Petition for Writ of Certiorari — Charles Town, Inc. v. Commissioner

Vv IM ie Ak © nate , “elt he SF I

__ | sonn F. pawes, c

Sepeoms Court of the United Sates

ALES

October Term, 1967_

No 86 5

CHARLES tosis, laccracmaak ers

. ne we re

ComMissioner oF INTERNAL REVENUE, .

SE . Respondent.

Petition for a Writ al Certiorari. to the Waited

~ States. Court of Appeals for the Fourth Circuit.

{

\

\

Greorce T. ALTMAN, |

_ 424 South Beverly Drive, _

‘Beverly Hills, Calif. 90212,

- Srancey H, WiLEN, _

| Attorneys for Petitioner.

X.

“SOBJRCY INDEX

cio a aceite eo ee

Opinions Below ree -ciphaarsaierled 1

Jurisdiction sho csusnanecatl oe I

Quiestion Presented ..:etecvincvscmtercesnsonnnenttneitszes 2

Statutes and 1 Regulations Tavolved oe SP 2

7

Statement

Reasons for Granting & the Writ ...........- rea

Conclusion . id Se 13 ;

_ Appendix. Opinion of the Court of Appeals for the A

Fourth Circuit 1

) ~ Order Denying Petition for Rehearing cin 16 |

» Findings and Opinion of the Tax Court on 5 ae

oe Decision of the Tax‘ Court sesposceerecmclgas 128965

Portions of the Evidence: ............. Se es

: : ee wif

: TABLE OF AUTHORITIES CITED

dibioe~. Kentucky, 384 U.S. 9s hence ae

Davis v. United States, 282 F. 24 623 een, 10 |

Eli Lilly & Co. v. U.S, 372 F. 2d 990 ............. 10

~"Hoeper v. Tax Commission, 284 U.S. 206 ....... | .----11, 12 |

Louisiana v: United States, 380 U.S. 145 ........:...12, 13

Manhattan General Equipment C Co. v. Commissioner,

BN U.S. 129. | t -:

National Carbide Corp. v. 1 emtanas 336: U.S...

ae 9.

Oil Base, Ine. v. Commissioner, 362 F. "e Seaae 9°

<< Rooney v. US.)30 ‘F, 2d 681 «........: i ee

. South Texas Rice’ Warehouse Co. v. Commissioner, |

© 366 FB. 2d B90. scccnsaiilascc 9°

_ United States v. Ogilvie Hardware, Co, Inc., 155,

UF. 2d 577, aff'd 330 U.S. 709 RRC Ye

ne vopre ~ Regulations :. oA ee

8, Treasury Regulations, Sec: 1,482-1(a) (3) spieecobset 3

= ieee, Regulations, Sec. nba i{e), mara

Internal Revenue Code, Sec.°45 1.2 9

Internal Revenue Code, Sec. 61 .--neeeewneisnereneeneee 3

. ‘Internal _—— ‘Code of 1954, Sec. 482...

fe <2, 7, 8, 9, 11, 12°

United States Code; Tite 28520. 1254( y Epeeieen ae

- United States Constitution, Fifth Seeninoee .. x 30

ie "e ie , oh ‘ , e

: Ee Mertens | Sec. $21, fns 81,82 1... a aaeeeed 12

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IN THE Loeb

_ Supreme Court of the United State

Sh

October Term, 165

No. ease

am :

’ bs . -

CHARLEs Town, fiaeporited eo |

| On ae Petitioner, :

, ' VS... i +i" |

3 Comsrsstoner OF INTERNAL REVENUE, a

pa a: Sere As "Respondent

Petition for a Writ of Certiorari to the United

. States Court of Appeals for the Fourth Circuit. .

i ! Opinions |] Below. Ts

The mtndaniian findings of fact and opinion of

the Tax Court (Appendix, infra, beginning at p. 17

thereof) was officially reported as T.C. Memo, 1966-

«

45, and appears in, the Commerce, Clearitig House

as “TCM” reports at 25 TCM 77... The. opinion of the

Court of Appeals (Appendix, infra, beginning at p.1

thereof) 1 is ds aiabh at 372 F. 2d 415. Pein i t

Jurisdiction.

Ts judge ‘tthe Covilt Ot A ppl via Gahered

| on Jantiary 31, 1967. [R. 27.]* On February 27, 1967,

“The ‘appendix to this petition’ contains’ the opinion of the

percent apr peng ow vpmisctiutfs pawn tgs’ ngig a

_— 2

the time for filing in said éourt petition for rehearing

"was extended to and including March 17, 1967, [R. 32.]

Pétition for Tehearing was filed March 13, 1967. [R.

cf '33.]- |The said ;pétition was denied March 23,; 1967...

[R. 40.] .The jurisdiction ‘of this Court is based ion

| 28 U.S.C. §1254(1)..

Question Presented.

a “The question presented is whether, under the facts

as found by the Tax Court, the Commissioner of

‘ Internal Revenue, pursuant to:Section 482 of the In-

ternal) Revenue Code of 1954, properly allocated to

petitioner, which conducted two race ‘meeting ventures, -

income received by another corporation from’ the, said

ventures’ ag its contractual share of ‘the profits thereof

- for the use ‘and risk of ‘money furnished by it. -

| Statutes, and: Regulations Involved. |

«Thus tatuhory ‘provision: apes by the: Tax Court

arid-the Court of Appeals here-is Section 482 of the |

Internal Revenue Code of 1954, reading as follows: 3

Pact ‘Allocation ' of income and deductions -

' among taxpayers... |

Af ae Sy organizations,

ee or businesses (whether or not incorporated,’ _ |

whether or not: organized in the United States,

and .whether or ‘not affiliated) owned or‘ con-

wll esti :ot ndliectly, by the, game. nterests ee

secretary. or his delegate may distribute, ap-

on, or lloate ‘gross income, deductions,

5, or al ces. or among such

Reapoiden as the Court of Appeal notes iso relied

on Section’61 of that Code. (App.-2/)? 0 se

As to related Treasury ‘regulations, both courts below

. set out ‘by footnote the full text of Section 1.482-1 (c)..

it i owed tn park GE thle pioiond Ws thd ppd

hereto. - (App. & 63.) The Court of Appeals, ‘how.

ever, _as shown inthe Appendix hereto (App. 9), also

cited and quoted from* — duieatilaloila of those *

—

- Statement. .

This js an income tax case. Tha: Tes Conk ates

tained the action of respondent, the Commissioner of.

‘Internal Revenue,..in— allocating to. petitioner, Charies

3 Town, Ager porated, hereinafter referred to as “Charles

~ Town; ” income reported by another corporation, Pair. |

mount ' Steel Corporation, hereinafter referred. to, as

“Fairmiount.” . The. Court of Appeals. affirmed...

The tax years of, petitioner involved are fiscal years

ended. November. 30, 1958, ‘and November? 30,. 1959.

. As stated by the Court of Appeals, the “Commissioner’s —

allocation .under Section 482 [was] predicated: on the

a alleged shifting of profits from’ one controlled entity

(Charles. Town) to. another. (Fairmount). for the pur--

pose of utilizing net operating loss carryovers,,of the

latter.” (App. 1-2,)..: Fairmount, as*the court: below -

"also stated, was controlled: at. all relevant: times, by.

two brothers, Ben and Herman ‘Coben, ; “They also:

+

; 2 | nee , 4 me: ; eae :

Engineering. Corporation and C.)B. Associates, a part-

= nership which succeeded Housing Engineering Cor-

Whether, Sadie We docs: ox: toccad Go the Fox’ Chart

the relation: of the Cohen brothers to Charles Town at

thé relevant time constituted. control of that entity

also, presents one of the problems i in this case.

"Charles Town 1 was incorporated i in’ West Virginia pA °

: the purpose of ‘operating a race track. (App. 24.) The

-. West Virginia Racing Commission in May 1958 had

issued an ultimatum to one Mrs. Boyle, owner of a .

race. track i in the city of. Charles Town, that if a sum-

. mer meet were not operated on that track it would take

her license away. On May 20 she executed a lease of

' the track, for the period May 22,°1958, to September —

10, 1958, to “Ben Cohen, acting for Charles Town,

Incorporated, a corporation to be hereinafter created

under the laws of the State of. West Virginia.” (App.

_ 23.) Fairmount gave Mrs. Boyle at the same time a .

' check for the agreed rental of $225,000. On May 22,

1958, it gave her an additional $15,000 pursuant te

supplemental agreement entered into on that date.

(App. 26.)

- On that date, also, Charles Town, the cir pordiion:

was incorporated. Pursuant to previous subscription

(App. 81), it then issued 100 shares at $10 each, one

each to Ben. and Herman Cohen and. ‘the other 98

- to Louis Pondfield (App.. 24), a first cousin of the

Cohehs who “had been’ connected with “horse racing —

since 1920 and had been a manager. of racing meets

since 1949. en seepage . | “aid

ss

* bg \ As —i- ni 5 : ‘

In its application to the Racing Commission ‘for a

license- Charles Town disclosed; in response to.a ques- :

tion therein“as to what persons had, other than ‘as :

shareholders, - “advanced, by loan’ or otherwise, the

capital invested in the business,” that such person was’

Fairmount: and that the amount of capital so advancéd

was $500,000.- (App.” 36, 80.) The Commission was

also at the same time informed’ that Pondfield “would ;

manage the nieet. (App. 87-88.) re

On’ May 20, 1958, concurrently with the éxecuition ee

of the lease on that date, an agreement was ‘entered .

into between Fairmount. and Charles Town. Under

said agreement Fairmount agreed to provide “all monies

| necessary” for operating. the meet, and in a minimum

amount of $450,000, and Charles Town agreed to

operate the meet. (App. 30-31.) The agreement fur-

ther provided that Charles Town would get 10 per

cent of the profits “for its services” in such operation,

and Fairmount would get the other 90 per cent for its

said financing of the meet and would bear entirely any

loss. It was executed on behalf of Fairmount by

Herman Cohen ‘and on behalf of Charles Town ‘by

a Pondfield. Also, pursuant to the agreement, Ben and

Herman Cohen were placed.on the board of directors of —

Charles Town, for “so long: as Charles ‘Town ‘shall be

indebted to Fairmount”; and. they were: ernpowered, as

_ the board majority “to make “all major decisions as to

the allocation of income and expenses and in the man-

agement of the race meet.” (App. 29-32.) This was

done to protect the: funds advanced: by Fairmount against

misuse by Pondfield. (App. 74.) Moreover, the Cohens

did not interfere in his management of the meet. (App.

73.)

Under an identical..but subsequent and entirely sepa-

rate’ agreement, expressly approved by Pondfield as

. well as the Cohens (App. 84-85), a second racing meet

was conducted, during the period November 20, 1958,

-to February 20, 1959. . In the case of each méet each —

‘gum advanced by Fairmount was.advanced by it for a.

specified use in connection with that meet. For each

meet, also, the advances so made consisted almost en-

tirely of just two items, the rent, and “bankroll,” the

latter being the money necessary to be on hand to start a-

day’s wagering operations. (App. 27-28, 67-68, 75-76.)*

_ The income from the racing meets was divided by the

two entities in accordance with their agreement.and was _

$0 Teported on -their income tax. returns. (App. 6, 45-

'46.) There is clear atid ‘uncontradicted testimony that

the division between them was fair, that it was, in fact,

just what one would expect between parties dealing at

' arm’s length, as evidenced by meets operated.by Pond-

field when the Cohens were not involved. (App. 74.) _

There. is absolutely no evidence and no finding to the’

“contrary. The ‘ ‘operation” in the case of each racing

‘ meet was the only duty assumed by Charles Town in

| ‘its _Tespective contract with Fairmount; the entire.

erate Sihvesided bip Bekeqrinent: Soe tha’ iret: matt,

pa May 1958 and repaid in full by August 9,

02 5.00; and the total actually advanced b ye Fair:

196, was $7,025.00; nd the oa in N and

| r, 1958; and in full/by ‘February 10, 1959, was __

a Ue ed 67-68.) The Tax Court and the Court

of Appeals adde gprs regina Hpac ee

financing, and the entire 5 Sanrio of any bled -were the

duties correspondingly and expressly assumed by Fair-

mount. (App. 30-31.) There is a finding by the. Tax i

Court that the total net income from the “operation” 3

_of the two racing meets was produced. and earned by ~

Charles Town. (App. 52.) There is no finding that. .

the total net income attribttable to performance’ by

both ‘parties, in other words, to the: operation, and

the entire financing and bearing of any loss; was pro- |

"duced and earned by Charles Town. The Commissioner,

nevertheless, sustained by the courts below, treated the

entire income from each racing. theet as the income —

emcac of Charles Town. (App. 15.) 3

Reasons for Granting the Writ.

ode (The decision. below is in clear ‘conflict with the

decision of the Ninth Circuit in Rooney v. U.S., 305 F

2d 681. The opinion below takes the form of cies

| from that case, agreeing with it, and then distinguish-

ing it. (App. 9.) But the attempted distinction, on

the very face of the opinion below, merely confirms 3

and emphasizes the conflict. 7

In Rooney it was held, 305 E. 2d at page 683, as quoted

by the court here below, that cormon control, to require

application of Section 482, must exist “when the tax-

payers deal with each other.” It was there also held, at

the same page, that “control at ariother time is un-

important.” Also, these holdings there were necessary

to the decision there.

Obviously, then, under the holding in that ¢ case, ‘rs a

requisite to ‘the application of Section 482 the common’

" control must have existed here | when each agreement

NATL ETT TA LEE EET IL ELITE 1 LEELA LALLA ALOT BE A,

between Fairmount and Charles Town was made. ad

‘Therefore, it could not: be based upon that nage : | |

Now, as to the first agreement, the opinion below, to

show that the common control was not based by it upon

| that agreement, says that that agreement was “only one.

of several facts... by which their [the Cohens*] actual

| and effective control of the corporation was acquired ~ |

and exercised.” (App. 9-10.) In direct conflict, how- |

ever, it then recites as the facts referred to a “course of =

events,” including “the execution of the agreement”

' (italics supplied), none of which except the agreement —

itself could have given them any control over Charles

Town, 98 per cent of the stock of which: was owned by.

Pondfield. :

The Court of Appeals next attempts to evold that y

effect by suggesting that even if the. Cohens were not,

at the relevant time, in control of Charles Town, they

were then in control of “the business known as Charles,

Town, Incorporated.” (App. 10, italics in original.)

But the entity to which the income was allocated under .

Section 482 is the petitioner here, the corporation. |

' The. control required is therefore clearly, of the cor-

poration, not the “business, % : a

Finally, the opinion then says (App. 10), “Pondfield

gave:up the control he could have exercised as majority

stockholder when he permitted Charles Town’ (italics

supplied) to enter into the agreement. ‘There again

the opinion itself makes clear that, except for the agree-

‘ment, and to the extent of the agreement, the control of

- Ghar Towra gas, Rot. in the, Cohene, it: was in Pond-

aN

Sys SALA RE dh aati Re RRR ins Ri ERI ESSER IB TEE LIES TARDY ALLOA, IRL T TIES RT LED

The same reasoning applies to the second agreement,

since the first agreement, by its express terms, applied -

only to the one meet. -( App. 29-32.) That was obviously

why, when the second meet was agreed upon, Pondfield —

as well as the Cohens approved it. (App. 84-85.) So”.

- again, except for the agreement, and to.the extent of. the

agreement, thé Cohens had no control of Charles Town. »

Thus the opinion below, on its face, in attempting to |

distinguish the Rooney case, shows all the more clearly

that it.is in direct conflict with that case, that. the ———

“Situation here-fails-to-meet the requirement of that < -

case that the common control extant “when the adil

deal with each other.” ~

2. The decision below is also in ait conflict with

that of the Tenth Circuit in Davis v. United’ States,

282 F. 2d 623. That case involved Section 45 of pre-

vious internal revenue law, the forerunner, without

substantial change, of present Section 482. As that case

shows, at page 627, the section cannot be applied, eyen

if there is common control, if the division of the income

between the entities is what it would have been “had

they been dealing at arm’s length.”. To the same

ak: __ effect are the following cases, in which, as in Davis,

there was common control, but which were decided for

the Commissioner because, in addition, the division of

the income between. the entities involved was found not

, to be what it would have been had they been dealing at

arm’s length: National Carbide Corp. v. Commissioner,

336 U.S. 422, 438; South Texas Rice Warehouse ‘Co.

De Commissioner (C.A. 5), 366 F. 2d 890, 897, cert: = -

_ denied, April 24, 1967; Oil-Base, Inc. v. Commissioner

(C.A.. 9), 362 .F. 2d 212, 214, cert. denied, Nov.:7,

1966; Ek Lilly & Co. v. U.S. (Ct.Cls.),; 372: F. 2d 990,

1000. “fo the same effect are the related Treasury

regulations. (App. 8, fn. 4, last sentence.). The Davis —

_» €ase also shows, at page 627, that the fact that Fairmount

‘here ‘was able to offset its own. net operating losses

against the income fromthe meets is wholly irtelevant. :

"Phere ’is here no finding, nor a single scintilla of

‘evidence to support ‘a finding, that the share of the

income’ received by Fairmount ‘was not fair and- just

_ Compensation to it for the-use and risk 6f the money }

‘furnished ‘by it. The clear evidence to the contrary,

showing that the division of the income between Fair-

‘mount and Charles Town’ was in accord with experi-

ence in the case of parties dealing at arm's length

> (App. 74), is wholly uncontradicted.

There is also no “finding as to what fair and just

compensation to Fairmount for the’ use and risk of

the money furnished by it should be, if not the amount

which it received. Thete is not even a finding that the

evidence was inadequate for that purpose.

We submit, therefore, that the decision below is in

clear conflict with the decision of the Tenth Circuit in

Davis, supra.

3, This, case in, imppastant becayas it, presents, on its

oe faces, Sens. denial of, the: doe, process, of Jew required

- by the Fifth Amendment. :

<Stidinstasta sob tee:kevpiaietinlt bettiore'Saicciven:

“and Charles Town, the funds were advanced by Fair-

mount for a ‘specific short-term purpose, a single racing

"+ meet, and only for the period of the meet; and only, —

- moreover, for specified uses in connection with the meet.

He

Fairmount furnished the use and’ risk of

- and Charles Town | |

NS “aie nie the ibibo ttiaeale

_\—~ side, ‘as owners of ‘Fairmount, and Pondfield,’on. the .

_) ottier side, as the owner.of Charles Town, and: there-

oe fore clearly at arm’s length., Indeed, the court below se

~ concedes ‘they. were at arm’s length, for it says that .

the reason, in its view, why the clauses ‘requiring

Fairmount to bear entirely any loss were inserted in

each contract was “to prevent F airtiount from charging

back any of its capital losses serine Charles Town.” :

‘(App.14.) :

In that situation to charge Charles Town with tax _

on the share of the ‘income belonging to, and received. .

by, Fairmount, is a plain violation of due process. As

this Court held in Hoeper v. Tax’ Commission, 284

U.S. 206, it is a violation of due process to tax the:

income of one person to another, even though they be

as closely related as husband and wife. Of course, we

do not suggest that Section 482 of LR.C. 1954 was.

so intended; but that is how the Tax Court and the

Court of Appeals have here applied it.

This violation of due process is emphfsized: by the

“business” which, as shown in Reason 1 above, the court

_’ below conjured up as a separate entity in order to show

control of petitioner by the Cohens. Who. owned that,

other entity? Was itperhaps the petitioner and Fair-

mount? The court below does not say. This attempt

- to impose a tax on petitioner here, because of control,

by the Cohens of some other entity, is in effect to tax.

petitioner on the income thereby allocated to that other

EE :

oer Tee |

| The principle so announced in the Hoeper case, that

one person be taxed on the income of another, is

clearly appli ble here. The decision below is palpably

in conflict with the rule in that case. fee. 5

ad This case also important because the interpreta-

. tion of Section 482° below would make that section

invalid due to°vagueness, and therefore presents an _

: important issue of general statutory construction.

| This Court stated, in Ashton v. Kentucky, 384 US. -

195, 200 (1966): “Vague laws in any area suffer a.

constitutional infirmity. ” This applies to any law lack--

ing in objective standards. with the result that the law’s*

administrator is given unlimited discretion. Louisiana |

‘v. United States, 380 U.S. 145, 150, 152-3 (1965).

“Under. the Treasury regulation applied here by the .

"court below in defining the term ‘ ‘control,” as used in

Section 482, that term includes, as quoted here by that

* court from the,said regulation, “any kind of control .

3 whether legally enforceable, - and however. ‘mareieatile

or exercised.” (App. 9.) This is solely the regulation.

There is nothing inthe statute itself to give the term

“control” that scope. And it is that scope, at least,

which the court below has applied. ‘To the extent to

which the regulation enlarges upon the statute, the

regulation is necessarily “void. Manhattan General

Equipment Co. v. Commissioner, 297 U.S. 129, 134;

United Statar v. Ogilvie Hardware Co., Inc., 155 F. 2d

577, 580. (C.A. 5), affirmed 330 US. 709, 1 ee

-§3.21, at “ns. 81, 82.

- Assuming, however, that that is what the statute —

means, itis so vague that no interpretation can save it

nd

\

nateeiien. oe (+) 2 Oem

ive j as alteady puny in Reason 1 shia the c court |

below attempts to show the Cohens’ control of Charles

oe "Town by the “course of events which led to the creation

- of Charles Town,” (App. 10) as though control is the.

“series of preceding events, rather than what it is,-a

presently existing power. If, indeed, that is. what the

term “control,” as used here, can mean, there are no

boundaries at all to its’ meaning. If that is what the

_ Statute. means, then the statute itself is void. Ashton

’ vy, Kentucky, supra; Louisiana 'v. U.S., supra.

We submit for that reason that this case is of great

importance, not only in the administration of the rev-"

enue, but in every other field in which stabatory ¢ con-

struction i is involved. ,

_. Therefore, for the reasons stated above, petitioner

prays that this Court issue the writ of certiorari sought

herein to the United States Court of Asus for the

* Fourth Circuit. , x

Respectfully submitted,

_ GEORGE T. ALTMAN,

A Horney jak Petitioner.