UNITED STATES v. STEWART(1940)
Rehearing Denied Dec. 16, 1940
See 311 U.S. 729 , 61 S.Ct. 390, 85 L.Ed. --. [311 U.S. 60, 61] Messrs. Robert H. Jackson, Atty. Gen., and Samuel O. Clark, Jr., Asst. Atty. Gen., for petitioner.
Messrs. W. Glenn Harmon, of San Francisco, Cal., and Ernest L. Wilkinson, of Washington, D.C., for respondent.
Mr. Justice DOUGLAS delivered the opinion of the Court.
This case is here on certiorari to resolve a conflict of the decision below (9 Cir., 106 F.2d 405) with Stern Brothers & Co. v. Commissioner, 8 Cir., 108 F.2d 309.
During the year 1930 respondent purchased farm loan bonds issued by joint-stock land banks under the Federal Farm Loan Act of 1916, 39 Stat. 360, 12 U.S.C.A. 641 et seq. The purchases were made for the prospective increment to the bonds and not for their interest. At the time the purchases were made the banks were in receivership. The bonds were acquired at prices substantially below par. In making these purchases respondent relied upon statements contained in circulars and bulletins issued by the Farm Loan Board, reasonably believing that he was purchasing securities the profit upon which in case of sale would be exempt income. A part of the bonds so purchased, with their appurtenant coupons, was sold in 1931; and a part was surrendered in that year to the receiver of the issuing [311 U.S. 60, 62] bank in exchange for cash paid to respondent 'under and pursuant to the covenants contained' in the bonds. Each of these transactions resulted in a profit to respondent. 1 The Commissioner held that those gains were taxable income. Consequently respondent included them in his income tax return for the year 1931 and claimed a refund. On disallowance of that claim, this suit for refund was instituted. The District Court determined that the gains so realized were income and taxable. 24 F.Supp. 145. The Circuit Court of Appeals reversed.
Sec. 22(a) of the Revenue Act of 1928, 45 Stat. 791, 26 U.S.C.A. Int. Rev.Acts page 354, includes in gross income 'gains, profits, and income derived from ... sales, or dealings in property, whether real or personal.' Sec. 22(b)(4) exempts from taxation 'Interest upon ... securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended.'
If those two sections are controlling, it is clear that respondent is taxable on these gains, for they fall squarely within the definition of gross income contained in 22(a) and they are not 'interest'2 within the meaning of 22(b)(4). But respondent places his main reliance on 26 of the Federal Farm Loan Act, 12 U.S.C.A. 931, which provides that 'farm loan bonds issued under the provisions of this Act (chapter), shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from [311 U.S. 60, 63] Federal, State, municipal, and local taxation.' It is urged that the gains here involved were 'income derived' from the bonds within the meaning of that section.
We disagree with that conclusion. It is our view that under 26 respondent is entitled to an exemption only for interest on the bonds.
To be sure, 'income' is a generic term amply broad to include capital gains for purposes of the income tax. Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509 , 41 S.Ct. 386, 15 A.L.R. 1305. It is likewise true that Congress will be presumed to have used a word in its usual and well-settled sense. Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 , 52 S.Ct. 211; Deputy v. du Pont, 308 U.S. 488 , 60 S.Ct. 363. But 26 does not exempt simply 'income'; it exempts the bonds and the 'income derived therefrom.' Analytically, income derived from mere ownership of the bonds is clearly different from income derived from dealings or transactions in the bonds. As stated in Willcuts v. Bunn, 282 U.S. 216, 227 , 228 S., 51 S.Ct. 125, 127, 71 A.L.R. 1260:
True, the Bunn cases dealt only with the alleged constitutional inhibition against taxation of capital gains on municipal bonds and not with a specific statutory exemption. But its analysis is cognate here as indicating that, in absence of clear countervailing evidence, an exemption of 'income derived' from a security does not embrace 'income derived' from transactions in that security. [311 U.S. 60, 64] There are no circumstances here which should make the reasoning of the Bunn case inapplicable.
The Revenue Act of 1916, 39 Stat. 756, was enacted shortly after the Farm Loan Act by the same Congress and at the same session. 3 Sec. 2 of that Act, like 22(a) of the 1928 Act, included in taxable income 'gains, profits, and income derived from ... sales, or dealings in property.' And 4 of that Act, like 22(b)(4) of the 1928 Act, exempted from taxation 'interest upon ... securities issued under the provisions of the Federal Farm Loan Act.' It is clear that 'all acts in pari materia are to be taken together, as if they were one law.' United States v. Freeman, 3 How, 556, 564. That these two acts are in pari materia is plain. Both deal with precisely the same subject matter, viz., the scope of the tax exemption afforded farm loan bonds. The later act can therefore be regarded as a legislative interpretation of the earlier act (Cope v. Cope, 137 U.S. 682, 688 , 11 S.Ct. 222, 224; Cf. Stockdale v. Atlantic Insurance Company, 20 Wall. 323, 331, 332) in the sense that it aids in ascertaining the meaning of the words as used in their contemporary setting. 4 It is therefore en- [311 U.S. 60, 65] titled to great weight in resolving any ambiguities and doubts. Cf. United States v. Stafoff, 260 U.S. 477, 480 , 43 S.Ct. 197, 199. In that view the express exemption of interest alone makes tolerably clear that capital gains are not exempt.
In support of the contrary view great stress is placed on the legislative history of 26. Extensive references are made to the hearings on this bill and to the debates in Congress. Typical are the statements or criticisms that the bill gave 'these investments a distinct advantage over other investments',5 that the exemption provision was important,6 that maintenance of a market for the bonds was desirable,7 that the exemption was too broad. 8 These comments, however, are inconclusive. They are not suf- [311 U.S. 60, 66] ficiently discriminating in their analysis or criticism to throw light on the narrow issue involved here.
Respondent's resort to administrative interpretation of 26 is equally unproductive. No established administrative practice is shown. The holding of the unpublished published memorandum9 of the General Counsel of the Bureau of Internal Revenue relied upon is not precisely in point, even were we to assume that it is entitled to authoritative weight. 10 It merely ruled that a joint-stock land bank was not taxable on gains from purchases of its own bonds. And when the question of the taxability of an individual on his capital gains from sales of these bonds was raised less than two years later, another such ruling was issued to the effect that he did not have the benefit of any exemption. 11
Nor is respondent materially aided by the change in 26 made by 817 of the Revenue Act of 1938, 52 Stat. 447, 578, 26 U.S.C.A. Int.Rev. Code, 3799. That amendment provides that 'all income, except interest, derived' from such bonds shall be included in gross income. 12 It is urged that this amendment is affirmative recognition by the Congress that 26 exempts these capital gains. But here again the legislative record is ambiguous and hence inconclusive. The purpose of 817, as originally introduced, clearly was to [311 U.S. 60, 67] make certain that capital gains realized by joint-stock land banks on transactions in their own obligations would not be exempt. 13 The section was amended on the floor of the Senate to its present form on the suggestion that 'perhaps the language is not as broad as it should be.' 14 [311 U.S. 60, 68] The purpose of the amendment may well have been to clarity the doubtful and uncertain status of capital gains which were not covered by the Committee's recommendation. There is no clear and convincing evidence that it was designed to change existing law, so far as these other categories of capital gains were concerned. But even if a contrary implication were to be assumed, it would not override so belatedly the clear inference, based on a long series of revenue acts exempting only interest, that capital gains were taxable.
Respondent further argues that comparison of other exemption statutes with the language of 26 reinforces the view that these capital gains are exempt. In that connection our attention is called to numerous statutes- some exempting only bonds15 and others exempting principal and interest;16 some exempting a corporation, 'including the capital stock and surplus therein, and the income derived therefrom,'17 and others18 containing [311 U.S. 60, 69] somewhat similar exemptions for the corporation but only an exemption as to principal and interest for its bonds; and still others19 containing the same kind of exemption as 26 of the Farm Loan Act. From this painstaking review respondent argues that where Congress has desired to exempt only 'interest' it has said so and where it has intended to grant a broader exemption it has used the word 'income'; that statutes exempting only 'interest' have a narrower meaning than those exempting 'income'; and that this long and recurrent legislative practice discloses a clear design of the part of Congress to draw distinctions and to shape the various exemptions to suit its differing policy in divers situations.
Suggestive as this analysis is, it is entitled to little weight. No mere collation of other statutes can be decisive in determining what the instant statute means. The meaning of each phrase must be closely related to the time and circumstance of its use. The phrase 'income derived therefrom' as used in 26 clearly has taken on coloration from the express exemption for nearly a quarter century of only interest on these bonds. We have no occasion to intimate an opinion as to the meaning of other similar statutes. It is sufficient here to note that in another legislative setting 'income derived' from bonds may or may not be synonymous with 'interest' on bonds. That must necessarily be dependent on a host of factors which only a minute scrutiny of the particular legislative scheme would reveal. For this reason the fact that the same Congress which in 1938 amended 26 granted an exemption to another federal instrumentality20 couched in the identical language of the original 26 is merely a straw in the wind. So far as the instant [311 U.S. 60, 70] bonds are concerned, that in itself is entitled to little weight as against the long standing express exemption in successive revenue acts of interest alone.
Respondent also stresses the fact that circulars, prepared and distributed by the Farm Loan Board 'advising investors of the merits and advantages of farm loan bonds',21 stated that these bonds and their income were 'free from all forms of taxation' including the income tax, that 'this exemption is complete', etc. As we have said, it was found that respondent relied upon such statements reasonably believing that capital gains would not be taxable. But aside from the fact that those statements are hardly more specific than the statute itself, they cannot be accorded the weight of uniform and long standing administrative treatment. 22 There was no authority for the Board to make representations that capital gains were or were not tax exempt. That administrative function resided only in the Treasury. An officer or agency of the United States to whom no administrative authority has been delegated cannot estop the United States even by an affirmative undertaking to waive or surrender a public right. Utah v. United States, 284 U.S. 534, 545 , 546 S., 52 S.Ct. 232, 235; Wilber National Bank v. United States, 294 U.S. 120, 123 , 124 S., 55 S. Ct. 362, 363, 364.
We return to our conclusion that the weight of these various considerations leans to the view that only interest is exempt. The cumulative strength of the several factors urged by respondent is not such clear evidence [311 U.S. 60, 71] of Congressional purpose as to make inapposite the application of the reasoning of Willcuts v. Bunn, supra, to this situation. In that posture of the case, respondent has succeeded only in casting some doubt on the proper construction of the statute. Yet those who seek an exemption from a tax must rest it on more than a doubt or ambiguity. Bank of Commerce v. Tennessee, 161 U.S. 134, 146 , 16 S.Ct. 456, 460; Id., 163 U.S. 416, 423 , 16 S.Ct. 1113, 1116. Exemptions from taxation cannot rest upon mere implications. United States Trust Co. v. Helvering, 307 U.S. 57, 60 , 59 S.Ct. 692, 693. As stated by Mr. Justice Cardozo in Trotter v. Tennessee, 290 U.S. 354, 356 , 54 S.Ct. 138, 139, 'Exemptions from taxation are not to be enlarged by implication if doubts are nicely balanced.' And see Pacific Co., Ltd., v. Johnson, 285 U.S. 480, 491 , 52 S.Ct. 424, 426. Hence broad, generalized statutory exemptions have frequently been construed narrowly and confined to those situations where the subject matter of the exemption was directly, not indirectly or remotely, involved. Murdock v. Ward, 178 U.S. 139 , 20 S.Ct. 775; Hale v. State Board of Assessment and Review, 302 U.S. 95 , 58 S.Ct. 102; United States Trust Co. v. Helvering, supra. The exemption contained in 26 of the Farm Loan Act must be so construed.
For these reasons the challenged judgment must be reversed.
Mr. Justice ROBERTS is of opinion that the judgment should be affirmed on the grounds stated by the Circuit Court of Appeals in its opinion below, 9 Cir., 106 F.2d 405.
[ Footnote 1 ] These purchases were for respondent and his wife who filed separate returns for the year in question.
[ Footnote 2 ] The record does not show what portion, if any, of the sums received on the sale or on the exchange of the bonds and appurtenant coupons was received as payment on accrued interest. Nor did the complaint allege that any portion of the sums received was exempt because it was 'interest' on the bonds. Hence that point was not raised below or here.
[ Footnote 3 ] The Farm Loan Act became law on July 17, 1916, the Revenue Act of 1916 on September 8, 1916.
[ Footnote 4 ] It should be noted in this connection that the exemption of 'interest' contained in 4 of the 1916 Act was continued in each subsequent Revenue Act until 1934. Sec. 213(b)(4), Revenue Act of 1918, 40 Stat. 1057, 1065; 213(b) (4), Revenue Act of 1921, 42 Stat. 227, 238, and 213(b)(4), Revenue Act of 1924, 43 Stat. 253, 268; 213(b)(4), Revenue Act of 1926, 44 Stat. 9, 24; 22(b)(4), Revenue Act of 1928, 45 Stat. 791, 798; 22(b)(4), Revenue Act of 1932, 47 Stat. 169, 178, 26 U.S. C.A. Int.Rev.Acts, pages 20, 164, 355, 488. By 22(b)(4) of the Revenue Act of 1934, 48 Stat. 680, 687, 26 U.S.C.A. Int.Rev.Code 22(b)(4), the exemption was generalized so as to include interest on obligations of any federal corporation which is an instrumentality of the United States, subject to the limitation that interest is exempt only if and to the extent provided for in the acts of Congress authorizing the issuance of such obligations. The Senate Committee (S.Rep. No. 558, 73d Cong., 2d Sess ., pp. 23, 24; Internal Rev. Bull., Cum. Bull. 1939-1, Part 2, p. 604) made the following comment on that change:
[ Footnote 5 ] Cong. Record, 64th Cong., 1st Sess., Vol. 53, Part 8, p. 7312. And see H.Rep. No. 630, 64th Cong., 1st Sess., p. 8.
[ Footnote 6 ] Joint Hearings before Sub-Committees of the Committees on Banking and Currency, Rural Credits, 63rd Cong., 2d Sess., pp. 95-97; S. Doc. No. 380, 63d Cong., 2d Sess., Agricultural Credit, Rep. U.S. Commission, pp. 17, 33.
[ Footnote 7 ] H. Doc. No. 679, 63rd Cong., 2d Sess., pp. 15, 16.
[ Footnote 8 ] Cong. Record, op. cit., supra, note 5, pp. 6850, 7311. Nor is it significant that substitute bills were offered (Cong. Record, op. cit., supra, note 5, pp. 7385, 7387; S. 4061, 63d Cong., 2d Sess.) by the terms of which 'interest' was exempted. These were overall substitutes. Therefore the implication is not warranted that the failure of their adoption was due to the desire of Congress to grant a broader exemption than 'interest'.
[ Footnote 9 ] This is reproduced, so far as material here, in S. Hearings, Committee on Finance, 75th Cong., 3d Sess., H.R. 9682, Part 4, pp. 619-621.
[ Footnote 10 ] See Helvering v. New York Trust Co., 292 U.S. 455, 468 , 54 S.Ct. 806, 810.
[ Footnote 11 ] See Agricultural Securities Corp. v. Commissioner, 39 B.T.A. 1103, 1111.
[ Footnote 12 ] This amendment is prospective only. It provides:
[ Footnote 13 ] S. Rep. No. 1567, 75th Cong., 3d Sess., p. 47. This report clearly indicates that the Committee was of the view that under 26 joint- stock land banks were exempt from capital gains resulting from purchases of their own obligations. A change in that regard was clearly intended, for the Committee said, p. 47:
The Committee draft of 817 (then 816) provided for that change as follows (H.R. 9682, 75th Cong., 3d Sess.):
As indicated, supra, note 9, the unpublished memorandum of the General Counsel of the Bureau of Internal Revenue ruling that a joint- stock land bank was not taxable on gains from purchases of its own bonds was before the Senate Committee. Cf. the recommendation made to the Committee, S. Hearings, op. cit., supra, note 9, pp. 614, 615.
[ Footnote 14 ] Statement by Senator King, member of the Committee on Finance, Cong. Record, Vol. 83, 75th Cong., 3 Sess., p. 4959. When Senator King offered the amendment, he gave the following explanation (Id. p. 5174):
[ Footnote 15 ] Statutes governing Panama Canal Toll Bonds, 32 Stat. 481, 484, 31 U.S.C.A. 744; 36 Stat. 11, 117, 31 U.S.C.A. 745, and Postal Savings Bonds, 36 Stat. 814, 817, 39 U.S.C.A. 760, are cited.
[ Footnote 16 ] Reference is made to various statutes including those pertaining to Treasury notes, 38 Stat. 251, 269, 12 U.S.C.A. 447, and several of the Liberty loans, 40 Stat. 35, 31 U.S.C.A. 746; 40 Stat. 288, 291, 31 U. S.C.A. 747; 40 Stat. 1309, 1310, 31 U.S.C.A. 753.
[ Footnote 17 ] Federal Reserve Act of December 23, 1913, 38 Stat. 251, 258, 12 U. S.C.A. 531. And see Bankhead-Jones Farm Tenant Act of July 22, 1937, 50 Stat. 522, 528, 7 U.S.C.A. 1014(i); Agricultural Adjustment Act of 1938, 52 Stat. 31, 75, 7 U.S.C.A. 1511.
[ Footnote 18 ] Reference is made to the War Finance Corporation Act of April 5, 1918, 40 Stat. 506, 511, 15 U.S.C.A. 344; Reconstruction Finance Corporation Act of January 22, 1932, 47 Stat. 5, 9, 15 U.S.C.A. 610; Home Owners' Loan Act of June 13, 1933, 48 Stat. 128, 130, 12 U.S.C.A. 1463.
[ Footnote 19 ] Federal Farm Mortgage Corporation Act of January 31, 1934, 48 Stat. 344, 347, 12 U.S.C.A. 1020f; Commodity Credit Corporation Act of March 8, 1938, 52 Stat. 107, 108, 15 U.S.C.A. 713a-5.
[ Footnote 20 ] Commodity Credit Corporation, supra, note 19.
[ Footnote 21 ] Pursuant to the authority vested in the Federal Farm Loan Board by 3 of the Act.
[ Footnote 22 ] Nor can the casual statement by the Secretary of the Treasury, in the course of a Congressional hearing on the Revenue Act of 1918, to the effect that 'Land bank bonds carry a wider exemption than Liberty bonds' ( S. Hearings, H.R. 12863, 65th Cong., 3d Sess., Part 4, p. 117) carry authoritive weight, as it does not even purport to be a discriminating analysis of this problem in its various aspects.