Petition — Gordon v. Commissioner

IN THE MICHAEL RODAK, JR., CLERK

SUPREME COURT

OF THE UNITED STATES

October Term 1977

No, 77°995

HARRY GORDON and

GERALDINE GORDON,

Petitioners,

vs.

COMMISSIONER OF

INTERNAL REVENUE,

——E

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRUCE !, HOCHMAN and

HARVEY D. TACK

9100 Wilshire Boulevard

Seventh Floor-West Tower

Beverly Hills, California 90212 |

(213) 273-1181 - 272-0561 |

VOLUME I

of Two Volumes Attorneys for Petitioners

IN ‘THE

SUPREME COURT

OF THE UNITED STATES

October Term 1977

No,

HARRY GORDON and

GERALDINE GORDON,

Petitioners,

vs.

COMMISSIONER OF

INTERNAL REVENUE,

Respondent,

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRUCE I. HOCHMAN and

HARVEY D. TACK

9100 Wilshire Boulevard

Seventh Floor-West Tower

Beverly Hills, California 90212

(213) 273-1181 - 272-0561

VOLUME I

of Two Volumes Attorneys for Petitioners

TOPICAL INDEX

Table of Authorities

OPINIONS BELOW

JURISDIC TION

QUESTION PRESENTED

STATUTES INVOLVED

STATEMENT OF THE CASE

REASONS FOR GRANTING WRIT

CONCLUSION

APPENDICES

12

TABLE OF AUTHORITIES

Page

W. S. Badcock Corp. v. Commissioner,

Sth Cir, 1974, 491 F.2d 226 8, 9

Commissioner v. Standard Life & Accident

Ins. Co.,

(1977) U.S. dint 97S.Ct. 2523 8

Crescent Wharf and Warehouse Co. v.

Commissioner,

(9th Cir. 1975) 518 F.2d 772 7, 8

Federal Life Insurance Co, v.

United States,

(7th Cir. 1975) 527 F.2d 1096 i)

Franklin Life Insurance Co. v.

United States,

(7th Cir. 1968) 399 F.2d 757,

c.d. 393 U.S. 1118 9

Great Commonwealth Life Insurance Co.

v. United States,

(5th Cir. 1974) 491 F.2d 109 i)

Hollingsworth, Jr. v. United States,

Trial Div, Opinion reported at

76-2 U.S, T.C. 9750, aff'd. 12/14/77 5

Lawyers Title Guaranty Fund

v. United States,

Sth Cir. 1975, 508 F.2d 1 8, 9

ii.

North American Life & Casualty Co,

v. Commissioner,

(8th Cir. 1976) 533 F.2d 1046 8, 9, 10

Pacific Grape Products v. Commissioner,

9th Cir. 1955, 219 F.2d 862

United States v. Anderson,

(1926) 269 U.S. 422

Regulations and Statutes

Treasury Regulations on Income Tax:

(1954 Code) §1.461-1(a)(2)

§44, 4401-3

26 U.S.C.:

Section 461(a)

Section 4401

Section 4421

Sections 6213, 6214

28 U.S.C. Section 1254(1)

iii.

IN THE

SUPREME COURT

OF THE UNITED STATES

October Term 1977

No.

HARRY GORDON and

GERALDINE GORDON,

Petitioners,

vs.

COMMISSIONER OF

INTERNAL REVENUE,

Respondent,

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

TO THE HONORABLE CHIEF JUSTICE AND

ASSOCIATE JUSTICES OF THE SUPREME

COURT OF THE UNITED STATES:

HARRY GORDON and GERALDINE GORDON,

the Petitioners herein, pray that a Writ of Certiorari

issue to review the Judgment of the United States

Court of Appeals for the Ninth Circuit, entered in

the above-entitled case on August 26, 1977.

1,

OPINIONS BELOW

The Opinion of the United States Court of

Appeals is not yet reported other than in the tax

service at 40 A. F.T.R.2d 77-5727; it is printed

in Appendix A hereto. The Judgment of the

United States Tax Court is reported at 63 T.C.

51 (the issue herein is discussed at pp. 77, 78).

The United States Tax Court also filed a Supple-

mental Opinion reported at 63 T.C. 501, dealing

with the issue herein. Because the Opinions of

the United States Tax Court are voluminous, they

are separately presented as Appendix C and

Appendix D,.

JURISDIC TION

The Judgment of the United States Court of

Appeals for the Ninth Circuit was entered on

August 26, 1977. <A timely Petition for Rehearing

was denied on October 13, 1977. (Appendix B)

The jurisdiction of the Supreme Court is invoked

under 28U.S.C. 1254(1).

QUESTION PRESENTED

Whether the wagering excise tax imposed

under 26 U.S.C. 4401 may be accrued by a tax-

payer conducting a legalized gambling business to

offset the income generated by wagers which are

not reflected in the income tax return, during the

2.

identical year in which the income is to be reported?

A more generalized statement of the issue is

whether an accrual basis taxpayer may accrue a

deduction for an excise tax placed indirectly in

dispute by an attack against assertion of a related

income item, owed to the same soverign, in order

to correctly correlate items of income and expense

arising out of the same transaction in the same

taxable year.

STATUTES INVOLVED

26 U.S.C. 461(a) GENERAL RULE, -

The amount of any deduction or credit

allowed by this subtitle shall be taken for

the taxable year which is the proper

taxable year under the method of account-

ing used in computing taxable income.

26 U.S.C. 4401. IMPOSITION OF TAX.

(a) WAGERS, - There shall be

imposed on wagers, as defined in section

4421, an excise tax equal to 10 percent of

the amount thereof,

STATEMENT OF THE CASE

Deficiencies were proposed for assessment

against HARRY and GERALDINE GORDON for

the calendar year 1967. A timely petition to the

United States Tax Court was filed by the taxpayers,

pursuant to 26 U.S.C. 6213, 6214 (granting

3.

jurisdiction to that Court). In response to the

question raised herein, the trial Court recognized

the nature of the wagering excise tax, and stated:

"The wagering excise tax is a necessary

cost of taking a wager and a necessary

offset to wagering income. ... Under

Section 461(a) a deduction is to be claimed

for 'the proper taxable year under the

method of accounting used.' Ina situation

such as this, where a deduction is a direct

function of the income, in one-to-one

correspondence with it, proper matching

of income and expense require that both

are taken in the same year. To do other-

wise would be as improper as to require

a taxpayer who denied making a sale to

accrue the sales income in one year and

his cost of sales in the latter year of resolu-

tion of the dispute. The wagering excise

tax is part of the cost of taking the wager,

and belongs tothe same taxable year as

that of the wager."

The United States Court of Appeals for the

Ninth Circuit disagreed with this conclusion of the

trial Court, and reversed. A dissent was lodged

by one member of the panel on this issue.

HARRY GORDON was the majority partner

in a partnership known as the Derby Turf Club

("'Derby''), which operated a legalized bookmaking

establishment in Las Vegas, Nevada. During the

calendar year 1967, the Derby was on the accrual

method of accounting. Wagers were taken by

employees of the Derby (not the petitioners herein),

4.

which were held to be taxable to the Derby, but

were not reported on its federal income tax return

for the year 1967. The amount of the additional

income, as proposed by the Commissioner, was

placed in dispute by the taxpayers through their

petition to the United States Tax Court, and during

trial of the case, the initial computation was

admitted to be overstated by counsel for the

Government. The United States Tax Court

ultimately determined the amount of the omitted

income, which determination was affirmed by the

Appellate Court. The trial Court also determined

that the taxpayers could accrue the wagering excise

tax attributable to the additional wagering receipts.

The Court of Appeals reversed this finding in a

two to one opinion.

REASONS FOR GRANTING WRIT

A conflict has recently developed between

the Court of Appeals for the Ninth Circuit (this

case) and the Court of Claims (Hollingsworth, Jr.

v. United States, Trial Div. Opinion reported at

76-2 U.S.T.C. 9750, aff'd. by Court per curiam

with modification of two footnoes, 12/14/77) on the

issue of accrual of expenses related to unreported

income subsequently ascertained. In our opinion,

the Court of Claims rejected the reasoning of the

Ninth Circuit and adopted the reasoning of the

Tax Court in this case by stating in revised Fn. 13:

The Tax Court Opinion, modifying

63 T.C. 51 (1974), was appealed by the

Government to the Ninth Circuit Court

of Appeals on the ground that the continuing

De

litigation concerning the amount of

unreported wagering income prevented

the accrual of the excise tax expenses

associated with that income. The

Ninth Circuit accepted the Government's

argument and reversed the Tax Court.

(Citation) We note that the Ninth

Circuit was not faced with the specific

issue involved in the present case, that

is whether the concealment of transactions

is a 'contest' for the purpose of the ‘all

events' test, but have, nonetheless,

weighed the opinion of the Ninth Circuit

carefully. We believe that, in the

circumstances of the present case, the

trial Judges' reliance on the result reached

and the reasoning employed by the Tax

Court was not misplaced since it appears

that the Tax Court decision was more in

consonance with our rationale in Dravo ~

and with relevant authorities, regulations

and rulings.'’ (Emphasis added. )

We have been advised by counsel for

Hollingsworth that the Government distributed

to the Court copies of the Ninth Circuit opinion

in Gordon during oral argument on review of the

trial Judge's opinion.

The accrual method of accounting is used

by virtually every substantial business in the

country - its use is compulsory if the taxpayer has

any inventory. The Courts have strived in recent

years to articulate the general principles govern-

ing use of the accrual method, most often success-

fully, but sometimes creating more questions than

they resolve. The Tax Court opinion, by an

6.

experienced tax practitioner and Tax Court Judge,

shed light in explaining the accrual method; the

Appellant Court's short and conclusionary state-

ment creates substantial confusion in that it strays

from the emerging law set forth by this Court and

the Circuit Courts throughout the country. It is

of the utmost import that this Court clarify the law

in this area affecting all major business so that

there is certainty rather than fuel for litigation.

As a general rule, a taxpayer using the

accrual method of accounting will deduct its expenses,

including taxes, in the year in which all the events

have occurred which determine the fact of the

liability and the amount thereof with reasonable

accuracy. E.g., United States v. Anderson (1926)

269 U.S. 422;. Crescent Wharf and Warehouse Co,

v. Commissioner (9th Cir. 1975) 518 F.2d 772;

Treasury Regulations on Income Tax (1954 Code)

§1.461-1(aX2). It is, accordingly, well settled

that an accrual basis taxpayer will deduct his

liability for taxes in the year in which the events

fix his tax liability, notwithstanding that the taxes

are not paid, nor the tax return filed, until a later

year. United States v. Anderson, supra.

The wagering excise tax constitutes a charge

against the wager at the time the wager is placed.

Treas. Reg. §44.4401-3 reads in part:

"The tax attaches when (a) a person engaged

in the business of accepting wagers with

respect to a sports event or a contest, or

(i) a person who operates a wagering pool

or lottery for profit, accepts the wager or

contribution from a bettor. In the case of

a wager on credit, the tax attaches whether

7.

or not the amount of the wager is actually

collected from the bettor. .. ."'

(Emphasis added. )

By reason of the last sentence, the tax becomes an

absolute liability whether the income from the wager

is subject to taxation or not,

The objective of the accrual method of account-

ing is to match income and directly related expense,

to the extent possible. This was done with the

accrual of workmen's compensation insurance

(Crescent Wharf & Warehouse Company v. Commis-

sioner, supra, 518 F.2d 772), expenses related to

sold but unshipped goods (Pacific Grape Products

v. Commissioner, 9th Cir. 1955, 219 F.2d 862),

commissions on the sale of furniture (W. S. Badcock

Corp. v. Commissioner, 5th Cir. 1974, 491 F, 2d

226), commissions on the sale of title insurance

policies (Lawyers Title Guaranty Fund v. United

States, 5th Cir. 1975, 508 F.2d 1), and the commis-

sions of life insurance salesmen (North American

Life and Casualty Co. v. Commissioner, 8th Cir,

1975, 533 P.2d 1046).

The Commissioner traditionally argues that

income and related expense should be coordinated,

and the Courts traditionally agree. In Commis-

sioner v. Standard Life & Accident Ins. Co. (1977)

___ U.S. ___, 97 S.Ct. 2523, 2529, this Court stated:

"In a sense the case presents a question of

timing. Respondent claims the right to

treat unpaid premiums as creating

reserves, and therefore a tax deduction,

in one year, but wishes not to recognize the

8.

unfavorable tax consequences of increased

'assets' and 'premium income' until the

year in which the premiums are actually

paid. As the Government forcefully

argues, the respondent's position lacks

symmetry and the lack thereof redounds

entirely to its benefit."

The Courts have consistently held that where

uncollected income is accrued, commissions payable

from that income, contingent only on collection of

the sales price, may likewise be accrued.

W. S. Badcock Corp. v. Commissioner, supra;

Lawyers Title Guaranty Fund v. United States,

supra; Great Commonwealth Life Insurance Co.

v. United States (5th Cir. 1974) 491 F.2d 109;

Franklin Life Insurance Co. v. United States

(7th Cir. 1968) 399 F.2d 757, c.d. 393 U.S. 1118;

Federal Life Insurance Co. v. United States (7th

Cir, 1975) 527 F.2d 1096.

In North American Life & Casualty Co. v.

Commissioner (8th Cir. 1976) 533 F.2d 1046, the

Court approved the rationale of the Tax Court

(63 T.C. 373):

Upon receipt of premiums, it is clear

that a liability to pay commissions arises,

Assumption of receipt of premiums

necessarily requires recognition of the

concomitant liabilities, for the petitioner

cannot receive premiums without incurring

corresponding commission expenses.

Both the accrual of income and deduction of

commissions are subject to the same contin-

gency, that is, the receipt of the premiums.

9.

Respondent [the Commissioner] cannot ignore the

contingency in requiring accrual of income

yet assert such contingency in determining

the accrual of related deductions.'' Emphasis

per Appellate Court, 533 F.2d, at 1050.

The Court added: "Once a taxpayer accrues all gross

income that has been deferred, consistency would

mandate that other directly related cost items that

can be determined with reasonable accuracy should

be accrued on the other side of the ledger."

(Emphasis added) 533 F.2d, at 1050-1051.

The import of this case goes well beyond the

accrual of wagering excise taxes, but rather relates

to the accrual of any type of expense that is directly

related to an item of income, such as commissions,

sales expenses, etc. The effect of the Opinion is to

tax in 1967, $269. 319.04 of accrued income, but to

postpone deduction of the offsetting wagering excise

tax of $181,156.01, which tax follows the income as

night follows day. Neither the income nor the

excise tax were determined until the Court issued

its ruling. The legal test for each accrual is

identical - the ''all events’ test. Why, in any

case, should the income be taxed in one year and the

tax deducted in another ?

The trial Court, relying upon Treasury

Regulations, stated:

''We agree with petitioner that the Derby

is entitled to accrue the wagering tax

and, as noted above, have allowed such

accrual. ‘Under an accrual method of

accounting, an expense is deductible for

10,

the taxable year in which all the events

have occurred which determine the fact

of the liability and the amount thereof

can be determined with reasonable

accuracy. * * * Where a deduction is

properly accrued on the basis of a computa-

tion made with reasonable accuracy and the

exact amount is subsequently determined

in a later taxable year, the difference, if

any, between such amounts shall be taken

into account for the later taxable year in

which such determination is made. '

Section 1,461-1(a)(2), Income Tax Regs.

The wagering excise tax accrued as soon

as the Derby took a wager; the only question

is the amount of unreported wagers the

Derby took in 1967. We determine the

amount:of such wagers in this litigation.

On those wagers the excise tax accrued in

1967 and is reflected in our determina-

tion. . . «

"The wagering excise tax is a neces-

sary cost of taking a wager and a necessary

offset to wagering income. Were there

some legitimate question whether the tax

attached and were petitioner seeking to

avoid its payment with respect to admitted

wagers, there would be a dispute within

the meaning of the regulation; all the

necessary events for resolution of the

liability would not have occurred and there

would be no accrual. But here, the

wagering tax clearly attached to the

transaction when it occurred. Despite

the attempted concealment of sorne of the

11,

the transactions, there was never any claim

that the tax did not attach to them. To

construe the regulation under such circum-

stances to place the income and the directly

correlative expense in different taxable

years would be unnecessarily and gratuitously

to move away from the objective or proper

measurement of income. We see no reason

to find that the petitioner's attempted conceal-

ment of part of the income, reprehensible

though it was, constitutes a license to

respondent to force upon the Derby an

accounting method which does not properly

refiect its income. We do not believe

that the Derby may defer accrual of an

associated expense clearly due and payable,

any more than it can defer accrual of the

corresponding gross income, merely

because petitioner intended to try to conceal

the transactions. We are cited to, and find,

no authority holding that attempted conceal-

ment of a transaction creates a 'dispute'

within the meaning of the regulation, and we

decline to so hold,"

CONCLUSION

For the foregoing reasons, this Petition for

a Writ of Certiorari should be granted.

Respectfully submitted,

BRUCE I. HOCHMAN and

HARVEY D. TACK

Attorneys tor Petitioners

12.

APPENDIX A

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

HARRY GORDON and GERALDINE )

GORDON, )Nos. 75-

Petitioners-Appellants-)2567 and

Cross-Appellees,)75-2960

Vv. )

)

COMMISSIONER OF INTERNAL )

REVENUE, ) OPINION

Respondent-Appellee-_ )

Cross-Appellant. )

On Appeals from the Decision of the

United States Tax Court.

Before CUMMINGS,* HUSTEDLER and KENNEDY,

Circuit Judges. PER CURIAM:

The petitioners reside in Las Vegas,

Nevada, and timely filed their 1967 federal in-

come tax joint return with the district director

of Internal Revenue at Reno, Nevada. In this

opinion, we refer only to petitioner Harry Gordon

because his wife Geraldine is involved only to the

extent of the joint return.

x

The Honorable Walter J. Cummings, United

States Circuit Judge, Seventh Circuit is sitting

by designation.

A-1

The Commissioner of Internal Revenue

determined a $177,472.60 deficiency plus a

$88,736.70 civil fraud penalty as to petitioner's

1967 income tax return. However, the tax court

reduced the deficiency to $38,577.60 and refused

to approve a fraud penalty. Turning aside assert-

ex Fourth and Fifth Amendment claims, the court

also refused to suppress evidence seized pursuant

to a search warrant during a raid by the Internal

Revenue agents on the Derby Turf Club, a licensed

horse-race and sports bookmaking establishment

in which petitioner was an 80 per cent partner.

With modifications accepted by the Commissioner,

the tax court approved his determination of the

Derby's unreported net income derived from

projections based on wagering tickets seized in

the raid. The court applied the profit percentages

of the Derby on reported wagers to the amounts of

gross wagers, determined by extrapolation, in

order to develop gross profit figures for the Derby.

Petitioner has appealed from these rulings.

The tax court permitted the Derby to

accrue and deduct from 1967 income its liability

under 26 U.S.C. § 4401(a) for federal wagering

excise taxes due and then unpaid on the additional

amount of the 1967 wagers determined in the tax

court proceedings. It also held that the Com-

missioner failed to carry his burden of proving

that petitioner's underpayment of income tax was

due to fraud. The Government has cross-appealed

from these adverse rulings.

The issues are fully developed in the tax

court's amended opinion reported at 63 T.C. 51

(1974) and 63 T.C. 501 (1975). Except in one

A-2

respect (discussed infra), we adopt that opinion

as our own. We need only briefly comment on

these issues in our opinion here.

After the tax court rendered its opinion,

the Supreme Court decided Andresen v. Maryland,

427 U.S. 463, which virtually destroys petitioner's

claim that the evidence upon which the Commissioner's

deficiency determination was based should have been

suppressed because it was obtained in violation of

the Fourth Amendment and which, as petitioner

concedes, entirely defeats his Fifth Amendment

claim. To the extent that petitioner's Fourth

Amendment suppression contentions is/are not

answered in Andresen, the tax court satisfactorily

demonstrated that the warrant was not overbroad

either in detailing the place to be searched or the

items to be seized, and that the raiding party did

not seize items which the warrant did not authorize

them to seize (63 T.C. at 63-69).

In order to estimate the 1967 gross receipts

of the Derby, the Commissioner extrapolated the

amount of unreported wagers from the day of the

raid over the preceding nine months and added that

figure to the wagers the Derby had reported for the

year. Petitioner attacks this methodology as arbi-

trary and capricious. However, a somewhat

similar extrapolation of wagering data was used to

assess wagering taxes in United States v. Janis,

428 U.S. 433, 437, and to assess income taxes in

Gerado v. Commissioner, 552 F.2d 549 (3rd Cir.

1/

1977). _—iIn light of the propriety of similar

methodologies for generating the amount of unre-

ported wager income by extrapolation and upon

our study of the specific methodology used by the

tax court here, we hold that petitioner has not

made the required showing that the tax court's

factual findings were clearly erroneous. Paxton

v. Commissioner, 520 F.2d 923, 925 (9th Cir.

1975), certiorari denied, 423 U.S. 1016.

The Derby was on an accrual method of

accounting. In its opinion, the tax court does not

satisfactorily explain why petitioner was permitted

to accrue the 10% wagering tax imposed under

26 U.S.C. § 4401(a) and deduct it as an ordinary

and necessary business expense under 26 U.S.C.

§ 162 in 1967. These excise taxes were paid

under protest after the tax court's March 14, 1975,

decision thatthere was a deficiency in income tax

for 1967 in the amount of $38,577.60. As petitioner

has advised us in his reply brief (at p. 5), he intend-

ed to file a refund claim if we had reduced the tax

court's computation of unreported gross wagers

1/

~ See also Mitchell v. Commissioner, 416 F.2d

10, 102-103 (7th Cir. 1969), certiorari denied,

396 U.S. 1060; Hamilton v. United States, 309 F.

Supp. 468, 472-473 (S.D. N. Y. 1969), affirmed,

429 F.2d 427 (2d Cir. 1970), certiorari denied,

401 U.S. 913; Mersel v. United States, 67-2

U.S. Tax Cas. para. 15,756 (S.D. Fla. 1967),

affirmed (except as to delinquency penalties), 420

F.2d 517 (Sth Cir. 1970).

A-4

accepted by the Derby. Since the amount of peti-

tioner's liability for the excise tax was not finally

accured until our decision passed on the tax court's

computation of the Derby's unreported gross wagers,

the deduction for the excise taxes cannot be permitted

to offset the unreported 1967 income. United States

v. Consolidated Edison Co. , 366 U.S. 380, 386;

Security Mills Co. v. Commissioner, 321 U.S. 281,

284.

We agree with the tax court that the Com-

missioner did not carry his heavy burden of proving

petitioner's fraudulent conduct by clear and con-

vincing evidence. Especially in an area involving

credibility findings, the tax court's conclusion should

not be upset absent a patent abuse of discretion.

Since the Commissioner fails to make out such an

abuse, a civil fraud penalty under 26 U.S.C.

§ 6653(b) may not be imposed.

The decision of the tax court is reversed

and remanded with respect to allowing accrual and

1967 income deduction of additional excise taxes

on the unreported wagers of $756,937.60 on the

Derby's horse-book operation and of $1, 054, 622, 54

on its sport-book operation for the first nine months

of 1967. In all other respects the decision is

affirmed,

GORDON v. COMMISSIONER OF

INTERNAL REVENUE,

Nos. 75-2567 and 75-2960

KENNEDY, Circuit Judge, concurring in part

and dissenting in part:

I concur in the majority's opinion except

insofar as it states that the wagering excise tax

on the receipts in question did not constitute an

accrued liability. As to that holding, I respect-

fully dissent.

The cases cited by the majority, United States

v. Consolicated Edison Co., 366 U.S. 380 (1961)

and Security Mills Co. v. Commissioner, 321 U.S.

281 (1944) are inapposite to the problem presented

here. The Consolidated Edison case addressed the

question whether a property tax liability was properly

accrued as a deduction in computing federal tax,

even though the taxpayer was contesting the property

tax in a separate state proceeding. The Security

Mills case considered whether the taxpayer could

deduct as an accrued liability an agricultural

processing tax, notwithstanding that it was con-

testing the constitutionality of that tax in court

proceedings.

In the case before us, the taxpayer has not

contested his liability for the excise tax, except

in the general sense that he asserts that he is not

liable for the income tax. He does so by denying

that certain transactions occurred. Once it has

been established that the taxpayer earned a certain

amount of unreported income for the taxable year

in question, neither the Internal Revenue Service

A-6

nor the taxpayer would dispute that the excise tax

is due. Further, the amount of excise tax is fixed

to a certainty by the identical determination that

establishes the amount of unreported income. The

taxpayer's liability for the excise tax becomes

established by reason of this and not some other

proceeding. As the Tax Courtobserved: "Ina

situation such as this, where a deduction is a direct

function of the income, in one-to-one correspondence

with it, proper matching of income and expense

require that both are taken in the same year,’

63 T.C. at 505. I would affirm the tax court's

holding allowing the excise tax as a properly

accrued deduction for the tax year in question.

/s/ Anthony M, Kennedy

United States Circuit Judge

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

HARRY GORDON and

)

GERALDINE GORDON, ) Nos.

) 75-2567

Petitioners-Appellants- )

Cross-Appellees, ) 75-2960

)

Vv. )

)

COMMISSIONER OF INTERNAL )

REVENUE, )

¥ )

Respondent-Appellee-_ )

Cross-Appellant. JORDER

)

Before: CUMMINGS,* HUFSTEDLER, and

KENNEDY, Circuit Judges.

The panelas constituted in the above case

has voted to deny the petition for rehearing.

Judges Hufstedler and Kennedy have voted to re-

ject the suggestion for a rehearing en banc.

Judge Cummings recommended against en banc

reconsideration.

* Honorable Walter J. Cummings, United States

Circuit Judge, Seventh Circuit, sitting by designation.

B-1

The full court has been advised of the

suggestion for an en banc hearing, and no judge

of the court has requested a vote on the suggestion

for rehearing en banc. Fed. R. App. P. 35(b).

The petition for rehearing is denied ana

the suggestion for a rehearing en banc is rejected.

10/6/77