Opposition Brief — Sampson v. Commissioner

= Supreme Court, US.

~ EILED

Y) JUN 8 1988

No. 87-1733 Z:HOSREH, SeANOU aR

In the Supreme Court of the Gnited States

OCTOBER TERM, 1987

WILLIAM C. SAMPSON, ET UX., PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT

IN OPPOSITION

CHARLES FRIED

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

TABLE OF AUTHORITIES

Page

5 Cases:

Abrams v. Commissioner, 814 F.2d 1356 (9th Cir. 1987) . 2

Alford v. Commissioner, 800 F.2d 987 (10th Cir. 1986) . . 2

Cincinnati Transit, Inc. v. Commissioner, 455 F.2d 220

I hee er ard et Gee gia Gap ae ls 2

Donley v. Commissioner, 791 F.2d 383 (Sth Cir.), cert.

ee are eias ee CE os ik es ee he cause ees 2

Holman v. United States, 728 F.2d 462 (10th Cir. 1984) .. 4

Laing v. United States, 423 U.S. 161 (1976) ............ 2

SE CUS V. GOS, ee Gis WEN CU MOE 6 5 vcs eck ss cease alas 3

Medeiros v. Commissioner, 77 T.C. 1255 (1981) ........ 2

Neely v. United States, 775 F.2d 1092 (9th Cir. 1985) .... 4

Schulz v. Commissioner, 686 F.2d 490 (7th Cir. 1982)... . 4

United States v. Basye, 410 U.S. 441 (1973) ............ 3

Constitution and statute:

U.S. Const. Amend. V (Due Process Clause) ........... ae

Be ee I ec oe ok kn were eek no wh kwh ates

tv

(1)

In the Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-1733

WILLIAM C. SAMPSON, ET UX., PETITIONERS

V.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT

IN OPPOSITION

Petitioners contend that the Rules of Practice and Pro-

cedure of the United States Tax Court violate the Due

Process Clause because they did not allow petitioners’

family trust to intervene as a party-petitioner in this litiga-

tion respecting petitioners’ individual federal income tax

liability.

1. Petitioners created a “family trust” in furtherance

of a scheme to avoid payment of the tax due on the income

earned by petitioner William Sampson as an osteopath.

That personal income was assigned to the trust, and the

trust then purported to deduct petitioners’ personal, liv-

ing, and family expenses as business or administrative ex-

penses of the trust. Pet. App. 32, 33-34. The Commis-

sioner of Internal Revenue issued a notice of deficiency to

petitioners in which he determined that the income

reported by the trust was instead taxable to petitioners (/d.

at 33). No notice of deficiency was issued to the trust (/d.

at 40).

(1)

Petitioners initiated an action in the United States Tax

Court for a redetermination of the deficiencies asserted by

the Commissioner. During these proceedings, the trust

filed a motion to intervene as a party-petitioner in the Tax

Court. The Tax Court denied that motion without ex-

planation (see Pet. App. 37), but the court stayed the pro-

ceedings to allow the trust to appeal.

The court of appeals vacated the Tax Court’s order and

remanded for further proceedings (Pet. App. 36-42). Find-

ing the Tax Court’s denial of the motion to intervene to be

an appealable order (id. at 37-40), the court held that the

trust could not intervene as a party-petitioner because it

had not been issued a notice of deficiency (id. at 40).* The

court of appeals further held, however, that the Tax Court

has discretionary authority to permit intervention as a

nonparty (id. at 40-41). Because the Tax Court had not

given any reason for its denial of the trust’s motion to in-

tervene, the court of appeals vacated the Tax Court’s order

and remanded the case for the court to determine, in the

exercise of its discretion, whether intervention by the trust

as a nonparty was appropriate (id. at 41-42).

On remand, the Tax Court determined that the trust had

no justiciable interest in the litigation and, accordingly,

denied its request to intervene (Pet. App. 47-52). No ap-

peal was taken from that denial. Thereafter, the Tax Court

* With certain limited exceptions not pertinent here, it is well settled

that only individuals or entities that have been issued a notice of defi-

ciency May appear as party-petitioners in the Tax Court. See 26

U.S.C. 6213; Laing v. United States, 423 U.S. 161, 165 (1976);

Abrams vy. Commissioner, 814 F.2d 1356, 1357 (9th Cir. 1987); Alford

v. Commissioner, 800 F.2d 987, 988 (10th Cir. 1986); Donley v. Com-

missioner, 791 F.2d 383, 384 (Sth Cir.), cert. denied, 479 U.S. 885

(1986); Cincinnati Transit, Inc. v. Commissioner, 455 F.2d 220, 221

(6th Cir. 1972); Medeiros v. Commissioner, 77 T.C. 1255, 1260

(1981).

resumed the trial of petitioners’ case and sustained the

deficiencies determined by the Commissioner (id. at

43-46z). The court held that petitioners’ family trust

scheme was ineffective to shift to the trust the incidence of

the tax on the income earned by William Sampson as an

Osteopath (id. at 460-46s). The court of appeals affirmed

on the basis of the Tax Court’s opinion (id. at 32-35).

2. Petitioners contend (Pet. 19-28) that the failure of

the Tax Court’s rules to permit the intervention of the trust

as a party violates the Due Process Clause of the Fifth

Amendment. At the outset, we question whether this issue

is properly before the Court. The trust did not take an ap-

peal from the second order denying intervention and thus

was not a party in the court of appeals below. Indeed, the

question of intervention was not raised at all on the second

appeal. Petitioners have no standing to raise on their own

the denial to the trust of the right to intervene, and, as

laymen, they cannot be said to be representing the trust in

this Court. In any event, petitioners’ contention is wholly

without merit.

It has been clear since the seminal case of Lucas v. Earl,

281 U.S. 111 (1930), that, for purposes of the federal tax

laws, income is taxable to the person who earns it,

regardless of what arrangements he may make to divert

the payment of it elsewhere. Indeed, this Court has

described this principle regarding “anticipatory

assignments of income” as “a cornerstone of our

graduated income tax system.” United States v. Basye, 410

U.S. 441, 449-450 (1973). In this case, petitioner William

Sampson made an anticipatory assignment of the income

earned by him as an Osteopath to a trust established for

petitioners’ benefit. Accordingly, the courts below correct-

ly held (Pet. App. 34-35, 460-46s) that, under Lucas v.

Earl, supra, and its progeny, that income is taxable to him

without regard to the validity of the assignment to the

4

trust under state law. See, e.g., Neely v. United States, 775

F.2d 1092 (9th Cir. 1985); Holman v. United States, 728

F.2d 462 (10th Cir. 1984); Schulz v. Commissioner, 686

F.2d 490 (7th Cir. 1982).

The proceedings in the Tax Court to determine whether

the assigned income should be taxable to petitioner

William Sampson did not implicate any rights or interests

of the trust or its beneficiaries; accordingly, the failure to

allow the trust to intervene as a party plainly did not

violate due process. As the Tax Court explained (Pet.

App. 50-52), its jurisdiction was limited to adjudicating

the correctness under federal law of the deficiencies in

petitioners’ tax asserted by the Commissioner. A deter-

mination as to the property rights of the trust and its

beneficiaries under state law was not necessary to the Tax

Court’s decision respecting petitioners’ income tax

liabilities; consequently, the court’s decision could not

have any binding effect on the trust or any other parties

not before the court, and there was no reason to allow the

trust to intervene in the proceedings.

It is therefore respectfully submitted that the petition

for a writ of certiorari should be denied.

CHARLES FRIED

Solicitor General

JUNE 1988

GOVERNMENT PRINTING OFFICE 1988— 202.037/60498