Answer to Respondents Brief in Opposition — Jiffy Enterprises, Inc. v. Sears Roebuck & Co.

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«@UPREME CoURT. US J.

REPLY TO RESPONDENT'S

_IN_ OPPOSITION JON F, DAIS, GLERK

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+ SUPREME COURT OF THE UNITED STATES

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No. 3

_ RUFUS F. TURNER and

- MARGUERITE H.. TURNER

St _ | Petitioners 2

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COMMISSIONER OF INTERNAL REVENUE

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On Peeenin Poa A Warr.on cearemant

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In ‘The

SUPRE ME COURT OF THE UNITED STATES

October Term, 1962

No, °

RUFUS F. TURNER and.

MARGUERITE H. TURNER

a “Petitioners | : ;

© COMMISSIONER OF INTERNAL REVE NUE

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Pa

ON PETITION FOR A WRIT Of CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH. CIRCUIT

‘REPLY TO. RESPONDENT’S MEMORANDUM

IN OPPOSITION |

The. respondent ths completely misstated the principal

issue in this’ proceeding as evidenced by his statement

_ (Mem.-3) that “Petitioner contends that the Notice of -In-

debtedness was a “security” within the meaning of Section

351 (Pet. 10-17)”. The petitioner doess trot now .( Pet. 10-.

17}, and did not in his briefs filed, in the ¢ courts below con-

tend that the Notice of Indebtedness was a “security” nor’

. does he, contend that the long term debenture bond received

on January 14, 1958 was a security (Pet. 19). In his pe;

tition, as amended (Appendix, infra), filed with the Tax

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Court and in baa briefs filed with the Tax Court and the

Court of Appeals, the petitioners’ contention, inter alia, has .

‘consistently been,'as set forth and recognizéd in the re-

spondent’s-brief (p. 18) filed with the Court of Appeals:

; “The taxpay er maintains that the ‘Notice of Indebted-

ness” was substantially ‘stock’ and consequently no’

— gain is to be recognized under Section 351(a). In this

argument he contends that investment in the corpora-

tion Tepresented by the ‘Notice of Indebtedness’ was

essentially ‘equity capital’ like a stock interest”.

it is s obvi ious that the cemqeateie | is well awage of the na-’

ture of the issue here presented and the’ 7“: that the —

Court of Appeals should have made as the’ respondent also.

stated in his briet before the Court of Appeais (p. 22, ™

4):

“In the event the Court of Appeals determines that

the Tax Court should have‘made. more specific find-

‘ings on the equity v. debt issue, the case should, of

course, be remanded with instructions. Gilbert v. C om-

missioner, 248 F. 2d 399 (C. A. 2d).”

Moreover, there i is nothing inthe argument (or,cases 1 re-

. lied upon therein) set forth in the Petition (10-17). that.

could pdssibly be coristrued to indicate that petitioners’ con-.

tention was that tlie “ Notice of Indebtedness”, itself , was a

. “security” (and not a"). :

» From the foregoing, it is reasonable to infer that the re-.

spondent: has attempted to mislead this Court as to the na-

‘ture of the issue here presented and, apparently, it has no

valid objection or response. to petitioners’ argument that

‘the Notice .of rw Or wee represeits risk capital equiva- ~

lent to “stock” ( Pet. —

Since Téspondent’s premise as to. > the i issue here- involved

' is in error, it follows that the case of Pinellas Ice Co. v.

Commissioner, 287. U.S. 462, cited by respondent as author-

ity for its position that the “notice” was not a “security”

s not- relevant, to the issue here presented.

Hons presented in thé courts below is misleading and reflectg

an attempt ta gloss over or ignore the precise questions

raised in the courts etal (Appendix, infra).

In deniving that a ini instinristeredina occurred, the

. following sub-questions were raised by the petition iled in

‘the Tax Court and’ extensively argued in the courts below

( see copy of am ded petition, — infra):

ys The Notice of Indebtedness was an equity interest

‘equivalent to stock (App. Par. 4 (f) (a. 7).

¢

2. The Notice of Indebtedness was an iehermneilidte om

and not a concluding step in the incorporation of petition-. :

er’s business. ( App gPar. + (a)) (Pet 18-19); .

3. The a business’ hea (a) no —_ will or 2

‘The es adent? 's adgnt}s ‘allegation (Mem. -3)" as to the ques-

‘(b) no transferable good will ae ‘Par. 4 4 (d)) —

19-22).

4. ‘Tf the Notice « of ; Indebtedness » was “other property”,

* “The question peeutaed same is whether. both courts below nese

___-sustained the Corhmissioner's determination that the Notice of Indebted-

ness was not a ‘security’ but was ‘other. property’ within the meaning of

Section 351 which was taxable to petitioner at its fair market Value.”

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it was-not the ‘ ‘equivalent of cash” and therefore not ‘ ‘other i

_ property received” ‘within the meaning of Section 351 (b) .

IRC 1954. (App. Par. 4(c) & 4 (e)). om 22- 24).

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5. The Notice of” Indebtedness had (a). no fair market

aries or (b)-a valrie less than:: face value. ia Par. 4 ( ¢)) |

_ (Pet. 225). /

A decision/on any one. eof the forégoing questions in favor

“of the petitioner would eliminate the deficiency in tax and,

contrary/o respondent’: s allegation (Mem. -3), the decisions

~ of othef courts conflicting with the opinion of the courts

below are (as set forth in the Petition) almost uncountable. |

The respondent's MEMORANDUM IN OPPOSITION

_is responsive to only two of the foregoing questions, 1.€.,

“good wil” and Sains transaction”.

Goop ick

la the respondent’ S' sidan (in, 3, page 4), 6 :

respondent alleges that: — % eee Se ig

“The contemporaneous | conduct and dederations of

(petitioners') accountant as the man most familiar

with taxpayers’ business are’ certainly substantial. evi-

dence to support the court’s findings” '(Pet. App. 31-

32). There is no cause for this Court to make a further

review of this factual determination.” “3

. |

_ As set forth i in the Petition (pages.-19-21) and on the

pen of the undisputed facts; the decision of the courts be- -

. low is clearly in err . Also, the questi@en of the transfer- —

ability of personal good will upon — is a -_

and not a “factual” question. :

‘?

STEP TRANSACTION

The Tax Court found that the Notice of Indebtedness:

was: a concluding and not an intermediate step on the

grounds that. the notice was a (legally) “enforceable obli-:

. gation” (Pet. App. 16-17 ) based upon its misconception

of the applicable local law. It also found, contrary to all

3 testimony adduced, that the execution of the long term de-

.benture bond on January 14, 1958, was promptéd by the.

advite of the petitioners’ accountant’s former supervisor

that the Notice of Indebtedness would. result:in a taxable

ae transaction (Pet. App. 11). In this connection, the state-.

ment at-Page 2.of the memorandum that: “This transac-

tion occurred a. few days after petitioner had been advised

by an accountant that the ‘Notice of Indebtedness’ rendered

the transfers to the corporation taxable rather than tax-—

‘free (Pet. App. 11). “is not due any great weight for the

reason. that the accountant who gave the petitioner such ad-

. vice was not the petitioners’ accountant. The petitioners’

accountant had considered the transaction to be tax free for

the reasorthat he knew that the. petitioner had intended the

notice to be merely a temporary’ memorandum to be later

| supplanted by a more formal instrument of debt.

* The Court of Appeals reviewed these facts ina cies

different light and rejected the Tax Court’s conclusion that

the Notice of Indebtedness was an “enforceable obligation”.

since. it was not formally authorized by the corporation

(Pet. App. 32) and for reason of the rule of law in Vir-

- ginia that “an officer cannot ‘legally bind his company in a

‘contract with himself without ‘authority’ expressly gual

13 Am. Jur: § 932; 4 Michie’s iste ainacae (Va., W. Va.)

‘Corporations § 164.

The Court of Appeals did not completely reject the testi-

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mony of the witnesses that a sdbeaguaht formal debt in- es

strument was contemplated#( Pet. App. 31). Rather, the

- Court] of Appeals held that the issuance of the Notice of

_ Indebtedness interrupted. a ‘preconc plan “with unfor- |

" dunate tax wericunueee to: Mry rner.” (Pet. App. 31). ;

Ini ignoring the test in ‘step transactions (Pet. 18) which

requires that the legal relations created by the first: transac-

tion not be f ruitless, the Court of Appeals,” apparenily, re-

lied upon the presumption that the petitioner, as sole stock- _

holder, would not impose any legal defense to the payment

“of the notice. (Pet. App. 32). This presumption, however,

is unwarranted. It has’ been held that where a corporation‘.

__ is newly formed the presumption is that the principal stock- .

§ holder ‘will not make withdrawals that would endanger the .

operation of the, business or. require its liquidation. Brake

& Electric Sales Corp. v. U.S., 287 F. ‘Bd (C. AL 1, 1961) ;

_ Charter Wire, Inc. v. US. onl, Supp—(DC-Wis. Nov. 17,”

a igs Also, the | petitioner stated, at the time of incorpora- ©

i that he had no intention of paying the notice except out

: ond E profits of the —* (Pet: 6).

rome

“CON CLU SION.

Fee the réasons stated, ‘the petition fae’ a writ of certio-

rari-should be gran ted.

fo)

Respectfully subimitted. i? nN ee

Fortescue W. HopkINns

H. Ciypé PEARSON

» 509 Mountain Trust Building .

Roanoke, Virginia

| Attorneys for Petitioners.

APPENDIX =—s-_—«&y— |

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MOTION FOR LEAVE TO Amun PETITION”

_ {Caption Omitted]

Come now the petitioners, by their attornky, Fortescue

‘W. ‘Hopkins, and respectfully move. the C ourt for leave

to amend their petition as follows. ~

* Pet itioners aver (and ré&spondent has , so advised » peti--

‘tioners’ counsél) that the following ainendments will not

in any tnanner delay the hearing in this proceeding sched-

uled for the calendar of the Tax Court at. Greensboro,

Nogth Carolina, agining on September 26, 1960:

—Q) The entire paragraph, 4 of. the: Petition verestbore :

"filed is eliminated. and the following paragraph 4 is sub-

stituted therefor:

A The deoaiaiaiibins of tax Set forth i in the said notice

’ of deficiency. is based upon the following errors:

(dy. The Commissioner erred in deterthining that the —

petitioners, in 1957, received a non-interest bearing note

_ (notice of indebtedness) taxable as a long term capital

gain in the amount of $48,893.46. In.making this deter-

_ mination, ‘the Commissioner erred in failing to determine

‘that (1) the incorporation of Cash Produce Company, Inc. —-

owas a tax-free exchange under the provisions. of Section

351, Internal Revenue Code 1954, and (2) thie. petitioners’

receipt in 1988 of a long term debénture bond in the sum.

mi “¢ »

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of $48,893.46 was an integral step in the plan of incor-.

peration of the said Cash Produce Company, Inc.

(b) Alternately, the Commissioner erred in determin-

ing that the said notice of indebtedness in the. amount of,

$48,893.46 constitutes “other property received”. within

the meaning of tion 351(b) (1) (B), IRC vii and

taxable to the petitioners i in 1957. -

(cy Alternately, if the Court should determine the

said“ notice of indebtedness constitutes ” “other . property.

received” within the. ‘meaning: of Section 351(b)(1)(B),.

IRC 1954, the Commissioner erred in failing to determine

7

that its fair market value’ was zero or -substantially less

than $48.8 893.46 and, therefore, yo gain was recognizable

_ to petitioners under the siubleeray of. Section’ 351( b) AS

IRC 1954. -

_ (d) Alternately, if the Court’ should determine that’

the said notice of indebtedness constituted “other property

received” within the meaning of Section 351(b) (1) B)

‘and that it had fair market value, the Commissioner

erred i in determining that the total fair market value of mn

assets received (notice of indebtedness plus’ 1,500 shares

of stock) exceeded the cost .of assets exchanged and that

a gain was realize¢ ypon the exchange incident to the in-

aie. exer of., peti s’ business.

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(e) Alternately, if the Court should ‘seioienis that

the said notice of indebtedness constitutes “boot” -taxable

to’ the petitioners under the provisions of Section 351-

(b)({1)(-B), the Commissioner erred in failing to deter-

“mine that. the ‘said notice of indebtedness was intended —

. merely as ev idence of an obligation and not intended in

— thereof and, therefore, the missioner erred

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15 Sept. 1960

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in determining that the petitioners’. realized taxable gain

in the year 1957 ev idenced by said notice 9 indebtedness.

(f) Alternately, the Coimnintoner rte in fedion to

‘determine that the said ‘notice of indebtedness constituted. °

an equity interest equivalent to sto¢k or security: and,

therefore, erred i in failing to determine that the incorpora-

tion was tax free under the’ provisions of Section aot,

IRC 1954. os

(2) Clautte (h) is ‘added t to the end of ean 5 of

the Petition heretofore filed:. -

“(h) The fair market vidine of the stock iad other prop-

erty, if any, received _by the petitioners upon the. incor-:

poration in 1957 did not exceed the cost basis of the assets”

exchanged therefor ($49,593.46).”

W HEREFORE, it is prayed 1 that this motion be social

‘and that the = be amended as — above.

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( Signed) oaeiectn W. Hopkins

_ Fortescue -W. Hopkins

~ Counsel for Petitioners - ees

509 Mountain Trust Bank Building?

Roanoke, Virginia

No objection.

(Signed) Hart H. SPIEGEL

a resciel H. SPIEGEL

| -PyW

Chief Coed. : ate

Internal Revenue Service