Respondents Brief — Rutter v. Commissioner

= F dttice Supreme Court, US.

4 FILED

No. 83-2124 OCT 10 1964

hiANDERL STEVAS, |

Ch TK

In the Supreme Court of the United States

—

OCTOBER TERM, 1984

JAMES H. RUTTER AND

MARIE R. RUTTER AND J. H. RUTTER REX

MANUFACTURING COMPANY, PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT IN OPPOSITION

Rex E. LEE

Solicitor General

Department of Justice

Washington, D. C. 20530

(202) 633-2217

=

TABLE OF AUTHORITIES

Page

Cases;

Arnold v. United States, 404 U.S.

ROI ye Ee Re 5

Borden Co. v. Sylk, 410 F.2d 843 .........0000- 7

Catlin v. United States, 324 U.S. 229 ........... 5

Ceco Steel Products Corp. v. Commissioner,

BA a eee nee 4

Cobbledick v. United States, 309 U.S.

DE VElNGe dsb euauaeh ceeeetes sued esbedcees 5:

Cohen v. Beneficial Loan Corp.,

a ace k sé omnnpre ap ah 5

Commissioner v. S. Frieder & Sons,

EE Die es eee ct went wn bns 3, 6

Commissioner v. Smith Paper, Inc.,

0 er 3

Estate of Dixon v. Commissioner,

ee ee an cane ne emede 4

Estate of Smith v. Commissioner,

EE ee eee ekieaeéhenebecenee 4

Handshoe v. Commissioner, 252 F.2d 328 ...... 4

Kiker v. Commissioner, 218 F.2d 389 .......... 3

Licavoli v. Commissioner, 318 F.2d

RN a ae bas ome 4,6

Louisville Builders Supply Co. v. Commissioner,

rere are ee ee 4,6

(I)

II

Page

Cases—Continued:

Michael v. Commissioner, 56 F.2d 825,

cont. Gonted, TIS ae SI Kit nev bvecces cess .

Porter v. Commissioner, 453 F.2d 1231 ........ 3

Raymond I. Smith, Inc. v. Commissioner,

292 F.2d 470, cert. denied, 368 U.S.

OS ivccswiienerea i ereetiaettares 7

Ryan v. Commissioner, 680 F.2d 324,

cont. Gomand, Gis Ue Ge. kode decrccses 4, 6,7

Sampson v. Commissioner, 710 F.2d 262 ....... 4

United States v. California Eastern Line,

Bee.; FOO OR: Fae see ees aoa evens 3

United States v. Margiotta, 662 F.2d 131 ....... 5

Wilson v. Commissioner, 564 F.2d 1317,

oust. deaind; 450 UB. Ube kascaece bssccecy. 3, 6

W.W. Windle Co. v. Commissioner, 550 F.2d

BD svadsicadéhasisinctdaieenateeneseks 7

Statutes and regulation:

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

SPE: eines asnensucdavanssecewenebceenae 2

OO ov okkcsicsicusiaaeenns: 2

DE nau tvendducsadesbeesuceeeugaene l

RR -4'b hbo nd Senses dase eeu eee Se

fF PE ke tebeiesSeeeeiadsaneseanre 3, 6

DE otendbndncbetecenkevswneus 1,3, 4,6

pe UE os pe rrr 2

In the Supreme Court of the Hnited States

OCTOBER TERM, 1984

No. 83-2124

JAMES H. RUTTER AND

MARIE R. RUTTER AND J. H. RUTTER REX

MANUFACTURING COMPANY, PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT IN OPPOSITION

Petitioners contend that a pretrial order of the Tax Court

determining the party upon whom the burden of proof

would rest was a final “decision” immediately appealable to

the court of appeals under Section 7482(a) of the Internal

Revenue Code.

1. Pursuant to Section 534(b) of the Code,! the Commis-

sioner notified petitioner J.H. Rutter Rex Manufacturing

Company? that he planned to issue a notice of deficiency

‘Unless otherwise noted, all statutory references are to the Internal

Revenue Code of 1954 (26 U.S.C.), as amended (the Code or I.R.C.).

2The corporate petitioner’s case in the Tax Court was consolidated

with that »° James H. and Marie R. Rutter, two of the corporation’s

principals. The term “petitioner” as used herein refers to the corporation.

(1)

2

that would include an amount with respect to the accumu-

lated earnings tax imposed by Code Section 531. Petitioner

timely submitted a statement under Section 534(c) setting

forth seven grounds on which it proposed to rely to estab-

lish that its earnings “ha[d] not been permitted to accumu-

late beyond the reasonable needs of the business.” The

Commissioner subsequently issued a notice of deficiency

asserting against petitioner an accumulated earnings tax

liability of $446,658 for 1977 and $598,077 for 1978 (Doc.

26).3

Petitioner sought redetermination of the deficiency in the

Tax Court (Doc. 5). In August 1983, petitioner moved to

shift to the Commissioner the burden of proof with respect

to the seven grounds enumerated in the statement it had

earlier filed (Doc. 14).4 Following a hearing, the Tax Court

issued an order denying petitioner’s motion with respect to

the first five grounds and granting its motion with respect to

the other two (Pet. App. Al-A19). Petitioner filed a notice

of appeal from that order (Doc. 28).

The Commissioner moved to dismiss the appeal for lack

of jurisdiction, contending that the appeal was interlocu-

tory and was not taken from a final “decision” of the Tax .

Court (Pet. App. A20-A21). The court of appeals granted

“Doc.” references are to the original documents as numbered by the

Clerk of the Tax Court.

4Section 534(a)(2) generally provides that if the taxpayer in an

accumulated earnings tax case has submitted the statement described in

Section 534(c), the burden of proof in the Tax Court shall “be on the

Secretary with respect to the grounds set forth in such statement in

accordance with the provisions of such subsection.” The regulations

provide that the burden of proof will not shift to the Commissioner if

“the ground or grounds on which the taxpayer relies are not relevant to

the [Commissioner’s] allegation, or if relevant, the statement does not

contain facts sufficient to show the basis thereof.” Treas. Reg.

§ 1.534-2(b)(2).

3

that motion and dismissed the appeal in an unpublished

judgment order (id. at A26). A petition for rehearing with

suggestion of rehearing en banc was denied on April 6, 1984

(id. at A27-A28).

2. Section 7482(a) grants the courts of appeals jurisdic-

tion to review “decisions” of the Tax Court. Section 7459(c)

provides that “[a] decision of the Tax Court (except a

decision dismissing a proceeding for lack of jurisdiction)

shall be held to be rendered upon the date that an order

specifying the amount of the deficiency is entered in the

records of the Tax Court.” Reading these two Sections

together, the courts of appeals have generally held that the

term “decision” as used in Section 7482(a) refers to two (and

only two) types of action by the Tax Court: (1) an order

dismissing the proceeding before it for lack of jurisdiction;

and (2) an order formally determining the amount of a tax

deficiency or the absence thereof. See, e.g., Porter v.

Commissioner, 453 F.2d 1231, 1232 (Sth Cir. 1972); Com-

missioner v. Smith Paper, Inc., 222 F.2d 126, 129 (1st Cir.

1955); Kiker v. Commissioner, 218 F.2d 389, 392 (4th Cir.

1955); Michael v. Commissioner, 56 F.2d 825 (2d Cir.

1932), cert. denied, 296 U.S. 579 (1935). See also Wilson v.

Commissioner, 564 F.2d 1317, 1318 (9th Cir. 1977), cert.

denied, 439 U.S. 832 (1978) (order denying a. taxpayer's

motion to amend his pleadings is an appealable decision

where “(t]he order ha[s] the effect of dismissing the * * *

petition * * * for lack of jurisdiction”); Commissioner v.

S. Frieder & Sons, 228 F.2d 478, 482 (3d Cir. 1955) (Tax

Court order striking Commissioner’s deficiency claim is an

appealable decision where the effect is “to decide that it has

no such jurisdiction to redetermine the tax”). Cf. United

States v. California Eastern Line, Inc., 348 U.S. 351 (1955)

(Tax Court order dismissing case on the ground that no

renegotiable contract existed was an appealable “decision”.

4

Some courts have expanded the definition of “decision”

as used in Section 7482(a) to include a third category of Tax

Court orders — those that finally “dispose[] of the entire

proceeding before” the Tax Court. Louisville Builders

Supply Co. v. Commissioner, 294 F.2d 333, 339 (6th Cir.

1961). Most of these cases involve orders denying petitions

to intervene. E.g., Sampson v. Commissioner, 710 F.2d

262, 263 (6th Cir. 1983) (per curiam); Estate of Dixon v.

Commissioner, 666 F.2d 386, 388 (9th Cir. 1982); Estate of

Smith v. Commissioner, 638 F.2d 665, 668 (3d Cir. 1981).

The courts in these cases noted that a denial of intervention

finally disposes of the would-be intervenor’s petition, and

that review of his claim would not be available upon the

taxpayer’s appeal of the Tax Court’s decision on the merits.

Sampson, 710 F.2d at 263; Estate of Smith, 638 F.2d at

667-668. The courts also noted that an order denying inter-

vention is an appealable “final order” when issued by a

federal district court. Estate of Dixon, 666 F.2d at 388

(citing cases); Estate of Smith, 638 F.2d at 668 (same).

The common thread running through these cases is that

an appeal can be taken only from a final decision of the Tax

Court. See, e.g., Estate of Dixon, 666 F.2d at 388; Estate of

Smith, 638 F.2d at 668; Handshoe v. Commissioner, 252

F.2d 328, 329 (4th Cir. 1958) (per curiam). Interlocutory

orders of the Tax Court, like those issued by federal district

courts, are not subject to immediate appeal. Estate of

Dixon, 666 F.2d at 388; Estate of Smith, 638 F.2d at 668.

See Ryan v. Commissioner, 680 F.2d 324, 326-327 (3d Cir.

1982) (Tax Court order denying motion for summary

judgment ‘is not an appealable “decision”); Licavoli v.

Commissioner, 318 F.2d 281, 282 (6th Cir. 1963) (per

curiam) (Tax Court order striking certain defenses is not an

appealable “decision”); Ceco Steel Products Corp. v.

Commissioner, 150 F.2d 698, 699 (8th Cir. 1945) (“interme-

diate order governing only the course of procedure before

x

5

the Tax Court” is not an appealable “decision”); Michael,

56 F.2d at 825 (Tax Court order granting severance motion

is not an appealable “decision”).‘

The order of the Tax Court at issue here plainly was not a

final “decision” immediately appealable to the court of

appeals under the principles outlined above. That order did

not establish a deficiency in tax or the absence thereof. It

did not dismiss the case for lack of jurisdiction. And it did

not in any sense finally dispose of the entire proceeding

before the Tax Court. All the order did was determine, prior

to a trial on the merits, the allocation as between petitioner

and the Commissioner of the burden of proof with respect

to the seven factual issues raised by petitioner’s Section

534(c) statement. The interlocutory nature of that order

could scarcely be plainer. See, e.g., United States v. Margi-

otta, 662 F.2d 131, 140 n.23 (2d Cir. 1981) (characterizing as

interlocutory and hence nonappealable a ruling whose

effect was “merely [to] present the Government with a

heavier burden of proof”); Arnold v. United States, 404

F.2d 953, 958 n.6 (Ct. Cl. 1968) (characterizing as ititerlocu-

tory a trial commissioner’s order respecting burden of

proof). This Court noted in Catlin v. United States, 324

U.S. 229, 233 (1945), that “[{a] ‘final decision’ generally is

one which ends the litigation on the merits and leaves

nothing for the court to do but execute the judgment.” The

Tax Court’s burden-of-proof ruling did not have that effect.

‘The purpose of restricting appeals to final decisions is “to combine in

one review all stages of the proceeding that effectively may be reviewed

and corrected if and when final judgment results.” Cohen v. Beneficial

Loan Corp., 337 U.S. 541, 546 (1949). In this way, courts avoid the

fragmentary and piecemeal review that would be caused by a succession

of separate appeals from the various rulings to which a litigation may

give rise. See Cobbledick v. United States, 309 U.S. 323, 324-326

(1940).

6

3. Accordingly, petitioners err in contending (Pet. 7-11)

that the circuits are in conflict, in any way material to this

case, about the meaning of the term “decision” as used in

Section 7482(a). As we have noted, the courts have gener-

ally held that a “decision” of the Tax Court means a deci-

sion of the type referred to in Section 7459(c) — viz., an

order dismissing the proceeding for lack of jurisdiction or

determining the amount of a tax deficiency. Some courts

have also held, where they have been required to address the

question, that a “decision” may include certain other final

orders (such as orders denying motions to intervene) that

dispose of the entire proceeding and that would not be

reviewable absent an immediate appeal. But the courts have

uniformly held that an interlocutory order, which does not

dispose of the entire case and which can be reviewed in the

normal course upon appeal of the Tax Court’s decision on

the merits, is not a “decision” subject to immediate review.

Since the order at issue here — a pretrial order allocating

the burden of proof — was clearly interlocutory, petitioner

could not prevail under any of the cases it cites.®

6The cited cases (Pet. 7-8) are either inapposite or do not stand for the

proposition for which petitioner cites them. As we have noted (see page

4, supra), the courts in Ryan v. Commissioner, supra, and Licavoli v.

Commissioner, supra, held that certain interlocutory orders of the Tax

Court were not appealable decisions. The courts in Wilson v. Commis-

sioner, supra,and Commissioner v. S. Freider & Sons, supra, held that

orders striking certain pleadings were appealable decisions, but only

because the orders had the effect of dismissing the case for lack of

jurisdiction. The court in Louisville Builders Supply Co. v. Commis-

sioner, supra, held that an order compelling the taking of a deposition

was an appealable decision, but that order was “entered by the Tax

Court ina so-called Special Proceeding initiated for the sole purpose of

obtaining such order” (294 F.2d at 336), ina situation where a notice of

deficiency had not yet been issued. The three other cases petitioner cites

(Pet. 7) involve appeals of orders denying motions to intervene.

ee

7

4. Finally, there is no merit to petitioner’s contention

(Pet 16-23) that it will be unfairly prejudiced absent an

immediate appeal of the Tax Court’s burden-of-proof rul-

ing. “Every interlocutory order involves, to some degree, a

potential loss or harm.” Ryan v. Commissioner, 517 F.2d

13, 19(7th Cir.), cert. denied, 423 U.S. 892 (1975) (emphasis

in original). B-:t that risk “must be balanced against the

need for efficient federal judicial administration, the need

for the appellate courts to be free from the harassment of

fragmentary and piecemeal review of cases otherwise result-

ing from a succession of appeals from the various rulings

which might arise during the course of litigation” (ibid.).

Accord, Borden Co. v. Sylk, 410 F.2d 843, 846 (3d Cir.

1969). Even if the Tax Court erred in allocating the burden

of proof, petitioner will suffer no harm if it prevails in its

claim that it did not unreasonably accumulate earnings (see

W.W. Windle Co. v. Commissioner, 550 F.2d 43 (Ist Cir.

1977)), or if the location of the burden of proof turns out to

be irrelevant to the Tax Court’s ultimate conclusion (e.g.,

Raymond I. Smith, Inc. v. Commissioner, 292 F.2d 470,

474 (9th Cir.), cert. denied, 368 U.S. 948 (1961)).’ At all

events, petitioner’s interests can be fully protected by an

appeal in the normal course following a final decision by the

Tax Court, if that decision is adverse to it.

7’Petitioner claims (Pet. 18-19) that, absent an immediate appeal of

the burden-of-proof ruling, its effort to “formulate [its] trial evidence

and strategy” may be prejudiced or compromised. But this risk is

present whenever an interlocutory order (such as an order respecting

the introduction of testimony or evidence) is involved. A litigant is often

faced with a choice between altering his trial strategy to comply with the

trial court’s rulings, or standing his ground and presenting his claims to

the appellate court following an adverse decision on the merits. But the

existence of such a choice does not entitle a party to immediate appeal

of interlocutory orders.

8

It is therefore respectfully submitted that the petition for

a writ of certiorari should be denied.

Rex E. Lee

Solicitor General

OCTOBER 1984

DO})-198+-10