Petition for Writ of Certiorari — Hibler v. Commissioner

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LIBRARY an PAGED

SUPREME) COURT. U. SS DEC 26 1967°

Oftice-Stupreme Court, U.S.

“3 Sa —— a"

In the

Supreme ¢ Court of the United States

OCTOBER TERM, 1967

No. 9 956

' Larry D. ‘een AND JUANITA HIBier,

_ Petitioners,

v. .

Commissioner OF INTERNAL REVENUE,

Respondent.

J

PETITION FOR WRIT OF CERTIORARI

To the United States Court of A ppeals-

i the Fifth Circuit ——

_ Bos Hurr, © |

‘Of Counsel, So

Hurr & Bowers, .

~ P.O. Box 506,

Lubbock, Texas 79408,

Epwakrp R. SMITH, — ,

. Of Counsel, °

SmirH & Baker, '

1313 Avenue L,

Lubbock, Texas 79401,

Attorneys for Petitioners.

—

WARLICK PRESS, INC.—P. O. BOX 10543-2263 VALDINA STREET—DALLAS—ME 1-3130

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SUBJECT INDEX

* Caption’ and Title Secale: er ee Sith Sgt oe

Reference to Lower Court Reports rae PRI ORES

Grounds.on Which Jurisdiction i is Invoked .............. scgene

_ Argument anew Reasons Relied On

For Allowance of Writ ........ We NNO erent :

Opinions of Lower Courts ........ aoe adeeamnanea: eet

ay, . Index of Authorities ,

Cases Page

; Atenas Realty Siti 46 'T.C. 363 (1966) ........... . 6

- Anderson v. Helvering, 310 U.S. 404 (1940) -................ 5,6

McCulley Ashlock, 18.T.C. 405 (1952) sedettmesarbvumicn 4A

. Commissioner v. Brown, 380 U.S. 563 (1965) oo... 5, 6

Olin Bryant, 46 AFTR 848 (1966) 00000... 0 cu, 6,7

Burton-Sutton Oil Co. v.- Commissioner, ok

ee ee sd scdcamesepsendncness 5

- Burnet v. Harmel, 287 U.S. 103 (1982) .......... eee a

- Thomas v. Perkins, 301 U.S. 655 (1987) ............... 4, 5, 6, 7,8

Commissioner. v. P. G. Lake, Inc., | | x |

5 MC I OI oaths cegapar vn scebdcobrseansbnewendemven 5,8

Stratton’s Independence v. Howbert, ;

cE yg” einen 5

‘Veni Transit Co. v. Commissioner, 218 F. 2d 468 6

U. S. v. Witte, 306 F. 2d 81 (5th Cir. 1962)... ce 8

és ! Announcements

T. I.R. 338 (September 15, 1961) 1961 Prentice-Hall

_» Federal Taxes 154,908 ........... Sees tetert tk casecan tatu 5,7

Other Publications |

Ginsburg, “Dividing Income and Capital Appreciation

Among Family Members,” 25 N.Y.U. Inst. 0 on iy;

Fed. Tax 671-673 (1967) 0.0.0... hee lcceceeeee eons ine

“The Present Status of the Border Line Between |

_ Capital, Ordinary, and Nontaxable Gains and

Losses: A Panel Discussion,” 25 N.Y.U. Inst.

on Fed. Tax 613 at 636-638 (1967) 00s 67

“Non-Depletable Property Doesn’t Qualify for Tax

‘Treatment Accorded ABC Transaction,” Report

Bulletin No. 5, 7105.2 P-H Oil and Gas Bs

' Taxes, 11-22-66 thon Aline AHS. Miho TROP bAleriiuees 7

‘Bulletin of the Section of Taxation, American

Bar Association, Vol. XX, een 4 (July, 1967),

pp. 144 and 262, Mew contin idee ioe opesiliaoshan iamatuereeaie oa Soci 7

; . Ts the

‘Supreme Court of the United. States

OCTOBER TERM, 1967

t

Larry D. Huser ano Juanrra Hiner,

Petitioners, ie

v.

Comnarssionen OF Re, REVENUE, |

"Respondent.

‘ PETITION FOR WRIT OF CERTIORARI _

To the United States Court of Appeals

for the Fifth Circuit: .

To the Honorable Earl Warren, Chief Snstice of the United

' States, and the Associate Justices of the Supreme Court

of the United States. ; : ar

|. REFERENCE TO LOWER COURT REPORTS _

‘The per curiam opinion of the Court of Appeals for the

Fifth Circuit is reported in... F.2d...

~ The opinion of the Tax Court is reported in 46 T. C. 633.

GROUNDS ON WHICH JURISDICTION IS INVOKED |

1. The date of the judgment sought to be reviewed, and

the date of its entry, is November 2, 1967.

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2d uriediction to review v the jniteiens in question is con-

ferred by Section 1254 (1) of Title 28 of the United States

Code.

QUESTION PRESE. NTED FOR REVIEW

The question presented for review is. whether i in the sale

of an insurance expiration list there was such a reserva-

tion by the seller as to cause a part of the post-sale income

therefrom to be taxed to the seller and not to the a

STATUTORY PROVISION

- The only statutory provision involved is Subsection 61 (a)

‘of the Internal Revenue Code of 1954 (also Subsection

61(a) of Title 26 of the United States Code). It reads in.

pertinent part ‘as follows: : :

“(a) General definition. —Except as otherwise provided

in this subtitle, gross income .means all income from

whatever source derived, including (but not limited to)

the following items:

(1) Compensation for services, including feed, com-

missions, and similar items;

| “ (2) Gross income derived from business;” °

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| STATEMENT OF THE CASE

All facts were stiplated. Summarized, the material facts

are as follows: Ee

“On January 24, 1962, ‘Walker sold to Hibler the expira- .

tion list and certain tangible personalty used in his fire,

casualty. and fidelity insurance agency. Two documents’

were executéd, a contract and a bill of sale. (These docu-

Dafa NES ANT Ge ive iter ~ whew a . ae

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. ments are set out in the opinion of the Tax Court ap-

pended.) The bill of sale recited a consideration of $20,000.00

cash and a reservation of 50% of the commissions upon

renewal of policies in the, expiration list’ until such 50%

- totaled $70,000.00. The contract repeatedly and consistently

referred to the 50% of commissions as having been reserved

from the sale. It provided that Hibler would*serve asa,

trustee in receiving and remitting Walker's share to Stand-

ard*Accident Insurance Company for Walker’s benefit. Hib- =|

ler’s only obligations were to exercise reasonable diligence -

to renew the policies on the expiration list and to use rea- _

sonable efforts to prevent the loss of business and to remit’

the proceeds of the interest reserved -by Walker. -Hibler

could not sell.without the consent of Walker and Standard. .

Aside from the above obligations Hibler was not liable for - |

_ the payment of the $70,000.00. Walker had no right to re |

possess or sell the assets .so conveyed unless Hibler dee |

faulted in the performance of the above obligations, _ ; |

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; Both documents were prepared by an attorney for Stand- |

' . ard. Hibler was not sepksan in the transaction by any

. attorney.

Hibler’s post-sale services were hecessary to produce reve-

~ nue from the expiration list, : a

The 50% commissions paid to Walker ideas to the

above documents amounted to $6,196. 49 in 1962 and $5,226.50

in 1963. Hibler did not pay income tax on these amounts.

The respondent determined that Hibler should have paid

tax on these amounts. The Tax Court: sustained the re-

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spondent, and the Fifth Circuit Court - of Appeals ame

the Tax Court per curiam. eee

- ‘BASIS FOR TAX COURT’S JURISDICTION.

Jurisdiction was conferred upon the Tax Court by sec- .

tions 7442 and 6213 of the Internal Revenue Code of 1954

- (section 7442 and 6213 of Title 26 of the United, States

Code). -

ARGUMENT AMPLIFYING REASONS RELIED ON

FOR ALLOWANCE OF WRIT

The Tax Court, as affirmed per curiam’by the Fifth Cir-

cuit, has decided a federal question in a way in conflict with

applicable decisions of this Court. Thesissue involved i is of .

* national interest and importance. a

The issue in the case essentially is whether one who sélls. °

-a non-depletable asset and reserves from the sale a portion -

of the post-sale income therefrom i is taxable on such income,

or whether the buyer is taxable thereon.

This precise issue, as it applies to minerals, was presented

to the Supreme Court in Thomas v. Perkins, 301 U.S. 655

(1937). There A conveyed undeveloped leases to taxpayer

for cash ‘and reserved $395,009 to be paid only out of one-

fourth of oil if, as.and when produced. Oil could be pro-

duced only through the development and operational ac-

_ tivities of taxpayer or his transferees; The Court held tax-

payer could exclude such one-fourth from his income.

_. Based upon such case, the Internal Revenue Service has

long issuéd rulings to similar purchasers of mineral interests.

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T.L.R. 338, (September | 15, _ 1961 Prentice-Hall Fed-

-—” eral Taxes 154,908. ‘ 7

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The lower courts hewk refused to apply ici v. Perkins

to the case at hand ‘solely because the former dealt with .

depletable natural resources.

_ ‘The treating of the income of detiletable assets differently -

from that of non-depletable assets is in conflict with appli-’

cable decisions of this Court. Stratton’s Independence v.

‘Howbert, 231 U.S. 399 (1913), holding that the production —

and sale of minerals was not a mere conversion of capital

. from one form to another, but was an income producing

' operation’ similar to manufacturing; Burnet v. Harmel, 287°

U.S. 103 (1932), and Anderson v. Helvering, 310 U.S. 404

(1940) stating that mining operations resemble a manufac- _

turing business carried on by the use of the soil; Burton-

Sutton Oil Co. v. Commissioner, 328 U. S. 25 (1946), stating’

_that royalty payments under mineral leases are: ‘income to

the . a, like payments of rent; and Commissioner _v.

Brown, 380 U.S. 563 (1965), stating that extracting natural

resources is viewed as an. incorfle-producing operation and

not as a conversion of capital investment.

The decision of this Court in Commissioner v. P. G. ‘Lede,

Inc., 356 U.S. 260 (1958), illustrates that the same rules

of inco..e recognition apply ‘to minerals as to non-minerals.

The lower courts had unanimously relied on the well estab-

lished mineral doctrines of economic interest and oil in

place to confer capital géins treatthent on an oil (payment

carve > out. This Cours reversed by unanimous decision.

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. The lower courts in this case justified their distinction

between minerals and-rion-minerals on this Court’s distinc-

tion of Thomas v. Perkins in the case of Commissioner v.

Brown, supra. Commissioner v. Brown is not in point.

This case represents, we believe, the first attempt by any

- court to limit Thomas v. Perkins to minerals. Other courts

have at least assumed that it was not so limited.? Clearly

if it were not so limited, the seller would have effectively

reserved income in the instant case. The documents in this

case could hardly more clearly have expressed the intent of:

the parties that the seller reserve income.

The issue in this case is unquestionably of national in-

- terest.’ 3 ; est

~The issue there was whether there was a sale. The question of

whether there was a reservation was not involved. Cf. U.S. v. Witte,

306 F.2d 81 (5th Cir. 1962). Brown first distinguished Perkins be-

cause of the policy of the tax law to allow the taxpayer to realize

on appreciated values at capital gains rates. Such distinction had

no relation to whether minerals were involved in Perkins or not.

Brown simply did not involve a reservation from an’ admitted sale.

The “peculiar character’ of minerals, mentioned in Brown, has

been recognized only for the purpese of allowing a deduction for

depletion. Brown next distinguished Perkins by pointing out the

limitation on Perkins announced by Anderson v. Helvering, supra.

The Anderson v. Helvering limitation obviously applied in Brown.

On the contrary, such limitation does not apply to the instant

case. Since Hibler’s only obligation was to use his best efforts

and to remit Walker’s portion, as a matter of substance Walker

had to look solely to production under the expiration list for the

satisfaction of his reserved interest. (By way of_comparison, the -

possibility of receiving compensation for damages for breach: of the

universal covenant to reasonably develop in an oil and gas lease

has never brought the Anderson v. Helvering limitation into force.)

-?Vermont Transit Co. v. Commissioner, 218 F. 2d 468 at. 469

(2d Cir. 1955), cert. den. 349 U. S. 945 (1955); McCulley Ash-

lock, 18 T. C. 405 at 412 (1952); Alstores Realty -Corporation,

46, T. C. 363 at 372 (1966).

The Same Tax Court judge who decided Hibler subsequently

thereto handed down _the,decision in Olin Bryant, 46 T. C. 848.

(1966), now on, appeal to the Fifth Circuit. Such case involved the

same issue and the court cited and followed its own holding in

Hibler.

(Footnote Continued on Following Page)

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_ It is common knowledge, T’. I. R. 338, supra, that the In--

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ternal Revenue Service issues rulings applying the reserva-

tion of income principles of Thomas v. Perkins to minerals.

Undoubtedly these approved transactions, both in number

(Footnote Continued From Preceding Page)

Counsel herein (who also represents the taxpayers in Bryant)

has received inquiries upon this issue from New York, California,

Pennsylvania and Texas. The Bryant case has been specially com-

n

mented upon in a nation wide tax service (“Non-Depletable Prop-

erty Doesn’t Qualify for Tax Treatment Accorded ABC Transac-

tion”, Report Bulletin No. 5. { 105.2, P-H Oil and Gas Taxes,

11-22-66, emphasizing that mineral income is to be accorded dif-

erent treatment) and in a leading tax-institute (Ginsburg, “Dividing

Income and Capital Appreciation Among Family Members,” 25

N.Y.U. Inst. on Fed. Tax 671-673 [1967]) and in the Bulletin of

the Section of Taxation, American Bar Association, Vol. XX, No.

4 (July, 1967), pp. 144 and 262.

Hibler ‘and Bryant have both been discussed by a leading. tax '

panel. “The Present Situs of the Border Line Between Capital,

Ordinary, and Nontaxable Gains and Losses: A Panel Discussion,”

- 25 N.Y.U. Inst. on Fed. Ta® 613 at 636-638 (1967).

The issue has also been the subject of Congressional debate.

The following is quoted from footnote 7 of the Tax. Court’s opinion

-in Olin Bryant:

“See. also the recent remarks by Senator Gore of Tennessee

where, in resisting the issuance of a favorable revenue ruling

involving an ABC acquisition of depletable mineral interests

other than oil and gas, he referred to the ‘notorious ABC

scheme’ which is ‘a sophisticated tax gimmick.’ See 113 Cong.

Rec. 1 12083 (June 8, 1966), 18146-18147 (Aug. 11, 1966),

18685 (Aug. 16, 1966). ‘Heretofore, the ABC transaction has

been largely confined to-.oil and gas, which are, of course,

favored industries. But I see no reason to compound inequity

by allowing the ABC transaction to spread to other industries.

* * * The ABC transaction is a tax dodge, pure and simple.

Taxation is the principal reason for setting it. up,’ 112 Cong.

Rec. 12081 (June 8, 1966). See also S. 3719, 89th Cong. 2d -

Sess. (1966), introduced by Senator Gore and referred. to the

‘Senate Committee on Finance on Aug. 11, 1966, which would

make the ABC transaction less profitable, especially outside

of the oil and gas industry.

_ “We simply point to this information as showing some re-

sistance to the extension of the ABC doctrine, not ‘only outside

of the mining: industry generally, but also outside of the oil

and gas industry itself.”

ome MyPerrry:

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TOO Ree RENT OE es

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- and in dollar volume, are very large in amount. While only

the Service would know, upon information available to peti-

tioners it seems reasonable to assume that this represents

one of the larger areas of ruling by the national office.

It works a major’ inequity upon a large segment of the

American society to apply the general reservation of income

principles announced by Thomas v. Perkins only to those

who have their income producing investments in minerals.

"As discussed above, this Court has consistently held that —

income from minerals is treated as operating income, just

as is income from other investments. Thus, absent legisla-

- tion, there i is no basic justification for establishing one rule —

for the recognition of one type of operating’ income (min-

erals) and a different rule for another enna. Com-

- missioner v. Pe G. Lake, ats supra. | |

“ae the a, ane would show that there is

- economic justification for applying the Thomas v. Relies

reservation of income principle to both minerals and non-”

minerals. It is, of course, obvious that these principles some-

times work to a taxpayer’s disadvantage. U. S. v. Witte,

_ supra. |

The importance’of this issue is that a fundamental gen-

eral principle of tax law regarding recognition of income

should ‘be uniformly applied to operating income from -

types of investinents.

9 .

“OPINIONS OF LOWER COURTS

hs se kis Sn a hs Dh Cs Cs

Appeals is appended hereto. (See Appendix)

The opinion of the Tax Court is set out on pages 5 through

24, both inclusive, of the record printed for the use of the

court below, nine copies of which are filed herewith under

paragraph 4 of Rule Ql.

Wherefore, premises considered, petitioners pray that u1s

Court grant this their petition for. Writ of Certiorari to the ~

Court of —_— for - Fath Circuit. me

SmirH & BAKER,

1313 Avenue L,

Lubbock, Texas 79401, .

Attorneys for Petitioners.

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BA LE ee ee 2

il ita nites

10 -

' CERTIFICATE. OF SERVICE “

The undersigned attorney for petitioners has on this’/$_ |

day of Dac. 1964, mailed (by depositing same in the

_ United States mail, with first class postage prepaid) three

copies of the foregoing petition addressed to Solicitor-Gen-

eral, Department of Justice, Washington, D. C. 20530 and

three such copies addressed to Honorable Mitchell Rogovin,

Assistant Attorney General, Tax Division, United States

Department of Justice, Washington, D. C. 20530.

4-I

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APPENDIX

In the .

UNITED STATES COURT OF APPEALS —

For the Fifth Circuit.

No. 24318 :

“Larry D. Higper AND JuaNira HIBLer, . 7

mls Petitioners, +:

versus 7 x ,

?

COMMISSIONER OF INTERNAL REVENUE, ”

_ Respondent.

fae.

Petition for Review of a Decision of the Tax Court

(Texas Case).

(November 2, 1967.)

Before JONES and GODBOLD, Circuit Judges, and . i

7 SCOTT, District Judge.

PER CURIAM: The facts giving rise to this oie and

the controlling principles of law are set forth in the opinion

of the Tax Court. Hibler v. Commissioner, 46 T.C. 663. We |

are in agreement with its decision. The appellant on argu- |

ment stresses the opinion of this Court in Moberg v. Com-

mission€; 365 F. 2d 337, which was decided too late for

consideration by the Tax Court. The facts of the Moberg

case distinguished it from this case and make inapplicable

the rule there announced. The decision of the Tax Court is

AFFIRMED.