Petition — General Foods Corp. v. United States

Supreme Court brief1976

Ask Donna

What actually matters in this document.

Text

IN THE

Supreme Couwt of the United States

OcToBerR TERM, 1975

GENERAL Foops Corroration, Petitioner,

Vv.

Unirep Srares, Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

Davip I. GRANGER

Harotp LD), Murry, Jr.

CLirrorp, WARNKE, GLASs,

McILwaIn & FINNEY

815 Connecticut Avenue, N.W.

Washington, D.C. 20006

Press or Byron S. AdAMsS Parrtntine, INC., WASHINGTON, D. C.

Page

Opinion Belew .nncccccscccccccccccsccsecce eovves 1

ER cs ccepeantevcdeeren een easels bioens 1

Questions Prosemted ....cccccccscccccccscccccccves 2

eS re er ee ee 2

i ne es cucu enudsaeecnbuenaa 2

Reasons for Granting the Writ ............000e00e0 4

I. The Court of Claims decision disregards the

Congressional intent with respect to Section 1232

of The Internal Revenue Code of 1954 ........ 5

Il. The Court of Claims erred in refusing jurisdic-

tion over General Foods’ claim of unlawful dis-

oe eed eee meal 11

PE Oi enced <4 ad peaen veuhe seuaseneneeeueds 14

Appendix:

Order extending time to file petition for certiorari .. la

General Foods Corporation v, United States, in the

United States Court of Claims

Opinion and Judgment ..............00000. la

Stipulation of facts between General Foods Corpo-

ration and the United States in the United

States Court of Claims ....cccccccccccccccce 15a

I Goss he ee eee eee eee eee ele ee 19a

ak a a le 2la

PET: cinekecdebdurdadeusseueeune cece 24a

PD scclo. veudiauebeatecouedoeaaes 25a

a ee ed ieee eat 27a

ii Index Continued

Page

Internal Revenue Code of 1954:

| i ; SPpeererrrerrrrrrrerr rr rrr ers 29a

Mamie GEE wacccccccccsecscovsvecésgetese 33a

Mattie BEER cccccccccceccccccesesnceseess 33a

2. SePererrrrrrrrerrrr rT troy 35a

Tax Reform Act of 1969:

i " BPererererrrerrerri rrr rrr Te 36a

TABLE OF AUTHORITIES

CASES:

Boise Cascade Corporation v. United States, 503 F.2d

£ oe. SS re Tree ee 11

Commissioner v. National Alfalfa Dehydrating and

Milling Co., 417 U.S. 134 (1974) 20... cece eens 9

Hanover Bank v. Commissioner, 369 U.S. 672 (1962) 8

International Business Machines Corporation vy. United

States, 343 F, 2d 914 (Ct. Cl. 1965), cert. denied,

Fs BS 5 Rr er eee 12

Jarecki v. G. D. Searle & Co., 367 U.S. 303 (1961) .. 9

Kuehn yv, United States, 480 F. 2d 1319 (Ct. Cl. 1973) 14

Mount Sinai Hospital of Greater Miami v. Weinberger,

517 F. 2d 329 (5th Cir. 1975), cert. denied, 44

U.S.L.W. 3603 (Apr. 19, 1976) .......cccscecess 11

Red Lion Broadcasting Co. v. FCC, 395 U.S. 367 (1969) 11

United States v. Kaiser, 363 U.S. 299 (1960) ........ 13

United States v. Midland-Ross Corp., 381 U.S. 54

ERE nop eccuacesebuedsenens 0606066900006040% 9

STATUTES:

Foreign Investors Tax Act of 1966, Pub. L. No, 89-809,

SP I BN 606 b6Rb ao NONs eB hows Onedonseécencs 12

Tuternal Revenue Code of 1939:

ME daceccuduaddu cane ssdeenenendeaunene 7,9

TT AT ee —

Table of Authorities Continued iii

Internal Revenue Code of 1954; 7

ON sited sei dvbos Scut) 2 12

EI eS eiieinddpesievndncndiede: 12

Section 1282 .................. 2, 4, 5, 6, 7, 8, 9, 10, 14

DON MD box dtaetidiited Macken 12

oe 12

‘lax a Act of 1969, Pub. L. No. 91-172, 83 Stat

EERE UAT PRA 6S6 oS 08 MONEE CERES REEL Seote oss 10

23 U.S.C. §1255 (1) ....... cc ccceeescceeeese, 2

MISCELLANEOUS:

H.Rep. No. 1337, 83d Cong., 2d Ses 1954) ;

Cong. & Adm. News 4 17 (1954). ; — : . _ 8

S.Rep. No. 552, 91st Cong., 1st S 1 .

Cong. & Adm. News 2027 (1969) \ _— ’ : , — 11

S.Rep. No. 1622, 83d Cong., 2d Sess. (1954) « :

Cong. & Adm. News 4261 (1954) \ vee ? tee 8

IN THE

Supreme Court of the United States

OcTOBER TERM, 1975

No.

GENERAL Foops Corporation, Petitioner,

Unitep States, Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

Petitioner, General Foods Corporation, prays that a

writ of certiorari issue to review the opinion and judg-

iment of the United States Court of Claims entered in

these proceedings on January 28, 1976.

OPINION BELOW

The opinion and judgment of the Court of Claims,

review of which is sought, is reported at 530 F.2d 923

and appears in the Appendix hereto. (App. la.)

JURISDICTION

The judgment of the Court of Claims was entered on

January 28, 1976, and an application for a 60-day ex-

tension of time for filing a petition for writ of certio-

rari was filed by the petitioner, General Foods Corpor-

ation, on April 15. 1976. An order of this Court extend-

ing the time to file a petition for writ of certiorari to

and including June 26, 1976, was issued on April 19,

1976. (App. la.) This petition for certiorari was time-

ly filed within the period provided by the order extend-

ing the time to file a petition for writ of certiorari.

This Court’s jurisdiction is invoked under 28 U.S.C.

§ 1255(1).

QUESTIONS PRESENTED

I. Whether gain attributable to original issue dis-

count received on the retirement of evidences of in-

debtedness issued after December 31, 1954, and before

May 28, 1969, and held by the petitioner, General

Foods Corporation, for periods of not more than six

months is taxable as short-term capital gain pursuant

to Section 1232 of the Internal Revenue Code of 1954.

II. Whether the Court of Claims erred in refusing *

jurisdiction over the petitioner’s claim of unlawful dis-

crimination.

STATUTES INVOLVED

This action arises under Section 1232 of the Internal

Revenue Code of 1954, reproduced in this petition at

pp. 5-6, infra.

STATEMENT OF THE CASE

During its taxable year 1959, beginning April 1,

1958, and ending March 31, 1959, petitioner General

Foods Corporation (‘‘General Foods’’) held promis-

sory notes with no stated interest issued by various

corporations. The notes, commonly referred to as com-

mercial paper, were non-registered bearer instruments

containing an unconditional promise to pay a specified

Pe ee

amount on a specified date at a specified place. General

Foods purchased each of the notes from either the

issuer or a dealer in securities for an amount less than

the stated face value of the note. General Foods held

the notes for less than six months, with the holding pe-

riods ranging from 43 days to 181 days. All of the

notes involved were held to maturity and retired in

the taxable year 1959, and at maturity General Foods

received the face value of the notes from the issuers.

The amount received by General Foods on retirement

of each of the notes which exceeded the amount paid by

General Foods for the note was original issue discount;

no part of that amount received was attributable to

market fluctuations as opposed to the passage of time.

General Foods Corporation is not now nor has it ever

been a dealer in securities. The notes were purchased

by General Foods for investment and did not constitute

property of a type that would be held in inventory

or for sale to customers in the normal course of busi-

ness. All of the notes were issued after December 31,

1954, and before Mav 28, 1969. On its federal income

tax return for the taxable year 1959 General Foods

reported short-term capital gains of $608,598.99, repre-

senting the difference between the purchase price of

the notes and the face value of the notes received upon

their retirement. For the taxable year 1959, General

Foeds had a net capital loss carry-over of $518,840.74

whieh was used to partially offset the short-term capital

gain received from the retirement of the notes.

In 1965, General Foods received a statement of tax

due for the taxable vear 1959 from the Commissioner

of Internal Revenue (‘‘Commissioner’’). The defici-

eney assessment totalled $345,638 plus interest, $208,291

of which resulted from the Commissiener’s treating as

interest income rather than as short-term capital gain

the amounts received in excess of the purchase price

on the retirement of the notes. General Foods paid

the entire deficiency assessment including interest in

1965.

On November 6, 1967, General Foods filed a claim

with the Commissioner seeking a refund in the amount

of $208,291 plus the interest paid thereon together with

interest as provided by law. The refund claimed rep-

resented that portion of the assessed deficiency attri-

butable to the Commissioner’s treatment as ordinary

interest income rather than as shert-term capital gain

the amounts received in excess of the purchase prices

from retirement of the corporate notes. On March 1,

1971, the Commissioner disallowed General Foods’

claim in its entirety, whereupon General Foods insti-

tuted suit in the Court of Claims. The Court of Claims,

en bane, upheld the Commissioner’s position and dis-

missed General Foods’ petition and entered judgment

against General Foods. Contrary to General Foods’ po-

sition, the Court of Claims held that Section 1252 of the

Internal Revenue Code of 1954 did not treat original

issue discount received on notes held for six months or

less as short-term capital gain, and that the original

issue discount realized on the retirement of notes held

by General Foods for six months or less was taxable as

ordinary income.

REASONS FOR GRANTING THE WRIT

In deciding against General Foods, the Court of

Claims ignored the meaning of the applicable statute

and the stated Congressional intent. Put simply, the

Court of Claims dismissed entirely the plainly-stated

intent of Congress. This undermines the tax structure

established by Congress. This Court should redress

this action.

Furthermore, the Court of Claims erred in refusing

jurisdiction over General Foods’ claim of unlawful

discrimination, thereby denying General Foods a

valid and independent ground for relief. This Court

should clarify the jurisdiction of the Court of Claims.

THE COURT OF CLAIMS DECISION DISREGARDS THE

CONGRESSIONAL INTENT WITH RESPECT TO

SECTION 1232 OF THE INTERNAL REVENUE

CODE OF 1954

During the tax year here in question Section 1232

of the Interiial Revenue Code of 1954 provided in rele-

vant part as follows:

666) an . *y* - ,

Sec. 1282. Boxps ann Oruer Evipences or ITx-

DEBTEDNESS.

(a) GENERAL Ruie.—For purposes of this sub-

title, in the case of bonds, debentures, notes, or

certificates or other evidences of indebtedness,

which are capital assets in the hands of the tax-

payer, and which are issued by any corporation, or

government or politiea! subdivision thereof—

(1) Retrrement.—Amounts received by the

holder on retirement of such bonds or ether evi-

dences of indebtedness shall be considered as

amounts received in exchange therefor... .

(2) Sate or ExcHance.—

_ (A) Geynerat Reie.—Except as provided

in subparagraph (B), upon sale or exchange

of bonds or other evidences of indebtedness

issued after December 31, 1954, held by the

taxpayer more than 6 months, any gain real-

ized which does not exceed an amount which

bears the same ratio to the original issue dis-

count (as defined in subsection (b)) as the

number of complete months that the bond or

other evidences of indebtedness was held by

the taxpayer bears to the number of complete

months from the date of original issue to the

date of maturity, shall be considered as gain

from the sale or exchange of property, which

is not a capital asset. Gain in excess of such

amount shall be considered gain from the sale

or exchange of a capital asset held more than

6 months.

* * +

(b) DEFINiITIons.—

(1) OrictnaL Issvuz Discount.—For purposes

of subsection (a), the term ‘original issue dis-

eount’ means the difference between the issue

price and the stated redemption price at ma-

turitv. If the original issue discount is less than

one-fourth of 1 percent of the redemption price

at maturity multiplied by the number of com-

plete years to maturity, then the issue diseount

shall be considered to be zero. For purposes of

this paragraph, the term ‘stated redemption

price at maturity’ means the amount fixed by

the last modifieation of the purchase agreement

and includes dividends payable at that time.”’

* * *

When Congress enacted Section 1232 of the Internal

Revenue Code of 1954, it established a statutory scheme

for the treatment of gain realized from the retirement

of original issue discount notes. Section 1232 of the

Internal Revenue Code did not provide that the orig-

inal issue discount realized from the retirement of a

note held for six months or less should be treated as

interest income. Tnstead, Section 1232(a)(1) estab-

lished the general rule that amount« received on the

retirement of evidences of indebtedness which were

capital assets in the hands of the taxpayer were to he

treated as capital gain. Section 1232(a)(2)(A) pro-

vided an exception to the general rule stated in Section

1232(a) (1) by treating the original issue discount por-

tion of the gain realized from the retirement of evi-

dences of indebtedness held by a taxpayer for more

than six months as gain from the sale or exchange of

property which is not a capital asset Since no excep-

tion was enacted to govern the original issue discount

realized on the retirement of evidences of indebtedness

held for six months or less, that gain was governed by

the general rule of Section 1232(a)(1) and treated as

capital gain.

The legislative history of Section 1232 makes plain

the Congressional intent of that section. In enactin,

Section 1232 of the Internal Revenue Code of 1954,

Congress was aware of the uncertainty regarding the

treatment of original issue discount under the prede-

cessor section to Section 1232:

“Under section 117(f) of present law, when a

corporate or Government bond in registered form

or with coupons attached is retired the transaction

is treated as a sale or exchange. There is some

uncertainty as to the status of proceeds in these

transactions, i.e., as capital gain or as interest

income where the bond or other evidence of in-

debtedness has been issued at a discount (see I. T.

3486, 1941-2, C.B. p. 76, as compared with Comm,

v. Caulkins, 144 F.2d 482). In these eases, that

part of the amount received on a sale or exchange

which may represent a partial recovery of dis-

count on original issue is a form of interest income

and in fact is deductible as an interest payment by

the issuing corporation.”’ 8S. Rep. No. 1622, 83d

Cong., 2d Sess. 112 (1954) ; 3 U.S.C. Cong. & Adm.

News 4745 (1954).

Congress resolved the question in enacting Section

1232:

‘Paragraph (1) restates the content of present

law. For bonds or other evidences of indebted-

ness issued after December 31, 1954, the bill aban-

dons present restriction of capital treatment on

retirement to bonds and other evidences of indebt-

edness which have interest coupons attached or

which are in registered form, Redemption of all

bonds and other evidences of indebtedness will re-

ceive capital gain or loss treatment on redemption

if issued after December 31, 1954, and if they are

otherwise capital assets, except to the extent that

the recovery of issue discount is subject to para-

graph (2) [Section 1232(a)(2)]."’ (emphasis

added) H.Rep. No. 13837, 83d Cong., 2d Sess.

A275 (1954); 3 U.S.C. Cong. & Adm. News 4417

(1954).

An identical statement is contained in the report

of the Committee on Finance, 8. Rep, No. 1622,

83d Cong., 2d Sess. 433; 3 U.S.C, Cong. & Adm.

News 2076 (1954).

Section 1232 by its own words and by its legislative

history plain'y provided that on retirement of evi-

dences of indebtedness held for six months or less, the

gain realized, including the original issue discount, was

to be treated as capital gain. As this Court stated in

Ilanover Bank vy. Commissioner, 369 U.S. 672. 682

(1962), ‘*[ wle are bound by the meaning of the words

used by Congress, taken in light of the pertinent legis-

lative history.”? And the Court of Claims failed to

give preper effect to the specifie provision, the specifie

exception in Section 1252 that original issue discount

on obligations held for more than six months ‘shall

be considered as gain from the sale or exchange of

property which is not a capital asset.’’ This was the

exception to the otherwise general rule of Section

1232. A statute must be read to give effect to all of its

provi. ions, and not interpreted in a strained manner.

Jarecki vy. G. D. Searle & Co., 867 U.S. 303, 307-308

(1961).

The Court of Claims relied upon United States v.

Midland-Ross Corp., 381 U.S. 54 (1965), and other

ease law for the proposition that original issue discount

was ordinary income and not eopital gain. Widland-

Hoss, however, was concerned with interpreting Section

117 of the 1939 Internal Revenne Code, prior to its

amendment by Section 1232 of the 1954 Internal Reve-

nue Code. This Court itself realized in Midland-Ross

that Congress had enacted Section 1222 as part of the

Internal Revenue Code of 1954 and stated that ‘we

intimate no view on the construction of this statute.”

S81 U.S, at 59, n. 5. Additionally, this Court in Com-

missioner V. National Alfalfa Dehydrating and Milling

Co., 417 U.S. 134 (1974), noted that under the 1939

Internal Revenue Code it was unsettled whether in-

come realized by an owner of an original issue discount

obligation was taxable as ordinary income or as eapi-

tal gain, and that this issue arising under the 1959

Internal Revenue Code was settled by Midland-Ross,

ut this Covrt also noted in National Alfalfa that

‘Congress, in enacting § 12382 of the 1954 Code, adopt-

ed a different approach to earned original issue dis-

eount....’’ 417 U.S. at 146, n.9. That different ap-

proach is evidenced in the statutory language and

legislative history of Section 1232.

OOOO ew

Even the later restatement by Congress of its ap-

proach in 1954 was unheeded by the Court of Claims.

In the Tax Reform Act of 1969, Pub. L. No. 91-172,

83 Stat. 487, Congress amended Section 1232 of the

Internal Revenue Code of 1954 to alter the treatment

of original issue discount. (App. 36a.) Under

the change, a taxpayer is now required to include

original issue discount realized on corporate obligations

issued after May 27, 1969, in yearly income on a rate-

able basis over the life of the obligation, regardless of

whether the notes are held for more tan six months or

for six months or less. Congress, in passing the Tax

Reform Act of 1969, stated that the rules regarding

original issue discount in effect until that time would

continue to govern notes issued on or before May 27,

1269, and specifically stated that the rule in effect until

1969 for original issue discount on a bond held for six

months or less was that original issue discount was

treated as short-term capital gain:

‘The rules provided by the bill regarding the

treatment of original issue discount are not to

apply in the case of bonds or other evidences of

indebtedness issued by any government or political

subdivision (or in the case of bonds or other evi-

dence of indebtedness issued by a corporation on

or before October 9, 1969). In these cases, the

rules of present law regarding the treatment of

original issue discount on the sale or exchange of

a bond which is a eapital asset in the hands of the

taxpayer and which has been held by the taxpayer

for more than 6 months are to continue to apply.

In addition, in these cases, gain on the sale or

erchange of a bond or other evidence of indebted-

ness which is a capital asset in the hands of the taz-

payer but which has not been held by the taxpayer

for more than 6 months is to be treated as a short-

—

See NL ee ae a ee ee wee

od et faves te ws Ge ke oe =. a8

term capital gain as under present law,’’ (empha-

sis added) S. Rep. No. 552, 91st Cong., Ist Sess.

148 (1969); 2 U.S.C. Cong. & Adm, News 2180

(1969).

The Court of Claims, however, dismissed this statement

of Congressional intent by holding that the views of a

subsequent Congress as to the meaning of a statute

enacted by a previous Congress do not carry great

weight. This Court has said that ‘[s]ubsequent legis-

lation declaring the intent of an earlier statute is en-

titled to great weight in statutory construction.’? Red

Lion Broadeasting Co. v. FCC, 395 U.S, 367, 380-381

(1969). See Mount Sinai Hospital of Greater Miami

v. Weinberger, 517 F.2d 329, 343 (Sth Cir, 1975), cert.

denied, 44 U.S.L.W. 3593 (Apr. 19, 1976).

The Court of Claims has interpreted the Internal

Revenue Code explicitly rejecting the Congressional

mandate. This Court should redress that imbalance.

Il.

THE COURT OF CLAIMS ERRED IN REFUSING JURIS-

DICTION OVER GENERAL FOODS’ CLAIM OF

UNLAWFUL DISCRIMINATION

The Commissioner’s treatment of the original issue

discount in this case as ordinary income rather than

short-term capital gain unlawfully discriminates

against General Foods. The answers filed by the Com-

missioner to interrogatories in Boise Cascade Corpora-

tion v. United States, 530 F.2d 1367 (Ct. Cl. 1976),

(which answers were made a part of this case, App.

25a-28a.) establish that during the taxable period here

in question the Commissioner did not tax as ordinary

income the income realized upon the retirement of

original issue discount notes held for six months or less

by similarly situated non-resident alien individuals and

foreign corporations.

Pursuant to Sections 871(a)(1) and 881(a) of the

Internal Revenue Code of 1954, a 30% tax rate was

imposed on certain items of income received by non-

resident alien individuals and foreign corporations

from sourees within the United States. (App. 29a, 3%a.)

The items of income which were subject to the tax

included interest and other fixed or determinable peri-

odieal gains. In general, the tax imposed on these

items was required to be withheld under Sections 1441

and 1142 of the 1954 Internal Revenue Code. (App.

3a, 30a.) During the taxable vear in question, the Com-

liissioncr made no attempt to tax original issue dis-

count on obligations held for six months or less as

ordinary or interest income under Sections 871 and 881

or require withholding under Seetions 1441 and 1442,

liven after the Foreign Investors Tax Act of 1966, Pub.

I.. No, 89-809, 80 Stat. 1529, required that the income

to be taxed to non-resident alien individuals and for-

cign corporations include amounts received on the re-

tirement of evidences of indebtedness which are treated

as gains from the sale of property which is not a eapi-

tal asset, the Commissioner did not tax original issue

discount received on obligatons held for six months

or less as ordinary or interest income. Apparently,

the Commissioner believed that original issue dis-

count received on obligations held for six months

or less by a non-resident alien individual or foreign

corporation was short-term capital gain. Otherwise

the Commissioner would have taxed original issue dis-

count received on obligations held for six months or less

as ordinary or interest income under Sections 871 and

881.

There is no justification under the Internal Revenue

Code for this discrimination between the domestic tax-

payer in this case, General Foods, and foreign taxpay-

ers. The courts have consistently held that discrimina-

tory treatment of similarly situated taxpayers by the

Internal Revenue Service is unlawful. As Mr. Justice

Frankfurter stated in his concurring opinion in United

States v. Kaiser, 363 U.S. 299, 308 (1960):

‘“The Commissioner cannot tax one and not tax

another without some rational basis for the differ-

ence. And 80, assuming the correctness of the

— of ‘e quality,’ it can be an independent

ground of incon that the Commissioner has been

inconsistent, without much concern for whether we

should hold as an original matter that the position

the Commissioner now seeks to sustain is wrong.”’

See International Business Machines Corp. v. United

States, 343 F.2d 914 (Ct. Cl. 1965), cert. denied, 382

U.S. 1028 (1966).

Instead of determining whether unlawful disecrimi-

nation existed, the Court of Claims held that since Gen-

eral Foods’ claim for refund made no mention of un-

lawful discrimination, the Court of Claims was without

jurisdiction to rule upon this issue.

The rule that a taxpayer cannot present one ground

for relief in its claim and a different ground in its pe-

tition is designed to prevent surprise and to give

adequate notice to the Commissioner of the nature of

the claim and the facts, not to reward the Commissioner

for concealing information which is solely within his

possession. The rule cannot apply when the Commis-

sioner has information exclusively within his own pos-

session which would serve as a basis for a claim for re-

fund and when the information is only subject to dis-

closure through judicial proceedings. General Foods’

claim for refund stated that original issue discount

received on the retirement of obligations held for six

months or less should be treated as short-term eapital

gain under Section 1232. All of the relevant facts ex-

cept for the Commissioner’s own action in treating

foreign taxpayers differently than General Foods were

presented in the claim for refund. The ease law on this

issue has required that a taxpayer need only give ** ‘no-

tice fairly advising the Commissioner of the nature of

the taxpayver’s claim.’ ”’ Auehn v. United States, 480

F.2d 1319, 1321 (Ct. Cl. 1973). Such notice was given

by General Foods, but it was only in this very litiga-

tion by General Foods and by Boise Cascade suing for

refunds after the claims for refund had been denied by

the Commissioner that the Commissioner was forced

to divulge his treatment of this very same kind of in-

come in other taxpayers’ hands.

The refusal of the Court of Claims to consider Gen-

eral Foods’ claim of unlawful discrimination was an

error by the Court of Claims regarding its own juris-

diction which this Court should correct.

CONCLUSION

For the above-stated reasons, the petition for writ of

ecrtiorari should be granted.

Respectfully submitted,

Davip I. GRANGER

Haroip DD. Murry, Jr.

CLirrorpD, WARNKE, GLASS,

McILwain & FINNEY

815 Connecticut Avenue, N.W.

Washington, D.C, 20006

APPENDIX

SUPREME COURT OF THE UNITED STATES

GENERAL Foops Corporation, Petitioner,

Unirep States

Order Extending Time To File Petition for

Writ of Certiorari

Upon Consiperation of the application of counsel for

petitioner(s),

Ir Is Orverep that the time for filing a petition for writ

of certiorari in the above-entitled cause be, and the same

is hereby, extended to and including June 26, 1976.

/s/ Warren E. Burcer

Chief Justice of the United States.

Dated this 19th day of April, 1976.

IN THE UNITED STATES COURT OF CLAIMS

No. 70-73

(Decided January 28, 1976)

GENERAL I*oons Corporation v. THE UnitTep States

David I, Granger, attorney of record, for plaintiff.

Harold D. Murry, Jr. and Clifford, Warnke, Glass, Mcllwain

& Finney, of counsel.

Richard F. Treacy, Jr., with whom was Assistant Attor-

ney General Scott P. Crampton, for defendant. Theodore

D. Peyser and Donald HH, Olson, of counsel.

Before Laramore, Senior Judge, Davis, SKELTonN,

Nicnots, Kasuiwa, Kunzic, and Bennett, Judges.

Opinion

Kasurwa, Judge, delivered the opinion of the court:

This action comes before us on a stipulation of facts. The

essential facts stipulated are recited below. Each of the

parties claims that it is entitled to judgment on said stipu-

lated facts. We hold for the defendant and against the

plaintiff for reasons hereafter stated.

This is an action arising under the Internal Revenue Code

of 1954 for the taxable vear 1959, beginning April 1, 1958,

and ending March 31, 1959. Since Section 1232 of the In-

ternal Revenue Code of 1954 is the center of discussion, we

shall first quote by footnote its relevant portions.’

1 Sec. 1232. Bonns AND OTHER EVIDENCES OF INDEBTEDNESS.

‘*(a) GeneRAL RuLe.—For the purposes of this subtitle, in the

case of bonds, debentures, notes, or certificates or other evidences

of indebtedness, which are capital assets in the hands of the tax-

payer, and which are issued by any corporation, or government or

political subdivision thereof—

‘*(1) RetiremMent.—Amounts received by the holder on retire-

ment of such bonds or other evidences of indebtedness shall be con-

sidered as amounts received in exchange therefor (except that in

the case of bonds or other evidences of indebtedness issued before

January 1, 1955, this paragraph shall apply only to those issued

with interest coupons or in registered form, or to those in such

form on March 1, 1954).

**(2) Sate or EXCHANGE.—

‘*(A) GeneraL RuLE.—Except as provided in subparagraph

(B), upon sale or exchange of bonds or other evidences of in-

debtedness issued after December 31, 1954, held by the taxpayer

more than 6 months, any gain realized which does not exceed—

‘*(i) an amount equal to the original issue discount (as defined

in subsection (b)), or

**(ii) if at the time of original issue there was no intention to

call the bond or other evidence of indebtedness before maturity,

an amount which bears the same ratio to the original issue discount

(as defined in subsection (b)) as the number of complete months

(Continued )

oes

Plaintiff, General Foods Corporation, is a corporation

duly organized and existing under the laws of the State of

Delaware, with its principal place of business at White

Plains, New York. The stipulation shows that General

Foods Corporation’s principal business is the production

and sale of a wide variety of food and grocery products,

many in package form under nationally advertised brand

names. General Foods Corporation is not now, nor has it

(Continued )

that the bond or other evidence of indebtedness was held by the

taxpayer bears to the number of complete months from the date

of original issue to the date of maturity,

‘‘shall be considered as gain from the sale or exchange of prop-

erty which is not a capital asset. Gain in excess of such amount

shall be considered gain from the sale or exchange of a capital asset

held more than 6 months.

‘*(B) Exceptions.—This paragraph shall not apply to—

‘*(i) obligations the interest on which is not includible in gross

income under section 103 (relating to certain governmental ob-

ligations), or

**(ii) any holder who has purchased the bond or other evidence

of indebtedness at a premium.

‘*(C) Dovusie INcLUsION In INcCoME Nor Requirev.—This sec-

tion shall not require the inclusion of any amount previously in-

cludible in gross income,

‘*(b) DEFINITIONS.—

“*(1) OrieinAL Issus Discount.—For the purposes of subsec-

tion (a), the term ‘‘original issue discount’’ means the difference

between the issue price and the stated redemption price at ma-

turity. If the original issue discount is less than one-fourth of 1

percent of the redemption price at maturity multiplied by the

number of complete years to maturity, then the issue discount shall

be considered to be zero. For purposes of this paragraph, the term

“*stated redemption price at maturity’’ means the amount fixed

by the last modification of the purchase agreement and includes

dividends payable at that time.’’

[As amended through 1959.]

ever been a dealer in securities. During the taxable year

1959, plaintiff held promissory notes with no stated interest

issued by various corporations. The notes, commonly re-

ferred to as commercial paper, were non-registered bearer

instruments containing an unconditional promise to pay a

specified amount on a specified date at a specified place.

Plaintiff purchased each of the notes from the issuer or

from Goldman, Sachs & Company, a dealer in securities, at

an amount less than its face value. The notes were held by

plaintiff for periods ranging from 45 days to 181 days. The

plaintiff held each note for a period less than six months

and at maturity received the face amount from the issuer.

Plaintiff retired all of the notes in the taxable year 1959.

The notes were purchased by the plaintiff for investment

and were not property of a type that would be he!d in in-

ventory or for sale to customers in the normal course of

business. All of the notes involved in this case were issued

after December 31, 1954, and before May 27, 1969. The

amount received by the plaintiff on retirement of each of

the notes which exceeded the amount paid by plaintiff for

the note was original issue discount ; no part of that amount

was attributable to market fluctuations as opposed to the

passage of time.

Gn its Federal income tax return for the taxable year

1959, beginning April 1, 1958, and ending Mareh 31, 1959,

plaintiff reported short-term capital gains of $608,598.99.

This was the amount received over and above the purchase

prices from the retirement at maturity of the total of

£90,750 000 non-interest-bearing corporate notes purchased

by the plaintiff at a discount and held for less than six

months. During the taxable year 1959 plaintiff had net

capital loss carryovers from the prior years in the amount

of $518,840.74. There is no dispute as to this loss carry-

over. Plaintiff claims that it is entitled to deduct the loss

enrryover from the above-mentioned gain of $608,598.99

because the gain is short-term capital gain.

Pree eae

ab ret nc CM 2 te le Renin ott

ee eee ae ee ee nes

On October 29, 1965, the Commissioner of Internal Reve-

nue mailed to the plaintiff a statement of tax due, assessing

a deficiency in income taxes for the taxable year 1959 in the

amount of $345,638 plus interest. Plaintiff paid this amount

plus interest on November 8, 1965. The amount of $208,291

of this deficiency assessment resulted from the Commis-

sioner treating as interest income rather than as short-term

capital gain the emount of $608,598.99 received by plaintiff

over and above the purchase prices on the retirement at

maturity of the non-interest-bearing corporate notes pur-

chased by the pleintiff at a discount for investment and

held for less than six months. On November 6, 1967, plain-

tiff filed a claim for refund of this amount of $208,291 plus

the interest paid thercon together with interest as provided

by law, representing that part of the assessed deficiency at-

tributable to treating as interest income rather than short-

term capital gain the amounts over and above the purchase

prices, received by plaintiff on the retirement of the cor-

porate notes. On March 1, 1971, the Commissioner of In-

ternal Revenue disallowed in its entirety plaintiff’s claim

for refund. This action for refund was filed in this court

on February 27, 1973.

Both parties agree that the sole issue presented is

whether gain attributabie to original issue discount on evi-

dences of indebtedness issued after December 31, 1954, and

before May 28, 1969, and held by plaintiff for periods of

not more than six months is taxable as short-term capital

gain on the retirement of the indebtedness.

The decision in this case rests, as we shall hereafter show,

upon Section 1221 but since plaintiff’s arguments center on

Section 1232, we shall first examine Section 1232. Plaintiff

claims that Section 1232 gives capital treatment to the gain

in this ease. Defendant, on the other hand, states that Sec-

tion 1232 is not relevant to the original issue discount herein

since Section 1232 only deals with notes which are capital

assets in the hands of the taxpayer and since original issue

discount under case law is not a capital asset, Section 1232

does not apply.

We shall first discuss the history of Section 1232. Section

206(a)(1) of the Revenue Act of 1921, ¢. 136, 42 Stat. 227,

232, defined the term ‘‘capital gain’’ as ‘‘taxable gain from

the sale or exchange of capital assets * * *.’’ This provi-

sion, without material change, was reenacted by Section

208(a)(1) of the Revenue Act of 1924, ¢. 234, 43 Stat. 253,

262; by Section 208 (a)(1) of the Revenue Act of 1926,

c. 27, 44 Stat. 9, 19; by Section 101(¢)(1) of the Revenue

Act of 1928, ¢. 852, 45 Stat. 791, 811; and by Section 101

(c)(1) of the Revenue Act of 1932, ¢. 209, 47 Stat. 169, 191.

The question arose as to whether, under these statutes, a

redemption (retirement) of bonds constituted a sale or ex-

change within the meaning of that provision and successor

statutes. A conflict of judicial decisions * on the matter led

Congress to enact Section 117(f) of the Revenue Act of

1934, c. 277, 48 Stat. 680, 715, which is the predecessor of

Section 1232(a)(1). The addition of that provision assured

that the retirement of notes would constitute an exchange.

While Section 117(f) served to resolve the question of

whether the retirement of a note constituted a ‘‘sale or ex-

change,”’ it created a new round of litigation as to whether

gain attributable to original issue discount was an amount

received in exchange for a capital asset and, consequently,

qualified for long-term capital gain treatment. In Commis-

sioner v. Caulkins, 144 F.2d 482 (6th Cir, 1944), the Sixth

Cireuit read Section 117(f) to permit long-term capital gain

treatment for the $5,000 gain realized, functionally, as

original issue discount. The court noted (at 484) that if the

application of Section 117(f) resulted in inconsistencies and

inequalities, ‘‘the correction of this defect in the operation

of the statute is for Congress and not for the courts.’’ The

Supreme Court in United Slates v. Midland-Ross Corp., 381

2 See Fairbanks v. United States, 306 U.S. 436 (1939).

— eo =

U.S, 54 (1965), subsequently disagreed with the holding of

Caulkins that the proceeds received upon a face-amount

certificate cannot be divided into separate increments which

represent interest income and capital gain after other

courts, including this court, refused to follow the rationale

of the Sixth Cireuit. See Pattiz v. United States, 160 Ct. Cl.

121, 311 F. 2d 947 (1963); Commissioner v. Morgan, 272

F, 2d 936 (9th Cir. 1959); Rosen v. United States, 288 F.2d

658 (38d Cir. 1961); United States v. Harrison, 304 F, 2d

835 (Sth Cir, 1962), cert. denied, 372 U.S. 934 (1963).

The legislative history of the revised version of Seetion

117(f) (Section 1232) indicates that Congress chose to heed

the admonition of the court in Caulkins to correct, at least

partially, a possible defect in the statute which, under the

holding of Caulkins, allowed the issuing corporation an in-

terest deduction for original issue discount, but taxed the

holder at more favorable long-term capital gain rates if the

netes were held more than six months. The following lan-

guage of the Senate Report accompanying the enactment of

Section 1232 of the 1954 Code graphically illustrates the

situation which Congress faced at the time (S. Rep. No.

1622, 83d Cong., 2d Sess. 122 (1954)):

(1) House changes accepted by committee

Under section 117(f) of present law, when a corpo-

rate or Government bond in registered form or with

coupons attached is retired the transaction is treated

as a sale or exchange. There is some uncertainty as to

the status of proceeds in these transactions, i.e., as

capital gain or as interest income where the bond or

other evidence of indebtedness has been issued at a

discount (see I.T. 3486, 1941-2, C.B. p. 76, as compared

with Comm. v. Caulkins, 144 F. 2d 482). In these cases,

that part of the amount received on a sale or exchange

which may represent a partial recovery of discount on

original issue is a form of interest income and in fact

is deductible as an interest payment by the issuing

corporation.

Effective with respect to bonds issued after Decem-

ber 31, 1954, the House bill removes doubt in this area

by providing that any gain realized by the holder of a

bond attributable to the original issue discount will be

taxed as ordinary income. * * *

The solution to the problem perceived by Congress as a

result of Caulkins was a limited one. Together with other

technical amendments to old Section 117(f), which amend-

ments have no effect on the instant problem, Congress

added subsection(a) (2) to Section 1232 to plug the revenue

loss resulting from the allowance, under Caulkins, of long-

term capital gain treatment.

Congress reenacted most of the text of Section 117(f) as

Section 1232(a) of the 1954 Code and specifically added the

limiting language ‘‘which are capital assets’’ to the lan-

guage ‘‘bonds, debentures, notes, or certificates or other

evidences of indebtedness.’’ It explained this addition as

follows (S. Rep. No. 1622, supra, at 434) :

Section 117(f) does not itself extend capital-gain

treatment to any transaction but simply provides one of

several requirements for such treatment on retirement

of certain securities. Paragraph (2) of this section

[Section 1232], however, provides specifically for capi-

tal-gain treatment and, therefore, the phrase is inserted

in the first sentence of this section to the effect that

this section only applies to bonds and other evidences

of indebtedness which are capital assets in the hands of

the taxpayer. * * * [Emphasis supplied.]

We turn now from the history of the present positions of

the parties. Plaintiff first argues that Section 1232 (a) (1)

makes the retirement of these notes equal to an exchange.

ie ee a ee

Oe Nt

Since the section does not provide for special treatment of

original issue discount for notes held six months or less as

it does for original issue discount on notes held more than

six months in Section 1232 (a) (2), notes held for six months

or less fall under Section 1232(a)(1). Their retirement is

treated as an exchange and an exchange of a capital asset

results in capital gain.

This is the point at which the parties separate. The de-

fendant states that Section 1232(a)(1) does not apply; in

fact, none of Section 1232 applies. In Section 1232(a) the

general rule refers to notes ‘‘which are capital assets in the

hands of the taxpayer.’’ Defendant argues that under case

law the original issue discount is separable from the note

and is not a capital asset. Since Section 1232 is only appli-

cable to capital assets, it does not apply to original issue

discount on notes held for six months or less, Therefore,

we must examine the case to determine how this item should

be treated.

It has been held by the Supreme Court and other courts

that an item of ordinary income derived from an income-

producing capital asset retained its character even though

sold as part of property which was a capital asset? In

* Watson v. Commissioner, 345 U.S. 544 (1953) [profit from sale

of an orange grove attributable to unmatured crop was ordinary

income] ; Commissioner v. Gillette Motor Transport, Inc., 364 U.S.

130 (1960) [award for wartime possession of trucking company

by Government was rental income and not capital gain from in-

voluntary conversion] ; Commissioner v. P. G. Lake, Inc., 356 U.S.

260 (1958) [consideration for assignment of oil payment right

carved out from a larger mineral interest producing ordinary in-

come was held to be taxable as ordinary income] ; Tunnell v. United

States, 259 F. 2d 916 (3d Cir. 1958) [proceeds of sale of interest

in law partnership, to the extent attributable to accounts receiv-

able, were taxable as ordinary income]; Fisher v. Commissioner,

209 F. 2d 513 (6th Cir. 1954) cert. denied, 347 U.S. 1014 [pro-

ceeds of sale of notes representing defaulted interest were ordinary

income}.

10a

United States v. Midland-Ross Corp., supra, the Supreme

Court held that original issue discount was ordinary income

and not capital gain. The Court held as follows at 56-57:

*** Although original issue discount becomes prop-

erty 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 ex-

clusions qualifies as a capital asset. This Court has

long held that the term ‘capital asset’ is to be con-

strued narrowly in accordance with the purpose of

Congress to afford capital-gains treatment only in

situations typically involving the realization of ap-

preciation in value accrued over a substantial period

of time, and thus to ameliorate the hardship of tax-

ation of the entire gain in one year.’’ Commissioner

yv. 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 con-

sistently construed ‘‘capital asset’’ to exclude property

representing income items or accretions to the value of

a capital asset themselves properly attributable to in-

come. * * * [Footnote omitted. |

In an earlier decision in Pattiz v. United States, supra, this

court held as follows:

We think the discount at which these notes were sold

was in lieu of the payment of interest on them and that

the difference in the amount paid for them and the

amount at which they were redeemed was ordinary in-

come. In our opinion it was not intended by $117(f) of

the Internal Revenue Code of 1939 to treat it as a

capital gain. [160 Ct. Cl. at 128, 311 F. 2d at 950)

Judge Whitaker in his Paftiz opinion examines the relevant

cases of several circuits and comes to the conclusion that

lla

Section 117(f), the predecessor of Section 1232(a)(1), was

intended to cover capital gain resulting from the retirement

of a note in contrast to original issue discount gain repre-

senting compensation for the use of money.

That decision agrees with the Third Circuit’s conclusion

in Rosen v. United States, supra. In Rosen the taxpayer

argued that Section 1232(a)(1) was an overriding statute

which prevented original issue discount from being taxed as

interest under Section 61. The court at 661 stated the issue

to be:

* * * whether the requirement of Section 1232(a) (1)

that amounts received on retirement of certain ‘‘evi-

dences of indebtedness shall be considered as amounts

received in exchange therefor’’ is tantamount to saying

that the entire increment realized in such an exchange

must be taxed as capital gain rather than ordinary

income.

The court then looked at the tax treatment of fully earned

increments upon the sale or exchange of capital assets and

concluded that the general rule applies: the right to receive

ordinary income from a capital asset is not changed into

capital gain upon the sale of that asset together with the

right. Section 1232(a)(1) did not abrogate that rule but,

rather, provided for capital treatment for the capital incre-

ment which was realized upon retirement.

Plaintiff seizes upon a sentence in a Senate Committee on

Finance Report to the Tax Reform Act of 1969, Pub. L. No.

91-172, 83 Stat. 487,‘ to argue that Section 1232 was in-

*S. Rep. No. 91-552, 91st Cong., Ist Sess. (1969) at 148:

—— , In * * * [the case of Government evidences of indebted-

ness or in the case of pre-October 10, 1969, corporate evidences

of indebtedness] gain on the sale or exchange of a bond or other

evidence of indebtedness which is a capital asset in the hands of

the taxpayer but which has not been held by the taxpayer for

more than 6 months is to be treated as a short-term capital gain

as under present law.’’

12a

tended to overrule Midland-Ross, supra. This statement

was made without any basis in the 1954 version of Section

1232. The views of a subsequent Congress as to the mean-

ing of ambiguous language of a previous Congress do not

carry great weight.® An attempt to amend legislation of a

previous Congress by Committee Report must be rejected.

Plaintiff also states that it should prevail because the

Commissioner unlawfully discriminated in favor of simi-

larly situated taxpayers. The basis of this claim is that the

Commissioner failed to tax as ordinary ineome original

issue discount on evidences of indebtedness held for six

months or less by nonresident alien individuals and foreign

corporations. In plaintiff’s claim for refund no mention is

made of a claim of unlawful discrimination. Accordingly,

this court is without jurisdiction to rule upon a claim not

set out in plaintiff’s claim for refund, See Section 7422(a)

of the 1954 Code and Treas. Reg. § 301.6402-2(b) (1) (1956) ;

Union Pacific R.R. v. United States, 182 Ct. Cl, 103, 108, 389

F, 2d 437, 442 (1968), and the eases cited therein.

We find for the defendant and against the plaintiff.

Plaintiff’s petition is dismissed. Judgment is entered for

the defendant and against the plaintiff.

— -——_—=

5 United States v. Price, 361 U.S. 304, 313 (1960) ; United States

v. Philadelphia National Bank, 374 U.S. 321, 348-49 (1963) ;

Waterman Steamship Corp. v. United States, 381 U.S, 252, 269

(1965): United States v. Southwestern Cable Co., 392 U.S. 157,

170 (1968); Brown v. United States, 192 Ct. Cl. 203, 210, 426 F. 2d

355, 357 (1970); and Humble Oil & Refining Co. v. United States,

194 Ct. Cl. 920, 932, 442 F, 2d 1362, 1369 (1971).

—

—-~

ee ee ee Sere eee ee ee

13a

Davis, Judge, concurring in the result:

My vote to dismiss the petition is not founded on the use

in section 1232 of ‘‘captal assets,’’ the primary purpose of

which i take to be to separate securities held for investment

from those held in the ordinary course of trade or business.

Rather, I am moved by the simple fact that section 1232

fails to deal at all with original issue discount on securities

held for no more than six months, and therefore must con-

clude that the applicable rule, even under the 1954 code, was

the ‘‘economic reality’’ of United States v. Midland-Ross

Corp., 381 U.S. 54 (1965), that such discount is equivalent

to interest. Taxpayers can point to no part of section 1232

which lays down the treatment for original issue discount

on bonds held for no more than six months. Subsection (a)

(2)(A), as everyone agrees, is restricted on its face to evi-

dences of indebtedness held for more than six months; sub-

section (a)(1) is no more than the equivalent of section

117(a)(4) of the 1959 Code which the Court in Midland-

Ross held not a bar to treating original issue discount as

ordinary income. The text of section 1232, in the initial 1954

Code, did not deal at all, as I read it, with the problem of

original issue discount on bonds retained no more than

half-a-year,

I agree with the taxpayer that the Congress which enacted

that section may well have thought that original issue dis-

count on such securities would thereafter be dealt with as

short-term capital gain. But that was because that Con-

gress mistakenly believed that Commissioner v. Caulkins,

144 F. 2d 482 (C.A. 6, 1944)—which had held all original

issue discount on bonds held for investment to be capital

gain—would continue as good tax law except insofar as the

rule was changed in section 1232 for the longer-term securi-

ties. And the probability is that same Congress did not

think it important to change the Caulkins rule for the no-

more-than-six-months bonds because short-term capital gain

is normally taxed at ordinary income rates. (The peculiar

l4a

situation now before us does not seem to have been in any-

one’s mind.) At any rate, it seems to me clear that the

Congress which enacted the 1954 Code did not adopt, in

section 1232 or another provision, any rule for original

issue discount on evidences of indebtedness held for no

more than six months; it simply left that subject uncovered

by specific rule. The result is that, since Congress has not

imbedded any part of Caulkins in the Code, we are required

to apply the rule of Midland-Ross which superseded and

overruled Caulkins. Congress is not legislating when,

instead of laying down a statutory rule, it leaves a subject

alone, even though it may be content to let the matter be

covered by a lower-court decision which later happens to

be set aside by the Supreme Court. Cf. Helvering v.

Hallock, 309 U.S. 106, 119-22 (1940).?

As for the claim of unlawful discrimination, I would rest

squarely on the ground that the taxation of non-resident

foreign taxpayers raises such different considerations that

it cannot validly be compared, for equal protection pur-

poses, to the taxation of domestic taxpayers.

'There is no solid indication that the section 1232 Congress

affirmatively desired that original issue discount on bonds held

for no more than six months should be treated as capital gain even

if Caulkins should be overturned by the Supreme Court.

* The views of a later Congress on the earlier law have ‘‘very

little, if any, signifieance.’’’ United States v. Southwestern Cadle

Co., 392 U.S. 157, 170 (1968). Therefore weight should be given

to the 1969 Senate report which said that ‘‘In * * ® [the case

of pre-1969 corporate indebtedness and Government bonds], gain

on the sale or exchange of a bond or other evidence of indebtedness

which is a capital asset in the hands of the taxpayer but which has

not been held by the taxpayer for more than 6 months is to be

treated as a short-term capital gain as under present law.’’ S. Rep.

No. 91-552, 91st Cong., Ist Sess. 148 (1969) (1969-3 Cum. But.

518).

l5a

THE UNITED STATES COURT OF CLAIMS

Genera Foops Corporation, Plaintiff,

Untrep States or America, Defendant

Stipulation of Facts

January 21, 1975

The following facts are stipulated between the parties

for the purposes of this case only and subject to the right

of either party to object to the relevance or materiality of

any of the facts stated herein:

(1) The petition giving rise to this action was timely

filed, and the Court has proper jurisdiction thereof under

Section 1346(a)(1) and 1491 of Title 28 and Section 7422

(a) of Title 26 of the United States Code.

(2) This action arises under the Internal Revenne

Code of 1954 and has been filed to seek a refund of Fed-

eral income taxes for the taxable year 195%, beginning

April 1, 1958 and ending March 31, 1959. Plaintiff’s peti-

tion is timely and Plaintiff is not barred from recovery

of any refund of taxes claimed by statute of limitation de-

fenses or by reason of the provisions of Section 6511 or

6532 of the Internal Revenue Code of 1954.

(3) Plaintiff in this action is General Foods Corpo-

ration. General Foods Corporation is a corporation duly

organized and existing under the laws of the State of

Delaware, with its principal place of business at 250 North

Street, in the City of White Plains, County of Westchester,

State of New York. General Foods Corporation’s princi-

pal business is the production and sale of a wide variety

of food and grocery products, many m package form under

nationally advertised brand names. General Foods Cor-

poration is not now, nor has it ever been, a dealer in secu-

rities.

16a

(4) General Foods Corporation is the sole and abso-

lute owner of claims herein presented, and no assignment

or transfer of said claims nor any part thereof has been

made.

(5) During the taxable year 1959, Plaintiff held prom-

issory notes with no stated interest issued by various cor-

porations. The notes (commonly referred to as commercial

paper) were non-registered bearer instruments containing

an unconditional promise to pay a specified amount on a

specified date at a specified place. The notes were held by

Plaintiff for terms ranging from 43 days to 181 days.

Plaintiff purchased each of the notes from the issuer or

from Goldman, Sachs & Co., a dealer in securities, at an

amount less than its face value. The Plaintiff held each

note for a period less than six months and at maturity re-

ceived the face amount from the issuer. Plaintiff retired

all of the notes in the taxable year 1959. The amount re-

ceived by the Plaintiff on retirement of each of the notes

which exceeded the amount paid by Plaintiff for the note

was original issue discount; no part of that amount was

attributable to market fluctuations as opposed to the pas-

sage of time.

(6) The notes were purchased by the Plaintiff for in-

vestment and were not property of a type that would be

held in inventory or for sale to customers in the normal

course of business.

(7) All of the notes involved in this case were issued

after December 31, 1954 and before May 27, 1969. A sum-

mary of the transactions, by issuer, is set forth in Exhibit

A attached hereto and incorporated herein.

(8) On December 15, 1959, Plaintiff duly and timely

filed its Federal income tax return for the taxable year

1959 with the District Director, Internal Revenue Service,

Manhattan District, New York; and at such place Plaintiff

paid to such District Director by payments made December

l7a

15, 1958, March 16, 1959, June 15, 1959, and September 15,

1959, the sum of $54,000,000 in connection therewith.

(9) Plaintiff reported on its income tax return for the

taxable year beginning April 1, 1958 and ending March 31,

1959, short-term capital gains of $608,598.99, the amount

received, over and above the purchase price, from the re-

tirement at maturity of the total of $90,770,000 non-inter-

est-bearing corporate notes purchased b, the Plaintiff at

a discount and held for less than six months.

(10) During the taxable year 1959 Plaintiff had net

capital loss carryovers from prior years in the amount of

$518,840.74, which amount is available for deduction from

the amounts received, over and above the purchase price,

on the retirement of the notes in the event it is determined

that those amounts are taxable as short-term capital gain.

(11) On October 29, 1965, the Commissioner of Inter-

nal Revenue mailed to the Plaintiff a Statement of Tax

Due, assessing a deficiency in income taxes for the taxable

year beginning April 1, 1958, and ending March 31, 1959,

in the amount of $345,638 plus interest, which sum plus in-

terest was paid by Plaintiff to the aforementioned District

Director on November 8, 1965.

(12) The amount of $208,291 of this deficiency assess-

ment resulted from the Commissioner treating as interest

income rather than as short-term capital gain the amount

of $608,598.99 received by Plaintiff on the retirement at

maturity of the non-interest-bearing corporate notes pur-

chased by the Plaintiff at a discount for investment and

held for less than six months.

(13) On November 6, 1967, Plaintiff duly and timely

filed with the District Director a claim for refund of this

amount of $208,291 plus the interest paid thereon, together

with interest as provided by law, representing that part of

the previously assessed deficiency attributable to treating

as interest income rather than short-term capital gain the

19a

18a

00°000°000°2 00°00¢‘Z66'T » 06 8&/08/6 89/2 /L Aueduioy ooovqo], ueoLweury

00°000°000'2 O0°'0S2L‘S66'T » GL 86/SI/6 8&/2 /L Uorye10di0g SuTpeg VlUIOFI[VS)

00°'000‘000'T §8°S68'L66 » GL 8&/St/6 8¢/2 /L woI78.10d 100) qIpeiy [elorouU0)

00°000°000°2 00°000°S86'T », [Sl 9&/zz/2t 8¢/%e/9 ‘ou “OD FY Ulpesy Ue

00°000°000'T 00°00S'Z66 »» IS 8&/%c/ZI 86/3%/9 ‘diog [BLOM WOD -pavyUle]_

00°000°000° — 00'000°86'T »» ISl 8&/zc/ct 8&/tz/9 UOTPVIOdIO[ S10}OVY [BIOIOUTLULOD

00°'000'000°S + 00'00S'296'F », ISL 8&/22/Zt 86/%2/9 Uuoneiodi0g souvjdoooy SuLmyorsnuvpyY OTe x

00°000°000'T 00°00S°266 »» I8l 8¢/22/Zt s8&/tz/9 worje10d10¢ eoueydo00V S1OJO]Y [BIO

00'000°00F'T © 99 9TF'S6E'T » O08 8&/cI/6 8&/ts/9 ‘ouy ‘Auvduioy FY sueaeg “q ‘f

00°000°000'% =—s-_:« 99 99T‘Z66'T » €6 8¢/C1/6 8¢/ZL/9 Auedu0g JUsWyseAUy UBIO

00°000°000' «ss SEERO'SEGT «= s«»s «96 = 88/S1/6 —8E/11/9 + UoNetods0y sounydedsoy SulnjousnuLY MOT? A

00°000°000' =—s«s BEES‘ 166'T » OL 8¢/ct/6 gc/s /9 Auvdulo) JUsWyseauT UwooULy

00°000000'T 00°0SL°C66 » SOL 8e/et/6 e8c/t /9 Auvdwog jUseMyseauy WRoLeUy

00°000'000'T 26°28‘ 166 »» SCL 8¢/SI/6 89/01/F woxeiodi0D souRdoooy Sulinjoujnueyy MOT] x

00°000'000' = SL LLL‘O86'T » SLT 8¢/e1/6 8¢/92/8 WOIVVIOdIO) soUB}deodY S1OJO]Y [B19

00°000°000°F = FF FFF'O86'S » 88 g¢/91/9 8¢/0Z/g WoRI0ds0) souR}dedoy SuLanyoRjnuRW AOT]e

00'000°000'9 ss Seees'ORG'S ~=—S«»,,:«OBT. = 8S/ET/6 ~—88/6T/E UoIVVL0dIO) souB}doody SOPOT [VVUF)

00°000'000'T 6 188°C66 » IL 9¢/60/¢ 8¢/6I/E Auvdwo) eoyg [euoTyeUIeyUT

00°000°000'L ss FR FGT'F66 » 16 8¢/8I/9 8&/FI/8 Aueduioy 1ed01y ey,

00°000'000'T 8o°6EL‘F66 » TOL 8¢/91/9 8&/L /§ udTyB10dI10H souB}daoV SIOJOTY [V1IUA)

00°000'000°'% =—s-:d OO ELE 686'T » BOL 8¢/91/9 = 8c/9 /E UOI}VIOdIO) dUB}da0V SIOJO}T [BAUH)

00°'000'000'T #6°90¢°866 »» OL &8¢6/91/9 = 8G/9%/Z_-— MONBAOdIOD soUBJdedoy SuLAINzoRFNUL]T AO[[e

00°000°000°¢ 68° E9L‘c96'F . OIL 8¢/91/9 ~—-8G/02/Z_~—- NONFBAOdI0,) eUBJdedoy SuLMjoRFNULPY MOT] X

00°000°000'T 32 Zza°Ss6é . ZEL 8¢/91/9 ~—- 8G/ST/T woresodi0D aoueydedoy SulanjoejnuLW AOTIo X

00°000°000'T 68° 889'F86 » S&L ge/9T/9 gc/g /T Uoryesod109 vouvjdeooy SulunjouynuRyy MOTe x

00°000°000' ~—s«a@BBes96e'T ., O9T 8c/9T/9 Bc/L/T wores0di0,) pon stmt SIOJOJT [BAeUe4)

00'000'000'T $ gg'cco'ts6 $ SMepFoT gc/9I/9 8¢/e /T uoTyVI0dI0) soUB}dIddV SLOJOPT [P4oUF)

uorjyduiapey oud poured oyu eq azouss]

Uo Spevd01g eseyoing ZurploH uoyndwmsepsay = osByoung

claim for refund is attached hereto as Exhibit B and incor-

notes described above in Paragraph 5. <A copy of such

porated herein.

$608,598.99 received by Plaintiff on the retirement of the

(14) On March 1, 1971, the Commissioner of Internal

Revenue disallowed in its entirety Plaintiff’s claim for re-

6S6I ‘IG HOUV]IY ONIGNG GNV QCéT ‘[ WadV ONINNIDGG AAA AMVXV

NOLLV4OduOR)) SGOO IVHANGY) Ad ATA

SELON ALVAOdUOH JO NOdNaAGAY OL LOadsaY ALIA, NOLLVNYOANT

NOILVUOdNOL) SGOO IVAANAS)

Wo WUVAXA

fund. <A copy of such notice disallowing Plaintiff’s claim

for refund is attached hereto as Exhibit C and incorpo-

rated herein.

(15) No part of the sum of $208,291, the amount of

tax claimed by Plaintiff, nor the deficiency interest paid

by Plaintiff thereon, has been refunded to Plaintiff.

(16) Attached hereto as Exhibits D and E and incor-

porated herein are answers dated October 15, 1970 and

March 8, 1971 to interrogatories, which answers were filed

by the Commissioner of Internal Revenue in the presently

pending ease in this Court of Boise Cascade Corporation

and Subsidiary Companies v. United States, Nos. 321-69

and 81-71.

o &

7% &

=< S&S

CiirForD, WARNKE, (iLAss,

McIiwarin & Finney

815 Connecticut Avenue, N.W.

Washington, D. C. 20006

Attorney for Plaintiff

$ o

= —

is) eS

S “>

v4 > ae)

o§ 8 So =

eo 2a-_

&§ g A

ze ~

S*serEABs w

FEN SOS -= &

CTOw 2 & ® &

eres eo m=

BOS rc eis

Fe eA = & rm

SsamK & >.

SSéeéa STe

NASH ENS §

~ =

es MQ =~4

~ ~ =

20a

2la

® .

és

—

Exhibit “B”

Refund of Taxes Illegally, Erroneously or Excessively

Collected.

1 Refund of Amount Paid for Stamps Unused, or Used in

Please Type or Print Plainly

Fill in applicable items—Attach letter size sheets

if space is not sufficient

gift, or income taxes).

Error or Excess.

[1] Abatement of Tax Assessed (not applicable to estate,

North Street

City, Town, State, Postal Zip Code

13-0762680

General Foods Corporation (A Delaware Corporation)

e. District in which return (if any) was filed

Number and street

White Plains, New York 10602

b. If an employer, enter employer identification number

Name of taxpayer or purchaser of stamps

00°000°0SL'06$ = LO'LOF'LEL‘06$

250 Park Avenue, New York 17, N. Y. and

250 North Street ,White Plains, N. Y. 10602

e. Period—if for tax reported on annual basis, prepare

separate form for each taxable year

From April 1, 1958 to March 31, 1959

f. Kind of tax

Manhattan District, New York

d. Name and address shown on return, if different from

General Foods Corporation

above

Income

moe ea ; S[PI0],

00°000'0¢L rat ~~ .

00°000'000'L poh hag . Mo gy a RA, Uorwdod.410,) pury su10dg

00°000°000'S = OU'000'886'T sg, ZL g/# /e re pne ‘di0,) [eosoutuo)-pavyuroyy

00°000'000'G (00 000"886'T 1» BL 8¢/¢ /e pe fren OUT “OY Unjosy wEETTTT AY

00';000'000'L = OO 00S" E66 oy gc /; y 4 66/6l WONVAOdIO,) SAOpILY [LLoLoUTUO

00°000°000'L ER CLL ZG ” 18 cafe & 82/ 66/GL ‘ouy ‘Xuvdwog xy SUAL}Y . _

00°000°000'2 CULL ESG'T ” = th 82/ 61/EL UOlBAOdI0,) WURdoooy SUL OR) NURTY ae.

00°000'000'Z ZULLLERG'L " e0 hed 8¢/ “Y ~ Auvduoy O0IBGOT ~ Sen

00'000'000°8 $6E'C) 62 . is , “/ SUG WOlRIOdIO,) Buiyor, (

00'000°000'Z pen bread 20: a 6s) 9t/ & 8¢/CL/EL Uotyesod.o, ) vouBjddoy fame aes

00 000'0U0"'E LE FOR CRE 'Z ” po 68/ 91/8 8¢/CT/2I Auevduwo,) 000RqO IL spjouaoy = A

00'000'000'°E E8OLZERG'Z aes 9) 8¢/t /6l 8f/9 /OL Auedwo,) qUSULSoAU] nat HR.

00°000'000'Z ZZ" L60°986'L ” “- —— $- 85/6 1/6 uolpe10ds0,y WUBI dD Sulu poRpuULyy poe

00°000'000'Z 22160986" * “ 8e/I cl 8¢/C1/G UwoljRsod.o,) wUR ooo Sulanjousuuryy ao A

00'000'000'T ZL6C9'£66 ” se 8e/ Cl/ cl 8¢/C1/6 uorRi0ds0,) surypeg ceneant

00'000'000'Z LL'98F'ER6'T ” ~ Ad /ol 8¢/LL/6 Sueduto,) ue) pene’.

60°000°000'T ES'ULZ EGG » _ 8¢/S1/eL 8/6 /6 Aueduio,) Ooovqoy, splousoy op -

00°000'000'T 18°98&E66 ” oe 8S/ Slal 8c/t /G UOI}41OdIO) eouRydavoy s10j0]Y [eau =

00°000°009 LUFOL66E : CF yy 8¢/F /6 WoLVB10d40,) vUR\doooy Bur Apovpnueyy Mole

00'000°000'T 88°020'866 r» = $ t 6 89/83/L UOHZRIOdIO) soURdooy SUOJOTY [L Jottan)

00°000°000°T == & 800" 866 » 2S 4 ~ 82/6 /2 HoH BEd.) euRdoooY SIOJO]Y [RAoUEH)

00°000°000'ES 8999 EGG'Z4 aie a _ r /6 80/6 /L WOK LIOdIO) Ytpeay [etodouutuo,

Oe PL¢ 8o/F /6 8¢/6 /L WorjRa0d.10,) dU jdoodwy Suranjoujnuey yes 4

uotjdwopay aug — no — : TY AMopoy

UO Spdv2d01.g dsvyouNng Surpjoy uwonduopay — osnyau nd bie

‘

6S6T “TE HOUV]Y ONIGNG ANV gegy ‘T TMaay ONINNIDAG YUVA AWVXV,

NOILVAOdUO) SGOO TWAANAD

SALON ALVAOdUO) JO NOLLA NAGY OL Lom.

Ad G1ay]

ISAY MLA NOMLVINYOGNT

NOILVHOdUO)) SAOOY TIVUAINAN

(PenuyU0D) Vy, TIqQTYyxXy

22a

Exhibit “B” (Continued)

g. Amount of assessment

$53,769,046.40

Dates of payment

December 15, 1958, March 16, 1959, June 15, 1959,

September 15, 1959, November 8, 1965

i. Amount to be refunded (if income tax, complete compu-

tation below)

$208,291.

k. The claimant believes that this claim should be allowed

for the following reasons :

See Rider Attached

Computation of Income Tax Refund Income Tax

Se SO UE Sndecovecucdoldesdncecdevuwus —0—

2. Estimated tax paid .....................6. 19,564,000

3. Tax paid with original return .............. 34,436,000

4. Any additional income tax paid ............ 345,638

d. Total tax paid (Add lines 1-4) ............. 54,345,638

6. Less : Your computation of correct tax ..... 53,560,755

7. Amount of overpayment ................... 784,883

8. Amount previously refunded .............. 576,592

9. Net overpayment (Enter in item 1 above)... 208,291

Under penalties of perjury, I declare that this claim, in-

cluding any accompanying schedules and statements, has

been examined by me and to the best of my knowledge and

belief it is true and correct.

EN iid even unndeenis secu

Dated October 31, 1967 Treasurer

23a

Exhibit “B” (Continued)

GENERAL Foops CorPorATION

(A Delaware Corporation)

River AtracHep To CLam For Rerunp or Feperat INcoME

TAXES FOR THE J'AXABLE YEAR Apri 1, 1958 To Marcu

31, 1959

Claimant, not a dealer in securities, reported in its in-

come tax return for the fiscal year beginning April 1, 1958

and ended March 31, 1959 short-term capital gain of

$608,598.99, resulting from the redemption at maturity of

non-interest-bearing corporation notes originally issued at

a discount and purchased by the claimant, and held for six

months or less.

Upon review of the claimant’s income tax return for its

taxable year beginning April 1, 1958 and ended March 31,

1958, claimant was assessed a tax deficiency of $345,638

plus interest. Part of this deficiency was the result of

treating the above-described $608,598.99 as interest income

rather than as short-term capital gain.

Claimant contends that Section 1232(a)(2) of the Inter-

nal Revenue Code of 1954 applies only to discounted notes

held for more than six months and that since there is no

specific provision within Section 1232(a) (2) for discounted

notes held for six months or less, gain from redemption

of such notes should be accorded short-term eapital gain

treatment.

Claimant therefore respectfully requests a refund of

$208,291, or such greater amount as may be legally re-

funded, together with interest thereon, representing that

part of the previously assessed deficiency attributable to

treating as interest income the $608,598.99 gain from re-

demption at maturity of non-interest bearing corporation

notes originally issued at a discount and held for six months

or less.

24a

Exhibit “C”

Service CENTER

NortH-ATLantic REGION

Date: March 1, 1971 In reply refer to:

General Foods Corporation

(A Delaware Corporation)

250 North St.

White Plains, NY 10602

Social Security Number or Employer Identification

Number: 13-0762680

Document Locator Number: CR000

Type of Tax: 1120-Corporation Income Return

Period Ending: March 1959

Amount Claimed: $208,291.00

Date Claim Received: November 6, 1967

Dear Taxpayer:

We have examined your claim for an adjustment of your

taxes. I am sorry to tell you that we cannot allow your

claim for the reasons stated below. This decison rests on

certain provisions of the internal revenue laws and regula-

tions.

This letter is your legal notice that your claim is dis-

allowed in full.

If you wish to begin suit or proceedings for the recovery

of any taxes, penalties, or other moneys for which this no-

tice of disallowance is issued, the law requires you to do so

within 2 years from the mailing date of this letter.

Sincerely yours,

/s/ ¥. 1. Boswirr

Director

Reasons for disallowance:

Full disallowance of claim per Appellate determination.

25a

Exhibit “D”

IN THE UNITED STATES COURT OF CLAIMS

No. 321-69

—_——_—— — -——

Botse Cascape Corporation and Supsipiary COMPANIEs,

Plaintiffs

Unirep States or America, Defendant

Response to Plaintiffs’ Interrogatories

Oct. 15, 1970

Donald W. Bacon, being duly sworn, responds to plain-

tiffs’ interrogatories as follows:

1. I hold the positon of Assistant Commissioner, Com-

pliance, Internal Revenue Service.

2. Plaintiffs’ Interrogatory 1 reads as follows:

State whether the Commissioner of Internal Reve-

nue requires payment of United States income taxes

under sections 871(a)(1) and 881(a) of the Internal

Revenue Code of 1954 with respect to original issue

discount on bonds or other evidences of indebtedness

issued after December 31, 1954, where such bonds or

other evidences of indebtedness are he!d by a nonresi-

dent alien individual or foreign corporation for a pe-

riod of not more than six months and such original

issuc discount is from United States sources but is not

effectively connected with the conduct of a trade or

business within the United States.

26a

3. Plaintiffs’ interrogatory 3 reads as follows:

State whether the Commissioner of Internal Reve-

nue requires withholding of United States income

taxes under section 1441 and 1442 of the Internal

Revenue Code of 1954 with respect to original issue

discount on bonds or other evidences of indebtedness

issued after December 31, 1954, where such bonds or

other evidences of indebtedness are held by a non-

resident alien individual or foreign corporation for a

period of not more than six months and such original

issue discount is from United States sources but is not

effectively connected with the conduct of a trade or

business within the United States.

4. My answer to these two interrogatories is as fol-

lows:

To the best of my knowledge and belief the Commis-

sioner did not require during the years in suit, 1955

through 1958, the payment of United States income

taxes under sections 871(a)(1) and 881(a) of the Inter-

nal Revenue Code of 1954, or the withholding of United

States income taxes under sections 1441 and 1442

of the Internal Revenue Code of 1954, with respect

to original issue discount on bunkers’ acceptances and

commercial paper, where such instruments were sold

or redeemed by nonresident alien individuals or cor-

porations, nor was the payment of tax or withholding

required with respect to the discount element of United

States Treasury bills when they were sold by such

persons. However, upon the redemption of Treasury

bills by nonresident aliens both the payment of tax and

withholding was required.

/s/ Donatp W. Bacon

Donald W. Bacon

27a

Exhibit “E”

IN THE UNITED STATES COURT OF CLAIMS

No. 321-69

Boise Cascape Corporation and Sussipiary CoMPANIEs,

Plaintiffs

Vv.

Unirep Srates or America, Defendant

Response to Plaintiffs’ Interrogatories

(Filed March 8, 1971)

Donald W. Bacon, being duly sworn, responds to plain-

tiffs’ interrogatories as follows:

1. I hold the position of Assistant Commissioner, Com-

plianece, Internal Revenue Service.

2. Plaintiffs’ interrogatory 1 reads as follows:

State whether the Commissioner of Internal Reve-

nue requires payment of United States income taxes

under sections 871(a)(1) and 881(a) of the Internal

Revenue Code of 1954 with respect to original issue

discount on bonds or other evidences of indebtedness

issued after December 31, 1954, where such bonds or

other evidences of indebtedness are held by a non-

resident alien individual or foreign corporation for

a period of not more than six months and such orig-

inal issue discount is from United States sources but

is not effectively connected with the conduct of a trade

or business within the United States.

28a

3. Plaintiffs’ interrogatory 3 reads as follows:

State whether the Commissioner of Internal Reve-

nue requires withholding of United States income taxes

under section 1441 and 1442 of the Internal Revenue

Code of 1954 with respect to original issue discount on

bonds or other evidences of indebtedness issued after

December 31, 1954, where such bonds or other evi-

cdences of indebtedness are held by a nonresident alien

individual or foreign corporation for a period of not

more than six months and such original issue discount

is from United States sources but is not effectively

connected with the conduct of a trade or business with-

in the United States.

4. My answer to these two interrogatories is as follows:

To the best of my knowledge and belief the Com-

missioner does not presently require the payment of

United States income taxes under sections 871(a)(1)

and 881(a) of the Internal Revenue Code of 1954, or

the withholding of United States income taxes under

sections 1441 and 1442 of the Internal Revenue Code

of 1954, with respect to original issue discount on

bankers’ acceptances and commercial paper issued

prior to May 28, 1969, where such instruments are sold

or redeemed by nonresident alien individuals or cor-

porations, nor is the payment of tax or withholding

required with respect to the discount element of United

States Treasury bil's which are sold by such persons.

However, upon the redemption of Treasury bills by

nonresident aliens both the payment of tax and with-

holding is required.

/s/ Doxatp W. Bacon

Donald W. Bacon

29a

INTERNAL Revenve Cope or 1954

§ 871. Tax on nonresident alien individuals

(a) No United States business and gross income of

not more than $15,400.

(1) Imposition of tax.—Except as otherwise pro-

vided in subsection (b) there is hereby imposed

for each taxable year, in lieu of the tax imposed

by section 1, on the amount received, by every non-

resident alien individual not engaged in trade or busi-

ness within the United States, from sources within

the United States, as interest (except interest on

deposits with persons carrying on the banking busi-

ness), dividends, rents, salaries, wages, premiums,

annuities, compensations, remunerations, emoluments,

or other fixed or determinable annual or periodical

gains, profits, and income (including amounts describ-

ed in section 402(a)(2), section 631(b) and (ec), and

section 1235, which are considered to be gains from

12In the view I take of the case, this conclusion renders moot

two subsidiary points raised by the parties. First, plaintiff

argues that defendant’s treatment of original issue discount in the

present case is so different from the treatment accorded such dis-

count in the hands of nonresident aliens and foreign corporations

as to be illegally discriminatory in favor of foreign persons and

against United States persons. However, should my view of the

law prevail, there is no such disvrimination, and the question be-

comes moot. Secondly, while coneeding that gain attributable to

original issue discount on evidences of indebtedness held for more

than 6 months is taxed only in the year realized through sale or

exchanee (Df’s Brief, p. 24), defendant contends that on short-

term evidences of indebtedness held by accrual basis taxpayers

(such as plaintiffs), the original issue discount is taxable on a

ratably aecrued basis in the same manner as ordinary interest

income. Tlowever, my treatment of such discount as short-term

canital gain places the question within the general scope of

defendant’s concession that discount on longer term evidences of

indebtedness is taxable only when realized, thus eliminating the

question.

30a

the sale or exchange of capital assets), a tax of 30

percent of such amount.

(2) Capital gains of eliens temporarily present in

the United States.—In the case of a nonresident alien

individual not engaged in trade or business in the

United States, there is hereby imposed for each tax-

able year, in addition to the tax imposed by para-

graph (1)—

(A) if he is present in the United States for a

period or periods aggregating less than 90 days

during such taxable year—a tax of 30 percent of

the amount by which his gains, derived from sources

within the United States, from sales or exchanges of

capital assets effected during his presence in the

United States exceed his losses, allocable to sources

within the United States, from such sales or ex-

changes effected during such presence; or

(B) if he is present in the United States for a

period or periods aggregating 90 days or more dur-

ing such taxable year—a tax of 30 percent of the

amount by which his gains, derived from sources

within the United States, from sales or exchanges

of capital assets effected at any time during such

year exceed his losses, allocable to sources within

the United States, from sales or exchanges effected

at any time during such year.

For purposes of this paragraph gains and losses shall

be taken into account only if, and to the extent that,

they would be recognized and taken into account if

such individual were engaged in trade or business in

the United States, except that such gains and losses

shall be computed without regard to section 1202

(relating to deduction for capital gains) and such

3la

losses shall be determined without the benefits of the

capital loss carryover provided in section 1212.

(b) No United States business and gross income of more

than $15,400.—A nonresident alien individual not engaged

in trade or business within the United States shall be tax-

able without regard to subsection (a) if during the taxable

year the sum of the aggregate amount received from the

sources specified in subsection (a)(1), plus the amount by

which gains from sales or exchanges of capital assets

exceed losses from such sales or exchange (determined in

accordance with subsection (a)(2)) is more than $15,400,

except that—

(1) the gross income shall include only income from

the sources specified in subsection (a)(1) plus any

gain (to the extent provided in subchapter P; see.

1201 and following, relating to capital gains and losses)

from a sale or exchange of a capital asset if such gain

would be taken into account were the tax being de-

termined under subsection (a) (2);

(2) the deductions (other than the deduction for

charitable contributions and gifts provided in section

873(c)) shall be allowed only if and to the extent that

they are properly allocable to the gross income from

the sources specified in subsection (a), except that any

loss from the sale or exchange of a capital asset shall

be allowed (to the extent provided in subchapter P

without the benefit of the capital loss carryover pro-

vided in section 1212) if such loss would be taken into

account were the tax being determined under sub-

section (a) (2);

(3) the taxes imposed by this subtitle (under section

1, or under section 1201(b)) shall, in no ease, be less

than 30 percent of the sum of—

(A) the aggregate amount received from the

sources specified in subsection (a)(1), plus

32a

(B) the amount, determined under subseection

(a)(2), by which gains from sales or exchanges of

capital assets exceed losses from such sales or ex-

changes.

vidual engaged in trade or business within the United

States shall be taxable without regard to subsection (a).

For purposes of part I, this section, sections 881 and 882,

and chapter 3, the term ‘‘engaged in trade or business

within the United States’’ includes the performance of

personal services within the United States at any time

within the taxable year, but does not include the perform-

ance of personal services—

(1) for a nonresident alien individual, foreign

partnership, or foreign corporation, not engaged in

trade or business within the United States, or

(2) for an office or place of business maintained by

a domestic corporation in a foreign country or in a

possession of the United States,

by a nonresident alien individual temporarily present in

the United States for a period or periods not exceeding

a total of 90 days during the taxable year and whose com-

pensation for such services does not exceed in the aggre-

gate $3,000. Such term does not include the effecting,

through a resident broker, commission agent, or custodian,

of transactions in the United States in stocks or securities,

or in commodities (if of a kind customarily dealt in or an

organized commodity exchange, if the transaction is of the

kind eustomarily consummated at such place, and if the

alien, partnership, or corporation has no office or place of

business in the United States at any time during the tax-

able year through which or by the direction of which such

transactions in commodities are effected).

33a

(d) Doubling of tax.—

For doubling of tax on citizens of certain foreign

countries, see section 891.

§ 881. Tax on foreign corporations not engaged in business

in United States.

(a) Imposition of tax.—In the case of every foreign

corporation not engaged in trade or business within the

United States, there is hereby imposed for each taxable

year, in lieu of the taxes imposed by section 11, a tax of

30 percent of the amount received from sources within the

United States as interest (except interest on deposits with

persons carrying on the banking business), dividends,

rents, salaries, wages, premiums, annuities, compensations,

remunerations, emoluments, or other fixed or determinable

annual or periodical gains, profits, and income (including

amounts described in section 631(b) and (ce) which are con-

sidered to be gains from the sale or exchange of capital

assets).

(b) Doubling of tax.—

For doubling of tax on corporations of certain

foreign countries, see section 891,

§ 1441. Withholding of tax on nonresident aliens

(2) General rule——Except as otherwise provided in

subsection (c), all persons, in whatever capacity acting

(including lessees or mortgagors of real or personal prop-

erty, fiduciaries, employers, and all officers and employees

of the United States) having the control, receipt, custody,

disposal, or payment of any of the items of income speci-

fied in subsection (b) (to the extent that any of such items

constitutes gross income from sources within the United

States), of any nonresident alien individual, or of any

partnership not engaged in trade or business within the

34a

United States and composed in whole or in part of non-

resident aliens, shall (except in the cases provided for in

section 1451 and except as otherwise provided in regula-

tions prescribed by the Secretary or his delegate under

section 874) deduct and withhold from such items a tax

equal to 30 percent thereof.

(b) Income items.—The items of income referred to

in subsection (a) are interest (except interest on deposits

with persons carrying on the banking business paid to

persons not engaged in business in the United States),

dividends, rent, salaries, wages, premiums, annuities,

compensations, remunerations, emoluments, or other fixed

or determinable annual or periodical gains, profits, and

income, and amounts described in section 402(a)(2), sec-

tion 631(b) and (ec), and section 1235, which are considered

to be gains from the sale or exchange of capital assets.

(1) Dividends of foreign corporations.—No deduction

or withholding under subsection (a) shall be required in

the case of dividends paid by a foreign corporation unless

(A) such ecrporation is engaged in trade or business within

the United States, and (B) more than 85 percent of the

gross income of such corporation for the 3-year period

ending with the close of its taxable year preceding the

declaration of such dividends (or for such part of such

period as the corporation has been in existence) was de-

rived from sources within the United States as determined

under part I of subchapter N of chapter 1.

(2) Owner unknown.—The Secretary or his delegate

may authorize the tax under subsection (a) to be deducted

and withheld from the interest upon any securities the

owners of which are not known to the withholding agent.

(3) Bonds with extended maturity dates—The deduc-

tion and withholding in the case of interest on bonds,

mortgages, or deeds of trust or other similar obligations

35a

of a corporation, within subsections (a), (b), and (e) of

section 1451 were it not for the fact that the maturity date

of such obligations has been extended on or after January

1, 1934, and the liability assumed by the debtor exceeds

2714 percent of the interest, shall not exceed the rate of

271% percent per annum.

(4) Compensation of certain aliens.—Under regula-

tions prescribed by the Secretary or his delegate, there

may be exempted from deduction and withholding under

subsection (a) the compensation for personal services of

nonresident alien individuals who enter and leave the

United States at frequent intervals.

(5) Special items.—In the case of amounts described

in section 402(a)(2), section 631(b) and (c), and section

1235, which are considered to be gains from the sale or

exchange of capital assets, the amount required to be de-

ducted and withheld shall, if the amount of such gain is

not known to the withholding agent, be such amount, not

exceeding 30 percent of the proceeds from such sale or

exchange, as may be necessary to assure that the tax de-

ducted and withheld shall not be less than 30 percent of

such gain.

(d) Alien resident of Puerto Rico.—For purposes of

this section, the term ‘‘nonresident alien individual’’ in-

cludes an alien resident of Puerto Rico.

§ 1442. Withholding of tax on foreign corporations

In the case of foreign corporations subject to taxation

under this subtitle not engaged in trade or business within

the United States, there shall be deducted and withheld at

the source in the same manner and on the same items of

income as is provided in section 1441 or section 1451 a tax

equal to 30 percent thereof; except that, in the case of in-

terest described in section 1451 (relating to tax-free cove-

36a

nant bonds), the deduction and withholding shall be at the

rate specified therein.

Section 1232, as amended by the Tax Reform Act of 1969,

Pub.L.No. 91-172, 83 Stat. 487:

Sec. 1232. Bonds and Other Evidences of Indebtedness.

(a) General Rule—For purposes of this subtitle,

in the case of bonds, debentures, notes or certificates or

other evidences of indebtedness, which are capital assets

in the hands of the taxpayer, and which are issued by any

corporation, or by any government or political subdivision

thereof—

(1) Retirement.—Amounts received by the holder on

retirement of such bonds or other evidences of indebt-

edness shall be considered as amounts received in ex-

change therefor (except that in the case of bonds or

other evidences of indebtedness issued before January

1, 1955, this paragraph shall apply only to those issued

with interest coupons or in registered form, or to those

in such form on March 1, 1954).

(2) Sale or Exchange.—

(A) Corporate Bonds Issued After May 27, 1969.—

Except as provided in subparagraph (C), on the sale

or exchange of bonds or other evidences of indebted-

ness issued by a corporation after May 27, 1969, held

by the taxpayer more than 6 months, any gain real-

ized shall (except as provided in the following sen-

tence) be considered gain from the sale or exchange

of a capital asset held for more than 6 months. If

at the time or original issue there was an intention

to call the bond or other evidence of indebtedness

before maturity, any gain realized on the sale or ex-

change thereof which does not exceed an amount

equal to the original issue discount (as defined in

subsection (b)) reduced by the portion of original is-

37a

sue discount previously includible in the gross in-

come of any holder (as provided in paragraph (3)

(B)) shall be considered as gain from the sale or

exchange of property which is not a capital asset.

(B) Corporate bonds issued on or before May 27,

1969, and government bonds.—Except as provided in

subparagraph (C), on the sale or exchange of bonds

or other evidences of indebtedness issued by a gov-

ernment or political subdivision thereof after De-

cember 31, 1954, or by a corporation after December

31, 1954, and on or before May 27, 1969, held by the

taxpayer more than 6 months, any gain realized

which does not exceed—

(i) an amount equal to the original issue dis-

count (as defined in subsection (b)), or

(ii) if at the time of original issue there was

no intention to call the bond or other evidence of

indebtedness before maturity, an amount which

bears the same ratio to the original issue dis-

count (as defined in subsection (b)) as the number

of complete months that the bond or other evi-

dence of indebtedness was held by the taxpayer

bears to the number of complete months from the

date of original issue to the date of maturity,

shall be considered as gain from the sale or ex-

change of property which is not a capital asset.

Gain in excess of such amount shall be considered

gain from the sale or exchange of a capital asset

held more than 6 months.

to—

(i) obligations the interest on which is not

ineludible in gross income under section 103 (re-

lating to certain governmental obligations), or

38a

(ii) any holder who has purchased the bond or

other evidence of indebtedness at a premium.

(D) Double inclusion in income not required.—

This section shall not require the inclusion of any

amount previously includible in gross income.

(3) Inclusion in income of original issue discount on

corporate bonds issued after May 27, 1969.—

(A) General rule—There shall be included in the

gross income of the holder of any bond or other

evidence of indebtedness issued by a corporation

after May 27, 1969, the ratable monthly portion of

original issue discount multiplied by the number of

complete months (plus any fractional part of a

month determined in accordance with the last sen-

tence of this subparagraph) such holder held such

bond or other evidence of indebtedness during the

taxable year. Except as provided in subparagraph

(B), the ratable monthly portion of original issue

discount shall equal the original issue discount (as

defined in subsection (b)) divided by the number of

complete months from the date of original issue to

the stated maturity date of such bond or other evi-

dence of indebtedness. For purposes of this section,

a complete month commences with the date of origi-

nal issue and the corresponding day of each succeed-

ing calendar month (or the last day of a calendar

month in which there is no corresponding day) ; and,

in any case where a bond or other evidence of indebt-

edness is acquired on any other day, the ratable

monthly portion of original issue discount for the

complete month in which such acquisition occurs

shall be allocated between the transferor and the

transferee in accordance with the number of days in

such complete month each held the bond or other

evidence of indebtedness.

39a

(B) Reduction in case of any subsequent holder.—

For purposes of this paragraph, the ratable monthly

portion of original issue discount shall not include

an amount, determined at the time of any purchase

after the original issue of such bond or other evi-

dence of indebtedness, equal to the excess of —

(i) the cost of such bond or other evidence of

indebtedness incurred by such holder, over

(ii) the issue price of such bond or other evi--

dence of indebtedness increased by the portion of

original discount previously includible in the gross

income of any holder (computed without regard

to this subparagraph).

divided by the number of complete months (plus any

fractional part of a month commencing with the date

of purchase) from the date of such purchase to the

stated maturity date of such bond or other evidence

of indebtedness.

graph (B), the term ‘‘purchase’’ means any acquisi-

tion of a bond or other evidence of indebtedness,

but only if the basis of the bond or other evidence of

indebtedness is not determined in whole or in part

by reference to the adjusted basis of such bond or

other evidence of indebtedness in the hands of the

person from whom acquired, or under section 1014

(a) (relating to property acquired from a decedent).

(D) Exceptions.—This paragraph shall not apply

to any holder—

(i) who has purchased the bond or other evi-

dence of indebtedness at a premium, or

( ii) which is a life insurance company to which

section 818(b) applies.

40a

(E) Basis adjustments.—The basis of any bond

or other evidence of indebtedness in the hands of

the holder thereof shall be increased by the amount

included in his gross income pursuant to subpara-

graph (A).

(b) Definitions.—

(1) Original issue discount.—For purposes of subsection

(a), the term ‘‘original issue discount’? means the differ-

ence between the issue price and the stated redemption

price at maturity If the original issue discount is less

than one-fourth of 1 percent of the redemption price at

maturity multiplied by the number of complete years to

maturity, then the issue discount shall be considered to be

zero. For purposes of this paragraph, the term ‘‘stated

redemption price at maturity’? means the amount fixed by

the last modification of the purchase agreement and in-

cludes dividends payable at that time.

(2) Issue price.—In the case of issues of bonds or other

evidences of indebtedness registered with the Securities

and Exchange Commission, the term ‘‘issue price” means

the initial offering price to the public (excluding bond

houses and brokers) at which price a substantial amount

of such bonds or other evidences of indebtedness were sold.

In the ease of privately placed issues of bonds or other

evidence of indebtedness, the issue price of each such bond

or other evidence of indebtedness is the price paid by the

first buver of such bond increased by the amount, if any,

of tax paid under section 4911 (and not credited, refunded,

or reimbursed) on the acquisition of such bond or evidence

of indebtedness by the first buyer. For purposes of this

paragraph, the terms ‘‘initial offering price’’ and ‘‘price

paid by the first buyer’’ include the aggregate payments

made by the purchaser under the purchase agreement, in-

cluding modifications thereof. In the case of a bond or

other evidence of indebtedness and an option or other se-

4la

curity issued together as an investment unit, the issue

price for such investment unit shall be determined in ac-

cordance with the rules stated in this paragraph. Such

issue price attributable to each element of the investment

unit shall be that portion thereof which the fair market

value of such element bears to the total fair market value

of all elements in the investment unit. The issue price of

the bond or other evidence of indebtedness included in such

investment unit shall be the portion so allocated to it. In

the case of a bond or other evidence of indebtedness, or an

investment unit as described in this paragraph (other than

a bond or other evidence of indebtedness or an investment

unit issued pursuant to a plan of reorganization within the

meaning of section 368(a)(1) or an insolvency reorganiza-

tion within the meaning of section 371, 373, or 374), which

is issued for property and which—

(A) is part of an issue a portion of which is traded

on an established securities market,

(B) is issued for stock or securities which are traded

on an established securities market,

the issue price of such bond or other evidence of indebted-

ness or investment unit, as the case may be, shall be the

- fair market value of such property. Except in cases to

which the preceding sentence applies, the issue price of a

bond or other evidence of indebtedness (whether or not

issued as a part of an investment unit) which is issued for

property (other than money) shall be the stated redemp-

tion price at maturity.

(3) Issue date.—In the case of issues of bonds or other

evidences of indebtedness registered with the Securities

and Exchange Commission, the term ‘‘date of original

issue’? means the date on which the issue was first sold to

the public at the issue price. In the case of privately placed

issues of bonds or other evidences of indebtedness, the term

‘“‘date of original issue” means the date on which each

42a

such bond or other evidence of indebtedness was sold by

the issuer,

or other evidence of indebtedness issued at any time with

interest coupons—

(1) is purchased after August 16, 1954, and before

January 1, 1958, and the purchaser does not receive all

the coupons which first become payable more than 12

months after the date of the purchase, or

(2) is purchased after December 31, 1957, and the

purchaser does not receive all the coupons which first

become payable after the date of the purchase,

then the gain on the sale or other disposition of such evi-

dence of indebtedness by such purchaser (or by a person

whose basis is determined by reference to the basis in the

hands of such purchaser) shall be considered as gain from

the sale or exchange of property which is not a capital

asset to the extent that the fair market value (determined

as of the time of the purchase) of the evidence of indebted-

ness with coupons attached exceeds the purchase price.

If this subsection and subsection (a)(2)(A) apply with

respect to gain realized on the sale or exchange of any evi-

dence of indebtedness, then subsection (a)(2)(A) shall

apply with respect to that part of the gain to which this

subsection does not apply.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.