Amicus Curiae Brief — Arkansas Best Corp. v. Commissioner

0 Supreme Court, US

No. 86-751 ‘AY 7 987

Supreme Court of the United States

OcTOBER TERM, 1986

ARKANSAS BEST CORPORATION,

Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On Writ Of Certiorari To The

United States Court Of Appeals For The Eighth Circuit

BRIEF OF AMICUS CURIAE

THE CIRCLE K CORPORATION IN SUPPORT OF

PETITIONER

Tuomas Sub, II

Counsel of Record

CHARLES L. SAUNDERS, JR.

James L. RASMUSSEN

STEPHEN R. NELSON

Kemp, Surrn, DuncAN &

HamMonp, P.C.

200 Lomas Blvd. NW.

Albuquerque, New Mexico

87102-2240

(505) 247-2315

Of Counsel: A. Jerry BUS

GEHL P. BaBinec Bussy & Bussey, Lrp.

General Counsel Suite 215, Royal Biltmore

Tux Cine K. 2929 East Camelback Road

CORPORATION Phoenix, Arizona 85016

Int’) Headquarters Bldg. (602) 957-0071

1601 North Seventh Street

Phoenix, Arizona 85006 Counsel for

The (Circle K Corporation

(i)

TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................

THE INTEREST OF AMICUS CURIAE ...........

SUMMARY OF ARGUMENT......................

J Shc osdedcccccseccccsoccsccccsccescces

I. THE LANGUAGE OF SECTION 1221 AND

OF ITS INTERPRETATIVE REGULATION

PERMITS EXCLUSIONS BEYOND THOSE

EXPRESSLY ENUMERATED ..............

II. CONGRESS CONSIDERED AND

DECLINED TO ADOPT THE POSITION

TAKEN BY THE EIGHTH CIRCUIT IN

THIS CASE AND, INSTEAD, ACCEPTED

THE APPLICATION OF CORN PRODUCTS

. woceccccccccsecccssscoccccccecs:

III. THE EIGHTH CIRCUIT PANEL'S

INTERPRETATION OF CORN PRODUCTS IN

THIS CASE IS INCONSISTENT WITH THE

VIEWS OF THAT CIRCUIT EXPRESSED IN

ITS PRIOR DECISIONS ...................

IV. CORN PRODUCTS ALLOWS FOR THE

PROPER MATCHING OF TAX

CONSEQUENCES TO THE UNDERLYING

ECONOMIC SUBSTANCE OF BUSINESS

MOTIVATED TRANSACTIONS s

. —

()

TABLE OF AUTHORITIES

Page

Cases

Arkansas Best Corp. d Subsidiaries v. Commissioner,

800 F.2d 215 (8th Cir. 1986), cert. granted, 55

U.S.L.W. 3643 (U.S. Mar. 24, 1987)

KK) 1. 5. 11. 12

Burnet v. Harmel, 287 U.S. 103 (1932) .............. 14

Carsello v. Commissioner, 35 T.C.M. (CCH) 832

ee —

Commissioner v. Bagley & Sewall Co., 221 F.2d 944

Ghd Gin. BEERS . cc eee, 16

Commissioner v. Brown, 380 U.S. 563 (1965) ......... 14

Commissioner v. Court Holding Co., 324 U.S. 331

. 12—ö-ÿ—:(ͥ . ... 15

Commissioner v Ferrer, 304 F.2d 125 (2nd Cir.

1—„ẽ̈ßfↄç.:.c . —:—.. !!!! 13

Commissioner v. Gillette Motor Transport, Inc., 364

CB. SED GRRE oc eee 14, 15

Commissioner v. P. G. Lake, Inc., 356 U.S. 260

1— ... mß.c0.,,ôôc,,....... 14

Corn Products Refining Co. v. Commissioner, 350

eise. 1, 3, 4. 7. 8. 9. 11. 14, 15, 17

FS Services, Inc. v. United States, 413 F 2d 548 (Ct.

A.. . . „„es 16

Frank v. Commissioner, 321 F.2d 143 (8th Cir.

K . ooo 12

Greenspon v. Commissioner, 229 F.2d 947 (8th Cir.

1——ñ-ẽ7k᷑ ꝙ-f. . ... 12

Gregory v. Helvering, 293 U.S. 465 (183) 15

Hollywood Baseball Ass'n v. Commissioner, 423 F 2d

494 (9th Cir. 1970), cert. demed, 400 U.S. 848

rr ee 16

Hort v. Commissioner, 313 U.S. 28 (1941) ............ 14

Nieselbach v. Commissioner, 317 U.S. 399 (184) 14

(iii)

TABLE OF AUTHORITIES — (Continued)

Page

Malat v. Riddell, 383 U.S. 569 (1966) ............... 14

Schlumberger Technology Corp. v. United States, 443

r ee ae usecase esccuecs 15

Smith & Welton, Inc. v. United States, 164 F. Supp. 605

D ͤ » 226 16

Steadman v. Commissioner, 424 F. 2d 1 (6th Cir. 1970),

cert. denied, 400 U.S. 869 (197: 16

Union Pacific Railroad Co. v. United States, 524 F.2d

1343 (Ct. Cl. 1975), cert. denied, 429 U.S. 827

, DIESE 2 ~

United States v. Midland-Ross Corp., 381 U.S. 54

Nee b b 14

Vaaler v. United States, 454 F.2d 1120 (Sth Cir. 1972) 13

W. W. Windle Co. v. Commissioner, 65 T.C. 694 (1976),

appeal dismissed, 550 F.2d 43 (Ist Cir.), cert.

ES UE, OD CUED ccc ccc cc ccccccccccss —

Statutes and Rules

Internal Revenue Code of 1954 512212 3. 4. 5. 6. 14

eee 6

Revenue Act of 1921, ch. 136, 5206 (a) (6), 42 Stat.

r ELE SII OO e

Tax Reduction and Simplification Act of 1977, Pus. L.

No. 96-30, 91 Stat. 126 (1977) ................... 11

Revenue Act of 1978, Pus. L. No. 95-600, 92 Stat.

LESS EEL 11

Pus. L. No. 96-167, 93 Stat. 1275 (19799 11

Pus. L. No. 96-601, 94 Stat. 3495 (1980⸗⸗· 11

Economie Recovery Tax Act of 1981, Pus. L. NO. 97

r è »». 9%˙ é ꝗ q Z. .. 11

Tax Equity and Fiscal Responsibility Act of 1982,

Pus. L. No. 97-248, 96 Stat. 324 (1982)........... 11

(iv)

TABLE OF AUTHORITIES — (Continued)

Page

Interest and Dividend Tax Compliance Act of 1983,

Pus. L. No. 98-67, 97 Stat. 369 (1983)............ 11

Deficit Reduction Act of 1984, Pus. L. No. 98-369, 98

D A 0 11

Pus. L. No. 99-121, 99 Stat. 505 (19850) 11

Tax Reform Act of 1986, Pus. L. No. 99-514, 100 Stat.

Dr ˙ ˙²w˙˙m neee 11

Treas. Reg. $1.1221-1(a) (1957 )) 6

Legislative Materials

H.R. 10902, 121 Cong. Ree. 37,907 (1975) ....... 7, 9, 10

H.R. Rep. No. 704, 73d Cong., 2d Sess. 31 (1934).... 5

H.R. Rep. No. 1360, 94th Cong., 2d Sess. 3

% ⁰˙—⅜¼ͤ 9 reer 8, 10

S. Rep. No. 1392, 94th Cong., 2d Sess. 2-3 (1976) .. 8, 10

Miscellaneous Minor Taz Bills, 1975: Hearings Before

the House Committee on Ways and Means, 94th

Cong., Ist Sess., at 202-203 (1975) ............. 7, 10

STAFF OF THE JOINT CoMM. ON INT. Rev. TAX., 947TH

CoNG., 18ST SESS., DESCRIPTION OF TECHNICAL AND

MINOR BILLS LISTED FOR A HEARING, (Comm.

TT ²˙ r...... „ 9

CONGRESSIONAL RECORD, Vol. 121 (1975)

PT Kiubtusnech GaGa adda eee 7

CONGRESSIONAL RECORD, Vol 122 (1976)

e eee 10

CONGRESSIONAL RECORD, Vol. 122 (1976)

pp. 34,589, 34,664, 35,078, 35,377 ................. 10

Other Authorities

Rev. Rul. 78-396, 1978-2 C. B. 1111114111. 6

I.. ene 6

Rev. Rul. 58-40, 1958-1 C. B. 27ũ 5. 6

In THE

Supreme Court of the United States

OCTOBER TERM, 1986

No. 86-751

ARKANSAS BEST CORPORATION,

Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On Writ Of Certiorari To The

United States Court Of Appeals For The Eighth Circuit

BRIEF OF AMICUS CURIAE

THE CIRCLE K CORPORATION IN SUPPORT OF

PETITIONER*

THE INTEREST OF AMICUS CURIAE

The Cirele K Corporation (“Circle K“) is the plaintiff in a

case now pending before the United States Claims Court, The

Circle K Corporation v. United States, No. 12-86 T. A major

issue in that case involves the application of this Court's

decision in Corn Products Refining Co. v. Commissioner, 350

U.S. 46 (1955), to Cirele K's purchase and sale of shares of

stock of a corporation which owned producing oil and gas

reserves.

* Both Petitioner and Respondent have consented to the filing of this

brief, and the written consents are on file with the Clerk. The

decision below is reported at 800 F.2d 215 (8th Cir. 1986).

2

Cirele K is an operator of convenience stores with its

headquarters in Phoenix, Arizona. In the early 1960's, Cirele K

pioneered the operation of self-service gasoline facilities at its

convenience stores, and by 1980 gasoline sales accounted for

approximately 30% of Circle K's total sales and produced

customer traffic for a substantial percentage of its non-gasoline

sales.

Gasoline shortages in 1973-1974 and 1979-1980, and the

continued threat of future gasoline shortages, prompted Cir-

cle K’s management to seek arrangements for insuring ade-

quate and reliable sources of gasoline for its stores. In pursuit

of this goal, Cirele K tried during the 1960's and 1970's to

obtain long-term supply contracts with major oil companies for

refined gasoline and tried to acquire refineries. For various

reasons all of these attempts failed, and by the end of the

1970s, Cirele K remained without a reliable source of supply.

In 1980, Cirele K's attention was directed toward Nucorp

Energy, Inc. (Nucorp) as a possible solution to its gasoline

supply problem. Nucorp was an oil and gas exploration and

development company which had major producing oil and gas

reserves. After investigation and negotiations between Cir-

ele K and Nucorp, Cirele K purchased a substantial amount of

Nucorp stock in order to obtain a source of supply of gasoline

in the event shortages again occurred.

Nucorp expanded rapidly thereafter, incurring substantial

debt. As world-wide oil shortages ended in the early 1980's and

the price of oil dropped rapidly, Nucorp’s financial situation

became precarious, and in July of 1982, Nucorp filed for

reorganization under Chapter 11 of the Federal Bankruptey

Code. In early 1983, after it was clear that Nucorp would not

continue to be an available solution to the supply problem,

Cirele K sold its stock in Nucorp, suffering a substantial loss.

3

Cirele K deducted the loss as an ordinary loss on its income

tax return for its fiseal year ended April 30, 1983, based on this

Court’s decision in Corn Products and related cases. The loss

was disallowed on audit by the Internal Revenue Service,

Cirele K paid the resulting deficiency, filed a Claim for Refund

and, after the claim was disallowed, filed suit for refund of the

tax paid in the United States Claims Court. The Government's

discovery in the Claims Court case is almost completed, and

the trial will probably be completed before the end of 1987

unless it is postponed pending this Court’s decision in this

case.

If this Court should affirm the opinion below, holding that

shares of stock can never be treated as anything other than

capital assets when held by a taxpayer other than a securities

dealer, no matter why they were purchased, held and sold, and

regardless of the attendant circumstances, that affirmation will

adversely affect Circle K's refund suit on this issue. If this

Court instead reaffirms the principles set forth in its Corn

Products decision, Cirele K will be given the opportunity to

prove that its losses should not be treated as losses from the

sale of capital assets and, if it carries that burden successfully,

to deduct those losses against the income from its business in

which those losses were incurred.

SUMMARY OF ARGUMENT

This Court’s decision in Corn Products Refining Co. v. Com-

missioner, 350 U.S. 46 (1955), acknowledges and stands for the

proposition that the literal language of the enumerated exelu-

sions set out in the predecessor to Section 1221 of the Internal

Revenue Code of 1954 does not include al! non-capital assets.

This Court decided that a narrow construction of the term

“eapital asset and a broad interpretation of the enumerated

4

exclusions are needed to effect Congressional purpose. Id. at

52.

Two of the three judges who heard this case in the Court of

Appeals decided, however, that the Corn Products decision

must be confined to its facts and may not be read to permit the

treatment of stock held by someone other than a securities

dealer as anything other than a capital asset, regardless of the

circumstances and purposes for which it was purchased and

held. Their decision conflicts with decisions of this Court, with

every other Circuit Court that has addressed the issue, with the

United States Claims Court and the United States Tax Court,

and is inconsistent with the prior opinions of the Eighth

Cireuit Court of Appeals itself.

The language of Section 1221 of the Code and its interpreta-

tion by Treasury regulations and Internal Revenue Service

rulings permits judicial exclusion of transactions that should

not receive capital treatment when that exclusion is necessary

to effect Congressional purpose. Congress has considered and

accepted Corn Products as applied by the courts generally,

ineluding its application to purchases of stock, and has consid-

ered and declined to adopt the position of the Eighth Cireuit

pane! in this case.

Corn Products recognizes the practical considerations of

doing business. It acknowledges that it is impossible to antici-

pate by statutory rule the almost infinite spectrum of ways in

which taxpayers may need to respond to the operating needs of

their businesses and allows the proper matching of tax conse-

quences to the economic substance of transactions.

5

ARGUMENT

I. THE LANGUAGE OF SECTION 1221 AND OF ITS

INTERPRETATIVE REGULATION PERMITS EX-

CLUSIONS BEYOND THOSE EXPRESSLY

ENUMERATED.

The majority of the three-judge panel for the Court ot

Appeals decided that the shares of stock purchased by Arkan-

sas Best had to be treated as capital assets because they were

not specifically described by any of the statutory exelusions, as

though Code Section 1221 defined “capital asset to mean, “all

property held by the taxpayer... ezcept,” or “all property...

other than,” or all property...except the following,” e.

language not permitting the exclusion of any item of property,

regardless of circumstances, unless described in a statutory

exclusion.’ But the statute does not say that, Treasury Regula-

tions do not give the definition that construction, and the

Internal Revenue Service does not follow that construction in

its administration of the capital gain and loss provisions.

Section 1221 simply says that “capital asset means property

held by the taxpayer . . but does not inelude It does not

' Arkansas Best Corp. & Subsidiaries v. Commissioner, 800 F.2d 215,

218 (8th Cir. 1986). The Court of Appeais opinion (/d. at 218)

quoted a statement in the Ways and Means Committee Report,

H.R. Rep. No. 704, 73rd Cong., 2d Sess. 31 (1934), for the Revenue

Bill of 1934, stating, “It will be noted that the definition [of

“eapital assets] includes all property, except as specifically ex-

eluded.” The remark was not a contemporaneous construction (the

statutory language, “capital asset means property held by the

taxpayer ... but does not inelude originated 13 years earlier

in the Revenue Act of 1921, ch. 136, 42 Stat. 227, at 233 (1921))

and the remark was not made in the context of changing the

definition. The only definitional change made by the House was to

say, “all property,” and the language it has always used to

preface the statutory exclusions, but does not include,” does

not rule out the possibility that “capital asset also “does not

inelude some item of property not falling within the deserip-

tions of the classes excluded by the statute if that exclusion is

necessary to effect Congressional purpose.

The Treasury Regulation's interpretation“ is consistent with

this construction. It says, The term, capital assets, includes

all classes of property not specifically excluded by section

1221” (emphasis added), meaning simply that there are no

other excluded categories or classes. That is not the same as

saying, and the Regulation does not say, that every item of

property outside the description of each excluded class is a

capital asset. A share of stock in Acme Corporation can

represent among other possibilities a long-term portfolio in-

vestment for an investor, inventory for a securities dealer, the

right to a ratable share of Acme’s production for Acme s

distributor, an opportunity for a short-swing profit on the stock

market for a securities trader, and future compensation income

upon its sale for Acme's employee. The Internal Revenue

Service has construed the definition of Section 1221 in that

manner in administering the capital gain and loss provisions.”

* The phrase originated in Section 206(a) (6) of the Revenue Act of

1921, ch. 136, 42 Stat. 227, 233 (1921).

* See Code Section 7701 (e) defining “ineludes” and “including.”

* Treas. Reg. § 1.1221-1(a) (1957).

* See, g Rev. Rul. 58-40, 1958-1 CB. 275; Rev. Rul. 72-238, 1972-1

CB. 65; Rev. Rul. 78-396, 1978-2 CB. 114.

7

Il. CONGRESS CONSIDERED AND DECLINED TO

ADOPT THE POSITION TAKEN BY THE EICHTH

CIRCUIT IN THIS CASE AND, INSTEAD, AC-

CEPTED THE APPLICATION OF CORN PRODUCTS

TO STOCK.

The House Committee on Ways and Means for the 94th

Congress was asked to amend the Code by adopting a flat rule

that all securities acquired for business reasons (except securi-

ties acquired by dealers and except for certain bonds acquired

by banks) be considered capital assets. Dispositions of all such

securities would then receive capital gain or loss treatment

regardless of the circumstances surrounding their acquisition

and sale. Both houses of Congress declined to adopt such a

rule and, instead, passed legislation which accepted the appli-

eation of Corn Products to provide ordinary gain or loss

treatment for sales of securities in appropriate circumstances.

The history of this Congressional action began in 1975 when

a member of the Committee on Ways and Means introduced

H.R. 10902 in the first session of the 94th Congress, proposing

the addition of a new Section 1254 to Subchapter P of the

Internal Revenue Code of 1954.° The committee reports on the

bill deseribed current law and the reason for H.R. 10902 as

follows:

The question of whether a security (or any asset) is a

capital asset is factual and depends on the facts and

circumstances of the particular case, le., whether the

taxpayer acquired and held the security as an investment

or whether he acquired and held it for sale to customers in

*121 Cone. Rec. 37,907 (1975). The text of H.R. 10902 as intro-

duced may be found in Miscellaneous Minor Taz Bills, 1975: Hear.

ings Before the House Committee on Ways and Means, 94th Cong., lst

Sess., at 202-203 (1975).

the ordinary course of business or held the stock for use in

Purchases of stock to protect the taxpayer's source of

income or his source of supply of another company’s

products have been held to be situations of this general

kind where taxpayers have often been upheld in treating

their loss as ordinary rather than capital. Few, if any,

situations have arisen, however, where in similar cireum-

stances a gain on later sale of the stock or securities has

been held to be ordinary income. [Footnote omitted. |

Your committee has concluded that, under present law, a

taxpayer can too readily obtain the best of both worlds

when he sells or exchanges a stock or other security and

knows whether he has a gain or a loss, by contending that

he did not hold the stock as an investment (if he wants

ordinary loss treatment) or that he did hold it as an

investment (if he wants capital gain treatment).

H.R. Rep. No. 1360, 94th Cong., 2d Sess. 3 (1976); 8S. Rep. No.

1392, 94th Cong., 2d Sess. 2-3 (1976). Each of the three cases

cited by the reports as examples of current law applied the

approach of Corn Products to determine whether a loss on the

sale or worthlessness of stock that had been purchased by a

business or for a business purpose should be treated as an

ordinary or capital loss.’

" Union Pacific R K Co. v. United States, 524 F.2d 1343 (Ct. Cl. 1975),

cert. demed, 429 U.S. 827 (1976) (on the facts, upholding ordinary

loss treatment); N MN. Windle Co. v. Commissioner, 65 T.C. 694

(1976), appeal dismissed, 550 F.2d 43 (Ist Cir.), cert. denied, 431

U.S. 966 (1977) (on the facts, denying ordinary loss treatment);

Carsello v. Commissioner, 35 TCM. (CCH) 832 (1976) (on the

facts, upholding ordinary loss treatment).

H.R. 10902 addressed this by requiring, as a condition

precedent to claiming an ordinary loss, that the taxpayer notify

the Internal Revenue Service within 30 days after acquiring the

security that he did not acquire it as an investment.”

The Department of the Treasury opposed H.R. 10902 and

suggested an alternative solution, almost identical to the rule

adopted by the Eighth Cireuit panel's majority opinion in this

ease: “Treasury suggests that the Committee consider whether

ordinary income and loss treatment on the sale of securities

should be eliminated in all cases.” STAFF OF THE JOINT Com™M.

on Int. Rev. Tax., 94th Cone. Ist Sess., Descriprion oF

TECHNICAL AND Minor Bits Listep ror A HEARING,

(Comm. Print 1975).”

H.R. 10902 provided that if a business taxpayer (other than a

securities dealer) realized a loss on sale of the security, he would

be permitted to contend for ordinary loss treatment only if he had

filed the notice of no investment purpose within 30 days after his

purchase, and if he had not filed the notice, he would receive capital

loss treatment, regardless of the circumstances. If, however, the

taxpayer had filed the notice of no investment purpose, a gain on

the later sale of the security would not be given capital gain

treatment, regardless of circumstances. The bil! left the Commis-

sioner free to impose ordinary gain treatment under Corn Products

even though the business taxpayer did not file the notice.

At a public hearing on the bill before the Ways and Means

Committee, one of the witnesses also urged the Treasury Depart-

ment's alternative of a flat prohibition:

I would suggest to the committee when they mark up this bill

that they consider a flat rule that all securities acquired by

businesses should be considered capital assets and therefore

receive capital gains treatment, except for dealers in securities,

who would obviously be accorded ordinary income treatment.

Also the bank bonds under section 852, which is mentioned in the

pamphlet should be exempted.

The Committee on Ways and Means did not adopt the

proposed alternative. Instead, it approved H.R. 10902, a-

cepting the possibility of ordinary loss treatment for securities

acquired for business purposes and reported the bill to the full

House which passed it as reported on August 24, 1976. The

Senate Finance Committee also did not adopt the Treasury's

suggestion, although it amended the bill to prohibit the tax-

payer from avoiding his notice of no investment purpose by a

transfer to a related party that would not file the notice The

bill, as amended, was reported to and passed by the Senate on

October 1, 1976.“ The House and Senate adjourned on that

day, and H.R. 10902 did not go to a conference of the two

houses.

Since 1976, five Congresses have had the opportunity to

return to the subject and reconsider the proposed ban on

ordinary gain or loss treatment for sales of stock which both

the House Committee on Ways and Means and the Senate

Miscellaneous Minor Taz Bills, 1975: Hearings Before the House

Committee on Ways and Means, 94th Cong. Ist Sess. 149-150 (1975)

(Statement of Robert Brandon, Director, Public Citizens’ Tax

Reform Research Group).

122 Cone. Rec. 23,549 (1976). On the floor, the Chairman of the

Committee on Ways and Means (Mr. Uliman) and a minority

member (Mr. Steiger) urged passage, explaining the bill as in the

committee reports. 122 Cone. Rec. 27,459-60 (1976). The text of

Section 1254 in H.R. 10902 as reported and passed by the House

may be found in H Rer. No. 1360, 94th Cone., 2d Sess... at 6-7

(1976).

122 Cone. Rec. 27,499 (1976).

For a description of the Senate Finance Committee amendment, see

8. Rer. No. 1392, 94th Cone. 2d Sees. 4-5 (1976).

122 Cong. Ree. 34,589, 34,664 (1976).

122 Cong. Rec. 35,078, 35,377 (1976).

Committee on Finance declined to adopt in 1976. Although

Congress has considered and enacted tax legislation in each of

the years 1977 through 1986," it has not passed any provision

to place gain or loss from disposition of stock beyond the reach

of Corn Products or even to place some limitation on the

application of that decision.”

III. THE EIGHTH CIRCUIT PANEL'S INTERPRETA.

TION OF CORN PRODUCTS IN THIS CASE IS IN.

CONSISTENT WITH THE VIEWS OF THAT

CIRCUIT EXPRESSED IN ITS PRIOR DECISIONS.

The majority on the Eighth Circuit's three-judge panel in

this case said,

We do not read Corn Products as either requiring or

permitting the courts to decide that capital stock can be

anything other than a capital asset under Section 1221.

800 F.2d at 221. This narrow reading of Corn Products is not

reflected in any prior opinion of the Eighth Cireuit. In con-

trast, that Court had, prior to its decision in this case, avoided

" See, ¢.g., Tax Reduction and Simplication Act of 1977, Pun. L. No.

95-30, 91 Stat. 126 (1977); Revenue Act of 1978, Fun. L. No. 95-

600, 92 Stat. 2763 (1978); Pus. L. No. 96-167, 93 Stat. 1275 (1979),

Pus. L. No. 96-601, 94 Stat. 3495 (1980); Economie Recovery Tax

Act of 1981, Pun. L. No. 97-34, 95 Stat. 172 (1981); Tax Equity and

Fiscal Responsibility Act of 1982, Pus. IL. No. 97-248, 96 Stat. 324

(1982); Interest and Dividend Tax Compliance Act of 1983, Pun.

L. No. 98-67, 97 Stat. 369 (1983); Deficit Reduction Act of 1984,

Pus. L. No. 98-369, 98 Stat. 494 (1984); Pre. L. No.99-121, 99

Stat. 505 (1985); Tax Reform Act of 1986, Pre. L. No. 99-514, 100

Stat. 2085 (1986).

" Cf. Corn Products Ref. Co., 350 U.S. 46, 52-53 (1955) (in view of a

well-recognized 20-year-old interpretation, Congress failure to

change it while re-enacting the Code on several occasions “be-

speaks congressional approval )

12

such a dogmatic, inflexible approach. The Eighth Circuit's

opinions on the process of determining whether some item of

property is within or without the Codes capital asset defini-

tion are as follows."’ In Greenspon v. Commissioner, 229 F 2d

947, 951 (Sth Cir. 1956):

In general, the courts take the position thet each case

must be determined upon its particular facts, end that no

definite formula for deciding cases of this type can be

prescribed. | Emphasis added. |

In Frenk v. Commissioner, 321 F.2d 143, 148 (8th Cir. 1963):

It has been said that no fixed formula exists for resolving

the issue; that no one factor is necessarily decisive, and

that “a congeries of factors is to be considered and

weighed.” Tidwell v. Commissioner, 298 F 2d 864, 866 (4

Cir. 1962); Leckhart v. Commissioner, 258 F 2d 343, 347 (3

Cir. 1958).

And from the same opinion, d. at 148-149:

We also have in mind that the phrase “capital asset in

§ 1221 os to be narrowly applied; that its exclusions are to

be interpreted broadly; and that every day operations of a

business are directed to ordinary income or loss rather

than te capital gain or loss Corn Products Refining Co. v.

Commissioner, 350 U.S. 46, 52 (1955); Commusmeoner vo.

P. G. Lake, Inc., 356 U.S. 260, 265 (1958); Commissioner v.

Gillette Motor Transport, lac. 364 U.S. 130, 134 (1960).

Te mayonty bunten of the Eighth Cirewit's three-judge panel in

this case ignores these views. It cites to n

321 F.2d 143 (8th Cir. 1963), but only for the holding that since

the taxpayers im that case were in the business of selling unte.

they were not entitled to capital gain treatment fer their stock sale

profits. 800 F 2d at 219.

13

In Vaaler v. United States, 454 F.2d 1120, 1122 (8th Cir. 1972):

Over the years considerable case law has evolved to fur-

ther illuminate the meaning of the term “capital asset. In

Commissioner v. Gillette Motor Transport, 364 U.S. 130, at

133, 80 S.Ct. 1497, at 1500 4 L.Ed.2d 1617, at 1621, Mr.

Justice Harlan writing for the Court said, “While a capital

asset is defined in §117(a)(1) as ‘property held by the

taxpayer, it is evident that not everything which can be

called property in the ordinary sense and which is outside

the statutory exclusions qualifies as a capital asset ....

Thus the Court has held that an unexpired lease, Hort v.

Commissioner, 313 U.S. 28, 61 S. Ct. 757, 85 L.Ed. 1168,

corn futures, Corn Products Ref. Co. V. Commissioner, 350

U.S. 46, 76 S.Ct. 20, 100 L.Ed 29, and oil payment rights,

Commissioner v. P.G. Lake, Inc., 356 U.S. 360, 78 S.Ct. 691,

2 L.Ed.2d 743, are not capital assets even though they are

concededly ‘property’ interests in the ordinary sense.“

And from the same opinion, id., at 1122, quoting approvingly

from Commissioner v. Ferrer, 304 F.2d 125, 129 (2d Cir. 1962):

Section 117(a) of the 1939 Code, now § 1221 of the 1954

Code, 26 U. S. C. A. § 1221, tells us, not very illuminatingly.

that “capital asset” means property held by the taxpayer

(whether or not connected with his trade or business), but

does not include four (now five) types of property therein

defined. However it has long been settled that a taxpayer

does not bring himself within the capital gains provision

merely by fulfilling the simple syllogism that a contract

normally consiitutes “property,” that he held a contract and

that his contract does not fall within a specified exclusion.

C. I. R. v. Gillette Motor Transport, Inc., 364 U.S. 130, 134-

135, 80 S.Ct. 1497, 4 L.Ed.2d 1617 (1960); Surrey, Defini-

tional Problems in Capital Gains Taxation, 69 Harv. L.

Rev. 985, 988 (1956). This is easy enough; what is difficult,

14

perhaps impossible, is to frame a positive definition of

universal validity. [Emphasis added. |

IV. CORN PRODUCTS ALLOWS FOR THE PROPER

MATCHING OF TAX CONSEQUENCES TO THE

UNDERLYING ECONOMIC SUBSTANCE OF BUSI-

NESS MOTIVATED TRANSACTIONS.

This Court, in Corn Products and in other cases which

preceded and followed it, has consistently held that the Code

definition of capital asset must be interpreted narrowly and the

exclusions from that definition broadly,” in order to properly

categorize capital and non-capital assets. These cases recog-

nize the practical impossibility of drafting a statute that would

1 Corn Products Ref. Co. v. Commissioner, 350 U.S. 46, 52 (1955). Cf.

United States v. Midland-Ross Corp., 381 U.S. 54 (1965); Commis-

sioner v. Brown, 380 U.S. 563 (1965); Commissioner v. Gillette Motor

Transport, Inc., 364 U.S. 130 (1960); Commissioner v. P. G. Lake,

Inc., 356 U.S. 260 (1958); Kieselbach v. Commissioner, 317 U.S. 399

(1943); Hort v. Commissioner, 313 U.S. 28 (1941); Burnet v.

Harmel, 287 U.S. 103 (1932).

Respondent in its Brief on Petition for a Writ of Certiorari (pp. 11

and 12) misperceives that a statement of this Court in Malat v.

Riddell, 383 U.S. 569, 572 (1966), supports Respondent's belief

“that this Court’s holding in Corn Products ... was that the corn

futures in the cireumstances of that case fell within the ‘inventory’

exception to what is now Section 1221.“ As support for that reading

of Corn Products, the Respondent refers to a statement in this

Court's opinion in Malat which Respondent quotes as follows: [a

literal reading of [Section 1221] is consistent with [its] legislative

purpose.” The Respondent, however, substituted “Section 1221”

for this Court's reference to “the statute.” The substitution signifi-

eantly distorts the meaning of this Court’s statement. [The

statute” to which this Court was referring was paragraph (1) of

§ 1221, and the question was whether a literal reading of the word

“primarily,” in paragraph (1) to mean, “of first importance,” was

consistent with the legislative purpose of Section 1221.

15

precisely divide all assets into capital and non-capital catego-

ries in all the contexts and cireumstances which may arise.“

Rather than elevate form over substance,” as does the

majority opinion of the Eighth Cireuit panel in this case, this

Court has considered the purpose for which an asset was

acquired and held, together with its nominal nature. This

approach allows tax consequences to turn on the underlying

economic substance of a transaction, taking into account the

context and relevant circumstances surrounding the purchase,

retention, and disposition of an asset by the taxpayer, rather

than solely on the nominal nature of the asset involved.

Similarly, prior cases and courts which have interpreted and

followed Corn Products have recognized that the nominal form

of the asset is not determinative. Thus, courts have determined

that in the context of a particular factual situation, stock

purchased and held to acquire markets, marketing technique

and know-how.“ baseball players’ contracts which although not

primarily held for sale were the essence of the taxpayer's

1 This impossibility was acknowledged in Commissioner v. Gillette

Motor Transport, Inc., 364 U.S. 130 (1960), as follows: “While a

capital asset is defined in [the predecessor to § 1221] as ‘property

held by the taxpayer,’ it is evident that not everything which can be

ealled property in the ordinary sense and which is outside the

statutory exclusions qualifies as a capital asset. Id. at 134.

” This Court has long held that it is the substance and not the form

of a transaction which is determinative of federal income tax

consequences. See, e. g., Commissioner v. Court Holding Company,

324 U.S. 331, 334 (1945), Gregory v. Helvering, 293 U.S. 465, 470

(1935).

Schlumberger Technology Corp. v. United States, 443 F.2d 1115 (5th

Cir. 1971).

16

business,” bonds deposited as security for the performance of

a contract,” stock purchased to prevent a lawyer from being

terminated as that corporation’s legal counsel,” stock pur-

chased to insure a supply of dresses for a department store,”

and stock acquired to insure a source of supply of petroleum

products for a wholesaler of petroleum products,” were not

capital assets. Congress could not draft a capital asset defini-

tion which would give the correct classification simply by

looking up any of the foregoing, or any as yet unanticipated

items, in a statutory list of exclusions and inclusions. The

courts, however can, and do, make the statute work.

* Hollywood Baseball Ass'n v. Commissioner, 423 F.2d 494 (9th Cir.

1970), cert. denied, 400 U.S. 848 (1970).

* Commissioner v. Bagley d Sewall Co., 221 F.2d 944 (2nd Cir. 1955).

* Steadman v. Commissioner, 424 F.2d 1 (6th Cir. 1970), cert. denied,

400 U.S. 869 (1970).

* Smith & Welton, Inc. v. United States, 164 F. Supp. 605 (D. Va.

1958).

„S Services, Inc. : United States, 413 F.2d 548 (Ct. Cl. 1969).

17

CONCLUSION

Thirty-two years have passed since this Court's decision in

Corn Products. Over that period the lower courts have devel-

oped a substantial and flexible body of case law in reliance on it

which has adapted tax consequences to the substance of busi-

ness transactions. Congress has recognized and accepted that

body of case law, effectively reaffirming it as an appropriate

interpretation of the statute and Congressional purpose. If and

when Congress chooses to change that law it may easily do so

prospectively. The decision of the Eighth Circuit panel below

attempts to overrule this Court’s opinions on the subject and

the case law based upon them. It should be reversed.

Respectfully submitted,

THOMAS Smipr, II

Counsel of Record

CHARLES L. SAUNDERS, JR.

JAMES L. RASMUSSEN

STEPHEN R. NELSON

Kemp, Situ, DuNcAN &

HamMonp, P.C.

200 Lomas Bivd. N.W.

Albuquerque, New Mexico

87102-2240

(505) 247-2315

Of Counsel: A. Jerry BUGA

GEHL P. BABINEC

General Counsel

Tux Circe K.

CORPORATION

Int'l Headquarters Bldg.

1601 North Seventh Street

Phoenix, Arizona 85006

Bussy & Bussy, Lrp.

Suite 215, Royal Biitmore

2929 East Camelback Road

Phoenix, Arizona 85016

(602) 957-0071

Counsel for

The Circle K Corporation