Appendix — OTM Corp. v. United States

f Supreme Court, U. S,

FILED

\

SEp 141978

IN THE

MICHABL RODAK, JR., CLERK

SUPREME COURT OF THE UNITED ST=Tes——

NO. (8-4 42

OTM CORPORATION,

Petitioner,

Vs.

UNITED STATES OF AMERICA,

Respondent.

PETITIONER'S APPENDICE FOR ITS

WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

Dougal C. Pope

Attorney for Petitioner

2317 Bissonnet

Houston, Texas 77005

(713) 527-9325

APPENDIX A

INDEX

Pages IN THE UNITED STATES DISTRICT COURT FOR THE

Findings of Fact and Conclusions SOUTHERN DISTRICT OF TEXAS

of Law of the Trial Court

dated September 30, 1977 l-A = OA HOUSTON DIVISION

Judgment of the Trial Court OTM CORPORATION, :

dated September 30, 1977 10-A - 11-A .

Plaintitft :

Opinion of the Fifth Circuit .

dated May 8, 1978 1-B - 11-B vs. : CIVIL NO. 70-H-145

Order Overruling Motion for UNITED STATES OF AMERICA,:

Rehearing in the Fifth :

Circuit dated June 27, 1978 12-B Defendant.:

Statutes Involved inf s Sef

FINDINGS OF FACT

AND CONCLUSIONS OF LAW

This matter came on to be heard before

this Court sitting without a jury, and the

parties having by their pleadings and by

stipulations established the evidence,

this Court enters its findings of fact and

conclusions of law:

Findings of Fact

1. This is a suit brought by the

plaintiff, OTM Corporation, against the

United States of America, for a refund of

federal income taxes paid by OTM for its

fiscal years ended September 30, 1955,

through September 30, 1958, in the

principal amount of $53,646.44, plus a

negligence penalty, assessed interest and

statutory interest thereon.

2. Plaintiff is a corporation incor-

porated under the laws of the State of

Texas with its place of business at

Houston, Texas. Defendant is the United

States of America.

3. Originally, this case involved a

number of issues concerning rental deduc-

tions claimed by the plaintiff of equip-

ment which it rented from an associated

company, Texas Industrial Equipment Rental

Co. (TIERCO), and the deductibility of

various miscellanous items. The plaintiff

has conceded that the Government properly

assessed and collected the tax with respect

to all of the miscellaneous items and they

are no longer in issue in this action.

. > a Rb RYE " 3

__..

only the question of the proper rental

deduction remains for consideration by the

Court.

4. During the years at issue, the

plaintiff, OTM, was owned 51 percent by

J. C. Bradshaw, 48 percent by Kenneth

Bradshaw, his adult son, and the remainder

by others. TIERCO was owned one-third by

J. C. Bradshaw, one-third by Kenneth Brad-

shaw, and one-third by James Hull, an

independent C.P.A., who was the auditor

for OTM.

5. During the years at issue, TIERCO

rented equipment to OTM. The Government,

following an audit of OTM's income tax

return, disallowed a portion of the

rental as a business deduction pursuant

to Section 162 of the Internal Revenue

Code of 1954 on ten of the items of equip-

ment. The parties have agreed that the

reasonable rental value of those items of

the equipment in dispute was such that a

refund of federal tax in the amount of

$17,474, plus assessed interest, was

proper and appropriate. This Court has

examined the record and adopts the stipu-

lation of the parties with respect to the

reasonable rental value.

6. At the same time that the Govern-

ment denied a deduction for excess rentals

paid by OTM to TIERCO, it did not reduce

TIERCO's income by an equal sum. At the

time the assessment was made against OTM,

the statute of limitations for assessment

against and claims for refund by TIERCO

had not yet run. The Government did not

voluntarily reduce TIERCO's rental income

and TIERCO took no legal action to claim

a refund of amounts previously paid by it

as taxes on rental income. Statutes of

limitation on assessment against and

claims for refund by TIERCO have, of

course, since elapsed.

7. TIERCO paid some $17,474. in

income tax by virtue of its receipt of

income equal to the disallowed deductions

for excessive rental expense to OTM.

8. The parties have agreed that the

negligence penalty of five percent assessed

against OTM will apply; however, the neg-

ligence penalty will not be applied to

amounts refunded to OTM pursuant to the

Stipulation of the parties. Accordingly,

with respect to the $17,474. to be refunded

to the plaintiff pursuant to the stipula-

tion of the parties, there will also be a

refund of $654.00 in negligence penalty.

9. Any conclusion of law deemed to be

a finding of fact is hereby adopted as the

same.

Conclusions of Law

1. This Court has jurisdiction of the

subject matter and of the parties. Venue

is proper and this lawsuit is properly

brought in this Court.

2. Following the stipulation of the

parties on the reasonable rental value of

the equipment and the concession by the

plaintiff of the miscellaneous issues,

there remains but one issue for decision

by the Court: Whether the failure of the

Government to reduce TIERCO's income by an

amount equal to the disallowed deductions

for OTM somehow prohibits the Government

from disallowing those deductions to OTM.

This issue requires brief reference to

Sections 162 and 482 of the Internal

Revenue Code of 1954 (26 U.S.C.).

3. Section 162 allows a business to

deduct the ordinary and necessary costs of

conducting its business. Tulia Feedlot,

Inc. v. United States, 513 F.2d 800 (C.A.

5, 1975), cert. denied, 423 U.S. 947 (1975).

With respect to rentals, only those sums

which are reasonable in amount are allowed

as a Section 162 deduction. Brown Printing

Co. v. Commissioner, 255 F.2d 436 (C.A. 5,

1958). It was pursuant to these princi-

ples that the Government, in its assessment,

disallowed a portion of the deductions

claimed by OTM for rental expense.

4. In a case involving two businesses

which are controlled by the same interests,

the Government has an alternative weapon--

Section 482 of the Internal Revenue Code

of 1954--which allows it to allocate income

and deductions amongst such businesses.

The Government did not purport to use Sec-

tion 482 in this case, although it might

have done so. In cases involving Section

482 the Government is required to make a

correlative adjustment. That is, if it

were to disallow deductions to OTM, it

would also have to reduce TIERCO's rental

income by a like amount. Treasury Regu-

lations on Income Tax (1954 Code),

§1.482-1(d)(2) (26 C.F.R.). Here, OTM

claims that, because the Government did

not reduce TIERCO's income, it is somehow

estopped from denying the deduction to OTM

on the basis of Section 162.

5. The law provides that Section 482

may be used only at the instance of the

Government--it may not be claimed by a

taxpayer nor can the Government be com-

pelled to use the principles of Section

482 in a given circumstance. Treasury

Regulations § 1.482-1(b) (3).

6. Accordingly, because the Govern-

ment did not use Section 482 and cannot be

compelled to, OTM cannot complain that

TIERCO's income was not reduced, i.e., no

correlative adjustment was made. The

Government's assessment was made solely by

virtue of the principles of Section 162

which do not require a correlative adjust-

ment. In such a case, TIERCO might have

(but did not choose to) filed a suit for

a refund of taxes. If TIERCO had chosen

to do so, its suit might well have been

joined with that of OTM in order to obtain

complete adjudication. However, there is

no requirement that the Government adjust

TIERCO's income under the principles of

Section 162; it was up to TIERCO to do

something about it.

7. Accordingly, this Court concludes

that OTM's point is not well taken. The

Government, having made its assessment

pursuant to Section 162 is entitled to

prevail as to the disallowance of that

portion of the rental expense over and

above the stipulated fair rental value.

8. If any finding of fact is deemed

to be a conclusion of law, it is hereby

adopted as the same.

The parties are hereby directed to

prepare a judgment in conformity with these

findings of fact and conclusions of law and

submit them to the Court for entry.

Done at Houston, Texas, this 30th day

of September, 1977.

/s/ Woodrow Seals

UNITED STATES DISTRICT JUDGE

IN THE UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

OTM CORPORATION,

Plaintiff :

~

VS.

UNITED STATES OF AMERICA,

Defendant

JUDGMENT

This matter having come on to be heard

before the Court, sitting without a jury,

and the Court having considered the stip-

ulation of the parties, the pleadings, and

the evidence, and having rendered its find-

ings of fact and conclusions of law, in

accordance therewith it is hereby

ORDERED, ADJUDGED AND DECREED that the

plaintiff, OTM, do have and recover of the

defendant, United States of America, for

its fiscal years ended September 30, 1955,

through September 30, 1958, the sum of

$45,754., consisting of $17,474. in prin-

- 10-A

CIVIL NO. 70-H-145

cipal, penalty in the amount of $654, asess-

ed interest in the amount of $2,189, and

statutory interest thereon in the amount of

$25,440 to September 21, 1977, with statu-

tory interest thereafter pursuant to law,

and with each party to bear its own costs.

Done at Houston, Texas, this 30th day

of September, 1977.

/s/ Woodrow Seals

UNITED STATES DISTRICT JUDGE

APPROVED AS TO FORM ONLY:

/s/ Dougal C. Pope

DOUGAL C. POPE

Pope and Waits

2317 Bissonnet

Houston, Texas 77005

ATTORNEY FOR PLAINTIFF

JAMES R. GOUGH

United States Attorney

By: /s/ Howard A. Weinberger

HOWARD A. WEINGERGER

Attorney, Tax Division

Department of Justice

Room 5B27, 1100 Commerce Street

Dallas, Texas 75242

(214) 749-1251

ATTORNEY FOR DEFENDANT

11-A

APPENDIX B

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. 77-3200

Summary Calendar*

OTM CORPORATION,

Plaintiff-Appellant,

versus

UNITED STATES OF AMERICA,

De fendant-Appellee.

(May 8, 1978)

Appeal from the United States District Court

for the Southern District of Texas

Before RONEY, GEE, AND FAY, Circuit

Judges

PER CURIAM: The judgment is affirmed on the

basis of the Findings of Facts and Conclusions

of Law of the District Court annexed hereto.

Appendix to follow

*Rule 18, 5 Cir.; See Isbell Enterprises,

Inc. v. Citizens Casualty Co. of New York,

et @i, 53 Cir., 1970, 431. 7.20 409, part l.

OTM CORPORATION VS. UNITED STATES

Appendix

IN THE UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

OTM CORPORATION,

Plaintiff,:

vs. , CIVIL NO. 70-H-145

UNITED STATES OF AMERICA,

Defendant.:

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

This matter came on to be heard before

this Court sitting without a jury, and the

parties having by their pleadings and by

stipulations established the evidence, this

Court enters its findings of fact and con-

clusions of law:

Findings of Fact

1. This is a suit brought by the

plaintiff, OTM Corporation, against the

United States of America, for a refund of

federal income taxes paid by OTM for its

fiscal years ended September 30, 1955,

through September 30, 1958, in the princi-

pal amount of $53,646.44, plus a negligence

penalty, assessed interest and statutory

interest thereon.

ee

2. Plaintiff is a corporation incor-

porated under the laws of the State of

Texas with its place of business at Hous-

ton, Texas. Defendant is the United

States of America.

3. Originally, this case involved a

number of issues concerning rental deduc-

tions claimed by the plaintiff of equip-

ment which it had rented from an asso-

ciated company, Texas Industrial Equipment

Rental Co. (TIERCO), and the deductibility

of various miscellaneous items. The

plaintiff has conceded that the Government

property assessed and collected the tax

it lets De

with respect to all of the miscellaneous

items and they are no longer in issue in

this action. Only the question of the

proper rental deduction remains for con-

sideration by the Court.

4. During the years at issue, the

plaintiff, OTM, was owned 51 percent by

J. C. Bradshaw, 48 percent by Kenneth

Bradshaw, his adult son, and the remainder

by others. TIERCO was owned one-third by

J. C. Bradshaw, one-third by Kenneth Brad-

shaw, and one-third by James Hull, an

independent C.P.A., who was the auditor

for OTM.

5. During the years at issue, TIERCO

rented equipment to OTM. The Government,

following an audit of OTM's income tax

return, disallowed a portion of the rental

as a business deduction pursuant Section

162 of the Internal Revenue Code of 1954

on ten of the items of equipment. The

parties have agreed that the reasonable

rental value of those items of the equip-

ment in dispute was such that a refund of

federal tax in the amount of $17,474,

plus assessed interest, was proper and

appropriate. This Court has examined the

record and adopts the stipulation of the

parties with respect to the reasonable

rental value.

6. At the same time that the Govern-

ment denied a deduction for excess rentals

paid by OTM to TIERCO, it did not reduce

TIERCO's income by an equal sum. At the

time the assessment was made against OTM,

the statute of limitations for assessment

against and claims for refund by TIERCO

had not yet run. The Government did not

voluntarily reduce TIERCO's rental income

and TIERCO took no legal action to claim

a refund of amounts previously paid by it

as taxes on rental income. Statutes of

limitation on assessment against and claims

for refund by TIERCO have, of course, since

elapsed.

7. #TIERCO paid some $17,474 in income

tax by virtue of its receipt of income

equal to the disallowed deductions for

excessive rental expense to OTM.

8. The parties have agreed that the

negligence penalty of five percent assessed

against OTM will apply; however, the neg-

ligence penalty will not be applied to

amounts refunded to OTM pursuant to the

Stipulation of the parties. Accordingly,

with respect to the $17,474 to be refunded

to the plaintiff pursuant to the stipula-

tion of the parties, there will also be a

refund of $654.00 in negligence penalty.

9. Any conclusion of law deemed to

be a finding of fact is hereby adopted as

the same.

Conclusions of Law

1. This Court has jurisdiction of the

subject matter and of the parties. Venue

is proper and this lawsuit is properly

brought in this Court.

2. Following the stipulation of the

parties on the reasonable rental value of

the equipment and the concession by the

plaintiff of the miscellaneous issues,

there remains but one issue for decision

by the Court: Whether the failure of the

Government to reduce TIERCO's income by an

amount equal to the disallowed deductions

for OTM somehow prohibits the Government

from disallowing those deductions to OTM.

This issue requires brief reference to

Sections 162 and 482 of the Internal Rev-

enue Code of 1954 (26 U.S.C.).

3. Section 162 allows a business to

deduct the ordinary and necessary costs of

conducting its business. Tulia Feedlot,

Inc. v. United States, 513 F.2d 800 (C.A.

5, 1975), cert. denied, 423 U.S. 947, 96

S.Ct. 362, 46 L.Ed.2da 281 (1975). With

respect to rentals, only those sums which

are reasonable in amount are allowed as a

Section 162 deduction. Brown Printing Co.

v. Commissioner, 255 F.2d 436 (C.A. 5,

1958). It was pursuant to these principles

that the Government, in its assessment,

disallowed a portion of the deduction

claimed by OTM for rental expense.

4. In a case involving two businesses

which are controlled by the same interests,

the Government has an alternative weapon--

Sectign 482 of the Internal Revenue Code

of 1954--which allows it to allocate income

and deductions amongst such businesses.

The Government did not purport to use Sec-

tion 482 in this case, although it might

have done so. In cases involving Section

482 the Government is required to make a

correlative adjustment. That is, if it

were to disallow deductions to OTM, it

would also have to reduce TIERCO's rental

income by a like amount. Treasury Regula-

tions on Income Tax (1954 Code), §1.482-

1(d) (2) (26 C.F.R.). Here, OTM claims that,

because the Government did not reduce

TIERCO's income, it is somehow estopped

from denying the deductions to OTM on the

basis of Section 162.

5. The law provides that Section 482

may be used only at the instance of the

Government--it may not be claimed by a

taxpayer nor can the Government be com-

pelled to use the principles of Section

482 in a given circumstance. Treasury

Regulations §1.482-1(b) (3).

6. Accordingly, because the Govern-

ment did not use Section 482 and cannot

be compelled to, OTM cannot complain that

TIERCO's income was not reduced, i. e.,

no correlative adjustment was made. The

Government's assessment was made solely by

virtue of the principles of Section 162

which do not require a correlative adjust-

ment. In such a case, TIERCO might have

(but did not choose to) filed a suit for a

refund of taxes. If TIERCO had chosen to

do so, its suit might well have been

joined with that of OTM in order to obtain

complete adjudication. However, there is

no requirement that the Government adjust

TIERCO's income under the principles of

Section 162; it was up to TIERCO to do

something about it.

7. Accordingly, this Court concludes

that OTM's point is not well taken. The

Government, having made its assessment

pursuant to Section 162 is entitled to

prevail as to the disallowance of that

portion of the rental expense over and

above the stipulated fair rental value.

8. If any finding of fact is deemed

to be a conclusion of law, it is hereby

adopted as the same.

The parties are hereby directed to pre-

pare a judgment in conformity with these

findings of fact and conclusions of law and

submit them to the Court for entry.

Done at Houston, Texas, this 30 day of

10-B

September,

1977.

/s/ Woodrow Seals

UNITED STATES DISTRICT JUDGE

11-B

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. S77-3200

OTM CORPORATION,

Plaintiff-Appellant,

versus

UNITED STATES OF AMERICA,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Texas

(June 27, 1978)

Before RONEY, GEE, AND FAY, Circuit Judges

BY THE COURT:

It is ordered that appellant's motion

for leave to file petition for rehearing

out of time is GRANTED and, upon consider-

ation, the petition for rehearing is denied.

/s PHR

6/8/78 Js (46

/s VF

12-B

APPENDIX C

Statutes Involved

26 U.S.C. 482 provides:

Sec. 482. Allocation of income and de-

ductions among taxpayers.

In any case of two or more organiza-

tions, trades, or businesses (whether

or not incorporated, whether or not

organized in the United States, and

whether or not affiliated) owned or

controlled directly or indirectly by

the same interests, the Secretary may

distribute, apportion, or allocate

gross income, deductions, credits, or

allowances between or among such organ-

izations, trades, or businesses, if he

determines that such distributions,

apportionment, or allocation is nec-

essary in order to prevent evasion of

taxes or clearly to reflect the income

of any of such organizations, trades,

or businesses.

26 U.S.C. 162 provides:

Sec. 162. Trade or business expenses.

(a) In general.--There shall be

allowed as a deduction all the ordinary

and necessary expenses paid or incurred

during the taxable year in carrying on

any trade or business, including--

* * * *

(3) rentais or other payments re-

quired to be made as a condition to the

continued use or possession, for pur-

poses of the trade or business, of pro-

Reg.

perty to which the taxpayer has not

taken cr is not taking title or in

which he has no equity.

* * * *

Regulations Involved

§1.482-1(b) (1) provides:

(b) Scope and purpose.

(1) The purpose of section 482 is to

place a controlled taxpayer on a tax

parity with an uncontrolled taxpayer,

by determining, according to the stan-

dard of an uncontrolled taxpayer, the

true taxable income from the property

and business of a controlled taxpayer.

The interests controlling a group of

controlled taxpayers are assumed to

have complete power to cause each con-

trolled taxpayer so to conduct its

affairs that its transactions and

accounting records truly reflect the

taxable income from the property and

business of each of the controlled

taxpayers. If, however, this has not

been done, and the taxable incomes are

thereby understated, the district

director shall intervene, and, by

making such distributions, apportion-

ments, Or allocations as he may deem

necessary of gross income, deductions,

credits, or allowances, or of any item

or element affectly taxable income,

between or among the controlled tax-

payers constituting the group, shall

determine the true taxable income of

each controlled taxpayer. The standard

to be applied in every case is that of

an uncontrolled taxpayer dealing at

arm's length with another uncontrolled

taxpayer.

Reg. §1.482-1(b) (2) provides:

(2) Whenever the district director makes

adjustments to the income of one member

of a group of controlled taxpayers (such

adjustments being referred to in this

paragraph as "primary" adjustments) he

shall also make appropriate correlative

adjustments to the income of any other

member of the group involved in the

allocation....

Reg. §1.482-2(c) provides:

(c) Use of tangible property.

(1) General rule.

Where possession, use, or occu-

pancy of tangible property owned or

leased by one member of a group of

controlled entities (referred to in

this paragraph as the owner) is trans-

ferred by lease or other arrangement

to another member of such group

(referred to in this paragraph as the

user) without charge or at a charge

which is not equal to an arm's length

rental charge (as defined in sub-

division (i) of subparagraph (2) of

this paragraph), the district director

may make appropriate allocations to

properly reflect such arm's length

charge....

* * * *

(2) Arm's length charge. |

(i) For the purposes of this para-

graph, an arm's length rental charge

shall be the amount of rent which was

charged, or would have been charged for

the use of the same or similar property,

during the time it was in use, in in-

Reg.

Reg.

dependent transactions with or between

unrelated parties under similar circum-

stances considering the period and lo-

cation of the use, the owner's invest-

ment in the property or rent paid for

the property....

§1.482-1l(a) (6) provides:

The term "true taxable income" means,

in the case of a controlled taxpayer,

the taxable income (or, as the case

may be, any item or element affecting

taxable income) which would have re-

sulted to the controlled taxpayer,

had it in the conduct of its affairs

(or, as the case may be, in the parti-

cular contract, transaction, arrange-

ment, or other act) dealt with the

other member or members of the group

at arm's length. It does not mean the

income, the deductions, the credits,

the allowances, or the item or elements

of income, deductions, credits, or

allowances, resulting to the controlled

taxpayer by reason of the particular

contract, transaction, or arrangement,

the controlled taxpayer, or the interests

controlling it, chose to make (even

though such contract, transaction, or

arrangement be legally binding upon the

parties thereto).

§1.482-l(c) provides:

Application. Transactions between one

controlled taxpayer and another will be

subjected to special scrutiny to .as-

certain whether the common control is

being used to reduce, avoid, or escape

taxes. In determining the true taxable

income of a controlled taxpayer, the

district director is not restricted

to the case of improper accounting, to

the case of a fraudulent, colorable,

Or sham transaction, or to the case of

a device designed to reduce or avoid

tax by shifting or distorting income,

deductions, credits, or allowances.

The authority to determine true taxable

income extends to any case in which

either by inadvertence or design the

taxable income, in whole or in part,

of a controlled taxpayer, is other

than it would have been had the tax-

payer in the conduct of his affairs

been an uncontrolled taxpayer dealing

at arm's length with another controlled

taxpayer.

— es