41 Opinion of the Court. status, and the like supervision exercised by the States over both military and civilian personnel of the National Guard, unmistakably lead in combination to the view that civilian as well as military personnel of the Guard are to be treated for the purposes of the Tort Claims Act as employees of the States and not of the Federal Government. This requires a decision that the United States is not liable to petitioners for the negligent conduct of McCoy.38 In so holding we are not unmindful that this doubtless leaves those who suffered from this accident without effective legal redress for their losses.39 It is nevertheless our duty to take the law as we find it, remitting those aggrieved to whatever requitement may be deemed appropriate by Congress, which in affording the administrative remedies, unfortunately not available here (see n. 37). has shown itself not impervious to the moral demands of such distressing situations. MR. JUSTICE DOUGLAS dissents. Affirmed. 38 Petitioners contend that the judgments of the District of Columbia Circuit in Meyer should be given collateral estoppel effect here, even though petitioners were not parties in Meyer. See Restatement, Judgments §93, comment b; Developments in the Law-Res Judicata, 65 Harv. L. Rev. 818, 865, 870-871 (1952); but see United States v. United Air Lines, Inc., 216 F. Supp. 709, aff'd on other grounds sub nom. United Air Lines, Inc. v. Wiener, 335 F. 2d 379, writ of cert. dismissed under Rule 60, 379 U. S. 951. We reject the Government's contention that the point was not preserved below. Having regard to the fact that the decision in Meyer came down during the interval between the argument and decision of Levin, we think that the estoppel challenge was properly and timely raised in the petition for rehearing in Levin. However, we need not reach the merits of the challenge since the judgment in Meyer, also pending in this Court (see p. 43, supra), must, in any event, now fall in consequence of our decision in the cases before us. 39 The State of Maryland has not, so far as we know, waived its sovereign immunity, and petitioners are not eligible for benefits under 32 U. S. C. § 715, supra, n. 35. Syllabus. 381 U.S. UNITED STATES v. MIDLAND-ROSS CORP. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT. No. 628. Argued March 31, 1965.-Decided May 3, 1965. Respondent taxpayer in 1952-1954 bought noninterest-bearing promissory notes at prices discounted below the face amounts and held them over six months. Before maturity and in the year of purchase it sold each below the face amount but for more than the issue price. The gains, concededly the economic equivalent of interest, were reported as capital gains. The Commissioner of Internal Revenue determined that the gains attributable to original issue discount were but interest in another form and therefore taxable as ordinary income. After paying the deficiencies respondent brought this refund action which both the District Court and the Court of Appeals decided in its favor. Held: Earned original issue discount is not entitled to capital gains treatment under the 1939 Internal Revenue Code. Pp. 56-67. (a) Although capital gains treatment is to be accorded to the sale of a "capital asset," defined in § 117 (a) (1) of the Internal Revenue Code of 1939 as "property" held by the taxpayer, the term "capital asset" is to be construed narrowly so as to apply only where there has been realization of appreciation in value accrued over a substantial period of time. Pp. 56-57. (b) "Capital asset" does not include an item like earned original issue discount, which serves the same function as stated interest, the earning of which is predictable and does not represent market appreciation. Pp. 57-58. (c) In specifying ordinary income treatment for original issue discount in § 1232 (a)(2) of the Internal Revenue Code of 1954 and in special provisions of the 1939 Code Congress did not indicate any understanding that such discount would be entitled to capital gains treatment in the absence of such provisions. Pp. 58-63. (d) A case in which the Tax Court allowed capital gains treatment of the full amount the taxpayer received upon retirement of an "Accumulative Installment Certificate"-Caulkins v. Commissioner, 1 T. C. 656, acq. 1944 Cum. Bull. 5, aff'd, 144 F. 2d 482 (C. A. 6th Cir.), acq. withdrawn, 1955-1 Cum. Bull. 7-did not 54 Opinion of the Court. unambiguously establish that original issue discount was itself a "capital asset" entitled to capital gains treatment, and what little other administrative practice dealt with the question appears contrary to its holding. Pp. 63-66. (e) This Court has often recognized the economic function of discount as interest. Pp. 66-67. 335 F. 2d 561, reversed. Frank I. Goodman argued the cause for the United States. With him on the brief were Solicitor General Cox, Assistant Attorney General Oberdorfer, Wayne G. Barnett and Joseph Kovner. Theodore R. Colborn argued the cause for respondent. With him on the brief was Theodore M. Garver. MR. JUSTICE BRENNAN delivered the opinion of the Court. The question for decision is whether, under the Internal Revenue Code of 1939, certain gains realized by the taxpayer are taxable as capital gains or as ordinary income. The taxpayer bought noninterest-bearing promissory notes from the issuers at prices discounted below the face amounts. With one exception, each of the notes was held for more than six months, and, before maturity and in the year of purchase, was sold for less than its face amount but more than its issue price.1 It is conceded that the 1 The original plaintiff, Industrial Rayon Corporation, was merged into respondent Midland-Ross Corporation in 1961. During 1952, 1953, and 1954, Industrial's idle funds were used to purchase 13 noninterest-bearing notes, varying in face amount from $500,000 to $2,000,000, from General Motors Acceptance Corporation, Commercial Investment Trust Company and Commercial Credit Company. The original issue discount in most instances was calculated to yield the equivalent of 2% to 22% on an annual basis if the note were held to maturity, and the gains on sale approximated the discount earned to date. It is not contended that any part of the gain was attributable to market fluctuations as opposed to the passage of time. Opinion of the Court. 381 U.S. gain in each case was the economic equivalent of interest for the use of the money to the date of sale but the taxpayer reported the gains as capital gains. The Commissioner of Internal Revenue determined that the gains attributable to original issue discount were but interest in another form and therefore were taxable as ordinary income. Respondent paid the resulting deficiencies and in this suit for refund prevailed in the District Court for the Northern District of Ohio, 214 F. Supp. 631, and in the Court of Appeals for the Sixth Circuit, 335 F. 2d 561. Because this treatment as capital gains conflicts with the result reached by other courts of appeals, we granted certiorari. 379 U. S. 944. We reverse. 2 The more favorable capital gains treatment applied only to gain on "the sale or exchange of a capital asset." §117 (a) (4). Although original issue discount becomes property when the obligation falls due or is liquidated prior to maturity and § 117 (a)(1) defined a capital asset as "property held by the taxpayer," we have held that "not everything which can be called property in the ordinary sense and which is outside the statutory exclusions qualifies as a capital asset. This Court has long held that the term 'capital asset' is to be construed narrowly in accordance with the purpose 2 Real Estate Investment Trust of America v. Commissioner, 334 F. 2d 986 (C. A. 1st Cir.), petition for writ of certiorari pending, No. 620; Dixon v. United States, 333 F. 2d 1016 (C. A. 2d Cir.), affirmed, post, p. 68; Rosen v. United States, 288 F. 2d 658 (C. A. 3d Cir.); United States v. Harrison, 304 F. 2d 835 (C. A. 5th Cir.); Commissioner v. Morgan, 272 F. 2d 936 (C. A. 9th Cir.). See also Pattiz v. United States, 160 Ct. Cl. 121, 311 F. 2d 947; Schwartz v. Commissioner, 40 T. C. 191; Leavin v. Commissioner, 37 T. C. 766; Gibbons v. Commissioner, 37 T. C. 569. 3 "Sec. 117. Capital Gains and Losses. "(a) Definitions.-As used in this chapter "(1) Capital Assets.-The term 'capital assets' means property held by the taxpayer. . . .' 54 Opinion of the Court. of Congress to afford capital-gains treatment only in situations typically involving the realization of appreciation in value accrued over a substantial period of time, and thus to ameliorate the hardship of taxation of the entire gain in one year." Commissioner v. Gillette Motor Co., 364 U. S. 130, 134. See also Corn Products Co. v. Commissioner, 350 U. S. 46, 52. In applying this principle, this Court has consistently construed "capital asset" to exclude property representing income items or accretions to the value of a capital asset themselves properly attributable to income. Thus the Court has held that "capital asset" does not include compensation awarded a taxpayer as representing the fair rental value of its facilities during the period of their operation under government control, Commissioner v. Gillette Motor Co., supra; the amount of the proceeds of the sale of an orange grove attributable to the value of an unmatured annual crop, Watson v. Commissioner, 345 U. S. 544; an unexpired lease, Hort v. Commissioner, 313 U. S. 28; and oil payment rights, Commissioner v. P. G. Lake, Inc., 356 U. S. 260. Similarly, earned original issue discount cannot be regarded as "typically involving the realization of appreciation in value accrued over a substantial period of time... [given capital gains treatment] to ameliorate the hardship of taxation of the entire gain in one year." Earned original issue discount serves the same function as stated interest, concededly ordinary income and not a capital asset; it is simply "compensation for the use or forbearance of money." Deputy v. du Pont, 308 U. S. 488, 498; cf. Lubin v. Commissioner, 335 F. 2d 209 (C. A. 2d Cir.). Unlike the typical case of capital appreciation, the earning of discount to maturity is predictable and measurable, and is "essentially a substitute for ... payments which § 22 (a) expressly characterizes as gross income[; thus] it must be regarded as ordinary income, and |