United States v. Stewart

Background

An investor bought farm loan bonds issued by joint-stock land banks in 1930 while the banks were in receivership. He bought them below face value to gain from future resale, not to collect interest. He relied on circulars from the Farm Loan Board that described the bonds and their income as tax-exempt. In 1931 he sold some bonds and exchanged others with a receiver, realizing profits. The Treasury treated those profits as taxable; after a refund claim was denied, lower courts divided on the issue and the case reached this Court to resolve the conflict.

Reasoning

The central question was whether the statute that makes the bonds and the “income derived therefrom” tax-exempt protects profits from buying and selling the bonds or only interest earned by holding them. The Court held the exemption covers only interest paid under the bonds, not gains from transactions. It relied on the tax code’s separate treatment of gains from sales, precedent distinguishing interest from transactional profits, the long history of revenue acts exempting interest, and the lack of a clear legislative or administrative rule showing that capital gains were meant to be exempt.

Real world impact

As a result, people who profited by buying and reselling these farm loan bonds must include those gains as taxable income. Statements by the Farm Loan Board could not prevent taxation and did not bind the Treasury. The ruling clarifies that tax exemptions for these bonds should be read narrowly and that investors cannot rely on agency circulars to create an exemption.

Dissents or concurrances

Justice Roberts would have affirmed the lower court ruling for the investor, reflecting a different view of how the exemption should be read.