# Petition — Gordon v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1978
- **Citation:** 435 U.S. 924

## Text

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

---

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