the Revenue Act of 1926, title VIII,

Section 300 and Schedule A3, as amended, a provision iden-

13

tical to that dealt with in the instant case, except that Sched-

ule A-3 concerns itself with transfers of stock and Sched-

ule A-9 with transfers of bonds.

Section 31 of the California Bank Act, above referred to,

provided that, upon the approval of the Superintendent

of Banks of a sale of a trust business by one bank to an-

other, the stocks and securities comprising such business

would be deemed transferred to the purchasing bank as ‘‘by

operation of law’’.

The court held that the transfers there in question were

effected ‘‘wholly by operation of law’’, and consequently

not taxable within the purview of Articles 35 (h) and 35 (r)

of Treasury Regulations 71 and, further, that the Califor-

nia State Law was controlling on the question as to what

constituted a transfer ‘‘ wholly by operation of law’’.

The facts in the case at bar are indistinguishable in prin-

ciple from the factual situation in the Merchants case.

In the instant case, the Second Circuit held that the New

York State Law was not controlling upon the Federal

Courts as to what constituted a transfer ‘‘wholly by opera-

tion of law.’’ The Second Cireuit further held that the

transfers herein were taxable and not within the purview

of the exceptions granted by Articles 35 (h) or 35 (r) (R.

116, 117).

The decisions of the Second Circuit in the case at bar and

the Ninth Circuit in the Merchants case are thus in conflict

in three independent respects, any one of which is sufficient

to justify this Court in accepting jurisdiction. These con-

flicts involve the applicability of State law and the inter-

pretation and application to the facts in the ease at bar of

Articles 35 (h) and 35 (r) of Treasury Regulations 71.

It is submitted that if jurisdiction is accepted by this

Court, a favorable determination of any one of these con-

flicts will require a reversal of the judgment.

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A.

Tue Conriict RecGarDING THE APPLICABILITY OF State Law.

The decisions of the Second and Ninth Circuits are dia-

metrically opposed regarding the controlling effect of State

Law as to the nature of the transfers. Both courts adopt

the doctrine of ‘‘necessary implication’’ as enunciated by

Burnet v. Harmel, 287 U. S. 1038, and reach opposite con-

clusions as to whether the taxing statute and Articles 35

(h) and 35 (r) by necessary implication make their opera-

tion dependent upon State law. Proceeding from this di-

vergence of basic construction and applying the law to sets

of facts which are legally identical, the Ninth Circuit ac-

cepted State law as controlling on the question of whether

the transfers were ‘‘wholly by operation of law’’ and the

Second Circuit completely rejected it.

B.

THe Conriict Recarpine ARTICLE 35 (H) or TREASURY

REeuations 71. :

While the facts in the Merchants case and in the case at

bar are legally identical, within the meaning of Article 35

(h), nevertheless the Ninth Circuit held that Article 35 (h)

afforded an exemption and the Second Circuit held to the

contrary.

In the Merchants case, the Ninth Circuit found that the

transfers were from a named resigned trustee to a named

substituted Trustee appointed in accordance with the terms

of the trust agreement and therefore conformed precisely

to the requirements of Article 35 (h) which exempted such

transfers from tax. The court found that since the Cali-

fornia Banking Act was in existence at the time the trust

agreement was executed, the provisions for the substitution

15

of the Trustees, as contained in the statute, were incorpo-

rated in the trust agreement as a matter of law. The Act

provided for the substitution of trustees in a manner which

brought the transfers within the provisions of Article 35

(h).

Similarly, the facts in the case at bar precisely conform

to the facts in the Merchants case insofar as the require-

ments of Article 35 (h) are concerned. There was a trans-

fer from a named resigned trustee (the Mortgage Commis-

sion) to a named substituted Trustee (the petitioners

herein). The substitution of the Trustees in both cases

was pursuant to the statutes of the State in which the trans-

fers occurred.

The Mortgage Commission Act (which incorporated part

of the provisions of the Schackno Act by reference, Article

VIII, Section 1769 Unconsolidated Laws of New York) was

the trust instrument pursuant to which the Mortgage Com-

mission derived all of its powers in the operation of the

trust estate for the benefit of the cestwis que trustents, the

certificate holders.

The substitution of the Trustees was in accordance with

the provisions of this trust instrument (the Mortgage Com-

mission Act).

People v. Title and Mortgage Guaranty Company, 264

N. Y. 69, 79, 89.

Judge Goddard, holding for the petitioners in the District

Court, said:

«* * * the legal relationship between the Super-

intendent of Insurance and the Mortgage Commission

on one side, and the certificate holders on the other, was

that of Trustee and cestui. See People v. Title and

Mortgage Company, supra, at pp. 79 and 89. Plain-

tiffs therefore took over the securities as Successor

16

Trustee and under the authority of United States v.

Merchants National Trust and Savings Bank, supra,

a transfer to them is not taxable’’ (R. 102).

C.

Tue Conruicr Recarpine ArtiIcLe 35 (r) or TREASURY

Reeutations 71.

The transfers involved in the Merchants case were held

to have been effected ‘‘wholly by operation of law’’ within

the meaning of Article 35 (r) and therefore exempt. As

the petitioners will demonstrate in Port IV, infra, the facts

in the instant case are so analagous to those in the Mer-

chants case, that the same legal result should properly fol-

low in the case at bar. Notwithstanding, the Second Circuit

concluded that Section 35 (r) of Regulations 71 had no

application and that the transfers were taxable.

Pornt III.

The Circuit Court of Appeals for the Second Circuit has

decided a Federal question in conflict with applicable deci-

sions of this Court concerning the controlling effect of State

law.

The law of the State of New York is well settled that

transfers identical in legal effect with the transfers in the

instant case are by operation of law.

Terminals Transportation Corp. v. State, 169 Mise. 708,

8 N. Y. S. 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;

Rockefeller Foundation v. State, 144 Mise. 460, 258 N. Y.

Supp. 812;

Phelps-Stokes Estates v. Nixon, 222 N. Y. 93.

17

The Circuit Court of Appeals for the Second Circuit has

recognized that:

‘‘The New York decisions in Terminals & Transporta-

tion Corp. v. State, 169 Mise. 703, aff’d 257 App. Div.

1028, and Electric Bond & Share Co. v. State, 249 App.

371, aff’d 274 N. Y. 625, that transfers similar to those

here were by operation of law * * *’’ (R. 116).

While the taxing statute with which we are here concerned

does not expressly make its operation dependent upon State

law, Articles 35 (h) and 35 (r) of Treasury Regulations 71

do so by clear and necessary implication.

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

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

101 F. (2d) 399.

The reference in Article 35 (r) to transfers ‘‘wholly by

operation of law’’ is explicable only by the law which ef-

fectuates the transaction, the legal effect of which is to be

determined. Thus, Article 35 (1) contains the general, ne-

cessary implication that the law creating the transaction

must define and determine its legal effect. Should the

nature of the transaction sought to be taxed be determined

by Federal law, then, by necessary implication, the Federal

law must be adopted to ascertain whether the transfer is

‘‘wholly by operation of law’’. Conversely, as in the case at

bar, should the transfer in question be effectuated by State

law, then, by necessary implication, the State law must be

adopted in determining whether the transfers were effected

‘‘wholly by operation of law’’. This is particularly true

where a State law, which is sui generis, initiated and by its

very terms effectuated the transfer. Once the State law

defines ihe legal effect of what it has accomplished, this de-

terminatiou is controlling on the Federal courts and the re-

18

maining question is whether the Federal statute taxes the

transaction so determined.

Morgan v. Commissioner, 309 U. 8S. 78;

Lang v. Commissioner, 304 U. S. 264, 267;

Blair v. Commissioner, 300 U.S. 5, 9, 10;

Freuler v. Helvering, 291 U.S. 35, 45;

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

101 F. (2d) 399;

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

Dayton & Michigam R. R. Co. v. Commissioner, 112 F.

(2d) 627;

Leser v. Burnet (4th Cir.), 46 F. (2d) 756, 760.

In Legg’s Estate, supra, the Fourth Circuit has recently

summarized the controlling authority concerning the ap-

plicability of State law as follows, at page 763:

‘*And the application of this rule is not affected by

the fact that a question of federal taxation is ultimately

involved, for while we look to federal decisions as au-

thoritative in interpreting the federal statute imposing

the tax, we look to the law of the state as laid down by

its courts in determining whether there has been such a

transfer of property as is subject to the tax under that

interpretation. ‘State law creates legal interests and

rights. The federal revenue acts designate what in-

terests or rights, so created, shall be taxed’ ’’ (citing

authorities).

Aside from the impossibility of determining the question

involved without resorting to and adopting the State law

defining the nature of the transfer, Article 35 (r) patently

indicates that the statute contemplated the adoption of State

law by the very example which it sets forth, i. e. the transfer

of stock from decedent to executor. This example definitely

contemplates a transfer by operation of the law of a State.

Congress does not and probably has no constitutional power

ee

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to regulate or provide for the transfer of property at death.

Since the example of a transfer ‘‘wholly by operation of

law’’ (described in the Regulations) is necessarily a trans-

fer by operation of State law, Article 35 (r) certainly can-

not be construed to exclude transfers wholly by operation

of State law. The Treasury Department has recognized this

and, in fact, ruled that whether or not a given transfer

of legal title to shares of stock results wholly from operation

of law depends upon the effect given to the transaction by

the law of the State in which the transaction occurs.

G..D; 737;

S. T. 5-21-250.

While the Government relied upon Cliffs Corporation v.

U. S., 103 F. (2d) 77, C. C. A. Sixth Circuit, certiorari de-

nied, 60 8. Ct. 91, to support its contention that the State

law is not controlling in this case, the court below tacitly

recognized the inapplicability of that case to the facts herein

by not even citing the Cliffs case in its opinion.

The court, in the Cliffs case, recognized the doctrine con-

tended for by the petitioners herein when it said:

‘‘In many Federal taxing statutes the tax is made to

follow at the time the State law creates a legal inter-

est. In such cases the state law will be applied to de-

termine such interest but the Federal Statute deter-

mines when and how it shall be taxed * * *.’’

Congress, in enacting the Rules of Decisions Statute

(U. S. Code, title 28, Sec. 725), has specifically provided and

indicated its intent that:

“The laws of the several states, except where the

Constitution, treaties, or statutes of the United States

otherwise require or provide, shall be regarded as rules

of decision in trials at common law, in the courts of the

United States, in cases where they apply.’’

20

This Court has given effect to that intent by consistently

holding that the Federal courts are bound by State law, ex-

cept where a Federal statute specifically requires or pro-

vides otherwise :

Erie R. Co. v. Tompkins, 304 U.S. 64;

Vandenbark v. Illinois Glass Co., 61 S. Ct. 347 (not yet

reported in United States reporter) ;

Morgan v. Commissioner, 309 U. S. 78;

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

Blair v. Commissioner, 300 U.S. 5, 9, 10;

Dayton & Michigan R. R. v. Commissioner, 112 F. (2d)

627.

Point IV.

The transfers herein were not taxable under the Fed-

eral law.

Petitioners have maintained in the preceding point that

Federal law requires the application of State law in deter-

mining the nature of the transfers here in question. How-

ever, even assuming that State law is not controlling on the

nature of the transfers, they must be held exempt from

taxation under the Federal law on any one of two separate

and distinct bases. They should have been exempted from

taxation under the provisions of Article 35 (h); and simi-

larly under the provisions of Article 35 (r).

A.

Tue Transrers Fir Precisetry WITHIN THE EXEMPTION

AFFORDED BY ARTICLE 35 (H).

To render a transfer not taxable as having been effected

‘wholly by operation of law’’, Article 35 (h) requires three

essential elements:

(1) a named, resigned Trustee;

21

(2) a named substituted Trustee, and

(3) each appointed in accordance with the terms of the

original trust agreement.

In Port II under Subdivision B, supra, we have estab-

lished that these essential elements existed in these trans-

fers. It is a necessary corollary, therefore, that the pro-

visions of the statute automatically operate and the court

must find the transfers were effected ‘‘wholly by operation

of law’’ and are consequently not taxable.

The subject transfers precisely and realistically repre-

sent the situation contemplated by the statute. The trust

agreement (Mortgage Commission Act) specifically con-

templated and anticipated the very succession of trustees

which in fact occurred. Thus, the substituted trustee was

not only appointed in accordance with the original trust in-

strument, (the Mortgage Commission Act), but the original

trust instrument by its terms contemplated such appoint-

ment.

People v. Title € Mortgage Guarantee Co. (1934) 264

N. Y. 69;

To the same effect, see

Matter of New York Title € Mortgage Co. (1934) 264

N. Y. 475.

In its opinion, the Court below completely disregarded the

application of Article 35 (h) to the instant transfers, al-

though no sound and cogent reason has yet been advanced

as to why these transfers are not governed by it.

B.

Tue Transrers Were WHOLLY BY OPERATION oF Law AnD

ConsEQuENTLY Exempt FRoM TAXATION PURSUANT TO

Articte 35 (r).

The court below, in arriving at its conclusion that the

4b

22

taxing statute should be applied strictly to the transfers in

suit, said:

‘‘The Supreme Court construed the Statute imposing

the transfer tax literally in Raybestos-Manhattan Inc.

vs. United States, 296 U. S. 60, and Founders General

Corp. v. Hoey, 300 U. S. 268, and was altogether strict

in subjecting the transfers to a tax.’’ (R. 116).

While the words just quoted were applicable to the facts

in the Raybestos and Founders cases, this Court, in White

v. U. S., 305 U. S. 281, has very recently ruled that neither

the taxpayer nor the taxing authority should be favored in

interpreting taxing statutes but that it is the duty of the

courts to decide fairly what the construction of the statutes

shall be.

In substantiation of its position regarding the construc-

tion to be placed upon the taxing statute, the court cited

Koppers Coal & Transportation Company v. U. S., 107 F.

(2d) 706, decided by the Circuit Court of Appeals for the

Third Circuit. It is for this reason that we advert to that

case, since neither from the standpoint of the facts nor of

the legal principles enunciated does that case have any

similarity to the case here presented. There are numerous

grounds of distinction between the cases. It is only neces-

sary to refer to the fact that the transfers there presented

were specifically taxable under Article 34 (r), a Regulation

in no way applicable to or involved in this case. The Court

in the Koppers case properly so held and aptly stated:

‘‘Such a transfer of title is within the express lan-

guage of Schedule A3 of Section 800 and is precisely

the example given in Article 34 (r) of Treasury Regula-

tions 71.’’

The court below considered, therefore, that any voluntary

act was sufficient to take the transfers out of the operation

23

of Article 35 (r) and render them taxable. The two-thirds

consent of the certificate holders (required by the statute)

was relied upon as the single voluntary act which prevented

the transfers from being exempt from taxation as ‘‘wholly

by operation of law’’ within the meaning of Article 35(r).

The fallacy in taxing these transfers because of the two-

thirds consent required by the statute can best be clarified

by an analysis of the circumstances surrounding their exe-

cution. In order properly to comprehend the significance

of this consent, it is necessary to review the manner in

which the transfers were effected.

A judicial decree effected the transfers herein taxed after

a series of legal steps activated by the machinery of the

Mortgage Commission Act.

The Mortgage Commission Act authorized the Mortgage

Commission to promulgate a plan of reorganization on its

own initiative without any act on the part of the cestuis.

In the case at bar, the transfers were consummated accord-

ing to the steps indicated by the statutory machinery; the

promulgation of the plan and the application to the court

for the approval thereof by the Mortgage Commission; the

obtaining of two-thirds consent of the certificate holders in

the event that an interlocutory order of approval was made

by the court; the making of a final order approving the plan

and finally, the appointment and qualification of the Trus-

tees. Upon the qualification of the Trustees, the transfers

were automatically effected under and pursuant to the

court order approving the plan and title immediately vested

in the Trustees without further act or instrument (R. 50-51).

The plan itself provides that:

‘‘ypon the execution of the Declaration of Trust * * *

all of the securities against which such mortgage in-

vestments have been issued * * ®* shall immediately

vest in the Trustees’’ (R. 50-51).

The implication is clear from the opinion of the court be-

low that, were it not for the two-thirds consent of the certifi-

24

cate holders, the transfers herein were effected wholly by

operation of law and consequently not taxable. However,

when the true nature of this consent is analyzed, it is readily

discernible that in no wise did such consent constitute a

voluntary act, the effect of which would render the transfers

taxable.

The late Mr. Justice Frankenthaler, who was largely re-

sponsible for the existing body of law in this field, expressed

the belief that certificate holders had no alternative but to

approve the plan. He said in Matter of New York Title and

Mortgage Company (Series N-81), 1"' Mise. 865 at page

866:

‘‘It may well be that their execution of consents to

the proposed pian was due to the fact that they were

faced with the alternative of either approving the plan

submitted to them or else going without any plan at

all.’

See also People v. Title d Mortgage Guaranty Co., 264

N. Y. 69;

Terminals Transportation Corp. v. State, 169 Misc. 708,

8 N. Y.S. (2d) 282, affd. 14 N. Y. 8S. (2d) 493, 281 N.

Y. 889 #23.

See also opinion of Mr. Justice Goddard in the Dis-

trict Court in this case. (R. 99).

A failure to consent to the plan on the part of the certifi-

cate holders would have meant that the future administra-

tion of the trust estate was completely undetermined.

Moreover, the Mortgage Commission could not continue to

exist beyond 1939. The certificate holders were, therefore,

in a position of uncertainty as to how or by whom their in-

vestments woi.'d be administered in the event that they re-

jected the plan. In this connection, it is significant to note

that the Mortgage Commission was created as a temporary

agency to administer, liquidate and turnover to permanent

on

liquidating trustees the issues administered by it before its

existence terminated. In a speech to the Legislature of the

State of New York made on March 21, 1939, regarding the

Mortgage Commission, Governor Lehman said:

‘It was ne-essary for the Commission immediately

(upon its creation) to set up an organization * * .

to promulgate reorganization proceedings for the ap-

pointment of Trustees to act for the certificate holders

in the future.’’ (parenthesis ours).

It was clear that if certificate holders were to leave their

investments with the Mortgage Commission for even a lim-

ited period of time it would have been disastrous and re-

sulted in complete chaos in the future administration of

the trust estate. The powers granted to the Mortgage Com-

mission by its trust agreement (the statute) were so limited

that it was unable properly to administer a group series

organized in the manner of the Series C-2 Issue. Tilustra-

tive of one of its limitations was the requirement to obtain

court approval upon consent of two-thirds (or failure to

dissent of one-third) of the certificate holders for each sale,

modification, extension or adjustment made in connection

with a mortgage or a property. This trust estate consists

of over 100 mortgages and properties involving invest-

ments ranging from less than $5000 to over $2,000,000 in

principal amount (R. 35-39, inel.). To have required, in

each transaction, the consent of two-thirds of 7500 certifi-

eate holders scattered widely over the United States would

have been totally impractical and prohibitively expensive.

When it is realized that the Mortgage Commission, at that

time, did not even have the power to satisfy a mortgage,

when the full principal plus accrued interest were offered

in payment thereof, the utter impossibility of permitting

the trust estate to remain with them becomes apparent.

26

While the Commission administered the Series C-2 issue,

a mortgagor actually did. attempt to pay off the full prin-

cipal amount of his mortgage and the payment was refused

because of the statutory inability of the Mortgage Commis-

sion to accept the same. Thus, the Mortgage Commission

was a liquidating trustee unable to liquidate.

The plan of reorganization (R. 33-56, incl.), however,

removed all of these limitations and gave to the prospective

Trustees a facility and latitude of powers which were re-

quired for an orderly and effectual administration and

liquidation of the trust estate.

A further analysis of the so-called ‘‘choice’’ of the cer-

tificeate holders by the two-thirds consent required by the

statute reveals that such consent did not cause or insure an

approval of the Plan by the court. If, after the required

consents had been obtained, the court did not see fit to ap-

prove the Plan, it was not required to do so, and conversely,

if the certificate holders who had filed consents desired to

withdraw them, they could not have done so.

In re New York Title and Mortgage Company (Series

N81), 154 Mise. 865, 278 . Y. Supp. 556.

Furthermore, if the plan were approved in accordance

with the statutory machinery, even though one-third of the

certificate holders opposed the plan they were bound

thereby. Certainly the certificate holders who refused to

consent and in fact opposed the plan cannot be said to have

performed a ‘‘voluntary’’ act.

Weil v. President and Directors of Manhattan Com-

pany, 275 N. Y. 238.

The true meaning of the ‘‘choice’’ given to the certificate

holders was that they were compelled to accept the plan

or to have no plan at all, which essentially means no

‘*choice’’ at all.

27

It has repeatedly been held that it is the underlying es-

sence of a transaction which determines its taxability.

See:

Helvering v. Tex-Pen Oil Co., 300 U. S. 481, 493, 57

S. Ct. 569, 81 L. Ed. 755;

Bowers v. Lawyers Mortgage Co., 285 U. S. 182, 188, 52

S. Ct. 350, 76 L. Ed. 690;

United States v. Phellis, 257 U. S. 156, 168, 42 S. Ct.

63, 66 L. Ed. 180;

Commissioner of Int. Rev. v. Schumacher Wall Bad.

Corp., 9 Cir., 93 F. (2d) 79, 81.

A realistic analysis of this situation may be found in the

following excerpt from the Harvard Law Review in its dis-

cussion of the opinion below in this case.

‘«And indeed a less meticulous concern for the vol-

untary aspect of the rehabilitation could have been

justified by a realization that the required approval is

often little more than a reluctant choice over the un-

attractive alternative of permitting the Mortgage Com-

mission to continue with enforced liquidation. See

Terminals & Transportation Corp. v. State, 169 Misc.

703, 705, 8 N. Y. S. (2d) 282, 284, 285 (Ct. Cl. 1938),

54 H. L. R. 890, at 891, 892.’’

Conclusion.

The taxpayers in this case consist of investors of small

and moderate means who invested in guaranteed mortgage

certificates not as a speculative venture but to conserve

their limited assets for future security. They were deluded

into believing that impregnable assets and guaranties but-

tressed their small investments which were legal for trust

funds in the State of New York.

The State created agencies to mitigate the losses sus-

tained as a result of the debacle of 1933. These agencies

acted as mere conduits to permanent liquidating Trustees,

28

the ultimate salvaging agents. It is upon this last salvag-

ing operation initiated and effectuated by State law that the

Government seeks to impose a further burden. It could not

have been the intention of Congress to tax as a voluntary

act a transfer resulting through the operation of State ma-

chinery designed to retrieve the remnants of their invest-

ments.

Respectfully submitted,

Evcene J. Morris,

Counsel for Petitioners.

Eveene J. Morris,

Hersert Burton Bri,

Wuusim EF. Russext, JRr.,

TrroporE TANNENWALD,

Auuan Rogow,

Of Counsel.