# Memorandum in Opposition — Burr Oaks Corp. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_0110%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Memorandum in Opposition - **Published:** January 1, 1967 - **Citation:** 385 U.S. 1007 ## Text a] Vv a the Saye go of the ined Silas _OctoRER TERM, 1966 No. 7164: Burr OAKs Corporaiion, ET AL., PETITIONERS Vv. CoMMISSIONER OF INTERNAL REVENUE atts Va rer oe: ON PETITION FOR A@WRIT OF CERTIORARI TO THE UNITED ‘STATES. COURT ‘OF APPEALS FOR°THE SEVENTH CIRCUIT . . MEMORANDUM FOR THE RESPONDENT IN OPPOSITION — Petitioner Burr Oaks Corporation was organized: - for the purpose of developing, subdividing and selling — ‘improved lots from a parcel of land owned by peti- tioners Elkind, Watkins and “Ri¢z (Pet. 35). The corporation’s common stock was issued (for a total of $4,500 in cash) one-third each to the wives of Elkind & . and, Watkins and one-third, to two brothers. of Ritz. - (Pet. 36). Shortly thereafter Elkind, Watkins and. Ritz transferred their land to the corporation. Al- though the land had a fair market value of not more 1 The Individizal’ petitioner’s wives’ are Wirtiog only tiedsitive _ they filed joint returns with their husbands for the yee ae question. wh 3 * 240-382—66. ig iag SD wa; a. “§ _ than’ $165,000, the corporation gave Elkind, | Watkins and Ritz 6 percent promissory notes in ‘the total ‘amount of $33,000: (each receiving | a $110,000 note) . (Pet. 37-38). . ‘Elkind,, “Watkins 2a Ritz: saieieniler dominated. the corporetion’s affairs, and, without the knowledge o : : of. the holders of the common stock’ or the board of - directors, the corporation rhadé transfers of part of ‘the land back to them without charge or for less than would have been realized from sales to- third parties - - (Pet. 38-40). Elkind, -Watkins. and. Ritz received - $64,000 apiece- during the years 1959-1961, as install- - ment payments on the notes (Pet. 41-42). The . ‘corporation -has never distributed anything to its common. stockholders (Pet. 42). ._The Tax. Court con-. cluded that Elkind, Watkins and Ritz never had any | intention of enforcing. the notes against the corpora- tion. but placed: their land at the risk of the business, using the notes only to obtain a continuing interest in . the ‘corporation that would enable them to withdraw . frorh ‘the corporation the developer’s profit norinally t - inherent in the subdivision and sale of ai land (Pet. + 3B, 42, 46). If the transaction had the dae effect Wopait for by . petitioners, (1) the corporation would have been able © -- to use the inflated purchase ‘price as its cost basis in _ ‘the land, eliminating substantially all of its profit on the sale of the lots and minimizing its income tax lia-: bilities, and (2) Elkind; Watk s and Ritz would have .; vobtained capital gain treatment on the:difference be- . tween the purported selling price to the corporation : = tele original cost basis in the end... & ; . ° oe : « ° ss 3 Both. courts tno ssiihdahd agreeing with the Com- “missioner, concluded that in reality Elkind, Watkins and Ritz had made an equity investment in the corpo- -@ ratioh-to the extent of the land which they transferred to it and that the promissory notes which they re- . _ eeived in exchange for the land constituted, in sub- ® stance, preferred ‘stock in the corporation. “Conse- *. quently, thé unified transaction whereby Elkind, Wat- . @ kins, Ritz and their relatives transferred the land and $4,500 cash to the. corporation upon its organization constituted an exchange of property for stock within - 4 “the purview of §351(a) of the 1954 Code,.and the i ' gorporation’s basis in the land was :the same as the basis which it had in the. hands of the transferors. 1954 Code §362(a). Thus,-the payments by the .. . corporation to Elkind, Watkins and Ritz constituted, ‘not payments on indebtedness, but proportional re- “demptions of preferred stock, taxable to them as divi- ° dend income undér § 302(d) to the éxtent of the corpo- Kes ration’ s earnings and profits.. (Pet. 21-56.) © | The decision below is correct, and. there is rio con- flict of decision or other basis for further ‘review. . Contrary to petitioner’s suggestion (Pet. 18), this _ is not “the first case where payments on instruments which were pure debt obligations under general Jaw principles were taxed to the recipients as dividends on - stock.” See, é.g:, Gooding Amusement Co. v: Commis-: sioner, 236 F.2d 159 (C.A. 6), certiorari denied, 352 - U.S. 1031; Fellinger v. United. States, 363. F..2d 826 ~ (CA. 6). Moreover; it is well established that the form of a. transaction i is. not determinative of whether rN : oi i tess debt instrument in plassaassd panes > ” genuine iieebiedinenn: or an n equity incirialinanathé See,. : _) @g- Gilbert v. Commissioner, 248 F. 2d 399:(C.A..2); _ '_. P.M. Finance Corp. v. Commissioner, 302 F. 24 786 — . CRB Aronov* yy Construction Co. v. United States, - 223 -F. Supp.. 175 (M.D. Ala:), affirmed, 338 F. 2d -- * + 337 (C.A. 5); Arlington Park Jockey Club v. Sauber, 262 F. 2d 902 (CsA. 7); Gooding Amusement ‘Co. Vv. ~ Commissioner, green > As the lower courts found, the. .transfer of the land to: the ‘corporation by Elkind, .. Watkins and Ritz had all of the characteristics of an: ' equity investment. ye The principal thrust’ of sities seu ae ever, is that Commissioner v.~Brown, 380 U.S. 563, - ~ tacitly abolished the. fundamental proposition that a transaction may be treated differently in the pradtical — reference of federal income taxation than state law ‘y and the labels selected by the parties would Buggest.. * In Brown, this Court merely held that when property © ae disposed of at a reasonable price in arm’s-length | Ae dealing to a buyer who i is not controlled by the seller, ee the transaction constitutes a “sale” even though the es A purchase price is collectible only out of the property tfansferred and. its profits’ To be sure, in reaching that result, this Court noted that the transaction there — involved was a “sale”? under general law (p..571), but that was the beginning. of the inquiry, not the end’ of - it. The instant case_did not. involve a arm’s-length bar- gaining, the purchase price was more ‘than twice the ‘ye° i fair market value of the property transferred, and the. : transferors controlled the transferee. Moreover, the _. questionsin ‘the present: case is whether the purported _ . . "5 “ ye ; . ¢ : 3 , F SE 3 Se s sf ; cn ; : : - ~ 4 . - ‘ : Pac} ° * ° St 6 z ~ » . e ; e = e .» ® a ‘ ’ . coy he ie a : pow ong ” “note? ; aetniaity constitute te eqhigy interests so that § 351 | will .apply. Finally, it is clear that Brown did not ‘overrule sub. ‘silentio all of the tax * deeisions in the : ties as Viewed under state law. ~ Phe- betition for a writ. of certiorari should be. denied’ | ° 4 ae _- Respectfully submitted, . : THURGOOD Marsan, - Soa eae Solicitor General. ef Pe | Minoneu Rocovin; Tt ose "” Assistant Attosgney General. _ G@uerv’E. ‘ANDREWS, : * bern oe SoLoMon L. WARHAFrI0, Ke tho Cae, eh oe DECEMBER 1966 fo. : Y die eegers a > a iat z ' gR = . | "® - ; ° o? - j Peake i Cd oe ! é By of? ° oO 5.7 . : 4 eee * as: covrahmniit epirine opricti 190s se a peer Aa ® a) aC ¥ Pe Sete p é \ equity-vérsus-debt area holding that the substanee of oy - the fransdetion controls and substitute, instead a. | mechani¢al_ reference to the labels chosen. by the par- | . > a « --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_0110%3A2. Public record. Not legal advice.