Appeal from the District Court of the United States for the Southern District of New York.
Before MANTON, L. HAND, and CHASE, Circuit Judges.
These cases were heard together. They involve the same questions, and one opinion, it is agreed, will suffice for their disposition.
The considered appeal is taken by the taxpayer, John S. Phipps, who purchased, not as an original subscriber, 3 3/4 per cent. United States Victory notes issued by the United States government under the Victory Liberty Loan Act of March 3, 1919 (40 Stat. 1309). This purchase was made in 1919, and a further purchase was made in 1920. At the time of purchase, the appellant borrowed money to buy the notes and paid interest on the loan while he held the notes. He sold some of these notes in 1921, but at the end of that year had a very large investment in them. He paid interest during the calendar year 1921 of $162,146.72, of which $157,420.45 was paid prior to November 23, 1921, at which date Congress passed the Revenue Act of 1921 (42 Stat. 227). The Commissioner declined to allow appellant to deduct from his income for 1921 the interest thus paid for that year. In 1923, appellant filed a claim for a refund, based upon the claim that deduction of this interest should be allowed. This suit is for an alleged excess of the amount of tax for that year resulting from the refusal to allow the deduction.
The Revenue Act of 1918, § 214 (40 Stat. 1066) provides:
"(a) That in computing net income there shall be allowed as deductions: * * * (2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from taxation under this title. * * *"
The Victory notes provide on their face:
"Exempt, both as to principal and interest from all taxation (except estate or inheritance taxes) now or hereafter imposed by the United States, or any State, or any of the possessions of the United States, or by any local taxing authority."
The deduction would be allowable but for the change Congress made in enacting the Revenue Act of November 23, 1921, which reads (section 214(a)(2):
"(a) That in computing net income there shall be allowed as deductions: * * *
(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title." 42 Stat. 239.
The Revenue Act of November 23, 1921 (42 Stat. 227), was considered and held to be constitutional, within the power of Congress to enact, and not in violation of rights of the taxpayer similarly situated to this appellant. Denman v. Slayton, 51 S. Ct. 269, 75 L. Ed. . In view of that authoritative pronouncement, the appellant has withdrawn its attack upon the constitutionality of the act.
The appellant argues, however, that, if the act is retroactive, it is unconstitutional, and that it should not be applied as to this taxpayer's 1921 interest payments. It is clear that Congress intended the statute to apply to all income of 1921 or income received during that year. The statute takes effect January 1, 1921, for the calendar year 1921, and, in determining income, the class named in the statute was permitted to deduct interest on indebtedness incurred in the purchase of securities of the United States. Other holders were not given this deduction. This is not a retroactive operation. But retroactive legislation is not void. It is objectionable where an attempt is made to attach further consequences to events that were completed in the past and by which a radical change of such events takes place. Nichols v. Coolidge, 274 U.S. 531, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A.L.R. 1081. But where there is no offense against fair play, as the term is used in the field of congressional power of taxation, there is no constitutional impediment. The 1918 act, passed in February, 1919, after the taxing period of 1918 had passed, and which imposed a higher rate of taxation over the 1917 act, and which affected transactions in 1918, was not considered unconstitutional. Brushaber v. Union Pacific Ry. Co., 240 U.S. 1, 36 S. Ct. 236, 60 L. Ed. 493, L.R.A. 1917D, 414, Ann. Cas. 1917B, 713. In Taft v. Bowers, 278 U.S. 470, 49 S. Ct. 199, 73 L. Ed. 460, 64 A.L.R. 362, the court considered the tax on a donee's income, and it was held that Congress had the power to tax as part thereof the difference between what the gift cost the donor and the price received when sold. Revenue Act of 1921, § 202(a)(2), 42 Stat. 229. The gift was made after December 31, 1920, and the ...