Petition for Writ of Certiorari — J. G. Boswell Co. v. Commissioner

IN THE

Supreme Court of the United State

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' Parker & Son, Inc., Law Printers, Los Angeles. hone MA. 6-9171.

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OK TORER L KM, 1§%)2.-

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J. G. Boswetit Com PANT and LF Cr. }OSWELL Ce IMPANY

(successor by.merger to Tulare Lake Land Company),

| Petitioner,

——— VS.

CoMMISSIONER OF INTERNAL. REVENUE,

aca | , Ss Respondent.

PETITION FOR WRIT OF CERTIORARI.

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Mervin D. Witson,: a

621 South Hope Street,

7 Los Angeles 17, Calitornia,

Counsel for Petitioner.

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eas : - PAGE

; Opinions tees oe oy ieee Cape A TEN! TAOS GN

. Grounds-uyen which jurisdiction of this court is inveked..:.... 2.

‘Dveniae pre-ented for* review... “ae lianas a yrotee

Statutes and regulations inyolved........ soncentptenlinigiabetes oy Ra Ack :

Statement of the ATE 7

of Appeals for gfe Ninth Circuit.....:.....:.. 10

Reasons for granting the writ... . il

*1.. The Circuit Court of Appeals has rendered a decision

in conflict with applicabl€ decisions of this court.......... IL

2 a Circuit Court of Appeals below has rendered a

| decision ‘in_conflict_-with-the decisions of other Circuit

neta tS Courts of. Appeal on the same matter ....0....-...ssseceessse 13

i 3. The court below in holding that this cofirt’s decision in

: Hort v. Commissioner, 313 U. S. 28, “is controlling,

_ reached a decision in conflict with statutory provisions

. and .in conflict with the decision of this gourt in Roa:

Hort. case itself......... 14 |

Conclusion eecaeeees

Appendix : -

“|. Opinion of - the United States Court of Appeals for the

Ninth A. prcvihenniancipeianissinmietbaeds feoncebnn App. p. \l

Judgment © apa ,

‘SUBJECT INDEX.

Py 4

‘Jurisdiction of BE and the United States Court

ARABLE OF MI ( THORITIES CITED — ’

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- CASES * a . PAGE,

Vicon : Association, Ine’ v.. | hited) States 239 F. x 260... 14

Bonwit Tele + & Co. v. Commissioner, 53°F. 2d 381, cert. den,

Wt USS. of) clara AA fay a Saints OY: Saueeen +... 16 fF 3

- Farmer's Appeal. ie. 2. Al., ee a Sele Seay 15

Fartiers and Merchants ‘Bank of coahaale: 59 F.2d 912... 18.

Ferguson v. Commissioner, 59 F. 2d 893.,... Pika irrarer key | ke

Helvering’v: Owens, WEL. S. 468........ EON, Ube ed Ph, 7S

Hort v. Commissioner, 313 U.S. 28.20 cscceectetecceeee a, 15).16->-

Josey v, Commissioner, 10% Fy 24 453. ec cneinnagituetie P11 er

Maasé, v. Higgitis, M2 U. 8. H3 ae sa esite ee ascciinks on eee .

| Moore, Mary Younig:-207- Fed. 265, cert. den, 347.U. $942 16°

" Pollack v. Farmers'I Loan and Trust Company, 157 U. S. 429-11 : ss

Portinoutht Harbor Jand anid. Hotel Company. United. | |

States, 200 U. S. 327. sadldbianle itisndectentelaellatg eecselanaaigiains “UU

Pumpelly v: ase Fs and Mississippi Canal Company, 13

Wall, (U.S. 166) 20 L. Ed. 57. senestapeverenecsvepereneee Ae

Raytheon I PO SIRE v — Commissioner ,. 1H F:

2d- 110 hres ceubakased PN al el CN Pr NETS Sere coenee : 18

Shearer v. Anderson, 16 F. 2d eee: urpemeemanan cree eee 14 .

Enited States v. Causby;3328 U.S. 250. cseciocententaeene 13 ;

-United States v. Grizaard, 219_U, s. 180... PRA 12. ‘

United States v. Lynah, 188 -U. S. 445...... askew 13

“United States vo Welch,’ 217 U.S: 333... Sa ON

Vinited States y. W hite Dental Manufacturing Corhpany, 274 i

ie he ee. Wem eres actsndan a Rie Wena t-sebuatiendeorng «Te

Warren Sted Corp. vy. Commissioner, 110 F. 34 ational 17 ?

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. ay REGVLATIONS ~ lice) ae

Kegitlation M1, Sec, 1165-7... é.

; Regzlation 111, Sec. 1.4G5-F66} i cccaccccscuex™ oocoesisi ccomenig.

: co oe Regulation ILI, Sec. 29.23(€) i) - ats ceenenets:sennnanneese th

| Regulation Hd, See. 27.23(€) (3) Ae | cetieetet CA Mae FAS.

Regulation 11, Sec. 20.23(£) (V)cevccccnsceensscutnesutugheses’

. STATUTES. Soles

“+ “Tnternal Reyenue | Conle.of 1939, Sec | eee somes Re

; Internal _Revertiie Code of 1939, Sec..23(k).Loenriopimnin. 16,

mata Internat Revenue Code of 1939, a | | a ee Cen 16

Internal Revenue Code of 1939, Sec. 72

7 Internal Kevenué Code of 1939, 6, 19

Internal Revenue Code, Sec.” 62 ea _ 10 |

Perks Code, ‘See. 442 fella logeuldanaeicaci e lt aetianinacacceidcbae 10

Nsw :

et ae aay ape te ieee A

INTHE ,

_Saprene Court of he United States |

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Gennes. TERM, 1092.

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J. : Boswett Com PANY an@ J. G. Postnas Cour PANY

me successor by merger to Tulare Lake Land Company },

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CoMMISSIONER OF INTERNAL REVENUE,

Petitioner,

Respondent.

3 ‘PETITION FOR WRIT OF CERTIORARI.

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, To the Supreme Court “ the United States:

Petitioner respectfully prays for Writ of Certiorari

to the United States Court of Appeals for the Nirith

Circuit to review a judgment thereof holding that peti-

* tioner did not’ Sustain a loss deductible for Jncome tax

purposes from a flood occurring in the spring of 1952

‘which inundated its farming lands by 13 feet of water

which it was correctly estimated would remain on the

| lands and prevent-their use for one and two years, re-

spectively.

Opinions Below.

This case Was trity in the Fax “¢ ‘ourt of the United

_ States and in’ its decigon reported in 34 T. C. 539°

(1960) it held that petitioner was not entitled to deduct *

“for ine ome tax purposes losses caused by said Hood. ,

5 a decision’. of. the Tax Court’ Was appealed to the

:United States Court -of Appeals, for the Ninth Circuit,

which, on April Vy, 1962, af firmed the Tax Couft’

'* decision. ;

e.

The later decision ia not been: officially reported,

but is found in the appendix to this petition. *

The judgment of the United States Circnit Court of -

Appeals, the court “below said* ;

“The decision of the Tax Court is affirmed.”

(See Appgpidis.)

Grounds Upon Which Jurisdiction of This Court Is

“at Oho “Invoked. / ° -

L.. ‘The judgment of the United States Ce ourt of Ap-

peals for the Ninth Circuit here sought to be reviewed

.- Was rendered and entered April. 17, 1962.

2. The statutory provisions which confer jurisdic-

‘tion to review/the judgmynt’in question by Writ of

_ Certiorari ard 28 United ; ates Code, Seions 1254(1)

- and 2101(c). ; °

Question Pisontad fie Review.

‘Whether petitioner suffered losses deductible for in- -°

come tax purposes ii its fiscal year ended ‘June 30, 1952:

for certain properties, and in its fiscal year “ended March

31, 1953 for other properties, due to a flood coming -

upon petitioner's farming lands in. the spring of 1952,

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which fliod had re: ached its hight ie June °30, “1082

by which time it was ascertainable that petitioner's

farming lands (lying in ‘an amndrairiable basin) would *

begsnder water ans unusable for one and two years, re-

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spectively. ‘3 . °

Statutes arid Revislationl Involved:

Section 23(f) of the Internal Revenue Cole: of 1939 ”

in effegt for 1952 and 1953, provided for lusses by

Se corporations as_ follows: ~~ ; ’

“In the case of a corp®ration, losses ‘stustainetl

during the taxable year ane not ——— for

by insurancé or otherw} ise.” ‘

Regulation 111, Section 23(6)(1) in effect until

September 1953 read as follows .

( “Losses by clotted Lande sustained by do-

mestic corporations dufing the taxable year and-not

compensatéd for by insurance, or. otherwise are

deductible * * *. The provisions of Settion -

- 29.23(e)(1) to 29.23(e) (5), inclusive, and Sec-

a tion 29.23(i){1)*are in general applicable to cor-

porations as well as individuals. *. ee wth

~ Section 20,23(€) ¢i) ol Refulation 111 pertains to

. losses by individuals. oe the extent that it is appli-

cable it is here quoted:

“Losses sustained by indiv idual ‘citizens or resi-

dents of the United States and* not compensated

for by insurance or otherwise are fully deductible- -

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(a) incurred in the taxpayer's trdde ot business,

or ap a

ama

( a incurred inany transaction entered into for

prot if,

| | Ago”

(ce) arising: from fires, storms, shipwreck, or:

other casualty, ‘or theit, anda deduction therefor.

has not prior to the’ filing -of the return beén.

: claimed for estate tax _ purposes s-in the estate tax

return, or

(dl) if not prohibited or limited by: any of the

following sections of- the Internal Revenue Code:

Sections 23(g¢) and 117, relating to capital losses;

Section 23(h) ‘relating to wagering losses; Section

24(b) relating to losses f rom sales or exchanges ‘ of

of property between persons designated therein;

Section 112, relating to recognition of gain or loss

upon sales or exchange of properties: Section 118,

relating to losses on w aslt-sales of stock or securi- °

ties; * * *”

“In general, losses for which an dniount may. be.

‘deducted’ from gross income niust be evidenced by.

- a closed and-completed transaction, fixed by identi-

fiable events, bona fide and actually sustained

- during the taxable period for which allowed. Sub-:

stance and not. mere form will gov ern in determin-

ing deductible Josses- Full consideration must .be

given to any s ‘salvage value and to any insurance

that

ered

oF other. compensation received in’ determining the

amount of losses actually sustained. See section

113(b) < yest

e Section ‘29 236) 5) covers rs _Josses of laianite and

regulation will be quoted i in such parts as is consid-

applicable as follows: He

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“Losses incurred in the operation of farms as

business enterprises are deductible from gross* in-

Me 5 Ft as .

Regulation ]11-Section 1.165-7 Casualty Losses.

b. Amount deductible—General Rule. In the case _

of any ‘casualty loss, whether or not incurred in a

trade or business or in ‘any transactior entered”

intg for profit. the amount of loss to be taken into

account for purposes of Section 165(a) shall be

the lesser of either-——(i) the amount which is equal

to the fair market value of the property immedi-

ately before the casualty reduced ‘by: thé fair market

value of the property immediately after the casu-

alty; or (ii) the amount of the adjusted basis pre-

scribed in Section 1.1011-1 for determining the loss.

from ‘the sale or other disposition of the property

involved.” :

_ Subsection ( e) of that | section prescribed the effective |

date’ of that, amendment to the . regulations covering

losses as fold ib ;

“(e) Effective date: The rules of this section are

_applicable to any taxable year beginning after the

@te of the publication of this section in the Fed- :

‘eral Register as a Treasury decision. If, for any

taxable year begining on or before such date, a

taxpayer computed the amount of any casualty loss

in accordance with the rules then applicable, such

taxpayer, is not required’ to change the amount of

the casualty loss allowable for any-such prior tax-

‘able tax year. ,On the other hand, the taxpayer

“may, if he so desires, amend his income tax return

" for. such year to compute the amount of a casualty :

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loss¢in accordance with the provisions of this sec-

_tion, but ne provision in .his section shall be*con-

strned as extending the period Of invitations with-

in which a claim for eredit or retund may be filed

under Section OS11." | en Ye é

/ Seetion JF ey) of the Internal Revenue ( ‘ode ot 1939

in effect Tor 1052 and 1033 read In part as follows:

“HIZC 4). Gains and losses from involuntary con-

version and from the sale or exchange of certain

property used in the trade or business.

(1) Definition of Property Used int ‘the Trade or

Business.-—For the purposes of this subsection,

- ‘the term ‘property used in the trade or _ business’

means -property used in the trade or Sissies. of a

character, which “is subject to the dllowance for

depreciation provided in’ Section 23(1), held for

more than 6 months, and real property used in the

‘trade or business held for more than 6 .months,

which is not’ ¢.\). property of a kind which would: | -

properly be includable in the inventory of the tax-

payer if on hand at.the close #f the taxable year,

or. (B) property held by the-t axpayer « primarily

for sale to customers in the ordinary: course. of his

‘trade or business’ * * *.

(2Y General Rule.—It. during the taxable. year, the

recognized gains upon-salés or. exchanges of prop-

‘erty used. in the: trade or ‘business, plus the recog-

nized gains from the compulsory or involuntary :

* conversion (as. a result of destruction in whole or

in part, theft or seizure, or’ an exercise. of the

s \ “power r of requisition or Beaten moor the threat

or imuminence thereof) « _ property used in the.

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trade or business and capital assets’ held for more

than © months into other property or money, ex-

ceed the recognized losses from such. sales, ex-

changes, and conversions, such gains and losses shall

be considered as gains and losses from sales or ex-

changes of capital assets held for more than six

such gains and losses shall not be considered as

gains and losses from sales or exchanges of. capital

assets. For the purposes of this’: paragraph:

* *. * (B), Losses upon the destruction, in

whole or in part. theft or ‘seizute, or requisition.

or condemnation of property used-in the trade or

business or capital assets held’ for more than 6

months shall be considered loSses from a compul-

_ sory or involuntary conversion.’

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Statement’ of the Case.

Petitioner. J. G. Boswell Company, is a California

corporation, and is a successor, by merger in 1957, of

the Tulare Lake Land Company and the J..G. Boswell

Company. The predecessor companies both owned lands

in Tulare Lake Basin which was inundated by the flood. -

Bec cagyse they had ditterent fiscal years at the time of

the flood, the loss deductions claimed appear in two°.

‘separate tax periods. The losses of the original Bos-,

well. Company occurred in the fiscal year ended - June

30, 19352 and the losses of the old Tulare Lake Land

Company occurred in the fiscal year ended March 31,

1953. (Appendix, yp. 2.)

- During the taxable years in question. the petitioner

was engaged in thé operation of farms in Kings County,

,

months. If such gains do not exceed such losses.

ales

‘California in an area commonly known as Tulare Lake

Basin. ( Appendix. p- 2.)

| - The lowest nattiral outlet is nearly 30. feet alyve the

tloor of the basiti, so the Hooding: Waters settle amd tn

time sink into the soil to some extent, eVapurate, or

are removed. by pumping... Approximately four feet

below the suriace is a hard clay pan which, for all

practical purposes is impervious to water, hence, there

is not much absorption of flood water -by ‘the soil. :

-.( Appendix, p. 3.) ; | 7

The levees surrounding jietitioner’s lands were

breached in the spring of W532. and by June 30, 1952

when the flood reached its. crest, all, the lands in ques-

‘tion were covered with. 12 to 15 \ feet . of water. The

lands could ‘not be used for any ‘purpose until the

water was cleared therefrom. _( Aemenike, pp. 4,6.) It

- was determinable. as of June—30, 41952; that the “kinds ©

could not be cleared of water, or used, for one and two

years, respectively,.depending upon the height. of their

protecting levees. (Appendix, pp. 6, 7.),

> Pumping of the flood waters off some, of the parcels

owned by the two companies was completed February.

23, 1953. (Appendix, p. 4.)

* Pumping of the waters off the other areas owned by |

‘both companies was completed by September ib, 1993. {

( Appendix, p. 3.)

The values and rental values of the lands prior to the

gs a j a o . . .* : . - 8

flood were high. [Tr. 56, 293.1 Petitioners received

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No insurance or other type of compensation tor damages

trom this Houd.. {Tr. St.

The United Sites Circuit Court of Appeals did

not find-which date was‘“immiediately after the flood",

nor the value of the lands “immediately after the flood”.

( Appendix. j i

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Both the Tax ¢ a the United States Circuit

Court of Appeals found that.a Toss from the flood, if

any, was clearly “that of petitioner” and that “the flood

constituted an identifiable event fixing the onset of the

alleged damage, 1 any”. | (.\ppendix, p. 3.)

These findings left for determination’ the other ele-

ments of- loss which the Tax Court and’ the ‘Circuit

Court of Appeals found were elements necessary to a

“loss. These were as follows: . i

——

RE sthean actual loss. ge

2. -The loss must be evidenced’ by a closed and com-

pleted transactic m. ‘and :

3. The loss- must be ssaeiailogd in the year claimed

as a deduction. (Appendix p. 3.)

Both the Tax Court and the Circuit Court of Appeals

- found agaitist the petitioner -on ‘the first twa of these

three elements, and .by implication, onthe third ele-

ment. ( Appendix, pp. 68.).

In the Tax Court and in the Court of Appeals, the

taxpayer ee four ‘types of losses which are. set

out on _page’2 of the Apperidix. In this Court the pe-

titioner claims only the first type: namely, that it liad

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a -loss of cajital, as it would. lose the use of its land

for a. period %t tine —th ut is. als long “us the land ", &

niained. ander water. ~ ;

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Petitioner claimed gs Tax Court and -in. th.

Cirguit Court of Appeals, afd claims in this Court that —

petitioner's inability te use its tarning lands because

of the water standing there on, constituted a tinal and.

nenreceverable and nourevsg sible impairment to the

value of the land w hich entitled petitioner to a dedue- 3

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tion for loss oF present capital.

Both the Tax Court and the Court of Appeals held.

that this was not a loss of present capital caused by. a’

. Casualty but was mercly a. prospective loss of potential

income. Both-Courts alse then went on to say that the

prospective loss—of use was’ too temporary to’ be con-

~“Sidere ‘d a. closed transaction or a loss of present capital ;

which were prerevptisites to a deductible loss. : —~f -

_ Petitioner maintains that the duration of the loss of

use afiected the amount of the damage or shrinkage.

win the .walue of the. land wily, and not the critical quies-

on of whether there Was a. closed transactiun—a loss

1 present capital, 5 pea GEN erage

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Jurisdiction of the Tax Court and the United States he

Court of Appeals for the Ninth Circuit. oer.

This case came betore the ¢ Circuit Court of Appeals

under the provisions of Section 7482 of- the Internal

Revenue’ Code on a petition fot review of a decision and

Grder of the Tax. Court of the United States which ~

took’ jurisdiction under the: provisions of Section 7442

wry gad 3( A) of the Internal i enue Code.

pore

REASONS. FOR. GRANTING THE WRIT. °

“1. The Circuit Court of Appeals Has Rendered a

~ Decision in Conflict With atmunea: Decisions

of This Court.

“The - Circuit Court ‘of Appeals in the instant’ ease

held, that the impairment of the roture use of the

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property by a casualty did hot-eause-a present loss of

capital and was not a ch ised and ‘completed transaction, © ——-—

. ee

That principle contlicts: with decisions of this

“In the tolfowit if tax—east’s this Court held that in-

i the use’ of property, which did not

completely de stroy the property, constituted closed ‘and

juries ‘to pre iperty

completed transactions, and losses of present capital:

United States v. White Dental Manufac turing Com- — «

pany, 274'U. S. 398% (where the use of the property

was Jost by seizure, by ahe German Government in the

~ First World War but was recovered two years later):

Helvering v. Owens, 305 U.S. 408 (where a car was

merely damaged in the aftuount of $35 by a collision). —

/ The decision of the court below that the flood did,

not cause a loss of present capital is contrary “to many

decisions and contrary to principles of law’ heretc Joré

_, propotinded by this Court. Tn Pollack v. Farmers Loan”

and Trust Company, 157 U. S. 409, this Court’ on

page 693. said: as peg )

“It must be conceded that w hinbyer ai ieets any

element that gives an article its valiie, in ‘the eye

ofthe law, affects the article itself.”

This principle: has been recognized .by this Court in >

several non-tax cases of injury, te the use of property.

. For example, in Pumpelly v. Greenbay. and’ pptanienipps

Canal:Company, 13 Wall. (U. 5. 166, 20 L. Ed. 377),

this Court held that the government, had ° “condemned”

(00 acres ‘of farming land and must pay the property

owner for it, when it erected a dam across the: Fox

River. which was an outlet of Lake Winnebayo, by

‘which the water of the lake -was raised so high as to

flood the land-and-to do the damage complained—of.

This Court held that the water standing on the land al-

“Most completely destroyed the value ot the land.” This

Court at page 1X1 said:

At remains true that webs real estate is

actually invagg! by superisRluced additions of wa-

tes. earth, sand or other materjal, or by havi ing any

artificial structure placed on it, so ‘as to - ef-

fectually destroy or impair its usetulness, it is a

taking, within the meaning of the Constitution, and

‘that this proposaion is not in conflict with the_

weight of judicial authority in this Country, and

certainly not with sound principle.”

Also, on page 179, this Court: said:

“But there are numerous authofities to sustain

the doctrine that a-serigus- interruption to the. cym-

mon atid necessary use of property may be, in the.

language of Mr. Angell in his work on water-

" COUTSgs, equivalent to the taking of it, and that “s

under the Cc curstitutic mal provisions it ‘is not neces-

sary that the land should be absolutely taken.”

Similar cases’ ‘involving flooding of land are United -

_ States v. Welch, 217 Oe S 333 (1910): United States

v. Grissard, 219 U. “180, 41911); United States: @.

Lynah, 188 U.S. 445 | ae

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In United States v. Lynah, supra, on page 470, this °

Court said :

“While the govertiment dues not directly’ pro-

ceed to appropriate the title, yet it takes away the

use and value: when that is done it is of little

, consequence in whom the fee may be vested.”

In more recent nontax cases not involving 1 tlooding

but otherwise involving injury to the use of dand, this

Court hetd that the government had “taken” property

and was required to pay ‘tor it. ~ See United State

Causby, 328.U. 5. 256, where a; government flew air-

‘craft over land, which destroyed its use; Portsmouth

Harbor Land and Hotel Company v. U. S., 260 VU. S.

327 where the government fired guns over the land

which destroyed its use. .

In holding that there was no present loss of capital

caused by the flood the court below reached. a de-

cision in conflict with the above- mentionéd nofitax deci-

_. sions of this Court; namely, that injury to the use of the ~~

y property is a partial destruction of the capital ‘in ‘the |

property itself. In reaching the decision that there was

not a-closed and completed transaction caused py the

flood the court below has reached a decision in conflict ©

with the decisions of.this Court in tax cases that a“

casualty doitig an’ injury to. property ‘or? the use of

property. is a closed and. completed transaction.

2. The Circuit Court of Appeals Below Has Ren-

- dered a Decision in Conflict With the Decisions

of. Other Circuit Courts of Appeal < on the Same’

. Matter.

Other ‘Circuit Courts of, Appeal, in. cases involving

injuries to property from casualtieS have decided that

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there were ciosed and completed transactions and losses

of present capital, which formed the ‘basis for losses for

income tax purposes: Seé Shearer «. Anderson (C. A.

2), lo F. 2d 995 (where an auto was injured, but not

destroyed, on an icy road); Ferguson v. Commissioner

(C. A. W), 59 F. 2d RY3- (where $.rmland was in-

jured by a flood---type of injury not described); Rhodes

zt. Commissioner (C. A. 6). 100 F. RP 06 (where,

land was covered with sand and debris by a hurricane

_ but was sold the next year): .tcoma Association, In--

_corporated v. U. S. (C. A. 5). 239 F. 24 365 (where ©

a hurricane damaged some but not all of the citrus

trees in a grove).

‘The statute does not require the damage to be total

or perpetual or éven permanent. The duration of the

damage affects only the amount of the loss. and does

not determine the critical question of whether there was’

a clused and completed transaction. and a loss of pres-

ent capital.

While the impairment to use of lands in the case’ at

bar may not have been perpetual, the loss was perma-

nent. : ;

3. The Court Below in Holding That This Court’s

Decision in Hort v. Commissioner, 313 U. S.

28, Is Controlling, Reached a Decision in Con-

- flict With Statutory Provisions and in Conflict

‘With the Decision of This Court in the Hort

Case Itself.

In the Afort case, supra, this Court. in holding that,

“the taxpayer did not’ have a‘ deductible loss when it

permitted the cancellation of a lease —_ the receipt

of, $140,000, page 31, said: ae

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“For the same reasons, that amount was’ _nof

. a return of capital because. petitioner adquited the

‘lease as -an inciden® of the realty devised to him

‘by his father. Theoretically, it might have’ been

possible in “sucht a case to value realty and lease

‘separately and to label cach a a capital asset. Coni-

pare Maass ~. Higgins, 312 U. S. 443; Farm-

er’s Appeal, 1 B. T. A. 711. «joint

.

The Maass v. Higgins and Farmer -cases involved

" situations where separate values for leases had not been

ascertained.

In the Hort case, the Tax Court, in its Opinion |

39 B. T. A. 922 said: |

“The petitioner has failed to ‘prove any figures

from which a loss can be computed. A. loss from

the disposition of property ‘is’ computed fdr in-

come tax purposes by deducting the amount ¥eal-

ized from the adjusted basis. The amount realized

from the cancellation of the lease was $140,000.

“This lease cost the petitioner nothing ‘and-«we |

must assume, in ‘accordanee with Commissioner's

determination, that it had no basis in his hands

for gain of loss. * * 9",

‘The above qéoted language of this Court. therefore,

‘implies that if the lease had a basis in the hands. of

Hort he’ might have hada deductible loss, even though

he did. not sell it, but merely collected less on it than -

he might have done if it had not been cancttted..

There are cases in which Je Seholds owned by lessors

had separate basis which ,could _ be amortized or

made the basis. for losses. See Mary Young Moore,

ae ae ale ee.

207 Fed. 265 (C. A. 9). cert. denied, 347 U. 3 942, and

oo Teller & Co. v. Commissioner, 53 F. 2d 381°

.A.-2), cert. denied 284 U. S: 690.

Under. Section 23(k k). Internal Rev enue C ode of 1939,

a taxpayer was permitted tu deduct’ bad debts where the

‘taxpayer had a basis for the accounts receivable. Said

basis was deseribed in Section 113(a) of ‘said Code.

Also by Section 44(d), 1939-Code, a taxpayer could

take a. deduction upon disposition of a7 installment

obligation if it received less than the basis, which basis

was set Out in Section 44(d).

C onsequently, in those cases where a taxpayer had a

basis for an account receivable, an installment obliga-

' tion, of a lease, and disposed of\them for less than its

cost, it could have a deduction. Obv iously, the taxpayer

would expect .to. receive at least its cost arid perhaps —

More, Hence, under certain circumstances, a taxpayer

may take a loss w hen ‘it disposes of an asset for less

than it expects to receive.

In the Hort casé. therefore, the faxpayer simply had .. 2

no basis for the lease and obviously could deduct. nothing’

when it cancelled the lease ‘for a’ certain amount of

money: .

. . . . ) :

* The petitioner in the case at bar, of course, jad a

basis for’ the land, which’ was injured, [Tr.: 49.]

can deduct the shrinkage, i in the value of the aus,

not in excess of. its cost. ‘where caused by a casualty.’

The matter of, cost of the ‘lease in the Hort case

was really the controlling point. In all of the cases lead-

ing: lip to it, ‘the lack of cx ist for the leases was. the~de-

termining factor, For. instance, in W arren ° Service

*

| -17-— c

Corfe v, Commissioner, 110 F, 223 ( (C. A. 2), the

court, page 724, said: ite, @.: “e

. “The Board , made no finding that any part of

the sum expended by the taxpayer was jnvésted in

the lease and the evidence would not have justified

such a finding. Nothing was set up” on ‘the books

‘ of the Ls ng r as an et parte in the lease.”

In Josey 7 “C ommissioner, 104 F. 2 453 (C. A. 10),

a similar situation was involved. <The taxpayer bought

a-lease Subject to a sublease’ tor $80,000, Later the

gublease was cancelled and taxpayer received $10,000. /

Hé claimed a loss on the theory that part of his $50.

had been “pai for the sublease aud that the cost of the,

sublease: was at feast equal to the. $10,000, but thy

Cikeuit Court of Appeals at page 455 said:

5 + “The cost to, Josey of the lease, subject to te

_ subleas¢, was $50,000, Assuming some part

of

that amoufit was paid for the sublease obligation,

the record does ‘not show that any attempt / was.

made by Josey t establish whar part of the $50.-

000-was paid for stich contractual Obligation,”

In the case at bar. the i fact Lal the ‘alue If

r

loss ‘of pecepestive ‘income. lt is pt

present capital. for’ which it ods a cht. ghd not cling /

cost. The value.6f the use-of t

as an evidential factor in déetermiying the’ Ida, asd not

as *) independent basis for a loss ;

j

j

/ .

i ee

This distinction is well established by the cases deal-

ing with the receipt of damages to: gov «will or- business. |

An example is found in the decision of Farmers and

“Merchants Bank of Catlettsburg: 59 F. 2d 912, (C. A.

6): There the bank ,received a payment in settlement

ola suit against the Federal R&erve System tor inter--

feging with its. business and for injury to its goodwill.

The court age that the amount received by the tax-

payer was ‘not income but a return of capital. The

court, page 913, said: 3

“We think that the gravamen of petitioner’s

‘action against. the Reserve Bank was the injury in-

flicted to its banking business generally, and that

the true measure of damages was compensation to’

be determined by ascertaining how much less val--

uable its business was by reason of wrongful acts

of: the ReservqgBank ke Injury -te its busi-

ness of course means injury to-its financial stand-*

ing. credit, reputation, goodwill, capital, and other

possible elements. Profits were one of the _chfet

indications of ‘the worth.of the business; but the»

usual carnings before the injury, as compared with

those afterward, were only an evidential: factor in

determining actual loss and not an: independent

basis for recovery.” (Emphasis added. )

; : 14 a

In the case at. bar, petitioner showed: its earnings and

rental value of the property before the flood and. the.

complete tack of them afterwards, not as an independent

basis for a deduetion of potential ihcome, but to show ;

the . shrinkage which occurred: in the value: of its

property.

~

This same distinction: was recognized in Reytirsn

Production Corporation v. Commissioner, 144 F, 2d_

Ak ae ena cris ato

a | —19—

110 (C. A. 1). There the taxpayer sued RCA ix

damages caused by violation’ by RCA of antitrust “A.

laws. Money ira received in settlement of the action

and the court in the tax case held it was a return of

capital invested “in the FOC dwill. . The court, page 113.

said: f e | :

“Where the suit is not to recover lost profits - ,

‘but is for injury to goodwill, the recovery repre- .

sents return of capital and, with certain limitations

to be set fe rth below, is not taxable.”

The:c ‘court further said at page 113:

“The allegations and ev seine as to the amount

of profits were nécessary in order-to establish the *

value of the gdodwill and business since that’ is

derived by capitalization of the profits.””— - :

The court below errone: musly concluded that petitioner <

was trying to take a deduction for loss of profits, where-

as it ws endeavoring to establish a ‘present los; of

capital 1 invested in its farming lands caused by. the flood

injury to those lands.

Under Section 117(j) of the Internal Revenue Cogle 7

of 1939, petitioner's ldss is an ordinary loss,-and not a

capital loss, as miscalled by the Court below.

. ” o

% .

‘ _ Conclusion. °

For the reasons | stated above, it is respectfully sub-

mitted that the judgment. of the United States Court

of. Appez als for the Ninth Cireuit should be reversed in.

‘its holding that: °

1. There was no actual loss of presertt’tapital. in

_ the years claimed when the f farming lands w ere inundated

and rendered’ useless for a substantial period.

Sa | flood injury to the lands did not constitute

a closed ‘and completed transaction.

j

3..- No loss. was dediactitle.

MELv1 N D. WILSON,

» + Counsel for, Petitioner. .

%

‘ APPEN DIX.

Opinion of the United States Court of: Appeals for

the Ninth Circuit.

Inthe United States Court of Appeals: for thé Ninth

Circuit. ees j !

J. G. Boswell Company and J. G. Boswell Company, ;

(Successor by merger to Tulare Lake Land Ce any

Petitioner, vs. Contmissioner-of Tntefnal Revenue, Re-

-spondent. Ne. 17 140. April 17, 1962.

Petition to Review: a Decisi mot the Tax Court of the

United States. | ey a

‘

~~ fefore: Chambers,. Stephens and Hamlin, Circuit.-

- Judges. oe

By: Stephens, Lircuit Judge.

In the spring of 1952, the Tulare Lake Basin Was in-

undated by a snow-melt runotf flood. — Petitioner

—claimed‘that it had sustained a loss in ‘the amount-of

© $1,695,619:06 by reason of this flood-upon its land, , In

1956, the Commissioner of Internal. Revenue disallowed

the loss deduction claimed, and assessed deficiencies ac-

cordingly.- Petitioner sought relief. in the Tax Court

which held that petitioner was not entitled to deduct the

alleged loss and confirmed the deficiencies asserted by

the Commissioner.

This is a petition to review the Tax Court decision.

34° T. C. 539 (1960). The fundamental question pre--

sented is whether, as a result of the flood, the petitioner.

* G. Boswell Company. ,has sustained a loss within the -

‘meaning of Section 23(f) of the Internal. Revenue Code |

of 1939 during the fiscal vears ended June 30, 1952 -

‘and March 31, — '

Petitioner meastires the claimed loss as being the al-

leged difference between the estimated fair market value -

of the land beforeshe flood and the estimated value ch

June 3C, 1952. when the flood-waters stood at their.

_. gredtest.depth way the tand. Chie amounts claimed. in pe-

titiomer;s returns are either these alleged differerices in

value or the adjusted basis of the several parcels. which-

‘ever is the lesser amount. The injury ‘causing the. loss

is alleged to consist of the tollowing- elements :

(1) Petitioner would lose the ase of its tands for an. -

indefinite period of time.

(2) The flood physically in jured the petitioner's lands.

© 3) The flood “permanently added salts to the soil

-which would shorten its useful lite for .tarming” pur-

poses. So eaen e, ce ve

(4) The “cotton history” of the | land weuld be re-

‘duced since no cotton could be grown .w hile the waters

stood on the land. er

The material tacts found by thy Tax Court may be

summarized paerateny as follows:

Petitioner, Ey G. Boswell Company, is a California

corporation, and is the successor by merger in 1957, of

the Tulare Lake Land Company and the J. G. Boswell.

Companx. The predlecess: x companies both owned land

in the basin which was inundated by the ‘flood. . Because.

they had different fiscal years at the time ot the flood.

the loss deductions claimed appear in two separate tax

- periods. During the taxable years in question the peti-

tioner was engage in the operation of farms in Kings.

County, Califernia, an afea commonly known as the

Tulare Lake Basin.

eee kw

‘The basin is a ‘reclaimed lake bed and is the natural

“ Fepository jor t the waters ot SEV ET: al mofmtain: STOW rim-

‘off, streams which tlow into the basin. =| |

Since ‘the: lowest natural outlet. 1s ‘eeaily thirty’ feet

ahove the Poe este the bisin. the flooding waters: settle

and_in Lise sink inte the soil, evaporate. or are remoted

SFA. keen

by yumping. -Thus it is net unusual for the water to

remain many weeks before it is entirely renioved. pre -

a venting, the hormal use ot the land.

Approximately four feet below the sur face is a hard

- glay pan whic h/ for all practical purposes. is impervieus

| to water. As result, thé soil above the pan has accun)

ew lated it high content of sgt deposits carried in by the

* successive floods and irrigation waters. This accumn,

- fated salt Avater rests directly on the pan. sia ts known

as the “ye rched water table.”

The uncontroligd presence eof salt.tends to inhibit and

“may /even prevent. the growth of crops. Successful

farming is possible. fowever. through a contistaation ot

leaching and other harming techniques: such as deep

= plowing, mulching, and rotation of crops. (Le: ihing Is

gone by the proper application of irrigation w aters.)

Although it was. found that the floc, water: which .

came on -the land in 1952 contained: on the’ average at

least 200 pounds of salt per acre-1ot of Water. there

was no evidene © as ‘to the salt content of the soil at the

fime of the flood -or myionedintety atter the lands. had

_ been de-watered.

e

-

about June 30. 1952. when the flood reached its crest.

the land in question was covered with 12 to 15 feet of

< ‘

> P o Se °

the process-of washing the salt deposits below the rowt

The levees were breached in the spring ot 1952, and

water. Pumping ot the tlood waters off * of the par-

cels was completed as early as I ‘ebruary 23, 1953. By

September 22, 1953, all of the remaining sit had

been pumped dry. The action of the flood- waters

caused breaks 1 in the lev ees, Washed the soil around, and:

deposited silt in the "drainage and irriggatic m ditches.

The land*was left in an uneven and rough condition.

To rectify the damage done by the flood the petitioner

was required to repair and level the land, rebuild the”

levees, and clean out the silt leposited in drainage and

irrigation ditches.. The-costs of making’ such repairs

were dedficted on the. petitioner's returns in the years

4neurred as ordinary and necessary business expenses.

Ns soon as the land was de-watered. and repaired, the

‘. soil was prepared for farming, crops were planted, and

‘normal operat moot the farms/was resumed. The cozt-

- of this rehabilitation was also deducted by petitioner

as ordinary and necessary _ business expense. Produc-

tien on most of the land equaled or, exceeded the pre-

flood output. ;

The Tax Court found that the Federal Government

had imposed cotten’ allotments’ or acreage limitations

in’ 1950, and 1954, and the years following. In 1954.

the limitation was imposed on-a crop land basis, a system.

of computation which has no relationship to. the humber

of acres previously planted to cotton. In 1950, and

again in 1955, the limitation was imposed on a history

basis, a system of computation which is based on the °

number of acres of cotton grown, in the inimediately

preceding three years. Thus, in 1955, the petitioner’s

cotton altotegent was restricted raat of its lack. of

“cotton history” in the yéars.of fhe flood. But in 1951,

1952, and 1953, during the tax years here involved, the:

j . z ‘ : } -

a

. Z ian

government did not restrict the growing ot cotton om

-

petitioner's lands.

In denying the petitioner's alleged loss. the Tax Court

correctly set forth the requirements tor capital ss de-

duction under Section 231 tot ‘the Code as follws:

“ (1) There must be an actual loss; “(23

the ‘persan’ claiming the loss must sustain it; °( 3)

the loss must He evidenced by a closed and com-

- . pleted transaction: (4) the loss must be’ fixed by

an identifiable event; and (5)- the Icss must be

" sustained in the year claimed as a deducti ms

These requirements are based on Regulation 111, $29.23

_(e)-1 of the 1939 Code, which has been in effect. for

-many years and has consistently required the elments

listed above. Boehm v. Comimissioner, 326 U.S. 287, .

291 (1945). Although this regulation applies to losses

_ by individuals, it is also applied to losses by corporations

-as provided: by. Regulation 111, §$29.23(f)-1. Since

these regulations have been “long continued without

‘substantial change. applying to unamended or substan-

tially re-enacted statutes,” they may be deemed to. Rave

received congressional approval and ,thuss have the .ef-

fect of law. Helvering v. Winmill, 305 Us S. 79, 83

(1938). The pertinent provisions of Regulati m 118,

which apply to the taxahle years beginning after Decem-

ber 34, ‘a3 are substantially the sante.

With regard to these requirements. the Tax Court

correctly observed that the facts of this case do not re-

quire a consideration of items (2) and (4): The Joss.”

if any. was clearly that of the petitioner. And, as noted .

below, the flood constituted an identifi able event fixing

the onset of the alleged damage. if any. We shall, then,

coailiieiad

examine the clements vi loss alleged by petitioner in

light of the remaining requirements, items (1), (3).

and (5). :

Petitioner alleges as the first element of ° its bine the

fact that, as of June 30, 1952, it would be unable tu use

the property for farming as long ‘as it remained under

water. This fact, it is contended. constituted an “abse-

. jute and final and non-recoverable and non-reversible”

impairment to. the value of the land which entitled peti-

tioner’to a Capital ldss deduction. In support of this

contention petitioner cites a number of cases for the

proposition that ° ‘the value of’ property is in the use to

which it cati be put.” . See United States v. W hite Den-

tal Mig. €o.. 274 U. S. 398 (1926); W. K. Stowers v.

United States, 169 Fed. Supp. ae ($<. D: Miss. 1958);

United States v. Causby, 328 -U. S. 256 (1945); Ports--

mouth Harbor Land and Hotel Co. o. v. United I States, 200

U. -S. 327 (1922).

”

_ We agree with the general proposition as cited frome

these authorities, but we think that the cortclisions

drawn therefrom by the petitioner in this case are not

well founded, The value of this.farm land is a reflec-

tion of its ability to produce income. If the property

is standing under water, it is clear that the ‘ability to

produce income by. growing cotton has been effectively °

interrupted. It is this impaired ability to. produce in-

come which petitioner cloaks in the phrase “impairment

to the prospective use of the land” in order to take ad-

vantage of the language of the cases cited supra.

" But calling the loss of potentiahincome a loss of use

of the property does not, in our view, serve to bring pe-

titioner’s case within the rule established by these au-.

thorities’ In-each of those cases the.itypaired aseful-

oe \

*

.

5 ,

aghs manent in, nature. : The linality of “the losl/ use vies

enough to convince the. courts in. these cages that the «

transactions aniounted to a less of the proper

In other words, the transaction had elosed and the loss

‘

‘in value had i in tact been reakzed.

An the instant case. however, the tacts do not ‘Support,

2 > ‘such a conclusion. Here. the basin had a history of

periodic flooding. in which normal farming operations

were resumed shoftly after the lands had been de-

watered. That petitioner had’ the same expectation

after this flood is. shown by the fact that it bought

parcel’ gf land in 1940, which Was tinder water, at the

_ time, of ‘purchase, de-watered the land, and began to

_ farm it the foal wing year.

we "As of June 30, 1952, petitioner hi id ‘not ‘sold or other

Pr ot ‘wise disposed of ‘is interest in the capital asset Here

; involved. What then is the natare of the ke iss Petitioner

“\ Claims to have sustained > Tn our View. the substance

of petitioner’ s claim is that it would be deprived of the

income produced by its” farms during © fhe —

presence of-the flood waters on the land. The Tax

Court found. and ‘petitioner in fact admits.. that the

. presence of the flood waters would be only” temporary.

z Such a short-term interruption in the use of the prop-

| erty is not in our view ascent us to a loss of the prop-

erty itself. te ‘ =

‘

‘That such‘a clainy cannot be the basis for ‘a Section

23(f) loss deduction is clearly established by Hort vy.

Commissioner, 313 U. $. 28 (1941), In Yhat ‘case the

Supreme Court set forth the rule that a loss of potential

income is not a deductible loss within the meaning. of

-”

*

« &

the capital loss provisions. We think the rule of , the

si

. by this contention.” ° 34 T. (C9539, 545.

“the useful-life of the land. for far

these experises are now properly claimed as’ a logs.

Hort case qo be controlling here, and we are not pér-

suaded by petitioner’ s effurts’to distinguish it from the

instant case. The policy underlying, the Hort rule may

require its application in many fact situations. W here, ;

as here, petitioner's claim amburits to nothing “more .

than «w temporary. loss of potential incume from the

property, no loss deduction can be allowed. Eee

Petitioner alleges as the secund element of its loss the

physical. injury inflicted upon its land by the flooding*

water... ‘The Tax’ Court, however, found that these injur-

ies had been repaired and that the land had been reha-

_ bilitated’ for farming. use. It found’ that the out-ot-

_ pocket costs. incurred to’ make | these repairs were de-

ducted by petitioner as ordinary and necessary business

expenses. - These deductions were stipulated by the par-

ties, to have been properly deducted. By now claiming

these expenses as a loss, petitioner secks to reinforce its

allegations as to the other, more speculative, elements of

loss sustained. We agree with the Tax Court's conclu-

sion that “petitiongr's claim for-the loss is not advancec

Petitioner argues further, however, that it ave hold

. the

Commissioner may invoke the felief “provisions f mt

a decision were made. But the availability of this re- |

lief does not serve to support the merits of /etitioner’ s

claim that’ such expenses should: 1 now be /regarded as

capital loss.

Petitioner alleges as the third elemeny/ii loss. the addi-

tion of salts to the soil. which, it isflaimed. shortened

ing purposes. The

‘ .

Tax Cout tound this contention to, be without merit.

We thiykk that substantial ry idence’ exists in the record -

rst, petitioner did ligt present any evidencé to _

> actual ameunt oi “salt added to the s sil by the 1952

lood. THe only evidence on. this note shis an in-’

crease in the salt concentration on one [partic ulat parcel

between the years 1948 and 195%. Such data provides

the trier of. fa ct with no reliable. inference as to the

salt .\crease brought about by thy 1952° flood. As

the Tax Court pointed out, any) Hoods and irrigé-

tion waters, both before and after the 1952 thowd have

also added salt, deposits to the soif.

‘

Second, petitioner also contefds that the salt. de-

posits added by. the’ 1952 floor

damage to its land. This it’

the opinion below,

constituted pernjanent

urged, is supported by

- ' gt

We think that a caretul /

opinion indicates just t

conchides’ that increas

flood would not, per /

land. 34 YT. C. 539,249.

In support of this. conclusion the Tax Court relies

upon the fact that modern farming techniques ty control

cading of the Tax Court’ s

contrary. The Court below

the salt content of ‘the soil -have been successfully

used on the farms in-this basin. In dact-many areas

“formerly unuseable have been sO treated by these meth-

ods and are new- successfully farmed. Such techniques F

were used by the petitioner in this case to the end

that the land was Ghortly returned to farming use ard

has produced as’ much or more than betog: the 1952

flood. We note that the costs incurred in rehabilitating

the soil frony these salt deposits are generally deductible

salt deposits from the 1952.

. shorten the ‘usetul life of the-

’

a a

—10—

i ‘ ex : °

as dindiey aad necessary business expenses, and were so

leducted by the petitioner r aiter.the 1952 flood.

‘On the Basis of dhese: tacts the Tax Court conclated:

that’ a claim ot permanent damage to the useful . lite

of the land was tuo sess to justify a capital loss

déduction in the taxable years in question. ‘We agree.

Petitioner has rec eived the benefit of a .tax ‘deduction

for the out-of-pocket. expenses incurred to return the

land. te productive use. The alleged capital loss was

”

"properly disallowed. ome, ee | eed

Pétitioner alleges as the fourth element of ee the.

reduction in. the ° ‘cotton history’ caused by its inability

to grow cotton while flood waters stood on the/ land.

In our. view this contention is also without merit. For

‘the taxable years in -question- this claim is at best,.

- speculative.

Petitioner's ‘claim of loss rests on: the assumption

‘that the vovernm ent. will, impose, in the years im- +

~ mediately after the flood, the same type of crop limita-

-tion as it has in the past: .- That this assumption can-

not support a claim for a Section 23(f) loss deduc-

tion is made clear by’ - rule in Lucas v. American

Code Company, 28 .U. S. 445 (1829). That case re-

quires. that where the loss has not been realized by sale

or other disposition, it must’ be ‘ ‘reasonably certain in

fact and ascertainable in amount” to be deductible as

. acapital loss, . ;

Neither of these tests is met in this case. The

speculative’ nature of the Gaim | is made clear by the fact

.

A <

-

‘er “

that: crop limitations on a “cotton history” basis were

imposed in 1950 and not again until 1955. Also by the

fact that ahe limitations imp sed in 1954-had no_rela-

tion to the history of cotton grown-.on the land. In

other words, as of the taxable years, in questign, pe-

titigner Was not reasonably certain in fact. either when

the growth of cotton would again be restricted or it the

history of cotton grown would be a basis for that re-

striction. “The year in which such controls were again

imposed would also have an etfect upon the amount of

the loss to be claimed, a ‘factor which petitioner failed

to consider. Such” speculation cannot, in our, view, be

the basis’ for a Section 23 (f) eapital loss ‘deduction.

In view of our determination of this claim we do not

reach the question (not raised on brict ) as to whether

a “cotton history”, is an elemerit. of property which

can come within the capital loss provisions in a year:

WwW hen suclea cryp restriction is in Tact imposed.

Having thus concluded that cach of the elements of

loss alleged by petitioner is not properly the basis of a

Section 23 (f) capital loss deduction, the deficiencies,

asserted by the Commissioner must be sustained.

The decision of the Tax Court As at firmed.

_ (Endorsed) Opinion I iled April 17. 1962.

+. + Frank FH. Sc hid. ( ‘le rk.

nf 2—

Judgment. :

, : - ™ all : ° ea .

United States Court of Appeals for the: Ninth Cir-

cult. - | :

J. G. Boswell C ompany and J. G. Boswell! Com-

pany (Successor by merger: to - Tulare ons Land Com- -

pany) Petitioner VS. Commissioner of Internal Reventie,

Respondent. .

Upon Petition to Review a Decision of The Tax

Court of the United States. aa

This Cause came on to be‘heard on the Transcript

of the Record from The Tax Court of the United

States, and was duly submitted.

Ce C onsideration Whereof, it is now here ordered

and adjudged by this Court, that the 0.2.0.0... Deci-

sion of the said Tax Court of the United States in this

Cause be, and hereby is af firmied. nce

-

_ Filed and entered April 17, 1962.