# Brief in Opposition to Petition for Writ of Certiorari — Charles Town, Inc. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_0675%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief in Opposition to Petition for Writ of Certiorari - **Published:** January 1, 1967 - **Citation:** 389 U.S. 841 ## Text In the Supreme Court of in United States . OCTOBER TERM, 1967 PERE : No. 265 CHARLES Town, INCORPORATED, PETITIONER 5 v. ? CoMMISSIONER: OF INTERNAL REVENUE ‘ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT: MEMORANDUM FOR THE — Oe 1 OPPOSITION Section 482 of the Internal Revenue Code of 1954 confers discretionary authority. upon the ‘Commis-. | a sioner of Internal Revenue to allocate i income between “two organizations which are controlled directly or indirectly by the same interests, if such allocation is necessary to prevent evasion of taxes or to reflect clearly the income of such organizations, Pursuant to that authority, the Commissioner here determined that taxpayer-petitibner (Charles Town) and Fair- 2. (i) 2 mount Steel ies. ( anmsunt) were controlled by Ben and Herman Cohen and that i income reported by Fairmount from the operation of two hörpe-racing meets in 1958-1959 ‘should be taxed to Charles TW. The Tax Court, sustaining the action of the Commis-- sioner, found that “the total net income derived from the operation of the two racing meets in question was produced and earned by Charles Town.” (Pet. App. 52.) The Court of Appeals for the Fourth . Cireuit affirmed (372 F. 2d 415). The decision below is correet and there is no con- flict of decisions or any other hasis for further review by this Court. : . 1. In early 1958, Ben ‘ind Herman Cohen, the operators of several enterprises including Pimlico Race Course, Baltimore, Maryland, were negotiating to purchase the Charles Town Race Course from the owner, Mrs. Helen Boyle. In May. 1958, while the negotiations were in progress, the West Virginia Rac- ing Commission advised Mrs. Boyle that she would lose her, franchise if a summer meet was not held. Ben Cohen then began negotiations to lease the track and on May 20, 1958, a lease was entered into be- tween Mrs. Boyle and “Ben Cohen acting for Charles Town Incorporated, a corporation hereinafter to be ereated. Charles Town, Inc. was incorporated on May 22, 1958, with Ben Cohen as its president, Herman Cohen as Secretary- Treasurer and Louis __ Pondfield, a cousin of the Cohens, as Vice President. “One hundred shares of $10 par common stock we ! issued, with the Cohens each receiving one share a the remaining 98 shares going: to Pondfield. „ 3 To provide the necessary capital for the operation of the meet, Housing Engineering Corporation, a i " corporation controlled by the Cohens, turned over 3900, 000 to Fairmount, another corporation con- _ trolled by the Cohens, and Fairmount then contracteeſd with Charles Town to advance all monies necessary for the operation of the race meet in return for 90% repaid in full by Charles Town within a few months. The profits distributed to Fairmount were 3497, 833.02 in 1958 and $284,466.84 in 1959. (Pet. App. 21-27, 37, 51.) This round-robin would defy explanation but for the fact that Fairmount had allowable net operating loss carryovers from prior. taxable years totaling $852,105.37. (Pet. App. 32.) By channeling 90% of | the profits to Fairmount, where the income from the _ ‘racing meets conducted by Charles Town would be offset entirely by the above-described income tax de- ductions, the Cohens hoped to avoid paying any in- come tax on the racing operation. This case obviously presents the kind of manipula- 8 tion which Section 482 was designed to combat. Tak- ing into account the fact that Charles Town owned the lease of the racetrack property, obtained the requisite license and insurance, hired all the employees and paid all the bills (Pet. App. 35-45)—in contrast with the mere paper connection Fairmount had with the actual operation—it is clear that in any practical frame of reference, Charles Town earned the income of the profits. The advances made by Fairmount | 3 were in two series—$479, 025 for the summer meet and $507,500 for the winter meet—each series being \ a * > 4 6 and should pay the tax on such income. National Carbide Corp. v. Commissioner, 336 U.S. 422. The anticipatory assignment of income to Fairmount is ineffective to shift the tax from the entity. which id carted it. ‘Lucas v. Earl, 281 US. 111, 114-115. 2. In Section 482, Congress used the phrase “di- rect or indirect” to describe the kind of control suffi- cient to make that provision operative. It also re- - frained from defining control in terms of stock owner- ship. Thus, Congress made plain that the existence of common control of two or more organizations is to be determined in economic terms rather than by any : set rule or formula. Consistent with the terms of Section 482, the term “eontrolled” has been defined as ineluding “ariy kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise.” . Section 1.482-1 (a) (3) of the Treasury Regulations on Income Tax (1954 Code). In examining the facts _ and circumstances of the case, including the course of events which led up to the formation of petitioner, the courts below have followed, rather than mis- applied, the statutory directive. — There is no merit to petitioner’s contention that 2 Section 482 is unconstitutionally vague because the term control is not precisely defined. It has long been recognized that Congress intended to give the Com- missioner broad power to deal with the economic réalities of particular situationd. Spicer Theatre, Inc. v. Commissioner, 346 F.2d 704 (C. A. 6); National SO 2342 K— — Securities Corporation v. Commissioner, 137 F. 2d 600 | (CA. 3). As this Court noted in American Power and Light Co. v. Securities and Eæchange Commission, va , 529 U.S. 90, 105: The legislative process moe Welnenth bog down if Congress were constitutionally required to appraise beforehand the myriad situations to which it wishes a particular poliey to be applied and to formulate specific rules for each situation. Necessity therefore fixes a point beyond which it is unreasonable and impracticable to compel Con- gress to prescribe detailed rules; it then becomes constitutionally sufficient if Congress clearly de- lineates the general pol icy, the publie ageney which is to apply it, and * boundaries of bre 25 delegated authority. 394. See also Hampton & Co. v. United States, 276 U.S. 3. Petitioner’s 1 that the instant case ‘aia flicts with Rooney v. United States, 305 F. 2d 681 (C.A..9), is unsound. Assuredly, Rooney stands for the proposition that common control must exist at the time “when the taxpayers deal. with each other,” but that standard clearly was applied by both courts be- low in this litigation. As pointed out by the court of appeals, the Cohen brothers “controlled the negotia- tions and entire course of events which led to the ereation of Charles Town, the acquisition of the lease | for the Race Course, and the execution of the agree- ment between Fairmount and Charles Town assuring essential capital for the new corporation and their con- tinued control of the business venture.” (Pet. App. * . 6 10.) Petitioner's main argument is that the eourts below did not afford critical significance to the faet that Louis Pondfield, a cousin of the Cohens, formally | owned 98% of its stock. In view of the fact that Eels 98%. ownership represented an investment f $980, whereas a total of $986,525 was advanced rles Town through the corporations controlled 8 the Cohens, the courts below quite properly re- _ jected petitioner’s argument that the Cohens Con- trolled” petitioner only through the written contracts which it entered into with Fairmount. In the per- spective of economic reality the control of petitioner y the Cohens was manifest, ineluding control at the time when petitioner and Fairmount, “dealt with a other.“ 4. Similarly, petitioner mistakenly contends that . this case is inconsistent with Davis v. United States, 282 F. 2d 623 (C. A. 10), which indicates that a Section 482 allocation cannot be made if the division — of income made by the parties is the same as it would have been if they had dealt with each other at arm's length. (Pet. 9-10). The transactions involved in this ease bear no resemblance to an arm's-length agreement and the Tax Court found that the amounts advanced by Fairmount to Charles Town were in the nature of an equity investment. Since an investor can not agree to divide taxable income with the corpora- tion, see Lucas v. Earl, supra, it was quite prop- erly concluded that the entire earnings of Charles Town should be included in its taxable income. See . National Carbine Corp. v. Commissioner, . 55 ‘The petition tor a writ of ‘certiorari should be denied. E pet va fs ip 14 ? : a U “Respectfully ee: Ex % |. SULLY 1967 — ast --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_0675%3A3. Public record. Not legal advice.