Petition for a Writ of Certiorari — Ach v. Commissioner

Te ory

c)

FILED

_ SUL 29 1966 -

pn :

JOHN F. DAVIS, CLERK

Ofted Supreme Court, U.8, | 4 ‘ ae

IN THE

Supreme Court of the i States

OCTOBER TERM, 1966 ¢

\ .

PAULINE W. ACH,

Vv.

COMMISSIONER OF INTERNAL: REVENUE,

Peti tione®

— |

ESTATE OF ERNEST M. ACH, DECEASED, PAULINE ;

‘ W.. ACH, SOLE LEGATEE, AND PAULINE we

ACH, SURVIVING WIFE,

. a

COMMISSIONER OF: ich neaamimarat REVENUE,.

een.

‘Petitioners, a

baie

PETITION FOR A WRIT OF CERTIORARI TO THE

7 _UNITED STATES COURT OF APPEALS

_._FOR THE SIXTH CIRCUIT ©

H. J. SIEBENTHALER .

2300 Central ‘Trust Tower

Cincinnati, Ohio 45202

¢

Ww

WILLIAM R. SEAMAN

RoNnALD E. HEINLEN

FrosT® JACOBS — ,

2300 Central Trust Tower

Cincinnati, Ohio 45202

July, 1966

_ Attorney for Petitioners

\ Tue Jounson & Haapin Co., Law Parintres

. : CINCINNATI, Onto

_*

a)

oF eee

yA INDEX:

bea oes ena PAGE

ee METER CRETE Te TTT eee Pyrriy ae ;

Jurisdiction .......... wnt eecegeseee Levan ee a o

- Question Presented ......... pean Beh ein soee Oe zz

Statute Involved ..............065 gate 2

* Statement vues bavecenees pe ere ieBeasees 3

Specification of Errors to Be Urged a Pee rk ees 5 a _

| Reasons for Granting the Writ... @ piteees ee ii 5

‘i i MTT EE Te eee eee Pree eee ecsatwak 10

Appendix e. : NK By

Opinion of the Court of Appeals cP heeeeneeees a: an

_ Appendix B ‘ | '

Judgment of the Court of — in No. 16, 154 .: 10a

- Appendix C — |

Judgment of the Court of t Appeala in | No. 16, 155 .. lta

Appendix D

Judgment of the Court of Appeals in No. 16, 156 . * 12a.

- Appendix eee aie,

aa Judgment of the Court of Appeals i in No. 16, 229 . 13a -

Appendix F ge

_. Order of the Court of Appeals Denying Petition for

& neneaeing in Nos. 16,154 and 16,155 ...... 14a

| CITATIONS Pals |

Cases: = , .

_|_: Aiken Drive-In Theatre eatre Corp. Vv." v.-United States, 281

if big tt ® | rerr errr ere Pere 5

‘Commissioner ‘v, Gross, 236 F.2d 612 (2d Cir. 1956) .

C Moline Properties, Ine. v. a 319 UsS. 436

16) en one nen 7 roe

eS * i ‘ : ; ‘

ms - sop

een, Gens

¢

Ot *: | v7 PAGE

a Spicer Theatre, Ine. Vex : Commissioner 346 F.2d 704 ;

f (6th Cir. 1965). “... oa eedeehavegeneavacee’s 5

Whipple ve Commissioner, 3 : -%7,9 -»

_ Statutes: ee | . aes ,

‘Internal Revenué Code of 1954 al

| ery sear. aes Mb hee ke wena Pee Je

_ Section 482 ses flnn seas Meade ot MOG 5, 6, 10

Miscellancdus: yaar . . i 4

Plumb and Kapp, “Reallocation of Teibome and De-.

ductions under Section 482,” 41 Taxes’ 809 .

Seema. EPOE) cadecigcesevn ae Keak Pi & —-10°-

7 3 = Sas S a

i iieohee nS ° 5 ; j

‘ 4 , |

. 5 : a af |

c : f wih

Pe are a, 2

° . \ P P ;

\

\ ra

Nyy, /

‘ :

f?

ii A *.

% ~ ?

&,

No..

IN THE

; Supreme Court of the United States

OCTOBER TERM, _——

a

RAULINE Ww. ACH,

ra wee : Petitioner,

~ COMMISSIONER OF ‘INTERNAL REVENUE, ©

3 Respondent.

ESTATE deaaieae a ACH, DECEASED, PAULINE.

-W. ACH, SOLE ‘LEGATEE; AND PAULINE W.

ACH,. SURVIVING WIFE, |

; Petitioners,

eis V.

COMMISSIONER OF INTERNAL REVENUE, *

Respondent. |

PETITION FOR A WRIT OF CERTIORARI TO -THE

_ UNITED STATES COURT OF APPEALS

, _ FOR THE — munmed

Petitioners, Pauline w. Ach and Estate of Ernest M.

“Ach, Deceased, Pauline W. Ach, Sole Legatee, and Pauline

W. Ach, Surviving Wife, pray that a writ of certiorari

issue to review the judgment of the United States Court

of Appeals for the Sixth Cireuit in its case Nos. 16, 154

and 16, 155. - zs

"OPINIONS BELOW

The o opinion of the Tax Court is reported-at 42 T.C. 114

. and is printed at page 87a of the Appendix to Petitioners’

2

= ™ ae 9 $ ‘ 4 ?

Brief.:’ The opinion of the court of appeals is reported at

358 F.2d 342 and appears at * Appenax A hereto, page la,

. j infra. . FY ;

i URISDICTION ©

"The judgment of the court of appeals in its case Nos.

16,154 and 16,155 was entered on March 30, 1966. Ap-

‘pendix B and C hereto, pages 10a and 11a, infra. Its judg-

ment in Nos. 16,156 and 16,229, decided on the same record

from the Tax Court, also was entered on March 30, 1966.

Appendix D and E hereto, pages 12a and 18a, infra. Peti-

. tioners’. timely application for rehearing in Nos. 16,154 -

"and 16,155«was deniéd on May 4, 1966. Appendix F_

hereto, page 14a, infra. The jurisdiction of this Court is

invoked under 28 U. S. C. section 1254 (1).

QUESTION PRESENTED

Petitioner, Pauline W. Ach, sold a dress business which ;

she had operated for several years as a sole proprietorship

at net book value to a valid and subsisting family corpora-

tion. After the sale Pauline rendered managerial services

to the corporation without compensation and engaged in

no other business endeavor. The question presented is

_ whether the Commissioner of Internal Revenue is em-

powered under section 482 of the Internal Revenue Code

of 1954 to allocate gross income of the corporation to

Pauline W. Ach as the corporation’s managing employee

under the theory that she was a separate organization,

trade, or business.

» 6

STATUTE INVOLVED

Section 482, of the Internal Revenue Code of 1954:

a 1 Nine copies so the Appendix printed See use in the court of

appeals have been filed with the Clerk of this Court pursuant to .

Rule 21 cad .

Ip any case of two or more organizations, trades,

or businesses (whether or not incorporated, whether

or not organized: in the United States, and whether

- or not affiliated) owned or controlled directly. or indi-

rectly by the /same interests, ‘the Secretary or his.

| delegate may distribute, apportion, or allocate gross |

income, deductions, credits, or allowances between or

among such organizations, ‘trades, or businesses, if he

‘determines. that such distribution, apportionment, or

allocation is necessary in order to prevent, evasion of |

taxes or clearly to reflect the income of any of such

vo trades, or businesses.”

STATEMENT |

Pauline W. Ach and her husband, Ernest M.° Ach, hed ai

. two sons, Roger W. Ach and §. Laurence Ach. Ernest died

on February 14, 1956: (R. 88a-89a)°

In December, 1946, Roger and his father formed’ a cor-

poration (‘The Ach Corporation), and they transferred to

it the assets of a.dairy business which they had purchased ©

" earlier. Roger owned the entire 300 issued and outstanding

common shares of the corporation until July 14, 1953, at

which time -he gave 149 of these. shares to his brother

Laurence. (R. 89a-92a) eee

Throughout the years 1947 through 1952 the. corpora-

tion’s principal business was operating a creamery plant..

Roger was president of the corporation and was its chief

‘executive officer. Ernest and Pauline did not participate

in the management of the corporation during these years, ©

but Ernest. did make loans-to the corporation totaling —

‘$282,700.00, evidenced by interest bearing notes. The dairy

‘business: was unsuccessful and was discontinued by the —

corporation prior to August 1, 1953. (R. 89a-90a)

For approximately 29 years prior to 1958 Pauline had

owned and operated as a sole proprietorship a succes8ful

- retail “dress and apparel business known as Vogues and

| Vania. — and Vanities mr nine to: Swerve

“—

at deenetcieaien SY a

-

4

a" -

— such during the taxable years in controversy. During thie

; 4 :

persons, and the net book value ‘of its assets on ; adi 1,

1953, was $30,705.57. (R. 92a)

‘At that time, Pauline sold the business of Vogues “i

Vanities “for $80, 705. 57 to the corporation which gave its

? -note for $30,705.57 to Pauline in payment. That note was

subsequently paid-infull by the corporation prior to August

| 12, 1954. The Tax Court found concerning this sale that

. “the corporation was actually in existence: and there was a

genuine transfer of assets to it that were actually used i in’

the conduct of the dress business. ” . ie 98a-D4a, Sa,

~ 101a).

Contemporaneously, Pauline became a director and presi-

dent and treasurer of the corporation and continued as:

same period Pauline managed the dress business on behalf

of the corporation and did not engage, either as a sole

proprietor or otherwise, in any other business endeavor.

Pauline received no payments from the corporation which

| i designated as compensation for her services as: man-

e

r of the corporation. (R. 98a-94a) , rea

After 1953 the corporation made payments on the notes |

held by Ernest, first to him until his death in 1956, then

to his estate until it was closed in 1958, and finally to

Pauline. (R. 79a, 95a)

‘ During the taxable years in question the corporation

received and reported the income derived from the dress

business, and Pauline W. Ach did not reflect or refort the

receipt of any income arising out,of her management of

the dress business. The payments made by the corporation

on account of the notes held by Ernest M. Ach, his estate,

and ultimately ‘by Pauline, were properly reflected by the _

corporation as reducing the principal amount due on | such bi

note

The Commissioner of Internal Revenue fesued a statu-

| tory notice of deficiency in which he determined that.the

‘entire net income of the corporation was allocable to—

4

pimerer 5

Pauline under iitiaia 482, ‘and inclindeble. in: her gross °

income under section 61.. (R. 6a, 16a)

The Tax Court, based. on its estimate of corporate

profits attributable to Pauline’s services, found that seventy

per cent of such profits were allocable to Pauline under

_ section 482 and. thus includable in her gross income: At

the same time it. rejected the Commissioner’s contention .

that the corporation was a sham and that the transfer of

Vogues and Vanities fo the corporation lacked substance.

The jurisdiction of the ‘Tax Court was invoked under the

applicable provisions of the Internal Revenue Cotle of 1954.

The court of appeals affirmed the decision sad the Tax

Court..

SPECIFICATION OF ERRORS TO: BE URGED.

The courts. pelow. erred in holding that an individual

whose only business endeavor is managing the business -

of a corporation is a separate organization, trade, or busi-

ness within the meaning of section 482 of the Internal

Reveny Code of 1954. ,

REASONS FOR GRANTING THE WRIT

1. The decision of the court of appeals presents an im-

portant and novel question of federal income tax law which

has not been, but should be, settled by this Court. Section

482 gives to the Commissioner unusually broad powers to

distribute, apportion, or allocate gross income, deductions,

credits, or allowances between or among controlled organi-

zations, trades, or businesses. Moreover, it is now well -

establighed that onee the Commissioner has acted under

aection 482, his determination will stand unless. the tax-

payer proves it‘ts arbitrary. Aiken Drive-In Theatre Corp.

vy. United States, 281 F.2d 7 (4th Cir. 1960); Spicer

Theatre, Inc. v. Commissioner, 346 F.2d 704 (6th Cir.

1965). Or, as the Tax Court stated in this case:

6:

“The Commissioner has considerable discretion in

applying this section and his determination must be -

~ _ .sustained unless he has abused his discretion. We may

reverse his determinations only where the taxpayer

proves them to be unreasonable, arbitrary or capri-

_. cious.” 42 T.C., at 125-26.

_ Because of the brodd arid sweeping authority which the

Commissioner may exercise under section 482 in allocating

income and deductions from one taxpayer to another, and-

- because of the heavy burden placed upon the taxpayer in

resisting such an allocation, it is of the utmost importance

that the scope and extent of the Commissioner’s authority

be carefully delineated to prevent the application of that

section to.taxpayers’ and to transactions _Which are not

. clearly within its terms.

The question presented is important further because of

its application to countless numbers of taxpayers who have

elected to do business in the corporate form. The Tax

Court and the court of appeals int this case have held that

an individual, who is not engaged in any business endeavor

other than managing the business of a corporation, is an

organization, trade, or business separate and apart from

the corporation by which he is employed. Thus, if the -

courts below correctly interpret the law, the Commissioner

_may allocate gross income and deductions of a corporation

to its controlling shareholders in any case where the share-

holders’ services contribute to the corporation’s profits.

| The decisions of the courts below. significantly diminish

the advantages of incorporation under the Internal Reve-

nue Code for the small closely held corporation. The Com- —

_ missioner may now contend, and under these decisions he

will be sustained, that a controlling shareholder who has

elected not to demand from the corporation a salary com-

- mensurate with the value of his services is taxable.on the

income generated by his services.

7

2. The decision of the court of appeals presents a

- eonflict, in principle, with decisions of this Court and other

_. courts of appeal. In Whipple v.. Commissioner, 373 U.S.

193 (1963), this Court held that an individual shareholder

_ who was actively engaged in serving»his own corporation

was not in a trade or business and therefore could not »

deduct as business bad debts advances made by him to the

corporation of which he was a shareholder. The Court,

relying on several of its prior decisions, stated:* “De-

voting one’s time and energies to the affairs of a cgrpora-

‘» tion is not of itself, and without more, a trade or business

of the. person so engaged.” 378 U.S., at 202. ;

In the instant\case it has been stipulated by the parties, °

and the trial court has found accordingly, that Pauline W.

Ach did not engage, either as a sole proprietor or otherwise, -

. in any business endeavor other than managing the dress |

business of’ The Ach Corporation.’ On these. facts and

‘findings the conclusion that-Pauline W. Ach is an organiza-

tion, trade, or business cannot be reconciled with the deci-

sion of this-Court in Whipple v. Commissioner, supra. -

This case also presents .a conflict, in pfinciple, with

Commissioner v. Gross, 236 F. 2d -. (2d Cir. 1956),

where the court stated:

_ “The officers of a corporation are not compelled to

take salaries for the services they render. They may

donate their services to the corporation if they choose . -

to do so.” 236 F.2d, at 618. )

' Finally, in Moline Prapeities: Ine. ' v. Ceisiinhewe. 319

- U. S. 4386 (1943), this Court laid down the following rule:

. “The doctrine of corporate entity fills a useful pur-

pose in business life. Whether-the purpose be to gain

an advantage under the law of the state of incorpora-

tion or to avoid.or to comply with the demands of

creditors or to serve the creator’s personal or undis-

8

_ closed convenience, so long as that purpose is the equiv-

- alent of business activity or is followéd by the carrying _

on of business by the corporation, the corporation re-

mains .a separate taxable entity... .” 319 U.S., at

'. 488-39. | . i 7

° P) : nad

The decision below is in violation of this established

principle of corporate ‘and tax law inasmuch as it holds

at the corporate entity may be ignored in any case

-where controlling shareholders contribute to the realiza-

tion of profits by a corporation, and that in such a case the

profits may be taxed directly to the shareholders. , ;

8. The decision of the court below is believed to be an

erroneous application and interpretation of the law and

such a departure,from the accepted and usual course of .

judicial -proceedings as.to call for an. exercise of this

Court’s power of supervision. Fair and impartial admin- -

istration of the tax laws requires that the words of the

statute imposing the tax be given their usual and cus-

' tomary meaning: The judicial power should not be em- ©

. «ployed to countenance an arbitrary extension of the appli-

‘cation of the ‘statute to encompass taxpayers and transac- .

‘tions clearly not within its terms. In this case the language

of the statute is plain and unambiguous in providing that

“the Commissioner may only allocate gross income between

“two or more organizations, trades, or businesses.” (Em-

phasis added.) An application of the statute where there is

but one organization, trade, or business is thus in flagrant

disregard of its. terms and should be corrected. |

The Tax Court and the court of appeals ‘have applied

. the statute in such a manner as to subvert completely the

requirement that there be two or more organizations,

trades, or businesses before the Commissioner can act; and

they have done this without a single precedent to support

their position and .in spite of substantial authorities

—

oC , F " ro

that :

a

?

os

’ : = gh

suggesting a contrary result. For thé simple and obvious

fact is that’ there is here only one organization, trade, or

business, namely, a dress business, and all] of its assets are

owned by The Ach Corporation. The holding that Pauline

W: Ach was a second organization, trade, or ‘business is

refuted by the applicable findings of fact of the trial court

(1) Pauline W. Ach made a genuine transfer of

_ all the tangible assets of the dress business to The Ach

Corporation which were ‘thereafter actually used by

The Ach Corporation in the conduct of the dress .

business. ; rename

(2) Pauline W. Ach did not engage either.as a sole

proprietor or otherwise in any business endeavor other .

than management of the dress business.

- Thus Pauline W. Ach did’ not operate as 4 sole. pro-

prietorship in any of the taxable. years involved; she

owned no assets used in a trade or business; and she had

no employees, According to the Tax Court her only busi-

ness endeavor was mariaging’ the dress-business ‘which she P=.

had sold to The Ach Corporation. We have, therefore, only

one organization, trade, or business, that of The Ach

Corporation, and this one organization, trade, or business

was managed by Pauline W. Ach. Cf.-Whipple v, Commis-

sioner, swpra. To hold on these facts that Pauline W. Ach

was.an organization, trade, or business separate from the

corporation she managed necessitates a strained congtruc-

tion of the plain language of the statute and would mean

that a single organization, trade, or business could be frag-

mented for tax purposes into assymany organizations, trade,

jecting to the Commissioner’s authority to allocate income

or businesses as it had er ah employees, thus sub- |

°

or deductions 4 vast new area of t nsactions and relation-

ships. See eats. ts

oe .

10

While ‘section 482 may present difficult questions of

interpretation in other contexts, there can be no disagree-

_ ment that section 482 presupposes an allocation from one

_ organization, trade, or business to. another co-existing, —

separate organization, trade, or business, felated through

~~ common ownership or control. The Tax Court and court

of appeals have misinterpreted and misapplied section |

482 in allocating the income of a single erganization,

trade, or business to one of its constituent parts, namely,

its managing ree. ;

CONCLUSION |

, For the foregoing reasons, petitioners pray that a writ

of certiorari issue ‘to review the decision of the Court of

- Appeals for the. Sixth Circuit.

Respectfully submitted,

H. J. SIEBENTHALER

2300 Central Trust Tower

: ‘Cincinnati, Ohio 45202

ee Attorney for Petitioners

WILLIAM R. SEAMAN uk |

_ . RONALD E. HEINLEN ©

Frost & JACOBS

2300 Central Trust Tower

_ Cincinnati, Ohio 45202

. July, 1966

* 2Cf. Plumb and Kapp, “Reallocation of -Income and Deductions

under Section 482,” 41 Taxes 809, 810 (December, 1963) :.

“It is doubtful that Section 482 applies to dealings between

‘. a corporation arid an individual stockholder, other than in his

capacity of carrying on an individual business. Oy

8

THE ACH CORPORATION,

; :

APPENDIX A

_ No.. 16154 *

UNITED STATES COURT OF APPEALS .

FOR THE, SIXTH CIRCUIT ;

PAULINE W. ACH, Petitic r,

Vv.

COMMISSIONER OF seilahearsinman REVENUE,

ee

No. 16155 *

ESTATE OF ERNEST M. ACH, DECEASED, PAULINE

*. W. ACH, SOLE. LEGATEE, AND PAULINE W.

ACH, SURVIVING ‘WIFE, Petit ‘

Vv.

COMMISSIONER OF INTERNAL REVENUE,

x. Respondent |

| - No. 16156

THE ACH CORPORATION,

Vv.

| Petitioner,

COMMISSIONER oF INTERNAL REVENUE,

osenaan |

No. 16229

COMMISSIONER oF INTERNAL REVENUE,

é ‘Petitioner,

Vv. ‘ ‘ 4 P

Respondent

On Petitions to Review Decisions of the Tax Court

of the United States ’

Decided, March 30, 1966.

ws 0

2a

Appendia_A

Before: WEICK, Chief Judge, CELEBREZZE, Circuit

Judge, and CEcIL, Senior Circuit Judge. .

_ CECIL, Senior Circuit Judge. These cases are before

‘the Court on petitions for review of decisions of the Tax

. Court of the United States.’ The petitioners and- taxpayers

are: Pauline W. Ach in docket No: 16,154, Estate of

Ernest M. Ach, deceased, Pauline W. Ach, sole legatee .

and Pauline W. Ach, surviving wife in docket No. 16,155

and the Ach Corporation in docket No. 16, 156. The Com-

missioner of Internal Revenue, ‘respondent herein, deter-

mined deficiencies in income tax against the above named

taxpayers and they bréught actions in the fax Court for

redetermination of those deficiencies. °

The claimed deficiencies grow out of the. inter-related

dealings between Ernest M. Ach, his wife, Pauline W. Ach,

and their two sons, Roger and Laurence. These dealings

disclose a family plan the obvious purpose of which was

to avoid or minimize the income tax of the husband and

. wife. It is perfectly proper for. individuals -and corpora-

tions to arrange their business affairs so as to minimize |

taxes and in the cases now before us the transactions were

“open arfd above board and no fraud is ‘claimed. ‘The ques-

tion presented here is whether the transactions involved

came within any statutory prohibitions of. the Internal

Revenue Code. .

The facts are fully stated in the Findings of Facts and _

Opinion of the Tax Court reported at 42 T.C. 114. Briefly .

stated, the pertinent facts of the family transactions may be

summarized as follows: Prior to and through mid 1953,

the son Roger owned all of the stock (800 shares) of

Rising Sun Creamery Company, an Ohio Corporation. The

stated purpose of the corporation was to deal in dairy

products. Roger had operated the business at a substantial a

3a

Appendiz A ee,

loss iid year and at the end of the year 1953, “ cumula- :

tive indebtedness amounted to-$282,700. This indebtedness

_. was evidenced by notes with interest payable to Ernest

Ach; the father, who-had:-eovered the yearly losses.

At -the time now under consideration and for a number .

‘of years prior thereto, Pauline operated a dress shop in .

Cincinnati under. the name of Vogues and Vanities. This

was, and had been, a successful business, netting profits of

$25,000 to $30, 000, a year, with the indication that —

were rising.

On April 23, 1958, the Sistah changed its name ‘to . ©

‘the Ach Corporation. It also changed its stated corpora-

tion purposes from a dairy products business to ‘broad,

‘general purposes which would include the operation of

- the dress business of Vogues and Vanities. The dairy .

business was discontinued prior to August tI, 1953. On or

. about July 14, 1953, Roger, pursuant to his parents’ ‘sug-

gestion,-transferred to his brother Laurence, without. con-

sideration, 149 shares of the corporation’s common stock.

All of the shares of the Corporation were transferred to |

Pauline by Roger and Laurence, without consideratiorf; in

May 1959. At“this time the corporation’s net operating *

- ‘Joss was no longer available as a carry over against income.

On or about Aiigust-1, 1953, Pauline became president,

. treasurer, and chairman of the boar€ of directors of the

-. Ach Corporation. She was not then a shareholder of record.

- Qn that date, at a special meeting of the Board. of Direc-

~ tors, she offered to sell to-the Corporation her Vogues and '

’ Vanities business for -$30;705.57,' to be paid for by a

demand note of the Corporation without interest. The

‘ agreed purchase price was the book value of the business. .

The offer was accepted and the transfer was made.”

, ; Ai te ! ‘ : *

ze ne, |

4a * |

Appendix: A |

Pauline continued to manage the business under the name

of Vogues and Vanities. There was no ostensible change in

the conduct of the business. Pauline received no salary:

from either the business or the. corporation. Roger. and

_ Laurence, the sole shareholders of the corporation, were

engaged i in other business ventures not related to the dress

oe business. They took no active part in the operation of

- Vogues and Vanities. The profits of the Business, under

- Pauline’s continued management, were channeled through

the corporation ‘and were used first to:pay to Pauline the

purchase price of the business-as evidenced by the corpora-

_ tion’s demand: note to her and-second to: pay the _corpora-

a tion’s notes to Ernest. The *profits thus realized by the .

: corporation were offset against the carry: oyer losses of the. «

* dairy business and no income tax was patd for the years

' in question. .

The respondent took the position that the bch should

te _° be disregarded as fiction and. that all of the profits of

hb | - Vogues’and Vanities s be allocated to Pauline under . .

- Section 482, Title 26, .C. He also ruled that the loss

carry-over should be disallowed under Section 269, Title 26,

U.S.C. The deficiencies were determined on this basis. The

petitioners challenged these rulings and brought their

-- actiohs in the Tax Court for a redetermination of the tax.

The Tax Court did not follow the respondent on the first:

©

ruling: above mentioned. It found that, “The corporatigp

’ was actually in existence, and there was a genuine transfer ~ .

__of assets to it that were actually used in the conduct of the .

_**~ dress business.” While we mighty take a different view if

ll this question were initially before us, we cannot say that

| _ this finding is clearly erroneous. Rule 52(a) F.R. C.P.,

. Commissioner v. Duberstein, 363 U.S. 278. .

| ‘ Judge Raum of the Tax Court.wrote a comprehensive

Q i

2

a . . Opinion, covering the issues raised by the petitioners in |

. @

oO

ee

%

-

‘ 5a °

. Appendia A

“that court. (42 T.C. 122) We are in accord with the

opinion’ of Judge Raum and find no need to. repeat the

discussion of the issues before the Tax Court.

The petitioners argue before this Court that the amount .

“of profits allocated to Pauline was not based on any intel-

ligible method of calculating the income attributable to her

and that the Court’s decision was wholly arbitrary. We

‘are of the opinion that there was ample evidence to support

he decision of the Tax Court. Under the. evidence, we

think that the amount of profits allotatéd to Pauline was

‘minimal and that it might well have been greater... In

Cohen v. Commissioner of Internal Revenue, 266 F. 2d 5;

12, C.A. 9, the court said:

*

"9 “We neither state nor imply” that the Tax Court’s

redetermination must be predicated upon, precisely

established income and expense figures. Since Cohan

v. Commissioner, 2 Cir., 39 F.2d 540, it has been the

recognized rule that absolute certainty is not required.

It is sufficient if the Tax Court makes as close an

approximation as it reasonably can. The Tax Court’s:.

permissible leeway in this regard is ‘the same as that

which the, Commissioner originally had.” .

In Bodoglau v. Commissioner of Internal Revenue, 230:

“F.2d 336, 340 C.A. 7, the court said:

“It is the function of ‘the trier of the fact to aon

. all the elements properly considered in the valuation °

‘ and to translate them into dollars and cents. (Citations

omitted) Nor is it essential that there be testimony .

7 of the specific figure fixed by the Tax Court.” '

“We concludé. that the Tax Court properly. allocated sev-

enty per cent of the profits. of ven and Vanities to:

Pauline W. Ach..

ly

6a

Appendix A

Another question before the Tax Court and now before

us is whether the losses sustained by the corporation rif

to 1953 in the operation of its creamery and dairy business

may be deducted as a net operating loss deduction in the

corporation’s tax years 1955-1958. The corporation claimed

the right to make these deductions from the profits derived

from the operation of the dress business in 1953 ‘and

subsequent years. .

‘The Tax Court sustained the resporident i in disallowing

these deductions. The Tax Court held that the deductions

were properly denied under and by virtue of Section 269

(a¥.of the Revenue Code of 1954, The pertinent part of

this section reads as follows: -

“If—(1) any person or persoris acquire, or acquired

on or after October 8, 1940, directly or es

control of a corporatian,

and the principal purpose for which such acquisition

was made is evasion or avoidance of Federal income ~

tax by securing the benefit of.a deduction, credit, or

other allowance which such person or corporation

would not otherwise enjoy, then ‘the Secretary or his

delegate may disallow such deduction, credit, or other

allowance. For purposes of paragraphs (1) and (2),

control means the ownership of stock possessing at ©

least 50 percent.of the total combined voting power.

of all classes of stock entitled to vote or at least 50

percent of the total value of*shares of all classes of

_ stock of the corporation. “

The petitioners claim that this statute is not applicable

for the reason that Pauline was not the record owner of

the stock. The Tax Court found that she was the beneficial

‘owner of all of the stock and as such owner she was within

the coverage of the statute.

‘

@

©

a Q

Ta }

Appendix A -

That the transactions here involved were for the purpose

. of tax avoidance cannot be successfully controverted. If

' Pauline had become the record owner-.of the stock on

August. 1, 19538, at the time she became president, trea-

surer, and chairman of the.board of ' directors of the cor- |

poration, there could be no question | ‘about the application

of the statute. .

_ We consider. first whether Pauline. was the beneficial

‘owner of the stock. This is a question of fact and we dre

of the opinion that there was ample evidence to support

the finding of the Tax Court that she was in fact .the

beneficial owner of all of the stock of the corporation.

‘On or about July 14, 1953, Roger, the sole owner of all

of the stock of the Ach Corporation, transferred 149 shares

of the 300 shares to his brother Laurence. This. transfer

was made pursuant to the parents’ suggestion, without

consideration. Laurence had had nothing to do.with the.

business of the corporation prior thereto and had nothing

to do thereafter with the dress shop business, operated

through the corporation, except to serve.as a director. On

August 1, 1958, Pauline became president, treasurer; and

chairman of the board of directors of the ‘Ach Corporation. .

On the same day she offered to sell her business to the cor- .

poration, for its book value. She took in payment the

demand note of the corporation, which had no assets except

some land which was a remnant of the dairy business. It

was hopelessly insolvent by reason of liabilities in the, form

of notes payable to her husband.: There was no ostensible

‘ change in the operation of the dress business and Pauline

continued in full control and management of the dress shop

without any assistance from her sons, the record share-

holders. Finally, aboutone year later, she paid herself the

‘sale price of the business out of the profits of the business

8a

Appendia A

earned through her management. Then when the corpora-

tion had served its purpose as a vehicle of tax avoidance,

the sons transferred to their mother, at her request, all -

of the stock of the corporation.

' This was indeed a thinly veiled transaction. It would

be difficult to conceive of a more — example of control

ahd beneficial ownership being in one person. There was

no apparent reason for the transfer of the business of. —

Vogues and Vanities to the corporation, other than tax

avoidance. There was some testimony on behalf of the —

Ars petitioners tending to show other purposes, but this was

discredited; and we think justifiably so, by the trier of the

facts. We cannot accept petitioners’ claim that the Tax

Court confused ownership of property with management

"of property. Each case must be judged upon its own facts.

The cases‘ cited in petitioners’ brief can be distinguished :

on their facts from the case at bar..

The Tax Court, having found that beneficial ownership

of the stock was in Pauline, held that the word “owner-

ship” in Section 269, above quoted, included beneficial |

ownership. We agree. The essential thrust of this statute

is to prevent sham or fictitious transactions for the purpose

of avoiding the payment-of income taxes. Control is defined

as stock ownership with 50 per cent of the voting power

of a corporation. We understand this to mean the quantum

of voting power necessary for control, not ——- literal

record ownership.

In the case before us where willing and obedient sons"

transferred the record title of shares pursuant to the sug-

gestions and requests of their parents, we conclude that

1 Montzyomery v. Commissioner, 230 F.2d 472, C.A. 5; Lawton v.

. Commissioner, 164 F.2d 380, C.A. 6; Henson v. Commissioner, 174 F.

2d 846, C. A. 5; ats N. Birmingham, ail F. Supp. 361.

9a ie

Appendize: A

Pauline had one hundred per cent control of the corpora-

tion.

. The Tax Court was correct i in disallowing the carry over

of the net operating losses against the profits of Vogues and

Vanities.

The judgment of the . Tax Court is in all respects

affirmed. °

“* Since this Court affirms the Tax Court in its allocation

of income between Pauline and the corporation .the cross- ¢

appeal of the respondent in docket No. 16 ,229 is moot and

-it is hereby dismissed.

is)

E

ve

2

="

+

10a

Appendix B

APPENDIX B

UNITED STATES COURT OF APPEALS--~

‘FOR THE SIXTH CIRCUIT

No. 16,154

PAULINE W. ACH,

ie Pine,

ow :

COMMISSIONER OF INTERNAL REVENUE,

Respondent. .

- On Petition to Review a Decision of he Tax Court ;

of the United States : hae

Before: WEICK, . Chief Judge, CELEBREZZE, Circuit Judge,

and CEcIL, Senior Circuit Judge.

This cause came to be heard on the transcript of record

. from the Tax Court of the United States and was argued

by counsel.

ON CONSIDERATION: -WHEREOF,. It is now: ‘hee

ordered and adjudged by this court that the decision of

the said Tax Court i in this cause be and the same is hereby

affirmed.

No costs, awarded: Rule. 23 (4). | eto,

Entered by order of the Court. 8

: a , /s/ CARL W. REUSS

Filed: March’30, 1966; © | ee

eee

ae 7

Appendix C .

" APPENDIX. c aks .

UNITED STATES COURT OF APPEALS ~ 2 E

— FOR THE SIXTH CIRCUIT | | :

No. rains

®)

ESTATE OF ERNEST M. ACH, DECEASED, PAULINE: a

- W. ACH, SOLE LEGATEE, AND PAULINE W. ae

‘ACH, SURVIVING WIFE, " Y

Petitioners,

Vv.

COMMISSTONER OF INTERNAL REVENUE, .

“an oe. —

On Petition to Review a Decision of the Tax Court _*

of ‘the United States - |

Before: WEICK, Chief J udge, CeLeeRezze, — J judge,

and CECIL, Senior Circuit Judge.

This cause came to be heard on the transcript of: record

from the Tax Court of aa United States and was argued

by counsel. a

ON CON SIDERATION. WHEREOF, It is‘ now here

. ordered and adjudged by this court that. the decision of

the said Tax Court i in this cause be _ ~ same is hereby

affirmed. 3

No costs awarded. Rile 93 (4).

Entered by onder of the Court. ©

ys, CARL W. REUusS

Clerk ;

; g— e

‘Filed: March 30, 1966.

12a %.

"Ss Appendin DES

aoe | %

APPENDIX D ay

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT |

a. ake ee No. 16,156

‘HE ACH CORPORATION, |

| Petitioner,

:

COMMISSIONER OF INTERNAL REVENUE,

Respondent

On Petition to. Review a Decision of the Tax Court

| of the United — , cad

Hg ak Ge

: “ait

Before: WEIcK, Chief Judge, CaLepregde, Circuit Judge,

and CECIL, Senior Circuit Judge: . — ‘

| This cause came to be heard on the transcript of record

| from the Tax Court of the United States and was argued ©

by counsel.

| ON CONSIDERATION WHEREOF, It is now ‘here

ordered and adjudged by this court that the decision of the

_ said Tax Court in this cause be and the same is hereby

affirmed.

No costs siebea. ‘Rule 23 (4).

Entered y order of the Court.

gies , /s/ CARL W. REUSS |

Filéd: March 30, 1966

_—

COMMISSIONER OF INTERNAL REVENUE,

_THE ACH CORPORATION,

6 -y

) | * po

<e ‘\ APPENDIX E

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 16,229:

Petitioner,

\ . W

Respondent.

~_) ,

a oe ode

On Petition to‘Review.a Decision of the Tax Court

of the United States ¢

,. Before: WEICK, Chief J udge, CELEBREZZE, Circuit J udge, :

and CECIL, Senior Circuit Judge. ae

This cause came to be heard on the transcript of record :

from the Tax Court of the United ‘States and was argued

- by counsel.

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this court that the decision of. the

- sald Tax Court: in ‘this cause be and the same is hereby

affirmed.

No.costs awarded. Rule 23(4). .

Entered by order of the Court. :

/s/ CARL W: REUusS

_. Clerk

Filed: March 30, 1966: 7

Ada | |

Appendix F *

APPENDIX F

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT.

No. 16,154

‘PAULINE W. ACH, = Se a

| | | Petitioner ‘on Revie,

. ee

COMMISSIONER OF INTERNAL REVENUE,

_ Respondent on. " Review.

No. 16,155

ESTATE OF ERNEST M. ACH, DECEASED, PAULINE

°W..ACH, SOLE LEGATEE, AND PAULINE W..

* ACH, SURVIVING WIFE, |

3 ) Petitioners on Review, |

. v. :

COMMISSIONER OF INTERNAL REVENUE,

ata tated on Review. —

yn | ar se No. 16,156

“THE ACH CORPORATION, ,

| Petitioner 0 on Review,

a F ; Vv.

| COMMISSIONER OF INTERNAL REVENUE, |

, | Riepondent on Review. ee

oo

15a |

Appendi« F

ORDER

Before: WEICK, Chief J udge, CELEBREZZE, Circuit Judge,

and CECI, Senior Circuit ‘Judge. gaat

These causes are before the Court on a petition for

rehearing of the appeal decided by us in our opinion of

_ March 30, 1966. The petition seeks to limit the rehearing

to the question of whether Pauline W. Ach, an individual,

is an “organization, trade, or business” within the mean- —

ing of section 482 of the Internal Revenue Code.

_ That question’was discussed and decided by the Tax °

Court in its opinion’ reported at 42 T.C. 114 at pages 124

and 125. We said at page 4 of our opinion.

m

“Judge Raum of the Tax Court wrote a comprehensive

opinion covering the issues raised by the petitioners

in that court. (42 T.C. 122) We are in accord with

the opinion of Judge Raum and find no need to

repeat the discussion of the issues before the Tax

Court.” | rene

Upon. consideration of the pétition for rehearing it is

ordered that it be and is hereby denied.

‘~~ Entered’ by order of the court.

/s/ CARL W: Rev

Clerk ©