Brief for the Respondents in Opposition — Reading Co. v. Commissioner

INDEX

Page

8) lpg ang A NS he a oo ee a ea ae TE 1

Jurisdiction cdi tn fStae es oho oe Saad 1

Question presented , poco . 2

Statute involved Ramee 2

Statement : 2

Argument Sar 7

Conclusion 10

CITATIONS

Cases:

Avery v. Commissioner, 22 F. 2d 6 rd 8

Capite!-Barg Dry Cleaning Co. v. Commissioner, 131 F. 2d

712. : pest 9

Dayton P. & L. Co. v. Commission, 292 U. 8. 290. 9

First National Bank v. Commissioner, 125 F. 2d 157 : 9

Grand Rapids Store Equipment Corp. v. Commissioner, 59 F.

2d 914 Buti als uesoact 10

Rosenthal v. Helvering, 124 F. 2d 474 : Sessa 7,9

Rassicur v. Commissioner, 129 F. 2d 820. ; ; : 9

Tracy Vv. Commissioner, 53 F. 2d 575, certiorari denied,

287 U. 8. 632 2 ae ied 10

Unification of Lines in Southern New Jersey, 193 1. C. C. 183_ 4

Wilmington Trust Co. v. Helvering, 316 U.S. 164.. _____- 9

Statutes:

Revenue Act of 1936, ¢. 690, 49 Stat. 1648:

Sec. 23..__--.- Ries Sy cand Oat Se aoe ek oh ae 2

514929—43——1 a)

Guthe Supreme Court of the Hnited States

OcTOBER TERM, 1942

No. 743

READING COMPANY, PETITIONER

Vv,

Guy T. HELVERING, CoMMISSIONER OF INTERNAL

REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE THIRD

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The memorandum opinion of the Board of Tax

Appeals (R. 3a-20a) is unreported. The opinion

of the Cireuit Court of Appeals (R. 170-177) is

reported at 132 F. 2d 306.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on October 23, 1942 (R. 177-178).

A petition for rehearing was denied on Novem-

ber 19, 1942 (R. 189). The petition for a writ

of certiorari was filed on February 16, 1943.

(1)

Sit as id Me etre cs tear ae . . .

PE ARETE Ree OCR TEAR OG i re ae aceon et a cre con

2

The jurisdiction of this Court is invoked under

Section 240 (a) of the Judicial Code, as amended

by the Act of February 13, 1925.

QUESTION PRESENTED

Taxpayer in 1933, 1934 and 1935 made loans

aggregating $2,805,000 to the Pennsylvania-Read-

ing Seashore Lines. The Board of Tax Appeals

found that although the taxpayer charged off

these debts in 1936, they had in fact become worth-

less, and taxpayer had ascertained them to be

worthless, prior to 1936. The Cireuit Court of

Appeals held that the findings were supported by

substantial evidence and affirmed the Board. Is

the taxpayer entitled to a bad debt deduction in

1936 under Section 23 (k) of the Revenue Act of

1936?

STATUTE INVOLVED -

Revenue Act of 1936, ¢. 690, 49 Stat. 1648:

Src. 23. DepucTIONS FROM GROSS INCOME.

In computing net income there shall be

allowed as deductions:

* * * * *

(k) Bad debts.—Debts ascertained to be

worthless and charged off within the tax-

able year * * *

STATEMENT

Prior to June 24, 1933, the Pennsylvania Rail-

road Company and the taxpayer each owned a con-

3

trolling interest in a subsidiary railway company

operating in southern New Jersey. Pennsyl-

vania’s subsidiary was the West Jersey and Sea-

shore Railroad Company; taxpayer’s subsidiary

was the Atlantic City Railway Company (R.

3da—-4a).

The operations of both lines were unprofitable.

The combined losses amounted to $1,582,054 in

1932 (R. 5a).

The two lines served practically the same sea-

shore resorts with similar schedules. In 1927 a

report was submitted by officers of the proprie-

tary companies recommending unification. It

culminated on November 23, 1932, in a unification

agreement approved by the Interstate Commerce

Commission on June 10, 1933 (R. 5a, 6a).

Under this agreement the taxpayer transferred

two-thirds of the Atlantic stock to Pennsylvania

and Pennsylvania assigned its lease of West Jer-

sey to Atlantic. All funded debt of Atlantic was

cancelled with the exception of $4,500,000 par

value of bonds. The taxpayer agreed to cancel

all Atlantic indebtedness to it for advances, and

Pennsylvania agreed to cancel certain specified

amounts owed it by West Jersey. Reading and

Pennsylvania agreed that in the event of the ina-

bility of the consolidated company to pay its op-

erating expenses that they would advance the

necessary sums which would bear interest at an

agreed rate. The advances were to be made on

4

the basis of stock ownership, which was one-third

by Reading and two-thirds by Pennsylvania. On

July 15, 1933, the name of the consolidated com-

pany was changed to Pennsylvania-Reading Sea-

shore Lines (hereafter sometimes referred to as

‘“‘Seashore’’) (R. 5a-6a).

A consulting engineering firm, reporting its in-

vestigation of the proposed unification to the New

Jersey Board of Public Utility Commissioners

said that it would reduce operating expenses by

approximately $1,700,000 and that capital require-

ments for the immediate future would be reduced

by approximately $8,000,000. The Interstate Com-

merce Commission in Unification of Lines m

Southern New Jersey, 193 I. C. C. 183, 188, stated

that the estimated savings as a result of the con-

solidation was a total of $1,612,211, ‘‘an amount

slightly in excess of the 1932 net income deficit of

the two roads”’ (R. 7a).

The unification resulted in substantial savings

in taxes, labor, and maintenance (R. lla), and the

operating efficiency of Seashore improved from

1934 through 1937 and 1939 (R. 12a). Despite

the attainment of ‘the anticipated reduction of op-

erating expenses and the increased operating effi-

ciency, Seashore had a net loss of $1,473,954 from

June 25 to December 31, 1933; $2,812,838 in 1934;

$2,623,044 in 1935; $2,152,694 in 1936; and

$2,651,350 in 1937 (R. 9a). During this period

5

Seashore requested and obtained advances from

the taxpayer and Pennsylvania as follows (R. 9a) :

: ‘Taxpayer Pennsylvania

‘ sb ie aires ei Seiad Nia UCN

5] June 25 to December 31, 1933... _- - : $250, 000 $500, 000

4 EO ee ees pa | 1,615,000 } 3, 230, 000

3 1935 | 940, 000 | 1, 880, 000

4 1936.__.- 765, 000 | 1, 530, 000

Bs 1937 ..| 783,000 1, 507, 333

a | (eet

4 4, 323, 667 | 8, 647, 333

5 | .

i SURE ee eas

i Reporting to the stockholders concerning the

_ period July 1 to December 31, 1933, the board of

F

directors stated (R. 10a):

As a result of the low level of industrial

activity which prevailed during the year

and the continued competition of highway

transportation, the revenues on these lines

declined and despite the economies effected

through unification the results were very

unsatisfactory. * * * With the com-

plete unification of train service, the aban-

donment of duplicate lines, and the prospect

of a somewhat larger volume of traffic dur-

ing the year 1934, it is anticipated that the

results will be better, but it is quite ap-

parent the savings resulting from unifica-

tion must be supplemented by a substantial

increase in the freight and passenger traffic

moving over these lines if satisfactory

financial results are to be realized.

The 1934, 1935 and 1937 annual reports of Sea-

shore continued to attribute the operating deficits

to low levels of gross revenues, increasing com-

petition with highway transportation and increas-

Pap Pe yt recat ha han a) ee Pir not

seereees

Rehan dst ya’ SHINS Ae NST RITE ee

3

6

ing costs due to wages, price of materials, ete.

The 1936 report said (R. 10a-1la):

It is apparent, therefore, that the econo-

mies effected through unification must be

supplemented by a substantial increase in

freight and passenger traffic moving over

thesc lines if satisfactory financial results

are to be realized.

Seashore’s gross operating revenue for 1934

was 89.4% of 1932; in 1935 it was 85.1% ; 1936,

98.9% ; 1937, 96.1%; 1938, 81.4%, and 1939,

88.9%. This is to be contrasted with the total

operating revenues of Class 1 railways of the

United States particularly in the Eastern Dis-

trict, which increased steadily from 1932 through

1937 (R. lla).

Prior to 1933, there had been competition from

truck and bus lines and passenger automobiles.

Freight and passenger traffic was being diverted

to highway transportation (R. 8a). After unifi-

cation in 1933, this diversion of railroad traffic

to highway transportation continued (R. 12a).

In southern New Jersey in January 1933, 19

different bus companies served territory tributary

to Atlantic and West Jersey lines operating on

58 different routes. Ninety-one truck companies

operated on 113 different routes. In the seven

counties in southern New Jersey served by

Atlantic and West Jersey, hard-surfaced and

improved highways increased 911 miles in 1931

over 1923 (R. 8a). In the period following unifi-

:

: J

7

eation in 1933, hard-surfaced highways extended

to every community of any size served by Sea-

shore (R. 12a). Almost every community of a

thousand population or more where Seashore had

a station was served by one or more bus lines

with scheduled trips, and by truck lines operating

from New York and Philadelphia (R. 13a).

Seashore had a corporate surplus in 1933 of

$3,975,309; in 1934 this had decreased to $2,565,-

198, and in 1935 the company had a deficit of

$464,993. This deficit increased to $7,543,449 in

1936 and to $10,656,503 in 1937 (R. lla).

In 1936 the taxpayer charged off its books as

uncollectible the advances made from June 1933

to the end of 1935 (R. 60a). The Board of Tax

Appeals found that the advances made by the tax-

payer to Seashore from 1933 through 1935 were

ascertained to be worthless before 1936 (R. 13a).

Accordingly, the deduction claimed was disal-

lowed (R. 18a). The Circuit Court of Appeals

affirmed (R. 170-177).

ARGUMENT

The holding of the court below, contrary to the

taxpayer’s contention (Pet. 7), is not in conflict

with Rosenthal v. Helvering, 124 F. 2d 474 (C.

C. A. 2d). That case prescribed a “‘subjective’’

standard in determining whether a debt has been

‘‘ascertained’’ to be worthless. Under this stand-

ard as explained by the Second Circuit, the tax-

payer is relieved of any ‘duty of general vigi-

514929—43—__2

PELE ETD LILI APE ATL OP REAR NIT NTN IN RN CL

8

lance’’ to make an inquiry into the facts (p. 477).

But it cannot refuse to use the facts it has (p.

476). The ‘taxpayer has the burden of proving

a negative—i. e. he must show that he did not

‘ascertain’ the debt to have been ‘worthless’ be-

fore the year in question,’’ and the fact that a

prudent man would have ascertained the worth-

lessness prior to the taxable vear is evidence that

the taxpayer did so (p. 476).

Although the court in the instant case stated

that it preferred the ‘‘objective’’ test (pursuant

to which a bad debt deduction is disallowed if

“the taxpayer knew or ought to have known its

worthlessness in a prior year,’’ Avery v. Commis-

stoner, 22 F. 2d 6, 8 (C. C. A. 5th)), it expressly

held that under either standard, ‘‘the findings of

the Board fully warranted its conclusion that the

advances made by the petitioner to Seashore in

1933, 1934 and 1935 ‘were ascertained to be worth-

less before 19367 *’ (R. 174-175). It is plain that

the court below was correct in its view that the

finding was justified even on the basis of the stand-

ard of the Rosenthal case. The Board found that

the advances had been ascertained to be worthless

before 1956, thus meeting that requirement of that

case. Since no question is raised here as to the

taxpayer’s knowledge of all the relevant facts

prior to 1936, it was a reasonable inference that

the taxpayer recognized from those facts the

worthlessness of the debts. There can be little

doubt on this record that a reasonable man would

ee a

9

reach this conclusion and that, as the court said

in the Rosenthal case, is evidence that the tax-

payer did so. Finally, the taxpayer did not sus-

tain the burden recognized by the Rosenthal case

of proving that it had not ascertained the debt to

be worthless prior to 1936.'

The only question in the case, therefore, is

whether there was substantial evidence to support

the Board’s finding that the taxpayer had ascer-

tained the debt to be worthless prior to the taxable

year. The decision is in accord with the familiar

rules governing the finality of determinations by

the Board of Tax Appeals on issues of fact. EF. 9.

Wilmington Trust Co. v. Helvering, 316 U. 8. 164.

Nor is the decision in conflict with Capitol-Bary

Dry Cleaning Co. v. Commissioner, 131 F. 2d

712 (C. C. A. 6th), in that the Board here reached

a conclusion at variance with that of the taxpay-

er’s expert witnesses as to the worthlessness of

the debts prior to 1936. The Sixth Circuit did

not, and had no intention to overrule its prior

decisions in accord with Dayton P. & L."Co. v.

Commission, 292 U. 8. 290, 298-299, holding that

opinions of experts have no conclusive weight

where there is other evidence to support the find-

ings of the trier of fact. First National Bank v.

‘Contrary to taxpayer's position (Pet. 6), neither the

Rosenthal case, Rassieur y. Commissioner, 129 F, 2a 920

(C. C. A. 8th), nor the decision of the court below express

conflicting views concerning any requirement that the year

in which the debt became bad must coincide with the year in

which the debt was ascertained to be worthless.

IN Aig EEN a ARI Se TOW CAIN DT IE EN MIG IEN BPE Nah 8 LAA A INS OTC AR I REIN She TSS eee

10

Commissioner, 125 F. 2d 157 (C. C. A. 6th);

Tracy v. Commissioner, 53 F. 2d 575 (C. C. A.

6th), certiorari denied, 287 U. 8. 682; Grand Rap-

ids Store Equipment Corp. v. Commissioner, 59

F. 24 914 (C. C. A. 6th). It expressly held in

the Capitol-Barg case that the evidence considered

in the aggregate was not sufficient to support the

Board’s finding. The opinion leaves no doubt

that the expert testimony was only one factor in

the conclusion that there was not substantial evi-

dence. Indeed, the court concluded that (p. 715),

‘Every case must stand upon its own peculiar

facts and circumstances * * *.’”’ In the in-

stant case, however, the opinion of the experts was

contrary to all the other evidence, and the court

below properly concluded that the findings were

supported by substantial evidence.

CONCLUSION

The case was correctly decided by the court

below, and there is no conflict of decisions. The

petition should be denied.

Respectfully submitted.

CHARLES Fany,

Solicitor General.

SaMveEL O. CxuarK, Jr.,

Assistant Attorney General.

SEWALL KEY,

HELEN R. CaARLoss,

Irvine I. AXELRAD,

Special Assistants to the Attorney General.

Marcu 1943.

U. $. GOVERNMENT PRINTIAG OFFICE: 1943