Brief for the Respondents in Opposition — Wilson Milling Co. v. Commissioner

INDEX

Opinions below

Jurisdiction - - - - - ‘ ee oan ED oe

Question presented - Beas eee ae ts tots

COURT ToS ages aay alg a are Ge Pee MISSES RPV ER aa cy

Statement-_--- --

Argument. . — =

Conclusion. - . Neo tee —_ =

Appendix. - -

CITATIONS

Cases:

Anniston Mfg. Co. v. Davis, 301 U.S. 337 .

Commissioner v. Blaine, Mackay, rye Co., now pending in

the Opie Cire. .. oc lee eae ap

Helvering v. Amer. Dental Co., 318 U. S. 322__.- ee

Helvering v. Cannon Valley Milling Co., 129 F. 2d 642

Helvering v. A. L. Killian Co., 128 F. 2d 433..

Hirsch vy. Commissioner, 115 F. 2d 656 a

Johnson v. Igleheart Bros., 95 F. 2d 4, certiorari denied, 304

U. S. 585- : ne u

Kingan & Co. ' v. Smith, a7 F, Supp. 217

Louisville Provision Co. v. Glenn, 18 F. Supp. 423, dismissed,

90.F. 2d 1012....-. ; kaa.

Moundridge Milling Co. v. Cream of Wheat Corp., 105 F.

2d 366___- er ata tte Po a a ek a nes and

North American Oil v. Burnet, 286 U.S. 417 pais

Rickert Rice Mills v. Fontenot, 297 U. . 110...

Schoellkopf Aniline & Chemical Works v. United States, 77

Ct. Cls. 529 Boe ais Cae ne ae oe

Security Flour Mills Co. . Commissioner, No 276, present

hs | Rs PA eee ae ee ee ey ee arc

Sportwear Hosiery Mills v. Commissioner, 129 F. 2d 376

Spring City Co. v. Commissioner, 292 U. 8S. 182

Union Packing Co. v. Rogan, 17 F. Supp. 934. .

United States v. Butler, 297 U. S. 1._._._.-.

United States v. Hudson, 299 U. S. 498 ats

White Packing Co. v. Robertson, 89 F. 2d 775 7

(1)

564154--43

II

Statutes: Page

Agricultural Adjustment Act of 1935, ¢. 25, 48 Stat. 31, as

amended by the Act of August 24, 1935, c. 644, 49 Stat.

Ota cies ae Seok an ee a dears so ahs oh Seon SG ig in 4

Revenue Act of 1934, c. 277, 48 Stat. 680, Sec. 43._.____- 6

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

OR lo cece nen e aa akan ehanena st aa ee 6

Pe ey ee eke Nae el Sen Coe eee eatin atertd 4,5, 11

OO Mi eteceesehe auton tab ston cag ae ahe cosas 5, 12

Sec. 902 (7 U. S. C. 1940 ed., Sec. 644)... .________- 4

Revenue Act of 1938, c. 289, 52 Stat. 447, Sec. 43._______ 6

Miscellaneous:

B. SOOe, 19RE-1 Com. RWG Choo on nde ccesccce 7

_

Guthe Supreme Court of the Bnited States

OcroseR TERM, 1943

Witson MiILiinc Company, A DissoLvep Corpora-

tion, BY A. J. LanpruM, R. E. Lee WIson, JR.,

J. H. Crain, 8. A. REGENOLD AND W. F. Witson,

TRUSTEES IN LIQUIDATION, PETITIONER

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE EIGHTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the Tax Court of the United

States (R. 13-20) is reported at 1 T. C. 389. The

opinion of the Cireuit Court of Appeals (R.

30-34) is not yet officially reported.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on October 18, 1943 (R. 35). The

petition for a writ of certiorari was filed on No-

vember 26, 1943. The jurisdiction of this Court

(1)

2

is invoked under Section 240 (a) of the Judicial

Code, as amended by the Act of February 13,

1925.

QUESTION PRESENTED

In 1935 the taxpayer purchased flour at prices

which included the processing tax imposed under

the Agricultural Adjustment Act and resold the

flour at prices which similarly included the tax,

In 1937 it received reimbursements from two of

its vendors representing amounts of the tax bur-

den which had been passed on to it and which

it had in turn passed on. Is the amount of these

reimbursements subject, for the year 1937, to the

unjust enrichment tax imposed by Section 501 of

the Revenue Act of 1936?

STATUTE INVOLVED

The statute involved is set forth in the Appen-

dix, infra, pp. 11-13.

STATEMENT

The facts as found by the Tax Court may be

summarized as follows:

The taxpayer is an Arkansas _ corporation,

organized on August 7, 1930, to engage in the

wheat and corn milling business. It was dis-

solved on May 2, 1938, and its directors are its

trustees in liquidation. (R. 14.)

The taxpayer discontinued the milling of wheat

in 1934 and thereafter bought flour on the open

market from other milling companies and sold it

to retail grocers. During 1937 it received the

—

3

amount of $3,794.92 as reimbursements from two

of its vendors on flour purchased in 1935. The

reimbursements were made with respect to flour

delivered under contracts known as ‘Miller’s

National Federation Uniform Sales Contract

(Adopted July 10, 1934).’”’ (R. 14.) These con-

tracts called for the delivery of a specified num-

ber of barrels of flour at a specified price per

barrel, and contained a clause reading in part

as follows (R. 14):

Taxes: The price named in this contract

includes all taxes as at the date hereof pro-

claimed by the Secretary of Agriculture by

virtue of the authority vested in him by

\ the Agricultural Adjustment Act of the

United States. * * * if any tax in-

cluded in the price hereof shall be decreased

or abated, then, in that event, said decrease

or abatement shall be deducted from the

price hereof.

No separate charge was made by the vendors for

processing tax, but the price per barrel was

sufficient to include the processing tax on wheat.

This flour the taxpayer sold at a specified price

per barrel, using as the cost price to determine its

sale price, the price paid by it to its vendors. No

separate charge was made to its vendees for the

processing tax. (R. 15.)

The taxpayer did not receive enough from the

sale of its products to cover its cost and expenses

of operating. It reported net losses on its income

4

tax returns for the years 1935, 1936 and 1937 in

the respective amounts of $11,436.81, $4,554.40 and

$8,677.06. (R. 15.)

The Commissioner determined that the tax-

payer was subject, under Title IIT of the Revenue

Act of 1936, to an unjust enrichment tax equal

to 80% of the reimbursements (R. 15). The Tax

Court affirmed the Commissioner’s determination

(R. 21) and its decision was in turn affirmed by

the Circuit Court of Appeals (R. 35).

ARGUMENT

Introductory.—Titles IIT and VII of the Reve-

nue Act of 1936 were enacted in response to the

decisions in United States v. Butler, 297 U. 8.1,

and Rickert. Rice Mills v. Fontenot, 297 U.S. 110,

holding invalid the processing taxes imposed by

the Agricultural Adjustment Act of 1935, ¢. 25,

48 Stat. 31, as amended by the Act of August 24,

1935, ¢. 641, 49 Stat. 750. Title VII conditioned

the refund of processing taxes which had been

paid to the Government upon a showing by the

claimant that he had not shifted the burden of

the tax ‘directly or indirectly.’ Section 902 (a).

See Anniston Mfg. Co. v. Davis, 301 U. S. 337.

Title III was directed at reaching the unjust en-

richment resulting from the invalidation of the

processing taxes in cases where the taxes had not

been paid to the Government, or where, if paid,

refunds had already been made. By Section 501

a tax of 80% was levied on the net unjust enrich-

es

5

ment or ‘windfall’? income. Clause (1) of See-

tion 501 (a) reached processors who had passed

on the burden of the tax but had not remitted to

the Government. Clause (2) reached cases, such

as the instant one, where a purchaser of a taxed

commodity had in turn passed on the burden of

the tax and had then received reimbursements

from his vendor. Clause (3) reached cases where

the processing tax had been paid to the Govern-

ment, but had been refunded. Section 501 (1)

provided that the tax was to be imposed on the

net income from these sources regardless of losses

from other transactions, and Section 502 avoided

double taxation by granting as a credit against

the tax the amount of other federal income’ and

excess profits taxes payable on that income. As

both the Tax Court and the Circuit Court of Ap-

peals have held, the reimbursements of $3,794.92

which the taxpayer received in 1937 fell squarely

within the terms of the statute.

1. There is but a vague relationship between

the instant case on the one hand and Security

Flour Mills Co. v. Commissioner, No. 276, present

Term, and Helvering v. Cannon Valley Milling Co.,

129 F. 2d 642 (C. C. A. 8th), on the other hand.

In those cases processors made reimbursements

to their vendees in years after 1935 and sought

to deduct, as business expenses, the amounts of

those reimbursements from their incomes for

1935, the year in which they had made the sales

6

with respect to which the reimbursements were

made, rather than from their incomes of the later

years. Those cases turn upon a specific statutory

provision (Sec. 43 of Title I of the Revenue Acts

of 1934,’ 1936,’ and 1938*), which deals only with

the time when deductions and credits shall be

taken.’ The instant case presents no question

under Section 43. It does not even present any

real issue as to the time when an item of income

is to be reported. For even if it should be

assumed that the taxpayer was on the accrual

basis of accounting, there is nothing in the record

to support any suggestion that a right to the re-

imbursements had accrued at any time prior to

1937. It is not shown and it cannot be assumed

that the taxpayer’s vendors had agreed prior to

that time to make the reimbursements. Proces-

sors frequently took the position [in which they

were sustained; see Moundridge Milling Co. v.

Cream of Wheat Corp., 105 F. 2d 366 (C. C. A.

10th); Johnson vy. Igleheart Bros., 95 F. 2d 4

(C. C. A. 7th), certiorari denied, 304 U. S. 585]

1 ©, 277, 48 Stat. 680.

> C. 690, 49 Stat. 1648.

3 ©, 289, 52 Stat. 447.

* Commissioner v. Blaine, Mackay, Lee Co., now pending

in the Third Circuit, on review of Memorandum Decisions

of January 17, 1942, of the Board of Tax Appeals (1942

P-H Memorandum Decisions, pars. 42,022, 42,032), also

raises that issue, namely the proper time for deduction of

reimbursements to vendees and of attorneys’ fees paid in

a suit attacking the validity of the processing taxes.

7

that the tax clause of the Miller’s Federation Con-

tract (R. 14) imposed no liability upon them to

make such payments. The record does not show

that there was here anything more than the usual

decision to pay the vendee’s claim; nor does it

show that any agreement to make the payments

was reached prior to 1937.2 The courts below

were therefore plainly correct under long settled

principles (see North American Oil v. Burnet,

286 U.S. 417) in holding that the reimbursements

were properly to be reported in that year.*

Neither Spring City Co. v. Commissioner, 292

U. S. 182, nor Schoellkopf Aniline & Chemical

Works v. United States, 77 Ct. Cls. 529, nor I. T.

3064, 1937-1 Cum. Bull. 94, is to the contrary.

They all hold that an item does not become in-

* There is certainly nothing in the case to suggest that the

reimbursements were gratuities. Cf. Helvering v. Amer.

Dental Co., 318 U.S. 322. Petitioner's assertion that the re-

imbursements were necessarily either gifts or made pursuant

to a fixed and definite right under the Miller’s Federation -

Contract is patently fallacious. It cannot be assumed that

there was an absence of the usual controversy leading to

negotiations resulting in a definite settlement.

* Since under any view the reimbursements were income of

1937, it was doubtless for this reason that the Circuit Court

found it unnecessary to consider the new issue, tendered there

at the eleventh hour, as to whether the taxpayer filed its re-

turn for that year on the cash or accrual basis of accounting.

Moreover it is to be observed that the evidence relied upon

by the taxpayer (Pet. 12-13) to show that the accrual system

was used is self-contradictory and hardly supports that

conclusion.

8

come to a taxpayer on the accrual basis until the

right thereto has become fixed.

2. There is no merit to the suggestion that the

opinion of the Cireuit Court is in conflict with its

own decision in Helvering v. A. L. Killian Co.,

128 F. 2d 483; see also Hirsch v. Commissioner,

115 F, 2d 656 (C. C. A. 7th). Those cases hold

simply that where there is a reduction in the pur-

chase price of property before the vendee has fin-

ished paying for it, the amount by which the

obligation has been reduced does not constitute

income to the purchaser, but is only a revision of

the original price. Here, however, the goods had

already been bought, paid for and resold; the

money turned over to the taxpayer by its vendors

in the year 1937 could hardly be viewed as other

than income in that year. See Sportwear Hosiery

Mills v. Commissioner, 129 F. 2d 876 (C. C. A.

3d).

3. The suggestion that Title III of the Revenue

Act of 1936 is unconstitutional ignores more than a

quarter of a century of history. The term ‘net

income’’ taxed by the statutes has never been the

net gain or profit of the taxpayer in the economic

sense; it has always been simply the difference be-

tween ‘‘gross income” as statutorily defined, and

the deductions as statutorily limited. From the

beginning some items which might properly have

been included in gross income have been excluded

therefrom, and from the beginning the items of

9

deduction have never attempted nor purported to

include all of those which in the economic sense

should be subtracted in order to arrive at net

gain. It has long been a normal feature of the

income tax that a taxpayer might sustain a net

loss in the accounting or economic sense, but never-

theless have a net income subject to tax. Famil-

iar and everyday examples are those arising from

the limitation upon the allowance of capital losses

as deductions. It is clear that there is no con-.

stitutional requirement that Congress allow a tax-

payer to deduct other losses from his unjust

enrichment net income,

The constitutionality of the unjust enrichment

tax has been sustained in Wivte Packing Co. v.

Robertson, 89 F. 2d 775 (C. C. A. 4th); Kingan

& Co. v. Smith, 17 F. Supp. 217 (S. D. Ind.);

Louisville Provision Co. v. Glenn, 18 F. Supp.

423 (W. D. Ky.), appeal dismissed, 90 F. 2d 1012

(C. C. A. 6th); and Union Packing Co. v. Rogan,

17 F. Supp. 934 (S. D. Cal.). And United States

v. Hudson, 299 U. S. 498, seems to have put to

rest any question concerning the power of Con-

gress to levy a special tax upon income arising

from a particular source.

Cees!

i

a

= gd

10

CONCLUSION

The decision below is plainly | correct and is

not in conflict.with-any-other- decision. There is

no oceasion for further review and the petition

should be denied. |

Respectfully submitted.

CHARLES Fany,

Solicitor General.

| SaMvEL O. CuarK, Jr.,

Assistant Attorney General.

SEWALL Key,

BERNARD CHERTCOFF,

Special ‘Assistants to the Attorney General.

DECEMBER, 1943