Source: https://supreme.justia.com/cases/federal/us/300/216/
Timestamp: 2019-04-25 20:26:38+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 300 › Helvering v. Midland Mutual Life Ins. Co.
Helvering v. Midland Mutual Life Insurance Co.
interest," Revenue Act 1928, § 202(a), even though the property, when so acquired, was worth less than the amount of the principal. P. 300 U. S. 222.
The bid was made without regard to the value of the property apparently for the purpose of avoiding loss of investment in case of redemption by the mortgagor. The property was carried on the company's books as an asset, valued at the principal of the loan plus certain expenses. The interest was not entered either as asset or as income.
2. The term "interest" in the Act, supra, is used generically. P. 300 U. S. 223.
3. A receipt of interest is taxable as income, whether paid in cash or by credit. Id.
4. Bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability. Id.
5. A mortgagee who, at foreclosure sale, acquires the property by bid of principal and interest acquires the same rights qua purchaser as the stranger who buys for cash, and in either case the debt, including the interest, is paid. Id.
6. Where the legal effect of a transaction fits the plain letter of a tax act, the transaction is included unless a definite intent to exclude it is clearly revealed in the Act or its history. P. 300 U. S. 224.
7. Tax laws are construed with a view to their efficient administration. P. 300 U. S. 225.
8. The tax in this case is not inconsistent with rights of mortgagees as defined in Louisville Joint Stock Land Bank v. Radford, 295 U. S. 555. P. 300 U. S. 226.
Certiorari, 299 U.S. 527, to review a judgment reversing a decision of the Board of Tax Appeals sustaining an increased income tax assessment.
Ins. Co., 78 F.2d 778, and National Life Ins. Co. v. United States, 4 F.Supp. 1000.
interest as part of the cost of the properties or as an asset, and did not include the interest as an asset in its annual statement or in its reports to insurance departments.
The arguments rest upon a misconception. The terms "interest," "dividends," and "rents" employed in the statute, simply and without qualification or elaboration, were plainly used by Congress in their generic meanings, as broadly descriptive of certain kinds of "income." Compare Lynch v. Hornby, 247 U. S. 339, 247 U. S. 344; Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, 293 U. S. 86. We cannot say that Congress did not intend to include in its definition a case like the present merely because the taxpayer received a credit, rather than money or other tangible property. Compare Raybestos-Manhattan, Inc. v. United States, 296 U. S. 60, 296 U. S. 62-64. A receipt of interest is taxable as income whether paid in cash or by a credit. Compare Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine R.R., id., 279 U. S. 732. This credit, it is true, was not entered on the taxpayer's books as interest or as an asset. But bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability. Compare Doyle v. Mitchell Bros. Co., 247 U. S. 179, 247 U. S. 187. The intent to use the full extent of power being clearly evident, we must not confine the legislation within narrower forms than the statutory language would indicate. Compare Irwin v. Gavit, 268 U. S. 161, 268 U. S. 166; Helvering v. Stockholms Enskilda Bank, supra, 293 U. S. 89.
stranger who acquires the property on a bid of like amount. It is true that the latter would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid. But the rights acquired qua purchaser are the same in either case, and likewise the legal effect upon the mortgage debt is the same. In each case, the debt, including the interest accrued, is paid. Where the stranger makes the purchase, the debt is discharged by a payment in cash; where the mortgagee purchases the property, the debt is discharged by means of a credit. The amount so credited to the mortgagor as interest paid would be available to him as a deduction in making his own income tax returns. [Footnote 6] It would be strange if the sum deductible by the mortgagor debtor were not chargeable to the mortgage creditor as income received. Where the legal effect of a transaction fits the plain letter of the statute, the tax is held payable unless there is clearly revealed in the act itself or in its history a definite intention to exclude such transactions from the operation of its applicable language. See Central National Bank v. United States, 137 U. S. 355, 137 U. S. 364; [Footnote 7] Treat v. White, 181 U. S. 264, 181 U. S. 268; Provost v. United States, 269 U. S. 443, 269 U. S. 456-458; Old Colony R. Co. v. Commissioner, 284 U. S. 552, 284 U. S. 560-561. Respondent here makes no such showing.
would seem to be that respondent valued the protection of the higher redemption price as worth the discharge of the interest debt for which it might have obtained a judgment. Moreover, the company's argument ignores the needs of an efficient system of taxation. The administration of the income tax law would be seriously burdened if it were held that, when a mortgagee bids in the property for a sum including unpaid interest, he may not be taxed on the interest received except upon an inquiry into the probable fair market value of the property. [Footnote 8] "At best, evidence of value is largely a matter of opinion, especially as to real estate." Montana Railway Co. v. Warren, 137 U. S. 348, 137 U. S. 353. There is nothing unfamiliar in taxing on the basis of the legal effect of a transaction. Income may be realized upon a change in the nature of legal rights held, though the particular taxpayer has enjoyed no addition to his economic worth. Compare Lynch v. Hornby, 247 U. S. 339, 247 U. S. 344, 247 U. S. 346; United States v. Phellis, 257 U. S. 156, 257 U. S. 170-171; Marr v. United States, 268 U. S. 536, 268 U. S. 540; Burnet v. Commonwealth Improvement Co., 287 U. S. 415, 287 U. S. 419-420.
"The income tax laws do not profess to embody perfect economic theory. They ignore some things that neither a theorist or a businessman would take into account in determining the pecuniary condition of the taxpayer."
"the mortgaged property devoted primarily to the satisfaction of the debt, either through receipt of the proceeds of a fair competitive sale or by taking the property itself."
The charge of inconsistency is unfounded. The company exercised its right to have a sale. At the sale, it was free either to bid or to refrain from bidding. If it bid, it was free to bid such sum as it pleased. It chose to bid the full amount of principal and interest. Thus, it obtained, in legal contemplation, full payment of the interest, as well as the principal. To tax the company upon the full amount of interest received as a result of its own bid in no way impairs its rights as mortgagee. Compare Texas & Pacific Ry. Co. v. United States, 286 U. S. 285, 286 U. S. 289. If the bid had been insufficient to yield full payment of the mortgage debt, principal, and interest, the company would have been entitled to a judgment for the deficiency. If the company had refrained from bidding, and a stranger had bid more than the principal, the company would obviously have been taxable upon the excess up to the amount of the interest due. Perhaps it was the company's custom of bidding the full amount of principal and interest which deterred bidding by others.
See National Life Insurance Co. v. United States, 277 U. S. 508, 277 U. S. 522.
Revenue Act 1928, § 201(b)(1), 45 Stat. 791, 842.
Compare §§ 244(a), 245(a), of the Revenue Acts of 1921, 42 Stat. 227, 261; 1924, 43 Stat. 253, 289; 1926, 44 Stat. 9, 47; §§ 202(a), 203(a), of the Revenue Acts of 1928, 45 Stat. 791, 842; 1932, 47 Stat. 169, 224; 1934, 48 Stat. 680, 731, 732; 1936, 49 Stat. 1648, 1710. See Helvering v. Independent Life Insurance Co., 292 U. S. 371, 292 U. S. 377, 292 U. S. 379; U.S. Treas.Reg. 74, Art. 951.
A large majority of the properties were located in Michigan. By Michigan law, it is said, the mortgagor is allowed one year from the date of the foreclosure sale within which he may redeem the property by paying to the purchaser the amount bid for the property plus interest from the time of the sale at the rate borne by the mortgage, even though the amount of such bid be less than the total amount of the mortgagee's investment in the property. See Comp.Laws 1929, c. 266, §§ 14435, 14436; compare Vosburgh v. Lay, 45 Mich. 455, 8 N.W. 91. The purchaser cannot, under the local law, acquire title until after the expiration of the redemption period. See Comp.Laws 1929, c. 266, § 14434. The mortgagee may, "fairly and in good faith," bid the property in (id., § 14432), and he enjoys the same rights as purchaser as would a third party. See Ledyard v. Phillips, 47 Mich. 305, 308, 11 N.W. 170.
The order of the Court of Appeals, which reversed the decision of the Board, remanded the cause for further proceedings. We are told by counsel for the company that thereafter the Board found, on the evidence above referred to, that the values of the several properties were less than the principal of the loans. This finding, made after the filing of the petition for certiorari, though apparently before its allowance, was not made part of the record. It is therefore disregarded.
See Revenue Act of 1928, § 23(b), 45 Stat. 791, 799.
See also Kentucky Improvement Co. v. Slack, 100 U. S. 648, 100 U. S. 658-659; Bailey v. Railroad Co., 106 U. S. 109, 106 U. S. 115-116; compare 89 U. S. Savings Union, 22 Wall. 38, 89 U. S. 41.
Compare Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 134 U. S. 236; New York ex rel. Hatch v. Reardon, 204 U. S. 152, 204 U. S. 159; Paddell v. City of New York, 211 U. S. 446, 211 U. S. 449-450; New York v. Latrobe, 279 U. S. 421, 279 U. S. 427.
Taxability has frequently been determined without reference to factors which the accountant, economist, or businessman might deem relevant to the computation of net gain. Compare Brushaber v. Union Pacific R. Co., 240 U. S. 1; Tyee Realty Co. v. Anderson, 240 U. S. 115; Weiss v. Wiener, 279 U. S. 333; Helvering v. Independent Life Insurance Co., 292 U. S. 371. The exigencies of a tax determined on an annual basis may lead to the inclusion as income of items which might be shown to involve no gain if the transactions were viewed as a whole over several years. Compare Burnet v. Sanford & Brooks Co., 282 U. S. 359, 282 U. S. 364-365; Brown v. Helvering, 291 U. S. 193, 291 U. S. 199; Spring City Foundry Co. v. Commissioner, 292 U. S. 182, 292 U. S. 189-190.
The judgment below, I think, is correct, and should be affirmed. A well considered opinion supports it.
The notion that Congress intended to tax the mere hope of recouping a loss some time in the future should be definitely rejected.
To support the assertion that here, the company collected interest, when in fact everything received was worth less than the sum loaned, requires resort to theory at war with patent facts. The company got nothing out of which to pay the exactment; its assets were not augmented. Like imaginary "receipts" of interest often repeated and similarly burdened would hasten bankruptcy.
Divorced from reality, taxation becomes sheer oppression.

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