# Memorandum in Opposition — Ach v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385602_1685%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Memorandum in Opposition - **Published:** January 1, 1966 - **Citation:** 385 U.S. 899 ## Text In te Supreme Gourt of the Cited i ines _ OCTOBER TERM, 1966 No. 396 PavuLine W. ACH, PETITIONER | a * ee = 3 the corporation purported to pay her no salary, it. did, over the five years here in question ( 1954-1958), pay Pauline and her husband the bulk of the profits from the dress business, allegedly on account of the corporation’s debts to them. And in mid-1959. Paul- ine’s sons transferred to her all of. the corporation’s stock without further consideration.’ (Pet. 1a+9a, R. 101a.) . } On her tax returns for those years, Pauline re- ‘ported no income from her activities in connection ' with the dress business; the corporation. reported the profits of the dress. business but used the net operat- ing losses previously incurred in the dairy business to wipe out any liability for taxes. The Commissioner took alternative positions, claiming, first, that the . net income of the dress business should be reallocated to Pauline under 1954 Code § 482, and, second, that. to the extent the income was taxable to the corporation, its claimed net operating loss ii dzone should be denied. In the Tax Court, ir ddimaid the appli- cability of § 482 on the ground that Pauline, fol- lowing the transfer of the physical assets of her dress, business to the corporation, was no longer en- gaged in a “‘business” and that she did. not, en constitute an independent “organization, ” “trade,” or “business”? to which incomé might be reallocated under § 482." The Tax Court found that the most ' valuable income-earning aspects of the business—the _ 1The lower‘courts found that Pauline had actually acquired . beneficial ownership to the corporation’s stock at the time she transferred the assets of her dress business to the corpora- tion in August 1953. 4 . intangible assets—had. been retained by Pauline, and — that her continued activity constituted a ‘‘business.” It determined that 30 percent of the business income was attributable to the assets owned by the corpora- tion andthe balance to the aspects of the business: which remained with Pauline; it therefore held that 70 percent of the income was taxable to Pauline and 30 percent to the corporation.’ The court of appeals affirmed.* *(R. 99a-110a, Pet la-9a. ) *The Tax Court stated (R. 101a): Plainly, [the transfer of assets by Pauline to the _ corporation ] was not, an arm’s length transaction. The corporation was hopelessly insolvent, and it is ‘utterly be-’ yond belief that any unrelated third party would have sold - @ prosperous business for a non-interest bearing $30,705.57 note of such an insolvent maker where the level of earn-— ings of that busihess was about $30,000 a year and rising, and where the sellét. contemplated continued full-time management of the business without compensation.. Not- withstanding testimony indicating otherwise, it is all too clear to us on this record that Paulinggwas acquiring con- trol of this moribund corporation : i purpose of at- _ tempting to utilize the net operating earnings of her successful dress business and to obtain the actual benefits of those tax-free earnings by having the corporation pay off, first, her $30,705.57 note, and then the notes of some $280,000 held by her husband which were ~ otherwise uncollectable—all of which would be received free of tax! * The lower courts also sustained the Commissioner’ s slit tive position that 1954 Code § 269 prevented the corporation . from carrying forward its previous net operating losses from the discontinued dairy business, and thus that the corporation was taxable on the 30 percent of the dress business income which was allocable to, it. The corporation has not filed a — petition for a writ of certiorari and the lower courts’ deter- mination on that.i issue is now final. carryover of the dairy business, to offset the resulting; deductions against . The decisions of the lower courts were correct. There is no coriflict of — or . other — warranting further review. 1. Petitioners argue that Pauline’ s activities were - ‘not sufficient to constitute a ‘‘business’’ and that the Commissioner was thus precluded from reallocating income to. her under § 482. The Tax Court found sthat Pauline’s retention of the intangible assets and - ~ her use of them in the continuing operation amounted to a “business.* Whether a. particular taxpayer’s » activities are sufficient to constitute a trade or busi- ithin the meaning of the Code depends priuci- pally on the facts of each case, and the question is not readily ‘susceptible to a rule of general applicability. Moreover, this Coutt has reviewed several cases ih- _ volving ‘this question under other sections of the — Code,‘ and there is no present need for the Court to ‘review this question in the context of the particular _ facts of the case at bar.’ 2: There is no conflict between the fevidiniit ey and the cases cited by petitioners (Pet. 7-8). Whipple v. ht weenie infra, this Court held on that “[dJevoting one’s time and energies to the af- 4 See, ¢.g., Whipple v. Commissioner, 373 U.S. 193; Burnet v Clark, 287 U.S.. 410; Higgins v. Commissioner, 312 U.S. 212; ‘see also Folker .% Jolason, 230 F. 2d 906 (C.A. 2); Schmid- lapp v. Commissioner, 96 F. 2d 680 (C.A. 2); Noland v. Com- missioner, 269 F.2d 108 (C.A.4). * Since, as the Tax Court found, Pauline had retained yalu- - able intangible assets, petitioners are incorrect in asserting (Pet. 6) that the instant decision will apply to any case where “a controlling _ shareholder * * * has elected not to demand from the corporation a Salary commensurate with the value of his service.” , 2 - Phos 2 et Ew ; fairs of a corporation is not of itself, and without” | more, a trade or business of the person so engag (p. 202). However, the Court recognized that if ad- ditional facts were present, a court might be justified in holding that the shareholder-employee was engaged in a trade or business (pp. 203-205). | Nor does the instant decision conflict with Com- . ‘missioner v. Gross, 236 F. 2d 612 (C.A. 2), since that ease involved only 1954 Code § 61. The Commissioner did not there attempt to invoke, .and the courts thus did not consider, the special remedial provisions of § 482, the provision here im question. Cf. Tennessee- Arkansas Gravel. Co. v. en 112 F. 2d 508, 510 (C.A. 6).° ‘Finally, Moline ‘Properties, Ine. Vv. Gnedidbiiae : 319 U.S. 436, is entirely inapposite since the lower | courts did not refuse to treat the corporation as a . Separate - “taxable entity. On the contrary, the Tax Court. found there was a genuine transfer of tangible assets to the corporation and that the. portion of the dress business’. income: properly attributable to those assets (30 percent) should be taxed to the a toned | tion (R. 10la—102a, 106a). °In Tennessee-Arkansas the taxpayer corporation rented: prop- erty to a related corporation but did not collect any rent. The Commissioner attempted to tax the lessor corporation on rental . _ Income without giving the-lessee corporation a corresponding de- duction for rent paid. . The court held that the Commissioner may not create income in ‘this manner, but) suggested that the Com- | missioner might (as he has done in the instant case) use § 482 or . its predecessor to reallocate some of the reported income from one 9 . Telated taxpayer to another. | | | t, ‘i 7 Therefore, the petition for a writ of certiorari should be denied. Respectfully submitted. | THURGOOD Marswat, Solicitor General. Ricwarp C. Puan, . Acting Assistant Aitorney General. ' Harotp C. WILKENFELD, __ ip Wit A. FRIEDLANDER,, 9 ae 2 , Attorneys. ' SEPTEMBER 1966. = : : o --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385602_1685%3A3. Public record. Not legal advice.