[292 U.S. 455, 456] The Attorney General and Mr. Erwin N. Griswold, of Washington, D.C., for Guy T. Helvering.
[292 U.S. 455, 460] Messrs. Chauncey Newlin and J. Du Pratt White, both of New York City, for New York Trust Co.
Mr. Justice BUTLER delivered the opinion of the Court.
This controversy arises out of the calculation of an income tax on the gain realized on the sale of property by a trustee in 1922. April 27, 1906, one Matthiessen acquired 6,000 shares of stock at a cost of $141,375. Its value on March 1, 1913, was less than cost. December 4, 1921, desiring to make provision for his son, Erard, he transferred the stock to the New York Trust Company in trust for him with remainder over in case of his death. When the trust was created, the market value of the stock was $577, 500. The trustee sold it in 1922 for $603,385. In the tax return for that year the trustee included $87,385 as the gain resulting from the sale. That figure was reached by subtracting the cost of the shares to the trustor, then claimed to be $516,000, from the amount the trustee received for them. But the trustee then, as it always has, insisted that the gain should be calculated on the basis of the value at the time of the creation of the trust. And it applied the rate of 12 1/2 per cent., applicable to capital gains. The Commissioner ascertained gain on the principle adopted in the return, but found the cost to trustor to be $141,375. He applied the normal and surtax rates that ordinarily are laid upon the incomes of individuals, and by the use of these factors arrived at an additional assessment of $238,275.95.1 The Board of Tax Appeals sustained the determination. 27 B.T.A. [292 U.S. 455, 461] 1127. The lower court held that the gain had been correctly ascertained, but that it was taxable at 12 1/2 per cent. 68 F. (2d) 19. These writs were granted on petition of the Commissioner and cross-petition of the trustee. 292 U.S. 616 , 54 S.Ct. 641, 642, 78 L.Ed. --.
The questions are: (1) Whether the gain resulting from the trustee's sale is the difference between price paid by trustor and that received by trustee, and (2), if so, whether the 12 1/2 per cent. rate is applicable.
The Revenue Act of 1921, 42 Stat. 227, governs. Section 2(9) defines taxpayer to include any person, trust, or estate subject to a tax imposed by the act. Section 202(a) provides: 'That the basis for ascertaining the gain derived ... from a sale ... of property ... shall be the cost of such property; except that-... (2) In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor.' Section 206(a)(6) defines capital assets to be 'property acquired and held by the taxpayer for profit or investment for more than two years' and (b) provides that the net gain from the sale of capital assets may be taxed at the rate of 12 1/2 per cent. instead of at the ordinary rates. Section 219(a) declares that the normal and surtax on net incomes of individuals shall apply to the income of property held in trust, including (3) income held for future distribution; (b) the fiduciary is required to make the return of income for the trust. And subsection (c) provides that, in cases under (a)(3), the tax shall be imposed upon the net income of the trust and shall be paid by the fiduciary.
By the trust indenture, which recites mutual covenants and agreements and the payment of $10 by each to the other as the consideration, the trustor did 'sell, assign, transfer, and convey' the 6,000 shares 'in trust, nevertheless, for the benefit of' his son, Erard, 'to be administered by the trustee' under specified terms and condi- [292 U.S. 455, 462] tions, among which are these: The trustee was required to hold the shares and any property purchased out of the avails, to collect and retain income until the twenty-first birthday of Erard, then to pay him the accumulated income, thereafter to pay him current income until he attained the age of twenty-five years, and at that time to deliver to him the principal and undistributed income. During the life of the trustor, the trustee was not to sell or reinvest without the written consent and approval of the trustor. In case of Erard's death before the age of twenty-five, the entire estate was to go to other sons of the trustor.
The trustor irrevocably disposed of the shares. He did not sell, but made a figt. Burnet v. Guggenheim, 288 U.S. 280 , 53 S.Ct. 369. He gave the trustee legal title temporarily to be held to enable it to conserve, administer, and transfer the property for the use and benefit of his son to whom he gave the beneficial interest. It may rightly be said that the trustee and beneficiary 'acquired by gift' as meant by section 202(a).2 If the broad definition in section 2(9) stood alone, either might be regarded as the taxpayer, but it is qualified by the rule that the trustee must pay the tax. It follows that the trustee properly may be regarded as the taxpayer and, for the purpose of calculating the gain, as having assumed the place of the trustor. Section 202(a)(2) was enacted to prevent evasion of taxes on capital gains. Taft v. Bowers, 278 U.S. 470, 479 , 482 S., 49 S.Ct. 199, 64 A.L.R. 362. And see Cooper v. United States, 280 U.S. 409 , 50 S.Ct. 164. Transfers to trustees for the benefit of others are clearly within the reason for the enactment. [292 U.S. 455, 463] They may be used to avoid burdens intended to be imposed, quite as effectively as may gifts that are directly made. The difference between the cost to the trustor in 1906 and the amount for which the trustee sold in 1922 was rightly taken as taxable income of the trust.
We come to the question whether the gain derived from the trustee's sale is taxable at 12 1/2 per cent. That rate is not applicable unless the shares were 'capital assets' defined by section 206(a)(6) to be 'property acquired and held by the taxpayer for profit or investment for more than two years.' The time between the creation of the trust and the sale was less than the specified period and, if the words alone are to be looked to, the shares were not by the taxpayer 'held ... for more than two years.' Soon after the passage of the act the Income Tax Unit of the Bureau of Internal Revenue ruled that property transferred to a trustee, for purposes and upon terms and conditions analogous to those expressed in the indenture before us, which remained in his hands less than two years, was not 'capital assets,' and that the resulting gain was not taxable at the 12 1/2 per cent. rate. That construction was followed by the Board of Tax Appeals, the Circuit Court of Appeals for the Third Circuit, and the Court of Appeals of the District of Columbia. 3 The Commissioner says that the words of the definition are free from ambiguity, and that the statute contains no exception. From an opinion of this court he [292 U.S. 455, 464] invokes these statements: 'If the language be clear it is conclusive. There can be no construction where there is nothing to construe.' United States v. Hartwell, 6 Wall. 385, 396. He suggests that his construction was approved by the Revenue Act of 1924, 208(a)(8), 43 Stat. 263, 26 USCA 939 note, which retained the definition, and that the provision in the Revenue Act of 1926, 208(a)(8), 44 Stat. 19, 26 USCA 939 note, which conforms to the construction for which the trustee here contends, operated to make a change in the law.
The rule that, where the statute contains no ambiguity, it must be taken literally and given effect accoring to its language, is a sound one not to be put aside to avoid hardships that may sometimes result from giving effect to the legislative purpose. Commr. of Immigration v. Gottlieb, 265 U.S. 310, 313 , 44 S.Ct. 528; Bate Refrigerating Co. v. Sulzberger, 157 U.S. 1, 37 , 15 S.Ct. 508. But the expounding of a statutory provision strictly according to the letter without regard to other parts of the act and legislative history would often defeat the object intended to be accomplished. Speaking through Chief Justice Taney in Brown v. Duchesne, 19 How. 183, page 194, this court said: 'It is well settled that, in interpreting a statute, the court will not look merely to a particular clause in which general words may be used, but will take in connection with it the whole statute (or statutes on the same subject) and the objects and policy of the law, as indicated by its various provisions, and give to it such a construction as will carry into execution the will of the Legislature, as thus ascertained, according to its true intent and meaning.' Quite recently in Ozawa v. United States, 260 U.S. 178 , page 194, 43 S.Ct. 65, 67, we said: 'It is the duty of this Court to give effect to the intent of Congress. Primarily this intent is ascertained by giving the words their natural significance, but if this leads to an unreasonable result plainly at variance with the policy of the legislation as a whole, we must [292 U.S. 455, 465] examine the matter further. We may then look to the reason of the enactment and inquire into its antecedent history and give it effect in accordance with its design and purpose, sacrificing, if necessary, the literal meaning in order that the purpose may not fail.' And in Barrett v. Van Pelt, 268 U.S. 85, 90 , 45 S.Ct. 437, 439, we applied the rule laid down in People v. Utica Ins. Co., 15 Johns. (N.Y.) 358, 381, 8 Am.Dec. 243, that 'a thing which is within the intention of the makers of a statute is as much within the statute as if it were within the letter, and a thing which is within the letter of a statute, is not within the statute, unless it is within the intention of the makers.'
The part of the definition under consideration is this: 'Held ... for more than two years.' Although on superficial inspection the words appear to be entirely clear, the Treasury Department deemed construction necessary to disclose the meaning that, upon consideration of the actual transactions of the taxpayers, it found Congress to have intended. Regulations 62, art. 1651, declares: 'The specific property sold or exchanged must have been held for more than two years, but in the case of a stock dividend the prescribed period applies to the original stock and the stock received as a dividend considered as a unit and where property is exchanged for other property ... the prescribed period applies to the property exchanged and the property received in exchange considered as a unit.' Construed strictly according to the letter, the provision would not include shares received as a dividend less than two years before the sale or property taken in exchange within that period. The need of this regulation illustrates how ambiguities requiring construction often exist where upon first reading the words seem clear. Generally, questions as to the meaning intended do not arise until the language used is compared with the facts or transactions in respect of which the intent and purpose are to be ascertained. Bradley v. Washington, [292 U.S. 455, 466] Alexandria & Georgetown Steam Packet Company, 13 Pet. 89, 97; Deery v. Cray, 10 Wall. 263, 270; Patch v. White, 117 U.S. 210, 217 , 6 S.Ct. 617; Gilmer v. Stone, 120 U.S. 586, 590 , 7 S.Ct. 689; American Net & Twine Co. v. Worthington, 141 U.S. 468, 474 , 12 S.Ct. 55.
Legislative reasons for applying the lower rate to capital gains give support to the construction for which the trustee contends. The report of the Committee on Ways and Means states: 'The sale of ... capital assets is now seriously retarded by the fact that gains and profits earned over a series of years are under the present law taxed as a lump sum (and the amount of surtax greatly enhanced thereby) in the year in which the profit is realized. Many such sales, with their possible profit taking and consequent increase of the tax revenue, have been blocked by this feature of the present law. In order to permit such transactions to go forward without fear of a prohibitive tax, the proposed bill, in section 206, adds a new section ... to the income tax, providing that where the net gain derived from the sale or other disposition of capital assets would, under the ordinary procedure, be subjected to an income tax in excess of 15 per cent. (afterwards changed to 12 1/2 per cent.) the tax upon capital net gain shall be limited to that rate. It is believed that the passage of this provision would materially increase the revenue, not only because it would stimulate profit-taking transactions but because the limitation of 15 per cent. is also applied to capital losses. Under present conditions there are likely to be more losses than gains.' 67th Congress, 1st Session, House Report No. 350, p. 10. See, also, Senate Report No. 275, p. 12. In respect of the legislative purpose to lessen hindrance caused by high normal and surtaxes, there is no distinction between gains derived from a sale made by an owner who has held the property for more than two years and those resulting from one by a donee whose tenure plus that of the donor exceeds that period. [292 U.S. 455, 467] Here the taxable gain was ascertained by putting together the periods in which the shares were held by trustor and trustee, respectively. The taxable gain was the same as if the former held continuously from the time of purchase in 1906 until the sale in 1922. But to ascertain the applicable rate the Commissioner broke the continuity. If the trustor had held until the sale, the 12 1/2 per cent. rate would have been applicable and the tax would have been substantially less than one-fourth of the amount assessed against the trustee who, for the purpose of calculating the gain, was substituted for the trustor.