Record and brief — Merchants Refrigerating Co. v. United States

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FEB 12 1999

No.

ALExan

IN THE

Supreme Court of the United States

OCTOBER TERM, 1981

MERCHANTS REFRIGERATING COMPANY

OF CALIFORNIA,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ALAN ROBERT GEIST

Attorney for Petitioner

235 Mamaroneck Avenue

White Piains, N.Y. 10605

(914) 428-2880

——

QUESTIONS PRESENTED

I. Did the Court of Appeals err in

refusing to consider a subsection of the

Internal Revenue Code when the entire

section was pleaded in the complaint as

grounds for relief?

II. Did the Court of Appeals err in

refusing to consider whether the peti-

tioner's facilities were "giant refriger-

ators" eligible for the investment cred-

it under 26 U.S.C.A. § 48(a)(1)(A) on the

ground that the point was not raised in

the lower courts, when in fact such

point was raised?

III. Did the Court of Appeals err in

refusing to follow its own precedent of

granting relief provided for by a provis-

ion of the Internal Revenue Code not

raised in the lower court but which

applied to the facts in the case?

IV. Was a conflict created by this

Court of Appeals in not following the

Court of Appeals for the Fourth Circuit,

which reversed the Tax Court because it

failed to apply certain sections of the

Internal Revenue Code applicable to the

facts established in the Tax Court even

though such provisions were not pleaded

in that case?

V. Did the lower court err in findire

that retention of control by the owner

of goods stored in a public facility

changed "fungible goods" into "non-

fungible goods" when there was no such

requirement set forth in the Internal

Revenue Code, Congressional Reports or

in the Regulations of the Commissioner of

Internal Revenue?

VI. Did the lower courts err in

applying such limitations when there was

only one owner storing goods at the

facility?

VII. Did the Court of Appeals err in

applying the "clearly erroneous" rule to

iii

a question of law?

VIII. Did the Court of Appeais err in

not reversing even though it found

error in the Court tlow?

The parties in the District Court and

Court of Appeals were Merchants Refrig-

erating Company of California (Califor-

nia) and the United States. Merchants

Refrigerating of California was a wholly

owned subsidiary of Merchants Refriger-

ating Company (New York) which was a

wholly owned subsidiary of Pet, Incor-

porated (Delaware), which was a wholly

owned subsidiary of I C Industries, Inc.

(Delaware). Title to the facilities in

question was conveyed in October, 1981

to Merchants Refrigerating Company

(Delaware), a wholly owned subsidiary of

Christian Salvesen, Ltd., (United King-

dom). Any refund of taxes hereunder

will inure to the benefit of Pet,

incorporated.

TABLE OF CONTENTS

Questions Presented

Table of Authorities

Opinions Below

Jurisdiction

Statute

Statement of Case

Reasons for Granting the Writ

Be The lower courts should

have considered the entire

applicable provisions of

the Internal Revenue Code.

It. The lower courts refused to

consider a provision of the

Internal Revenue Code

although pleaded.

III. The Circuit Court refused

to follow its own precedents.

IV. The Circuit Court is in

conflict with the Fourth

Circuit.

Vv. The lower courts erred in its

definition of "fungible

goods",

- WwW OY F Ss

VI. Retention of control does

not destroy fungibility. 24

VII. The Circuit Court should

not have applied the

"clearly erroneous" rule. 25

VIII. The Circuit Court should have

reversed after finding error. 29

Conclusion 30

Appendix A = Opinion cof

Circuit Court A-1

Appendix B - Order of Circuit

Court denying

rehearing B-1

Appendix C - Memorandum Decision

of District Court C-1

Appendix D - Judgment of

District Court D=-1

TABLE OF AUTHORITIES

Cases

Ah Pah Redwood v. Commissioner,

251 F. od 103 (9th Cir., 1957) 17,18,20

Allen v. United States, 541

F. od 786 (9th Cir., 1976) 28

Catron v. Commissioner, 50 T.C.

968) 16

Central Citrus Co. v. Commis-

sioner, 56 T.C. 365 (1972) 16,17

Commissioner v. Duberstein,

(1960) 27

Cooper v. Commissioner of

Internal Revenue, 197 F. 2d

r., 1952) 20

Parkside v. Commissioner,

. od 1092 (9th Cir.,1977) 26

Redwood Empire Savings & Loan

Assn. v. commissioner, ooo F.

2d 516, 521 (9th Cir., 1980) 18, 20

Thompson v. Commissioner, 631

F. 3 642 (9th Cir., 1980) 27

United States v. Patrin, 575

: > ?i2 (9th Cir., 1978) 18

United States v. United States

Gypsum Co., 333 U.S. 305 (19®) 28

Statutes

26 U.S.C.A. 38 4, 22

26 U.S.C.A. 48 3,4,15

26 U.S.C.A. 48 (a)(1)(A) 3,15,16,17

ig) end (244) —" 3,4,15

Rule 52 (a) Fed. Rules Civ.

Proc. 28 U.S.C.A. 25

Committee Report

Senate Committee Report

(92d Cong. lst Sess.

Rep. No. 92-437(1971)26) 22

IN THE

SUPREME COURT OF THE UNITED STATES

October Term 1981

No.

oe en wn wo ow ww wn ww nw wn wn wo wo wo oe ee ee x

MERCHANTS REFRIGERATING COMPANY

OF CALIFORNIA,

Petitioner,

- Yeo

UNITED STATES OF AMERICA,

Respondent.

we ee wn wn wn oo ww nw wn no oo oo oe ee ee 4

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUI1

Petitioner prays that a writ of cer-

tiorari issue to review the judgment of

the United States Court of Appeals for

the Ninth Circuit entered in this case

on October 13, 1981.

OPINIONS BELOW

The opinion of the United States Court

of Appeals for the Ninth Circuit

affirming the decision and judgment of

the United States District Court for the

Eastern District of California was made

on October 13, 1981. (659 F.2d 116).

This opinion is included as Appendix A.

The opinion of the United States Dis-

trict Court for the Eastern District of

California granting summary judgment for

the respondent was made March 2, 1979 is

unreported, and is included as Appendix

C. The judgment of the District Court

was entered on April 19, 1979 and is

included as Appendix D.

JURISDICTION

The judgment of the United States Court

of Appeals for the Ninth Circuit was

entered on October 13, 1981, a timely

petition for a rehearing was filed and

an Order denying the petition was filed

November 25, 1981, a copy of which is

included as Appendix B.

This Court has jurisdiction pursuant to

28 u.s.c. § 1254 (1).

STATUTE

The pertinent provisions of the Inter-

nal Revenue Code are 26 U.S.C.A. § 48 (a)

(1) (A) and (B) are as follows:

(a) Section 38 property

(1) In general -- Except as pro-

vided in this subsection, the

term “section 38 property"

means --

(A) tangible personal property

(other than an air conditioning

ar heating unit), or

(B) other tangible property (not

including a building and its

structural components) but

only if such property --

(i) is used as an integral part of

manufacturing, production, or

extraction or of furnishing

transportation, communications,

electrical energy, gas, water,

or sewage disposal services,

OP « « «

(411) constitutes a facility used in

connection with any of the

activities referred to in

clause (i) for the bulk stor-

age of fungible commodities

(including commodities in a

liquid or gaseous state)...

STATEMENT OF THE CASE

In the District Court, petitioner

claimed an investment credit for certain

depreciable property as allowed by 26

U.S.C.A. 38. The District Court found

that such property did not meet the

requirements of 26 U.S.C.A. 48, and

thereby denied such relief. This deci-

sion was affirmed by the Court of Appeals

for the Ninth Circuit.

Petitioner is a California corporation

filing its income tax returns on a

March 31 fiscal year basis. It provides

refrigerated storage facilities for food

processors in Modesto and Salinas,

California.

During fiscal 1973 petitioner construc-

ted a one-story cold storage facility in

Modesto, identified as Building "F"

addition, an extension of an existing

building "F". The addition consisted of

three separate areas. The main part of

the addition was a fully enclosed freezer

room with 23,162 square feet of refriger-

ated area; an enclosed non-refrigerated

truck dock of 3,913 square feet and an

enclosed rail dock of 3,325 square feet.

It cost $267,075 to construct exclusive

of machinery and equipment.

Also during fiscal 1973 petitioner con-

structed a one-story cold storage facility

identified as "Building 3" in Salinas.

The building consisted of three separate

areas. The main part was a fully enclosed

freezer with 39,427 square feet of

refrigerated area; a warehouse office of

1,483 square feet and a canopy covered

truck dock of 17,058 square feet. It cost

$664,987 to construct exclusive of ma-

chinery and equipment.

During fiscal 1974 petitioner construc-

ted a one-story cold storage facility

identified as "Building 4", located in

Salinas. The building consisted of a

fully enclosed freezer area of 41,787

square feet and a canopy covered truck

dock area of 10,055 square feet. It cost

$316,096 to construct exclusive of

machinery and equipment.

Each of these structures is used excl-

usively to store frozen perishable commo-

dities. No processing or packaging

activities whatsoever are carried

on therein.

They were each depreciable and had a

useful life of over four years. It is

the construction of these three facilities

that form the basis of this action.

Processors use three methods to pre-

pare food for storage in the petition-

er's facilities. In each operation, the

product is initially received by the

processor in its raw state. It is

cleaned, graded, processed and then

frozen.

Under the first method of preparation,

known as belt freezing, the unfrozen

product is poured from the processing

line onto a mesh belt. As it is con-

veyed along this belt, extrenely cold

air is forced up from underneath the

food causing it to float on top of the

belt while simultaneously freezing it

individually. Thus, peas treated in this

manner would be separately frozen and

loose flowing as they reach the end of

the belt. From there the foods are

poured into tote bins or other large

containers such as a 50=-pound carton.

Tote bins are 4'x4'x4' in size. After

being stamped or tagged with a descrip-

tion of the product, its grade, ware-

house lot number and the name of the

packer, owner, or distributor, the tote

bins are removed from the processor's

premises by forklift trucks and deliv-

ered to petitioner's freezer room. A

particular lot may consist of several

thousand tote bins. When the processor

later decides to package some of the

commodities, it will requisition a cer-

tain number of tote bins. Petitioner

selects those bins closest to the aisle

where they are stacked and delivers them

to the processor or its assignee. Thus,

within any given lot, any tote bins may

be delivered to the person requistioning

less than the entire lot. In addition,

tote bins containing the same commodity

may be stored under several lot numbers.

At times, the processor will requisition

all the lots containing the same commo-

dity and, upon their delivery to the re-

wrap shed, will commingle the contents

prior to placing the food in smali

consumer packages.

At Modesto, almost all of the food is

placed into tote bins after freezing and

is stored in Building "F", which con-

tains products owned only by John Inglis

Frozen Food Company or its assignees.

Not all commodities are amenable to

belt freezing. Vegetables such as spin-~

ach cannot be frozen separately, but

must be packaged and then frozen in one

solid mass within the container. For

this, the processor will clean, grade,

cut and package the commodity usually in

10 ounce cartons and then label them.

The unfrozen packages are put on freezer

racks which in turn are placed in a blast

freezing tunnel. Air at-35° F. is forced

through the tunnel for three to four

hours to freeze the packages. There-

after the commodities are taken to the

petitioner's freezer room where they are

stored on pallets by lot number. From

time to time, packages with one label

may be needed to fill the needs of a

different distributor; the processor

will remove the labels and relabel them

with the appropriate name.

The third method of freezing is called

plate freezing. It is similar to blast

freezing in that the product is packaged

in consumer sized packages and labeled

as soon as it comes off the processing

line. The packages are placed on a re-

frigerated shelf where they remain until

they are frozen. From there, they are

placed in larger packing crates, taken to

the freezer room and stored by lot number

and the name of the distributor, owner

or packer.

At Salinas, one-half of the food pro-

cessed is by the belt method and placed

in tote bins or 50-pound cartons (mostly

in tote bins). The other half is pack-

aged in 10 ounce cartons. John Inglis

Frozen Food Company is the major pro-

cessor at this facility.

No portion of the freezing room space

is specifically rented to a particular

tenant or processor. Charges fo stor-

age are paid on a weight per month basis.

The following constitutes schematic

drawings of the petitioner's facilities:

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REASONS FOR GRANTING THE WRIT

This Court is urged to exercise its

discretion in favor of granting the

writ for the following reasons:

(1) to resolve a conflict between

the Circuit Courts for the

Ninth Circuit and Fourth Circuit

relating to questions raisable

on appeal and failing to follow

its own precedent.

(2) to resolve an important question

of a provision of the Internal

Revenue Code since this case is

the only decision dealing with

an interpretation of the meaning

of "bulk storage of fungible

commodities" which term was first

introduced into the Internal

Revenue Code in 1971, and which

term is of great importance to

the storage and transportation

industries in the United States.

be The Lower Courts should have

considered the entire applicable

provisions of the Internal

Revenue Code.

. The lower courts were in error

when they considered only the applicabil-

ity of 26 U.S.C.A. § 48(a)(1)(B) (444),

although 26 U.S.C.A. 3 48(a)(1)(A) was

equally applicable to the facts before

the court. In its complaint petitioner

claimed that these facilities met the

requirements of 26 U.S.C.A. 848. Relief

should have been granted to petitioner if

the facts of the case met the require-

ments of any subsection of 26 U.S.C.A.

S 48. Refusal to do so was error.

Bae The Lower Courts refused to

consider a provision of the

Internal Revenue Code

although pleaded.

The Court of Appeals refused to

consider whether the facilities were

really "giant refrigerators" and thus

entitled to the investment credit under

26 U.S.C.A. $ 48 (a)(1)(A) because that

point allegedly was not raised in the

lower court. The memorandum opinion of

the lower court (C-25) states that two

cases relied upon by the petitioner are

Catron v. Commissioner,50 T.C. 306 (1968)

and Central Citrus Co. v, Commissioner,

58 T.C. 365 (1972). In Catron where

freezer facilities similar to those here

involved the Court stated in footnote 5:

"In reality what we are dealing

with here is a 40 foot square

walk-in cold storage refrigera-

tor attached to the end of an

adjoining structure."

The Tax Court went on at

footnote 7:

"The cold storage room is basic-

ally a giant refrigerator and

may arguably qualify apart from

its storage functions, under the

regulatory exceptions for

structures which are essentially

items of equipment. See Sec. l-

48-(1)(e) (1) Income Tax Regs.

We deem it unnecessary to

pursue this possibility in light

of our conclusion that the room

constitutes a storage facility."

Inasmuch as the petitioner relied

upon Catron in the lower court and the

lower court considered that case, every

point favorable to the petitioner in

that case must be deemed to have been

raised in the lower court.

Lose The Circuit Court refused

to follow its own precedents.

The Court of Appeals refused to

consider 26 U.S.C.A. § 48(a)(1)(A) on the

ground that it was raised for the first

time on appeal. This holding was in

direct conflict with its own decision in

Ah Pah Redwood v, Commissioner, 251 F. 2d

163 (9th Cir., 1957). In that case its

decision was based on a section of the

Internal Revenue Code not raised by

either party in the lower court. In the

instant case not only was the subsection

of the Internal Revenue Code raised by

the pleadings, but the facts necessary

to bring such subsection into play were

before the lower court.

In the last paragraph of the

Court of Appeals' opinion, (A-7) the

Court states: "This contention was not

made in the district court, and we will

not consider it for the first time on

appeal." The Court cites for its

authority United States v, Patrin, 575 F.

2d 708, 712 (9th Cir., 1978), and

Redwood Empire Savings and Loan Assn. v,

Commissioner, 628 F. 2d 516, 521 (9th

Cir., 1980}. Based upon an analysis of

the foregoing two cases, it is difficult

to understand how the Court reached its

determination. As heretofore pointed

out, in the instant case all the neces-

sary facts were before the lower court.

In United States v Patrin, supra at

page 712, the Court notes that this

Circuit has recognized an exception to

the general rule. "When the issue con-

ceded or neglected in the trial court is

purely one of law and either does not

affect or rely upon the factual record

developed by the parties ... the

Court of Appeals may consent to consider

it. The evident principal underlining

this exception is that the parties

against whom the issue is raised must

not be prejudiced by it." Since the

"giant refrigerator" theory is an alter-

native legal principal based upon the

same facts that were before the lower

court, inno way could the United States

be prejudiced by its presentation to this

Court. In fact, the United States had

every opportunity in its answering brief

to the Court of Appeals to show that as

a matter of law, the "giant refrigerator"

theory was not applicable to the

instant case.

Since a pure question of law is

involved and no prejudice is shown here-

in, this Court should have considered

this particular point of law on appeal,

particularly in view of the fact that it

was pleaded in the complaint.

In Redwood Empire Savings and

Loan Assn. v Commissioner, supra, the

Court notes at page 521 that in the

lower court, the plaintiff taxpayer did

not develop the factual basis to estab-

lish the deduction which was raised on

appeal for the first time. This, of

course, is not applicable to the present

case since all necessary facts were

before the Court.

IV. The Circuit Court is in

conflict with the Fourth Circuit.

The Court of Appeals in the

instant case is in conflict with the

decision of the United States Court of

Appeals for the Fourth Circuit in Cooper

v, Commissioner of Internal Revenue,

197 F. 2d 951 (1952). In that case the

Court reversed the Tax Court because it

refused to apply certain sections of the

Internal Revenue Code which applied to

the facts even though such provisions

were not pleaded. In the instant case,

although such provision was pleaded, the

Ninth Circuit refused to consider it.

The effect of the refusal of the

Circuit Court to consider a subsection

of the Internal Revenue Code to which

the pleadings and established facts

applied was to wrongfully deprive the

petitioner of a tax credit to which it

was entitled and thereby unjustly en-

riched the United States.

Vv. The Lower Courts erred in

its definition of "fungible

goods".

The lower court held that the

retention of control and identification

of goods which were fungible destroyed

the fungibility of such goods for pur-

poses of 26 U.S.C.A. 38.

There is no definition in the

Internal Revenue Code for the term

"fungible commodities".

However, the Senate Committee

Report (92d Cong. lst Sess. Rep. No.92-

437 (1971) 26) states: "The commodity

stored must be fungible in nature; that

is, of such a nature that one part may

be used in place of another". Congress

meant that if a commodity is of such a

nature that one part may be used in place

of another, then it is fungible. Nothing

more is required. The lower court found

that the commodities stored herein were

of such a neture that one part could be

used in place of another.

However, the lower court added

another requirement; i.e., the owner,

packer or distributor must not expect

return of the particular items deposit-

ed, but rather an equal quantity of a

similar product. This was an unwarran-

ted modification of the congressional

definition.

It should be further noted that

the Commissioner's Regulations do not

contain a disqualification of fungibil-

ity based upon retention of control

or identification.

On pages C-7 amd C-8 of the

Appendix, the lower court stated:

"A particular lot may consist

of several thousand tote bins.

When the food processor later

decides to package some of the

commodities, it will requisition

a certain number of bins.

Merchants selects those bins

closest to the aisle where they

are stacked and delivers them to

the processor or its assignee.

Thus within any given lot, any

bins may be delivered to the

person requisitioning less than

the entire lot. In addition,

tote bins containing the same

commodity may be stored under

several lot numbers. At times,

the processor will requisition

all the lots containing the

same commodity and upon their

delivery to the rewrap shed, will

commingle the contents prior to

placing the food in small

packages."

VI. Retention of control does not

destroy fungibility.

The lower court in its memoran-

dum decision stated the following:

"The food placed in Merchants'

facilities is identified by

owner, packer or distributor.

Although these commodities are

fungible within each lot, and

on occasion with other lots,

they are nevertheless segre-

gated according to the stated

ownership at the time they are

received, and each tenant

retains control over his

own product.

The court is of the opinion

that this identification by the

tenant indicates an intent that

the goods not be considered

fungible." (C-50).

The lower court obviously

ignored the facts before it. At the

Modesto facility, there was only one

processor and tenant. Therefore the

question of segregation and control did

not apply.

VII. The Circuit Court should not

have applied the "clearly

erroneous" rule.

The Circuit Court in reviewing

the decision of the lower court invoked

the "clearly erroneous" rule. From a

reading of Rule 52(a) of the Fed. Rules

Civ. Proc. 28 U.S.C.A., and of the

cases cited by the Circuit Court in its

opinion, it was error by the Circuit

Court to invoke the "clearly erroneous"

rule in the review of this case. By so

doing, the Circuit Court imposed an

unjust burden upon the petitioner.

In the first instance, the

entire sentence of Rule 52(a) should be

considered and not the portion extrac-

ted by the Circuit Court. The sentence

reads as follows: "Findings of fact

shall not be set aside unless clearly

erroneous, and due regard shall be given

to the opportunity of the trial court to

judge the credibility of the witnesses."

Therefore, it is perfectly clear from

reading the entire sentence that the

"clearly erroneous" rule applies only to

questions of fact and not to those of

law. The question of fungibility is

only one of law. An examination of the

decisions in the lower court and Circuit

Court indicates that the lower court was

not called upon to make any findings of

fact in this case since all facts were

either stipulated to or contained in

uncontroverted affidavits.

An examination of the other

authorities cited by the Circuit Court

also demonstrated an improper applica-

tion of the rule. In Parkside, Inc. v,

Commissioner, 571 F. 2d 1092 (9th Cir.,

1977), the lower court was confronted by

a variety of questions of fact. In the

concurring opinion by Judge Pregerson,

on page 1098, he stated as follows:

"Whether the taxpayer's real

property was ‘held primarily

for sale' is a question of

law ... to which the ‘clearly

erroneous' rule should be

inapplicable."

In Commissioner v. Duberstein,

363 U.S. 278 (1960), the lower court was

confronted with a question of fact as to

whether the transfer of an automobile

constituted a gift or was made for some

other reason.

In Thompson v. Commissioner, 631

F. 2d 642 (9th Cir., 1980), the trans-

actions before the lower court were ones

of both mixed fact and law and therefore

in the opinion of the Court was subject

to the "clearly erroneous" standards

of review, the rational being that the

presence of the question of fact even

though mixed with the question of law

invokes the "clearly erroneous" rule.

In the instant case, however, there were

no controverted questions of fact before

the lower court.

In United States v. United

States Gypsum Co., 333 U.S. 364 (1947),

the Supreme Court stated at page 395 that

"A finding is 'clearly erroneous' when

although there is evidence to support

it, the reviewing court on the entire

evidence is left with a definite and

firm conviction that a mistake has been

committed". It is obvious that from

this Supreme Court decision that the use

of the word "evidence" indicates that

there are facts in controversy since

evidence has to do with determination

of questions of fact and not of law.

Allen v. United States, 541 F. 2d

786 (9th Cir., 1976) follows the United

States v. United States Gypsum Co. case

heretofore referred to, and the "clearly

erroneous" doctrine should not have been

invoked by the Circuit Court.

VIII. The Circuit Court should have

reversed after finding error.

The Circuit Court in its

opinion after improperly applying the

"clearly erroneous" rule states: "We

are not convinced that an error of this

magnitude has occurred". (A-6)

Therefore, the Circuit Court

admits that there was an error committed

in the lower court. However, since the

only error that the lower court could

have committed was one of law, then the

finding that there was error should have

resulted in a reversal.

CONCLUSION

For all of the above reasons, it is

respectfully prayed that the Writ

of Certiorari be granted.

Respectfully submitted,

ALAN ROBERT GEIST

Attorney for Petitioner

235 Mamaroneck Avenue

White Plains, N.Y. 10605

(914) 428-2880

- yIpueddy

A-1

APPENDIX A

UNITED STATES COURT OF APPEALS,

NINTH CIRCUIT

MERCHANTS REFRIGERATING COMPANY

OF CALIFORNIA,

Plaintiff-Appellant,

) UNITED STATES OF AMERICA,

Defendant-Appellee.

No. 79-4378

Argued and Submitted May 14, 1981.

Decided October 13, 1981.

Appeal from the United States District

Court for the Eastern District of Calif-

ornia.

Before MERRILL and CHOY, Circuit Judges,

and HAUK,*® District Judge.

* The Honorable A. Andrew Hauk, Chief

United States District Judge for the Central

District of California, sitting by designation

PER CURIAM:

Appellant Merchants Refrigerating Com-

pany of California (Merchants) provides

cold storage facilities for food pro-

cessors. Between 1973 and 1974. Mer-

chants constructed large frozen food

storage and shipping structures at Sali-

nas and Modesto, California. Merchants

contends these facilities are used "for

the bulk storage of fungible commodities"

under Int. Rev. Code § 48(a)(1)(B) (411)

which qualifies it for an investment tax

credit under Int. Rev. Code $§ 38. Mer-

chants' claims for tax refund were not

approved, and it commenced this action.

The district court entered summary judg-

ment against Merchants on the question

of whether the facilities fell under

S$ 48(a)(1)(B)(4441). We affirm.

The following stipulated facts were sub-

mitted to the district court: The Mo-

desto facility consists of 23,162 square

feet of freezer space and 7, 238 square

feet of loading dock area added to an

existing building. In Salinas, two ad-

joining buildings were constructed. The

first contains 39,427 square feet of

freezer space and 18,541 square feet used

for an office and loading dock. The sec-

ond holds 41,787 square feet of freezer

space and 10,055 square feet of loading

dock area.

No processing takes place in these

structures. Food processors deliver fro-

zen fruits, vegetables and fish to Mer-

chants packed in 64-cubic-foot tote bins,

50-pound boxes and cases of 10-ounce pack-

ages. The containers are marked with a

description of the product, a warehouse

lot number and the name of the owner,

packer or distributor before storage.

Each processor retains control over its

products while stored and is charged on

the basis of quantity.

A-4

New property eligible for section 38

investment tax credit includes:

(A) tangible personal property, or

(B) other tangible property (not in-

cluding a building and its struc-

tural components) but only if

such property --

(i) is used as an integral part

of manufacturing, production

or extraction ... or

(i441) constitutes a facility used

in connection with any of the

activities referred to in

clause (i) for the bulk

storage of fungible commcdi-

ties ...

26 U.S.c. 8 48(a)(1)(emphasis added). In

the district court, Merchants argued that

the cold storage facilities fell under

this definition because food held in tote

bins and 50-pound boxes before final pro-

cessing is in "bulk storage" and the in-

terchangeability of containers within a

particular lot made the goods fungible.

The parties were unable to cite any

cases interpreting this provision. In-

stead, their arguments relied on legis-

lative history, tax regulations, reven-

ue rulings, federal warehouse law, the

Uniform Commercial Code, tax court inter-

pretations of the superseded portion of

section 48 and Webster's Dictionary. In

a carefully reasoned memorandum, the dis-

trict court weighed each party's agru-

ments before deciding that the food

stored by Merchants was not fungible

since containers were identified by

owner, packer or distributor and process-

ors expected return of the particular

items deposited rather than an equal qua-

ntity of a smiilar product.

Where the district court rules on

questions involving a mixture of fact and

law, reversal is not warranted unless the

finding was "clearly erroneous."

Parkside, Inc. v. Commissioner, 571 F.2d

1092, 1095-96 (9th Cir. 1977)(per Choy,

Circuit Judge, with special concurrence).

See also Fed.R.Civ.P. 52(a); Commissioner

v. Duberstein, 363 U.S. 278, 291, 80 S.Ct.

1190, 1200, 4 L.Ed.2d 1218 (1960);

Thompson v. Commissioner, 631 F.2d 642,

646 (9th Cir. 1980), cert. denied,-U.S.--

101 S.Ct. 3110, 69 L.Ed.2d 972 (1981). "A

finding is ‘clearly erroneous' when al-

though there is evidence to support it,

the reviewing court on the entire evid-

ence is left with the definite and firm

conviction that a mistake has been commi-

tted." United States v. United States

Gypsum Co., 333 U.S. 364, 395, 68 S.Ct.

525, 542, 92 L.Ed. 746 (1948); Allen v.

United States, 541 F.2d 786, 788 (9th Cir.

(1976) We are not convinced that an error

of this magnitude has occurred.

Merchants has also advanced the argu-

ment that the cold storage rooms were

"giant refrigerators" eligible under Int.

Rev. Code § 48(a)(1)(A) for investment

tax credits. This contention was not

made in the district court, and we will

not consider it for the first time on

appeal. United States v. Patrin, 575 F2d

708, 712 (9th Cir. 1978); accord, Redwood

Empire Savings and Loan Assn. v. Commiss-

ioner, 628 F.2d 516, 521 (9th Cir. 1980).

The judgment of the district court is

AFFIRMED.

APPENDIX B

Filed November 25, 1981

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MERCHANTS REFRIGERATING

COMPANY OF CALIFORNIA, No.

79-4378

Plaintiff-Appellant,

ORDER

UNITED STATES OF AMERICA,

Defendant-Appellee.

-eeeeeeeeeeee eee = x

Before: MERRILL and CHOY, Circuit Judges,

and HAUK,*, District Judge.

The panel as constituted in the above

case has voted to deny the petition for

rehearing and to reject the suggestion

for rehearing en banc.

The full court has been advised of the

suggestion for rehearing en banc and no

judge of the court has voted to grant re-

* The Honorable A. Andrew Hauk, Chief United

States District Judge for the Central District

of California, sitting by designation.

hearing en banc. F.R.App.P. 35(b).

The petition for rehearing is denied

and the suggestion for rehearing en banc

is rejected.

C-1

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

eee eee eaeceaneee xX

MERCHANTS REFRIGERATING

COMPANY OF CALIFORNIA,

Plaintiff, CIVIL NO.

S-77-454

vs.

UNITED STATES OF AMERICA,

Defendant.

wer ewe ewe ew ew ewe ei ew = = HX

MEMORANDUM

This case is before the court on the

parties' cross-motions for summary judg-

ment. Plaintiff seeks district court

review of the Internal Revenue Service

denial of its claims for tax refunds of

certain taxes paid for fiscal years

ending March 31, 1973, and March 31,

1974. Jurisdiction is alleged under

28 U.S.C. 8 1348(a)(1).

Merchants Refrigerating Company of

California (Merchants) is a wholly-owned

C-2

subsidiary of Merchants Refrigerating

Company, a New York corporation.

Plaintiff provides cold storage

facilities for food processors.

Merchants' principal place of business is

located in Modesto, California. Other

facilities are owned in Salinas and

Santa Clara, California.

During the 1973 fiscal year, plaintiff

constructed a refrigerated storage

facility at its Modesto location.

Similar structures were built by plain-

tiff at its Salinas location in fiscal

years 1973 and 1974. Plaintiff alleges

these three facilities qualify for the

tax investment credit provided for in

section 38 of the Internal Revenue Code,

26 U.S.C. § 38. Based on its contention

that these structures are "section 38

property" and therefore entitled to the

investment credit, plaintiff timely filed

claims for refund. In addition, Merchants

C-3

seeks a revision in the amount of depre-

ciation allowed for the 1973 and 1974

fiscal years contending that the facili-

ties should be eligible for 200 percent

declining balance depreciation pursuant

to section 1245 of the Internal Revenue

Code, 26 U.S.C. s 1245, rather than the

150 percent straight line depreciation

allowed if the property is characterized

as section 1250 property, 26 U.S.C.

s 1250. Timely claims for refunds of

these amounts were also filed. Finally,

plaintiff seeks an increase in its

franchise tax deduction for 1974. At the

time this complaint was filed, however,

plaintiff had not yet sought a refund for

the franchise tax as required by 26 U.S.C.

§ 7422.

The parties have filed cross-motions

for summary judgment on several grounds.

The Government contends that the court

lacks subject matter jurisdiction over the

c-4

franchise tax claim because of the

failure to seek a refund. To cure the

jurisdictional defect, plaintiff has

‘responded with a motion to supplement its

complaint to allege it had subsequently

sought a refund for this amount which

was denied by the IRS. As a second

ground for summary judgment, the parties

seek a ruling as to whether or not the

three storage facilities are section 38

property. Finally, the parties have

stipulated that the applicable rate of

depreciation will be determined by the

outcome of the tax investment credit

issue. This court will first consider

whether the facilities qualify as section

38 property.

NATURE OF THE COLD STORAGE FACILITIES

The Modesto facility, constructed in

1973, is known as the "addition to

Building F" and consists of three

separate areas. The main part of the

C-5

structure is a fully enclosed freezer

room. Also part of the addition are a

truck dock and rail dock, both of which

are enclosed.

The Salinas facility known as "Buildirg

3" was constructed in 1973 and consists

of a large freezer area, a warehouse

office and a canopy-covered truck dock.

In 1974, Merchants constructed another

cold storage facility in Salinas,

"Building 4", which consists of an

enclosed freezer area and a canopy-

covered truck dock. The parties have

stipulated that each of the three

buildings at issue is depreciable

property which had, at the time it was

placed in service, a useful life in

excess of four years.

Each of these structures is used to

store frozen perishable commodities but

is not used by Merchants for any food

processing activities. In Modesto, the

C-6

foods stored include such vegetables as

lima beans, spinach, broccoli, green

beans, mixed vegetables, peas, carrots,

and asparagus. In addition to vegetables

fruits such as boysenberries have been

stored there. At Salinas, not only are

fruits and vegetables stored, but also

frozen fish such as salmon and herring.

Processors use three methods to pre-

pare food for storage in Merchants'

facilities. In each operation, the

product is initially received by the

processor in its raw state. It is

cleaned, graded, processed and then

frozen. Under the first method of pre-

paration, known as belt freezing, the

unfrozen product is poured from the

processing line onto a mesh belt. As it

is conveyed along this belt, extremely

cold air is forced up from underneath the

food causing it to float on top of the

belt while simultaneously freezing it

individually. Thus, peas treated in this

manner would be separately frozen and

loose flowing as they reach the end of

the belt. From there, the food is poured

into a tote bin or other large container

such as a 50=-pound carton. Tote bins are

4" x 4" x 4" in size and are lined with

overlapping polyethylene plastic bags.

After being stamped or tagged with a

description of the product, its grade,

warehouse lot number and the name of the

packer, owner, or distributor, the tote

bins are removed from the processor's

premises by forklift trucks and delivered

to Merchants' freezer room.

A particular lot may consist of sev-

eral thousand tote bins. When the food

processor later decides to package some

of the commodities, it will requisition a

certain number of bins. Merchants selects

those bins closest to the aisle where they

are stacked and delivers them to the

c-8

processor or its assignee. Thus, within

any given lot, any bins may be delivered

to the person requisitioning less than

the entire lot. In addition, tote bins

containing the same commodity may be

stored under several lot numbers. At

times, the processor will requisition all

the lots containing the same commodity

and, upon their delivery to the rewrap

shed, will commingle the contents prior

to placing the food in small packages.

Some processors are not equipped to

handle tote bins but can use the 50 pound

containers. In such instances, these con-

tainers will be sent to the processor when

it is ready to package the commodities in

small cartons. These containers may also

be sent directly to customers without

further packaging where such buyers have

no need to purchase the food in small

packages.

Not all commodities are amenable to

C-9

belt freezing. Vegetables such as spinach,

broccoli and celery, for example, cannot

be frozen separately but must be packaged

and then frozen in one solid mass within

the carton. For these foods, the proces-

sor will clean, grade, cut and package

the commodities, usualiy in 10-oz. car-

tons, and then label them. The unfrozen

packages are put on freezer racks which in

turn are placed in a blast freezing tun-

nel. Air at minus 35 degrees is forced

through the tunnel for three to four

hours to freeze the packages. Thereafter,

the commodities are taken to Merchants'

freezer room where they are stored on

pallets by lot number. From time to time,

packages with one label may be needed to

fill the needs of a different distributor;

the processor will remove the labels and

relabel them with the appropriate name.

The third method of freezing is called

plate freezing. It is similar to blast

C-10

freezing in that the product is packaged

in consumer-sized packages and labeled as

soon as it comes off the processing line.

The packages are placed on a refrigerated

shelf where they remain until they are

frozen. From there, they are placed in

larger packing crates, taken to the

freezing room, and stored by lot number

and the name of the distributor, owner

or packer.

Of the three methods used, approxima-

tely one-half of the food stored in all of

Merchants' Salinas facilities is frozen by

the belt method so that it is placed in

tote bins or 50 pound cartons. The other

one-half is packaged in 10 oz. cartons. At

Modesto, almost all of the food is placed

into tote bins after freezing. None of

the processing and freezing takes place

within the freezer room itself, although

blast freezing is done in other sections

of Merchants' buildings. The freezing room

C11

space is not specifically rented or lea-

sed to any particular tenant or customer.

Rather, each tenant pays on a weight-per-

month basis. However, each tenant retains

control over its own preduct, and the pro-

ducts cannot be commingled in any way by

Merchants without the express permission

of the owner.

TAX INVESTMENT CREDIT

Section 38 of the Internal Revenue Code

provides for an income tax credit for in-

vestments in certain property. Property

which qualifies for this credit is de-

fined by section 48. Section 48 provides

in part:

(1) In general. - Except as provided in

this subsection, the term "section 38

property" means --

(A) tangible personal property, or

(B) other tangible property (not in-

cluding a building and its structural

components) but only if such propert}

C-12

(i) is used as an integral part of

manufacturing, production, or

extraction or of furnishing tra-

nsportation, communications,

electrical energy, gas, water,

or sewage disposal services, or.

(111) constitutes a facility used in

connection with any of the

activities referred to in

Clause (i) for the bulk stor-

age of fungible commodities

(including commodities in a

liquid or gaseous state)...

26 U.S.C. 8 48 (a)(1) (Emphasis added).

This statute was amended to the above

form in 1971. Pub. L. No. 92-178, § 104

(a), 85 Stat. 497. Prior to that time,

section 38 property was defined as:

(A) tangible personal property, or

(B) other tangible property (not

including a building and its

structural components) but only

C -13

if such property --

(14) is used as an integral part

of manufacturing, production,

or extraction or of furnish-

ing transportation, communic-

ations, electrical energy,

gas, water or sewage dispos-

al services, or

(ii) constitutes a research or

storage facility used in

connection with any of the

activities referred to in

clause (i)...

26 U.S.C. § 48(a)(1)(1962) (amended 1971)

(Emphasis added).

A comparison between the two provisions

demonstrates that, prior to 1971, any

storage facility used in connection with

the specified activities might qualify for

the tax investment credit, whereas after

1971, only those facilities used for the

purpose of "bulk storage of fungible

C-14

commodities" in connection with the

designated activities are deemed eligible

for section 38 treatment. That Congress

intended to limit the class of storage

facilities is clear from the legislative

history of the Revenue Act of 1971. The

House Conference Committee report states:

The Senate amendment clarifies the

provision of present law relating to

storage facilities (section 48(a)(1)

(11) of the Code) so as to make it

clear that such provision applies only

to facilities for the bulk storage of

fungible commodities, including commo-

dities in a liquid or gaseous state.

H.R. Conf. Rep. No. 92-708, 92d Cong.,

lst Sess. (1972), reprinted in 1972 U.S.

Code Cong. & Ad. News 2053, 2056.Similar-

ly, the Senate Report states:

Since the Internal Revenue Service has

encountered significant difficulties

interpreting this provision (section

C-15

48 of the Code), the committee beli-

eves it is desirable to clarify the

law regarding the types of storage

facilities, . . which are entitled to

the credit.

S. Rep. No. 92-437, 92d Cong., lst Sess.

(1972), reprinted in 1972 U.S. Code

Cong. & Ad. News 1918, 1936.

Defendant stated at oral argument that

Merchants' Modesto and Salinas facilities

built in 1973 and 1974 meet all the re-

quirements of section 38 property except

that they do not house fungible goods in

bulk. The gravamen of the Government's

argument is that these facilities do not

hold fungible commodities in bulk because

the foods are of several varieties which

are already processed, graded, contain-

erized or packaged, and often labeled.

Merchants asserts that, as to the tote

bins and 50-pound cartons, the foods are

fungible because any bin or carton within

C-16

a particular lot (and sometimes several

lots) is interchangeable with any other

prior to final packaging. Merchants

further contends that the food is held in

bulk because it has not been packaged in

its final form, particularly when held in

the tote bins and 50-lb. cartons. Finally

plaintiff says that even the 10-ounce

packages are fungible because a label can

be removed if the processor wishes to use

particular packages for a different buyer

than the one for whom the food was origi-

nally labeled.

There appear to be no cases dealing

with storage facilities built after 1971

in which the court has had to interpret

the meaning of bulk storage of fungible

commodities. The parties have therefore

relied on legislative history, tax regu-

lations and revenue rulings, tax court

decisions as to pre-1971 facilities, the

Uniform Commercial Code and Webster's

C-17

Dictionary.

Turning first to legislative history,

the Government quotes from the Senate

Committee Report which defined "bulk" and

"fungible" as follows:

Bulk storage has reference to the

keeping of a commodity in a large mass

prior to its consumption or utilization

The commodity stored must be fungible

in nature, that is, of such a nature

that one part may be used in place

of another.

S. Rep. No. 92-437, supra. While the

Treasury Regulations do not define

"fungible", they have adopted the above

language almost verbatim to describe the

meaning of "bulk" storage. See 26 C.P.R.

S$ 1.48-1(d)(5)(41). To illustrate the

meaning of bulk storage, the regulations

give the following example:

In the case of property described in

section 50, property will constitute a

c-18

storage facility only if the facility

is used principally for the bulk stor-

age of fungible commodities. Bulk

storage means the storage of a commo-

dity in a large mass prior to its con-

sumption or utilization. Thus, if a

facility is used to store oranges that

have been sorted and boxed, it is not

used for bulk storage.

Id. The Uniform Commercial Code states

that: "fungible" means goods or securi-

ties of which any unit is, by nature or

usuage of trade, the equivalent of any

other like unit. Goods which are not

fungidle shall be deemed fungible for

the purpose of this Act to the extent

that under a particular agreement or doc-

ument unlike units are treated as equiv-

alents.

U.C.C. §$ 1-201. Webster's New Collegiate

Dictionary (1976 ed.) defines "bulk" in

part as "a ponderous shapeless mass of

C-19

material". "Fungible" is defined as "of

such a kind or nature that one specimen

or part may be used in place of another

specimen .. interchangeable".

On the basis of these definitions, the

Government asserts that Merchants' facil-

ities do not house fungible goods nor do

they store commodities in bulk. The

defendant argues that the foods are not

fungible because they consist of many

varieties, grades and sizes and because

they have been processed. Additionally,

the Government contends that even the

same type of food may not be fungible as

to separate iots since there may be vari-

ations in quality and size. To support

its “bulk" argument, the defendant points

out that the foods have been sorted and

packaged in units so that the items no

longer are held in a large mass. Accord-

ing to the Government, this is true

whether the items are placed in tote bins

C=-20

or in 10-ounce packages.

Merchants, on the other hand, believes

the fungibility requirement is met as to

the tote bins because the foods are

fungible within each lot. Thus, although

there may be as many as 2000 bins within

a lot, each bin is interchangeable with

any other in that lot. Plaintiff further

contends that the packaged foods are also

interchangeable because, if a processor

seeks to fill a Birds Eye order but does

not have enough labeled packages, it can

take packages containing the same commo-

dities wrapped with Snow Crop labels,

remove the labels, and rewrap the package

with Birds Eye labels. Merchants, how-

ever, has not addressed the question as

to whether or not the 10-oz, packages

meet the bulk requirement of section 38.

The parties also refer to other rele-

vant Treasury Regulations in effect after

1971 which give some indication of the

C-21

type of structure which may qualify for

the tax credit. Thus, warehouses are not

entitled to section 38 treatment because

they are buildings. 8 1.48-1(e)(1).

Storage facilities include oil and gas

storage tanks and grain storage bins.

s 1.48-1(d)(5)(41). "Buildings" does not

include the latter two structures, silos,

or fractionating towers. 3 1.48-1(e)(1).

Although a storage facility must be used

in connection with specific activities,

the taxpayer-owner of such structures

need not be engaged in the activity.

S$ 1.48-1(4)(5)(4).

The Government has consistently argued

that the 1971 amendment to the defini-

tion of section 38 property indicates an

intent by Congress to limit investment

credit to structures which are essenti-

ally containers themselves - structures

such as grain storage bins, silos and ~~~~

gas storage tanks - rather than ware-

C-22

house-type facilities which are used to

store a wide variety of products. At oral

argument, however, counsel for the defen-

dant auggested that a facility storing a

variety of commodities might qualify if

the different items were stored seriatim

rather than at the same time as frequen-

tly occurs in the plaintiff's structures.

Merchants points out that the examples of

storage facilities set forth in the

regulations "include oil and gas storage

tanks and grain storage bins", but asserts

that such examples are clearly not inten-

ded to be exclusive.

Both parties rely on several tax court

rulings which, even though each dealt

with structures built prior to 1971, shed

some light on this issue. Merchants was

the plaintiff in an earlier action before

the Tax Court seeking a determination that

its 1968 storage facility qualified for

section 38 investment credit. In Merchants

C=-23

Refrigerating Co. of California v.

Commissioner, 60 T.C. 856 (1973), the

freezer room to which the Modesto "addi-

tion F" was added in 1973 was held to be

a storage facility within the meaning of

section 38. The characterization of that

facility as section 38 property, however,

is not controlling in the instant case.

The Tax Court made it clear that its

ruling was based upon the statute as it

was worded prior to 1971. After citing

the 1968 definition of section 38 prop-

erty as set out in section 48, it noted

that those provisions were amended by the

Revenue Act of 1971 which "replaced the

term 'storage facility' in sec. 28(a)(1)

(B) with the narrower concept of "a

facility used .. . for the bulk storage

of fungible commodities". Id. at 859 n.1l.

Yet, the court believed it was bound by

two prior tax court decisions "not fairly

distinguishable from the present case",

C-24

not only because of stare decisis princi-

ples, but

particularly since the statutory

provisions involved remain appli-

cable only up to the time when the

1971 amendments to the statute

take over (see fn.1 supra).

Id. at 860. The court continued:

nor do we accept the Government's

argument that the freezer room is

not in any event a "storage facil-

ity" within (B)(ii) on the ground

that “the structure must be used

for the bulk storage of fungible

goods", Passing the question

whether the frozen foods stored in

petitioner's facility may be re-

garded as "fungible", the require-

ment of fungibility appeared for

the first time in the 1971 amend-

ments to the statute (fn.1 supra)

which were not retroactive to the

C-25

year before us.

id. Thus, the Tax Court recognized that

only certain storage facilities would be

eligible for tax investment credit after

1971. Significantly, the court also

stated under facts very similar to those

before this court that the merchandise

stored in Building F was generally fung-

ible within each particular lot but not

fungible as between lots. Id. at 858.

This latter statement, however, does not

address the broader question as to whe-

ther commodities must be fungible as to

every other item within the facility, or

whether it is sufficient if they are

fungible within a particular lot.

The two cases relied upon by Merchants

are illustrative of the approach taken

by the courts in dealing with pre-1971

structures. In Catron v. Commissioner,

50 T.C. 306 (1968), an apple farmer sorted

graded and boxed apples after which he

C-26

placed them in a cold storage facility

to await sale and shipment. The court

said that the facility was used solely

to store goods used in food processing

so that it qualified for section 38

treatment. In Central Citrus Co. v.

Commissioner, 58 T.C. 365 (1972), the

facility at issue consisted of a room

where oranges were placed prior to or

after packaging to condition the fruit.

The court determined that the room was

eligible for the investment credit since

it was an integral part of processing.

Thus, as to structures built before

1971, the courts applied the law very

broadly to include any storage facility

at any stage of processing whether or not

the commodities were in mass or sorted

and boxed.In a footnote, however,

Merchants indicated that Catron might

have been decided differently under

current law. The court found indications

C-27

in the regulations

that facilities used to store boxed

fruit might be treated differently

under the 1971 legislation from the

manner in which such facilities were

treated, under prior law, in Catron.

Merchants Refrigerating Co. of Calif-

ornia v. Commissioner, supra at 860 n.3,

citing Treas. Reg. 8 1.48-1(d)(5) (44).

As final support for its position, the

Government relies on three post-1971

Revenue Rulings. As an initial matter,

this court rejects plaintiff's contention

that such rulings are "only opinions of

an employee" of the Interal Revenue

Service and thus of no persuasive value.

Although the Internal Revenue Service

cautions that its rulings should be

applied and followed only when the facts

are closely similar, courts have held them

to be entitled to some weight. See

Groves v. U.S., 533 F.2d 1376 (5th Cir.

C-28

1976).

The Government first cites Revenue

Ruling 74-451. The taxpayer in that case

built a refrigeration facility in 1972 in

to which varieties of apples were placed

prior to packaging. After final sorting

and packaging into boxes, most of the

boxes were shipped out to customers but a

few stayed in the facility for a short

time. The Commission concluded that, even

though a few boxes were placed in the

storage room, the facility was used prin-

cipally to hold the apples in bulk prior

to final processing so that it qualified

for section 38 treatment under the amend-

ed statute. Although the Government con-

tends that these apples were placed in

the storage bins without any prior sort-

ing, grading, or processing, it is not

clear from the opinion if, in fact, none

of these activities had taken place prior

to the time the apples were placed in the

C-29

facility. Since the ruling says the

apples were removed from the facility for

final sorting, there is a suggestion that

some pre-sorting may have taken place so

that the bins of apples may not have been

completely interchangeable.

The defendant also cites Revenue Ruling

74-452 which involved two different situ-

ations. In the first, a 1972 structure

was leased to a wholly-owned subsidiary

for use in its food processing business.

The subsidiary purchased fruit from

growers and put the fruit into cans or

Grums. It then placed these containers

into the structure for which it sought a

tax credit. The taxpayer also subleased

storage space to others for storing

poultry, vegetables and fruits. Unfortu-

nately, the opinion does not say whether

these latter goods were processed, sorted,

packaged, or placed into tote bins. In the

second situation two 1972 structures were

C-30

used to store processed food products for

redistribution. Most of the space was

leased to food processors. Again, the

ruling does not give many important de-

tails. In both instances, the Internal

Revenue Service ruled that the structures

were not section 38 property since none of

them was used principally for the bulk

Storage of fungible commodities.

The Government argues that the facts of

the second situation in Revenue Ruling 74-

452 are virtually identical to those of

the instant case. Since few details are

set forth in that ruling, however, it is

impossible to tell if the Commissioner

denied the tax credit because the foods

had been placed in packages and were

therefore no* held in bulk or because the

foods had been processed, and, impliedly,

sorted and graded so that they may have

been considered to be not fungible.

Revenue Ruling 74-452 does not, therefore,

C-31

compel the conclusion that Merchants’

facilities fail to qualify for the invest

ment credit because they are used to

store processed foods of several variet-

ies which have been sorted, graded and

quite often packaged.

The Government's arguments can be

placed into three categories: (1) the

goods are not fungible because they con-

sist of different varieties; (2) they are

not fungible because they have been sor-

ted, graded and processed; and (3) they

are not fungible or held in bulk because

they have been containerized and iden-

tified as to owner. Because section 38

requirements are met only if commodities

stored therein are both fungible and held

in bulk, Merchants' facilities will fail

to qualify if any one of the Government's

three assertions is correct. The court

will therefore examine each argument

individually.

C-32

As to the Government's first point, the

fact that Merchants stores an assortment

of vegetables, fruits and fish concurr-

ently does not, by itself, compel the

conclusion that the storage facilities do

not house fungible commodities. One need

only examine the characteristics of grain

storage to note that facilities may still

qualify for the tax credit even though

more than one kind of commodity is stored

in separate bins at the same time. Since

the Government, throughout its argument,

has relied on grain storage bins as an

example of section 38 property and, be-

cause the Treasury Regulations did not

delete this type of facility as indica-

tive of such property even after the sta-

tute was amended in 1971, it is appropri-

ate to compare the nature of Merchants'

goods with those placed in grain bins.

Although the Government implied that

grain storage bins house a single

C-33

commodity, counsel for both parties admit

ted at oral argument they are not famil-

iar with the details of grain storage

activities. Subsequent research by this

court reveals that it is common for grain

storage facilities to heuse a variety of

grains at any given moment during the

year. In F.P. Wood & Son v. United States

314 F. Supp. 1205 (E.D.N.C. 1970), the

court stated:

In the grain business, a large

number of bins is necessary, because

several varieties of grain are handled

and each type must be binned separ-

ately. Each grain has five different

grades which must be binned separately

also. The problem is further compli-

cated since dried grain must be binned

separately from undried grain.

(Emphasis added).

id, at 1207. The court noted that the

taxpayer, Wood, dealt in several varieties

C34

of grain including corn, soybeans and

cereal grains, including wheat, oats,

barley and rye. When brought to Wood's

storage facility, the grain was weighed,

graded and dumped into the appropriate

storage bins. Id. at 1206. The court

concluded that the concrete grain storage

facility at issue was section 38 proper-

ty, and, although the structure in which

the numerous bins were located was built

in 1966, there is nothing in the amended

Statute, subsequent Treasury Regulations,

tax court opinions, or Revenue Rulings

which suggests that a different result

would be reached had the Wood facility

been built after 1971. The facts set

forth in Sherley-Anderson-Rhea Elevator,

Inc. v. U.S., 315 F. Supp. 1055 (N.D. Tex.

1970), and C.I.R. v. Schuyler Grain Co.,

411 F.2d 649 (7th Cir. 1969), also indi-

cates that a grain facility will typically

house more than one type of commodity.

C-35

Indeed, the very term "grain" is defined

by the Department of Agriculture to in-

clude products such as wheat, corn, oats,

barley, rye, flaxseed, rice, sunflower

seeds, field peas, soybeans, emmer, sorg-

hum, safflower seed, triticale, millet

and such other products as are ordinarily

stored in grain warehouses. 7 C.F.R. 8

102.2(j). Of course, the fact that any

one of these commodities may be classif-

ied as grain does not mean that more than

one such item will be stored in a grain-

ery. Nevertheless, the cases cited above

indicate that this may indeed occur in

the grain business.

On the other hand, for a grain storage

facility to be analogous to Merchants'

structures, more than one variety of

goods must be stored concurrently. It is

not clear in Schuyler if that is indeed

the case or if the four varieties stored

therein arrive at various seasons during

C-36

the course of the year. While this latt-

er sequence occurs at the Merchants'

facilities to some degree, plaintiff

admitted that, at most times, the facil-

ities contain a large variety of foods.

In Wood, the language quoted above

clearly indicates that the plaintiff in

that case maintained different bins

because it had to store several varieties

of grains at the same time. In Sherley,

much of the grain arrived at different

times of the year, but, because some

grain was stored as much as a year, it

follows that at some point the facility

contained more than one variety of grain.

315 F. Supp. at 1057.

The court recognizes, as it stated at

oral argument, that a single grain bin or

silo will contain only one kind of grain

so that the entire interior of that par-

ticular structure is devoted to the

storage of a single commodity. Neverthe-

C-37

less, there is nothing in the statute or

Treasury Regulations to indicate that a

storage facility which contained several

bulk bins or hoppers located side by side

and housed under one roof would not

qualify under section 38 if the contents

of each bin differed from that of any

other at a given moment. Such facilities

would not be unlike Merchants' freezer

rooms insofar as they house tote bins

side by side, under one roof. Since the

Statute does not state that only storage

bins of a certain size may qualify for

section 38 treatment, the court is un-

willing to conclude that the plaintiff's

tote bins are not analogous to grain bins

or hoppers located within one larger

structure. And because grain storage

facilities concurrently store a variety

of grains, Merchants' facilities do not

lose their section 38 eligibility simply

because they house more than one variety

C-38

of food at the same time. Thus, the Gov-

ernment's first point is rejected.

The Government's next argument is that

fungibility is not present in this case

because the foods have been sorted, gra-

ded and processed. This argument, also,

must be rejected. A very similar sequence

of events occurs in preparing grains for

storage in facilities the courts consid-

ered as meeting section 38 requirements

prior to 1971. In Wood, for example, the

following events took place:

When grain is brought to Wood's

storage facility, it is weighed and

graded according to moisture con-

tent, test weight, amount of damage,

and foreign material content. Then

the grain is dumped into the appro-

priate storage bin. Frequently,

various grades of a particular grain

are blended to achieve a different

grade. For example, No. 2 corn,

C-39

the grade generally sold, has a

permissible foreign material limit

of 3%; by blending a bin of corn

with a 5% foreign material con-

tent (No. 4 corn) with a bin of

corn containing only 1% of for-

eign material (No. 1 corn); the

result may reach a No. 2 corn.

It is also possible to upgrade

two bins of a particular grade of

grain, depending upon particular

grade factors.

The court continued:

After the grain has been graded,

it must be dried to reduce its

moisture content. The actual

drying process takes two or three

hours, depending on the moisture

reduction that is required.

Drying is accomplished artifi-

cially by blowing hot air across

the grain as it moves down the

c-40

dryer, and the process is

necessary to prevent grain from

spoiling and moulding. If the

grain is not dried, it will be

unfit for use in animal feed

or food for human consumption.

Wood's major grain, corn, has a

moisture content of 20-25% at

time of harvesting. The mois-

ture must be reduced to 14-15%

within 48 hours after the ker-

nels have been removed from the

cob to prevent spoilage.

Once the grain has been dried,

it must be cooled and cleaned by

screening out foreign matter and

cracked grains. This process is

particularly important if the

grain is to be later sold to a

processor who will use it in

human food products.

Stored grain must also be aerated

C-41

periodically and this is

accomplished by use of large

fans located under each bin ..

After grain has been cleaned

and dried, the bins are used

for storage until the grain

is sold.

314 F. Supp. at 1206-1207.

In the above example, the grain is

first graded, and, unless blended, is

segregated according to grade. To pre-

vent spoilage, the grain is next dried by

a process that takes two to three hours.

When preparing some grains, such as corn,

the kernels must be removed before the

drying can commence. Once the grain is

dried, it is cooled and cleaned. Even

after the grain has been through these

stages, it must still be aerated

periodically.

The foods placed in Merchants' facil-

ities go through similar stages before

C-42

they are sent to the freezer room for

storage in tote bins. Depending upon the

type of fruit, vegetable, or fish, the

food will be sorted, cut, cleaned, occa-

sionally blended (as with mixed veget-

ables), and frozen to prevent spoilage.

At that point, it will be placed in bins

until ready for final processing. The

significant difference in the two types

of pre-storage activities is the fact

that, in the grain business, the prelim-

inary activities are the first of many

stages through which the grain may go and

are conducted primarily for the optimimum

efficiency in storing the products at this

point. In the food freezing business,

the food products may go through no other

processing stages after storage except

for final packaging. Thus, although

grain may be sold as is for feed, it will

frequently be ground for flour or conver-

ted to other products such as cooking

C-43

oils. On the other hand, the same step

may take place as to Merchants’ commodi-

ties where a food manufacturer such as

Campbell Soup Company uses the bulk veg-

etables as ingredients for precooked

items it markets. Thus, even this

difference does not exist in every

instance. As stated with reference to

the Government's first argument, there is

no indication that the 1971 amendment

changed the type of grain storage bins

which are now eligible for tax credits;

accordingly, the court is of the opinion

that it is appropriate to compare the

processing, grading and sorting that

occurs in the grain business with the

Similar events that take place in the

frozen food industry, and to conclude that

these activities do not make the frozen

foods placed in Merchants' tote bins non-

fungible goods. The Government's second

argument must be rejected.

c=-44

The Government's third point, however,

has merit. The containerization and

identification of the commodities by

owners may result in the determination

that they are no longer fungible goods

held in bulk. As the court views the con

tainerization and identification as two

Gistinct issues, they will be discussed

individually.

The Treasury Regulation quoted earlier

indicates that commodities are no longer

held in bulk once they have been boxed.

See § 1.48-1(a)(5) (44), supra at 9.

Although this statement does not specify

if the crossover point is reached, as

Merchants contends, only after the goods

are placed in the final package, or, as

the Government argues, when they are put

into any kind of container, including the

tote bins, the court is of the opinion

that the regulation refers to the final

packaging. In this instance, that point

c-45

is reached when the food is placed into

the 10-ounce packages. Merchants'

comment that the labels may be exchanged

goes to its fungibility argument but does

not address the bulk requirement of

section 38. Similarly, this point may

also be reached when the food is put into

the 50-pound containers since the con-

tainers may be sold directly to certain

customers without further packaging. The

court concludes that insofar as the

storage facilities contain commodities

that have been packaged in either 10-

Ounce or 50-pound containers, such stor-

age is not bulk within the meaning of

section 48 of the Internal Revenue Code

defining section 38 property.

Turning to the tote bins, Merchants'

contention that the goods stored in this

manner are held in bulk is persuasive.

These bins merely hold the food in a large

mass until the processor is ready to put

C-46

the goods into the final package. The

Government has cited no authority to

support its suggestion that goods in 4' x

4" x 4" tote bins are not held in bulk

but that grain placed in larger grain

bins or silos is so held. Until the food

is taken from these bins, therefore, it

is held in bulk for purposes of section

38 treatment.

The second aspect of the Government's

final point, however, creates an insur-

montable bar for Merchants. Although

defendant has not placed much emphasis on

the fact that the goods in Merchants'

facilities are identified as to the indi-

vidual cwners who segregate their food

and retain total control over its ulti-

mate disposition, the court believes this

issue is controlling. This identifica-

tion and segregation has destroyed the

fungibility of such goods.

Because there is no case law on point,

C-47

the court reaches this conclusion by an-

alogy to federal warehouse law, federal

regulations and cases that have attempted

to define "fungible" in other contexts.

Under federal warehouse law, 7 U.S.C.

ss 241-273, owners of fungible an are

entitled to have their commodities kept

separate in the absence of an agreement

or custome to the contrary. 7 U.S.C.

8 258. It is customary, however, to co-

mmingle fungible goods. 78 Am. Jur. 2d,

Warehouses § 179, Under the Uniform

Commercial Code, fungible goods so commin

gled are owned in common. U.C.C. 8 7-207.

Conversely, if the depositor has indica-

ted that otherwise fungible goods must be

identified and specially stored, the goods

are not owned in common. Rather, the

individual, upon demand, has the right to

receive the very items he deposited with

the warehouse. 7 U.S.C. 8 258. See also

7 C.F.R. § 102.48.

c-48

These distinctions become important

when it is necessary to determine the

liability of warehousemen for the goods

stored in their facilities. Thus, if

fungible goods have been commingleu and

therefore owned in common, any loss can

be replaced by the tender of goods of the

same quality and quantity. If the owner

intended that the goods be identified,

they are not owned in common so that the

loss of such goods is not satisfied by

the tender of equivalent commodities. The

word "fungible" in such cazes takes on

specific legal significance.

Although case law is not prolific on

this point, there are several courts that

have concluded that otherwise fungible

goods may loose their fungibility if

identified and specially stored. In

Edwards v. Cleveland Mill & Power Co.,

138 S.E. 131, 53 A.L.R. 1404 (N.C. 1937),

the court held that bales of cotton which

c-49

were weighed, numbered and marked so that

they could be identified were not fungi-

ble goods, particularly where the con-

tract of storage contemplated the return

of the identical goods to the owners.

Similarly, in Petzoldt v. Lawrence

Warehouse Co., 157 F. Supp. 184 (D. Colo.

1957), the trial court concluded that the

fact that the seed was bagged and tagged

with the plaintiff's number, and intended

to be kept separate from the other seed,

indicated that neither party regarded it

as fungible. On appeal, the Tenth Circuit

affirmed on other grounds, First National

Bank v. Petzoidt, 262 F.2d 540 (10th Cir.

1958), but held that the seed was fungi-

ble pursuant to a written agreement which

expressly authorized the commingling of

such goods.

The food placed in Merchants' facilities

is identified by owner, packer, or distri-

_butor. Although these commodities are

C-50

fungible within each lot, and, on occas-

ion, with other lots, they are neverthe-

less segregated according to the stated

ownership at the time they are received

and each tenant retains control over his

own product. At oral argument, Merchants

admitted it does not have the authority

to commingle the products without the

express authorization of the owner. There

has been no evidence presented to the

court that, in fact, the commodities are

commingled. This is not, therefore, the

typical bulk storage facility where the

warehouseman has the ability to commingle

fungible products such as grain or nuts

unless the parties specify otherwise.

Rather, each tenant expects that its goods

will be identified, segregated and retur-

ned upon request. The court is of the

opinion that this identification by the

tenant indicates an intent that the goods

not be considered fungible.

C-51

The court recognizes that the cases

cited above construing the meaning of

"fungible" have not done so in the con-

text of tax investment credits. It may

be argued that Congress intended the term

to be defined in such a manner that

wherever inherently fungible goods are

stored in bulk, such facilities will come

within the meaning of section 38 property

even if the commodities are identified

and held in bins according to individual

ownership. Nevertheless, Congress has

chosen terms that have certain legal

connections. In the absence of any ex-

pressions of congressional intent to the

contrary, the court feels constrained to

apply the legal meaning given to the term

"fungible" in contexts similar to the

situation at hand. The court therefore

concludes that the commodities stored in

Merchants' facilities at issue here are

not fungible within the meaning of section

C52

48 of the Internal Revenue Code as it

defines section 38 property. Accordingly,

the defendant's motion for summary judg-

ment on the grounds that plaintiff's

Modesto and Salinas facilities built in

1973 and 1974 fail to qualify for the

section 38 tax investment credit is

granted. Plaintiff's cross-motion for

summary judgment on this same issue

is denied.

DEPRECIATION

As a second ground for summary judg-

ment, the parties seek an adjudication as

to the applicable rate of depreciation to

be applied to the three buildings at issue

here. The parties have stipulated that

this court's ruling as to the eligibility

of the facilities for tax investment

credit under section 38 will be determin-

ative of the depreciation question.

Although the parties state that this

property is limited to the 150 percent

C-53

straight line method of depreciation in

the event it is not eligible for section

38 treatment, they have not briefed this

issue. Since the parties may not stipu-

late to the law, Los Angeles Shipbuildir

& Drydock Corp. v. United States, 289 F.

2d 222, 231 (9th Cir. 1961), the court

declines to rule on the correctness of

the parties' conclusion as to the

applicable rate of depreciation in this

instance. Should the parties wish such

a ruling, they must renew their motions

and support them by adequate briefing.

FRANCHISE TAX DEDUCTION

Plaintiff's motion to supplement its

complaint to allege that it has filed a

claim for refund as to franchise tax pay-

ments made for fiscal year 1974 is

granted. Accordingly, the Government's

motion for summary judgment on the

grounds that the court lacks subject

Matter jurisdiction over the franchise

C-54

tax claim is moot.

IT IS SO ORDERED.

DATED: 3-2-79

T.J. MacBride

JUDGE

APPENDIX D

Filed April 19, 1979

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

MERCHANTS REFRIGERATING COMPANY

CIVIL

OF CALIFORNIA, NO. S=-77

454 TIM

Plaintiff,

Vv.

UNITED STATES OF AMERICA,

Defendant

ORDER

Pursuant to this Court's Memorandum

entered on March 2, 1979, and the

Stipulation of the Parties,

IT IS HEREBY ORDERED that judgment be

entered in favor of the defendant, United

States of America, dismissing with pre-

judice Count I of the plaintiff's

Complaint for Tax Refund as Supplemented.

IT IS FURTHER ORDERED that judgment be

D-2

entered in favor of the plaintiff,

Merchants Refrigerating Company of

California, in the amount of $5,956 plus

interest as provided by law, on Count II

of Plaintiff's Complaint for Tax Refund

as Supplemented.

T.J. MacBride

UNITED STATES DISTRICT

JUDGE

— ae ee 8 ee ee

—_

—

No. 81-1533

In the Supreme Court of the United States

OcTOBER TERM, 1981

MERCHANTS REFRIGERATING COMPANY OF CALIFORNIA,

PETITIONER

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

IN OPPOSITION

Rex E. LEE

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

TABLE OF AUTHORITIES

Cases:

Commissioner V. Duberstein, 363 U.S. 378 ..............

Cooper Vv. Commissioner, 197 F.2d 951 ....................

Parkside Inc. v. Commissioner, 571 F.2d 1092........

Redwood Empire Savings & Loan Association v.

Commissioner, 628 F.2d 516 ‘ -

Singleton v. Wulff, 428 U.S. 106 -~......................-.....

United States v. Patrin, 575 F.2d 708 ....................

Statutes, rules, and regulations:

Internal Revenue Code of 1939 (26 U.S.C.) (1952

ed.) :

Section 117(e) : 7 .

EERE RCE nTT eee

I ag acidemia

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

BRI GEER CED GID acececncncncaccescssccnsceccccnsccssens

Section 48(a) (1) (B) (iii) —...-----------------.--000---

Rev. Rul. 74-452, 1974-2 Cum. Bull. 11 -..................

CIGD... sssetnereeenniannnnane

~ > >

>_> >

Iu the Supreme Court of the United States

OCTOBER TERM, 1981

No. 81-1533

MERCHANTS REFRIGERATING COMPANY OF CALIFORNIA,

PETITIONER

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

IN OPPOSITION

Petitioner seeks review of the decision below in

this federal income tax case holding that certain

refrigerated food storage facilities that it placed in

service during 1973 and 1974 were not used for the

“bulk storage of fungible commodities,” and there-

fore did not qualify for the investment tax credit

under Section 48(a)(1)(B) (iii) of the Internal

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

The pertinent facts may be summarized as follows:

Petitioner provides cold storage facilities for food

processors. Between 1973 and 1974, petitioner con-

structed refrigerated storage facilities which were

used for the frozen storage of perishable commodities.

No processing takes place in these structures. Food

processors deliver frozen fruits, vegetables, and fish

to petitioner packed in 64-cubic-foot tote bins, 50-

pound boxes, and cases of 10-ounce packages. Before

storage, the containers are marked with a descrip-

tion of the product, a warehouse lot number, and the

name of the owner, packer, or distributor. Each

processor retains control over its products while

stored, and is charged on the basis of quantity (Pet.

App. A-3).

On audit, the Commissioner of Internal Revenue

disallowed petitioner’s claimed investment credit for

its cold storage facilities as facilities used for the

bulk storage of fungible commodities. Petitioner’s

position was that food held in tote bins and boxes be-

fore final processing was stored in bulk, and the

interchangeability of containers within a particular

lot made the goods fungible. In this refund suit

brought by petitioner in the United States District

Court for the Eastern District of California, the dis-

trict court held that the fact that the goods stored in

petitioner’s facilities were identified as to the in-

dividual owners, who segregated their food and re-

tained total control over its ultimate disposition, de-

stroyed the fungibility of the stored food so that

petitioner’s facilities were not used for the bulk stor-

age of fungible commodities (Pet. App. C-48 to C-

52). It therefore entered summary judgment in

favor of the government (Pet. App. D-1 to D-2). The

court of appeals affirmed,’ concluding that the dis-

trict court’s holding was not clearly erroneous. The

court also refused to consider petitioner’s argument,

raised for the first time on appeal, that the cold stor-

age rooms were “giant refrigerators” eligible, as

“tangible personal property,” for the investment

credit pursuant to Section 48(a)(1)(A) of the Code

(Pet. App. A-5 to A-7).

1 The opinion of the court of appeals (Pet. App. A-1 to A-7)

is reported at 659 F.2d 116.

1. The decision below correctly disallowed petition-

er’s claimed investment credit for its cold storage fa-

cilities. The decision below properly applied the appli-

cable Treasury Regulations, Section 1.48-1(d) (5) (ii)

(26 C.F.R.), which provides that “property will con-

stitute a storage facility only if the facility is used

principally for the bulk storage of fungible com-

modities. Bulk storage means the storage of a com-

modity in a large mass prior to its consumption or

utilization. Thus, if a facility is used to store oranges

that have been sorted and boxed, it is not used for

bulk storage.” Accord, Rev. Rul. 74-452, 1974-2 Cum.

Bull. 11. Here, the record established beyond doubt

that the food stored in petitioner’s facilities was seg-

regated by owner, thereby destroying the fungibility

of the food items and the qualification of petitioner’s

facility as one for bulk storage. Contrary to peti-

tioner’s contentions (Pet. 25-29), the court of appeals

therefore properly viewed the district court’s ruling

as one involving a mixture of facts and law that did

not warrant reversal unless shown by petitioner to

be clearly erroneous. Commissioner v. Duberstein,

363 U.S. 278, 291 (1960); Parkside Inc. v. Com-

missioner, 571 F.2d 1092, 1095-1096 (9th Cir. 1977).

2. Petitioner further contends (Pet. 15-16) that

the court of appeals erroneously refused to consider

whether its facilities were in fact “giant refrigera-

tors” and thus were tangible personal property en-

titled to the investment credit under Section 48(a)

(1)(A) of the Code. Petitioner raised this essen-

tially factual argument for the first time in its brief

on appeal (Pet. App. A-6 to A-7). It was not men-

tioned in petitioner’s (supplemented) complaint (CR

20, 21E, at 18-25),” in its motion for summary judg-

2 “CR” references are to the docket control numbers assigned

by the district court clerk to the documents filed in the case.

ment and accompanying memorandum (CR 17), or

in its pretrial statement (CR 18). Accordingly, the

court of appeals properly refused to consider it.

United States v. Patrin, 575 F.2d 708, 712 (9th Cir.

1978); accord, Redwood Empire Savings & Loan

Association v. Commissioner, 628 F.2d 516, 521 (9th

Cir. 1980). And, contrary to petitioner’s assertions

(Pet. 17-20), the court of appeals did not depart

from these precedents, which approve the accepted

practice that “‘a federal appellate court does not

consider an issue not passed upon below.’” United

States v. Patrin, supra, 575 F.2d at 712, quoting

Singleton v. Wulff, 428 U.S. 106, 120 (1976).

Nor does the court of appeals’ refusal to consider

petitioner’s belated tangible personal property argu-

ment conflict with Cooper v. Commissioner, 197 F.2d

951 (4th Cir. 1952), as petitioner contends (Pet. 20-

21). In Cooper, the Tax Court held that the taxpayer

realized ordinary income to the exten‘ his collection of

interest claims against a bank exceeded the amount

he paid former depositors for these claims. The court

of appeals affirmed the Tax Court’s holding that the

amount realized did not constitute a tax-free gift,

and that there had been no sale or exchange of a

capital asset. It reversed and remanded the case,

however, for further proceedings in which the Tax

Court was to consider the possible applicability of

Sections 117(e), 117(f) and 23(¢) (2) of the Internal

Revenue Code of 1939 (26 U.S.C.) (1952 ed.)).* The

8 Section 117(f) of the 1939 Code provided that amounts

received upon the retirement of corporate certificates of in-

debtedness with interest coupons or in registered form were

considered received in exchange therefor. Section 117(e)

was the five-year capital loss carryover provision, and Section

23(g)(2) was the 1939 Code provision giving capital loss

characterization to losses incurred on worthless securities.

remand in Cooper was a matter of the court’s discre-

tion and is hardly a precedent for mandatory consid-

eration of petitioner’s belated argument.*

It is therefore respectfully submitted that the pe-

tition for a writ of certiorari should be denied.

Rex E. LEE

Solicitor General

APRIL 1982

* Petitioner asserts (Pet. 29) that the court of appeals

“admits that there was an error committed in the lower

court.” But the court held only that it was not convinced

that the district court’s findings were clearly erroneous (Pet.

App. A-5 to A-6).

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.