Warren E. Burger: Court will hear arguments first this morning in 76-1150, Baldwin against Fish and Game Commission of Montana. Mr. Goetz, you may proceed whenever you are ready.
James H. Goetz: Mr. Chief Justice and may it please the Court, my name is James H. Goetz. I am from Bozeman, Montana. I represent the appellants. This case presents a challenge on constitutional grounds to the statutory system of the State of Montana by which big game licenses are made available to hunters who are not residents of Montana. The Montana statutory scheme is challenged on the basis of two provisions of the United States constitution, Art.IV, § 2, the Interstate Privileges and Immunities Clause and Amendment Fourteen, the Equal Protection Clause of that Amendment. The statutory system is challenged in two parts, the first is challenge goes to the severe license fee differential, implicit in the Montana statutory scheme that is the differential between resident and non-resident big game hunters. The second challenge goes to the requirement that the non-resident in order to hunt in Montana must buy what is called a Combination License and that Combination License, I believe is described adequately in the appellant's opening brief.
Byron R. White: Well, is that a latter really any different from the first? All that required is to pay some money is it not?
James H. Goetz: That all of it required is to pay some money to get th combination license. I think it presents a --
Byron R. White: But it is just a -- you can get it if you just pay some money, quite a bit of more money.
James H. Goetz: Yes, that is true, in that sense, it is the same and in that sense, our position, appellant's position is that it is a means of indirectly gouging, if you will of a non-resident hunter to increase the fees. However, in the constitutional sense it is different, because the state shows to defend the Combination License, four reasons unrelated to the monitory or a cost justification. So I think it presents a different issue in that regard.
Warren E. Burger: Do you analogize this to your legal tie-in sale?
James H. Goetz: Yes, I think I would, I have not thought about it in that context right away, but I think it would be something like an illegal tie-in and in the sense that it entails an indirect imposition which must be undertaken by a person in order to avail themselves of the right to hunt. I think in that sense it is much like an Anti-Trust Tie-In, if I understand your question correctly.
Lewis F. Powell, Jr.: Did the District Court address the Combination License issue?
James H. Goetz: In my judgment the District Court did not, there is one Footnote in the District Court's opinion which suggests that the District Court addressed that issue simply as another aspect of the increase in fees, somewhat along the lines of Justice White's question here today, I believe it is clear the District Court did not address it directly.
Lewis F. Powell, Jr.: Do you think it is before us?
James H. Goetz: Well, yes I do because it was presented in the District Court and the District Court rejected the plaintiffs and the appellant's challenge to the Combination License and there is absolutely no doubt from the record that that issue was presented squarely and specifically and as I say, it was referenced in the Footnote, the District Court did not address it at least as I thought they should have as a separate issue. Now, the position of the appellants on the constitutional issue is that the Combination License is simply unconstitutional under both provisions presented. With respect to the fee differential as a severe fee differential, it is position of appellants that that as supplied in Montana is unconstitutional. But that the case Toomer v. Witsell and the companion case from Alaska, Mullaney v. Anderson, leave room on the fee differential for some additional assessment for non-residents. If that assessment is reasonably related to one of two factors or both, those factors are if the state residents can contribute taxes which go to the resource or to conservation, which the nonresident does not then to that extent the non-resident can be assessed a higher fee. The second aspect of the Toomer and Mullaney standard is that if the non-resident imposes some additional enforcement burden, then to that extent the non-resident can be assessed an additional fee by the state.
Speaker: Do I understand you to agree with those propositions.
James H. Goetz: Yes, I certainly do Your Honor.
William H. Rehnquist: Both Toomer and Mullaney involved commercial enterprises, that kind of calling or making a living thing that I think Bush at Washington first referred to in Coryell v. Corfield, do you think those automatically carry over to big game money which certainly is not a way of making a living at least for the people who come in and hunt?
James H. Goetz: Your Honor, I do not think that they automatically carry over, that is I do appreciate a difference between recreation and the pursuit of a common calling. However, it is appellant's position here that when logically analyzed and with due regard to the precedent in the area that indeed Toomer and Mullaney do apply to the present situation. If I may expand on that, I would say that that there is some question about how far the privileges and immunities as far it goes to what it applies, and I have looked at the two most recent or two of the most recent announcements by this court. The most recent being Austin v. New Hampshire and there the case did not not my in my guessing, address very specifically the question of what is the nature of the right, rather the opinion of the court went to the purposes of the privilege, the interstate Privileges and Immunities Clause namely to promote comity among the states and that issue was certainly and that purpose is certainly brought to bear in present case.
William H. Rehnquist: Do you think that loomed large in the minds of the framers of the constitution, the right of the people in one state to hunt elk and another?
James H. Goetz: No, I do not. I think it was probably not significant question at that time.
Potter Stewart: There were no Elk in the East I think.
James H. Goetz: I do not think there were any elk in the East, but at any rate, the premium on recreation was not nearly so great at that time for obvious reasons, plus I suspect, but I do not know, I suspect that hunting and fishing were not licensed at all.
Thurgood Marshall: Mr. Goetz, comment on how many states have laws like this?
James H. Goetz: Well, the Appendix of the Appellee sets forth the list of states. In the first place, with respect to the Combination License requirement, I think no state other than Montana has it.
Thurgood Marshall: Well, that is what I am talking about.
James H. Goetz: Yeah, the Combination License, I am not aware of any state that has that kind of requirement.
Thurgood Marshall: So all we are dealing with is Montana.
James H. Goetz: In so far as the Combination License is involved.
Speaker: Well how many licenses are applied for Montana, I mean, only people are involved in it.
James H. Goetz: Well, in the last year for which figures are available, there were approximately 31,000 non-resident hunters.
Speaker: In Montana?
James H. Goetz: Yes.
Thurgood Marshall: Only Montana?
James H. Goetz: Yes.
Thurgood Marshall: Elk hunters?
James H. Goetz: No, elk hunters were substantially fewer somewhere in the neighborhood of -- I would have to consult defendant's Exhibit A, but somewhere in the neighborhood of 14,000 and so there is a statutory limit for non-resident Combination Licenses, now in the Montana Statute which I have referenced in my brief, that figure of 17,000 that figure, has not been approached.
Thurgood Marshall: How many elks do you have in Montana?
James H. Goetz: Well, I am not sure.
Thurgood Marshall: If you got 14,000 shooting at them, then how many do you have left?
James H. Goetz: Well, we have got a substantial number of elk in Montana and the elk is quite widely and all elk are not shot. In other words, not all hunters get elk, those are 14,000 non-residents, of course, the number of residents is much greater than that. So we have substantial number of elk hunters.
Thurgood Marshall: Well, then I conclude there are whole lot of bad shots.
James H. Goetz: They have to see them first to shoot them.
Speaker: Mr. Goetz how long have these disparate fees were in effect in your state?
James H. Goetz: I am not sure, it has been quite a substantial period of time, the precise fee has changed of course with time, the most recent being in 1975.
Speaker: And this is the first challenge that you know to the --
James H. Goetz: To the fee structure it is. There was a requirement in Montana that non-residents be accompanied by resident outfitters when hunting and that was found un-constitutional by the Montana Supreme Court on Equal Protection grounds in 1975. But to the fee structure, to my knowledge, this is the first Montana case. Now, there is a New Mexico federal case, which I have referenced in my reply brief that was decided in August of this year.
Speaker: Now, there are aspects of your statutory structure where no distinction is drawn between resident and non-resident, is that not so? Bow and arrow shooting?
James H. Goetz: Yes, I believe that is true.
Speaker: And wild turkeys?
James H. Goetz: Yes.
Speaker: Do know why there is a different treatment there?
James H. Goetz: No I do not frankly.
Warren E. Burger: Maybe the mortality rate of elk is not very high with bows and arrows, is that it?
James H. Goetz: Well, it is rather rare that an elk would be taken by bow and arrow and I do know from my own experience, it is not on the record, but the turkey is not a very prevalent game bird in Montana and it might be that it is just not thought to be a very important issue. If I may --
Potter Stewart: You are saying, just before you proceed that the total number of non-resident elk hunters is limited to a figure of 17,000 and what they would be drawn by a lot if there were more than that many applicants?
James H. Goetz: I believe that is the -- as I read the statute, it is not clear how they do that and it maybe that the State Fishing Game Commission has to implement that by regulation. My understanding it is on a first come first serve basis of whether it would be that or a deadline and then some lot, but they have not reached that figure so that --
Potter Stewart: It has never been necessary to determine --
James H. Goetz: And that has not been challenged of course in this lawsuit.
William H. Rehnquist: Do you think it would be challenged under your line of reasoning, if anybody from who reside in Montana was able to get an elk license, but there was flat sealing on the number of out of staters who would get it, but no license fee differential.
James H. Goetz: I believe that under my line of reasoning that would be equally or that would probably be faulty, I must confess that since that is not in the case, I may not have thought through it as carefully as I have the issues here, but it is my position that that probably would be constitutionally faulty also.
Potter Stewart: And, a fortiori, if Montana should say that there should be no non-resident hunters, only our residents should hunt out.
James H. Goetz: Absolutely, I believe that would be flatly unconstitutional.
Speaker: Mr. Goetz, in my home state there is a provision that senior citizens like most of us up here over the age of 'x' years can get a fishing license without charge at all, but they had to get a license, under your line of reasoning would that be unconstitutional? The minimum significance, they would catch a fish. They are the ones that always are --
James H. Goetz: I think that is an excellent answer and I would like to stand on that.
Speaker: That is what your case amounts to -- you better dig out more than that --
James H. Goetz: No, I think the case presents a much more significant issue where I would not be here. But in order to respond to your question, I believe that well, if we look at the senior citizen classification under the Equal Protection Clause as this court did in the Merger, Massachusetts Board of Retirement v. Merger, it was decided to review that on a minimal scrutiny basis and if the state has reasonable grounds for that approach then that would pass constitutional muster. The difference between that and I would be willing in the Minnesota case to that is where you are from, is not it. That is the state you are talking about, but I would be willing to accept the constitutionality of that kind of discrimination, if we carry that over to the present case, I think we have an explicit holding by the District Court that the discrimination is not justifiable on any cost basis and I interpret that to be there are no rational grounds under the Equal Protection Clause, unless you go to what the District Court went to and that is the political justification and I think lies one of the difference between your situation and the Montana situation and my feeling is we have unanimous finding by the District Court that except for the political justification, this non-resident fee differential cannot be justified in Montana.
William H. Rehnquist: That is another factual finding, now that is a conclusion of law, is it not?
James H. Goetz: No, I think that is a factual finding in this sense, facts were taken by the District Court. Testimony was taken, the District Court looked at that testimony, looked at the rationalization offered by the state and then said, looking at the evidences can not be justified. Even giving due regard to the presumption of constitutionality.
William H. Rehnquist: But the question of whether a statute may be justified under a particular set of facts, under a conceivable set of facts, is itself a question of law?
James H. Goetz: Well, I agree from that perspective, there has to be legal rubric within which to fit the facts and that legal rubric in the District Court was this, the appellants were arguing that the Toomer v. Witsell standard is applicable. That is to the extent that higher enforcement cost or conservation resident taxes were not paid or posed where higher enforcement costs were posed by nonresident, their conservation resident taxes were unpaid, there could be a higher non-resident fee and that is a legal rubric within which the court found in my judgment that factually the state cost justification does not fit into that. I guess, I would classify that as a mixed law facts.
Byron R. White: Could you tell me or is it in the record, what percentage of the elks that are taken on federal land?
James H. Goetz: 75% of the elk taken in Montana are taken on federal land.
Byron R. White: I take if all of the United States believes that sort of thing and that state under our cases, if Congress were so inclined, I suppose, it could limit or regulate the taking of elk on federal land.
James H. Goetz: In my judgment under the property clause, constitutionally Congress could on the federal lands have a federal license and I might add to that one of the worries posed on I think both sides implicitly in this case, from a state's right standpoint is a federal license. My feeling is --
Byron R. White: Or may be not a federal license but a limit on what the states could charge.
James H. Goetz: Right, either one, federal what Montana might call federal intervention, my feeling is that if the appellant's position were accepted here and if reasonable constitutional limitations were placed on the states, it would pose less threat in terms of outside what is perceived to be outside or federal influence with the game in Montana.
Warren E. Burger: Do you think Congress could preempt this area with exclusive license or would they have to do it concurrently with the states as with the duck standpoint of state license.
James H. Goetz: I am not sure what they would have to do, in terms of hunting on the federal lands, I guess, my feeling is that Congress could preempt the area, if it wanted to, in so far as gaming of course, on non-federal lands, I am not sure if Congress has any interest in doing that. So I think, I would separate the two in that sense.
John Paul Stevens: Mr. Goetz, your cost, the cost problem, the cost justification issue is that relevant to both your equal protection claim and your privileges and immunities claim or does it have different constitutional significance
James H. Goetz: It is relevant and important under both. However, there may be different standards of judicial review under the Equal Protection Clause as opposed to Privileges and Immunities Clause.
John Paul Stevens: Well, is there any difference in the standard of what the state and according to your theory must prove in order to cost justify that license be required?
James H. Goetz: No, according to our theory that standard would be the same and we take that standard of course, from Toomer v. Witsell and there is no, well, I was going to say to my knowledge there is no Equal Protection case that imposes that same standard. However, it should be recognized in Takahashi v. Fish & Game Commission of California was decided at the same time of Toomer and is an Equal Protection Clause and I think juxtaposing those two cases, given their similarities in the time proximity that really, probably that Toomer v. Witsell standard applies also under the Equal Protection standard. I have reserved ten minutes for rebuttal, so I will conclude at this point.
Warren E. Burger: Very well, Mr. Goetz. Mr. Lenzini.
Paul A. Lenzini: Mr. Chief Justice and may it please the Court. Appellants challenge to separate features at Montana's statutory beginning licensing, first the Combination License and second the higher fees imposed upon non-residents. Montana, however is by no means unique among the states in charging higher fees for hunting by nonresidents, indeed virtually every state does charge higher fees. Resolution, the constitutional issue here requires analysis of the asserted right as well as a regulatory interest of the State of Montana in regularly in big game species. Appellants claim that this case is covered by Toomer v. Witsell and that the P&I Clause of the constitution requires that non-residents should be treated on terms of substantial equality with residents. Either the appellants or the dissenting judge below, however assert that recreational hunting is a fundamental privilege and immunity and indeed no case has ever held rather appellants argue that extraneous features involved here call them to play the protections of the Privileges and Immunities Clause, namely, the fact that 75% of the elk are taken on federally on land and the fact that the state receives financial assistance from the federal government for wildlife restoration programs. Appellees submit that this analysis without any support in the judicial history of the P&I Clause and indeed from the earliest interpretation in Corfield v. Corfield, the courts have consistently focused on the nature of the right itself. The clause has never been considered to guarantee the nonresident, equality and all rights and privileges and the fundamental right analysis has been consistently followed. Neither may the appellants transform somehow this recreation activity in to an activity covered by the privileges clause, simply because of federal landing involved. Congress has declared that on the national forest and indeed much the land in Western Montana where the elk is taken is national forest and has declared that in 60 U.S.C. Section 4e, the jurisdiction over the national forest resides in the state, both civil and criminal. Indeed in the Multiple-Use Sustained-Yield Act of 1960, affecting the National Forest, in USC528, Congress specifically declared that nothing there in shall be considered affecting the jurisdiction, a responsibility.
Byron R. White: Would it be your position then that the State of Montana, could, if it wanted to, just exclude non-residents entirely from recreational hunting? I mean, in so far as the Privileges and Immunities Clause is considered.
Paul A. Lenzini: In so far as the Privileges and Immunities Clause is concerned, I believe it could with respect to the Equal Protection Clause, we have a different --
Byron R. White: Similarly with the parks.
Paul A. Lenzini: With the national parks? By law there is no hunting permitted at all.
Byron R. White: Yeah, but how about state parks, just reserving state parks for the use of citizens?
Paul A. Lenzini: I submit that under the Privileges Clause, the court could because a fundamental right is not involved. I think we have a different question under the Equal Protection Clause, there I believe that unlike this case, where we have a substantial number of nonresidents coming into Montana, there I think the question would probably require a higher level of scrutiny by this court.
Byron R. White: Well, let us just say the state says that for political purposes namely to encourage our citizens to be willing to put up the money for state parks, we are going to exclude nonresidents, it is just recreation, they just only want to do is to camp and walk around.
Paul A. Lenzini: If the state seem absolutely deterred, all incoming non-residents, I think we have a different situation in this case.
Byron R. White: Don't you think that that would be reached by the Privileges and Immunities Clause?
Paul A. Lenzini: I do not think it would be reached by the P$I Clause.
Byron R. White: And then the Equal Protection?
Paul A. Lenzini: Because I do not think that --
Byron R. White: In Equal Protection, you would say you would need more than a rational basis?
Paul A. Lenzini: That is not the case of course, but I think that we would have to look at different reasons for the state that is what is rational in that situation might be different than -
Byron R. White: But the interest remains the same, the interest in nonresidents and you are saying that under the Equal Protection Clause, you would say that interest in entitled to more weight?
Paul A. Lenzini: I think that under the Equal Protection Clause, where there is -- if federal lands are involved for example, I think that there might well be a different measure of the states conservation activity than in the situation here.
Potter Stewart: Your point is that under the Privilege and Immunities Clause, that that cause is simply inapplicable because this right is the right that is not recreation, it is not covered by that clause. But non constant, the Equal Protection Clause is applicable because it need not be any kind of a right for Equal Protection analysis is it not?
Paul A. Lenzini: Well, under the Equal Protection Clause, implicit or explicit constitutional rights --
Potter Stewart: Equal Protection Clause has to do with classifications.
Paul A. Lenzini: That is correct and where the classification is not invidious as here but where the result is a total exclusion, I could see the court applying a different level not necessarily strict scrutiny but --.
Byron R. White: Because in your mind of the interest so called involved.
Paul A. Lenzini: Because of the result I think, Your Honor.
John Paul Stevens: I must say I just do not follow the reasoning because the classification in either case, we are taking of Equal Protection, now let us forget about Privilege and Immunities, the classification between residents and non-residents, you say that is a legitimate classification, if it is a legitimate classification why cannot they say no non-residents at all. Here you have said, no nonresidents who cannot afford $240 or whatever it is, but let us say it is an Equal Protection Clause.
Paul A. Lenzini: I think that conceivably a state could say no nonresidents at all, it would depend upon the rationale of the state what it was trying to do, and I think we had for example a situation we had a rare species and only a limited number could be hunted, I believe that the state can readily say and demonstrate the need.
John Paul Stevens: In all these cases as Justice White points out, we do not want too many people overusing our park facilities and we would rather save them for the taxpayers of pay forums, so we will simply exclude our (Inaudible), what is wrong with that?
Paul A. Lenzini: I simply believe that it is not a fundamental right and I believe that the classification is not invidious.
Potter Stewart: Toomer against Witsell what is wrong with that?
Paul A. Lenzini: Well, Toomer versus Witsell was a P&I clause case and in Toomer versus Witsell We are talking only Equal Protection.
John Paul Stevens: But that was a racial classification, wasn't it?
Paul A. Lenzini: That is correct.
Speaker: As I recall in dry years, South Dakota has limited present resident hunting to residents on occasion.
Paul A. Lenzini: That is correct, that case came to the Supreme Court and it was -- and appeal was dismissed because of lack of a substantial federal question. With respect to the question of federal aid, the Federal Aid in Wildlife Restoration Act provides an 11% excise tax on certain scoring arms and ammunition and of course sends money back to the states for wildlife restoration programs. Montana is a beneficiary of that, but there is nothing in the statute, the Pittman -Robertson Act, which in any way restricts the state in connection with nonresident, resident differentials and thus happily submit that the P&I Clause cannot be transformed to cover this activity simply because of the presence of federal land or because of the fact that Congress has provided for federal assistance. Congress knows how to establish limitations, and it has done so in connection with military personnel on military reservation. Those lands are generally planned over which the federal government has exclusive legislative jurisdiction, but even there, Congress has said, state fishing licenses shall be required, but that if personnel who are on duty for more 30 days, they need not to have a state license, if the state does not provide licenses on terms as favorable as those for residents. So Congress knows how to establish conditions. It simply has not done so. The question here also involves nature of the state right of the wildlife. In Toomer v. Witsell, the court stated that it was long ago decided that one of the privileges which the clause of Privileges and Immunities Clause guarantees is that of doing business in state B on terms of substantial equality with citizens of that state. But plainly, Toomer dealt with commercial shrimping doing business and does not govern the institute case. Both, the majority below and the dissenting judge found that the case involved recreational hunting and the majority state that elk is not now and never will hunted commercially. Turning to the Equal Protection Clause, the court below found that the Montana scheme, there is a rational relationship to a legitimate state purpose. It held that it was a finite local resource, not everybody could hunt it and therefore some restriction had to be made on hunter days. The District Court did not choose between the ownership doctrine and the police power doctrine. The nature of the state's power to conserve wildlife has involved some semantic difficulties. We have had the ownership doctrine versus the police power doctrine. In a 1935 decision of this court Bayside Fish Flour Company v. Gentry 297 US, Mr. Justice Sutherland declared that over a while being generally the state has supreme control. But in Toomer v. Witsell, the court said that well, that ownership was simply a legal fiction. But it was a legal friction, which was expressed, even legal shorthand of the importance to its people, that a state had power to preserve and regulate the exploitation of an important resource.
Warren E. Burger: How would you distinguish between a State's interest in wild game as a resource to use that term and subsurface minerals and energy?
Paul A. Lenzini: Owned by the state as opposed to prior that ownership, in the mineral situation, the state has technical ownership, as it would with the state capital I believe, the state capital building. But in connection with fish and wildlife I think the state has a qualified ownership. It does not have technical ownership as Mr. Justice ---
Warren E. Burger: These are different partly because the minerals can not migrate but the game again, would that be a factor?
Paul A. Lenzini: I think it is simply a question of title Your Honor, I think that where the state owned minerals it has a patent, perhaps, from the federal government, first from someone else, it has all of the indicia of what consider to be necessary to clear title.
Warren E. Burger: You are preceding on a premise that title much rest somewhere, are you?
Paul A. Lenzini: No sir, I am not titled to things that are capable of ownership, ordinarily rest somewhere but title to wildlife is in no one, it was held that common law to be raised newly as, it was owned by no one. But although it is owned by no one, there was a right, a beneficial right to utilize the wildlife and it was held to be in the state for the benefit of its people, that is the holding of Geer v. Connecticut. But Mr. Justice Marshall earlier this year stated in Douglas v. Seacoast, said it is fantasy to talk about the state owning wildlife, because wildlife cannot be owned in the sense so they --private game preserve owner owns the animals that he has stocked there in. Last year in Kleppe v. New Mexico, taking again about the nature of the State's interest there Justice Marshall stated, that state has board, trustee and police power interest in wildlife. So we had difficulty in semantics, and one is the state ownership. In Toomer, Chief Justice Benson stated that there is considerable authority beginning with year to support the contention of the state, that a state can fine the consumption of fishing game wholly within its limits. As a representative of its people, it can keep the fishing wildlife from moving in interstate commerce.
Warren E. Burger: Are you suggesting that wildlife is not capable of ownership under any circumstances?
Paul A. Lenzini: If it is reduced to possession lawfully, it is capable of ownership an it is owned by the --
Warren E. Burger: That definition it is not wildlife any longer.
Paul A. Lenzini: It is no longer wildlife but personal property but prior to it being lawfully reduced possession, it is considered not to be held on technical ownership. So it is clear from the cases that this thing does not have a technical ownership in wildlife. But because of the fact that ownership is no one one, but it is clear that the State's authority of wildlife is that for the common good and conveys all the authority, the technical ownership ordinarily confers such as in Toomer where the court said, it is important that the state had the power to preserve and exploit the exploitation of an important resource. If the authority of the state must be expressed in terms of police power however, Appellees then submit that the exercise of the police power in managing wildlife is not inconsistent with the recognition of beneficial user and by the people. A use of (Inaudible) right perhaps. We then turn to appellants' Equal Protection Claim, it is alleged that residence is a suspect classification and thus requires a showing of a compelling state interest, to sustain its use. Appellees submit that the classification of residents cannot be said to be a suspect, It is not aimed at any discrete minority such as classification by race, religion, sex or alienage, and involves no fundamental right. A nonresident's opportunity to hunt a priced trophy species, simply does not rise to the dignity of the fundamental right and the record discloses that the non-resident hunter is not a group, who was in need of special solicitude under the Constitution.
William H. Rehnquist: If someone had come to Montana and declared his residence there, would he then say ten days later, I have been able to get a resident license?
Paul A. Lenzini: Montana has a six month residency requirement and if he had resided for six months prior to the application for the license, he would have gotten a residence permit.
William H. Rehnquist: So it does not make any difference how, once you have fulfilled the six months requirement, it does not make any difference, how much longer you have resided, you can get a residence license.
Paul A. Lenzini: That is correct. A trial below the appellants have tempted to show that the license fee differentials could not be cost justified by additional expenditures imposed on residence and appellant's witness testify that at most and their calculations, the state can charge a nonresident fee of 2.5 to 1, this approach is comparable however to the approach taken in the commercial fishing cases, namely those fundamental rights cases where the requirement of substantial equality between residents and nonresidents was involved and it is seemed that recreational hunting is a fundamental right. The District Court below determined that no records were kept, which precisely disclose the direct and indirect cost which properly maybe a portion and thus the court found that the ration 7.5-1 could not be justified on any basis of cost allocation. However, the court did not specifically address the arguments that lay behind pros and cons of the arguments behind the Combination License issue in its view of the case. The appellant below demonstrated, attempted to demonstrate that the direct costs were those costs of the Fishing Game department itself, and that indirect cost for all of the costs spent by the state in that year which amounted to about $211 million and when the appellant's witness below calculated the number of person days in that Montanan spent in Montana versus the number of person days spent by nonresident hunters, the witness determined that one-tenth of 1% of all these indirect costs could be utilized by the state as a cost of the hunting license and the witness testified that no other cost, I mean, no other forbearance, no other state interest could properly be considered in establishing the price of the hunting service as it was stated. Another appellant's witnesses testified that the license fee should be determined on the basis of generally accepted accounting principles and that no one should become bogged down in any measurement of value. Appellees submit that the foregoing analysis is of course unrealistic, because many elements are involved in producing big game populations that may be harvested in a state. Private ranch lands are involved, because during the critical winter month of the year, elk and deer move down from a higher elevations which can be federally owned land and move down into the lower private lands where they spend the winter months, which are the critical months in survival and depend upon forage provided by those ranch lands.
Thurgood Marshall: I think those ranchers can keep anybody off their land.
Paul A. Lenzini: It is correct.
Thurgood Marshall: Well, I do not understand what you are arguing?
Paul A. Lenzini: I am saying that because of the fact that the deer and the elk service just to a large extent because of the presence of those ranch lands and the mere fact that they could keep hunters off the land does not mean that they keep the deer off the land or the elk off the land in fact, they had no recourse for the damage and depredations they may receive from the deer and elk.
Thurgood Marshall: I do not understand why for that reason you have to charge somebody an extra amount? Because the elk comes in my land and eats my forage, therefore I keep the out of a state manner.
Paul A. Lenzini: Yes. But the deer and elk are not taken on your land, they come on your land during the winter months and during the summer months, and in the fall months, they migrate off your land and they move on to adjoining federal land and that is where they are being taken off on land, not your land and there being --
Thurgood Marshall: I guess my real question is that isn't it true that Montana was survived with this law?
Paul A. Lenzini: Are we talking about the Combination License? Are we talking about the license fee differential?
Thurgood Marshall: All the license with Montana.
Paul A. Lenzini: I think, Montana as a state will survive within the question hours whether the wildlife management program was survived. That is the question.
Thurgood Marshall: This is the only state.
Paul A. Lenzini: This is the only state that I am aware of that has a Combination License, it is one. Well, there are two questions I think Justice Marshall, there is a Combination License and there is the question of the rest of the fee differentials and the fee differentials is an extremely important management tool used by the state wildlife agencies and if that were held unconstitutional there would be a very significant impact on Fish and wildlife management, particularly wildlife management.
Warren E. Burger: Are you arguing that a rancher who is paying Montana state taxes on his land and whose land is then used by elks and others is entitled to sort of special protection and which can not be measured mathematically?
Paul A. Lenzini: No, Your Honor, I am not. In some states, in fact like Colorado there are provisions under state statute or claims by ranchers for depredations. In the State of Montana, the legislature in its wisdom has decided not to provide a claims procedure for ranchers and therefore they are required simply to undergo this depredation and loss of forage.
Warren E. Burger: But then they are contributing something to the well being of the elks which nonresidents do not contribute.
Paul A. Lenzini: I certainly submit that they are, yes indeed. It is an opportunity cost, because if they chose to keep those elk and deer off of their ranch lands they might do better in some other pursuit, they might be able to have more forage, more grazing, but the Montana Supreme Court has said that one who acquires property in Montana does so with notice and knowledge that we had some very substantial big game populations here and he does so with knowledge that wild game cannot distinguish between Fructis nature allies and fructis industry allies, and therefore cannot control animals. They cannot be controlled through the owner and accordingly a property owner in the State of Montana must recognize the fact that there may be some injury to property, from wild game for which there is no recourse. And in State versus Rathbone 100 pacific seconds State really --
Potter Stewart: Your answer Mr. Lenzini to my borther Marshall's question indicated your belief that this relatively high license fee actually operated as a real disincentive to nonresident hunting in Montana. Do you think that is correct?
Paul A. Lenzini: I believe that operates as a control. I believe the record indicates that in years when legislature has raised that the there has been a drop off in a number of nonresidents.
Potter Stewart: My observation as well as I may say personal experience has been in this sort of recreation is quite an extravagant pursuit monetarily and that the $200 fee is rather small fraction of the overall cost and would probably not in fact operate as much of a disincentive to the kind of person who comes from outside of Montana and comes in there and hires a guy, normally outfitting material necessary and indulges in big game hunting, is that correct, am I quite wrong about that?
Paul A. Lenzini: I think you are correct, I think that the fee here is $225, I think that the record indicates that over a $1,000 is involved apart from that and spending seven days for hunting. So it is a very expensive recreation and the $225 is not that much but the plaintiff's --
Potter Stewart: Well, that is not a disincentive and to the extent it is not a disincentive, your case is weakened is it not?
Paul A. Lenzini: No, I think not because I think to some extent it is a disincentive, it is a control mechanism that is why the plaintiffs are here. Their witnesses say that they can not come back next year because of this license fee increase. So for their concern, it is a disincentive and that is why they are here.
William H. Rehnquist: If it is not an injury in effect to them, I suppose they have no play?
Potter Stewart: I do not see any threat, but on the other hand, if it does not discourage any non residents from coming in and hunting elk, then you have no case.
Paul A. Lenzini: Well, I think that we can take notice of the fact that an increased license fee is going to have an effect on some people. Now, it may not have an effect on a person who is (Inaudible) comes out. But it is going to have an effect on some people, may be from South Dakota, may be neighbors from Colorado, but it is going to have an effect on some people. This case is not in Toomer v. Witsell situation where in the year prior to the $2,500 license fee, there were 100 nonresident shrimp boats license and following enactment of that license fee there were no shrimp boats licensed by the state of North Carolina and South Carolina. The effect to that case was to exclude nonresidents, we have here instead a situation where in the period of 1960 to 1970, the number of Montana residents hunting in the state had increased by about 67% and the number of nonresidents had increased over 530%. We have a situation here where Montana in 1974 was the state most frequently visited by out-of-state hunters. We have a siltation here where during 1974. there were 32,000 nonresident big game hunters and there were 20,500 nonresident Combination Licenses issued, not 14,000 as stated by appellant.
Potter Stewart: I know there is a limit of 17,000.
Paul A. Lenzini: Limit of 17,000 came into the law later, Your honor. Based with this increase in the number of nonresidents, the legislature simply increased fee for the nonresident license. The state shows an economic means to limit the number of hunter days and the method plainly is not arbitrary. With respect to the combination license. The record below indicates that nonresidents hunt in larger groups than the residents, they usually come in groups of four or more and that license swapping is a problem and it is likely to recur more among nonresidents whereas residents tend to hunt in smaller groups, one or two and in tempting to force its conservation laws, the State of Montana has adapted the equal responsibility law, they have a state of about 145,000 square miles and they have 70 game wardens at this time, which means that each game warden is supposed to cover an area of about 2,000 square miles, it is very difficult to do that. But the state does have over 400 licensed out fitters and guide and so the legislature in its wisdom said that if a violation occurs in hunting party, which is guided by a lot of license outfitter and guide then unless that guide or outfitters reports a violation, he himself is equally responsible with the person committing the violation, because of the fact that there is license swapping, because of the practice, people going out and one buys a license for deer, one buys a license for elk and then if they come upon the one and he is not licensed for it, they still make feel that they can take the deer or the elk. Because of that problem the legislature decided to establish the Combination License so that whatever you tended to come across, in so far as bear, deer and elk are concerned, you would be licensed for that and the record below indicates that nonresidents utilize outfitters more than residents, perhaps the size of 50% in some areas of Western Montana. The dissenting opinion below said that the use of a political justification namely that without this discrimination, the program will not receive political support. The dissent said that that was inherently inappropriate. The appellee submit that such political considerations are part and parcel of numerous legislative choices, and cannot be set to vitiate the choice unless fundamental rights are involved or unless invidious classifications are made. We submit that in San Antonio School District versus Rodriguez, decided by this Court in 1973, such considerations were taken into account to determine whether there was a rational basis for the Texas system, a financing public education in that case the financing method was the ad valorem  tax on property within the state school district supplemented by funds from the state central system. The attack on that, the Equal Protection in fact, they said, on the basis of wealth because some districts had less valuable properties than others that the school districts were being deprived of their Equal Protection Right, but the court referring to local control, the school districts which was fostered by the Texas plan concluded that the plan was not irrational because people of Texas maybe justified in believing that other systems are financing would lessen desired local autonomy and in Salyer Land Company v. Tulare Water District which involved boarding in water districts that was limited only to land owners. The court said that that there was no violation of the Equal Protection Clause, because the state of California could conceivably take into account that land owners as opposed to residents would not be willing to join in. Formation of the water storage district, if short term lassies for example whose fortunes were not in a long run, tied to the land, would have a major vote in the affairs of the district. Some where a state possess a qualified ownership interest in a natural resource or at least a substantial regulatory interest which imports a right to the beneficial use there of, which may be exploited by citizens of other state. A state may prefer its own, if the state regulatory program would be frustrated with outside discrimination. To sum up, there is room in the Fourteenth Amendment for practical considerations where no invidious classification is involved, where no fundamental right is involved and whereas here, the state in regulating finite resource in which its people have a beneficial interest. Appellees submit that the judgment below should be affirmed.
William H. Rehnquist: Mr. Goetz, as I understand the record, none of your clients assert that they were actual residents of Montana who were denied the license simply because they had not fulfilled the six months requirement.
James H. Goetz: That is correct, there is no issue as to durational residency requirement. I might say in that connection that one of the nonresident plaintiffs, however is a property owner in Montana and I think one of the problems with Mr. Lenzini's argument on depredation is that he is equating non-residency with property ownership. There may be nonresidents who own property, who contribute likewise to the elk resource. Obviously the incident to that is lower than resident property owners.
Speaker: And there maybe a lot of residents, who do not know about it.
James H. Goetz: That is correct also. In response to the Appellee's position, first I would like to say with regard to the ownership question that I think that this court has settled that issue in the recent decision in Douglas v. Seacoast Products where the opinion indicated that rather than viewing wildlife and some kind of ownership context, the proper way to look at the wildlife resources to the traditional police power's concept and that is the position that appellants have taken throughout this decision. I believe the language in Douglas Seacoast is very strong in that regard. Now, with respect to the Equal Protection issue, Mr. Lenzini has argued that the both the license fee differential and I understand also the Combination License requirement, both of those are very important management tools and the thrust of the District Court decision is that this is a valid conservation measure. I think the record throws substantial doubt on that for a number of reasons. First of all, the State of Montana did not attempt to justify this in the District Court as a conservation measure. Secondly, Montana in 1975 charged residents only $4 to hunt an elk.
Warren E. Burger: Must the legislature assert this conservation aspect in order to rely on it and the passage of the statute of this kind?
James H. Goetz: No, I do not think it has to assert that, we have very little legislative history in Montana. However, what I am saying is that the State Fishing Game Department in defending the case in the District Court did not assert that, that does not necessarily bar them from arguing it now, but I think it does show some doubt on whether they firmly believe that this can be justified as a reasonable management tool. You see there is no limit on the number of nonresident licenses that can be issued for elk and they cost only $9 now.
Potter Stewart: I think you said there was a limit of $17,000.
James H. Goetz: No, I mean on residents --
Potter Stewart: But there are not many residents in Montana.
James H. Goetz: Pardon me.
Potter Stewart: There are not many adult male residents in Montana, compared to the other, to the total of the other 49 states.
James H. Goetz: Well, you do not have to be in an adult male to hunt.
Potter Stewart: Well, generally that is there.
James H. Goetz: In any event the District Court seemed to find that there are large numbers of hunters and a finite number of elk and I think there obviously is a finite dimension on that resource, but the legislature has not imposed any restrictions on residents as far as hunting them.
Potter Stewart: What is the population in Montana?
James H. Goetz: 600,000 approximately.
Potter Stewart: The whole state men, women and children?
James H. Goetz: Yes, and approximately a 198,000 hunting licenses are issued in Montana. However that relates to the whole spectrum of game birds etcetera.
Speaker: There is a limitation on the number of elk that maybe taken.
James H. Goetz: Yes.
Speaker: One per license.
James H. Goetz: Yes, they are one per license, but what I am saying is that if this is viewed as a conservation device and this economic discrimination designed to discourage nonresident hunters, we can see likewise that there is no equivalent in terms of the resident hunters and Douglas v. Seacoast Products said that this can not properly be viewed in the Virginia context as a legitimate conservation measure. If you have no limits or no policies to discouraging the residents and simply discriminate against the nonresidents.
Thurgood Marshall: But Seacoast was not only commercial, it was very high powered commercial.
James H. Goetz: Well, that is true, but I think the proposition for which I cited that is the difference between the resident and the non-resident and the fact that Virginia did not take any measure to discourage residents. I think that is applicable to the present case. In any event, if we look at the combination license requirement we have something that appears wholly arbitrary and capricious. Now, for instance in 1975, Montana changed its Combination License from one elk two deer, to one elk, one deer and one black bear. The record shows that with respect on the abridger to the later half of the hunting season, black bears were hibernated. Now, what kind of conservation device or management tool is that, they are not huntable.
Potter Stewart: As well as license to hunt tigers I suppose.
James H. Goetz: Yeah, they are just not going to be around the shoe, and in line with that it is very difficult to mistake an elk for black bear, if the black bear is hibernated obviously and even if it is not hibernated, it is rather difficult to mistake those two.
William H. Rehnquist: Is there a bear season in Montana?
James H. Goetz: There is, there are two bear season, one in the spring and then there is a bear season that is pretty much the equivalent of the elk season and my understanding is that the spring bear season is different in the sense that it is the Combination License does not impact that one way another.
William H. Rehnquist: Well is there any reason why possessor of the Combination License could not come back in the spring and shoot a bear if he found they were all hibernating in the fall.
James H. Goetz: I am not sure whether he has to buy an additional license for to start with. I just do not know that, but secondly there is an economic reason of course that cost money to come into the state, a second time and the record divulges that black bears are not in great demand in terms of hunting that is in 1975, the year before this went into effect 730 nonresident black bear license were issued as opposed to somewhere in the neighborhood Mr. Lenzini correct me about 20,000 elk deer Combination Licenses. So obviously most nonresidents who want to hunt either elk or deer, do not desire to hunt black bear. So what it appears as though the State of Montana is doing is gauzing the nonresident with higher fees to subsidise artificially the operation of a Fishing Game Department in Montana while charging probably the nonresidents an unreasonably low figure.
William H. Rehnquist: But that argument does not militate against the combination of elk and deer does it, it just --
James H. Goetz: No that goes to the license fee differential however the problem with the license, the economic problem as Justice White is compounded by loading on other licenses and then saying, well you have got to pay before because you have got to buy these other licenses.
Potter Stewart: Well, isn't as Mr. Justice White suggested in very early in your argument, is this not really one problem. Let us say that Montana had said that in order to hunk elk, you also had to be licensed to tigers and elephants and zebras. In other words, wholly unrealistic, but that is what you have to do to get an elk license, and you have to pay $225 for it. Is this not realistically the same as though they set it to $225 fee?
James H. Goetz: Well, in one sense it is and in the sense that if you look at the Combination License as simply a way to assess more fees to the nonresident. However, in constitutional sense what that Combination License is, is excess baggage that is conceivably although I do not believe it should be the case, this court could hold up a reasonable or an unreasonable differentiation and still find the Combination License so arbitrary and capricious which it seems to me it is, of that it would strike that down, and that would be the argument I would be making here, if I thought this differential was reasonable under the Toomer standard, not withstanding the Combination License. That is we would just attack the Combination License. However, we think that the differentiation cannot make the Toomer and Mullaney standards in any event, so to that extent, I think they are two separate issues and as Mr. Lenzini pointed out, he tried to justify them of the Combination License on a separate basis.
John Paul Stevens: Can you tell me if the record tells us how many elk are taken by residents as opposed to nonresident?
James H. Goetz: Yes, the record does, I can not tell you off hand where it is, if I think for just a second.
Warren E. Burger: I thought you said earlier that it was about to a little less than half of the 31,000.
James H. Goetz: That is the number of hunters who hunt elk, but the question is what percentage of residents take elk as opposed to nonresidents is that your question?
John Paul Stevens: Yes.
James H. Goetz: Yes, the short answer is found in the footnote 17, on page 32 of Mr. Lenzini's brief, the success ratio in 74 nonresidents succeeded on 15% of their elk licenses compared with 11% success ratio for residents.
John Paul Stevens: Thank you.
Warren E. Burger: Thank you gentleman. The case is submitted.


Earl Warren: W. Palmer Dixon, et al., Petitioner versus United States. Mr. Goodman, you may continue your argument.
Frank I. Goodman: Mr. Chief Justice, may it please the Court. When we broke off yesterday, I had just offered an analogy which in our view aptly illustrates the basic principle of this case. I suggested that if A lends B $100 today, in return for B's promise to repay the $100 plus $6 extra one year from today, B's obligation could be expressed in the note in a number of different ways, all of which mean exactly the same thing. The note could say $100 plus 6% interest or $100 plus 6% or $100 plus $6 or as in the present case, the note could simply say $106. In each of these cases, the $6 increment simply represents the compensation which the borrower agrees to pay the lender in return for the lender's money, in short, interest as this Court has defined it. Everyone agrees that in the case of the note with 6% stated interest an accrual basis taxpayer would be required to accrue the $6 increment over the life of the note and we say exactly the same result should obtain in the case of $106 note issued at a $6 discount. A cash basis taxpayer of course would not be required to account for the gain until he sold or redeemed the note. At that time, he would be deemed to be selling two things; first, the note itself carrying with it the right to interest accruing in the future, and secondly, the right to the interest that had already been earned up to the date of the sale or redemption. Part of the purchase price would have to be allocated to the note and the rest of it would have to be allocated to the interest component and that part allocated to the interest component would be taxable as ordinary income.
Potter Stewart: What if the going rate of interest changed between the time of the issuance of the note and the sale of third party and which would affect the price because of the going of the change and the going rate of interest.
Frank I. Goodman: Yes. Well, if -- let's suppose first that nothing happens and he sells the note at the end of six months for $103.
Potter Stewart: Well, that's the case you've already given.
Frank I. Goodman: That's right. In that case, there would be no capital gain or loss and there would be interest income of $3. If the market rate of interest increased we'll say, so that he was able to sell the note only for $102, the result in that case roughly speaking, not quite exactly, but roughly speaking, would be a $1 capital loss and $3 of interest income. It wouldn't be exactly that because the $102 would have to be -- well 100, one hundred and thirds of that would have to be allocated to the note and three one hundred and thirds to the interest element and would come out that he had perhaps received about $2.97 of interest and slightly less than $100 would be attributable to the note in that case.
Potter Stewart: I understand that a good deal of this problem has been explicitly covered in the 1954 --
Frank I. Goodman: That's right Mr. Justice Stewart.
Potter Stewart: Am I right in my understanding that with respect to the note of an individual person --
Frank I. Goodman: That's right.
Potter Stewart: The 54 statute does not --
Frank I. Goodman: That's right, the 54 statute applies only to securities issued by a corporation or by a governmental entity.
Arthur J. Goldberg: Can you explain to us why that happened Mr. Goodman, why the individual was left out?
Frank I. Goodman: Well I think for the most part Mr. Justice Goldberg, the 1954 statute was intended primarily as a legislative overruling of the Caulkins case. They primarily were thinking within the general framework of that decision and simply didn't provide a legislative solution which went to the heart of the principle.
Arthur J. Goldberg: Had the Treasury proposed a broader solution, do you know?
Frank I. Goodman: I don't think so. I maybe wrong about that. I don't think they did. The taxpayer concedes all of this in the case of the note with stated interest and we say that exactly the same principle should apply in the case of the discounted note. This conclusion is compelled not only by reason, it is supported also by the overwhelming weight of authority. Since 1959, the basic issue involved in this case has come before six Courts of Appeals, the Court of Claims and the Tax Court. Only one court, the Sixth Circuit in the Midland-Ross case has resolved the matter in favor of the taxpayer. All of the others, the First, Second, Third, Fifth and Ninth Circuits have recognized that original issue discount is exactly the same thing as interest and should be taxed as such. The conclusion is further supported by the long-standing rule as to the treatment of original issue discount from the standpoint of the borrower, that is to say, the corporation which issues the security. The decisions of this and other courts have uniformly held that this -- that the excess of the amount which the borrower agrees to pay upon maturity over the amount at which the security is issued, represents a cost of obtaining the lender's money and as such must be amortized over the life of the note and deductible from ordinary income. It is true that at least one Court of Appeals, the Second Circuit has thought it more appropriate to regard this deductible item as a cost sustained by the issuing corporation rather than its interest. The Ninth Circuit has regarded it alternatively, either as interest or as a cost. But three other Courts of Appeals, the Third, the Fourth and the D.C. Circuit have concluded unequivocally that original issue discount is deductible as an interest expense by the issuing corporation. At page 15 of our brief in the Midland-Ross case, we cite the well-reasoned opinions of Judge Goodrich for the Third Circuit and Judge Parker for the Fourth Circuit. We neglected to cite the third case which is Helvering versus California-Oregon Power Company, 75 F.2d 64, the decision of the District of Columbia Circuit. The same --
Arthur J. Goldberg: [Inaudible]
Frank I. Goodman: Of this aspect? We regard it as an interest deduction.
Arthur J. Goldberg: Both sides?
Frank I. Goodman: On both sides -- as an interest deduction by the issuer and as an interest income to the lender.
Arthur J. Goldberg: [Inaudible]
Frank I. Goodman: I'm not quite sure, I understand what that means Mr. Justice Goldberg.
Arthur J. Goldberg: [Inaudible]
Frank I. Goodman: You're distinguishing the yield from the nominal rate of interest. I believe that's true. I've read that Mr. Justice Goldberg. In regard to the question that you just asked, in view of the contention by Midland-Ross that the government has taken a different view with regard to the status of original issue of discount to the borrower, Midland-Ross says that the government regards this as a loss rather than as interest. It's true that the government has been inconsistent about this over the course of the years and at times has regarded it as a loss. But so far as I know, the most recent expression is contained in the ruling which we quote on page 36 of the Midland-Ross brief which says -- states as follows, the final paragraph from the footnote. The courts have considered the nature of discount in cases involving private corporations and have held it to be in the nature of differed interest which maybe amortized for income tax purposes over the life of the bonds by deducting the annual proportion thereof from the issuing corporations' gross income each year as accrued interest. The leading decision of -- oh, I was going to present one further citation which we didn't give in our brief, and that is to the Longview Hilton Hotel Company case, 9 T.C. 180, 182 and the case is cited therein, which I think expresses the view of most of the cases of the Tax Court to the effect that it is an interest deduction to the borrower. The leading decision of this Court, Helvering versus Union Pacific Company is a little bit ambivalent. At some point, the Court appears to refer to the original issue of discount item as a loss. But it also states that discount is a factor “in arriving at the actual amount of interest paid for the use of capital procured by a bond issue.” The difference between the capital realized by the issuer and par value which is to be paid at maturity, must be added to the aggregate coupon payments in order to arrive at the total interest paid. Now if as these authorities seem to indicate, original issue discount represents interest paid or accrued by the borrower, then necessarily it represents income, it represents interest received or accrued by the lender. Petitioners don't really dispute the fact that original issue discount and stated interest are in substance one and the same thing. They argue however, that the government is estopped to deny them capital gains treatment because of its earlier acquiescence in the Sixth Circuit's decision in the Caulkins case.
Potter Stewart: Before you get to that, how do you handle the consistent treatment of premium or have you told us about it?
Frank I. Goodman: Well, Mr. Justice Stewart, I agree with the petitioners that premium logically should be treated the same way as discount and vice versa and also that prior to 1942, I think it was the general understanding that premium was not to be regarded as an item which ended into the computation of interest but rather as a capital item to use that terminology. However, the two questions have historically been treated as separate compartments, altogether apart from one another at least much of the time. In 1942, Congress enacted a statute dealing expressly with the problem of bond premium and said not a word about bond discount. In 1954, it enacted a statute dealing with original issue discount and said not a word about premium and in some respects, the two statutory solutions are not parallel.
Byron R. White: [Inaudible] dealing with discount to what the law was before.
Frank I. Goodman: The House Committee as Mr. Brandes said yesterday stated that the prior law was that the discount was a capital item and was not interest. On the other hand --
Byron R. White: Now your view of -- your position is that's just plain wrong.
Frank I. Goodman: That was -- we think that was an erroneous and overly broad statement. The Senate on the -- the Senate Committee on the other hand, took a different view. It said that the law simply was not clear and that the purpose of the House Bill, the 1944 legislation having originated in the House was simply to clarify the preexisting law and to remove all uncertainties and doubts. So at least as far as the Senate is concerned, I don't think there is any negative implication in the 1954 legislation.
Byron R. White: And the 1954 legislation would have applied to the one who loans on a note and a discount and what if he sells the note then, meanwhile? If he sells the note meanwhile then that fellow gets paid off with it.
Frank I. Goodman: That's right. I think that --
Byron R. White: Both of them have interest.
Frank I. Goodman: Under the 19 -- if the first -- if the original holder of the note sells it, he is chargeable with that part of the discount interest which it accrued up to the date of the sale.
Byron R. White: And the buyer?
Frank I. Goodman: Is accountable for the balance of the interest as it accrues during his holding period.
Byron R. White: And the discount where -- this is only -- this applies only where there is a interest not stated?
Frank I. Goodman: That's right. The statute applies to original issue discount. That result would have been true with -- I think everyone agrees that, that result would have been -- would have obtained in the cases where interest was stated.
Byron R. White: But that -- you said yesterday that was only as of 1954, there was a case on that.
Frank I. Goodman: No. What I said yesterday was this. Well, the question you ask I believe is what treatment would have been accorded to the sale of a security with accrued interest where the purchase price was not specifically allocated between the two components. And my answer was that the earliest case on this so far as I know is the Fischer case decided in 1954. Since then, there had been a number of cases which have confirmed the result that you must allocate the purchase price between the interest and principal component. Prior to that time, there was no specific case and I think that the matter was inconsiderable, valid and confusion. That was not the result of any statutory change in 1954. I was answering Mr. Justice Stewart's question about premium. Not only has Congress treated premium and discount differently, but this Court has also tended to regard them as separate questions. In 1932, a much criticized decision, the Old Colony case, this Court held in effect that premium was not to be taken into account in computing the interest deductions for the issuer. The Court said that interest meant what everybody -- interest meant what is called interest. It meant the nominal interest rate and it didn't have anything to do with what the Court called the esoteric notion of effective interest dreamed up by accountants. Two years later though in 1936 in the Union Pacific case to which I've already referred, the Court said that original issue discount as distinct from premium was to be taken into account in determining the issuer's interest deductions so that it treated premium and interest differently -- premium and discount differently. And as I've already indicated, the lower federal courts have fairly consistently though not entirely consistently treated discount as an interest item to the borrower without so much as nod to the Old Colony case and its ruling as to premium. This disparity of treatment was noted by no less than observer than Roswell Magill who stated at page 184, I think it was. I have that somewhere, stated at page 184 of his well known book on tax -- 204 rather, of his well known book on taxable income that the Union Pacific decision with regard to discount is “hardly reconcilable on theories of accrual accounting with the prior holding as to bond premium.” So while I don't pretend to defend a differentiation in treatment between premium and discount. I don't think that the Court need deter from reaching the sound and sensible result in the case of discount merely because of early and long since discredited decisions about premium which in any event were superseded by statute as early as 1942, long before the transactions in this case.
Potter Stewart: Your answer -- your explanation does indicate that plenty of -- there are plenty of examples and you've given us, one where things which are a matter of economics are alive have because of the labels attributed to -- has been treated differently by this Court and other courts. You've just told us about premium and discount and the same might well be true about discount and the interest even though economically, these things are all in a parity, still the labels that people have given to them have rightly or wrongly influenced the courts to different results and again --
Frank I. Goodman: I can't -- I don't --
Potter Stewart: Results which is a matter of economics or interest.
Frank I. Goodman: I don't think I can deny that Mr. Justice Stewart. I would emphasize your word wrongly though, in the case of Old Colony decision which all of the accounting commentators have roundly criticized even while it still had a lot of vitality and I don't think it has much anymore. Now turning to the Caulkins' decision and the contention that the government is estopped by virtue of its acquiescence in that case, we think that, that contention fails for two reasons. The first place, because the government is not bound by its acquiescence and in the second place, because in any event, the Caulkins' decision does not rule this case. It's well settled I think that acquiescence in an erroneous decision does not preclude the government from correcting its mistake and collecting a tax otherwise due. The taxpayer cannot claim surprise in this regard because the cumulative bulletin, every cumulative bulletin says on its very front page that the rulings contain therein and that includes acquiescence are not binding but are simply intended as guides to official administrative prudent, administrative thinking. The statute expressly gives the Commissioner discretion to determine the extent to which any ruling maybe applied without retroactive effect. The taxpayer says that in this case, that abuse -- that discretion was abused because the Commissioner made the withdrawal of his acquiescence retroactive with respect to all taxpayers other than those who had purchase the particular type of security involved in the Caulkins case. Now we don't say that the differentiation between that type of security and other types of securities was altogether a reasonable one, but on the other hand, it certainly wasn't arbitrary and invidious. The government simply made a limited vow in the direction of stare decisis much as this Court did when it held that football and boxing were subject to the antitrust laws but refrained from extending that principle to baseball which was the particular sport which had been covered by the prior decision in Tulsan exempting it from the antitrust laws. In any event, the Caulkins case really isn't in point here. The Caulkins arose under a particular statute, Section 117F of the 1939 code which dealt only with the retirement of bonds and the decision was very much based upon the particular language of that statute. In Caulkins, the taxpayer purchased for about $15,000 payable in ten annual installments, an installment certificate in the face amount of $20,000 which he surrendered for that amount. That represented the equivalent of a 5.5% return on his investment. And indeed, the 5.5% was even written on the cover of the certificate. The Court held that this was capital gain under the language of Section 117F which provided that amounts received upon the retirement of corporate bonds would be considered to be received in exchange therefore. The Court didn't base its decision upon any broad, general principle that original issue discount was different from interest or had traditionally been treated differently. In fact, specifically agreed with the government, that the discount was essentially the same as interest and that there was no practical reason for taxing it other than as ordinary income, but it felt compelled by the particular language of Section 117F to hold it capital gain. I think it's quite probable that the Court would have reached the same result in the case of a note with stated interest and it might well have reached a different result had the discounts been realized upon a transaction not covered by Section 117F, in other words, by a sale. Now this interpretation of the Caulkins' decision is by no means a novel one. Even before the government withdrew its acquiescence in Caulkins, the Tax Court held that the rule of Caulkins was confined to retirements and did not apply to sale and I'd like to read the Court exactly what the Tax Court said in that regard. It said in the Paine case 23 T.C. 391 and 401, we think it clear that the decision in the Caulkins case was based solely upon the precise language of Section 117F which left no doubt that the entire amount received as a result of the retirement of notes and registered form was to be deemed received in exchange for such notes despite the recognition of both courts, both the Tax Court and the Court of -- and the Sixth Circuit that the increment there under consideration was essentially interest. It is obvious however that Section 117F is not here applicable because there was no retirement of the notes but only a sale and there is no evidence that the notes were in registered form.
Potter Stewart: The Paine case was reversed by the Court of Appeals?
Frank I. Goodman: It was reversed on grounds which are completely irrelevant to this consideration. It was reversed essentially on the ground that in that case, the notes in question had been given in return for property.
Potter Stewart: So it didn't get to this ground --
Frank I. Goodman: No. They concluded that there was no interest element at all in the case because they didn't know what the value of the property was.
Potter Stewart: Right.
Frank I. Goodman: Premium is governed by a different statute which was enacted in 1942. In general, the treatment is similar. The treatment --
Speaker: [Inaudible]
Frank I. Goodman: Well yes, I suppose it was. The difference in treatment --
Speaker: [Inaudible]
Frank I. Goodman: Well, they're very similar. I don't mean to suggest that they're entirely different. On the contrary, they're almost the same, but only almost the same. For example, the statute dealing with premium deals with both market premium and original issue premium, the distinction I haven't --
Speaker: [Inaudible]
Frank I. Goodman: Well, the statute provides that it -- the statute gives the lender an election to either to amortize it over the life of -- amortize it as a deduction over the life of the security or to treat it as a loss in the year of sale or redemption, it has that choice.
Speaker: [Inaudible]
Frank I. Goodman: The statute doesn't deal with the element that pays it.
Speaker: [Inaudible]
Frank I. Goodman: Well, he is required to amortize it. Now as I indicated earlier, the Old Colony case said that you don't amortize it as an interest deduction but it left open the possibility at least after 1913 of amortizing it as income received by the issuer. So that really, it is treated in exactly the same way as we argue that discount should be treated, but I have to concede that it was not on the theory that it was an interest deduction.
Speaker: [Inaudible]
Frank I. Goodman: I'd like to correct what I just said. I was a little bit confused. He is allowed to amortize it but not on the theory that it is an offset to interest. In other words, if a bond is purchased for 100 -- for $94 and it's a $100 bond --
Speaker: [Inaudible]
Frank I. Goodman: No, alright if it's purchased for $100 and it has a face amount say of $94, it's purchased at a premium. The $6 premium that is received by the issuer is required to be amortized as income by the issuer over the term of the security. Now originally in the Old Colony case, the government argued that this should be true because you should treat the $6 as a factor which enters into the computation of his interest deduction in subsequent years. You should treat it as an offset to his interest deduction in subsequent years as reducing his interest deduction. The Court held in Old Colony, no that wasn't the proper way of looking at interest, but it did leave the way open for amortizing it nonetheless and this would have the same effect.
Speaker: [Inaudible]
Frank I. Goodman: He is the lender. He is the person who was governed by the statute and he is permitted -- he is given an election as to whether to amortize it or as to whether to treat it as a loss in the year in which he sells the bond or redeems it. That was the statutory solution adopted in 1942. Now I suppose that in most cases he would be -- he would choose to amortize it and treat it as an ordinary loss so that the election aspect of the statute --
Speaker: [Inaudible]
Frank I. Goodman: No. From the lender's side, it is a deductible item. It increases his interest if you want to look at it that way. The statute doesn't say anything about interest.
Speaker: [Inaudible]
Frank I. Goodman: It increases his interest deduction.
Speaker: [Inaudible]
Frank I. Goodman: That's right.
Speaker: [Inaudible]
Frank I. Goodman: Now, he is -- excuse me. I've been confusing you I'm afraid. Excuse me, he is the person who is receiving the interest.
Byron R. White: The lender received --
Frank I. Goodman: Yes. He is the recipient. The lender is the recipient of interest. He has no interest deduction. The lender may treat this $6 premium which he has had to pay at the time he purchases the bond as a deduction amortized over the life of the asset.
Byron R. White: But it offsets the interest that he receives.
Frank I. Goodman: That is right. It offsets the interest which he received. Now the statute doesn't say that that's the theory of the deduction. It simply says that he may deduct it. Now it's not clear whether he may deduct it as a loss or as an offset to the interest which he received.
Byron R. White: Now that -- now is that statutory?
Frank I. Goodman: That is statutory in the case of the lender, yes.
Byron R. White: And did that change the rule of the cases?
Frank I. Goodman: Yes.
Byron R. White: The cases were treated as a capital.
Frank I. Goodman: That's correct, it treated -- it changed the rule of the New York Life Insurance Company case which --
Byron R. White: So far as the lender is concerned by statute now, discount and premium were treated almost --
Frank I. Goodman: Almost the same, that's correct Mr. Justice White.
Speaker: [Inaudible]
Bernard E. Brandes: Mr. Goodman yesterday afternoon in his statement of the facts, inadvertently but yet very peculiarly significant reason, I am afraid misdescribed the facts. Mr. Goodman's mistake was that he stated that in the transactions here involved, I beg your pardon, it was an economic loss of consequence. The fact is however that there was an economic gain of substance. This was examined by the Treasury Department on audit and they were satisfied. And that is why the question of whether or not there was an economic gain in this transaction was not raised in either in the lower courts or raised until yesterday -- or stated until yesterday afternoon. Now the reason why Mr. Goodman made that mistake is that he compared the gain on the sales of the securities made in 1952 with the interest course of carrying the entire position including those securities which were first sold in 1953. The significance of the mistake is that it emphasizes the difference between an investment including a discount obligation and stated interest. You don't know the results on an investment until the investment is fully disposed of. It is only then that the economic consequences are in hand.
Byron R. White: But you do know what the consequences would be if you hold it for the good.
Bernard E. Brandes: If all things work out as you hope they will.
Byron R. White: What do you mean -- all you mean is that the lender can pay?
Bernard E. Brandes: If the lender can pay. If the lender remains --
Byron R. White: Or if the borrower can pay you back, now you -- that's the risk.
Bernard E. Brandes: Of course, the lender -- that the borrower remains solvent and able to meet his obligation. Now, strangely and interestingly --
Byron R. White: Do you know why the -- does the record show why these notes were sold?
Bernard E. Brandes: No, that is not in the record. It is conceded that they were sold and in bona fide sales.
Byron R. White: I understand that but [Inaudible]
Bernard E. Brandes: A period of time that probably differed as between various obligations maybe somewhat so closer to maturity and others were so -- at a period of time further removed from the maturity.
Byron R. White: You would have held that no maturity --
Bernard E. Brandes: If they had been held to maturity under the statute as it existed prior of 1954, the gain would have been ordinary income because these obligations were not in registered form or with coupons attached and the significance given in the statute on a retirement was limited to obligations in registered form or with coupons attached.
Byron R. White: Well is this pretty solvent borrower?
Bernard E. Brandes: The borrowers were solvent.
Byron R. White: And that this must [Inaudible]
Bernard E. Brandes: They were sold and there is no -- as I mentioned, no argument made about the sale.
William J. Brennan, Jr.: Did I understand you to say that, had they been held to maturity, then it would have been treated as an income and not as --
Bernard E. Brandes: The gain would not have been a capital gain because the threshold item of a sale or exchange would be missing. 117F which makes a retirement, a deemed exchange was then limited to obligations and registered form or with coupons attached. That requirement was eliminated in the 1954 code. Now, I wanted at this point to bring in the analogy of the premium case, the leading case on premium in this Court, the New York Life Insurance against Edwards. There the Court pointed out that only on disposition could it be known whether or not a security issued at a premium would produce profit or loss and that is why the lender was not to be permitted to amortize his premium course as against his income currently and I should like to take the liberty of reading the words of the Court. Obviously, no actual ascertainable loss had occurred. All of the securities might have been sold thereafter above cost. The result of the venture could not be known until they were either sold or paid off. Mr. Justice Goldberg raised the question of whether the new provision in the 1954 code applies to obligations of an individual. For some reason, Congress has not done that but by the same token, the privilege of amortizing premium is not allowed with regard to obligations issued by individuals. The two things march along together for reasons apparently best known to the Congress.
Byron R. White: Now could you tell me now -- could you tell me what -- how premium is now treated under the statute from the standpoint of --
Bernard E. Brandes: Premium on private --
Byron R. White: - the lender.
Bernard E. Brandes: Premium paid by the lender on a private security is distinct from a municipal security. He may at the election of the lender be amortized so as to reduce his ordinary income including his income from the obligation which he holds.
Byron R. White: What's his other election?
Bernard E. Brandes: His other election is not to make the election which I just described in which event, it is an item of capital gain or loss on disposition of the obligation in the same way as it was before the statute was changed in 1942.
Byron R. White: Now how about public securities?
Bernard E. Brandes: Public securities; the lender is forced to amortize his premium. There is no right of election on public securities, tax exempts and obligation yield on which -- or the income from which, is not subject to federal income tax.
Byron R. White: What does a borrower do with the same thing, amortize it and set it off against good faith?
Bernard E. Brandes: No. He is forced to amortize it but without an offset to income. The -- since the -- the interest on the municipal security is not subject to tax, Congress decided that the premium which was paid should not be permitted to result in an eventual capital loss when the obligation is disposed of.
Byron R. White: How about the private security?
Bernard E. Brandes: On the private security, the amortization of the premium is at the election of the lender. He can elect --
Byron R. White: How about the borrower?
Bernard E. Brandes: The borrower? The borrower must at all times, even at the time when the lender could not reduce his income from the obligation, the borrower must at all times increase as it were his income because he is reducing his cost with regard to the carrying of that obligation. I thank the Court.