De Stuers v. Commissioner

HUBERT DE STUERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. De Stuers v. Commissioner Docket No. 46015. United States Board of Tax Appeals 26 B.T.A. 201; 1932 BTA LEXIS 1349; May 31, 1932, Promulgated *1349 Second Liberty loan bonds were purchased on the open market at less than par for a nonresident alien individual not engaged in business in the United States. The profit realized when these bonds were redeemed at par is not exempt from income tax by reason of the provisions of section 4 of the Act approved March 3, 1919, 40 Stat., part 1, p. 1311, but was properly held to be net income from sources within the United States under the provisions of section 217 of the Revenue Act of 1926. Charles B. Fernald, Esq., for the petitioner. James K. Polk, Jr., Esq., and Harold Noneman, Esq,, for the respondent. MURDOCK *201 The Commissioner determined a deficiency of $1,633.17 in the income-tax liability of the petitioner for the year 1927. The errors assigned are that the Commissioner has included a part of the principal amount paid by the Treasury Department in redemption of certain United States bonds in the taxable income of the petitioner, a nonresident alien, and has failed to exempt from taxation the principal and interest of such Government bonds held for this nonresident alien, contrary to the provisions of Act of March 3, 1919, ch. 100, *1350 sec. 4. *202 FINDINGS OF FACT. The parties filed a stipulation as follows: 1. The petitioner, Hubert De Stuers, is and was at all times mentioned in the petition an alien having no residence in the United States; he was and is an incompetent person so adjudged by the courts of his domicile, the Netherlands, and by the Supreme Court of New York by order entered in New York County on or about January 4, 1913, true copies of said orders being attached hereto marked Exhibits A and B, and by this reference made a part of this stipulation. The surviving Committee of his property in the State of New York, by appointment of the Supreme Court of New York, was, at all times mentioned in the petition, Hugo Loudon, as described in said orders. 2. On or about February 14, 1921, an order of the Supreme Court of New York was entered, a copy of which is attached hereto, marked Exhibit D, and by this reference made a part of this stipulation. A further order of said court was entered in the same cause under date of June 29, 1923, a copy of which is attached hereto marked Exhibit E and made part hereof. 3. Pursuant to the orders of the Supreme Court of New York the chamberlain*1351 of the City of New York received various funds and from time to time between February 1921 and July 1923 invested monies turned over to him in Second Liberth 4 1/4% United States Bonds bought in the open market, the said bonds having a total face value of $287,300 and being acquired at a cost of $271,869.06. 4. Pursuant to an order of the Supreme Court of New York entered in New York County March 30, 1925, a copy of which order is attached, marked Exhibit F, and by this reference made a part of this stipulation, the said chamberlain likewise received additional monies and with said monies purchased additional Second Liberty 4 1/4% United States Bonds of a face value of $1,850 and paid therefor the amount of $1,887.74. 5. On or about November 16, 1927, all of said Second Liberty Bonds were called and redeemed by the payment of their face value of $289,150.00 and accrued interest, by the Treasury of the United States, whereupon the said Chamberlain received the principal value of the bonds so held by him as aforesaid aggregating $289,150 and interest on said bonds to said date of redemption. The principal amount of the bonds so held and redeemed exceeded the aggregate purchase*1352 cost of the bonds by the amount of $15,393.20 which latter amount the Commissioner has added to the taxable income reported on the return of the petitioner to produce the deficiency proposed in this case. 6. Pursuant to decree of the Supreme Court of New York entered on or about August 20, 1931, on the accounting and resignation of Hugo Loudon as Committee, Louis de Stuers was by the said Court appointed to succeed him and has since duly qualified and is now acting as Committee of the property of the said Hubert de Stuers in the State of New York. A true copy of the said decree is attached hereto marked Exhibit G and by this reference made part hereof. Exhibit B is an order of the Supreme Court of the State of New York reciting that the petitioner had been adjudged an incompetent by a judgment of the District Tribunal of The Hague, a court of record in the Kingdom of Holland, and appointing Alphonse Lambert Eugene de Stuers and Hugo Loudon the committee of all the property, real and personal, of the petitioner within the State of New York. *203 Exhibit D is an order of the Supreme Court of New York entered in the partition action of Chanler v. Aldrick et al.*1353 , affirming the referee's report of distribution and directing, among other things, that of the net proceeds of the sale of real property, the subject of the action, the 20/360 part, representing the share of the petitioner, be paid into court by the referee by delivering to the chamberlain of the city of New York certain bonds and mortgages and the referee's check for the sum specified; the chamberlain invest said sums in Second Liberty 4 1/4 per cent bonds of the United States; and he hold the principal funds for the benefit of the committee of the property of the petitioner, subject to inchoate right of dower, if any, of Cora Livingston de Stuers, wife of the petitioner. Exhibit E is an order of the Supreme Court of New York entered in the same partition action directing, among other things, the Title Guaranty and Trust Company, the depositary of a fund derived from the proceeds of a sale, to distribute a certain part of that fund to the chamberlain of the city of New York, such part being 20/360 part of the principal, which with another payment of income to the guardian represented the part of the fund distributed belonging to the petitioner. Exhibit F is an order of the*1354 Supreme Court of New York entered in the same partition action, directing the referee to pay to the chamberlain of the city of New York a further amount of money to be held for the benefit and to the credit of the committee of the property of the petitioner subject to the inchoate right of dower, if any, of Cora Livingston de Pallandt, formerly the wife of the petitioner, and directing said chamberlain to invest the same for said purposes. The petitioner was neither in the United States nor engaged in business in the United States in the year 1927. A nonresident alien individual income-tax return for the calendar year 1927 was made and filed for the petitioner by his committee. No part of the principal and interest received on the redemption of the Liberty bonds was included in the income therein reported, but a memorandum was annexed to the return reporting for the information of the Treasury Department the amounts paid by the chamberlain of the city of New York for the Liberty bonds and the amounts paid by the Government in redemption thereof and stating as the reason for such noninclusion the statutory exemption of the principal and interest of such bonds from taxation. *1355 OPINION. MURDOCK: The provision of the Act of March 3, 1919, 40 Stat., part 1, p. 1311, under which the petitioner claims exemption from tax is as follows: *204 SEC. 4. That section 3 of the Fourth Liberty Bond Act is hereby amended to read as follows: SEC. 3. That, notwithstanding the provisions of the Second Liberty Bond Act or of the War Finance Corporation Act or of any other Act, bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a nonresident alien individual, or a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States or by any local taxing authority. The statute under which these bonds were issued required that they be issued at par. Act of September 24, 1917, 40 Stat. 288, ch. 56. Most of them were purchased on behalf of the petitioner at less than par and all were redeemed prior to maturity at par. The difference between the amount paid and the amount*1356 received on behalf of the petitioner was neither interest nor in lieu of interest. . . It was income within the accepted definition of that term. Therefore the question is, would a tax on this difference be a tax on the principal of the bonds? There is a distinction between a tax on the principal of bonds, such as an estate tax (see ), and a tax on profit obtained from purchase and sale of bonds. Cf. . The petitioner, however, seeks to distinguish this case because the purchased bonds were not sold, but were redeemed by the Government, a special qualifying circumstance not present in the above case and not distinct from the contracts made by the Government in the bonds themselves. The return in question, he argues, came "to the owner of the security according to the provisions of the obligation and without any further transaction on his part." *1357 An exempting statute such as this one should be strictly construed and the exemption allowed only where founded on plain language. ; ; ; ; ; . We do not believe that a government, issuing its obligations at par, would have sufficient interest in the purchase and sale of those obligations below par to provide tax exemption in any case for the profit derived from a purchase below par and subsequent redemption at par. The benefits, if any, which the government would thus derive, would be unreasonably remote. Probably Congress never intended to exempt a profit such as this petitioner had. O.D. 729, C.B. No. 3, July-December, 1920, pp. 123-124, was cited with apparent approval in *1358 It is as follows: *205 In the case of Treasury certificates of indebtedness which are offered by the Government at par and accrued interest and not at a discount, only the coupon interest can be considered exempt from normal tax, and from surtax to the extent provided by the act approved September 24, 1917. Where such certificates are subsequently purchased at a discount, the difference between the purchase price and the par value of the certificates received at maturity is profit subject to both normal tax and surtax. The subscriber for Treasury certificates who sells them at a discount sustains a deductible loss, which is the difference between the par value of the certificates and the selling price. Any gain or loss on the sale of Treasury certificates of indebtedness prior to maturity should be determined in accordance with section 202 of the Revenue Act of 1918. The Willicuts v. Bunn case is not direct authority for the decision of this case. The questions involved are quite different. In the present case there is no question of the power of Congress to tax. The obligations are its own and may be taxed. Furthermore, *1359 the facts in the two are different. But the principals laid down in that case may apply here nevertheless. The profit in this case was not paid as such by the United States, but resulted from purchases at low prices and retention until the bonds were redeemed when worth par. This profit resulted from a combination of several factors, including capital investment and probably some measure of sagacity. If profit results from these factors where there has been both purchase and sale in the ordinary sence, we see no reason to hold otherwise where there has been either an ordinary purchase or an ordinary sale, as where bonds subscribed for and obtained at par are later sold at a premium or where bonds have been purchased at less than the amount at which they are redeemed. In all such transactions capital has been invested and generally some measure of sagacity has been a factor in the purchase as well as in a sale. The gain may be regarded as "the creation of capital, industry, and skill" and a tax on it is not on the obligation of the United States. Counsel for the petitioner argues, irrespective of statutory exemption, that the profits arising from these transactions are not*1360 taxable to the petitioner under the provisions of section 217(a) of the Revenue Act of 1926, which defines income from sources within the United States, but does not include profits such as arose in this case. However, the provisions of section 217(a) are not an all inclusive definition of income from sources within the United States for the purpose of determining the net income of nonresident alien individuals. This is apparent from section 217(e), which provides that items of gross income, other than those specified in subdivision (a), shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Subdivision (e) contains also some specific provisions in regard to gains from the purchase and sale of personal property. When section 217 is read as a whole and the rules and regulations prescribed by the Commissioner with the *206 approval of the Secretary considered, articles 324 and 328 of Regulations 69, it is apparent that the profit from the transactions in question in this case must be considered to be income from sources within the United States. Cf. *1361 . Income upon the disposition of personal property is not in any case income from sources without the United States unless there has been a sale outside the United States. The bonds here involved were purchased within the United States and never were outside the territorial limits of the United States. Every act with reference to them which gave rise to the profits, took place in this country pursuant to an order of a court of the State of New York. Nor can the fiction of law that the situs of the personal property is presumed to be the domicile of its owner, save the profits here involved from tax. Judgment will be entered for the respondent.