Source: https://supreme.justia.com/cases/federal/us/292/455/
Timestamp: 2019-04-20 20:17:19+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 292 › Helvering v. New York Trust Co.
Helvering v. New York Trust Co.
1. A father transferred securities irrevocably to a trustee, in trust, to pay income and eventually the principal to his son. Within less than two years, the trustee sold the securities for a price which exceeded their value at the time of the creation of the trust and exceeded still more the price for which the trustor had acquired them.
(1) That the shares were "acquired by gift," by the trustee, within the meaning of § 202(a)(2) of the Revenue Act of 1921, and, under that Act, the basis for ascertaining the gain derived from the sale was "the same as that which it would have been in the hands of the donor" -- i.e., the cost of the shares to the trustor. P. 292 U. S. 462.
(2) The shares were "capital assets," defined by § 206(a)(6) of the Act as "property acquired and held by the taxpayer for profit or investment for more than two years," and the gain was therefore taxable under that section at 12 1/2%, and not at the normal and surtax rates. In applying the definition, the tenures of donor and trustee must be treated as continuous. P. 292 U. S. 463.
(3) The purpose of this provision of § 206 was to lessen the discouragement of sales of capital assets caused by high normal and surtaxes, in which respect there is no distinction between gains derived from a sale made by an owner who has held the property for more than two years and those resulting from one by a donee whose tenure plus that of the donor exceeds that period. P. 292 U. S. 466.
(4) No valid ground has been suggested for requiring tenures of capital assets to be added to get the base under § 202(a)(2) and forbidding their combination for finding the rate under § 206(a)(6). P. 292 U. S. 467.
2. The rule requiring that an unambiguous statute shall be given effect according to its language is not to be put aside to avoid hardships that may result from carrying out the legislative purpose. P. 292 U. S. 464.
3. But adherence to the letter of a statutory provision without regard to other parts of the Act and to the legislative history will often defeat its object. P. 292 U. S. 464.
4. Generally, questions as to the meaning intended do not arise until the language used is compared with the facts or transactions in respect of which the intent and purpose are to be ascertained. P. 292 U. S. 465.
5. Mere change of language in a reenactment does not necessarily indicate an intention to change the law. The purpose may be to prevent misapprehension of the existing law by clarifying what was doubtful. P. 292 U. S. 468.
Certiorari to review a judgment modifying a decision of the Board of Tax Appeals, 27 B.T.A. 1127.
This controversy arises out of the calculation of an income tax on the gain realized on the sale of property by a trustee in 1922. April 27, 1906, one Matthiessen acquired 6,000 shares of stock at a cost of $141,375. Its value on March 1, 1913, was less than cost. December 4, 1921, desiring to make provision for his son, Erard, he transferred the stock to the New York Trust Company in trust for him with remainder over in case of his death. When the trust was created, the market value of the stock was $577,500. The trustee sold it in 1922 for $603,385. In the tax return for that year, the trustee included $87,385 as the gain resulting from the sale. That figure was reached by subtracting the cost of the shares to the trustor, then claimed to be $516,000, from the amount the trustee received for them. But the trustee then, as it always has, insisted that the gain should be calculated on the basis of the value at the time of the creation of the trust. And it applied the rate of 12 1/2 percent applicable to capital gains. The Commissioner ascertained gain on the principle adopted in the return, but found the cost to trustor to be $141,375. He applied the normal and surtax rates that ordinarily are laid upon the incomes of individuals, and, by the use of these factors, arrived at an additional assessment of $238,275.95. [Footnote 1] The Board of Tax Appeals sustained the determination. 27 B.T.A.
1127. The lower court held that the gain had been correctly ascertained, but that it was taxable at 12 1/2 percent. 68 F.2d 19. These writs were granted on petition of the Commissioner and cross-petition of the trustee.
The questions are: (1) whether the gain resulting from the trustee's sale is the difference between price paid by trustor and that received by trustee, and (2), if so, whether the 12 1/2 percent rate is applicable.
"That the basis for ascertaining the gain derived . . . from a sale . . . of property . . . shall be the cost of such property; except that -- . . . (2) In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor."
Section 206(a)(6) defines capital assets to be "property acquired and held by the taxpayer for profit or investment for more than two years," and (b) provides that the net gain from the sale of capital assets may be taxed at the rate of 12 1/2 percent instead of at the ordinary rates. Section 219(a) declares that the normal and surtax on net incomes of individuals shall apply to the income of property held in trust, including (3) income held for future distribution; (b) the fiduciary is required to make the return of income for the trust. And subsection (c) provides that, in cases under (a)(3), the tax shall be imposed upon the net income of the trust, and shall be paid by the fiduciary.
among which are these: the trustee was required to hold the shares and any property purchased out of the avails, to collect and retain income until the twenty-first birthday of Erard, then to pay him the accumulated income, thereafter to pay him current income until he attained the age of twenty-five years, and at that time to deliver to him the principal and undistributed income. During the life of the trustor, the trustee was not to sell or reinvest without the written consent and approval of the trustor. In case of Erard's death before the age of twenty-five, the entire estate was to go to other sons of the trustor.
The trustor irrevocably disposed of the shares. He did not sell, but made a gift. Burnet v. Guggenheim, 288 U. S. 280. He gave the trustee legal title temporarily, to be held to enable it to conserve, administer, and transfer the property for the use and benefit of his son, to whom he gave the beneficial interest. It may rightly be said that the trustee and beneficiary "acquired by gift" as meant by § 202(a). [Footnote 2] If the broad definition in § 2(9) stood alone, either might be regarded as the taxpayer, but it is qualified by the rule that the trustee must pay the tax. It follows that the trustee properly may be regarded as the taxpayer, and, for the purpose of calculating the gain, as having assumed the place of the trustor. Section 202(a)(2) was enacted to prevent evasion of taxes on capital gains. Taft v. Bowers, 278 U. S. 470, 278 U. S. 479, 278 U. S. 482. And see Cooper v. United States, 280 U. S. 409. Transfers to trustees for the benefit of others are clearly within the reason for the enactment.
They may be used to avoid burdens intended to be imposed, quite as effectively as may gifts that are directly made. The difference between the cost to the trustor in 1906 and the amount for which the trustee sold in 1922 was rightly taken as taxable income of the trust.
invokes these statements: "If the language be clear, it is conclusive. There can be no construction where there is nothing to construe." United States v. Hartwell, 6 Wall. 385, 73 U. S. 396. He suggests that his construction was approved by the Revenue Act of 1924, § 208(a)(8), 43 Stat. 263,, which retained the definition, and that the provision in the Revenue Act of 1926, § 208(a)(8), 44 Stat. 19, which conforms to the construction for which the trustee here contends, operated to make a change in the law.
"It is well settled that, in interpreting a statute, the court will not look merely to a particular clause in which general words may be used, but will take in connection with it the whole statute (or statutes on the same subject) and the objects and policy of the law, as indicated by its various provisions, and give to it such a construction as will carry into execution the will of the legislature, as thus ascertained, according to its true intent and meaning."
examine the matter further. We may then look to the reason of the enactment, and inquire into its antecedent history and give it effect in accordance with its design and purpose, sacrificing, if necessary, the literal meaning in order that the purpose may not fail."
"a thing which is within the intention of the makers of a statute is as much within the statute as if it were within the letter, and a thing which is within the letter of a statute is not within the statute unless it is within the intention of the makers."
"The specific property sold or exchanged must have been held for more than two years, but, in the case of a stock dividend, the prescribed period applies to the original stock and the stock received as a dividend, considered as a unit, and where property is exchanged for other property . . . , the prescribed period applies to the property exchanged and the property received in exchange considered as a unit."
A. & G. Steam Packet Co., 13 Pet. 89, 38 U. S. 97; Deery v. Cray, 10 Wall. 263, 77 U. S. 270; Patch v. White, 117 U. S. 210, 117 U. S. 217; Gilmer v. Stone, 120 U. S. 586, 120 U. S. 590; American Net & Twine Co. v. Worthington, 141 U. S. 468, 141 U. S. 474.
"The sale of . . . capital assets is now seriously retarded 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. In order to permit such transactions to go forward without fear of a prohibitive tax, the proposed bill, in § 206, adds a new section . . . to the income tax providing that, where the net gain derived from the sale or other disposition of capital assets would, under the ordinary procedure, be subjected to an income tax in excess of 15 percent (afterwards changed to 12 1/2 percent), the tax upon capital net gain shall be limited to that rate. It is believed that the passage of this provision would materially increase the revenue not only because it would stimulate profit-taking transactions, but because the limitation of 15 percent is also applied to capital losses. Under present conditions, there are likely to be more losses than gains."
67th Congress, 1st Session, House Report No. 350, p. 10. See also Senate Report No. 275, p. 12. In respect of the legislative purpose to lessen hindrance caused by high normal and surtaxes, there is no distinction between gains derived from a sale made by an owner who has held the property for more than two years and those resulting from one by a donee whose tenure plus that of the donor exceeds that period.
Sections 202(a)(2) and 206(a)(6) are included in the same Act, and are applicable respectively to different elements of the same or like transactions and are not to be regarded as wholly unrelated. While undoubtedly legally possible and within the power of Congress, the methods adopted and results attained by the Commissioner are so lacking in harmony as to suggest that the continuity required to be used to get the base was also intended for use in finding the rate. No valid ground has been suggested for requiring tenures to be added for the one purpose and forbidding combination for the other. The legislative purpose to be served by the application of the lower rate upon capital gains is directly opposed to the Commissioner's construction. There is no ground for discrimination such as that to which the trustee was subjected. It is to be inferred that Congress did not intend penalization of that sort.
definition had not been construed in any Treasury Decision, by the Board of Tax Appeals or by any court prior to that enactment. The dates of all constructions of the definition to which our attention has been called are shown in the margin. [Footnote 5] The regulation above referred to was approved February 15, 1922. In respect of the question here involved, it puts no construction upon the definition. The rulings, I.T. 1379, 1660, and 1889, cited by the Commissioner were made before the passage of the 1924 act, but they "have none of the force or effect of Treasury Decisions and do not commit the Department to any interpretation of the law." See cautionary notice published in the bulletins containing these rulings. It does not appear that the attention of Congress had been called to any such construction. There is no ground on which to infer that, by the 1924 Act, Congress intended to approve it.
to existing law. In view of the inclusion of the same definition in the acts of 1921, 1924, and 1926 and the legislative purpose underlying it, the contention that the new words were added to change the meaning of "capital assets," as defined in the earlier acts, is without force. The definition, so clarified, was not new law, but "a more explicit expression of the purpose of the prior law." Jordan v. Roche, 228 U. S. 436, 228 U. S. 445; Merle-Smith v. Commissioner, 42 F.2d 837, 842. McCauley v. Commissioner, 44 F.2d 919, 920.
* Together with No. 899, New York Trust Co., Trustee v. Helvering, Commissioner, certiorari to the Circuit Court of Appeals for the Second Circuit.
On the basis of the return made, the tax was $14,391.71. On the construction of § 202(a)(2) for which trustee contends, the tax would be $7,714.
McDonogh's Executors v. Murdoch, 15 How. 367, 56 U. S. 400, 56 U. S. 404; Maguire v. Trefry, 253 U. S. 12, 253 U. S. 16; Neilson v. Lagow, 12 How. 98, 53 U. S. 106,-107, 53 U. S. 110; Croxall v. Shererd, 5 Wall. 268, 72 U. S. 281; Doe v. Considine, 6 Wall. 458, 73 U. S. 471; Bowen v. Chase, 94 U. S. 812, 94 U. S. 817, 94 U. S. 818-819; Young v. Bradley, 101 U. S. 782, 101 U. S. 787; Anderson v. Wilson, 289 U. S. 20, 289 U. S. 24-25.
L.T. 1379, 1-2 C.B. (July December, 1922) 41. I.T. 1660, II-1 C.B. (January-June, 1923) 36. I.T. 1889, III-1 C.B. (January-June, 1924) 70. McKinney v. Commissioner, 16 B.T.A. 804, 808; Johnson v. Commissioner, 17 B.T.A. 611, 614, aff'd, 52 F.2d 727; Shoenberg v. Commissioner, 19 B.T.A. 399, 400, aff'd, 60 App.D.C. 381, 55 F.2d 543; Stegall v. Commissioner, 24 B.T.A. 1231, 1235; McCrory, Trustee v. Commissioner, 25 B.T.A. 994, 1011.
The deficiency assessed, $238,275.91, plus original assessment, $14,391.71, makes the total $252,667.66. The taxpayer's calculation indicates that, if the 12 1/2 percent rate were applied, the total tax would be $58,921.51.
"The term 'capital assets' means property held by the taxpayer for more than two years. . . . In determining the period for which the taxpayer has held property, however acquired, there shall be included the period for which such property was held by any other person, if under the provisions of § 204 [corresponding to § 202(a)(2) of the 1921 Act] such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person."
Within the meaning of § 202(a) of the Revenue Act of 1921, the trustee acquired the trust res by gift. But reference must be had to §§ 206 and 219 to ascertain the rate of tax to be applied to the gain on the sale. These are distinct sections, found not in juxtaposition with 202, but in portions of the Act dealing with unrelated topics, the one with "capital Gains" and the other with "Estates and Trusts." Confessedly the first grants an exemption from the normal rate of tax and allows payment at a lower rate only to a "taxpayer" who realizes gain from the sale of a capital asset which he (the "taxpayer") has held for profit or investment for over two years. The second, in words too plain to be misunderstood, designates the trustee of a trust such as the one here in question as the taxpayer. The unambiguous mandate of the act should be enforced.
1. Under the recognized rules of construction, we should give the words of the statute their ordinary and common meaning. Old Colony R. Co. v. Commissioner, 284 U. S. 552, 284 U. S. 560. If the language be plain, there is nothing to construe. Hamilton v. Rathbone, 175 U. S. 414, 175 U. S. 419; Thompson v. United States, 246 U. S. 547, 246 U. S. 551. We cannot enact a law under the pretense of construing one. Heiner v. Donnan, 285 U. S. 312, 285 U. S. 331.
Nor can we avoid the plain meaning of a statute by construction, so-called, because we think, as written, it begets "hard and objectionable or absurd consequences, which probably were not within the contemplation" of its framers. Crooks v. Harrelson, 282 U. S. 55. Where, as in the present case, the provision is one granting an exemption from the full rate of taxation, doubts must be resolved against the taxpayer. Heiner v. Colonial Trust Co., 275 U. S. 232, 275 U. S. 235.
2. For twelve years after the passage of the Act, the administrative rulings uniformly denied the benefit of the capital gains sections of the Act of 1921 to a donee who had not himself held the property over two years. These are entitled to respectful consideration, and will not be disregarded except for weighty reasons. Fawcus Machine Co. v. United States, 282 U. S. 375, 282 U. S. 378. Two Courts of Appeals have decided against the trustee's contention. In the face of this unbroken agreement of the executive and judicial departments, we should be show to announce a contrary view.
as the base and assert that he had made no gain. There is no incongruity in declaring that, in the case of a gift, the donee shall pay tax at the full rate unless he shall have held the property a full two years. Congress might well think it proper thus to condition the privilege of a reduced rate to one who paid nothing for the property.
Assuming, however, for the sake of argument, that there is a logical inconsistency between the prescribed method for arriving at the base and that for ascertaining the rate, it is the province of Congress alone to remove it. There is no abstract justice in any system of taxation. Nothing could involve more dangerous consequences than that the courts should rewrite plain provisions of a tax act in order to bring them into harmony with a supposed general policy. Such a principle of decision would embark us on a sea of construction whose bounds it is difficult to envisage. Every revenue act embodies policies which conflict to some extent with those elsewhere in the act evinced. Income tax legislation is a continuous series of corrections and amendments in an effort to make the policy of taxation more congruous.
The very sections extending the relief of a reduced rate on capital gains teach us how inconsistently the principle has been followed and how impossible and improper it would be for a court to rewrite the sections in an effort to make them logically consistent.
Instances might be multiplied of logical inconsistency in the incidence of the capital gain or loss provisions, but this Court is not at liberty, because it thinks the provisions inconsistent or illogical, to rewrite them in order to bring them into harmony with its views as to the underlying purpose of Congress.
"The same question arises in the case of property received by gift after December 31, 1920. The amendment provides that the period in which the property was held by the donor shall be added to the period in which the property was held by the donee in determining whether or not the property so received falls within the capital gain or loss section. [Footnote 2/8]"
Certainly this language is far from compelling the conclusion pressed upon us, that the amendment was merely a confirmation of the understanding of Congress as to the effect of the earlier acts.
The judgment should be reversed, and the cause remanded for the calculation of the tax to the trustee at ordinary rates for the reason that it did not hold the capital assets for two years, so as to entitle it to the 12 1/2 percent rate.
MR. JUSTICE BRANDEIS and MR. JUSTICE STONE concur in this opinion.
Sections 202(a)(2), 206(a)(2), (b), 42 Stat. 229, 232, 233.
Section 208(c), 44 Stat. 20.
See § 208(c), 44 Stat. 20. As stated in Regulations 69, art. 1654, by § 208(b), if the taxpayer has a capital net gain, he has an election whether to return it under the capital gains and losses provision, but the limitation with respect to a capital net loss provided in 208(c) will be applied irrespective of the taxpayer's election.
§ 206(a)(6), 42 Stat. 233.
§ 208(a)(8), 43 Stat. 263; Act of 1926, § 208(a)(8), 44 Stat. 19; Act of 1928, § 101(c)(8), 45 Stat. 811.
Revenue Act of 1926, § 208(a)(2), 44 Stat. 19; Regulations 69, Art. 1651; Art. 141; Cumulative Bulletin V-I, 61.
Section 208(a)(8), 44 Stat. 19.
House Rep. No. 1 and Senate Rep. No. 52, 69th Cong., 1st Session.

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