Opposition — OTM Corp. v. United States

In the Supreme Court of the United States

‘ OCTOBER TERM 1978

OTM CorPORATION, PETITIONER

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

IN OPPOSITION

WapveE H. McCree, Jr.

Solicitor General

Department of Justice

Washington, D.C. 20530

In the Supreme Court of the Wnited States

OcTOBER TERM, 1978

No. 78-442

OTM CorPoRATION, PETITIONER

A

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

IN OPPOSITION

Petitioner seeks review of the decision of both courts

below that amounts that it paid to 2 related corporation,

Texas Industrial Equipment Rental Co. (TIERCO),' for

the rental of equipment are not deductible for federal

income tax purposes to the extent they exceeded the fair

rental value of the equipment. Petitioner does not deny

that the rentals in question in fact exceeded fair value

(Pet. App. 3-A to 4-A). It nevertheless contends that the

Commissioner is required to accept deductions for

payments made to related parties unless he invokes his

authority under Section 482 of the Internal Revenue Code

of 1954 to allocate income or deductions between such

related entities and makes the “correlative adjustments”

_ ‘J.C. Bradshaw and Kenneth Bradshaw owned controlling interests

in both corporations (Pet. App. 3-A).

(1)

tr

provided by Treasury Regulations on Income Tax,

Section 1.482-I(d)(2) (26 C.F.R.). Under those provisions,

Whenever adjustments are made to the income of one

member of a group of commonly-controlled taxpayers

under Section 482, “appropriate correlative adjustments”

to the income of other members of the controlled group

may also be required. Here, however, the Commissioner

did not invoke his authority under Section 482, and

theretore did not make any correlative adjustments to

IIERCO’s income. Nor did TIERCO seek a reduction of

its own income tor the period in question by filing an

amended return or claim tor refund as it might have done

within the applicable statutory period of limitations (Pet.

App. 4-A).

Petitioner argues (Pet. 17-22) that the Commissioner's

failure to proceed under Section 482 and to make a

correlative adjustment to TIERCO’s gross income

precludes disallowance of the claimed deductions. But the

scope of the Commissioner's authority under Section 482

is irrelevant to the question presented — whether petitioner

is entitled to a rental deduction in the first instance under

Section 162. As this Court has stated, “a taxpayer seeking

a deduction must be able to point to an applicable statute

and show that he comes within its terms.” New Colonial

lee Co. \. Helvering, 292 U.S. 435, 440 (1934). Petitioner

has failed to do so.

It is well established that a business expense can be

deducted under Section 162 only if it is “reasonable in

amount.” Tulia Feedlot, Inc. v. United States, 513 F. 2d

800, 804 (Sth Cir.), cert. denied, 423 U.S. 947 (1975). The

requirements of Section 162 apply alike to taxpayers that

are members of commonly-controlled groups and to those

that are not. Where, as here, a taxpayer seeks to deduct a

payment that is unreasonable in amount or otherwise fails

-—_—-——*

wa

to meet the requirements of Section 162, the deduction

may be dis allowed for that reason alone, without resort to

the Commissioner's authority under Section 482, even

though the payment is to a related entity, Seo Julia

Feedlot, supra, 513 F. 2d at 806, Brown Printing Co. Vv.

Commissioner, 255 F. 2d 436, 438-440 (Sth Cir. 1958).

Since it is undisputed that the rentals in this case were

excessive, the deductions in question are not permitted

under Section 162, and were properly disallowed.

Moreover, petitioner's argument that the Commissioner

is required to proceed under Section 482 in the case of

deductions for payments to related taxpayers finds no

support either in the statutory language or in the case law.

Indeed, as the district court observed (Pet. App. 8-A), this

contention is squarely contrary to Section 1.482-1(b)(3) of

the Regulations, which specifically provides that, “Section

482 grants no right to a controlled taxpayer to apply its

provisions at will, nor does it grant any right to compel

the district director to apply such provisions.”

It is therefore respectfully submitted that the petition

for a writ of certiorari should be denied.

WADE H. McCreek, Jr.

Solicitor General

NOVEMBER 1978

DOJ.1978-11